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As filed with the Securities and Exchange Commission on February 10, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ICARUS INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MARYLAND 7372 52-2069941
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE NUMBER)
ONE CENTRAL PLAZA
11300 ROCKVILLE PIKE
ROCKVILLE, MARYLAND 20852
(301) 881-9350
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS)
COPIES TO: COPIES TO:
JEFFREY A. KOEPPEL, ESQ. HERBERT G. BLECKER, President HARLAN P. COHEN, ESQ.
FIORELLO J. VICENCIO, ESQ. ICARUS International, Inc. JOHN B. MCKNIGHT, ESQ.
ELIAS, MATZ, TIERNAN & HERRICK L.L.P. One Central Plaza LOCKE PURNELL RAIN HARRELL
734 15TH STREET, N.W. 11300 Rockville Pike (A PROFESSIONAL CORPORATION)
12TH FLOOR Rockville, Maryland 20852 2200 ROSS AVENUE
WASHINGTON, D.C. 20005 (301) 881-9350 SUITE 2200
(202) 347-0300 DALLAS, TEXAS 75201
(214) 740-8000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering./ /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box./ /
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE (1) PRICE (1) REGISTRATION FEE
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Common Stock, $.01 par value 2,875,000 $9.00 $25,875,000 $7,635.00
====================================================================================================================================
(1) Estimated solely for purposes for calculating the registration fee pursuant
to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1998
PROSPECTUS
2,500,000 SHARES
ICARUS INTERNATIONAL, INC.
[LOGO]
COMMON STOCK
All of the 2,500,000 shares of common stock, $.01 par value per share
(the "Common Stock"), offered hereby (the "Offering"), are being sold by ICARUS
International, Inc. ("ICARUS" or the "Company"). Prior to the Offering, there
has been no public market for the Common Stock. It is currently estimated that
the initial public offering price per share of Common Stock will be between
$7.00 and $9.00. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price.
Application has been made to list the Common Stock on the Nasdaq
National Market under the symbol "ICRS."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share................ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)................. $ $ $
======================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
civil liabilities. See "Underwriting."
(2) Before deducting estimated expenses of $800,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day overallotment option
to purchase up to a total of 375,000 additional shares of Common Stock
on the same terms and conditions as set forth above. If all such
shares are purchased by the Underwriters, the total Price to Public
will be $_________, the total Underwriting Discount will be
$___________ and the Proceeds to the Company will be $___________ .
See "Underwriting."
The shares of Common Stock are offered by the several Underwriters
subject to prior sale, receipt and acceptance by them, and subject to the right
of the Underwriters to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that certificates for
the shares of Common Stock will be available for delivery on or about
__________, 1998, at the offices of Hoak Breedlove Wesneski & Co.
HOAK BREEDLOVE WESNESKI & CO.
________________, 1998
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[Front Inside Cover - Panel One]
[Circular flow chart graphic titled "Automated Desktop Engineering."
The flow chart depicts the general process by which the Company's
automated engineering software works. The chart begins as a long arrow at the
top, left corner with "BUSINESS QUESTION" and concludes at the bottom, right
corner with a "BUSINESS ANSWER" of either "GO" or "NO GO."
The beginning of the process is represented by a full-color photo of a
corporate executive with the phrases "Which market?," "How long?," "How much?,"
"Why?," and "Business Risk," reversed out of the photo in white, and is
positioned over the text that reads, "BUSINESS QUESTION."
The arrow continues around and through a spoke-like image that
represents the phases of the simplified process manufacturing plant lifecycle.
On each of the spokes are the names of each phase, including "Business
Development," "Process Engineering," Cost Engineering," "Detailed
Engineering/Procurement," "Construction Scheduling," and "Operations &
Maintenance." In the center of the image is the ICARUS Logo.
The spokes are encircled with the benefits of the ICARUS system which
include "Faster Time to Market," "Compressed Schedules," "Cost Reductions," and
"Engineering Process Automation." These benefits are represented in a different
color to indicate they are different elements in the process.
Below the text "BUSINESS ANSWER" is a full-color photo depicting an
"engineering team" with text reversed out to white that reads, "Confident
Decisions" and "Backed by Engineering."]
[Caption to graphic: ICARUS International, Inc. develops automated
desktop engineering ("AutoDE") software for the process manufacturing segments
of various industries. The Company's AutoDE software products enable customers
to analyze a proposed project more quickly, more thoroughly and less
expensively than they can using conventional methods.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING THE ENTRY OF STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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[Inside Front Cover - Panels Two and Three]
[Flow chart graphic depicts a header entitled "SIMPLIFIED
PROCESS MANUFACTURING PLANT LIFECYCLE." Under the header are six arrows
linked horizontally entitled (Arrow 1) "Business Development," (Arrow
2) "Process Engineering," (Arrow 3) "Cost Engineering," (Arrow 4)
"Detailed Engineering/Procurement," (Arrow 5) "Construction Scheduling"
and (Arrow 6) "Operations and Maintenance". Above arrows 1-3 there is a
line entitled "Decision Engineering" and above arrows 4-6 there is a
line entitled "Plant Engineering." On the top, left corner of the page
is the Company's logo with the caption "ICARUS Automated Desktop
Engineering Products." Below the Arrows, the page is horizontally
divided into two segment planes entitled (Segment 1) "Existing
Products" and (Segment 2) "Release Planned in FY 1998 or FY 1999."
Segment 1 runs horizontally under the linked arrows and contains
"ICARUS Process Evaluator" under Arrow 2, "ICARUS 2000" under Arrows 3
and 4, "ICARUS Project Manager" under Arrows 5 and 6, and "Questimate"
under Arrow 6. Segment 2 runs horizontally under Segment 1 and contains
"ICARUS Decision Engineering Analyzer," "ICARUS/SRIC Process
Model" and "ICARUS/SRIC Project Model" under Arrow 1, "ICARUS/HYPROTECH
Plant-Product" and "ICARUS/HYPROTECH Process-Product" under Arrow 2,
"ICARUS-RICHARDSON Estimating Modules" under Arrows 3 and 4, and
"ICARUS Project Object Database (IPOD)" under Arrows 1-6.]
[Caption to graphic: "ICARUS International, Inc.'s business strategy is
to expand its portfolio of integrated AutoDE products to meet customer
needs in every stage of the process manufacturing plant lifecycle."]
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus. Except as otherwise indicated herein, the information in this
Prospectus assumes (i) the completion of the recapitalization of the Company and
certain related entities (the "Recapitalization," as more specifically defined
under "Certain Transactions - Pending Recapitalization") to be effected
immediately prior to the closing of the Offering, (ii) an initial public
offering price of $8.00 per share, the midpoint of the range set forth on the
cover page of this Prospectus, and (iii) the 30-day over-allotment option
granted to the Underwriters is not exercised. Unless the context otherwise
requires, references in this Prospectus to "ICARUS" or the "Company" include
ICARUS International, Inc., a Maryland corporation, and its predecessors and
consolidated subsidiaries. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
ICARUS International, Inc. develops automated desktop engineering
("AutoDE") software for the process manufacturing segments of the chemical,
petroleum refining, pulp and paper, food and other industries. Process
manufacturing plants make products in bulk quantities through various chemical,
physical, and other operations. The Company's 300-plus customers are primarily
large, multinational corporations that own and operate process manufacturing
plants or provide engineering and construction services to such
owner-operators. The Company's customers include such companies as Mitsubishi
Chemical Corporation, Shell Oil Company, The Mead Corporation, Campbell Soup
Company and Fluor Daniel, Inc.
Industry sources indicate that more than 15,000 process manufacturing
plants are now in operation worldwide and that global spending on process
manufacturing plant construction projects will exceed $160 billion in 1998--an
all-time high. The Company's current software products automate important steps
in the "decision engineering" process through which a customer's engineering
staff evaluates the technological and economic feasibility of the construction
or modification of a process manufacturing plant and senior executives determine
whether to proceed with a proposed project. Despite the importance of this
decision, which may involve a capital investment in excess of one billion
dollars, these executives usually have only a limited ability to manage the
conventional decision engineering process, which is time-consuming,
labor-intensive, imprecise and expensive.
The Company's current products directly address a number of the
deficiencies in the conventional decision engineering process by
"re-engineering" the process to take full advantage of today's desktop computing
technology. The Company's products enable engineers to simulate, model and
analyze the design, cost and time requirements of a proposed project more
quickly and less expensively than they can using conventional
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engineering methods. ICARUS products also enhance senior executives' ability to
focus the decision engineering process on business priorities. With more timely
and accurate information that integrates business considerations with
sophisticated engineering analysis, senior executives can make faster, better
informed and more confident decisions. Benefits arising from the use of the
Company's decision engineering software products include more effective
strategic planning, faster reaction to market developments and improved plant
operating efficiency, all of which enhance the customer's competitive position.
In addition to the Company's decision engineering products, other
AutoDE software products automate important steps in the "plant engineering"
process, which occurs after the decision to proceed with a project has been
made. These products also facilitate construction scheduling and cost estimation
for smaller projects at existing plants.
The Company's strategy is to expand its portfolio of integrated AutoDE
software products to meet customer needs in every stage of the process
manufacturing plant lifecycle--from the business development decision to
consider entering a process manufacturing segment, through the process and cost
engineering analysis of a specific proposed plant, to the detailed engineering,
construction scheduling and operations and maintenance activities that follow
the decision to proceed with a proposed plant. For the decision engineering
process, which encompasses business development, process engineering and cost
engineering, ICARUS currently offers process engineering and cost engineering
products. The Company plans to supplement these products and also to release a
new suite of business development products designed to enable senior executives
to analyze high-level, early-stage technological and economic feasibility
issues. This suite of products also will assist senior executives in ensuring
that their engineering staffs are focused on the business impact of their
engineering work. For the plant engineering process, which encompasses detailed
engineering/procurement, construction scheduling and operations and maintenance,
ICARUS currently offers construction scheduling and cost estimation products and
plans to release an object database product that will support plant engineering
applications such as computer-aided engineering ("CAE") or computer-aided design
("CAD") production of detailed construction drawings. A more detailed
enumeration of the elements of the Company's strategic plan is set forth under
the caption "Business-Strategy."
ICARUS markets its products on a world-wide basis through its direct
sales force operating from its home office in Rockville, Maryland and its other
offices in Houston, Texas, Altrincham, England, and Tokyo, Japan. The Company
also has independent sales representatives located in Argentina, Australia,
Brazil, Colombia, France, Germany, India, Saudi Arabia, South Africa, South
Korea, Venezuela and certain independent republics of the former Soviet Union,
and a sales representative that sells into the People's Republic of China. As
part of its marketing effort, ICARUS participates in domestic and international
trade shows, publishes a newsletter, advertises in engineering and other trade
magazines, and holds annual user conferences in the United States, Europe and
Japan.
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The primary source of the Company's revenues are single-year and
multi-year term license fees. At October 31, 1997, 57.5% of the Company's
licenses had a remaining life of one year or more. For the twelve-month period
ended October 31, 1997, 68.5% of licensed authorized users whose licenses
expired during such period elected to renew such licenses (including renewals
that involved the substitution of another ICARUS product) and 49.1% of all new
licenses sold to authorized users were for a term of two or more years. The
Company believes that its license renewal rates and ability to sell multi-year
term licenses are important historical financial strengths. ICARUS also derives
revenue from technical support and training for its customers' employees,
maintenance agreements and consulting services.
The name "ICARUS" is an acronym for Industrial Computer Application
Retrieval and Utility Systems, which was adopted when ICARUS commenced business
operations in 1969. The Company's principal offices are located at One Central
Plaza, 11300 Rockville Pike, Rockville, Maryland 20852; its telephone number is
(301) 881-9350.
"QUESTIMATE," "ICARUS 2000," ICARUS Mentor logo design, "ICARUS" and
design, "ICARUS PROCESS EVALUATOR," and "ICARUS" are registered trademarks of
the Company. "COST" and design, "ARCHES" and design, "Questimate," "ICARUS
2000," "ICARUS," "ICARUS PROCESS EVALUATOR," and "ICARUS" and design are
registered service marks of the Company. The Company has filed an application
for the federal trademark registration of, and claims a trademark in, "ICARUS
PROJECT MANAGER" and design. The Company claims a service mark in, and has filed
an application for the federal registration of, "ICARUS PROJECT MANAGER" and
design. The Company claims and has obtained a federal copyright registration for
the work entitled "ICARUS PROCESS SYSTEMS PIPING AND INSTRUMENTATION DRAWINGS."
All other trademarks or service marks referred to in this Prospectus are the
property of their respective owners.
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THE OFFERING
Common Stock to be offered ...............................................2,500,000 shares
Common Stock to be outstanding after the Offering.........................5,500,000 shares (1)
Use of proceeds...........................................................To further the Company's
strategic goals by developing
complementary AutoDE
software products, expanding
its engineering and direct sales
and marketing force, possibly
funding strategic alliances, the
possible acquisition of
complementary technologies or
companies, and for general
corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol....................................ICRS
(1) Excludes (i) 760,500 shares of Common Stock reserved for issuance under
the Company's 1998 Stock Option Plan (the "Stock Option Plan"), of
which options to purchase approximately 437,400 shares of Common Stock
are expected to be granted prior to the commencement of the Offering
with the exercise price to be set at the initial public offering price
set forth on the cover page of this Prospectus, (ii) 507,000 shares of
Common Stock reserved for issuance under the Company's Recognition and
Retention Plan and Trust (the "Recognition Plan"), of which no shares
of Common Stock are expected to be granted immediately following
consummation of the Offering. See "Management - Stock Plans - 1998
Stock Option Plan" and "- Recognition and Retention Plan and Trust."
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended Six Months Ended
April 30, October 31,
---------------------------------- -------------------
1995 1996 1997 1996 1997
------ ------ ------ ------ -----
CONSOLIDATED STATEMENT OF (Unaudited)
OPERATIONS DATA:
Total revenue.............................. $5,058 $5,678 $7,339 $3,562 $4,260
Total operating expenses................... 4,554 5,395 6,309 2,993 3,751
Income from operations..................... 504 283 1,030 569 509
Net income ................................ 300 193 656 352 343
Net income per share....................... 0.10 0.06 0.22 0.12 0.11
Weighted average common
shares (1)............................... 3,000 3,000 3,000 3,000 3,000
October 31, 1997
----------------------------------
Actual As Adjusted(2)
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(Unaudited)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $1,078 $18,478
Total assets........................................... 5,271 22,671
Total liabilities...................................... 3,775 3,775
Total stockholders' equity............................. 1,496 18,896
(1) Computed as described in Note A of Notes to Consolidated Financial
Statements.
(2) Adjusted to give effect to the sale of 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering
price of $8.00 per share, after deducting the estimated underwriting
discount and Offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."
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RISK FACTORS
The shares offered hereby involve a high degree of risk. The following
risk factors should be considered carefully in addition to the other information
in this Prospectus before investing in shares of the Common Stock offered
hereby. The discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, goals, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus.
Prospective investors in the shares of Common Stock offered hereby are cautioned
that, while the forward-looking statements reflect the Company's good faith
beliefs, they are not guarantees of future performance and involve known and
unknown risks and uncertainties and that the Company's actual results could
differ materially from those discussed herein. Some of the factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere herein.
Market Acceptance of the Company's Products. The success of the Company
is dependent upon continued and increased use in the process manufacturing
segments of various industries of CAE software in general, and of the Company's
AutoDE software products in particular. Market acceptance of the Company's
existing and future products depends on several factors including the ease with
which the products can be implemented and used, the performance and reliability
of the products, the range of tasks that the products can perform, the degree to
which users achieve expected cost savings and productivity gains, and the extent
to which the Company's customers and prospective customers are able to implement
alternative approaches to meet their business development, engineering,
construction scheduling and operations and maintenance needs. Some of the above
factors are beyond the Company's control. There can be no assurance that the
Company's customers will realize the intended benefits of the Company's products
or that the Company's products will achieve continued or increased market
acceptance. Any significant or ongoing failure to achieve such benefits or to
maintain or increase market acceptance would substantially restrict the future
growth of the Company and could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business - The
Decision Engineering Process" and "- Competition."
Dependence on Contract Renewals. The Company derives a significant
portion of its total revenue from the renewal of license agreements with
existing customers. The Company expects contract renewals to account for an
increasing portion of the Company's total revenue in the future to the extent
that the Company increases the number of contracts for renewing customers. The
Company's license agreements generally have one to five year terms and do not
obligate customers to renew after the expiration of their licenses. The
Company's ability to secure renewals may be affected by, among other factors,
its ability to deliver consistent, high-quality and timely product enhancements
and support services; ownership, management or personnel changes within customer
organizations, including acquisitions of customers by other companies; the
general global investment climate for the process manufacturing segments of
various industries; customer capital budget constraints; the introduction of
competing products by third parties; political and economic stability in
customers' markets and other factors, many of which are beyond the control of
the Company. There can be no assurance that the Company will be able to maintain
its historical renewal rates and any significant or ongoing decline in renewal
rates would have a material adverse effect on the Company's business, operating
results and financial
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condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
Risks Associated with Continued Product Development; Rapid
Technological Change. The market for CAE software is characterized by rapid
technological change, quickly evolving industry standards and frequent changes
in customer requirements. As a result, new products or product features are
continually being introduced by CAE software companies. The Company's future
results of operations will depend in part upon the Company's ability to avoid
product obsolescence by anticipating and responding to the changes described
above in a timely manner. There can be no assurance that the Company will be
successful in developing and marketing new products and features or that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such new products and features
or that such new products and features will adequately meet the requirements of
the marketplace and achieve market acceptance. In particular, the Company may
face additional risks in the development of products which are intended to
address different stages of the process manufacturing lifecycle resulting from
the Company's limited knowledge and experience in developing products for such
stages. The Company may also face additional risks related to the process
manufacturing requirements of certain industries not currently addressed by the
Company's products, the Company's attempt to sell new or existing products into
new markets and its dependence upon the contractual performance of new strategic
alliance "partners." See "Business - Strategy."
The Company in the past has experienced delays in the release of new
products and new product features due primarily to the lack of funding to
support product development, difficulties in the allocation and/or recruitment
of required personnel and delays in receipt of necessary technology and supplies
from third parties upon whom the Company was dependent. If any new significant
products or product features are materially delayed or if they fail to achieve
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected. In addition, the introduction
or announcement of new product offerings or new product features by the Company
or the Company's competitors may cause customers to defer or forgo purchases of
current versions of its products, which could, in turn, have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business - Products and Product Development."
The success of the Company's products in the future will depend, in
part, on technological factors, including the evolution of desktop and network
operating systems and the migration of existing and potential customers from
centralized mainframe-based computing systems to distributed client-server
computing systems. There can be no assurance that the Company will successfully
develop new AutoDE software products (and updated versions of existing products)
that will respond adequately to changes in existing operating systems and the
potential introduction of new operating systems or that such development, even
if successful, will be completed on a timely basis. Neither can there be any
assurance that the Company's current efforts to develop client-server-compatible
products will be successful. A failure in either case could have a material
adverse effect on the Company's business, operating results and financial
condition.
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Fluctuations in Future Operating Results. The Company's operating
results have fluctuated in the past and will in the future likely fluctuate
significantly from quarter to quarter or on an annual basis as a result of a
number of factors, including, but not limited to, the size and timing of
customer orders, delays in renewals or failure of existing customers to renew
their licenses with the Company when their current licenses expire, the length
of the Company's sales cycle, changes in contract terms (including terms
affecting the timing of recognition of license revenue) and the rate at which
such changes are made, timing of new product announcements and introductions by
the Company and its competitors, the Company's ability to develop, introduce and
market new products and product enhancements, market acceptance of the Company's
products, deferrals of customer orders in anticipation of new products or
product enhancements, the Company's ability to control costs, (including the
hiring of new employees), political instability in, or trade embargoes with
respect to, foreign markets, changes in the Company's management team, and
fluctuating economic conditions. The Company's future operating results may
fluctuate as a result of these and other factors, which could have a material
adverse effect on the Company's business, operating results and financial
condition. It is possible that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be adversely
affected to a material degree. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Selected Quarterly Operating
Results."
The Company ships software products within a short period after receipt
of a new order and typically does not have a material backlog of unfilled
orders. Revenue in any quarter is substantially dependent on orders booked and
license renewals in that quarter and are not predictable with any degree of
certainty. The Company has recently incurred substantial expenses associated
with product development and increased staffing of its direct sales force with
no certainty that the incurrence of such expenses will result in future
revenues. In addition, because a large portion of the Company's expense levels
are fixed (i.e., relate to salaries, benefits and occupancy expenses), if
revenue is below expectations in any given quarter, then the adverse effect may
be magnified by the Company's inability to adjust spending in a timely manner to
compensate for any revenue shortfall. In addition, a customer's purchase of the
Company's products generally involves a significant commitment of capital with
possible attendant delays frequently associated with authorization procedures
for substantial capital expenditures within large organizations. Moreover, the
Company believes that because some customers are purchasing larger and more
complex AutoDE software products, the Company's average licensed user fees have
been increasing and purchases of the Company's products require approval at
higher executive levels. For these and other reasons, the sales cycles for the
Company's products can be lengthy and are subject to a number of significant
risks over which the Company has little or no control. As a result of the large
dollar amounts represented by a single order, the timing of the receipt of an
order can have a significant impact on the Company's revenues and earnings for a
particular period. Any significant or ongoing failure to reach definitive
agreements with customers, including renewals of current licensing agreements
upon their expiration, would have a material adverse effect on the Company's
business, operating results and financial condition.
Ability to Attract and Retain Required Personnel. The Company believes
that its future business results will depend in significant part upon its
ability to attract and retain highly
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skilled engineering, managerial and marketing personnel. Competition for such
personnel is intense, and any failure to attract and retain such personnel could
have a material adverse effect on the Company's business, operating results and
financial condition. In particular, the Company has found it difficult to
attract qualified engineering personnel in the past and no assurance can be
given that the Company will not have similar difficulties in the future.
Intense Competition. The market for CAE software used in the process
manufacturing segments of various industries is intensely competitive. The
Company experiences competition primarily from its customers and potential
customers, which have developed, or may decide to develop, and/or maintain their
own software internally rather than purchasing commercial software products such
as those offered by the Company. As a result, the Company must continuously
educate existing and prospective customers about the advantages of purchasing
the Company's AutoDE software products and services. There can be no assurance
that these customers or other potential customers will perceive sufficient value
in the Company's products and services to justify licensing them. In addition,
customers or potential customers could enter into strategic relationships with
one or more of the Company's competitors to develop, market and sell competing
products and services.
The Company has also experienced and expects to continue to experience
intense competition from current and future competitors, some of whom have
significantly greater financial, technical, marketing and other resources than
the Company. The Company's current direct third-party competitors include
Timberline Software Corporation and a number of smaller private companies. To a
lesser degree, ICARUS faces competition or potential competition from Aspen
Technology, Simulation Sciences Inc. and ChemStations, Inc. Many of the
Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products than can the Company.
Also, several of the Company's current and potential competitors have greater
name recognition and larger installed bases that could be leveraged to increase
market share at the Company's expense. The Company expects to face increased
competition as other established and emerging companies enter the CAE software
market in the process manufacturing sector of various industries and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduction in license renewals and loss
of market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. In addition, current and
potential competitors have in the recent past made, and may in the future make,
strategic acquisitions, merge or establish cooperative relationships among
themselves or with third parties, thereby increasing the ability of their
products to address the needs of the Company's current or prospective customers.
Such competition could materially adversely affect the Company's ability to sell
new or renewal licenses and support agreements on terms favorable to the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business - Competition."
Ability to Manage Growth. To the extent the Company experiences growth
in its business, it is expected that such growth would place a significant
strain on the Company's personnel and resources. The Company's ability to manage
future growth, if any, will depend on its ability to implement and improve
operational, financial and management
- 9 -
14
information and control systems on a timely basis, together with maintaining
effective cost controls, and any failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition. No
assurance can be given that the Company will not experience such difficulties in
the future.
Limited Line of Products and Services. The Company derives its revenues
from the licensing and sale of a limited number of products and services. The
Company currently offers four primary AutoDE software products, and the software
license revenue derived from such products constituted approximately 75.6% and
70.4% of the Company's total revenues for the six-month period ended October 31,
1997 and for fiscal 1997, respectively. As a consequence, in the event that the
Company were to experience a decline in the demand for one or more of its AutoDE
software products, such a decline could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business -
Products and Product Development."
Concentration of Revenue in the Chemical and Petroleum Refining
Industries. For the six months ended October 31, 1997 and for fiscal 1997, the
Company has derived a significant amount of its total revenue from software
licenses and services to companies in the process manufacturing segments of the
chemical and petroleum refining industries, which are highly cyclical
industries. Accordingly, the Company's future success is dependent to a
substantial degree upon the continued demand for its AutoDE software by
companies in the chemical and petroleum refining industries. The Company
believes that economic downturns in the U.S., Europe and Asia at different
times, and pricing pressures experienced by chemical and petroleum refining
companies in connection with cost containment measures, have led to delays and
reductions in certain capital and operating expenditures by many of such
companies in the past, and such delays or reductions will likely recur in the
future. Any such delays or reductions could have a material adverse effect on
the Company's business, operating results and financial condition. Further, the
Company's revenue in the past has been, and in the future may be, subject to
substantial period-to-period fluctuations as a consequence of general domestic
and foreign economic conditions, political developments and other factors
affecting spending in the chemical and petroleum refining industries. The
Company has developed new products and product features for, and has increased
its marketing efforts of its current products to, companies in the process
manufacturing segments of other industries. However, no assurance can be given
that such efforts will decrease the Company's concentration of revenues from the
chemical and petroleum refining industries in the foreseeable future. See
"Business - Strategy."
Risks Associated with International Operations. A significant portion
of the Company's total revenue for the six months ended October 31, 1997 and for
fiscal 1997 was derived from customers whose licensed users are located outside
the United States. The Company's international operations are subject to risks
inherent in the conduct of international business, including unexpected changes
in regulatory requirements, exchange rates, export license requirements, tariffs
and other barriers, political and economic instability, limited intellectual
property protection, difficulties in collecting payments due from sales
representatives or customers, difficulties in managing its sales
representatives, difficulties in staffing and managing foreign subsidiary
operations, and potentially adverse tax consequences. Certain of the Company's
international sales are denominated in local currencies, and the impact of
future exchange rate fluctuations on the Company's operating results and
financial condition cannot be accurately predicted. The Company does not
- 10 -
15
currently engage in currency exchange rate hedging transactions, but the Company
will occasionally buy and sell different currencies to protect itself against
currency exchange rate fluctuations. There can be no assurance that fluctuations
in currency exchange rates in the future will not have a material adverse impact
on revenue from international sales and thus the Company's business, operating
results and financial condition. The Company may engage in hedging in the
future; however, there can be no assurance that any currency hedging policies
implemented by the Company in the future will be successful. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Sales and Marketing."
Potential for Software Defects. Like other software products, the
Company's products have, on occasion, contained undetected errors, or "bugs,"
which become apparent through use of the product. Because the Company's new or
enhanced products are initially installed in a limited number of personal
computers and operated by a limited number of users, such errors may not be
detected for a number of months after delivery of the software. Significant
errors could result in the redeployment of Company personnel and funds to cure
the errors resulting in delays in product development and enhancements.
Moreover, software products with substantial errors could be rejected by
customers, which could have a material adverse effect on the Company's business,
results of operations or financial condition. Although the Company has not
experienced material adverse effects resulting from any such errors or defects
to date, there can be no assurance that errors or defects will not be discovered
in the future, potentially causing delays in product introduction and shipments
or requiring design modifications that could adversely affect the Company's
business, results of operations, or financial condition. It is also possible
that errors or defects in the Company's software products could give rise to
product liability or other liability claims. See "- Product Liability."
Risks Associated with Proprietary Rights. The Company relies primarily
upon trade secret and copyright laws to protect its proprietary technology. The
Company enters into trade secret and confidentiality agreements with its
employees and also enters into confidentiality agreements with its distributors
and customers. Such confidentiality agreements typically limit access to, and
seek to prohibit decompilation and reverse engineering of the object code
embedded in the Company's AutoDE software products and other proprietary
software. The Company also typically uses a proprietary physical security device
developed by the Company and proprietary software to control the identity,
number of users and term of use of its AutoDE software products. The Company has
historically declined to seek patent protection for its AutoDE software products
because patents on such products would result in the public disclosure of
proprietary ideas and structures associated with its software. Further, the
Company generally has declined to seek copyright registration of its
copyrightable software since the registration process requires the disclosure of
certain portions of its source code and therefore increases the risk that a
competitor could use such copyright registrations to obtain sensitive
information regarding the Company's AutoDE software products. The Company has
applied for, and received U.S. trademark and service mark registrations on many
of the trademarks and service marks used in marketing its products and services.
There can be no assurance, however, that the steps taken by the Company to
protect its products and services under applicable intellectual property laws
and with the Company's proprietary control device are adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's
- 11 -
16
technology. Further, it is very difficult to police unauthorized use of the
Company's products due to the nature of software. Any such misappropriation of
the Company's technology or development of competitive technologies could have a
material adverse impact on the Company's business, operating results and
financial condition. In addition, the laws of certain countries in which the
Company's products are distributed do not protect the Company's intellectual
property rights to the same extent as the laws of the United States. For
example, the laws of many foreign jurisdictions in which the Company licenses
its software products protects trademarks solely on the basis of the first to
register. The Company currently does not possess any trademark registrations in
foreign jurisdictions, although it does have copyright protection of its
software products under the provisions of various international conventions.
Accordingly, intellectual property protection of its products and services may
be ineffective in many foreign countries. In summary, there can be no assurance
that the protection provided by the laws of the United States or foreign
jurisdictions will be sufficient to protect the Company's intellectual property.
The Company could incur substantial costs in protecting and enforcing
its intellectual property rights. Although there presently are no pending or
threatened intellectual property claims against the Company, third parties may,
in the future, assert patent, trademark, copyright and other intellectual
property right claims to technologies which are incorporated into the Company's
products. In such event, the Company may be required to incur significant costs
in reaching a resolution to the asserted claims. There can be no assurance that
such a resolution would not require that the Company pay damages or obtain a
license to the third party's intellectual property rights in order to continue
licensing the Company's products as currently offered or, if such a third party
license is required, that it would be available on terms acceptable to the
Company.
Certain technology used in the Company's current products and products
under development include technology licensed from third parties. These licenses
generally require the Company to pay royalties and to fulfill confidentiality
obligations. The termination of any such licenses, or the failure of the third
party licensors to adequately maintain or update their products, could result in
delays in the Company's ability to ship certain of its products or in delays in
the introduction of the Company's new or enhanced products while it searches for
similar technology from alternative sources, if any, which would prove costly.
Any need to implement alternative technology could prove to be very expensive
for the Company and any delay in product introduction or shipment could result
in a material adverse effect on the business, result of operations and financial
condition of the Company. It may also be necessary or desirable in the future to
obtain additional licenses for use of third party products in the Company's
products and there can be no assurance that the Company will be able to do so on
commercially reasonable terms, if at all. See "Business - Proprietary Rights."
Risks Attendant to Strategic Alliances or Acquisitions. The Company's
business strategy includes the possible acquisition of companies or technologies
or the entry into strategic alliances which will complement or supplement the
products and services sold by the Company. No assurance can be given that the
Company will be able to find attractive acquisition or strategic alliance
candidates, or that after completion of an acquisition or entry into an alliance
the Company will be able to effectively integrate the acquired operations or to
profitability manage such operations or strategic alliances. The failure to
- 12 -
17
complete acquisitions or enter into strategic alliances could have a material
adverse effect on the Company's ability to grow its revenues in the future.
There are significant risks attendant to the Company's entry into
strategic alliances or the consummation of acquisitions. The Company has
recently entered into three strategic alliances and may enter into additional
strategic alliances in the future. Risks inherent in such current and any future
alliances include, among others, the inability to realize the intended benefits
of an alliance, the Company's increased reliance on third parties, the increased
payment of third party licensing fees or royalties for incorporation of third
party technology into the Company's products, the inadvertent transfer of the
Company's proprietary technology to a strategic "partner" and the opportunity
costs associated with entering into alliances. If any strategic alliance or
acquisition is consummated for cash and the Company borrows the required funds,
the Company may become highly leveraged, which could make it vulnerable to
increases in interest rates and extended economic downturns, limiting the
Company's flexibility in responding to changing economic and industry
conditions. If any strategic alliance or acquisition is financed by the issuance
of additional Common Stock or other convertible securities, such issuance may be
without stockholder approval and could dilute current stockholders and
stockholders who purchase shares of Common Stock in this Offering and may have a
negative impact on earnings per share and on the market price of the Common
Stock. There can be no assurance that the Company will be able to obtain
additional debt or equity financing on terms favorable to the Company, or at
all, or if obtained, there can be no assurance that such debt or equity
financing will be sufficient for the financing needs of the Company.
Dependence on Management Personnel. The Company's future business
results depend in significant part on Herbert G. Blecker, the Company's Chairman
of the Board, President and Chief Executive Officer ("Mr. Blecker"), William F.
Geritz, III, the Company's Executive Vice President ("Mr. Geritz") and other
senior management and key employees, including certain engineering, managerial
and marketing personnel. The loss of the services of any of these individuals,
or groups of individuals, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company has employment
agreements with Messrs. Blecker and Geritz that include non-competition
covenants. See "Management - Employment Agreements."
Legal Proceedings. In 1979, the Company and Mr. Blecker were convicted
by a federal court for defrauding the General Services Administration ("GSA") by
making misstatements regarding Company employee qualifications in connection
with the performance of a subcontract for GSA, which resulted in overbilling the
GSA for such employees' services. The Company was fined $62,000 and Mr. Blecker
was sentenced to one year imprisonment, of which he served nine months. The GSA,
in 1983, sent a letter to the Company stating that the Company would be
permitted to continue to contract with the GSA. In addition, as a result of a
dispute with the Internal Revenue Service ("IRS") regarding a payment plan for
back taxes, the Company filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code in 1985 and emerged therefrom in 1988, making all payments
required pursuant to its plan of reorganization, the final payment being made in
1993. The Company believes that the foregoing described legal proceedings have
not had an adverse impact on the Company's recent business, financial condition
or results of operations. See "Business - Legal Proceedings - Prior Legal
Proceedings."
- 13 -
18
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. Although the Company currently offers software products that
are either designed to be year 2000 compliant or have been, or are being or will
be upgraded to be year 2000 compliant, there can be no assurance that the
Company's software products contain all necessary date code changes. In
addition, the Company has warranted, and may in the future warrant, to certain
customers that its products will be year 2000 compliant, and the failure of such
products to be year 2000 compliant could have a material adverse effect on the
Company's business, financial condition or results of operations. Any failure of
the Company's products to be year 2000 compliant could result in a material
adverse effect on the Company's business, financial condition or results of
operations.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims arising from a customer's use of the
Company's products. The Company does not guarantee that any particular result
will be obtained through the use of its AutoDE software, because the customer's
input variables typically control the results of the product's calculations. It
is possible, however, that the limitation of liability provisions contained in
the Company's license agreements may not be effective as a result of existing or
future federal, state or local laws or ordinances or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of its software may entail the risk of such
claims, which could be substantial in light of the applications in which the
Company's products are used. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Broad Management Discretion in Use of Proceeds. The net proceeds to the
Company from the sale of the Common Stock offered by the Company hereby at an
assumed initial public offering price of $8.00 per share (the midpoint of the
range as set forth on the cover page of this Prospectus) are estimated to be
$17.4 million, after deducting the estimated underwriting discount and Offering
expenses payable by the Company. Although the Company currently anticipates that
it will use a portion of such proceeds to further its strategic goals, the
remainder of such proceeds are currently allocated only for general corporate
purposes. Moreover, management will have the discretion to modify the use of net
proceeds, as described under the caption "Use of Proceeds." Consequently,
management will have broad discretion over the use of the net proceeds of the
Offering.
Control by Principal Stockholders. Upon completion of the Offering, Mr.
Blecker, the Chairman of the Board and Chief Executive Officer, and his wife,
Eunice E. Blecker, the Company's Treasurer and Secretary (collectively, the
"Principal Stockholders"), will, in the aggregate, beneficially own
approximately 54.5% of the issued and outstanding shares of Common Stock of the
Company, and will therefore have the ability to effectively control the outcome
of all matters (including the election of directors, any merger or
consolidation, or the sale of all or substantially all of the Company's assets)
submitted to the stockholders for approval. This concentration of ownership may
also have the effect of delaying, deferring
- 14 -
19
or preventing a change in control of the Company and making certain
transactions more difficult or impossible absent the support of such
stockholders, including proxy contests, mergers involving the Company, tender
offers, open-market purchase programs or other purchases of Common Stock that
could give public, minority stockholders of the Company the opportunity to
realize a premium over the then-prevailing market price for shares of Common
Stock. See "Principal Stockholders."
Anti-Takeover Effects of the Company's Articles of Incorporation and
Maryland Law. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of preferred stock, $.01 par value per share, of the Company
(the "Preferred Stock"), of which 100 shares of Series A Preferred Stock will be
outstanding following consummation of the Recapitalization, and to determine the
price, rights, preferences, privileges and restrictions of the unissued shares
thereof, including voting rights, without any further vote or action by the
Company's stockholders within certain limitations as prescribed by the rules of
the Nasdaq National Market. See "Description of Capital Stock." Moreover, the
Articles of Incorporation ("Articles") of the Company contain certain provisions
which, among other things, maintain a "staggered" Board of Directors, limit the
personal liability of, and provide indemnification for, the directors of the
Company, require that stockholders comply with certain requirements before they
can nominate someone for director or submit a proposal before a meeting of
stockholders, limit the ability of stockholders to call special meetings of
stockholders, limit the ability of stockholders to act by written consent and
require a supermajority of stockholders in the event that a "related person" (as
defined) attempts to engage in a business combination with the Company. See
"Description of Capital Stock -- Maryland Anti-Takeover Law and Certain
Provisions of the Articles of Incorporation."
No Prior Public Trading Market. Prior to the Offering, there has been
no public trading market for shares of the Common Stock, and there can be no
assurance that an active public trading market will develop following
completion of the Offering or, if developed, that such market will be
sustained. The initial public offering price of the shares of Common Stock was
determined by negotiation between the Company and the Underwriters and will
not necessarily reflect the market price of the Common Stock following the
Offering. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
Possible Volatility of Stock Price. The market price for the Common
Stock following the Offering will be affected by a number of factors, including
the announcement of new products, product enhancements or services by the
Company or its competitors, quarterly variations in the Company's results of
operations or results of operations of the Company's competitors, changes in
earnings estimates or recommendations by securities analysts, developments in
the Company's industry and in the process manufacturing segments of various
industries, general market and economic conditions and other factors, including
factors unrelated to the operating performance of the Company or its
competitors. In addition, stock prices for many companies in the technology and
emerging growth sectors have experienced wide fluctuations which have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations may adversely affect the market price of the Company's Common
Stock.
Shares Eligible for Future Sale. Sales of a substantial number of
shares of Common Stock in the public market following the Offering could
adversely affect the market price
- 15 -
20
of the Common Stock prevailing from time to time. Upon completion of this
Offering, the Company will have 5,500,000 shares of Common Stock outstanding. Of
these outstanding shares, the 2,500,000 shares sold in this Offering will be
freely transferable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless they are held
by "affiliates" of the Company within the meaning of Rule 144 promulgated under
the Securities Act ("Rule 144") as currently in effect. The remaining 3,000,000
shares held by existing stockholders will be "control shares" within the meaning
of Rule 144 and may not be sold in the absence of registration under the
Securities Act or pursuant to an exemption from registration under Rule 144
promulgated under the Securities Act.
The Company and each of the Principal Stockholders of the Company have
entered into lock-up agreements providing that neither the Company nor any
Principal Stockholder will offer, sell, pledge, grant an option for the sale of
or otherwise dispose of shares of Common Stock, or any interest therein, or any
securities exercisable for or convertible into shares of Common Stock, for a
period of 180 days after the effective date of the offering made hereby (until
______ __, 1998) without the prior written consent of Hoak Breedlove Wesneski &
Co. Any shares subject to these lock-up agreements may be released at any time
by Hoak Breedlove Wesneski & Co.
As of the date of this Prospectus, the Company has reserved an
aggregate of 760,500 shares of Common Stock for issuance pursuant to the Stock
Option Plan and options to purchase 437,400 shares will be outstanding under the
Stock Option Plan immediately prior to the commencement of the Offering. Such
options will vest at a rate of 20% per year on each annual anniversary of the
date on which the option was granted. The Company also has reserved 507,000
shares for issuance under the Recognition Plan, none of which are anticipated to
be granted immediately following the consummation of the Offering. As soon as
practicable following the Offering, the Company intends to file registration
statements on Form S-8 under the Securities Act to register shares of Common
Stock reserved for issuance under such plans. Such registration statements will
automatically become effective immediately upon filing. See "Shares Eligible for
Future Sale."
Substantial Dilution. Purchasers of Common Stock offered hereby will
suffer an immediate and substantial dilution of $4.56 per share in net tangible
book value per share of the Common Stock. See "Dilution."
- 16 -
21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $8.00 per share are estimated to be $17.4 million, after deducting the
estimated underwriting discount and Offering expenses payable by the Company
(or approximately $20.1 million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds to further its strategic
goals as described herein, and therefore expects to utilize a portion of the net
proceeds to accelerate its development of complementary AutoDE software
products, to expand its engineering and direct sales and marketing force, for
current or possible future strategic alliances, for the possible acquisition of
complementary technologies or companies, and for general corporate purposes. See
"Business - Strategy."
Company management continually evaluates the manner in which it can
most effectively bring new products or product enhancements to market and,
accordingly, reviews on a constant basis whether it is more efficacious to
develop internally or acquire (by purchase, license or alliance) certain
technologies. As a consequence, the amount of net proceeds to be devoted to
furthering a given element of the Company's strategic plan, such as internal
product development, may be re-directed towards furthering one or more other
elements of the Company's strategic plan, such as possibly entering into
strategic alliances or undertaking acquisitions. Accordingly, the net proceeds
which may be used for a particular purpose may be subject to change based on
future events which cannot be accurately predicted. Moreover, the Company
intends to maintain its flexibility to use the net proceeds to respond to other
business opportunities in the engineering software and software services
industry in the future. Consequently, management will have broad discretion over
the use of the proceeds in this Offering. See "Risk Factors - Broad Management
Discretion in Use of Proceeds."
The Company continues to evaluate potential strategic alliances and
potential acquisitions and to identify and have preliminary discussions with
potential strategic alliance and/or acquisition candidates, although there are,
as of the date of this Prospectus, no agreements, arrangements or understandings
between the Company and any party relating thereto. There can be no assurance
that any strategic alliance or acquisition can or will be consummated on terms
favorable to the Company, or at all. See "Risk Factors-Risks Attendant to
Strategic Alliances or Acquisitions" and "Business -Strategy."
Pending the uses described above, the Company will invest the net
proceeds from the sale of the Common Stock offered by it hereby in short-term,
investment grade, interest-bearing securities.
- 17 -
22
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on the Common
Stock and does not presently intend to pay cash dividends on the Common Stock in
the foreseeable future. Any payment of cash dividends on shares of Common Stock
will be within the discretion of the Company's Board of Directors and will
depend upon the earnings of the Company, the Company's capital requirements,
restrictions imposed by the Company's lenders, if any, applicable requirements
of the Maryland General Corporation Law ("MGCL") and other factors considered
relevant by the Company's Board of Directors.
- 18 -
23
CAPITALIZATION
The following table sets forth the (unaudited) capital lease obligation
and capitalization of the Company at October 31, 1997, and as adjusted to give
effect to the Offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
the consolidated financial statements of the Company and the notes related
thereto included elsewhere in this Prospectus.
OCTOBER 31, 1997
--------------------------------------
ACTUAL AS ADJUSTED
--------------- -----------------
(In thousands)
Capital lease obligation, less current portion................................ $ 5 $ 5
---- ----
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized, 100 shares
Series A Preferred Stock issued and outstanding actual; 100 shares Series A
Preferred Stock issued and outstanding as
adjusted(1).............................................................. -- --
Common Stock, $.01 par value, 20,000,000 shares authorized, 3,000,000 shares
issued and outstanding actual; 5,500,000 shares issued and
outstanding as adjusted(2)............................................... 30 55
Additional paid-in capital................................................. 10 17,385
Retained earnings.......................................................... 1,444 1,444
Cumulative foreign currency translation adjustment......................... 12 12
----- ------
Total stockholders' equity.............................................. 1,496 18,896
----- ------
Total capitalization................................................. $1,501 $18,901
===== ======
- --------------------
(1) The Company will issue 100 shares of Series A Preferred Stock in
connection with the Recapitalization, which will be consummated
immediately prior to the closing of the Offering. See "Certain
Transactions - Pending Recapitalization."
(2) Excludes (i) 760,500 shares of Common Stock reserved for issuance under
the Stock Option Plan, of which options to purchase approximately
437,400 shares of Common Stock are expected to be granted prior to the
commencement of the Offering with the exercise price to be set at the
initial public offering price set forth on the cover page of this
Prospectus, and (ii) 507,000 shares of Common Stock reserved for
issuance under the Recognition Plan, of which no shares of Common Stock
are expected to be granted immediately following consummation of the
Offering. See "Management - Stock Plans - 1998 Stock Option Plan" and
"- Recognition and Retention Plan and Trust."
- 19 -
24
DILUTION
At October 31, 1997, the unaudited net tangible book value of the
Company was $994,000 or $0.33 per share of Common Stock outstanding. The net
tangible book value per share represents the amount of total assets (excluding
intangible assets) less total liabilities, divided by the total number of shares
of Common Stock outstanding. At October 31, 1997, after having given effect to
the sale of 2,500,000 shares of the Common Stock in the Offering by the Company
at an assumed initial public offering price of $8.00 per share and after
deduction of estimated underwriting discounts and Offering expenses payable by
the Company, the pro forma net tangible book value of the Company would have
been $18.9 million or $3.44 per share. This represents an immediate increase in
pro forma net tangible book value of $3.11 per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $4.56 per
share to the new investors purchasing shares of Common Stock in this Offering.
The following table illustrates this per share dilution:
Assumed initial public offering price per share.............................................. $8.00
----
Net tangible book value per share at October 31, 1997(1)..................................... $0.33
Increase in pro forma net tangible book value per share attributable
to new investors............................................................................ 3.11
----
Pro forma net tangible book value per share after the Offering............................... 3.44
----
Dilution per share to new investors.......................................................... $4.56
====
- ----------
(1) Based upon 3,000,000 shares of Common Stock outstanding as of October
31, 1997. Does not include 1,267,500 shares of Common Stock reserved for
future issuance under the Company's Stock Option Plan and Recognition
Plan. See "Management - Stock Plans - 1998 Stock Option Plan" and "-
Recognition and Retention Plan and Trust."
- 20 -
25
The following table summarizes, on a pro forma basis as of October 31,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid for such shares and the average price per share paid for such
shares by existing stockholders and by the new investors purchasing shares of
Common Stock from the Company in this Offering (based on an assumed initial
public offering price of $8.00 per share and before deduction of estimated
underwriting discounts and Offering expenses payable by the Company):
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------------------- ---------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- ------------- --------------- ---------- ---------------
Existing stockholders............... 3,000,000 54.5% $ 40,000 0.2% $0.01
New investors....................... 2,500,000 45.5 20,000,000 99.8 $8.00
--------- ----- ----------- -----
Total............................... 5,500,000 100.0% $20,040,000 100.0%
========= ===== =========== =====
- ----------------------
(1) Assumes no exercise of stock options. As of the date of the consummation
of this Offering, there will be outstanding options to purchase 437,400
shares of Common Stock with an exercise price equal to the initial
public offering price, which options will vest and become exercisable at
the rate of 20% per year in 1999 through 2003. It is also anticipated
that options to purchase shares will be issued to non-employee directors
immediately after the Company's 1998 annual meeting of stockholders and
that no shares will be granted under the Recognition Plan immediately
following the Offering. See "Management - Stock Plans - 1998 Stock
Option Plan" and "- Recognition and Retention Plan and Trust."
- 21 -
26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the years
ended April 30, 1995, 1996 and 1997 are derived from the Company's audited
consolidated financial statements, which have been audited by Grant Thornton
LLP, independent accountants, whose report for the years ended April 30, 1996
and 1997 is included elsewhere in this Prospectus. The selected financial data
presented below for the six months ended October 31, 1996 and 1997 are derived
from the unaudited consolidated financial statements of the Company that have
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for the periods presented. The operating results for the six
months ended October 31, 1997 are not necessarily indicative of the results to
be expected for any future period. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this Prospectus.
Six Months Ended
Year Ended April 30, October 31,
----------------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ----------- ------------ ---------- -----------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
DATA:
Revenue:
Software license revenue.................. $3,166 $3,812 $5,165 $2,472 $3,219
Maintenance fee and other revenue......... 1,892 1,866 2,174 1,090 1,041
----- ----- ----- ----- -----
Total revenue....................... 5,058 5,678 7,339 3,562 4,260
Expenses:
Cost of software license revenue.......... 507 562 871 419 607
Cost of maintenance fee and other
revenue.................................. 322 537 520 248 286
Selling and marketing..................... 1,663 2,172 2,473 1,185 1,429
Research and development.................. 841 850 904 400 511
General and administrative................ 1,221 1,274 1,541 741 918
----- ----- ----- ----- -----
Total operating expenses............. 4,554 5,395 6,309 2,993 3,751
----- ----- ----- ----- -----
Income from operations.................... 504 283 1,030 569 509
Interest income, net...................... 8 21 45 13 49
Other (expense) income.................... (9) -- -- -- --
------ ----- ------ ------ -----
Income before income taxes................ 503 304 1,075 582 558
Provision for income taxes................ 203 111 419 230 215
----- ----- ----- ----- -----
Net income........................... $ 300 $ 193 $ 656 $ 352 $ 343
===== ===== ===== ===== =====
Net income per share...................... $ 0.10 $ 0.06 $ 0.22 $ 0.12 $ 0.11
===== ===== ===== ===== =====
Weighted average common
shares................................... 3,000 3,000 3,000 3,000 3,000
April 30, October 31,
------------------------------------------------------
1995 1996 1997 1997
-------------- -------------- -------------- ----------------
(Unaudited)
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................ $ 236 $ 496 $1,096 $1,078
Total assets............................... 2,043 2,859 4,554 5,271
Total liabilities.......................... 1,762 2,397 3,427 3,775
Total stockholders' equity................. 281 462 1,127 1,496
- 22 -
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The discussion in this Prospectus contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. While the forward-looking
statements reflect the Company's good faith beliefs, they are not guarantees of
future performance and involve known and unknown risks and uncertainties. The
Company's actual results could differ materially from those discussed here. Some
of the factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
The Company was organized in 1969 to develop and market engineering
services to the process manufacturing segments of the chemical, petroleum
refining and other industries. During this period, the Company developed a cost
estimation software product to be run on the mainframe computers of certain of
its large customers. In 1970, the Company shipped its first commercial cost
estimation software program, the COST System. With the proliferation of powerful
desktop computers and easy-to-use operating systems like Windows in the early
1990s, the Company shifted direction to focus on the development of AutoDE
software products. In fiscal 1993, the Company released the first of a series of
Windows-based AutoDE products.
The Company derives its revenue primarily from the sale of licenses of
its AutoDE software products, and, to a lesser extent, from maintenance fee and
other revenue. Revenue from software licenses accounted for 75.6% and 70.4% of
the Company's total revenues for the six months ended October 31, 1997 and for
fiscal 1997, respectively. Maintenance fee, training, consulting and other
services accounted for 24.4% and 29.6% of the Company's revenues for the six
months ended October 31, 1997 and for fiscal 1997, respectively.
The Company typically licenses its AutoDE software to customers on a
per-authorized user basis for a one or multi-year term. The license fee for a
one-year license for a single U.S. user of one of the Company's core AutoDE
software products ranges from $7,900 to $31,500, depending on the product and
license term. The license fee charged by the Company per authorized user
declines as the customer increases the total number of authorized users and
increases the commitment term of the license.
Customers who license software products from the Company under
multi-year agreements have the option of paying the applicable license fee in
full at the beginning of the term of the license or making annual payments
throughout the term of the license. A substantial majority of customers who have
multi-year agreements elect the annual payment option. The Company believes that
this election is principally because the customers prefer to pay for the
Company's AutoDE software products out of their operating budgets. Customers who
elect to pay throughout the term of the license are required to pay
- 23 -
28
additional annual charges based upon increases in the Consumer Price Index in
the United States, the Retail Price Index in the United Kingdom, the Consumer
Price Index in Japan, the United Kingdom Retail Price Index in the European
Union, and the United States Consumer Price Index elsewhere, depending upon the
location of the Company's billing office.
The following table sets forth the license terms remaining at October
31, 1997 for all licenses in effect on that date:
License Term No. of Users Percent of All
Remaining Licensed* Licensed Users
------------------- ------------ --------------
Less than 12 Months 524 42.5%
12-23 Months 107 8.7
24-35 Months 66 5.3
36-47 Months 224 18.2
48-59 Months 263 21.3
60 or More Months 50 4.0
- ------------------
* Does not include 4 older licenses which permit an unlimited number of
users, nor does it include 7 multi-year term licenses that have been
prepaid.
The Company believes that its ability to sell a substantial number of
multi-year term licenses, as demonstrated by the above table, is an important
historical financial strength. For the twelve-month period ended October 31,
1997, 68.5% of licensed authorized users whose licenses expired during such
period elected to renew such licenses (including renewals that involved the
substitution of another ICARUS product), and 49.1% of all new licenses sold to
authorized users were for a term of two or more years. The Company is highly
dependent upon license renewal revenues. See "Risk Factors - Dependence on
Contract Renewals."
One of the Company's strategic alternatives is to enter into technology
licensing arrangements or strategic alliances to more quickly bring to market
new AutoDE software products or product enhancements by combining its technology
with the technology of its strategic "partners." Management of the Company
believes that any revenue generated as a result of such licensing or alliance
arrangements will be partially offset by increased costs of software license
revenue due to the more significant royalty or license fee obligations of the
Company arising out of such arrangements. In addition, the Company also expects
that it will have certain higher expenses in near-term future periods, as it
recently increased the level of its expenses associated with product development
and sales, with no certainty that the incurrence of such expenses will result in
future revenues.
The Company recognizes revenue from product licensing agreements in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 91-1, "Software Revenue Recognition" ("SOP 91-1"). Revenue from
software license agreements is recognized upon execution of a contract and
shipment of the software, provided that no significant vendor obligations remain
and collection is probable. Upon renewal of one-year licenses, revenue is
recognized on the contract renewal date. For multi-year agreements,
- 24 -
29
revenue is recognized ratably over the multi-year period on each successive
anniversary date. Any amount billed in advance of satisfying the above revenue
recognition criteria is classified as current and long-term deferred revenue.
Maintenance revenue is recognized ratably over the support period, which is
generally one year. Such revenue includes amounts bundled with the initial
license fee arrangement for which separate prices have been derived for
financial reporting purposes based upon the Company's historical retail pricing
for separate arrangements. Consulting and training revenue is recognized as the
related services are performed. See Note A of Notes to Consolidated Financial
Statements.
The American Institute of Certified Public Accountants has released
Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"),
which supersedes SOP 91-1. The new SOP 97-2 will be effective for all
transactions entered into by the Company in fiscal year 1999. The new SOP 97-2
requires, among other things, that revenue should be recognized when there is
persuasive evidence of an existing arrangement, delivery has occurred, the fees
charged are fixed or determinable and collectibility is probable. Additionally,
SOP 97-2 provides that for those arrangements which consist of multiple elements
such as upgrades, enhancements and post-contract support, the fees charged must
be allocated to each element of the arrangement based upon vendor-specific
objective evidence of fair value, which is limited to a price charged when the
element is sold separately or the price for the element is established by
management. The Company currently recognizes revenue on license agreements when
all of the conditions described above have been met, and revenue on multi-year
license agreements typically is not recognized until such time that payments
from customers become due (i.e., the license anniversary date). Additionally,
the Company has allocated fees between elements of its arrangements based upon
established prices charged for those elements when sold separately. In
management's opinion, the impact of SOP 97-2 is not expected to be material.
Software development costs relating to new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, after which additional costs are
capitalized in accordance with Financial Accounting Standards Board Statement
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Historically, the Company has not incurred material
software development costs following the establishment of technological
feasibility, and therefore no costs for software development have been
capitalized for the six months ended October 31, 1997 or for fiscal years 1997,
1996 or 1995.
- 25 -
30
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations
data as a percentage of total revenue for the periods indicated.
Six Months Ended
Year Ended April 30, October 31,
-------------------------------------- ------------------------------
1995 1996 1997 1996 1997
--------- --------- --------- ------------- ------------
(Unaudited)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue
Software license revenue........................ 62.6% 67.1% 70.4% 69.4% 75.6%
Maintenance fee and other revenue............... 37.4 32.9 29.6 30.6 24.4
----- ---- ----- ----- -----
Total revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses
Cost of software license revenue................ 10.0 9.9 11.9 11.8 14.3
Cost of maintenance fee and other
revenue........................................ 6.4 9.4 7.1 7.0 6.7
Selling and marketing........................... 32.9 38.3 33.7 33.3 33.5
Research and development........................ 16.6 15.0 12.3 11.2 12.0
General and administrative...................... 24.1 22.4 21.0 20.7 21.6
----- ----- ----- ----- -----
Total operating expenses................... 90.0 95.0 86.0 84.0 88.1
----- ----- ----- ----- -----
Income from operations............................. 10.0 5.0 14.0 16.0 11.9
Interest income, net............................... .2 .4 .6 .4 1.2
Other (expense) income............................. (.2) -- -- -- --
----- ------ ------- ------ -----
Income before income taxes......................... 10.0 5.4 14.6 16.4 13.1
Provision for income taxes......................... 4.1 2.0 5.7 6.5 5.0
----- ----- ----- ----- -----
Net income......................................... 5.9% 3.4% 8.9% 9.9% 8.1%
===== ===== ===== ===== =====
SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1996
Total Revenue. Total revenue for the six months ended October 31, 1997
increased by $698,000 or 19.6% to $4.3 million from $3.6 million for the six
months ended October 31, 1996. Software license revenue consists of fees paid by
the Company's customers to license its AutoDE software under single or
multi-year arrangements. Software license revenue increased 30.2% from $2.5
million for the six months ended October 31, 1996 to $3.2 million for the six
months ended October 31, 1997. The increase in software license revenue for the
six-month period in fiscal 1998 as compared to the six-month period in fiscal
1997 was primarily due to renewals of software licenses, the addition of new
users by existing customers, the sale of new products developed in fiscal 1996
to existing customers and the sale of new and existing products to new
customers. Maintenance fee and other revenue consists of maintenance fee,
training, consulting services and other revenue. Maintenance fee and other
revenue decreased 4.5% from $1.1 million for the six months ended October 31,
1996 to $1.0 million for the six months ended October 31, 1997. The decrease was
primarily attributable to a reduction in the number of on-site training courses
conducted by the Company during this period due to a temporary reduction in the
Company's staff dedicated to training.
Cost of Software License Revenue. Cost of software license revenue
consists of costs related to delivery of software (including disk duplication
and system control device costs),
- 26 -
31
printing of manuals and packaging, and commissions, royalties and license fees
paid to third parties. Cost of software license revenue was $607,000 and
$419,000 for the six months ended October 31, 1997 and 1996, respectively.
Expressed as a percentage of software license revenue, cost of software license
revenue was 18.9% and 17.0% in the six-month periods of fiscal years 1998 and
1997, respectively. The increase in the cost of software license revenue is
largely attributable to increased labor costs associated with product releases,
independent sales representatives' commission expenses as well as increased
duplication expenses.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue consists primarily of technical support, training, consulting and
facility costs as well as other contract costs. Cost of maintenance fee and
other revenue was $286,000 and $248,000 for the six months ended October 31,
1997 and 1996, respectively. Expressed as a percentage of maintenance fee and
other revenue, the cost of maintenance fee and other revenue was 27.5% and 22.8%
for the six months ended October 31, 1997 and 1996, respectively.
Selling and Marketing. Selling and marketing expense consists primarily
of personnel costs related to sales and marketing, including occupancy, travel,
entertainment, telephone, promotional, trade show expenses and direct sales
force commissions. Selling and marketing expense was $1.4 million and $1.2
million in the six months ended October 31, 1997 and 1996, respectively. Selling
and marketing expense as a percentage of total revenue was 33.5% and 33.3% for
the six months ended October 31, 1997 and 1996, respectively. The increase in
selling and marketing expense during the six-month period in fiscal 1998, as
compared to the same period in fiscal 1997, was chiefly the result of the
expansion of the Company's direct sales force and increases in the Company's
participation in exhibitions and related expenses.
Research and Development. Research and development expense consists
principally of personnel, equipment and facility costs incurred in the research,
design, development and refinement of the Company's products. Research and
development expense was $511,000 in the first six months of fiscal 1998 as
compared to $400,000 for the same period in fiscal 1997. Research and
development expense as a percentage of total revenue was 12.0% and 11.2% for the
first six months of fiscal 1998 and 1997, respectively. The increase reflects
the Company's continued commitment and investment in the research and
development of new AutoDE software products.
General and Administrative. General and administrative expense consists
principally of personnel costs for corporate administration, in addition to
accounting and legal services, depreciation, equipment and facility costs, and
general management expenses of the Company. General and administrative costs
were $918,000 and $741,000 for the six months ended October 31, 1997 and 1996,
respectively. General and administrative expense as a percentage of total
revenue was 21.6% and 20.7% for the six months ended October 31, 1997 and 1996,
respectively. The increase in general and administrative expense was chiefly
attributable to the establishment of a reserve, totaling approximately $110,000,
for a potential claim against the Company by a former employee, the opening of
the Company's Houston, Texas office, the hiring of the Company's Chief Financial
Officer and an increase in administrative payroll and related expenses.
- 27 -
32
Interest Income, net. Interest income, net increased $36,000 from
$13,000 for the six months ended October 31, 1996 to $49,000 for the same period
in 1997 because of larger cash balances on deposit.
Provision (Benefit) for Income Taxes. The Company's effective tax rate
was 38.5% and 39.5% for the six months ended October 31, 1997 and 1996,
respectively.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Total Revenue. Total revenue increased $1.6 million or 29.2% from $5.7
million in fiscal 1996 to $7.3 million in fiscal 1997. Software license revenue
increased to $5.2 million in fiscal 1997 from $3.8 million in fiscal 1996,
representing an increase of 35.5%. The increase in software license revenue in
fiscal 1997 as compared to fiscal 1996 was primarily due to renewals of software
licenses, the addition of new users, and the sale of new products to existing
customers resulting from a promotional campaign which commenced late in the
third quarter of 1997 and continued through the fourth quarter of 1997, and to a
lesser extent, sales associated with the creation of the Company's Tokyo office
in December 1995. Maintenance fee and other revenue increased by $308,000 or
16.5% from $1.9 million in fiscal 1996 to $2.2 million in fiscal 1997. The
increase was largely the result of increases in training and maintenance fees
associated with increased license sales and increased training, partially offset
by reductions in consulting and other services.
Cost of Software License Revenue. Costs of software license revenue was
$871,000 and $562,000 in fiscal years 1997 and 1996, respectively. Expressed as
a percentage of software license revenue, cost of software license revenue was
16.9% and 14.7% in fiscal years 1997 and 1996, respectively.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue was $520,000 and $537,000 in fiscal years 1997 and 1996,
respectively. Expressed as a percentage of maintenance fee and other revenue,
cost of maintenance fee and other revenue was 23.9% and 28.8% in fiscal years
1997 and 1996, respectively. Cost of maintenance fee and other revenue decreased
from fiscal years 1996 to 1997 due to a decrease in third party hardware
expenses.
Selling and Marketing. Selling and marketing expense was $2.5 million
and $2.2 million in fiscal years 1997 and 1996, respectively. However, as a
percentage of total revenues, selling and marketing expense was 33.7% and 38.3%
in fiscal years 1997 and 1996, respectively. The increase in actual expense in
fiscal 1997 from fiscal 1996 was primarily the result of new sales and marketing
activity associated with the opening of the Company's new Tokyo office in
December 1995, the expansion of the Company's direct sales force, both
nationally and internationally, and increases in telephone, travel and
commission expenses.
Research and Development. Research and development expense was $904,000
and $850,000 in fiscal years 1997 and 1996, respectively. However, research and
development expense as a percentage of revenue was 12.3% and 15.0% in fiscal
years 1997 and 1996, respectively. The increase in actual expense reflects the
Company's continued commitment and investment in the research and development of
new AutoDE software products.
- 28 -
33
General and Administrative. General and administrative costs were $1.5
million and $1.3 million in fiscal years 1997 and 1996, respectively. However,
general and administrative expense as a percentage of revenue was 21.0% and
22.4% in fiscal years 1997 and 1996, respectively. The increase in actual
expense is largely attributable to the formation of the Company's Tokyo office
in December 1995, the hiring of the Company's Chief Financial Officer, and to a
lesser degree increases in legal, accounting and temporary staff in preparation
for the Offering, and foreign exchange losses, which were partially offset by a
decline in equipment costs.
Interest Income, net. Interest income, net increased $24,000 from
$21,000 in fiscal 1996 to $45,000 in fiscal 1997.
Provision (Benefit) for Income Taxes. The Company's effective tax rate
was 38.9% and 36.5% in fiscal years 1997 and 1996, respectively.
YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995
Total Revenue. Total revenue increased 12.3% to $5.7 million in fiscal
1996 from fiscal 1995. Software license revenue increased 20.4% from fiscal 1995
to $3.8 million in fiscal 1996. The increase in software license revenue from
fiscal 1995 to fiscal 1996 was primarily due to the introduction of new products
in the first quarter of fiscal 1996, as well as the addition of new users by
existing customers, which was partially offset by a slight decline in the sales
of other products. Maintenance fee and other revenue remained constant at $1.9
million in fiscal 1996 and fiscal 1995.
Cost of Software License Revenue. Cost of software license revenue
increased 10.9% from fiscal 1995 to $562,000 in fiscal 1996 and represented
14.7% of software license revenue in fiscal 1996. Cost of software license
revenue increased over the prior year primarily due to higher third party
software and Control Device costs.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue increased $215,000 or 66.8%, to $537,000 and represented 28.8% of
maintenance fee revenue in fiscal 1996. Of this increase, $125,000 was the
result of an increase in the cost of hardware sold to customers using ICARUS
products. Additionally, $76,000 of this increase was a result of the increased
staffing required to support additional training classes offered by the Company.
Selling and Marketing. Selling and marketing expense increased 30.6%
from fiscal 1995 to $2.2 million or 38.3% of revenue in fiscal 1996. The
increase in selling and marketing expense in fiscal 1996 from fiscal 1995 was
generally attributable to the expansion of the Company's marketing efforts.
Research and Development. Research and development expense increased
1.1% from fiscal 1995 to $850,000 or 15.0% of total revenue in fiscal 1996.
General and Administrative. General and administrative costs increased
4.3% from fiscal 1995 to $1.3 million or 22.4% of revenue in fiscal 1996. The
increase was generally attributable to increases in depreciation, insurance
expense and office supplies.
- 29 -
34
Interest Income, net. Interest income, net increased $13,000 from
fiscal 1995 to $21,000 in fiscal 1996.
Provision (Benefit) for Income Taxes. The Company's effective tax rate
was 36.5% and 40.4% in fiscal years 1996 and 1995, respectively.
SELECTED QUARTERLY OPERATING RESULTS
The Company ships software products within a short period after receipt
of an order and typically does not have a material backlog of unfilled orders.
Total revenue in any quarter is dependent (and will become substantially
dependent to the extent the Company increases the number of contracts for new
and renewing customers that result in the recognition of license revenue upon
shipment) on orders booked and license renewals in that quarter and are not
predictable with any degree of certainty.
The Company's operating results have fluctuated in the past and may in
the future fluctuate significantly from quarter to quarter or on an annual basis
as a result of a number of factors, including, but not limited to: the size and
timing of customer orders; changes in license renewal rates, delays in renewals,
or failure of existing customers to renew their licenses with the Company when
their current licenses expire; the length of the Company's sales cycle; changes
in contract terms (including terms affecting the timing of recognition of
license revenue); success of the Company's service offerings; timing of new
product announcements and introductions by the Company and its competitors; the
Company's ability to develop, introduce and market new products and product
enhancements; market acceptance of the Company's products; deferrals of customer
orders in anticipation of new products or product features; the Company's
ability to control general and administrative costs; changes in the Company's
management team; and fluctuating economic conditions; and political instability
in, or trade embargoes with respect to, foreign markets. The Company's future
operating results may fluctuate as a result of these and other factors, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors - Fluctuations in Future
Operating Results."
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35
The following tables set forth selected quarterly statement of
operations data in dollars and as a percent of total revenue for fiscal 1997 and
for the first two quarters of fiscal 1998. These data are unaudited but, in the
opinion of the Company's management, reflect all adjustments that the Company
considers necessary for a fair presentation of these data in accordance with
generally accepted accounting principles. The quarterly results are not
indicative of future results of operations.
Three Months Ended
------------------------------------------------------------------------------------------
Fiscal 1997 Fiscal 1998
------------------------------------------------------- ---------------------------
July 31, October 31, January 31, April 30, July 31, October 31,
1996 1996 1997 1997 1997 1997
----------- -------------- ------------- ---------- ---------- --------------
(In thousands)
Revenue
Software license revenue......... $1,367 $1,105 $1,342 $1,351 $1,747 $1,472
Maintenance fee and other
revenue....................... 476 614 425 659 531 510
----- ----- ----- ----- ----- -----
Total revenue.................... 1,843 1,719 1,767 2,010 2,278 1,982
----- ----- ----- ----- ----- -----
Expenses
Cost of software license
revenue....................... 220 199 267 185 300 307
Cost of maintenance fee
and other revenue............. 115 133 142 130 125 161
Selling and marketing............ 645 540 651 637 686 743
Research and development......... 198 202 298 206 236 275
General and administrative....... 348 393 327 473 485 433
----- ----- ----- ----- ----- -----
Total operating expenses......... 1,526 1,467 1,685 1,631 1,832 1,919(1)
----- ----- ----- ----- ----- -----
Income from operations.............. 317 252 82 379 446 63
Interest income, net............. 5 8 22 10 21 28
Other (expense) income........... (7) 7 -- -- 1 (1)
----- ------ ----- ----- ----- -----
Income before income taxes.......... 315 267 104 389 468 90
Provision for income taxes.......... 119 111 45 144 176 39
----- ----- ----- ----- ----- ------
Net income.......................... $ 196 $ 156 $ 59 $ 245 $ 292 $ 51(1)
===== ===== ===== ===== ===== ======
- 31 -
36
Three Months Ended
-------------------------------------------------------------------------------------
Fiscal 1997 Fiscal 1998
------------------------------------------------------- ---------------------------
July 31, October 31, January 31, April 30, July 31, October 31,
1996 1996 1997 1997 1997 1997
---------- ------------ ------------ ---------- --------- -------------
(As a percentage of total revenue)
Revenue
Software license revenue.......... 74.2% 64.3% 75.9% 67.2% 76.7% 74.3%
Maintenance fee and other
revenue......................... 25.8 35.7 24.1 32.8 23.3 25.7
----- ----- ----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
Expenses
Cost of software license
revenue.......................... 11.9 11.6 15.1 9.2 13.2 15.5
Cost of maintenance fee
and other revenue............... 6.3 7.7 8.0 6.5 5.5 8.1
Selling and marketing............. 35.0 31.4 36.8 31.7 30.1 37.5
Research and development.......... 10.7 11.8 16.9 10.2 10.4 13.9
General and administrative........ 18.9 22.8 18.6 23.5 21.2 21.8
----- ----- ----- ----- ----- -----
Total operating expenses.......... 82.8 85.3 95.4 81.1 80.4 96.8(1)
----- ----- ----- ----- ----- -----
Income from operations............... 17.2 14.7 4.6 18.9 19.6 3.2
Interest income, net.............. 0.3 0.5 1.2 0.5 0.9 1.4
Other (expense) income............ (0.4) 0.4 -- -- -- --
----- ----- ----- ----- ----- -----
Income before income taxes........... 17.1 15.6 5.8 19.4 20.5 4.6
Provision for income taxes........... 6.5 6.5 2.5 7.2 7.7 2.0
----- ----- ----- ----- ----- -----
Net income........................... 10.6% 9.1% 3.3% 12.2% 12.8% 2.6%(1)
==== ===== ===== ===== ===== =====
- -----------------
(1) Total operating expenses were higher on an absolute basis and as a
percentage of total revenue during the second quarter of fiscal 1998 on
a comparative basis to the other quarters presented due primarily to
increased personnel and related benefit costs. During the second
quarter of fiscal 1998, increased selling and marketing expenses
reflect the hiring of additional sales and marketing personnel and an
increase in overall marketing and business development efforts. Also,
during this quarter, increased research and development expenses
reflect the addition of five new research and development employees,
one new technical support employee and related recruitment fees.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended October 31, 1997 and fiscal years
1997 and 1996, the Company satisfied its cash needs through cash provided by
operations. Cash provided by operating activities during the six months ended
October 31, 1997 and fiscal years 1997 and 1996 was approximately $648,000, $1.2
million and $519,000, respectively. At October 31, 1997 and at April 30, 1997
and 1996, the Company had working capital of $1.1 million, $1.1 million and
$496,000, respectively. The ratio of current assets to current liabilities at
October 31, 1997 and at April 30, 1997 and 1996 was 1.34 to 1, 1.39 to 1 and
1.25 to 1, respectively. The Company currently does not maintain a credit
facility.
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37
Cash used in investing activities has been for the purchase of property
and equipment which amounted to $158,000, $250,000 and $215,000 for the six
months ended October 31, 1997 and in fiscal years 1997 and 1996, respectively.
Cash used in financing activities for the six months ended October 31,
1997 and during fiscal years 1997 and 1996 was $1,000, $107,000 and $0,
respectively. Cash used in financing activities for the six months ended October
31, 1997 was for payments on a capital lease obligation. Cash used in financing
activities for fiscal 1997 was primarily for the repayment of two shareholder
notes that were issued in April 1992, in the aggregate amount of $125,000, with
interest at 6.5% annually. Such notes were repaid in full in January 1997.
The Company believes that the net proceeds from this Offering, existing
cash resources and cash flow from operations will be sufficient to fund the
Company's operations for at least the next twelve months. See "Use of Proceeds"
for more information regarding possible capital requirements with respect to the
Company's strategic goals.
INFLATION
Because many license agreements require an adjustment tied to certain
consumer or retail price indices, inflation has not had a significant impact on
the Company's operating results to date. The Company does not expect inflation
to have a significant impact on its results of operations during fiscal 1998.
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38
BUSINESS
THE COMPANY
ICARUS develops automated desktop engineering software for the process
manufacturing segments of the chemical, petroleum refining, pulp and paper,
food and other industries. The Company's 300-plus customers are primarily
large, multinational corporations that own and operate process manufacturing
plants (the "owner-operators") or primarily multinational engineering and
construction companies that provide services to owner-operators (the "E&C
companies"). The Company's customers include such companies as Mitsubishi
Chemical Corporation, Shell Oil Company, The Mead Corporation, Campbell Soup
Company and Fluor Daniel, Inc.
The Company's integrated AutoDE software products are widely used in
the chemical and petroleum refining industries. One or more of the Company's
products are licensed to 18 of the top 20 chemical companies and 18 of the top
20 petroleum refining companies, as such companies are listed in the "1997
Fortune 500 List," and 8 of the top 10 chemical plant contractors listed in
Engineering News Record's "Top 400 Contractors." Near-term growth opportunities
for the Company include the introduction of new AutoDE products to the
Company's current customers and to potential customers in the chemical and
petroleum refining industries, further penetration by existing and new products
in other industries, including the pharmaceutical, paper and pulp, food and
power industries, and continued expansion in international markets.
The Company's current software products automate important steps in the
"decision engineering" process through which a customer's engineering staff
evaluates the technological and economic feasibility of the construction or
modification of a process manufacturing plant and senior executives determine
whether to proceed with a proposed project. Despite the importance of this
decision, which may involve a capital investment in excess of one billion
dollars, these executives usually have only a limited ability to manage the
conventional decision engineering process, which is time-consuming,
labor-intensive, imprecise and expensive.
The Company's current products directly address a number of the
deficiencies in the conventional decision engineering process by
"re-engineering" the process to take full advantage of today's desktop computing
technology. The Company's products enable engineers to simulate, model and
analyze the design, cost and time requirements of a proposed project more
quickly and less expensively than they can using conventional engineering
methods. ICARUS products also enhance senior executives' ability to focus the
decision engineering process on business priorities. With more timely and
accurate information that integrates business considerations with sophisticated
engineering analysis, senior executives can make faster, better informed and
more confident decisions. Benefits arising from the use of the Company's
decision engineering software products include more effective strategic
planning, faster reaction to market developments and improved plant operating
efficiency, all of which enhance the customer's competitive position.
In addition to the Company's decision engineering products, other
AutoDE software products automate important steps in the "plant engineering"
process, which occurs after the
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39
decision to proceed with a project has been made. These products also facilitate
construction scheduling and cost estimation for smaller projects at existing
plants.
THE PROCESS MANUFACTURING BUSINESS
Process manufacturing of products in bulk quantities is performed in
the chemical, petroleum refining, pharmaceutical, pulp and paper, metal and
mineral, food, consumer product, power and other industries. Through chemical
reaction, combustion, mixing, separation, heating, cooling and other operations,
process manufacturing plants process raw materials (e.g., separate oil and gas
from other substances), refine those materials (e.g., extract propylene from oil
and gas feedstocks), produce intermediate products (e.g., synthesize nylon from
propylene) and manufacture finished products. Using data provided by industry
sources, the Company estimates that total worldwide process manufacturing annual
revenues exceed $3 trillion. Industry sources also indicate that more than
15,000 process manufacturing plants are now in operation worldwide and that
global spending on process manufacturing plant construction projects will exceed
$160 billion in 1998--an all-time high.
On a regular basis, owner-operators consider proposals to build or
modify process manufacturing plants. The Company believes that hundreds of
proposed process manufacturing projects are evaluated for every project actually
built. In evaluating the potential return-on-investment of project proposals,
owner-operators face three basic facts: First, the construction or modification
of a plant requires a substantial capital investment. A world-class petroleum
refining complex, for example, can cost in excess of one billion dollars.
Second, heightened global competition has reduced both profit margins and the
acceptable margin for error in project evaluation. Third, increasingly efficient
global capital markets will penalize an owner-operator, particularly a public
owner-operator, for allocating capital to a project that does not produce
satisfactory returns.
An E&C company faces an equally challenging business environment.
First, the E&C company must expend thousands of engineering man-hours on
competitive bid proposals. If the company does not win the bid, the man-hours
invested are lost. Second, the E&C company is under increasing pressure to
prepare more bid proposals without expanding their engineering staffs. Third,
the increasing use of lump-sum, turnkey project contracts has shifted much of
the financial risk of cost overruns, construction delays and performance
shortfalls from the owner-operator to the E&C company. Inaccurate bids or
improperly prepared proposals can result in multi-million dollar losses and
seriously damage the reputation of the E&C company.
THE DECISION ENGINEERING PROCESS
The conventional decision engineering process typically begins with a
senior business development executive at a major owner-operator, who has been
assigned the task of determining which of several market opportunities the
owner-operator should pursue. Building a plant to pursue a given opportunity may
involve a commitment of hundreds of millions or more than one billion dollars,
and the full impact of that capital investment decision may not be apparent for
years. To answer business-critical questions on a proposed project's scope,
cost, timing and return, the executive turns to his internal engineering staff
for assistance.
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40
In response to the senior executive's request, process engineers first
perform process simulation and create conceptual mechanical process design
alternatives. With these alternatives in hand, they select the core process
equipment, (e.g., distillation towers, compressors, etc.) and produce CAD and
CAE drawings, such as block diagrams, process flow diagrams and piping and
instrumentation diagrams. With the assistance of engineers from various
disciplines (such as mechanical, structural, civil and electrical engineering),
a conceptual mechanical project design is completed.
Once this design is complete, engineers calculate the quantities of
pipe, steel, instrumentation, process control, electrical fixtures, wiring,
paint, insulation, etc., necessary to build the project. Then, they research
cost information for alternative geographical locations and determine the number
of construction man-hours that will be required to install, lift, weld, connect
and construct each component of the project. A team of engineers then takes this
information and creates a critical-path-method schedule that outlines the tasks
necessary to complete the project on time and within budget. Finally, after the
evaluation of several different scenarios, a detailed decision engineering
report incorporating the conceptual mechanical design of the proposed project
together with cost estimates, preliminary engineering drawings and a preliminary
construction schedule is presented to the executive for review.
At this stage, project specifications are often modified, and the
decision engineering process must be repeated. A single change in one aspect of
the project may affect a multitude of engineering calculations. For example,
enlarging a pump will require a larger electrical motor and larger diameter
piping and conduit, which in turn will require a larger pump foundation, etc.
An apparently minor modification can thus result in substantially greater costs,
and despite the expense and delay, the decision engineering process must attempt
to identify the full impact of such modifications. Otherwise, the risk of cost
overruns, construction delays and/or performance shortfalls may be greatly
increased.
If the project sustains the executive's initial review, internal
engineering and financial reports are sent to several E&C companies, which then
perform their own, albeit more detailed, decision engineering process to produce
engineering, procurement and construction proposals. Ultimately, they present
their proposals to the owner-operator, which will then compare its internally
developed return-on-investment analysis with the E&C companies' proposals. If
the owner-operator decides to proceed, it may ask the E&C companies to prepare
lump-sum ("cost not to exceed") or other types of bids. Then, the owner-operator
and certain selected E&C companies may engage in negotiations involving the
basis for the bid request and the bids. After the owner-operator selects a final
E&C company, further efforts are expended to fine-tune the decision engineering
analysis during the design phase of the project.
Even when significant resources are expended in conventional decision
engineering to develop detailed preliminary concepts to assist senior executive
decision-making, the final outcome may bear little resemblance to the initial
concept. This variance largely can be attributed to deficiencies in the
conventional process, which has not been comprehensively updated to take
advantage of new technology. These deficiencies include:
- - Coordination Between Business Development and Engineering Is Limited.
Senior business development executives in owner-operators and E&C
companies usually find
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41
it difficult to manage their internal engineering staffs to ensure that
business priorities are driving engineering considerations, rather than
the reverse. Senior executives generally do not have the management
tools needed to dynamically guide and direct the decision engineering
process. As a result, substantial time and resources can be wasted on
engineering issues that are not pertinent to a senior executive's
decision-making analysis, and pertinent issues can be overlooked or
under-analyzed.
- - Dependence on Unreliable, Inconsistent or Unavailable Data Sources.
Each engineering team usually develops its own specialized database of
design and cost data, which may be unreliable or involve the use of
assumptions. Developing and maintaining a specialized database
requires labor-intensive research using multiple internal and external
data sources of varying reliability that may be inconsistent with one
another or with data collected by other teams. In some situations,
reliable data is simply unavailable, and the team must make
assumptions to fill the gap in available data.
- - Time-Consuming, Calculation-Intensive Data Manipulation Is Required. In
addition to the laborious data entry efforts required to develop
specialized databases, each engineering team must perform
time-consuming, calculation-intensive data manipulation in its
simulation, modeling and analysis efforts. Industry sources indicate
that 50% to 80% of a process design engineer's time is spent moving and
organizing, rather than analyzing, data.
- - Engineering Decisions Are Interdependent. As previously noted, a change
in one aspect of a project by one engineering team often requires
changes in other aspects of the project by other teams. It is difficult
in the conventional decision engineering process to ensure that all
such interdependent changes are made and that the final engineering
product is internally consistent. One miscalculation can adversely
affect many aspects of the project.
- - Participants Must Work Sequentially. Engineering a complex project is
largely an iterative process. Engineering decision interdependence and
the capture of key information in separate, specialized databases
usually require engineering teams in the conventional decision
engineering process to work in a strictly sequential, rather than in a
concurrent, collaborative manner. A delay in the work of one team can
thus delay the work of many other teams.
- - Time and Cost Constraints Limit the Testing of Alternative Process
Design Solutions. Even with the large internal engineering staffs that
owner-operators and E&C companies have traditionally maintained, time
and cost constraints force internal staff engineers to make simplifying
assumptions that limit the accuracy of their analysis and require them
to evaluate only parts of the process design, rather than the whole, or
to consider fewer alternative process design solutions. This deficiency
is exacerbated by corporate downsizing/re-engineering, which has
resulted in substantial engineering staff cuts at major
owner-operators.
- - Owner-Operators and E&C Companies Find It Difficult To Communicate. The
transfer of data and analyses from the owner-operator to the E&C
company and back is
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42
complicated by the use of different methodologies and systems. The lack
of a common language increases expense and reduces the quality of the
decisions made.
The foregoing deficiencies reduce the ability of a senior executive in
an owner-operator to: (i) focus the overall project evaluation process on
business priorities, (ii) increase the efficiency of the process so that more
proposed projects can be evaluated in the same amount of time without increased
resources, (iii) respond in a timely fashion to changing market conditions, and
(iv) more effectively manage the owner-operator's relationship with the E&C
company that will ultimately perform the final plant engineering and
construction. A senior executive in an E&C company faces similar limitations.
Numerous efforts have been made to address the deficiencies of the
conventional decision engineering process through computerization. The earliest
software was mainframe based, performed only basic cost calculations and usually
supported the work of only specialized cost estimation teams. This software did
not (i) eliminate the need for engineers from other disciplines to develop
specialized databases or engage in calculation-intensive data manipulation, (ii)
provide all engineering teams with concurrent access to key information nor
(iii) more effectively address the interdependence of engineering decisions.
Despite efforts by owner-operators and E&C companies to mitigate these
continuing problems by custom designing engineering programs for specific
projects, mainframe-based computerization continued to produce imprecise results
that required thorough manual review and revision.
The deployment of powerful Windows-based desktop computers linked by
networks have provided a large number of engineers and project execution
professionals with access to computerized engineering tools for the first time.
Despite the progress demonstrated by some desktop CAE software products that
incorporate a standardized base of information for use in process simulation and
design and cost modeling, new and old users of computerized engineering tools
still face many challenges in completing their engineering simulation, modeling
and analysis.
First, users are still required in many instances to develop
specialized databases of design and cost information and to then laboriously
enter the data into spreadsheet-style programs, which perform only basic data
compilation and arithmetic functions. In most cases, users working on different
aspects of the same project still do not have concurrent access to key data and
expertise. Second, the results of one engineering team's work are not
concurrently integrated with the results of other teams, so users have to remain
constantly vigilant to ensure that engineering decisions in one aspect of a
project are reflected in all other aspects of the project. Third, users often
encounter software compatibility problems when using desktop CAE products from
different vendors, which often use different proprietary databases. Finally,
most CAE programs do little to enhance senior management's ability to control
and shape the decision engineering process.
In short, despite the desktop revolution in computing, which made
computerized engineering tools available to larger numbers of users, the CAE
software most engineers use today still fails to incorporate data, and also
fails to automate and integrate the decision engineering process in an effective
and efficient manner.
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THE ICARUS SOLUTION
The Company's current line of AutoDE software products directly address
a number of the deficiencies of the conventional decision engineering process by
comprehensively automating and integrating important steps in the process, such
as process engineering and cost engineering. The Company's products reduce the
overall time and expense of the decision engineering process, while also
enabling participants--particularly senior executives--to take greater control
of the process so that business priorities drive engineering considerations,
rather than the reverse.
Developed with the input of on-staff engineers from many disciplines
(including chemical, mechanical, structural, civil and electrical engineers) the
Company's AutoDE products provide all process participants concurrent access to
automated process design simulation tools, automated design and cost models and
comprehensive, frequently updated design, cost and engineering databases. ICARUS
products anticipate the needs of engineering and project execution professionals
and senior executives, allowing them to (i) quickly and easily examine
alternative process designs through the use of realistic simulations, (ii)
rapidly create detailed design and cost models and (iii) prepare preliminary
engineering and construction schedules. Using the Company's products, different
engineering teams can work concurrently on the same project without having to
spend substantial amounts of time on repetitious data entry and manipulation.
The teams can share their data and expertise with the assurance that a change
made in one area, such as process design, will be automatically reflected in
other engineering areas, such as mechanical, electrical or civil engineering. In
this way, the overall commitment of resources to the project can be reduced even
as the teams jointly improve the quality of their project evaluation effort by
performing extensive alternative scenario analysis.
Customers have told ICARUS that the Company's products enable them to
reach a decision on whether or not to proceed with a project in approximately
one-fifth of the time previously required by conventional decision engineering
tools. Using the Company's products, owner-operators are also able to enhance
the quality of overall strategic decision-making, respond more quickly to market
changes and improve overall project design. E&C companies are able to reduce the
costs of preparing, and enhance the quality of, bids on projects, thus reducing
the risks they incur under turnkey, lump-sum project contracts. The Company
believes that a number of its customers have licensed ICARUS products because
they could not adequately address their decision engineering needs with
competing tools.
The Company believes that it currently provides the only commercial
integrated process manufacturing CAE product line. The Company's products
utilize common proprietary elements, including automated models, expert system
modules and databases, and can be integrated with CAE and other software
engineering products developed by other vendors. By enabling users to use the
results generated by one product as the starting point for another product, this
integration eliminates many of the labor-intensive steps associated with
information transfer and manipulation in the conventional decision engineering
process and allows engineers from different disciplines to communicate and
collaborate more effectively. For example, using the Company's process
engineering product, ICARUS Process Evaluator, a customer can take the output
of a process
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44
simulation program developed by another vendor, specify additional basic
premises and then rapidly simulate a manufacturing process plant design. The
customer can then electronically transfer a file to the Company's design and
cost engineering product, ICARUS 2000, which will quickly develop detailed
preliminary design and cost models of that process plant design under varying
conditions. These steps can be repeated many times to identify the optimal
process plant design.
The data and analyses produced by the Company's products can also be
used to "jump start" the plant engineering process that follows decision
engineering. For example, such data and analyses can be used to help populate
downstream CAD/CAE applications that will generate the detailed drawings to be
used in actual construction. Additionally, certain ICARUS products directly
address steps in the plant engineering process, such as construction scheduling
and cost estimation for smaller construction projects at existing plants.
STRATEGY
The Company's strategy is to expand its portfolio of integrated AutoDE
software products to meet customer needs in every stage of the process
manufacturing plant lifecycle--from the business development decision to
consider entering a process manufacturing segment, through the process and cost
engineering analysis of a specific proposed plant, to the detailed engineering,
construction scheduling and operations and maintenance activities that follow
the decision to proceed with a proposed plant. For the decision engineering
process, which encompasses business development, process engineering and cost
engineering, ICARUS currently offers process engineering and cost engineering
products. The Company plans to supplement these products and also to release a
new suite of business development products designed to enable senior executives
to analyze high-level, early-stage technological and economic feasibility
issues. This suite of products also will assist senior executives in ensuring
that their engineering staffs are focused on the business impact of their
engineering work. For the plant engineering process, which encompasses detailed
engineering/procurement, construction scheduling and operations and maintenance,
ICARUS currently offers construction scheduling and cost estimation products and
plans to release an object database product that will support plant engineering
applications such as CAD/CAE production of detailed construction drawings.
The Company believes that developing and marketing a comprehensive
portfolio of products that provides users throughout a customer's organization
with common AutoDE software tools that operate with one another and with CAE
software products supplied by other companies will substantially enhance its
competitive position. A comprehensive portfolio of products will also provide
customers with a "migration path" to buy other Company products as their need to
automate additional engineering functions grows. See "- Products and Product
Development."
The key elements of the Company's business strategy are as follows:
Leverage the Company's Existing Customer Base to Introduce New
Integrated AutoDE Products. Because of its consistent delivery of quality
products, product updates, training and user conferences, the Company enjoys
strong relationships with many of its customers. The Company believes that these
relationships can be leveraged to market and sell new,
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45
integrated products to such customers. The Company also believes that it can
leverage its reputation in the chemical and petroleum refining industries to
market and sell such products to new customers in those industries. The Company
intends to recruit additional senior sales and technical personnel to capitalize
on this opportunity. See "- Customers."
Continue to Maintain Technology Leadership by Developing Innovative
AutoDE Software. The Company will continue to expend significant resources to
build on its core technology and develop new technology to create innovative,
integrated AutoDE products and maintain the Company's technology leadership
position within the market it serves. During calendar 1998, the Company plans to
nearly double the number of its product offerings. See "Products and Product
Development."
Increase the Penetration of the Company's Products in the Pulp and
Paper, Pharmaceutical, Power and Food Industries. The Company has a solid
customer base in the chemical and petroleum refining industries. The Company
intends to increase its efforts to expand its customer base in the paper and
pulp, pharmaceutical, power and food industries. Because the decision
engineering analysis related to process manufacturing in different industries
involves many of the same concepts, the Company's AutoDE products may be
utilized in different industries with relatively few adjustments.
Increase Its Consulting Efforts to Provide Integrated Turnkey
Engineering Solutions. A number of the Company's customers currently seek, on a
limited basis, the Company's assistance in integrating their proprietary
technology with the Company's software, reviewing work performed by the
customers' internal staffs or performing front-end design and cost studies. The
Company believes that many of its customers would respond favorably if the
Company offered comprehensive consulting and training services. The Company
intends to dedicate substantial resources to develop such integrated turnkey
engineering solutions.
Enter into Strategic Alliances That Accelerate Product Development and
Enhance Marketing and Sales Opportunities. The Company has recently entered into
three strategic alliances with leading technology and research companies that
will provide access to valuable process design and cost data and accelerate the
development of new products, including products that address stages in the
process manufacturing plant lifecycle not currently covered by the Company's
products. The Company believes that these and possible future strategic
alliances may provide the best opportunity to introduce certain products and
open new marketing and sales opportunities. See "- Strategic Alliances."
Pursue Acquisitions to Further Product Development, Sales and Marketing
and Consulting Services. The Company intends to pursue acquisitions that will
expand its product line, increase its customer base and enhance its ability to
offer comprehensive consulting services. ICARUS believes that it can effectively
compete for acquisition opportunities because of its leadership position in
process manufacturing CAE software and its knowledge of the market and potential
acquisition targets.
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46
PROPRIETARY TECHNOLOGY AND DATABASES
The Company's core proprietary technology includes, but is not limited
to, its automated design and cost models, the expert (or knowledge-based)
systems incorporated into its artificial intelligence modules, its
object-oriented project databases and other proprietary databases.
Design and Cost Models. The Company has developed automated design and
cost models for most standard process manufacturing plant equipment types,
including the process and solids handling equipment used for heat transfer,
distillation, chemical reaction, pumping, compressing and other functions. These
models also cover the materials needed to install such equipment in a process
manufacturing plant, such as piping, steel, instrumentation, electrical,
insulation and paint. Drawing on fundamental laws of chemistry and physics and
proprietary databases, the Company's design and cost models automate and
integrate the following engineering elements: (i) "best practices" expertise
from expert engineers in many different engineering disciplines (including
process, mechanical, structural, civil and electrical engineering); (ii)
engineering design standards and codes for many countries; (iii) construction
methodology for determining the equipment, material, fabrication, labor, expense
and time requirements for a given project; (iv) volumetric calculations used to
determine the change in material requirements when a project is scaled up or
down; (v) costing the various inputs such as labor and materials needed to
complete a project; and (vi) critical-path-method construction scheduling.
Expert Systems. An expert system is a computer program designed to
emulate a human expert in a particular limited field of knowledge. Expert
systems improve productivity by helping users make decisions when a human expert
is unavailable or too expensive. These expert systems automatically calculate
the design and cost impact of changes made by multiple engineering teams working
on the same project and help to solve problems associated with the
interdependence of engineering decisions. ICARUS Mentor is an expert system
software development tool that the Company has used to develop expert system
modules that are included in the Company's current line of products to enhance
the performance of the automated design and cost models. These modules can be
customized by users to incorporate customer-developed expertise.
Object-Oriented Project Database. The Company has developed an
object-oriented project database designed to serve as the central repository of
information pertaining to a particular project throughout the decision
engineering and plant engineering processes. Information contained in such a
database may include, but is not limited to, process solution results, plant
components, design data, capital costs and schedules, operating costs and
investment analysis results and graphical data relating to process flow
diagrams, piping and instrumentation diagrams and plot plan drawings.
Proprietary Databases. Finally, the Company has developed extensive
proprietary databases that include engineering design and cost information from
a variety of public and private sources, including information from customers.
These databases are embedded in the Company's products and are updated regularly
to provide customers with current cost and other data. The databases can be
customized by users to incorporate customer-developed information.
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STRATEGIC ALLIANCES
In 1994, ICARUS entered into a strategic alliance with Primavera
Systems Inc. ("Primavera"), a leading provider of scheduling software. Pursuant
to a multiple-year renewable marketing and product development agreement, the
two companies have combined the Company's design and cost modeling and
engineering automation expertise with Primavera's scheduling expertise. The
resulting integrated design estimating and scheduling product, ICARUS Project
Manager, has been marketed by the Company to hundreds of authorized users in 22
countries since fiscal 1995.
ICARUS entered into three new strategic alliances for product
development and marketing in 1997. The Company expects that these strategic
alliances will enable it to integrate complementary technology and data into its
core products in a time- and cost- efficient manner; to create new products that
will be attractive to the customer base of both the Company and the other
participant in the alliance; to immediately add complementary products to its
product line; and generally to expand its revenue opportunities without a
significant up-front investment. The Company's current strategic alliances are
with SRI Consulting, Inc. ("SRIC"), Hyprotech, Ltd. ("Hyprotech") and Richardson
Engineering Services, Inc. ("Richardson"). See "- Strategy."
Alliance With SRIC. In August 1997, the Company signed a multiple-year
renewable marketing and product development agreement with SRIC, a subsidiary
of SRI International, headquartered in Menlo Park, California, to
develop and market at least two new products based on the Company's current
process design and design and cost modeling products and its general decision
engineering expertise and SRIC's Process Economics Program ("PEP"), which
provides in-depth reports of process technology and economics for more than 800
chemical and refinery processes. The new products will be jointly marketed by
ICARUS and SRIC. See "- Products and Product Development."
Alliance With Hyprotech. In July 1997, the Company, through a wholly
owned subsidiary, executed a multiple-year marketing and development agreement
with Hyprotech, a company headquartered in Calgary, Canada that supplies process
simulation solutions to an international customer base in the chemical and
petroleum refining industries. The companies agreed to jointly develop at least
two new products based on certain of the Company's existing products and
expertise and Hyprotech's technology. These products will be jointly marketed
and licensed by ICARUS and Hyprotech. See "Products and Product Development."
Alliance With Richardson. In May 1997, the Company entered into a
multiple-year renewable technology licensing and marketing agreement with
Phoenix-based Richardson, which is a leading publisher of global process
manufacturing plant construction estimating standards. Under the agreement,
ICARUS has the right to use Richardson's unit cost construction database to
extend the capabilities of the Company's AutoDE software products in plant
engineering. Under the agreement, the Company will market this technology and is
also authorized to resell Richardson's winRace software and database products to
the chemical industry.
The Company may use a portion of the net proceeds of the Offering to
develop the products contemplated by these or future strategic alliances. See
"Use of Proceeds."
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PRODUCTS AND PRODUCT DEVELOPMENT
The Company's current AutoDE software products are designed to run on
standard PC hardware and operating platforms, including Windows 95, Windows NT
and UNIX. They incorporate an easy-to-use graphical user interface, automated
design and cost models, artificial intelligence modules, and embedded databases.
The Company works continually to enhance its products to operate on new
operating systems, updates of existing operating systems and new network
topologies, including the client-server environment.
A common feature of the Company's existing products is a proprietary
electronic hardware device called the "Control Device." The Control Device is
independent of the customer's computer hardware platform and is designed to
prevent unauthorized and unlicensed use of the Company's products. The Company's
products are designed so that they cannot be operated without the Control
Device, which resembles an external modem and plugs into the desktop computer's
serial port. Every time a Company product is used, the Control Device verifies
the licensed user's identifier to permit entry. When the license period ends,
the Control Device is designed to prevent further entry into the product. The
Control Device has been used by the Company on a wide variety of hardware and
operating system platforms since 1992.
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The following table provides an overview of the Company's current
product line, which addresses the process engineering, cost engineering,
construction scheduling, and operations and maintenance stages of the process
manufacturing plant lifecycle.
PRODUCT Plant Lifecycle Description Original Current Release
NAME Stage of Product Release (DATE/VERSION)
Date OPERATING SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
ICARUS Process Enables process engineers June 1995 (October 1997/Version
Process Engineering to rapidly screen 4.0)
Evaluator alternative chemical Microsoft Windows 95
("IPE") process designs for a & NT
proposed major process
manufacturing project.
- ------------------------------------------------------------------------------------------------------------------------------------
ICARUS Cost Enables engineering teams December (July 1997/Version 6.0)
2000 Engineering in owner-operators and 1992 UNIX
E&C companies to quickly (August 1997/Version
prepare engineering, 6.0)
procurement and Microsoft Windows NT
construction estimates for
a proposed major project.
- ------------------------------------------------------------------------------------------------------------------------------------
ICARUS Construction Enables project managers May 1995 (June 1997/Version
Project Scheduling to create cost estimates 3.0)
Manager and automatically develop Microsoft Windows 3.1,
planning and construction 95 and NT
schedules for small
projects, revamps and
renovations.
- ------------------------------------------------------------------------------------------------------------------------------------
Questimate Operations Enables cost estimators at November (May 1997/Version
and operating plants to quickly 1986 12.0)
Maintenance evaluate the cost impact of Microsoft Windows 3.1,
proposed plant 95 and NT
modifications and
maintenance.
- ------------------------------------------------------------------------------------------------------------------------------------
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50
The Company's business strategy is to expand through internal
development, acquisitions, and strategic alliances its portfolio of integrated
AutoDE software products to meet customer needs at every stage of the process
manufacturing lifecycle--from the business development decision to enter a
process manufacturing niche, through the process and cost engineering of a
specific proposed project, to the detailed engineering and procurement,
construction scheduling and operations and maintenance activities that follow
the decision to proceed with the proposed project. These products are designed
to respond to the different skills and decision criteria applied by engineers
from different disciplines and by decision-makers that do not have substantial
engineering knowledge. Consistent with this strategy, ICARUS entered into three
strategic alliances in calendar 1997. See "- Strategic Alliances."
During fiscal years 1998 and 1999, ICARUS plans to release the
following products, most of which will focus on the business development and
process engineering stages of the plant lifecycle:
ICARUS Decision Engineering Analyzer. Designed for use by senior
executives as well as by engineers, ICARUS Decision Engineering Analyzer
("Analyzer") will enable a user to enter basic information on the scope and
features, such as product and product capacity, of a proposed major project.
This basic information can be derived from ICARUS/SRIC products discussed below
or from proprietary data developed by a customer. Using this basic project scope
definition, Analyzer will automatically develop a detailed early conceptual
design. Analyzer will also produce estimates of design quantities, engineering
tasks and associated effort, procurement and construction work products and
tasks, field manpower, costs of project components, engineering and construction
schedules, investment and operating costs, and economic and financial reports.
The product's reporting modules will produce graphic and text reports, such as
block diagrams, linked process flow diagrams and piping and instrumentation
diagrams, data sheets, and line lists. Additionally, Analyzer will produce input
files for key CAE applications used by the customer's internal engineering staff
so that a senior executive or staff user can perform value-added engineering on
an interactive, dynamic basis.
ICARUS-SRIC Process Model and Project Model. ICARUS and SRIC plan to
develop a Process Model and a Project Model for each of SRIC's more than 800
chemical and refinery processes. Process Model will be an interactive
multimedia software containing SRIC's PEP technical content and the results of
the Company's project evaluation technology applied to a specific process, such
as the production of gasoline. This multimedia document will be used to
evaluate major issues relating to a customer's potential entry into a
particular product line. By extracting process intelligence input data from a
specific PEP report, Project Model will automatically create for a user of
ICARUS 2000 or ICARUS Process Evaluator detailed conceptual designs and
estimates for a proposed process manufacturing plant. Using this information,
the user can easily produce cost analyses and other specialized project
information.
ICARUS plans to sell Process Model and Product Model separately or as
part of an integrated software bundle called the Decision Engineering Tool Suite
that will include the ICARUS Decision Engineering Analyzer. The Company expects
that this product suite will be used for a variety of business development
purposes, including front-end analysis by
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51
senior executives of whether an owner-operator should enter a specific process
manufacturing niche.
Hyprotech-ICARUS Products. ICARUS and Hyprotech are developing two
products that combine Hyprotech's process evaluation expertise in chemical
process design with the Company's design and cost engineering expertise.
Plant-Product is intended to be marketed primarily to process engineers that
use Hyprotech's products but have little or no prior cost engineering
experience or responsibility. They will enter static design data to generate
detailed cost estimates. Process-Product will be marketed primarily to process
engineers that use Hyprotech's products to help them produce cost estimates and
schedules of engineering and construction.
ICARUS Project Object Database ("IPOD"). ICARUS is developing an
object-oriented database product that will serve as the central repository of
information (such as process simulation results, plant components, design data,
capital costs and schedules, operating costs and investment analysis results and
graphical data pertaining to a specific process manufacturing project throughout
the decision engineering and plant engineering processes. A customer can use
IPOD, which will be implemented on a client-server platform, to automatically
populate numerous other CAD/CAE software applications (from a variety of
vendors) relating to the engineering, construction, operations and maintenance
and financial reporting of a specific plant.
ICARUS-Richardson Construction Estimating Modules. ICARUS is in the
early stages of developing a product that integrates the Company's design and
cost modeling technology with Richardson's unit cost estimating technology to
provide customers with enhanced cost estimating capability during the detailed
engineering/procurement and construction stages of a project.
As of October 31, 1997, 19 of the Company's employees were directly
involved in internal product development. The Company's product development
expenditures for the six months ended October 31, 1997 and for the year ended
April 30, 1997 were $511,000 and $904,000, representing 12.0% and 12.3% of total
revenue, respectively. The Company has made substantial investments in, and
intends to use a portion of the net proceeds from this Offering for, product
development. See "Use of Proceeds," and also see "Management's Discussion and
Analysis of Financial Condition and Result of Operations - Overview" for
information relating to the expensing of the Company's research and development
costs.
ICARUS believes that its future performance will depend in large part
on its ability to maintain and enhance its current product line, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet new customer requirements. The Company's product development efforts
are subject to numerous risks and no assurance can be given that the Company's
product development goals will be realized. See "Risk Factors - Risks Associated
with Continued Product Development; Rapid Technological Change" and "- Market
Acceptance of the Company's Products."
COMPANY SERVICES
The Company believes that the services it offers help to maintain
customer loyalty and increase potential license renewals and the number of
licensed users in a particular
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52
customer's organization. The Company believes that strong customer support is
crucial, both to the initial marketing of its AutoDE software products and to
ensure that its customers successfully apply its AutoDE software products to
their engineering automation needs so that they will be encouraged to renew and
expand their license arrangements with the Company. In addition, the Company
believes that every customer support contact creates a marketing opportunity to
license its AutoDE software products to additional users at a customer's
location and to license additional AutoDE software product to users at other
customer locations.
Training. The Company offers introductory and advanced training courses
at its Rockville, Maryland; Houston, Texas; Altrincham, England; and Tokyo,
Japan offices and, from time to time, at the offices of its customers to train
licensed users of its AutoDE software products. These seminars generally run
between one and four full days, depending upon the product and/or platform being
taught. The Company typically charges licensed users for such training. Product
training is not mandatory, but the Company believes that such training enhances
the value of the licenses purchased by the customer and is highly recommended.
The Company believes that continuing product training helps build product
loyalty and reinforces the value of the Company's product to the customer.
Post-Contract Support. The Company also offers free technical support
to its licensed users by telephone from a help-desk located in its Rockville,
Maryland offices. The help-desk is available during business hours Monday
through Friday. In addition, the Company typically provides to its licensed
users and to customers having annual maintenance plans a "cost update" for
materials, equipment and labor, the data for which is obtained from publicly
available cost information received from the Company's customers, vendors,
published data sources and from the Company's proprietary pricing models. This
update typically is released in early summer. From time to time and on an "as
available" basis, the Company may issue an update that contains one or more new
features for the AutoDE software product, such as new report types, new screens
for data input, new equipment models and the resolution of software problems or
"bugs."
Consulting Services. A number of the Company's customers currently
seek, on a limited basis, the Company's assistance in integrating their
proprietary technology with the Company's software, reviewing work performed by
the customers' internal staff or performing front-end design and cost studies.
The Company believes that these services leverage software sales because the
customer must have a license to its AutoDE software products in most instances
in order to use the cost model, application or customization delivered by the
consulting team. Application projects enable the Company to provide turnkey
solutions to customers who do not have the resources to build their own design
and cost models. These projects provide an important mechanism for the Company
to extend the range of applications that its technology can model. Although the
Company enters into agreements to protect the customer's proprietary information
in these consulting projects, the Company typically retains the right to use the
generic design and cost modeling methods, expert systems and know-how developed
as a result of the project in other Company AutoDE software products. The
Company expects to increase the scope and depth of its consulting services in
the future. See "Business - Strategy."
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53
The provision of services by the Company to its customers for the six
months ended October 31, 1997 and the year ended April 30, 1997 represented
approximately 6.2% and 7.1% of total revenues, respectively.
CUSTOMERS
The Company currently has over 300 customers worldwide who represent
all segments of the process manufacturing industry and the engineering and
construction firms that serve them. One or more of the Company's products are
licensed to 18 of the top 20 chemical companies and 18 of the top 20 petroleum
refining companies, as such companies are listed in the "1997 Fortune 500 List,"
and 8 of the top 10 chemical plant contractors listed in Engineering News
Record's "Top 400 Contractors."
The following is a representative list of the Company's larger
customers.
Agrium, Inc. Campbell Soup Company
Air Products and Chemicals, Inc. Kvaerner Metals
ARCO Chemical Company ARCO Products Company
Bayer Corporation Chevron U.S.A., Inc.
BOC Process Plants Ecopetrol
Chevron Chemical Company Marathon Oil Company
Cytec Industries, Inc. Mobil Technology Company
Dow North America Pennzoil Products Company
Eastman Chemical Company Phillips Petroleum Company
Elf Atochem North America, Inc. Qatar General Petroleum Corp.
FMC Corporation Saudi Arabian Oil Company
GE Plastics Shell Oil Company
Hercules Incorporated Texaco Refining & Marketing, Inc.
Hoechst Celanese Corporation The Mead Corporation
Millennium Inorganic Chemicals
Mitsubishi Chemical Corporation
NOVA Chemicals, Inc.
Occidental Chemical Corp.
PPG Industries, Inc.
Praxair, Inc.
Rhone-Poulenc North America
Rohm and Haas Company
SABIC Americas, Inc.
Solutia Inc.
Solvay Polymers, Inc.
The Lubrizol Corporation
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54
ABB Lummus Global, Inc.
Bateman Engineering, Inc.
Bechtel Corporation
Brown & Root, Inc.
Delta Hudson Engineering Ltd.
Fluor Daniel, Inc.
Foster Wheeler USA Corporation
Jacobs Engineering Group, Inc.
Kvaerner Process
LG Engineering Company, Ltd.
Parsons Process Group, Inc.
S&B Engineers and Constructors, Ltd.
SNC LAVALIN, Inc.
Stone & Webster Engineering Corporation
Sverdrup Facilities, Inc.
Techint International Construction Corp.
The M.W. Kellogg Company
The Company derives a significant portion of its total revenue from
software licenses to companies in the chemical and petroleum refining
industries, which are highly cyclical. See "Risk Factors - Concentration of
Revenue in the Chemical and Petroleum Refining Industries." As a consequence,
the Company is focusing greater resources on developing products and marketing
efforts directed at companies in process manufacturing segments of other
industries. No individual customer accounted for 10.0% or more of the Company's
total revenues for the six months ended October 31, 1997 or fiscal 1997.
Although all of the customers listed above are current licensees of the
Company's AutoDE software, there can be no assurance that any of them will
continue to license any of such products beyond the term of the existing
license.
The Company believes that its ability to maintain and grow its customer
and revenue bases will depend, in part, on its ability to maintain a high level
of customer satisfaction. The Company believes that its customers typically
purchase AutoDE software products only when they are convinced that such
products will provide them with quicker and more reliable results than the
software they are currently utilizing (which is typically developed "in-house"
by the customer). The Company believes that its customers are its best sales
representatives and finds that sales within an organization are easier once
there is a licensed user in that organization.
SALES AND MARKETING
The Company markets its products and services in more than 25 countries
around the world through its direct sales force, which as of October 31, 1997,
consisted of 12 full time Company sales personnel based at the Company's
Rockville, Maryland office, its United Kingdom offices located in Altrincham,
England and its Asian offices located in Tokyo, Japan, and through its
independent sales representatives located in Argentina, Australia, Brazil,
Colombia, France, Germany, India, Saudi Arabia, South Africa, South Korea,
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55
Venezuela and certain independent republics of the former Soviet Union, and an
independent sales representative that markets the Company's products in the
People's Republic of China. The Company relies on its direct sales force to
initiate sales contacts, follow-up on leads provided by the Company's marketing
department and to engage in face-to-face contact with its customers to solicit
orders. The Company believes its Company sales personnel have a number of strong
relationships with existing customers which assists the sales personnel in
obtaining additional users of Company products currently licensed by its
customers and in obtaining licenses of additional AutoDE software products. As
of October 31, 1997, the Company had agreements with 13 independent,
non-exclusive sales representatives in 14 countries worldwide. These agreements
are for a term of one year, automatically renewable for an additional one year
term unless sooner terminated. Such international sales typically are priced in
United States dollars, English pounds or Japanese yen; product is generally
shipped with thirty day payment terms. Sales by the Company's independent sales
representatives were $317,000 for the six months ended October 31, 1997 and
$499,000 for fiscal 1997.
The Company also has an in-house marketing department that designs and
updates the Company's home page on the World Wide Web and its sales materials
and performs demographic studies of new sales territories to identify potential
customers. The marketing department also works with the sales force on direct
mail, e-mail and facsimile and other marketing campaigns to gauge and generate
the interest of potential customers.
The Company sells primarily through direct contact with customers and
does not conduct significant mass market advertising due to the expense involved
and the inability to target the Company's particular customer base through such
advertising. It does, however, publish articles and advertise selectively in
professional trade publications, such as Chemical Engineering and Chemputers
magazines. The Company also publishes the SUN (its System User Newsletter) three
times per year to keep industry participants informed about news of interest
regarding ICARUS technology. The SUN is in its ninth year of publication. The
ICARUS Internet site on the World Wide Web is also used to keep its current and
potential customers informed about the latest information and developments in
process and project evaluation. In conjunction with licensed users of its
technology, the Company sponsors User Group meetings in various locations having
a concentration of Company customers to increase the proficiency of its user
community in the effective use of its products. In recent years, the Company has
also sponsored the ICARUS International User's Conference, at which customers
had the opportunity to review major industry trends, learn about the Company's
development plans and meet with industry experts. The Company believes that the
ICARUS International User Conference provides a valuable service to its
customers and assists in enhancing the Company's reputation as a leading
provider of AutoDE software to the process manufacturing industry. Moreover, the
Company actively participates in trade shows such as the Chemputers Show in the
United States and Europe each year, the Chem Show, TAPPI (Technical Association
of Pulp and Paper Industry), the Petro Expo and Daratech, as well as
international trade fairs.
COMPETITION
The growing market for CAE software used in process manufacturing is
intensely competitive and the Company's competitors include several companies
that possess significantly greater financial, technical, marketing and other
resources than ICARUS. The
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Company's primary competition currently comes from customers and potential
customers that have developed, or have the resources and capabilities to
develop, their own process engineering, cost engineering and construction
scheduling software solutions. The Company's direct third-party competitors
include Timberline Software Corporation and a number of smaller private
companies. To a lesser degree, ICARUS faces competition or potential competition
from Aspen Technology, Simulation Sciences Inc. and ChemStations, Inc. The
Company expects to face additional competition as other established and new
companies enter the computer-aided engineering simulation and analysis software
market and new products and technologies are introduced. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition.
In order to compete in the marketplace, ICARUS must persuade a customer
or potential customer that the Company's AutoDE software products offer a
superior solution to internally developed software or CAE products supplied by
other vendors. In doing so, ICARUS emphasizes the quality and sophistication of
its products, the technological expertise and creativity of its personnel, the
frequency with which it releases AutoDE software enhancements and updates the
quality of its technical support and training courses. Increasingly,
owner-operators and E&C companies that have for years developed and maintained
their own CAE simulation and analysis software are recognizing the efficiency
and economic gains they can achieve by deploying commercially developed CAE
software, including the Company's AutoDE software products.
PROPRIETARY RIGHTS
The Company relies primarily upon trade secret and copyright laws,
including the use of invention assignment and confidentiality agreements with
employees and confidentiality agreements with third parties, and physical
security devices such as its Control Device to protect its proprietary
technology. The Company presently relies upon its registered trademarks and
service marks as well as common law rights in its trademarks and service marks
to protect the use of its name and brands. The Company maintains United States
registrations of certain trademarks and service marks and has filed applications
for United States registrations on additional trademarks and service marks. The
Company's ability to protect its products in foreign jurisdictions, however, is
limited in that the laws of certain foreign jurisdictions in which the Company's
products are distributed do not protect the Company's intellectual property
rights to the same extent as the laws of the United States. Therefore, there can
be no assurance that the protection provided by the laws of either the United
States or of foreign jurisdictions will be sufficient to protect the Company's
proprietary rights in its products and technology.
The Company presently enters into invention assignment and
confidentiality agreements with its employees and confidentiality agreements
with certain customers. The Company also limits access to the source code to its
AutoDE software and other proprietary information. The Control Device is
designed to prevent unauthorized users from utilizing the Company's AutoDE
software products and shuts down the product after the license period expires.
The Company's AutoDE software also will not operate on a computer which is not
connected to the Control Device. It is difficult, however, to totally prevent
unauthorized use. There can be no assurance that the steps taken by the Company
in this
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57
regard will be adequate to prevent misappropriation of its technology or
infringement of its copyrights or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. The Company believes, however, that due to the
rapid pace of innovation within the software industry, factors such as the
technological and creative expertise of its personnel, the quality of its
products, the quality of its technical support and training services, and the
frequency of release of software product enhancements are more important to
establishing and maintaining a technology leadership position than the various
legal protections available for the Company's products and technology.
Certain technology used in the Company's AutoDE software products, such
as the Primavera Project Planner, Empress SQL and Hummingbird XCEED, are
currently licensed from third parties. These licenses generally require the
Company to pay royalties and/or license fees and to maintain the confidentiality
of certain matters. The Company believes that there are alternative sources for
each of the material components of the technology licensed by the Company from
third parties. However, the termination of any of such licenses, or the failure
of the third party licensors to adequately maintain or update their products,
could result in delay in the Company's ability to ship certain of its products
or in a delay of the introduction of its new or enhanced products while it
searches for similar technology from alternative sources. See "Risk Factors -
Risks Associated with Proprietary Rights."
EMPLOYEES
As of October 31, 1997, the Company had a total of 58 full-time and 4
part-time employees, including 33 in sales, marketing and technical support and
training, 19 in product development and 10 in finance and administration. Of
these employees, 6 work in the Company's United Kingdom office and 2 work in the
Company's Tokyo, Japan office. None of these employees is engaged pursuant to a
collective bargaining agreement, nor has the Company experienced any labor
actions such as a work stoppage. The Company believes that its relations with
its employees are good.
LEGAL PROCEEDINGS
Prior Legal Proceedings. In 1985, the Company settled a dispute with
the IRS regarding the Company's income taxes for the fiscal years 1977 through
1982. It was the Company's understanding that the IRS would accept a payment
plan, including interest, for the disputed amount. After the settlement papers
were signed, and the IRS obtained financial information from the Company
relating to developing such a payment plan, it appeared that the IRS believed
that the Company had sufficient cash reserves to permit an immediate payment.
The Company contended that these funds represented working capital which was
needed for corporate expansion and other operations. Negotiations to arrive at a
mutually satisfactory payment plan with the IRS could not be satisfactorily
concluded. Consequently, the Company thereafter filed a petition under Chapter
11 of the U.S. Bankruptcy Code in 1985 to allow the Company and the IRS to work
out a payment plan satisfactory to both parties. The Company emerged from
Chapter 11 when its Plan of Reorganization was confirmed by the Court in 1988.
All payments required under the Plan of Reorganization were made, the final
payment being made in December 1993 and the case
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58
was subsequently closed. The Company believes that these proceedings have had no
adverse effect on the Company's current business, financial condition or
reputation.
In 1979, a federal grand jury for the Eastern District of Virginia
returned a criminal indictment against the Company, Herbert G. Blecker, Chairman
of the Board, President and Chief Executive Officer of the Company, and an
employee of Computer Sciences Corporation ("CSC"), a company the shares of which
were and are traded on the New York Stock Exchange. The indictment arose out of
events relating to a contract between the GSA and CSC and a subcontract between
CSC and the Company. In 1972, CSC was awarded a multi-million dollar contract by
the GSA to provide federal agencies with computer and data processing services
(the "GSA/CSC contract"). That contract authorized CSC to subcontract for
consulting services. In 1972, CSC subcontracted with the Company for those
services. Under the GSA/CSC contract, the rates charged for consultant services
were to be based upon the education and experience of the consultants who
performed services. The prosecution contended that Mr. Blecker instructed a
number of employees of the Company to embellish their resumes with additional
degrees and experience which they did not have and, further, that he caused the
resumes of other employees to be enhanced without their knowledge. The 37 count
indictment alleged that the Company and Mr. Blecker submitted to the CSC
invoices for fees based on the false resumes. Further, the indictment asserted
that the Company and Mr. Blecker knew that CSC, in turn, would present to the
GSA claims for payment based upon the invoices. The case was tried before a
jury. The Company and Mr. Blecker were convicted on six counts of presenting
false claims to an agency of the United States and, in addition, the Company was
convicted on two counts of mail fraud. The Company was fined $62,000 and Mr.
Blecker received a one-year sentence of confinement, of which he served nine
months.
Following this conviction, the GSA issued a debarment order which
prevented the Company from entering into a contract or subcontract for the
performance of work for the government. The debarment was terminated as of April
22, 1983, thereby eliminating any restrictions on the ability of the Company to
perform services for the government.
In October 1980, a grand jury in the Eastern District of Virginia
returned a criminal indictment against Mr. Blecker, CSC, and five current or
former officers and employees of CSC. The charges in this indictment also arose
out of the GSA/CSC contract referred to above. The charges involved alleged
improper billing for computer services and for computer software packages. Mr.
Blecker was charged with one count of conspiracy, one count of violating the
Racketeer Influenced Corrupt Organizations Act (RICO), six counts of mail fraud,
and two counts involving alleged false claims against the government. This case
was tried by a jury in May 1983, and all of the defendants were acquitted.
The Company believes that the matters described above have had no
adverse effect on the Company's recent business, financial condition or results
of operations.
Current Legal Proceedings. On October 7, 1997, a former employee of
the Company's U.K. subsidiary, ICARUS Services Limited ("ISL"), filed suit
against ISL in the High Court of Justice, Manchester District, United Kingdom.
The suit seeks approximately 75,000 pound sterling (approximately U.S.
$125,000) for compensation relating to the former employee's termination of
employment in early 1997, pursuant to an employment contract between ISL and
the former employee. ISL has filed a defense with the High Court denying
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59
indebtedness to the former employee; however, as of the date of this Prospectus,
a hearing date has not been set. The Company intends to vigorously defend itself
against this action. It has established a reserve of approximately $110,000 as a
result of the foregoing claim and believes that any liability exceeding such
amount would not have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company is also a party from time to time to certain legal
proceedings arising in the ordinary course of its business, none of which is
expected to have a material adverse effect on the Company's business, financial
condition or results of operations.
FACILITIES
The Company's principal administrative, sales, marketing and product
development facility occupies approximately 17,500 square feet in Rockville,
Maryland pursuant to a lease which requires annual rent of $382,800 and expires
on March 31, 1998. The Company anticipates relocating to larger quarters located
at 600 Jefferson Plaza, Rockville, Maryland, by April 1, 1998, pursuant to a new
ten (10) year lease dated December 31, 1997, for approximately 28,900 square
feet at an annual base rent of $571,210 plus increases in operating expenses.
The Company also leases 4,535 square feet of office space in Houston, Texas
which lease requires an annual rent of $91,585, plus all operating expenses of
the leased premises as such costs may increase from time to time and expires on
April 1, 2002, and leases approximately 1,921 square feet in Altrincham, England
which lease requires annual rent of 20,275 pound sterling (approximately US
$34,000) and expires on May 8, 2002, and leases approximately 1,070 square feet
of office space in Tokyo, Japan, which lease requires an annual rent of 3.6
million Japanese Yen plus 720,000 Japanese Yen (approximately US $36,000) for
utilities and expires on January 19, 2000. The Company believes that its
existing facilities are adequate for its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
Name Age Position
- ---- --- --------
Herbert G. Blecker 62 Chairman of the Board of Directors,
President and Chief Executive
Officer
William F. Geritz, III 33 Director and Executive
Vice President
Mark S. Kingsley 48 Chief Financial Officer and
Controller
Eunice E. Blecker 61 Director, Treasurer and Secretary
Motoo Iso 33 General Manager and member of the Board of
Directors of ICARUS Nippon K.K.
(an indirect wholly-owned subsidiary of the
Company)
Dennis E. Leister, Ph.D. 51 Director of Client Services
Daniel M. McCarthy 49 Director of Systems Integration
Bahram Meyssami, Ph.D. 36 Director of Process Technology
Martin D. Ryan 50 Director of Cost Engineering
Dr. Robert L. Steinberger 68 Director of Decision Engineering
Tyler T. Winkler 32 Director of Sales
James J. Byrne 62 Vice Chairman of the Board of
Directors
J. Edward Beck, Jr. 49 Director
Gary M. Roush 51 Director
HERBERT G. BLECKER. Mr. Blecker founded the Company in 1969 and has served
as Chairman of the Board of Directors, Chief Executive Officer and President of
the Company since that time. From 1969 to 1996, Mr. Blecker also served as Chief
Financial Officer of the Company. Prior to founding the Company, Mr. Blecker
held various positions with Allied Chemical Corporation, the National
Aeronautics and Space Administration and the U.S. Department of the Interior.
Mr. Blecker received his Bachelor of Chemical Engineering degree from the
College of the City of New York. Mr. Blecker is the husband of Mrs. Blecker.
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61
WILLIAM F. GERITZ III. Mr. Geritz has served as a director of the Company
since May 1997 and Executive Vice President of the Company since January 1998.
Mr. Geritz has held various positions with the Company since 1988, including
Vice President from May 1997 to January 1998, Director of Sales from 1993 to
1997, Sales Manager from 1992 to 1993, and Account Executive from 1988 to 1992.
Prior to 1988, Mr. Geritz held the position of Account Executive with Mentor
Systems, Inc., a software and hardware integration company. Mr. Geritz received
his B.A. degree in economics from St. Mary's College, St. Mary's City, Maryland.
MARK S. KINGSLEY. Mr. Kingsley has served as Controller and Chief
Financial Officer of the Company since October 1996 and January 1998,
respectively. From March 1990 to October 1996, Mr. Kingsley held the position of
Controller and Director of Human Resources of Allstate Financial Corporation, an
Arlington, Virginia multi-company financing and asset-based lending organization
listed on the Nasdaq National Market. Mr. Kingsley received his B.S. degree in
accounting and a B.A. degree in Russian Area Studies from the University of
Maryland, College Park, Maryland.
EUNICE E. BLECKER. Mrs. Blecker is a co-founder of the Company and has
served as a director, Treasurer and Secretary of the Company since April 1969.
Mrs. Blecker is the wife of Mr. Blecker.
MOTOO ISO. Mr. Iso has served as General Manager and Director of ICARUS
Nippon K.K. since December 1995. From October 1995 to December 1995, Mr. Iso
served as a consultant to ISL. From August 1992 to October 1995, Mr. Iso was
employed by Dodwell Marketing Services Ltd., where he sold, marketed and
provided technical support for the Company's products in Japan. Mr. Iso received
his B.S. degree in industrial science from Nihon University, Tokyo, Japan, in
1987.
DENNIS E. LEISTER, PH.D. Dr. Leister has served as Director of Client
Services of the Company since November 1997. From May 1993 to December 1997, Dr.
Leister was Manager of Client Services of the Company, and from May 1989 to May
1993, was the Company's Product Marketing Manager. Dr. Leister received his B.S.
degree in Biology from Yale University in 1968, his Ph.D. in cell and
developmental biology from The Johns Hopkins University, Baltimore, Maryland, in
1973, completed three years of post-doctoral training at the
Max-Planck-Institute fuer experimentelle Medizin in Goettingen, W. Germany, in
1976 and completed a second post- doctorate and visiting assistant professorship
at Indiana University, Bloomington, Indiana, in 1978.
DANIEL M. MCCARTHY. Mr. McCarthy has served as Director of Systems
Integration of the Company since November 1997. Mr. McCarthy has been employed
by the Company since 1974 in various capacities and prior to November 1997
served most recently as Manager of Computer Operations, from 1984 to 1997. Mr.
McCarthy received his B.S. degree in chemical engineering from the University of
Notre Dame, Notre Dame, Indiana, in 1970.
BAHRAM MEYSSAMI, PH.D. Dr. Meyssami has served as Director of Process
Technology since November 1997. From December 1993 to November 1997, Dr.
Meyssami held the position of Manager of Expert Systems Technology in the
Company. Prior to that, Dr. Meyssami was an Applications Consultant for the
Company from December 1990 to
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December 1993. Dr. Meyssami received his B.S., M.S. and Ph.D. degrees in
chemical engineering from the University of Maryland, College Park, Maryland.
MARTIN D. RYAN. Mr. Ryan has served as Director of Cost Engineering of the
Company since November 1997. From November 1996 to November 1997 and from August
1984 to November 1996, Mr. Ryan held the positions of Manager of Technology
Services and Manager of Product Development, respectively, of the Company. Mr.
Ryan received a Diploma in Quantity Surveying from Liverpool College of
Building, United Kingdom, and is an Associate of the Royal Institute of
Chartered Surveyors.
DR. ROBERT L. STEINBERGER. Dr. Steinberger has served as the Company's
Director of Decision Engineering since February 1998. Prior to that, Dr.
Steinberger held the positions of Director of Integrated Systems, Director of
Business Development and Director of Marketing of the Company, from April 1993
to February 1998, from 1993 to 1997 and from 1986 to 1993, respectively. Dr.
Steinberger obtained his doctorate in engineering science and master's degree
in chemical engineering from New York University, and his bachelor's degree in
chemical engineering from The City College of New York.
TYLER T. WINKLER. Mr. Winkler has served as Director of Sales of the
Company since January 1998. From July 1996 to January 1998, Mr. Winkler held
the position of Sales Manager, North and South America of the Company. From
October 1992 to June 1996, Mr. Winkler was an Account Executive with the
Company. Mr. Winkler received his B.S. degree in management from Towson
University in Towson, Maryland.
JAMES J. BYRNE. Mr. Byrne has served as Vice-Chairman of the Board of the
Company since January 1998. Mr. Byrne has served as Managing Partner of Byrne
Technology Partners, Ltd. since January 1996. The firm provides professional
services for strategic alliances and mergers within the computer industry and
offers technology consulting services for corporate re-engineering. From April
1990 to its sale in March 1995, Mr. Byrne served as President of Harris Adacom
Corporation, a company formed from the merger of the data communications
division of Harris Corp. and Adacom Inc., which was engaged in network systems
and services. From December 1986 to April 1990, Mr. Byrne was the Vice President
and General Manager of the data communications division of Harris Corp. Mr.
Byrne serves on the boards of directors of STB Systems, Inc., a publicly traded
company listed on the Nasdaq National Market that designs, manufactures and
sells various multimedia subsystems, and Lennox International, Inc., a
manufacturer of heating, ventilation and air conditioning systems. Mr. Byrne is
also a member of the national board of directors of the American Electronics
Association (AEA), and a member of the Advisory Council of the University of
Texas School of Engineering and Computer Science. Mr. Byrne completed the
Stanford Executive Institute program at Stanford University, Palo Alto,
California, and received his B.S. degree in business administration from
Duquesne University, Pittsburgh, Pennsylvania.
J. EDWARD BECK, JR. Mr. Beck has served as a director of the Company since
January 1998. Since 1985, Mr. Beck has been the President and Chief Executive
Officer of Bitrek Corporation, a privately held manufacturer of pipe fittings.
Mr. Beck also is a director of Dauphin Deposit Bank and Trust Company, a banking
subsidiary of First Maryland Bancorp, Chairman of the Board of Wilson College, a
private liberal arts college located in Pennsylvania, and Vice Chairman of the
Board for Summit Health, a non-profit healthcare
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provider in south-central Pennsylvania. Over the past eight years, Mr.
Beck also has served on the Boards of Directors of Dauphin Deposit Corporation,
a financial services holding company which traded on the Nasdaq National
Market, and ValleyBank Corporation, which traded on the Nasdaq SmallCap Market
until its acquisition by Dauphin Deposit Corporation in December 1993. Prior to
1985, Mr. Beck served as the Senior Adviser to the Assistant Secretary for
Electronic Systems and Information Technology at the U.S. Department of
Treasury from 1982 to 1984. Mr. Beck received his J.D. degree from Dickinson
School of Law, Carlisle, Pennsylvania (now known as Dickinson School of Law of
the Pennsylvania State University), his M.B.A. degree from Mt. St. Mary's
College, Emmitsburg, Maryland and his B.A. degree from Dickinson College,
Carlisle, Pennsylvania.
GARY M. ROUSH. Mr. Roush has served as a director of the Company since
January 1998. Since February 1996, Mr. Roush has been the President of Capital
Accounting, a financial consulting firm based in Washington, D.C., and prior to
that date served as its Vice President since May 1994. From August 1988 to May
1994, Mr. Roush was an accountant with Friedman & Fuller, P.C., in Rockville,
Maryland. Mr. Roush is licensed as a certified public accountant by the
Commonwealth of Virginia and the State of Colorado, and is a member of the
American Institute of Certified Public Accountants. Mr. Roush received his
B.S.B.A. degree in accounting from the University of Denver, Denver, Colorado.
The Company's Articles of Incorporation and Bylaws provide that the
Company's Board of Directors be divided into three classes. Class I, which will
consist of Messrs. Blecker and Byrne, will expire at the Annual Meeting of
Stockholders to be held in 2000; Class II, which will consist of Messrs. Geritz
and Beck, will expire at the Annual Meeting of Stockholders to be held in 1999;
and Class III, which will consist of Mrs. Blecker and Mr. Roush, will expire at
the Annual Meeting of Stockholders to be held in 1998. At each annual meeting of
stockholders, one class of directors will be elected for a full term of three
years to succeed those directors whose terms are expiring.
The Board of Directors has appointed an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee performs the
functions of the Board, with certain exceptions, when the Board is not in
session. The members of the Executive Committee are Mr. Blecker, Chairman and
Messrs. Geritz, Roush and Byrne. The Audit Committee reviews the scope and
results of the annual audit of the Company's consolidated financial statements
conducted by the Company's independent accountants, the scope of other services
provided by the Company's independent accountants, proposed changes in the
Company's financial and accounting standards and principles, and the Company's
policies and procedures with respect to its internal accounting, auditing and
financial controls, and makes recommendations to the Board of Directors on the
engagement of the independent accountants as well as other matters which may
come before it or as directed by the Board of Directors. The members of the
Audit Committee are Messrs. Beck, Byrne and Roush, Chairman. The Compensation
Committee administers the Company's compensation programs, including the 1998
Stock Option Plan, the Recognition Plan and the 401(k) Plan, and performs such
other duties as may from time to time be determined by the Board of Directors.
The members of the Compensation Committee are Messrs. Byrne and Roush,
Chairman.
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DIRECTOR COMPENSATION
The Board of Directors is currently required to meet not less than
quarterly. Directors who are not full-time employees of the Company receive a
quarterly fee of $1,250 for their services, plus $500 for each meeting attended
and $500 for each committee meeting attended and are reimbursed for their
out-of-pocket expenses arising from attendance at a Board or committee meeting.
Directors who are also employees receive no compensation for attending such
meetings other than their base salaries. It is anticipated that options to
purchase shares of Common Stock will be issued to the Company's non-employee
directors immediately following the Annual Meeting of Stockholders to be held in
1998, and that such directors will thereafter be entitled to receive additional
stock options under the Company's Stock Option Plan. See "- Stock Plans - 1998
Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the two other most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers") for the
fiscal year ended April 30, 1997.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
-------------------------------------- COMPENSATION
AWARDS
------------
OTHER All
ANNUAL Securities Other
COMPEN- Underlying Compen-
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) SATION(3) Options(#) sation
- --------------------------- ----------- ------------ ----------- ------------ ------------
Herbert G. Blecker(1) $144,000 $-- $-- -- $--
Chairman of the Board,
President and Chief
Executive Officer
William F. Geritz, III(2) 100,000 50,000 -- -- --
Executive Vice President
- --------------------
(1) The Company anticipates granting Mr. Blecker 63,600 options to purchase
Common Stock pursuant to the Company's Stock Option Plan. See "- Stock Plans -
1998 Stock Option Plan."
(2) The Company anticipates granting Mr. Geritz 106,000 options to purchase
Common Stock pursuant to the Stock Option Plan. See "- Stock Plans - 1998 Stock
Option Plan."
(3) Other Annual Compensation includes accrued but unpaid vacation and sick pay,
the lease and maintenance payments for an automobile, payment of personal
telephone charges and the payment for a home security system. Such amounts did
not exceed the lesser of $50,000 or 10% of the total amount of salary and bonus
reported for Mr. Blecker for the year ended April 30, 1997.
EMPLOYMENT AGREEMENTS
Effective January 22, 1998, the Company entered into an employment
agreement with Mr. Blecker which superseded his employment agreement dated
August 1, 1981, and negotiated a new employment agreement with Mr. Geritz
(Messrs. Blecker and Geritz being referred to collectively as the "Executives").
Except for base salary amounts, terms of the employment agreements are
substantially similar. Each of the Executives are engaged for five year terms;
which terms will be automatically extended for an additional year upon each
anniversary date of the respective employment agreement. The aggregate base
salaries for the Executives in each of the calendar years 1998, 1999, 2000 and
2001 will be $250,000 and $125,000 for Mr. Blecker and Mr. Geritz, respectively.
The base salaries will be supplemented by a cash bonus as may be determined by
the Board of Directors with respect to Mr. Blecker and a cash bonus of $125,000
with respect to Mr. Geritz for his performance in fiscal 1998, payable in May
1998, as well as a cash bonus for fiscal years 1999, 2000 and 2001 to be based
on performance goals to be agreed upon by him and the Board of Directors, to be
payable quarterly in fiscal years 1999, 2000 and 2001.
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The base salary amounts shall automatically be increased by the amount of the
prior year's increase in the consumer price index ("CPI"). The Executives are
entitled to participate in all employee benefit plans of the Company and will
be reimbursed for expenses relating to Company business. An automobile, the
lease payments and operating expenses of which will be paid by the Company,
will be provided to Mr. Blecker. Each Executive is entitled to four weeks paid
vacation, all Company holidays and sick leave in accordance with Company
policy. The employment agreements are terminable by the Company with or without
"cause" and upon the Executive's death, disability or retirement, or by the
Executives for "Good Reason." If the Company terminates the employment
agreement for cause or if the Executive terminates his employment for other
than Good Reason, the Executive will have no right to further compensation or
benefits under the employment agreement. If the Executive's employment is
terminated by the Company for other than cause, or for disability, retirement
or death or if the employment agreement is terminated by the Executive because
the Company has breached the employment agreement, the Executive will be
entitled to receive severance pay equal to three times the Executive's average
annual compensation. The Executive would also be entitled to maintain, at no
cost to him, the Company benefits he was then receiving (other than
participation in stock option or restricted stock plans) until he obtains
full-time employment with another employer or the expiration of the remaining
term of the employment agreement, whichever is earlier.
With respect to the employment agreements, "Good Reason" is defined to
mean termination of employment following a change in control of the Company
(defined by his employment agreement to be an event that would be required to be
reported under Regulation 14A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or the acquisition by any person of 25% or more of the
voting power of the Company or a change in the individuals constituting the
Board of Directors during any two consecutive years) based on: (i) failure to
elect, re-elect, or appoint or to re-appoint the Executives to their respective
offices or a material adverse change in their respective functions, duties or
responsibilities; (ii) a material reduction in their base salary; (iii) the
relocation of the Company's executive offices; (iv) any purported termination of
their respective employment without proper notice; or (v) the failure by any
successor to the Company to assume their respective employment agreements. If
the employment agreement is terminated for "Good Reason" subsequent to a Change
in Control, the Executive will be entitled to receive a lump sum cash severance
amount equal to five times his current base salary. The Executive would also be
entitled to maintain, at no cost to him, the Company benefits he was then
receiving (other than participation in stock options or restricted stock plans)
until he obtains full time employment with another employer or the expiration of
the remaining term of the employment agreement, whichever is earlier. The
Company has agreed to pay any excise tax attributable to any severance payment,
if necessary, pursuant to Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code").
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The Executives have agreed not to disclose any proprietary information of
the Company and not to compete with the Company for two years after the
termination or expiration of their respective employment agreement.
Mr. Kingsley was hired in October 1996 at a base salary of $85,000 per
annum with a bonus of $10,000 based upon the performance and continued
profitability of the Company, which was paid on April 30, 1997. His current base
salary is $92,000.
STOCK PLANS
1998 Stock Option Plan. Effective January 22, 1998, the Board of Directors
of the Company adopted the Stock Option Plan, which was approved by the
stockholders of the Company by unanimous written consent on January 22, 1998.
The Stock Option Plan is designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and reward key employees for outstanding performance and the
attainment of targeted goals. The Stock Option Plan is also designed to attract
and retain qualified directors, consultants, agents and advisors to the Company.
The Stock Option Plan provides for the grant of incentive stock options intended
to comply with the requirements of Section 422 of the Code ("incentive stock
options") and non-incentive or compensatory stock options which may be granted
to non-employee directors or other persons who may not be employed by, or be
directors of, the Company (collectively "Awards"). Awards will be available for
grant to directors and key employees of the Company and its subsidiaries, except
that non-employee directors will not be eligible to receive incentive stock
options.
The Stock Option Plan is administered and interpreted by the Compensation
Committee of the Board of Directors consisting of two or more non-employee
directors. Unless sooner terminated, the Stock Option Plan will be in effect for
a period of ten years or until January 21, 2008.
Under the Stock Option Plan, the Compensation Committee will determine
which officers and key employees will be granted options, whether such options
will be incentive or compensatory options, the number of shares subject to each
option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable. The Stock Option Plan,
however, provides that non-employee directors automatically will be granted
compensatory stock options to purchase a specified number of shares of Common
Stock annually.
Pursuant to the Stock Option Plan, the per share exercise price of an
incentive stock option is required to be at least equal to the fair market value
of a share of Common Stock on the date the option is granted. The Code also
requires that the aggregate fair market value of the Common Stock with respect
to which the incentive stock options are exercisable for the first time by the
optionee during any calendar year cannot exceed $100,000. Moreover, any person
who owns 10% or more of the voting power of the Common Stock
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may not receive incentive stock options whose exercise price is less than 110%
of the fair market value of a share of Common Stock of the Company on the date
of grant. The Stock Option Plan requires that the per share exercise price of a
compensatory stock option be no less than 85% of the fair market value of a
share of Common Stock on the date the option is granted.
Stock options will become vested and exercisable at the rate of 20% per
year on each annual anniversary of the date on which the option was granted or
as otherwise specified by the Compensation Committee, and the right to exercise
stock options shall be cumulative. Each stock option or portion thereof will be
exercisable at any time on or after its vesting date and will remain exercisable
until ten years after its date of grant or three months after the date on which
the optionee's employment terminates, unless the Compensation Committee, in its
discretion, decides at the time of grant or thereafter to extend such period of
exercise for a period of three months to five years. Unless the Compensation
Committee, in its discretion, shall specifically state otherwise at the time of
grant, all options will become immediately vested and exercisable in full on the
date an optionee terminates his or her employment or service as a non-employee
director due to his or her death, retirement, disability or as a result of a
"Change in Control" of the Company. A "Change in Control" of the Company is
defined by the Stock Option Plan to have occurred if: (i) any person other than
Mr. Blecker or the Company becomes the beneficial owner of 25% of more of the
voting power of the Company then outstanding; (ii) during any period of two
consecutive years individuals who at the beginning of such period constitute the
Board of Directors cease for any reason to constitute at least a majority of the
Board; (iii) the stockholders of the Company approve a merger or consolidation
of the Company whereby the voting securities of the Company represent less than
50% of the combined voting power of the Company immediately after such merger or
consolidation; or (iv) the stockholders of the Company approve a plan of
liquidation of the Company or an agreement for the sale or disposition of
substantially all of the Company's assets. However, failure to exercise
incentive stock options within three months after the date on which the
optionee's employment terminates may result in adverse tax consequences to the
optionee. Stock options are non-transferable except by will or the laws of
descent and distribution.
The Company has reserved for issuance pursuant to the Stock Option Plan
760,500 shares of Common Stock. In the event of a stock split, reverse stock
split or stock dividend, the number of shares of Common Stock under the Stock
Option Plan, the number of shares to which any Award relates and the exercise
price per share under any option shall be adjusted to reflect such increase or
decrease in the total number of shares of the Common Stock outstanding.
Under current provisions of the Code, the federal income tax treatment of
incentive stock options and compensatory stock options is different. With
respect to incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
market value of the Common Stock on the date of exercise and the option exercise
price generally will be treated as compensation income to the optionee upon
exercise, and the Company will be entitled to a deduction in the amount of
income so recognized.
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No options were granted or exercised in fiscal 1997. The Company
anticipates granting immediately prior to the commencement of this Offering the
following number of options to the following executive officers of the Company
with an exercise price equal to the initial public offering price: 63,600 to Mr.
Blecker; 106,000 to Mr. Geritz; 6,300 to Mr. Kingsley; and 8,400 to Mrs.
Blecker. In addition, the Company anticipates granting 253,100 options to
non-executive employees of the Company with an exercise price equal to the
initial public offering price. These options will be subject to a five-year
vesting schedule providing that 20% of such options will vest annually. In
addition, the Company intends to issue 4,200 compensatory options to each of the
three non-employee directors immediately subsequent to the Annual Meeting of
Stockholders in calendar 1998 and immediately following each subsequent Annual
Meeting (to the extent that options remain available therefor under the Stock
Option Plan). These options will vest immediately and have an exercise price
equal to the fair market value of the Common Stock on the date of grant.
Recognition and Retention Plan and Trust. The Board of Directors of the
Company, on January 22, 1998, adopted the Recognition Plan for directors,
selected officers and employees of the Company, and the stockholders of the
Company, approved such plan by unanimous written consent on January 22, 1998.
The objective of the Recognition Plan is to enable the Company to provide
directors, officers and employees with a proprietary interest in the Company as
an incentive to contribute to its success.
The Recognition Plan is administered by the Compensation Committee, which
will have the responsibility to hold all Common Stock contributed, or to invest
all funds contributed, to a trust created for the Recognition Plan (the
"Trust"). The Recognition Plan will remain in effect for a period of ten years
or until January 21, 2008, unless it is terminated by the Board of Directors or
all assets of the trust are distributed prior to such date.
The Company has reserved for issuance 507,000 shares of Common Stock under
the Recognition Plan. The shares, while restricted, may not be sold, pledged or
otherwise disposed of and are required to be held in the Trust. If a recipient
terminates his or her employment for reasons other than death, disability or
retirement, the recipient will forfeit all rights to the allocated shares under
restriction. The Company will indemnify the trustees of the Trust for all
claims, expenses and liabilities arising out of or related to the exercise of
the trustees' powers and the discharge of their duties under the Trust, unless
the same is due to the gross negligence or willful misconduct of the Trustee.
The Trust may purchase from the Company and/or stockholders thereof additional
shares of Common Stock for distribution pursuant to the Recognition Plan. Shares
of Common Stock granted pursuant to the Recognition Plan generally will be in
the form of restricted stock earned at the rate of 20% per year, subject to
continued employment or service as a director, except that all shares will be
deemed earned as of the last day of a recipient's employment as a result of
death or retirement or, in the event and as of the date of, a Change of Control
of the Company, which is defined under the Recognition Plan to mean any change
of control of the Company which would be required to be reported by the Company
under Regulation 14A of the Exchange Act. Recipients of grants under the
Recognition Plan will not be required to make any payment at the time of grant
or when the underlying shares of Common Stock become vested.
For accounting purposes, compensation expense in the amount of the fair
market value of the Common Stock at the date of the grant to the recipient will
be recognized pro
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rata over the number of years during which the shares vest. The Board of
Directors of the Company can terminate the Recognition Plan at any time, and if
it does so, any shares not allocated will revert to the Company.
The Company does not anticipate granting stock awards for shares of Common
Stock to directors, executive officers and other key personnel immediately
subsequent to the consummation of the Offering but may do so thereafter. It is
currently anticipated that stock awards will be made to other officers and key
personnel by the committee primarily based on performance, although the
committee will be able to consider other factors determined to be relevant in
its sole discretion. In addition, pursuant to the Recognition Plan, shares of
Common Stock authorized to be awarded by the Recognition Plan will be available
to be awarded to non-employee directors of the Company pursuant to a formula
that complies with Rule 16b-3 under the Exchange Act. See "Risk Factors -
Substantial Dilution."
401(k) Plan. The Company has a 401(k) plan for all employees (the "401(k)
Plan"), age 21 or older, with one year of service. The 401(k) Plan is a
contributory defined contribution plan which is intended to qualify under
Section 401(k) of the Code. Participants may contribute to the 401(k) Plan by
salary reduction of up to 20% of annual compensation for the year. Such
contribution defers the employee's earnings up to a maximum of $9,500 in each
plan year, indexed annually. The Company may, in its discretion, determine each
year to make a matching contribution out of current or accumulated net profit
equal to a percentage of the amount deferred by the employee. Although an
employee's contributions to the 401(k) Plan are immediately vested, the matching
contributions made by the Company become vested at the rate of 20% per year upon
the completion of two years of credited service. All funds contributed to the
401(k) Plan are held in a trust maintained by a brokerage firm and investments
are made at the direction of the employee. Contributions by the Company to the
401(k) Plan were $14,898 for fiscal 1997.
Cafeteria Plan. All Company employees who satisfy the conditions for
coverage under the insurance benefit plans maintained by the Company are
eligible to participate in the Company's Cafeteria Plan, which permits employees
to deduct a portion of their gross wages prior to the calculation of federal
income tax, FICA and Medicare deductions and state income tax, to be used to pay
for the following permissible benefits: group health insurance, life insurance,
disability insurance, cancer plan, vision plan, accidental death, dismemberment
plan, or dental insurance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee on January 22,
1998. The Compensation Committee currently is comprised of Messrs. Beck and
Roush. None of the executive officers of the Company currently serves on the
compensation committee of another entity or on any other committee of the board
of directors of another entity performing similar functions.
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CERTAIN TRANSACTIONS
PENDING RECAPITALIZATION
The Company was organized under the laws of the State of Maryland on
December 2, 1998. On January 26, 1998, the Company entered into an Agreement and
Plan of Recapitalization with Mr. Blecker, Mrs. Blecker (collectively the
"Bleckers"), ICARUS Corporation ("ICARUS MD") and ICARUS Services Limited
("ICARUS UK"), providing for the transfer by the Bleckers of all of their shares
of the capital stock of ICARUS MD and ICARUS UK to the Company in exchange for
an aggregate of 2,999,000 shares of Common Stock and 100 shares of Series A
Preferred Stock of the Company (the "Recapitalization"). See "Description of
Capital Stock - Preferred Stock." As a result of the Recapitalization, ICARUS MD
and ICARUS UK will become wholly-owned subsidiaries of the Company. Following
the Recapitalization, ICARUS Nippon will remain a wholly-owned subsidiary of
ICARUS UK, and ICARUS Development and Marketing Corporation will remain a
wholly-owned subsidiary of ICARUS MD. It is anticipated that the
Recapitalization will be consummated immediately prior to the closing of the
Offering.
STOCKHOLDER LOANS TO COMPANY
During fiscal 1992, Mr. Blecker made two loans to the Company in the
aggregate amounts of $100,000 and $25,000, respectively. The loans were made
pursuant to an unsecured demand promissory note bearing interest at 6.5% per
annum. All amounts outstanding under the loans were fully repaid in January
1997.
FUTURE TRANSACTIONS
Future transactions between the Company and related parties will be
approved by a majority of all disinterested directors and will be on terms no
less favorable than those which could be obtained from unrelated third parties.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Blecker holds 97.0% of the outstanding Common Stock, and after the
Offering will own approximately 52.9%. Accordingly, Mr. Blecker will, after the
Offering, be in a position to control all matters relating to the Company's
business, including the election of the Company's Board of Directors, the
acquisition or disposition of assets (in the ordinary course of the Company's
business or otherwise), future issuances of Common Stock or other securities of
the Company, and the declaration and payment of dividends on the Common Stock.
In addition, he may be able to prevent, delay or make more difficult any
business combination involving the Company not approved by him. See "Risk
Factors - Control by Principal Stockholders" and "Description of Capital Stock -
Maryland Anti-Takeover Law and Certain Provisions of the Articles of
Incorporation."
The Principal Stockholders of the Company will benefit from this Offering
in that a public market will be created for shares of the Company's Common
Stock and the Principal Stockholders will have substantial unrealized gain with
respect to shares of the Company's Common Stock owned by them following this
Offering.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles that eliminate to the
fullest extent permissible under Maryland law the liability of its directors to
the Company or its stockholders for monetary damages except to the extent that
it is proven that the director actually received an improper benefit or profit
in money, property or services or the director's action or failure to act was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. This provision is designed to ensure that
the ability of the Company's directors to exercise their best business judgment
in managing the Company's affairs, subject to their continuing fiduciary duties
to the Company and its stockholders, is not unreasonably impeded by exposure to
potentially high personal costs or other uncertainties of litigation.
The Articles also provide that the Company shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, because such person is or was a director, officer, employee or
agent of the Company. Under the terms of the Articles, such indemnification also
will be provided to any person who is or was serving at the request of the
Company as a director, officer, employee, agent or in certain other capacities
of another corporation, partnership, joint venture, trust, employee benefit plan
or certain other enterprises. Such indemnification is furnished to the full
extent provided by law against expenses (including attorneys' fees), judgments,
fines, excise taxes and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding. The indemnification
provisions also permit the Company to pay reasonable expenses in advance of the
final disposition of any action, suit or proceeding as authorized by the Board
of Directors, provided that the indemnified person provides a written
affirmation that he or she has met the standards of conduct necessary for
indemnification under applicable law and undertakes to repay the Company if it
is ultimately determined that such person was not entitled to indemnification.
The rights of indemnification provided in the Company's Articles are not
exclusive of any other rights which may be available under the Articles or
Bylaws of the Company, any insurance or other agreement, by vote of stockholders
or disinterested directors or otherwise. In addition, the Articles authorize the
Company to maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Company or with another entity at the request
of the Company, whether or not the Company would have the power to provide
indemnification to such person. The Company intends to obtain director and
officer liability insurance coverage.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
At the present time, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 30, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby by (i) each
person known by the Company to be the beneficial owner of more than 5.0% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Executive Officers named in the Summary Compensation Table and (iv) all
executive officers and directors as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING OFFERING
------------------- -------------------
NAME(1) NUMBER PERCENT NUMBER PERCENT
- -------------------------------- -------- ---------- --------- ---------
Herbert G. Blecker (2) 2,910,000 97.0% 2,910,000 52.9%
Eunice E. Blecker (2) 90,000 3.0 90,000 1.6
William F. Geritz, III -- -- -- --
Mark S. Kingsley -- -- -- --
James J. Byrne -- -- -- --
J. Edward Beck, Jr. -- -- -- --
Gary M. Roush -- -- -- --
All directors and executive officers
as a group (seven persons)
- -------------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. The Company believes, based on information furnished by
such persons, that the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them. The address of each beneficial owner is One
Central Plaza, 11300 Rockville Pike, Rockville, Maryland 20852, except
that the address for Mr. Roush is c/o Capital Accounting, 1299
Pennsylvania Avenue, N.W., Washington, D.C. 20005, the address for Mr.
Beck is c/o Bitrek Corporation, 330 East Ninth Street, P.O. Box 510
Waynesboro, Pennsylvania 17268, and the address for Mr. Byrne is
c/o Byrne Technology Partners, Ltd., One Galleria Tower, Suite 500,
13344 Noel Rd., Dallas, Texas 75240.
(2) The number of shares shown in the table for each of Mr. Blecker and
Mrs. Blecker excludes the number of shares beneficially owned by the
other. In addition, the number of shares shown in the table for each of
Mr. Blecker and Mrs. Blecker includes 1,000 shares of Common Stock which
are currently issued and outstanding as well as shares issuable pursuant
to the Recapitalization (which also includes 100 shares of Series A
Preferred Stock). See "Certain Transactions - Pending Recapitalization."
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock.
COMMON STOCK
As of January 30, 1998, there were 1,000 shares of Common Stock
outstanding. Upon the Recapitalization, the Company will issue an aggregate of
2,999,000 shares of Common Stock (in addition to 100 shares of Series A
Preferred Stock) to Mr. Blecker and Mrs. Blecker in exchange for all of the
outstanding common stock of ICARUS Corporation and ISL. See "Certain
Transactions - Pending Recapitalization."
Dividends. Subject to the prior rights of the holders of any shares of
preferred stock that may be outstanding, the Company may pay dividends as
declared from time to time by the Board of Directors out of funds legally
available therefor. The holders of Common Stock will be entitled to receive and
share equally in such dividends as may be declared by the Board of Directors.
Voting Rights. Except as provided in any resolution or resolutions adopted
by the Board of Directors establishing any series of Preferred Stock, the
holders of Common Stock possess exclusive voting rights in the Company. Each
holder of shares of Common Stock is entitled to one vote for each share held on
all matters voted upon by stockholders.
Liquidation. Subject to the prior rights of the holders of any shares of
Company Preferred Stock that may be outstanding, in the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, the holders of the Common Stock would generally be entitled to
receive pro rata, after payment of all debts and liabilities of the Company, all
remaining assets of the Company available for distribution.
Preemptive Rights; Redemption. Holders of the Common Stock do not have any
preemptive rights with respect to any shares of capital stock of the Company. In
addition, the Common Stock is not subject to any redemption provisions.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated,
"blank check" Preferred Stock, of which 100 shares of Series A Preferred Stock
will be outstanding following consummation of the Recapitalization. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's stockholders. The Preferred Stock may be
issued in distinctly designated series, may be convertible into Common Stock and
may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. Accordingly,
the issuance of Preferred Stock could adversely affect the voting and other
rights of holders of Common Stock.
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Following consummation of the Recapitalization, there will be 100 shares
of Series A Preferred Stock issued and outstanding and held beneficially and of
record by the Bleckers. The shares of the Series A Preferred Stock rank senior
to the Common Stock as to rights upon liquidation, but are not entitled to any
dividends, are non-redeemable, have no voting rights, no registration rights and
no sinking fund is to be established for their retirement. The Series A
Preferred Stock was issued solely to facilitate the Recapitalization under
applicable law.
The authorized but unissued shares of Preferred Stock and the authorized
but unissued and unreserved shares of Common Stock are available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve a transaction in which the additional authorized shares of
Preferred Stock would be issued or as may be required by the NASD to maintain
the quotation of the Common Stock on the National Association of Securities
Dealers, Inc. Automated Quotation ("Nasdaq") National Market no stockholder
approval would be required for the issuance of these shares. The issuance of
Common or Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price of,
and the voting and other rights of, the holders of Common Stock. Except for this
Offering, the Recapitalization and shares reserved for issuance pursuant to the
Company's employee stock benefit plans, the Company has no current plans to
issue any shares of Common or Preferred Stock.
MARYLAND ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION
General. The following discussion is a general summary of certain
provisions of the Maryland General Corporation Law and the Articles of the
Company, which may be deemed to have an anti-takeover effect. The following
description of certain of the provisions of the MGCL and the Articles of the
Company is necessarily general and reference should be made in each case to the
Articles which are set forth as an exhibit to the Company's Registration
Statement filed with the Commission and the applicable provisions of the MGCL.
See "Available Information." Capitalized terms not otherwise defined shall have
the meanings set forth in the Articles.
Maryland General Corporation Law. The MGCL maintains certain provisions
that may have the effect of delaying, deterring or preventing a change of
control of the Company. Section 3-701 and following sections state that control
shares (defined as shares of stock of a corporation owned by a person or as to
which such person is entitled to vote within the ranges of 20% to 33%, 33% or
more but less than 51%, or 51% or more of all voting power) acquired in a
control share acquisition (defined as the acquisition of, or power to vote, such
shares) have no voting rights except to the extent approved by stockholders at a
special meeting called for such purpose by the affirmative vote of two-thirds of
all the votes entitled to be cast on such matter, excluding all shares owned by
the person who acquired such control shares. The corporation that is the target
of a control share acquisition may, at its option, redeem any or all control
shares at their fair value, except for control shares for which voting rights
have been previously approved. In addition, if voting rights for control shares
are approved at a special meeting held in accordance with the statute and the
acquiring person is entitled to exercise or direct the exercise of a majority or
more of all voting power, all stockholders of the corporation (other than the
acquiring person) have the
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right to object to such action and seek from the Company payment of fair value
for their shares, which amount may not be less than the highest price paid by
the acquiring person for his or her shares in the control share acquisition.
This statute may have the effect of discouraging persons from acquiring large
blocks of Company Common Stock. Article X.D. of the Company's Articles expressly
excludes the Blecker Interest, as defined therein, from the operation of these
provisions.
Section 3-603 of the MGCL also contains a provision which is substantially
similar to Article X of the Articles relating to business combinations with
related persons. The Company has elected not to be governed by this provision of
the MGCL.
Nominations and Stockholder Proposals. Article VII.D. of the Company's
Articles governs nominations for election to the Board of Directors, and
requires all nominations for election to the Board of Directors other than those
made by the Board to be made by a stockholder who has complied with the notice
provisions of such section. Article IX.C. of the Articles provides that only
such business as shall have been properly brought before an annual meeting of
stockholders shall be conducted at the annual meeting. Business may be brought
before the meeting by or at the direction of the Board of Directors or otherwise
must be properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Company. In
both instances, written notice of a stockholder nomination or stockholder
proposal must be communicated to the attention of the Company's Secretary and
either delivered to, or mailed and received at, the principal executive offices
of the Company for the first annual meeting after the filing of the Articles,
before the close of business on the tenth day following the date on which notice
of such meeting is first given to stockholders, and thereafter, not less than 60
days prior to the anniversary date of the mailing of proxy materials by the
Company in connection with the immediately preceding annual meeting of
stockholders of the Company. Each such notice shall include specified matters
set forth in the Articles.
The procedures regarding stockholder nominations and stockholder proposals
will provide the Board of Directors with the information which will be necessary
to evaluate a stockholder nominee to the Board and stockholder proposals and
other relevant information, such as existing stockholder support for a nominee
or business proposal, as well as the time necessary to consider and evaluate
such information in advance of the applicable meeting.
Special Meetings of Stockholders. Article IX of the Company's Articles
provides that special meetings of the Company's stockholders, for any purpose or
purposes, may only be called by the Chairman of the Board, the President or a
majority of the whole Board of Directors and a majority of the Continuing
Directors (generally, those directors at the time of effectiveness of the
Articles and those directors who are not affiliated with the Related Person and
who are elected as directors prior to the time the Related Person (as defined
below) became such, or those directors who are unaffiliated with a Related
Person and who are designated as Continuing Directors before their initial
election by a majority of the other Continuing Directors), or by holders of not
less than majority of all votes entitled to be cast on any issue proposed to be
considered at such special meeting. A "Related Person" is defined generally to
include any person, partnership, corporation, group or other entity (other than
Mr. Blecker, Mrs. Blecker or any of Mr. Blecker's relatives, or the Company) who
is the beneficial owner of 10% or more of the shares of the Company entitled to
vote
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generally in an election of directors ("Voting Shares"). This provision will
make it more difficult for stockholders to take action opposed by the Board of
Directors.
Business Combinations. Article X of the Articles governs any proposed
"Business Combination" (defined generally to include certain sales, purchases,
exchanges, leases, transfers, dispositions or acquisitions of assets, mergers or
consolidations, or certain reclassifications of securities of the Company)
between the Company, on the one hand, and a Related Person, on the other hand.
In general, Article X provides that if certain specified conditions are
not met, then the Company may not become a party to any Business Combination
without the prior affirmative vote at a meeting of the Company's stockholders by
the holders of at least 80% of the Voting Shares, voting separately as a class,
and by an Independent Majority of Stockholders (generally, the holders of a
majority of the outstanding Voting Shares that are not beneficially owned,
directly or indirectly, by a Related Person or any affiliate or associate
thereof). If such approval were obtained, the specified conditions would not
have to be met. Such conditions also would not have to be met if the Board of
Directors approved the Business Combination.
Article X is intended to provide minimum safeguards for stockholders who
do not accept a takeover attempt and continue to hold their shares after the
attempt succeeds and the control of the Company is required by a Related Person.
However, Article X would not restrict another company that merely desired
to exercise control over the Company and did not intend to effect a subsequent
Business Combination. Moreover, these provisions may not apply to an attempted
combination with a person not a Related Person, including Mr. Blecker, Mrs.
Blecker or any "Blecker Interest" (generally, descendants of Mr. Blecker or any
person holding Voting Shares for the benefit of Mr. Blecker, Mrs. Blecker or the
descendants of Mr. Blecker). If, however, another company obtaining control over
the Company were not willing to meet the price and other conditions of Articles
X, the holders of more than one-fifth of the outstanding Voting Shares could
block a Business Combination supported by the remaining stockholders. The result
is that Business Combinations favored by a majority of stockholders might not be
approved. Article X might also discourage a tender offer for the Company's stock
because of the resulting need either to observe the minimum price requirements
or to obtain an 80% stockholder vote as a precondition to any subsequent
Business Combination. This might have the effect of preventing temporary
fluctuations in the market price of the stock of the Company that could result
from actual or rumored takeover attempts.
Amendment of Articles. Article XI of the Company's Articles provides that
any amendment of the Articles must be first approved by a majority of the Board
of Directors and thereafter by the holders of two-thirds of the shares of the
Company entitled to vote in an election of directors, but the approval of 75% of
the shares of the Company entitled to vote in an election of directors is
required for any amendment to Articles VI (pre-emptive rights), VII (directors),
VIII (indemnification), IX (relating to meetings of stockholders), and XI
(amendments to the Articles and Bylaws). In addition, Article X.E. of the
Company's Articles provides that Article X may not be changed, amended or
repealed without the affirmative vote of the holders of at least 80% of the
Voting Shares and by an Independent Majority of Stockholders. However, any
change, amendment or repeal to Article X of the Company's Articles approved by
two-thirds of the whole Board
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of Directors and a majority of the Continuing Directors is not subject to the
approval requirements of Article X.E.
Anti-Takeover Effects. The Board of Directors believes that the foregoing
provisions in the Articles are prudent and, together with applicable state law,
will reduce vulnerability to takeover attempts and certain other transactions
that are not negotiated with and approved by the Board of Directors of the
Company. The Board of Directors believes that these provisions are in the best
interests of the Company and its stockholders. In the Board of Directors'
judgment, the Board of Directors is in the best position to determine the true
value of the Company and to negotiate more effectively for what may be in the
best interests of its stockholders. Accordingly, the Board of Directors believes
that it is in the best interests of the Company and its current and future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the Company's
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so. The Board of Directors, however, has
concluded that the potential benefits of these provisions outweigh their
possible disadvantages. The Board of Directors of the Company is not currently
aware of any effort that might be made to acquire control of the Company.
Certain Benefit Plan Provisions. In addition to the above provisions, the
Company's Stock Option Plan provides that, in the event of a change in control
of the Company, any outstanding options would become immediately exercisable.
The Company's Recognition Plan also provides that in the event of any change in
control of the Company, all shares of Common Stock subject to a plan share award
shall be deemed earned as of the date of the Change of Control. Such provisions,
to the extent they increase the cost of any acquisition of control, could be
deemed to have an anti-takeover effect. See "Management - Stock Plans - 1998
Stock Option Plan" and "Recognition and Retention Plan and Trust."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, Cranford, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of
the Company. Sales of substantial shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock prevailing from time to time.
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Upon completion of this Offering, the Company will have 5,500,000 shares
of Common Stock outstanding. Of these shares, all of the shares sold in this
Offering will be freely transferable without restriction or registration under
the Securities Act, except for any shares purchased by an existing "affiliate"
of the Company as that term is defined by the Securities Act (an "Affiliate"),
which shares will be subject to the resale limitations of Rule 144 adopted under
the Securities Act. On the date of this Prospectus, 3,000,000 "control shares"
as defined in Rule 144 will be outstanding. All of said shares will become
available for sale in reliance upon Rule 144 one year after the date of the
Recapitalization.
The Company and each of the Principal Stockholders have agreed not to
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any swap or similar agreement that
transfers, in whole or in part, the economic risk of ownership of the Common
Stock, for a period of 180 days after the date of this Prospectus, without the
prior written consent of Hoak Breedlove Wesneski & Co. Hoak Breedlove Wesneski &
Co. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to the lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year
(including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding; or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Subject to the contractual restrictions described above, "144(k)
shares" may therefore be sold immediately upon the completion of this Offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Exchange Act, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Commission has indicated that
Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after the
date of this Prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other
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than Affiliates subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its two-year minimum holding
period requirements.
The Company anticipates that prior to the date of this Prospectus, options
to purchase 437,400 shares of Common Stock will be outstanding. Shortly after
this Offering, the Company intends to file a registration statement on Form S-8
under the Securities Act covering shares of Common Stock reserved for issuance
under the Company's stock plans. See "Management - Executive Compensation -
Stock Plans." Shares of Common Stock issued upon exercise of options under the
Form S-8 will be available for sale in the public market, subject to Rule 144
volume limitations applicable to Affiliates and subject to the contractual
restrictions described above. The options to be granted will vest annually over
a five-year period.
UNDERWRITING
The Underwriters named below, represented by Hoak Breedlove Wesneski & Co.
(the "Representative"), have severally agreed, subject to the terms and
conditions contained in the underwriting agreement (the "Underwriting
Agreement"), by and between the Company and the Underwriters, to purchase from
the Company the number of shares of Common Stock indicated below opposite their
respective names, at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to
purchase all of the shares of Common Stock if they purchase any.
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Hoak Breedlove Wesneski & Co.........................
---------
Total................................................ 2,500,000
=========
The Representative has advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $______________ per share; and
the Underwriters may allow, and such dealers may reallow, a concession of not
more than $_____________ per share to certain other dealers. After the
Offering, the public offering price and other selling terms may be changed by
the Representative. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock, to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the
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Underwriters exercise this option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with this Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof.
The Principal Stockholders have agreed that, for a period of 180 days from
the date of this Prospectus, they will not offer, sell or otherwise dispose of
any shares of their Common Stock or options to acquire shares of Common Stock
without the prior written consent of Hoak Breedlove Wesneski & Co. The Company
has agreed not to sell any shares of Common Stock or any other securities
convertible into shares of Common Stock for a period of 180 days from the date
of this Prospectus without the prior written consent of Hoak Breedlove Wesneski
& Co., except that the Company may, without consent, grant stock options
pursuant to the Company's stock option plans or issue shares of Common Stock
upon exercise of outstanding stock options.
The Representative has informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the shares of
Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiations between the Company and the Representative. Among
the factors to be considered in determining the initial public offering price
are prevailing market and economic conditions, revenues and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions and other factors.
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
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LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C. Locke
Purnell Rain Harrell (A Professional Corporation), Dallas, Texas, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the Offering.
EXPERTS
The Consolidated Balance Sheet of the Company as of April 30, 1997 and the
related Consolidated Statements of Operations, Changes in Stockholders' Equity
and Cash Flows for the years ended April 30, 1997 and 1996, included in this
Prospectus have been audited by Grant Thornton LLP, independent certified public
accountants, as stated in their report, which is included elsewhere herein, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company, which is not currently a reporting company, has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act"), with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. Copies of the Registration Statement, including
exhibits and schedules thereto, and, if the Company becomes a reporting company
after the Offering, copies of its periodic reports and proxy materials, may be
inspected and copied at the Commission's Public Reference Section at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company. Copies may also be obtained at prescribed
rates by writing to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. If the Company is listed on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") National Market
after the Offering, such information may also be inspected at the offices of the
National Association of Securities Dealers, Inc. ("NASD"), 1735 K Street, N.W.,
Washington, D.C. 20006.
After the Offering, the Company intends to furnish its stockholders with
annual reports containing financial statements audited and reported upon by
independent accountants and quarterly reports containing unaudited summary
financial information for each of the first three quarters of each fiscal year.
-78-
83
ICARUS INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheet as of April 30, 1997, and Unaudited
Consolidated Balance Sheet as of October 31, 1997........................ F-3
Consolidated Statements of Operations for the Years Ended April 30, 1996
and 1997 and Unaudited Consolidated Statements of Operations for the
Six Months Ended October 31, 1996 and 1997............................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended April 30, 1996 and 1997, and Unaudited Consolidated Stockholders'
Equity for the Six Months Ended October 31, 1997......................... F-5
Consolidated Statements of Cash Flows for the Years Ended April 30, 1996
and 1997, and Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended October 31, 1996 and 1997........................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
ICARUS International, Inc.
We have audited the accompanying consolidated balance sheet of ICARUS
International, Inc. (the Company) as of April 30, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended April 30, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of ICARUS International,
Inc., as of April 30, 1997, and the results of its operations and its cash flows
for the years ended April 30, 1997 and 1996, in conformity with generally
accepted accounting principles.
Vienna, Virginia
July 8, 1997
F-2
85
ICARUS INTERNATIONAL, INC.
Consolidated Balance Sheets
April 30, October 31,
1997 1997
---- ----
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 1,716,371 $2,218,315
Accounts receivable, net 1,992,571 1,849,803
Prepaid expenses and other current assets 174,721 190,839
----------- ----------
Total Current Assets 3,883,663 4,258,957
Property and Equipment, net 401,899 475,440
Deferred Offering Costs 245,160 502,623
Other Noncurrent Assets 23,376 34,032
----------- ----------
Total Assets $ 4,554,098 $5,271,052
----------- ----------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 178,677 $ 346,715
Accrued payroll and related costs 439,581 554,808
Other accrued liabilities 49,926 7,305
Current maturities under capital lease obligations 1,630 1,789
Income taxes payable 165,840 242,046
Deferred income taxes 284,417 155,824
Deferred revenue 1,667,453 1,872,316
----------- ----------
Total Current Liabilities 2,787,524 3,180,803
Deferred Revenue, less current portion 634,033 589,267
Capital Lease Obligations, less current portion 5,159 4,541
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock, $.01 par value;
5,000,000 shares authorized, 100 shares
issued and outstanding 1 1
Common stock, $.01 par value;
20,000,000 shares authorized, 3,000,000
shares issued and outstanding 30,000 30,000
Additional paid-in capital 10,357 10,357
Retained earnings 1,100,439 1,443,553
Cumulative translation adjustment (13,415) 12,530
----------- ----------
Total Stockholders' Equity 1,127,382 1,496,441
----------- ----------
Total Liabilities and Stockholders' Equity $ 4,554,098 $5,271,052
----------- ----------
See accompanying notes to consolidated financial statements.
F-3
86
ICARUS INTERNATIONAL, INC.
Consolidated Statements of Operations
Year ended April 30, Six months ended October 31,
-------------------- ----------------------------
1996 1997 1996 1997
---- ---- ---- ----
(unaudited)
Revenue
Software license revenue $ 3,811,905 $5,164,907 $2,471,547 $3,219,349
Maintenance fee and other revenue 1,866,088 2,174,124 1,090,131 1,041,170
----------- ---------- ---------- ----------
Total Revenue 5,677,993 7,339,031 3,561,678 4,260,519
Operating Expenses
Cost of software license revenue 561,968 870,796 418,675 606,545
Cost of maintenance fee and other revenue 537,436 520,304 247,665 286,430
Selling and marketing 2,171,699 2,472,670 1,185,410 1,429,180
Research and development 849,527 904,259 400,013 511,214
General and administrative 1,273,898 1,541,344 741,547 918,340
----------- ---------- ---------- ----------
Total Operating Expenses 5,394,528 6,309,373 2,993,310 3,751,709
----------- ---------- ---------- ----------
Income from Operations 283,465 1,029,658 568,368 508,810
----------- ---------- ---------- ----------
Interest Income, net 20,649 45,575 13,359 49,070
Other (Expense) Income (150) -- -- --
----------- ---------- ---------- ----------
Income Before Income Taxes 303,964 1,075,233 581,727 557,880
Provision for Income Taxes 111,024 418,804 229,728 214,766
----------- ---------- ---------- ----------
Net Income $ 192,940 $ 656,429 $ 351,999 $ 343,114
----------- ---------- ---------- ----------
Net Income Per Share $ 0.06 $ 0.22 $ 0.12 $ 0.11
----------- ---------- ---------- ----------
Weighted Average Shares Outstanding 3,000,000 3,000,000 3,000,000 3,000,000
----------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-4
87
ICARUS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity
Additional Cumulative Total
Preferred Common Paid-in Retained Translation Stockholders'
Stock Stock Capital Earnings Adjustment Equity
----- ----- ------- -------- ---------- ------
Balance as of April 30, 1995 $1 $30,000 $10,157 $ 251,070 $(10,688) $ 280,540
Issuance of Common Stock - -- 200 -- -- 200
Translation Adjustment - -- -- -- (11,769) (11,769)
Net Income - -- -- 192,940 -- 192,940
-- ------- ------- ---------- -------- -----------
Balance as of April 30, 1996 1 30,000 10,357 444,010 (22,457) 461,911
Translation Adjustment - -- -- -- 9,042 9,042
Net Income - -- -- 656,429 -- 656,429
-- ------- ------- ---------- -------- -----------
Balance as of April 30, 1997 1 30,000 10,357 1,100,439 (13,415) 1,127,382
Translation Adjustment (unaudited) - -- -- -- 25,945 25,945
Net Income (unaudited) - -- -- 343,114 -- 343,114
-- ------- ------- ---------- -------- -----------
Balance at October 31, 1997 (unaudited) $1 $30,000 $10,357 $1,443,553 $ 12,530 $ 1,496,441
-- ------- ------- ---------- -------- -----------
See accompanying notes to consolidated financial statements.
F-5
88
ICARUS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Year ended April 30, Six months ended October 31,
-------------------- ----------------------------
1996 1997 1996 1997
---- ---- ---- ----
(unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 192,940 $ 656,429 $ 352,001 $ 343,114
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 174,372 182,362 88,182 86,855
Deferred income taxes 59,700 222,839 50,128 (127,789)
Changes in assets and liabilities
Accounts receivable (442,312) (360,404) 277,528 170,315
Prepaid expenses and other current assets (64,328) (365,315) (7,043) (240,965)
Accounts payable and accrued expenses 193,115 20,727 14,748 235,656
Income taxes payable (10,007) 131,241 181,379 102,365
Deferred revenue 415,515 723,866 (205,543) 78,879
--------- ----------- ----------- -----------
Net Cash Provided by Operating Activities 518,995 1,211,745 751,380 648,430
--------- ----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment (215,476) (249,635) (72,329) (157,871)
--------- ----------- ----------- -----------
Cash Flows from Financing Activities
Issuance of common stock 200 -- -- --
Capital lease payments (431) (1,681) (1,571) (815)
Repayment of notes payable -- (105,375) -- --
--------- ----------- ----------- -----------
Net Cash Used in Financing Activities (231) (107,056) (1,571) (815)
--------- ----------- ----------- -----------
Effect of Exchange Rate Changes on Cash (22,648) 49,626 (25,698) 12,200
--------- ----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 280,640 904,680 651,782 501,944
Cash and Cash Equivalents, Beginning of Period 531,051 811,691 811,691 1,716,371
--------- ----------- ----------- -----------
Cash and Cash Equivalents, End of Period $ 811,691 $ 1,716,371 $ 1,463,473 $ 2,218,315
--------- ----------- ----------- -----------
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes $ 61,331 $ 63,522 $ 43,942 $ 287,362
--------- ----------- ----------- -----------
Cash paid for interest $ -- $ 4,922 $ -- $ --
--------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-6
89
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting principles applied in the
preparation of the consolidated financial statements follows:
FORMATION OF HOLDING COMPANY AND RECAPITALIZATION
ICARUS International, Inc., was formed December 2, 1997, to be a newly
created holding company for its two wholly owned subsidiaries, ICARUS
Corporation (a Maryland corporation) and ICARUS Services, Limited (a United
Kingdom private limited company). ICARUS International, Inc., and its
subsidiaries are collectively referred to herein as "the Company." In
conjunction with the filing of a registration statement relating to an
initial public offering (see Note K), and immediately prior to the effective
date of such offering, Icarus International, Inc., will issue an aggregate
of 2,999,000 shares of a total of 20,000,000 newly authorized shares of
common stock, and 100 shares of a total of 5,000,000 newly authorized
preferred stock, in exchange for all the outstanding shares of capital stock
of the subsidiaries (the Recapitalization).
The accompanying financial statements, including stockholders' equity and
per share amounts, give retroactive effect to the Recapitalization for all
periods presented.
NATURE OF OPERATIONS
The Company develops and markets project modeling software and services
internationally. The Company's principal products are used in the conceptual
design, estimating, scheduling, cost determination and cost tracking in the
construction of facilities in chemical processing, energy producing,
petrochemical, pharmaceutical, food, pulp and paper and related industries.
The Company's services include maintenance, application consulting services
on a contract basis and training courses.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ICARUS International, Inc., and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
INTERIM REPORTING
The accompanying condensed financial information as of October 31, 1997, and
for the six months ended October 31, 1996, and 1997, including such
information included in the Notes to Consolidated Financial Statements and
disclosures regarding matters occurring after April 30, 1997, is unaudited.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of the results for any other interim period or for an entire
year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost, which approximates market, and
consists of short-term, highly liquid investments with original maturities
of less than three months.
F-7
90
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, accounts receivable and
accounts payable at April 30, 1997, approximate fair value in accordance
with Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," due to the
relatively short period of time between origination of the instruments and
their expected realization.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization, computed using the
straight-line and declining-balance methods, by charges to operations in
amounts estimated to allocate the cost of the assets over their estimated
useful lives as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Computer equipment 3-5 Years
Purchased software programs 3 Years
Furniture and fixtures 7 Years
Leasehold improvements Life of Lease
REVENUE RECOGNITION
The Company recognizes revenue from product licensing agreements in
accordance with the American Institute of Certified Public Accountants
Statement of Position No. 91-1, "Software Revenue Recognition" (SOP 91-1).
The Company typically licenses its products pursuant to single-year and
multi-year noncancelable agreements. Revenue from software license
agreements is recognized upon execution of a contract and shipment of the
software, provided that no significant vendor obligations remain and
collection is probable. For recurring one-year license fees, revenue is
recognized on the contract renewal date. For multi-year agreements, revenue
is recognized ratably over the multi-year period on each successive
anniversary date. Customer payment terms vary. Amounts collected in advance
of satisfying revenue recognition criteria are classified as current and
long-term deferred revenue in the accompanying balance sheets.
Maintenance fee revenue is recognized ratably over the support period, which
is generally one year. Such revenue includes amounts bundled with initial
license fee arrangement for which separate prices have been derived based
upon the Company's historical retail pricing for separate arrangements.
Consulting and training revenue is recognized as the related services are
performed.
Accounts receivable arising from sale of software license agreements,
maintenance, training and other services are due from customers 30 days from
the date invoiced. Provision for returns and uncollectible accounts has been
determined based upon the Company's past experience.
F-8
91
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
COMPUTER SOFTWARE DEVELOPMENT COSTS
Development costs relating to new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility has been established, after which additional costs would be
capitalized in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed." Historically,
the Company has not incurred material software development costs following
the establishment of technological feasibility, and therefore no costs
have been capitalized as of October 31, 1997.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs as incurred, including
costs relating to strategic technology arrangements.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
affiliates are translated using the local currency as the functional
currency. Assets and liabilities of the affiliates are translated at the
exchange rate in effect at year-end. Income statement accounts are
translated at the average rate of exchange rates prevailing during the year.
Translation adjustments arising from the use of differing exchange rates
from period to period are included in the cumulative translation adjustment
account in stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in operations and are not material for
any of the periods presented.
STOCK-BASED COMPENSATION COSTS
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record stock-based employee compensation plans at
their fair value. The Company has elected to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
employee stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
exercise price an employee must pay to acquire the stock.
EARNINGS PER SHARE
Earnings per share are based on the weighted-average common shares
outstanding in each year including the effect of common stock equivalents
and all stock options issued within one year prior to, and in conjunction
with, the Company's initial public offering.
F-9
92
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued three new
accounting standards that will affect the Company's financial reporting
methods. Under SFAS No. 128, the Company will be required to prospectively
change the method used to compute fully diluted earnings per share; however,
the impact is not expected to be material. Under SFAS No. 130, the Company
will be required to display an amount representing total comprehensive
income and its components in the financial statements. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. Under SFAS No. 131, the Company will be required to report
certain information about its operating segments in its interim and annual
financial statements, and certain information about its products and
services, the geographic areas where it operates and its major customers. In
the initial year of application, comparative information for earlier years
is to be restated. SFAS No. 128 is effective for the Company's fiscal year
1998, and SFAS Nos. 130 and 131 are effective for the Company's fiscal year
1999.
The American Institute of Certified Public Accountants released Statement of
Position 97-2 "Software Revenue Recognition" (SOP 97-2), which supersedes
SOP 91-1. The new SOP 97-2 will be effective for all transactions entered
into by the Company in fiscal year 1999. The new SOP 97-2 requires, among
other things, that revenue should be recognized when there is persuasive
evidence of an existing arrangement, delivery has occurred, the fees charged
are fixed or determinable and collectibility is probable. Additionally, SOP
97-2 provides further that for those arrangements which consist of multiple
elements such as upgrades, enhancements and post-contract support, the fees
charged must be allocated to each element of the arrangement based upon
vendor-specific objective evidence of fair value, which is limited to a
price charged when the element is sold separately or the price for the
element established by management being the relevant authority. The Company
currently recognizes revenue on license agreements when all the conditions
described above have been met, and revenue on multi-year license agreements
typically is not recognized until such time that payments from customers
becomes due (the anniversary date). Additionally, the Company historically
has allocated fees between elements of its arrangements based upon
established prices charged for those elements when sold separately. In
management's opinion, the impact of SOP 97-2 is not expected to be material.
USING ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1996 have been reclassified to conform to 1997
presentations.
F-10
93
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
CONCENTRATION OF REVENUE IN THE CHEMICAL AND PETROLEUM REFINING INDUSTRIES
The Company derives a substantial majority of its revenue from software
licenses to companies in the chemical and petroleum refining industries,
which are highly cyclical. Accordingly, the Company's future success is
dependent upon the continued demand for computer-aided chemical engineering
software by companies in these industries. The Company believes that
economic downturns in the United States, Europe, Japan and Asia and pricing
pressures experienced by chemical and petroleum companies in connection with
cost containment measures have led to delays and reductions in certain
capital and operating expenditures by many of such companies worldwide. The
Company's revenue has in the past been, and may in the future be, subject to
substantial period-to-period fluctuations as a consequence of such industry
patterns, general domestic and foreign economic conditions and other factors
affecting spending in the chemical and petroleum refining industries. There
can be no assurance that such factors will not have a material, adverse
effect on the Company's business, operating results and financial condition.
NOTE B--ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
APRIL 30, OCTOBER 31,
--------- -----------
1997 1997
---- ----
Trade receivables $ 2,109,745 $ 1,864,820
Other receivables 1,621 12,840
Less allowance for returns and
uncollectible accounts (118,795) (27,857)
----------- -----------
$ 1,992,571 $ 1,849,803
----------- -----------
F-11
94
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE C--PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
APRIL 30, OCTOBER 31,
--------- -----------
1997 1997
---- ----
Furniture and fixtures $ 865,365 $ 946,528
Computer equipment 904,092 1,005,906
Leasehold improvements 35,874 36,448
----------- -----------
1,805,331 1,988,882
Accumulated depreciation (1,403,432) (1,513,442)
----------- -----------
Net property and equipment $ 401,899 $ 475,440
----------- -----------
Depreciation expense on property and equipment for the years ended April 30,
1996 and 1997, was approximately $173,000 and $175,000, respectively.
Depreciation expense for the six months ended October 31, 1997, was
approximately $86,000.
NOTE D--ACCRUED PAYROLL AND RELATED COSTS
The following is a summary of accrued payroll and related costs:
APRIL 30, OCTOBER 31,
--------- -----------
1997 1997
---- ----
Accrued leave $399,522 $508,641
Other payroll-related costs 40,059 46,167
-------- --------
$439,581 $554,808
-------- --------
The accrued leave liability represents cumulative vested but unused employee
leave. Effective May 1, 1996, the Company established a maximum accrual
limit of 160 hours for any single employee. Prior-year vested amounts
exceeding the limit remain vested and payable, but no further accrual will
result for any employee until the individual's leave balance falls below the
limit.
F-12
95
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE E--RELATED PARTY TRANSACTION
In 1992, the Company borrowed a total of $125,000 from a shareholder of the
Company under two promissory note agreements. The notes, which were repaid
during fiscal year 1997, were payable on demand and accrued interest at 6.5%
annually.
NOTE F--RETIREMENT PLAN
The Company has adopted a 401(k) profit-sharing plan covering all employees
at least 21 years of age who have been employed one year and have provided
at least 1,000 hours of service. Employees are eligible to enroll in the
plan on May 1 and November 1 of each year and may contribute up to 20% of
their compensation or the statutory limit. Annual contributions by the
employer are discretionary. Contribution expense for the years ended April
30, 1996 and 1997, was $34,406 and $14,898, respectively.
NOTE G--COMMITMENTS
OPERATING LEASES
As of April 30, 1997, the Company has various operating lease commitments
expiring through August 2002 for office space and rental equipment, as
follows:
Year ending April 30,
---------------------
1998 $ 452,000
1999 128,000
2000 126,000
2001 119,000
2002 119,000
Thereafter --
----------
$ 944,000
----------
Rent expense was approximately $426,000 and $445,000 for the years ended
April 30, 1996 and 1997, respectively.
CAPITAL LEASE OBLIGATION
The Company has capitalized leases for certain office equipment. The lease
agreements are for periods of five years, with monthly lease payments of
approximately $175.
Minimum lease payments under the capital leases, together with the present
value of the net minimum lease payments as of April 30, 1997, are as
follows:
F-13
96
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE G--COMMITMENTS -- CONTINUED
Year ending April 30,
---------------------
1998 $ 2,080
1999 2,080
2000 2,080
2001 1,562
--------
Total minimum lease payments 7,802
Less amounts representing interest 1,013
--------
Present value of net minimum lease payments $ 6,789
--------
STRATEGIC TECHNOLOGY ALLIANCES
The Company has entered into strategic technology alliances with various
organizations which provide for the integration of complementary
technologies to create new products and marketing capabilities. The terms of
the alliances vary, but generally provide for each participant's funding of
its own research and development and marketing costs and the ultimate
sharing of new product revenue and commissions. Expenses incurred by the
Company during the year ended April 30, 1997, and the six months ended
October 31, 1997, were $-0- and approximately $53,000, respectively. Revenue
and commissions totaling $3,670 have been earned by the Company through
October 31, 1997.
LITIGATION
In the normal course of business operations, the Company is periodically
involved in litigation. Management is of the opinion that the outcome of
such pending litigation would not have a material impact on the Company's
financial statements.
NOTE H--INCOME TAXES
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting purposes and
income tax purposes. The income tax effects of the temporary differences
result primarily from the use of accrual basis for financial reporting
purposes and cash basis methods for income tax filings, net operating loss
carryforwards and the use of different tax year-ends in the United Kingdom.
The tax effect of significant temporary differences that gave rise to
deferred income taxes as of April 30, 1997, is as follows:
F-14
97
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE H--INCOME TAXES -- CONTINUED
DEFERRED TAX
LIABILITY
---------
Deferred revenue $ 364,781
Net operating losses (64,800)
Other (15,564)
-----------
$ 284,417
-----------
The provision (benefit) for income taxes consists of the following:
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
-------------------- -----------
1996 1997 1997
---- ---- ----
Current
Federal $ 29,564 $ 169,147 $ 247,000
State 9,526 37,589 54,000
Foreign 12,234 (10,771) 41,555
-------- --------- ---------
51,324 195,965 342,555
Deferred
Federal (47,000) (28,000) (55,000)
State (8,000) (5,000) (13,000)
Foreign 114,700 255,839 (59,789)
-------- --------- ---------
59,700 222,839 (127,789)
-------- --------- ---------
$ 111,024 $ 418,804 $ 214,766
-------- --------- ---------
The provision for income taxes differs from the federal statutory rate
because of the following:
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
-------------------- -----------
1996 1997 1997
---- ---- ----
Federal tax at statutory rate 34.0% 34.0% 34.0%
State income tax, net of federal
tax benefit 4.6 4.6 4.6
Other (2.1) .3 (.1)
---- ---- ----
Provision for income taxes 36.5% 38.9% 38.5%
---- ---- ----
F-15
98
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE I -- REVENUE
The following is a summary of revenue:
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
-------------------- -----------
1996 1997 1997
---- ---- ----
Software license revenue $ 3,880,190 $ 5,621,988 $ 3,258,864
Maintenance fees and other revenue 1,866,088 1,825,365 1,041,170
Less sales returns and allowances (68,285) (108,322) (39,515)
----------- ----------- -----------
$ 5,677,993 $ 7,339,031 $ 4,260,519
----------- ----------- -----------
NOTE J--GEOGRAPHIC INFORMATION
The Company's operations are based worldwide through offices in the United
States, the United Kingdom and Japan.
Revenue and operating profit shown below are classified according to the
location of the office originating the invoicing. Revenue and operating
profit classified under the caption "United States" include licensing income
from non-U.S. sources.
APRIL 30,
------------------------------ OCTOBER 31,
1996 1997 1997
---- ---- ----
Revenue
United States $4,672,554 $ 5,795,198 $3,601,323
United Kingdom 833,131 1,267,119 508,689
Japan 172,308 276,714 150,507
---------- ----------- ----------
Total revenue $5,677,993 $ 7,339,031 $4,260,519
---------- ----------- ----------
Income from operations
United States $ 27,073 $ 558,360 $ 368,540
United Kingdom 226,851 584,228 117,852
Japan 29,541 (112,930) 22,418
---------- ----------- ----------
Total income from operations $ 283,465 $ 1,029,658 $ 508,810
---------- ----------- ----------
F-16
99
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE J--GEOGRAPHIC SEGMENT INFORMATION -- CONTINUED
APRIL 30,
----------------------------- OCTOBER 31,
1996 1997 1997
---- ---- ----
Identifiable assets
United States $2,258,740 $3,048,361 $3,350,724
United Kingdom 594,401 1,209,418 1,459,776
Japan 271,455 296,319 460,552
---------- ---------- ----------
$3,124,596 $4,554,098 $5,271,052
---------- ---------- ----------
NOTE K--SUBSEQUENT EVENTS
REGISTRATION STATEMENT
The Company's Board of Directors has authorized the filing of a registration
statement relating to an initial public offering of common stock. Costs
relating to the initial public offering have been deferred and are reflected
as other noncurrent assets in the accompanying financial statements. Upon
successful completion of the offering, such costs will be reclassified as a
reduction of net proceeds and additional paid-in capital.
EMPLOYMENT AGREEMENTS
On January 22, 1998, the Company entered into five-year employment
agreements with its chief executive officer and executive vice president
whereby they shall be entitled to minimum base salaries as well as other
employment incentives including discretionary bonuses.
STOCK OPTION PLAN
On January 22, 1998, the Board of Directors and shareholders adopted the
1998 Stock Option Plan (the Plan). The Plan provides for the granting of
incentive stock options to employees of the Company to purchase shares of
the Company's common stock at a price equal to the fair market value of the
common stock at the date of grant. In addition to the granting of incentive
stock options, the Plan also provides for the granting of nonqualified
options to employees, non-employee directors, consultants and agents of the
Company at a price not less than 85% of the fair market value at the date of
grant. Reserved for issuance under the Plan will be 760,500 shares of common
stock, of which 437,400 options to purchase such shares of Common Stock will
be granted immediately prior to the commencement of the initial public
offering, at the offering price.
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100
ICARUS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements -- Continued
NOTE K--SUBSEQUENT EVENTS -- CONTINUED
All options granted to employees, non-employee directors, consultants and
agents of the Company vest and become exercisable at a rate of 20% per year
on each annual anniversary of the date on which the option was granted. The
Plan expires in January 2008.
RECOGNITION AND RETENTION PLAN AND TRUST
On January 22, 1998, the Board of Directors adopted the Recognition and
Retention Plan and Trust (the Trust). Under the Trust, the Company may make
contributions in cash or shares of common stock to the Trust. All the
Trust's assets shall be invested primarily in the Company's common stock. A
total of 507,000 shares of common stock may be purchased from the Company or
its shareholders by the Trust for distribution. A committee appointed by the
Board of Directors may grant Plan shares to employee and non-employee
directors of the Company.
Plan share awards shall be earned by a recipient at the rate of 20% of the
aggregate number of shares covered by the award as of each anniversary of
the date of grant. All Plan shares, together with any shares representing
stock dividends, shall be distributed in the form of common stock. One share
of common stock shall be given for each Plan share earned and distributable.
Payments representing cash dividends shall be made in cash. The Trust
expires in January 2008, however, the Trust may be terminated earlier if all
benefits have been fully distributed or at the discretion of the Board of
Directors.
NEW OFFICE LEASE
In January 1998, the Company signed a ten year lease agreement for its
new corporate headquarters. The lease will commence on April 1, 1998 and
expires in March 2008. Base rent on the lease is approximately $571,000
and is subject to annual escalations.
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101
[Inside Back Cover]
THIS PAGE INTENTIONALLY LEFT BLANK.
102
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Use of Proceeds............................................................ 17
Dividend Policy............................................................ 18
Capitalization............................................................. 19
Dilution................................................................... 20
Selected Consolidated Financial Data....................................... 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 23
Business................................................................... 34
Management................................................................. 56
Certain Transactions....................................................... 67
Principal Stockholders..................................................... 69
Description of Capital Stock............................................... 70
Shares Eligible for Future Sale............................................ 74
Underwriting............................................................... 76
Legal Matters.............................................................. 78
Experts.................................................................... 78
Available Information...................................................... 78
Index to Financial Statements.............................................. F-1
UNTIL ___________, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,500,000 SHARES
COMMON STOCK
[LOGO]
ICARUS INTERNATIONAL,
INC.
PROSPECTUS
HOAK BREEDLOVE
WESNESKI & CO.
____________________, 1998
103
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ICARUS International, Inc. (the "Company") is a Maryland corporation. Section
2- 405.1(c) of the Maryland General Corporation Law (the "MGCL") states:
"(c) A person who performs his duties in accordance with the standard
provided in this section shall have the immunity from liability described
under Section 5-417 of the Courts and Judicial Proceedings Article."
Section 5-417 of the Maryland Courts and Judicial Proceedings Article states:
"A person who performs the duties of that person in accordance with the
standard provided under Section 2-405.1 of the Corporations and
Associations Article has no liability by reason of being or having been a
director of a corporation."
Section 2-418 of the MGCL states:
"(a) In this section the following words have the meaning indicated.
(1) "Director" means any person who is or was a director of a corporation
and any person who, while a director of a corporation, is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, other enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger, consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of director in the
corporation; and
(ii) When used with respect to a person other than a director as
contemplated in subsection (j), the elective or appointive office in the
corporation held by the
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officer, or the employment or agency relationship undertaken by the
employee or agent in behalf of the corporation.
(iii) "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture, trust,
other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or is threatened to be made a
named defendant or respondent in a proceeding.
(6) "Proceeding" means any threatened, pending or completed action, suit
or proceeding, whether the civil, criminal, administrative, or investigative.
(b)(1) A corporation may indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is established
that:
(i) The act or omission of the director was material to the matter
giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The director actually received an improper personal benefit in
money, property, or services; or
(iii) In the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful.
(2)(i) Indemnification may be against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding.
(ii) However, if the proceeding was one by or in the right of the
corporation, indemnification may not be made in respect of any proceeding
in which the director shall have been adjudged to be liable to the
corporation.
(3)(i) The termination of any proceeding by judgment, order, or
settlement does not create a presumption that the director did not meet
the requisite standard of conduct set forth in this subsection.
(ii) The termination of any proceeding by conviction, or a plea of
nolo contendere or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the director did
not meet that standard of conduct.
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105
(c) A director may not be indemnified under subsection (B) of this section
in respect of any proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official
capacity, in which the director was adjudged to be liable on the basis
that person benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or otherwise, in the
defense of any proceeding referred to in subsection (B) of this section shall
be indemnified against reasonable expenses incurred by the director in
connection with the proceeding.
(2) A court of appropriate jurisdiction upon application of a director and
such notice as the court shall require, may order indemnification in the
following circumstances:
(i) If it determines a director is entitled to reimbursement under
paragraph (1) of this subsection, the court shall order indemnification,
in which case the director shall be entitled to recover the expenses of
securing such reimbursement; or
(ii) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances,
whether or not the director has met the standards of conduct set forth in
subsection (b) of this section or has been adjudged liable under the
circumstances described in subsection (c) of this section, the court may
order such indemnification as the court shall deem proper. However,
indemnification with respect to any proceeding by or in the right of the
corporation or in which liability shall have been adjudged in the
circumstances described in subsection(c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same court in which the
proceeding involving the director's liability took place.
(e)(1) Indemnification under subsection (b) of this section may not be
made by the corporation unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is
permissible in the circumstances because the director has met the standard of
conduct set forth in subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a quorum
consisting of directors not, at the time, parties to the proceeding, or,
if such a quorum cannot be obtained, then by a majority vote of a
committee of the board consisting solely of two or more directors not, at
the time, parties to such proceeding and who were duly designated to act
in the matter by a majority vote of the full board in which the designated
directors who are parties may participate;
(ii) By special legal counsel selected by the board of directors or a
committee of the board by vote as set forth in subparagraph (i) of this
paragraph, or, if the
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requisite quorum of the full board cannot be obtained therefor and the
committee cannot be established, by a majority vote of the full board in
which director who are parties may participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of expenses shall be made in the manner specified in
subparagraph (ii) of paragraph (2) of this subsection for selection of such
counsel.
(4) Shares held by directors who are parties to the proceeding may not be
voted on the subject matter under this subsection.
(f)(1) Reasonable expenses incurred by a director who is a party to a
proceeding may be paid or reimbursed by the corporation in advance of the
final disposition of the proceeding upon receipt by the corporation of:
(i) A written affirmation by the director of the director's good
faith belief that the standard of conduct necessary for indemnification by
the corporation as authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the director to repay
the amount if it shall ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by subparagraph (ii) of paragraph (1) of this
subsection shall be an unlimited general obligation of the director but need
not be secured and may be accepted without reference to financial ability to
make the repayment.
(3) Payments under this subsection shall be made as provided by the
charter, bylaws, or contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of expenses provided or authorized
by this section may not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director may be entitled under the
charter, the bylaws, a resolution of stockholders or directors, an agreement
or otherwise, both as to action in an official capacity and as to action in
another capacity while holding such office.
(h) This section does not limit the corporation's power to pay or
reimburse expenses incurred by a director in connection with an appearance as
a witness in a proceeding at a time when the director has not been made a
named defendant or respondent in the proceeding.
(i) For purposes of this section:
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(1) The corporation shall be deemed to have requested a director to serve
an employee benefit plan where the performance of the director's duties to
the corporation also imposes duties on, or otherwise involves services by,
the director to the plan or participants or beneficiaries of the plan;
(2) Excises taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law shall be deemed fines; and
(3) Action taken or omitted by the director with respect to an employee
benefit plan in the performance of the director's duties for a purpose
reasonably believed by the director to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be for a purpose which is
not opposed to the best interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as and to the
extent provided in subsection (d) of this section for a director and shall be
entitled, to the same extent as a director, to seek indemnification pursuant
to the provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may indemnify and advance expenses to an
officer, employee, or agent who is not a director to such further extent,
consistent with law, as may be provided by its charter, bylaws, general or
specific action of its board of directors or contract.
(k)(1) A corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan against any liability asserted against and incurred by
such person in any such capacity or arising out of such person's position,
whether or not the corporation would have the power to indemnify against
liability under the provisions of this section.
(2) A corporation may provide similar protection, including a trust fund,
letter of credit, or surety bond, not inconsistent with this section.
(3) The insurance or similar protection may be provided by a subsidiary or
an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a director in
accordance with this section, if arising out of a proceeding by or in the
right of the corporation, shall be
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reported in writing to the stockholders with the notice of the next
stockholders' meeting or prior to the meeting."
The Articles of Incorporation ("Articles") of the Company also limit the
liability of, and provide indemnification to, directors and officers of the
Company. Article VIII of the Company's Articles states:
"A. Limitation of Liability. No director who has performed his or her duties
in accordance with the standard set forth in Section 2-405.1 of the MGCL (or any
successor provision thereto) shall be personally liable to the Corporation or
its stockholders for monetary damages for any act or omission by such director
as a director; provided that a director's liability shall not be limited or
eliminated to the extent that: (i) it is proved that the director actually
received an improper benefit or profit in money, property or services for the
amount of the benefit or profit in money, property or services actually
received; or (ii) a judgment or other final adjudication adverse to the director
is entered in a proceeding based on a finding in the proceeding that the
director's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. No amendment to or repeal of this Article VIII.A. shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
B. Indemnification. The Corporation shall indemnify any person who was or is
a party or is threatened to be a made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, limited liability company, partnership, joint venture,
trust or other enterprise or employee benefit plan, against liability and
expenses (including court costs and attorney's fees), judgments, fines, excise
taxes and amounts paid in satisfaction, settlement or compromise actually and
reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent authorized by Section 2-418 of the MGCL or any
successor provision thereto.
C. Advancement of Expenses. Reasonable expenses incurred by a director,
officer, employee or agent of the Corporation in defending a civil or criminal
action, suit or proceeding described in Article VIII.B. shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors only upon receipt of written
affirmation by or on behalf of such person of his good faith belief that he has
met the standard of conduct necessary for indemnification under relevant law and
a written undertaking to repay such amount if it shall ultimately be determined
that the person has not met that standard.
D. Other Rights and Remedies. The indemnification provided by this Article
VIII shall not be deemed to exclude any other rights to which those seeking
indemnification or advancement of expenses may be entitled under the
Corporation's Articles of Incorporation,
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any insurance or other agreement, trust fund, letter of credit, surety bond,
vote of stockholders or disinterested directors or otherwise, both as to actions
in their official capacity and as to actions in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person; provided that no indemnification
shall be made to or on behalf of an individual if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action as adjudicated and (i) were committed in bad faith; or (ii)
were the result of active and deliberate dishonesty; or (iii) the director
actually received an improper personal benefit in money, property or services;
or (iv) in the case of any criminal proceedings, the director had reasonable
cause to believe that the act or omission was unlawful; provided, however, that
a director who has been successful, on the merits or otherwise, in the defense
of proceedings referred to under clauses (i) through (iv) above, may still be
indemnified as to reasonable expenses actually incurred by such person in
connection with the proceeding as approved by a disinterested majority of the
Board of Directors.
E. Insurance. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, limited liability company, partnership, joint venture,
trust or another enterprise or employee benefit plan, against any liability
asserted against him or incurred by him in any such capacity, or arising out of
his status, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article or the MGCL.
F. Modification. The duties of the Corporation to indemnify and to advance
expenses to a director, officer, employee or agent provided in this Article VIII
shall be in the nature of a contract between the Corporation and each such
director, officer, employee or agent and no amendment or repeal of any provision
of this Article VIII shall alter, to the detriment of such director, officer,
employee or agent, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment or repeal.
G. Proceedings Initiated by Indemnified Persons. Notwithstanding any other
provision of this Article VIII, the Corporation shall not indemnify a director,
officer, employee or agent for any liability incurred in an action, suit or
proceeding initiated by (which shall not be deemed to include counter-claims or
affirmative defenses) or participated in as an intervenor or amicus curiae by
the person seeking indemnification unless such initiation of or participation in
the action, suit or proceeding is authorized, either before or after its
commencement, by the affirmative vote of a disinterested majority of the
directors then in office or unless intervention is required by law in order to
protect the rights, claims or defenses of the director, officer, employee or
agent with respect to matters for which the Corporation shall otherwise be
required to provide indemnification hereunder."
Article X of the Company's Bylaws states:
"(a) A director of the Corporation shall not be personally liable for
monetary damages for action taken, or any failure to take action, as a director,
to the extent set forth in the
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Corporation's Articles of Incorporation, which provisions are incorporated
herein with the same affect as if they were set forth herein.
(b) The Corporation shall indemnify any person who is a director, officer,
employee or agent of the Corporation to the extent set forth in the
Corporation's Articles of Incorporation, which provisions are incorporated
herein with the same affect as if they were set forth herein."
In addition, the Company intends to obtain a directors and officers liability
insurance policy relating to certain actions or omissions which may be taken, or
omitted to be taken, by the directors and officers of the Company, as well as a
policy which insures against errors and omissions in the offering documents
relating to the offer and sale of the Common Stock to the public.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the expenses to be incurred in connection
with the offering of the Common Stock described herein.
SEC filing fee ................................... $7,635
NASD filing fee .................................. 3,088
Legal fees and expenses........................... *
Accounting fees and expenses...................... *
Printing and delivery expenses.................... *
Blue Sky legal fees and expense................... 10,000
Registrar and transfer agent
fees and expenses.............................. 4,750
Nasdaq Market listing fees and expenses........... 17,500
CUSIP fees and expenses........................... 100
Miscellaneous expenses............................ *
-----
Estimated Total............. $
=====
- ----------------
* To be filed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On January 22, 1998, in connection with the Company's formation, ICARUS sold
1,000 shares of Common Stock to Herbert G. Blecker and Eunice E. Blecker (the
"Bleckers") for a total of $1,000. The shares were issued by the Company in a
transaction not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
Immediately prior to the Offering, pursuant to the Agreement and Plan of
Recapitalization by and among the Company and the Bleckers dated January 26,
1998, the Company will issue to the Bleckers an aggregate of 2,999,000 shares of
Common Stock and 100 shares of Series A Preferred Stock in exchange for all of
their shares of ICARUS Corporation and ISL. The issuance of such shares by the
Company will represent a transaction by the issuer not involving any public
offering pursuant to Section 4(2) of the Securities Act.
Other than the transactions described above the Company has sold no
unregistered securities within the past three years.
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ITEM 27. EXHIBITS.
The Exhibits attached hereto are as follows:
1.1 Underwriting Agreement.*
2.1 Agreement and Plan of Recapitalization by and among Mr. Herbert G.
Blecker, Mrs. Eunice Blecker, ICARUS Corporation, ICARUS Service
Limited and the Company, dated January 26, 1998;
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Form of Stock Certificate of the Company.
5.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P.*
10.1 Technology Licensing and Marketing Agreement by and between ICARUS
Corporation and Richardson Engineering Services, Inc., dated May
1, 1997.**
10.2 Joint Development Agreement between ICARUS Development and Marketing
Corporation and Hyprotech, Ltd., dated July 24, 1997.**
10.3 Marketing and Development Agreement between ICARUS Corporation and
SRIC Consulting, dated August 4, 1997.**
10.4 Software Distribution and License Agreement between ICARUS
Corporation and Primavera Systems, Inc. dated January 17, 1995.**
10.5 Lease for One Central Plaza, 11300 Rockville Pike, Rockville,
Maryland by and between One Central Plaza Limited Partnership and
the Company, dated October 15, 1976, as amended.*
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10.6 Lease for 600 Jefferson Plaza, Rockville, Maryland, by and between
Allstate Life Insurance Company and the Company, dated December 31,
1997.
10.7 Lease for 16945 Northchase Drive, 14th Floor, Houston, Texas, by and
between Greenpoint Plaza Limited Partnership and the Company, dated
January 31, 1997.
10.8 Lease for Units 3 and 4, 4th floor, First Floor Storeroom and Car
Parking, The Graftons, Stamford New Road, Altrincham, Greater
Manchester, by and between Wayborn Leasing Limited and the Company,
dated April 19, 1993.
10.9 Lease for 5F Sakae Bldg., 2-10-3 Minami-Ikebukuro, Toshima-Ku, Tokyo
171 Japan, by and between Saburo Ikeda and the Company, dated January
20, 1996.
10.10 Employment Agreement between Mr. Herbert G. Blecker and the Company,
dated January 22, 1998.
10.11 Employment Agreement between Mr. William F. Geritz III and the
Company, dated January 22, 1998.
10.12 ICARUS International, Inc. 1998 Stock Option Plan.
10.13 ICARUS International, Inc. Recognition and Retention Plan and Trust.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P.
23.2 Consent of Grant Thornton LLP.
24.1 Power of Attorney is contained in the signature page to this
Registration Statement.
27.1 Financial data schedule.
- --------
* To be filed by amendment.
** Certain portions of this Exhibit have been omitted from this Registration
Statement and filed separately with the Commission accompanied by a request for
confidential treatment pursuant to Rule 406 under the Securities Act.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby provides the following undertakings:
(a) The Registrant will provide to the Underwriter at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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(c) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4), or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(d) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Rockville, State of Maryland on February 10, 1998.
ICARUS INTERNATIONAL, INC.
By: /s/ Herbert G. Blecker
-------------------------------
Herbert G. Blecker
Chairman of the Board, President
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of the Registrant, do
hereby constitute and appoint Herbert G. Blecker and Eunice E. Blecker as our
true and lawful attorneys and agents, to do any and all things and act in our
names in the capacities indicated below and to execute any and all instruments
for us in our names in the capacities indicated below which said persons may
deem necessary or advisable to enable the Registrant to comply with the
Securities Act of 1933 and the rules promulgated thereunder in connection with
the offering of Common Stock of the Registrant described in this Registration
Statement, including specifically, but not limited to, power and authority to
sign for us or any of us in our names in the capacities indicated below the
Registration Statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that said persons
shall do cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Herbert G. Blecker Dated: February 10, 1998
- -------------------------------------------
Herbert G. Blecker
Chairman of the Board, President
and Chief Executive Officer
(Principal executive officer)
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/s/ Mark S. Kingsley Dated: February 10, 1998
- -------------------------------------------
Mark S. Kingsley
Controller and Chief Financial Officer;
(Principal Accounting Officer and
Principal Financial Officer)
/s/ Eunice E. Blecker Dated: February 10, 1998
- -------------------------------------------
Eunice E. Blecker
Director, Secretary and Treasurer
/s/ James J. Byrne Dated: February 10, 1998
- -------------------------------------------
James J. Byrne
Director and Vice Chairman of the Board
/s/ William F. Geritz III Dated: February 10, 1998
- -------------------------------------------
William F. Geritz, III
Director and Executive Vice President
/s/ Gary M. Roush Dated: February 10, 1998
- -------------------------------------------
Gary M. Roush
Director
/s/ J. Edward Beck Dated: February 10, 1998
- -------------------------------------------
J. Edward Beck
Director
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