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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
REGISTRATION NO. 333-45957
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ICARUS INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MARYLAND
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7372
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-2069941
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
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)
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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 ONE CENTRAL PLAZA LOCKE PURNELL RAIN HARRELL
L.L.P. 11300 ROCKVILLE PIKE (A PROFESSIONAL CORPORATION)
734 15TH STREET, N.W. ROCKVILLE, MARYLAND 20852 2200 ROSS AVENUE
12TH FLOOR (301) 881-9350 SUITE 2200
WASHINGTON, D.C. 20005 DALLAS, TEXAS 75201
(202) 347-0300 (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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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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 APRIL 15, 1998
PROSPECTUS
2,500,000 SHARES
[LOGO]
ICARUS INTERNATIONAL, INC.
COMMON STOCK
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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."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.
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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
PUBLIC DISCOUNT(1) THE COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
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."
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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. or its agent.
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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 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,
"ICARUS Project Scheduler" under Arrow 5, 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. The Company's
subsidiaries include ICARUS Corporation, ICARUS Services Limited, ICARUS Nippon
K.K. and ICARUS Marketing and Development Corporation. See "Business -- The
Company" and "Certain Transactions -- Pending Recapitalization." 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 is expected to total $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 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
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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. The planned products described above are expected to be released in
fiscal year 1999 and the Company has, as of January 31, 1998, incurred
substantially all of its share of the development expense related thereto
(although additional development expense will be required for certain
process-specific products). 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.
The primary source of the Company's revenues are single-year and multi-year
term license fees. At January 31, 1998, 66.3% of the Company's licenses had a
remaining life of one year or more. For the twelve-month period ended January
31, 1998, 71.7% 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 53.1% 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. The Company's World Wide Web site is located at
http://www.icarus-us.com. Information contained in the Company's Web site does
not constitute, and shall not be deemed to constitute, part of this Prospectus.
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"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
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEAR ENDED APRIL 30, JANUARY 31,
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1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue.................................... $5,058 $5,678 $7,339 $5,329 $6,775
Total operating expenses......................... 4,554 5,395 6,309 4,678 5,809
Income from operations........................... 504 283 1,030 651 966
Net income....................................... 300 193 656 411 660
Net income per share............................. 0.10 0.06 0.22 0.14 0.22
Weighted average common shares(2)................ 3,000 3,000 3,000 3,000 3,000
JANUARY 31, 1998
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ACTUAL AS ADJUSTED(3)
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(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................. $ 794 $18,194
Total assets..................................... 5,193 22,593
Total liabilities................................ 3,413 3,413
Total stockholders' equity....................... 1,780 19,180
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(1) Excludes (i) 825,000 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, and (ii) 550,000 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."
(2) Computed as described in Note A of Notes to Consolidated Financial
Statements.
(3) 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. Total revenue from
renewed license agreements (including renewals that involved the substitution of
another ICARUS product) constituted 45.5% ($3.1 million) and 46.2% ($3.4
million) of total revenue for the nine months ended January 31, 1998 and for
fiscal 1997, respectively. 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 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
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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. Such past delays did not
have a material adverse effect on the Company's financial condition, results of
operations or liquidity. 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.
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
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"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 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
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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 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 78.8% and 70.4% of the Company's total
revenues for the nine-month period ended January 31, 1998 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 nine months ended January 31, 1998 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. The most recent event in this regard
involved the invasion of Kuwait by the military forces of Iraq in the fourth
calendar quarter of 1990, which resulted in the interruption of the flow of
petroleum from that country and in capital projects in the Middle East in
general. During that period, orders for the Company's products slowed
substantially. However, with the quick resolution of the Gulf War in the first
quarter of 1991, orders for software licenses recovered. Any such delays or
reductions in the future 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
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revenues from the chemical and petroleum refining industries in the foreseeable
future. See "Business -- Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
For the nine months ended January 31, 1998 and for fiscal 1997, customers
located outside the United States (based on the customer's billing address)
accounted for 34.5% and 32.8% of the Company's total revenue, respectively. 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 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
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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 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 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 strategic alliances with SRI Consulting, Inc., Hyprotech, Ltd. and
Richardson Engineering Services, Inc., 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
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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. While the Company's Articles of Incorporation do not require stockholder
approval prior to the issuance of additional shares of the Company's capital
stock, the rules of the Nasdaq Stock Market generally require stockholder
approval for share issuances in a transaction not involving a public offering
that are below specified price levels and which equal or exceed 20% of the
number of or voting power of shares of the Company then issued and outstanding.
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.
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.
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."
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
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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 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
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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 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. The Principal Stockholders
do not currently contemplate requesting an early release from this contractual
restriction.
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As of the date of this Prospectus, the Company has reserved an aggregate of
825,000 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 550,000 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 $4.51 per share in net tangible book value per share of
the Common Stock. See "Dilution."
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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.
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.
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CAPITALIZATION
The following table sets forth the (unaudited) capital lease obligation and
capitalization of the Company at January 31, 1998, 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.
JANUARY 31, 1998
-------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
Capital lease obligation, less current portion.............. $ 8 $ 8
------ -------
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......................................... 1,760 1,760
Cumulative foreign currency translation adjustment........ (20) (20)
------ -------
Total stockholders' equity............................. 1,780 19,180
------ -------
Total capitalization................................. $1,788 $19,188
====== =======
- ---------------
(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) 825,000 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) 550,000
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."
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20
DILUTION
At January 31, 1998, the unaudited net tangible book value of the Company
was $1.1 million or $0.38 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 January 31, 1998, 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 $19.2 million or $3.49 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 $4.51 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 January 31, 1998(1).... $0.38
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.................................................. 3.49
------
Dollar dilution per share to new investors.................. $4.51
======
Percentage dilution per share to new investors.............. 56.4%
======
-------------------------
(1) Based upon 3,000,000 shares of Common Stock outstanding as of
January 31, 1998. Does not include 1,375,000 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."
The following table summarizes, on a pro forma basis as of January 31,
1998, 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."
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21
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 nine months ended January 31, 1997 and 1998 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 nine
months ended January 31, 1998 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.
NINE MONTHS
ENDED
YEAR ENDED APRIL 30, JANUARY 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software license revenue.......................... $3,166 $3,812 $5,165 $3,814 $5,338
Maintenance fee and other revenue................. 1,892 1,866 2,174 1,515 1,437
------ ------ ------ ------ ------
Total revenue.................................. 5,058 5,678 7,339 5,329 6,775
Expenses:
Cost of software license revenue.................. 250 266 419 293 233
Cost of maintenance fee and other revenue......... 362 578 561 420 503
Selling and marketing............................. 1,710 2,220 2,626 1,951 2,498
Research and development.......................... 1,181 1,229 1,326 1,065 1,352
General and administrative........................ 1,051 1,102 1,377 949 1,223
------ ------ ------ ------ ------
Total operating expenses....................... 4,554 5,395 6,309 4,678 5,809
------ ------ ------ ------ ------
Income from operations............................ 504 283 1,030 651 966
Interest income, net.............................. 8 21 45 35 75
Other (expense) income............................ (9) -- -- -- (3)
------ ------ ------ ------ ------
Income before income taxes........................ 503 304 1,075 686 1,038
Provision for income taxes........................ 203 111 419 275 378
------ ------ ------ ------ ------
Net income..................................... $ 300 $ 193 $ 656 $ 411 $ 660
====== ====== ====== ====== ======
Net income per share.............................. $ 0.10 $ 0.06 $ 0.22 $ 0.14 $ 0.22
====== ====== ====== ====== ======
Weighted average common shares.................... 3,000 3,000 3,000 3,000 3,000
APRIL 30,
------------------------ JANUARY 31,
1995 1996 1997 1998
------ ------ ------ -----------
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $ 236 $ 496 $1,096 $ 794
Total assets........................................... 2,043 2,859 4,554 5,193
Total liabilities...................................... 1,762 2,397 3,427 3,413
Total stockholders' equity............................. 281 462 1,127 1,780
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22
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 78.8% and 70.4% of
the Company's total revenues for the nine months ended January 31, 1998 and for
fiscal 1997, respectively. Maintenance fee, training, consulting and other
services accounted for 21.2% and 29.6% of the Company's revenues for the nine
months ended January 31, 1998 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 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.
20
23
The following table sets forth the license terms remaining at January 31,
1998 for all licenses in effect on that date:
LICENSE TERM NO. OF USERS PERCENT OF ALL
REMAINING LICENSED* LICENSED USERS
------------ ------------ --------------
Less than 12 Months............................... 410 33.7%
12-23 Months...................................... 119 9.8
24-35 Months...................................... 96 7.9
36-47 Months...................................... 295 24.2
48-59 Months...................................... 290 23.9
60 or More Months................................. 6 0.5
- ---------------
* 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 January 31,
1998, 71.7% 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 53.1% 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, 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 effective date of this provision of the statement has been
deferred for one year. The Company currently recognizes
21
24
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 nine months ended January 31, 1998 or for fiscal years 1997,
1996 or 1995.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of total revenue for the periods indicated.
NINE MONTHS
ENDED
YEAR ENDED APRIL 30, JANUARY 31,
----------------------------- -----------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue
Software license revenue................. 62.6% 67.1% 70.4% 71.6% 78.8%
Maintenance fee and other revenue........ 37.4 32.9 29.6 28.4 21.2
----- ----- ----- ----- -----
Total revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses
Cost of software license revenue......... 4.9 4.7 5.7 5.5 3.4
Cost of maintenance fee and other
revenue................................ 7.2 10.2 7.7 7.9 7.4
Selling and marketing.................... 33.8 39.1 35.8 36.6 36.9
Research and development................. 23.3 21.6 18.1 20.0 20.0
General and administrative............... 20.8 19.4 18.7 17.8 18.0
----- ----- ----- ----- -----
Total operating expenses............... 90.0 95.0 86.0 87.8 85.7
----- ----- ----- ----- -----
Income from operations..................... 10.0 5.0 14.0 12.2 14.3
Interest income, net....................... .2 .4 .6 .7 1.1
Other (expense) income..................... (.2) -- -- -- --
----- ----- ----- ----- -----
Income before income taxes................. 10.0 5.4 14.6 12.9 15.4
Provision for income taxes................. 4.1 2.0 5.7 5.2 5.6
----- ----- ----- ----- -----
Net income................................. 5.9% 3.4% 8.9% 7.7% 9.8%
===== ===== ===== ===== =====
NINE MONTHS ENDED JANUARY 31, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 31,
1997
Total Revenue. Total revenue for the nine months ended January 31, 1998
increased $1.5 million or 27.1% to $6.8 million from $5.3 million for the nine
months ended January 31, 1997. 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 40.0% from $3.8
million for the nine months ended January 31, 1997 to $5.3 million for the nine
months ended January 31, 1998. The increase in software license revenue for the
nine-month period ending January 31, 1998 as compared to the same nine-month
period in 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 fees and
revenue derived from
22
25
training, consulting services and other services. Maintenance fee and other
revenue decreased 5.2% to $1.4 million for the nine months ended January 31,
1998 from $1.5 million for the nine months ended January 31, 1997. The decrease
was primarily attributable to a reduction in the number of on-site training
courses conducted and a reduction in the training staff due to reassignment.
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), printing of manuals and packaging, royalties
and license fees paid to third parties. Cost of software license revenue was
$233,000 and $293,000 for the nine months ended January 31, 1998 and 1997,
respectively. Expressed as a percentage of software license revenue, cost of
software license revenue was 4.4% and 7.7% in the first nine months of fiscal
years 1998 and 1997, respectively. The decrease in cost of software license
revenue was attributable to decreases in third party software and system Control
Device costs, as a result of lower costs associated with the renewal of software
licenses.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue consists primarily of technical support, training, depreciation
and facility costs, consulting and other contract costs. Cost of maintenance fee
and other revenue was $503,000 and $420,000 for the nine months ended January
31, 1998 and 1997, respectively. Expressed as a percentage of maintenance fee
and other revenue, cost of maintenance fee and other revenue was 35.0% and 27.7%
for the nine months ended January 31, 1998 and 1997, respectively. Cost of
maintenance fee and other revenue grew because of the expansion of technical
support personnel required to support the increase in sales, as well as an
increase in equipment expense.
Selling and Marketing. Selling and marketing expense consists primarily of
personnel costs related to sales and marketing, including occupancy,
depreciation, travel, entertainment, telephone, promotional, trade show expenses
and direct sales force commissions. Selling and marketing expense was $2.5
million and $2.0 million in the nine months ended January 31, 1998 and 1997,
respectively. Selling and marketing expense, as a percentage of revenue was
36.9% and 36.6% for the nine months ended January 31, 1998 and 1997,
respectively. The increase in selling and marketing expense during the nine
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 participation in
exhibitions and related expenses.
Research and Development. Research and development expense consists
principally of personnel costs, equipment, depreciation and facility costs
incurred in the research, design, development and refinement of the Company's
products. Research and development expense was $1.4 million for the nine months
ended January 31, 1998 as compared to $1.1 million for the same period in fiscal
year 1997. Research and development as a percentage of total revenue was 20.0%
for each of the nine months ended January 31, 1998 and 1997. The increase in
research and development expense 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 expense of the Company. General and administrative expense
was $1.2 million and $949,000 for the nine months ended January 31, 1998 and
1997, respectively. General and administrative expense as a percentage of
revenue was 18.0% and 17.8% for the nine months ended January 31, 1998 and 1997,
respectively. The increase in general and administrative expense was chiefly
attributable to the establishment of a reserve, totaling approximately $125,000,
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.
Interest Income, net. Interest income, net increased $40,000 from $35,000
for the nine months ended January 31, 1997 to $75,000 for the same period in
fiscal year 1998 because of larger cash balances on deposit.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
36.4% and 40.1% for the nine months ended January 31, 1998 and 1997,
respectively.
23
26
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
$419,000 and $266,000 in fiscal years 1997 and 1996, respectively. Expressed as
a percentage of software license revenue, cost of software license revenue was
5.7% and 7.0% in fiscal years 1997 and 1996, respectively.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue was $561,000 and $578,000 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 25.8% and 31.0% 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 $2.6 million and
$2.2 million in fiscal years 1997 and 1996, respectively. However, as a
percentage of total revenues, selling and marketing expense was 35.8% and 39.1%
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 $1.3
million and $1.2 million in fiscal years 1997 and 1996, respectively. However,
research and development expense as a percentage of revenue was 18.1% and 21.6%
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.
General and Administrative. General and administrative costs were $1.4
million and $1.1 million in fiscal years 1997 and 1996, respectively. However,
general and administrative expense as a percentage of revenue was 19.0% and
19.4% 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
24
27
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 6.4% from fiscal 1995 to $266,000 in fiscal 1996 and represented 7.0%
of software license revenue in fiscal 1996. Cost of software license revenue
increased chiefly due to royalties and license fees paid to third parties.
Cost of Maintenance Fee and Other Revenue. Cost of maintenance fee and
other revenue increased $216,000 or 59.7%, to $578,000 and represented 31.0% 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 29.8% from
fiscal 1995 to $2.2 million or 39.1% 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 4.1%
from fiscal 1995 to $1.2 million or 21.6% of total revenue in fiscal 1996.
General and Administrative. General and administrative costs increased
4.9% from fiscal 1995 to $1.1 million or 19.4% of revenue in fiscal 1996. The
increase was generally attributable to increases in depreciation, insurance
expense and office supplies.
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. 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, petroleum refining and other industries. Although no assurances
can be made, the Company believes that the recent economic problems in Asia will
not have a material adverse affect on the Company's operations. The Company's
future operating results may fluctuate as a result of the above 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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28
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 three 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, JANUARY 31,
1996 1996 1997 1997 1997 1997 1998
-------- ----------- ----------- --------- -------- ----------- -----------
(IN THOUSANDS)
Revenue
Software license revenue............. $1,367 $1,105 $1,342 $1,351 $1,747 $1,472 $2,119
Maintenance fee and other revenue.... 476 614 425 659 531 510 396
------ ------ ------ ------ ------ ------ ------
Total revenue...................... 1,843 1,719 1,767 2,010 2,278 1,982 2,515
------ ------ ------ ------ ------ ------ ------
Expenses
Cost of software license revenue..... 95 56 143 125 112 100 21
Cost of maintenance fee and other
revenue............................ 124 144 151 142 135 171 197
Selling and marketing................ 673 592 686 675 745 820 933
Research and development............. 322 326 417 261 403 443 506
General and administrative........... 311 349 288 429 437 385 401
------ ------ ------ ------ ------ ------ ------
Total operating expenses........... 1,525 1,467 1,685 1,632 1,832 1,919(1) 2,058
------ ------ ------ ------ ------ ------ ------
Income from operations................. 318 252 82 378 446 63 457
Interest income, net................. 5 8 22 10 21 28 26
Other (expense) income............... (7) 7 -- -- 1 (1) (3)
------ ------ ------ ------ ------ ------ ------
Income before income taxes............. 316 267 104 388 468 90 480
Provision for income taxes............. 119 111 45 144 176 39 163
------ ------ ------ ------ ------ ------ ------
Net income............................. $ 197 $ 156 $ 59 $ 244 $ 292 $ 51(1) $ 317
====== ====== ====== ====== ====== ====== ======
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
------------------------------------------------ ------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1996 1996 1997 1997 1997 1997 1998
-------- ----------- ----------- --------- -------- ----------- -----------
(AS A PERCENTAGE OF TOTAL REVENUE)
Revenue
Software license revenue............. 74.2% 64.3% 75.9% 67.2% 76.7% 74.3% 84.3%
Maintenance fee and other revenue.... 25.8 35.7 24.1 32.8 23.3 25.7 15.7
----- ----- ----- ----- ----- ----- -----
Total revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
Expenses
Cost of software license revenue..... 5.2 3.3 8.1 6.2 4.9 5.0 .8
Cost of maintenance fee and other
revenue............................ 6.8 8.4 8.6 7.1 5.9 8.6 7.9
Selling and marketing................ 36.5 34.5 38.8 33.6 32.7 41.4 37.1
Research and development............. 17.5 19.0 23.6 13.0 17.7 22.4 20.0
General and administrative........... 16.8 20.1 16.3 21.3 19.2 19.4 16.0
----- ----- ----- ----- ----- ----- -----
Total operating expenses........... 82.8 85.3 95.4 81.2 80.4 96.8(1) 81.8
----- ----- ----- ----- ----- ----- -----
Income from operations................. 17.2 14.7 4.6 18.8 19.6 3.2 18.2
Interest income, net................. 0.3 0.5 1.2 0.5 0.9 1.4 1.0
Other (expense) income............... (0.4) 0.4 -- -- -- -- (0.1)
----- ----- ----- ----- ----- ----- -----
Income before income taxes............. 17.1 15.6 5.8 19.3 20.5 4.6 19.1
Provision for income taxes............. 6.5 6.5 2.5 7.2 7.7 2.0 6.5
----- ----- ----- ----- ----- ----- -----
Net income............................. 10.6% 9.1% 3.3% 12.1% 12.8% 2.6%(1) 12.6%
===== ===== ===== ===== ===== ===== =====
- ---------------
(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.
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LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended January 31, 1998 and fiscal years 1997
and 1996, the Company satisfied its cash needs through cash provided by
operations. Cash provided by operating activities during the nine months ended
January 31, 1998 and fiscal years 1997 and 1996 was approximately $627,000, $1.2
million and $519,000, respectively. At January 31, 1998 and at April 30, 1997
and 1996, the Company had working capital of $794,000, $1.1 million and
$496,000, respectively. The ratio of current assets to current liabilities at
January 31, 1998 and at April 30, 1997 and 1996 was 1.27 to 1, 1.39 to 1 and
1.25 to 1, respectively. The Company currently does not maintain a credit
facility.
Cash used in investing activities has been for the purchase of property and
equipment which amounted to $252,000, $250,000 and $215,000 for the nine months
ended January 31, 1998 and in fiscal years 1997 and 1996, respectively. The
Company intends to continue to invest in its core technology and develop new
technology to create innovative integrated AutoDE products, which will involve
increased staffing levels. Although the Company currently has no significant
commitments, it expects that purchases of property and equipment in fiscal 1998
and fiscal 1999 will meet or exceed expenditures for fiscal 1997 chiefly as a
result of increased staffing levels. The Company anticipates that capital
expenditures associated with the relocation of its domestic headquarters will
approximate $500,000 and will be incurred in the fourth quarter of fiscal 1998.
Cash used in financing activities for the nine months ended January 31,
1998 and during fiscal years 1997 and 1996 was $1,200, $107,000 and $0,
respectively. Cash used in financing activities for the nine months ended
January 31, 1998 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.
The Company has taken actions to make its software products Year 2000
compliant. The majority of the Company's products are currently designed to be
Year 2000 compliant and the remainder of its products is targeted to be Year
2000 compliant by December 1998. Year 2000 compliance activities will be
performed as part of the Company's normal development activity. The Company does
not believe it will incur any significant Year 2000 costs with its software
products. Consequently, Year 2000 compliance costs are not expected to result in
any material incremental costs to the Company. See "Risk Factors -- Year 2000
Compliance." The Company has been informed by its vendor that its accounting
software is Year 2000 compliant.
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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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 decision to proceed with a project has been made. These
products also facilitate construction scheduling and cost estimation for smaller
projects at existing plants.
ICARUS International, Inc. is a newly organized Maryland corporation formed
for the purpose of holding the voting stock of ICARUS Corporation, a Maryland
corporation which performs certain software development, sales and services
described herein, and of ICARUS Services Limited, a United Kingdom private
limited company engaged in the sale of software licenses and the performance of
certain services related thereto in Europe. The Company's other subsidiaries are
ICARUS Nippon K.K., a Japanese corporation engaged in the sale of software
licenses and the performance of certain services related thereto in Southeast
Asia, and ICARUS Marketing and Development Corporation, a Maryland corporation
formed to engage in strategic alliances with other companies. All references to
the "Company" or to "ICARUS" include ICARUS International, Inc. and its
predecessors and consolidated subsidiaries.
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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 is expected
to total $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.
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.
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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 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.
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- 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 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.
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
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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 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
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35
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, 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 pulp and paper,
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
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36
compete for acquisition opportunities because of its leadership position in
process manufacturing CAE software and its knowledge of the market and potential
acquisition targets.
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.
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
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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."
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.
ORIGINAL CURRENT RELEASE
PRODUCT PLANT LIFECYCLE DESCRIPTION RELEASE (DATE/VERSION)
NAME STAGE OF PRODUCT DATE OPERATING SYSTEM
- ---------------------------------------------------------------------------------------------------
ICARUS Process Process Enables process engineers June (October 1997/Version
Evaluator Engineering to rapidly screen 1995 4.0) Microsoft Windows 95
("IPE") alternative chemical & NT
process designs for a
proposed major process
manufacturing project.
- ---------------------------------------------------------------------------------------------------
ICARUS 2000 Cost Enables engineering teams December (July 1997/Version 6.0)
Engineering in owner-operators and 1992 UNIX (August 1997/Version
E&C companies to quickly 6.0) Microsoft Windows NT
prepare engineering,
procurement and
construction estimates
for a proposed major
project.
- ---------------------------------------------------------------------------------------------------
ICARUS Project Construction Enables project managers May (June 1997/Version 3.0)
Manager Scheduling to create cost estimates 1995 Microsoft Windows 3.1, 95
and automatically develop and NT
planning and construction
schedules for small
projects, revamps and
renovations.
- ---------------------------------------------------------------------------------------------------
Questimate Operations and Enables cost estimators November (May 1997/Version 12.0)
Maintenance at operating plants to 1986 Microsoft Windows 3.1, 95
quickly evaluate the cost and NT
impact of proposed plant
modifications and
maintenance.
- ---------------------------------------------------------------------------------------------------
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 year 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.
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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 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 Project Scheduler ("IPS"). IPS will be designed to develop
Primavera Project Planner ("P3") engineering and construction scheduling
networks using ICARUS 2000's project estimate results. IPS will produce a
detailed P3 project schedule containing a complete Precedence Diagramming Method
("PDM") network of engineering and construction activities, precedence
relationships, resources and activity codes. IPS also will be designed to
produce detailed engineering and procurement activities allowing a customer to
choose whether the engineering network begins with basic engineering or with
detailed engineering. IPS will provide the customer with an opportunity to unify
the basis for the engineering, procurement, and construction estimate and
schedule, thereby enabling the customer to better schedule and control projects
during the engineering, procurement, and construction phases.
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 January 31, 1998, 23 of the Company's employees were directly
involved in internal product development. The Company's product development
expenditures for the nine months ended January 31, 1998
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and for the year ended April 30, 1997 were $1.4 million and $1.3 million,
representing 20.0% and 18.1% 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 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
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Company expects to increase the scope and depth of its consulting services in
the future. See "Business -- Strategy."
The provision of services by the Company to its customers for the nine
months ended January 31, 1998 and the year ended April 30, 1997 represented
approximately 7.4% and 7.7% 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 customers.
Agrium, Inc.
Air Products and Chemicals, Inc.
ARCO Chemical Company
Bayer Corporation
BOC Process Plants
Chevron Chemical Company
Cytec Industries, Inc.
Dow North America
Eastman Chemical Company
Elf Atochem
North America, Inc.
FMC Corporation
GE Plastics
Hercules Incorporated
Hoechst Celanese 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
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
Campbell Soup Company
Kvaerner Metals
ARCO Products Company
Chevron U.S.A., Inc.
Ecopetrol
Marathon Oil Company
Mobil Technology Company
Pennzoil Products Company
Phillips Petroleum Company
Qatar General Petroleum Corp.
Saudi Arabian Oil Company
Shell Oil Company
Texaco Refining &
Marketing, Inc.
The Mead Corporation
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 nine months ended January 31, 1998 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
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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 January 31, 1998,
consisted of 17 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,
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 January 31, 1998, 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 $706,000 for the nine months ended January 31, 1998 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 Company's primary competition currently comes from
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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
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
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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 January 31, 1998, the Company had a total of 57 full-time and 3
part-time employees, including 30 in sales, marketing and technical support and
training, 23 in product development and 7 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 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.
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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 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 $125,000 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 April 30, 1998. The Company anticipates relocating to larger quarters located
at 600 Jefferson Plaza, Rockville, Maryland, during May 1998, pursuant to a new
ten (10) year lease dated December 31, 1997, as amended March 30, 1998, 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.......... 62 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. 68
Steinberger.............. 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.
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
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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 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
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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 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.
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 $500 for each committee meeting attended and are reimbursed for their
out-of-pocket expenses
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arising from attendance at a Board or committee meeting. Directors who are also
employees receive no compensation for attending such meetings other than their
base salaries. It is anticipated that options to purchase shares of Common Stock
will be issued to the Company's non-employee directors immediately following the
Annual Meeting of Stockholders to be held in 1998, and that such directors will
thereafter be entitled to receive additional stock options under the Company's
Stock Option Plan. See "-- Stock Plans -- 1998 Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the two other most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers") for the
fiscal year ended April 30, 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION(3) OPTIONS($) COMPENSATION
--------------------------- --------- -------- --------------- ------------ ------------
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 immediately prior
to the Offering. 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 immediately prior to the
Offering. 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").
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-
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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 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
825,000 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
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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.
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 550,000 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 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
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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.
CERTAIN TRANSACTIONS
PENDING RECAPITALIZATION
The Company was organized under the laws of the State of Maryland on
December 2, 1997. 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.
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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.
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.
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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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 10, 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, 13355 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.
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
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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 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
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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 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.
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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 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.
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
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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. The Principal
Stockholders do not currently contemplate requesting an early release from this
contractual restriction.
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 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.
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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 shares of Common
Stock are released for sale to the public, 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 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
59
62
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.
Pursuant to an understanding between the Company and the Representative,
the Representative has the right to approve the addition of two independent
directors to the Company's Board of Directors. The Representative approved the
nomination of Messrs. Beck and Byrne to the Board, neither of which had any
prior relationship with the Company.
The Representative was formed in 1996 by the combination of two investment
banks. The founders and senior professionals of the Representative have
substantial backgrounds in investment banking, principal investing and corporate
management. The Representative has served as a co-manager of several other
public offerings.
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.
60
63
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.
61
64
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 January 31,
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1996 and 1997 and Unaudited Consolidated
Statements of Operations for the Nine Months Ended January
31, 1997 and 1998......................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended April 30, 1996 and 1997, and Unaudited
Consolidated Stockholders' Equity for the Nine Months
Ended January 31, 1998.................................... 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 Nine Months Ended January
31, 1997 and 1998......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
65
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.
/s/ GRANT THORNTON LLP
Vienna, Virginia
July 8, 1997
F-2
66
ICARUS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30, JANUARY 31,
1997 1998
---------- -----------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents................................. $1,716,371 $2,081,345
Accounts receivable, net.................................. 1,992,571 1,414,387
Prepaid expenses and other current assets................. 174,721 200,914
---------- ----------
Total Current Assets................................... 3,883,663 3,696,646
Property and Equipment, net................................. 401,899 524,694
Deferred Offering Costs..................................... 245,160 638,787
Other Noncurrent Assets..................................... 23,376 332,819
---------- ----------
Total Assets........................................... $4,554,098 $5,192,946
---------- ----------
Current Liabilities
Accounts payable.......................................... $ 178,677 $ 348,933
Accrued payroll and related costs......................... 439,581 559,658
Other accrued liabilities................................. 49,926 --
Current maturities under capital lease obligations........ 1,630 1,797
Income taxes payable...................................... 165,840 354,416
Deferred income taxes..................................... 284,417 132,017
Deferred revenue.......................................... 1,667,453 1,506,156
---------- ----------
Total Current Liabilities.............................. 2,787,524 2,902,977
Deferred Revenue, less current portion...................... 634,033 501,333
Capital Lease Obligations, less current portion............. 5,159 8,378
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 1,760,313
Cumulative translation adjustment......................... (13,415) (20,413)
---------- ----------
Total Stockholders' Equity............................. 1,127,382 1,780,258
---------- ----------
Total Liabilities and Stockholders' Equity............. $4,554,098 $5,192,946
---------- ----------
See accompanying notes to consolidated financial statements.
F-3
67
ICARUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED APRIL 30, JANUARY 31,
----------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
Revenue
Software license revenue.................... $3,811,905 $5,164,907 $3,813,989 $5,338,377
Maintenance fee and other revenue........... 1,866,088 2,174,124 1,515,320 1,436,987
---------- ---------- ---------- ----------
Total Revenue................................. 5,677,993 7,339,031 5,329,309 6,775,364
Operating Expenses
Cost of software license revenue............ 266,296 419,059 293,411 232,820
Cost of maintenance fee and other revenue... 577,542 561,642 419,773 502,781
Selling and marketing....................... 2,219,696 2,625,840 1,951,298 2,498,055
Research and development.................... 1,228,686 1,325,881 1,065,105 1,351,499
General and administrative.................. 1,102,308 1,376,951 948,520 1,223,636
---------- ---------- ---------- ----------
Total Operating Expenses...................... 5,394,528 6,309,373 4,678,107 5,808,791
---------- ---------- ---------- ----------
Income from Operations........................ 283,465 1,029,658 651,202 966,573
---------- ---------- ---------- ----------
Interest Income, net.......................... 20,649 45,575 35,000 74,885
Other (Expense) Income........................ (150) -- -- (3,230)
---------- ---------- ---------- ----------
Income Before Income Taxes.................... 303,964 1,075,233 686,202 1,038,228
Provision for Income Taxes.................... 111,024 418,804 275,000 378,354
---------- ---------- ---------- ----------
Net Income.................................... $ 192,940 $ 656,429 $ 411,202 $ 659,874
---------- ---------- ---------- ----------
Net Income Per Share.......................... $ 0.06 $ 0.22 $ 0.14 $ 0.22
---------- ---------- ---------- ----------
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
68
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).................. -- -- -- -- (6,998) (6,998)
Net Income (unaudited)......... -- -- -- 659,874 -- 659,874
-- ------- ------- ---------- -------- ----------
Balance at January 31, 1998
(unaudited).................. $1 $30,000 $10,357 $1,760,313 $(20,413) $1,780,258
-- ------- ------- ---------- -------- ----------
See accompanying notes to consolidated financial statements.
F-5
69
ICARUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED APRIL 30, JANUARY 31,
------------------------ -----------------------
1996 1997 1997 1998
--------- ------------ ---------- ----------
(UNAUDITED)
Increase (Decrease) in Cash and Cash
Equivalents
Cash Flows from Operating Activities
Net income................................ $ 192,940 $ 656,429 $ 411,202 $ 659,874
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization.......... 174,372 182,362 127,238 129,267
Loss on disposal of property........... -- -- -- 3,193
Deferred income taxes.................. 59,700 222,839 (21,009) (158,820)
Changes in assets and liabilities
Accounts receivable.................... (442,312) (360,404) 122,288 582,440
Prepaid expenses and other current
assets.......................... (64,328) (365,315) (63,570) (723,566)
Accounts payable and accrued
expenses........................ 193,115 20,727 68,201 239,821
Income taxes payable.............. (10,007) 131,241 231,139 190,565
Deferred revenue.................. 415,515 723,866 253,170 (295,542)
--------- ------------ ---------- ----------
Net Cash Provided by Operating Activities... 518,995 1,211,745 1,128,659 627,232
--------- ------------ ---------- ----------
Cash Flows from Investing Activities
Purchase of property and equipment........ (215,476) (249,635) (96,892) (269,737)
Proceeds from sale of property and
equipment.............................. -- -- -- 17,817
--------- ------------ ---------- ----------
Net Cash Used in Investing Activities....... (215,476) (249,635) (96,892) (251,920)
--------- ------------ ---------- ----------
Cash Flows from Financing Activities
Issuance of common stock.................. 200 -- -- --
Capital lease payments.................... (431) (1,681) (443) (1,223)
Repayment of notes payable................ -- (105,375) (105,375) --
--------- ------------ ---------- ----------
Net Cash Used in Financing Activities....... (231) (107,056) (105,818) (1,223)
--------- ------------ ---------- ----------
Effect of Exchange Rate Changes on Cash..... (22,648) 49,626 (10,694) (9,115)
--------- ------------ ---------- ----------
Net Increase in Cash and Cash Equivalents... 280,640 904,680 915,255 364,974
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 $1,726,946 $2,081,345
--------- ------------ ---------- ----------
Supplemental Disclosure of Cash Flow
Information
Cash paid for income taxes.................. $ 61,331 $ 63,522 $ 53,732 $ 347,304
--------- ------------ ---------- ----------
Cash paid for interest...................... $ -- $ 4,922 $ -- $ --
--------- ------------ ---------- ----------
See accompanying notes to consolidated financial statements.
F-6
70
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 L), 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 January 31, 1998,
and for the nine months ended January 31, 1997, and 1998, 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.
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.
F-7
71
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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 January 31, 1998.
Research and Development Costs
The Company expenses research and development costs as incurred, including
costs relating to strategic technology arrangements.
F-8
72
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued four 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. Under SFAS No. 132, companies will be required
to revise current disclosure relating to employers' pension and other retiree
benefits. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations. SFAS No. 128 is effective
for the Company's fiscal year 1998, and SFAS Nos. 130, 131, and 132 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
F-9
73
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
sold separately or the price for the element established by management being the
relevant authority. The effective date of this provision of the statement has
been deferred for one year. 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 prior year amounts have been reclassified to conform to 1997
presentations.
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, JANUARY 31,
1997 1998
---------- -----------
Trade receivables........................................... $2,109,745 $1,443,408
Other receivables........................................... 1,621 8,305
Less allowance for returns and uncollectible accounts....... (118,795) (37,326)
---------- ----------
$1,992,571 $1,414,387
========== ==========
F-10
74
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, JANUARY 31,
1997 1998
----------- -----------
Furniture and fixtures..................................... $ 865,365 $ 932,158
Computer equipment......................................... 904,092 1,070,589
Leasehold improvements..................................... 35,874 35,846
----------- -----------
1,805,331 2,038,593
Accumulated depreciation................................... (1,403,432) (1,513,899)
----------- -----------
Net property and equipment................................. $ 401,899 $ 524,694
----------- -----------
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 nine months ended January 31, 1998, was
approximately $129,000.
NOTE D -- OTHER NONCURRENT ASSETS
The following is a summary of other Noncurrent Assets:
APRIL 30, JANUARY 31,
1997 1998
--------- -----------
Lease Deposit............................................... $ -- $300,000
Other....................................................... 23,376 32,819
-------- --------
$ 23,376 $332,819
-------- --------
NOTE E -- ACCRUED PAYROLL AND RELATED COSTS
The following is a summary of accrued payroll and related costs:
APRIL 30, JANUARY 31,
1997 1998
--------- -----------
Accrued leave............................................... $399,522 $513,491
Other payroll-related costs................................. 40,059 46,167
-------- --------
$439,581 $559,658
-------- --------
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.
NOTE F -- 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.
F-11
75
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- 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 H -- COMMITMENTS
Operating Leases
The Company has various operating lease commitments expiring through August
2002 for office space and rental equipment. The Company's headquarters lease
expired on March 31, 1998 and was extended to April 30, 1998. See also Note L.
Future commitments on operating leases as of April 30, 1997 are 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:
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
F-12
76
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- COMMITMENTS -- (CONTINUED)
the Company during the year ended April 30, 1997, and the nine months ended
January 31, 1998, were $-0- and approximately $126,000, respectively. Revenue
and commissions totaling $5,860 have been earned by the Company through January
31, 1998.
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 I -- 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 methods 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:
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:
YEAR ENDED APRIL 30, NINE MONTHS
--------------------- ENDED
1996 1997 JANUARY 31, 1998
--------- --------- ----------------
Current
Federal......................................... $ 29,564 $169,147 $ 306,000
State........................................... 9,526 37,589 67,010
Foreign......................................... 12,234 (10,771) 164,164
-------- -------- ---------
51,324 195,965 537,174
Deferred
Federal......................................... (47,000) (28,000) 6,000
State........................................... (8,000) (5,000) 27,000
Foreign......................................... 114,700 255,839 (191,820)
-------- -------- ---------
59,700 222,839 (158,820)
-------- -------- ---------
$111,024 $418,804 $ 378,354
-------- -------- ---------
F-13
77
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- INCOME TAXES -- (CONTINUED)
The provision for income taxes differs from the federal statutory rate
because of the following:
YEAR ENDED
APRIL 30, NINE MONTHS
----------- ENDED
1996 1997 JANUARY 31, 1998
---- ---- ----------------
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 (2.2)
---- ---- ----
Provision for income taxes................................ 36.5% 38.9% 36.4%
---- ---- ----
NOTE J -- REVENUE
The following is a summary of revenue:
NINE MONTHS
ENDED
YEAR ENDED APRIL 30, JANUARY 31,
----------------------- ------------
1996 1997 1998
---------- ---------- ------------
Software license revenue......................... $3,880,190 $5,621,988 $5,382,529
Maintenance fees and other revenue............... 1,866,088 1,825,365 1,436,987
Less sales returns and allowances................ (68,285) (108,322) (44,152)
---------- ---------- ----------
$5,677,993 $7,339,031 $6,775,364
---------- ---------- ----------
NOTE K -- GEOGRAPHIC INFORMATION
The Company's operations are based worldwide through offices in the United
States, the United Kingdom and Japan.
F-14
78
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- GEOGRAPHIC INFORMATION -- (CONTINUED)
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,
----------------------- JANUARY 31,
1996 1997 1998
---------- ---------- -----------
Revenue
United States.......................................... $4,672,554 $5,795,198 $5,779,624
United Kingdom......................................... 833,131 1,267,119 713,407
Japan.................................................. 172,308 276,714 282,333
---------- ---------- ----------
Total revenue............................................ $5,677,993 $7,339,031 $6,775,364
---------- ---------- ----------
Income from operations
United States.......................................... $ 27,073 $ 558,360 $ 742,391
United Kingdom......................................... 226,851 584,228 118,971
Japan.................................................. 29,541 (112,930) 105,211
---------- ---------- ----------
Total income from operations............................. $ 283,465 $1,029,658 $ 966,573
---------- ---------- ----------
APRIL 30,
----------------------- JANUARY 31,
1996 1997 1998
---------- ---------- -----------
Identifiable assets
United States.......................................... $2,258,740 $3,048,361 $3,329,510
United Kingdom......................................... 594,401 1,209,418 1,444,911
Japan.................................................. 271,455 296,319 418,525
---------- ---------- ----------
$3,124,596 $4,554,098 $5,192,946
---------- ---------- ----------
NOTE L -- 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
F-15
79
ICARUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- SUBSEQUENT EVENTS -- (CONTINUED)
825,000 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.
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
550,000 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 or before May 1, 1998 and
expires in 2008. Base rent on the lease is approximately $571,000 and is subject
to annual escalations.
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80
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THIS PAGE INTENTIONALLY LEFT BLANK.
81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 28
Management............................ 44
Certain Transactions.................. 51
Principal Stockholders................ 53
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 57
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Available Information................. 61
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
82
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 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-1
83
(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.
(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,
II-2
84
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 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:
(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.
II-3
85
(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 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.
II-4
86
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, 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 Corporation's Articles of
Incorporation, which provisions are incorporated herein with the same
affect as if they were set forth herein.
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(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.
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 expenses............................ 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.
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.*
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88
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 SRI Consulting Inc., 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.
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 Agreement.
10.14 Amendment, dated March 30, 1998, to lease for 600 Jefferson
Plaza, Rockville, Maryland, by and between Allstate Life
Insurance Company and the Company, dated December 31, 1997.
10.15 Amendment, dated January 21, 1998, to lease for One Central
Plaza, 11300 Rockville Pike, Rockville, Maryland, by and
between the Company and One Central Plaza Limited
Partnership.+
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.*
27.1 Financial data schedule.*
- ---------------
* Previously filed.
** 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.
+ To be filed by amendment.
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.
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89
(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.
(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 Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Rockville, State of Maryland on April 14, 1998.
ICARUS INTERNATIONAL, INC.
By: /s/ HERBERT G. BLECKER
------------------------------------
HERBERT G. BLECKER
CHAIRMAN OF THE BOARD, PRESIDENT
CHIEF EXECUTIVE OFFICER
------------------------
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HERBERT G. BLECKER Chairman of the Board, President April 14, 1998
- ------------------------------------------------ and Chief Executive Officer
HERBERT G. BLECKER (Principal executive officer)
/s/ MARK S. KINGSLEY Controller and Chief Financial April 14, 1998
- ------------------------------------------------ Officer; (Principal Accounting
MARK S. KINGSLEY Officer and Principal Financial
Officer)
/s/ EUNICE E. BLECKER Director, Secretary and April 14, 1998
- ------------------------------------------------ Treasurer
EUNICE E. BLECKER
/s/ HERBERT G. BLECKER* Director and Vice Chairman of April 14, 1998
- ------------------------------------------------ the Board
JAMES J. BYRNE
/s/ WILLIAM F. GERITZ, III Director and Executive Vice April 14, 1998
- ------------------------------------------------ President
WILLIAM F. GERITZ, III
/s/ HERBERT G. BLECKER* Director April 14, 1998
- ------------------------------------------------
GARY M. ROUSH
/s/ HERBERT G. BLECKER* Director April 14, 1998
- ------------------------------------------------
J. EDWARD BECK
- ---------------
* Herbert G. Blecker has signed on behalf of each individual indicated in the
capacities stated as their attorney-in-fact.
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