As filed with the Securities and Exchange Commission on May 19, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 3; File No. 333-94465)
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DAEDALUS SYSTEMS
INCORPORATED
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Delaware 5039 54-1950671
(State of Incorporation) (SIC) (Employer I.D #)
8653 Richmond Highway
Alexandria, Virginia 22309-4206
(703) 360-5700
(703) 360-1974 - fax
(Address and telephone number of principal
executive offices and principal place of business)
Herbert S. Rosenblum
Attorney and Counselor at Law
526 King Street, Suite 211
Alexandria, Virginia 22313-0058
(703) 684-0060
(703) 684-0072 - fax
(Name, address and telephone number of agent for service)
Approximate date of commencement or proposed sale to the public:
June 15, 2000
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please 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 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(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. [ ]
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: [ ]
CALCULATION OF REGISTRATION FEE
- ----------------------- ------------------------ ----------------------- ----------------------- ----------------
Title of each class Dollar Proposed Proposed maximum
of securities to be amount to maximum offering aggregate offering Registration
registered be registered price per unit price fee
Common stock
($0.01 par value 1,000,000 shares $.3333(2) $333,333 $170.453
per share)1
- ----------------------- ------------------------ ----------------------- ----------------------- ----------------
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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1 Shares of common stock of the registrant being distributed to shareholders of
Empiric Energy, Inc.
2 Based upon one-third of the liquidating preference value of the preferred
stock of Empiric Energy, Inc. to be exchanged for the subject 1,000,000 shares
of common stock of the registrant, solely for purposes of calculating the
registration fee pursuant to Rule 457(f)(2).
3 Paid
2
Preliminary Prospectus
Subject to completion
DAEDALUS SYSTEMS
INCORPORATED
"Daedalus"
PROSPECTUS
1,000,000 Shares of Common Stock
Dividend distribution to the shareholders of Empiric Energy, Inc. of
record, June 15, 2000.
On the basis of one share of Daedalus common stock for each 12.5 shares
of Empiric common stock, and one share of Daedalus common stock for each share
of Empiric Series B preferred stock.
This is our initial public offering and no public market currently
exists for our shares. We cannot guarantee that any market will develop for our
shares. We will apply for listing on the over-the-counter Bulletin Board under
the symbol "DSYS".
The Daedalus shares involve a high degree of risk. You should carefully
consider the information appearing under the caption Risk Factors, on page 7.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________________
3
DAEDALUS SYSTEMS, INCORPORATED
PROSPECTUS
TABLE OF CONTENTS
PROSPECTUS SUMMARY........................................................... 5
RISK FACTORS................................................................. 7
CAPITALIZATION...............................................................10
DIVIDEND POLICY..............................................................11
INFORMATION CONCERNING EMPIRIC...............................................11
FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION..........................................................12
DESCRIPTION OF DAEDALUS' BUSINESS............................................15
MANAGEMENT'S DISCUSSION OF PLAN OF OPERATION.................................30
MANAGEMENT OF DAEDALUS.......................................................34
EXECUTIVE COMPENSATION.......................................................40
RELATED TRANSACTIONS.........................................................41
PRINCIPAL SHAREHOLDERS OF DAEDALUS COMMON STOCK..............................42
DESCRIPTION OF SECURITIES OF DAEDALUS........................................44
SHARES ELIGIBLE FOR FUTURE SALE..............................................47
LEGAL MATTERS................................................................48
EXPERTS......................................................................48
DISCLOSURE OF COMPANY POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES...............................48
FINANCIAL STATEMENTS.........................................................49
4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus.
Prospective investors should read the entire prospectus carefully.
Organization and Business of Daedalus. Daedalus was incorporated in the
state of Delaware, in October of 1999, to focus upon an opportunity to supply
low-cost housing to a large sector of the world's population that is either
homeless or without adequate shelter. Daedalus has one principal functioning
subsidiary, Daedalus Composites, Inc., a Canadian corporation that operates
Daedalus' plastic recycling facility in Brantford, Ontario.
Agreement with Empiric Energy, Inc. In October, 1999, Daedalus reached
agreement with Empiric Energy, Inc. to exchange equity between the companies and
to pursue complementary objectives. Upon completion of the exchange,. Daedalus
will hold 4.8% of Empiric outstanding shares, and Empiric will hold 4.9% of
Daedalus outstanding shares. Neither company will hold a controlling interest in
the other. No merger of the companies is planned and neither company plans on
becoming a subsidiary of the other. Empiric plans to distribute a portion of the
stock it receives from Daedalus--that portion covered by this prospectus--to its
shareholders.
Daedalus Building Systems(TM). Daedalus current product line is
comprised of two types of low-cost housing, one fabricated from recycled
plastics, and the other is a foam-filled metal panel system. These products are
priced below the identified competition in the international market.
o Market. The market for Daedalus building systems is the nearly one
billion people in the world who are either homeless or without adequate
shelter, with a specific focus upon developing countries. Additionally,
both systems have cost-competitive applications for refugee and
disaster relief.
o Competition. Unlike competition within other identifiable sectors the
housing markets, the competition to Daedalus products includes scarce
resources--the inability of individuals and governments throughout the
developing world to provide for basic needs.
o Contracts. Daedalus currently has two contracts with a private-sector
entity in Peru, one for each type of housing. The contract stipulates
that Daedalus will assist World Business Investors Group to seek
financing through the Export-Import Bank but there are no assurances of
success in obtaining such financing. World Business may approach other
financing institutions to secure financing. Aside from Peru, Daedalus
is actively pursuing additional contracts.
o Production. Daedalus commenced limited production in December, 1999,
in preparation for fulfillment of its contract for composite
structures.
Business Development Strategy. Daedalus business development strategy
concentrates upon shelter, energy, water, and waste management. Daedalus'
current products will address the first aspect. Daedalus goals in the energy
area will be pursued on a complementary basis with Empiric Energy. Community
water and waste management issues will be the long-range focus of Daedalus
growth activities.
Risks. In addition to those risks that are common to all business
undertakings and investments, Daedalus unproven--and unprecedented--composite
products may present difficulties with acceptance and implementation of the
Daedalus development plans.
Public Ownership of Daedalus. Daedalus' management and board of
directors decided that public ownership is consistent with, and would best
support, Daedalus' strategic business development plan. To this end, Daedalus
entered into an agreement with Empiric Energy, Inc. that provides for Daedalus
to issue to Empiric, on the date of this prospectus, 1,500,000 shares of
Daedalus common stock in exchange for the following Empiric shares:
o preferred stock that has a liquidating preference of $1,500,000 and
is convertible into 750,000 shares of Empiric common stock
5
o three year warrants to purchase 750,000 shares of Empiric common
stock for $2.00 per share. Empiric will distribute 1,000,000 of the Daedalus
shares to the Empiric shareholders of record June 15, 2000 on the basis of one
Daedalus share for each 12.5 Empiric common share and one Daedalus share for
each Empiric Series B preferred share.
Daedalus Systems, Incorporated
8653 Richmond Highway
Alexandria, Virginia 22309-4206
(703) 360-5700
(703) 360-1974-fax
6
RISK FACTORS
Because we have not produced, sold and delivered any of our two
principal products, we may not be able to do so or achieve profitability.
Daedalus is a new company without a proven track record. Daedalus was
formed in October, 1999. Its wholly owned subsidiary, Daedalus Composites was
formed in May, 1999. Our ability to produce and sell our housing systems or to
achieve profitability is unproven.
Because we lack sufficient capital to finance our operations, we may
not be able to start production of our two principal products.
On a consolidated basis, Daedalus and Daedalus Composites has
approximately $100,270 in cash, receivables, and inventories, and $337,551 in
current payables and accrued expenses, as of January 31, 2000. We need
approximately $500,000 in cash to begin production of our housing system
products. We need a minimum of $85,000 per month for the next 12 months to meet
its level-of-effort expenditures. If we do not raise this needed capital,
Daedalus will not be able to produce and market its products and our business
will fail. See Management's Discussion of Plan of Operation, page 30.
Because the Daedalus housing systems have never been produced or
employed in the field, they are unproven and may not be successful in providing
low cost housing to or accepted by our target markets.
Daedalus business is a venture into aspects of housing and
community-building in developing countries that are unproven and, in general,
have not been attempted previously. There is no assurance that Daedalus will be
successful in its business development approach nor that its products will gain
sufficiently broad market acceptance to produce profitability.
If we do not receive firm purchase orders in support of our housing
contracts, we will not have any significant sales revenues and will not be
profitable.
Deadalus does not have any firm purchase orders to buy units of either
its composite or its metal housing systems. We have two contracts to sell our
systems to a private Peruvian company; however those contracts are subject to
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the Peruvian company's obtaining financing to purchase our Deadalus systems,
which it has not yet secured.
Unless a market for Daedalus common stock develops, an investor in our
shares may not be able to sell his stock.
There is no public market for the common stock of Daedalus. Further,
there is no assurance that an active public market will develop for Daedalus'
stock or that the stock will ever trade above the levels established by the
market after the dividend distribution to the Empiric shareholders.
Prospective purchasers of Daedalus common stock may decide not to
purchase shares because Edward A. McCulloch holds 61% of the Daedalus stock
voting rights, thus limiting a market for our stock.
After the distribution, Mr. McCulloch will control approximately 61% of
Daedalus' common stock voting rights. That situation may complicate certain
transactions, such as mergers and acquisitions, changes in incumbent management,
and other instances in which other stockholders consider such transactions in
their best interests. Similarly, the inability, incapacity, or reluctance of Mr.
McCulloch to take action perceived by others to be in the best interests of the
other stockholders could deprive them of an opportunity to sell their shares at
a premium over the market price of the shares. Consequently, hostile takeover
attempts may be discouraged and a prospective investor may decline to buy our
stock,. thereby diminishing a market for our stock.
If the present shareholders of Daedalus common stock sell their shares
in the market, our stock price may decline.
As of the date of this prospectus and consummation of the exchange
agreement with Empiric, Daedalus will have 10,200,000 shares of common stock
outstanding. Our current shareholders hold an aggregate of 8,700,000
"restricted" shares. If a market for our stock develops, those shareholders may
be able to sell their shares into the market beginning October 31, 2000. If they
do, our stock price may become depressed.
8
CAPITALIZATION
The following table sets forth the capitalization of Daedalus as of
January 31, 2000 as adjusted to reflect the issuance of 1,500,000 shares of
Daedalus common stock to Empiric in exchange for 1,500,000 preferred stock of
Empiric. This table should be read in conjunction with the accompanying
Financial Statements and notes.
As
Stockholders Equity Actual Adjusted(4)
--------- --------
Preferred Stock, $1.00 par value,
3,000,000 shares authorized,
250,000 Series A issued and outstanding $ 250,000 $ 250,000
1,000,000 Series B issued and outstanding 1,000,000 1,000,000
1,000,000 Series C issued and outstanding 1,000,000 1,000,000
375,000 Series D issued and outstanding 375,000 375,000
Common Stock, $0.01 par value,
30,000,000 shares authorized, 8,700,000 shares issued
and outstanding, before the distribution and
10,200,000 shares issued and outstanding after the distribution 87,000 102,000
Additional paid-in capital 896,959 2,381,959
Accumulated deficit (354,009) (354,009)
Accumulated other comprehensive (2,361) (2,361)
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Total Capitalization $3,252,589 $4,752,589
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(4) These adjustments will also increase Daedalus total assets by $1,500,000.
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DIVIDEND POLICY
Daedalus has not paid any cash dividends on its common stock and does
not expect to pay dividends for the foreseeable future. Daedalus intends to
re-invest any profits that may be earned into Daedalus' business. Any future
payments of dividends, and the amount thereof will be dependent upon Daedalus'
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Board of Directors.
INFORMATION CONCERNING EMPIRIC
Empiric Energy, Inc., a Delaware corporation, is an independent oil and
gas exploration and production company that is publicly traded on the OTC
Bulletin Board (Symbol: EMPE). Empiric has over 600 shareholders with
approximately 10,000,000 outstanding common shares.
The distribution agreement. On October 1, 1999 Empiric and Daedalus
entered into an agreement that provides for Daedalus to issue to Empiric, on the
date of this prospectus, 1,500,000 shares of Daedalus common stock in exchange
for the following Empiric shares:
o preferred stock that has a liquidating preferences of $1,500,000 and
is convertible into 750,000 shares of Empiric common stock
o three year warrants to purchase 750,000 shares of Empiric common
stock for $2.oo per share.
Empiric will distribute 1,000,000 of the Daedalus shares to the Empiric
shareholders of record date June 15, 2000 on the basis of one Daedalus share for
each 12.5 Empiric common shares and one Daedalus share for each Empiric Series B
preferred share. Fractional shares will be rounded up to whole shares. Certain
principal Empiric shareholders will contribute the shares necessary to round up
to whole shares. The agreement provides that Empiric distribute to its
shareholders, as a dividend, at least 1,000,000 shares of the 1,500,000 shares
of Daedalus common stock. In this regard, Empiric may be considered an
underwriter for purposes of liability under Section 11 of the Securities Act of
1933. Section 11 imposes liability upon certain persons, including an
underwriter, for losses to a person that acquires a security in a distribution
registered under the Act, if the registration statement contains a material
misstatement or omission, unless the underwriter exercises due diligence. Due
diligence means that after reasonable investigation, the person has reasonable
grounds to believe and believes that there were not any material misstatements
or omissions in the registration statement.
Empiric shareholders of record will initially have their ownership of
Daedalus common stock registered only in book-entry form in which no
certificates are issued. On the distribution date, each Empiric shareholder, as
of the close of business on the record date, will be credited through book-entry
in the records of the transfer agent with the number of shares of Daedalus
common stock distributed to each shareholder. Each Empiric shareholder will
receive an account statement indicating the number of shares of Daedalus common
stock that the shareholder owns. Empiric shareholders that hold their stock in
street name will have their Daedalus common stock credited to their brokerage
accounts. Following the distribution date, any Empiric shareholder may obtain,
at any time without charge, a certificate to represent his Daedalus stock. The
record date for the distribution is the close of business on June 15, 2000.
Empiric shareholders will not be required to pay any cash or other
consideration to receive Daedalus common stock in the distribution.
Daedalus was created to develop, produce and sell composite and metal
housing building systems. We believe that if our stock is traded in the public
markets, it will be easier for us to raise capital to fund our operations. We
therefore entered into the agreement with Empiric to exchange our stock for
Empiric stock and to have most of our stock distributed as a dividend to Empiric
shareholders. In addition, we believe that our investment in Empiric stock will
be profitable.
10
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion is a general summary of current Federal income
tax consequences of the distribution as presently interpreted, and a
shareholder's particular tax consequences may vary depending on his individual
circumstances. You are urged to consult your own tax advisor as to the
particular tax consequences to you of the distribution, including, without
limitation, the applicability and effect of any state, local or foreign tax laws
and the possible effects of changes of applicable tax laws.
The Internal Revenue Service will not give an advance ruling as to the
valuation of the Daedalus common stock to be distributed as a dividend by
Empiric to its shareholders. The IRS is not bound by any determination made by
Empiric as to the fair market value of the property distributed to the Empiric
shareholders.
The distribution of Daedalus common stock to Empiric shareholders as a
dividend is a taxable event. Section 301 of the Internal Revenue Code of 1986
provides that the taxable amount of the dividend shall be the fair market value
of the property distributed. Section 316 of the Code provides generally that a
corporate distribution will be treated as a dividend to the extent the
distribution is paid out of earnings and profits accumulated since February 28,
1913, or out of earnings and profits for the year of the distribution.
Management believes Empiric has no accumulated earnings and profits in the
corporation as of December 31, 1999. The year of the distribution will be 2000.
Thus, the distribution will be taxable as an ordinary dividend only to the
extent there are earnings and profits for the year 2000.
If Empiric has no earnings and profits for the year 2000, then the
distribution will be treated as a liquidating dividend of Empiric to the extent
of the fair market value of the property distributed. Generally a liquidating
distribution is treated as a return of the shareholder's basis, reducing his or
her tax basis in the investment. To the extent the distribution exceeds the tax
basis of the investment, the excess will be treated as a gain from the sale of
the investment. If Empiric has earnings and profits for the year 2000, but not
enough earnings and profits to cover the value of the property distributed, then
the distribution will be taxed as an ordinary income dividend to the extent of
the earnings and profits for 2000 and the remainder will be treated as a
liquidating dividend of Empiric.
Corporate holders of Empiric shares (other than S Corporations) may be
entitled to the dividends-received deduction, which would generally allow such
shareholders a deduction, subject to certain limitations, from their gross
income of either 70% or 80% of the amount of the dividend depending on their
ownership percentage in Empiric. The holding period for the Empiric shareholders
for the Daedalus common stock received in the distribution will commence on the
date of the distribution.
Computation of Fair Market Value. For income tax purposes, fair market
value is the price at which a willing buyer and a willing seller would agree to
exchange property. Therefore, the best measure of the value of the Daedalus
shares distributed to Empiric shareholders is the amount that will be paid for
those shares at the time they are acquired by Empiric. The 1,500,000 Daedalus
common shares acquired by Empiric are to be acquired by the issuance of
$1,500,000 face value convertible preferred stock, convertible into 750,000
shares of restricted Empiric common stock. The announcement of the
Daedalus/Empiric Agreement was made September 17, 1999. The average closing
price of the Empiric common stock for the ten days prior to the announcement was
$.6312 and the average volume traded was 11,050 shares. Even though the
preferred stock maintains a liquidation preference, the asset value to be placed
upon Empiric's books is the related value of the common shares at the time of
the announcement. Because the common shares are restricted and there is limited
trading volume, the value has been discounted 20%, 10% for restrictions, and 10%
for volume to reach a value of $.5050 per Empiric common share. Utilizing
750,000 Empiric common shares at $.5050 gives a value to the transaction of
$378,720. This valuation assumes that the exchange of warrants will be valued
separately. Since the warrants are not to be distributed to the public, their
value will remain an asset of Empiric until either exercised or the warrants
expire. The transaction value of $378,720 divided by the 1,500,000 Daedalus
common shares received values the common shares of Daedalus at $.2525 per share,
fair market value.
If Empiric has $378,720 in earnings and profits in the year 2000, then
the distributed shares, each worth $.2525, will be treated as ordinary income to
the recipient and must be added to gross income. If Empiric has no earnings and
profits for the year 2000, the distributed shares, each worth $.2525, will be
treated as a liquidating dividend and the tax treatment will depend upon each
recipient's basis in the shares of Empiric owned. Management expects Empiric to
have a loss for the first quarter of 2000 and cannot predict whether Empiric
11
will have earnings and profits for the year 2000. Therefore, the tax impact of
the distribution cannot be determined at this time and must wait until the
completion of the computation of the earnings and profits for Empiric for the
year 2000.
The recipients of the distribution are not paying for the shares
received and are therefore not making a decision about investing in the shares.
The tax consequences of the distribution do not change the fact that
shareholders of Empiric will receive the shares and the tax consequences will be
delivered to each shareholder in the ordinary course of business after the
computation of earnings and profits for Empiric for the year 2000.
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DESCRIPTION OF DAEDALUS' BUSINESS
Business Development. Daedalus was formed to help alleviate two of the
world's seemingly intractable and growing, population-related problems: the
disposal of plastics, particularly in municipal solid waste, and the vast world
homeless population for whom there is a critical shortage of adequate shelter
and low-cost housing. Daedalus' contribution to the solution of those problems
is through a common mechanism of producing polymer composite building materials
for low-cost housing fabricated from recycled plastic.
On March 3, 2000, Daedalus resolved to change its name from Daedalus
Building Systems, Inc. to Daedalus Systems, Incorporated to reflect the broader
scope of Daedalus' interest in the development of community systems based upon
structures, water, energy, sewage, and waste management services. Despite
Daedalus' interest, it currently has only two products, both of them structural
systems for low-cost housing.
Formation. Daedalus was incorporated in the State of Delaware on the
28th of October, 1999 as a C corporation.
Litigation. Daedalus is not currently a party to any claim or legal
action.
Business of Daedalus.
Background. The world's population is projected to increase from the
current six billion to approximately 10 billion people in the next 35-50 years.
Virtually all growth will occur in developing countries where housing
requirements are predicted to be more than doubled by the middle of the
twenty-first century. This growth in the numbers of housing is going to be
greatly complicated by shortages in conventional materials, financial
constraints, intensified land competition, and increased poverty.
The United Nations estimates that there are nearly one billion people
in the world that are homeless or without adequate shelter, a situation that
carries with it the potential for grave social and economic consequences.
Consistent with those figures is the estimate for housing. Housing requirements
for the Asian region alone are predicted to reach 700 million units during the
next 35-50 years. The use of conventional housing materials, particularly wood,
simply will not sustain the expansion that is necessary.
Estimates today are that in the United States, the per capita usage of
materials of all kinds is approximately 100 kg. per day, or 36.5 tons per year.
As the developing world moves toward the increased utilization of materials,
consistent with the US or western model, the demand for materials will rise
dramatically--just to meet the requirements of the increase in population. The
impact upon the demand for housing materials to construct basic shelters and
low-cost houses will be similarly increased.
Millions of tons of plastics are produced each year throughout the
world. Authoritative estimates are that less than five percent of the amount
produced each year is recycled. Most of the recycled plastics are of homogeneous
types; only an extremely small fraction of recycled plastics consists of
13
non-homogeneous plastic waste. Even a smaller portion of combined industrial,
commercial, and post-consumer plastic waste is recycled to produce such items as
speed bumps and plastic wood for livestock stalls, marine applications, and park
benches. The majority of plastic waste is committed to landfills, where its
non-biodegradable nature complicates its disposal, or it is left lying where its
utility ceased.
Neither homelessness nor waste plastic is new; however, we believe this
is the first time that any project of this nature has been devised to address
both problems. Similarly, the technology to process plastic waste into useful,
after-market products has been available for years; however, little attention
has been given to providing for the have-nots of this world from the excesses of
the haves.
Daedalus approach uses proven process technologies that are extensively
used within the plastics processing/recycling industry. Indeed, there are
several companies in North America already utilizing the plastics blending,
compounding and molding techniques that are proposed by Daedalus. However, to
our knowledge, none of these companies have focussed their recycling/molding
activities on the provision of low cost housing in the developing world.
Instead, their concentration has been on the manufacture and sale of discrete
products aimed at the construction industry in North America, such as outdoor
decking, roof shingles, shed floors, marine pontoons and internal door frames.
One of the reasons these companies have not entered the market with a
low cost housing system may have been their inability to conceive a building
design and structural panel design that results in a dimensionally stable, low
cost structure. As evidenced by the studies carried out by Virginia Polytechnic
Institute and State University, the design has novelty.
In addition to the foregoing, which supported Daedalus' decision to
produce this polymer composite housing system, a foam-filled metal panel system
has been incorporated into the business to pursue a slightly higher
socio-economic sector of the world housing market and to leverage marketing
efforts by being able to meet a broader range of requirements.
Principal products. The principal products of Daedalus are marketed
under the Daedalus Building System(TM), which includes two components: a polymer
composite structural system and a metal composite structural system.
Polymer composite structural system. The polymer composite structural
system consists of panels fabricated from recycled polyolefins, compounded with
various additives designed to increase performance parameters and the typical
attributes of composites such as strength, flexibility, durability, and
permanence. The technology of the composite housing system consists of four
principal components: composites, structural panels, structures, and production
technologies.
14
o Composites. The polymer composites consist primarily of recycled
polyolefins, primarily polyethylene and polypropylene compounded with
various additives, including glass fiber, talc, and naturally-occurring
materials such as rice husks or sand may be used to increase
performance parameters such as strength, flexibility, durability, and
permanence.
o Structural Panels. The polymer composites are formed into structural
panels through various plastic forming technologies discussed below.
Currently, there are nine different types of panels which are assembled
into a structure:
- floor panels
- wall panels
- mitered wall panels
- window panels
- door panels
- roof truss panels (2)
- roof panels (2)
The design of the polymer composite system envisioned that all
configurations of the panels could be produced from the same basic
mold, approximately 1.25 by 1.25 meters square. That objective was
achieved.
o Structures. The basic structural unit is the building block of this
system. The basic structural unit consists of approximately 60 single
panels, assembled three panels wide and two panels high to form a
structure measuring 2.5 meters high by 3.75 meters square with a floor
area of on approximately 14 square meters or 150 square feet.
Structural units can be combined to achieve various
configurations of multiple unit structures.
Selling prices for the structures provided below, for both
polymer and metal composite panels, are FOB East Coast USA Port. This
is a standard method of pricing products that are being shipped
internationally since transport costs vary significantly from country
to country and are highly dependent upon volume, that is, number of
containers being shipped.
Clearly, transport cost is a significant element and may range
from 20% to 30% of the delivered price of the structural panels.
Therefore, the aim in all relationships with strategic partners is to
achieve sufficient sales volume to justify local manufacture. Not only
will this significantly reduce transport costs but it will also attract
financial support from governments and financing institutions that are
keen to give recognition to projects capable of creating attractive
economic activity.
Related selling prices and costs for the standard
configurations of these structures follow:
Production cost (does not include amortization or leasing costs):
o basic structural unit - $632.50 per structure
Selling prices*:
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Structural Units Measurement, Measurement, Area, Area, Price,
sq. meters sq. feet sq. meters sq. feet USD
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Basic Structural Unit 3.75 x 3.75 12.38 x 12.38 14.06 153.26 $2,000.00
Double Unit 3.75 x 7.50 24.75 x 12.38 28.13 306.41 $2,750.00
Triple Unit 3.75 x 11.25 37.12 x 12.38 42.19 459.55 $3,900.00
-----------------------------------------------------------------------------------------------
* subject to a five-percent royalty in accordance with the
agreement with The Daedalus Project, Inc.
15
o Production Technologies. Panels may be produced using three
principal production technologies: compression,
injection-compression, and Panelform(TM). All of these
technologies will produce panels with acceptable material
composition and overall dimensions (based upon the Virginia
Polytechnic Institute and State University studies). The
differences in the technologies relate, in the main, to
machine cost, mold cost, labor requirement and product quality
(in terms of dimensional tolerance and surface finish).
Daedalus is continuing the process of qualifying
suitable subcontract companies in North America capable of
manufacturing the panels. The range of companies includes all
of the technologies mentioned above. A brief description of
each one follows.
- Compression. Sometimes referred to as lump forming,
compression forming technology forms items by applying large
compression forces--in this case in the range of 2500-5000
tons--in large presses to lumps of compounded material placed
in the mold to squeeze the polymer throughout the volume of
the mold. This technology is one of the oldest, technologies
used in the plastics forming industry. This technology
accommodates large-size additives thus permitting a broad
array of additives and versatility of compounding. Presses and
molds required for this type of molding technology are
generally expensive, on the order of hundreds of thousands of
dollars.
- Injection-Compression. Injection-compression technology
injects molten polymer through a relatively small orifice into
the mold cavity that is nearly closed. Once the cavity is
filled, the mold closes completely thereby filling the vacuous
spaces within the mold. One of the advantages of this system
is that allows a significant improvement of the material
properties through the introduction of reinforcing long fibers
and impact modifiers. However, because of the relatively small
injection nozzle, it does not permit the utilization of a wide
variety of naturally-occurring additives. Machinery for this
technology is expensive as are the associated molds.
- Panelform(TM). In this case, molten material is extruded
directly into a mold until it is filled. Then, light
compression forces--approximately 200 tons--are applied to
fill out the vacuous parts of the mold. This production method
has the advantage of reducing the requirement for heavy and
expensive presses capable of exerting large compression
forces, thereby achieving production objectives while reducing
capital expenditures.
Metal composite structural system. The second part of the
Daedalus Building System(TM), the metal system was added to the
building system through Daedalus' acquisition of the stock of Cambridge
Unique Associates, Inc., of Ontario Canada.
Cambridge Unique Associates, Inc. now known as
Daedalus-Cambridge, Inc. was not conducting operations at the time of
the acquisition. Its sole asset was the worldwide rights to the
production and distribution of the metal composite panel under US
Patent No. 08/988, 697, Load Bearing Pre-fabricated Building
Construction Panel, which is further addressed below.
The metal composite system consists of two layers of 26 gauge
steel that are passed through a forming die and filled with an expanded
polyurethane foam to form an insulating panel. The panels are two feet
16
wide, three or five inches thick, and have an internal supporting
member running lengthwise that allows the panel to be used as a
structural panel without additional structural support. That feature
differentiates this panel system from other foam-filled insulating and
cladding panel systems.
The metal system will be used to fabricate low-cost houses,
and other structures complementing those of the polymer composite
structural system within a slightly higher socio-economic level. The
panels are very simple and versatile so as to permit their utilization
to build most types of structures from dwellings to commercial and
industrial structures. The system is capable of forming multi-story
structures to four stories, without additional framework.
Daedalus is not currently producing the metal panel system.
Similar metal panel systems are produced by a variety of manufacturers
and Daedalus' proprietary panel could be produced on a contract basis
in the near term to meet the requirements of its Peruvian contract for
22million square feet of metal panels over three years. Daedalus is
currently examining both in-house and contract production of the metal
panel system.
Related selling prices and costs for the standard
configurations of these structures follow:
Production costs (does not include amortization or leasing
costs):
o in-house - $2.10 per foot
$860 for a basic structural unit
o contract - $3.55 per foot
$1,450 for a basic structural unit
Selling prices*:
-----------------------------------------------------------------------------------------------
Structural Units Measurement, Measurement, Area, Area, Price ,
-----------------------------------------------------------------------------------------------
Basic Structural Unit 3.75 x 3.75 12.38 x 12.38 14.06 153.26 $3,200.00
Double Unit 3.75 x 7.50 24.75 x 12.38 28.13 306.41 $4,100.00
Triple Unit 3.75 x 11.25 37.12 x 12.38 42.19 459.55 $5,100.00
-----------------------------------------------------------------------------------------------
* subject to a royalty of $.15 per foot ($ Candaian) in
accordance with the agreement between Daedalus-Cambridge and
Douglas Murdock, the inventor of the metal system.
Testing. In general, there are no specific requirements to be
met by building materials within the international market for low-cost
housing. Nonetheless, finite element analysis was conducted on the
structural panels of the composite system by Virginia Polytechnic
Institute and State University. Results of that testing are available
from Daedalus under the title of Recycled Composite Shelter Project:
Structural Analysis and Testing, dated January 29, 1999. The panels
performed well, substantiating their acceptability for use as housing
materials. As stated in the report: "From recycled high density
polyethylene pallet application experience, preliminary materials
testing and numerical structural analysis, it was determined that the
Daedalus structure concept was feasible."
Similar finite element analysis was performed on the panels of
the metal composite system which demonstrated the ability of the panels
to comply with the roof and floor loading requirements of the Canadian
National Building Code, which should suffice for any requirements for
low-cost housing imposed by developing countries.
Markets. The primary market for the Daedalus Building
System(TM)is divided into four parts:
o low-cost and socialized housing programs
o programs for those without adequate housing
o programs for the homeless
o disaster relief programs
17
All of these markets have a significant public
sector/non-profit involvement. However, it is Daedalus' view that the
most effective route to market is through private sector organizations
already active in the construction industry within specific developing
nations, such as builders and developers. Based upon their local
credibility, these private sector organizations are capable of
utilizing their network of contacts within their respective government
housing ministries and their knowledge of the activities of the local
public sector organizations (for example, World Bank, USAID, charities)
to deliver Daedalus' products.
A secondary market for all Daedalus' structures is the
commercial market, which is currently being investigated by Daedalus
throughout the United States and the rest of the world. Of particular
interest in the United States is the market for residential
outbuildings, such as garden sheds, etc.
The international industry for housing, including low-cost
housing, is enormous--by any measure. Statistics for housing and
construction within developing nations are generally inadequate for
Daedalus' purposes. They do not adequately address the requirements
within the world market for housing at all levels--particularly the
bottom end--rather they support more conventionally recognized housing
industry within developed and developing countries. Daedalus' focus
within the international housing industry is generally focused upon the
lowest level of the socio-economic spectrum, although the structures
are suitable for the conventional construction and building industry
throughout the world.
The figures that are more relevant for Daedalus' purposes are
those that are derived from such sources as the United Nations, the
United Nations development Program, the United Nations High
Commissioner for Refugees, Habitat, and the World Bank. Of even greater
importance and accuracy are those derived from the officials of the
respective countries. The following are several examples of the
requirements for low-cost housing that were derived from their official
representatives:
o Peru - two and three-quarter million
o South Africa - three million
o Philippines - three and three-quarter million
o Sri Lanka - one million
o Madagascar - 35,000
o India - 31-33 million
The combined requirement for the countries listed above is
approximately 41 million low-cost homes. Although the size of low-cost
housing varies tremendously around the world, Daedalus' experience with
low-cost housing markets reveals a tendency toward an average size of
low-cost homes at approximately 450 square feet, which is the
equivalent of Daedalus' three-unit house, or three basic structural
units (see pricing chart above). Accordingly, the requirements
reflected by only the countries listed above equate to approximately
123 million basic structural units of the polymer composite structural
system.
The enormous worldwide demand for housing creates significant
opportunity. One of the challenges in that opportunity is to identify
replacements for conventional materials, namely wood. The impact of
deforestation upon the environment has already raised public
consciousness. The United States government--as announced during
President Clinton's trip to Bangladesh (White House press release March
19, 2000)--announced that the United States will make available up to
$6 million for a debt-for-nature swap for Bangladesh to invest funds in
tropical forest conservation programs.
As example of the enormity of this opportunity, the Worldwatch
Institute of Washington, DC, estimates that the requirement for houses
in the Asian region alone over the next 50 years, is approximately 700
million homes. The amount of wood necessary to construct even minimal
structures to meet that requirement will place further demands upon an
already stressed environment. Accordingly, without the intervention of
other factors, the building materials that Daedalus proposes may gain
general acceptance as the requirement for alternatives to conventional
materials increases.
18
Marketing and distribution methods for the products. Although
to date Daedalus has not successfully delivered any of its building
systems, its principal marketing objective is to reach sales of 100,000
shelters per year by the end of the third year of operations and to
establish equivalent production capacity and sales for the metal panels
within that period.
Daedalus intends to market and distribute its structural
panels--composite and metal--through strategic partners--organizations
and individuals acting in their own interest to market Daedalus'
products--in those countries of greatest promise. Daedalus intends to
identify and select strategic partners with a strong interest in
handling all aspects of the relationship with Daedalus, including all
interface with public and private sector individuals and organizations.
Daedalus will seek individuals and organizations that are well
connected in both the private and public sectors; are experienced in
the housing and construction industries; are experienced in contracting
with public-sector organizations; and, possess the requisite financial
strength to complement Daedalus' performance.
Daedalus marketing staff will be expanded and organized to
interface with the strategic partners, to service their requirements,
and provide demonstrations and practical training regarding the
technical aspects of Daedalus' products and applications.
Daedalus markets its products throughout the world, with the
principal source of printed matter being the U.S. Government,
Department of Commerce publication, Commercial News USA. Daedalus
receives daily mail and e-mail from around the world--principally from
the private sector--requesting information on our products. Daedalus is
currently in active dialogue with over 300 contacts (from over 100
countries). This approach has been, and will continue to be, the main
source of our strategic partners..
Daedalus has now entered contracts with strategic partners in
Peru--and agreement, in principle, in Ghana--to supply, in total,
44,000 polymer composite houses and 22 million square feet metal foam
panel. We have offered to sell our products to our strategic partners
at the prices shown in the earlier tables. Our strategic partners are
free to establish an appropriate market price in their respective
territories.
The warranty of Daedalus applies only to the building
material, that is, the panels, for a period of one year. Defects caused
by assembly within the country is not Daedalus' responsibility.
To support this ongoing marketing activity Daedalus continues
personal visits to Embassies in Washington, DC, with such visits now
numbering around 70.
New products. Daedalus has not publicly announced any new
product or service.
Competitive business conditions. The low-cost housing market
is very price sensitive and Daedalus' success in this market is not
assured. Daedalus has not encountered a competitive product that offers
the same features and benefits as the polymer composite structural
system--within the same price range. There are direct competitors to
the metal composite structural system, but few that are currently
concentrating upon the lowest priced sector of the housing market and
none other that are known to be both insulating and structural panels.
However, other firms may enter into this market sector with greater
capital resources and the ability to be more competitive.
Although Daedalus' marketing approach is principally upon
private-sector sales to meet its objectives, to the degree that
Daedalus' private-sector customers are dependent upon public funds, the
real competition for Daedalus' products is scarce resources, the
inability of the governments of developing countries to meet the basic
needs of their people. Daedalus--through its private sector
customers--will be competing for those scarce resources.
Daedalus competitive position. At this point in the
development of Daedalus business, it is difficult to assess Daedalus'
competitive position. Part of Daedalus' strategic approach is to
19
capitalize upon a market that is so vast that competitive position--or
market share--does not have the same relevance or degree of importance
as it might in the US market or that of other developed countries. If
Daedalus is able to meet its objective of producing and selling 100,000
units per year in the polymer composite systems and a corresponding
number of metal systems, it would only reflect one-tenth of one percent
of the market as it is currently understood.
Methods of competition. Daedalus' competitive approach,
principally that of the polymer system, is based upon five principal
considerations:
o Pricing. Daedalus' pricing is designed to be the most
competitive in the marketplace.
o Humanitarian. Daedalus' was based upon a determination of
the need and then engineering a product to meet that need; it
is solving a humanitarian problem that makes it supportable by
public and private sector organizations
o Environmental. Waste plastics only have a value if a market
exists for their re-use and/or recycling. The activities of
Daedalus directly contribute to the development of a
significant market for waste plastics and, therefore, reduce
the tendency to casually discard these materials in the form
of litter or, in a more organized manner, in landfills.
o Material. Daedalus' approach is focused upon providing
alternative materials, particularly to developing countries
where shortages of conventional materials--particularly
wood--exist and will increase o Economic considerations.
Daedalus' approach is solidly focused upon the generation of
stable and sustained economic growth in developing countries
by employing local labor in the sales, assembly, and eventual
manufacture, of the panels of the systems.
Incorporation of the metal composite system into the Daedalus
Building System(TM) increases Daedalus' marketing and competitive
efforts by permitting it to respond to a wider socio-economic sector of
the populations of developing countries.
Sources and availability of raw materials. The primary raw
materials used in the manufacture of the polymer composite housing
system are recycled polyolefins, primarily polyethylene and
polypropylene, with various additives, including glass fiber and talc.
The types of material required may be derived from both post-industrial
and post-consumer waste streams, both of which are readily available.
Principal suppliers. Daedalus Composites, was
established--in Ontario, Canada--for the purpose of acquiring
and processing approximately 125,000 pounds per day of
recycled plastics to meet the material requirements of the
polymer composite building system. That facility will have the
capacity to provide recycled materials to satisfy the
production requirements for the Peruvian contract and beyond.
In the case of the metal building system, there is a plentiful
supply of light gauge steel for production of the structural
panels.
Dependence on major customers. Daedalus has two contracts with
a private-sector organization in Lima, Peru, the World Business
Investors Group (WBIG), which are subject to WBIG qualifying for
financing by the Export-Import Bank of the United States. Currently
these are the only contracts in hand and Daedalus will be dependent
upon these contracts for its near term success unless others are
developed.
The first contract is for a minimum of 36,000 basic structural
units over three years, utilizing polymer composite material, and a
minimum sales value of $67.5 million. The second contract is for the
purchase of 22 million square feet of the metal composite system over
one year for a total of $121 million. The Export-Import Bank of the US
provided a letter of interest to Daedalus with regard to the first
contract and verbally expressed the same interest in the second. This
communication with the Bank demonstrates that the bank is 'on
coverage', meaning that its financial services and support are
available in that geographical area. It further indicates that the
goods and services proposed by the exporter fall within the scope of
the bank's activities and that the bank is interested in providing
financing for the transaction, as proposed. To date, there has been no
20
further discussions with the Export-Import Bank. A final determination
will be made by the Bank as soon as Daedalus completes all the
documents necessary to process the financing request.
Daedalus is actively marketing its products throughout the
international marketplace, communicating with approximately 300 private
and public-sector entities in over 100 countries.
Supporting documents and agreements.
Patents. The patent for metal panel building system
has been allowed (but not yet issued) under the US
Patent Application No. 08/988,697, entitled LOAD
BEARING PRE-FABRICATED BUILDING CONSTRUCTION PANEL. A
similar patent application (2,254,497, filed November
24, 1998) exists under the same name in Canada, which
has not yet entered into the examination process.
Both patents provide for load bearing, pre-fabricated
building construction panels that differ principally
from similar metal panel systems by the fact that
they are load bearing as opposed to being exterior,
siding, or merely insulating panels, thus eliminating
the need and expense involved with the use of an
interior, skeletal structure, to support the panels.
Trademarks. Daedalus Building System(TM)is a
registered trademark of Daedalus.
Licenses.
Polymer composite system. The polymer
composite system is licensed to Daedalus by the
Daedalus Project, Inc.
Metal composite system. The rights to the
metal composite system were acquired from Cambridge
Unique Associates, Inc., as covered under an original
agreement with Douglas G. Murdock as further
described under the acquisition and stock transfer
agreement between Daedalus and Cambidge Unique
Associates.
Royalty agreements.
Polymer composite system. The above
referenced license agreement provides for a five
percent royalty on the gross sales of the polymer
composite structural system to be paid to The
Daedalus Project, Inc. by Daedalus.
Metal composite system. The above referenced
acquistion agreement provides for a $.15 ($ Canadian)
per foot royalty to be paid to the inventor of the
metal system.
Need for governmental approvals of principal products. As a
general rule, universal building codes do not exist and few, if any,
exist within the developing world that would adversely impact the sales
of either the composite or metal building systems. However, as a
practical matter, requirements differ by country. Daedalus made a
conscious decision not to pursue the US building industry, preferring
to concentrate in developing countries where the need for low-cost
housing is much greater and government regulation is, generally,
non-existent.
Effect of existing or probable governmental regulations.
Daedalus is subject to a wide range of federal, foreign, state, and
local law and regulations relating to the pollution and protection of
the environment. Among the many environmental requirements applicable
to Daedalus are laws relating to air emissions, wastewater discharges
and the handling, disposal and release of solid and hazardous
substances and wastes. Based upon continuing internal review and advice
from independent consultants, Daedalus believes that it is currently in
compliance with applicable environmental requirements.
21
Estimate on research and development costs. Daedalus has not
expended any funds on research and development. Product development was
conducted by those organizations from which the products were licensed.
Costs and effects of compliance with environmental laws
(federal, state, and local). Daedalus' operations under Daedalus
Composites and most of manufacturing processes envisioned for its
products are mechanical and are therefore considered to be
environmentally benign. The polyolefin resins used as raw materials are
readily recyclable and are typically reclaimed within Daedalus' own
operations. As a result, Daedalus does not currently anticipate any
adverse effect on its operations, financial condition, or competitive
position as a result of its efforts to comply with environmental
requirements. Some risk of environmental liability is inherent,
however, in the nature of Daedalus' business, and there can be no
assurance that environmental liabilities will not arise. Future
developments in environmental regulation could lead to unanticipated
costs of environmental compliance.
Number of total employees and number of full time employees.
As of the date of this prospectus, Daedalus employs seven people,
working full-time, in its Alexandria office. Daedalus Composites
employs twenty people working full-time at its Canadian facility. No
employee is represented by a labor union or trade council. Daedalus
considers its employee relations to be very good.
Facilities. Daedalus and its subsidiaries operate from the
following leased facilities:
o Alexandria, Virginia 4,556 square feet - Office, Marketing,
and Sales
o Brantford, Ontario, Canada 55,000 square feet - Office,
Marketing, Sales, Manufacturing and Warehousing
Reports to security holders. Daedalus Systems, Inc. filed with
the Securities and Exchange Commission a registration statement on Form
SB-2 to register the shares of Daedalus common stock to be distributed
to the Empiric shareholders.
The registration statement and the exhibits and schedules may
be inspected and copied (at prescribed rates) at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549. Please call 1-800-SEC-0330 for
further information on the public reference rooms in other locations.
Also, you can review this information at the Commission's Electronic
Data Gathering Analysis and Retrieval System, which is publicly
available through the Commission's Web site (http://www.sec.gov).
This prospectus does not contain all of the information set
forth in the registration statement and the exhibits thereto. Daedalus
will provide without charge to each person who receives this
prospectus, upon written or oral request of such person, a copy of any
of the information that is incorporated by reference herein (excluding
exhibits to the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference) by
contacting Daedalus at 8653 Richmond Highway, Alexandria, VA
22309-4206, Attention: Chief Financial Officer, telephone:
703.360.5700.
Daedalus has not authorized any dealer, salesperson or other
person to give any information or represent anything not contained in
this prospectus. You must not rely on any unauthorized information.
This prospectus does not offer to sell or buy any shares in any
jurisdiction where it is unlawful.
22
MANAGEMENT'S DISCUSSION OF PLAN OF OPERATION
Equity exchange with Empiric Energy, Inc. In October, 1999, Daedalus
reached agreement with Empiric Energy, Inc. to exchange equity between the
companies and to pursue complementary objectives. Upon completion of the
exchange, both companies will hold a meaningful amount of the stock of the
company, which is a reflection of the commitment between the parties in
promoting their mutual interests through their combined activities for the
benefit of their respective stockholders.
No merger of the companies is planned and neither company plans on
becoming a subsidiary of the other. Empiric plans to distribute a portion of the
stock it receives from Daedalus--that portion covered by this prospectus--to its
shareholders. The fundamental basis for the agreement is the mutual interests of
the parties in the energy aspects of community planning which reflects Daedalus'
approach to community building. Although Daedalus only has two main products
today, the agreement reflects the broader scope of the parties' interests in
creating community systems based upon structures, water, energy, sewage, and
waste management services. Empiric's stock will be held by Daedalus for the
benefit of its stockholders and may continue to be held or sold depending upon
its appreciation and the continued success in the cooperative activities of the
parties.
Components of Statement of Operations. From May 20, 1999 through
January 31, 2000, the net sales of $54,202 in the statement of operations is
comprised of Daedalus Composite's sales from performing toll work, that is,
processing/grinding for various customers, The selling price, per pound of
processed material, averages 12 cents per pound. Daedalus Composites has four
extruder machines in its facility but during the period mentioned above, only
one, small machine was operational for the initial two months succeeded by the
second machine in the middle of September. Currently, three machines are
operational with the fourth machine being refurbished and is anticipated to be
fully operational beginning June. All four machines have a total capacity of
125,000 pounds per day.
The cost of goods sold in the statement of operations for $59,177 is comprised
of material costs, packaging, customs brokerage, direct labor, direct fringe
benefits, indirect labor, indirect fringe benefits, and production supplies. The
largest percentage of the costs were direct labor and material costs.
Operating expenses, which totaled $276,907 for the same period, comprised of
general and administrative expenses, which is 54% of the total expenses, repairs
and maintenance, utilities, property tax, insurance, depreciation, and other
miscellaneous manufacturing costs.
Plan of operation. The following discussion contains Daedalus' plan of
operation for the next twelve months. Accordingly, it contains forward-looking
information that reflects Daedalus' plans, estimates and beliefs. Actual results
may differ. Potential investors should read the following discussion in
conjunction with Daedalus' financial statements including the related notes,
which appear elsewhere in this prospectus.
During the next twelve months, Daedalus intends to make progress toward
accomplishing objectives in six principal areas, namely:
o Staffing. Daedalus intends to increase its full-time staff
in Alexandria to meet the requirements of the overall
activities and, specifically, to meet the needs for increased
marketing of its products. As production continues to expand
in the Canadian plant, increases in staff at that location
will also be necessary. Increases in Canada will be coincident
with increased revenue at that location. Increases in
Alexandria may lag positive cash flow, requiring additional
capital.
o Design. Daedalus' in-house design capability requires
expansion to include automation to keep abreast of the demands
of potential customers and industry standards. Costs
associated with an automated system would require additional
capital.
o Marketing. Marketing activities, including the preparation
of both printed and electronic marketing materials, must be
expanded in order to achieve profitability. Daedalus intends
23
to conduct extensive marketing operations in order to develop
additional contracts for its housing systems. Those activities
will result in the need for additional capital.
o Control and information systems. Daedalus requires
additional control and information systems to permit the
timely and efficient exchange of information both internally
and externally. Acquisition and installation of those systems
will require additional capital.
o Production. Daedalus must commence production, either
through internal means or on a contract basis, to fulfill its
obligations under its existing contracts for its building
systems. Development of an internal production capacity will
require additional funds, although financing options exist for
most of the equipment that Daedalus would require.
o Research and development. Daedalus intends to conduct
research and development to lower the cost of its polymer
composite structural system as further described below.
In order to meet the objectives briefly outlined above,
Daedalus will have to raise additional capital, either equity or debt,
to meet a combination of increased level-of-effort expenditures and
those for machinery and equipment.
Cash requirements and additional funds. As of the January 31,
2000, Daedalus had approximately $80,000 in cash, receivables, and
prepaid deposits. Additionally, Daedalus Composites has approximately
$20,000 in inventory of recycled plastics available for sale. As of the
said date, Daedalus had approximately $337,000 in current payables.
Considerably more funds will be required to accomplish the general
objectives outlined above.
Daedalus is presently considering all available options to
generate adequate cash to meet its needs. Under the current conditions,
Daedalus will require an average of approximately $85,000 per month
over the next twelve months to meet its level-of-effort expenditures.
On March 31, 2000, Daedalus--under Daedalus
Composites--received limited debt financing from GE Capital of Canada
in the amount of $750,000 Cdn. (approximately $500,000 USD) with a
security guaranty taken against two pieces of equipment in the Canadian
facility; both Erema plastic extruders. The term of the loan is 60
months commencing April 29, 2000, at a rate of prime rate plus 1.75%.
Currently, Daedalus is circulating a private placement
memorandum to raise a combination of debt and equity totaling $5
million. Simultaneously, we are communicating with additional
asset-based lending institutions to borrow against the remaining
unencumbered equipment at the Canadian plant. That equipment was
recently appraised--at the request of GE Capital, Canada, at
approximately $5.6 million (orderly disposition) and $2.9 million
(forced sale). However, there can be no assurance that the requested
financing will be available or, if so, will be available on terms
favorable to Daedalus. If adequate funds are not available or are not
available on acceptable terms, Daedalus' ability to fund expansion,
take advantage of unanticipated opportunities, develop or enhance
products or otherwise respond to competitive pressures could be
significantly limited.
If Daedalus is unable to generate sufficient capital through
debt or equity placement in the near term, Daedalus will concentrate
effort upon moving the Canadian facility toward greater profitability
until it is able to support greater debt service to meet the desired
objectives.
Planned research and development. In expansion of the earlier
statement, Daedalus' principal research and development objective over
the next 12 months is to lower the cost of its polymer composite
building system. In addition to the constituent polymers, the panels
may contain various amounts of other natural or synthetic recyclable or
virgin materials. Daedalus intends to conduct research and development
using additives, such as ground glass, volcanic ash, fly ash, rice
husks, sand, and other materials that occur naturally in the countries
of interest, such as rubber, glass, fiberglass, paper, fiber, and metal
in proportions that may contribute to their structural integrity while
remaining compatible with the basic manufacturing processes. Rather
24
than simply using the polymer composites as structural material,
Daedalus' planned developmental activities, to be undertaken in
cooperation with Virginia Tech, George Washington University, the
University of Toronto, and the University of Newcastle, UK, will
eventually permit the utilization of the locally-available materials
listed above. As a goal, in contrast to the production costs shown
above, the estimated material cost of a basic structural unit
fabricated from a 60% sand/polymer alloy is approximately $100. Local
production of these materials, in countries in which markets are
developed, is one of the competitive aspects of Daedalus' overall
competitive strategy.
Expected purchase of plant and equipment. Daedalus is
committed to near-term production of both the polymer and metal
systems, but has not yet committed to a large cash expenditure for
equipment. The Canadian facility has adequate space for expansion of
production for the polymer panels. The approximate cost for the
required equipment would be $2,500,000, but would be financed, not
purchased for cash.
In the case of the metal system the approximate costs for
production equipment would be the same as that for the polymer panels.
The principal difference is that the metal system would require an
additional facility.
In order to balance the requirement for production of both the
polymer and metal systems against a cash short position, Daedalus will
probably opt for contract production for the structural material until
sufficient cash is available. The costs associated with that approach
would entail--at most--purchase of molds in the case of the polymer
system, and metal forming dies for the metal system. The total
expenditure for those items should not exceed $500,000. Daedalus'
preference would be for the contract producers to pay for the molds and
dies with an impression charge applied for each piece of the polymer
system and a running foot charge in the case of the metal panels. Such
arrangements are not uncommon within either industry.
Increases in work force. Along with the increase in the work
force anticipated to meet increased production in Canada and the
marketing activities in Virginia, general and administrative expenses
are expected to increase as we expand our staff to support the growth
of the business. Those costs are included in the figure stated above
for level-of-effort activity. Increases above those levels will require
realization of income before they can be implemented.
25
MANAGEMENT OF DAEDALUS
Executive Officers and Directors
Following is a summary listing of the Executive Officers and Directors
of Daedalus, providing their names, ages, and positions. All Executive Officers
and Directors have been with Daedalus since its inception.
Executive Officers
Name Age Position
---- --- ---------
Edward A. McCulloch 57 President, Chief Executive
Officer
David Lightbody 43 Executive Vice President
and Chief Financial Officer
Patricia L. Espino-Nayar 30 Vice President, Secretary-
Treasurer, and Controller
Abbey Nash 72 Vice President, Production
and Engineering, and Director,
Daedalus Composites, Inc. (Canada)
Norio Sakai 70 Vice President, Design
Directors
Name Age Position
---- --- --------
James A. Lyons, Jr. 72 Chairman
Edward A. McCulloch 57 Director
Grant L. Hopkins 53 Director
Ralph O. Hutchison 76 Director
David Lightbody 43 Director
George C. Montgomery 55 Director
Norio Sakai 70 Director
Robert J. Salmon 57 Director
Walker A. Williams 59 Director
Term of office. All current officers and directors serve until the next
annual meeting of shareholders or until they are elected and qualified. Each
executive officer and director of Daedalus holds office until a successor is
elected, or until the earliest of death, resignation or removal. All officers
serve at the discretion of the Board of Directors.
Family relationships. There are no family relationships among
directors, executive officers, or significant employees of Daedalus.
26
Involvement in certain legal proceedings. None of Daedalus' directors,
or executive officers have been involved in any legal proceedings related to
bankruptcy; criminal proceedings; orders, judgements, or decrees; have been
found in violation of federal or state securities or commodities laws; or, any
other act requiring reporting as defined by reference.
Other directorships held in reporting companies. None of Daedalus'
directors hold other directorships in reporting companies.
Business experience. Following are biographical summaries that
highlight the business experience of Daedalus' executive officers and directors
during the past five years.
Executive Officers.
Edward A. McCulloch, President, Chief Executive Officer,
Director, and founder of Daedalus. Since August, 1997, Mr. McCulloch
has been the president of the Daedalus Project, Inc., developing the
business development model and technology that permitted the formation
of Daedalus.
From January, 1994 to July 1997, he was involved in
international marketing and business development as a consultant for
Polymer Group, Inc, principally with the commercialization of
technology for the removal of metal ions from aqueous-based waste
streams using water-soluble polymers and hollow-fiber membrane
technology; developed by Los Alamos National Laboratory for which the
small company he previously owned to Polymer Group--Micro-Set Inc.--was
chosen as the industrial partner for the laboratory.
During the same time period, through his company, The
Chesapeake Group, International Programs In Applied Technology, Inc.,
Mr. McCulloch was directly involved in the international marketing of a
broad range of products, processes, and technologies including:
immunochemicals, biological raw material; medical diagnostics;
contraceptive devices; special coatings; low-cost drinking water
systems for developing countries; absorbent and superabsorbent polymers
for the recovery of a variety of hazardous and non-hazardous liquids
and the filtration of primary aromatics. Additionally, Mr. McCulloch
designed a business model for small business participation within the
global economy based upon population-based, critical, non-discretionary
products, processes and technologies. He maintains a general
contracting license and has recent and relevant experience in disaster
response planning in foreign countries.
David Lightbody, Ph.D., Executive Vice President, Chief
Financial Officer, and Director is a Polymer Chemist who participated,
along with Mr. McCulloch, in the development of Daedalus' composite
housing concept from its inception.
Prior to joining Daedalus, in February, 1995, Dr. Lightbody
was the molded products manager with British Polythene Industries,
PLC--the largest polyethylene film company in Europe, and a leader in
the field of plastics recycling, where he managed a plastics recycling
business that processed over 5000 tons per year.
27
Patricia Espino-Nayar, Vice President, Secretary-Treasurer,
and Controller, has been with Daedalus since its inception. Ms.
Espino-Nayar is a Chemical Engineer with responsibility for
administration, corporate matters, accounting, financial execution and
accounting, and project development. She was instrumental in
negotiation of Daedalus' first contract with Peru.
In addition to her responsibilities within Daedalus's domestic
activities, Ms. Espino-Nayar established, and is the Managing Director
of, Daedalus Construction, Inc., a Philippine-based affiliate of
Daedalus formed since February, 1999, for the purposes of contracting
with the public and private sectors of the Philippines.
Beginning April, 1996, Ms. Espino-Nayar has been the
Secretary-Treasurer of The Chesapeake group of companies, including The
Daedalus Project, Inc., from which the Daedalus Building System(TM) was
licensed. She was also the General Manager of Chesapeake BioProducts,
Inc., from beginning April, 1996. As with her current assignment in
Daedalus, her previous duties included responsibility for
administration, corporate matters, accounting, financial execution and
accounting, and project development.
From February 1994-1996 Ms. Espino-Nayar was the Product
Manager for Nike International Philippines, Incorporated, a distributor
of Nike products.
Abbey Nash, Vice President, Production and Engineering,
Director, Daedalus Composites, Inc. (Canada), and ex-officio member, a
contributing participant but a non-voting member of Daedalus' Board of
Directors since October, 1999.
In February 1993, Mr. Nash co-founded Palletronix, Inc., a
Toronto based manufacturer of material handling products. As the
inventor of the patented Palletronix plastic pallet system, he has
demonstrated his significant understanding of the molding of polymer
composite products utilizing recycled materials as feedstock. In
August, 1998, Mr. Nash was appointed as a Director of Cambridge Unique
Associates, Inc., the developer of a patented low cost metal composite
building system. He played a major role in determining the technology
and business development strategy for the company. Mr. Nash was the
principal motivating force behind Daedalus' acquisition of Cambridge
Unique Associates, Inc.
Norio Sakai, Vice President, Design and Director, has
participated with Mr. McCulloch as the chief architect of the project
since its inception, participating in basic design of the structural
components of the composite building system, designing its most
elaborate structures, and providing engineering drawings for the
fabrication of molds. Mr. Sakai has been an architectural consultant
for over 30 years.
Mr. Sakai's broad personal experience brought greater depth to
the Daedalus Building System(TM) than simply the design of
prefabricated, modular, or panel systems. He has permitted Daedalus to
capitalize upon demographically-driven community design as a
fundamental and competitive aspect of Daedalus' composite and metal
panel systems.
28
Directors
Admiral James A. Lyons, Jr., USN (Ret.). Admiral Lyons,
Chairman of the Board of Directors of Daedalus since its inception, and
former Commander-in-Chief of the US Pacific Fleet from January
1985-1987, is President and CEO of LION Associates since April 1988 to
present, an international consulting firm that provides technical
expertise in the areas of international marketing and trade, foreign
policy and security affairs along with defense and commercial
procurement. Additionally, Admiral Lyons is Chairman, President, and
CEO of Guam Industrial Services, Inc. and Guam Shipyard, Inc. founded
in February, 1999, providing ship repair and maintenance services to
deployed units of the U.S. Pacific Fleet.
In addition to his association with Daedalus, Admiral Lyons
serves as: Director, Wilson UTC, March, 1999; Director, SHIPINVEST, II,
July, 1999; Director, Defense Intelligence Scientific and Technical
Advisory Board; Director, The National Coalition for Defense Advisory
Board, March, 1998; and, Member, Advisory Committee National Foundation
for Cancer Research
Grant L. Hopkins is the founder of Combined Area Studies of
Pittsburgh, Pennsylvania, which was founded in February, 1997. Combined
Area Studies is a strategic facilitator of relationships within the
defense, national security, and technology sectors, with a number of
domestic and foreign clients, most recently the Republic of Yemen.
From February 1988-1997, Mr. Hopkins was employed by the
Washington DC based petroleum consultancy, The Petroleum Finance
Company, Ltd. where he headed Special Projects and founded its Studies
& Observations Group, which used the intelligence cycle to provide
clients with real time information on events affecting petroleum
markets thus allowing them to make independent market-related
assessments regarding supply, production and commercial trading.
Ralph O. Hutchison. Mr. Hutchison is a licensed Professional
Engineer in South Carolina, Georgia and Texas, who has served for
twenty-eight years as President and CEO of National Stonehenge
Corporation, a management consulting firm that provides management
audits, acquisition analysis and evaluation, operations analysis,
financial and management controls to improve profits. The company also
provides asset audits for refinancing, production planning and
management. Management consultant to FDIC from March 1994 to 2000.
Mr. Hutchison is the founder, President and CEO of United Real
Estate Management Corporation (1992-2000), which provides institutional
management, property management, property evaluations and feasibility
studies, corporate and partnership workouts, takeover procedures,
computerized accounting and reporting systems. He was also the Honorary
Counsel for the Grand-Duche' de Luxembourg from May 1978 to 1996.
Ambassador George C. Montgomery. Ambassador Montgomery is the
former US Ambassador to the Sultanate of Oman. He is a partner in the
Washington office of Baker, Donelson, Bearman and Caldwell where he is
managing partner and has been for the past five years.
Robert J. Salmon. Mr. Salmon has been a director with Daedalus
since its inception. From June 1995 to present, Mr. Salmon has been an
independent management consultant who developed medical insurance,
emergency procedures, equipment and supplies outfitting and a medical
management plan for NESCOR Incorporated, a private natural resources
company operating in the Gobi Desert region of Mongolia and China.
29
He has provided research services and reports to a private
sponsor of medical facilities and food for disaster relief. In
addition, he also participated in the refinancing of a private auto
parts manufacturer.
From September 1993 to April 1994, Mr. Salmon was Project
Manager for EXXON Chad/Cameroon malaria control; including recruitment
of paramedical personnel for emergency and disaster relief activities;
development of specifications for emergency medical supplies; and
vendor networks for turnkey hospitals; medical equipment and supplies;
and, pharmaceuticals and drugs necessary to support emergency medical
and mortuary services.
Walker A. Williams. Mr. Williams has worked with Daedalus
beginning January, 1998, first as a consultant and then as a Director
of the Daedalus Project, to advance the company's objectives of with
specific emphasis upon the District of Columbia, west and south Africa
and humanitarian programs directed toward solution of the worldwide
housing shortage, such as Habitat for Humanity International.
Mr. Williams is President of Education Africa USA, founded in
March, 1992, a non-profit, non-political organization committed to
providing quality educational opportunities within South Africa. Mr.
Williams is also president of Alternative Marketing Access, a
full-service communications and management consulting firm founded in
September, 1996.
30
Executive Compensation
Directors of the corporation are not compensated unless they otherwise
perform duties for the corporation, such as those of the officers.
There has been no compensation awarded to, earned by, or paid to Mr.
McCulloch and Dr. Lightbody for the year ended December 31, 1999. Therefore, the
table detailing executive compensation for the past fiscal year has been
omitted.
The following table sets forth the executive officers of Daedalus whose
aggregate compensation for the year ended December 31, 2000, is expected to
exceed $100,000 per year:
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (f) (g)
- ------------------------------------- ---------- ------------ ------------ -------------- ---------------------------
Name and Year Salary Bonus Restricted Securities Underlying
Principal Position ($) ($) Stock Awards Options/SAR (#)
($)
- ------------------------------------- ---------- ------------ ------------ -------------- ---------------------------
Edward A. McCulloch 2000 225,000 0 0 0
President and 2001 275,000 0 0 0
Chief Executive Officer, 2002 325,000 0 0 0
- ------------------------------------- ---------- ------------ ------------ -------------- ---------------------------
David Lightbody 2000 130,000 0 0 0
Executive Vice President and 2001 160,000 0 0 0
Chief Financial Officer 2002 190,000 0 0 0
- ------------------------------------- ---------- ------------ ------------ -------------- ---------------------------
All officers and directors 2000 553,000 0 0 0
as a group (5 officers)
- ------------------------------------- ---------- ------------ ------------ -------------- ---------------------------
Employment agreements were entered into by Daedalus with Mr. McCulloch
and Dr. Lightbody. The employment agreements are relatively straightforward
agreements that provide compensation, without complicated bonuses or stock
options, for the founder of the company, the developers of the composite
technology, and Daedalus' senior decision-makers. Under the agreements, both
employees are provided the same level of health insurance as all other employees
and the opportunity to participate in any program of higher education at the
expense of the company so long as that education relates to the business of
Daedalus and to the functions for which they are employed. To date, no
educational expense has been incurred on the part of either employee.
31
Related Transactions
The Daedalus Project, Inc. is affiliated with Daedalus Systems, Inc.
Edward A. McCulloch is the principal shareholder and President of The Daedalus
Project, Inc. Initial ownership of common shares in Daedalus Systems, Inc.--on
October 28, 1999--was pursuant to the original subscription agreements with
investors in The Daedalus Project, Inc., which provided, among other things, for
the ownership by those shareholders of any other entities created by The
Daedalus Project, Inc. for public or distributed ownership. Thus, with the
exception of the equity position of Mr. McCulloch--who agreed to take a
reduction--the initial equity positions of the owners of Daedalus Systems, Inc.,
reflect their absolute ownership of The Daedalus Project, Inc. Mr. McCulloch
received 3,447,150 shares of Daedalus Systems, Inc. common stock, all 250,000
shares of Daedalus Series A preferred and all 1,000,000 shares of Daedalus
Series B preferred, the latter containing certain "earn-out" provisions
pertaining to the performance of the company and their conversion to common
stock.
On October 31, 1999, The Daedalus Project, Inc. and Daedalus Systems,
Inc., entered into agreement to transfer all rights to the composite housing
technology of the Daedalus Building System(TM), developed by Mr. McCulloch and
advanced by The Daedalus Project, Inc., and the capital stock of Daedalus
Composites, Inc., its Canadian subsidiary, in exchange for a five percent
royalty on the gross sales of Daedalus.
Mr. McCulloch is also the principal shareholder of Chesapeake Services
Corporation. Daedalus leases approximately 4,556 square feet of office space in
Alexandria, Virginia from Chesapeake for approximately $82,000 per year, under a
five-year lease. Mr. McCulloch owns all of Chesapeake Services Corporation
through its parent corporation, The Chesapeake Group, International Programs In
Applied Technology, Inc. We believe that the terms of the lease are as fair to
Daedalus as those that could have been obtained from unrelated third parties and
arms-length negotiation.
32
PRINCIPAL SHAREHOLDERS OF DAEDALUS COMMON STOCK
(Before the distribution - 8,700,000 common shares issued)
Common
Name and Address Shares Owned Percentage
of Beneficial Owner Beneficially Owned
- ------------------- ------------ ----------
Edward A. McCulloch (5) 3,336,982 38.36%
7514 Ridgecrest Drive
Alexandria, VA 22308
Robert J. Salmon
3623 Raymond Street
Chevy Chase, MD 20815 1,000,000 11.49%
Steve Stone and William Johns, Sr. (jointly held)
25802 Novi Road
Novi, MI 48375 819,000 9.41%
All officers and directors(6)
As a group (11 persons) 5,414,482 62.24%
Note: The principal shareholders will not receive additional shares in the
offering.
- --------------
(5) Mr. McCulloch owns 3,336,982 shares of Daedalus common stock, 250,000 shares
of Daedalus Series A Preferred Stock, and 1,000,000 shares of Daedalus Series B
Preferred Stock, each of which has one vote on matters pertaining to preferred
shareholders. Additionally, each share of the Series A Preferred Stock has 30
votes on all matters submitted to shareholders of common stock; and, each common
share has one vote. Therefore, Mr. McCulloch will own 38.36% of the outstanding
common stock, 33.33% of the preferred stock, 66.89% of the common voting rights
and 33.33% of the preferred voting rights of all of Daedalus' outstanding
capital stock. Mr. McCulloch will have, as a practical matter, control of
6 All officers and directors, as a group, own a total of 62.24% common shares
and control of cumulative voting rights of 79.70%.
Daedalus.
33
Voting class of preferred stock
- --------------------------- ----------------------------- -------------------------- -----------------------
(1) (2) (3) (4)
- --------------------------- ----------------------------- -------------------------- -----------------------
Title of Class Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Owner Class Owned
- --------------------------- ----------------------------- -------------------------- -----------------------
Preferred Stock Edward A. McCulloch, 250,000 shares 100
Series A 7514 Ridgecrest Drive,
Alexandria, VA 22308
- --------------------------- ----------------------------- -------------------------- -----------------------
34
DESCRIPTION OF SECURITIES OF DAEDALUS
Common Stock
Daedalus has 30,000,000 shares of authorized common stock, with
8,700,000 shares issued and outstanding, at $0.01 par value per share. Upon
completion of the registration statement and distribution of 1,000,000 shares to
the stockholders of Empiric, 10,200,000 shares of common stock will be issued
and outstanding. Daedalus does not intend to distribute dividends to its common
stockholders in the foreseeable future. Each outstanding share of common stock
is entitled to cast one vote on all matters submitted to a vote of stockholders.
The shares of common stock will not be redeemable or convertible, and the holder
will have no preemptive rights to purchase any securities of Daedalus
Preferred Stock
Daedalus has 3,000,000 shares of authorized preferred stock at $1.00 par
value per share, with 2,625,000 shares issued and outstanding, as Series A, B,
C, and D preferred stock. The remaining 375,000 shares of authorized stock is
issuable in one or more series, and shall have the rights, preferences, and
other features to be determined by Daedalus' board of directors.
Designated, Issued and Outstanding:
o Series A preferred stock have 250,000 shares designated, issued and
outstanding, with liquidation preference of $1.00 per share. Series
A is equal to Series B preferred stock, and senior to all other
series of preferred stock of Daedalus. Each share of Series A stock
may, at the option of the holder, be converted into one share of
common stock of Daedalus at any time within twenty years. This
preferred stock is entitled to cast thirty votes, in common with
the votes to which holders of Daedalus common stock are entitled to
cast, one vote per share, on all matters submitted for action by
the stockholders, as stated in the Certificate of Incorporation of
Daedalus or applicable provisions of the General Corporation Law of
Delaware. The holders have no redemption rights and the preferred
stock has no dividend rights. Provided funds are legally available,
all shares of Series A preferred stock outstanding on the twentieth
anniversary of the Closing of the Agreement with Empiric (note 3)
may be called by Daedalus at a price of $1.00 per share.
o Series B preferred stock have 1,000,000 shares designated, issued
and outstanding, with liquidation preference of $2.50 per share.
Series B is equal to Series A preferred stock, and senior to all
other series of preferred stock of Daedalus. Series B preferred
stock has no dividend rights. Subject to Daedalus' satisfying the
conditions pertaining to its Pre-Tax Earnings and quantity
limitations, the shares of Series B preferred stock may, at the
option of the holder, be converted into shares of common stock of
Daedalus upon reaching the following earning plateaus, on or before
December 31, 2003:
- Upon record of $5,000,000 pre-tax earnings, 333,333 Series B
shares can be converted into 1,666,665 Daedalus common
shares.
- Upon record of an additional $5,000,000 in pre-tax earnings
(a total of $10,000,000 pre-tax earnings), an additional
333,333 Series B shares can be converted into 1,666,665
Daedalus common shares.
- Upon the record of an additional $6,000,000 (a total of
$16,000,000 pre-tax earnings), an additional 333,334 Series
B shares can be converted into 1,666,670 Daedalus common
shares.
o Series C preferred stock have 1,000,000 shares designated, issued
and outstanding, with liquidation preference of $2.50 per share.
Series C is subordinate to Series A and Series B, equal to Series
D, and senior to all other series of preferred stock of Daedalus.
Series C does not hold voting rights and has no dividend rights.
35
Subject to Daedalus satisfying the conditions pertaining to its
Pre-Tax Earnings, the shares of Series C preferred stock may, at
the option of the holder, be converted into shares of common stock
at $2.00 per share upon reaching the earning plateau of $1,000,000.
o Series D preferred stock have 375,000 shares designated, issued and
outstanding, with liquidation preference of $2.50 per share. Series
D is subordinate to Series A, B, and C, and senior to all other
series of preferred stock of Daedalus. Series D does not hold
voting rights and has no dividend rights. Subject to Daedalus'
satisfying the conditions pertaining to its Pre-Tax Earnings and
quantity limitations, the shares of Series D preferred stock may,
at the option of the holder, be converted into shares of common
stock of Daedalus at $2.00 per share, upon reaching the following
earning plateaus, on or before December 31, 2003:
- Upon record of $10,000,000 pre-tax earnings, 125,000 Series
D shares can be converted into 62,500 Daedalus common
shares.
- Upon record of an additional $10,000,000 in pre-tax earnings
(a total of $20,000,000 pre-tax earnings), an additional
125,000 Series D shares can be converted into 62,500
Daedalus common shares.
- Upon the record of an additional $10,000,000 (a total of
$30,000,000 pre-tax earnings), an additional 125,000 Series
D shares can be converted into 62,500 Daedalus common
shares.
Warrants
Daedalus has 750,000 of authorized Series A common stock warrants, with
expiration date of September 30, 2003. The holders of each Series A warrant will
have the right to purchase one share of Daedalus' common stock at a price of
$2.00 per share. Daedalus shall have the right to call for redemption of all
Series A warrants then outstanding when the Average Market Price of Daedalus'
common stock is at least $3.00 per share for a period of ten consecutive market
days. The redemption price is $0.10 per warrant.
36
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the common stock may be adversely affected by the
sale, or availability for sale, of substantial amounts of the common stock in
the public market following the distribution. The 1,000,000 shares included in
the distribution will be freely tradable.
All of the 8,700,000 outstanding shares of common stock may be sold in
the public market only if registered or pursuant to Rule 144 of the Securities
Act. The provisions of Rules 144 provide that these securities will be available
for sale in the public market on October 31, 2000 which is one year from the
date they were issued, subject to the volume limitations and other conditions of
Rule 144.
Daedalus also has 250,000 shares of Series A Preferred Stock
outstanding owned by Mr. McCulloch that are convertible into a number of shares
of common stock. Mr. McCulloch also owns 1,000,000 outstanding shares of
Daedalus Series B Preferred Stock that are convertible into as many as 5,000,000
shares of common stock, in accordance with a pre-tax earnings formula. We also
have outstanding 1,000,000 shares of Series C Preferred Stock that are
convertible into 500,000 shares of common stock and 375,000 shares of Series D
Preferred Stock that are convertible into 187,500 shares of common stock if
certain pre-tax earnings levels are achieved. These shares of common stock that
become outstanding upon any conversion of the said preferred stock may also be
sold in the public market pursuant to Rule 144.
Rule 144. In general, under Rule 144, a person who has owned shares of
our common stock for at least one year would be entitled to sell within any
three- month period a number of shares that does not exceed the greater of: one
percent of the number of shares common stock then outstanding, which will equal
approximately 102,000 shares immediately after the distribution; or the average
weekly trading volume of the common stock on the National Association of
Securities Dealers Over-the-Counter Electronic Bulletin Board during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Daedalus.
37
LEGAL MATTERS
The validity of the common stock covered by this prospectus will be
passed upon for Daedalus by our counsel, Herbert S. Rosenblum, Esq., Alexandria,
Virginia. Carl A. Generes, Esq., Dallas, Texas, has acted as special securities
counsel to Daedalus.
EXPERTS
This registration statement includes the financial statements of
Daedalus for the period May 20, 1999 (inception) to October 31, 1999, which have
been audited by Pannell Kerr Forster PC, independent certified public
accountants. These financial statements have been included herein in reliance
upon the audit reports appearing elsewhere herein, given upon the authority of
said firm as experts in accounting and auditing.
DISCLOSURE OF COMPANY POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation and by-laws provide that we shall
indemnify all of our directors and officers to the fullest extent permitted by
Delaware law. Under such provisions, the director or officer, who in his
capacity as such is made or threatened to be made, party to any suit or
proceeding, shall be indemnified if it is determined that such director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of Daedalus. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, and persons controlling Daedalus pursuant to the foregoing
provision, or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
We maintain officer's liability insurance providing aggregate coverage
of $5,000,000.
38
DAEDALUS BUILDING SYSTEMS, INC.
AND SUBSIDIARIES
Financial Statements
For The Period May 20, 1999 (Inception)
To October 31, 1999 and
For The Three Months Ended
January 31, 2000 (Unaudited)
39
Table of Contents
Independent Auditors' Report .................................. 41
Consolidated Balance Sheets ................................... 42
Consolidated Statements of Operations ......................... 43
Consolidated Statements of Stockholders' Equity................ 44
Consolidated Statements of Cash Flows ......................... 45
Notes to Consolidated Financial Statements .................... 46
40
Pannell Kerr Forster PC
Fairfax, Virginia
Independent Auditors' Report
To the Stockholders and Board of Directors
Daedalus Building Systems, Inc.
Alexandria, Virginia
We have audited the accompanying consolidated balance sheet of Daedalus Building
Systems, Inc. and subsidiaries as of October 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period May 20, 1999 (inception) to October 31, 1999. These financial
statements are the responsibility of Daedalus' management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Daedalus Building Systems, Inc. and subsidiaries at October 31, 1999, and the
results of their operations and their cash flows for the period May 20, 1999
(inception) to October 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Pannell Kerr Forster PC
-----------------------
Pannell Kerr Forster PC
December 10, 1999
41
Daedalus Building Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
October 31 January 31
1999 2000
---------------- ----------------
(Unaudited)
Current assets
Cash $ 74,953 $ 17,949
Accounts receivable trade 18,272 47,227
Inventories 11,596 20,960
Prepaid expenses 8,161 14,134
---------------- ----------------
Total current assets 112,982 100,270
Equipment (net) (note 1) 1,887,917 1,914,870
Patent (note 1) 1,575,000 1,575,000
---------------- ----------------
Total assets $ 3,575,899 $ 3,590,140
================ ================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 27,680 $ 296,080
Accrued expenses 11,387 41,471
---------------- ----------------
Total current liabilities 39,067 337,551
---------------- ----------------
Commitments and contingencies (notes 3, 4, 5, and 6)
Stockholders' equity (note 2)
Common stock, par value $0.01 per share, authorized
30,000,000 shares; issued and outstanding 8,700,000 87,000 87,000
shares
Convertible preferred stock, par value $1.00 per
share, 3,000,000 aggregate shares authorized;
2,625,000 outstanding, $6,187,500 aggregate
liquidation preference (note 2) 2,625,000 2,625,000
Additional paid-in capital 896,959 896,959
Accumulated deficit (72,127) (354,009)
Accumulated other comprehensive (loss) - (2,361)
---------------- ----------------
Total stockholders' equity 3,536,832 3,252,589
---------------- ----------------
Total liabilities and stockholders' equity $ 3,575,899 $ 3,590,140
================ ================
See notes to consolidated financial statements.
42
Daedalus Building Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Period Ended Three
May 20, 1999 Months
(Inception) to Ended
October 31, January 31,
1999 2000
----------------- ------------------
(Unaudited)
Net sales $ 38,296 $ 54,202
Cost of goods sold 23,788 59,177
----------------- -----------------
Gross profit (loss) 14,508 (4,975)
----------------- -----------------
Operating expenses
General and administrative 32,238 148,602
Repairs and maintenance 5,046 10,504
Utilities 16,412 31,557
Property tax 24,480 11,475
Insurance 4,073 3,848
Other 4,386 -
Depreciation - 70,921
----------------- -----------------
Total operating expenses 86,635 276,907
----------------- -----------------
Net (loss) $ (72,127) $ (281,882)
================= =================
Basic (loss) per share $ (0.01) $ (0.03)
================== =================
(Loss) per common share, assuming full dilution $ (0.01) $ (0.03)
================== =================
Weighted average shares outstanding 8,700,000 8,700,000
================== =================
See notes to consolidated financial statements
43
Daedalus Building Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For The Period May 20, 1999 (Inception) to October 31, 1999 and The
Three Months Ended January 31, 2000 (Unaudited)
Inception of Acquisition of Contributed Net Balance Net Foreign Balances
Daedalus Cambridge Capital (loss) October (loss) currency January 31
Composites, Unique, Inc. (note 5) 31,1999 translation 2000
Inc. adjustment
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock
- ------------
Shares 8,500,000 200,000 - - 8,700,000 - - 8,700,000
Amount at Par $ 85,000 $ 2,000 $ - $ - $ 87,000 $ - $ - $ 87,000
Preferred Stock
- ---------------
Series A
Shares 250,000 - - - 250,000 - - 250,000
Amount at Par 250,000 - - - 250,000 - - 250,000
Series B
Shares 1,000,000 - - - 1,000,000 - - 1,000,000
Amount at Par 1,000,000 - - - 1,000,000 - - 1,000,000
Series C
Shares - 1,000,000 - - 1,000,000 - - 1,000,000
Amount at Par - 1,000,000 - - 1,000,000 - - 1,000,000
Series D
Shares - 375,000 - - 375,000 - - 375,000
Amount at Par - 375,000 - - 375,000 - - 375,000
Additional Paid-In
Capital 648,037 198,000 50,922 - 896,959 - - 896,959
Accumulated
Deficit - - - (72,127) (72,127) (281,882) - (354,009)
Accumulated
Other
Comprehensive
(loss) - - - - - - (2,361) (2,361)
----------------------------------------------------------------------------------------------------------
Total $1,983,037 $1,575,000 $50,922 $(72,127) $3,536,832 $(281,882) $(2,361) $3,252,589
==========================================================================================================
See notes to consolidated financial statements
44
Daedalus Building Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash
Period Ended Three
May 20, 1999 Months
(Inception) to Ended
October 31, January 31,
1999 2000
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net (loss) $ (72,127) $(281,882)
Adjustments to reconcile net (loss) to net cash
provided (used) by operating activities:
Depreciation -- 70,921
Changes in assets and liabilities:
Accounts receivable trade (18,272) (28,955)
Inventories (11,596) (9,364)
Prepaid expenses (8,161) (5,973)
Accounts payable 27,680 268,400
Accrued expenses 11,387 30,084
--------- ---------
Net cash provided (used) by operating activities (71,089) 43,231
Cash flows from investing activities:
Purchase of equipment -- (97,874)
--------- ---------
Cash flows from financing activities:
Contributed capital 50,922 --
Stock issued for cash 95,120 --
--------- ---------
Net cash provided by financing activities 146,042 --
--------- ---------
Foreign currency translation adjustment -- (2,361)
--------- ---------
Net change in cash 74,953 (57,004)
Cash at beginning of period -- 74,953
--------- ---------
Cash at end of period $ 74,953 $ 17,949
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Patent rights valued at $1,575,000 and equipment valued at $1,887,917
were acquired through the issuance of common stock and warrants.
See notes to consolidated financial statements
45
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 1 - Nature of business and significant accounting policies
- ---------------------------------------------------------------
Nature of business
- ------------------
Daedalus Building Systems, Inc., (Daedalus) is marketing and commencing
manufacturing operations for the production of low-cost structures comprised of
panels that are formed by advanced composite technology, the Daedalus Building
System(TM). Daedalus recycles plastic waste. Panels will be fabricated
principally from recycled polyolefins, compounded with various additives to form
polymer alloys and to increase performance parameters and the typical attributes
of composites such as strength, flexibility, durability, and permanence.
Additionally, Daedalus recently acquired the worldwide rights to the production
and distribution of a polyurethane foam filled metal panel building system that
will complement the marketing efforts of the low-cost composite structures in a
slightly higher socio-economic sector of the worldwide market.
Basis of presentation
- ---------------------
The accompanying consolidated financial statements are prepared on the basis of
generally accepted accounting principles and include the accounts of Daedalus
and its subsidiaries, all of which are wholly owned. All material inter-company
accounts have been eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Daedalus is a Delaware corporation incorporated on October 28, 1999. Daedalus'
fiscal year ends April 30, 2000. Daedalus entered into the following
acquisitions immediately after incorporation.
Acquisition of Cambridge Unique Associates, Inc.
- ------------------------------------------------
On October 30, 1999, Daedalus acquired all of the stock of Cambridge Unique
Associates, Inc., (Cambridge), a Canadian corporation, in exchange for 200,000
shares of common stock of Daedalus and 1,000,000 shares Series "C" preferred
stock and 375,000 shares of Series "D" preferred stock in Daedalus. The
acquisition was accounted for using the purchase method. The purchase price of
$1,575,000 was allocated solely to the patent which was the only asset of
Cambridge. Cambridge has worldwide manufacturing and distribution rights for a
metal building system patented under US Patent No. 08/988,697 Load Bearing
Pre-fabricated Building Construction Panel, which is a polyurethane foam filled
metal panel building system that will be used to fabricate houses to complement
those of the Daedalus Building System(TM) at a slightly higher socio-economic
level. The inventor of the metal building system assigned the patent in return
46
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 1 - Nature of business and significant accounting policies (continued)
- ---------------------------------------------------------------------------
Acquisition of Cambridge Unique Associates, Inc. (continued)
- ------------------------------------------------------------
for certain royalty payments as follows. Upon the establishment of a factory in
Canada the inventor shall receive a royalty of fifteen cents per square foot of
all material processed by the equipment. The royalties are to be paid in
Canadian dollars. All royalties from plants established outside of Canada by
Cambridge shall be fifteen cents per square foot calculated and payable in U.S.
dollars. The inventor is to receive a $50,000 per year guarantee from each
factory that Cambridge opens.
Acquisition of Daedalus Composites, Inc.
- ----------------------------------------
On October 31, 1999, Daedalus acquired all of the stock of Daedalus Composites,
Inc. (Daedalus Composites), a Canadian corporation, as well as the exclusive,
nontransferable right and license to manufacture, use, market, and sell and
otherwise to commercialize the patents, potential patents, technology,
information and processes, and the improvements (the "Technology") throughout
the world, related to residential housing units, from a company under common
control, The Daedalus Project, Inc., in exchange for a royalty of five percent
of gross sales in which the Technology is embedded; and the issuance of
8,500,000 shares of common stock, 250,000 shares of Series "A" preferred stock
and 1,000,000 shares of Series "B" preferred stock of Daedalus, to the
stockholders of The Daedalus Project, Inc. The purchase price of the acquisition
was determined to be the historical cost of the net assets of Daedalus
Composites, ($1,911,532) and no goodwill was recognized with the transaction.
The acquisition was accounted for as a reorganization of entities under common
control and, accordingly, the financial statements for all periods presented
have been adjusted to reflect the combination of the entities at their
historical bases.
Foreign currency translation
- ----------------------------
The functional currency of Daedalus' subsidiaries is the Canadian dollar.
Because of the importance of Daedalus' financial activities in the United
States, the financial statements are presented in U.S. dollars. Assets and
liabilities of Daedalus' subsidiaries are translated at the exchange rate in
effect at period end. Income statement accounts are translated at the average
rate of exchange prevailing during the period. Translation adjustments arising
from differences in exchange rates from period to period from the subsidiaries'
assets and liabilities are included in the accumulated other comprehensive loss
account in stockholders' equity. There were no such material adjustments during
the period ended October 31, 1999 due to the stability of the U.S. and Canadian
dollar exchange rate.
Revenue recognition
- -------------------
Revenue is recognized at the time the ownership of goods transfers to the
customers and the earnings process is complete.
47
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 1 - Nature of business and significant accounting policies (continued)
- ---------------------------------------------------------------------------
Cash
- ----
For purposes of reporting the statement of cash flows, Daedalus considers all
cash accounts, which are not subject to withdrawal restrictions or penalties and
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Equipment
- ---------
Equipment, consisting of various plastic manufacturing and recycling machines,
is stated at cost. The equipment was acquired from an unrelated party.
Depreciation is computed on the straight-line method over the estimated useful
lives ranging from three to fifteen years. The equipment is housed in a facility
in Canada, which is leased under the terms of a verbal agreement (note 6), and
at the corporate headquarters in Alexandria, Virginia. Accumulated depreciation
at January 31, 2000 totaled $70,921.
Income taxes
- ------------
To the extent that taxable income differs from financial reporting net income
due to temporary differences, deferred taxes are recognized. Income tax credits,
if any, are recognized by the flow through method.
Loss per share
- --------------
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Potential common
shares totaling 6,437,500 have been excluded from the earnings per share
computation as the effect of such shares would be anti-dilutive.
Fair value of financial instruments
- -----------------------------------
The carrying amounts of Daedalus' financial instruments, including cash,
accounts receivable, accounts payable, and accrued expenses, approximate fair
values because of the short maturities of these instruments.
Patent
- ------
Amortization of the patent is computed by the straight-line method over its
useful life of seventeen (17) years.
48
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 1 - Nature of business and significant accounting policies (continued)
- ---------------------------------------------------------------------------
Interim financial information
- -----------------------------
The financial information as of January 31, 2000 and for the three months then
ended is unaudited and includes all adjustments, consisting only of normal and
recurring accruals, that management considers necessary for the fair
presentation of its consolidated financial position, operating results and cash
flows. Results for the three months ended January 31, 2000 are not necessarily
indicative of results to be expected for the full fiscal year 2000 or for any
future period.
Note 2 - Preferred stock
Preferred stock
Authorized: 3,000,000 shares, par value $1.00, issuable
in series, with 250,000 shares Series "A"
and 1,000,000 shares of Series "B",
1,000,000 of Series "C", and 375,000 of
Series "D" preferred stock. The remaining
375,000 shares of authorized preferred stock
being issuable in one or more series, as
designated and determined from time to time
by the Board of Directors of Daedalus.
Except for the above mentioned Series "A"
and "B" preferred stock, each subsequently
designated series of preferred stock shall
consist of the number of shares so
designated for such series, and shares of
that series shall have the rights,
preferences, and other features as so
determined and designated.
Designated, issued, and outstanding:
Series "A"
No. of shares designated: 250,000
No. of shares issued and
outstanding: 250,000
Liquidation preference: $1.00 per share
Ranking: Pari passu with the Series "B" preferred
stock and senior to all other series of
preferred stock.
49
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 2 - Preferred stock (continued)
- ------------------------------------
Conversion rights: Each share of Series "A" preferred
stock may, at the option of the holder, be
converted into one (1) share of common stock
of Daedalus at any time within twenty (20)
years following the Closing of the Agreement
with Empiric (see note 3).
Voting rights: Each share of Series "A" preferred stock
shall have and be entitled to cast thirty
(30) votes, in common with the votes to
which holders of common stock then
outstanding shall be entitled to cast (one
vote per share) on all matters submitted
for, or required to be submitted for action
by the stockholders, as set forth in the
Certificate of Incorporation of Daedalus or
applicable provisions of the General
Corporation Law of the State of Delaware.
Additionally, holders of Series "A"
preferred stock shall be entitled to cast
one (1) vote for each share of such Series
"A" preferred stock on all matters submitted
for, or required to be submitted for, voting
by holders of such Series "A" preferred
stock, as a separate class of stock, as set
forth in the Certificate of Incorporation of
Daedalus or applicable provisions of the
General Corporation Law of the State of
Delaware.
Dividends: None
Redemption rights: None
Call provisions: Provided funds are legally available
therefore, all shares of Series "A"
preferred stock outstanding on the twentieth
(20th) anniversary of the Closing of the
Agreement with Empiric (note 3) may be
called by Daedalus at a price of $1.00 per
share.
Series "B"
No. of shares designated: 1,000,000
No. of shares issued and
outstanding: 1,000,000
Liquidation preference: $2.50 per share
50
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 2 - Preferred stock (continued)
- ------------------------------------
Ranking: Pari passu with the Series "A" preferred
stock, and senior to all other series of
preferred stock.
Conversion rights: Subject to Daedalus satisfying the
conditions pertaining to its "Pre-Tax
Earnings", as described below, during the
following prescribed periods and subject to
the following quantity limitations, the
shares of Series "B" preferred stock may, at
the option of the holder thereof, be
converted into shares of common stock upon
reaching the following earning plateaus on
or before December 31, 2003:
(1) 333,333 Series "B" shares can be
converted into 1,666,665 common shares, upon
achievement of $5,000,000 pre-tax earnings.
(2) Upon achievement of an additional
$5,000,000 in pre-tax earnings (a total of
$10,000,000 pre-tax earnings), an additional
333,333 Series "B" shares can be converted
into 1,666,665 common shares.
(3) Upon achievement of an additional
$6,000,000 (a total of $16,000,000 pre-tax
earnings), an additional 333,334 Series "B"
shares can be converted into 1,666,670
common shares.
Voting rights: Holders of Series "B" preferred stock shall
be entitled to cast one (1) vote for each
share of such Series "B" preferred stock on
all matters submitted for, or required to be
submitted for, voting by holders of such
Series "B" preferred stock, as a separate
class of stock, as set forth in the
Certificate of Incorporation of the General
Corporation Law of the State of Delaware.
Redemption rights: None
Dividends: None
Series "C"
No. of shares designated: 1,000,000
51
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 2 - Preferred stock (continued)
- ------------------------------------
No. of shares issued and
outstanding: 1,000,000
Liquidation preference: $2.50 per share
Ranking: Subsequent to Series "A" and Series "B"
preferred stock.
Dividends: None
Voting rights: None
Redemption rights: None
Call provisions: None
Conversion rights: Subject to Daedalus satisfying the
conditions pertaining to its "Pre-Tax
Earnings", as described above, the shares of
Series "C" preferred stock may, at the
option of the holder thereof, be converted
into shares of common stock at $2.00 per
share upon reaching the earning plateau of
$1,000,000.
Series "D"
No. of shares designated: 375,000
No. of shares issued and
outstanding: 375,000
Liquidation preference: $2.50 per share
Ranking: Subsequent to Series "A", Series "B", and
Series "C" preferred stock.
Dividends: None
Voting rights: None
Redemption rights: None
Call provisions: None
52
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 2 - Preferred stock (continued)
- ------------------------------------
Conversion rights: Subject to Daedalus satisfying the
conditions pertaining to its "Pre-Tax
Earnings", as described above, during the
following prescribed periods and subject to
the following quantity limitations, the
shares of Series "D" preferred stock may, at
the option of the holder thereof, be
converted into shares of common stock at
$2.00 per share upon reaching the following
earning plateaus on or before December 31,
2003:
(1) 125,000 Series "D" shares can be
converted into 62,500 common shares, upon
achievement of $10,000,000 in pre-tax
earnings.
(2) Upon achievement of an additional
$10,000,000 in pre-tax earnings (a total of
$20,000,000 pre-tax earnings), an additional
125,000 Series "D" shares can be converted
into 62,500 common shares.
(3) Upon achievement of an additional
$10,000,000 (a total of $30,000,000 pre-tax
earnings), an additional 125,000 Series "D"
shares can be converted into 62,500 common
shares.
The following table summarizes preferred stock:
- -----------------------------------------------------------------------------------------------------------------------------------
Number Number of Liquidation Votes
Preferred of Shares Shares Issued Preference Conversion Dividend per Redemption Call
Shares Designated & Outstanding per Share Ranking Rights Rights Share Rights Provisions
- -----------------------------------------------------------------------------------------------------------------------------------
Senior to C 1 share of
Series A 250,000 250,000 $1.00 & D & D and equal common None 30 None $1.00 per
to Series B stock share
- -----------------------------------------------------------------------------------------------------------------------------------
Senior to C & Subject to
Series B 1,000,000 1,000,000 $2.50 D and equal to earning None 1 None None
Series A conditions
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinate Subject to
to Series A earning None None None None
Series C 1,000,000 1,000,000 $2.50 & B; senior conditions
to D
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinate Subject to
Series D 375,000 375,000 $2.50 to Series A, B, earning None None None None
and C conditions
- -----------------------------------------------------------------------------------------------------------------------------------
53
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 3 - Commitments and contingencies
- --------------------------------------
Exchange of equity securities with Empiric Energy, Inc.
- -------------------------------------------------------
Daedalus entered into an agreement with Empiric Energy, Inc. (Empiric) to
exchange Empiric securities of $1,500,000 in preferred stock, convertible to
750,000 shares of common and, 750,000 Series "G" Warrants, each allowing the
purchase of one common share at $2.00 per share for three years, for Daedalus
Building Systems, Inc. securities consisting of 1,500,000 common shares and
750,000 Warrants, each allowing the purchase of one share of common stock for
$2.00 per share for three years. A Registration Statement is being prepared by
Daedalus, and, upon completion of the registration, a minimum of 1,000,000 fully
registered Daedalus Building Systems, Inc. shares will be distributed by Empiric
as a dividend to its shareholders. The agreement will be consummated on the
third business day following the date upon which the Registration Statement is
declared effective by the Securities and Exchange Commission. The fundamental
basis for the agreement is the mutual interests of the parties in the energy
aspects of community planning as defined by Daedalus' approach to community
building.
Note 4 - Risks and uncertainties
- --------------------------------
Environmental
- -------------
Daedalus is subject to a wide range of federal, foreign, state, and local laws
and regulations relating to the pollution and protection of the environment.
Among the many environmental requirements applicable to Daedalus are laws
relating to air emissions, wastewater discharges, and the handling, disposal,
and release of solid and hazardous substances and wastes.
Daedalus does not currently anticipate any adverse effect on its operations,
financial condition, or competitive position as a result of its efforts to
comply with environmental requirements. Some risk of environmental liability is
inherent, however, in the nature of Daedalus' business, and there can be no
assurance that environmental liabilities will not arise. It is also possible
that future developments in environmental regulation could lead to material
environmental compliance or clean up costs.
54
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 5 - Related party transactions
- -----------------------------------
The Daedalus Project, Inc. (Daedalus Project) (note 1) contributed $50,922 to
Daedalus to commence operations. Project received no stock for this contribution
and does not require the amount to be repaid.
Daedalus has an exclusive license agreement with Daedalus Project that conveys
the exclusive, nontransferable right and license to manufacture, use, market,
sell and otherwise commercialize the potential patents, technology, information
and process, and its improvements throughout the world for purposes of
residential housing units. Daedalus shall pay and deliver to The Daedalus
Project, Inc., royalties equivalent to five percent of gross sales of any
products in which the technology is embodied. Daedalus shall render written
statements thereof to Daedalus Project on a quarterly basis.
Note 6 - Events subsequent to October 31, 1999
- ----------------------------------------------
On November 1, 1999, Daedalus entered into a lease agreement, as lessee, for
office space. The lessor is an entity under common control and the lease expires
October 31, 2004. Daedalus has the right to extend the term of the lease for
three optional periods of five years each. The lease provides for rent increases
based on the Consumer Price Index. Minimum annual rentals for each of the next
five years are: 2000 - $82,008; 2001 - $82,008; 2002 - $82,008; 2003 - $82,008;
and, 2004 - $82,008, for a total of $410,040. Payments under this lease are
comparable to those of a similar lease with an unrelated party.
Daedalus has a lease as lessee with the owner of the manufacturing facility in
Canada. Rent expense under the agreement is scheduled to be:
February 1, 2000 through December 31, 2000 Cdn$13,888 per month
January 1, 2001 through January 31, 2003 Cdn$17,172 per month
February 1, 2003 through June 30, 2004 Cdn$18,316 per month
On December 1, 1999 Daedalus entered into three year employment contracts with
two officers. The agreements provide for aggregate compensation payments of:
Year 1 - $355,000; Year 2 - $435,000; and, Year 3 - $515,000.
On March 3, 2000 Daedalus resolved to change its name to Daedalus Systems, Inc.
55
Daedalus Building Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
October 31, 1999
(Information Pertaining to the Three Months Ended
January 31, 2000 is unaudited)
Note 7 - Events subsequent to date of auditors report (continued)
- -----------------------------------------------------------------
On March 31, 2000, Daedalus-under Daedalus Composites-received limited debt
financing from GE Capital of Canada in the amount of $750,000 Cdn.
(approximately $500,000 USD) with security guaranty taken against two pieces of
equipment in the Canadian facility; both Erema plastic extruders. The term of
the loan is 60 months commencing April 29, 2000, with an interest rate of prime
plus 1.75 percent.
Daedalus is also circulating a private placement memorandum to raise a
combination of debt and equity totaling $5 million.
Note 8 - Income taxes
- ---------------------
At October 31, 1999 Daedalus had approximately $72,000 of Canadian net operating
losses which may be used to offset future tax liabilities arising in Canada. The
losses will expire, if unused, in 2006. A deferred tax asset of approximately
$28,000, attributable entirely to these losses, had been fully reserved at
October 31, 1999.
56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") relates to
Daedalus Systems, Inc. (referred to herein as the "Company") which provides in
applicable part as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may 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
(other than an action by or in the right of the corporation) by reason of the
fact that he 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, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had any reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner, which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he 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, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made by the following:
o by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding,
o if such a quorum is not obtainable, or, even if obtainable a quorum
of disinterested directors so directs, by independent legal counsel in a
written opinion,
o by the stockholders.
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(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who 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, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, 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 a person.
The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Company's Certificate of Incorporation limits the liability of
directors (in their capacity as directors, but not in their capacity as
officers) to the Company or its stockholders to the fullest extent permitted by
the DGCL, as amended. Specifically, no director of the Company will be
personally liable to the Company or its stockholders for monetary damages for
breach of the director's fiduciary duty as a director, except as provided in
Section 102 of the DGCL for liability: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not in
good faith and which involve intentional misconduct or knowing violation of law;
58
(iii) under Section 174 of the DGCL, which relates to unlawful payments of
dividends or unlawful stock purchases or redemptions; or (iv) for any
transaction from which the director derived an improper personal benefit. The
inclusion of this provision in the Company's Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
action, if successful, might otherwise have benefited the Company and its
stockholders.
Under the Company's Certificate of Incorporation and in accordance with
Section 145 of the DGCL, the Company will 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 (other than a "derivative" action by or in the right of the
Company) by reason of the fact that such person was or is a director or officer
of the Company, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such acts were unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such an action and then, where the person is adjudged to be liable to the
Company, only if and to the extent that the Court of Chancery of the State of
Delaware or the court in which such action was brought, determines that such
person is fairly and reasonably entitled to such indemnity and then only for
such expenses as the court deems proper. The Company will indemnify, pursuant to
the standard set forth in Section 145 of the DGCL, any past or present officer
or director who was or is a party, or is threatened o be made a party, to any
threatened, pending or completed derivative action by or in the right of the
Company.
The Company's Certificate of Incorporation also provides that the
Company may pay for the expenses incurred by an indemnified director or officer
in defending the proceedings specified above in advance of their final
disposition, provided that, if the DGCL so requires, such indemnified person
agrees to reimburse the Company if it is ultimately determined that such person
is not entitled to indemnification. The Company's Certificate of Incorporation
also allows the Company, in its sole discretion, to indemnify any person who is
or was one of its employees and agents to the same degree as the foregoing
indemnification of directors and officers. To the extent that a director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith. In addition, the Company may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Company or another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against and incurred by such
person in such capacity, or arising out of the person's status as such whether
or not the Company would have the power or indemnify such person against such
liability under the provisions of the DGCL.
59
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses payable by Daedalus in connection with the issuance
and distribution of the securities being registered, are as follows:
SEC Registration and Filing Fee $ 170.45
Legal Fees and Expenses* 60,000.00
Accounting Fees and Expenses *. 35,000.00
Financial Printing * 1,000.00
Transfer Agent Fees * 0.00
Miscellaneous * 1,000.00
TOTAL $ 97,170.45
--------------
* Estimated
60
RECENT SALES OF UNREGISTERED SECURITIES
On October 31, 1999, Daedalus acquired all of the stock of Daedalus
Composites, Inc., a Canadian corporation, as well as the exclusive,
nontransferable right and license to manufacture, use, market, and sell and
otherwise to commercialize the patents, potential patents, technology,
information and processes, and the improvements throughout the world, related to
residential housing units, from a company under common control, The Daedalus
Project, Inc., in exchange for a royalty of five percent of gross sales in which
the technology is embedded; and the issuance of 8,500,000 shares of common
stock, 250,000 shares of Series A preferred stock and 1,000,000 shares of Series
B preferred stock of Daedalus, to the stockholders of Daedalus Projects, Inc.,
which occurred at the time of formation of Daedalus, October 28, 1999, in
accordance with the agreements between the parties.
Daedalus relies upon Section 4(2) of the Securities Act of 1933 as its
exemption from the registration requirements of such Act in connection with this
transaction.
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EXHIBITS
The following exhibits are filed as part of this registration
statement:
Exhibit Description of Document
Number
2. Agreement between Empiric Energy, Inc. and Daedalus dated October 1,
1999
3.1 Articles of Incorporation of Daedalus Building System, Inc.
3.2 Bylaws of Daedalus Building System, Inc.
3.3 Amendment for corporate name change from Daedalus Building Systems,
Inc. to Daedalus Systems, Incorporated
4. Common stock certificate of Daedalus Building Systems, Inc.
5. Consent of Herbert S. Rosenblum, opinion of counsel
10.1 Assignment of Contract dated October 31, 1999 between Daedalus and
The Daedalus Project, Inc.
10.2 Sales Contract dated March 27, 1999 between The Daedalus Project,
Inc. and the World Business Investors Group, S. A. as extended by
letter of agreement dated October 6, 1999
10.3 Sales Contract dated October 27, 1999 between Daedalus and the World
Business Investors Group, S. A.
10.4 Stock Transfer and License Agreement dated October 31, 1999 between
Daedalus Building Systems, Inc. and The Daedalus Project, Inc.
10.5 Employment Agreement dated December 1, 1999 between Daedalus
Building Systems, Inc. and Edward A. McCulloch
10.6 Employment Agreement dated December 1, 1999 between Daedalus
Building Systems, Inc. and David Lightbody
10.7 Lease dated November 1, 1999 between Daedalus Building Systems, Inc.
and Chesapeake Services Corporation
21. Subsidiaries of Daedalus Systems, Incorporated
23.1 Consent of Pannell Kerr Forster PC
27. Financial Data Schedule
62
UNDERTAKINGS
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Daedalus pursuant to the provision described in Item 24, or
otherwise, Daedalus 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 of 1933 and is, therefore, unenforceable.
In the event a claim for indemnification against such liabilities,
other than the payment by Daedalus of expenses incurred or paid by a director,
officer of controlling person of Daedalus in the successful defense of any
action, suit of proceeding, is asserted by such director, officer or controlling
person in connection with the shares being registered hereby, Daedalus will,
unless, in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by Daedalus is against public policy as expressed
in the Securities Act of 1933 and will be governed by the final adjudication of
such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of
Alexandria, state of Virginia, on May 19, 2000.
DAEDALUS SYSTEMS, INC.
Date: May 19, 2000
By: /s/ Edward A. McCulloch
----------------------------
Edward A. McCulloch
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration was signed by the following persons in the capacities and on the
dates stated.
Date: May 19, 2000
By: /s/ Edward A. McCulloch
----------------------------
Edward A. McCulloch
President, Chief Executive Officer and Director
Date: May 19, 2000
By: /s/ David Lightbody
----------------------------
David Lightbody
Executive Vice President, Chief Financial Officer and Director
Date: May 19, 2000
By: /s/ Patricia L. Espino-Nayar
----------------------------
Patricia L. Espino-Nayar
Controller
Date: May 19, 2000
By: /s/ James A. Lyons
----------------------------
James A. Lyons
Chairman of the Board of Directors
Date: May 19, 2000
By: /s/ Norio Sakai
----------------------------
Norio Sakai
Director
Date: May 19, 2000
By: /s/ Robert J. Salmon
----------------------------
Robert J. Salmon
Director
64