- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
_____________
Commission file no. 0-23477
ICON CMT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3603128 13-3603128
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 Harbor Blvd., Weehawken, New Jersey 07087
- -------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 601-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] . No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on March 27, 1998 was $109,536,468. Such
aggregate market value is computed by reference to the average of the high and
low bid price of the Common Stock on such date.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 15,025,285 shares of Common
Stock as of the close of business on March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Icon CMT Corp. ("Icon" or the "Company") is an Internet solutions
provider that offers a comprehensive range of services and products that enable
corporate customers to implement their Internet, intranet and extranet
strategies. Icon's mission is to provide end-to-end solutions to its customers
by facilitating the distribution of the customers' information and applications
over Icon's communications infrastructure as well as access to such information
and applications. In order to provide end-to-end solutions, Icon integrates
services and products in three key areas: (i) communications services, including
high quality Internet access and web/server hosting and management, enhanced by
the Company's proprietary technologies; (ii) a range of professional services,
including custom application and website development and design, systems
integration and maintenance and support services; and (iii) product resales,
including hardware and software, which are an integral component of systems
design and integration and serve as a means of establishing customer
relationships. Icon differentiates itself by integrating its services and
products to provide customized turnkey solutions for the needs of corporate
customers. Icon's customers include major corporations in the financial
services, telecommunications, travel and media industries, such as ABC Radio
Network Inc. ("ABC Radio"), The Associated Press, Bear, Stearns & Co., Inc.
("Bear Stearns"), Bell Atlantic Internet Solutions, Inc. ("Bell Atlantic
Internet Solutions") CBS, Inc. ("CBS"), Nomura Securities, Co. Ltd., Swissair
and Swissotel.
MARKET AND INDUSTRY OVERVIEW
The emergence of the Internet and the widespread adoption of Internet
Protocol ("IP") as a data transmission standard in the 1990s, combined with
deregulation of the telecommunications industry and advances in
telecommunications technology, have significantly increased the demand for
providing data communications applications and services over public networks. At
the same time, growth in client/server and distributed computing, multimedia
personal computers and online computing services and the proliferation of
networking technologies have resulted in a large and growing group of end-users
who are accustomed to using networked computers for a variety of purposes,
including electronic mail, electronic file transfers, online computing and
electronic financial transactions. These trends have increasingly led businesses
to explore opportunities to provide IP-based applications and services
internally within their organizations via intranets, externally to selected
customers and business partners via extranets and to the general public via the
Internet.
The ubiquitous nature and relatively low cost of the Internet have
resulted in its widespread usage for certain applications, most notably web
browsing and electronic mail. Use of the Internet for mission-critical business
applications is increasing even with the limited security and unreliable
performance inherent in the structure and management of the Internet, as well as
the difficulties of integrating web gateways and IP-based networks with
applications traditionally run on legacy systems. Additionally, emerging
applications such as IP-based audio and video applications and certain
multimedia applications require a communications infrastructure that has high
performance characteristics, including low latency (response time) and high
throughput. These factors have resulted in demand from an increasing number of
businesses for high bandwidth Internet access, secure networked systems,
technology-related products and integration and custom application development
services. Revenues generated by the Internet communications services market in
the United States, comprised of access and hosting, are expected to increase
from $1.4 billion in 1996 to $28.1 billion in 2000 according to Forrester
Research, Inc., while the worldwide Internet-related professional services
market is expected to grow from $2.5 billion in 1996 to $13.8 billion in 2000
according to International Data Corporation.
As the amount of information transmitted over the Internet has grown
and the speed and complexity of networks has increased, IP-based services and
products have become increasingly intertwined. Corporate customers have not only
come to rely on IP-based networks for distributing mission-critical information
and applications to end-users but have become dependent on the technical
services that enable access and distribution of this information,
-1-
<PAGE>
resulting in an increasing number of outside vendors offering services to
corporate customers. However, given the growth in complexity and expenditures
related to implementation of Internet, intranet and extranet strategies, the
Company believes that customers are increasingly seeking a single-source
provider.
STRATEGY
Icon is an Internet solutions provider that offers a comprehensive
range of services and products that enable corporate customers to implement
their Internet, intranet and extranet strategies. Icon's mission is to provide
end-to-end solutions to its customers by facilitating the distribution of
customers' information and applications over Icon's communications
infrastructure as well as access to such information and applications. Unlike
many of its competitors who focus on a single service or product, the Company
continuously expands the breadth of its services and its engineering expertise
to provide customized turnkey solutions to meet the increasingly demanding
requirements of corporate customers. In order to provide end-to-end solutions,
Icon offers communications and professional services, as well as product resales
capabilities. The key strategic initiatives of the Company are to:
LEVERAGE CAPABILITY TO PROVIDE END-TO-END INTERNET SOLUTIONS. Icon's
ability to provide end-to-end solutions is often a decisive factor in
attracting and retaining customers and contributes to generating additional
business from its existing customer base. While some of the Company's
customers are initially attracted to Icon's end-to-end solutions, others
seek a specific service or product. The Company has historically succeeded
in migrating many of such customers to become users of the Company's
additional services and products. Icon's relationships with several
customers, such as The Associated Press, Bear Stearns and CBS, began with a
single offering and evolved into an end-to-end solution encompassing
multiple communications and professional services. The Company's strategy
is to expand the number of customers who demand end-to-end solutions and to
become an integral component of its customers' information technology
infrastructure.
MAINTAIN RELIABLE AND HIGH PERFORMANCE COMMUNICATIONS INFRASTRUCTURE. The
Company maintains a nationwide communications infrastructure that
incorporates proprietary technologies and is managed to deploy and
distribute information and applications. The Company manages its network to
achieve utilization levels that enable it to operate in a reliable and high
performance manner. Icon controls its network and provides hosting and
management services from its state-of-the-art NOC, enabling it to meet
increasingly demanding customer requirements. The Company will continue to
develop network-centric proprietary technologies and integrate third party
technologies to optimize network performance and provide value-added
network services to its customers. The Company currently focuses on new
communications services offerings, such as back-up and recovery and wide
area data caching, as well as real-time audio and video streaming and
Internet telephony. Icon will seek to continue to develop its
communications infrastructure to enhance the speed, security, reliability
and overall performance of its network.
EXPAND NETWORK DOMESTICALLY AND OVERSEAS. The Company plans to expand its
network to specifically address the growing bandwidth and global reach
requirements of its customers, both in the United States and
internationally. Icon's agreement with MFS Datanet, Inc. ("MFS") provides
for access to MFS communications facilities throughout the country. The
Company believes that the usage-based pricing model in its agreement with
MFS enables it to enter new markets in a more advantageous manner than many
of its competitors which, in many cases, must expend greater resources to
build or lease facilities on a fixed-price basis. The Company also has
agreements with other vendors who provide similar services, and the Company
will pursue similar arrangements in the future as the Company continues to
expand its network. In November 1997, the Company entered into a joint
venture agreement with Teleway Corporation ("Teleway") that will extend the
reach of the Company's network into Japan; however, this transaction is
subject to third party and governmental consents and no assurance can be
made that the Company will obtain the required consents or that the
transaction will otherwise be successful. Recently, Kokusai Denshain Denwa
Co. Ltd. ("KDD") announced that it is in negotiations to acquire Teleway.
The Company cannot predict the effect, if any, such acquisition would have
on the joint venture.
-2-
<PAGE>
EXPAND AND INTEGRATE PROFESSIONAL SERVICES OFFERINGS. Icon's professional
services include software application development, website design and
development, integration with legacy systems, maintenance and support
services and consulting. Unlike many of Icon's competitors, who focus on a
single service or product, the Company continuously expands the breadth of
its services and its engineering expertise to optimize its end-to-end
solutions. The Company intends to continue to develop and leverage both its
expertise in designing graphical user interfaces (so-called "front-end"
design) and integrating with legacy data that resides on databases or
mainframe systems (so-called "back-end" integration).
CONTINUE TO BUILD EFFICIENT DISTRIBUTION THROUGH DIRECT AND INDIRECT
CHANNELS. Icon continues to grow its direct sales force, which has grown
from 25 at the beginning of 1997 to 41 as of December 31, 1997. The direct
sales force targets large accounts with significant revenue-generating
potential. It focuses on information-intensive industries, such as
financial services, media, telecommunications and travel. The Company
believes that the organization of its direct sales force along industry
lines enables it to leverage its expertise and develop solutions that can
be replicated and tailored to meet recurring demands of corporate customers
throughout a particular industry. In addition, the Company has continued to
expand distribution relationships that enable it to compete effectively by
expanding its customer base without substantial costs. The Company's
indirect sales channels include relationships with telecommunications
providers, such as Bell Atlantic Internet Solutions and Fiberlink
Communications Corp. ("Fiberlink"), as well as resellers and master
distributors. Bell Atlantic Internet Solutions offers its customers the
option to select Icon as their global service provider to provide the long
distance portion of the Internet access services. In October 1997, the
Company extended its Global Service Provider ("GSP") agreement through
October 1999 to continue to make its services available in the traditional
Bell Atlantic southern region and to include the Bell Atlantic northern
region (previously NYNEX) for dedicated access service. The Company
currently plans that it will make its services available to Bell Atlantic
Internet Solutions business customers in the northern region during the
first half of 1998, subject to certain regulatory approvals.
GROW THROUGH ACQUISITIONS. The Company from time to time intends to
evaluate potential acquisitions of business and product lines to strengthen
its market position, to obtain complementary expertise in certain segments
of the Internet business and to maximize value through cross-selling
opportunities.
JOINT VENTURE
In November 1997, the Company entered into an agreement with Teleway, a
Japanese communications company, pursuant to which they agreed to establish
Icon-Teleway Internet Corporation ("ITIC"), to operate an Internet solutions
business to market end-to-end solutions to corporate customers in Japan
(including Japanese subsidiaries of United States corporations). Teleway,
established in 1984, is one of the largest long distance companies in Japan,
with sales of approximately $850 million in fiscal year 1996. Teleway will hold
a 52% equity stake and Icon will hold a 48% equity stake in the joint venture
that owns ITIC, which was formally established during the first quarter of 1998.
The services provided by ITIC will be similar to the services provided by Icon
in the United States, including communications services, professional services
and product resales. ITIC's network infrastructure will be based on Teleway's
nationwide ATM network.
Teleway has agreed to provide ITIC an initial loan of (Y)1 billion
(approximately $7.9 million) and, upon request, to make an additional loan for
up to (Y)500 million (approximately $4.0 million) to fund operations. In
connection with the creation of the venture, the Company agreed to license to
ITIC the exclusive right to exploit Icon's intellectual property in Japan for a
period of five years. Any net royalties received by Icon (up to a maximum of $8
million) will be contributed back to ITIC as equity and will be matched by
Teleway such that the relative ownership is maintained. ITIC will use such
equity contributions to repay outstanding loans from Teleway and to fund
operations. Icon and Teleway have agreed to establish a network cross-connection
between Icon's network in the United States and Teleway's network in Japan. The
parties have further agreed to a reciprocal wholesale arrangement, on a "most
favored nations" basis, pursuant to which Icon and ITIC will purchase
communications services (including Internet access) from each other at a
wholesale price and resell such services to customers in their respective
countries. The transaction is
-3-
<PAGE>
subject to third party and governmental consents. Recently, KDD announced that
it is in negotiations to acquire Teleway. The Company cannot predict the effect,
if any, such acquisition would have on ITIC.
COMMUNICATIONS INFRASTRUCTURE
The Company developed its communications infrastructure in recognition
of the market need for commercial-grade Internet access and value-added
deployment of mission-critical information and applications. The Company's
customers use the Company's communications infrastructure for private networks
and commercial applications. The Company has developed proprietary technologies
that enhance network performance in terms of speed, reliability, security and
flexibility. See " -- Research and Development." The Company's communications
infrastructure is based upon an Asynchronous Transfer Mode ("ATM") architecture.
The Company's customers can connect to the Company's network from major cities
across the United States through dedicated high-speed leased lines. The network
is logically designed as a "cloud," with multiple high-speed paths between
switches, so as to reduce the possibility that any single point of failure will
cause network outage. The network uses state-of-the-art routing platforms,
including Cisco routers. Currently, the Company's backbone consists of 18 nodes,
and the Company currently plans to add several additional nodes.
After a customer's data has entered the Company's backbone, it is
routed to its destination, either over the Company's backbone or to another
Internet Service Provider's ("ISP") backbone, which is facilitated through
peering arrangements with other ISPs. In order to peer with other Tier 1 ISPs,
an ISP must demonstrate that its network transports sufficient volumes of data
and that it can peer at geographically diverse locations. The Company has
established Tier 1 peering arrangements with other ISPs and long distance
carriers enabling it to exchange traffic at major peering points, including
MAE-East, MAE-West, Ameritech Advanced Data Services NAP, Digital Internet
Exchange (including the CIX), Sprint Communications NAP and Pacific Bell NAP.
Peered ISPs share routing tables with each other so that each ISP's customers
can have access to the information on a peered-ISP's network. Although many ISPs
have recently been adding to their peering eligibility requirements, the Company
has been successful in qualifying for these arrangements. The Company believes
that the need to enter into peering arrangements and the increasingly stringent
eligibility standards to be met to qualify for these relationships now provide a
significant barrier to entry for other companies trying to build nationwide
backbones to provide Internet access. The Company believes that its combination
of a nationwide backbone and peering arrangements establishes the Company as a
Tier 1 provider, which differentiates the Company from regional ISPs who,
without peering arrangements, may have to pay transit fees to national Internet
carriers in order to exchange network traffic.
The Company's communications network consists of facilities leased from
a number of providers, including MFS, WorldCom and certain Regional Bell
Operating Companies ("RBOCs), Local Exchange Carriers ("LECs") and Competitive
Access Providers ("CAPs"). In June 1995, the Company entered into a service
agreement with MFS that provides the Company access to all of MFS'
communications facilities throughout the country. The Company believes that the
usage-based pricing model in its agreement with MFS enables it to enter new
markets in a more advantageous manner than many of its competitors which, in
many cases, must expend greater resources to build or lease facilities on a
fixed-price basis. Furthermore, Icon's agreement with MFS affords the Company
the flexibility of converting to a fixed price model, at its option, as
utilization of facilities by the Company increases. Pursuant to the agreement,
MFS also provides certain additional related services including, upon request by
the Company, the provisioning of local telecommunications services and
co-location of certain of the Company's equipment. Either MFS or Icon may
terminate the agreement with or without cause, with six months written notice,
such termination to be effective as early as December 1998. The Company has
on-going discussions with MFS regarding the potential extension of the agreement
past December 1998 while at the same time identifying alternative vendors who
provide similar services to ensure the continued uninterrupted operation of its
high performance network.
In November 1997, the Company entered into an agreement with Teleway
pursuant to which they agreed to establish ITIC to operate an Internet solutions
business to corporate customers in Japan (including Japanese subsidiaries of
United States corporations). ITIC was formally established during the first
quarter of 1998. Additionally, in March 1998, the Company announced a reseller
agreement with IBM Global Services that will allow the Company to expand its
network offerings nationwide and to rebrand and remarket IBM's network dial
services. The parties are negotiating an interconnection arrangement to enable
the Company to resell IBM's services under the agreement. However, no assurance
can be made at this time that these transactions will ultimately be successful.
-4-
<PAGE>
The Company's network is monitored 24 hours per day, 7 days per week by
its Network Operations Center ("NOC"), located at its Weehawken, New Jersey
headquarters. The NOC is the primary control and networking equipment center for
all forms of network operations. Redundant network paths connect the NOC to the
backbone, reducing the possibility that a single point of failure will cause a
network outage. The NOC hosts systems, which consist of networking equipment,
hardware and software, for customers by providing space, connectivity, data
protection and continuous monitoring and maintenance. The Company maintains a
second internal secure network as a dedicated data conduit for backup and
restoration of hosted client data. To date, the Company has not experienced any
network-wide outages or significant losses of customer data.
SERVICES AND PRODUCTS
The Company integrates services and products in three key areas: (i)
communications services, (ii) professional services and (iii) product resales.
COMMUNICATIONS SERVICES
ACCESS SOLUTIONS. Icon's network access solutions enable customers to
deploy mission-critical information and applications over the Internet,
intranets and extranets. In some cases, the Company provides guaranteed levels
of service for dedicated Internet access to corporate customers and targets
performance benchmarks for connection success rates, latency levels and
throughput. The Company also provides switched Internet access including ISDN
and dial-up through Bell Atlantic Internet Solutions and may, in the future,
seek to expand its switched services to augment its dedicated offerings to its
corporate customers, who may want to provide switched access to their employees
or customers. In addition, the Company offers data back-up services by acting as
an outsourcer for archiving customers' data on its servers and systems, and
provides business recovery solutions by using its proprietary technologies. See
" -- Research and Development."
Depending upon the size of the customer and corresponding application
and information needs, bandwidth requirements vary widely. For example, audio
and video applications typically require greater bandwidth than text-based
applications. Icon generally offers five levels of Internet access to meet the
wide range of bandwidth needs:
o 56 Kbps
o Fractional DS-1 (n x 64 Kbps; n24)
o DS-1 (1.544 Mbps)
o Fractional DS-3 (n x 3 Mbps; 1n15)
o DS-3 (45 Mbps)
HOSTING AND MANAGEMENT SOLUTIONS. Hosting and management solutions
consist of the provisioning, installation, maintenance and monitoring of the
hardware and software components that comprise a hosted system. The actual
components of web hosting are the server, the physical workstation or PC upon
which the website or application resides, the Company's NOC which hosts the
server, a high speed physical connection to the Company's backbone, server and
power backup to ensure 24 hour functionality, and maintenance, monitoring and
management services to ensure ongoing operation of the server. Within both the
NT and UNIX product lines, the Company offers a diversity of hardware, software,
network and service level configuration options to meet the requirements of its
sophisticated customer base. By outsourcing its web server management function
to the Company, a customer can reduce costs while increasing reliability and
performance of its servers. The Company offers 24 hours per day, 7 days per week
monitoring of the server and Internet connection through the Company's technical
staff. In addition, Icon provides upgrades as the customer's speed and capacity
requirements grow. In addition to its existing hosting facility at its corporate
headquarters, the Company currently plans to expand its hosting locations to
include New York City and San Francisco to support increasing customer demands.
-5-
<PAGE>
PROFESSIONAL SERVICES
CUSTOM SOFTWARE APPLICATION DEVELOPMENT. The Company designs and
develops specialized software applications that enable corporations to
communicate business information and conduct commerce through IP-based networks.
The Company's engineering staff is experienced in programming languages such as
C, C++ and Java and works closely with its customers to analyze and design
specifications for IP-based applications. The Company has completed custom
application projects for customers including ABC Radio, The Associated Press,
Bear Stearns, CBS and Galileo International ("Galileo").
WEBSITE DESIGN AND DEVELOPMENT. The Company is an established provider
of advanced website design and implementation services. The Company designs
websites ranging from basic "inquiry only" sites to complex, interactive sites
featuring sophisticated graphics, animation, sound and other multimedia content.
The Company has completed website design projects for customers including Bell
Atlantic Internet Solutions, CBS News, a division of CBS, Comedy Central,
Deutsche Morgan Grenfell, Galileo, Eastman Kodak Company, Kobra International
(Nicole Miller), Swissair and Swissotel.
In addition, the Company historically operated an interactive
publishing unit that produced three Internet-based media properties: Word(TM), a
"lifestyle" publication targeted at 18-34 year olds; Charged(TM), focusing on
the extreme sports market; and SportsFan On-Line(TM), a spectator-sports media
property that was a joint venture with Sports Fan Radio Network, a division of
Winstar Communications, Inc. The Company had historically experienced operating
losses in connection with the ongoing operation of its media properties. On
March 9, 1998, the Company announced that it would discontinue the ongoing
operations of Word and Charged. Also, during the first quarter, Icon terminated
its agreement with SportsFan Radio Network, and instead began providing
consulting services and communications services to SportsFan Radio Network in
connection with the ongoing operation of SportsFan Online.
INTEGRATION WITH LEGACY SYSTEMS. The Company combines its expertise in
communications services, systems design and custom software and website design
and development to offer integration services. Icon's integration services
enable its customers to access corporate information that resides on legacy
systems, such as IBM or Unix mainframes, that are connected by network
architectures. The Company's technical engineers, whose training and
certification includes Sun Solaris, Netscape, Microsoft NT and Cisco Systems
Inc. ("Cisco"), are skilled at design and implementation of databases in order
to reduce demands on legacy systems and increase the efficiency of transporting
corporate data between legacy and client/server systems over an IP-based
network. The Company has completed integration projects for customers including
ABC Radio, The Associated Press, Bear Stearns, CBS News, Galileo, Merrill Lynch
& Co. Inc. ("Merrill Lynch"), Nomura Securities Co. Ltd. ("Nomura Securities"),
Omnipoint Communications ("Omnipoint"), Swissair, Tudor Investment Company and
John Wiley & Sons, Inc. ("John Wiley").
MAINTENANCE AND SUPPORT OF CUSTOMER IT INFRASTRUCTURE. The Company's
maintenance and support services organization offers 24 hours per day, 7 days
per week hardware and software maintenance and support for its customers.
Services include call-in support, troubleshooting, software and hardware updates
and on-site helpdesk and general support personnel. Engagements of the Company
to perform maintenance and support services have often developed when or after
the customer has purchased products from the Company or used other professional
services. The Company has provided maintenance and support services for
customers including Bear Stearns, CBS, Merrill Lynch, Moore Capital Management,
Inc., Omnipoint, Tudor Investment Company and John Wiley.
PRODUCT RESALES
PRODUCT RESALES ARE AN INTEGRAL PART OF PROVIDING END-TO-END SOLUTIONS.
The Company identifies and resells hardware and software that become components
of its customers' information technology infrastructure. The Company, in certain
cases, leverages product resales to cross-sell Icon's end-to-end solutions to a
growing customer base. The products include hardware and networking equipment
such as Sun Microsystems servers and Cisco routers, and software such as
Checkpoint fire walls, Netscape web servers and Oracle, Informix and Sybase
databases.
-6-
<PAGE>
SALES AND MARKETING
The Company's distribution strategy entails expanding its sales
channels to sell its services and products directly to commercial users and
through a network of indirect distribution channels, including OEM
relationships, regional systems integrators, VARs, distributors and
relationships with telecommunications companies, including Bell Atlantic
Internet Solutions and Fiberlink.
DIRECT SALES FORCE
The Company's direct sales force targets large accounts with
significant revenue-generating potential. The Company's sales group focuses on
information-intensive industries, such as financial services, media,
telecommunications and travel and includes customers such as ABC Radio, Bear
Stearns, CBS, Galileo and Nomura Securities. The Company believes that the
organization of its direct sales force along industry lines enables it to
leverage its expertise and develop solutions that can be replicated and tailored
to meet recurring demands of corporate customers throughout a particular
industry. As the size of the direct sales force grows, the Company plans to
expand into additional vertical segments, including general commercial and
consumer brand products. The Company has expanded its sales staff from 25 at the
beginning of 1997 to 41 as of December 31, 1997. Typically, the Company's sales
representatives receive a compensation package that includes a salary and
commissions that are based on actual sales and oriented toward selling higher
margin services.
INDIRECT DISTRIBUTION CHANNELS
The Company markets its services and products through a network of
third-party relationships, thereby expanding its customer base throughout the
country without incurring the associated sales, marketing and administrative
costs. Regional systems integrators, VARs and, in some cases, regional ISPs may
also resell the Company's services and products. By reselling the Company's
services and products, these companies are able to expand their service and
product offerings and provide more comprehensive solutions to their customers.
As an example of this strategy, the Company has entered into master distribution
agreements with Access Graphics and Merisel, two leading distributors of Sun
Microsystems Computer Company ("Sun") workstations, to bundle Sun web servers
with the Company's Internet access services. Such distributors and resellers may
participate in the Company's indirect distribution channel either by (i)
sublicensing the Company's services and products and reselling them to their
customers or (ii) referring orders to the Company in exchange for an agency
commission. Icon has also pursued a distribution strategy that enlists the
assistance of telecommunications companies who are already providing
communications services (such as local phone service or cable television) to
existing customers. This strategy enables the Company to leverage not only a
substantially larger sales and marketing infrastructure, but also strong
customer relationships. While the Company's margins are lower in this
distribution channel, the Company's resellers absorb all of the
customer-acquisition and administrative costs that would otherwise be borne by
the Company.
In addition to its reseller agreements, pursuant to the arrangement
with Bell Atlantic Internet Solutions, Bell Atlantic Internet Solutions offers
its customers the option to purchase Icon's communications services and bills
the customers on Icon's behalf. In October 1997, the Company extended its
arrangement with Bell Atlantic Internet Solutions by entering into an updated
GSP agreement with Bell Atlantic Internet Solutions. The Company currently plans
to make its services available to requesting Bell Atlantic Internet Solutions
business customers in the Bell Atlantic northern region during the first half of
1998, subject to certain regulatory approvals. The Company intends to pursue
additional relationships with other telecommunications providers, including
additional "local telco service" providers both using wireline and wireless
facilities, including LECs, RBOCs, CAPs and cable television companies.
MARKETING
The Company employs marketing and public relations personnel and works
with third-party advertising firms and consultants to provide broad coverage in
network computer and vertical industry publications. The Company participates in
nationwide industry trade shows, historically including NetWorld+InterOp,
Internet World and CompTel. The Company also participates in co-branding
promotions with strategic partners including Sun, Access Graphics and
-7-
<PAGE>
Merisel. Recently, the Company expanded its marketing budget in an effort to
increase its brand recognition among potential customers in its target vertical
markets.
RESEARCH AND DEVELOPMENT
To optimize overall network performance, Icon develops and markets
proprietary technologies. Icon"s proprietary technologies are based on a modular
development approach that offers flexibility and allows for the reuse of
individual components and the rapid implementation of custom solutions. In
addition, Icon maintains a technology-neutral position thereby enabling it to
integrate third-party technologies to optimize its clients" solutions
irrespective of technology platform.
OLIVE -- Objects Live. OLive (TM) is an object-oriented development
platform developed and used by the Company in the design of its proprietary
technologies. The Company designed OLive to simplify the development process of
customized network-centric applications solutions and is focused on
re-usability, interoperability and ease of customization.
NESI. The protection of mission-critical data is of vital importance to
a company's business. As a result, corporations need business recovery
capabilities to replicate data in remote locations. To address data backup and
recovery needs, the Company developed NESI (TM), a technology that extends the
distance over which computers can communicate with peripherals such as disk
drives. Data can be sent over a WAN to be processed on a device at a remote
location, in the same manner as if the device were local. As a result,
administrative tools may be used to manage remote devices without modification.
Major benefits of NESI include the ability to be integrated with third-party
data mirroring products, such as Sun's Solstice DiskSuite and the Veritas Volume
Manager, and with data backup software. The Company plans to provide a business
recovery service by combining NESI with its proprietary IP replication
technology. IP replication technology redirects requests for data stored on a
specific server to one or more servers that are hosted on the Company's network
by replicating the IP address or identity of the original server. If data is
requested from a server that has failed, the request is re-directed to a
different NESI-enabled server that is storing a mirrored copy of the data. This
further improves recoverability of the data and speed of access to it. The
Company has a patent pending on the NESI technology.
ICONCACHE. End users often experience poor performance while waiting
for content to be downloaded from a web server. IconCache(TM), an OLive-based,
intelligent caching technology speeds this download process, enhancing the
access to and distribution of information over the Internet. Traditionally, when
end-users request data via the Internet, a server in a single location fulfills
the request. This configuration may result in poor performance due to high
server loads caused by overburdening the server with a high volume of requests
or increased latency or transmission delays caused by end-user requests
originating a significant distance from the server. IconCache improves network
performance by addressing both of these problems. Icon addresses server load and
distance-related latency problems in areas experiencing high request volume by
replicating server data and offloading or caching it to other servers.
Ultimately, IconCache diversifies single server loads and moves data closer to
the end-user, minimizing backbone traffic and enhancing performance. IconCache
is different from other caching technologies, such as proxy servers, that do not
provide high levels of data management and are typically used for simple static
websites. Icon plans to enhance the flexibility of IconCache by combining it
with IP replication. The Company has a patent pending on this technology.
ICONFEED. In order to fulfill the growing need to publish and
distribute content over the Internet, Icon developed IconFeed(TM), an
OLive-based content publishing and distribution technology. IconFeed is an
application that resides on a server and receives data, regardless of format,
and normalizes it for optimal storage, maintenance and distribution on the web.
The normalized data can be stored in and accessed by a variety of data storage
devices, including databases and file systems. Ultimately, it is distributed and
converted into a format suitable for presentation via web servers, including
HTML. The Company has a patent pending on this technology.
ICONCHAT. The Internet enables the real-time interaction of end-users
via text, audio and video technologies. By incorporating these increasingly
popular interactive technologies into their websites, corporations are realizing
benefits, including the extended duration of end-user visits to
revenue-generating sites and the reduction of traditional
-8-
<PAGE>
communications costs. While currently integrated with a third-party software
product, IconChat(TM), a text-based real-time discussion system, is the
Company's first Internet-based interactive offering. IconChat includes
proprietary functionalities, including a message board functionality that
enables the electronic posting of messages similar to that of a traditional
bulletin board. The Company believes that IconChat is ideal for corporate
customers who want to facilitate real-time text-based dialog among users of a
company's website. It is offered as a value-added service to Icon's
communications services customers.
COMPETITION
The markets served by the Company are extremely competitive. The influx
of new market entrants is expected to continue in each sector of the Company's
business to meet the growing demand for information technology and
communications services and products. Additionally, the Company believes that
such factors as shifting customer demands and the rapid pace of technological
advance will intensify competition and result in continual pressures to
potentially reduce prices, enhance services and products and develop and exploit
new technology. Most of the Company's current and potential competitors enjoy a
greater market presence and possess substantially greater technical, financial
and marketing resources than the Company. The Company believes that its ability
to compete successfully depends upon a number of factors, including the
performance, reliability and security of its communications infrastructure,
continued ability to provide end-to-end Internet solutions, its ability to
maintain and expand its channels of distribution, its continued expertise in
proprietary and third party technologies, its ability to attract and retain
service engineers, the pricing policies of its competitors and suppliers, the
variety of services it offers, the timing of introductions of new services by
the Company and its competitors, customer support, the Company's ability to
support industry standards and industry and general economic trends.
COMMUNICATIONS SERVICES
The Company's current and prospective competitors in the Internet
communications services sector generally may be divided into the following five
groups: (i) telecommunications companies, such as AT&T Corp., MCI Communications
Corporation ("MCI"), Sprint Corp., WorldCom, Inc., Intermedia Telecommunications
Inc. ("Intermedia"), GTE Corporation and LECs; (ii) online services providers,
such as America Online Inc., The Microsoft Network ("MSN") and Prodigy Services
Company; (iii) ISPs, such as NETCOM Online Communications Services, Inc. , PSI
Network, Inc., Concentric Network Corporation and other national and regional
providers; (iv) cable modem connectivity providers such as @Home; and (v) data
center providers such as Exodus Communications. Most of these competitors have
greater market presence, engineering and marketing capabilities, and financial,
technological and personnel resources than those available to the Company. As a
result, they may be able to develop and expand their communications
infrastructures more quickly, adapt more swiftly to new or emerging technologies
and changes in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their services and products than the Company. In addition to the
companies named above, various organizations have entered into or are forming
joint ventures or consortiums to provide services similar to those of the
Company. The Company believes that competitive factors in the Internet services
market include market presence, network capacity, reliability and security,
price, new products and enhancements and conformity with industry standards.
Certain companies, including WorldCom, Intermedia and GTE, have also
obtained or expanded their Internet access services and products as a result of
acquisitions. In 1996, MFS merged with UUNET Technologies, Inc., a competitor of
the Company in the area of Internet access. MFS has been acquired by WorldCom,
which is also a supplier of network services to Icon. WorldCom has reached an
agreement to acquire MCI, which is a major provider of Internet backbone
services. The combination of MFS, UUNET, WorldCom and MCI means that one of the
Company's major suppliers is also one of its formidable competitors in providing
Internet services. Such acquisitions may permit the Company's competitors to
devote greater resources to the development and marketing of new competitive
products and services and the marketing of existing competitive products and
services. Additionally, certain distributors of the Company's services and
products, such as Bell Atlantic Internet Solutions, may compete with the Company
in the future. Certain companies are also providing high-speed data services
using alternative delivery methods such as cable television, direct broadcast
satellites and wireless cable.
-9-
<PAGE>
As a result of increased competition and vertical and horizontal
integration and consolidation in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For example,
certain of the Company's competitors that are telecommunications companies may
be able to provide customers with reduced communications costs in connection
with their Internet access services or private network services, reducing the
overall cost of their solutions and significantly increasing price pressures on
the Company. There can be no assurance that the Company will be able to offset
the effects of any such price reductions with an increase in the number of its
customers, higher revenue from enhanced services, cost reductions or otherwise.
PROFESSIONAL SERVICES
The professional services market is highly fragmented and served by
numerous providers, including consulting and systems integration firms,
facilities management and MIS outsourcing companies, applications software
firms, major equipment providers through their professional services units,
major accounting firms, general management consulting firms and website/intranet
design firms. The Company typically encounters competition from mid-sized and
regional consulting and systems integration firms, such as Cambridge Technology
Partners, Inc. and Technology Solutions Co., and increasingly competes with
large-scale systems integrators, such as EDS. The Company's design group also
competes with a variety of interactive design firms including agency.com,
Razorfish, USWeb Corporation and CKS Group. The Company believes that the
primary competitive factors at work in this market are price, the ability to
fashion and deliver efficient solutions to customer needs, the quality of
service, including project management and ongoing support and maintenance, its
ability to attract and retain service engineers and the availability and quality
of hardware. Accordingly, the Company competes on the basis of its reputation,
personnel, technical sophistication and ability to provide single-source,
end-to-end solutions.
PRODUCT RESALES
The product resales business is a highly competitive market with low
margins and no substantial barriers to entry. The Company believes that its
ability to compete successfully depends on a number of factors, including its
ability to integrate value-added services with its product resales, the price at
which the Company resells products, the speed and accuracy of delivery, the
effectiveness of sales and marketing programs, credit availability, the ability
to tailor specific solutions to customer needs, the quality and breadth of
products offered, the availability to offer product information and technical
support and industry and general economic trends.
The Company's current and prospective competitors generally can be
divided into three groups: (i) national and regional VARs, such as EJV Bridge
Networks, Bell Technology Group Ltd. and LANCOM; (ii) national and regional
systems integrators, such as EDS, Sapient, Computer Associates International,
Inc. and The Ergonomics Group; and (iii) hardware distributors, such as CHS
Electronics and ITOCHU Corporation. Many of these competitors have greater
market presence and financial resources than those available to the Company. As
a result, they may be able to adapt more swiftly to changes in market prices and
customer requirements, provide financing to customers for purchases, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than can the
Company. In addition, the Company expects that additional competitive pressure
may arise from manufacturers that have been successful in selling directly to
the end-users without the use of resellers.
PROPRIETARY RIGHTS
The Company believes that factors such as the technical and business
expertise of its personnel, attentive high-quality customer service and
strategic alliances with its suppliers and other vendors, have to date played a
predominant role in promoting its reputation and the growth of its business but
recognizes that its ability to compete effectively and to continue to grow will
depend increasingly on the use and appeal of its proprietary technology. While
the Company relies on patent, trademark, contract, trade secret and copyright
law to protect its proprietary technologies, it is possible for a third party to
copy or otherwise obtain and use the Company's technologies without
authorization, or to develop similar technologies independently. Although the
Company has not to date registered any trademark or
-10-
<PAGE>
service mark, it has applied to register its name and logo design as trademarks
and certain of its product and service names and marks as trademarks or service
marks in the United States. The Company does not own but has applied for patents
on certain of its proprietary technologies. Although the Company does not
believe that its services or products infringe the proprietary rights of any
third parties, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful.
In accordance with the Company's policy, all of the Company's employees
and consultants have entered into, and all future employee and consultants are
expected to enter into, agreements containing confidentiality and
nonsolicitation covenants. Similarly, the Company's agreements with customers
and suppliers include provisions prohibiting or restricting the disclosure of
proprietary information and products, the use of software in source code form
and the sublicensing of licensed software. The Company also monitors and limits
access to and the distribution of its proprietary technologies. In addition, the
Company sells or licenses its services and products in, and the Internet and
other global networks facilitate the delivery of the Company's software to,
other countries where the laws may not afford adequate protection of the
Company's proprietary rights in such products or provide effective means for its
enforcement of such rights.
Certain technologies used in the Company's solutions are licensed or
leased by the Company, generally on a non-exclusive basis. There can be no
assurance that such technology will continue to be available to the Company on
commercially reasonable terms. The loss of such technology could impair the
Company's products or services or require the Company to obtain substitute
technologies of lower quality or performance standards or at greater cost.
GOVERNMENTAL REGULATION
The Company believes it is not currently subject to direct regulation
by the FCC or any other governmental agency, other than regulations applicable
to businesses generally. To date, the FCC has not actively sought to regulate
the provision of Internet access and related services. Except for the
stand-alone provision of underlying basic transmission capability, the offering
of Internet services or access to the Internet has generally been considered an
'enhanced service,' a type of services offering that is not currently regulated
by the FCC. Whether the FCC will assert regulatory authority over the Internet
and the level of such regulation, if asserted, are pending issues at that
agency, and regulation of the Internet and related services in general is being
considered by lawmakers at many levels of government. The Company cannot predict
whether regulation may be imposed in the future, what form such regulation may
take or that such regulation will not adversely affect the Company's business,
financial condition or results of operations.
Under current law, operators of "enhanced" services are exempt from FCC
regulation, but operators of 'basic' services are not similarly exempt. The FCC
has not yet addressed whether providing transport services, including Internet
telephony, to customers over an IP-based network is an enhanced service. A
determination by the FCC that providing Internet transport or telephone services
to customers over an IP-based network is subject to regulation would adversely
impact the Company's ability to provide various existing and planned services
and to provide Bell Atlantic Internet Solutions' customers with the option to
purchase the Company's communications and other services, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Some states may also seek to exercise regulatory
jurisdiction over certain aspects of such offerings.
The FCC also extensively regulates the cable and broadcasting
industries. These regulations address, among other things, technical, ownership,
competition and content-related issues. To date, the FCC has not determined
whether or to what extent its regulatory framework can or should be extended to
directly govern analogous communications on the Internet, such as video and
audio streaming. There can be no guarantee that the limited regulatory burdens
on the Internet to date will not increase or that new laws governing the
Internet will not be passed.
In February 1996, the Telecommunications Act of 1996 was signed into
law by the President of the United States. Changes in the regulatory environment
relating to the Internet access industry, including regulatory changes that
directly or indirectly affect the regulatory status of Internet services, affect
telecommunications costs, including the application of access charges to
Internet services, or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company's business, financial condition and
-11-
<PAGE>
results of operations. Due to the increase in Internet use and publicity, it is
possible that laws and regulations may be adopted with respect to the Internet,
including with respect to privacy, pricing and characteristics of services or
products. Certain other legislative initiatives, including those involving
taxation of Internet services and transactions, Internet regulation and
universal service contribution requirements for Internet providers have also
been proposed. The Company cannot predict the impact, if any, that these or
other laws and regulations or legal or regulatory changes may have on its
business.
In addition, Bell Atlantic has filed a petition with the FCC seeking
relief from various regulations that affect the deployment of advanced
telecommunications services by RBOCs. The petition asks the FCC to approve Bell
Atlantic's (i) provision of high-speed broadband services without regard to
current geographic restrictions, (ii) development of new services without
current pricing, unbundling or separations restrictions and (iii) sale of new
services unrestricted by otherwise applicable price cap and separate affiliate
rules. If the FCC approves the petition, Bell Atlantic or Bell Atlantic Internet
Solutions may be able to undertake many of the functions that the Company
currently performs for Bell Atlantic Internet Solutions' customers. The FCC has
invited public comment on Bell Atlantic's request.
Recently the FCC proposed to eliminate the requirement that RBOCs must
file comparably efficient interconnection plans and obtain approval for those
plans prior to providing new enhanced services. Elimination of this requirement
could lessen certain regulatory burdens currently imposed on Bell Atlantic
Internet Solutions. Furthermore, on December 31, 1997, a Federal District Court
Judge declared several provisions of the Telecommunications Act
unconstitutional. That decision has been stayed pending appeal. If upheld on
appeal, this decision may allow Bell Atlantic to offer certain services, which
Bell Atlantic Internet Solutions and its affiliates have been prohibited from
offering under the Telecommunications Act, without the FCC finding Bell Atlantic
to be in compliance with the network unbundling and other competitive
requirements set out in the Telecommunications Act. The Company currently
provides such services for Bell Atlantic Internet Solutions' customers; and if
the decision is upheld on appeal, Bell Atlantic Internet Solutions or its
affiliates may provide such services directly to their customers.
Bell Atlantic Internet Solutions' relationship with the Company is
subject to review and regulation by state and federal authorities, including the
FCC. Although the Company understands that Bell Atlantic Internet Solutions has
received the requisite approvals to provide service and make the Company's
services available to those of Bell Atlantic Internet Solutions' customers who
request them (which has only included customers in the traditional Bell Atlantic
southern region through December 31, 1997), a petition submitted by MFS in July
1996 for reconsideration of such FCC approvals is currently pending before the
FCC. Additionally, the extension of the Company's service offerings into the
traditional Bell Atlantic northern region (NYNEX) is subject to approvals at the
state and federal levels. There can be no assurance that Bell Atlantic Internet
Solutions will be successful in maintaining or procuring the requisite
regulatory approvals. Failure of Bell Atlantic Internet Solutions to maintain or
prospectively procure such approvals at the federal or state level could
adversely affect the Company's existing agreements with Bell Atlantic Internet
Solutions, and, as a result, the Company's business, financial condition and
results of operations.
Additionally, certain lobbying groups are attempting to initiate
legislation which would compel ISPs to pay access charges for the use of some of
the local networks operated by the RBOCs. The adoption of such laws or
regulations could inhibit the continued growth of the Internet or other wide
area information networks, impose additional costs on the Company, expose the
Company to greater potential liability from regulatory actions or private legal
proceedings or otherwise adversely affect the Company's business operations or
performance. However, at present, the Company is unable to predict whether any
laws or regulations specifically applicable to the Company or its businesses
will be adopted, or, if any such laws or regulations are adopted, the nature or
extent of their impact on the information technology industry or the Company's
business operations or performance.
Federal and state laws and regulations relating to the liability of
online services companies and Internet access providers for information carried
on or disseminated through their networks is currently unsettled. Several
private lawsuits seeking to impose such liability upon online services companies
and Internet access providers are currently pending.
-12-
<PAGE>
In addition, legislation has been enacted and new legislation has been
proposed that imposes liability for or prohibits the transmission on the
Internet of certain types of information. The imposition upon the Company and
other Internet access providers of potential liability for information carried
on or disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources, or to discontinue certain service or
product offerings. The increased attention focused upon liability issues as a
result of these lawsuits and legislative actions and proposals could impact the
growth of Internet use. While the Company carries professional liability
insurance, it may not be adequate to compensate or may not cover the Company in
the event the Company becomes liable for information carried on or disseminated
over its networks.
EMPLOYEES
As of December 31, 1997, the Company had 268 employees, all of whom
were full time. Of these, 99 were principally engaged in professional services,
39 were principally engaged in the communications services, 10 were principally
engaged in the interactive publishing group, 47 were principally engaged in
sales and marketing, 20 were principally engaged in research and development, 12
were principally engaged in operations and 41 were principally engaged in
finance, administration, legal, management information systems and human
resources. None of the Company's employees is represented by a labor union. The
Company considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company currently occupies approximately 55,000 square feet in a
modern office building in Weehawken, New Jersey, under a lease that expires on
February 28, 2006. The Company's NOC is located at its Weehawken building. The
Company also occupies approximately 5,700 square feet in New York City and has
recently entered into a lease to occupy 23,000 square feet in New York City
which will replace the existing New York City facility. The Company has also
recently entered into a lease to occupy 13,000 square feet in San Francisco. The
Company currently expects to locate a second NOC in the San Francisco facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's common stock, par value $.001 per share ("Common
Stock"), began trading on The Nasdaq Stock Market's National Market under the
symbol "ICMT" on February 12, 1998. On March 27, 1998, the high and low bid
price for the Common Stock was $16.625 and $15.500, respectively.
On March 30, 1998, there were approximately 91 holders of record of
the Common Stock, exclusive of stockholders whose shares were held by brokerage
firms, depositories and other institutional firms in "street name" for their
customers.
The Company has not paid any cash dividend to stockholders and does not
anticipate paying such dividends in the foreseeable future, as the Company's
Board of Directors intends to retain earnings for use in the development and
continued expansion of the Company's business. The payment of cash dividends by
the Company is prohibited under its revolving line of credit. Any future
determination concerning the payment of dividends will be within the sole
discretion of the Board of Directors and will depend upon the existence of such
restriction, the Company's financial condition, the Company's results of
operations and such other factors as the Board of Directors deems relevant.
On May 30, 1997 the Company effected a 6-for-1 stock split of its
Common Stock. For each share of Common Stock outstanding on May 30, 1997, the
holder thereof received six shares of Common Stock. On December 15, 1997 the
Company effected a 1-for-2.75 reverse stock split of its Common Stock. For each
2.75 shares of Common Stock outstanding on December 15, 1997 the holder thereof
received one share of Common Stock. The Company believes the preceding issuances
were exempt from registration under the Securities Act of 1933 (the "Securities
Act") in reliance upon Section 3(a)(9) of such Act.
In January 1996, the Company sold 422,607 shares of Series A
Convertible Participating Preferred Stock, par value $.01 per share ("Series A
Preferred Stock"), at $23.33 per share, each of which converted into shares of
Common Stock at a price of $6.02 per share upon consummation of the Company's
initial public offering. Between January and March 1996, the company issued
five-year warrants to purchase an aggregate of 15,635 shares of Common Stock at
an exercise price of $.03 per share. Between May and September 1997, the Company
sold 180,240 shares of 10% PIK Series B Convertible Participating Preferred
Stock, par value $.01 per share ("Series B Preferred Stock"), at $100 per share,
each of which converted into shares of Common Stock at a price of $6.02 per
share upon consummation of the Company's initial public offering. Between March
and September 1997, the Company issued ten-year warrants to purchase 880,710
shares of Common Stock at an exercise price of $6.02 per share and 52,544 shares
of Common Stock at an exercise price of $.03 per share. The Company believes the
preceding issuances were exempt from registration under the Securities Act in
reliance upon Section 4(2) of such Act.
(b) On February 12, 1998, the Securities and Exchange Commission
declared effective the Company's Registration Statement on Form S-1 (File No.
333-38339). The managing underwriters in the offering (the "Offering") were
Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and
Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"). The
Representatives sold 3,850,000 shares of Common Stock in the Offering for the
Company's account at an aggregate offering price of $38,500,000. Additionally,
the Company registered an aggregate of 577,500 shares of Common Stock to cover
over-allotments.
-14-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from, and are
qualified by reference to, the audited financial statements of the Company for
the period indicated . The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7and the Financial Statements included in
Item 8 of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues, net:
Services: -
Professional.............................. $996 $1,914 $4,397 $6,570 $17,140
Communications............................ -- -- 189 1,286 5,979
Media..................................... -- -- 202 529 89
--- ----- --- --- --
Total services revenues.............. 996 1,914 4,778 8,367 23,208
--- ----- ----- ----- ------
Products...................................... 10,605 17,083 21,424 29,741 23,769
------ ------ ------ ------ ------
Total revenues, net................................ 11,601 18,997 26,212 38,108 46,977
------ ------ ------ ------ ------
Cost of revenues:
Services...................................... 382 758 2,596 6,842 17,001
Products...................................... 9,596 14,132 17,653 24,607 19,401
----- ------ ------ ------ ------
Total cost of revenues............................. 9,978 14,890 20,249 31,449 36,402
----- ------ ------ ------ ------
Gross profit....................................... 1,623 4,107 5,963 6,659 10,575
----- ----- ----- ----- ------
Operating expenses:
General and administrative.................... 652 1,548 2,435 7,006 10,925
Selling and marketing......................... 742 1,393 3,450 6,504 9,798
Research and development...................... 695 501 411 969 1,347
Depreciation and amortization................. 75 94 228 460 978
-- -- --- --- ---
Total operating expenses........................... 1,538 3,536 6,524 14,939 23,048
----- ----- ----- ------ ------
Income (loss) from operations...................... 82 571 (561) (8,280) (12,473)
Total other income (expense)....................... 2 9 (62) 32 (268)
Provision (benefit) for income taxes............... 43 289 (183) (210) 256
-- --- ---- ---- ---
Net income (loss).................................. $ 44 $ 291 $ (440) $ (8,038) $ (12,997)
============= ============= ============ =========== ============
Basic earnings (loss) per share and diluted
earnings (loss) per share(a)................... $ 0.01 $ 0.04 $ (0.07) $ (1..31) $ (2.17)
============= ============= ============ =========== ============
Weighted average shares outstanding used for
basic earnings (loss) per share
and diluted earnings (loss) per share(a)....... 6,545 6,545 6,545 6,545 6,545
Pro forma basic loss per share and diluted
loss per share(a)(b)........................... $ (1.39)
Pro forma weighted average shares
outstanding used for basic loss per
share and diluted loss per share(a)(b)......... 9,347
Balance Sheet Data (at period end): $ 74 $ 82 $ 620 $ 515
Cash and cash equivalents.......................... 212 423 (712) (1,900) $ 1,011
Working capital (deficiency)....................... 1,967 4,510 8,611 13,292 (1,281)
Total assets....................................... 1,553 3,805 8,213 11,543 20,434
Total liabilities.................................. -- -- -- 9,881 14,158
Mandatorily redeemable preferred stock............. 414 705 398 (8,132) 27,229
Stockholders' equity (deficit)..................... (20,953)
- -------------------
a) For information concerning the computation of earnings (loss) per share and
pro forma loss per share of Common Stock and weighted average shares and
pro forma weighted average shares of Common Stock outstanding, see Notes 4
and 14 to the Financial Statements.
(b) Gives effect to the conversion of 422,607 shares of Series A Preferred
Stock and 180,240 shares of Series B Preferred Stock into 1,637,061 and
2,992,770 shares of Common Stock, respectively, upon consummation of the
Company's initial public offering on February 18, 1998.
</TABLE>
-15-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Financial Statements included elsewhere in this Report. This discussion contains
forward-looking statements based on current expectations that involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth at the end of this Item.
OVERVIEW
Integration Consortium, Inc. ("ICI"), the Company's predecessor, was
incorporated in New York in February 1991. Icon was incorporated in Delaware in
February 1995, and ICI was merged with and into Icon in December 1995. ICI was
primarily engaged in the design, marketing, installation and on-going support of
high-end network-based information management systems. ICI also focused on
developing, customizing and integrating both third-party and proprietary
software applications.
In 1995, recognizing the emergence of IP as a data transmission
standard, the Company's management redefined the Company's strategy to provide
end-to-end solutions that enable corporate customers to implement their
Internet, intranet and extranet strategies. The Company's revenues are primarily
derived from the following services and products: (i) a range of professional
services, including custom application and website development and design,
systems integration and maintenance and support services; (ii) communications
services including high-quality Internet access and related services, such as
web/server hosting and management, enhanced by the Company's proprietary
technologies; and (iii) product resales, including hardware and software sold as
an integral part of systems design and integration and as a means to sell
integrated communications and professional services and establish customer
relationships.
STATEMENT OF OPERATIONS
The Company provides professional services to its customers to
facilitate the delivery of their information and applications over Icon's
communications infrastructure, including development, design and integration
services and maintenance and support services. Revenues from development, design
and systems integration contracts are recognized on a percentage-of-completion
basis. Maintenance and support services are typically provided in accordance
with annual agreements that are renewable at the discretion of the customer and
subject to change annually. Maintenance and support revenues are recognized
ratably over the term of the respective agreement.
Revenues from communications services are generated by providing
Internet access and other related communications services, such as web/server
hosting and management. Communications services are generally provided based on
one-year or multi-year service agreements, which are renewable at the discretion
of the customer. Communications services revenues are recognized ratably over
the term of the respective service agreement.
As a result of the Company's implementation of its end-to-end solutions
strategy, services revenues (which incorporate professional, communications and
media services) have increased on a yearly basis as a percentage of total
revenue. For the years ended December 31, 1995, 1996, and 1997 services revenues
consisted of 18.3%, 22.0%, and 49.4% of total net revenues, respectively. The
increase in services revenues as a percentage of total net revenues is expected
to continue to increase in the future. Historically, the Company generated
limited media revenues from selling advertisement space on its three new-media
properties, Word(TM), Charged(TM) and SportsFan Online. The Company has
experienced operating losses in connection with the ongoing operation of its
media properties and, on March 9, 1998, the Company announced that it would
discontinue the ongoing operations of Word and Charged. Also, during the first
quarter, Icon terminated its agreement with SportsFan Radio Network, and instead
began providing consulting services and communications services to SportsFan
Radio Network in connection with the ongoing operation of SportsFan Online.
-16-
<PAGE>
Historically the Company has experienced relatively stable gross
margins on product sales. For the years ended December 31, 1995, 1996 and 1997
gross margins on product sales were 17.6%, 17.3% and 18.4%, respectively. Over
the same periods gross margins on services have fluctuated as cost of revenues,
particularly on communications services, have increased in advance of revenue
growth for such services. The Company anticipates that in the future services
will provide greater opportunities for increased gross margins.
The Company generates products revenues through the reselling of
computer and networking hardware and software, including network servers,
routers, firewall software, and database management software. Products revenues
are recognized upon shipment.
Professional services cost of revenues consists of the labor and
overhead costs for the personnel performing the service including the cost of
project management, quality control and project review. Cost of communications
services revenues consists primarily of the cost to maintain and operate the
Company's communications infrastructure and customers' hosted web servers,
access charges from LECs and network and related communications facilities
costs, depreciation of network equipment and rental expenses for equipment
pursuant to operating leases. The Company expects its services revenues to
continue to increase in dollar amount, while declining as a percentage of
services revenue as the Company expands its customer base and more fully
utilizes its communications infrastructure. Cost of revenues for products
consists primarily of the Company's acquisition cost of computer and networking
hardware and software that is purchased from the manufacturers' distributors.
General and administrative expenses consist primarily of personnel
expense and professional fees, as well as rent and operating costs of the
Company's facilities. The Company expects general and administrative expenses to
increase in dollar amount, reflecting the continued growth of its operations and
the costs associated with being a publicly held entity, but to decrease in
future years as a percentage of total net revenues.
Selling and marketing expenses consist primarily of personnel expenses,
including salary, benefits, commissions, overhead costs and the cost of
marketing programs, such as advertising, trade shows and public relations. The
Company expects selling and marketing expenses to continue to increase in dollar
amount in future years as the Company's business grows and as it increases its
presence at trade shows, increases the size of its sales force and develops
additional materials to reach a larger audience. The Company expects marketing
expenses to decrease as a percentage of total net revenues due to the fact that
initial marketing expenses, such as development and preparation of collateral
materials, were incurred upon the expansion of business lines.
Research and development expenses consist primarily of personnel and
related costs associated with the development of the Company's technologies. The
Company expects its research and development spending to continue to grow and to
increase modestly as a percentage of total operating expenses in future years.
The Company's expectations of significant revenue growth are not dependent,
however, upon the success of ongoing future research and development activities.
OTHER
In order to provide nationwide communications services including
Internet access, the Company entered into a three-year agreement in June 1995
with MFS to access MFS' nationwide communications facilities and related
communications products and services. The terms of the agreement provide for the
Company to pay MFS primarily based on the average bandwidth of the Company's
traffic transmitted over MFS' communications facilities. The Company believes
that the usage-based pricing plan established in the agreement has allowed, and
will continue to allow, the Company to grow communications services revenues
without incurring the full fixed costs typically associated with building a
nationwide network and Internet access. The Company also believes that as the
utilization of its network increases the Company may elect to lease and install
its own dedicated high speed connections between nodes and may rely less on MFS'
communications facilities for data transport.
-17-
<PAGE>
The Company, which had been profitable prior to 1995, has incurred net
losses and negative cash flow from operations since transitioning its strategy
to provide end-to-end Internet solutions and expects to continue to operate at a
loss and experience negative cash flow at least through 1998. The Company's
attainment of profitability and positive cash flow is dependent upon its ability
to substantially grow its revenue base and achieve related operating
efficiencies.
The Company will continue to focus on growing its professional services
and communications services businesses, which could require it to significantly
increase its expenses for personnel and marketing.
The Company serves major customers in information intensive industries,
such as financial services, telecommunications, media and travel. As discussed
in Note 10 to the financial statements, revenues attributable to Bear Stearns
comprised 28%, 30% and 49% of the Company's total net revenues in 1995, 1996 and
1997, respectively, and in each year represented a significant component of
services and products revenues. Revenues attributable to Nomura Securities
comprised 15% and 13% of the Company's total net revenues in 1995 and 1996,
respectively, and in each year represented a significant component of products
revenues. Revenues attributable to Merrill Lynch comprised 10% of the Company's
total net revenues in 1995, which represented a significant component of
products revenues. No other customers represented over 10% of the Company's
total net revenues in the same time periods. Management expects revenue
concentration to decline as the Company grows its services revenues.
Historically, the Company has marketed and sold its services and
products through its direct sales force and through indirect channels. In May
1996, the Company entered into an arrangement with Bell Atlantic Internet
Solutions whereby Bell Atlantic Internet Solutions agreed to provide billing
services in connection with the offering of the Company's communications
services to requesting Bell Atlantic Internet Solutions customers for both
dedicated and switched access, including residential customers. Revenues from
customers acquired through Bell Atlantic Internet Solutions represented 31% of
communications services revenues in 1997. The Company believes that revenues
from this arrangement will continue to grow at least until such time that Bell
Atlantic Internet Solutions receives regulatory relief from the FCC from various
regulations that affect the development of advanced telecommunications services
by the RBOCs and that this relationship will represent a significant element of
Icon's distribution strategy in Bell Atlantic Internet Solutions' region. In
October 1997, the Company extended its arrangement by entering into an updated
GSP agreement with Bell Atlantic Internet Solutions to continue to make its
services available in the traditional Bell Atlantic southern region for switched
and dedicated services and to expand the Company's reach with respect to
dedicated services into the Bell Atlantic northern region (previously NYNEX)
through October 1999. The Company currently plans that it will make its services
available to requesting Bell Atlantic Internet Solutions business customers in
the northern region during the first half of 1998, subject to certain regulatory
approvals. The Company also has agreements with Access Graphics, Fiberlink,
Merisel and other resellers to resell the Company's communications services.
The Company has incurred losses in 1995, 1996 and 1997 that have
generated net operating loss carryforwards of approximately $19.2 million at
December 31, 1997 for federal and state income tax purposes. These carryforwards
are available to offset future taxable income and expire in 2011 through 2012
for federal income tax purposes.
-18-
<PAGE>
RESULTS OF OPERATIONS
The following table shows various items on the Company's Statement of
Operations as a percentage of total net revenues (except where otherwise noted).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Services:
Professional.......................... 8.6% 10.1% 16.8% 17.3% 36.5%
Communications........................ -- -- 0.7 3.3 12.7
Media................................. -- -- 0.8 1.4 0.2
--- --- --- --- ---
Total services revenues.......... 8.6 10.1 18.3 22.0 49.4
--- ---- ---- ---- ----
Products.................................. 91.4 89.9 81.7 78.0 50.6
---- ---- ---- ---- ----
Total revenues, net............................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of revenues:
Services(a)............................... 38.4% 39.6% 54.2% 81.8% 73.3%
Products(b)............................... 90.5 82.7 82.4 82.7 81.6
Total cost of revenues......................... 86.0 78.4 77.3 82.5 77.5
Gross profit................................... 14.0 21.6 22.7 17.5 22.5
Operating expenses:
General and administrative................ 15.6 8.2 9.2 18.4 23.2
Selling and marketing..................... 6.5 7.3 13.1 17.1 20.9
Research and development.................. 0.6 2.6 1.6 2.5 2.9
Depreciation and amortization............. 0.6 0.5 0.9 1.2 2.1
--- --- --- --- ---
Total operating expenses....................... 13.3 18.6 24.8 39.2 49.1
---- ---- ---- ---- ----
Income (loss) from operations.................. 0.7 3.0 (2.1) (21.7) (26.6)
Net income (loss).............................. 0.4 1.5 (1.7) (21.1) (27.7)
- -------------------
(a) As a percentage of total services revenues.
(b) As a percentage of products revenues.
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total net revenues were $47.0 million for the year ended
December 31, 1997, an $8.9 million increase over total net revenues of $38.1
million for the year ended December 31, 1996.
Professional services revenues were $17.1 million and $6.6 million for
the years ended December 31, 1997 and 1996, respectively, representing an
increase in 1997 of 161%. This increase was attributable to the growing demand
for professional services in its existing customer base and the acquisition of
several new customers, a high renewal rate of existing maintenance contracts, an
increased number of systems engineers available to perform these services and a
higher utilization and average billing rate per systems engineer.
Communications services revenues were $6.0 million and $1.3 million for
the years ended December 31, 1997 and 1996, respectively, representing an
increase in 1997 of over 372%. This increase is primarily attributable to the
acquisition of new customers and the arrangement with Bell Atlantic Internet
Solutions under which the Company began providing service in the third quarter
of 1996. Revenues derived from the Bell Atlantic Internet Solutions arrangement
were a significant component of communications revenues for the year ended
December 31, 1997.
-19-
<PAGE>
Products revenues were $23.8 million and $29.7 million for the years
December 31, 1997 and 1996, respectively, representing a decrease of 19.9%. This
decrease was due primarily to the transition of the Company's focus from its
historical role as a VAR to providing IP network-related services.
COST OF REVENUES. Total cost of revenues were $36.4 million and $31.4
million for the years ended December 31, 1997 and 1996, respectively,
representing 77.5% and 82.5% of total net revenues, respectively. The overall
margin improvement was primarily attributable to the continued successful
implementation of the Company's strategy to sell higher-margin professional
services.
Services cost of revenues were approximately $17.0 million and $6.8
million for the year ended December 31, 1997 and 1996, respectively. This growth
is primarily attributable to the hiring of 24 additional professional services
personnel and the continued expansion of the Company's communications
infrastructure. Such costs decreased to 73.3% as a percentage of services
revenues in 1997 from 81.8% in 1996.
Products cost of revenues were $19.4 million and $24.6 million for the
year ended December 31, 1997 and 1996, respectively, representing 81.6% and
82.7% of products revenues for the years ended December, 1997 and 1996,
respectively. The slight decrease in margin was due primarily to a change in the
mix of resold products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$10.9 million and $7.0 million for the years ended December 31, 1997 and 1996,
respectively. This higher level of expenses reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business, as well as rent and operating costs of
the Company's facilities. General and administrative expenses as a percentage of
total net revenues increased to 23.3% in 1997 from 18.4% in 1996 due to
expansion of the Company's administrative infrastructure necessary to manage the
rapid growth of the Company's services business.
SELLING AND MARKETING. Selling and marketing expenses were $9.8 million
and $6.5 million for the years ended December 31, 1997 and 1996, respectively.
The 50.6% increase in 1997 reflects increased spending including the development
of new marketing materials. Selling and marketing expenses as a percentage of
total net revenues increased to 20.9% in 1997 from 17.1% in 1996 as a result of
the higher sales commissions and increased marketing and promotional activities.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.3
million and $1.0 million for the years ended December 31, 1997 and 1996,
respectively. This higher level of expense reflects an overall increase in the
number of personnel required to develop new technologies that enhance the
performance and reliability of the Company's network.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total net revenues were $38.1 million in 1996, an $11.9
million increase over total net revenues of $26.2 million in 1995.
Professional services revenues were $6.6 million and $4.4 million in
1996 and 1995, respectively, representing an increase of 49.4%. This increase
was attributable to the growing demand for professional services in the
Company's existing customer base and the acquisition of several new customers, a
high renewal rate of existing maintenance contracts, the increased number of
systems engineers available to perform these services and a higher utilization
and average billing rate per systems engineer.
Communications services revenues increased to $1.3 million in 1996 from
$0.2 million in 1995, representing an increase of 570%. This increase is
primarily attributable to the acquisition of new customers, the rollout of the
Bell Atlantic Internet Solutions arrangement in the second half of 1996 and the
continued cross-selling of communications services to the Company's existing
professional services and products customers.
Products revenues were $29.7 million and $21.4 million in 1996 and
1995, respectively, representing an increase of 38.8%. This increase was due
primarily to hardware and software resales related to large scale systems
integration projects for customers in the financial services industry.
COST OF REVENUES. Total cost of revenues were $31.4 million and $20.2
million in 1996 and 1995, respectively, representing 82.5% and 77.3% of total
net revenues, respectively. This decline in margin is primarily
-20-
<PAGE>
attributable to the expansion of the Company's network, resulting in significant
fixed costs with minimal communications services revenues.
Services cost of revenues were $6.8 million and $2.6 million in 1996
and 1995, respectively. This growth is primarily attributable to the hiring of
professional services personnel, expansion of the Company's communications
infrastructure and costs associated with the Company's media properties. Such
costs increased to 81.8% as a percentage of services revenues in 1996 from 54.2%
in the prior year, reflecting the significant fixed costs involved in expanding
the Company's communications infrastructure.
Products cost of revenues were $24.6 million and $17.7 million in 1996
and 1995, respectively, representing 82.7% and 82.4%, respectively, of products
as a percentage of products revenues in 1996 and 1995, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$7.0 million and $2.4 million in 1996 and 1995, respectively. This higher level
of expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business as well
as rent and operating costs of the Company's facilities. General and
administrative expenses as a percentage of total net revenues increased to 18.4%
from 9.3% in the year earlier period due to expansion of the Company's
administrative infrastructure necessary to manage the rapid growth of the
Company's services business.
SELLING AND MARKETING. Selling and marketing expenses were $6.5 million
and $3.5 million in 1996 and 1995, respectively. The 88.5% increase in 1996
reflects an increase in sales commissions resulting from increased services and
products revenues combined with increased marketing and promotional activities,
including advertising and trade shows. Selling and marketing expenses as a
percentage of total net revenues increased to 17.1% in 1996 from 13.1% in 1995
as a result of the higher sales commissions and increased marketing and
promotional activities.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.0
million and $0.4 million in 1996 and 1995, respectively. This higher level of
expenses reflected an increase in personnel to develop new technologies that
allow the Company's network to more efficiently transport data.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results have in the past and may in
the future vary significantly depending upon factors such as the timing and
installation of significant orders, which in the past have been and will in the
future be, delayed from time to time by delays in the provisioning of
telecommunications services and products by subcontractors. Additional factors
contributing to variability of quarterly operating results include the pricing
and mix of products and services sold by the Company, terminations of service,
new services and products introductions by the Company and its competitors,
market acceptance of new and enhanced versions of the Company's services and
products, changes in pricing or marketing policies by its competitors and the
Company's responses thereto, the Company's ability to obtain sufficient supplies
of sole source or limited source components, changes in the Company's
communications infrastructure costs, as a result of demand variation or
otherwise, the lengthening of the Company's sales cycle, access to capital and
the timing of the expansion of the Company's communications infrastructure.
The following tables set forth the statement of operations data for
each of the eight quarters through December 31, 1997, as well as such operations
data as a percentage of the Company's revenues. This information has been
derived from the Company's unaudited financial statements. In the opinion of
management, the unaudited information set forth below has been prepared on the
same basis as the audited financial statements contained herein and includes all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the information set forth herein. The operating results for any
quarter are not necessarily indicative of results for any future period.
-21-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Services:
Professional............... $ 1,203 $ 1,062 $ 1,671 $ 2,634 $ 3,207 $ 4,268 $ 4,513 $ 5,152
Communications............. 147 185 353 583 938 1,233 1,760 2,048
Media...................... 124 113 116 176 77 -- -- 12
--- --- --- --- -- ----- ----- -----
Total services revenues... 1,474 1,360 2,140 3,393 4,222 5,501 6,273 7,212
----- ----- ----- ----- ----- ----- ----- -----
Products....................... 7,281 7,328 7,732 7,400 4,795 4,885 4,626 9,463
----- ----- ----- ----- ----- ----- ----- -----
Total revenues, net 8,755 8,688 9,872 10,793 9,017 10,386 10,899 16,675
----- ----- ----- ------ ----- ------ ------ ------
Cost of revenues:
Services....................... 1,270 1,237 1,826 2,509 3,137 3,592 4,792 5,480
Products....................... 6,157 5,865 6,384 6,201 3,813 4,092 3,771 7,725
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues.............. 7,427 7,102 8,210 8,710 6,950 7,684 8,563 13,205
----- ----- ----- ----- ----- ----- ----- ------
Gross profit........................ 1,328 1,586 1,662 2,083 2,067 2,702 2,336 3,470
Operating expenses.................. 2,566 3,873 3,909 4,591 4,652 5,269 5,723 7,404
----- ----- ----- ----- ----- ----- ----- -----
Loss from operations................ (1,238) (2,287) (2,247) (2,508) (2,585) (2,567) (3,387) (3,934)
Net loss............................ (1,169) (2,205) (2,179) (2,485) (2,950) (2,734) (3,404) (3,909)
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Services:
Professional............ 13.7% 12.3% 16.9% 24.4% 35.5% 41.1% 41.4% 30.9%
Communications.......... 1.7 2.1 3.6 5.4 10.4 11.9 16.2 12.3
Media................... 1.4 1.3 1.2 1.6 0.9 0.0 0.0 0.1
--- --- --- --- --- --- --- ---
Total services revenues 16.8 15.7 21.7 31.4 46.8 53.0 57.6 43.3
---- ---- ---- ---- ---- ---- ---- ----
Products.................... 83.2 84.3 78.3 68.6 53.2 47.0 42.4 56.7
---- ---- ---- ---- ---- ---- ---- ----
Total revenues, net.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== ======
Cost of revenues:
Services(a)................. 86.2% 91.0% 85.3% 73.9% 74.3% 65.3% 76.4% 76.0%
Products(b)................. 84.6 80.0 82.6 83.8 79.5 83.8 81.5 81.6
Total cost of revenues........... 84.8 81.7 83.2 80.7 77.1 74.0 78.6 79.2
Gross profit..................... 15.2 18.3 16.8 19.3 22.9 26.0 21.4 20.8
Operating expenses............... 29.3 44.6 39.6 42.5 51.6 50.7 52.5 44.4
---- ---- ---- ---- ---- ---- ---- ----
Loss from operations............. (14.1) (26.3) (22.8) (23.2) (28.7) (24.7) (31.1) (23.4)
Net loss......................... (13.4) (25.4) (22.1) (23.0) (32.7) (26.3) (31.2) (23.4)
- --------------------------
(a) As a percentage of total services revenues.
(b) As a percentage of products revenues.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had an accumulated deficit of $21.1 million at December 31,
1997 and has used cash of $16.3 million in the aggregate to fund operations
during 1995, 1996 and 1997. Prior to consummation of the Company's initial
public offering on February 18, 1998 (the "Offering"), the Company had satisfied
its cash requirements primarily through the sale of preferred stock and
borrowings under credit agreements. The Company's principal uses of cash are to
fund operations, working capital requirements and capital expenditures. At
December 31, 1997 the Company had $1.0 million in cash and cash equivalents and
a working capital deficit of $1.3 million. Net cash used in operating
-22-
<PAGE>
activities for the years ended December 31, 1995, 1996 and 1997 was
approximately $1.3, $5.0 and $10.0 million, respectively. Net cash used in
investing activities for the years ended December 31, 1995, 1996 and 1997 was
approximately $1.0, $3.7 and $5.0 million, respectively. For the years ended
December 31, 1995, 1996 and 1997, cash of approximately $2.9, $8.6 million and
$15.5 million, respectively, was provided by financing activities. Cash provided
by financing activities for the years ended December 31, 1997 includes
approximately $16.5 million in net proceeds from the issuance of the Series B
Preferred Stock.
As of December 31, 1997, the Company's operating lease obligations were
projected to be $1.7, $1.2 and $1.1 million for 1998, 1999 and 2000,
respectively.
On August 13, 1996, the Company obtained a secured line of credit with
The CIT Group/Business Credit, Inc. ("CIT") for $10.0 million which expires on
August 13, 1998. Borrowings under this line are secured by substantially all of
the assets of the Company and are limited to a specified percentage of
qualifying accounts receivable less outstanding obligations of the Company owed
to CIT including outstanding letters of credit. Under this secured line of
credit, the Company may not pay cash dividends, pledge any of its assets to
third parties, borrow money from third parties, lend money to third parties or
merge or consolidate with third parties without CIT's prior written consent.
Borrowings under this line amounted to $2.2 and $1.1 million at December 31,
1996 and 1997, respectively. The Company does not currently expect that it will
be necessary to use the secured line of credit to meet its working capital and
capital expenditure requirements through the end of 1998. Interest is payable
monthly at an annual rate equal to the prime rate plus one percent. Following a
change in the prime rate, the rate adjusts on the first of the month following
any change. Interest expense amounted to $0.1 and $0.3 million for the year
ended December 31, 1996 and 1997, respectively. As of December 31, 1997, there
was $4.1 million available under the line.
As of December 31, 1997, trade payables to a vendor in the amount of
$3.8 million were secured by a lien on substantially all of the Company's
assets.
The Company has made capital investments in its network, NOC and other
capital assets totaling $1.0, $3.7 and $5.0 million in 1995, 1996, and 1997
respectively. The Company expects to make additional capital investments to
expand and enhance its operations of approximately $5.5 million in 1998. The
foregoing expectation with respect to capital investment is a forward-looking
statement that involves risks and uncertainties and the actual amount of capital
investment could vary materially as a result of a number of factors.
On February 18, 1998, the Company completed the Offering, selling 3.85
million shares of Common Stock at a price of $10.00 per share, providing gross
proceeds to the Company of $38.5 millon and net proceeds, after deducting
underwriting discounts, commissions and estimated offering expenses payable by
the Company, of approximately $34.5 million. Since the Company expects to incur
additional operating losses, the Company intends to use the net proceeds from
the Offering to meet its short term capital requirements. The Company believes
that proceeds from the Offering will be sufficient to meet its anticipated cash
needs for working capital and for the acquisition of capital equipment through
the end of 1998. However, there can be no assurance that the Company will not
require additional financing within this time frame. The Company's forecast of
the period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that such
additional financing, if needed, will be available on terms attractive to the
Company, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") FASB
issued Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"), which requires the presentation of components of comprehensive
income in a company's financial statements for the reporting periods beginning
subsequent to
-23-
<PAGE>
December 15, 1997. Comprehensive income is defined as the change in a company's
equity during a financial reporting period from transactions and other
circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available for sale securities). The adoption of FAS 130 is not expected to have
a material impact on the Company's financial statements.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), which establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. FAS 131 is effective for fiscal years beginning after December 31,
1997. The adoption of the provisions of FAS 131 is not expected to have a
material impact on the Company's existing disclosures.
YEAR 2000
As reasonably necessary and appropriate, the Company is in the process
of modifying or replacing software components that it uses so that such software
will properly recognize dates beyond December 31, 1999 ("Year 2000 Compliance").
The cost for such modifications and replacements is not expected to be material.
The Company has initiated formal communications with its significant vendors and
customers to determine the extent that Year 2000 Compliance issues of such
parties may affect the Company. There can be no guarantee that the systems of
such other companies will be timely converted, or that their conversion will be
compatible with information included in the Company's systems, without a
material adverse effect on the Company's business, financial condition or
results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend," "estimate" and similar
expressions. Those statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectation of the
Company or its directors or officers with respect to, among other things, trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected, expressed or implied in the
forward-looking statements as a result of various factors, including but not
limited to the following ("Cautionary Statements"): (i) the Company's limited
operating history and history of negative cash flow and operating losses, (ii)
potential fluctuations in the Company's quarterly operating results, (iii) the
Company's concentration of revenues, (iv) challenges facing the Company as it
experiences rapid growth and (v) its dependence on a limited number of
suppliers. The accompanying information contained in this report, including the
information set forth under "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," identifies important factors
that could cause such differences. Such forward-looking statements speak only as
of the date of this report, and the Company cautions potential investors not to
place undue reliance on such statements. The Company undertakes no obligation to
update or revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth on the Financial
Statements, commencing on page F-1 included herein.
-24-
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
PART III
The information called for by Part III (Items 10, 11, 12 and 13) of
Form 10-K is incorporated herein by reference to such information, which will be
contained in the Company's definitive proxy statement relating to the Company's
1998 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A
under the Securities Act of 1934, as amended (the "1998 Proxy Statement").
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. Financial Statements filed as part of this Report:
Index to the Financial Statements.............................F-1
Report of Independent Accountants.............................F-2
Balance Sheet as of December 31, 1996 and 1997................F-3
Statement of Operations for the Years Ended December 31,
1995, 1996 and 1997.......................................F-4
Statement of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 1995, 1996 and 1997......F-5
Statement of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.......................................F-6
Notes to Financial Statements.................................F-7
2. Financial Statement Schedules filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the last fiscal
quarter of the period covered by this Report.
(c) EXHIBITS.
Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation of the registrant.
3.2 * Restated By-laws of the registrant.
4.1 * Specimen Copy of Stock Certificate for shares of Common
Stock of the registrant.
-25-
<PAGE>
Exhibit Description
------- -----------
4.2 * Form of Investors' Rights Agreement between the registrant and
each of the holders of its Series A Convertible Participating
Preferred Stock.
4.3 * Form of Registration Rights Agreement between the registrant and
each of the holders of its 10% PIK series B Convertible
Participating Preferred Stock.
4.4 * Form of warrant with certain registration rights of the
registrant.
10.1 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Scott A. Baxter, as amended.
10.2 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Richard M. Brown, as amended.
10.3 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Scott Harmolin, as amended.
10.4 +* Employment Agreement dated as of February 1997 between the
registrant and Frank C. Cicio, Jr.
10.5 +* Employment Agreement dated March 31, 1997 between the
registrant and Kenneth J. Hall.
10.6 +* 1995 Stock Option Plan of the registrant.
10.7 * Form of Stock Option Contract granted to employees of the
registrant.
10.8 +* Form of Stock Option Contract granted to executives officers
and certain key employees of the registrant.
10.9 * Lease dated November 3, 1995 between the registrant and Hartz-PW
Tower B Limited Partnership as supplemented on November 15, 1995.
10.10 * Financing Agreement dated August 13, 1996 between the registrant
and The CIT Group/Business Credit, Inc.
10.11 * Master Service Agreement dated June 29, 1995 between the
registrant and MFS
10.12 * Addendum No. 1 dated June 29, 1995 to the MFS Agreement.
Confidential treatment has been sought as to various portions of
this exhibit. Such portions have been omitted pursuant to an order
of the Securities and Exchange Commission granting such request.
10.13 * Modification Agreement to Addendum No. 1 to the MFS Agreement.
10.14 * Indirect Value Added Reseller Agreement dated November 2, 1992
between the registrant and Sun Microsystems Computer Company, as
amended through December 13, 1996.
10.15 * Master Value Added Reseller Agreement as amended through October
31, 1996 between the registrant and Cisco Systems, Inc.
10.16 * Global Service Provider Agreement dated October 17, 1997 between
the registrant and Bell Atlantic Internet Solutions, Inc.
10.17 * Application for Data Services dated February 11, 1997 between
the registrant and WorldCom Inc.
10.18 * Interconnection Agreement effective as of August 18, 1997
between the registrant and UUNET Technologies, Inc.
10.19 * Intercreditor Agreement dated August 18, 1996 among the
registrant, the CIT Group/Business Credit, Inc. and Access
Graphics, Inc.
11.1 Computation of pro forma per share earnings.
27.1 Financial Data Schedule.
- ------------------
Filed as the same exhibit number as part of the registrant's
Registration Statement on Form S-1 (File No. 333- 38339) declared
effective by the Securities and Exchange Commission on February 12,
1998 and incorporated by reference herein.
Management contract or compensatory plan.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1998.
ICON CMT CORP.
(Registrant)
By: /s/SCOTT A. BAXTER
------------------
Scott A. Baxter
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/SCOTT A. BAXTER President, Chief Executive Officer and March 31, 1998
------------------ Chairman of the Board of Directors
(Scott A. Baxter) (Principal Executive Officer)
/S/RICHARD M. BROWN Vice President -- Information Tech- March 31, 1998
- ------------------- nologies, Secretary and Director
(Richard M. Brown)
/S/SCOTT HARMOLIN Senior Vice President, Chief March 31, 1998
- ----------------- Technology Officer, and Director
(Scott Harmolin)
/S/KENNETH J. HALL Senior Vice President, Chief March 31, 1998
------------------ Financial Officer and Treasurer
(Kenneth J. Hall) (Principal Financial Officer)
/s/WILLIAM B. FISCHER Vice President and Controller March 31, 1998
- --------------------- (Principal Accounting Officer)
(William B. Fischer)
/s/SAMUEL A. PLUM
- -------------------
(Samuel A. Plum) Director March 31, 1998
/s/WAYNE B. WEISMAN
- -------------------
(Wayne B. Weisman) Director March 31, 1998
-27-
<PAGE>
ICON CMT CORP.
INDEX TO THE FINANCIAL STATEMENTS
Report of Independent Accountants............................................F-2
Balance Sheet as of December 31, 1996 and 1997...............................F-3
Statement of Operations for the Years Ended December 31,
1995, 1996 and 1997......................................................F-4
Statement of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 1995, 1996 and 1997.....................F-5
Statement of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997......................................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ICON CMT CORP.
In our opinion, the financial statements listed in the index under Item
14(a)(1) and (2) on page 25 present fairly, in all material respects, the
financial position of Icon CMT Corp. (the "Company") at December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Stamford, Connecticut
March 6, 1998
F-2
<PAGE>
ICON CMT CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER
31, 1997
DECEMBER 31, (NOTE 14)
------------------------ -------------
1996 1997 (UNAUDITED)
---- ----
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 515 $ 1,011
Accounts receivable, net of allowance for
doubtful accounts of $437 and $450, respectively............... 7,348 9,276
Unbilled costs and accrued earnings............................... 184 981
Notes receivable.................................................. 167 178
Inventories....................................................... 92 104
Prepayments and other current assets.............................. 752 1,327
Deferred financing costs.......................................... -- 824
Deferred tax asset (Note 1)....................................... 430 --
----------- -----------
Total current assets.............................................. 9,488 13,701
Fixed assets, net (Note 5)............................................. 3,721 6,525
Other assets........................................................... 83 208
----------- -----------
Total assets......................................... $ 13,292 $ 20,434
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................. $ 6,689 $ 8,941
Short-term borrowings............................................. 2,194 1,000
Accrued expenses.................................................. 2,232 4,096
Deferred revenue.................................................. 273 121
----------- -----------
Total current liabilities..................................... 11,388 14,158
Deferred tax liability............................................ 155 --
--- ------
Total liabilities.................................... 11,543 14,158
----------- -----------
Commitments (Note 13)
Mandatorily redeemable 10% PIK Series B Convertible Participating
Preferred Stock ($.01 par value; 415,000 shares authorized,
none issued and outstanding in 1996, 180,240 shares issued and outstanding
in 1997, pro forma none issued and outstanding) (liquidation preference of
$18,866 at December 31, 1997)....................................... -- 16,628
Mandatorily redeemable Series A Convertible Participating Preferred Stock ($.01
par value; 450,000 shares authorized, 422,607 issued and outstanding in 1996
and 1997, pro forma none issued and outstanding)(liquidation preference of
$10,401 and $10,993, respectively) 9,881 10,601
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized) -- --
Common stock ($.001 par value; 50,000,000 shares authorized, 11
6,545,454 shares issued and outstanding in 1996 and 1997,
pro forma 11,175,285 shares issued and outstanding)............. 7 7 $
Additional paid-in capital........................................ 23 498 27,335
Accretion of mandatorily redeemable preferred stock............... (89) (388) --
Accumulated deficit............................................... (8,073) (21,070) (21,070)
----------- ----------- -------------
Total stockholders' (deficit) equity..................... (8,132) (20,953) $ 6,276
----------- ----------- =============
Total liabilities, mandatorily redeemable preferred stock $ 13,292 $ 20,434
and stockholders' deficit............................
=========== ===========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ICON CMT CORP.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues, net:
Services:
Professional............................................ $ 4,397 $ 6,570 $ 17,140
Communications.......................................... 189 1,268 5,979
Media................................................... 202 529 89
-------------- ------------- --------------
Total services revenues............................ 4,788 8,367 23,208
-------------- ------------- --------------
Products.................................................... 21,424 29,741 23,769
-------------- ------------- --------------
Total revenues, net................................ 26,212 38,108 46,977
-------------- ------------- --------------
Cost of revenues:
Services.................................................... 2,596 6,842 17,001
Products.................................................... 17,653 24,607 19,401
-------------- ------------- --------------
Total cost of revenues............................. 20,249 31,449 36,402
-------------- ------------- --------------
Gross profit..................................................... 5,963 6,659 10,575
-------------- ------------- --------------
Operating expenses:
General and administrative.................................. 2,435 7,006 10,925
Selling and marketing....................................... 3,450 6,504 9,798
Research and development.................................... 411 969 1,347
Depreciation and amortization............................... 228 460 978
-------------- ------------- --------------
Total operating expenses................................ 6,524 14,939 23,048
-------------- ------------- --------------
Loss from operations............................................. (561) (8,280) (12,473)
-------------- ------------- --------------
Other income (expense):
Interest income............................................. 16 107 94
Interest expense............................................ (78) (75) (362)
-------------- ------------- --------------
Total other income (expense)............................ (62) 32 (268)
-------------- ------------- --------------
Loss before income taxes......................................... (623) (8,248) (12,741)
-------------- ------------- --------------
Provision (benefit) for income taxes............................. (183) (210) 256
-------------- ------------- --------------
Net loss......................................................... $ (440) $ (8,038) $(12,997)
============== ============= ==============
Basic loss per share and diluted loss per share.................. $ (0.07) $ (1.31) $ (2.17)
============== ============= ==============
Weighted average shares outstanding used for basic loss per
share and diluted loss per share............................ 6,545 6,545 6,545
Pro forma data (unaudited) (Note 14):
Pro forma basic loss per share and diluted loss per share... $ (1.39)
Pro forma weighted average shares outstanding used for
basic loss per share and diluted loss per share.......... 9,347
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-4
<PAGE>
Icon CMT Corp.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accretion of
Mandatorily
Redeemable Retained Total
Common Stock Additional Convertible Earnings Stockholders'
------------ Paid-In Preferred (Accumulated Equity
Shares Amount Capital Stock Deficit) (Deficit)
------ ------ ------- ----- -------- ---------
(In thousands, except share amnounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 6,545,454 $ 7 $ 293 $ 405 $ 705
Issuance of compensatory stock
options to employees........ -- -- 133 -- 133
Net loss...................... -- -- -- (440) (440)
Balance at December 31, 1995.. 6,545,454 7 426 (35) 398
Issuance of warrants in
connection with sales of Series
A convertible participating
preferred stock ............ -- -- 166 -- 166
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value...................... -- -- (569) $ (89) -- (658)
Net loss...................... -- -- - -- (8,038) (8,038)
Balance at December 31, 1996 6,545,454 7 23 (89) (8,073) (8,132)
Issuance of warrants in
connection with sale of 10%
PIK Series B convertible
participating preferred stock -- -- 2,362 -- -- 2,362
Expenses related to issuance of
10% PIK Series B convertible
participating preferred stock -- -- (500) -- -- (500)
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
values...................... -- -- (1,387) (299) -- (1,686)
Net loss...................... -- -- -- -- (12,997) (12,997)
--------- ------ --------- --------- ---------- ---------
Balance at December 31, 1997 6,545,454 $ 7 $ 498 $ (388) $ (21,070) $(20,953)
========= ====== ========= ========= ========== =========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ICON CMT CORP.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities: (In thousands)
Net loss..................................................... $ (440) $ (8,038) $ (12,997)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................ 228 1,054 2,191
Stock option compensation................................ 133 -- --
Deferred income taxes, net............................... (198) (62) 275
Non-cash interest expense................................ -- -- 20
Changes in assets and liabilities:
Accounts receivable...................................... (2,230) (1,312) (1,928)
Unbilled costs and accrued earnings...................... -- (184) (797)
Inventories.............................................. 223 (71) (12)
Prepayments and other current assets..................... (352) (402) (586)
Other assets............................................. (69) -- --
Accounts payable......................................... 697 3,242 2,252
Accrued expenses......................................... 771 754 1,864
Deferred revenue......................................... 241 32 (152)
Income taxes payable..................................... (316) -- --
---- ---- ----
Net cash used in operating activities............... (1,312) (4,987) (9,870)
------ ------ ------
Cash flows from investing activities:
Capital expenditures......................................... (1,000) (3,701) (4,995)
Investment in joint venture.................................. -- -- (125)
------ ------ ------
Net cash used in investing activities............... (1,000) (3,701) (5,120)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of short-term notes................... 3,000 2,194 7,750
Net repayments of short-term notes........................... -- (3,000) (7,944)
Loans to stockholders........................................ (150) -- --
Net proceeds from issuance of mandatorily redeemable
convertible preferred stock............................... -- 9,389 16,504
Deferred financing costs..................................... -- -- (824)
---- ---- -----
Net cash provided by financing activities........... 2,850 8,583 15,486
----- ----- ------
Net increase (decrease) in cash................................... 538 (105) 496
Cash and cash equivalents at beginning of period.................. 82 620 515
-- --- ---
Cash and cash equivalents at end of period........................ $ 620 $ 515 $ 1,011
============ ============= ============
Cash paid (received) for:
Income taxes................................................. $ 461 $ (175) $ (22)
============ ============ ===========
Interest..................................................... $ 56 $ 75 $ 332
============ ============= ============
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-6
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. ORGANIZATION AND BUSINESS
ORGANIZATION
Icon CMT Corp. ("Icon" or the "Company") was incorporated in February
1995 under the laws of the State of Delaware for the purpose of merging with
Integration Consortium, Inc. (the "Predecessor"), which was incorporated in 1991
under the laws of the State of New York. In July 1995, the stockholders of the
Predecessor exchanged their shares of the Predecessor for 6,545,454 shares of
the common stock of Icon and the Predecessor became a wholly owned subsidiary of
Icon. A merger of Icon and the Predecessor was effected in December 1995, and
pursuant to the merger agreement, Icon was the surviving entity. The share
exchange and subsequent merger has been accounted for in a manner similar to a
pooling of interests. References herein to the operations and historical
financial information of the "Company" prior to the date of the share exchange
refer to the operations and historical financial information of the Predecessor.
Unless the context otherwise requires, all other references herein to the
"Company" refer to Icon.
BUSINESS
From inception through 1994, the Company was primarily engaged in the
design, marketing, sale, installation and on-going support of information
management systems and distribution of information over networks. Through 1994,
the Company primarily generated revenue through the sales of hardware and
services to migrate its customers' networks to local client/server environments
and by managing, maintaining and expanding those networks.
During 1995 the Company began its transition to become an end-to-end
Internet solutions provider to corporate customers. The Company currently
derives its revenues from the following services and products: (i) professional
services including custom application development and design, systems
integration and maintenance and support services, (ii) high quality Internet
access and related communications services such as web/server hosting and
management and (iii) product resales, including hardware and software, as a part
of systems design and integration.
2. LIQUIDITY
The Company has incurred significant operating losses for the years
ended December 31, 1996 and 1997. At December 31, 1996 and 1997 the Company had
an accumulated deficit of $8,073 and $21,070, respectively, and a working
capital deficit of $1,900 and $1,281, respectively. Such losses have resulted
principally from general and administrative and selling and marketing expenses
associated with the Company's expanded level of operations. The Company expects
that its cash and working capital requirements will continue to increase as the
Company's operations continue to expand. In order to fund these efforts, the
Company completed private placements of its mandatorily redeemable Series A
Convertible Participating Preferred Stock (the "Series A Preferred") during 1996
and its mandatorily redeemable 10% PIK Series B Convertible Participating
Preferred Stock (the "Series B Preferred") during 1997 (Note 7). The Company
utilized the net proceeds from these issuances for the repayment of short-term
debt and working capital, including marketing and product line expansions. In
addition, the Company has borrowed $1,000 under a secured line of credit at
December 31, 1997 (Note 6) to meet its working capital requirements.
In February 1998 the Company completed an initial public offering of
its common stock and management believes that the net proceeds of such offering
will provide sufficient funding to meet the Company's planned business
objectives through December 31, 1998 (Note 14).
F-7
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SERVICES REVENUE
Revenue from custom software development, database design, outsourcing
and corporate website production is recognized as the services are rendered or
on a percentage of completion basis for contracts requiring milestone
achievements prior to invoicing.
Revenue from communications services, such as Internet access, hosting
services, on-site maintenance, product enhancements and telephone support, is
recognized ratably over the period of the underlying agreement as the services
are provided, typically one year.
Revenue from sponsorships of digital publications is recognized ratably
over the period in which the sponsorship is displayed on a website or webzine
produced by the Company.
Unbilled costs and accrued earnings consist primarily of services
performed which were not billed at the end of the period due to specific
contractual terms established with certain customers.
PRODUCTS REVENUE
Revenue from the resale of products, which consist of high-end
non-proprietary network hardware and software products, is recognized upon
shipment to the customer when no significant vendor obligations exist and
collectibility is probable.
DEFERRED REVENUE
Deferred revenue consists principally of billings in advance for
services not yet provided.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
INVENTORIES
Inventories, which consist principally of purchased computer hardware,
are stated at the lower of cost (determined on a first-in, first-out basis) or
market value.
DEFERRED FINANCING COSTS
On October 16, 1997, the Board of Directors of the Company authorized
management to pursue an underwritten sale of shares of the Company's common
stock in an initial public offering (the "IPO") pursuant to the Securities Act
of 1933. In connection with the Company's IPO, which was completed in February
1998, the Company has incurred certain costs which have been deferred at
December 31, 1997 (Note 14).
F-8
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the
respective assets, generally three to five years. Depreciation expense related
to equipment used solely for communications-related services is included in
services cost of revenues.
RESEARCH AND DEVELOPMENT
The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with their
1997 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, notes receivable, accounts
payable, accrued expenses and short-term borrowings approximate their fair
values due to the relatively short maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"), which requires the presentation of the components of comprehensive
income in a company's financial statements for reporting periods beginning
subsequent to December 15, 1997. Comprehensive income is defined as the change
in a company's equity during a financial reporting period from transactions and
other circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available-for-sale securities). The adoption of FAS 130 is not expected to have
a material impact on the Company's financial statements.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), requires that public business enterprises report certain information
about operating segments. It also requires that public business enterprises
repot certain information about their products and services, geographic areas in
which they operate and major customers. FAS 131 is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years must be restated. The adoption of the
provisions of FAS 131 is not expected to have a material impact on the Company's
existing disclosures.
F-9
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
4. LOSS PER COMMON SHARE
Effective December 31, 1997 the Company adopted Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS 128") which requires presentation
of basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (i.e., options, warrants, convertible securities or
contingent stock arrangements). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation of
Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings.
All prior periods presented have been restated for the adoption of FAS
128. The adoption of FAS 128 did not have a significant impact on the loss per
share of prior periods. The computation of basic loss per share and diluted loss
per share for the years ended December 31, 1995, 1996 and 1997 are as follows:
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
Net loss............................. $(440) $(8,038) $(12,997)
Accrued dividends on Series A
Preferred and Series B Preferred... - (542) (1,234)
------ ----- -------
Loss available to common
stockholders....................... $(440) $(8,580) $(14,231)
====== ======== =========
Weighted average shares outstanding
used for basic loss per share and
diluted loss per share............. 6,545,454 6,545,454 6,545,454
Basic loss per share and
diluted loss per share............. $(0.07) $(1.31) $(2.17)
======= ======= =======
At December 31, 1997, outstanding options to purchase 1,241,150 shares
of common stock, with exercise prices ranging from $6.02 to $14.27 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 948,891 shares of common stock,
with exercise prices ranging from $0.01 to $6.02, were also antidilutive and
excluded from the computation of diluted loss per share at December 31, 1997.
Common shares issuable upon conversion of Series A Preferred and Series B
Preferred have also been excluded from the computation of diluted loss per share
at December 31, 1997 as they are antidilutive.
F-10
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
5. FIXED ASSETS
Fixed assets is comprised of the following at December 31, 1996 and
1997:
December 31,
--------------------------
1996 1997
---- ----
Computer equipment................................. $ 4,688 $ 8,917
Furniture and fixtures............................. 397 469
Vehicles........................................... 35 35
Leasehold improvements............................. -- 694
--- ---
5,120 10,115
Less: accumulated depreciation and amortization... (1,399) (3,590)
------ ------
$ 3,721 $ 6,525
========= =========
6. NOTES PAYABLE
SECURED LINE OF CREDIT
On August 14, 1995, the Company obtained a secured line of credit with
a bank for $3,000 which expired on June 30, 1996. Borrowings under this line
were secured by certain assets of the Company. At December 31, 1995, borrowings
under this line amounted to $3,000. Interest was charged at the bank's prime
rate plus one percent, which was 9.5% at December 31, 1995. Interest expense
amounted to $78 and $25 in 1995 and 1996, respectively. This line of credit was
repaid in full on January 31, 1996.
On August 13, 1996, the Company obtained a secured line of credit with
a lending institution for $10,000 which expires on August 13, 1998. Borrowings
under this line are secured by substantially all of the assets of the Company.
Borrowings under this line are limited to a specified percentage of qualifying
accounts receivable less outstanding obligations of the Company owed to the
lending institution including outstanding letters of credit. The payment of cash
dividends is prohibited under this secured line of credit. At December 31, 1996
and 1997, borrowings under this line amounted to $2,194 and $1,000,
respectively. Interest is payable monthly at an annual rate equal to the lending
institution's prime rate plus one percent, which was 9.25% and 9.50% at December
31, 1996 and 1997, respectively. The rate adjusts on the first of the month
following any change. Interest expense amounted to $50 and $324 for the years
ended December 31, 1996 and 1997, respectively. The agreement requires an annual
commitment fee of approximately $28. At December 31, 1997, amounts available
under the secured line of credit were $4,143.
At December 31, 1997, irrevocable letters of credit of $1,000, were
issued under this agreement which are being maintained as security for
performance under long-term property lease agreements.
BRIDGE FINANCING
In March 1997, the Company obtained a $1,000 unsecured bridge loan
which bore interest at a rate of 10% per annum from a holder of the Series A
Preferred. The terms of the loan provided for a rate of interest of 10% per
annum through June 30, 1997 and 18% per annum from July 1, 1997, payable
monthly. The loan was payable upon demand by the holder at any time after the
earliest of the following to occur: (i) the closing of initial public offering
in the amount of $8,000 or greater, (ii) the closing of a private placement of
any class of the Company's capital stock equal to or exceeding $8,000, (iii) a
"Disposal Event" as defined by the loan agreement, or (iv) September 30, 1997.
F-11
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
The loan agreement also provided that upon completion of a public
offering or private placement equal to or exceeding $8,000, the holder of the
loan had the option to convert the outstanding principal amount of the note and
accrued and unpaid interest into the class of capital stock issued in the public
or private offering. In May 1997 the holder of the loan converted the loan plus
accrued interest thereon, in the amount of $20, into 10,200 shares of Series B
Preferred.
In further consideration of the loan, upon completion of the Series B
Preferred financing, the Company issued a warrant to the Series A Preferred
holder to purchase 41,511 shares of common stock at an initial exercise price of
$6.02 per share. The warrant is exercisable for a period of ten years from the
date of issuance. The fair value of the warrant, in the amount of $103, has been
recorded as additional paid-in capital.
7. COMMON STOCK AND CONVERTIBLE PARTICIPATING PREFERRED STOCK
COMMON STOCK SPLIT, INCREASE IN AUTHORIZED COMMON SHARES, CHANGE TO PAR VALUE OF
COMMON STOCK, AND REVERSE STOCK SPLIT
Effective May 30, 1997, the Company implemented a 6-for-1 stock split
applicable to all issued and outstanding shares of the Company's common stock
and increased the number of authorized shares of common stock from 10,000,000 to
50,000,000. In addition, the par value of the Company's common stock was changed
from $.01 per share to $.001 per share.
In connection with the IPO, on October 16, 1997 the Company's Board of
Directors approved a 1-for-2.75 reverse stock split to be applicable to all
issued and outstanding shares of the Company's common stock, which split became
effective December 15, 1997.
All common shares, stock options, warrants and related per share data,
reflected in the financial statements and notes thereto, have been presented as
if the stock splits had occurred on January 1, 1995.
SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK
In January 1996, the Company issued 422,607 shares of Series A
Preferred at $23.33 per share providing gross proceeds of $9,859 and net
proceeds, after deducting expenses, of $9,389. Each share of Series A Preferred
is convertible at the option of the holder into the number of shares of common
stock determined by dividing $23.33 by the conversion price. The initial
conversion price was $10.70, which is subject to adjustment to the share price
of any security issuances at a per share price lower than $10.70 prior to the
second anniversary of the date of issuance of the Series A Preferred stock.
Subsequent to the second anniversary of the issuance of the Series A Preferred
the Series A shares are subject to weighted average anti-dilution provisions.
Upon issuance of the initial Series B Preferred on May 30, 1997 (See below), the
conversion price of the Series A Preferred was adjusted to $6.02 per share. The
Series A Preferred shares converted into common stock upon the consummation of
the Company's IPO.
If the Series A Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series A
Preferred, could have sold such shares to the Company at a redemption price of
$23.33 per share plus a redemption premium equal to $1.40 per annum accruing
from the date of issuance to the redemption date, less any dividends paid
thereon prior to the redemption date and including the amount of any dividends
or other distributions declared but unpaid on the Series A Preferred. The excess
of the redemption value over the carrying value was recorded by periodic charges
to stockholders' equity through the earliest date at which the Series A
Preferred holders may require redemption of the Series A Preferred.
F-12
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
The holders of Series A Preferred were entitled to vote on matters
which holders of common stock have the right to vote.
In connection with this transaction, the Company issued a warrant for
the purchase of 15,542 shares of the Company's common stock, at an initial
exercise price of $0.03 per share, as a placement fee to a financial advisor.
The fair value of the warrant in the amount of $166 has been recorded to
additional paid-in capital. The warrant is exercisable for a period of ten years
from the date of issuance.
10% PIK SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
On May 30, 1997, the Company issued and sold 100,000 shares of the
Series B Preferred at $100.00 per share providing gross proceeds of $10,000 and
net proceeds, after deducting expenses, of $9,601. Subsequent to the initial
issuance, and prior to the first anniversary of the closing date, subject to
certain closing conditions, the Company had the option to issue and sell up to
an additional 50,000 shares to the original investors at a price per share of
$100.00. As of December 31,1997, the Company had not exercised this option. This
option lapsed upon the closing of the IPO. In connection with this transaction,
the Company issued a warrant for the purchase of 838,199 shares of the Company's
common stock, at an initial exercise price of $6.02 per share, to the original
investors of the Series B Preferred. The warrant is exercisable for a period of
ten years from the date of issuance. The fair value of the warrant, in the
amount of $1,958, has been recorded as additional paid-in capital.
The holders of the Series B Preferred had the right to convert such
shares into common stock at an initial conversion rate of $100.00 divided by a
conversion price of $6.02 per share. In the event the Company had exercised its
option to sell the additional 50,000 shares of Series B Preferred to the
original investors, the conversion price would have been amended to $4.51 per
share. The Series B Preferred shares converted into common stock upon the
consummation of the IPO.
If the Series B Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series B
Preferred, could have sold such shares to the Company at a redemption amount,
and in the event of a liquidation of the Company the holders of the Series B
Preferred were entitled to a senior liquidation preference (each as defined).
An in-kind dividend accrued at an annual rate of 10%. The excess of
redemption value over carrying value, was recorded by periodic charges to
stockholders' equity through May 30, 2002, the earliest date the Series B
Preferred holders could have required redemption of the Series B Preferred. The
holders of Series B Preferred were entitled to participate equally per share in
any dividends to holders of common stock or the Series A Preferred in excess of
an annual rate of 10% and were entitled to vote on matters which holders of
common stock have the right to vote.
Also in connection with the initial issuance of Series B Preferred, the
Company issued a warrant to a financial advisor for the purchase of 50,042
shares of common stock at an exercise price of $0.03 per share. The fair value
of the warrant, in the amount of $301, has been recorded to additional paid-in
capital.
Prior to the initial issuance of the Series B Preferred, the original
Series B Preferred investors advanced amounts to the Company in the form of
bridge loans totaling $5,750 bearing interest at an annual rate of 10%. Such
advances were repaid with interest in the amount of $16, upon the closing of the
initial issuance of the Series B Preferred.
During the period from June 1997 to December 1997, the Company issued
and sold an additional 70,040 shares of the Series B Preferred at $100.00 per
share, providing gross proceeds of $7,004 and net proceeds, after deducting
expenses, of $6,904.
F-13
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
8. TRANSACTIONS WITH RELATED PARTIES
On July 17, 1995, the three founders and principal stockholders of the
Company entered into an agreement whereby, among other things, each of these
stockholders agreed to grant to the other two stockholders the right of first
refusal to purchase any shares of the Company's common stock they propose to
sell on substantially the same terms as a potential third-party is offering and,
upon their death, the right to purchase any or all of their shares of common
stock of the Company at the fair market value on the date of death. Upon
consummation of the IPO, the agreement was terminated.
In August 1995, the Company made loans in the amount of $50 to each of
its three principal stockholders. The loans bear interest at a rate of 7% per
annum. Interest income from such loans amounted to $3, $14, and $11 for the
years ended December 31, 1995, 1996 and 1997, respectively. The loans, and
accrued interest thereon, are due on demand.
On December 4, 1995, the Company entered into employment agreements
with each of its three principal stockholders and founders, which expire five
years from the date of the agreement. The employment agreements, which provide
for base salaries and guaranteed bonuses, contain certain non-compete clauses
which are in effect for a period of one year following termination of
employment. In the event of termination of employment of any of such principal
stockholders following a change in control (as defined in the employment
agreements), that has not been approved by the Board of Directors, the principal
stockholders will receive a termination payment equal to 2.99 times their
respective base salary. On June 2, 1997, the employment agreements were amended
by the Company. As a result of these amendments, the expiration dates of the
agreements were extended to May 29, 2002.
9. STOCK OPTION, DEFINED CONTRIBUTION AND PROFIT SHARING PLANS
STOCK OPTION PLANS
In July 1995, the Company adopted a stock option plan (the "July Plan")
which was subsequently terminated by the Company's Board of Directors on October
23, 1995. Pursuant to the July Plan, the Company granted certain employees
options to purchase 552,000 shares of the Company's common stock at $0.27 per
share. The Company recorded $133 of compensation expense during 1995 related to
the grant of such options. As of the date of grant, 65,455 options were
exercisable, and none were exercised prior to October 23, 1995, the date on
which the July Plan and all options granted pursuant thereto were canceled.
On October 23, 1995, the Company implemented its 1995 Stock Option Plan
(the "Plan"), whereby incentive and nonqualified options to purchase up to
1,090,909 shares of the Company's common stock may be granted to key employees,
directors and consultants. On March 14, 1997, the Board of Directors approved an
amendment to the Plan whereby the aggregate number of shares of common stock for
which options may be granted under the Plan was increased to 1,636,363. The
exercise and vesting periods and the exercise price for options granted under
the Plan are determined by a Committee of the Board of Directors. The Plan
stipulates that no option may be exercisable after ten years from the date of
grant. The fair market value of the Company's common stock is determined by the
Board of Directors. Options granted under the Plan generally vest in equal
installments over periods ranging from one to five years.
Under the Plan, each non-employee director, upon their initial
appointment, shall be granted options to purchase 3,273 shares of the Company's
common stock at a price equal to its fair market value at the date of grant.
Additionally, options to purchase 2,182 shares of the Company's common stock at
the then fair market value shall be granted immediately following each annual
meeting of the stockholders. These options are exercisable for five years from
the date of grant.No such options have yet been granted as of December 31, 1997.
F-14
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
On June 18, 1997 outstanding employee stock options, with exercise
prices ranging from $6.42 to $14.27, to purchase 868,364 shares of common stock
were repriced at $6.02 per share, which was the fair market value as determined
by the Board of Directors at such date. Outstanding stock options to purchase
109,091 shares of common stock held by an employee who is also a principal
stockholder were also repriced on such date from $11.76 to $6.63 per share.
The following table summarizes activity regarding stock options for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise
Option Price
------ -----
<S> <C> <C>
Options outstanding at December 31, 1995...................... 614,182 $6.42
Granted at $11.00-$11.74................................. 479,127 11.17
Forfeited at $6.42....................................... (148,364) 6.42
Forfeited at $11.00...................................... (35,127) 11.00
--------
Options outstanding at December 31, 1996 at:
$6.42.................................................... 465,818 6.42
$11.00-$11.74............................................ 444,000 11.19
-------
Total options outstanding at December 31, 1996................ 909,818 8.74
Granted at $10.00-$14.27................................. 402,968 13.54
Cancelled at $6.42-$14.27................................ (977,455) 9.92
Re-granted at $6.02-$6.63................................ 977,455 6.09
Granted at $6.02......................................... 106,364 6.02
Forfeited at $6.02-$11.00................................ (178,000) 9.13
---------
Options outstanding at December 31, 1997 at:
$10.00-$14.27............................................ 173,877 12.58
$6.02-6.63............................................... 1,067,273 6.08
---------
Total options outstanding at December 31, 1997................ 1,241,150 6.99
=========
Exercisable at December 31, 1997.............................. 274,364 7.99
=======
Options available for grant at December 31, 1997.............. 395,214
=======
Weighted average remaining contractual life for options at:
$6.02-$6.63............................................. 2.3 years
$10.00-$14.27........................................... 2.3 years
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its Plan and other stock-based compensation issued to employees
and directors. During the years ended December 31, 1996 and 1997, the Company
was not required to recognize compensation expense for options granted to
employees.
Had compensation cost for options grants to employees been determined
based upon the fair value at the date of grant for awards under the Plan
consistent with the methodology prescribed under Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation," ("FAS 123"), the Company's
net loss for the years ended December 31, 1995, 1996 and 1997 would have
increased by approximately $35, $529 and $561, respectively.
F-15
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
The fair values of options granted to employees during the years ended
December 31, 1995, 1996 and 1997 has been determined on the date of the
respective grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
1995 1996 1997
---- ---- ----
Dividend yield.................................... None None None
Weighted average risk free interest rate on date
of grant..................................... 6.3% 6.3% 6.3%
Forfeitures....................................... None None None
Expected life..................................... 5 years 5 years 5 years
DEFINED CONTRIBUTION AND PROFIT SHARING PLANS
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code, for employees
meeting certain service requirements. Participants may contribute up to 10% of
their gross wages not to exceed, in any given year, a limitation set by Internal
Revenue Service regulations. The Plan provides for discretionary contributions
to be made by the Company as determined by the Company's Board of Directors. The
Company has not made any contributions to the Plan during the periods presented.
The Company also has a profit sharing plan (the "PSP") covering substantially
all full-time employees. Contributions by the Company to the PSP amounted to $28
in 1996. There were no contributions to the PSP during 1995 and 1997.
10. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
A significant percentage (58%, 68% and 59% in the years ended December
31, 1995, 1996, and 1997, respectively) of the Company's revenues are derived
from domestic third-party financial services companies. Financial instruments
which potentially subject the Company to concentrations of credit risk are
primarily cash, accounts receivable, notes receivable, accounts payable and
short-term notes payable. The Company generally does not require collateral and
the majority of its trade receivables are unsecured. The Company is directly
affected by the well being of the financial services industry; however, the
Company does not believe significant credit risk exists at December 31, 1997.
The Company relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality required by the Company, are
available only from a limited number of sources. The Company is also dependent
upon local exchange carriers to provide telecommunications services to the
Company and its customers. There can be no assurance that the Company will be
able to obtain such services on the scale and within the time frames required by
the Company at an acceptable cost, or at all.
The network-based information management systems sold by the Company
are provided by one manufacturer for whom the Company serves as a value-added
reseller. Termination or loss of the Company's agreement with this manufacturer
may have a material adverse impact on the Company's financial position and
results of operations.
F-16
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
Revenues attributable to a single customer comprised 28%, 30% and 49%
of of the Company's total net revenues in 1995, 1996 and 1997, respectively.
Revenues attributable to a second customer comprised 15% and 13% of the
Company's total net revenues in 1995 and 1996, respectively. Revenues
attributable to a third customer comprised 10% of the Company's total net
revenues in 1995.
11. INCOME TAXES
The Company has incurred losses during 1995, 1996, and 1997. At
December, 1997, the Company has available for federal income tax purposes net
operating loss carryforwards of approximately $19,182 that expire in 2011
through 2012. At December 31, 1997 the Company also had research and development
tax credit carryforwards in the amount of $87 which expire in 2001. These losses
and credits are subject to limitation on future years utilization as a result of
certain ownership changes. In general, a change in ownership occurs when greater
than a 50 percent change in ownership takes place. The annual utilization of net
operating loss carryforwards generated prior to the change in ownership is
limited, in any one year, to a percentage of the fair value of the Company at
the time of the change in ownership.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $8,778 at December 31,
1997. The Company's operating plans anticipate taxable income in future periods;
however, such plans make significant assumptions which cannot be reasonably
assured including continued market acceptance of the Company's products and
services by customers. Therefore, in consideration of the Company's accumulated
losses and the uncertainty of its ability to utilize this deferred tax benefit
in the future, the Company has recorded a valuation allowance in the amount of
$8,778 at December 31, 1997, to offset the deferred tax benefit amount.
F-17
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
Significant components of the current and noncurrent deferred tax
assets at December 31, 1996, and 1997 are as follows:
December 31,
------------
1996 1997
---- ----
Deferred tax assets:
Accounts receivable reserves....... $ 185 $ 197
Net operating loss................. 3,296 8,392
Accruals........................... 245 135
Research and development credits... -- 87
Depreciation....................... -- 4
--- ---
Total deferred tax assets.......... 3,726 8,815
----- -----
Deferred tax liabilities:
Depreciation....................... (117) --
Other.............................. (38) (37)
--- ---
Total deferred tax liabilities..... (155) (37)
---- ---
Net deferred tax asset...................... 3,571 8,778
Less: valuation allowance................... (3,296) (8,778)
------ -------
Deferred tax asset, net..................... $ 275 $ --
======= ========
The components of the provision (benefit) for income taxes are as follows:
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
Current taxes:
Federal......................... -- $ (148) --
State and city.................. $ 15 -- --
-------- -------- ------
Total current taxes............. 15 (148) --
-------- -------- ------
Deferred taxes:
Federal......................... (114) (51) $ 174
State and city.................. (84) (11) 82
--- --- --
Total deferred taxes............ (198) (62) 256
---- --- ---
Provision (benefit) for income taxes..... $ (183) $ (210) $ 256
======= ======= ======
F-18
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. income tax rate to loss
before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax statutory rate................. (35.0%) (35.0%) (35.0%)
State income taxes, net of federal tax benefit.... (7.2) (9.6) (8.8)
Stock compensation................................ 7.4 -- --
Other nondeductible items......................... 5.4 2.1 2.8
Valuation allowance............................... -- 40.0 43.0
---- ---- ----
Income tax rate as recorded....................... (29.4%) (2.5%) 2.0%
===== ==== ===
</TABLE>
12. JOINT VENTURE
In November 1997, the Company entered into a Joint Venture agreement
with Teleway, a Japanese communications company, pursuant to which they intend
to establish Icon-Teleway Internet Corporation ("ITIC"). ITIC will operate an
Internet solutions business to market end-to-end solutions to corporate
customers in Japan. Teleway and the Company will hold equity stakes of 52% and
48%, respectively, in ITIC, which will be formally established by the first
quarter of 1998. The services provided by ITIC will be similar to the services
provided by the Company in the United States, including communications services,
professional services and product resales.
Teleway has agreed to provide ITIC an initial loan of Y1 billion
(approximately $7,900) and, upon request, to make an additional loan for up to
Y500 million (approximately $4,000) to fund operations. In connection with the
creation of ITIC, the Company licensed to ITIC the exclusive right to utilize
the Company's intellectual property in Japan for a period of five years.
As consideration of the rights granted to ITIC by the Company, ITIC
will pay royalties to the Company in amounts equal to 3.5% and 1.0% of net
income generated by ITIC through the leasing and sublicensing or sale of the
Company's services and sale of communications products, respectively. Any
royalties received by the Company (up to a maximum of $8,000) will be
contributed back to ITIC as equity and will be matched by Teleway so that their
respective ownership interests will remain constant.
In connection with the formation of ITIC the Company was required to
make a capital contribution of $125, which has been recorded in Other assets at
December 31, 1997.
13. COMMITMENTS
LEASES
Future minimum payments under non-cancelable operating leases, which
primarily relate to network capacity and office space, with initial or remaining
terms of one year or more, consist of the following as of December 31, 1997:
F-19
<PAGE>
Icon CMT Corp.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share and per share amounts)
Year
----
1998.............................................. $ 1,723
1999.............................................. 1,232
2000.............................................. 1,101
2001.............................................. 1,119
2002.............................................. 1,143
2003 and thereafter............................... 3,714
-----
$ 10,032
=========
Rent expense amounted to $210, $584 and $813 in 1995, 1996 and 1997.
OTHER
In February 1997, the Company entered into an agreement to purchase
interexchange telecommunications services through February 29, 2000. Pursuant to
this agreement the Company has a monthly commitment, before discounts, of $50.
These purchase commitments are not expected to exceed usage requirements in any
of the months covered by the agreement.
At December 31, 1997 trade payables to a vendor in the amount of $3,800
were secured by substantially all of the assets of the Company. The security
agreement is subordinated to the security interests of a lending institution in
connection with a secured line of credit (Note 6).
14. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING AND PRO FORMA PRESENTATION
On February 18, 1998, the Company completed the IPO, selling 3,850,000
shares of common stock at a price of $10.00 per share providing gross proceeds
to the Company of $38,500 and net proceeds, after deducting underwriting
discounts, commissions and estimated offering expenses payable by the Company,
of approximately $34,505.
Upon completion of the offering, the shares available for grant under
the 1995 Stock Option Plan were increased from 1,636,364 to 2,181,818.
Upon the closing of the IPO, all outstanding shares of Series A and
Series B Preferred Stock converted into an aggregate of 4,629,831 shares of
common stock. The pro forma effects of this conversion have been reflected in
unaudited pro forma stockholders' equity at December 31, 1997 and pro forma
earnings per share for the year ended December 31, 1997.
DISCONTINUED PRODUCT LINE
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $202, $529 and $89 from the selling
of advertising space on its new media properties in 1995, 1996 and 1997,
respectively. The cost of revenues associated with media services during 1995,
1996 and 1997 was $147, $1,504 and $2,316, respectively.
F-20
SCHEDULE II
ICON CMT CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1995...... $103 $225 -- -- $328
Year ended December 31, 1996...... 328 109 -- -- 437
Year ended December 31, 1997...... 437 13 -- -- 450
VALUATION RESERVE - DEFERRED TAX ASSETS
Year ended December 31, 1995...... -- -- -- -- --
Year ended December 31, 1996...... -- 3,296 -- -- 3,296
Year ended December 31, 1997...... 3,296 5,482 -- -- 8,778
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation of the registrant.
3.2 * Restated By-laws of the registrant.
4.1 * Specimen Copy of Stock Certificate for shares of Common Stock of the
registrant.
4.2 * Form of Investors' Rights Agreement between the registrant and each
of the holders of its Series A Convertible Participating Preferred
Stock.
4.3 * Form of Registration Rights Agreement between the registrant and
each of the holders of its 10% PIK series B Convertible Participating
Preferred Stock.
4.4 * Form of warrant with certain registration rights of the registrant.
10.1 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Scott A. Baxter, as amended.
10.2 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Richard M. Brown, as amended.
10.3 +* Employment Agreement dated as of December 4, 1995 between the
registrant and Scott Harmolin, as amended.
10.4 +* Employment Agreement dated as of February 1997 between the
registrant and Frank C. Cicio, Jr.
10.5 +* Employment Agreement dated March 31, 1997 between the registrant
and Kenneth J. Hall.
10.6 +* 1995 Stock Option Plan of the registrant.
10.7 * Form of Stock Option Contract granted to employees of the
registrant.
10.8 +* Form of Stock Option Contract granted to executives officers and
certain key employees of the registrant.
10.9 * Lease dated November 3, 1995 between the registrant and Hartz-PW
Tower B Limited Partnership as supplemented on November 15, 1995.
10.10* Financing Agreement dated August 13, 1996 between the registrant and
The CIT Group/Business Credit, Inc.
10.11* Master Service Agreement dated June 29, 1995 between the registrant
and MFS
10.12* Addendum No. 1 dated June 29, 1995 to the MFS Agreement.
Confidential treatment has been sought as to various portions of this
exhibit. Such portions have been omitted pursuant to an order of the
Securities and Exchange Commission granting such request.
10.13 * Modification Agreement to Addendum No. 1 to the MFS Agreement.
10.14* Indirect Value Added Reseller Agreement dated November 2, 1992
between the registrant and Sun Microsystems Computer Company, as
amended through December 13, 1996.
10.15* Master Value Added Reseller Agreement as amended through October 31,
1996 between the registrant and Cisco Systems, Inc.
10.16* Global Service Provider Agreement dated October 17, 1997 between the
registrant and Bell Atlantic Internet Solutions, Inc.
10.17* Application for Data Services dated February 11, 1997 between the
registrant and WorldCom Inc.
10.18* Interconnection Agreement effective as of August 18, 1997 between
the registrant and UUNET Technologies, Inc.
10.19* Intercreditor Agreement dated August 18, 1996 among the registrant,
the CIT Group/Business Credit, Inc. and Access Graphics, Inc.
11.1 Computation of pro forma per share earnings.
27.1 Financial Data Schedule.
- -------------------
* Filed as the same exhibit number as part of the registrant's
Registration Statement on Form S-1 (File No. 333-38339) declared
effective by the Securities and Exchange Commission on February 12,
1998 and incorporated by reference herein.
+ Management contract or compensatory plan.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ICON CMT CORP.
It is hereby certified that:
ARTICLE I
The present name of the corporation (hereinafter called the
"Corporation") is Icon CMT Corp. The name under which the Corporation was
originally incorporated was ICon International Inc. The date of filing of its
original certificate of incorporation with the Secretary of State of the State
of Delaware was February 27, 1995.
ARTICLE II
The restated certificate of incorporation of the Corporation
filed with the Secretary of State of the State of Delaware on December 15, 1997,
as amended on February 12, 1998 (the "Old Certificate"), is hereby amended by
striking out Paragraphs Fifth and Sixth of Article V thereof and by renumbering
the remaining Paragraphs Seventh through Thirteenth of the Old Certificate as
Paragraphs Fifth through Eleventh of Article V hereof, all of which is set forth
in the Restated Certificate of Incorporation hereinafter provided for.
ARTICLE III
The provisions of the certificate of incorporation of the
Corporation as heretofore amended and/or supplemented, and as herein amended,
are hereby restated and integrated into the single instrument which is
hereinafter set forth, and which is entitled Restated Certificate of
Incorporation of Icon CMT Corp., without any further amendments other than the
amendments herein certified and without any discrepancy between the provisions
of the certificate of incorporation as heretofore amended and supplemented and
the provisions of the said single instrument hereinafter set forth.
ARTICLE IV
The amendments and the restatement of the certificate of
incorporation herein certified have been duly adopted in accordance with the
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware (the "GCL").
-1-
<PAGE>
ARTICLE V
The certificate of incorporation of the Corporation, as
amended and restated herein, reads as follows:
RESTATED CERTIFICATE OF INCORPORATION
OF
ICON CMT CORP.
FIRST: The name of the Corporation is Icon CMT Corp.
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1013 Centre Road, Wilmington, New Castle
County, Delaware 19805. The name of its registered agent at such address is
Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the GCL.
FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is 51,000,000 shares, consisting of:
(a) 50,000,000 shares of a single class of common stock, par value $.001 per
share ("Common Stock"); and (b) 1,000,000 shares of a single class of preferred
stock, par value $.01 per share ("Preferred Stock"). The number of shares of
Preferred Stock may be issued from time to time in one or more series. The
Preferred Stock may be issued from time to time, when and as authorized by the
Board of Directors, in one or more subseries as to the date of issuance, upon
such terms and conditions as the Board of Directors may approve in one or more
additional series. The Board of Directors is expressly authorized to provide for
the issuance of all or any shares of the Preferred Stock in one or more classes
or series, and, subject to the provisions hereof, to fix by resolution or
resolutions the designations, powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations and
restrictions, of each such class or series.
FIFTH: Except as required by law, and subject to the rights of
holders of any series of Preferred Stock established pursuant to Paragraph
Fourth of this Certificate of Incorporation, a special meeting of stockholders
may be called at any time by the Board of Directors, the Chairman or the
President, and shall be called only by the Board of Directors or the Chairman or
the President pursuant to a resolution approved by a majority of the directors
of the Corporation then in office. Any such call must specify the matter or
matters to be acted upon at such meeting and only such matter or matters shall
be acted upon thereat. Any such meeting shall be at such time and at such place,
within or
-2-
<PAGE>
without the State of Delaware, as shall be set forth in the Board of Directors'
resolution calling for such meeting.
SIXTH:
i. The number of directors of the Corporation shall be fixed in
accordance with the By-laws of the Corporation, and may be increased or
decreased from time to time in such a manner as may be prescribed in the By-laws
of the Corporation.
ii. Unless and except to the extent that the By-laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
iii. The directors of the Corporation, other than those who may be
elected by the holders of any series of Preferred Stock, voting as a separate
class, shall be divided into three classes, as nearly equal in number as
possible. One class of directors of the Corporation shall be initially elected
for a term expiring at the annual meeting of stockholders to be held in 1998,
another class shall initially be elected for a term expiring at the annual
meeting of stockholders to be held in 1999 and another class shall initially be
elected for a term expiring at the annual meeting of stockholders to be held in
2000. Members of each class shall hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the
Corporation, the successors of the class of directors of the Corporation whose
term expires at that meeting shall be elected, in accordance with the By-laws of
the Corporation, to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election.
SEVENTH: The By-laws of the Corporation or any of them may be
amended or repealed, in any respect, and new By-laws may be adopted, at any time
either (i) by an affirmative vote of the holders of at least 66-2/3% of all of
the shares of the Corporation entitled to vote generally for the election of
directors of the Corporation or (ii) by an affirmative vote of a majority of the
directors of the Corporation present at a meeting of the Board of Directors, in
each case, in accordance with the terms of the By-laws. Notwithstanding the
foregoing and anything contained in this Certificate of Incorporation to the
contrary, Section 5 ("Special Meetings") or Section 7 ("Order of Business") of
Article II ("Meetings of Stockholders") of the By-laws; Section 1 ("Number and
Term"), Section 4 ("Nomination of Directors, Elections") or Section 8
("Meetings") of Article III ("Directors") of the Bylaws; or Article VI
("Amendments") of the By-laws shall not be amended or repealed and no provision
inconsistent therewith shall be adopted without the affirmative vote of the
holders of at least 66-2/3% of all of the shares of the Corporation entitled to
vote generally for the election of directors of the Corporation, voting together
as a single class.
-3-
<PAGE>
EIGHTH:
i. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, Paragraphs Fifth, Sixth and Seventh hereof shall
not be altered, amended or repealed and no provision inconsistent therewith
shall be adopted without the affirmative vote of the holders of at least 66-2/3%
of all of the shares of the Corporation entitled to vote generally in the
election of directors of the Corporation, voting together as a single class.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 66-2/3% of all of the
shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to alter, amend
or repeal or adopt any provision inconsistent with this section (a) of this
Paragraph Eighth.
ii. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, or any
amendment thereof, in the manner now or thereafter prescribed by the laws of the
State of Delaware or this Certificate of Incorporation, and all rights conferred
upon the stockholders of the Corporation are granted subject to this
reservation.
NINTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for the Corporation under
the provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
TENTH: No director shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
-4-
<PAGE>
ELEVENTH: The Corporation shall, to the fullest extent
permitted by the GCL, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have power to indemnify from and against any and
all liabilities, including, without limitation, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement of any suit, action or
proceeding to which such person is made, or is threatened to be made, a party.
The indemnification provided for herein shall not be deemed exclusive of any
other rights to which any person may be entitled under any By-law, 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; shall continue as to a person who has ceased to be a director, officer,
employee or agent; and shall inure to the benefit of the heirs, executors and
administrators of such a person.
IN WITNESS WHEREOF, the undersigned has duly signed this certificate
on March 3, 1998.
ICON CMT CORP.
By: /S/ SCOTT A. BAXTER
-------------------
Scott A. Baxter
President, Chief Executive Officer and
Chairman of the Board
-5-
<PAGE>
EXHIBIT 11.1
ICON CMT CORP.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
WEIGHTED
DAYS AVERAGE
SHARES OUTSTANDING SHARES
------ ----------- ------
YEAR ENDED DECEMBER 31, 1997
Shares outstanding at January 1, 1997 6,545,454 365 6,545,454
Issuance of common stock upon
conversion of preferred stock 4,981 101 1,378
830,220 105 238,830
83,022 121 27,522
4,151 125 1,422
33,209 156 14,193
41,345 164 18,577
166,044 174 79,155
3,466,901 215 2,042,149
921,441 150 378,674
---------------
Pro forma weighted average common shares outstanding 9,347,354
---------------
Net loss for the year ended December 31, 1997 $(12,997,000)
---------------
Pro forma net loss per common share $ (1.39)
===============
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037330
<NAME> ICON CMT CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,011
<SECURITIES> 0
<RECEIVABLES> 9,726
<ALLOWANCES> 450
<INVENTORY> 104
<CURRENT-ASSETS> 13,701
<PP&E> 10,115
<DEPRECIATION> 2,191
<TOTAL-ASSETS> 20,434
<CURRENT-LIABILITIES> 14,158
<BONDS> 0
27,229
0
<COMMON> 7
<OTHER-SE> (20,960)
<TOTAL-LIABILITY-AND-EQUITY> 20,434
<SALES> 46,977
<TOTAL-REVENUES> 46,977
<CGS> 36,402
<TOTAL-COSTS> 36,402
<OTHER-EXPENSES> 23,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362
<INCOME-PRETAX> (12,741)
<INCOME-TAX> 256
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,997)
<EPS-PRIMARY> 0
<EPS-DILUTED> (2.17)
</TABLE>
