ITEM 1. BUSINESS
WorldCorp, Inc., a Delaware corporation ("WorldCorp" or the "Company"), was organized in March 1987 to serve as the holding company for World Airways, Inc., a Delaware corporation ("World Airways"), which was organized in March 1948 and is the predecessor to the Company. Currently, WorldCorp owns positions in companies that operate in two distinct business areas.
WorldCorp's aviation services subsidiary, World Airways, is a global provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate contracts. World Airways also leads a contractor teaming arrangement that is one of the largest suppliers of commercial aircraft to the United States Air Force's Air Mobility Command ("U.S. Air Force" or "USAF"). World Airways was a wholly-owned subsidiary in 1993. In February 1994, pursuant to an October 1993 agreement, WorldCorp sold 24.9% of its ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, the Company increased its ownership in World Airways to 80.1% through the purchase of 5% of World Airways common stock held by MHS. In October 1995, World Airways completed an initial public offering. In September, 1997, World Airways purchased 3,227,000 shares of its common stock from WorldCorp. As a result, at December 31, 1997, WorldCorp owned approximately 46.3% of World Airways. Accordingly, beginning in September, 1997, WorldCorp reports its proportionate share of World Airways' financial results using the equity method of accounting. In January, 1998, MHS sold 773,000 shares of its World Airways common stock to World Airways. Effective January 23, 1998, WorldCorp and MHS own 51.2% and 16.8%, respectively, of the outstanding common stock of World Airways, with the balance publicly traded.
WorldCorp also had an ownership interest in US Order, Inc. ("US Order"), a company which provided products and services for two markets: home banking and smart telephones. In August 1996, US Order and Colonial Data Technologies Corp. ("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which US Order and Colonial Data would be merged (the "Mergers") with and into a new public company, InteliData Technologies Corporation ("InteliData"). Pursuant to the Mergers which were consummated on November 7, 1996, InteliData became the successor corporation to US Order. The Mergers were treated as a purchase of Colonial Data by US Order. Following the Mergers, WorldCorp reports its proportionate share of InteliData's financial results using the equity method of accounting. InteliData develops and markets products and services for the telecommunications and financial services industries through its telecommunications and electronic commerce business divisions. At December 31, 1997, WorldCorp owned 9,179,273 shares of InteliData, or an ownership interest of approximately 29.4%
On April 20, 1998, WorldCorp consummated a transaction pursuant to which it acquired an 80% interest in Paper Acquisition Corp., a Delaware corporation ("Paper"). Paper was organized by Sun Capital Partners, Inc. ("Sun Capital") to acquire and operate specialty paper businesses. In December 1996, Paper acquired and consolidated two companies that produce a variety of coated papers and specialty inks which are sold to business forms manufacturers. For the 12 months ended December 31, 1997, Paper had approximately $48 million (unaudited) of sales.
Pursuant to the transaction, (i) WorldCorp exchanged seven-year warrants to acquire 35% (after the exercise of such warrants and the WorldCorp Acquisition Corp. options described below) of the issued and outstanding capital stock of WorldCorp Acquisition Corp. a Delaware corporation ("WorldCorp Acquisition"), held by WorldCorp for certain of the shares of Paper held by the Paper shareholders (the warrants are exercisable after one-year, at an exercise price of 125% of the estimated fair market value of the WorldCorp Acquisition stock at April 20, 1998 and payable with a seven-year, full-recourse, interest only note)(ii) WorldCorp contributed all of its shares of World Airways and the Paper shares received above, to WorldCorp Acquisition Corp., in exchange for 80% of the issued and outstanding capital stock of WorldCorp Acquisition and (iii) the holders of Paper contributed their shares of capital stock of Paper in exchange for (A) 20% of the issued and outstanding capital stock of WorldCorp Acquisition, (B) the assumption of approximately $15 million of debt, net of cash and investments, of Paper, (C) $15 million of 8% interest only promissory notes of WorldCorp Acquisition due in April 2003, (D) $1 million of 8% promissory notes of WorldCorp Acquisition due in March 1999 and (E) an earn-out based on the
earnings before interest, taxes, depreciation and amortization of Paper during the next five years. The earn-out is payable, including interest at 10%, in September 2002. WorldCorp has pledged all of its shares of common stock of both WorldCorp Acquisition and InteliData, and WorldCorp Acquisition has pledged all of its shares of common stock of both World Airways and Paper to the current Paper shareholders to collateralize the notes and the earn-out.
WorldCorp and WorldCorp Acquisition have entered into a consulting agreement with Sun Capital, which through an affiliate owned approximately 85% of the issued and outstanding shares of Paper immediately prior to the transaction, pursuant to which Sun Capital will receive $500,000 per year for financial consulting. Sun Capital also received seven-year options to acquire approximately 20% and 10% (after the execise of such options and the warrants described above) of the issued and outstanding shares of common stock of WorldCorp and WorldCorp Acquisition, respectively, which options vest over five years. The exercise prices of these options is 125% of the fair market value of the underlying stock at April 20, 1998, and are payable with seven-year, full recourse, interest only notes.
The WorldCorp Board of Directors unanimously approved the acquisition of Paper because, among other things, Paper will provide WorldCorp and WorldCorp Acquisition with a platform for WorldCorp and WorldCorp Acquisition to pursue their growth strategy and with additional operating cash flow. Although the acquisition of Paper will not resolve WorldCorp's liquidity issues, it is intended to build long-term value for WorldCorp's stockholders.
The Company desires to take advantage of the "safe harbor" provisions in the Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1998 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company.
The principal executive offices of WorldCorp are located at Washington Dulles International Airport in The Hallmark Building, 13873 Park Center Road, Herndon, Virginia 20171. WorldCorp's telephone number is (703) 834-9200.
WORLD AIRWAYS
World Airways is a global provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate contracts. Airline operations account for 100% of its operating revenue and operating income. World Airways' passenger and freight operations employ 12 wide-body aircraft which are operated under contracts, a substantial portion of which are with Pacific Rim airlines. These contracts generally require World Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet lease"), while its customers are responsible for a large portion of the other operating costs, including fuel. World Airways' airline customers have determined that outsourcing a portion of their wide-body passenger and cargo requirements can be less expensive, and offers greater operational and financial flexibility, than purchasing new aircraft and additional spare parts required for such aircraft. World Airways also leads a contractor teaming arrangement that is one of the largest suppliers of commercial aircraft to the U.S. Air Force.
In July 1996, World Airways restructured its business to focus on ACMI contract services. As such, World Airways ceased all scheduled passenger and scheduled charter services as of October 27, 1996, taking a one-time charge for estimated loss on disposal of $21.0 million as of June 30, 1996.
World Airways' operating philosophy is to build on its existing ACMI relationships to achieve a strong platform for future growth. World Airways concentrates on ACMI contracts because such contracts shift yield, load factor and cost risks to the customer. The customer bears the risk of filling the aircraft with passengers or cargo and assumes a large portion of the operating expenses, including fuel. World Airways has elected to emphasize its ACMI business because World Airways perceives a number of opportunities created by a
global economy, particularly growth in second and third world economies where the demand for airlift exceeds capacity. World Airways attempts to maximize profitability by combining its multi-year ACMI contracts with short term, higher-yielding ACMI agreements which meet the peak seasonal requirements of its customers. World Airways responds opportunistically to rapidly changing market conditions by maintaining a flexible fleet of aircraft that can be deployed in a variety of configurations.
World Airways focuses its marketing efforts on countries where rapid economic development drives demand for its services. World Airways believes that its modern fleet of long-range medium- density wide-body MD-11 and DC10-30 aircraft are well suited to these less dense international routes and provide superior economics as compared to other popular aircraft such as the Boeing 747 which has greater capacity.
World Airways substantially increases its potential customer base by being able to serve both passenger and cargo customers. World Airways flies passenger, cargo and passenger/cargo convertible aircraft that World Airways believes permit World Airways to target emerging opportunities. World Airways has been providing safe, reliable services for almost 50 years. World Airways has flown for the USAF since 1956, for Malaysian Airlines System Berhad ("Malaysian Airlines") since 1981, and for Garuda Indonesia ("Garuda") since 1973.
Customers
Over the years, World Airways has had relationships with a number of major international airlines and with the USAF (see "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Customers"). World Airways' growth strategy is based, first and foremost, upon providing the highest level of service to these customers, thereby maintaining and expanding the amount of business being done through long-term contracts.
The information regarding major customers and foreign revenue is contained in Note 19 "Major Customers" of the Company's "Notes to Consolidated Financial Statements" in Item 8.
Information concerning the classification of products within the air transportation industry comprising 10% or more of World Airways' operating revenues from continuing operations is presented in the following table (in millions):
Year Ended December 31, --------------------------------- 1997 1996 1995 ---- ---- ---- Flight Operations - Passenger $267.3 $257.6 $168.0 Flight Operations - Cargo 39.5 39.3 64.6
Competition and Seasonality
See MD&A and Note 22 "Unaudited Quarterly Results" of the Company's "Notes to Consolidated Financial Statements" in Item 8.
Aviation Fuel
World Airways' source of aviation fuel is primarily from major oil companies, under annual delivery contracts, at often frequented commercial locations, and from United States military organizations at military bases. World Airways' current fuel purchasing policy consists of the purchase of fuel within seven days in advance of all flights based on current prices set by individual suppliers. More than one supplier is under contract at several locations. World Airways purchases no fuel under long-term contracts nor does it enter into futures or fuel swap contracts.
The air transportation industry in general is affected by the price and availability of aviation fuel. Both the cost and availability of aviation fuel are subject to many economic and political factors and events occurring throughout the world and remain subject to the various unpredictable economic and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant impact on the World Airways' operations in recent years because, in general, World Airways' ACMI contracts with its customers limit its exposure to increases in fuel prices. However, a substantial increase in the price or the unavailability of aviation fuel could have a material adverse effect on the air transportation industry in general and the financial condition and results of operations of the World Airways.
Regulatory Matters
Since it was founded in 1948, World Airways has been authorized to engage in commercial air transportation by the Department of Transportation (the "DOT") or its predecessor agencies. World Airways is currently authorized to engage in the scheduled and charter air transportation of combination (persons, property and mail) and all-cargo services between all points in the U.S., its territories and possessions. It also holds worldwide charter authority for both combination and all-cargo operations. In addition, World Airways is authorized to conduct scheduled combination services to the foreign points listed in its DOT certificate. World Airways also holds certificates of authority to engage in scheduled all-cargo services to a limited number of foreign destinations.
World Airways is subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including flight operations, equipment, aircraft noise, ground facilities, dispatch, communications, training weather observation, flight time, crew qualifications, aircraft registration and other matters affecting air safety. The FAA requires each air carrier to obtain an operating certificate and operations specifications authorizing the carrier to operate to particular airports on approved international routes using specified equipment. These certificates and specifications are subject to amendment, suspension, revocation or termination by the FAA. In addition, all of World Airways' aircraft must have and maintain certificates of airworthiness issued or approved by the FAA. World Airways currently holds an FAA air carrier operating certificate and operations specifications under Part 121 of the Federal Aviation Regulations. The FAA has the authority to suspend temporarily or revoke permanently the authority of World Airways or its licensed personnel for failure to comply with regulations promulgated by the FAA and to assess civil penalties for such failures.
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations, World Airways' aircraft fleet must comply with certain Stage 3 noise restrictions by certain specified deadlines. All of World Airways' aircraft currently meet the Stage 3 noise reduction requirement, which is currently the most stringent FAA noise requirement. FAA regulations require compliance with the Traffic Alert and Collision Avoidance System ("TCAS"), approved airborne windshear warning system and aging aircraft regulations.
Additional laws and regulations have been proposed from time to time which could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations. Laws and regulations have been considered from time to time that would prohibit or restrict the ownership and transfer of airline routes or slots. There is no assurance that laws and regulations currently enacted or enacted in the future will not adversely affect World Airways' ability to maintain its current level of operating results.
Several aspects of airline operations are subject to regulation or oversight by Federal agencies other than the DOT or FAA. For instance, labor relations in the air transportation industry are generally regulated under the Railway Labor Act, which vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines and labor unions arising under collective bargaining agreements. In addition, World Airways is subject to the jurisdiction of other governmental entities, including (i) the FCC regarding its use of radio facilities pursuant to the Federal Communications Act of 1934, as amended, (ii) the Commerce Department, the Customs Service, the Immigration and Naturalization Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture regarding World Airways' international operations, (iii) the Environmental Protection Agency (the "EPA") regarding compliance with standards for aircraft exhaust emissions and (iv) the Department of Justice regarding certain merger and acquisition transactions. The EPA regulates operations, including air carrier operations, which affect the quality of air in the U.S. World Airways has made all necessary modifications to its operating fleet to meet fuel-venting requirements and smoke emissions standards issued by the EPA.
World Airways' international operations are generally governed by the network of bilateral civil air transport agreements providing for the exchange of traffic rights between governments which then select and designate air carriers authorized to exercise such rights. In the absence of a bilateral agreement, such international air services are governed by principles of comity and reciprocity. Bilateral provisions pertaining to the wet lease services in which World Airways is primarily engaged vary considerably depending on the particular country. Most bilateral agreements into which the U.S. has entered permit either country to terminate the agreement with one year's notification to the other. In the event a bilateral agreement is terminated, international air service between the affected countries is governed by the principles of comity and reciprocity.
Certain airports served by World Airways are subject to slot allocations administered by the governments of the countries in which such airports are located or by coordinating committees comprising airline representatives. A "slot" is an authorization to take off or land at the designated airport within a specified time window. In the past, World Airways has generally been successful in obtaining the slots it needs in order to conduct planned operations. There can be no assurance, however, that it will be able to do so in the future because, among other factors, government policies regulating the distribution of slots, both in the U.S., and in foreign countries, are subject to change.
Pursuant to federal law, no more than 25% of the voting interest in World Airways may be owned or controlled by foreign citizens. In addition, under existing precedent and policy, actual control must reside in U.S. citizens. As a matter of regulatory policy, the DOT has stated that it would not permit aggregate equity ownership of a domestic air carrier by foreign citizens in an amount in excess of 49%. World Airways fully complies as of the date hereof with these U.S. citizen ownership requirements.
Due to its participation in CRAF, World Airways is subject to inspections approximately every two years by the military as a condition of retaining its eligibility to perform military charter flights. The last such inspection was undertaken in 1996 and the next is anticipated to occur in 1998. As a result of such inspections, World Airways has been required to implement measures, such as the establishment of a crew resource management course, beyond those required by the DOT, FAA and other government agencies. The USAF may terminate its contract with World Airways if World Airways fails to pass such inspection or otherwise fails to maintain satisfactory performance levels, if World Airways loses its airworthiness certificate or if the aircraft pledged to the contracts lose their U.S. registry or are leased to unapproved carriers.
World Airways believes it is in compliance in all material respects with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension or revocation of any of World Airways' DOT or FAA authorizations or certificates could have a material adverse effect upon World Airways. World Airways also is subject to state and local laws and regulations at locations where it operates and the regulations of various local authorities which operate the airports it serves. Certain airport operations have adopted local regulations which, among other things, impose curfews and noise abatement regulations. While World Airways believes it is currently in compliance in all material respects with all appropriate standards and has all required licenses and authorities, any material non-compliance by World Airways therewith or the revocation or suspension of licenses or authorities could have a material adverse effect on World Airways.
Employees
As of March 2, 1998, World Airways had 801 full time employees classified as follows:
Classification Number of Full-Time Employees - -------------- ----------------------------- Management 8 Administrative and Operations 298 Cockpit Crew (including pilots) 298 Flight Attendants (active) 197 --- Total Employees 801 ===
World Airways' cockpit crew members, who are represented by the International Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year collective bargaining agreement that will become amendable in July 1998. Approximately 37% of World Airways' employees are covered under the collective bargaining agreement. World Airways expects to begin negotiations in April 1998 and cannot predict the outcome of the negotiations or their possible impact on World Airways' financial condition and results of operations.
World Airways' flight attendants, who are also represented by the Teamsters, are subject to a four-year collective bargaining agreement that will expire in August 2000. World Airways' flight attendants argued the "scope clause" of the collective bargaining agreement had been violated by World Airways and challenged the use of foreign flight attendant crews on World Airways' flights for Malaysian Airlines and Garuda Indonesia which has historically been World Airways' operating procedure. World Airways is contractually obligated to permit its Southeast Asian customers to deploy their own flight attendants. While the arbitrator in this matter denied in 1997 the union's request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that World Airways' contract with its flight attendants requires World Airways to first actively seek profitable business opportunities that require using World Airways' flight attendants, before World Airways may accept wet lease business opportunities that use the flight attendants of World Airways' customers. Subsequently, in 1997, the flight attendants challenged and filed "scope clause" grievances with respect to four separate wet-lease contracts. World Airways and the Teamsters are presently in discussions regarding these grievances. At this time, however, World Airways can give no assurance that these discussions will be successful and the grievances will not be submitted to formal arbitration. World Airways can provide no assurance as to how the resolution of this matter will affect World Airways' financial condition and results of operations.
World Airways' aircraft dispatchers are represented by the Transport Workers Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995, the parties reached agreement with respect to a new four-year contract. This contract was ratified on February 7, 1996. Fewer than 12 World Airways employees are covered by this collective bargaining agreement.
World Airways is unable to predict whether any of its employees not currently represented by a labor union, such as its maintenance personnel, will elect to be represented by a labor union or collective bargaining unit. The election by such employees for representation in such an organization could result in employee compensation and working condition demands that could have a material adverse effect on the financial results of World Airways.
InteliData
InteliData was incorporated on August 23, 1996 under the Delaware General Corporation Law in order to effect the Mergers of US Order and Colonial Data. The Mergers were announced on August 5, 1996, when US Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement"). On November 7, 1996, the Mergers were consummated with each share of outstanding US Order and Colonial Data common stock being exchanged for one share of InteliData common stock. Accounting for the Mergers was treated as a purchase of Colonial Data by US Order. Accordingly, the financial statements of InteliData included herein reflect the results of US Order through November 7, 1996 and the consolidated results of US Order and Colonial Data thereafter.
Effective September 30, 1996, US Order acquired the business of Braun, Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7 million consisting of cash and US Order common stock (and including US Order transaction costs) pursuant to the merger of Braun Simmons into US Order (the "Braun Simmons Acquisition"). Braun Simmons was an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions. The acquisition expanded InteliData's product line for both large and small financial institutions.
The business of InteliData consists of the businesses previously conducted by US Order, Colonial Data and Colonial Data's subsidiaries. InteliData develops and markets products and services for the telecommunications, retail and financial services industries through its two primary business divisions: telecommunications and electronic commerce.
The telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by the regional Bell operating companies ("RBOCs") and other telephone companies ("telcos"). InteliData has concentrated its product development and marketing efforts on products that support Caller ID and other emerging intelligent network services, including smart telephones which provide consumers call management features and the ability to access numerous network services and interactive applications via telephone. InteliData currently offers a line of Caller ID adjunct units, smart telephones, small business telecommunications systems and high-end telecommunications equipment. InteliData also repairs and refurbishes telecommunications products for commercial customers and provides other services that support the development and implementation of intelligent network services.
The electronic commerce division develops and markets software products and implementation services to assist financial institutions in their home banking and electronic bill payment initiatives. The products are designed to assist consumers in accessing and transacting business with their banks and credit unions electronically, and to assist financial institutions in connecting to and transacting business with third parties, including data processors and billers. The services focus on consulting and maintenance agreements that support InteliData's products.
In 1994, InteliData sold its bill payment operations and technology (the "Visa Bill-Pay System") to Visa for cash and the right to future royalty payments which are based on the number of customers utilizing the Visa Bill-Pay System. In August 1997, Integrion Financial Network ("Integrion") acquired Visa InterActive, and certain rights in the Visa Bill-Pay System, from Visa. In October 1997, InteliData surrendered the right to certain future royalty payments in exchange for $5,000,000 in cash from Visa. The cash payment is recorded as deferred revenue and is being recognized into electronic commerce revenues over a two year period.
During the fourth quarter of 1997, InteliData announced its intention to sell the interactive services division which was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communication Systems ("PCS") devices and personal digital assistants ("PDAs"). The discontinued operations of the interactive services division are not considered to be material to the overall financial statements.
InteliData's principal executive offices are located at 13100 Worldgate Drive, Suite 600, Herndon, Virginia 20170 and its telephone number is (703) 834-8500.
Industry Background
InteliData maintains operations in two primary markets: telecommunications and electronic commerce.
Telecommunications
The telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by RBOCs and other telcos. Deregulation and technological advances have intensified competition among existing operators of telecommunication networks and encouraged the entrance of new service providers. In the United States, competition among RBOCs, other telcos and long distance carriers and new service providers that have entered the local and long distance markets, has increased and may increase further as a result of the Telecommunications Act of 1996 (the "Telecommunications Act") or industry consolidation. RBOCs and other telcos are responding to increasing competition by, among other things, introducing value-added, intelligent network services.
In order to deploy intelligent network services, the telcos have been upgrading their telecommunications networks to support a set of standards, known as the Intelligent Networks ("IN"). IN supports open, distributed switching and processing capabilities and allows the telcos to create, modify and deploy new
services quickly and economically. In addition, Bell Communications Research, Inc. has developed the Analog Display Services Interface ("ADSI"), a standard protocol for the simultaneous transmission of data and voice information between an information source and a subscriber's telephone or other communications device such as a smart telephone.
One of the first intelligent network service offerings by RBOCs and telcos was Caller ID, a service that provides information about the incoming call, including the number and name of the caller and the time and date of the call, enabling that information to be displayed on a screen located on the telephone (an integrated telephone) or on a device located near the telephone, in the case of an adjunct unit. InteliData estimates that the current penetration rate of Caller ID service is approximately 25% of the total subscribers in those areas in the United States that have Caller ID capabilities.
By deploying the ADSI protocol in the telecommunications network, RBOCs and other telcos will be able to offer additional intelligent network services and third-party interactive applications. ADSI-based services will include Caller ID on Call Waiting together with call disposition. By subscribing to Caller ID on Call Waiting with Disposition, a subscriber who receives a Call Waiting signal can look at the Caller ID display screen and see the name and number of the calling party before deciding whether to answer the call, send a prerecorded message telling the calling party to wait, forward the call to voice mail, conference both calls together or drop the line. Additional services which can be supported through ADSI include on-line directory assistance, e-mail, paging, news, weather, stock quotes and other information.
The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act has effected basic changes in the telecommunications regulatory scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovation to telephone customers in the United States. The Federal Communications Commission ("FCC") issued its first major order under the Telecommunications Act in August, 1996 which constitutes the FCC's initial measures to implement sections of the Telecommunications Act relating to interconnection between carriers and the provision of access to unbundled services. However, portions of this order, most significantly its pricing provisions, have been successfully challenged in the U.S. Court of Appeals for the Eighth Circuit. The U.S. Supreme Court has agreed to review the Eighth Circuit's decision overturning those provisions. In December 1996, the FCC issued a Notice of Proposed Rulemaking which suggests rules concerning the implementation of the Telecommunications Act provisions relating to RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other emerging intelligent network services subject to certain conditions. The U.S. District Court for the Northern District of Texas has declared the Telecommunications Act's manufacturing provisions, among others, unconstitutional. This decision has been stayed pending review by the U.S. Court of Appeals for the Fifth Circuit. InteliData is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or InteliData's business generally.
Electronic Commerce
The electronic commerce division provides software products and implementation services to financial institutions whose processes and systems are subject to regulatory approvals. Electronic commerce is a developing marketplace. Financial institutions are expanding their electronic home banking services to permit customers not only to review historical account information, but also to engage in transactions such as paying bills and transferring funds. InteliData's future growth and profitability will depend, in part, upon consumer acceptance of electronic home banking.
Products and Services
InteliData's business strategy is to develop products and services to meet the needs of its customers in the telecommunications and electronic commerce markets. InteliData develops products and services for the RBOCs and other telcos, financial institutions and their customers. InteliData strives to develop products with broad appeal that are easy-to-use, practical, inexpensive and built around common industry standards. InteliData believes its electronic commerce products position InteliData to offer support services which are expected to generate recurring monthly fee revenue.
Telecommunications
Since introducing the first commercially available Caller ID unit in 1987, InteliData has developed and marketed Caller ID products with increased functionality to meet the needs of its RBOC and other telco customers. A substantial majority of InteliData's revenues are derived from the sale of its Caller ID products. The following represent InteliData's telecommunications products and services:
Entry Level Caller ID Adjunct Devices. InteliData provides low-priced, entry level Caller ID devices primarily to support RBOC marketing and promotional campaigns in which a telco may give away or subsidize the purchase of a Caller ID adjunct device when a consumer subscribes for the service. InteliData believes that RBOCs utilize lower-priced products to reduce or eliminate the initial consumer expenditure required to obtain the service and, as a result, may subsequently achieve higher penetration rates for Caller ID in selected markets. InteliData's entry level Caller ID adjunct devices have suggested retail prices of $19.99 to $29.99.
Full-Featured Caller ID Adjunct Devices. InteliData's full-featured products display all transmitted information before the incoming telephone call is answered and store this information in memory. Among the features available on InteliData's full-featured products are memory capacity for up to 99 calls, a "blocked call"/"new call" light, a patented "Block the Blocker" feature, a bilingual display and a "message waiting alert" light that indicates to a network voice mail subscriber that a new voice mail message has been received. "Block the Blocker" is a feature that detects when call block is used by a caller, delivers a message to that caller that the Caller ID subscriber does not accept blocked calls and disconnects the call. InteliData's full-featured Caller ID adjunct devices have suggested retail prices of $29.99 to $59.99.
Caller ID on Call Waiting. Caller ID on Call Waiting allows a subscriber to combine both Caller ID and Call Waiting network services, to view the directory name and telephone number of an incoming call as the Call Waiting signal is delivered. InteliData's Caller ID on Call Waiting adjunct device also allows a consumer to store approximately 85 names and numbers in memory. The Caller ID on Call Waiting adjunct device has a suggested retail price of $69.99.
Call Manager. The Call Manager is a sophisticated Caller ID device that works with both single-data and multi-data message services. The Call Manager stores up to 75 of the most recent names and numbers called. The product incorporates a wide variety of telco provided network services, including Caller ID on Call Waiting with Disposition, into a compact adjunct. The Call Manager has a suggested retail price of $89.99.
Smart Telephones. InteliData offers a line of smart telephones with integrated Caller ID, Caller ID on Call Waiting and preprogrammed keys to support intelligent network services. InteliData's ADSI-Compatible smart telephone was designed and developed by InteliData and is being marketed under the Intelifone brand name. The smart telephone incorporates a graphics display screen, magnetic card reader, alpha-numeric keypad, V.22 modem and a processor. It also supports Caller ID with Disposition, the integration of Caller ID on Call Waiting and a visual message waiting indicator. InteliData's smart telephones have suggested retail prices of $99.99 to $199.99.
Small Business Telecommunications Systems. InteliData, through one of its subsidiaries, distributes small business telecommunications systems and multi- line telephones. The small business telecommunications systems include analog
and digital key systems that allow up to 128 individual telephone lines to be serviced from the same operating system. These small business systems are sold through independent dealers that install and service the products. The IPS telephone systems and multi-line telephones are also sold through retail stores. InteliData markets its small business telecommunications systems to small businesses and small office/home office ("SOHO") consumers who are looking for an easy-to-install communications system at a reasonable price.
Repair and Refurbishment. InteliData has provided telephone repair and refurbishment services to telcos and certain telephone equipment manufacturers for a wide variety of telecommunications products, including corded and cordless telephones, key telephone business systems, cellular telephones and leased telephone products. During the year ended December 31, 1997, InteliData's service customer base included Nitsuko America Corp., TIE/communications, Inc. ("TIE") and Motorola, Inc.
Electronic Commerce
InteliData's strategy in the electronic commerce market is to support financial institutions by providing products and services that help them deploy home banking to their customers. In addition, during the first half of 1997, InteliData supported Visa InterActive and Visa member banks with products and services which facilitate bill payment and bill presentment. InteliData's products and services are designed to provide financial institutions the capability to process banking transactions from multiple channels including personal computers, internet or telephone. The following represent InteliData's electronic commerce products and services:
InterposeTM Financial Engine. The Interpose Financial Engine is the heart of InteliData's home banking software system. It runs on the financial institution's host computer system, providing real-time connectivity to remote delivery channels. Along with this critical host connection, Interpose provides robust customer profiling and control over system security. Its Advanced Financial Message Set gives banks the functionality to offer a complete range of online financial services.
InterposeTM OFX Server. The Interpose OFX Server allows a financial institution to take advantage of the Open Financial Exchange ("OFX") standard to directly support customers who use Intuit Quicken(R), Microsoft Money(R), Home Financial Network's Home ATM(TM), and other OFX compliant client software. It supports synchronized information across all delivery channels, including personal computers, the internet and telephones.
InterposeTM Bill Payment Warehouse. The Interpose Bill Payment Warehouse provides a software solution to financial institutions that automates bill payment processing while giving the financial institution the benefit of tracking payment activity and integrating delivery channels.
MoneyClipTM. The MoneyClip smart card system allows financial institutions to offer a secure banking system based on smart cards with digital certificates. MoneyClip can turn almost any personal computer into a smart card reader, providing home banking security and building an infrastructure for stored value and internet commerce applications. The smart card contains a digital certificate that permits access to bank account information and transactions, letting users bank from any internet connected personal computer with a 3.5-inch disk drive.
Product Support Services. InteliData offers its clients consulting services to assist in implementation, training and customization on a time and materials basis and provides maintenance services and software upgrades pursuant to agreements which are typically renewable on an annual basis.
Customer Support Services. InteliData offered bank-branded turnkey customer service to financial institutions in support of its consumer access products. InteliData's customer service operation was open seven days a week, 18 hours a day. If a bank chose InteliData to provide customer service, InteliData typically received a start-up fee from that bank and a per minute fee per customer. InteliData discontinued its customer support services in the second quarter of 1997.
Marketing and Distribution
InteliData sells its products and services to telephone operating companies, retailers and financial institutions in the United States. Revenues from Bell Atlantic, Worldwide Telecom and the US West lease base represented 19%, 19% and 14% of total revenues for the year ended December 31, 1997, respectively.
Telecommunications. InteliData markets its telecommunications products and services through 22 employees in its direct sales force and marketing department, and currently uses 14 independent sales representative firms. InteliData's distribution strategy is to make its products available to potential end users through multiple distribution channels including: direct fulfillment arrangements, direct marketing, retailers and others as described below.
Direct Fulfillment Arrangements. InteliData sells telecommunications products to RBOC subscribers and other telco subscribers through direct fulfillment arrangements with Ameritech Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell Atlantic"), BellSouth Corporation ("BellSouth") and SBC Communications Inc. ("SBC"). In most instances, the telco representatives market both Caller ID service and InteliData's equipment to subscribers and transmit equipment orders to InteliData electronically on a daily basis. InteliData then ships its equipment directly to the subscribers and bills the telco which, in turn, bills its subscribers directly or through a third party. As part of promotional campaigns, some RBOCs may elect to purchase Caller ID units from InteliData and distribute them to their subscribers free of charge. InteliData provides an 800 number for service and support to help the subscriber understand how to utilize the Caller ID service and equipment.
InteliData continually seeks to strengthen its current telco marketing alliances and to develop new alliances. InteliData believes that marketing of Caller ID service and equipment is more successful when the subscriber can subscribe to Caller ID service and purchase or lease Caller ID equipment from a single source, especially when payment for equipment can be made either on an installment basis or by monthly lease payments through the subscriber's telephone bill. InteliData believes that subscriber satisfaction with Caller ID service is enhanced when the subscriber receives Caller ID equipment promptly after ordering the service and is provided an 800 number for service and support.
Direct Marketing on Behalf of Telcos. During 1997, InteliData was a party to a joint venture agreement with the direct marketing firm of Blau Marketing Technologies, Inc. The joint venture operated through a jointly owned corporation, Worldwide Telecom Partners, Inc. ("Worldwide Telecom"), which was 50% owned by each of the joint venturers. Worldwide Telecom provided direct marketing services to Ameritech, Bell Atlantic and SBC under several separate programs and has completed numerous programs for Caller ID, Call Answering and Call Waiting services. InteliData supplied Caller ID units and product management services for Worldwide Telecom. The joint venture agreement was terminated by InteliData in the third quarter of 1997.
Beginning in 1998, InteliData has contracted with telcos directly to market services on behalf of the telcos. InteliData expects to aggressively compete in this marketplace.
Retail and Other Customer Sales. InteliData sells Caller ID units, smart telephones and small business telephone systems to national, regional and local retailers and private label customers. A substantial portion of InteliData's retail sales are made through manufacturers' representatives or distributors with the support of InteliData's sales personnel. InteliData's retail customers include Sears, Roebuck & Co., Staples, Inc. and OfficeMax, Inc. among others. In addition, InteliData sells its small business telephone systems and multi-line telephones to small business dealers and distributors.
Electronic Commerce
InteliData concentrates its marketing efforts on direct sales to financial institutions. Currently, InteliData is marketing to the top 200 banks in the United States and targeting financial institutions that have a large percentage of customers interested in home and remote banking. InteliData is developing products and services to assist financial institutions who want to provide their customers with the ability to access certain information from their bank accounts and complete transactions with the bank concerning bill payments, loan payments, online transfers and other transactions from remote locations via touch tone telephones, personal computers and screen based telephones.
Competition
Telecommunications
The market for InteliData's products and services is highly competitive and subject to increased competition resulting from rapid technological change as well as increased competition resulting from changes in the telecommunications regulatory environment, telecommunications industry consolidation and the emergence of new market entrants. At present, InteliData's principal competitors in the market for Caller ID products are CIDCO Incorporated ("CIDCO"), Lucent Technologies, Inc. ("Lucent") and Northern Telecom, Ltd. ("Northern Telecom"). InteliData's Caller ID products also compete with Caller ID adjuncts and telephones offered by Panasonic, Sony Corp. ("Sony"), Thomson Consumer Electronics, Inc. ("Thomson"), TT Systems Corporation ("TT Systems"), US Electronics, Inc. ("US Electronics") and other companies.
InteliData expects competition to increase in the future from existing and new competitors, possibly including telcos or other current customers, from network switch-based services and from the increased application of cellular technology. InteliData's primary current and potential competitors in the market for products that support intelligent network services have substantially greater financial, marketing and technical resources than InteliData. Increased competition could materially and adversely affect InteliData's results of operations through, among other things, price reductions and loss of market share.
InteliData competes with a large number of competitors for its repair services and other services supporting the development and implementation of intelligent network services. Several of InteliData's competitors in the market for such services have substantially greater financial, marketing and technological resources than InteliData. There can be no assurance that InteliData will be able to continue to compete successfully against its existing competitors or that it will be able to compete successfully against new competitors.
InteliData believes that the principal competitive factors in the markets for its telecommunications products and services are knowledge of the requirements of the various RBOCs and other telcos, product reliability, product design, the quality of repair and support services, customer service and support, and price relative to performance. InteliData competes in the market for its telecommunications products and services principally on the basis of its relationships with telcos, product design and reliability, low product pricing and flexibility of marketing alternatives, including leasing.
Electronic Commerce
InteliData's electronic commerce products and services face competition from several types of competitors. Some banks have elected to develop internally their own home banking solutions instead of purchasing products and services from the Company or third parties. Banks may also contract with service bureaus, such as Checkfree Corp., Security First Network Bank or Online Resources, Inc., to obtain electronic commerce services. Finally, a number of other software companies, including Edify Corp., Corillian Corporation and Destiny Software Corporation, offer products and services that compete with those of InteliData.
InteliData expects that competition in all of these areas will increase in the near future. InteliData believes that a principal competitive factor in its markets is the ability to offer an integrated system of various electronic commerce products and services. Competition will be based upon price, performance, customer service and the effectiveness of marketing and sales efforts. InteliData competes in its various markets on the basis of its relationships with strategic partners, by developing many of the products required for complete solutions, by leveraging market experience, and by building reliable products and offering those products at reasonable prices.
Product Development
InteliData operates in industries that are rapidly growing and changing. In efforts to improve InteliData's position with respect to its competition, InteliData has increased its product development efforts and has focused management efforts in the area of product development. In 1997, 1996 and 1995, InteliData's research and development expenditures, exclusive of nonrecurring in-process research and development expenses were $9,691,000, $2,649,000 and $1,067,000, respectively.
At December 31, 1997, 43 employees were engaged in product development including 14 in the telecommunications division and 29 in the electronic commerce division.
Telecommunications
InteliData's product development efforts are focused on new products that support intelligent network services, product enhancements, international standards compliance and the continued improvement of hardware components to reduce manufacturing costs. InteliData's product development group is experienced in engineering products for high-volume assembly, stressing low-cost manufacturing design while maintaining quality, consistency and reliability. InteliData's products utilize proprietary electrical, mechanical and software design.
Standard Telecommunications Ltd. ("STL") of Hong Kong, an affiliate of InteliData's principal manufacturer, provides additional design, engineering and product development support services to InteliData from time to time on a subcontract basis. InteliData also utilizes the engineering resources of some of its other manufacturers.
Electronic Commerce
The electronic commerce division's product development efforts are focused on software and systems for electronic banking. In particular, InteliData applies its research and development expenditures to data transaction processing and messaging software. The electronic commerce industry is characterized by rapid change. To keep pace with this change, InteliData maintains an aggressive program of new product development and dedicates considerable resources to research and development to further enhance its existing products and to create new products and technologies. InteliData's ability to attract and retain highly skilled research and development personnel is important to InteliData's continued success.
Manufacturing
InteliData's primary equipment manufacturer in the past has been STL and certain of its affiliates, which have ISO 9000 series certified facilities located in the People's Republic of China, for the manufacture of its Caller ID units, smart telephones and other products. In addition, InteliData has established relationships with other ISO 9000 series certified Asian manufacturers for its smart telephones and small business telecommunications products. The facilities of InteliData's suppliers are supplemented, in part, by InteliData's own limited manufacturing facilities in Connecticut. The availability or cost of InteliData's products may be affected by political, economic or labor conditions in the countries where those products are manufactured, including the 1997 return of Hong Kong to China, by fluctuations in currency exchange rates and by other factors. In addition, a change in the tariff structure or other trade policies of the United States could adversely affect InteliData's foreign manufacturing strategies.
InteliData does not have any production contracts with its assembly contractors. InteliData's principal manufacturer performs comprehensive inspection and statistical process control testing, utilizing InteliData's internally designed automated testing equipment. To date, InteliData has not experienced significant returns of defective products.
In the United States, InteliData's manufacturing operations are limited to the testing, quality control and shipping of finished products and the purchase and inventory management of two key components of InteliData's products.
The key components used in InteliData's products are currently being purchased from two sources, except for its application specific integrated circuit ("ASIC") chips, which are purchased from a single source. Although InteliData believes it could develop other sources for each of the components for its products, the process could take several months, and the inability or refusal of any such source to continue to supply components could have a material adverse effect on InteliData pending the development of an alternative source.
Government Regulation
Telecommunications
The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act has effected basic changes in the telecommunications regulatory scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovation to telephone customers in the United States. The FCC issued its first major order under the Telecommunications Act in August 1996 which constitutes the FCC's initial measures to implement certain sections of the
Telecommunications Act relating to interconnection between carriers and the provision of access to unbundled services. However, portions of this order, most significantly its pricing provisions, have been successfully challenged in the U.S. Court of Appeals for the Eighth Circuit. The U.S. Supreme Court has agreed to review the Eighth Circuit's decision overturning those provisions. In December 1996, the FCC issued a Notice of Proposed Rulemaking which suggests rules concerning the implementation of the Telecommunications Act provisions relating to RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other intelligent network services subject to certain conditions. The U.S. District Court for the Northern District of Texas has declared the Telecommunications Act's manufacturing provisions, among others, unconstitutional. The decision has been stayed pending review by the U.S. Court of Appeals for the Fifth Circuit. InteliData is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or InteliData's business generally.
In the United States, Caller ID and other intelligent network services offered by telcos are subject to federal and state regulation. Caller ID is currently available in all 50 states and the District of Columbia. However, during the past several years, protests by special interest groups and regulatory concerns regarding the privacy aspects of the service have been effective in both slowing down the regulatory approval process and, in most states, requiring free per-call or per-line call blocking to be offered by the telcos, thereby allowing a caller to prevent the display of his or her name and number.
A series of FCC orders require all U.S. telephone service providers with signaling system 7 ("SS7") switching architecture to transmit to each other without charge Caller ID number information on interstate calls within the United States (except for public pay phones, hotel and motel lines, and party lines). FCC orders also require that by March 28, 1998, telcos that offer Caller ID service must provide to their telephone subscribers without charge per-call blocking and unblocking mechanisms to block and unblock the transmission of their Caller ID information on interstate calls and must inform subscribers that their telephone numbers may be identified to a called party and how to use these blocking and unblocking capabilities.
Although the initial FCC order setting forth these requirements was implemented December 1, 1995, several factors may delay, prevent or substantially limit the implementation or market acceptance of Caller ID. The availability of Caller ID service in a particular area requires end-to-end interconnection of SS7 networks between telcos and other carriers. Further, the FCC Order requires telcos to offer free per-call blocking for interstate calls to all customers to protect privacy interests and permits state public utility commissions to authorize per-line blocking for interstate calls. Such blocking, if widely adopted, could limit the usefulness and marketability of the Caller ID service.
The California Public Utilities Commission and AT&T Corp. ("AT&T") filed petitions for review of the FCC Order in federal court challenging portions of the FCC Order. Although the FCC Order withstood that particular challenge, other parties have also objected to, sought delays in the implementation of or sought clarification of the FCC Order. In addition, in the future, Caller ID service may be subject to additional state and federal legislation, regulation and court challenges. InteliData is unable to predict what effect, if any, further legislation, regulation, court challenges or other objections may have on the FCC Order or Caller ID service.
InteliData's smart telephone products are subject to regulation by the FCC. Among other requirements, InteliData's smart telephones must comply with Parts 15 and 68 of the FCC's regulations.
Electronic Commerce
The banking market which InteliData has targeted for marketing is highly regulated. The banking industry, although it has recently undergone significant deregulation, remains quite regulated at both the federal and state levels. Interpretation, implementation or revision of banking and telecommunications regulations can accelerate or hinder the ultimate success of InteliData and its products.
Patents, Proprietary Rights and Licenses
InteliData holds limited patent or registered intellectual property rights with respect to its products. InteliData has been issued a patent for its "Block the Blocker" feature and certain aspects of its Caller ID on Call Waiting product. However, there can be no assurance that the patent will afford effective protection of InteliData's technology. InteliData also holds or has filed for patents on certain new features developed by InteliData for use in the ADSI smart telephone and certain of its transaction processing technology, but there can be no assurances that such patents will have any commercial value.
InteliData additionally relies on trade secret laws to establish and maintain its proprietary rights to its products. Although InteliData has obtained confidentiality agreements from its key executives and engineers in its product development group, there can be no assurance that third parties will not independently develop the same or similar alternative technology, obtain unauthorized access to InteliData's proprietary technology or misuse the technology to which InteliData has granted access.
InteliData has rights to practice the inventions under certain of Lucent's Caller ID patents. These patents are also licensed to others, including InteliData's competitors. Lucent receives royalties from sales and leases of InteliData's Caller ID products other than to Lucent. The Lucent license agreement has no expiration date but is terminable by Lucent for breach on two months' written notice unless within such time all specified breaches have been remedied. If the Lucent license were terminated and InteliData were unable to negotiate a new patent license agreement with Lucent, InteliData would no longer be authorized to manufacture or sell Caller ID products in the United States other than to the RBOCs and to Lucent. Additionally, under the agreement, InteliData granted Lucent a non-exclusive, royalty-free license to all patents on inventions which are improvements or modifications based upon the technology licensed from Lucent.
InteliData does not believe that its products and services infringe on the rights of third parties. From time to time, third parties assert infringement claims against InteliData. There can be no assurance that any such assertion will not result in costly litigation or require InteliData to cease using, or obtain a license to use, intellectual property rights of such parties.
Employees
At December 31, 1997, InteliData had approximately 280 employees, of whom 265 were full-time. InteliData has no collective bargaining agreements with its employees and believes that its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES
Flight Equipment
At December 31, 1997, World Airways' aggregate operating fleet consisted of 12 leased aircraft as follows (see Note 13 "Long-Term Obligations" of the Company's "Notes to Consolidated Financial Statements" in Item 8):
Capacity ------------------------------------ Aircraft(a) Passenger(seats)(b) Cargo (Tons) Total(c) - ----------- ------------------- ------------ --------
McDonnell Douglas MD-11 409 -- 3 McDonnell Douglas MD-11F -- 95 1 McDonnell Douglas MD-11CF 410 90 2 McDonnell Douglas MD-11ER 409 -- 2 McDonnell Douglas DC10-30 350 -- 3 McDonnell Douglas DC10-30CF 380 65 1 - Total 12 == Notes
(a) "F" aircraft are freighters, "CF" are convertible freighters and may operate in either passenger or freight configurations. "ER" aircraft maintain extended-range capabilities. Aircraft with no letter designation are passenger-only aircraft. (b) Based on standard operating configurations. Other configurations are occasionally used. (c) Lease terms expire between 1998 and 2020 (assuming exercise of all lease extensions).
Ground Facilities
WorldCorp and World Airways lease office space located near Washington Dulles International Airport which houses their corporate headquarters and substantially all of their administrative employees.
In addition, World Airways leases additional office and warehouse space in Wilmington, Delaware; Philadelphia, Pennsylvania; New York, New York; Los Angeles, California; Kuala Lumpur, Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small offices and maintenance material storage space are leased at often frequented airports to provide administrative and maintenance support for commercial and military contracts.
InteliData is headquartered in Herndon, Virginia, where it leases 30,000 square feet of office space from an unaffiliated party. The lease expires in August 1999. InteliData also leases other, less significant sales and product development facilities.
Additionally, InteliData owns a building located in New Milford, Connecticut which consists of approximately 63,000 square feet. Certain environmental contamination occurred in the part of the facility formerly occupied by another tenant and the Connecticut Department of Environmental Protection performed a clean-up and removed such contamination. InteliData does not believe the foregoing will have a materially adverse effect on InteliData.
InteliData believes that its facilities are suitable and adequate for the current and foreseeable future business of InteliData, however, InteliData will continue to assess its warehousing and office space needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For a description of the Company's current legal proceedings, see Note 21, "Commitments and Contingencies" of the Company's "Notes to Consolidated Financial Statements" in Item 8.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security stockholders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK & RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the symbol "WOA". The high and low sales prices of the Company's common stock, as reported on the New York Stock Exchange for each quarter in the last two fiscal years, are as follows:
Common Stock -------------------------- High Low ---- --- Fourth Quarter $ 2 1/8 $ 7/8 Third Quarter 2 3/4 1 11/16 Second Quarter 3 1/2 2 1/2 First Quarter 4 1/2 2 7/8
Fourth Quarter $ 6 1/2 $ 4 Third Quarter 6 3/4 4 1/2 Second Quarter 9 3/4 6 3/8 First Quarter 10 3/4 8 5/8
In March 1992, the Company filed with the Securities and Exchange Commission ("SEC") a registration statement on Form S-3 registering $60.0 to $90.0 million of Convertible Subordinated Debentures due 2004 (the "Debentures"). On May 26, 1992, $65.0 million of the Debentures were issued. The Debentures are convertible into WorldCorp common stock at $11.06 per share and bear an annual interest rate of 7%. Semi-annual interest payments are due on May 15 and November 15. In September 1996, the Company issued $10.0 million, 10% Senior Subordinated Notes due September 2000 (the "Notes").
The Company did not declare any cash dividends in 1997 or 1996 and does not plan to do so in the foreseeable future. The Indenture governing the Notes, and the Indenture governing the Company's Debentures, in certain circumstances, restrict the Company from paying dividends or making distributions on its common stock. Under the terms of certain borrowing arrangements, WorldCorp has pledged all of its shares of World Airways and InteliData (see Notes 23 of the Company's "Notes to Consolidated Financial Statements" in Item 8).
The approximate number of stockholders of record at April 14, 1998 is 2,273 and does not include those stockholders who hold shares in street name accounts.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
WORLDCORP, INC. AND SUBSIDIARIES Selected Financial Data (in thousands except per share data)
* Amounts are anti-dilutive.
(a) As a result of World Airways' purchase of 3,227,000 shares of its common stock from the Company, beginning September 18, 1997, the Company reports its share of World Airways' results of operations under the equity method of accounting. As a result, beginning September 18, 1997, operating revenues and expenses relate entirely to the operations of WorldCorp.
(b) Includes a $0.9 million reversal of aircraft costs incurred in 1996 relating to reimbursements for disputed spare engine lease charges and a $1.0 million reversal of accrued maintenance expense in excess of the cost of an overhaul of a DC-10 aircraft.
(c) Includes a $17.6 million gain on the sale of World Airways' stock, offset by a $8.7 million loss on purchases of equity by World Airways and a write-off of approximately $20.3 million of restructuring charges by InteliData.
(d) Includes the $41.3 million net gain realized on the issuance of stock by InteliData to effect the Merger of US Order and Colonial Data in November 1996; a $2.4 million net loss on other stock transactions of World Airways and InteliData; partially offset by approximately $23.6 million of one-time noncash Merger related charges (see Notes 4 and 5).
(e) Includes the $51.3 million gain realized on US Order's offering in June 1995 and other stock transactions (see Note 5) and the $16.0 million gain realized on World Airways' offering in October 1995 (see Note 4).
(f) Includes a $4.2 million reversal of excess accrued maintenance reserves associated with the expiration of three DC10 aircraft leases in 1994.
(g) Includes a $27.0 million gain on the sale of 24.9% of World Airways common stock (see Note 4) and a $14.5 million gain on the sale of US Order's bill payment operations (see Note 5).
(h) Includes $2.3 million of termination fees related to the early return of three DC10-30 aircraft.
(i) Earnings per share for the periods presented have been calculated in accordance with Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 128, Earning Per Share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the operations of WorldCorp, Inc. ("WorldCorp" or "the Company") as reflected in its consolidated financial statements. These statements primarily include the accounts of World Airways, Inc. ("World Airways"). On February 28, 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of its ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, WorldCorp repurchased 5% of World Airways' common stock from MHS. In October 1995, World Airways completed an initial public offering in which 2,000,000 shares were issued and sold by World Airways and 900,000 shares were sold by WorldCorp. On September 18, 1997, World Airways purchased 3,227,000 shares of its common stock from WorldCorp (the "Purchase"). As a result of the Purchase, the Company's ownership percentage in World Airways was reduced to 46.3% and, as such, beginning September 18, 1997, WorldCorp reports its share of World Airways' net assets and results of operations under the equity method of accounting. At December 31, 1997, WorldCorp and MHS owned 3,702,586 shares, or 46.3%, and 1,990,000 shares, or 24.9%, respectively, of World Airways' outstanding common stock. The balance was publicly traded.
On August 26, 1997, World Airways completed a private offering, issuing $50.0 million of 8% convertible senior subordinated debentures (the "Debentures") due in 2004 (the "Offering"). The Debentures were subsequently registered with the Securities and Exchange Commission. The Debentures are unsecured obligations, convertible into shares of World Airways' common stock at $8.90 per share, subject to adjustment in certain events, and subordinated to all present and future senior indebtedness of World Airways. In the event of a change in control of World Airways, as defined, the holders of the Debentures could require World Airways to repurchase the outstanding Debentures. The Debentures are not redeemable by World Airways prior to August 26, 2000. In connection with the Offering, and pursuant to an agreement entered into on August 20, 1997, World Airways purchased 3,227,000 shares of its common stock from WorldCorp on September 18, 1997, for approximately $24.7 million. Therefore, at December 31, 1997, WorldCorp owned approximately 46.3% of World Airways. In accordance with a shareholders agreement, dated as of February 3, 1994, as amended, among WorldCorp, MHS Berhad ("MHS") and World Airways, if WorldCorp were to dispose of its holdings in World Airways with the result that WorldCorp's ownership interest in World Airways falls below 51% of the outstanding shares of common stock, then MHS may either sell its shares to a third party or require WorldCorp to sell a pro rata number of shares held by MHS to the party purchasing WorldCorp's World Airways shares. Therefore, as a result of the Purchase, MHS had the right to sell, and accordingly sold 773,000 shares of its World Airways common stock to World Airways (the "MHS Purchase") for approximately $5.9 million, effective January 23, 1998. Effective January 23, 1998, WorldCorp and MHS own approximately 51.2% and 16.8%, respectively, of World Airways, with the balance publicly traded.
WorldCorp also had an ownership interest in US Order, Inc. ("US Order"), a company which provided products and services for two markets: home banking and smart telephones. In August 1996, US Order and Colonial Data Technologies Corp. ("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which US Order and Colonial Data would be merged with and into a new public company, InteliData Technologies Corporation ("InteliData"). Pursuant to this Merger, which was consummated on November 7, 1996, InteliData became the successor corporation to US Order. The Merger was treated as a purchase of Colonial Data by US Order. Following this Merger, WorldCorp reports its proportionate share of InteliData's financial results using the equity method of accounting. At December 31, 1997, WorldCorp owned 9,179,273 shares, representing approximately 29.4%, of InteliData.
The Company desires to take advantage of the "safe harbor" provisions in the Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1998 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company.
OVERVIEW
WorldCorp owns positions in companies that operate in two distinct business areas. World Airways (Nasdaq:WLDA) provides worldwide passenger and cargo air transportation to major international airlines, the U.S. Air Force, and international tour operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData develops and markets products and services for the telecommunications and financial services industries through its telecommunications and electronic commerce business divisions.
World Airways
World Airways is a global provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate contracts. World Airways' passenger and freight operations employ 12 wide-body aircraft which are currently operated under contracts, a substantial portion of which are with Pacific Rim airlines. These contracts generally require World Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet lease"), while World Airways' customers are responsible for a large portion of the other operating expenses, including fuel. World Airways' airline customers have determined that outsourcing a portion of their wide-body passenger and cargo requirements can be less expensive, and offers greater operational and financial flexibility, than purchasing new aircraft and additional spare parts required for such aircraft. World Airways also leads a contractor teaming arrangement that is one of the largest suppliers of commercial airlift services to the United States Air Force's Air Mobility Command ("U.S. Air Force" or "USAF").
In July 1996, World Airways restructured its business to focus on ACMI contract services. As such, World Airways ceased all scheduled passenger and scheduled charter services as of October 27, 1996, taking a one-time charge of $21.0 million as of June 30, 1996 (see "Discontinuation of Scheduled Service Operations").
World Airways generally charges customers on a block hour basis rather than a per seat or per pound basis. "Block hours" are defined as the elapsed time computed from the moment the aircraft first moves under its own power at the point of origin to the time it comes to rest at its final destination. World Airways provides most services under two types of contracts: wet lease contracts and full service contracts. Under wet lease contracts, World Airways provides the aircraft, cockpit crew, maintenance and insurance and the customer provides all other operating services and bears all other operating expenses, including fuel and fuel servicing, marketing costs associated with obtaining passengers and/or cargo, airport passenger and cargo handling fees, landing fees, cabin crews, catering, ground handling and aircraft push-back and de-icing services. Under full service contracts, World Airways provides fuel, catering, ground handling, cabin crew and all related support services as well. Accordingly, World Airways generally charges a lower rate per block hour for wet lease contracts than full service contracts, although it does not necessarily earn a lower profit. Because of shifts in the mix between full service contracts and wet lease contracts, fluctuations in revenues are not necessarily indicative of volume trends or profitability. It is important, therefore, to measure World Airways' business volume by block hours flown and to measure profitability by operating income per block hour.
World Airways' operating philosophy is to build on its existing ACMI relationships to achieve a strong platform for future growth. World Airways concentrates on ACMI contracts which shift yield, load factor and certain cost risks to the customer. The customer bears the risk of filling the aircraft with passengers or cargo and assumes a portion of the operating expenses, including fuel. World Airways has elected to emphasize its ACMI business because World Airways perceives a number of opportunities created by a growing global economy, particularly growth in second and third world economies where the demand for airlift exceeds capacity. World Airways attempts to maximize profitability by combining its multi-year ACMI contracts with short term, higher-yielding ACMI agreements which meet the peak seasonal requirements of its customers. World Airways responds opportunistically to rapidly changing market conditions by maintaining a flexible fleet of aircraft that can be deployed in a variety of configurations.
As noted above, World Airways has focused its business on ACMI contract services. As is common in the air transportation industry, World Airways has relatively high fixed aircraft costs. World Airways operates a fleet of eight MD-11 and four DC10-30 wide-body aircraft, and while World Airways believes that the lease rates on its MD-11 aircraft are favorable relative to lease rates of other MD-11 operators, World Airways' MD-11 aircraft have higher lease costs (although lower operating costs) than its DC10-30 aircraft. Therefore, achieving high average daily utilization of its aircraft (particularly its MD-11 aircraft) at attractive yields are important factors to World Airways' financial results. In addition to fixed aircraft costs, a portion of World Airways' labor costs are fixed due to monthly minimum guarantees to cockpit crewmembers and flight attendants.Factors that affect World Airways' ability to achieve high utilization in its ACMI business include the compatibility of World Airways' aircraft with customer needs and World Airways' ability to react on short notice to customer requirements (which can be unpredictable due to changes in traffic rights, aircraft delivery schedules and aircraft maintenance requirements). Other factors that affect the ACMI business include particular domestic and foreign regulatory requirements, as well as a trend toward aviation deregulation which is increasing the number of alliances and code share arrangements.
Significant Customer Relationships
In 1997, World Airways' business relied heavily on its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"), Philippine Airlines, Inc. ("Philippine Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air Force. For the year ended December 31, 1997, these customers provided approximately 21%, 31%, 10% and 25%, respectively, of World Airways' revenues and 23%, 34%, 11% and 16%, respectively, of total block hours. In 1996, these customers provided approximately 34%, 15%, 13%, and 25%, respectively, of World Airways' revenues and 42%, 17%, 14%, and 17%, respectively, of total block hours flown from continuing operations.
Malaysian Airlines. World Airways has provided wet lease services to Malaysian Airlines since 1981, providing wet lease services for Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owned 16.8% of World Airways as of January 23, 1998, also owns 28% of Malaysian Airlines. World Airways also entered into a 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby World Airways is providing two passenger aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. However, World Airways agreed to a five month reduction in the utilization of one aircraft during 1997, although the aircraft was redeployed in other activity. Malaysian Airlines has not informed World Airways of any reductions for 1998. World Airways provided three aircraft for 1997 Hadj operations. MAS received notice from the Malaysian Hadj Board that MAS would not participate in the 1998 Hadj pilgrimage. As a result, MAS entered into an agreement on behalf of World Airways for World Airways to provide two DC-10 aircraft to fly in the 1998 Indian Hadj.
World Airways has a long-term contract to operate three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into another contract which ended in February 1998. World Airways and Malaysian Airlines are currently discussing the redeployment of these aircraft back into Malaysian Airlines' operations during 1998 in order to meet the contracts' original obligations. World Airways can provide no assurances, however, that World Airways will, in fact, be able to do so.
Malaysian Airlines is subject to the financial difficulties associated with the adverse economic conditions in Malaysia and the Asia Pacific Region, but it has remained current with its payments for committed block hour minimums provided in the contracts. Failure by Malaysian Airlines to meet its aircraft lease obligations, if not offset by other business, would have a material adverse effect on the financial condition, cash flows and results of operations of World Airways.
Garuda. World Airways has flown for Garuda periodically since 1973 and yearly since 1988. Since 1988, World Airways has been one of the largest providers of passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj pilgrimage is the world's largest due to the size of Indonesia's Islamic population. In 1997, approximately 40,000 of the 200,000 Indonesians who traveled to Jeddah for the Hadj pilgrimage flew on World Airways' aircraft. World Airways has reached an agreement with Garuda to operate six aircraft during the 1998 pilgrimage.
Philippine Airlines. World Airways had agreements with Philippine Airlines to operate four passenger aircraft until November 1997. As a result of the economic distress experienced in the Philippines, World Airways negotiated to terminate the agreements on two of the aircraft effective in August 1997, and received monthly termination payments totaling $3.0 million through the original end of the agreements in November 1997. In addition, the contracts on the remaining two aircraft were extended until February 1998 and the per block hour rates for those two aircraft were reduced slightly. The two aircraft which were removed from Philippine Airlines service were redeployed by World Airways under agreements with other customers. The contract with Philippine Airlines expired in February 1998.
U.S. Air Force. World Airways has provided international air transportation to the U.S. Air Force since 1956. In exchange for requiring pledges of aircraft to the Civil Reserve Air Fleet ("CRAF") for use in times of national emergency, the U.S. Air Force grants awards to CRAF participants for peacetime transportation of personnel and cargo. Although World Airways' agreements with the USAF provide for full service contracts with certain minimum performance requirements, World Airways has risks similar to an ACMI agreement because the USAF agreements are cost-plus contracts at attractive rates. The overall downsizing of the U.S. military places a premium on the mobility of the U.S. armed forces. This is reflected in the stable size over the past several years of the USAF's procurement of commercial airlift services. It is uncertain, however, what impact, if any, the instability within the Middle East will have upon World Airways' future flight operations.
The USAF awards points to air carriers acting alone or through teaming arrangements in proportion to the number and type of aircraft such carriers make available to CRAF. World Airways utilizes such teaming arrangements to maximize the value of potential awards. World Airways leads a contractor teaming arrangement that enjoys a large market share of the USAF's overall commercial airlift requirement. During a period in which the U.S. military downsized substantially, World Airways' portion of the fixed USAF award increased from $15.6 million for the government's 1992-93 fiscal year, to $73.4 million for the government's 1997-98 fiscal year. The current annual contract commenced on October 1, 1997 and expires on September 30, 1998. World Airways, however, cannot determine how future cuts in military spending may affect future operations with the U.S. Air Force.
VASP. World Airways leased a cargo plane to Viacao Aereo Sao Paulo ("VASP"),a Brazilian airline, under an ACMI contract which began in June 1997 and terminated prior to December 31, 1997. World Airways also during 1997 entered into a Memorandum of Agreement with VASP for the lease of two MD-11 passenger aircraft for a six-month term with a six-month renewal option. This contract was not finalized in 1997 and World Airways currently is not contracting with VASP for any aircraft. The aircraft intended for VASP have been redeployed to other customers of World Airways.
Although World Airways' customers bear the financial risk of filling World Airways' aircraft with passengers or cargo, World Airways can be affected adversely if its customers are unable to operate World Airways' aircraft profitably, or if one or more of World Airways' customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances, World Airways can be adversely affected by receiving delayed or partial payments or by receiving customer demands for rate and utilization reductions, flight cancellations, and/or early termination of their agreements.
As a result of these and other contracts, World Airways had an overall contract backlog at December 31, 1997 of $305.8 million, compared to $468.0 million at December 31, 1996. Approximately $199.4 million of the backlog relates to
operations during 1998. World Airways' backlog for each contract is determined by multiplying the minimum number of block hours guaranteed under the applicable contract by the specified hourly rate under such contract. Approximately 57% of the backlog relates to its contracts with Malaysian Airlines, included in which are the revenues associated with the three cargo aircraft for Malaysian Airlines (see "Significant Customer Relationships - Malaysian Airlines" for further discussion of these contracts). Consistent with prior years, World Airways has substantial uncontracted capacity in the third and fourth quarters of 1998 and beyond. Although there can be no assurance that it will be able to secure additional business to reduce this excess capacity, World Airways is actively seeking customers for 1998 and beyond, and has historically been successful in obtaining new customers. World Airways' financial results and financial condition would be affected adversely if World Airways is unable to secure additional business to reduce this excess capacity.
The information regarding major customers and foreign revenue is contained in Note 19 "Major Customers" of WorldCorp's "Notes to Consolidated Financial Statements" in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (in thousands)
December 31, ------------ 1997 1996 ---- ---- CURRENT ASSETS
Cash and cash equivalents, including restricted cash of $447 at December 31, 1996 (Note 21) $ 4,659 $ 12,462
Restricted cash and short-term investments (Notes 8, 12 and 21) -- 2,047
Trade accounts receivable, less allowance for doubtful accounts of $413 at December 31, 1996 (Note 12) -- 15,460
Other receivables 214 4,667
Due from affiliate, net (Note 6) -- 5,548
Prepaid expenses and other current assets (Notes 9 and 20) 57 8,314
Assets held for sale (Notes 10 and 13) -- 500 ----- ------
Total current assets 4,930 48,998 ----- ------
ASSETS HELD FOR SALE (Notes 10 and 13) -- 3,425
EQUIPMENT AND PROPERTY (Notes 10 and 13) Flight and other equipment 3,114 75,191 Equipment under capital leases 173 11,639 ----- ------ 3,287 86,830 Less accumulated depreciation and amortization 3,026 21,357 ----- ------
Net equipment and property 261 65,473 ----- ------
LONG-TERM OPERATING DEPOSITS (Note 13) -- 15,951
INVESTMENT IN AFFILIATES (Notes 4 and 5) 8,344 36,299
OTHER ASSETS AND DEFERRED CHARGES, NET (Notes 5, 6, 9 and 20) 2,454 5,145
INTANGIBLE ASSETS, NET (Note 11) 843 1,072 ------ -------
TOTAL ASSETS $ 16,832 $ 176,363 ====== =======
(Continued)
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT (in thousands except share data)
December 31, ------------ 1997 1996 ---- ---- CURRENT LIABILITIES Notes payable (Note 12) $ -- $ 26,386 Current maturities of long-term obligations (Note 13) 9,626 9,990 Accounts payable 187 23,939 Due to affiliate, net (Notes 4 and 6) 259 1,767 Net liabilities of discontinued operations (Note 3) -- 1,834 Unearned revenue -- 3,046 Accrued maintenance in excess of reserves paid -- 9,770 Accrued salaries and wages (Note 20) 610 10,344 Accrued interest 818 981 Accrued taxes 99 1,249 ------ ------ Total current liabilities 11,599 89,306 ------ -------
LONG-TERM OBLIGATIONS, NET (Note 13) 65,000 104,804 ------ -------
OTHER LIABILITIES Deferred gain from sale leaseback transactions, net of accumulated amortization of $19,099 as of December 31, 1996 -- 6,252 Accrued postretirement benefits (Note 16) -- 2,545 Accrued maintenance in excess of reserves paid -- 6,867 Other 163 3,378 ------ ------- Total other liabilities 163 19,042 ------ -------
TOTAL LIABILITIES 76,762 213,152 ------ -------
MINORITY INTEREST (Notes 4 and 6) -- 3,548
COMMON STOCKHOLDERS' DEFICIT (Notes 5, 12, 13, 14, 15, 16 and 20) Common stock, $1 par value, (60,000,000 shares authorized, 16,642,511 shares issued and 13,883,243 shares outstanding at December 31, 1997 and 16,420,350 shares issued and 15,020,265 shares outstanding at December 31, 1996) 16,643 16,617 Additional paid-in capital 43,966 43,824 Deferred compensation (25) (591) Unrealized gain on investments of affilates 125 -- Accumulated deficit (110,494) (91,366) ESOP guaranteed bank loan (Notes 13 and 16) -- (805) Treasury stock, at cost (2,759,266 and 1,596,766 shares in 1997 and 1996, respectively) (Notes 1, 4 and 16) (10,145) (8,016) -------- -------- TOTAL COMMON STOCKHOLDERS' DEFICIT (59,930) (40,337) -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 6, 12, 13, 15, 16, 18, 19 and 21)
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 16,832 $ 176,363 ========= =======
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except share data)
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- OPERATING REVENUES (Note 19) World Airways $ 216,092 $ 309,587 $ 242,386 InteliData -- 4,085 4,186 ------- ------- ------- Total operating revenues 216,092 313,672 246,572 ------- ------- -------
OPERATING EXPENSES World Airways: Flight 47,892 71,121 65,223 Maintenance (Notes 6, 13 and 21) 44,698 60,462 41,843 Aircraft costs (Notes 6 and 13) 65,046 85,227 67,331 Fuel 10,660 19,255 16,704 Flight operations subcontracted to other carriers 2,367 12,932 9,096 Promotions, sales and commissions 6,919 6,236 1,995 Depreciation and amortization 5,795 8,032 6,056 General and administrative 17,818 24,677 18,240 ------ ------ ------ Total operating expenses - World Airways 201,195 287,942 226,488 ------- ------- -------
InteliData: Total operating expenses - InteliData -- 19,190 9,457 ------- ------ -----
WorldCorp: General and administrative 2,198 3,803 4,334 ------- ----- ----- Total operating expenses 203,393 310,935 240,279 ------- ------- -------
OPERATING INCOME 12,699 2,737 6,293 ------ ----- -----
OTHER INCOME (EXPENSE) Interest expense (Notes 12 and 13) (9,575) (11,680) (12,586) Interest income 931 3,389 2,909 Equity in earnings (loss) of affiliates, net (Notes 4 and 5) (26,975) (23,273) -- Gain (loss) on issuances (purchases) of equity by affiliates, net (Notes 4 and 5) (8,726) 38,886 43,676 Gain on sales of subsidiaries' stock (Notes 4 and 5) 17,615 -- 23,717 Other, net 31 (1,550) 1,676 ------- ------ ----- Total other income (expense), net (26,699) 5,772 59,392 ------- ----- ------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (14,000) 8,509 65,685
INCOME TAX EXPENSE (Note 18) (350) (504) (661)
MINORITY INTEREST (4,778) (568) (866) ------ ---- ----
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (19,128) 7,437 64,158
DISCONTINUED OPERATIONS (Note 3) Loss from discontinued operations (less applicable income tax benefit of $83 in 1996) -- (11,720) (5,250) Loss on disposal (less applicable income tax benefit of $562 in 1996) -- (20,655) -- ------ ------- --------
LOSS FROM DISCONTINUED OPERATIONS BEFORE MINORITY INTEREST -- (32,375) (5,250)
MINORITY INTEREST -- 13,184 1,300 ------- ------ -----
LOSS FROM DISCONTINUED OPERATIONS -- (19,191) (3,950) ------- ------- ------
NET EARNINGS (LOSS) $(19,128) $ (11,754) $ 60,208 ======== ========= ========= (Continued)
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ----
BASIC EARNINGS (LOSS) PER SHARE (Note 17)
Continuing operations $ (1.29) $ 0.46 $ 4.01 Discontinued operations -- (1.19) (0.24) ----- ----- ----- Net earnings (loss) $ (1.29) $ (0.73) $ 3.77 ========== ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 14,804,356 16,153,227 15,988,365 ========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 17)
Continuing operations $ * $ * $ 2.99 Discontinued operations * * (0.17) ---------- ---------- ----- Net earnings (loss) $ * $ * $ 2.82 =========== =========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING * * 22,994,866 =========== =========== ==========
* Amounts are anti-dilutive.
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' DEFICIT Years Ended December 31, 1997, 1996, and 1995 (in thousands except share data)
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 7) $ 12,462 $ 74,443 $ 8,160 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) (19,128) (11,754) 60,208 Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities: Depreciation and amortization 6,251 10,361 8,043 Deferred gain recognition (704) (1,058) (1,063) Deferred aircraft rent payments, net -- -- 153 Loss (gain) on purchases (issuances) of equity by affilates, net 8,726 (38,886) (43,676) Gain on sales of subsidiaries' stock (17,615) -- (23,717) Minority interest in earnings (loss) of subsidiaries 4,778 (12,616) (434) Equity in (earnings) loss of affiliates, net 26,975 23,273 -- Equity loss in investee of subsidiary -- 1,641 -- Gain on sale of equipment and property (299) (32) (462) Writedown of assets held for sale -- 400 -- Deferred compensation expense 566 162 904 Loss on disposal of discontinued operations -- 1,734 -- Other 468 870 570 Changes in certain assets and liabilities, net of effects of non-cash transactions: Decrease (increase) in accounts receivable 8,078 (10,607) (11,013) Decrease (increase) in restricted short-term investments 941 (2,171) (3,550) Decrease (increase) in deposits, prepaid expenses and other assets 3,654 399 (3,528) (Decrease) increase in accounts payable, accrued expenses and other liabilities (391) 22,195 11,500 Increase (decrease) in unearned revenue 1,693 (7,206) 4,806 (Decrease) increase in air traffic liability -- (2,073) 2,332 ------ ------ ----- Net cash provided (used) by operating activities 23,993 (25,368) 1,073 ------ ------- ----- CASH FLOWS FROM INVESTING ACTIVITIES Additions to equipment and property (4,166) (12,620) (24,286) Proceeds from disposal of equipment and property 946 735 1,768 Purchase of investments -- (1,345) (219) Cash of InteliData at date of Merger -- (12,800) -- Cash of World Airways at Purchase (58,050) -- -- ------- -------- -------- Net cash used by investing activities (61,270) (26,030) (22,737) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in line of credit borrowing arrangement, net (12,226) 5,031 (1,051) Issuance of debt 50,000 47,144 25,278 Repayment of debt (27,135) (51,172) (33,187) Proceeds from stock transactions -- 1,499 4,353 Proceeds from sales of equity by subsidiaries -- 2,177 64,453 Proceeds from sales of subsidiaries' stock, net 23,687 -- 28,986 Purchase of common stock (2,129) (7,676) -- Purchase of common stock of subsidiary (476) (7,361) -- Debt issuance costs (2,247) (225) -- Payment of dividends by subsidiary -- -- (885) ------- -------- ---- Net cash (used) provided by financing activities 29,474 (10,583) 87,947 ------ ------- ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,803) (61,981) 66,283 ------ ------- ------ CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7) $ 4,659 $ 12,462 $ 74,443 ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WorldCorp, Inc. ("WorldCorp" or "the Company") was organized in March 1987 to serve as the holding company for World Airways, Inc., ("World Airways"). WorldCorp owns positions in companies that operate in two distinct business areas. World Airways provides worldwide passenger and cargo air transportation to major international airlines, the U.S. Air Force, and international tour operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData Technologies Corporation ("InteliData") concentrates on two markets: telecommunications and electronic commerce.
WorldCorp has an ownership interest in World Airways, a leading provider of long range passenger and cargo air transportation, serving customers in three distinct markets: major international air carriers; the U.S. Government and international tour operators in leisure passenger markets. World Airways' business relies heavily on its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air Force (see Note 19).
On August 26, 1997, World Airways completed a private offering, issuing $50.0 million of 8% convertible senior subordinated debentures (the "Debentures") due in 2004 (the "Offering"). The Debentures were subsequently registered with the Securities and Exchange Commission. The Debentures are unsecured obligations, convertible into shares of World Airways common stock at $8.90 per share, subject to adjustment in certain events, and subordinated to all present and future senior indebtedness of World Airways. In the event of a change in control of World Airways, as defined, the holders of the Debentures could require World Airways to repurchase the outstanding Debentures. The Debentures are not redeemable by World Airways prior to August 26, 2000. In connection with the Offering, and pursuant to an agreement entered into on August 20, 1997,World Airways purchased 3,227,000 shares of its common stock from WorldCorp on September 18, 1997, for approximately $24.7 million (the "Purchase"). Therefore, at December 31, 1997, WorldCorp owned approximately 46.3% of World Airways. In accordance with a shareholders agreement, dated as of February 3, 1994, as amended, among WorldCorp, MHS Berhad ("MHS") and World Airways, if WorldCorp were to dispose of its holdings in World Airways with the result that WorldCorp's ownership interest in World Airways falls below 51% of the outstanding shares of common stock, then MHS may either sell its shares to a third party or require WorldCorp to sell a pro rata number of shares held by MHS to the party purchasing WorldCorp's shares. Therefore, as a result of the Purchase, MHS had the right to sell, and accordingly sold, 773,000 shares of its World Airways common stock to World Airways (the "MHS Purchase") for approximately $5.9 million, effective January 23, 1998. Effective January 23, 1998, WorldCorp owns approximately 51.2% of World Airways.
WorldCorp also has an ownership interest in InteliData, a company which is engaged in providing products and services for two primary markets: telecommunications and electronic commerce. InteliData designs, develops and markets telecommunications products including Caller ID adjuncts and integrated and smart telephones and markets small business systems to retailers and distributors. InteliData also develops products and services for financial institutions to assist in home banking and electronic bill payment initiatives. During the fourth quarter of 1997, InteliData announced its intention to sell the interactive services division which was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communications Systems ("PCS") devices and personal digital assistants ("PDAs").
During the third quarter of 1996, the Company announced its intention to purchase up to 2.5 million shares of its publicly-traded common stock pursuant to open market transactions. During the fourth quarter of 1996, the Company purchased 1,337,500 shares of its common stock for an aggregate cost of $7.7 million. During 1997, the Company purchased an additional 1,162,500 shares of its common stock for an aggregate cost of $2.1 million. WorldCorp does not intend to purchase any additional shares at this time.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WorldCorp; its wholly owned subsidiaries WorldCorp Investments, Inc. and World Airways Cargo, Inc., its interest in World Airways through September 18, 1997 and its interest in InteliData through November 7, 1996. During 1997, two other wholly owned subsidiaries, World Flight Crew Services, Inc. and World Games, Inc., were dissolved. All significant intercompany balances have been eliminated.
On November 7, 1996, US Order and Colonial Data Technologies Corp. ("Colonial Data") merged with and into InteliData ("Merger"). Effective with this Merger, InteliData became the successor corporation to US Order. As a result of the Merger, WorldCorp's ownership percentage in InteliData was reduced to 28.9% and, as such, beginning November 7, 1996, WorldCorp reports its share of InteliData's net assets and results of operations under the equity method of accounting.
On September 18, 1997, World Airways purchased 3,227,000 shares of its common stock from the Company for approximately $24.7 million in cash. As a result of the Purchase, the Company's ownership percentage in World Airways was reduced to 46.3% and, as such, beginning September 18, 1997, WorldCorp reports its share of World Airways' net assets and results of operations under the equity method of accounting. Effective January 23, 1998, MHS sold 773,000 shares of its World Airways common stock to World Airways (see Note 6) for approximately $5.9 million. Therefore, effective January 23, 1998, WorldCorp owns approximately 51.2% of World Airways.
Use of 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.
Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.
Revenue Recognition
World Airways recognizes revenue as the services are provided.
Earnings (Loss) Per Common Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("FAS 128") became effective for the year ended December 31, 1997, and required restatement of previously reported earnings per share data. FAS 128 provides for the calculation of basic and diluted earnings per share.
Basic earnings (loss) per common shares is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share also includes common equivalent shares outstanding during the period. The Company's common equivalent shares consist of stock options, convertible securities and warrants.
Equipment and Property
Equipment and property are stated at cost or, if acquired under capital leases, at the present value of the minimum lease payments.
Provisions for depreciation and amortization of equipment and property are computed over estimated useful lives or the term of the lease, if shorter, for capital leases, by the straight-line method, with estimated salvage values of 0 - - 15%. Estimated useful lives of equipment and property are as follows:
DC10 and MD-11 flight equipment 15-16 years Other equipment and property 5-10 years
Deferred gains realized in connection with sale-leasebacks of aircraft and equipment are amortized over the periods of the respective leases.
Aircraft Maintenance
Major airframe maintenance and engine overhauls are expensed using the accrual method of accounting. The accrual method provides for estimating the cost of the initial overhaul and accruing the cost, based on an hourly rate, to the overhaul. At that time, the actual cost of overhaul is charged to the accrual, with any deficiency or excess charged or credited to expense. The cost of the next overhaul is then estimated, based on the new rate, and accrued to that overhaul, at which time the process is repeated. Certain of the World Airways' leases require it to make monthly payments to the lessor for estimated maintenance costs to be incurred. Modifications performed in response to Airworthiness Directives issued by the Federal Aviation Administration are capitalized at cost. Routine maintenance and general repairs are expensed as incurred.
Assets Held for Sale
Assets held for sale are recorded at the lower of cost or estimated net realizable value. Net realizable value is based on the estimated fair value (measured by using a current selling price for similar assets) less estimated selling costs.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset's carrying amount and its estimated fair market value.
Intangible Assets
The excess of cost over the estimated fair value of the Company's share of its affiliate's net assets at the date of acquisition is being amortized over approximately 6 years, using the straight-line method (see Note 11).
Other Assets and Deferred Charges
Contract enhancements, pre-operating costs and debt issuance costs are amortized on a straight line basis over certain estimated periods (see Notes 6 and 9).
Income Taxes
The Company computes income taxes in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The results of World Airways' and InteliData's operations are not included in the Company's consolidated income tax returns.
Postretirement Benefits Other Than Pensions
World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. World Airways accounts for the benefit costs in accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS 106"). World Airways funds the benefit costs on a pay-as-you-go (cash) basis.
Transactions in Subsidiaries'/Affiliates' Stock
Gains or losses realized in connection with the issuance, sale or purchase of stock by a subsidiary/affiliate are recognized in income by the Company (see Notes 4 and 5).
Accounting for Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") , which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note 15). In addition, in accordance with SFAS 123, the Company applies fair value as the measurement basis for transactions in which equity instruments are issued to nonemployees (as defined) (see Note 14).
2. OPERATING ENVIRONMENT
The Company is a highly leveraged holding company. As a holding company, all of WorldCorp's funds are generated through its positions in World Airways and InteliData, which have not paid dividends on common stock since 1992. At December 31, 1997, World Airways has a working capital deficit of $1.8 million and has substantial debt and lease commitments. At December 31, 1997, InteliData has working capital of $32.4 million, with no long-term debt. World Airways' ability to pay dividends is currently restricted under certain borrowing arrangements. Additionally, World Airways and InteliData currently intend to retain their future earnings, if any, to fund the growth and development of their business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
As of December 31, 1997, WorldCorp has $4.7 million in cash and cash equivalents, and has parent company repayment obligations, including principal and interest, of approximately $15.6 million for 1998. Included in this amount is $10.0 million of senior subordinated notes outstanding. Subsequent to year-end, the Company prepaid $5.0 million of the senior subordinated notes and the remaining $5.0 million may be required to be prepaid in the near term in the event the Company does not meet the minimum "Asset Value" requirement, as defined, at the end of any quarter (see Note 13). Subsequent to year-end, World Airways loaned the Company $2.0 million, which was used by WorldCorp to pay debt obligations. In order to meet its debt service obligations and its general and administrative costs, the Company must use its cash and either sell shares of World Airways or InteliData, obtain additional financing, refinance existing borrowings or obtain concessions from its lenders. WorldCorp has pledged all of its shares of World Airways and InteliData as collateral for certain borrowings (see Note 23). At December 31, 1997, based on quoted market prices, the market value of the Company's 3,702,586 shares of World Airways and 9,179,273 shares of InteliData, approximated $25.5 million and $16.9 million, respectively.
Although management intends to attempt to refinance certain of its borrowings or arrange for concessions from its lenders, there can be no assurance that these efforts will be successful. As a result, substantial doubt exists regarding the Company's ability to meet its obligations in 1998 and to continue as a going concern.
3. DISCONTINUED OPERATIONS
World Airways commenced its scheduled service operations between Tel Aviv and New York in July 1995 and commenced its scheduled service operations between the U.S. and South Africa in June 1996. In addition, in May 1996 World Airways commenced its scheduled charter operations between the United States and Germany, Switzerland, Ireland, and the United Kingdom. However, World Airways was unable to operate these scheduled service operations profitably.
Therefore, in July 1996, World Airways announced its decision to exit its scheduled service operations by October 1996 and focus its operations on its core business: operating aircraft under contracts with international carriers, the U.S. Government, and international tour operators. Consistent with this decision, World Airways ceased all scheduled operations as of October 27, 1996. As a result, World Airways' scheduled service operations were reflected as discontinued operations as of June 30, 1996, and prior period results were restated to reflect scheduled service operations as discontinued operations. Loss from discontinued operations (net of income tax effect) approximated $11.7 million for the year ended December 31, 1996. In addition, an estimated loss on disposal of $21.0 million (net of income tax effect), which was recorded as of June 30, 1996, included the following: $13.6 million for estimated operating losses during the phase-out period; a $2.6 million estimated loss to be incurred in connection with sub-leasing DC-10 aircraft which will not be utilized in World Airways' operations subsequent to the phase-out of scheduled service operations; a $2.3 million writeoff of related leasehold improvements; and $2.0 million for passenger reprotection expenses. World Airways recognized an additional $0.5 million of expense in the fourth quarter of 1997 and believes that substantially all of the costs relating to the disposal have been incurred as of December 31, 1997. World Airways is subject to certain claims arising as a result of the discontinuance of its scheduled service operations (see Note 21), but World Airways believes it has substantial defenses to these actions.
4. INVESTMENT IN WORLD AIRWAYS
On February 28, 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of its 100% ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, WorldCorp repurchased 5% of World Airways' common stock from MHS (see Note 6).
On August 8, 1995, World Airways filed a registration statement on Form S-1 with the Securities and Exchange Commission to register 2,900,000 shares of World Airways' common stock. The offering was completed on October 12, 1995 at an offering price of $12.50 per share. Of the 2,900,000 shares registered, 2,000,000 shares were issued and sold by World Airways which resulted in an $11.9 million net gain to the Company, and 900,000 shares were sold by the Company, resulting in a $4.1 million net gain. Net proceeds received from the offering by the Company and World Airways approximated $10.2 million and $22.8 million, respectively. At December 31, 1996, the Company and MHS owned approximately 61.3% and 17.6%, respectively, of the outstanding common stock of World Airways. The remaining shares were publicly traded.
In the third quarter of 1996, World Airways announced its intention to purchase up to one million shares of its publicly-traded common stock pursuant to open market transactions. During the fourth quarter of 1996, World Airways purchased 718,000 shares of its common stock for an aggregate cost of $7.4 million. In January 1997, World Airways repurchased an additional 52,000 shares of its common stock for an aggregate cost of $0.5 million. World Airways does not intend to purchase any additional shares at this time. As a result of the 1996 treasury stock purchases, the Company recognized a $4.2 million loss on purchases of equity by subsidiaries.
In connection with World Airways' issuance of $50.0 million of 8% convertible senior subordinated debentures on August 26, 1997, (the" Offering"), and pursuant to an agreement entered into on August 20, 1997, World Airways purchased 3,227,000 shares of its common stock from the Company on September 18, 1997 for approximately $23.7 million in cash, net of expenses incurred of approximately $1.0 million. As a result of this transaction, the Company recognized a $17.6 million gain on the sale of its common stock of World Airways, which was partially offset by a $8.7 million loss on purchases of equity by World Airways. As a result of this Purchase, the Company's ownership percentage in World Airways was reduced to 46.3%.
The Company's consolidated results for the year ended December 31, 1997 include the results of World Airways for the period prior to the Purchase. Following the Purchase, the Company reports its proportionate share of World Airways' financial results using the equity method of accounting. As such, WorldCorp's investment in World Airways is included as investment in affiliates in the accompanying balance sheet at December 31, 1997. The Company's portion of World Airways' loss for the period after the Purchase approximated $0.5 million and is recorded in equity in earnings (loss) of affiliates, net in the accompanying consolidated statement of operations for the year ended December 31, 1997.
The following represents summarized financial information (in thousands) for World Airways:
Year ended December 31, ----------------------- Results of operations:
Operating revenues $ 309,412 Operating expenses 292,555 Operating income 16,857 Earnings from continuing operations 11,967 Net earnings 11,452
At December 31, --------------- Financial position:
Current assets $ 54,085 Noncurrent assets 95,063 Current liabilities 55,905 Noncurrent liabilities 98,014
5. INVESTMENT IN INTELIDATA
Formation
On September 10, 1990, the Board of Directors of WorldCorp unanimously authorized WorldCorp to enter into and consummate a Stock Purchase Agreement dated as of September 14, 1990 (the "Stock Purchase Agreement"), under which WorldCorp agreed to purchase Series A Preferred Stock ("the Preferred Stock") issued by US Order. The Board of Directors of the Company authorized the purchase of US Order as part of the Company's continuing efforts to diversify its interests. In connection with this agreement, the Company was granted an option to purchase the common stock held by the founding shareholders. Mr. Gorog is Chairman of the Board of InteliData and a director of WorldCorp. Mr. Gorog, together with certain members of his immediate family (the "Founders"), were majority owners of US Order.
On August 25, 1994, the Company's Board of Directors approved the exercise of WorldCorp's option to purchase 4.8 million shares of US Order common stock held by the Founders. Under the terms of this agreement, prior to December 31, 1994, WorldCorp paid $0.4 million in cash to the Founders in exchange for 498,794 shares of US Order common stock, increasing WorldCorp's ownership of voting stock to 52%. Effective February 16, 1995, WorldCorp purchased the remaining 4.3 million shares of US Order common stock with 302,282 shares of WorldCorp common stock, $0.3 million in cash, and $1.1 million in the form of notes due to the Founders. These notes were paid in 1995. As a result of this option exercise, WorldCorp increased its ownership in US Order's voting stock to approximately 89% in February 1995.
In August 1996, WorldCorp exercised 346,429 warrants to purchase an equivalent number of shares of US Order's common stock at $4.00 per share.
Sale of Banking Operations
On August 1, 1994, US Order sold its electronic banking and bill payment operations to Visa International Services Association, Inc. ("Visa") (which subsequently transferred these assets to a wholly owned subsidiary, Visa InterActive) for cash and the right to future royalty payments which are based on the number of customers utilizing the Visa Bill-Pay System. In August 1997, Integrion Financial Network ("Integrion") acquired Visa InterActive, and certain rights in the Visa Bill-Pay System, from Visa. In October 1997, InteliData surrendered the right to certain future royalty payments in exchange for $5.0 million in cash from Visa. InteliData recorded the cash payment as deferred revenue and is recognizing it into electronic commerce revenues over a two year period.
Initial Public Offering
In June 1995, US Order completed an initial public offering of 4,427,500 shares of its common stock at an offering price of $14.75 per share. Of the 4,427,500 shares sold, 3,062,500 were issued and sold by US Order which resulted in a gain of approximately $27.0 million to the Company, and 1,365,000 shares were sold by the Company resulting in a gain of approximately $19.6 million. Net proceeds from the offering to the Company and US Order approximated $18.7 million and $41.6 million, respectively. In conjunction with the offering, the US Order preferred stock previously held by the Company was converted to common stock. As a result of the above transactions, WorldCorp owned 56.9% of the outstanding common stock of US Order at December 31, 1995.
Acquisitions
On October 18, 1995, US Order acquired a 40% equity interest in Home Financial Network, Inc. ("HFN"), a newly formed, development stage personal computer software company that plans to develop and deliver electronic financial products and services to consumers, through the issuance of 296,746 shares of its common stock valued at $5.0 million. As a result, the Company recognized a $2.5 million gain on issuances of equity by subsidiaries.
Effective September 30, 1996, US Order acquired the business of Braun, Simmons & Co. ("Braun Simmons"), an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions, for $2.0 million and 375,000 shares of US Order common stock. As a result, the Company recorded a gain on issuances of equity by subsidiary of $1.8 million as of September 30, 1996. The acquisition was accounted for under the purchase method of accounting. US Order expensed $4.9 million of the purchase price which was allocated to in-process research and development with no alternative future use. As discussed further below, based on rapid market and technological changes in 1997, the goodwill generated from this transaction was written-off in the third quarter of 1997.
Colonial Data Merger
On April 6, 1995, US Order entered into a stock exchange agreement with Colonial Data. Pursuant to the terms of the agreement, on June 8, 1995, US Order exchanged 230,000 shares of its common stock, valued at the initial public offering price of $14.75 per share, or $3.4 million, for 170,743 shares of Colonial Data's unregistered common stock (valued based on the average closing price of Colonial Data's stock for the twenty trading days preceding the date of the exchange) which was equivalent to the value of US Order stock exchanged. The Company recognized a gain on issuances of equity by subsidiaries of $2.0 million as a result of the exchange of this stock. The fair value of this investment at December 31, 1995 was approximately $3.5 million, based on the quoted market price of the stock, and was held for purposes other than trading.
On November 7, 1996, US Order and Colonial Data were merged with and into InteliData, a newly formed corporation, through an exchange of stock ("Merger"). Upon consummation of the Merger, each outstanding share of US Order common stock was converted into one share of InteliData common stock and each outstanding share of Colonial Data common stock was converted into one share of InteliData common stock. The transaction was accounted for as a purchase of Colonial Data by US Order. Pursuant to this transaction, InteliData became the successor corporation to US Order. As a result of the Merger, WorldCorp recognized a gain on issuances of equity by subsidiaries of $42.6 million, which was offset by the elimination of approximately $1.3 million of goodwill related to US Order. As a result of the Merger, WorldCorp's ownership percentage in InteliData was reduced to 28.9% and, as such, WorldCorp began reporting its share of InteliData's net assets and results of operations under the equity method of accounting. As a result of the Merger, InteliData reported non-cash, merger related charges of approximately $72.3 million, of which the Company recorded its pro rata share, or $20.9 million. These charges related to the write-off of in-process research and development expenses for purchased in-process technology that had not reached technological feasibility as of the date of the Merger and did not have alternative future uses. The remaining $2.4 million equity in loss of affiliate for 1996 represents the Company's share of InteliData's operating results for the period following the Merger. As discussed further below, based on rapid market and technological changes in 1997, the goodwill generated from the Merger was written-off in the third quarter of 1997.
Due to equity transactions by InteliData in 1997, WorldCorp's ownership percentage in InteliData was 29.4% at December 31, 1997. As such, WorldCorp's investment in InteliData is included in investment in affiliates in the accompanying balance sheets at December 31, 1997 and 1996 and its share of InteliData's losses for the periods from November 7, 1996 through December 31, 1996, and for the year ended December 31, 1997 are shown as equity in earnings (loss) of affiliates, net in the accompanying statements of operations for the years ended December 31, 1997 and 1996.
During the third quarter of 1997, InteliData announced a strategic repositioning and determined that it would be appropriate to charge to operations the remaining unamortized costs of intangible assets due to impairment, adjust inventory carrying amounts to the lower of cost or market, and to reflect certain restructuring charges. The impairment was based on the excess of the carrying value of the assets over the assets' fair values. These items resulted in an aggregate charge of $69.1 million to InteliData's operations, of which the Company recorded its pro rata share, or $20.3 million.
Summarized financial information of InteliData is as follows (in thousands):
Year ended December 31, ----------------------- 1997 1996 ---- ---- Results of operations:
Revenues $ 60,309 $ 13,899 Cost of revenues 43,514 10,448 Gross profit 16,795 3,451 Operating loss (91,304) (96,112) Net loss applicable to common shareholders (90,094) (95,727)
At December 31, --------------- 1997 1996 ---- ---- Financial position:
Current assets $ 47,821 $ 82,989 Noncurrent assets 6,580 60,757 Current liabilities 15,457 19,457 Noncurrent liabilities 1,875 --
Shown below is the Company's unaudited pro forma condensed consolidated results of operations for the years ended December 31, 1996 and 1995, excluding the impact of the non-recurring charges for acquired in-process research and development and the impact of the gain on issuances of equity by subsidiaries relating to the Braun Simmons and Colonial Data acquisitions and as though both companies had been acquired and merged into InteliData as of the beginning of InteliData's fiscal years 1996 and 1995 (in thousands, except for per share data):
Year ended December 31, ----------------------- 1996 1995 ---- ----
Revenues $ 309,587 $ 242,386 Net income (loss) (27,252) 64,925 Net income (loss) per share: Basic (1.69) 4.06 Diluted * 3.02
* Amounts are anti-dilutive.
This method of combining historical financial statements for the preparation of the unaudited pro forma condensed consolidated financial information is for presentation only. The unaudited pro forma condensed consolidated financial information is provided for illustrative purposes only and is not necessarily indicative of the consolidated financial position or consolidated results of operations that would have been reported had the Mergers occurred at the beginning of the year, nor do they represent a forecast of the consolidated financial position or results of operations for any future period.
6. TRANSACTIONS WITH MHS AND MALAYSIAN AIRLINES
On October 30, 1993, WorldCorp, World Airways, and MHS entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which MHS, subject to satisfactory completion of its due diligence investigations, agreed to purchase 24.9% of World Airways' common stock for $27.4 million in cash. Under this Agreement, World Airways would receive upon closing $12.4 million to fund its working capital requirements. The remaining $15.0 million would be paid to WorldCorp to add to its cash reserves. WorldCorp received $2.7 million prior to December 31, 1993 as an advance on the sales price. At the time of the signing of the Stock Purchase Agreement, World Airways was a wholly-owned subsidiary of WorldCorp. On February 28, 1994, WorldCorp, World Airways, and MHS concluded the transaction according to the terms described above. Under the agreement, if at any time after October 30, 1996 World Airways registers additional common stock under the Securities Act of 1933, MHS has the right to demand the registration of its shares of the Company's common stock. Under a shareholders agreement, MHS has the right to nominate two members to the Company's board of directors and WorldCorp has agreed to vote its shares of common stock to elect such nominees. Also, if without the prior written consent of MHS: (1) World Airways sells all or substantially all of its business; or (2) World Airways fundamentally changes its line of business, then MHS has the option to require WorldCorp to purchase all or part of MHS's shares at fair market value. Fair market value is defined to be not less than the aggregate of the costs borne by MHS in acquiring and holding its World Airways shares. Management of World Airways has indicated that it does not have any current intent to take any such actions without the prior consent of MHS or the directors nominated by MHS. The shareholders agreement also provides that if WorldCorp's ownership interest in World Airways falls below 51% of the outstanding shares of common stock, then MHS may either sell its shares to a third party or require WorldCorp to sell a pro rata number of shares held by MHS to the party purchasing WorldCorp's shares. MHS also has a right of first refusal to purchase shares of common stock issued by World Airways or sold by WorldCorp and to purchase additional shares of common stock to maintain its ownership percentage in World Airways.
In connection with World Airways' Offering on August 26, 1997 (see Notes 1 and 13), World Airways purchased 3,227,000 shares of its common stock from WorldCorp on September 18, 1997 for approximately $24.7 million. Therefore, at December 31, 1997, MHS owned approximately 24.9% of World Airways' common stock. In accordance with the shareholders agreement, when World Airways purchased the 3,227,000 shares of common stock from WorldCorp in September 1997, MHS had the right to sell, and accordingly sold, 773,000 shares of its World Airways common stock to World Airways for approximately $5.9 million, effective January 23, 1998, thereby reducing MHS's ownership interest in World Airways to 16.8%.
During 1994, MHS acquired 32% of Malaysian Airlines, the flag carrier of Malaysia. Due mainly to the issuance of additional shares of common stock by Malaysian Airlines during 1996, MHS owns 28% of Malaysian Airlines at December 31, 1997. World Airways has provided service to Malaysian Airlines since 1981, providing aircraft for integration into Malaysian Airlines' scheduled passenger, cargo and charter operations as well as transporting passengers for the annual Hadj pilgrimage. Malaysian Airlines is one of World Airways' largest customers (see Note 19).
Effective December 31, 1994, WorldCorp entered into a 6% note payable to MHS in the amount of $8.5 million, due December 31, 1995, in exchange for 5% of World Airways' common stock held by MHS and the execution of certain multi-year contracts between World Airways and Malaysian Airlines. The shares were pledged as security for the note payable. The note was repaid in accordance with the agreement. Of the $8.5 million consideration paid by WorldCorp to MHS, $3.0 million was attributable to the contract enhancements discussed above. This amount is included in other assets and deferred charges and in contributed capital in the accompanying balance sheet at December 31, 1996 (see Note 9). Because WorldCorp reports its share of World Airways' net assets and results of operations under the equity method of accounting, there is no corresponding amount in the accompanying balance sheet at December 31, 1997. The amount attributable to the contract enhancements is being amortized over the terms of the related Malaysian Airlines contracts, approximately two to five years. Amortization expense for the period January 1, 1997 to September 17, 1997 approximated $0.3 million.
In late 1994, World Airways entered into a series of multi-year contracts, with expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. World Airways also entered into a 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby World Airways is providing two passenger aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. However, in 1997, World Airways agreed to a five month reduction in the utilization of one aircraft during 1997 although that aircraft was redeployed. Malaysian Airlines has not informed World Airways of any reductions for 1998. World Airways provided three aircraft for the 1997, 1996 and 1995 Hadj operations. MAS received notice from the Malaysian Hadj Board that MAS would not participate in the 1998 Hadj pilgrimage. As a result, MAS entered into an agreement on behalf of World Airways for World Airways to provide two DC-10 aircraft to fly in the 1998 Indian Hadj.
World Airways has a long-term contract to operate three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into another contract which ended in February 1998.World Airways and Malaysian Airlines are currently discussing the redeployment of these aircraft back into Malaysian Airlines' operations during 1998 in order to meet the contracts' original obligations. World Airways can provide no assurances, however, that World Airways will, in fact, be able to do so (see Note 19).
As of December 31, 1996, World Airways had $5.5 million included in due from affiliate, in the accompanying balance sheet. Included in this balance are certain reimbursable operating costs of $0.6 million due from Malaysian Airlines incurred by World Airways pursuant to the currently operated contracts. In addition, included in the amount shown as due to affiliate in the accompanying balance sheet is $1.4 million of aircraft rent owed to Malaysian Airlines at December 31, 1996.
During 1995, World Airways entered into agreements with Malaysian Airlines to lease two DC10-30 aircraft. The aircraft were delivered in June and December 1995 and had original lease terms of 26 and 36 months, respectively. The leases on the two aircraft expire in August 1999 and December 1998. In March 1996, World Airways leased two additional DC-10-30 aircraft from Malaysian Airlines. These additional aircraft were not expected to be utilized after the discontinuance of the Company's scheduled service operations in October 1996 (see Note 3). Therefore, effective December 31, 1996, the parties mutually agreed to terminate the lease agreement for the additional two aircraft. In March 1997, World Airways entered into an agreement with Malaysian Airlines to lease an incremental DC10-30 aircraft on a short-term basis to support its peak flying season. The aircraft was returned at the end of the Hadj program. Rent expense and maintenance reserve payments related to these aircraft leased from Malaysian Airlines amounted to $5.1 million, $12.6 million and $1.6 million for the period January 1, 1997 to September 17, 1997 and for the years ended December 31,1996 and 1995, respectively.
7. SUPPLEMENTAL INFORMATION -- STATEMENTS OF CASH FLOWS
Additional information pertaining to certain cash payments and noncash investing and financing activities is as follows (in thousands):
For the years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Cash paid for: Interest $ 9,243 $ 12,377 $ 12,130 Income taxes 255 412 711
Due to the Purchase, on September 18, 1997, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting. Therefore, only non-cash transactions relating to World Airways operations through September 17, 1997 are described herein.
In 1997, World Airways entered into a capital lease, valued at $0.8 million, with a lessor to lease an auxiliary power unit over a 32 month term beginning in July 1997. World Airways made principal payments of $0.05 million between January 1 and September 17, 1997.
In January 1996, World Airways agreed to purchase an additional engine and received a commitment from the engine manufacturer to finance 85% of its purchase price over a seven-year term (see Note 13). In June 1997, World Airways took delivery of the engine and signed a note for $6.3 million, of which $0.1 million was repaid between January 1, 1997 and September 17, 1997.
World Airways purchased a spare engine which was delivered in March 1996. The engine cost approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term (see Note 13).World Airways made payments of $0.4 million, $0.4 million and $1.2 million towards this purchase during the period January 1, 1997 to September 17, 1997 and for the years ended December 31, 1996 and 1995, respectively.
In March 1996, World Airways entered into an agreement with McDonnell Douglas to lease two MD-11ER aircraft (see Note 13). World Airways entered into a simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. World Airways can borrow a total of $9.0 million of which $3.0 million became available with the delivery of each aircraft and an additional $3.0 million became available in December 1996. Borrowings under the agreement were $1.5 million and $6.4 million during the period January 1, 1997 to September 17, 1997 and for the year ended December 31, 1996, respectively, and payments of $0.7 million and $0.5 million were made in these periods, respectively.
8. SHORT-TERM INVESTMENTS
At December 31, 1996, short-term investments consist of cash pledged as collateral for letters of credit with original maturities in excess of ninety days, and expiration dates within one year, and cash collateralizing a loan with a financial institution (see Note 12).
9. OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consist of the following (in thousands): December 31, ------------ 1997 1996 ---- ---- Debt issuance costs, net $ 1,417 $ 1,763 Long-term notes receivable (Note 20) 787 529 Deferred contract cost (Note 6) -- 1,509 Aircraft integration costs, net -- 1,094 Long-term investment 250 250 --- --- $ 2,454 $ 5,145 ============ ===========
Debt issuance costs consist of the costs of issuing the Convertible Subordinated Debentures due 2004 and are being amortized over the term of the debt instrument using the effective interest method (see Note 13). The debt issuance costs relating to the Bridge Loan due in 1997 (see Note 12) were included in the accompanying balance sheet at December 31, 1996, but were fully amortized when the loan was paid off in 1997.
Aircraft integration costs consist of pre-operating costs incurred in connection with integrating the new MD-11 aircraft into World Airways' fleet (see Note 13). These costs, consisting primarily of flight crew training, are being amortized on a straight-line basis over a five-year period.
Long-term investment consists of an investment in a company which is accounted for under the cost basis method.
Prepaid expenses and other current assets at December 31, 1997 consists of prepaid insurance. At December 31, 1996, prepaid expenses also included World Airways' prepaid insurance of approximately $4.9 million and prepaid rent of approximately $2.5 million.
World Airways' prepaid expenses and aircraft integration costs, net are not included in the December 31, 1997 balance sheet due to the change in WorldCorp's accounting for its investment in World Airways to the equity method on September 18, 1997 as a result of the Purchase.
10. ASSETS HELD FOR SALE
Assets held for sale consisted primarily of DC10 and B727 rotables with a net book value of $3.9 million as of December 31, 1996. World Airways has consigned these parts with a third party to be sold over a reasonable period of time with the objective of maximizing the proceeds from the sales. As a result of the discontinuance of World Airways' scheduled service operations in 1996 (see Note 3), and the termination of two DC10 lease agreements in December 1996 (see Note 6), World Airways consigned additional DC10 rotables with the third party during 1997. Accordingly, the net book value of these parts of $1.7 million was reclassified from flight and other equipment to assets held for sale in the accompanying balance sheet at December 31, 1996. During the fourth quarters of 1997 and 1996, World Airways wrote-down assets held for sale by $0.5 million and $0.4 million, respectively, to reflect the estimated fair value of the parts less estimated selling costs. As a result of the Purchase on September 18, 1997, WorldCorp began reporting its share of World Airways' net assets and results of operation under the equity method of accounting. Therefore, there is no balance in assets held for sale in the accompanying balance sheet at December 31, 1997. During the third quarter of 1997, WorldCorp recognized a $0.3 million gain on its sale of the remaining B727 rotables to the third party, which is included in other income in the accompanying statement of operations for the year ended December 31, 1997.
11. INTANGIBLE ASSETS
As a result of various transactions in the capital stock of US Order through 1995, the Company recorded approximately $5.2 million of goodwill, which is being amortized over approximately six years using the straight-line method. As a result of the sale of a portion of its stock of US Order pursuant to US Order's initial public offering during 1995, approximately $1.9 million of this goodwill was eliminated and offset against the gain on sale of stock. As a result of the merger of US Order and Colonial Data with and into InteliData during 1996, approximately $1.3 million of goodwill was eliminated and offset against the gain on issuances of equity by affiliates (see Note 5).
12. NOTES PAYABLE
In 1993, World Airways entered into an $8.0 million revolving line of credit borrowing arrangement which is collateralized by certain receivables which were sold to the bank with recourse. Borrowing availability under the line is based on the amount of eligible receivables. This borrowing arrangement was amended effective June 30, 1996 (see Note 13). At December 31, 1996, World Airways had minimal unused borrowing capacity and borrowings under the line of credit were $6.8 million. Upon completion of the Offering (see Notes 1 and 13),World Airways repaid the outstanding balance on the line. Therefore, at December 31, 1997, there was no outstanding balance or borrowing capacity on the revolving line of credit.
Subsequent to December 31, 1997, World Airways amended its Credit Agreement with BNY Financial Corporation ("BNY"). The amended line has a borrowing capacity of up to $25.0 million, subject to borrowing base amounts related to receivables and spare parts inventory, as defined. The amended arrangement contains certain dividend restrictions and certain covenants related to World Airways' financial condition and operating results, including quarterly net worth and net income (loss) requirements and debt coverage requirements. Borrowings under this amended Credit Agreement are collateralized by certain receivables, inventory, and equipment.
A $4.6 million note bearing interest at 3.8% is included in notes payable at December 31, 1996. The note was fully paid during 1997.
On August 29, 1996, the Company entered into a bridge loan (the "Bridge Loan") with a financial institution pursuant to which the Company borrowed $25.0 million and subsequently retired its existing 13 7/8% Subordinated Notes of the same amount. The Bridge Loan was due September 29, 1997 and earned interest of LIBOR plus 2.5%, payable monthly. On September 30, 1996, the Company entered into a purchase agreement (the "Purchase Agreement") which contained a series of Senior Subordinated Notes ("Notes") totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan in October 1996 (See Note 13). The remaining balance on the Bridge Loan of $15.0 million was repaid in September 1997.
In the first quarter of 1997, WorldCorp entered into a $1.0 million margin loan with Scott & Stringfellow, Inc., whereby WorldCorp pledged approximately 400,000 shares of InteliData common stock which WorldCorp owns as collateral for such loan (the "Margin Loan"). The Company did not draw any funds on the loan and the InteliData shares have been returned to WorldCorp.
13. LONG-TERM OBLIGATIONS
Long-Term Debt
Long-term obligations of the Company at December 31 are as follows (in thousands): 1997 1996 ---- ---- WorldCorp:
Senior Subordinated Notes -- with interest at 10% payable semi-annually beginning March 31, 1997 (net of unamortized discount of $0.4 million and $0.3 million at December 31, 1997 and 1996, respectively) (Note 12). 9,603 9,675
Convertible Subordinated Debentures due 2004 -- with interest at 7% payable semi-annually beginning May 15, 1992. 65,000 65,000
Unsecured promissory note due 1997 -- with interest at 6% payable quarterly beginning May 8, 1994. -- 900
Capitalized lease obligations 23 67
World Airways:
Note payable due 1999 -- with principal and interest at 7.25% payable monthly, collateralized by one Pratt & Whitney PW4462 engine. $ -- $ 4,393
Note payable due 2003 -- with principal and interest at 9.98% payable monthly, collateralized by one Pratt and Whitney PW4462 engine. -- 6,018
Spare parts loan due 1998 -- with principal and interest at 8.5% payable monthly, collateralized by certain MD-11 spare parts. -- 3,229
Spare parts loan due 2003 -- with principal and interest at 8.5% payable monthly collateralized by certain MD-11 spare parts. -- 2,581
Spare parts loan due 2003 -- with principal and interest at 10% payable monthly, collateralized by certain MD-11 spare parts. -- 5,929
Aircraft spare parts security agreement payable to bank due 1999, net ofdiscount of $0.2 million -- with interest at the greater of the federal funds rate plus 2.5% or the prime rate plus 2% (10.25% at December 31, 1996),collateralized by certain rotables. -- 7,372
Employee Saving and Stock Ownership Plan guaranteed bank loan (Note 16) -- 805
Capitalized lease obligations -- 7,683
Deferred aircraft rent -- 1,142 ------ -----
Total 74,626 114,794
Less current maturities 9,626 9,990 ----- -----
Total long-term obligations, net $ 65,000 $ 104,804 ========== ==========
The estimated fair value of the Convertible Subordinated Debentures at December 31, 1997 approximated $26.9 million. The Company believes that the carrying values of the other amounts outstanding under the above debt agreements approximate fair value.
In May 1992, the Company issued $65.0 million of Convertible Subordinated Debentures due 2004 (the "WorldCorp Debentures"). The WorldCorp Debentures are convertible into WorldCorp common stock at $11.06 per share, subject to adjustment in certain events, and bear an annual interest rate of 7%. Semi-annual interest payments are due on May 15 and November 15. The terms of this indenture cause World Airways not to pay dividends upon the occurrence of any events of default by the Company under the indenture. The indenture also restricts the Company's ability to pay dividends or make other distributions on its common stock.
On August 29, 1996, the Company entered into a bridge loan (the "Bridge Loan") with a financial institution pursuant to which the Company borrowed $25.0 million and subsequently retired its existing 13 7/8% Subordinated Notes of the same amount (see Note 12).
The Company entered into a purchase agreement (the "Purchase Agreement") on September 30, 1996 which contained a series of Senior Subordinated Notes totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan in October 1996. The Notes are payable in three installments through September 2000 and earn interest of 10%, payable semi-annually. Sinking fund payments equal to 20% of the then outstanding principal balance are required to be made on each of September 30, 1998 and September 30, 1999. In connection with the Purchase Agreement, the Company granted warrants to the lenders to purchase up to 120,000 shares of the Company's common stock, at $6.00 per share, subject to certain adjustments. The Company may also be required to issue up to an additional 80,000 warrants contingent upon certain market conditions. These warrants were valued at approximately $0.6 million (see Note 14). Under the terms of the Purchase Agreement, the Company is not permitted to pay cash dividends. Also, WorldCorp is obligated under certain conditions to make certain mandatory prepayments of the Notes. The Purchase Agreement states that if the Asset Value, as defined, at the end of any fiscal quarter is less than $70.0 million, then WorldCorp shall prepay 50% of each of the outstanding Notes within 60 days of the end of such fiscal quarter. If the Asset Value at the end of any fiscal quarter is less than $50.0 million, then WorldCorp shall prepay all of the outstanding Notes within 60 days of the end of such fiscal quarter. If WorldCorp sells any shares of common stock of InteliData, 20% of the net proceeds received by WorldCorp upon such sale must be used to prepay the then outstanding Notes within 30 days. "Asset Value" is defined to mean (i) the market value of the common stock of World Airways and InteliData beneficially owned by the Company and the common stock of any other subsidiary of the Company beneficially owned by the Company which is listed on an exchange or quoted on the NASDAQ National Market plus (ii) the value of all other tangible assets of the Company. Also under the Purchase Agreement, Senior Indebtedness of the Company shall not exceed $50.0 million. As of December 31, 1997, the Asset Value was $56.8 million. Therefore, subsequent to year end, the Company prepaid $5.0 million of the Notes. The Company may not meet the $50.0 million Asset Value requirement as of March 31, 1998, in which event, the Company would be required to prepay the remaining $5.0 million outstanding under the Notes. The Company has classified the outstanding balance of the Notes as a current liability as of December 31, 1997.
Subsequent to December 31, 1997, the Company borrowed $2.0 million from World Airways, the proceeds from which were used by the Company to repay a portion of the Notes. This loan is collateralized by 1.0 million of World Airways' shares owned by WorldCorp, bears interest at prime plus 2.5%, and is due on April 28, 1998.
On August 26, 1997, World Airways completed a private offering, issuing $50.0 million of 8% convertible senior subordinated debentures (the "Debentures") due in 2004 (the "Offering"). The Debentures were subsequently registered with the Securities and Exchange Commission. The Debentures are unsecured obligations, convertible into shares of World Airways' common stock at $8.90 per share, subject to adjustment in certain events, and subordinated to all present and future senior indebtedness of World Airways. In the event of a change in control of World Airways, as defined, the holders of the Debentures could require World Airways to repurchase the outstanding Debentures. The Debentures are not redeemable by World Airways prior to August 26, 2000. World Airways used the net proceeds of the Offering to purchase approximately 4.0 million shares of its common stock (see Notes 1, 4 and 6), repay certain indebtedness, increase working capital and for general corporate purposes. After completion of the Offering, World Airways repaid approximately $3.8 million, which was outstanding on the aircraft spare parts security agreement.
Due to the Purchase, effective September 18, 1997, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting. Accordingly, no World Airways debt balances are recorded in the accompanying balance sheet at December 31, 1997.
Subsequent to December 31, 1997, World Airways amended its Credit Agreement with BNY, which included the aircraft security agreement and the $8.0 million revolving line of credit borrowing (see Note 12), to provide for up to a $25.0 million revolving line of credit borrowing (see Note 12). In 1996, in connection with a previous amendment, World Airways granted warrants to BNY to purchase up to 50,000 shares of authorized but unissued common stock. The warrants were granted at an exercise price of $8.00 per share which was equal to the market price of World Airways' stock at the date of grant. All warrants were vested and became fully exercisable at the date of grant and expire on December 31, 1999. The per share weighted-average fair value of warrants granted was $3.615 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk free interest rate of 6.0%, expected life of 3 years and expected volatility of 61.0%. World Airways recorded $0.2 million related to the warrants which will be amortized into interest expense over the terms of the related debt.
In September 1995, World Airways entered into an agreement with a lessor to purchase a spare engine, previously under lease, for $5.5 million. World Airways paid $0.5 million upon closing and signed a note for the $5.0 million balance. The note bears interest at a rate of 7.25% and is payable over a 40-month period at $69,000 a month, with the balance of $3.3 million due on January 29, 1999. World Airways purchased an additional spare engine, which was delivered in March 1996, at a cost of approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term at an interest rate of 9.98%. World Airways made payments of $1.2 million and $0.4 million towards this purchase in September 1995 and January 1996, respectively.
In January 1996, World Airways agreed to purchase an additional engine for approximately $7.2 million and received a commitment from the engine manufacturer to finance 85% of its purchase price over a seven-year term with an interest rate to be fixed at the time of delivery. In June 1997, World Airways took delivery of the engine and signed a note for $6.3 million. The note bears interest at a rate of 8.18% and is payable over an 84-month period at approximately $48,000 per month, with the balance of $2.2 million due on June 18, 2004.
During 1993, World Airways negotiated with several of its lessors to defer approximately $14.7 million of lease payments on eight aircraft. In addition, during 1995 and 1994 World Airways deferred approximately $0.7 million of rent, pursuant to the 1993 agreement. Of these amounts, World Airways repaid approximately $14.5 million through 1997.
The following table shows the aggregate annual amount of scheduled WorldCorp principal maturities (in thousands) of debt outstanding at December 31, 1997, excluding capital lease obligations:
1998 $ 10,000 1999 -- 2000 -- 2001 -- 2002 -- Thereafter 65,000 ------ Total 75,000 Less: unamortized debt discount (397) ---- Total $ 74,603 ==========
The above scheduled principal maturities do not include World Airways' borrowings since WorldCorp began recording its share of World Airways' net assets and results of operations under the equity method of accounting as of September 18, 1997.
Capital Leases
The present value of the obligations under WorldCorp capital leases at December 31, 1997, calculated using a rate of 8.9%, amounted to approximately $23,000, net of imputed interest of approximately $1,000, is due in 1998.
Property under capital leases consists of equipment leases and are amortized over the lease terms or expected useful life of the assets. As a result of the Purchase, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting as of September 18, 1997. Accumulated amortization under capital leases was $0.1 million and $4.3 million at December 31, 1997 and 1996, respectively. Amortization expense of property under capital leases totaled approximately $0.5 million for the period January 1, 1997 through September 17, 1997 and $0.7 million for the years ended December 31, 1996 and 1995.
Operating Leases
In October 1992 and January 1993, World Airways signed a series of agreements with International Lease Finance Corporation ("ILFC"), McDonnell Douglas Corporation, GATX Capital Corporation, and United Technologies Corporation's Pratt & Whitney Group ("Pratt and Whitney") to lease seven new McDonnell Douglas MD-11 aircraft and associated engines under initial lease terms of two to five years. World Airways returned one aircraft in August 1997. The remaining six aircraft leases contain annual renewal options in years six through fifteen of the lease term. If these renewal options are not exercised, World Airways is required to pay a substantial penalty to the lessor. Under the terms of the lease agreements, World Airways may be required to pay additional rent in excess of the fixed monthly amounts depending on block hours flown.
In February 1992, World Airways signed 12-year operating leases for two McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways returned these aircraft to their lessor. Certain matters related to the termination of these leases were resolved in 1995 and resulted in a gain to World Airways of approximately $0.8 million. This gain is included in other income in 1995.
World Airways' MD-11 leases contain options to purchase the aircraft at various times throughout the lease terms. Long-term deposits consist primarily of deposits on the MD-11 leases. As part of the lease agreements, World Airways was assigned purchase options for four additional MD-11 aircraft. In 1992, World Airways made non-refundable deposits to McDonnell Douglas toward the option aircraft. In March 1996, World Airways entered into an agreement with McDonnell Douglas to lease two MD-11ER aircraft. Under this agreement, World Airways is leasing each aircraft for a term of 24 years with an option to return the aircraft after a seven year period, subject to fixed termination fees of $2.8 million per aircraft. The non-refundable deposits of $1.2 million previously paid to McDonnell Douglas towards options on four MD-11 aircraft were applied to the deposits required on the MD-11ER aircraft. World Airways entered into a simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. World Airways can borrow a total of $9.0 million of which $3.0 million became available with the delivery of each aircraft and an additional $3.0 million became available in December 1996. Net borrowings under the agreement were $6.3 million and $5.9 million at December 31, 1997 and 1996, respectively. McDonnell Douglas retains a purchase money lien in the purchased parts. In connection with this lease agreement, World Airways agreed to assume an existing lease of two additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the event the existing lessee terminates its lease with McDonnell Douglas at that time.
Effective August 1997, World Airways entered into an agreement with one of its lessors to return a passenger MD-11 aircraft. The aircraft was returned in September 1997. In conjunction with the aircraft return, World Airways forfeited security deposits of $0.2 million and paid an additional $0.2 million to the lessor in 1998.
In October 1997, one of World Airways' MD-11 aircraft was damaged upon its landing at Montevideo, Uruguay. The aircraft was out of service until January 1998 while certain repairs were made. World Airways expects insurance to cover the majority of repair and certain related costs.
In 1995, World Airways entered into three DC10-30 aircraft leases with lease terms, as amended, expiring in September 1998, December 1998 and August 1999. In addition, another DC-10 aircraft lease expires in January 2003.
As of December 31, 1997, World Airways' fleet consisted of three passenger MD-11 aircraft, one freighter MD- 11 aircraft, two convertible MD-11 aircraft, two MD-11ER aircraft, three passenger DC10-30 aircraft, and one DC10-30 convertible aircraft.
World Airways extended the lease terms on two spare engines during 1996. One lease, originally expiring on December 31, 1995, was extended until February 1998. This lease was classified as a capital lease at December 31, 1995, but became an operating lease under the new agreement. The other engine was extended three years from its original April 20, 1996 termination date. During 1997, World Airways reached a settlement with its engine manufacturer for reimbursements related to disputed spare engine lease charges. As a result of this settlement, during 1997, World Airways reversed aircraft costs of $0.9 million originally recorded during 1996. In addition, World Airways received the use, at no charge, of one spare engine through September 30, 1998.
During 1997, World Airways' lease for its headquarters space expired, and World Airways entered into a new agreement with the lessor to lease the space until 2003. As part of the lease agreement, the lessor agreed to finance certain leasehold improvements provided that World Airways meets specific net worth requirements. As a result of World Airways' purchase of 3,227,000 shares on September 18, 1997 (see Note 1), World Airways was not in compliance with this covenant. World Airways and the lessor are currently discussing possible amendments to the agreement.
As a result of the Purchase, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting as of September 18, 1997. Rental expense for continuing operations, primarily relating to aircraft leases, totaled approximately $64.7 million, $84.6 million, and $66.7 million for the period January 1 through September 17, 1997 and for the years ended December 31, 1996 and 1995 respectively.
WorldCorp has no future annual minimum rental payment obligations. The following is a schedule of World Airways' future annual minimum rental payments, principally aircraft rentals (excluding variable portions), required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1997 (in thousands):
1998 $ 79,500 1999 72,772 2000 72,831 2001 72,989 2002 73,148 Thereafter 612,817 ------- Total $ 984,057 ================
These future annual minimum rental payments include all option years. Under the terms of certain of the MD-11 leases, if the options are not exercised, World Airways must pay a substantial penalty to the lessor, consisting of either a fixed penalty or a penalty based on the number of block hours flown since delivery of the aircraft. World Airways intends to exercise the options under these leases.
14. COMMON STOCK PURCHASE WARRANTS
BNYFC Warrants
On December 7, 1993, in connection with a revolving line of credit facility and an aircraft parts security agreement (see Notes 12 and 13), the Company granted to Bank of New York Financial Corporation ("BNYFC") warrants expiring December 7, 1996 to purchase 250,000 shares of the Company's common stock, at a price of $6.15 per share. During 1996, 150,000 warrants were exercised and the remaining 100,000 warrants expired unexercised. Therefore, at December 31, 1997, there were no WorldCorp BNYFC warrants outstanding.
1989 Executive Warrants
During 1989, the Company entered into warrant agreements with certain officers of the Company providing for the issuance of warrants ("the 1989 Executive Warrants") to purchase a total of 745,000 shares of the Company's common stock at an exercise price of $5.50; such warrants vested at differing rates over 60 months. The 1989 Executive Warrants expired on August 31, 1997. During 1995, 141,083 warrants were exercised. As of December 31, 1997, 603,917 of these warrants had been canceled or expired.
1996 Purchase Agreement Warrants
On September 30, 1996, in connection with the Purchase Agreement (see Note 13), the Company entered into an agreement to issue up to 200,000 warrants. The warrants are fully exercisable when granted. 120,000 of the warrants were granted on September 30, 1996 and expire on September 30, 2000. The remaining 80,000 warrants were issuable as to 40,000 each on October 1, 1997 and October 1, 1998 and expire on September 30, 2001 and September 30, 2002, respectively, and are contingent upon certain market conditions. The conditions for granting the first 40,000 warrants were met during 1997, rendering these warrants issuable. The warrants have an exercise price of $6.00 per share, subject to certain adjustments.
The per share weighted-average fair value of warrants granted during 1996 was $2.99 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0%, risk- free interest rate of 6.1%, expected life of 4 years and expected volatility of 62%.
The Company recorded $0.6 million related to the warrants which will be amortized into interest expense over the term of the related debt.
15. STOCK OPTIONS
On July 19, 1988, the Board of Directors approved the WorldCorp, Inc. 1988 Stock Option Plan (the "1988 Plan"). The 1988 Plan was amended and restated on May 13, 1992. The 1988 Plan calls for one share of WorldCorp common stock to be issued upon exercise of one stock option. Warrants issuable under the 1988 Plan, as amended, shall not exceed 2,800,000 in the aggregate. Options may be granted to employees and directors at the discretion of the Administrative Committee of the 1988 Plan. In 1990, the 1988 Plan was amended to change the vesting percentage to 20% per year beginning on the grant date provided that the grantee was still an employee of the Company or a subsidiary. These options expire at the earlier of the stated expiration, which shall not exceed ten years from the date of grant, or at a certain period of time after the termination of the participants' employment with the Company. Stock options are granted with an exercise price at least equal to the stock's fair market value at the date of grant.
In August 1994, the Company granted 1,050,000 options to an officer and a board member of the Company. These options become vested at various times through May 2004. During 1997, 1996 and 1995, approximately $0.1 million, $0.2 million and $0.7 million, respectively, of compensation expense was recognized in connection with the vested portion of these options. These options expire at the earlier of the stated expiration, or a certain period of time after the termination of the participants' employment with the Company.
The per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $1.20, $4.59 and $7.21, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1997 1996 1995 ---- ---- ----
Expected dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 5.8% 6.2% to 6.5% 5.3% to 5.6% Expected life (in years) 5 to 10 5 to 10 5 to 8 Expected volatility 58% to 61% 56% to 59% 58% to 59%
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options which were granted with an exercise price at least equal to the stock's fair market value at the date of grant, in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings (loss) would have been changed to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ----
Net earnings (loss) As reported $ (19,128) $ (11,754) $ 60,208
Pro forma (20,534) (12,760) 59,433
Basic earnings (loss) per common equivalent share As reported $ (1.29) $ (0.73) $ 3.77 Pro forma (1.39) (0.79) 3.72
Diluted earnings (loss) per common equivalent share As reported $ * $ * $ 2.82 Pro forma * * 2.78
* Amounts are anti-dilutive
Pro forma net earnings reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of six months to 10 years and compensation cost for options granted prior to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Options Weighted-Average Outstanding Exercise Prices ----------- ---------------
Balance at December 31, 1994 2,322,404 $ 5.68 Granted 50,000 7.06 Exercised (418,485) 5.47 Forfeited (100,000) 9.64 Expired (25,000) 9.07 ------- ----
Balance at December 31, 1995 1,828,919 $ 5.48 Granted 225,000 6.14 Exercised (104,456) 5.52 Forfeited -- -- Expired (125,845) 6.28 -------- ----
Balance at December 31, 1996 1,823,618 $ 5.50 Granted 275,000 1.86 Exercised -- -- Forfeited (431,667) 5.04 Expired (99,117) 6.09 ------- ----
Balance at December 31, 1997 1,567,834 $ 4.96 ========= ==========
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $1.75 to $12.23 and 5.7 years, respectively. The following table summarizes the stock options
outstanding and exercisable at December 31, 1997:
Stock Options Outstanding Stock Options Exercisable ------------------------- -------------------------
Weighted Weighted Range of Number of Average Average Number of Weighted Exercise Options Remaining Life Exercise Options Average Price Outstanding (Years) Price Exercisable Exercise Price - ----- ----------- ------- ----- ----------- --------------
$ 1.75 - 2.00 275,000 9.8 $ 1.86 52,083 $ 1.99 4.01 - 5.00 870,000 6.1 4.51 820,000 4.51 5.01 - 6.00 155,000 1.3 5.63 155,000 5.63 7.01 - 8.00 79,223 2.5 7.49 79,223 7.49 9.01 - 10.00 163,611 1.9 9.55 163,611 9.55 12.01 - 13.00 25,000 5.7 12.23 25,000 12.23 --------- --------- 1,567,834 1,294,917 ========= =========
At December 31, 1997 and 1996, the number of options exercisable was 1,294,917 and 1,324,244, respectively, and the weighted-average exercise price of those options was $5.51 and $5.50, respectively.
World Airways has adopted separate stock option plans for members of its board of directors, employees and consultants.
16. EMPLOYEE BENEFIT PLANS
During 1989, the Company adopted an Employee Stock Ownership Plan (the "ESOP") for the benefit of employees not covered by collective bargaining agreements. The ESOP is designed as a stock bonus plan which qualifies for favorable tax treatment under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and as an employee stock ownership plan under Section 4975(e)(7) of the Code. In addition, the ESOP includes a "cash or deferred arrangement" under Section 401(k) of the Code.
During 1989, the ESOP acquired 450,000 shares of common stock from Violet June Daly and 450,000 shares of common stock from the Estate of Edward J. Daly. The purchase price in each transaction was $4.00 per share or a total of $3.6 million.
In 1990, the ESOP was replaced by the Employee Savings and Stock Ownership Plan ("the WorldCorp KSOP"). Participation in the WorldCorp KSOP was limited to employees not covered under a collective bargaining agreement. Employees could elect to invest Salary Deferral Contributions in either the WorldCorp Stock Fund or in other investment funds. The WorldCorp KSOP provided employer matching contributions in the WorldCorp Stock Fund at a rate determined by the Board of Directors, but at no less than 50% of the salary deferral contribution. The employer matching contribution rate in the WorldCorp Stock Fund for 1997, 1996 and 1995 was 100%. The employer matching contribution in other investment funds was at the rate of 33 1/3% of the Salary Deferral Contribution. The Company charged approximately $0.01 million, $0.2 million and $0.3 million to expense for its contributions in 1997, 1996 and 1995, respectively.
The Board of Directors of World Airways adopted an Employee Savings and Stock Ownership Plan (the "Plan") effective October 1, 1996. The Plan is intended to allow employees not covered by collective bargaining agreements, as well as certain WorldCorp and WorldCorp Investments, Inc. employees, to share in the growth and prosperity of World Airways, to encourage participants to save on a tax-favored basis, and to provide participants an opportunity to accumulate capital for their future economic security. The Plan is an amendment and continuation of the WorldCorp KSOP. As a result of various business developments, the vast majority of the participants in the WorldCorp KSOP were World Airways employees. For that reason, in 1996, World Airways and WorldCorp agreed that World Airways should assume WorldCorp's obligation under the WorldCorp KSOP. In connection with that action, the Trustees exchanged the unallocated shares of WorldCorp common stock held by the WorldCorp KSOP for a like-value of shares in World Airways common stock. World Airways also made a special contribution of $50,000 to the Plan.
The WorldCorp KSOP originally assumed bank financing from its predecessor plan, the WorldCorp Employee Stock Ownership Plan. This obligation was paid off by WorldCorp in 1994 and the WorldCorp KSOP agreed to repay WorldCorp the amount of the bank loan. The WorldCorp KSOP refinanced its debt to WorldCorp through a margin loan obtained in January 1995 and amended in May 1996 in the amount of $1.5 million. As discussed above, effective October 1, 1996, World Airways and WorldCorp agreed that World Airways should assume WorldCorp's obligation under the WorldCorp KSOP. Principal payments of $90,000 are due quarterly and a final principal payment of $0.1 million is due May 1998. Interest is payable quarterly at the call loan rate plus 1.5%. The margin loan is collateralized by approximately 59,677 of the unallocated shares of common stock owned by the Plan at December 31, 1997. World Airways is required to make minimum annual discretionary contributions to the Plan in an amount necessary to pay principal and interest due on the margin loan to the extent that other contributions to the Plan are insufficient to make such payments. Contributions were sufficient to make the required principal and interest payments during 1997.
The Plan will continue to hold the shares of WorldCorp common stock that were allocated to the participants' accounts before October 1, 1996. No additional shares of WorldCorp common stock will be allocated under the Plan on or after that date. Instead, participants will have the opportunity to receive future allocations of World Airways common stock.
Under the Plan, employees may elect to invest salary deferral contributions in either the World Airways Stock Fund or in other investment funds. The Plan provides employer matching contributions in the World Airways Stock Fund at a rate determined by the Board of Directors, but at no less than 50% of the salary deferral contribution. The employer matching contribution rate in the other investment funds is 33 1/3% of the salary deferral contribution. World Airways expensed approximately $ 0.2 million for its contributions to the Plan for the period January 1, 1997 through September 17, 1997.
The World Airways' Crewmembers Target Benefit Plan is a defined contribution plan covering flight engineers and pilots with contributions based upon defined wages. It is a tax-qualified retirement plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Pension expense for the Target Benefit plan totaled $1.4 million, $2.5 million, and $1.9 million for the period January 1, 1997 through September 17, 1997 and for the years ended December 31, 1996, and 1995, respectively.
Until September 1996, World Airways' flight attendants participated in the World Airways' Flight Attendant Target Benefit Plan, which was a tax-qualified retirement plan under Section 401(a) of the Code. Under the collective bargaining agreement between World Airways and the flight attendants, represented by the International Brotherhood of Teamsters ("Teamsters"), that was signed in June 1996 and ratified by the flight attendants in August 1996, the World Airways' Flight Attendant Target Benefit Plan was terminated in September 1996. World Airways is required under the agreement to make certain monthly payments on behalf of the flight attendants to the Teamsters subsequent to the termination of the previous plan. Pension contributions made to the Teamsters on behalf of the flight attendants totaled $0.3 million and $0.1 million for the period January 1, 1997 through September 17, 1997, and the fourth quarter of 1996, respectively. Pension expense relating to the Flight Attendant Target Benefit Plan totaled $0.5 million and $0.2 million for the first three quarters of 1996 and the year ended 1995, respectively.
Effective January 1, 1994, World Airways adopted the World Airways, Inc. Retroactivity and Profit Sharing Bonus Plan ("the 1994 Profit Sharing Plan"). The 1994 Profit Sharing Plan provides for the payment of retroactive pay to certain DC10 crewmembers for the period July 1, 1992 to August 15, 1994, as well as for certain profit sharing payments. Distributions under the 1994 Profit Sharing Plan are equal to 20% of World Airways defined earnings, subject to an annual limitation of 10% of the total annual aggregate compensation of World Airways employees participating in the 1994 Profit Sharing Plan in that year. This is not a tax-qualified retirement plan under Section 401(a) of the Code. World Airways distributed approximately $1.7 million in 1996 pertaining to 1995 results, which included the retroactive payment required under the plan. World Airways did not make any 1997 distributions pertaining to 1996 results. World Airways expects to distribute approximately $2.6 million in 1998 pertaining to 1997 results.
World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. World Airways accounts for the cost of health benefits in accordance with FAS 106 which requires accrual accounting for all postretirement benefits other than pensions. World Airways funds the benefit costs on a pay-as-you- go (cash) basis.
A summary of the net periodic postretirement benefit costs for the period January 1, 1997 through September 17, 1997 and for the years ended December 31, 1996 and 1995 is as follows:
1997 1996 1995 ---- ---- ---- Service cost $ 118,000 $ 176,000 $ 118,000 Interest cost on accumulated postretirement benefit obligation 78,000 100,000 134,000
Net amortized gain (38,000) (38,000) (40,000) ------- ------- ------- Net periodic postretirement benefit cost $ 158,000 $ 238,000 $ 212,000 =========== ============ ===========
As a result of the Purchase, beginning September 18, 1997, WorldCorp reports its share of World Airways' net assets and results of operations under the equity method of accounting. Therefore, there is no amount included for the accrued postretirement benefit obligation in the accompanying balance sheet at December 31, 1997. However, the following table shows the components of the World Airways accumulated postretirement benefit obligation as of December 31, 1997 and 1996:
1997 1996 ---- ----
Retirees and dependents $ 863,000 $ 789,000 Fully eligible, active participants 183,000 229,000 Not fully eligible participants 1,706,000 1,527,000 --------- --------- $ 2,752,000 $ 2,545,000 Less: plan assets -- -- --------- --------- Accrued postretirement benefit obligation $ 2,752,000 $ 2,545,000 =========== ============
The assumed discount rate used to measure the accumulated postretirement benefit obligation for 1997 and 1996 was 6.75%. The medical cost trend rate in 1998 was 7.5% trending down to an ultimate rate in 2021 of 4.0%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of 1997 net periodic postretirement benefit cost by $28,000 and would have increased the accumulated postretirement benefit obligation as of December 31, 1997 by $121,000.
Near the end of 1997, the Company entered into employment agreements with two of its senior executives. Under these agreements, the Company granted the employees options to purchase 475,000 and 100,000 shares of InteliData and World Airways' stock, respectively, owned by the Company. The exercise prices of the InteliData options range from $2.98 to $3.00, and the exercise price of the World Airways' options is $7.92. The per share weighted-average fair values of the InteliData options and the World Airways' options at the date of the grant were $2.01 and $5.08, respectively. The Company is amortizing the estimated fair value of these options of $1.5 million over the vesting periods of the options, which range from two years to ten years, with accelerated vesting under certain circumstances. The Company expensed approximately $0.2 million during 1997 relating to these options.
Near the end of 1997, the Company also agreed to adopt a supplemental executive retirement plan for one of its executives, which is expected to require certain funding in 1998 and 1999.
17. EARNINGS PER SHARE
Earnings per share ("EPS") for the years ended December 31, 1997, 1996 and 1995 are computed as follows:
For the Year Ended December 31, 1997 ------------------------------------
Earnings Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS Loss from continuing operations $ (19,128,000) 14,804,356 $ (1.29) ======
Effect of Dilutive Securities 7% convertible debentures 4,550,000 5,877,034 --------- --------- Diluted EPS Loss available to common stockholders $ (14,578,000) 20,681,390 $ * ============== ========== ============
For the Year Ended December 31, 1996 ------------------------------------
Earnings Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------
Basic EPS Earning from continuing operations $ 7,437,000 16,153,227 $ 0.46 ===== Effect of Dilutive Securities Options -- 530,970 7% convertible debentures 4,550,000 5,877,034 --------- --------- Diluted EPS Earnings available to common stockholders $ 11,987,000 22,561,231 $ * ============ ========== =============
For the Year Ended December 31, 1995 ------------------------------------
Earnings Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS Earnings from continuing operations $ 64,158,000 15,988,365 $ 4.01 ======= Effect of Dilutive Securities Options -- 1,129,467 7% convertible debentures 4,550,000 5,877,034 - - --------- --------- Diluted EPS Earnings available to common stockholders $ 68,708,000 22,994,866 $ 2.99 ============= ========== =============
* Amounts are anti-dilutive.
18. FEDERAL AND STATE INCOME TAXES
Income tax expense attributable to earnings from continuing operations consists of (in thousands):
For the years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ----
U.S. Federal $ 350 $ 504 $ 573 State -- -- 88 --- --- --- Income tax expense $ 350 $ 504 $ 661 ========= ========= ===========
There is no deferred tax expense or benefit for the years ended December 31, 1997, 1996, and 1995.
Income tax expense attributable to earnings (loss) from continuing operations for the years ended December 31, 1997, 1996, and 1995 differed from the amounts computed by applying the U.S. Federal income tax rate of 34 percent for the years ended December 31, 1997, 1996 and 1995 as a result of the following (in thousands):
For the years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Expected Federal income tax expense(benefit) at the statutory rate $ (6,385) $ 2,700 $ 22,038 Change in valuation allowance, net of change attributed to discontinued operations losses 6,207 (3,339) -- Amounts attributable to (earnings)/loss of subsidiaries not consolidated for tax purposes -- -- (3,115) Income tax expense of subsidiaries not consolidated for tax purposes 350 -- 296 Loss (gain) on issuances (purchases) of equity by affiliates not consolidated for tax purposes -- -- (14,850) Amortization of goodwill -- -- 283 Book/tax difference in gain on sales of subsidiaries stock -- -- (252) Generation (utilization) of net operating loss and capital loss carryforwards -- -- (3,640) Federal alternative minimum tax and environmental tax -- -- 231 State income tax expense, net of Federal benefit -- -- 58 Other 178 1,143 (388) --- ----- ---- Income tax expense $ 350 $ 504 $ 661 =========== ======== ==========
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, are as follows (in thousands):
1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 21,419 $ 18,111 Investment in affiliate 8,648 14,480 Deferred compensation 8 199 Accruals not deductible for tax 67 24 Compensated absences, primarily due to accrual for financial statement purposes 16 10 ------ ------ Gross deferred tax assets 30,158 32,824 Less: valuation allowance 29,484 23,277 ------ ------ Net deferred tax assets 674 9,547 ------ ----- Deferred tax liabilities: Investment in affiliate 630 9,499 Property and equipment 44 48 ------ ----- Gross deferred tax liabilities 674 9,547 ------ ----- Net deferred income taxes $ -- $ -- ====== =====
The valuation allowance for deferred tax assets as of January 1, 1996 was $20.1 million. The net change in the total valuation allowance for the year ended December 31, 1996 was an increase of $ 3.2 million and an increase of $6.2 million for the year ended December 31, 1997.
As of December 31, 1997, the Company has approximately $ 63.0 million of net operating loss carryforwards, which expire as follows (in millions):
2005 5.8 2007 15.2 2008 11.2 2009 10.1 2010 1.1 2011 10.2 2012 9.4 --- $ 63.0 ======
There can be no assurance that the operations of the Company will generate taxable income in future years so as to allow the Company to realize a tax benefit from its net operating loss carryforwards ("NOLs"). The NOLs are subject to examination by the IRS and thus, are subject to adjustment or disallowance resulting from any such IRS examination. In addition, an ownership change of the Company, as defined in the Internal Revenue Code, may occur in the future and may result in the imposition of a lower annual limitation on the Company's NOLs existing at the time of any such ownership change.
As a result of certain transactions with MHS in 1994 (see Note 6), World Airways is no longer consolidated with the Company for income tax purposes. As of December 31, 1997, World Airways had NOLs for federal income tax purposes of approximately $92.2 million, which is only available to offset future federal taxable income of World Airways. Of this amount, $ 27.8 million is subject to a $6.9 million annual limitation resulting from an ownership change, pursuant to the Internal Revenue Code of 1986, as amended, which occurred in 1991. In addition, future transactions in the stock of the Company, World Airways or World Airways' stockholders could cause an additional ownership change at World Airways, which could result in a substantial reduction in the annual limitation in the use of World Airways' NOLs and the loss of a substantial portion of the NOLs available to World Airways.
19. MAJOR CUSTOMERS
The Company owns positions in companies that operate in two distinct business areas. As of December 31, 1997, the Company owned approximately 46.3% of the outstanding common stock of World Airways, a provider of worldwide passenger and cargo air transportation for commercial and government customers. The Company also owns 29.4% of InteliData, a company which concentrates on two markets: telecommunications and electronic commerce.
As a result of the Purchase (see Note 1), as of September 18, 1997, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting which is included in equity in earnings (loss) of affiliates, net in the accompanying statements of operations. Results of operations for the period prior to the Purchase are included in WorldCorp's consolidated results of operations. Information concerning customers for years in which their revenues comprised 10% or more of the Company's consolidated operating revenues is presented in the following table (in thousands):
For the Period Year ended December 31, January 1, 1997 ----------------------- Through September 17, 1997 1996 1995 ------------------ ---- ----
Malaysian Airlines $ 51,143 $ 105,410 $ 100,934 U.S. Department of Defense (including U.S. Air Force) 45,114 79,029 52,889 Philippine Airlines 75,889 46,516 -- P. T. Garuda Indonesia 30,627 39,849 26,263 Look Charters -- 3,749 3,677
World Airways has provided wet lease services to Malaysian Airlines since 1981, providing wet lease services for Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owned 16.8% of World Airways as of January 23, 1998, also owns 28% of Malaysian Airlines. World Airways also entered into a 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby World Airways is providing two passenger aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. However, World Airways agreed to a five month reduction in the utilization of one aircraft during 1997, although the aircraft was redeployed in other activity. Malaysian Airlines has not informed World Airways of any reductions for 1998. World Airways provided three aircraft for 1997 Hadj operations. MAS received notice from the Malaysian Hadj Board that MAS would not participate in the 1998 Hadj pilgrimage. As a result, MAS entered into an agreement on behalf of World Airways for World Airways to provide two DC-10 aircraft to fly in the 1998 Indian Hadj.
World Airways has a long-term contract to operate three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into another contract which ended in February 1998. World Airways and Malaysian Airlines are currently discussing redeployment of these aircraft back into Malaysian Airlines' operations during 1998 in order to meet the contracts' original obligations. World Airways can provide no assurances, however, that World Airways will, in fact, be able to do so.
World Airways' contract with the U.S. Air Force expires in September 1998. World Airways anticipates that future renewals of the U.S. Air Force contract will be on an annual basis.
World Airways has provided service to PT Garuda Indonesia ("Garuda") since 1973 and has operated under an annual Hadj contract since 1988. World Airways operated six aircraft in the 1997 Garuda Hadj and seven aircraft in the 1996 Garuda Hadj. World Airways will operate six aircraft for the 1998 Garuda Hadj.
World Airways had agreements with Philippine Airlines to operate four passenger aircraft until November 1997. As a result of the economic distress experienced in the Philippines, World Airways negotiated to terminate the agreements on two of the aircraft effective in August 1997, and received monthly termination payments totaling $3.0 million through the original end of the agreements in November 1997. In addition, the contracts on the remaining two aircraft were extended until February 1998 and the per block hour rates for those two aircraft were reduced slightly. The two aircraft which were removed from Philippine Airlines service were redeployed by World Airways under agreements with other customers. The contract with Philippine Airlines expired in February 1998.
World Airways provided service to Look Charters under an annual contract from 1992 through 1996. In 1996 and 1995, World Airways performed operations for a summer charter program transporting passengers between Paris, France and various locations in the United States and Mexico.
Although World Airways' strategy is to enter into long-term contracts with its customers, the terms of its existing customer contracts are substantially shorter than the terms of World Airways' lease obligations with respect to its aircraft. World Airways' financial results could be materially adversely affected even by relatively brief periods of low aircraft utilization and yields. Consistent with prior years,World Airways has substantial uncontracted capacity in the third and fourth quarters of 1998 and beyond. In addition, as further described below, its major customer, Malaysian Airlines, is subject to the financial difficulties associated with the adverse economic conditions in Malaysia and the Asia Pacific Region. Although there can be no assurance that it will be able to secure additional business to reduce this excess capacity, World Airways is actively seeking customers for 1998 and beyond, and has historically been successful in obtaining new customers.
A substantial portion of World Airways' business in 1997 was with two customers: Malaysian Airlines and Philippine Airlines. The contract with Philippine Airlines expired in February, 1998. In 1997, World Airways received approximately $11.2 million in revenue associated with minimum guarantee payments from Malaysian Airlines and $3.0 million in contract modification payments from Philippine Airlines, not associated with aircraft flying and related costs. As of December 31, 1997, Malaysian Airlines and Philippine Airlines owed World Airways $2.6 million and $1.0 million, respectively, primarily related to reimbursable costs incurred by World Airways. A substantial portion of World Airways' contracted business in 1998 is with Malaysian Airlines and Garuda Indonesia. Although World Airways' customers bear the financial risk of filling its aircraft with passengers or cargo,World Airways can be affected adversely if its customers are unable to operate its aircraft profitably, or if one or more of its customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances,World Airways can be adversely affected by receiving delayed or partial payments or by receiving customer demands for rate and utilization reductions, flight cancellations, and/or early termination of their agreements.
In 1997, the affects of the adverse economic conditions in Malaysia and Indonesia and other countries in the Asia Pacific Region included a national liquidity crisis, significant depreciation in the value of the ringgit and rupiah, higher domestic interest rates, reduced opportunity for refinancing or refunding of maturing debts, and a general reduction in spending throughout the region. These conditions and similar conditions in other countries in the Asia Pacific Region could have a material adverse effect on the operations of Malaysian Airlines and Garuda Indonesia, and therefore on the operations of World Airways. However, management also believes these conditions could provide new opportunities to wet lease aircraft to airlines customers, particularly those who have deferred or canceled new aircraft orders but are still in need of providing additional airlift.
All export contracts are denominated in U.S. dollars as are substantially all of the related expenses. The classification between domestic and export revenues is based on entity definitions prescribed in the economic regulations of the Department of Transportation. Information concerning World Airways' export revenues from continuing operations is presented in the following table (in thousands):
For the Period Year ended December 31, January 1, 1997 ----------------------- Through September 17, 1997 1996 1995 ------------------ ---- ---- Operating Revenues: Domestic $ 47,190 $ 91,516 $ 59,278 Export - Malaysia 51,143 105,410 100,934 - Philippines 75,889 46,516 -- - Indonesia 30,627 39,849 26,263 - Belgium 9,136 -- -- - France -- 3,749 6,897 - Other 2,107 22,547 49,014 ----- ------ ------ Total $ 216,092 $ 309,587 $ 242,386 =========== =========== ===========
20. RELATED PARTY TRANSACTIONS
Effective November 10, 1988, T. Coleman Andrews', III employment agreement to serve as Chief Executive Officer and President of WorldCorp, which was originally entered into in August 1986, was extended an additional five years to August 1, 1994. In connection with the employment agreement, Mr. Andrews had also entered into a Supplemental Incentive Agreement ("the Incentive Agreement") with WorldCorp that provided for a bonus in the amount of $1.3 million plus interest earned at 8.91% to be paid to Mr. Andrews on August 1, 1994, provided he was still an employee of WorldCorp at that time. In connection with this employment arrangement, the Company loaned Mr. Andrews $1.3 million on January 10, 1989. Mr. Andrews executed and delivered to the Company a full recourse promissory note dated January 10, 1989. The principal amount of the note was due and payable on December 31, 1994 and interest accrued quarterly and was payable at maturity at a fixed rate of 8.91% per annum. Effective December 1993, the Company and Mr. Andrews terminated the Incentive Agreement and entered into a new agreement. In connection with the new agreement, the Company paid Mr. Andrews in December 1993 (approximately seven months early) $0.2 million due him under the Incentive Agreement. The new agreement delays payment to Mr. Andrews of the balance due under the Incentive Agreement and provides that the Company will make four annual installment payments of $0.4 million beginning January 2, 1995, plus interest earned at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. The first three payments were made as scheduled in 1995, 1996 and 1997. The remaining and final payment under the Incentive Agreement was made on January 2, 1998. At the same time, Mr. Andrews agreed to cancel his previous promissory note dated January 10, 1989 and issue a full recourse promissory note dated December 29, 1993. The principal amount of $1.8 million is payable in annual installments of varying amounts beginning January 1, 1994 and payable every February 1 thereafter until 1998. Interest is payable at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. Mr. Andrews has reduced the principal balance of his obligation to the Company by $1.1 million. Mr. Andrews and the Company entered into a new two year employment agreement as of October 1, 1997 to serve as Chairman of the Company. In October, 1997, Mr. Andrews entered into a promissory note for $0.9 million representing the remaining amounts due to the Company under the previous note, payable in annual installments beginning February 28, 1998 through February 28, 2001, bearing interest at 6.1%. The Incentive Agreement amounts are included in accrued wages in the accompanying consolidated balance sheets. As of December 31, 1997 and 1996, $0 and $0.4 million, respectively, of the promissory note are included in prepaid expenses and other current assets and $0.8 million and $0.5 million, respectively, are included in other assets and deferred charges in the accompanying consolidated balance sheets.
As of December 31, 1997, WorldCorp owns approximately 29.4% of the outstanding common stock of InteliData (see Note 5). The former Chairman of the Board of Directors of WorldCorp is also one of the founders of US Order, and is currently the Chairman of the Board of InteliData.
Effective January 23, 1998 and December 31, 1997, MHS owned approximately 16.8% and 24.9%, respectively, of the outstanding common stock of World Airways. Effective December 31, 1997, MHS owned approximately 28% of the outstanding common stock of Malaysian Airlines. Malaysian Airlines is one of World Airways' largest customers (see Notes 6 and 19).
During 1997 the Company issued 26,000 shares of common stock to members of the Board of Directors of the Company as compensation for their services.
Bain & Company, Inc. provided consulting services of approximately $0.2 million to the Company during 1995. A former principal of Bain & Company is also a member of the Board of Directors of WorldCorp.
21. COMMITMENTS AND CONTINGENCIES
Litigation and Claims
World Airways and WorldCorp (the "World Defendants") were defendants in litigation brought by the Committee of Unsecured Creditors of Washington Bancorporation in August 1992, captioned Washington Bancorporation v. Boster et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the "Boster Litigation"). Under a 1997 settlement agreement, the plaintiff agreed to dismiss with prejudice the Boster Litigation against all defendants, including the World Defendants, with each party to bear its own costs. Under the settlement agreement, the World Defendants do not have any further liability in the Boster Litigation.
World Airways' cockpit crew members, who are represented by the International Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year collective bargaining agreement that will become amendable in July 1998. Approximately 37% of World Airways' employees are covered under this collective bargaining agreement. World Airways expects to begin negotiations in April 1998 and cannot predict the outcome of the negotiations or their possible impact on World Airways' financial condition and results of operations.
World Airways' flight attendants, who are also represented by the Teamsters, are subject to a four-year collective bargaining agreement that will expire in August 2000. World Airways' flight attendants argued the "scope clause" of the collective bargaining agreement had been violated by World Airways and challenged the use of foreign flight attendant crews on World Airways' flights for Malaysian Airlines and Garuda Indonesia which has historically been World Airways' operating procedure. World Airways is contractually obligated to permit its Southeast Asian customers to deploy their own flight attendants. While the arbitrator in this matter denied in 1997 the Union's request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that World Airways' contract with its flight attendants requires World Airways to first actively seek profitable business opportunities that require using World Airways' flight attendants, before World Airways may accept wet lease business opportunities that use the flight attendants of World Airways' customers. Subsequently, in 1997, the flight attendants challenged and filed "scope clause" grievances with respect to four separate wet-lease contracts. World Airways and the Teamsters are presently in discussions regarding these grievances. At this time, however, World Airways can give no assurance that these discussions will be successful and the grievances will not be submitted to formal arbitration. World Airways can provide no assurance as to how the resolution of this matter will affect World Airways' financial condition and results of operations.
World Airways has periodically received correspondence from the FAA with respect to minor noncompliance matters. In November 1996, as the FAA has increased its scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of $810,000 in connection with certain security violations by ground handling crews contracted by World Airways for services at foreign airport locations. Under 49 U.S.C., Section 46301, any violation of pertinent provisions of 49 U.S.C. Subsection 40101 or related rules is subject to a civil penalty for each violation. Upon review of the evidence or facts and circumstances relating to the violation, the statute allows for the compromise of proposed civil penalties. The penalties were proposed by the FAA in connection with recent inspections at foreign airport facilities and relate primarily to ground handling services provided by World Airways' customers in connection with their operations; specifically, the inspection procedures of its aircraft, passengers and associated cargo. In each of these instances, World Airways was in compliance with international regulations, but not the more stringent U.S. requirements, despite the fact that the flights in question did not originate or terminate in the United States. World Airways has taken steps to comply with the U.S. requirements. In September 1997, World Airways entered into a consent order and settlement agreement with the FAA in connection with
the above-mentioned alleged violations. Pursuant to this agreement, World Airways is liable for the sum of $610,000, of which $405,000 was paid in September. The remaining $205,000 was suspended and will be forgiven if World Airways complies with the provisions of the settlement agreement, including not incurring any security violations during the one year period following the execution of the settlement agreement. While World Airways believes it is currently in compliance in all material respects with all appropriate standards and has all required licenses and authorities, any material non-compliance by World Airways therewith or the revocation or suspension of licenses or authorities could have a material adverse effect on the financial condition or results of operations of World Airways.
In connection with the discontinuance of World Airways' scheduled service operations, World Airways is subject to claims by various third parties and may be subject to further claims in the future. One claim which had been filed in connection with World Airways' discontinuance of scheduled service to South Africa, and which sought approximately $37.8 million in compensatory and punitive damages, has been settled by the parties for approximately $0.7 million. Also, a claim has been filed in Germany against the Company by a tour operator seeking approximately $3.5 million in compensation related to the cancellation of a summer program in 1996. World Airways believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial condition.
Contingent Rental Payments
In July 1993, World Airways returned certain DC10-30 aircraft to the lessor (see Note 13). As a result of this early lease termination, World Airways is responsible, until 2004 for one aircraft and 2005 for the second aircraft, for one- third of any deficit in rent incurred in future leases of the aircraft, up to $100,000 monthly per plane, with an overall combined cap of $1,850,000. World Airways incurred $984,000 for rent shortfalls through December 1996. World Airways' remaining contingent liability related to this matter approximates $866,000.
Letters of Credit
At December 31, 1996, restricted cash and short-term investments included customer deposits held in escrow and cash pledged as collateral for various letters of credit facilities issued by a bank on World Airways' behalf totaling $1.0 million, with expiration dates occurring in 1997. At December 31, 1997, there were no outstanding letters of credit.
MD-11 Engine Maintenance Agreement
Engine maintenance accounts for most of World Airways' annual maintenance expenses. Typically, the hourly cost of engine maintenance increases as the aircraft ages. World Airways outsources major airframe maintenance and power plant work to several suppliers. World Airways has a 10-year contract expiring in August 2003 with United Technologies Corporation's Pratt & Whitney Group for all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under this contract, the manufacturer agreed to provide such maintenance services at a cost not to exceed specified rates per hour during the term of the contract. The specified rates per hour are subject to annual escalation, increasing substantially in 1998. Accordingly, while World Airways believes the terms of this agreement have resulted in lower engine maintenance costs than it otherwise would incur, engine maintenance costs will increase substantially during the last five years of the agreement. World Airways began to accrue these increased expenses in 1997 and such expenses will continue to increase during the remainder of the term of the contract as World Airways' aircraft fleet ages.
22. UNAUDITED QUARTERLY RESULTS
The results of the Company's quarterly operations (unaudited) for 1997 and 1996 are as follows (in thousands except per share amounts):
Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 Total Year -------- ------- ------------ ----------- ----------
Operating revenues $ 78,748 $ 81,928 $ 55,416 $ -- (1) $ 216,092
Operating income (loss) 6,022 5,488 (2) 1,543 (3) (354) (1) 12,699
Earnings (loss) from continuing operations 709 (213) (14,119) (4) (5,505) (19,128)
Net earnings (loss) $ 709 $ (213) $ (14,119) $ (5,505) $ (19,128)
Basic earnings (loss) per common equivalent share(7): $ 0.05 $ (0.01) $ (0.94) $ (0.39) $ (1.29)
Diluted earnings (loss) per common equivalent share(7): $ * $ * $ * $ * $ *
Operating revenues $ 66,691 $ 87,056 $ 76,461 $ 83,464 $ 313,672
Operating income (loss) (6,673) 11,449 (5,738) 3,699 (5) 2,737
Earnings (loss) from continuing operations (6,592) 4,379 (4,147) 13,797 (6) 7,437
Discontinued operations (less applicable tax benefit) (2,481) (16,897) 107 80 (19,191)
Net earnings (loss) $(9,073) $(12,518) $ (4,040) $ 13,877 $ (11,754)
Basic earnings (loss) per common equivalent share(7): Continuing operations (0.41) $ 0.27 $ (0.25) $ 0.90 $ 0.46 Discontinued operations (0.15) (1.03) 0.01 0.01 (1.19) ----- ----- ---- ---- ----- Net earnings (loss) $(0.56) $ (0.76) $ (0.24) $ 0.91 $ (0.73) ====== ======= ======== ======== =========
Diluted earnings (loss) per common equivalent share(7): Continuing operations $ * $ * $ * $ 0.70 $ * Discontinued operations * * * 0.01 * ---- ---- ---- ---- ---- Net earnings (loss) $ * $ * $ * $ 0.71 $ * ====== ======= ======== ======== =========
* Amounts are anti-dilutive.
(1) - As a result of the Purchase, beginning September 18, 1997, the Company reports its share of World Airways' results of operations under the equity method of accounting. As a result, during the fourth quarter, operating revenues and expenses relate entirely to the operations of WorldCorp (Notes 1 and 4).
(2) - Operating expenses include a $1.0 million reversal of accrued maintenance expense in excess of the cost of an overhaul of a DC-10 aircraft.
(3) - Operating expenses include a $2.3 million reversal of aircraft costs incurred in 1996 and the first six months of 1997, relating to reimbursements for disputed spare engine lease charges (see Note 13).
(4) - Includes a $17.6 million gain on the sale of World Airways' stock, offset by a $8.7 million loss on purchases of equity by World Airways, and a write-off of approximately $20.3 million of restructuring charges by InteliData.
(5) - Includes a net gain of $37.1 million on issuances (purchases) of equity by subsidiaries (see Notes 4 and 5).
(6) - Includes the reversal of maintenance costs, which had been accrued throughout 1996, of $1.5 million relating to the termination of two DC10-30 aircraft in December 1996 (see Notes 6 and 13).
(7) - Earnings per share for the periods presented have been calculated in accordance with Financial Accounting Standard Board's Statement of Financial Accounting Standard No. 128, Earnings Per Share.
23. SUBSEQUENT EVENT
On April 20, 1998, WorldCorp consummated a transaction pursuant to which it acquired an 80% interest in Paper Acquisition Corp., a Delaware corporation ("Paper"). Paper was organized by Sun Capital Partners, Inc. ("Sun Capital") to acquire and operate specialty paper businesses. In December 1996, Paper acquired and consolidated two companies that produce a variety of coated papers and specialty inks which are sold to business forms manufacturers. For the 12 months ended December 31, 1997, Paper had approximately $48 million (unaudited) of sales.
Pursuant to the transaction, (i) WorldCorp exchanged seven-year warrants to acquire 35% (after the exercise of such warrants and the WorldCorp Acquisition Corp. options described below) of the issued and outstanding capital stock of WorldCorp Acquisition Corp., a Delaware corporation ("WorldCorp Acquisition"), held by WorldCorp for certain of the shares of Paper held by the Paper shareholders (the warrants are exercisable after one-year, at an exercise price of 125% of the estimated fair market value of the WorldCorp Acquisition stock at April 20, 1998 and payable with a seven-year, full-recourse, interest only note) (ii) WorldCorp contributed all of its shares of World Airways and the Paper shares received above, to WorldCorp Acquisition Corp., in exchange for 80% of the issued and outstanding capital stock of WorldCorp Acquisition and (iii) the holders of Paper contributed their shares of capital stock of Paper in exchange for (A) 20% of the issued and outstanding capital stock of WorldCorp Acquisition, (B) the assumption of approximately $15 million of debt, net of cash and investments, of Paper, (C) $15 million of 8% interest only promissory notes of WorldCorp Acquisition due in April 2003, (D) $1 million of 8% promissory notes of WorldCorp Acquisition due in March 1999 and (E) an earn-out based on the earnings before interest, taxes, depreciation and amortization of Paper during the next five years. The earn-out is payable, including interest at 10%, in September 2002. WorldCorp has pledged all of its shares of common stock of both WorldCorp Acquisition and InteliData, and WorldCorp Acquisition has pledged all of its shares of common stock of both World Airways and Paper to current Paper shareholders to collateralize the notes and the earn-out. The notes contain various restrictive covenants, including dividend restrictions on WorldCorp and its subsidiaries, limitations on transfers of cash to WorldCorp, as well as cross-default provisions. Upon an event of default, the noteholders may assume control of the WorldCorp Acquisition board and the pledged collateral.
WorldCorp and WorldCorp Acquisition have entered into a consulting agreement with Sun Capital, which through an affiliate owned approximately 85% of the issued and outstanding shares of Paper immediately prior to the transaction, pursuant to which Sun Capital will receive $500,000 per year for financial consulting. Sun Capital also received seven-year options to acquire approximately 20% and 10% (after the exercise of such options and the warrants described above) of the issued and outstanding shares of common stock of WorldCorp and WorldCorp Acquisition, respectively, which options vest over five years. The exercise prices of these options is 125% of the fair market value of the underlying stock at April 20, 1998 and are payable with seven-year full recourse interest only notes.
The WorldCorp Board of Directors unanimously approved the acquisition of Paper because, among other things, Paper will provide WorldCorp and WorldCorp Acquisition with a platform for WorldCorp and WorldCorp Acquisition to pursue their growth strategy and with additional operating cash flow. Although the acquisition of Paper will not resolve WorldCorp's liquidity issues, it is intended to build long-term value for WorldCorp's stockholders.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders WorldCorp, Inc.:
We have audited the accompanying consolidated balance sheets of WorldCorp, Inc. and subsidiaries (WorldCorp) as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in common stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 14(a)(2) herein. These consolidated financial statements and financial statement schedule are the responsibility of WorldCorp's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We did not audit the consolidated financial statements of InteliData Technologies Corporation and subsidiaries ("InteliData"), a 29.4% and 28.9% investee company, as of and for the years ended December 31, 1997 and 1996, respectively. WorldCorp's investment in InteliData was $ 10.4 million and $ 37.4 million at December 31, 1997 and 1996, respectively, and its equity in the loss of InteliData was $ 26.5 million and $ 31.8 million for the years ended December 31, 1997 and 1996, respectively. The consolidated financial statements of InteliData were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for InteliData, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WorldCorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, in order to meet its debt service obligations for 1998, the Company must obtain additional financing, refinance existing borrowings or obtain concessions from its lenders. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Washington, D.C. February 16, 1998, except as to notes 2 and 23, which are as of April 20, 1998
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Company incorporates herein by reference the information concerning directors contained in its Notice of Annual Stockholder's Meeting and Proxy Statement to be filed within 120 days after the end of the Company's fiscal year (the "1998 Proxy Statement").
Executive Officers
The following table sets forth the names and ages of all executive officers of the Company and all positions and offices within the Company presently held by such executive officers:
Name Age Position Held
T. Coleman Andrews, III 43 Chairman of the Board, Director and of WorldCorp and Chairman of the Board and Director of World Airways and InteliData
Patrick F. Graham 58 President, Chief Executive Officer, Principal Accounting Officer and Director of WorldCorp, and Director of InteliData
Mr. T. Coleman Andrews III was elected Chairman of the Board in 1997. Prior to that he served as Chief Executive Office and President since June 1987. He has served as Chairman of the Board of World Airways since 1986. On March 14, 1997, World Airways announced that Charles W. Pollard departed as President and Chief Executive Officer. Pursuant to the Company's bylaws, Mr. Andrews acted as President and Chief Executive Officer on an interim basis pending the hiring of Russell L. Ray Jr. as Chief Executive Officer in April, 1997. He has served as a Director of InteliData Technologies Corporation (and its predecessor, US Order, Inc.) since 1990. From 1978 through 1986, he was affiliated with Bain & Company, Inc. an international strategy consulting firm. At Bain, he was elected partner in 1982 and was a founding general partner in 1984 of the Bain Capital Fund, a private venture capital partnership. Prior to his experience with Bain, Mr. Andrews served in several appointed positions in the White House for the Ford Administration.
Mr Patrick F. Graham was appointed as President and Chief Operating Officer of World Corp in November 1997. Mr. Graham has been a director of WorldCorp since October 1992. Prior to joining WorldCorp Mr. Graham was a Director of Bain & Company, Inc., a management consulting firm based in Boston, Massachusetts. Mr. Graham co- founded the firm in 1973. In addition to his primary responsibilities with Bain clients, he has also served as Bain's Vice Chairman and Chief Financial Officer. Prior to the start of Bain & Company, Mr. Graham was Group Vice President with the Boston Consulting Group. His previous experience also includes positions with IBM, Ford Motor Company, and as a captain in the U.S. Army. Mr. Graham received an M.B.A. with Distinction from Stanford University's Graduate School of Business. He holds a B.A. from Knox College, where he graduated magna cum laude, was elected to Phi Beta Kappa and is currently on the Board of Trustees. Mr. Graham also serves as a director of InteliData Technologies Corporation.
Beneficial Ownership Reporting
The Company incorporates herein by reference the information required by Item 405 of Regulation S-K contained in its 1998 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning executive compensation contained in the 1998 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning security ownership of certain beneficial owners and management contained in the 1998 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning certain relationships and related transactions contained in the 1998 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements of WorldCorp, Inc. and subsidiaries are filed herewith:
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Operations, Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Changes in Common Stockholders' Deficit, Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial Statement Schedule
Schedule Number
II. Valuation and Qualifying Accounts
NOTE: All other schedules are omitted because the requisite information is either presented in the financial statements or notes thereto or is not present in amounts sufficient to require submission of the schedules.
Status of Prior Documents
WorldCorp's Annual Report on Form 10-K for the year ended December 31, 1997, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Sections 13, 14, and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, as amended, which incorporates by reference such Annual Report on Form 10-K.
(3) Index to Exhibits
Exhibit No. Exhibit
3.1 Certificate of Incorporation of WorldCorp, Inc. dated March 16, 1987. (Filed as Exhibit 3.1 to WorldCorp, Inc.'s Registration Statement on Form S-4 (Commission File No. 33012735) filed on March 19, 1987 and incorporated herein by reference.)
3.2 Amended and Restated Bylaws of WorldCorp, Inc. dated November 13, 1987. (Filed as Exhibit 3.1 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference.)
4.6 First Supplemental Indenture dated as of February 22, 1994 between WorldCorp, Inc. and The First National Bank of Boston, as Trustee. (Filed as Exhibit 4.6 to WorldCorp, Inc's Form S-3 Registration Statement (Commission file No. 33-60247) filed on June 15, 1995 and incorporated herein by reference.)
4.8 Stock Option Agreement dated as of April 1, 1995 between WorldCorp, Inc. and Patrick F. Graham. (Filed as Exhibit 4.8 to WorldCorp Inc's Form S-3 Registration Statement (Commission file No. 33-60247) filed on June 15, 1995 and incorporated herein by reference.)
10.1 Merger Agreement and Plan of Reorganization dated as of April 28, 1987 by and among World Airways, Inc., World Merger Corporation and WorldCorp, Inc. (Filed as Exhibit 10.50 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.)
10.2 Form of Assumption Agreement dated as of June 23, 1987 among WorldCorp, Inc., World Airways, Inc. and each Indemnified Party (Filed as Exhibit 10.60 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.)
10.3 Agreement between World Airways, Inc. and Flight Attendants represented by International Brotherhood of Teamsters. (Filed reference as Exhibit 10.67 to WorldCorp, Inc.'s Form S-3 Registration Statement (Commission File No. 2-91998) filed on December 10, 1987 and incorporated herein by reference.)
10.4 Office Lease - The Hallmark Building dated as of May 16, 198 between WorldCorp, Inc. and GT Renaissance Centre Limited Partnership. (Filed as Exhibit 10.36 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.5 Lease Amendment dated as of June 27, 1989 between WorldCorp, Inc and GT Renaissance Centre Limited Partnership. (Filed as Exhibit 10.37 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.6 Office Lease - The Hallmark Building dated as of September 20, 1989 between World Airways, Inc. and GT Renaissance Centre Limited Partnership. (Filed as Exhibit 10.38 to WorldCorp, Inc's Annual Report on form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.7 Warrant Agreement dated as of July 22, 1989 between WorldCorp, Inc. and Charles W. Pollard. (Filed as Exhibit 10.45 to WorldCorp Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.8 WorldCorp, Inc. Employee Savings and Stock Ownership Plan. (Filed as Exhibit 10.49 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.9 Amendment No. 1 to WorldCorp Inc. Employee Savings and Stock Ownership Plan. (Filed as Exhibit 10.50 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.10 Aircraft Lease Agreement dated as of January 15, 1991 between World Airways, Inc. and First Security Bank of Utah, N.A., not in its individual capacity, but solely as Owner Trustee. (Filed as Exhibit 10.47 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by reference.)
10.11 Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.12 Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.13 Aircraft Lease Agreement for Aircraft Serial Number 48633 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.14 Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.15 Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.16 Accounts Receivable Management and Security Agreement dated as of December 7, 1993 between World Airways, Inc. and BNY Financial Corporation. Incorporated herein by reference.
10.17 Amendment No. 1 To Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as of November 1993 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.18 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as of March 8, 1993 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.19 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 48437 dated as of March 31, 1993 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.20 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number 48437 dated as of April 15, 1993 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.21 Acquisition Agreement Among VISA International Service Association, US Order, Inc, and WorldCorp, Inc, dated as of July 15, 1994. Incorporated herein by reference.
10.22 Stock Purchase Agreement by and among World Airways, Inc., WorldCorp, Inc., and Malaysian Helicopter Services Berhad dated as of October 30, 1993. Incorporated herein by reference.
10.23 Stock Registration Rights Agreement between World Airways, Inc. and Malaysian Helicopter Services Berhad dated as of October 30, 1993. Incorporated herein by reference.
10.24 Shareholders Agreement between Malaysian Helicopter Services Berhad and WorldCorp, Inc., and World Airways, Inc. dated as of February 3, 1994. Incorporated herein by reference.
10.25 Amendment No. 1 to Shareholders Agreement dated as of February 28, 1994, among WorldCorp, World Airways, and MHS. Incorporated herein by reference.
10.26 Stock Option Agreement dated as of August 1, 1994 ("Grant Date") between WorldCorp, Inc. and William F. Gorog. Incorporated herein by reference.
10.27 Employment Agreement dated as of August 1, 1994 between US Order, Inc. and John C. Backus, Jr. Incorporated herein by reference.
10.28 Employment Agreement dated as of August 19, 1994 between WorldCorp, Inc. and T. Coleman Andrews, III. Incorporated herein by reference.
10.29 Stock Option Agreement dated as of August 19, 1994 ("Grant Date") by and between WorldCorp, Inc. and T. Coleman Andrews, III. Incorporated herein by reference.
10.30 Agreement between World Airways, Inc. and the International Brotherhood of Teamsters representing the Cockpit Crewmembers employed by World Airways, Inc. dated August 15, 1994-June 30, 1998. Incorporated herein by reference.
10.31 Aircraft Services Agreement dated September 26, 1994 by and between World Airways, Inc. ("World") and Malaysian Airlines. Incorporated herein by reference.
10.32 Freighter Services Agreement dated October 1, 1994 by and between World Airways, Inc. and Malaysian Airline System Berhad. Incorporated herein by reference.
10.33 World Airways, Inc. 1995 AMC Contract-94-D0027 dated October 1, 1994 between World Airways, Inc. and Air Mobility Command. Incorporated herein by reference.
10.34 Stock Purchase Agreement (the "Agreement") dated as of December 31, 1994 by and between MHS Berhad, a Malaysian corporation (the "Shareholder") and WorldCorp, Inc., a Delaware corporation (the "Purchaser"). Incorporated herein by reference.
10.35 Amendment No. 1 to Passenger Aircraft Services and Freighter Services Agreement dated December 31, 1994 by and between World Airways, Inc. and Malaysian Airline System Berhad. Incorporated herein by reference.
10.36 Customer Agreement between WorldCorp ESSOP and Scott & Stringfellow, Inc. dated January 11, 1995 for a margin loan. Incorporated herein by reference.
10.37 Side Letter dated January 11, 1995 from Scott & Stringfellow, Inc. to William F. Gorog, Trustee of WorldCorp Employee Savings and Stock Ownership Plan for a margin loan to the WorldCorp ESSOP. Incorporated herein by reference.
10.38 Guarantee Agreement dated January 11, 1995 by WorldCorp, Inc. ("Guarantor") for the benefit of Scott & Stringfellow, Inc. (the "Lender"). Incorporated herein by reference.
10.39 Registration Rights Agreement dated as of January 11, 1995 by and between WorldCorp, Inc. and Scott & Stringfellow, Inc. Incorporated herein by reference.
10.40 Side Letter dated January 11, 1995 from WorldCorp, Inc. to Scott & Stringfellow, Inc. regarding commitment to make contributions to the WorldCorp Employee Savings and Stock Ownership Plan (the "ESSOP"), for the duration of the Scott & Stringfellow loan to the ESSOP. Incorporated herein by reference.
10.41 Amendment No. 2 to Passenger Aircraft Services and Freighter Aircraft Service Agreement dated February 9, 1995 by and between World Airways, Inc. and Malaysian Airline System Berhad. Incorporated herein by reference.
10.42 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as of April 23, 1993 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.43 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as of April 1993 between World Airways, Inc. and International Lease Finance. Incorporated herein by reference.
10.44 Aircraft Lease Agreement for Aircraft Serial Number 48437 dated as of September 30, 1992 between World Airways, Inc. and International Lease Finance Corporation. Incorporated herein by reference.
10.45 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as of April 28, 1995 between World Airways, Inc. and International Lease Finance Corporation.
10.46 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as of April 28, 1995 between World Airways, Inc and International Lease Finance Corporation. Incorporated herein by reference.
10.47 Amendment (No. 1) to the Accounts Receivable Management and Security Agreement between World Airways, Inc. and BNY Financial Corporation dated March 15, 1995 and effective as of January 1, 1995. Incorporated herein by reference.
10.48 Amendment No. 2 to the Accounts Receivable Management and Security Agreement between World Airways, Inc. and BNY Financial Corporation dated August 1995. Incorporated herein by reference.
10.49 Long Term Aircraft Charter Agreement dated August 20, 1986 between World Airways, Inc. and Malaysian Airline System Berhad. Incorporated herein by reference.
10.50 Amendment dated April 10, 1991 to the Long Term Aircraft Charter Agreement dated August 20, 1986 between World Airways, Inc. and Malaysian Airline System Berhad. Incorporated herein by reference.
10.51 Amendment No. 3 to the Freighter Services Agreement by and between World Airways, Inc. and Malaysian Airline System Berhad dated May, 1995. Incorporated herein by reference.
10.52 FY1996 Contractor Team Agreement among World Airways, Inc., Continental Airlines, Inc., Emery Worldwide Airlines, Inc., Evergreen International Airlines, Inc., Miami Air International, Inc., Northwest Airlines, Inc. and Rich International Airways, Inc. dated April 3, 1995. Incorporated herein by reference.
10.53 Maintenance Agreement between Malaysian Airline System Berhad and World Airways, Inc. dated March 1, 1995. Incorporated herein by reference.
10.54 Form of Master Services Agreement between World Airways, Inc. and the Company. Incorporated herein by reference.
10.55 1996 U.S. Air Force Contract dated October 1, 1995 between World Airways, Inc. and Air Mobility Command. Incorporated herein by reference.
10.56 Amendment No. 3 to the Accounts Receivable Management and Security Agreement between World Airways, Inc. and BNY Financial Corporation dated as of September 28, 1995. Incorporated herein by reference.
10.57 Amendment No. 4 to the Accounts Receivable Management and Security Agreement between World Airways, Inc. and BNY Financial Corporation dated as of September 28, 1995. Incorporated herein by reference.
10.58 Form 10-K for the fiscal year ended December 31, 1997 for World Airways, Inc. Filed Herewith
10.59 Form 10-K for the fiscal year ended December 31, 1997 for InteliData Technologies Corporation, Inc. Filed Herewith
10.60 Employment Agreement, by and between the Company and T. Coleman Andrews, III Filed Herewith
10.61 Employment Agreement, by and between the Company and Patrick F. Graham Filed Herewith
11 Statement on Calculation of Earnings (Loss) Per Common Share. Filed Herewith
21 Subsidiaries of the Registrant WorldCorp, Inc. Filed Herewith
23.1 Consent of KPMG Peat Marwick LLP. Filed Herewith
23.2 Consent of Deloitte & Touche LLP. Filed Herewith
27 Financial Data Schedule for the year ended December 31, 1997. Filed Herewith
1 Confidential treatment of portions of the Agreement has been granted by the Commission. The copy filed as an exhibit omits the information subject to confidentiality request. Confidential portions so omitted have been filed separately with the Commission.
(b) Reports on Form 8-K
Form 8-K dated September 18, 1997 was filed with the Securities and Exchange Commission on October 3, 1997.
* * * * * * * * * * * * * *
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.
WORLDCORP, INC.
By /s/ Patrick F. Graham Patrick F. Graham Chief Executive Officer, President, and Principal Accounting Officer
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 dates indicated.
Signature Title Date
/s/ Patrick F. Graham Chief Executive Officer, April 20, 1998 (Patrick F. Graham) President, and Principal Accounting Officer
/s/ T. Coleman Andrews, III Director and April 20, 1998 (T. Coleman Andrews, III) Chairman of the Board
/s/ Gideon Argov Director April 20, 1998 (Gideon Argov)
/s/ James E. Colburn Director April 20, 1998 (James E. Colburn)
/s/ William F. Gorog Director April 20, 1998 (William F. Gorog)
SCHEDULE II
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1997, 1996 and 1995 (in thousands)
Balance at Charged to Deductions Balance beginning costs and charged to at end of of period expenses reserves period --------- -------- -------- ------
Allowance for Doubtful Accounts
Year ended December 31, 1997 $ 413 $ 413 (1) $ -- $ -- ======== ========= ====== =======
Year ended December 31, 1996 $ 322 $ 236 $ 145 $ 413 ======== ========= ====== =======
Year ended December 31, 1995 $ 81 $ 414 $ 173 $ 322 ======== ========= ====== =======
Valuation Allowance for Deferred Tax Assets
Year ended December 31, 1997 $ 23,277 $ 6,207 $ -- $ 29,484 ======= ======= ====== =======
Year ended December 31, 1996 $ 20,113 $ 3,164 $ -- $ 23,277 ======= ======= ====== =======
Year ended December 31, 1995 $ 13,973 $ 6,140 $ -- $ 20,113 ======= ======= ====== =======
(1) Due to the Purchase, WorldCorp began reporting its share of World Airways' net assets and results of operations under the equity method of accounting as of September 18, 1997. Therefore, allowance for doubtful accounts relating to World Airways is not included in the December 31, 1997 consolidated balance sheet.