<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
- - --------------------------------------------------------------------------------
For the Quarter ended: March 31, 1994 Commission File Number 1-5351
WORLDCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3040585
(State of incorporation) (I.R.S. Employer Identification Number)
13873 Park Center Road, Suite 490, Herndon, VA 22071
(Address of Principal Executive Offices)
(703) 834-9200
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
The number of shares of the registrant's Common Stock outstanding on May 6, 1994
was 15,245,319.
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WORLDCORP, INC.
MARCH 1994, QUARTERLY REPORT ON FORM 10Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31,
1994 and December 31, 1993..................................................3
Condensed Consolidated Statements of Operations,
Three Months Ended March 31, 1994 and 1993..................................5
Condensed Consolidated Statement of Changes in Common
Stockholders' Deficit, Three Months Ended March 31, 1994....................7
Condensed Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1994 and 1993..................................8
Notes to Condensed Consolidated Financial Statements........................9
Exhibit 11, Calculations of Income (Loss) Per Common Share.................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................11
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
Item 6. Exhibits and Reports on Form 8-K...........................................17
</TABLE>
2
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including $1,037
restricted cash at March 31, 1994 and
$3,171 at December 31, 1993 $ 24,698 $16,916
Restricted short-term investments 713 668
Trade accounts receivable, less allowance for
doubtful accounts of $299 at March 31, 1994
and $311 at December 31, 1993 6,731 8,476
Other receivables 4,022 5,109
Prepaid expenses and other current assets 4,397 3,476
Assets held for sale 6,000 6,000
-------- -------
Total current assets 46,561 40,645
-------- -------
ASSETS HELD FOR SALE 8,175 8,660
EQUIPMENT AND PROPERTY
Flight and other equipment 37,700 35,547
Equipment under capital leases 13,005 13,675
-------- -------
50,705 49,222
Less accumulated depreciation and amortization 16,320 16,171
-------- -------
Net equipment and property 34,385 33,051
-------- -------
LONG-TERM OPERATING DEPOSITS 11,460 10,028
OTHER ASSETS AND DEFERRED CHARGES 4,088 4,735
-------- -------
TOTAL ASSETS $104,669 $97,119
======== =======
(Continued)
</TABLE>
3
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
(in thousands except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1994 1993
----------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to bank $ 6,148 $ 7,069
Current maturities of long-term obligations 15,005 10,448
Deferred aircraft rent 6,512 6,295
Accounts payable 9,346 11,064
Unearned revenue 3,790 4,456
Accrued maintenance in excess of reserves paid 9,476 14,732
Accrued salaries and wages 8,038 7,252
Accrued interest 2,744 2,224
Accrued taxes 1,994 955
--------- ---------
Total current liabilities 63,053 64,495
--------- ---------
LONG-TERM OBLIGATIONS, NET
Subordinated convertible debt 65,000 65,000
Subordinated notes, net 24,930 24,926
Deferred aircraft rent, net of current portion 1,860 1,850
Equipment financing and other long-term
obligations 20,292 26,825
--------- ---------
Total long-term obligations, net 112,082 118,601
--------- ---------
OTHER LIABILITIES
Deferred gain from sale leaseback transactions,
net of accumulated amortization of $31,547 at
March 31, 1994 and $30,395 at December 31, 1993 9,170 10,322
Accrued postretirement benefits 2,322 2,250
Accrued maintenance in excess of reserves paid 2,470 2,080
Other 459 444
--------- ---------
Total other liabilities 14,421 15,096
--------- ---------
TOTAL LIABILITIES 189,556 198,192
--------- ---------
COMMON STOCKHOLDERS' DEFICIT
Common stock, $1 par value, (60,000,000 shares
authorized, 15,314,976 shares issued and
15,252,391 shares outstanding at March 31, 1994
and 15,224,076 shares issued and 15,161,491
shares outstanding at December 31, 1993) 15,315 15,224
Additional paid-in capital 34,480 34,071
Retained deficit (132,518) (148,114)
ESOP guaranteed bank loan (1,824) (1,914)
Treasury stock, at cost (340) (340)
--------- ---------
TOTAL COMMON STOCKHOLDERS' DEFICIT (84,887) (101,073)
--------- ---------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 104,669 $ 97,119
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended March 31,
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
OPERATING REVENUES
Contract flight operations $ 31,561 $ 27,321
Flight operations subcontracted to other carriers -- 141
Other 159 424
Transaction processing-US Order 317 151
------- -------
Total operating revenues 32,037 28,037
------- -------
OPERATING EXPENSES
Flight 13,038 11,002
Fuel 5,336 5,478
Maintenance 964 6,383
Aircraft costs 11,747 8,945
Selling and administrative 5,620 4,038
Depreciation and amortization 1,334 2,152
Flight operations subcontracted to other carriers 28 95
Transaction processing-US Order 2,379 2,490
Loss on sale of Key Airlines -- 423
------- -------
Total operating expenses 40,446 41,006
------- -------
OPERATING LOSS (8,409) (12,969)
------- --------
OTHER INCOME (EXPENSE)
Interest expense (3,209) (2,458)
Interest income 171 225
Gain on sale of interest in World Airways 26,921 --
Other, net (7) (211)
------- -------
Total other income (expense) 23,876 (2,444)
------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST 15,467 (15,413)
INCOME TAX EXPENSE (340) --
MINORITY INTEREST 469 1,225
------- -------
NET EARNINGS (LOSS) $ 15,596 $ (14,188)
======= =======
(Continued)
</TABLE>
5
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Primary: $ 0.93 $ (1.00)
===== =====
Fully diluted: $ 0.74 $ *
===== =====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
<S> <C> <C>
Primary 17,100,862 14,214,093
========== ==========
Fully diluted 22,977,896 *
========== ==========
</TABLE>
* Fully diluted earnings per share are anti-dilutive.
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN COMMON STOCKHOLDERS' DEFICIT
For the Three Months Ended March 31, 1994
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Employee
Stock Owner- Total
Additional ship Plan Treasury Common
Common Paid-in Retained Guaranteed Stock Stockholders'
Stock Capital Deficit Bank Loan at cost Deficit
------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1993 $ 15,224 $ 34,071 $ (148,114) $ (1,914) $ (340) $ (101,073)
Exercise of 90,000 options
and warrants 91 359 -- -- -- 450
Employee Stock Ownership Plan
guaranteed bank loan -- -- -- 90 -- 90
Other -- 50 -- -- -- 50
Net loss -- -- 15,596 -- -- 15,596
-------- -------- -------- -------- ------ --------
BALANCE AT
MARCH 31, 1994 $ 15,315 $ 34,480 $ (132,518) $ (1,824) $ (340) $ (84,887)
======== ======== ========== ======= ====== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
7
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 16,916 $ 13,759
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 15,596 (14,188)
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization 1,334 2,240
Deferred gain recognition (1,152) (1,141)
Loss on sale of property and equipment 51 --
Minority interest in loss of subsidiary (469) (1,225)
Gain on sale of World Airways (26,921) --
Other 379 237
Changes in certain assets and liabilities net of
effects of non-cash transactions:
Decrease in accounts receivable 2,835 3,919
Increase in deposits, prepaid expenses and
other assets (1,918) (1,844)
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (2,080) 12,065
-------- --------
Net cash (used) provided by operating
activities (12,345) 63
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property (2,670) (5,492)
Disposals of equipment and property 625 1,679
Proceeds from sales of investments 150 3,299
Purchase of investments (195) (750)
-------- --------
Net cash used by investing activities (2,090) (1,264)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances under bank line of credit and debt 40,493 700
Repayments under bank line of credit and debt (43,377) (1,828)
Proceeds from stock transactions 450 1,134
Proceeds from sale of World Airways 24,651 --
Other -- (70)
-------- --------
Net cash provided (used) by financing activities 22,217 (64)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,782 (1,265)
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,698 $ 12,494
======== ========
</TABLE>
NOTE: Cash payments of approximately $2.5 million and $2.1 million were made for
interest in 1994 and 1993.
See accompanying Notes to Condensed Consolidated Financial Statements
8
<PAGE>
WORLDCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed consolidated balance sheet of WorldCorp, Inc. ("WorldCorp" or
the "Company") as of March 31, 1994, the related condensed consolidated
statements of operations for the three month periods ended March 31, 1994 and
1993, the condensed consolidated statement of changes in common stockholders'
deficit for the three months ended March 31, 1994, and the condensed
consolidated statements of cash flows for the three months ended March 31, 1994
and 1993 are unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. All significant
intercompany balances have been eliminated. Interim results are not necessarily
indicative of results for a full year. Certain 1993 amounts have been
reclassified to conform with the 1994 presentation.
The financial statements and notes are presented as required by Form 10-Q, and
do not contain certain information included in the Company's annual financial
statements and notes. These financial statements should be read in conjunction
with the financial statements and the notes included in the Company's annual
report filed on Form 10-K for the year ended December 31, 1993.
2. On February 28, 1994, WorldCorp, World Airways, and MHS Berhad ("MHS")
completed the 24.9% sale of World Airways' common stock for $27.4 million in
cash. WorldCorp recognized a gain of approximately $26.9 million from this
transaction in the first quarter of 1994. The Company expects to use a portion
of its capital loss and net operating loss carryforwards to offset this gain.
3. On March 31, 1994, the lease of three DC10-30 convertible aircraft
expired. World Airways will continue to sublease these aircraft from their new
lessor beginning April 1, 1994 with lease terminations at various dates between
July 10, 1994 and September 19, 1994. In connection with this lease
termination, the Company reversed $4.5 million in accrued maintenance reserves.
9
<PAGE>
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES
CALCULATIONS OF EARNINGS (LOSS) PER COMMON SHARE
For the Three Months Ended March 31,
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
----------------------------- -----------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings (loss) from continuing operations $ 15,596 $ 15,596 $ (14,188) $ (14,188)
Plus: assumed interest expense reduction
from conversion of convertible debt -- 1,137 -- --
Plus: assumed interest expense reduction
due to retirement of subordinated notes
with excess proceeds from exercise of
options and warrants 382 382 -- --
----------- ----------- ---------- ----------
Net earnings (loss) applicable to
common stock $ 15,978 $ 17,115 $ (14,188) $ (14,188)
=========== ========== ========== ==========
Weighted average common shares
outstanding 15,170,020 15,170,020 14,214,093 14,214,093
Weighted average options and warrants
treated as common stock equivalents 1,930,842 1,930,842 -- --
Weighted average other dilutive securities -- 5,877,034 -- --
----------- ---------- ---------- ----------
Primary and fully diluted number of shares 17,100,862 22,977,896 14,214,093 14,214,093
========== ========== ========== ==========
Net earnings (loss) per share of
common stock $ 0.93 $ 0.74 $ (1.00) $ (1.00)
========== ========== ========== ==========
</TABLE>
10
<PAGE>
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. ("the
Company") as reflected in its condensed consolidated financial statements.
These statements primarily include the accounts of the contract flight
operations of World Airways, Inc. ("World Airways"). On February 28, 1994, the
Company sold 24.9% of its ownership in World Airways to MHS Berhad, a Malaysian
aviation company. WorldCorp also has an ownership interest in US Order, Inc.
("US Order"), a developmental stage company, which has developed systems that
facilitate banking, bill payment, enhanced telephone services, and shopping from
the home. On July 1, 1992, the Company increased its ownership to 51%. In
December 1993, US Order completed a $12.0 million private equity placement. As
a result of this transaction, WorldCorp currently owns 46% of the voting stock
of US Order. WorldCorp has an option through December 15, 1994, to purchase
additional shares of the capital stock of US Order for consideration equal to
$5.0 million which, if exercised, would increase its voting ownership percentage
to 79%. US Order's results of operations are consolidated in the accompanying
financial statements.
General
WorldCorp operates in two business areas: air transportation services and
transaction services. WorldCorp's air transportation services business consists
of its 75.1% ownership of World Airways, a leading worldwide provider of air
transportation for commercial and government customers. WorldCorp's transaction
services business consists of its 46% ownership of the voting stock of US Order
and 100% ownership of WorldGames. US Order develops and sells systems and
services that enable consumers to bank, pay bills, shop, or use enhanced
telephone services from the home. WorldGames is the sole licensee of ScanFone(R)
technology for applications in the gaming industry.
Air Transportation Services
- - ---------------------------
World Airways is a contract air carrier that charges customers based on a
block hour basis rather than a per seat or per pound basis. A "block hour" is
defined as the elapsed time computed from the moment the aircraft moves at its
point of origin to the time it comes to rest at its destination. Fluctuations
in flight revenues are not necessarily indicative of true growth because of
shifts in the mix between full service contracts and basic contracts. Under the
terms of full service contracts, World Airways is responsible for all costs
associated with operating these contracts and receives a higher rate per hour.
Under the terms of basic contracts, World Airways provides only certain services
associated with the contract including aircraft, crews, insurance, and
maintenance. World Airways typically charges a lower rate per hour for basic
contracts since the customer is responsible for other operating costs. For this
reason, it is important to measure pure growth through block hours flown rather
than actual revenues earned. Typically, U.S. military contracts are full
service contracts where the rate paid is set annually and consists of all flying
costs, including fuel and ground handling of the aircraft and cargo. World
Airways, as a matter of policy, includes fuel cost adjustment mechanisms in full
service contracts, thus minimizing the risk of fuel price volatility to World
Airways.
Customers
- - ---------
World Airways' business relies heavily on its U.S. Air Mobility Command
("AMC"), Malaysian Airline System Berhad ("MAS"), and P.T. Garuda Indonesia
("Garuda") contracts, which provided 24%, 17%, and 21%, respectively, of
consolidated revenues in 1993, and 19%, 16%, and 16%, respectively, of total
block hours. The AMC contract provided 51% of consolidated revenues and 38% of
total block hours in the first quarter of 1994. Operations under the MAS and
Garuda contracts commence in the second quarter. The loss of any of these
contracts or a substantial reduction in business from any of these contracts, if
not replaced, would have a material adverse effect on the Company's revenues and
financial condition.
AMC has awarded contracts to World Airways since 1956. World Airways' current
annual contract with AMC will expire in September 1994. The minimum contract
amount for 1994 of $20.4 million is a 68% increase over 1993, and will be
augmented by further expansion business. Expansion business totalled 161% of
the minimum contract amount for 1993 and 98% for the first quarter of 1994.
World Airways cannot determine how any future cuts in military spending may
affect future operations with AMC.
11
<PAGE>
World Airways has provided service to MAS since 1981, transporting passengers
for the annual Hadj pilgrimage as well as providing aircraft for integration
into MAS' scheduled passenger and cargo operations. The current MAS contract,
which was entered into in 1992, expires in 1996. In 1993, World Airways provided
four aircraft for Hadj operations. Due to limitations imposed by the Saudi
government on the number of pilgrims allowed in 1994, MAS' aircraft requirements
from World Airways was reduced to two aircraft. MHS Berhad, which recently
acquired 24.9% of World Airways, is in the process of acquiring 32% of MAS from
the Malaysian government.
World Airways has provided service to Garuda since 1988 under an annual
contract. World Airways is providing six aircraft for the 1994 Garuda Hadj
operations. In addition, World Airways has provided aircraft for Garuda's cargo
operations in previous years.
Transaction Services
- - --------------------
US Order is a leading provider of interactive transaction services to the home
and the only company with a screen-based telephone that is fully operational
with a broad menu of available services. Transaction services are currently
offered via screen-based telephones, although the Company expects to offer its
bill pay services via personal computers and touch tone telephones using audio
response units in 1994. Longer term, the Company plans to develop the
capability to support services offered via interactive cable, video games
control units, and personal digital assistants. Services currently offered by
US Order include bank account inquiry, funds transfer, bill payment, catalog
shopping, home delivery of groceries and restaurant meals, and enhanced
telephone services. Future services are expected to encompass an expanded set
of applications. The Company generates revenues through the monthly fees
charged to customers for its screen-based telephones (ScanFone(R) and
PhonePlus/TM/) and transaction services used, as well as the fees paid to the
Company by service providers.
Results of Operations
Three Months Ended March 31, 1994 Compared to the Three Months Ended March 31,
- - ------------------------------------------------------------------------------
1993
- - ----
Operating Revenue
- - -----------------
In the first quarter of 1994, operating revenues increased $4.0 million (14%)
to $32.0 million primarily due to an increase in block hours flown. Block hours
increased 18% to 4,207 in 1994 from 3,566 in 1993. This increase was partially
offset by a three percent decrease in revenue per block hour to $7,502 in 1994
from $7,701 in 1993. Block hours under full service contracts were 72% of total
block hours in 1994 and 83% in 1993.
Aircraft capacity, the number of days that the Company's aircraft are
available for service (including days in maintenance), increased to 8.1
available aircraft per day in the first quarter of 1994 from 7.3 in 1993. This
increase was augmented by a five percent increase in daily aircraft utilization
to 5.8 hours in 1994 from 5.5 hours in 1993. Aircraft utilization is measured by
the total block hours that the Company's aircraft were in use divided by the
number of days that the aircraft were available for service (including days in
maintenance).
Operating Expenses
- - ------------------
Flight costs increased $2.0 million (19%) due to costs associated with
increased passenger flying.
Maintenance costs decreased by $5.4 million (85%). In the first quarter of
1994, the lease of three DC10-30 aircraft expired. Excess accrued maintenance
reserves of $4.5 million associated with these aircraft were reversed. Excluding
the effect of this reversal, maintenance cost per block hour was $1,287 in the
first quarter of 1994 compared with $1,790 in 1993. The reduced maintenance
costs are due, in part, to guarantees and warranties received from the engine
and aircraft manufacturers of the MD-11 aircraft. Because the MD-11 is a
relatively new aircraft, cost experience on the maintenance of the aircraft is
unavailable. Therefore, the Company is, in part, relying on manufacturers'
guidelines to estimate future maintenance costs on the MD-11 aircraft.
Aircraft costs increased by $2.8 million (31%) in 1994. This increase was
primarily due to a $6.6 million increase in rent cost associated with the
delivery of four MD-11 aircraft during March and April 1993. Partially
offsetting these increases was a reduction of $4.1 million in rent costs
associated with the return of the three DC10 aircraft in 1993.
12
<PAGE>
Fuel costs decreased by $0.1 million (3%) primarily due to a decrease in full
service contracts.
Depreciation and amortization decreased $0.9 million (40%) primarily as a
result of the elimination of costs for leasehold improvements to two DC10-30
aircraft integrated into World Airways' fleet in April 1992. These aircraft were
initially leased under twelve-year operating leases and were returned to their
lessor in July 1993, accelerating the amortization of the related leasehold
improvements. This decrease was partially offset by the purchase of spare parts
for MD-11 aircraft integrated into the fleet in 1993.
Selling and administrative costs increased $1.6 million (39%) primarily as a
result of increased legal fees and marketing efforts.
Transaction Services - US Order
- - -------------------------------
In December 1993, US Order completed a $12.0 million private equity placement.
Following this transaction, WorldCorp's ownership percentage decreased from 51%
to 46% of the voting stock of US Order. WorldCorp has an option through
December 15, 1994 to purchase additional shares of the voting stock of US Order
for consideration equal to $5.0 million, which would increase its ownership of
the voting stock to 79%. The accompanying statements of operations include 59%
of the results of operations of US Order in the first quarter of 1994. This 59%
is based on liquidation preferences. In the first quarter of 1994, the Company
recorded $2.4 million of losses relating to US Order, compared to $1.4 million
of losses (net of $1.2 million of minority interest) in 1993.
Non-Operating Items
- - -------------------
Interest income decreased as a result of lower investment balances and lower
interest rates in 1994. Interest expense increased $0.8 million in 1994 as a
result of MD-11 rotables financing, aircraft rent deferrals, and a bank line of
credit.
Liquidity and Capital Resources
The Company's air transportation subsidiary operates in a very challenging
business environment. The combination of a generally weak economy, reduced
military spending, and the depressed state of the airline industry and the
economy has adversely affected the Company's operating performance. The Company
is highly leveraged primarily due to losses sustained by World Airways'
discontinued scheduled operations between 1979 and 1986, and losses the Company
incurred in 1990, 1992, and 1993. The Company has historically financed its
working capital and capital expenditure requirements out of cash flow from
operating activities, secured borrowings, and other financings from banks and
other lenders.
Cash Flows from Operating Activities
- - ------------------------------------
During the first quarter of 1994, operating activities used $12.3 million
compared to providing $0.1 million in the prior year. This decrease in cash is
primarily due to the reduction in accounts payable. In 1993, the Company
incurred significant liabilities relating to the integration of four MD-11
aircraft into the fleet.
Cash Flows from Investing Activities
- - ------------------------------------
Cash flows from investing activities used $2.1 million in 1994 as compared to
$1.3 million in 1993. In 1994, the Company purchased spare parts for one MD-11
aircraft integrated into the fleet in April 1994. In 1993, the Company purchased
spare parts relating to the integration of four MD-11 aircraft which was offset
by the sale of equipment and investments.
Cash Flows from Financing Activities
- - ------------------------------------
In the first quarter of 1994, financing activities provided $22.2 million
compared to using $0.1 million in the prior year. This increase resulted
primarily from the sale of 24.9% of World Airways to MHS.
Capital Plans
- - -------------
World Airways plans to exit higher cost DC10 aircraft and ultimately
standardize its fleet around the MD-11 aircraft. In October 1992 and January
1993, World Airways signed a series of agreements to lease seven new MD-11
aircraft for
13
<PAGE>
initial lease terms of two to five years. As of May 6, 1994, World Airways has
taken delivery of four passenger MD-11 aircraft and one freighter MD-11 and is
scheduled to take delivery of two convertible MD-11s in 1995. Two of the
passenger MD-11 aircraft replaced the two passenger DC10-30 aircraft which were
integrated into World Airways' fleet in April 1992 and returned to McDonnell
Douglas in July 1993. The delivery of the convertible MD-11s is expected to
occur approximately six months after the end of the lease of three DC10-30
convertibles during the third quarter of 1994.
World Airways made $3.8 million of capital expenditures and cash deposits for
MD-11 integration in the first quarter of 1994. World Airways estimates that
its required capital expenditures for MD-11 integration will be approximately
$3.5 million for the remainder of 1994 and $9.8 million in 1995. As of March
31, 1994, the Company holds approximately $14.2 million (at book value) of
aircraft spare parts and transaction processing terminals currently available
for sale. The Company anticipates proceeds from the sale of these assets to be
approximately $7.5 million in 1994 with the balance received in 1995.
US Order's working capital and capital expenditure requirements for 1994 are
expected to be approximately $8.0 million. As of March 31, 1994, WorldCorp has
invested $18.1 million of funds in US Order. US Order is currently seeking a
private equity placement for up to $8.0 million with financial and strategic
partners. However, there can be no assurance that such financing will be
obtained. WorldCorp does not plan to provide additional financing to US Order in
1994.
Financing Developments
- - ----------------------
As previously stated in its most recent Form 10-K, the Company has closed
certain transactions and executed agreements covering other transactions which,
in aggregate, have significantly increased the cash reserves of WorldCorp, World
Airways, and US Order.
First, on October 30, 1993, WorldCorp, Inc., World Airways, Inc., and MHS
Berhad 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 (the "Closing") $12.4 million to fund its working capital requirements.
The remaining $15.0 million (less a $2.7 million deposit received in November
1993) would be paid to WorldCorp to add to its cash reserves. 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. As a result
of this transaction, WorldCorp recognized a gain of approximately $26.9 million
in the first quarter of 1994.
Second, World Airways finalized an agreement with a financial institution for
a $20.0 million credit facility collateralized by certain receivables and spare
parts. This agreement contains certain covenants related to World Airways'
financial condition and operating results. Approximately $10.8 million of the
proceeds from this transaction were used to retire existing obligations. The
balance was added to cash reserves. As of April 30, 1994, $2.4 million of the
$8.0 million portion of the credit facility collateralized by receivables was
utilized. World Airways was not in compliance with its debt covenants at the end
of the first quarter but has obtained waivers from the financial institution.
World Airways will not meet these required covenants in the second quarter of
1994, and will seek waivers.
Third, on November 8, 1993, World Airways completed negotiations for $14.7
million of lease payment deferrals and related financings for eight of its nine
aircraft in 1993. The ninth aircraft was returned to the lessor in October
1993. Additionally, World Airways received a permanent reduction in the lease
rate for one DC10 aircraft, the only DC10 that will remain on long-term lease
after September 1994. In 1993, $6.6 million of the deferrals were repaid. The
remaining deferrals are scheduled to be repaid beginning in the second quarter
of 1994, and bear interest at rates ranging from 7% to 12%.
Fourth, in December 1993, US Order completed a private equity placement with
financial and strategic partners for $12.0 million, of which WorldCorp invested
$1.7 million. As a result of this transaction, WorldCorp owns 46% of the voting
stock of US Order. WorldCorp has an option through December 15, 1994, to
purchase additional shares of capital stock of US Order for consideration equal
to $5.0 million which, if exercised, would increase its ownership percentage of
the voting stock to 79%.
14
<PAGE>
Finally, WorldCorp is seeking to place privately two securities of US Order
that it currently holds: a $3.5 million increasing rate note with warrants in
US Order, and $7.5 million of non-convertible preferred stock with warrants in
US Order. No assurances can be made that the Company will be successful in
placing these securities.
The Company believes that the combination of the financings consummated to
date and the operating and additional financing plans described above will be
sufficient to allow the Company to meet its operating and capital requirements
during 1994.
Business Trends
The Company's air transportation business is highly seasonal. Typically, World
Airways experiences reduced demand during the first quarter for passenger and
cargo services relative to other times of the year. World Airways generally
experiences stronger results in the second and third quarters due to demand for
commercial passenger services including the annual Hadj pilgrimage. Fourth
quarter results depend upon the overall world economic climate and global trade
patterns.
Since the end of the Persian Gulf War, soft demand and weakening yields have
adversely affected worldwide cargo and passenger markets. In management's view,
block hours flown are a critical driver of the airline's profitability. In
order for World Airways to achieve positive operating results and meet its
requirements under certain financing agreements, it will be necessary to
increase block hours flown from 1993 levels. In response, World Airways has
significantly increased its worldwide sales and marketing presence by 1) selling
24.9% of its equity to MHS Berhad, solidifying a marketing alliance with a
leading aviation company in Malaysia, 2) recruiting three active outside board
members with experience in worldwide aviation and travel services, and 3)
increasing its internal sales and marketing staff from two to seven executives.
These actions were taken with the objective of increasing World Airways' flying
levels. The fourth quarter of 1993 was the first recent quarter where flying
level trends turned positive, increasing by 40% over the prior year's fourth
quarter. In the first quarter of 1994, the trend continued with flying levels
up 18% over the first quarter of 1993.
World Airways expects its second quarter results to be affected by the
imposition of quota limitations by the Saudian government which reduced the size
of the 1994 MAS Hadj from four to two aircraft. Third quarter results depend in
part on the ability of World Airways to obtain regulatory approval by a foreign
government to operate a scheduled service contract for one passenger aircraft.
Fourth quarter 1994 flying levels will largely depend upon global trade demand
for one MD-11 cargo aircraft and the placement of at least two MD-11 passenger
aircraft under longer-term contracts. World Airways is currently in discussions
with its equity partner, MHS, to place one or more of these aircraft.
In the course of the past year, while preparing to launch its third-generation
service offering, US Order has maintained a customer base of approximately
10,000 users. As a result of extensive studies of the preferences and usage
patterns of these customers, US Order has shifted to some degree the focus of
its service offerings.
US Order's research clearly indicates the importance of bill-payment and
banking services to attracting and retaining customers. Therefore, US Order's
service offering to financial institutions and their customers has expanded in
recent months. US Order will soon provide bill-payment and banking services to
financial institutions via audio response units (APUs), which are currently the
principal technology used for touch-tone or telephone banking by consumers. US
Order is currently negotiating with several major banks to begin offering
services via APUs. Late in 1994, US Order also expects to offer similar bill-
payment and banking services via personal computers. US Order's management
believes that the proliferation of different types of devices (screen-based
phones, PCs, touch-tone phones, etc.) will assist in the development of its
bill-payment and banking business.
US Order is also significantly expanding its direct sales to consumers of
screen-based phones and transaction services. Central to this effort is US
Order's third-generation screen-based phone, PhonePlus/TM/, which was announced
in October 1993 and will be available to consumers in the third quarter of 1994
with a range of financial services and enhanced telephone services. US Order's
relationships with various telephone companies are evolving from joint marketing
arrangements to US Order acting as a reseller of enhanced telephone services.
This shift has been facilitated by the fact that screen-based phones such as
PhonePlus/TM/ greatly improve the ease of use of enhanced telephone services
such as Caller ID.
15
<PAGE>
Other Matters
On August 11, 1992, WorldCorp, World Airways, and certain other commercial
paper customers of Washington Bancorporation ("WBC") were served with a
complaint by WBC as debtor-in-possession by and through the Committee of
Unsecured Creditors of WBC (the "Committee"). The complaint arises from
investment proceeds totaling $6.8 million received by WorldCorp and World
Airways from WBC in May 1990 in connection with the maturity of WBC commercial
paper. The Committee seeks to recover this amount on the grounds that these
payments constituted voidable preferences and/or fraudulent conveyances under
the Federal Bankruptcy Code and under applicable state law. On June 9, 1993,
the Company filed a motion to dismiss this litigation and intends to vigorously
contest the claim. No assurances can be given of the eventual outcome of this
litigation.
World Airways' cockpit and flight attendant crewmembers are covered by
collective bargaining agreements which expired in July 1992. World Airways is
currently in negotiations with the International Brotherhood of Teamsters
("Teamsters") to develop new agreements for cockpit and flight attendant
crewmembers. World Airways and the Teamsters jointly requested the assistance
of a federal mediator to facilitate negotiations between World Airways and its
cockpit crewmembers. The outcome of the negotiations cannot be determined at
this time.
WorldCorp has never paid any cash dividends and does not plan to do so in the
foreseeable future. Both the 13 7/8% Subordinated Notes Indenture and the
indenture pursuant to which the Debentures were issued (the "Indentures")
restrict the Company's ability to pay dividends or make other distributions on
its common stock. In addition, the Indentures originally restricted the ability
of World Airways to pay dividends other than to the Company. In 1994, however,
the Company received approval from the holders of the Indentures to allow World
Airways to pay dividends to parties other than the Company.
The $20 million credit facility also contains restrictions on World Airways'
ability to pay dividends. Under this agreement, World Airways cannot declare,
pay, or make any dividend or distribution in excess of the lesser of $4.5
million or 50% of net income for the previous six months. In addition, World
Airways must have a cash balance of at least $7.5 million immediately after
giving effect to such dividend.
All of the funds from operations are generated by the Company's subsidiaries.
The ability of the Company and its subsidiaries to pay principal and interest on
their respective short and long-term obligations is substantially dependent upon
the payment to the Company of dividends, interest or other charges by its
subsidiaries and upon funds generated by the operations of the subsidiaries.
As of December 31, 1993, the Company had net operating loss carryforwards,
investment tax credit carryforwards, and alternative minimum tax credit
carryforwards of $137.2 million, $9.6 million, and $2.2 million, respectively
(the "Carryforwards"). The availability of net operating loss and tax credit
carryforwards to reduce the Company's future federal income tax liability is
subject to limitations under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, these limitations restrict availability of net operating
loss and tax credit carryforwards upon an ownership change. In August 1991, the
Company experienced an ownership change, and the use of $72.6 million of net
operating loss carryforwards available to the Company from losses generated
prior to the ownership change, plus the tax credit carryforwards described
above, are limited to approximately $6.3 million annually (the "Limitation").
As a result of the transaction with MHS in February 1994, however, the
Carryforwards will be split into two components: those generated solely by
World Airways, and those generated by the remaining entities of the controlled
group. As a result, approximately $84.8 million of the consolidated net
operating loss carryforward will no longer be available to offset federal
taxable income reflected on future consolidated tax returns. Instead, the $84.8
million will be available to World Airways on a separate company basis (subject
to the Limitation). World Airways will also retain sole use of the $9.6 million
investment tax credit carryforward and the $2.2 million alternative minimum tax
credit carryforward to reduce its future federal income tax liability, subject
to limitations under the Code.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- - ------------------------------------------
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
11 Calculation of Income (Loss) per Common Share
</TABLE>
(b) Reports on Form 8-K.
--------------------
Form 8-K, dated February 28, 1994, was filed with the Securities and Exchange
Commission on March 14, 1994.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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/ T. Coleman Andrews, III
---------------------------
(T. Coleman Andrews, III)
Chief Executive Officer, President,
and Principal Accounting Officer
Date: May 13, 1994
18
<PAGE>
Commission file number 1-5351
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 1994
WORLDCORP, INC.
(Exact name of registrant as specified in its charter)
<PAGE>
EXHIBIT 11
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES
CALCULATIONS OF EARNINGS (LOSS) PER COMMON SHARE
For the Three Months Ended March 31,
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
----------------------------- -----------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings (loss) from continuing operations $ 15,596 $ 15,596 $ (14,188) $ (14,188)
Plus: assumed interest expense reduction
from conversion of convertible debt -- 1,137 -- --
Plus: assumed interest expense reduction
due to retirement of subordinated notes
with excess proceeds from exercise of
options and warrants 382 382 -- --
----------- ----------- ---------- ----------
Net earnings (loss) applicable to
common stock $ 15,978 $ 17,115 $ (14,188) $ (14,188)
=========== ========== ========== ==========
Weighted average common shares
outstanding 15,170,020 15,170,020 14,214,093 14,214,093
Weighted average options and warrants
treated as common stock equivalents 1,930,842 1,930,842 -- --
Weighted average other dilutive securities -- 5,877,034 -- --
----------- ---------- ---------- ----------
Primary and fully diluted number of shares 17,100,862 22,977,896 14,214,093 14,214,093
========== ========== ========== ==========
Net earnings (loss) per share of
common stock $ 0.93 $ 0.74 $ (1.00) $ (1.00)
========== ========== ========== ==========
</TABLE>
