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===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
June 8, 1995
WorldCorp, Inc.
(Exact name of registrant as specified in charter)
DELAWARE 1-5351 94-3040585
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification Number)
13873 Park Center Road, Suite 490, Herndon, VA 22071
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(703) 834-9200
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<PAGE>
Item 2. Acquisition or Disposition of Assets.
On June 8, 1995, WorldCorp, Inc., (the "Company") closed its equity
carve-out of US Order, Inc., ("US Order"). The Company sold in a public offering
1,365,000 shares of common stock ($.001 par value) of US Order at $14.75 per
share. US Order sold 3,062,500 shares for its own account. Prior to the US Order
offering, the Company's beneficial ownership in US Order was 88%; subsequent to
the offering, the Company owns 8,832,844 shares of common stock, with a
beneficial ownership of 61% in US Order. The Company's press release dated
June 2, 1995 announcing the sale is attached hereto as Exhibit 99.1 and is
incorporated by reference herein.
The US Order prospectus dated June 1, 1995 with respect to the
equity carve-out is set forth on the following pages:
<PAGE>
PROSPECTUS
3,850,000 SHARES
US ORDER, INC. [LOGO OF US ORDER APPEARS HERE]
COMMON STOCK
($.001 par value)
Of the shares of Common Stock, $.001 par value per share (the "Common Stock"),
being offered (the "Shares"), 2,800,000 Shares are being issued and sold by US
Order, Inc. ("US Order" or the "Company"), and 1,050,000 Shares are being sold
by the Selling Stockholder. The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholder. See "Principal and Selling
Stockholders."
Prior to this Offering (the "Offering"), there has been no public market for
the Common Stock. For a discussion of the factors considered in determining the
initial public offering price, see "Underwriting." The Common Stock has been
approved for listing on The Nasdaq National Market under the symbol "USOR,"
subject to official notice of issuance.
THE SHARES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDER(2)
<S> <C> <C> <C> <C>
Per Share.......... $14.75 $1.0325 $13.7175 $13.7175
Total(3)........... $56,787,500 $3,975,125 $38,409,000 $14,403,375
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company and the Selling
Stockholder, estimated at $360,000 and $135,000, respectively.
(3) The Company and the Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to 262,500 and 315,000 additional shares of
Common Stock, respectively, at the Price to Public, less Underwriting
Discount, solely to cover over-allotments, if any. If the Underwriters
exercise such options in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholder will be
$65,305,625, $4,571,394, $42,009,844 and $18,724,387, respectively. See
"Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about June 8, 1995.
SALOMON BROTHERS INC
FIRST ALBANY CORPORATION
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
The date of this Prospectus is June 1, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements
included elsewhere in this Prospectus. Except as otherwise noted, all
information in the Prospectus (i) reflects the conversion or redemption of all
outstanding shares of Former Preferred Stock into shares of Common Stock
effective concurrently upon the consummation of this Offering and (ii) assumes
no exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock" and "Underwriting."
THE COMPANY
The Company designs and develops products and services for two markets: home
banking and intelligent telecommunications network services. Home banking
allows consumers to pay bills, check account balances and receive other bank
information from their homes. Intelligent network services allow consumers to
send and receive text information from a smart telephone, which is a telephone
with a central processing unit, an integrated display screen and memory. In the
home banking market, the Company expects to generate revenues from (i)
royalties from Visa International Service Association ("Visa"), (ii) sales to
banks of voice response systems with software that supports touch-tone bill
payment applications, and (iii) monthly fees for bank-branded customer service
supporting electronic bill payment customers. In the intelligent network
services market, the Company expects to generate revenues from (i) royalties
from sales to customers of the Company's smart telephones through Colonial Data
Technologies Corp. ("Colonial Data") and (ii) sales of smart telephone-based
interactive applications such as catalog shopping and national directory
assistance. The Company currently receives revenues largely from the sale of
products and services to Visa member banks and from monthly fees paid by
customers using the Company's existing smart telephones. The Company intends to
introduce additional interactive applications on its new smart telephone, the
Falcon, which the Company expects to introduce at the end of 1995.
The Company's marketing strategy is to identify a strategic partner with an
established distribution channel in each target market. US Order has entered
into a strategic alliance with Visa Interactive, Inc., a wholly owned
subsidiary of Visa, in the home banking market. Visa has 13,000 U.S. member
banks. Since August 1994, 50 Visa member banks, including six of the top 20
banks in the United States, have committed to offer the Visa Interactive home
banking program to their customers. US Order also has entered into a strategic
alliance with Colonial Data in the intelligent network services market.
Colonial Data is a leading provider of Caller ID equipment whose customers
include U S WEST, Inc., NYNEX Corp., BellSouth Corp., Ameritech Corp. and Bell
Atlantic Corp.
In August 1994, the Company sold its bill payment operations and technology
(the "Visa Bill-Pay System") to Visa for cash and the right to future royalty
payments generated by customers utilizing the Visa Bill-Pay System. Visa formed
Visa Interactive around the technology and personnel acquired from the Company,
including 54 former US Order employees. Visa Interactive has agreed to resell
certain of the Company's products and services to Visa member banks through
1997. Visa Interactive also has agreed through 2000 to inform Visa member banks
that the Company is a preferred provider of certain home banking products and
services. In January 1995, Colonial Data agreed to sell the Company's ADSI
smart telephones and interactive applications to its telephone company
customers through 1999. The Company also intends to sell its smart telephones
and interactive applications to consumers in other markets, including the home
banking market. The Company's right to future royalty payments from Visa is
subject to a cumulative offset amount aggregating $879,780 and, accordingly,
the Company does not expect to begin receiving royalty payments until 1996.
While the Company
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expects the agreements with Visa and Colonial Data to result in increased
revenue, there can be no assurances that the Company will receive any revenues
pursuant to these agreements.
The Company has selected home banking and intelligent network services as its
initial markets. Although small today, the Company's strategy is based on its
belief that these markets will grow significantly over the next several years.
The Company believes that consumers are increasingly interested in processing
transactions and sending and receiving information from their homes. Banks are
expected to embrace home banking in order to increase customer loyalty and to
reduce paper check processing costs. The Company also believes that telephone
companies will aggressively market intelligent network services in order to
increase revenue per subscriber and expand overall network usage. The Company
believes that its strategy of marketing its products through strategic partners
will allow it to avoid significant marketing costs.
US Order's product strategy is to develop products and services for its
strategic partners and their customers. The Company strives to develop products
with broad appeal that are easy-to-use, practical, inexpensive and built around
common industry standards. US Order's products position the Company to offer
support services and interactive applications which are expected to generate
monthly fee revenue. The Company also intends to develop products which
facilitate home banking from smart telephones, personal computers and other
access devices. The Company is implementing this strategy in the home banking
market by emphasizing sales of bill payment software for voice response units.
By selling a bill payment voice response unit to a bank, the Company also has
the opportunity to offer bank-branded customer service, which results in
additional monthly fee revenue. The Company is also implementing this strategy
in the intelligent network services market by emphasizing sales of smart
telephones. By selling smart telephones, the Company increases its opportunity
to receive additional monthly fee revenue from the sale of its interactive
applications.
In 1992, the Company introduced the first smart telephone bill payment
service that could be used by customers of any U.S. bank. In 1993, US Order was
the first to offer direct, secure ATM network access via a smart telephone with
the industry standard DES encryption algorithm, enabling balance inquiry, funds
transfer and direct debit purchases from the home. In 1994, Visa adopted the
Company's transaction processing technology by acquiring US Order's bill
payment operation and forming Visa Interactive. In 1995, in alliance with Visa
and InterVoice, Inc., a leading voice response system manufacturer, US Order
began offering banks a voice recognition bill payment software package.
US Order was founded in 1990 by William F. Gorog, Chairman of the Board and
Chief Executive Officer of the Company. Mr. Gorog has successfully identified
and commercialized transaction and information processing technologies during
his career. Mr. Gorog's first company, DataCorp., developed the Lexis and Nexis
information service and was subsequently sold by him to the Mead Corporation in
1969. Mr. Gorog also assisted VeriFone, Inc., a leading provider of point-of-
sale transaction systems, during its development stage. Mr. Gorog formed a
company that served as VeriFone's east coast distributor, which he subsequently
sold to VeriFone. He also served on VeriFone's Board of Directors from 1981
through 1993.
US Order, Inc. was incorporated in Delaware in 1990. The Company's principal
executive offices are located at 13873 Park Center Road, Suite 353, Herndon,
Virginia 22071 and its telephone number is (703) 834-9480.
4
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company...................... 2,800,000 shares
Common Stock offered by the
Selling Stockholder.......... 1,050,000 shares
Common Stock to be outstanding
after the Offering(1)........ 14,406,096 shares
Use of proceeds by the
Company...................... Repayment of certain indebtedness, redemption of
certain equity securities, and general corporate
purposes. Of the $38.0 million of estimated net
proceeds to the Company, approximately $10.2
million will be used to redeem certain equity
securities and repay indebtedness held by the
Selling Stockholder. See "Use of Proceeds."
Nasdaq National Market
symbol....................... "USOR"
</TABLE>
- --------
(1) Excludes (i) 2,582,810 shares of Common Stock issuable upon the exercise of
options, (ii) 471,429 shares of Common Stock issuable upon the exercise of
warrants to purchase Common Stock (the "Warrants") and (iii) 230,000 shares
of Common Stock that the Company has agreed to issue to Colonial Data in a
stock exchange upon consummation of the Offering in accordance with the
Company's strategic alliance with Colonial Data. See "Management--Stock
Options," "Principal and Selling Stockholders" and "Business--
Telecommunications/Network Services--US Order's Telecommunications
Strategy."
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
US Order (R) and ScanFone (R) are registered trademarks and PhonePlus (TM)
and Falcon (TM) are trademarks of US Order. Visa (R) and Visa and Bands symbol
are registered trademarks of Visa International Service Association.
VeriFone (R) and the VeriFone logo are trademarks of VeriFone, Inc. InterVoice
and the InterVoice logo are trademarks of InterVoice, Inc. Colonial Data and
the Colonial Data logo are trademarks of Colonial Data Technologies Corp.
Metromail and the Metromail logo are trademarks of Metromail Corporation, a
subsidiary of R.R. Donnelley and Sons Company. Litle & Company and the Litle &
Company logo are trademarks of Litle & Company. Whenever such names, or
registered trademarks and trademarks of companies other than the Company,
appear in this Prospectus, such names shall be deemed to refer to the
corresponding registered trademarks or trademarks, whichever the case may be.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD FROM THREE MONTHS ENDED
INCEPTION THROUGH YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------------ ------------------
1990 1991 1992 1993 1994 1994 1995
----------------- ------- ------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue.......... $ -- $ 1 $ 63 $ 905 $ 1,432 $ 317 $ 744
Total cost of revenue.. -- 23 126 908 1,013 222 477
------ ------- ------- -------- -------- --------- ---------
Gross margin........... -- (22) (63) (3) 419 95 267
Total operating
expenses.............. 314 1,844 6,492 (1) 10,540 (1) 10,584 (2) 2,305 1,498
------ ------- ------- -------- -------- --------- ---------
Operating loss......... (314) (1,866) (6,555) (10,543) (10,165) (2,210) (1,231)
Gain on sale of bill
pay operations........ -- -- -- -- 14,523 (3) -- --
Total other income
(expense)............. 19 13 (251) (682) (575) (152) (138)
------ ------- ------- -------- -------- --------- ---------
Income (loss) before
income taxes.......... (295) (1,853) (6,806) (11,225) 3,783 (2,362) (1,369)
Income tax expense -- -- -- -- 70 -- --
------ ------- ------- -------- -------- --------- ---------
Net income (loss)...... $ (295) $(1,853) $(6,806) $(11,225) $ 3,713 $(2,362) $(1,369)
====== ======= ======= ======== ======== ========= =========
Weighted average common
stock and common
equivalent shares
outstanding........... 5,021 6,090 6,090 6,090 8,243 6,090 6,090
====== ======= ======= ======== ======== ========= =========
Net income (loss) per
common share.......... $ (.06) $ (.30) $ (1.18) $ (2.01) $ .28 (4) $ (.47) $ (.29)
====== ======= ======= ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...................................... $ 161 $ 26,241
Net property and equipment........................... 1,477 1,477
Total assets......................................... 3,792 29,872
Notes payable to affiliates.......................... 4,654 --
Redeemable preferred stock........................... 4,864 --
Accumulated deficit.................................. (17,834) (17,834)
Total stockholders' equity (deficit)................. (7,813) 27,785
</TABLE>
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(1) Operating expenses in 1992 and 1993 include write-downs of terminals and
terminal components of approximately $430,000 and $1.5 million,
respectively.
(2) Operating expenses in 1994 include a $3.25 million payment to certain
employees to cancel certain outstanding vested options in connection with
the sale of the US Order bill pay operations to Visa. Visa required that
all US Order employees who became employees of Visa Interactive, Inc.
cancel their outstanding vested options to eliminate any potential
conflicts of interest. As a result, US Order's shareholders and Board of
Directors agreed to pay all active and full-time US Order employees
(excluding William F. Gorog) an aggregate of $3.25 million for the
cancellation of 675,334 of their outstanding and vested options with
exercise prices ranging between $0.98 and $4.00 per share. Of the $3.25
million, approximately $2.1 million was paid to US Order employees who
became Visa Interactive, Inc. employees as of August 1, 1994. See
"Management--Executive Compensation."
(3) The Company sold its bill pay operations to Visa in connection with the
Company's entry into a strategic alliance with Visa. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business--Home Banking--US Order's Home Banking Strategy."
(4) Excluding the effect of the gain on the sale of the Company's bill pay
operation to Visa, net income (loss) per common share in 1994 would
decrease by $2.37 per share.
(5) As adjusted to give effect to the sale of 2.8 million shares of Common
Stock pursuant to the Offering and the use of proceeds therefrom. See "Use
of Proceeds."
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RISK FACTORS
MINIMAL REVENUES; HISTORY OF LOSSES
US Order did not introduce its first commercial product until 1991 and
accordingly has a limited operating history. To date, the Company has
generated minimal operating revenues, has incurred significant losses and has
experienced a substantial negative cash flow. The Company had an accumulated
deficit as of March 31, 1995 of approximately $17.8 million, with operating
losses of $6.6 million, $10.5 million and $10.2 million for the years ended
December 31, 1992, 1993 and 1994, respectively, and an operating loss of $1.2
million for the three months ended March 31, 1995. To date, the Company has
generated limited revenues from the sale of its products and services. The
Company expects to incur operating losses at least into 1996 at decreasing
levels. There can be no assurance that the Company will be able to achieve
profitability and, if achieved, sustain such profitability, nor can there be
any assurance as to when such profitability might be achieved. The Company is
subject to all of the risks inherent in the establishment of a new business
enterprise. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEVELOPING MARKETPLACE
Home banking and intelligent network services are developing markets.
Consumer preferences in interactive technologies are difficult to predict. The
Company's future growth and profitability will depend, in part, upon consumer
acceptance of electronic home banking and smart telephone technologies and a
significant expansion in the consumer market for telephone-based interactive
applications technologies. Even if these markets experience substantial
growth, there can be no assurance that US Order's products and services will
be commercially successful or benefit from such growth. US Order commenced
operations in 1991 with an emphasis on grocery shopping applications. Although
the Company's grocery shopping application was well received by the existing
home delivery market, the market for home grocery delivery was small and not
growing quickly. As a result, the Company de-emphasized its grocery shopping
application in 1992 and discontinued it in 1994. As the Company de-emphasized
its grocery shopping application, it began to focus its efforts on home
banking and telecommunications.
EARLY STAGE PRODUCTS AND SERVICES
The continued development of the marketplace for the Company's products and
services will depend in part upon the Company's ability to create and develop
additional interactive applications for the Company's technologies. Many of US
Order's interactive products and services, including its smart telephones, are
in the early stages of development or marketing, and are subject to the risks
inherent in the development and marketing of new products and services. Many
of the Company's competitors, including Philips Home Services, Inc.
("Philips") and Northern Telecom Ltd. ("Northern Telecom"), have already
introduced smart telephones which include technological features incorporated
in the Company's PhonePlus product. The Company's Falcon product incorporates
newer digital signal processing technology. Although the Company is currently
unaware of any efforts by its competitors to deploy digital signal processing
technology in their smart telephones, the Company expects that its competitors
will attempt to replicate the Falcon digital signal processing design if it is
commercially successful. The Company is discontinuing its ScanFone smart
telephones in anticipation of the introduction of its PhonePlus and Falcon
smart telephones. The Company has not completed the sale of a substantial
number of PhonePlus smart telephones and is still developing its fourth-
generation smart telephone, the Falcon. The Company's risks include
competition from banks, electronics manufacturers, telecommunications
companies, computer software and data processing companies and technology or
service companies, failure of the Company's products to attain widespread
acceptance in the marketplace, and the development of unforeseen design or
engineering problems with the Company's products and applications. There can
be no assurance that these or other risks associated with new product and
service development will not occur. The occurrence of one or more of these
risks could have a material adverse effect on the Company's financial
condition and operating results.
DEPENDENCE ON STRATEGIC ALLIANCES
The Company's business strategy is to sell products and services that
support and enhance home banking and intelligent network services primarily
through a strategic alliance in each of these two
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marketplaces. The Company's success in each area depends both on the ultimate
success of these partners as well as on the ability of its partners to
successfully market the Company's products and interactive applications.
Therefore, the Company's success in home banking will depend not only on
growing consumer acceptance of home banking but also on the success of Visa
Interactive, Inc. ("Visa Interactive") in having the Visa Bill-Pay System
become a widely accepted industry standard. Failure by the Company to complete
its strategic alliance strategy or failure of the Company's strategic partners
to successfully develop and sustain a market for the Company's products and
services would adversely affect US Order's overall performance.
Although the Company views its alliances as a key factor in the development
and commercialization of its technologies, there can be no assurance that
these industry partners view their alliance with the Company as significant
for their own businesses or that they will not reassess their commitment to
the Company at any time in the future. Colonial Data, the Company's strategic
ally in the telecommunications industry, can terminate its agreement with the
Company if the Company's Falcon smart telephone is not available for
commercial distribution by April 1, 1996. Under Visa's agreement with the
Company, Visa can, under certain circumstances, abandon the Visa Bill-Pay
System (the use of which will generate royalties for the Company) in favor of
another bill payment system. Visa may replace the Visa Bill-Pay System with a
system that is materially different and does not use any significant portion
of the Visa Bill-Pay System, its source code or system documentation, but only
if Visa can demonstrate that the replacement system is required for commercial
purposes other than avoidance of its obligation to pay royalties. The ability
of the Company's strategic allies to incorporate the Company's products and
services into successful commercial ventures will depend, in part, on the
Company's ability to continue to successfully upgrade and develop new
technologies. There can be no assurance that the Company will be able to
comply with future specification and delivery schedule requirements regarding
its technologies. The Company's inability to meet such requirements would
delay the ongoing development of services utilizing its technologies and could
result in the strategic alliance partners seeking alternative technologies for
use in their products and services, which would have a material adverse impact
on the Company. See "Business--Home Banking--US Order's Home Banking Strategy"
and "--Telecommunications/Network Services--US Order's Telecommunications
Strategy."
CONTROL BY WORLDCORP; POTENTIAL CONFLICTS OF INTEREST
Upon the completion of this Offering, WorldCorp Investments, Inc., a wholly
owned subsidiary of WorldCorp, Inc. ("WorldCorp" or the "Selling Stockholder",
which terms shall include WorldCorp, Inc. and its subsidiaries), will own
approximately 65% (or approximately 61% if the Underwriters' over-allotment
option is exercised in full) of the outstanding Common Stock. WorldCorp owns
majority positions in two companies: US Order and World Airways, Inc. ("World
Airways"). WorldCorp is highly leveraged, and therefore requires substantial
funds to cover debt service each year. As a holding company, all of
WorldCorp's funds are generated through its subsidiaries. As a result of
WorldCorp's cash requirements, it may be required to sell shares of US Order
from time to time and such sales, or the threat of such sales, could have a
material adverse effect on the market price for the Company's Common Stock.
WorldCorp also will be in a position to control the outcome of substantially
all issues submitted to the Company's stockholders, including the election of
all of the Company's Board of Directors, adoption of amendments to the
Company's Certificate of Incorporation and approval of mergers or sales of the
Company's assets. Under Delaware law, WorldCorp will be able to approve
certain actions by written consent without a meeting of the stockholders of US
Order. The purchasers of the Common Stock offered hereby will be minority
stockholders, both individually and in the aggregate. See "Principal and
Selling Stockholders." In addition, the Company's Board of Directors has seven
members, five of whom also serve on the board of directors of WorldCorp. See
"Management" and "Certain Relationships and Transactions."
RELIANCE ON VISA ROYALTY PAYMENTS
US Order sold its electronic banking and bill payment operation to Visa on
August 1, 1994, for approximately $15 million in cash, the assumption of
certain liabilities and a 72-month royalty obligation commencing January 1,
1995 and ending December 31, 2000 (the "Royalty Period"). Visa subsequently
8
<PAGE>
transferred these assets to Visa Interactive, its wholly owned subsidiary. The
royalty obligation is based on the number of customers who use the Visa Bill-
Pay System during the Royalty Period. The agreement with Visa expressly
provides that the royalty will apply only if the means by which a customer
makes an electronic bill payment involves the use of a "significant portion"
of the Visa Bill-Pay System. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Royalties to US Order are calculated and paid by Visa Interactive quarterly
during the Royalty Period. Because the amount of the royalties to US Order is
dependent upon the number of customers that use the Visa Bill-Pay System on a
monthly basis during the Royalty Period, the Company cannot provide any
assurances of the amount of royalties, if any, that will be payable by Visa
Interactive to US Order. The royalty payment will be reduced for each quarter
through December 31, 1997 by an offset amount (the "Visa Offset") which is
initially set at $73,315. If the royalty payment that would otherwise be due
in respect of a quarter is smaller than the offset amount for that quarter, no
royalty payment will be made to US Order, and the difference between $73,315
and the royalty otherwise due will increase the size of the Visa Offset for
the next quarter. The aggregate amount of the Visa Offset is $879,780. US
Order does not expect to receive any royalty revenues from Visa in 1995 due to
the Visa Offset. In addition, after a Visa member bank commits to use the Visa
Bill-Pay System, there can be an extended technical and marketing roll-out
period before the Company begins to earn royalty revenues. At present, only
three banks have begun such a technical and marketing roll-out in small,
limited markets. These banks have successfully enrolled in their home banking
program only approximately 2,000 customers. These banks have over a million
customers in the aggregate, although the Company estimates that a substantial
majority of them have not been solicited at this time regarding this program.
There can be no assurances as to the banks' ultimate success with this
program. Failure to receive significant royalties from Visa Interactive during
the Royalty Period would have a material adverse effect upon US Order's future
prospects, assets, financial condition and liquidity. The Company does not
expect to begin receiving royalties under the Visa Bill-Pay System until 1996.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In addition, under the terms of its agreement with Visa, Visa Interactive is
not obligated to pay royalties to US Order for active bank customers who
utilize home banking and bill payment technology independently developed by
Visa Interactive. If Visa Interactive independently develops or acquires its
own home banking and bill payment technology which does not use or build upon
US Order's technology, this could have a material adverse effect on the amount
of royalties payable by Visa Interactive to US Order.
As a condition of Visa's acquisition of US Order's bill payment and banking
operation, US Order has agreed to work exclusively with Visa in certain areas
and to refrain from certain activities that are in competition with Visa and
its affiliates. These covenants may increase US Order's reliance upon Visa.
Although Visa must make its members aware of the preferred provider status
of US Order and its products and services, Visa is under no obligation to
guarantee any minimum purchases by it or any of its members of any such US
Order products and services. Because of the Company's status as a preferred
provider, Visa Interactive makes its customers aware of the Company's ability
to provide customer support services and the Company provides such services at
predetermined prices and established standards during the Royalty Period. The
Company's dependence on Visa, and the terms of the agreement between the
parties, may have a material adverse effect on the Company. See "Business--
Home Banking--US Order's Home Banking Strategy."
COMPETITION
The market for interactive products and services is highly competitive and
subject to rapid innovation and technological change, shifting consumer
preferences and frequent new product introductions. In addition to competing
with other companies that provide smart telephones, including Philips,
Northern Telecom and AT&T Corp. ("AT&T"), the Company also faces increasing
competition from other emerging interactive applications delivered through
personal computers and cable television, including developing transactional
services offered by Microsoft Corp. ("Microsoft"), Intuit, Inc. ("Intuit"),
Electronic Data Systems, Inc. ("EDS") and other software companies. The
Company expects
9
<PAGE>
competition to increase in the future from existing and new competitors,
possibly including telecommunications companies. Established on-line
information services, including America Online Inc. ("America Online") and
Prodigy Services Company ("Prodigy"), offer competing home banking and other
services delivered through home computers. In addition, several banks
including Citibank, N.A. ("Citibank") and The Huntington National Bank
("Huntington Bank") have developed home banking products for their own
customers and, in the future, may offer these services to other banks. Most of
the Company's primary current and potential competitors in the market for its
products have substantially greater financial, marketing and technical
resources than the Company. The Company believes that potential new
competitors, including large multimedia and information systems companies, are
increasing their focus on interactive transaction processing. Increased
competition in the market for the Company's products and services could
materially and adversely affect the Company's results of operations through
price reductions and loss of market share. Additionally, the Company's
customers, including its strategic partners, face competition from other
resellers of interactive applications. For example, MasterCard International,
Inc. ("MasterCard") offers Masterbanking home banking to compete with Visa
Interactive. The Company's success will depend in part upon the ability of its
strategic partners and customers to successfully compete in the retail
interactive applications marketplace. There can be no assurance that the
Company or the Company's strategic partners will be able to continue to
compete successfully against their existing competitors or that they will be
able to compete successfully against new competitors. See "Business--Home
Banking--Competition" and "--Telecommunications/Network Services--
Competition."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; PROTECTION OF PROPRIETARY RIGHTS
US Order's success is heavily dependent upon its proprietary technology.
Having sold its sole patent to Visa, US Order holds no patents, and existing
copyright and trade secret laws afford only limited practical protection for
US Order's software. US Order sold a significant portion of its proprietary
technology to Visa, and Visa licensed back certain proprietary technology to
US Order. While this license agreement gives US Order a worldwide, royalty-
free license (exclusive in some cases and non-exclusive in others) to use the
transaction processing software owned by Visa, this license does contain
certain restrictions on the usage of the licensed technology, including
certain restrictions on US Order's sublicensing of such technology for banking
applications or financial services. No assurances can be given as to whether
any of such restrictions in the licensing agreement from Visa to US Order will
adversely affect the operations or business of US Order in the future or the
ability of the Company to enter into future strategic alliances.
The Company regards certain of its interactive applications technologies as
proprietary and attempts to protect such technologies and associated smart
telephones and transaction processing software. The Company depends in part
upon its proprietary technology and know-how to differentiate its products and
services from those of its competitors. The Company relies on a combination of
contractual rights and trade secret laws to protect its proprietary
technology, and presently expects to seek patent protection for certain other
proprietary technologies. There can be no assurance that the Company will be
able to protect its technology or that third parties will not be able to
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. Therefore, existing and potential
competitors may be able to develop products that are competitive with the
Company's products, and such competition could adversely affect the Company.
See "Business--Patents, Proprietary Rights and Licenses."
In addition, the laws of some foreign countries do not protect US Order's
proprietary rights to the same extent as do the laws of the United States and
Canada. Accordingly, US Order relies primarily on trade secret protection and
confidentiality and proprietary information agreements to protect its
intellectual property. The loss of any material trade secret, trademark, trade
name or copyright could have a material adverse effect on US Order. There can
be no assurance that the Company's efforts to protect its intellectual
property rights will be successful. Despite US Order's precautions, it may be
possible for unauthorized third parties to copy certain portions of US Order's
products and services or to obtain and use information that the Company
regards as proprietary.
10
<PAGE>
From time to time, the Company receives communications from third parties
asserting that certain features or content of the Company's products infringe
upon the intellectual property rights held by such third parties. Although the
Company does not believe that its products and services infringe on the rights
of third parties, there can be no assurance that third parties will not assert
infringement claims against US Order in the future or that any such assertion
will not result in costly litigation or require the Company to cease using, or
obtain a license to use, intellectual property rights of such parties. In
addition, there can be no assurance that such licenses will be available to
the Company on reasonable terms. See "Business--Patents, Proprietary Rights
and Licenses" and "--Legal Proceedings."
TECHNOLOGICAL CONSIDERATIONS
The Company's business activities are concentrated in fields characterized
by rapid and significant technological advances. There can be no assurance
that the Company will remain competitive technologically or that the Company's
products, processes or services will continue to be reflective of such
advances. Failure to introduce new products or product enhancements that
achieve market acceptance on a timely basis could materially and adversely
affect the Company's business, operating results and financial condition. Many
of the Company's competitors and potential competitors have substantial
experience and expertise in producing and selling interactive products and
services and have significantly greater financial, technological, marketing
and research and development resources than the Company. See "Business--
Product Development," "--Home Banking--Competition," "--
Telecommunications/Network Services--Competition," and "--Patents, Proprietary
Rights and Licenses."
MANAGEMENT OF GROWTH
Certain of the Company's key employees have not had experience in managing
companies larger than the Company. The Company's ability to manage growth
successfully will require the Company to continue to improve its operational,
management and financial systems and controls. If the Company's management is
unable to manage growth effectively, the Company's business, results of
operations and financial condition could be materially and adversely affected.
See "Management."
DEPENDENCE ON KEY EMPLOYEES
The Company is highly dependent on certain key executive officers and
technical employees, the loss of any of whom could have an adverse impact on
the future operations of the Company. Given the Company's stage of
development, the Company is dependent on its ability to recruit, retain and
motivate high quality personnel. Competition for such personnel is intense,
and the inability to attract and retain additional qualified employees or the
loss of current key employees could materially and adversely affect the
Company's business, operating results and financial condition. While the
Company maintains proprietary non-disclosure agreements with all of its key
employees, it has an employment agreement with only its President and Chief
Operating Officer, John C. Backus, Jr. Additionally, the Company does not
maintain "key man" insurance policies on any of its employees nor does the
Company intend to secure such insurance. See "Management" and "Business--
Employees."
DEPENDENCE ON FOREIGN PRODUCTION
The Company's telephone devices are manufactured or are contemplated to be
manufactured by manufacturers with facilities in Hong Kong, Taiwan and the
People's Republic of China. The availability or cost of these smart telephones
may be adversely affected by political, economic or labor conditions in Hong
Kong, including the 1997 return of Hong Kong to China, and by fluctuations in
currency exchange rates. In addition, a change in the tariff structure or
other trade policies of the United States or countries from which the Company
imports products could adversely affect the Company's foreign manufacturing
strategies. See "Business--Manufacturing."
FLUCTUATIONS IN OPERATING RESULTS
The Company may experience fluctuations in quarterly operating results due
to the size and timing of customer orders or the royalty payments from Visa
Interactive, changes in the Company's pricing
11
<PAGE>
policies or those of its competitors, new product introductions or
enhancements by competitors, delays in the introduction of new products or
product enhancements by US Order or by its competitors, customer order
deferrals in anticipation of upgrades and new products, market acceptance of
new products, the timing and nature of sales and marketing expenses, research
and development expenses, other changes in operating expenses, personnel
changes and general economic conditions. Fluctuations in operating results
could result in volatility in the price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in net tangible book value per share of the Common
Stock from the initial public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE
Upon completion of the Offering, the Company will have outstanding
14,406,096 shares of Common Stock. Of this amount, the 3,850,000 Shares sold
in this Offering and 30,771 shares held by nonaffiliates of the Company will
be freely transferable and may be resold without further registration under
the Securities Act. The holders of the remaining 10,525,325 shares will be
entitled to resell them only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
an exemption provided by Rule 144. Substantially all of the remaining
10,525,325 shares are held by stockholders with the right to require the
Company to register these shares and the Company has agreed to register
certain other shares under a "shelf registration" pursuant to Rule 415 under
the Act. Additionally, as of April 30, 1995, the Company had outstanding
471,429 Warrants (446,429 of which were held by WorldCorp) at a weighted
average exercise price of $4.00 and options to purchase 2,638,889 shares of
Common Stock at a weighted average price of $5.03, of which options for
1,043,998 shares of Common Stock were exercisable as of April 30, 1995 at a
weighted average exercise price of $2.05. Shares issued upon the exercise of
such Warrants are also subject to registration rights. No prediction can be
made as to the effect that resales of shares of Common Stock, or the
availability of shares of Common Stock for resales, will have on the market
price of the Common Stock. The Company has agreed not to issue, and all
directors and executive officers of the Company have agreed not to resell, or
otherwise dispose of, any shares of Common Stock or other equity securities of
the Company for 180 days after the date of this Prospectus without the prior
written consent of the representatives of the Underwriters. Additionally, the
Selling Stockholder has agreed not to resell, or otherwise dispose of, any
shares of Common Stock or other equity securities of the Company for 270 days
after the date of this Prospectus without the prior written consent of the
representatives of the Underwriters. See "Shares Eligible for Future Sale" and
"Underwriting." Sales of substantial amounts of Common Stock in the public
market or the prospect of such sales after this Offering could adversely
affect the market price for the Company's Common Stock. See "Shares Eligible
for Future Sale," "Description of Capital Stock" and "Underwriting."
In addition, on April 6, 1995, in accordance with the Company's strategic
alliance agreement with Colonial Data, the Company and Colonial Data entered
into an agreement whereby the Company has agreed to exchange 230,000 shares of
Common Stock for shares of common stock of Colonial Data with an equivalent
fair market value. Such exchange will be consummated upon the closing of the
Offering. The agreement also provides for the Company and Colonial Data to
exchange an additional $3.0 million in fair market value of each other's
common stock in April 1996. Such shares of Common Stock to be issued to
Colonial Data are subject to registration rights obligating the Company to
effect registration of such shares. Colonial Data will be entitled to resell
such shares only pursuant to a registration statement under the Securities Act
or an applicable exemption from registration thereunder such as an exemption
provided by Rule 144. See "Business--Telecommunications/Network Services--US
Order's Telecommunications Strategy."
12
<PAGE>
ABSENCE OF PRIOR MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY OF STOCK
PRICE
Prior to this Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on The Nasdaq
National Market, there can be no assurance that an active or liquid trading
market in the Common Stock will develop upon completion of this Offering, or
if developed, that it will continue. The initial public offering price of the
Common Stock will be determined through negotiations between the Company, the
Selling Stockholder and the representatives of the Underwriters and may not be
indicative of the market price for the Common Stock after this Offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
high technology and developmental stage companies and that has often been
unrelated to the operating performance of such companies. Factors such as
announcements of the introduction of new products or services by the Company
or its competitors, announcements of joint development efforts or corporate
partnerships in the interactive applications industry, market conditions in
the banking, telecommunications and other emerging growth company sectors and
rumors relating to the Company or its competitors may have a significant
impact on the market price of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF DELAWARE LAW, CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of Delaware law, the Company's Certificate of
Incorporation and Bylaws and certain other contractual provisions could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Under the Company's agreement with Visa, the Company may not sell equity
interests in the Company or a portion of its assets to major competitors of
Visa, currently including MasterCard, Discover Card, American Express, Japan
Credit Bureau and EuroPay Card, until at least December 31, 2000. In addition,
as long as WorldCorp owns more than 50% of the Common Stock, WorldCorp has
exclusive control over any sale of the Company and can make additional changes
to the Company's Certificate of Incorporation and Bylaws to make it more
difficult for a third party to acquire control of the Company. Such provisions
and control considerations could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders. The issuance of Preferred Stock could decrease the amount
of earnings and assets available for distribution to the holders of Common
Stock or could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock. In certain circumstances, such
issuance could have the affect of decreasing the market price of the Common
Stock. See "--Control by WorldCorp; Potential Conflicts of Interest" and
"Description of Capital Stock--Preferred Stock" and "--Delaware Law and
Certain Charter and Bylaw Provisions."
RESTRICTIONS ON PAYMENT OF DIVIDENDS
WorldCorp, which will own approximately 65% of the Common Stock upon
completion of the Offering, is subject to two indentures expiring in 1997 and
2004, respectively, under which it is obligated to cause US Order not to pay
dividends under certain limited circumstances. As of March 31, 1995, WorldCorp
is obligated under the indenture terminating in 1997 to cause US Order not to
pay dividends on its Common Stock. See "Dividend Policy."
GOVERNMENT REGULATION
The two markets the Company has targeted for its products and services--
banking and telecommunications--are subject to restrictive state and federal
regulations. Future regulations in any of these industries could have a
material adverse effect on the Company. See "Business--Government Regulation."
13
<PAGE>
THE COMPANY
US Order was founded in 1990 by William F. Gorog, Chairman of the Board and
Chief Executive Officer of the Company, and his sons Jonathan M. Gorog and
Peter M. Gorog. Mr. William Gorog has successfully identified and
commercialized transaction and information processing technologies during his
career. Mr. Gorog's first company, DataCorp., developed the Lexis and Nexis
information service, and was subsequently sold by him to the Mead Corporation
in 1969. Mr. Gorog also assisted VeriFone, Inc. ("VeriFone"), a leading
provider of point-of-sale transaction systems, during its development stage.
Mr. Gorog formed a company that served as VeriFone's east coast distributor,
which he subsequently sold to VeriFone. He also served on VeriFone's Board of
Directors from 1981 through 1993. Mr. Gorog formed US Order to develop
products and services that would appeal to a broad market by utilizing a
familiar and simple telephone as a platform. In 1990, Jonathan Gorog patented
an automated order and payment system and assigned it to the Company. Based on
this patent, the Company developed its prototype ScanFone. WorldCorp, which at
the time was actively seeking to diversify its holdings, made its initial
investment in US Order in September 1990. Mr. William Gorog has served as a
director of WorldCorp since 1989. Through a series of additional equity
investments and the conversion of certain loans made to US Order, WorldCorp
increased its beneficial ownership of the Company to 89% as of March 31, 1995.
Today, WorldCorp owns majority positions in two companies: US Order and World
Airways.
US Order, Inc. was incorporated in Delaware in 1990. The Company's principal
executive offices are located at 13873 Park Center Road, Suite 353, Herndon,
Virginia 22071 and its telephone number is (703) 834-9480.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be $38.0 million (approximately $41.6
million if the Underwriters exercise their overallotment option in full) after
deducting underwriters' discounts and commissions and offering expenses
payable by the Company. Approximately $12.3 million of the net proceeds of the
Offering will be used to (i) pay approximately $2.7 million in accumulated
dividends on the Company's Series A Convertible Preferred Stock (the "Series A
Preferred Stock") and Series C Convertible Preferred Stock (the "Series C
Preferred Stock") in connection with the mandatory conversion of all
outstanding shares of Series A Preferred Stock and Series C Preferred Stock
into Common Stock, (ii) redeem all outstanding shares of the Company's Series
B Redeemable Preferred Stock (the "Series B Preferred Stock" and together with
the Series A Preferred Stock and the Series C Preferred Stock, the "Former
Preferred Stock") for $4.3 million and pay approximately $0.6 million in
accumulated dividends, (iii) retire a $3.5 million 14% note held by the
Selling Stockholder due upon a public sale of the Company's equity securities
and (iv) retire a $1.2 million 7.5% unsecured note (the "7.5% Note") held by a
principal supplier due on the earlier of 1998 or upon the public sale of the
Company's equity securities. The 7.5% Note was issued in August 1994 pursuant
to the Company's repurchase of the holder's shares of Series C Preferred
Stock. Of these $12.3 million of estimated net proceeds, approximately $10.2
million will be used to repay indebtedness and to redeem certain equity
securities held by the Selling Stockholder. The Company will use the remaining
$25.7 million of net proceeds for general corporate purposes, including
investment in product development, working capital, the financing of operating
losses, capital expenditures and possible international expansion through the
Visa Interactive alliance. The Company may also use proceeds for acquisitions
which further the Company's strategy, although the Company is not engaged in
negotiations concerning any acquisitions at this time. The Company expects the
proceeds to be sufficient to satisfy its cash requirements for the foreseeable
future.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholder.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
decision concerning the payment of dividends on the Common Stock will depend
upon the results of operations, financial condition and capital expenditure
plans of the Company, as well as such other factors as the Board of Directors,
in its sole discretion, may consider relevant. Additionally, WorldCorp, which
will own approximately 65% of the Common Stock upon completion of the
Offering, is subject to the provisions of two indentures expiring in 1997 and
2004, respectively, under which it is obligated to cause US Order not to pay
dividends under certain limited circumstances. Under the indenture terminating
in 2004, WorldCorp has agreed to cause US Order not to pay dividends if at the
time WorldCorp is in default under such indenture. Under the indenture
terminating in 1997, WorldCorp has agreed to cause US Order not to pay
dividends unless WorldCorp has a positive adjusted net worth (as defined
therein). As of March 31, 1995, there is not an event of default by WorldCorp
under the indenture terminating in 2004, but WorldCorp's adjusted net worth is
negative and under the indenture terminating in 1997 WorldCorp is therefore
obligated to cause US Order not to pay dividends. See "Risk Factors--Control
by WorldCorp; Potential Conflicts of Interest."
15
<PAGE>
DILUTION
At March 31, 1995, the Company had a deficit net tangible book value of
$(7,812,899) or $(1.50) per share. After giving effect to this Offering and
the use of proceeds therefrom at the offering price of $14.75 per share, and
after deducting estimated offering expenses and underwriting discounts, the
pro forma net tangible book value of the Company as of March 31, 1995 would
have been approximately $27.8 million or $1.94 per share of Common Stock. This
represents an immediate dilution to new investors purchasing shares in this
Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $14.75
Net tangible book value per share as of March 31, 1995.... $(1.50)
Increase in net tangible book value per share attributable
to the conversion of preferred stock..................... .82
Increase in net tangible book value per share attributable
to this Offering and use of proceeds therefrom........... 2.62
------
Pro forma net tangible book value per share after this
Offering................................................. 1.94
------
Dilution per share to new investors....................... $12.81
======
</TABLE>
The following table summarizes as of March 31, 1995, after giving effect to
this Offering, the number of shares of Common Stock purchased from the
Company, the total consideration paid therefor (using the public offering
price of $14.75 per share for the new investors) and the average price per
share paid by the existing stockholders and by the new investors purchasing
shares of Common Stock in this Offering before deduction of the estimated
underwriting discounts and commissions and offering expenses payable by the
Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 11,549,846 80% $13,725,905 25% $ 1.19
New investors.................. 2,800,000 20% 41,300,000 75% 14.75
---------- ---- ----------- ---- ------
Total........................ 14,349,846 100% $55,025,905 100% $ 3.83
========== ==== =========== ==== ======
</TABLE>
The above computations assume (i) no exercise of the Underwriters' over-
allotment option, (ii) no exercise of outstanding warrants and (iii) no
exercise of outstanding options. The Company issued to WorldCorp warrants to
purchase a total of 271,429 shares of Common Stock in May 1, 1993 in
connection with the consummation of the WorldCorp 14% loan and has issued
warrants to purchase an additional 200,000 shares of Common Stock pursuant to
the terms of such loan (collectively, the "Warrants"). These Warrants are
immediately exercisable at a price per share of $4.00. To the extent all of
such Warrants are exercised, there would be dilution of $12.75 per share to
new investors. Additionally, at March 31, 1995, the Company had options
outstanding to purchase 2,599,394 shares of Common Stock at a weighted average
exercise price of $4.95 per share. At March 31, 1995, options to purchase
1,016,858 shares of Common Stock at a weighted average exercise price of $1.97
per share were exercisable. To the extent all outstanding options are
exercised, there would be dilution of $12.31 per share to new investors.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1995, and as adjusted to give effect to the sale of the 2,800,000 shares
of Common Stock offered hereby by the Company at the public offering price of
$14.75 per share and the conversion or redemption of all outstanding shares of
Former Preferred Stock, after deducting estimated offering expenses and
underwriting discounts, and the application of a portion of the net proceeds
therefrom. See "Use of Proceeds." This information should be read in
conjunction with the Company's Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Notes payable to affiliates..................... $ 4,653,806 $ --
Series B redeemable, nonvoting preferred stock;
$.001 par value; 10,000 shares authorized,
4,300 shares issued and outstanding; none
authorized and none issued and outstanding as
adjusted....................................... 4,863,730 --
Stockholders' equity (deficit):
Preferred stock, $.001 par value; none
authorized, none issued and outstanding;
5,000,000 shares authorized and none issued
and outstanding as adjusted.................. -- --
Series A convertible preferred stock, $0.001
par value; 6,000,000 shares authorized,
5,204,082 shares issued and outstanding; none
authorized and none issued and outstanding as
adjusted..................................... 5,204 --
Series C convertible preferred stock, $0.001
par value; 5,000,000 shares authorized,
1,147,725 shares issued and outstanding; none
authorized and none issued and outstanding as
adjusted..................................... 1,148 --
Common stock, $0.001 par value; 30,000,000
shares authorized, 5,198,039 shares issued
and outstanding; 30,000,000 shares authorized
and 14,349,846 shares issued and outstanding
as adjusted(1)............................... 5,198 14,350
Additional paid-in capital.................... 12,969,727 48,564,669
Deferred compensation......................... (459,684) (459,684)
Receivable from sale of stock(2).............. (2,500,000) (2,500,000)
Accumulated deficit........................... (17,834,492) (17,834,492)
------------ ------------
Total stockholders' equity (deficit).......... (7,812,899) 27,784,843
------------ ------------
Total capitalization........................ $ 1,704,637 $ 27,784,843
============ ============
</TABLE>
- --------
(1) The number of outstanding shares does not include 230,000 shares of Common
Stock that the Company has agreed to issue to Colonial Data in a stock
exchange upon consummation of the Offering in accordance with the
Company's strategic alliance with Colonial Data. See "Management--Stock
Options," "Principal and Selling Stockholders" and "Business--
Telecommunications/Network Services--US Order's Telecommunications
Strategy."
(2) Reflects $2.5 million credit toward future advertising services received
by the Company in connection with the sale of Series C Preferred Stock in
December 1993. Such advertising credit is subject to certain restrictions
regarding its use.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company for, and as of the end
of the seven-month period from inception through December 31, 1990 and each of
the years in the four-year period ended December 31, 1994, are derived from
the Company's audited financial statements. The following selected financial
data as of March 31, 1995, and for the three month periods ended March 31,
1994 and 1995 are derived from the Company's unaudited financial statements.
In the opinion of management of the Company, such unaudited financial
statements include all adjustments necessary for a fair presentation of the
financial position and the results of operations as of and for such periods.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements and the Notes thereto appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD FROM
INCEPTION THREE MONTHS
THROUGH YEARS ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ----------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------------ ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue......... $ -- $ 1 $ 63 $ 905 $ 1,432 $ 317 $ 744
Total cost of revenue. -- 23 126 908 1,013 222 477
----- ------- ------- -------- ------- ------- -------
Gross margin.......... -- (22) (63) (3) 419 95 267
Total operating
expenses............. 314 1,844 6,492 (1) 10,540 (1) 10,584 (2) 2,305 1,498
----- ------- ------- -------- ------- ------- -------
Operating loss........ (314) (1,866) (6,555) (10,543) (10,165) (2,210) (1,231)
Gain on sale of bill
pay operations....... -- -- -- -- 14,523 (3) -- --
Total other income
(expense)............ 19 13 (251) (682) (575) (152) (138)
----- ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes......... (295) (1,853) (6,806) (11,225) 3,783 (2,362) (1,369)
Income tax expense.... -- -- -- -- 70 -- --
----- ------- ------- -------- ------- ------- -------
Net income (loss)..... $(295) $(1,853) $(6,806) $(11,225) $ 3,713 $(2,362) $(1,369)
===== ======= ======= ======== ======= ======= =======
Weighted average
common stock and
common equivalent
shares outstanding... 5,021 6,090 6,090 6,090 8,243 6,090 6,090
===== ======= ======= ======== ======= ======= =======
Net income (loss) per
common share......... $(.06) $ (.30) $ (1.18) $ (2.01) $ .28 (4) $ (.47) $ (.29)
===== ======= ======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- MARCH 31,
1990 1991 1992 1993 1994 1995
---- ------ ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............... $785 $ (198) $(1,789) $ 1,799 $ 1,628 $ 161
Net property and
equipment............... 2 988 2,772 2,876 1,207 1,477
Total assets............. 814 1,342 4,681 7,694 4,826 3,792
Notes payable to
affiliates.............. -- -- -- 3,500 4,633 4,654
Redeemable preferred
stock................... -- -- 4,570 7,567 4,783 4,864
Accumulated deficit...... (295) (2,148) (8,954) (20,178) (16,465) (17,834)
Total stockholders'
equity (deficit)........ 786 393 (3,633) (5,849) (6,465) (7,813)
</TABLE>
- --------
(1) Operating expenses in 1992 and 1993 include write-downs of terminals and
terminal components of approximately $430,000 and $1.5 million,
respectively.
(2) Operating expenses in 1994 include a $3.25 million payment to certain
employees to cancel certain outstanding vested options in connection with
the sale of the US Order bill pay operations to Visa. Visa required that
all US Order employees who became employees of Visa Interactive cancel
their outstanding vested options to eliminate any potential conflicts of
interest. As a result, US Order's shareholders and Board of Directors
agreed to pay all active and full-time US Order employees (excluding
William F. Gorog) an aggregate of $3.25 million for the cancellation of
675,334 of their outstanding and vested options with exercise prices
ranging between $0.98 and $4.00 per share. Of the $3.25 million,
approximately $2.1 million was paid to US Order employees who became Visa
Interactive employees as of August 1, 1994. See "Management--Executive
Compensation."
(3) The Company sold its bill pay operations to Visa in connection with the
Company's entry into a strategic alliance with Visa. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business--Home Banking--US Order's Home Banking Strategy."
(4) Excluding the effect of the gain on the sale of the Company's bill pay
operation to Visa, net income (loss) per common share in 1994 would
decrease by $2.37 per share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized in 1990 to provide interactive applications
(including home banking and home shopping) primarily to individual customers
on a smart telephone.
On August 1, 1994, the Company sold its electronic banking and bill pay
operations to Visa for approximately $15,000,000, the assumption of certain
liabilities and the right to receive certain royalties during a 72-month
period. The Company recognized a one-time non-operating gain of $14,523,217
from the sale. In addition, Visa designated the Company as a "preferred
provider" through the Royalty Period and as such will make its member banks
aware that the Company can provide certain of its interactive applications,
customer support services and smart telephones to Visa member banks, with Visa
acting as a direct marketer and reseller. Prior to December 31, 1994, US
Order's primary source of revenue was from the monthly service fees which the
Company charges its customers for the use of its smart telephones and
interactive applications. As a result of the Visa transaction, US Order is in
the process of converting these customers over to Visa member banks and by the
end of 1995 expects to be offering its services strictly on a wholesale basis
to Visa and other strategic partners. As each customer is converted to a Visa
member bank, US Order will no longer collect monthly fee revenue from these
customers. In January 1995, the Company entered into a strategic alliance with
a leading manufacturer of Caller ID units, Colonial Data, to jointly develop
and distribute the Company's next generation of smart telephones to the
telecommunications industry.
To date, the Company has generated limited revenue. As a result of its new
strategic relationships in the home banking and telecommunications industries,
the Company no longer offers its services directly to the end user but,
instead, markets its products and services on a wholesale basis. This shift in
strategy will reduce the Company's overall cost structure, in particular its
expenditures for advertising and promotion, while improving its distribution
channels. Due to this change in the Company's strategy, the Company expects
that its sources of revenues in 1995 and the future, and the costs it incurs
to generate such revenues, will differ from its results prior to 1995.
As a result of the strategic change in the Company's business focus, the
Company anticipates that in the future it will generate revenue by selling its
products such as smart telephones and voice response systems as well as by
generating monthly fees for providing ongoing services, including interactive
applications and customer support services. In addition, commencing January 1,
1995, through December 31, 2000, the Company will have the right to receive on
a quarterly basis from Visa $0.66 per month per active retail bill pay
customer that uses the Visa Bill-Pay System, subject to certain limitations
including the Visa Offset. The Visa Offset, initially set at $73,315 per
quarter, accumulates quarterly up to an aggregate of $879,780. See "Risk
Factors--Reliance on Visa Royalty Payments." US Order does not expect to
receive any Visa royalty payments, after application of the Visa Offset, in
1995. The Company's strategy is to sell its smart telephones and voice
response systems pursuant to a market penetration pricing strategy designed to
build an installed base of subscribers who are potential sources of monthly
fee revenue. As a result, the Company would expect that its gross margin
percentages will be higher in periods when monthly fee revenue is relatively
larger than revenue from smart telephone and system sales.
Results of operations for 1992, 1993 and 1994 reflect the Company's prior
retail strategy. Results of operations for the quarter ended March 31, 1995
reflect the Company's current wholesale strategy.
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
Revenue
Total revenue for the first quarter in 1995 was $744,692 compared to
$317,143 in the first quarter of 1994. The increase of $427,549 is primarily
attributable to the sale of the Company's new products and services, such as
its voice response systems, smart telephones and customer support services,
through the Company's "preferred provider" relationship with Visa. The Company
sold voice response
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<PAGE>
systems to Visa Interactive and one Visa member bank, generating $209,007 in
revenue during the first quarter of 1995. In addition to the "preferred
provider" relationship, on December 20, 1994, the Company entered into a
formal reseller agreement with Visa Interactive, permitting the Company to
offer its products and services to Visa Interactive with Visa Interactive
reselling the Company's products and services directly to Visa member banks.
During the first quarter of 1995, the majority of the $458,641 in service fee
revenue was generated from two sources: (1) customer support services and (2)
monthly service fees. The Company generated $106,300 in customer support
services which were remarketed by Visa Interactive to Visa member banks under
the above-mentioned reseller agreement. The Company also generated $267,271 in
monthly service fees from its customers for the use of its smart telephones
and interactive applications during the first quarter of 1995, compared to
$299,925 during the same period in 1994. The decrease of $32,654 is primarily
due to the fact that the Company is in the process of converting these
customers over to Visa member banks and expects to be offering these services,
primarily on a wholesale basis, by the end of 1995.
Cost of Revenue
The Company's cost of revenue increased by $255,517 during the first quarter
of 1995 compared to the same period in 1994, due to the sale of its voice
response systems and smart telephones. The Company's cost of revenue
historically has consisted of bill pay processing costs and depreciation of
the Company's smart telephones being utilized by customers for a monthly fee
under the Company's prior retail strategy. During 1995, the Company began
selling its voice response systems and smart telephones and, accordingly,
recognizes the cost of these products as cost of revenue. As a result of these
changes, the Company's gross margin improved from 30% to 36% when comparing
the first quarters of 1994 and 1995, respectively.
Research and Development
The Company has been actively engaged in research and development since its
inception and expects that these activities will be essential to the
operations of the Company in the future. Research and development costs were
$308,899 for the three months ended March 31, 1995 compared to $230,572 during
the same period in 1994. The increase of $78,327 was primarily due to the
costs associated with developing, designing and testing the prototype for the
Company's fourth generation smart telephone, the Falcon, during 1995. The
Company anticipates that the Falcon will be available for sale at the end of
1995.
Advertising and Promotion
Advertising expenses have been significant prior to 1995 due to the
Company's efforts to market its smart telephones and interactive applications
directly to the end user. Advertising and promotion expenditures decreased by
$513,411, from $518,120 in the first quarter of 1994 to $4,709 in the first
quarter of 1995. The Company ceased advertising to end users after the sale of
the Company's electronic bill pay system to Visa in August 1994, as it began
to offer its services and products on a wholesale basis. The Company does not
expect advertising expenses to be significant in 1995.
General and Administrative
General and administrative expenses were $1,184,486 for the first quarter of
1995 compared to $1,556,313 for the first quarter of 1994. The decrease of
$371,827 was due primarily to reduced costs associated with approximately 60%
of the Company's personnel becoming Visa Interactive employees effective
August 1, 1994. Aggregate general and administrative expenses are expected to
increase as the Company grows. The amount of any increase will depend on the
products and services offered by the Company and its alliances with strategic
partners.
Interest Expense
The Company's interest expense consists of interest incurred in connection
with capital leases for computer equipment and outstanding borrowings with
WorldCorp and VeriFone. Interest expense was $154,666 for the three months
ended March 31, 1995 compared to $169,001 for the same period in
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<PAGE>
1994. The decrease was primarily due to the August 1994 sale of the Company's
electronic banking and bill pay operations to Visa, whereby Visa assumed
$853,370 of the Company's capital lease obligations and miscellaneous
liabilities. This decrease was partially offset by additional interest expense
incurred on a $1,098,000 7.5% unsecured promissory note which was issued by
the Company to VeriFone in August 1994.
YEARS ENDED DECEMBER 31, 1993 AND 1994
Revenue
Total revenue for 1994 was $1,431,841 compared to $904,510 in 1993. The
increase is attributable to the increased deployment of smart telephones
during the year. At the end of 1994, the Company had approximately 9,000
ScanFones in use. The $527,331 increase in service fees from 1993 to 1994 was
primarily attributable to several marketing campaigns throughout the first
half of 1994 and greater customer retention. In addition, on December 20,
1994, the Company entered into a formal reseller agreement with Visa
Interactive, permitting the Company to offer its products and services to Visa
Interactive with Visa Interactive reselling the Company's products and
services directly to Visa member banks. This arrangement generated a small
amount of revenue in 1994. The Company no longer manufactures or distributes
ScanFones but intends to support their use through 1995.
Cost of Revenue
The Company's cost of revenue through December 31, 1994 primarily represents
bill pay processing costs and depreciation of the Company's telephones
deployed in the field. Cost of revenue increased from $907,927 in 1993 to
$1,012,601 in 1994 primarily due to the increase in service fees generated
from smart telephones. The increase in 1994 was partially offset by a decrease
in depreciation expense of its smart telephones due to a write-down in the
carrying value of the smart telephones in 1993. As a result of the decrease in
depreciation of the smart telephones, gross margin improved from a break-even
in 1993 to 29% in 1994.
Research and Development
Research and development costs were $1,769,029 in 1994 compared to $963,694
in 1993. The increase of $805,335 in 1994 from 1993 was primarily due to the
Company's increased activities associated with simultaneously developing its
third and fourth generation smart telephones and transaction processing
software. The Company's third generation smart telephone, the PhonePlus, is
anticipated to be available for sale in the second quarter of 1995 while its
fourth generation smart telephone, the Falcon, is anticipated to be available
for sale at the end of 1995.
Advertising and Promotion
Advertising and promotion expenditures were $847,334 in 1994 compared to
$1,569,282 in 1993. Advertising expenses decreased by $721,948 from 1993 to
1994 due to the Company's strategic shift from offering its products and
services on a retail basis to a wholesale basis after the August 1994 Visa
transaction. Accordingly, advertising expenses for the six months ending June
30, 1994 were $746,473 whereas expenses for the six months ending December 31,
1994, decreased to $100,861.
General and Administrative
General and administrative expenses were $7,968,046 in 1994 compared to
$6,470,474 in 1993. The increase of $1,497,572 from 1993 to 1994 was due to
compensation expense incurred in connection with the Visa transaction. The
Company paid $3,250,000 to certain employees on August 1, 1994 (including
approximately $2,100,000 paid to employees transferred to Visa) in exchange
for the cancellation of 675,334 outstanding vested options. This increase was
partially offset by reduced costs associated with approximately 60% of the
Company's personnel becoming Visa Interactive employees effective August 1,
1994.
21
<PAGE>
Gain on Sale of Bill Pay Operations
In August 1994, the Company sold its electronic banking and bill pay
operations to Visa and recognized a one-time non-operating gain of $14,523,217
from the sale. The transaction was structured as an asset sale with the
Company retaining ownership of certain specific assets that were not related
to home banking. Visa granted the Company a perpetual, royalty-free, worldwide
license to use intellectual property which it purchased with the provision
that the Company not compete with Visa through 2000. Similarly, the Company
granted to Visa a perpetual, royalty-free, worldwide license to use
intellectual property retained by the Company necessary for the operation of
the Visa Bill-Pay System.
Write-Down of Terminals and Terminal Components
The write-down of terminals and terminal component expense (smart
telephones) was $0 in 1994 as compared to $1,535,833 in 1993. The expense
recognized in 1993 related to the Company recording a provision to reduce the
carrying values of its first and second-generation smart telephones to their
estimated net realizable value. The Company expects that substantially all of
the first and second generation smart telephones being used by its current
customers will be returned to the Company during 1995 as the Company transfers
these customers to Visa member banks. The Company does not anticipate future
write-downs of its first and second generation smart telephones since the
Company has sold, and expects to continue to sell, these remaining terminals
to a third party, at amounts which approximate the current carrying values.
Additionally, the Company plans to sell its third and fourth generation smart
telephones directly to banks, leasing companies and local telephone exchange
carriers and long distance telephone companies under wholesale arrangements.
Interest Expense
The Company's interest expense comprises interest incurred in connection
with product financing arrangements with VeriFone, capital leases for computer
equipment, and outstanding borrowings with WorldCorp and VeriFone. Interest
expense was $649,653 in 1994 compared to $736,452 in 1993. Interest expense
decreased in 1994 from 1993 by $86,799 primarily due to the following: (i) in
December 1993 the Company converted approximately $1,704,373 in VeriFone
product financing arrangements and $1,612,360 in trade accounts payable into
Series C Preferred Stock, and (ii) as a result of the August 1994 Visa
transaction, Visa assumed $853,370 of the Company's capital lease obligations
and miscellaneous liabilities. These decreases were partially offset by
additional interest expense incurred on a $1,098,000 7.5% unsecured promissory
note which was issued by the Company to VeriFone in August 1994.
Income Taxes
Income taxes increased from $0 in 1993 to $70,000 in 1994 based primarily on
federal alternative minimum taxes and state income taxes incurred on the
Company's 1994 income before taxes of $3,782,801. At December 31, 1994, the
Company had net operating loss carryforwards for federal income tax purposes
of approximately $12,125,000 which expire by 2008. Use of these net operating
losses in future years may be limited as a result of the change in control
which is expected to occur for tax purposes upon completion of this Offering.
YEARS ENDED DECEMBER 31, 1992 AND 1993
Revenue
Total revenue for 1993 was $904,510 compared to $62,536 in 1992. This
increase is attributable to the increased deployment of ScanFones during the
year due to a 1992 fourth quarter marketing campaign in Detroit and a 1993
first quarter marketing campaign in Washington, D.C.
Cost of Revenue
The Company's cost of revenue primarily represents bill pay processing costs
and depreciation of the smart telephones deployed in the field. Cost of
revenue increased from $125,904 in 1992 to
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<PAGE>
$907,927 in 1993 primarily due to the corresponding increase in service fees
generated from smart telephones. Gross margin improved from (101%) in 1992 to
0% in 1993 primarily due to the insignificant amount of revenue in 1992.
Research and Development
Research and development costs were $963,694 in 1993 compared to $684,795 in
1992. The increase of $278,899 in 1993 from 1992 was attributable to the
Company's development of its third generation smart telephone, the PhonePlus,
as well as the development of the transaction processing system it sold to
Visa.
Advertising and Promotion
Advertising expenses have been significant in the past due to the Company's
efforts to market new products directly to the end user. Advertising and
promotion expenditures were $1,569,282 in 1993 compared to $1,317,697 in 1992.
This increase is primarily due to the addition of personnel and resources to
support the Company's efforts to enter new markets, coupled with the
advertising expenditures incurred in connection with a marketing campaign in
Washington, D.C. during the first quarter of 1993.
General and Administrative
General and administrative expenses were $6,470,474 in 1993 compared to
$4,058,441 in 1992. The increase of $2,412,033 in general and administrative
expenses from 1992 to 1993 is largely attributable to increased salary and
benefits expense resulting from the Company increasing its workforce during
the period by approximately 50%.
Write-Down of Terminals and Terminal Components
The write-down of terminals and terminal components expense (smart
telephones) was $1,535,833 in 1993 compared to $430,420 in 1992. The expense
recognized in 1993 and 1992 related to the Company recording provisions to
reduce the carrying values of its first and second generation smart telephones
to their estimated net realizable value.
Interest Expense
The Company's interest expense comprises interest incurred in connection
with product financing arrangements with VeriFone, capital leases for computer
equipment and outstanding borrowings with WorldCorp and VeriFone. Interest
expense was $736,452 in 1993 compared to $264,743 in 1992.
Interest expense increased by $471,709 from 1992 to 1993 due to interest
incurred on a $3,500,000 long-term note issued by the Company to WorldCorp
during 1993. Additionally, the Company entered into additional equipment
capital leases during 1993, thereby increasing its capital lease obligations
by approximately $315,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated operating losses since its inception. The
Company's interactive products and services are subject to the risks inherent
in the marketing and development of new products. The market for the Company's
products and services is relatively new and is characterized by rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. In
addition, the industry for these products and services is intensely
competitive. The Company experiences direct competition from manufacturers of
smart telephones and from companies that develop transaction processing
software for interactive applications and customer support services. To date,
the Company has generated limited revenue through the sale of its products and
services and there can be no assurance as to what level of future royalties,
if any, the Company will receive from Visa.
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<PAGE>
During the first quarter of 1995, operating activities used $1,220,087
compared to $2,240,281 in the first quarter of 1994. This decrease is
primarily due to reduced operating losses in 1995. During the year ended
December 31, 1994, operating activities used $10,484,382 compared to
$7,218,825 in 1993. This increase is due primarily to increased operating
losses in 1994, exclusive of the gain on the sale of electronic bill pay
operations in 1994 to Visa, non-cash write-downs of terminals and terminal
components in 1993 and an increase in accounts receivable. The increase in
accounts receivable related primarily to certain business expenses paid by the
Company on behalf of Visa Interactive following the Visa transaction. These
expenses were reimbursed at cost in January 1995. The Company does not expect
to pay costs on behalf of Visa Interactive in the future.
Investing activities used cash of $94,364 during the quarter ended March 31,
1995 compared to the use of cash of $22,311 in the first quarter of 1994. This
increase is due primarily to increases in purchases of equipment in 1995 to
support the customer services operations. Investing activities provided cash
of $15,786,454 in 1994 as compared to using cash of $1,687,417 in 1993. In
1994, the Company generated proceeds of $14,645,101 from the sale of its
electronic bill pay operations to Visa. In 1993, the Company purchased
$3,055,604 of property and equipment. In each of 1994 and 1993, the Company
generated approximately $1,400,000 from the sale of first and second
generation smart telephones.
Financing activities provided cash of $36,984 in the quarter ended March 31,
1995 and used cash of $91,216 in the first quarter of 1994. The 1995 quarter
includes the proceeds from the exercise of employee stock options. Financing
activities used $6,178,201 in 1994 and provided $12,283,971 in 1993. In 1994,
the Company used $5,968,734 of the proceeds from the sale of its bill pay
operations to redeem outstanding preferred stock. In 1993, the Company
obtained $7,051,000 of debt financing from WorldCorp and generated $6,457,273
from the sale of preferred stock. Of the approximately $15,500,000 of cash
generated from the sale of preferred stock since its inception, the Company
placed approximately $11,000,000 with WorldCorp, $3,500,000 (exclusive of a
$2,500,000 advertising credit which is subject to certain restrictions
regarding its use) with Knight-Ridder, Inc. ("Knight-Ridder") and the
remainder with other investors.
As of March 31, 1995, the Company had committed to purchase from VeriFone
1,900 PhonePlus smart telephones for a total of $437,000. The Company had no
other material commitments for capital expenditures nor does it anticipate a
significant change in the current level of its capital expenditures.
The Company's primary needs for cash in the future are investment in product
development, working capital, the financing of operating losses and capital
expenditures. In order to meet the Company's needs for cash for the next 12
months, the Company will utilize proceeds from this Offering, funds generated
from asset sales, including approximately $1,000,000 of its first and second
generation smart telephones (which the Company sells to third parties for use
as point of sale terminals), and its $2,500,000 advertising credit subject to
certain restrictions regarding its use, and revenue generated from the sale of
its products and services. The Company intends to use approximately
$12,310,037 of the net proceeds of this Offering to repay all of its
outstanding notes payable to WorldCorp and VeriFone, redeem and retire its
Series B Preferred Stock and pay $3,338,203 for all accumulated dividends on
its Former Preferred Stock.
OTHER MATTERS
In conjunction with the Company's August 1, 1994 sale of its bill pay
operations, the Company transferred to Visa all of its rights as they related
to a patent which covered various proprietary aspects of the Company's
ScanFone automated order and payment system. Although not technically pending
or threatened, the Company has received notices from three third parties
claiming potential infringement of previously issued patents to these third
parties. The Company has also received a notice of a third-party patent
infringement claim related to a product currently under development by the
Company. The Company and its patent counsel, Darby & Darby P.C., believe that
the Company has substantial defenses to any potential claims of infringement,
should that occur. However, there can be no assurance that such third parties
will not make a formal claim of infringement or that the Company would prevail
in any proceedings in relation thereto. See "Business--Legal Proceedings."
INFLATION
The Company believes that inflation has not had a material effect on the
Company's sales and revenue during the past three years.
24
<PAGE>
BUSINESS
GENERAL
The Company designs and develops products and services for two markets: home
banking and intelligent telecommunications network services. Home banking
allows consumers to pay bills, check account balances and receive other bank
information from their homes. Intelligent network services allow consumers to
send and receive text information from a smart telephone, which is a telephone
with a central processing unit, an integrated display screen and memory. In
the home banking market, the Company expects to generate revenues from (i)
royalties from Visa, (ii) sales to banks of voice response systems with
software that supports touch-tone bill payment applications, and (iii) monthly
fees for bank-branded customer service supporting electronic bill payment
customers. In the intelligent network services market, the Company expects to
generate revenues from (i) royalties from sales to customers of smart
telephones through Colonial Data and (ii) sales of interactive applications on
smart telephones such as catalog shopping and national directory assistance.
The Company currently receives revenue largely from the sale of products and
services to Visa member banks and from monthly fees paid by customers using
the Company's existing smart telephones. The Company intends to introduce
additional interactive applications on its new smart telephone, the Falcon,
which the Company expects to introduce at the end of 1995.
HOME BANKING
Changes in Banking Industry
The banking industry is facing increasing competition as a result of
deregulation and technological innovation. Banks are facing greater
competition not only from within their industry, but also from new competitors
in related industries, including broker-dealers, insurance companies and
mutual fund complexes. The Company believes that the following trends will
require financial institutions to improve their competitive position by
strengthening customer relationships, offering new products and cutting costs.
. Interstate Banking. Recent federal legislation will largely remove
restrictions on interstate banking during the period from 1995 to 1997.
Interstate banking is likely to result in both heightened competition
and increased consolidation of bank branches as banks seek to cut
overhead costs. The Company believes that banks will attempt to expand
their franchises to meet competition in a low-cost manner by
capitalizing on technology.
. Electronic Distribution Channels. Banks are currently reducing costs and
increasing customer service through technology-driven services such as
automated teller machines ("ATMs") and touch-tone telephone access to
account information. As of September 1994, there were 109,080 ATMs in
the United States generating more than 600 million transactions per
month. Also, the growth of alternative networks (such as the Internet
and other public-switched networks) will offer consumers additional ways
to access services electronically. In addition, more than 80% of major
U.S. banks have installed touch-tone response information systems in
their computer centers.
. Growing Consumer Acceptance of Electronic Banking. Bank customers are
becoming increasingly comfortable with the use of technology. ATMs have
become widely available and commonly used. In addition, approximately
25% of U.S. households use touch-tone telephone systems to access
account information, such as balances and deposits, and to verify
whether specific checks have cleared.
Home Banking Market
The Company believes that the home banking market is poised for significant
growth. Home banking services are expanding to permit customers not only to
review historical account information but also to engage in transactions such
as paying bills and transferring funds. Further, customers will
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<PAGE>
be able to engage in home banking not just through touch-tone telephones but
also through other devices, such as computers and smart telephones. Consumer
preferences are difficult to predict, however, and there can be no guarantee
that either electronic home banking or the Company's products and services
will gain widespread consumer acceptance.
. Benefits to Banks of Home Banking. The Company believes that banks will
accelerate the marketing of home banking services for the following
reasons:
. Cost Advantages--The Company believes home banking represents an
opportunity for banks to lower costs by reducing check processing
expenses and capital costs. According to the Federal Reserve Bank of
Boston, the printing, mailing and delivering of more than 60 billion
checks each year costs the equivalent of approximately 0.5% of the
Gross Domestic Product of the United States. Home banking also
permits banks to expand their customer base without incurring the
"brick and mortar" costs associated with the traditional branch.
. Potential to Strengthen Customer Relationships--Home banking, by
providing integrated and instant access to customer debit and credit
accounts at the bank, represents an opportunity for banks to
strengthen customer relationships through greater service and thereby
increase customer loyalty.
. Opportunity to Generate Fee-Based Income--Many banks are seeking to
grow non-interest income. Home banking is a service for which banks
may be able to charge ongoing fees and transaction charges.
Institutions using the Visa Bill-Pay System are currently charging
customers between $2.50 and $6.00 per month for home banking and are
being charged between $1.00 and $2.00 per customer per month by Visa.
. Benefits to Bank Customers of Home Banking. The Company believes home
banking will gain increased customer acceptance for the following
reasons:
. Ease of Use--Home banking services will become increasingly easy for
customers to use. The use of touch-tone systems can now be simplified
with voice recognition capability. A number of companies also offer
personal computer software packages that permit customers access to
their account information electronically. Further, smart telephones
can now deliver an ATM-like user interface for banking transactions
in the home.
. Greater Convenience--Home banking is evolving from an information
product to a transaction processing product. Customers who previously
could only check their account balances electronically can now pay
bills and transfer funds from their home. In addition, transactions
conducted on one home banking device (such as a telephone) can be
reviewed or modified from another device (such as a personal
computer). At the same time, the costs to the consumer of
conventional bill payment have increased due to postal rate increases
as well as per check surcharges that banks are beginning to impose.
US Order's Home Banking Strategy
US Order's strategy in the home banking market is to support Visa
Interactive by providing products and services that help financial
institutions deploy home banking to their customers. The Company believes its
home banking products and services will provide it with an important source of
monthly fee revenue both from ongoing customer support services for Visa
member banks as well as a royalty from Visa (based on the number of customers
using the Visa Bill-Pay System). The following are important elements of the
Company's home banking strategy:
. Gain Access to Financial Institutions through Strategic Alliance with
Visa. The Company has formed a strategic alliance with Visa Interactive,
a wholly owned subsidiary of Visa. The Company's strategy with Visa is
to increase the number of subscribers for the Company's products and
services with the goal of growing monthly fee revenues. Visa is the
largest consumer payment system in the world with more than 12 million
acceptance locations. Visa states that it has more than 20,000 member
financial institutions worldwide that have issued
26
<PAGE>
more than 387 million credit cards, including 17,000 members that have
issued 205 million cards in the United States.
As part of this alliance, the Company sold its banking and bill
payment operation to Visa and Visa formed Visa Interactive to market the
Visa Bill-Pay System. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Through December 31,
2000, for each Visa Interactive customer who uses the Visa Bill-Pay
System, the Company will receive $0.66 per month as a royalty, payable
quarterly, subject to certain limitations, including the Visa Offset.
The Visa Offset, initially set at $73,315 per quarter, accumulates
quarterly up to an aggregate of $879,780. See "Risk Factors--Reliance on
Visa Royalty Payments." The Company's agreement with Visa also provides
that the Company is designated a preferred provider of certain products
and services, including smart telephones, interactive applications and
customer support services throughout the Royalty Period. Because of the
Company's status as a preferred provider, Visa will make its customers
aware that US Order can provide various products and services in support
of the Visa Bill-Pay System but customers will be under no obligation to
use US Order to provide such products and services. As part of the Visa
transaction, the Company's President was appointed to, and the Company's
Chairman and Chief Executive Officer was named an advisor to, the board
of directors of Visa Interactive.
As of May 1, 1995, Visa Interactive had announced commitments from 50
financial institutions for the Visa Bill-Pay System. Although 50 banks
have committed to participate in the Visa Bill-Pay System, due to the
time necessary to install and implement the system for each bank, only
three banks have begun the technical and marketing roll-out of this
program. These banks have rolled out in small, limited markets and have
successfully enrolled approximately 2,000 customers. There can be no
assurances as to the banks' ultimate success with this program or the
number of US Order products and services that will be purchased by these
institutions or the number of customers that ultimately will use the
program. Announced customers of Visa Interactive include NationsBank
Corporation, First Tennessee Bank National Association, Crestar Bank and
Deposit Guaranty National Bank. The Company believes its relationship
with Visa Interactive keeps the Company in close contact with Visa, its
banks and the end users of home banking services. The Company believes
that this contact will enable the Company to continue to develop
complementary products and services, such as applications software for
Visa member banks. There can be no assurance, however, that Visa will
not reassess its commitment to the Company at any time in the future.
. Enable Visa to Provide Turnkey Services for Home Banking. Visa
Interactive offers banks the ability to access an electronic bill
payment network, but Visa Interactive itself does not provide the
consumer access devices or customer support services needed by Visa
member banks to implement home banking. The Company's products and
services allow Visa Interactive to offer a turnkey home banking service
for Visa member banks. The Company's home banking offerings include
voice response systems and customer support services.
The Company believes that many banks seeking to offer home banking
services to their customers will not be inclined independently to design
and support a proprietary home banking system. By purchasing a turnkey
service through Visa (which may or may not include some of the Company's
products and services), such banks will be linked to a large network of
billers and in-home access devices and will be able to forego the cost
that would otherwise accompany a proprietary system. However, some
banks, including Citibank and Huntington Bank, have developed their own
home banking products and could offer these services to other banks in
the future.
. Build to Visa Interactive's Standards. The Company believes that it is
critical for commonly accepted standards to be developed for home
banking to be successful. Visa Interactive is developing these standards
for banks that use the Visa Bill-Pay System. Such standards may also be
used by devices that use the Visa Bill-Pay System. The three Visa
Interactive standards are: ADMS, the communication protocol for use
between Visa Interactive's host and a remote consumer device such as a
smart telephone; EBMS, the communication protocol between Visa
Interactive's host and a bank that uses the Visa Bill-Pay System; and e-
Pay, the system for the electronic execution of customer bill payment
transactions. The Company designs its products to be compatible with the
Visa Bill-Pay System and its standards.
27
<PAGE>
. Identify Monthly Fee Revenue Opportunities. The Company's strategy is to
focus on monthly fee revenue opportunities by increasing the Company's
customer service subscriber base. Increasing the number of customers
using the Visa Bill-Pay System also generates a royalty opportunity. The
diagram below illustrates how sales of products to banks can generate
customers for the Company's services and increase royalty payments. In
the example below, the sale of a US Order touch-tone voice response unit
to a bank that enrolls in the Visa Bill-Pay System creates an
opportunity for the Company to market its customer support services to
that bank. In addition, each bank customer who uses the bank's voice
response unit to pay a bill during the month generates the potential for
a royalty to US Order. Banks enrolling in the Visa Bill-Pay System,
however, can provide their own customer support services or could
purchase these services from a competitor of the Company. Currently, US
Order is the only provider of customer support services that meets Visa
Interactive specifications.
Touch-tone Telephone Revenue Opportunities
[FLOW CHART DENOTING POTENTIAL REVENUE TO US ORDER APPEARS HERE]
. Maximize Visa Royalty. The Visa royalty, net of the Visa Offset, is paid
to the Company quarterly over a six year period beginning in January
1995 and ending December 2000. The royalty is equal to $0.66 per month
per customer who pays a bill using the Visa Bill-Pay
28
<PAGE>
System. The royalty is due to US Order regardless of whether a consumer
uses a smart telephone, personal computer, television or other device to
access the Visa Bill-Pay System. In developing home banking products,
the Company focuses on maximizing the total value of the Visa royalty.
First, the Company offers products and services, such as bank-branded
customer service, that enable banks to deploy home banking to their
customers quickly and easily. Second, the Company focuses on products
with the potential for immediate broad appeal, such as its touch-tone
bill payment system. Third, the Company strives to facilitate deployment
of the Visa Bill-Pay System by Visa member banks on a variety of
consumer access devices, with products such as its data translation
system which is now under development. The following diagram illustrates
various devices that a consumer could use, today and in the future, to
access the Visa Bill-Pay System, all of which could result in royalties
to US Order. At each level of opportunity, however, customers may select
products and services offered by the Company's competitors, in which
case the Company would not receive revenues from the sale of such
products and services and could only receive a royalty from Visa if such
products and services access the Visa Bill-Pay System.
[ART-WORK DENOTING THE VARIOUS OPTIONS FOR VISA BILL-PAY SYSTEM APPEARS HERE]
Regardless of the access device used to access the Visa Bill-Pay System, each
bill paying customer generates a royalty of $0.66 per month for US Order through
December 31, 2000*
* Subject to certain limitations described above.
29
<PAGE>
Home Banking Products
The Company designs, develops and markets applications software for voice
response systems through its relationship with InterVoice, Inc.
("InterVoice"). InterVoice states that it is a global leader in providing
call-automation solutions with more than 5,000 systems installed in 40
countries. The Company is an authorized value-added reseller of InterVoice's
hardware products. InterVoice and US Order jointly developed a bill payment
system using voice recognition for exclusive sale to Visa Interactive
financial institutions. Visa Interactive announced the availability of the
Company's system to Visa member banks in March 1995. US Order intends to
continue to devote resources to the development and improvement of its voice
recognition bill payment software.
The Company's current home banking products allow consumers to pay bills,
check account balances and receive other bank information from their home and
are available exclusively to Visa member banks who support the Visa
Interactive processing standards. These products include:
BANKPlus An entry level touch-tone-based bill payment system
with built-in connectivity to the Visa Bill-Pay
System. Customers first establish a list of payees
identified by numerical codes. Customers then use
BANKPlus to pay bills over their telephone by
pressing the appropriate payee code and desired
payment amount.
VOICEBanking A hybrid touch-tone and voice bill payment system
with built-in connectivity to the Visa Bill-Pay
System. Customers first establish a list of payees
identified by numerical codes and record their own
voice identifying the payee by name. Customers then
use VOICEBanking to pay bills over their telephone by
pressing the appropriate payee code, whereupon they
hear their own voice recording confirm that the
proper payee has been selected, and then touching in
the desired amount of payment.
VOICEBanking+ An advanced touch-tone-based bill payment system with
integrated voice recognition to select a payee and
built-in connectivity to the Visa Bill-Pay System.
After establishing a list of payees identified by
numerical codes and recording their own voice
identifying the payee by name, customers can pay
bills over the telephone by speaking the name of the
payee and then touching in the desired amount of the
payment.
To pay a bill on the Visa Bill-Pay System, a customer first calls his bank
and enters a series of touch-tones to access his account, selects a payee and
enters the amount of the bill to be paid as well as the date on which the
transaction is to be completed. The bill pay request is then transferred to
the Visa Bill-Pay System, which forwards the request to the customer's
account. The customer then receives a confirmation that an authorization to
debit his account had been received. Within 24 hours of the selected payment
date, the Visa Bill-Pay System debits the customer's account and credits a
central clearing account managed by Visa Interactive. The Visa Bill-Pay System
then initiates a simultaneous debit to this clearing account and transfers the
funds to the payee's bank account.
The Company is developing a data translation system for financial
institutions that are Visa Interactive customers. This new system is expected
to allow for rapid and secure connectivity between the Visa Bill-Pay System
and a bank's mainframe computer. This type of connectivity will enable banks
to offer their customers personalized information, such as the presentation of
interim checking account statements. The Company expects to begin trial of its
data translation system in the second half of 1995.
30
<PAGE>
Home Banking Support Services
The Company believes that many banks seeking to offer home banking to their
customers will conclude that it is not cost effective for them to handle the
attendant marketing, fulfillment of orders, customer service and technical
support required. The Company has provided this type of customer support
services in the past to a variety of companies.
The Company has entered into a three-year reseller agreement with Visa
Interactive whereby Visa Interactive resells the Company's customer support
services to Visa member banks. As of May 1, 1995, 14 Visa member banks had
contracted for the Company's customer support services. No assurance can be
given that in the future additional new bank customers will purchase the
Company's customer support services.
US Order offers bank-branded, turnkey customer service to Visa member banks
on smart telephone and touch-tone telephone platforms. The Company's customer
service operation is open seven days a week, 24 hours a day. If a bank chooses
US Order to provide customer service, the Company receives a start-up fee for
that bank. The Company also currently charges a fee of $1.00 per customer per
month for touch-tone customers and will initially charge $2.00 per customer
per month for smart telephone customers enrolled by the bank. The Company has
agreed with Visa that during the Royalty Period the Company will provide its
home banking products and services to Visa member banks at competitive prices.
Marketing
Visa initially markets Visa Interactive and US Order home banking products
and services to Visa member banks. Once a Visa member bank signs a commitment
to deploy home banking services through the Visa Bill-Pay System (the
"Commitment Date"), an extended roll-out period of the member bank's home
banking services begins.
During the first 90 days following the Commitment Date, Visa Interactive
begins technical and operational implementation of the home banking service
for the Visa member bank and the member bank determines which consumer access
devices it will offer to its customers and how it will provide customer
support services. During this period, the Company has opportunities to market
its products and services directly to the member bank. The bank may choose US
Order to provide (i) BANKPlus, VOICEBanking or VOICEBanking+, (ii) customer
support services, and (iii) in the future, data translation systems.
During the second 90 days following the Commitment Date, the Visa member
bank completes the technical trial phase and begins a market trial of its home
banking system, including any selected US Order-provided services.
Approximately six months following the Commitment Date, the member bank
completes its market trial and can begin a market roll-out of its home banking
services.
Competition
The Company's home banking products and services compete with services
offered by a number of competitors and competition may intensify as a result
of new market entrants. Banks such as Citibank and Huntington Bank have
developed home banking products for their own customers and, in the future,
may offer these services to other banks. Non-banks like EDS and First Data
Corporation also may develop home banking products to offer to banks. Computer
software and data processing companies such as Microsoft and Intuit also offer
home banking services. Visa competes with other organizations, including
MasterCard, which offers its Masterbanking home banking service through a
joint venture with CheckFree Corporation. The Company's success in home
banking depends both on
31
<PAGE>
the ultimate success of Visa and on the ability of Visa Interactive and Visa
member banks to successfully market home banking to their customers. In
addition, the success of the Company's home banking strategy depends on the
ability of Visa member banks to maintain market share in an environment of
disintermediation.
Many competitors exist for the Company's data translation systems and voice
response systems, including other manufacturers of touch-tone response
systems, such as Periphonics Corporation and Syntellect Inc., other financial
software companies such as Braun-Simmons and ACI, and financial services
software and service companies such as Hogan Systems, Inc. and M&I Data
Services, Inc. The Company believes that its primary competition for its
customer support services will come from Visa member banks that choose to
offer customer support services directly.
The Company expects that competition in all of these areas will increase in
the near future. The Company believes that a principal competitive factor in
its markets is the ability to offer an integrated system in conjunction with
Visa of various home banking products and services. Competition will be based
upon price, performance, customer service and the effectiveness of marketing
and sales efforts. The Company competes in its various markets on the basis of
its relationships with strategic partners, by developing many of the products
required for complete solutions and by building reliable products and offering
those products at reasonable prices.
TELECOMMUNICATIONS/NETWORK SERVICES
Changes in Telecommunications Industry
Technological innovation and an increasingly deregulated environment are
resulting in a more competitive and fragmented telecommunications industry.
Local telephone companies have increased their marketing of intelligent
network services as a means of generating incremental revenue per residential
subscriber. In addition, local telephone companies offer intelligent network
services to their subscribers in order to differentiate their services from
those being offered by alternative service providers.
. Increased Competition. The telecommunications industry is currently
undergoing fundamental changes which are increasing competition for
local and long distance telephone companies. These changes are driven by
the accelerated pace of technological innovation, the convergence of the
telecommunications, cable television, information services and
entertainment businesses, and an environment of increasing deregulation
in which many traditional regulatory barriers are being lowered and
competition encouraged. In recent years, potential competitors to the
Regional Bell Operating Companies ("RBOCs") and other local telephone
companies have expanded to include interexchange carriers and cable
television companies.
. Emergence of Intelligent Network Services. Simple network services such
as Call Waiting, Call Forwarding and Speed Dialing have been available
for several years. Simple network services can be offered through touch-
tone telephones.
Intelligent network services have been developed that differ from
these simple services in that they employ the transmission of data.
Recent investments by many local telephone companies in new signaling
technologies and network upgrades have made possible the introduction
of intelligent network services. Among the first of these new services
to be introduced were Caller ID and Caller ID Name and Number. These
intelligent network services can be offered through adjunct devices
attached to touch-tone telephones or through screen-based telephones.
Once the initial investment in switch and software upgrades has been
made, the variable costs of providing intelligent network services to a
single user are a small fraction of the monthly or per usage fees
charged. Because of this high margin profit potential,
32
<PAGE>
the Company believes that local telephone companies will seek to
increase the penetration of existing intelligent network services.
Advanced intelligent network services are now being developed and
offered to incorporate the Analog Display Services Interface ("ADSI")
protocol, which permits simultaneous transmission of voice and data.
These ADSI-based intelligent network services will include Integrated
Caller ID on Call Waiting, national directory assistance, stock
quotations and advanced home shopping. ADSI-based intelligent network
services will be offered through smart telephones such as the Company's
Falcon product, which is expected to be available at the end of 1995.
The Company believes that the growth and acceptance of ADSI-based
intelligent network services will facilitate the introduction of new
ADSI service offerings by both local telephone companies and companies
such as US Order. The ADSI protocol, for example, will allow
sophisticated call disposition features for Integrated Caller ID on
Call Waiting. With this service, a residential telephone company
subscriber who receives a call waiting signal could look at the display
screen on his ADSI telephone and see the name and number of the calling
party before deciding whether to answer the call, send a prerecorded
message telling the other party to wait, forward the call to a voice
mailbox, or drop the line. Other local telephone company features will
include on-line directory assistance and electronic yellow pages.
. Consumer Acceptance of Specialized Telecommunications Hardware. Caller
ID was the first intelligent network service to require the purchase of
either an adjunct device or a telephone with integrated Caller ID
capability. Since 1987, over six million Caller ID devices have been
shipped. The RBOCs and other local telephone companies are utilizing
equipment leasing, installment payment plans and giveaway programs
developed in conjunction with equipment suppliers to reduce the initial
cost of consumer access devices required for the use of intelligent
network services.
. Development of Smart Telephones. The Company believes that consumers
will purchase smart telephones, such as the Company's PhonePlus product
or next-generation Falcon product, due in part to the fact that these
smart telephones simplify the use of the growing number of network
services in addition to their capacity for new applications. Simple
network services, on the other hand, require the customer to memorize
various access codes and enter multiple keys to activate the service
using conventional telephones. The following table presents the
capabilities of the various classes of telephones.
33
<PAGE>
<TABLE>
<CAPTION>
TOUCH-TONE DISPLAY-BASED SMART
TELEPHONES TELEPHONE TELEPHONES(1)
---------- ------------- -------------
<S> <C> <C> <C>
Network Services
Simple.............................. X X X
Intelligent......................... X X
ADSI-based.......................... X
Features
Touch-tone capability............... X X X
Numeric keypad...................... X X X
Display screen...................... X X
QWERTY keyboard..................... X
Embedded CPU........................ X
Minimum 32K+ memory capacity........ X
Magnetic stripe card reader......... X
ADSI capability..................... X
Applications
Voice transmission.................. X X X
Call Waiting........................ X X X
Caller ID........................... X X
Data transmission................... X X
Simultaneous voice & data........... X
Information services(2)............. X
Transactional services(3)........... X
</TABLE>
- --------
(1) The Company's PhonePlus product has the capability for all smart telephone
features except ADSI capability and is capable of all smart telephone
applications except simultaneous voice and data transmissions. The
Company's Falcon product is expected to have capability for all of the
features and applications of smart telephones. See "--US Order's
Telecommunications Products and Services".
(2) Information services are expected to include directory assistance, stock
quotations, yellow pages, news, weather and sports applications.
(3) Transactional services are expected to include home banking, advanced home
shopping, paging and e-mail.
Intelligent network services include both transactional services and
information services. The Company intends to focus on transactional services
and expects local telephone companies to emphasize information services.
US Order's Telecommunications Strategy
The Company's strategy in the telecommunications market is to build a
subscriber base for its own proprietary interactive applications. The Company
will strive to accomplish this strategy by designing cost-effective smart
telephones that it licenses for manufacture and sale by Colonial Data,
incorporating the ADSI protocol and its own proprietary digital signal
processing ("DSP") technology. The following are elements of the Company's
telecommunications strategy:
. Gain Access to Telephone Company Customers through Strategic Alliance
with Colonial Data. The Company has formed a strategic alliance with
Colonial Data pursuant to which Colonial Data will manufacture and sell
to or on behalf of its local telephone company customers smart
telephones that have ADSI capability and are based on the Company's
designs, with features including a display screen, an embedded CPU, a
QWERTY keyboard and a credit card reader. Colonial Data has agreed that,
after introduction of the Company's
34
<PAGE>
Falcon product and through January 17, 2000, all ADSI smart telephones
that it produces and sells to local telephone companies will be based on
the Company's designs. For each such smart telephone produced and sold
by Colonial Data through December 31, 1997, Colonial Data will pay the
Company a royalty of 10% of the sale price, with the royalty thereafter
subject to annual good faith renegotiation. The strategic alliance
agreement with Colonial Data may be terminated by Colonial Data if the
Falcon product is not available for commercial distribution by April 1,
1996. Under the agreement with Colonial Data, US Order can manufacture
and market ADSI-based smart telephones outside of the telephone company
market but must pay Colonial Data a 10% royalty for each such sale. In
connection with this arrangement, the Company also has authorized
Colonial Data to manufacture its Falcon product using Colonial Data's
manufacturers in Hong Kong and the People's Republic of China. The
Company believes this arrangement will allow the Company to penetrate
the smart telephone market without expending resources to manufacture
smart telephones for that market. See "--US Order's Telecommunications
Products and Services--Smart Telephones." In accordance with the
Company's strategic alliance agreement with Colonial Data, on April 6,
1995, the Company and Colonial Data entered into an agreement whereby
the Company agreed to exchange 230,000 shares of Common Stock for shares
of common stock of Colonial Data with an equivalent fair market value.
Such exchange will be consummated upon the closing of the Offering. The
agreement also provides for the Company and Colonial Data to exchange an
additional $3.0 million in fair market value of each other's common
stock in April 1996.
Colonial Data designs, develops and markets telecommunications
products that support intelligent network services. Its most successful
product is a Caller ID adjunct device that it sells to or on behalf of
RBOCs, such as U S WEST, Inc., NYNEX Corp. and BellSouth Corp., and
other local telephone companies. Colonial Data has reported that since
1987 it has shipped over 2.5 million units. The Company believes that
Colonial Data has been successful in selling Caller ID adjunct devices
because it has developed relationships with RBOCs and other local
telephone companies, from whom most consumers prefer to order access
devices when subscribing for intelligent network services. Colonial Data
currently has direct fulfillment arrangements with U S WEST, NYNEX,
BellSouth, Ameritech Corp. and Bell Atlantic Corp. under which Caller ID
units are sold or leased to RBOC subscribers. Local telephone company
representatives may market both Caller ID service and Colonial Data
equipment to subscribers and transmit equipment orders to Colonial Data
electronically. The Company believes that the marketing of smart
telephones will be more successful when a consumer can subscribe to
network services and purchase it from a single source, especially when
the payment for the equipment can be made either on an installment basis
or by monthly lease payments through the subscriber's telephone bill.
. Build to ADSI Standards. ADSI is a Bellcore standard defining a protocol
for the simultaneous transmission of data and voice information between
an information system (e.g., a voice mail system or service bureau) and
a subscriber's telephone or other communications device. The Company's
Falcon smart telephone is being based upon the ADSI standard. ADSI
allows a central office switch to provide display-based telephone
services on a subscriber's smart telephone. The Company believes that
providing smart telephones based on standards accepted by the RBOCs is
critical to the consumer acceptance of smart telephones.
. Provide ATM-like User Interface. The Company believes use of custom
menus on a display screen will increase the use of intelligent network
services. The Company believes that ADSI telephones will gain market
acceptance by allowing transactional and information services, such as
national directory assistance, stock quotes and advanced home shopping,
to be presented in a familiar, user-friendly format.
. Pursue Low-Cost Smart Telephone Strategy. The Company believes that it
is important to be a low cost producer of smart telephones. The Company
has developed three areas of
35
<PAGE>
focus for aggressive cost management: design, manufacturing and volume.
US Order has designed its Falcon product around DSP architecture that
will allow the product to be manufactured with fewer components than
other currently available smart telephones. The Company believes that as
production volume increases there will be additional opportunities for
cost savings.
. Sell Interactive Applications to Smart Telephone Purchasers. The Company
believes that interactive applications will be an important source of
monthly fee revenue for the Company. US Order's interactive applications
strategy is to combine proprietary applications developed by US Order
with third party applications. In accordance with its strategic alliance
with Colonial Data, US Order intends to sell interactive application
packages to Colonial Data for ultimate resale to telephone companies and
their customers. The Company believes that a successful application
bundle must include a limited number of interactive applications that
are transaction-oriented and provide high perceived value. The Company
expects to offer applications such as home shopping, national directory
assistance, alphanumeric paging and e-mail. The following diagram shows
how the Company receives revenues from the sale of the Company's smart
telephones and sales of its interactive applications.
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<PAGE>
Smart Telephone Revenue Opportunities
[FLOW CHART DENOTING REVENUE TO US ORDER THROUGH SMART TELEPHONE APPEARS HERE]
US Order's Telecommunications Products and Services
. Smart Telephones.
. ScanFone. In 1992, the Company introduced the first commercially
available smart telephone, the ScanFone, with integrated Caller ID
and DES encryption capability. The Company deployed more than 20,000
ScanFones between 1992 and 1994.
. PhonePlus. The Company began field-testing the PhonePlus in September
1994 and expects commercial introduction by June 1995. New features
of the PhonePlus include 4 line by 20 character display screen, 32-
bit CPU and 48 key QWERTY keyboard. The
37
<PAGE>
Company has entered into contracts for the sale of the PhonePlus to GTE
Communications Systems Corp., and Sprint/United Management Company
("Sprint").
. Falcon. The Company's Falcon product, currently under development, is
expected to be commercially available by the end of 1995. The Falcon
was designed and developed exclusively by US Order. Its design is
based on DSP architecture. The Company believes the Falcon will
provide customers with better functionality at a lower price than
other currently available smart phones. In May 1995, the Company
executed a contract with Sprint for the initial sale of Falcon units.
. Interactive Applications. The Company's strategy is first to deploy its
interactive applications on its smart telephones and later to deploy its
interactive applications on smart telephones manufactured by other
companies. US Order believes that it must deliver a limited number of
interactive applications that exploit the unique capabilities of smart
telephones. The Company intends to sell interactive applications to
local telephone companies through Colonial Data.
US Order's interactive applications are expected to include:
<TABLE>
<CAPTION>
EXPECTED
AVAILABILITY DATE
-------------------
<S> <C> <C>
Universal Catalog A mail order catalog ordering application Currently available
Shopping developed in conjunction with Litle &
Company that enables users to place orders
electronically from any catalog.
DataSave An application that provides remote backup Currently available
capability for information that is stored
in the smart telephone memory.
FastFind A national directory assistance application Second quarter 1995
that will permit users to search a national
database provided by Metromail corporation,
a subsidiary of R.R. Donnelley and Sons
Company, for both "white pages" and "yellow
pages" information.
Fast Notes An application that enables users to send During 1996
notes and messages via fax, e-mail or
paging.
Prepaid Long Distance An application enabling users to buy long During 1996
distance service in advance at a discounted
rate.
</TABLE>
The Company currently expects to price these applications on a bundled basis
for $1.50 per customer per month.
Competition
The market for the Company's telecommunications products and services is
highly competitive and subject to rapid technological change. At present, the
Company's principal competitors in the market for smart telephones are Philips,
Northern Telecom, Online Resources and AT&T. The Company expects competition to
increase in the future from existing and new competitors and expects new
competitors to include electronics manufacturers, such as Sony Corp. and
Panasonic Company. The Company's competition for interactive applications
generally comes from device manufacturers. Many of the Company's competitors,
including Philips and Northern Telecom, have already introduced smart
telephones which include technological features incorporated in the Company's
PhonePlus
38
<PAGE>
product. Visa Interactive and Philips have recently announced that they have
entered into a letter of intent to collaborate on a series of projects,
including the development of a Visa Interactive banking application on a
Philips smart telephone. The Company's Falcon product incorporates newer
digital signal processing technology. Although the Company is currently
unaware of any efforts by its competitors to deploy digital signal processing
technology in their smart telephones, the Company expects that its competitors
will attempt to replicate the Falcon digital signal processing design if it is
commercially successful. The Company expects that as the market for smart
telephones grows, it will face competition from traditional personal computer
on-line service providers, such as America Online, Prodigy and Compuserve,
Inc., as well as from personal computer software companies such as Microsoft,
Intuit and Novell, Inc.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on software and
systems for the banking and telecommunications industries. In particular, the
Company applies its research and development expenditures to audio and data
transaction processing software, customer support services and smart telephone
designs.
The Company's ability to attract and retain highly skilled research and
development personnel is important to the Company's continued success. At
March 31, 1995, 20 of the Company's 46 full-time employees were engaged in
product and service development. The Company expects to increase the number of
personnel devoted to product development over the next several months.
US Order commenced operations in 1991 with an emphasis on grocery shopping
applications. Although the Company's grocery application was well received by
the existing home delivery market, the market for home grocery shopping
delivery was small and not growing quickly. As a result, the Company de-
emphasized its grocery shopping application in 1992 and discontinued it in
1994. As the Company de-emphasized its grocery shopping application, it began
to focus its efforts on home banking and telecommunications.
MANUFACTURING
The Company's manufacturing operations are limited to the sourcing, testing,
quality control, software downloading and shipping of finished products. The
Company's PhonePlus product is manufactured by VeriFone's Taiwan facility,
which is certified under the ISO 9000 series. In addition, the Company has
authorized Colonial Data to manufacture its Falcon product using Colonial
Data's manufacturer in Hong Kong and the People's Republic of China.
The Company generally provides a one-year warranty and offers, for an
additional cost to the customer, an extended warranty against defects for its
products.
PROPERTIES
The Company is headquartered in Herndon, Virginia, where it leases 17,000
square feet of office space from unaffiliated parties under two leases
expiring in 1999. The Company utilizes a portion of such space to provide
facilities for its customer support services. Additionally, the Company leases
a 9,000 square foot facility in Salt Lake City, Utah for inventory storage and
distribution.
GOVERNMENT REGULATION
The Company's smart telephone products are subject to regulations by the
Federal Communications Commission ("FCC"). Among other requirements, the
Company's smart telephones must comply with Parts 15 and 68 of the FCC's
regulations.
The two markets which the Company has targeted are highly regulated. The
banking industry, although it has undergone recently significant deregulation,
remains quite restrictive at both the federal and state levels. Similarly, the
telecommunications industry has undergone rapid change in the past decade.
Federal and state regulations are currently undergoing constant review and
revision.
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<PAGE>
Interpretation, implementation or revision of banking and telecommunications
regulations can accelerate or hinder the ultimate success of the Company and
its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
As of May 1, 1995, the Company holds no patents or other registered
intellectual property rights with respect to its products. The Company's
original patent for an automated order and payment system was sold to Visa in
August 1994.
The Company expects to file patents in 1995 on certain new features
developed by the Company for use in the Falcon ADSI smart telephone and
certain of its transaction processing technology, but there can be no
assurances that such patents will be granted, or if granted, will have any
commercial value.
Although the Company does not believe that its products and services
infringe on the rights of third parties, there can be no assurance that third
parties will not assert infringement claims against US Order in the future or
that any such assertion will not result in costly litigation or require the
Company to cease using, or obtain a license to use, intellectual property
rights of such parties.
LEGAL PROCEEDINGS
In August 1991, US Order received a letter from a third party bringing to US
Order's attention a patent issued to such third party entitled Home
Merchandise Ordering Telecommunications Terminal, which such third party
subsequently claimed was infringed by US Order. In the opinion of US Order's
patent counsel, Darby & Darby P.C., the Company has substantial defenses to
such claim. Nonetheless, there can be no assurance that such third party will
drop its claim of infringement or that US Order would prevail in any
proceeding in relation thereto.
In July 1994, US Order received a letter from a third party bringing to US
Order's attention a patent issued to such third party entitled Method and
Apparatus for Decoding and Processing the Informational Content of Multi-
Frequency Signals. No claim of infringement has been asserted. In the opinion
of Darby & Darby P.C., the Company has substantial defenses to any such claim
that might be made. Nonetheless, there can be no assurance that such third
party will not file a claim of infringement or that US Order would prevail in
any proceeding in relation thereto.
EMPLOYEES
At May 1, 1995, the Company had approximately 81 employees, of whom
approximately 49 were full-time. Of the full-time employees, 22 were engaged
in research and development, 10 were engaged in customer service and
fulfillment, five were engaged in sales and marketing and 12 were engaged in
administration and finance. The Company has no collective bargaining
agreements with its employees and believes that its relationship with its
employees is good. See "Management" and "Principal and Selling Stockholders."
40
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Set forth below are the names, ages and positions and a brief description of
the business experience of the Company's directors, executive officers and
other significant employees. All directors hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William F. Gorog(1)....... 69 Chief Executive Officer and Chairman of the
Board
John C. Backus, Jr.(1).... 36 President, Chief Operating Officer and Director
Scott A. Corzine.......... 40 Vice President--Consumer Products Sales and
Marketing
Peter Costello............ 35 Vice President--Consumer Products Development
Thomas A. Cramer.......... 54 Vice President--Operations
Mark S. Lynch............. 32 Vice President--Finance and Controller
Steven C. Shap............ 50 Vice President--Transactions Systems Sales and
Marketing
Patrick A. Transue........ 39 Vice President--Transactions Systems Development
Albert N. Wergley......... 47 Vice President and General Counsel
T. Coleman Andrews,
III(1)................... 40 Director, Chairman of the Executive Committee
Patrick F. Graham(2)(3)... 55 Director
Ross Jones(2)(3).......... 52 Director
Geoffrey S. Rehnert(2)(3). 37 Director
L. William Seidman........ 74 Director
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
WILLIAM F. GOROG is the founder of US Order and has served as its chairman
and chief executive officer since May 1, 1990. From October, 1987 until
founding US Order, he served as chairman of the board of Arbor International,
an investment management firm. From 1982 to 1987, he served as president and
chief executive officer of the Magazine Publishers of America, an association
representing the principal consumer publications in the United States. During
the Ford Administration, Mr. Gorog served as deputy assistant to the President
for Economic Affairs and Executive Director of the Council on International
Economic Policy. Prior to that time, he founded and served as chief executive
officer of DataCorp., which developed the Lexis and Nexis information systems
for legal and media research and which Mr. Gorog subsequently sold to the Mead
Corporation in 1969. Mr. Gorog also assisted VeriFone, a leading provider of
point-of-sale transaction systems, during its development stage. Mr. Gorog
formed a company that served as VeriFone's east coast distributor, which he
subsequently sold to VeriFone. He also served on VeriFone's board of directors
from 1981 through 1993. He currently serves as a director of NationsBank
(Maryland), a bank holding company, and as chairman of the board of WorldCorp,
the majority owner of World Airways and US Order and the Selling Stockholder.
Mr. Gorog is a graduate of the United States Military Academy and received an
M.S. from Ohio State University.
JOHN C. BACKUS, JR. has worked with US Order since its inception in 1990 and
has served as President, Chief Operating Officer and a director of the Company
since 1994. Prior to working with US Order, Mr. Backus worked for six years at
WorldCorp and its subsidiaries holding a variety of executive positions
including vice president of corporate development, vice president of finance,
and vice president of sales and marketing at a WorldCorp subsidiary. Prior to
joining WorldCorp, Mr. Backus worked for Bain & Company, Inc., a worldwide
strategy consulting firm with approximately 1,200
41
<PAGE>
employees, in its consulting and venture capital groups where he focused on
consumer products and services. Mr. Backus serves on the board of directors of
WorldCorp and of Visa Interactive. Mr. Backus received both his B.S. and
M.B.A. from Stanford University.
SCOTT A. CORZINE has served as Vice President--Consumer Products Sales and
Marketing of US Order since 1992. He is responsible for all of the Company's
consumer product sales and marketing efforts and development of strategic
partner channels. Prior to joining US Order, Mr. Corzine was vice president of
sales and marketing for the music division of Broadcast Data Systems, a unit
of BPI Communications, a company that creates and markets airplay recognition
information to music, advertising and syndication markets. From 1985 to 1990,
he worked at Prodigy, most recently as director of merchandise marketing where
he helped develop the shopping strategy of Prodigy. Mr. Corzine received his
B.S. from the University of North Carolina at Chapel Hill and his M.B.A. from
Pace University.
PETER COSTELLO began working with US Order in 1992, and was promoted to Vice
President--Consumer Products Development in 1995. Mr. Costello is responsible
for the development and delivery of new consumer products and services for the
Company. From 1988 to 1992 he served as director of hardware engineering for
Frox Inc., where he helped bring the Frox Digital Home Entertainment system to
market. The Frox Digital Home Entertainment system included a wireless mouse
to select movie and music databases, view on-screen television listing and
schedule shows to record. He managed all hardware tasks including system
architecture, hardware design, prototype builds, OEM and vendor interface,
diagnostics and manufacturing hand-off. Mr. Costello designed four custom
chips, CPU core, printed circuit boards, diagnostic code and several device
drivers for Frox. From 1982 to 1986, he worked for Sun Microsystems Inc.
("Sun") as Sun's fourth employee, where he designed and managed the Sun-1
color graphics projects, QIC streaming tape interface, Sun 2/160 color
workstation and Sun-3 color. He shared responsibility for the Sun 2/50
workstation with one of Sun's founders. Mr. Costello received his B.S., M.S.
and M.B.A. from Stanford University.
THOMAS A. CRAMER has served as Vice President--Operations since 1994, and
joined US Order in 1993. Mr. Cramer is responsible for all support-service
related interaction between US Order and Visa Interactive and Visa member
banks. Prior to joining US Order, Mr. Cramer served as director of data
processing at Crestar Bank and a predecessor bank where he developed and
implemented a point of sale program utilizing MOST and Visa services and
developed the Crestar-Visa electronic bill payment pilot program using US
Order technology. Mr. Cramer is a member of the electronic bill payment
committee of the National Automated Clearinghouse Association and the ANSI
X.12 electronic bill payment standards committee. He is a former member of the
board of directors of SUMIT, a Systematics users group, where he guided the
development of financial management system and loan systems. Systematics is a
global leader in providing banking software in the world. Prior to his banking
services career, Mr. Cramer was a director of information systems for several
industrial companies. Mr. Cramer received an M.S. from the State University of
New York at Buffalo and an M.B.A. from Canisius College.
MARK S. LYNCH has served as Vice President--Finance for US Order since 1993
and as controller since 1991. He is responsible for all financial,
administrative and accounting aspects of the Company. Prior to joining the
Company, he served as assistant controller of The Clark Construction Group
from 1989 to 1991, and he worked at KPMG Peat Marwick LLP from 1986 to 1989.
He received a B.S. from The Pennsylvania State University and an M.B.A. from
The George Washington University and is a certified public accountant.
STEVEN C. SHAP has served as Vice President--Transaction Systems Sales and
Marketing since March, 1995. From 1994 until joining US Order, Mr. Shap was
the director of systems integrator programs and director of sales integration
for Newbridge Networks, Inc. where he coordinated
42
<PAGE>
relationships with systems integration partners including IBM, EDS and Xerox.
From 1992 until 1994, Mr. Shap was vice-president--North American Operations
for Virtual Software Factory, Inc, a provider of Meta-CASE Tool technology and
solutions products based in the United Kingdom. From 1991 to 1992, Mr. Shap
was the vice president--sales and marketing for Digital Analysis Corporation,
a venture-funded technology company in the LAN and WAN network management
software and services market. From 1983 to 1991, Mr. Shap held a variety of
positions with Apple Computer, Inc., including national federal sales manager
from 1989 to 1991 where he helped develop and implement a sales incentive
promotion, compensation plans, forecasting systems and a demo training
program. Mr. Shap received B.S. degrees from both the University of Maryland
and Johns Hopkins University.
PATRICK A. TRANSUE joined US Order in 1991 and has served as Vice
President--Transactions Systems Development since 1994. Mr. Transue is
responsible for transaction system product development and quality control.
Mr. Transue oversaw the development of the Company's most successful products,
including its bill payment system which was sold to Visa, the ScanFone and its
voice recognition software. Prior to joining the Company, Mr. Transue was
manager of information systems at Basken Financial Corporation where he
oversaw a national computer network which facilitated the trading of jumbo
certificates of deposit by large regional banks and brokerage firms. Mr.
Transue received his B.S. from the College of William and Mary.
ALBERT N. WERGLEY has served as Vice President and General Counsel since May
1995. From 1986 to 1994, Mr. Wergley was vice president and general counsel of
Verdix Corporation (now Rational Software Corporation), a manufacturer of
software development tools. From 1983 to 1986, he was associated with the
McLean, Virginia office of the law firm of Reed Smith Shaw & McClay. From 1978
to 1983, Mr. Wergley was associated with Howrey & Simon in Washington, D.C.
Mr. Wergley received an A.B. from the College of William and Mary and a J.D.
from the University of South Carolina.
T. COLEMAN ANDREWS, III has served as a director and as chairman of the
executive committee of US Order since 1990. He is the chief executive officer,
president and a director of WorldCorp, the Selling Stockholder, and chief
executive officer and director of World Airways, a position he has held since
1986. 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 Ford Administration,
including serving with Mr. Gorog in the White House. Mr. Andrews received his
B.A. from Dartmouth College and his M.B.A. from Stanford University.
PATRICK F. GRAHAM has served as a director of US Order since 1993. He is a
director of Bain & Company, Inc., a management consulting firm co-founded by
Mr. Graham in 1973. In addition to his primary responsibilities with Bain
clients, he has served as Bain's vice chairman and chief financial officer.
Prior to founding Bain, Mr. Graham was a group vice president with the Boston
Consulting Group. Mr. Graham currently serves as a director of Worldcorp, the
Selling Stockholder. Mr. Graham received a B.A. degree from Knox College and
his M.B.A. from Stanford University.
ROSS JONES has served as a director of US Order since 1994. Mr. Jones is the
chief financial officer of Knight-Ridder, a multimedia holding company. Prior
to joining Knight-Ridder in 1993, Mr. Jones was an executive with the Reader's
Digest Association, Inc., serving as vice president and treasurer from 1985 to
1993. Mr. Jones received his B.A. from Brown University and his M.B.A. from
Columbia University. Mr. Jones was elected to the Board of Directors pursuant
to the terms of an Investment Agreement dated December 20, 1993 between the
Company and Knight-Ridder. The Investment Agreement provides that Knight-
Ridder is entitled to one seat on the Board of Directors for as long as it
owns any equity securities of the Company.
GEOFFREY S. REHNERT has served as a director of US Order since 1994. Mr.
Rehnert is a managing director of Bain Capital, Inc., a private equity firm
that manages four different funds with over $500 million in capital. Bain
Capital invests in both venture capital and management buyout situations. Mr.
Rehnert joined Bain Capital at its inception in 1984 and became a partner in
1986. Prior to joining Bain Capital, Mr. Rehnert worked as a consultant with
Bain & Company. He currently serves as a director of Holson Burnes Group,
Inc., ICON Health & Fitness, Inc. and of WorldCorp, the Selling Stockholder.
Mr. Rehnert received an A.B. from Duke University and a J.D. from Stanford
University.
43
<PAGE>
L. WILLIAM SEIDMAN has served as a director of US Order since March, 1995.
He is the publisher of Bank Director magazine, chief commentator on CNBC-TV
and a consultant to The World Bank, Pillsbury, Madison & Sutro, BDO Seidman
and the Capital Group. Mr. Seidman served from 1985 to 1991 as the chairman of
the Federal Deposit Insurance Corporation ("FDIC") and from 1989 to 1991 also
served as the first Chairman of the Resolution Trust Corporation. Before
joining the FDIC, Mr. Seidman served as Dean of the College of Business at
Arizona State University. From 1977 to 1982 he was vice-chairman and chief
financial officer of Phelps Dodge Corporation. Mr. Seidman has also served as
managing partner of Seidman & Seidman, Certified Public Accountants (now BDO
Seidman), and as Assistant to the President for Economic Affairs during the
Ford Administration. Mr. Seidman presently serves as a director of Fiserv,
Inc., a data processing company. Mr. Seidman received his A.B. from Dartmouth
College, LL.B. from Harvard University and his M.B.A. from the University of
Michigan.
The Company has entered into an agreement with Visa whereby following
consummation of the Offering, Visa shall be entitled to name a representative
to be nominated to the Company's Board of Directors. As of the date of this
Prospectus, Visa has not indicated to the Company whether it intends to
exercise this right or identified the person it will designate as its
representative.
BOARD COMMITTEES
The Board of Directors has three standing committees: a Compensation
Committee, an Audit Committee and an Executive Committee. The Compensation
Committee reviews and monitors key employee compensation policies and
administers the Company's management incentive compensation plans, including
its stock option plans. The Audit Committee recommends the Company's
independent auditors, reviews the results and scope of and other accounting
related services provided by such auditors and reviews the terms of all
material transactions between the Company and its affiliates. The Executive
Committee exercises all of the power of the Board of Directors during
intervals between meetings of the Board.
The Company anticipates that prior to completion of the Offering, the
Company's Board of Directors will consist of seven directors, divided into
three classes. The initial term of the first class will expire at the annual
meeting of stockholders to be held in 1996, the initial term of the second
class will expire in 1997, and the initial term of the third class will expire
in 1998. Messrs. Backus and Graham are in the first class, Messrs. Andrews and
Rehnert are in the second class, and Messrs. Gorog, Jones and Seidman are in
the third class. Officers are elected annually by the Board of Directors for
one year terms subject to removal by the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Patrick F. Graham,
Ross Jones and Geoffrey S. Rehnert. Mr. Jones is the chief financial officer
of Knight-Ridder, which is the beneficial owner of 7% of the Company's capital
stock. Currently, Knight-Ridder owns 771,389 shares of Series C Preferred
Stock which will be converted to shares of Common Stock upon consummation of
the Offering. Knight-Ridder will receive approximately $753,000 in accumulated
dividends upon the conversion of the Series C Preferred Stock.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for attendance at Board
meetings or meetings of Board committees. Directors who are not also executive
officers of the Company or of an affiliate of the Company ("Non-Affiliate
Directors") are reimbursed for usual and ordinary expenses of meeting
attendance. Under the Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") each Non-Affiliate Director is offered options to purchase
15,000 shares of Common Stock upon initial election to the Board and
additional options to purchase 7,500 shares of Common Stock upon reelection to
the Board. The exercise price for all options that have been previously issued
to the current Non-Affiliate Directors is $7.13 per share. The exercise price
for any future option grants under the Directors' Plan will be the average
closing price of the Common Stock during the 30 trading days immediately
preceding the date of grant. Options granted under the Directors' Plan vest in
36 equal monthly installments during the Non-Affiliate Director's continued
service on the Board. The option price may be paid in cash, by surrendering
shares of Common Stock or by a combination of cash and Common Stock. All
options expire ten years after their grant. Up to 250,000 shares of Common
Stock may be issued under the Directors' Plan, subject to certain adjustments.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company during the years ended December
31, 1994, 1993 and 1992 by the Chief Executive Officer of the Company and the
three other executive officers who received at least $100,000 in compensation
in 1994 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------- ---------------------
SECURITIES UNDERLYING
YEAR SALARY BONUS OTHER(1) OPTIONS (#)
---- -------- ------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
William F. Gorog........ 1994 $220,805 -- -- --
Chief Executive Officer 1993 197,230 -- -- --
1992 120,000 -- -- --
John C. Backus, Jr. .... 1994 190,192 $ 4,000 $875,000 850,000(2)
President and 1993 139,981 -- -- --
Chief Operating Officer 1992 137,404(3) -- -- 375,000(3)
Scott A. Corzine ....... 1994 124,327 1,000 103,817 22,422
Vice President--
Consumer 1993 120,000 -- -- 40,000
Products Sales and 1992 41,538(4) -- -- 60,000
Marketing
Thomas A. Cramer ....... 1994 93,923 10,000 14,470 59,623
Vice President--
Operations 1993 48,185(5) -- -- 20,000
1992 -- -- -- --
</TABLE>
- --------
(1) As part of the August 1, 1994 purchase of US Order's bill pay operations,
Visa required that all US Order employees who became employees of Visa
Interactive cancel their outstanding vested options to eliminate any
potential conflicts of interest. As a result, US Order's shareholders and
Board of Directors agreed to pay all active and full-time US Order
employees (excluding William F. Gorog) an aggregate of $3.25 million for
the cancellation of 675,334 of their outstanding and vested options with
exercise prices ranging between $0.98 and $4.00. Of the $3.25 million,
approximately $2.1 million was paid to US Order employees who became Visa
Interactive employees as of August 1, 1994 and $1.1 million was paid to
executive officers of the Company, including Messrs. Backus, Corzine and
Cramer.
(2) Mr. Backus received two separate option grants in August 1994. Mr. Backus
received options to purchase 250,000 shares of Common Stock at an exercise
price of $7.13 per share which vest over a three-year period. Mr. Backus
was also awarded options to purchase 600,000 shares of Common Stock at an
exercise price of $7.13 per share which vest in May 2004, except that
vesting can be accelerated based on increases in the value of US Order
stock pursuant to the execution of an employment agreement between the
Company and Mr. Backus. See "--Employment Agreement."
(3) Mr. Backus was an employee of WorldCorp and served as an officer of the
Company during 1992. Mr. Backus' salary for 1992 was paid by WorldCorp
which was reimbursed by the Company at cost.
(4) Mr. Corzine became an employee of the Company in August 1992.
(5) Mr. Cramer became an employee of the Company in August 1993.
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<PAGE>
The following table provides details regarding stock options granted to the
Named Executive Officers in 1994. In addition, in accordance with the rules of
the Securities and Exchange Commission, the table sets forth hypothetical
gains that would exist for the respective options based on assumed rates of
annual compounded growth in the stock price of 0%, 5% and 10% from the date
the options were granted over the full option term. The actual value, if any,
that an executive may realize will depend on the spread between the market
price and the exercise price on the date the options are exercised.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------- --------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/
UNDERLYING SARS GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION
GRANTED (#) FISCAL YEAR ($/SH) PRICE DATE 0% 5% 10%
------------ --------------- ------------ ---------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William F. Gorog........ -- -- -- -- -- -- --
John C. Backus, Jr. .... 250,000 18% $7.13 7/31/2002 $ 0 $ 851,064 $2,038,447
600,000 47 7.13 7/31/2004 0 2,690,411 6,818,030
Scott A. Corzine........ 22,422 2 7.13 7/31/2002 0 76,330 182,824
Thomas A. Cramer........ 59,623 4 7.13 7/31/2002 0 202,972 486,153
</TABLE>
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1994. Also
reported are the values for "in-the-money" options which represent the
positive spread between the exercise price of any such existing stock options
and the estimated price of the Common Stock as of December 31, 1994.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#)(2) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William F. Gorog........ -- -- 341,421 58,579 $2,099,738 $360,262
John C. Backus, Jr. .... 11,000 $67,650 256,105 815,619 1,363,603 --
Scott A. Corzine........ -- -- 21,718 78,282 70,544 228,642
Thomas A. Cramer........ -- -- 6,603 68,397 5,268 42,862
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities ($7.13 per share at December 31, 1994) as determined by the
Board of Directors minus the aggregate exercise price.
(2) Mr. Backus exercised options to purchase 11,000 shares of Common Stock on
September 30, 1994.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with John C. Backus,
Jr. providing that Mr. Backus will serve as President and Chief Operating
Officer of the Company until July 31, 1997, a term which automatically extends
until December 31, 1997 unless terminated earlier. Mr. Backus is entitled to a
base salary of $250,000 per year, a bonus of between 0 and 75% of his base
salary based on his individual performance as well as that of the Company as
determined by the Board of Directors,
46
<PAGE>
the right to participate in all bonus and incentive compensations plans or
arrangements made available to other US Order officers and directors and
certain other benefits, including a $5 million life insurance policy. Mr.
Backus is entitled to receive performance stock options in accordance with the
Company's 1991 Stock Option Agreement (the "1991 Plan"). The Company may
terminate the agreement upon Mr. Backus' death, disability or for cause (as
defined) upon the affirmative vote of the majority of the Board of Directors.
If the Board terminates Mr. Backus without cause, Mr. Backus is entitled to
receive the remainder of the base salary and certain other compensation due
under the agreement and all options granted to Mr. Backus but unexercisable
under the 1991 Plan shall become immediately exercisable for a period of one
year. Mr. Backus may terminate the agreement upon 30 days notice under certain
circumstances, including a diminution of responsibilities, a change in control
(as defined) of the Company or a relocation of its executive offices outside
of the Washington, D.C. area. Upon such termination by Mr. Backus, he is
entitled to receive the remainder of his base salary and certain other
compensation due under the Employment Agreement and all options granted but
unexercisable shall become immediately exercisable for a period of one year.
As part of his employment agreement, Mr. Backus has agreed to hold shares of
Common Stock during the term of the agreement. Mr. Backus has agreed to hold
10,000, 15,000 or 20,000 shares of Common Stock upon the earlier of April 1,
1996, April 1, 1997 and April 1, 1998 or the exercise of 100,000, 200,000 or
300,000 options, respectively.
Pursuant to a stock option agreement between the Company and Mr. Backus, Mr.
Backus has been awarded options to purchase 600,000 shares of Common Stock at
an exercise price of $7.13 per share. The options for 600,000 shares will
become exercisable on May 1, 2004; however, the exercise date will be
accelerated with respect to increments of 100,000 shares if certain targets
are achieved regarding the Company's stock price. Pursuant to this provision,
Mr. Backus will be entitled to exercise options to purchase 100,000 shares of
Common Stock, at the $7.13 exercise price, each time that the Common Stock
trades at a price that is an increase of 25% over the preceding eligibility
level for twenty trading days. Thus, Mr. Backus will first be entitled to
exercise options for 100,000 shares if the Common Stock trades at or above
$8.91 for twenty consecutive trading days. The same entitlement would arise
for five additional blocks of 100,000 options, at the exercise price of $7.13
per share, if the Common Stock trades at or above $11.14, $13.93, $17.41,
$21.76, and $27.20, for twenty trading days each (each of these trading prices
is 25% above the price of the Common Stock at the earlier tier). In the event
that Mr. Backus is no longer employed in certain capacities by the Company or
its affiliates, options that have not become exercisable by such time will not
thereafter become exercisable, except that upon a termination without Cause or
for Good Reason (as defined therein) the exercisability of the options shall
accelerate.
INCENTIVE COMPENSATION PLAN
Under the Company's 1994 and 1995 Incentive Compensation Plan ("ICP"), all
US Order employees at or above the departmental director level are eligible
for incentive cash bonus awards based on a combination of individual,
department and Company performance standards. The goals of the plan are to (i)
reward and encourage individual accomplishment, (ii) encourage contributions
to group success, (iii) encourage eligible employees to achieve broad
corporate goals and (iv) focus senior management on objectives that improve
the intrinsic value of the Company. The maximum bonus level attainable under
the plan is 75% of salary. Eligible employees can earn up to 20% of salary for
meeting individual goals, up to 50% for reaching individual and department
goals and up to 75% for achieving individual, department and Company
performance goals.
EMPLOYEE SAVINGS PLAN
In 1991, the Company adopted a defined contribution plan (the "401k plan")
for all full-time employees. The Plan qualifies for preferential tax treatment
under Section 401(a) of the Internal Revenue Code. Employee contributions are
voluntary and are determined on an individual basis with a maximum annual
amount for 1994 and 1993 equal to 20% of annual compensation up to IRS limits.
All participants are fully vested in their contributions. There are no
employer contributions under the Plan. Administrative expenses for the Plan
are paid by the Company.
47
<PAGE>
STOCK OPTIONS
1991 Stock Option Plan. The Company has reserved 3,000,000 shares of Common
Stock for issuance upon the exercise of options held by employees and
directors pursuant to the 1991 Stock Option Plan (the "1991 Plan") which will
terminate upon the consummation of the Offering. As of April 30, 1995, 198,039
shares of Common Stock had been issued upon exercise of options, 2,568,889
shares of Common Stock were subject to outstanding options at a weighted
average exercise price of $4.97 (of which options for 1,028,320 shares of
Common Stock are exercisable with a weighted average exercise price of $1.97)
and 233,072 shares remained available for future grant under the 1991 Plan.
Upon termination of the 1991 Plan, no future option grants will be awarded
under this plan.
Options may be exercised during the term of the option by payment in cash or
in the form of Common Stock, provided that such Common Stock has been held by
the participant for at least six months. Following the consummation of this
Offering, there will be no restrictions under the terms of the 1991 Plan on
the transfer of shares acquired upon the exercise of stock options issued
under the 1991 Plan, although any such shares may be subject to transfer
restrictions under applicable federal or State securities laws. See "Shares
Available for Future Sale."
1995 Incentive Plan. The Board of Directors has adopted, and the
shareholders have approved the 1995 Incentive Plan (the "1995 Plan"). The 1995
Plan will take effect upon the consummation of the Offering. The 1995 Plan
permits the grant of options to purchase shares of Common Stock from the
Company, stock appreciation rights ("SARs"), Stock Awards and Incentive
Awards.
The Compensation Committee (the "Committee") administers the 1995 Plan. The
Committee has the authority to select the individuals who will participate in
the 1995 Plan ("Participants") and to grant Options and SARs and to make Stock
Awards and Incentive Awards upon such terms (not inconsistent with the terms
of the 1995 Plan), as the Committee considers appropriate.
The Committee may delegate its authority to administer the 1995 Plan to an
officer of the Company. The Committee, however, may not delegate its authority
with respect to individuals who are subject to Section 16 of the Securities
Exchange Act of 1934. As used in this summary, the term "Administrator" means
the Committee and any delegate, as appropriate.
Any employee of the Company or any subsidiary and any person who provides
services to the Company or a subsidiary is eligible to participate in the 1995
Plan if the Administrator, in its sole discretion, determines that such person
has contributed significantly or can be expected to contribute significantly
to the profits or growth of the Company or a subsidiary.
Options granted under the 1995 Plan may be incentive stock options ("ISOs")
or nonqualified stock options. The option price will be fixed by the
Administrator at the time the option is granted, but the price cannot be less
than 85% of the shares' fair market value on the date of grant. The option
price may be paid in cash, with shares of Common Stock, or both. Options may
be exercised at such times and subject to such conditions as may be prescribed
by the Administrator. The maximum period in which an option may be exercised
will be fixed by the Administrator at the time the option is granted but
cannot exceed ten years in the case of an ISO. Options generally will be
nontransferable except by will or the laws of descent and distribution. The
Administrator may prescribe that options may be transferred without
consideration to members of the Participant's immediate family, a family trust
or a family partnership or as permitted under Rule 16b-3, as in effect from
time to time.
SARs generally entitle the Participant to receive the excess of the fair
market value of a share of Common Stock on the date of exercise over the
initial value of the SAR. The initial value of the SAR is the fair market
value of a share of Common Stock on the date of grant. The 1995 Plan provides
that the Administrator may prescribe that the Participant will realize
appreciation on a different basis than
48
<PAGE>
described in the preceding sentences. For example, the Administrator may limit
the amount of appreciation that may be realized upon the exercise of an SAR.
SARs may be granted in relation to option grants ("Corresponding SARs") or
independently of option grants. The difference between these two types of SARs
is that to exercise a Corresponding SAR, the Participant must surrender
unexercised that portion of the stock option to which the Corresponding SAR
relates.
The 1995 Plan also permits the grant of Stock Awards, which are shares of
Common Stock. A Stock Award may be subject to forfeiture or nontransferable or
both unless and until certain conditions are satisfied. These conditions may
include, for example, a requirement that the Participant complete a specified
period of service or that certain objectives be achieved. The objectives may
be based on performance goals that are stated with reference to the fair
market value of the Common Stock or on the Company's, a subsidiary's or an
operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital or return on assets. A Stock Award that is
not immediately vested and nonforfeitable will be restricted for a period of
at least three years; provided, however, that the period shall be at least one
year in the case of a Stock Award that is subject to objectives based on one
or more of the foregoing performance criteria.
Incentive Awards also may be granted under the 1995 Plan. An Incentive Award
is an opportunity to earn a bonus, payable in cash, upon the attainment of
stated performance objectives. The performance objectives may be stated with
reference to the fair market value of the Common Stock or on the Company's, a
subsidiary's or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital or return on assets. The
period in which the performance will be measured will be at least one year.
Incentive Awards are nontransferable except by will or the laws of descent and
distribution except that the Administrator may grant Incentive Awards that are
transferable as permitted under Rule 16b-3, as in effect from time to time.
Under the 1995 Plan, a maximum of 1,000,000 shares of Common Stock may be
issued upon the exercise of options and SARs and the grant of Stock Awards.
These limitations will be adjusted, as the Administrator determines is
appropriate, in the event of a change in the number of outstanding shares of
Common Stock by reason of a stock dividend, stock split, combination,
reclassification, recapitalization, or other similar events.
The 1995 Plan terminates in 2005. The Board may, without further action by
shareholders, terminate or suspend the 1995 Plan in whole or in part prior to
2005. The Board also may amend the 1995 Plan except that no amendment that
increases the number of shares of Common Stock that may be issued under the
1995 Plan, changes the class of individuals who may be selected to participate
in the 1995 Plan or materially increases the benefits that may be provided
under the 1995 Plan will become effective until it is approved by
shareholders.
Other Options. In addition to options issued under the 1991 Stock Option
Plan, the Company issued 15,000 options to three of its four Non-Affiliate
Directors (see "--Compensation of Directors") and 25,000 options to a non-
affiliate who helped in arranging a placement of Series C Preferred Stock.
Each of these grants have a $7.13 exercise price and vest over 36 equal
monthly installments. As of April 30, 1995, of these 70,000 options, options
for 15,679 shares of Common Stock are exercisable with a weighted average
exercise price of $7.13.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of the date of this Offering and as
adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, (iv) the Selling Stockholder and
(v) all current directors and Named Executive Officers as a group. Unless
otherwise indicated in the footnotes to the table, each person or entity has
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such person or entity.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING (1) AFTER OFFERING
---------------------------- NUMBER OF --------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF STOCKHOLDER SHARES PERCENT OFFERED SHARES PERCENT
------------------- -------------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
WorldCorp............... 10,644,273(2) 88% 1,050,000 9,594,273(2) 65%
13878 Park Center Road
Suite 490
Herndon, Virginia 22071
Knight-Ridder, Inc...... 771,389 7% -- 771,389 5%
1 Herald Plaza
Miami, Florida 33132
William F. Gorog(3)..... 469,409(4) 4% -- 469,409 3%
John C. Backus, Jr. .... 241,122(5) 2% -- 241,122 2%
Scott A. Corzine........ 36,034(6) * -- 36,034 *
Thomas A. Cramer........ 15,914(7) * -- 15,914 *
T. Coleman Andrews, III. 11,500(8) * -- 11,500 *
Patrick F. Graham....... 2,199(9) * -- 2,199 *
Ross Jones.............. -- * -- -- *
Geoffrey S. Rehnert..... 2,199(9) * -- 2,199 *
L. William Seidman...... 1,831(10) * -- 1,831 *
Directors and Named
Executive Officers as a
Group (9 persons)...... 780,208(11) 6% 780,208 5%
</TABLE>
- --------
(1) Reflects conversion or redemption of all of the Company's outstanding
Preferred Stock concurrent with the consummation of this Offering.
(2) Includes (i) 5,440,165 shares of Common Stock to be received concurrent
with the consummation of this Offering in exchange for 5,204,082 shares
of Series A Preferred Stock and 236,083 shares of Series C Preferred
Stock and (ii) 446,429 shares of Common Stock issuable upon the exercise
of Warrants.
(3) Does not include 10,644,273 shares of Common stock held by WorldCorp, of
which Mr. Gorog serves as chairman of the board. Mr. Gorog disclaims
beneficial ownership of such shares.
(4) Includes 388,197 shares issuable upon the exercise of options exercisable
through August 1, 1995.
(5) Includes 241,122 shares of Common Stock issuable upon the exercise of
options exercisable through August 1, 1995.
(6) Includes 36,034 shares of Common Stock issuable upon the exercise of
options exercisable through August 1, 1995.
(7) Includes 15,914 shares of Common Stock issuable upon the exercise of
options exercisable through August 1, 1995.
(8) Does not include 10,644,273 shares of Common Stock held by WorldCorp, of
which Mr. Andrews serves as chief executive officer, president and
director. Mr. Andrews disclaims beneficial ownership of such shares.
Additionally, Mr. Andrews is the beneficial owner of 5% of the
outstanding shares of WorldCorp.
(9) Includes 2,199 shares of Common Stock issuable upon the exercise of
options exercisable through August 1, 1995.
(10) Includes 1,831 shares of Common Stock issuable upon exercise of options
exercisable through August 1, 1995.
(11) Includes 689,695 shares of Common Stock issuable upon exercise of options
exercisable through August 1, 1995.
* Less than 1%.
50
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company has operated since 1992 as a majority-owned subsidiary of
WorldCorp, the Selling Stockholder. The chairman of the board of WorldCorp
serves as the Chief Executive Officer and Chairman of the Board of the
Company. The president of WorldCorp serves on the Company's Board of Directors
and three other members of the WorldCorp board of directors also serve on the
Board of Directors of the Company.
Since 1990, through a series of equity investments and interest-bearing
loans, WorldCorp has provided the most significant portion of the Company's
capital investment.
During 1992, WorldCorp loaned $1.25 million to the Company for working
capital purposes under a line of credit facility collateralized by 8,300
ScanFone terminals. Additionally during 1992, WorldCorp loaned $500,000 to the
Company under a short-term borrowing agreement for working capital purposes.
During 1992, WorldCorp received approximately $102,000 of interest expense
related to these borrowings. WorldCorp converted these borrowings to 1,750
shares of Series B Preferred Stock on December 31, 1992.
During the fourth quarter of 1992, WorldCorp advanced the Company $2.0
million and agreed to advance an additional $0.8 million in January 1993. In
1992, WorldCorp received 2,800 shares of Series B Preferred Stock in exchange
for the $2.8 million of outstanding indebtedness. In connection with this
purchase of Series B Preferred Stock, the Company granted WorldCorp the
exclusive right to certain technology developed by the Company. On August 1,
1994 WorldCorp relinquished its rights to this technology as part of the
Company's sale of its electronic banking operations.
In 1993, WorldCorp advanced an additional $2.6 million of short-term debt to
the Company at an interest rate of 7.5%. On April 1, 1993, the Company
exercised its option to convert this loan into 2,551 shares of Series B
Preferred Stock. The Company paid WorldCorp approximately $25,000 in interest
relating to this 7.5% Note. During 1993, WorldCorp purchased an additional 449
shares of Series B Preferred Stock for $449,000. In August 1994, the Company
redeemed 3,250 shares of WorldCorp's Series B Preferred Stock for $3.25
million with proceeds from the sale of its bill pay operations.
In June 1993, WorldCorp advanced $3.5 million to the Company in the form of
a long-term note due on the date of any public sale of equity securities
aggregating $3.0 million plus the outstanding principal amount on the note.
The note granted WorldCorp 271,429 Warrants to purchase common stock at $4.00
per share. In connection with this loan, the Company agreed to issue 200,000
additional Warrants to purchase common stock at $4.00 per share. The Company
issued these Warrants during 1994. WorldCorp transferred 25,000 of its
Warrants in February 1995 to Mr. Charles B. Ganz, a private investment manager
and beneficial owner of 10% of WorldCorp common stock, who facilitated Knight-
Ridder's investment in the Company. The note had a variable interest rate
until February 28, 1994, when the interest rate on the loan was fixed at an
annual rate of 14%. As of March 31, 1995, the Company had paid WorldCorp
approximately $800,000 in interest expense relating to this Loan. This loan
and accrued interest will be repaid with part of the proceeds of the Offering.
See "Use of Proceeds."
The Company subleased between 4,000 and 8,000 square feet of office space
from WorldCorp on a month-to-month basis prior to November 1994. Payments to
WorldCorp relating to the lease totaled approximately $71,000, $138,000 and
$92,000 in 1992, 1993 and 1994, respectively, and approximated WorldCorp's
cost to lease the space. In November 1994, the Company terminated its lease
with WorldCorp. During 1994, the Company entered into a three-year capital
lease with WorldCorp for telephone equipment. Payments to WorldCorp under this
lease totalled approximately $5,000 in 1994. WorldCorp also pays certain of
the Company's personnel costs, including salary, benefits, business, and other
related costs, for which the Company was billed at cost. During 1992, 1993 and
1994, the Company paid WorldCorp approximately $790,000, $500,000 and
$103,000, respectively, related to these arrangements. Pursant to an oral
agreement, WorldCorp provides the Company with certain administrative services
for which the aggregate annual payments are approximately $60,000.
51
<PAGE>
The Company's Chairman of the Board and Chief Executive Officer was a member
of the board of directors of VeriFone, the Company's primary supplier of the
terminal components, until August 1993. During 1992, 1993 and 1994, the
Company's purchases from this supplier totalled approximately $2.4 million,
$2.8 million and $32,000, respectively. Interest expense related to product
financing arrangements was $59,000, $164,000 and $0 in 1992, 1993 and 1994,
respectively. Amounts due under product financing arrangements and trade
payables to the supplier were converted to 465,180 shares of Series C
Preferred Stock on December 21, 1993.
In 1993, the Company agreed to purchase 25,000 PhonePlus smart telephones
from VeriFone for approximately $5.75 million plus an additional $75,000 to
offset associated research and development costs. Following the Company's sale
of its electronic bill payment operations to Visa in August 1994, the Company
and VeriFone amended this agreement whereby the Company made a prepayment of
$230,000 for 1,000 PhonePlus terminals and agreed to purchase an additional
2,000 PhonePlus terminals for $460,000. The Company also purchased all of the
shares of Series C Preferred Stock held by VeriFone at $7.13 per share and
paid approximately $182,707 in accumulated dividends. The aggregate amount
paid included $2.4 million in cash and a $1.1 million 7.5% unsecured note.
Each of the transactions with VeriFone were negotiated on an arms-length
basis between the parties and were concluded on what the Company believes to
be terms no less favorable than would have been obtained had the transactions
been entered into with non-affiliated third parties.
Peter Costello, Vice President--Consumer Products Development, has been an
officer of the company since January, 1995. Prior to that time, he provided
consulting services to US Order through his company, Melody Design
Corporation, which received approximately $174,000 from US Order during 1994.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, the Company has approximately 25 stockholders of
record. Upon completion of the Offering, the Company will have outstanding
14,406,096 shares of Common Stock. Of this amount, the 3,850,000 Shares sold
in this Offering and 30,771 shares held by non-affiliates of the Company will
be freely transferable and may be resold without further registration under
the Securities Act. The holders of the remaining 10,525,325 shares will be
entitled to resell them only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
an exemption provided by Rule 144. Substantially all of the remaining
10,525,325 shares are held by stockholders with the right to require the
Company to register these shares and the Company has agreed to register
certain other shares under a "shelf registration" pursuant to Rule 415 under
the Act. Additionally, as of April 30, 1995, the Company had outstanding
471,429 Warrants at a weighted average exercise price of $4.00 and options to
purchase 2,638,889 shares of Common Stock at a weighted average exercise price
of $5.03, of which options for 1,043,998 shares of Common Stock were
exercisable as of April 30, 1995 at a weighted average exercise price of
$2.05. See "Management--Stock Options". Shares issued pursuant to exercise of
the Warrants will be subject to a registration rights agreement obligating the
Company to effect registration of such shares. The Company intends to register
shares that may be issued upon the exercise of options, and accordingly such
shares, unless held by an affiliate, will be freely transferrable without
further registration. On April 6, 1995, in accordance with the Company's
strategic alliance agreement with Colonial Data, the Company and Colonial Data
entered into an agreement whereby the Company has agreed to exchange 230,000
shares of Common Stock for shares of common stock of Colonial Data with an
equivalent fair market value. Such exchange will be consummated upon the
closing of the Offering. The agreement also provides for the Company and
Colonial Data to exchange an additional $3.0 million in fair market value of
each other's common stock in April 1996. Such shares of Common Stock to be
issued to Colonial Data are subject to registration rights obligating the
Company to effect registration of such shares. Colonial Data will be entitled
to resell them only pursuant to a registration statement
52
<PAGE>
under the Securities Act or an applicable exemption from registration
thereunder such as an exemption provided by Rule 144. See "Business--
Telecommunications/Network Services--US Order's Telecommunications Strategy."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted
securities" for at least two years may, under certain circumstances, resell
within any three-month period such number of shares as does not exceed the
greater of 1% of the then-outstanding shares or the average weekly trading
volume during the four calendar weeks prior to such resale. Rule 144 also
permits, under certain circumstances, the resale of shares without any
quantity limitation by a person who has satisfied a three-year holding period
and who is not, and has not been for the preceding three months, an affiliate
of the Company. In addition, holding periods of successive non-affiliate
owners are aggregated for purposes of determining compliance with these two-
and three-year holding period requirements.
The availability of shares for sale or actual sales under Rule 144 or
otherwise may have an adverse effect on the market price of the Common Stock.
Sales under Rule 144 or otherwise also could impair the Company's ability to
market additional equity securities. The Company has agreed, however, not to
issue, and all directors and executive officers of the Company have agreed not
to resell, or otherwise dispose of, any shares of Common Stock or other equity
securities of the Company for 180 days after the date of this Prospectus
without the prior written consent of the representatives of the Underwriters.
Additionally, the Selling Stockholder has agreed not to resell, or otherwise
dispose of, any shares of Common Stock or other equity securities of the
Company for 270 days after the date of this Prospectus without the prior
written consent of the representatives of the Underwriters.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the Company's authorized capital stock
will consist of 30,000,000 shares of Common Stock, par value $.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock") of which 14,406,096 shares of Common Stock and no shares of
Preferred Stock will be issued and outstanding. All of the issued and
outstanding shares of Common Stock will be fully paid and nonassessable.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to
the Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws (the
"Bylaws"), copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one
upon which a different vote is required by express provision of law or the
Company's Certificate of Incorporation or Bylaws. There is no cumulative
voting with respect to the election of directors (or any other matter), but
the Company's Board of Directors is classified, which means that the holders
of a majority of the shares at a meeting at which a quorum is present can
elect all of the directors of the class then to be elected if they choose to
do so, and, in such event, the holders of the remaining shares would not be
able to elect any directors of that class. Under Delaware law, WorldCorp will
be able to approve certain actions by written consent without a meeting of the
stockholders of US Order.
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities.
53
<PAGE>
Subject to the rights of holders of Preferred Stock, if any, in the event of
a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to participate equally, share for share, in all assets
remaining after payment of liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The payment by the Company of dividends, if any,
rests within the discretion of its Board of Directors and will depend upon the
Company's results of operations, financial condition and capital expenditure
plans, as well as other factors considered relevant by the Board of Directors.
The Company may enter into bank credit agreements which include financial
covenants restricting the payment of dividends. Additionally, WorldCorp is
subject to two indentures under which it has agreed to cause US Order not to
pay dividends on capital stock under certain limited circumstances. See
"Dividend Policy."
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board of Directors
to issue up to 5,000,000 shares of Preferred Stock in one or more series and
to establish such relative voting, dividend, redemption, liquidation,
conversion and other powers, preferences, rights, qualifications, limitations
and restrictions as the Board of Directors may determine without further
approval of the stockholders of the Company. The issuance of Preferred Stock
by the Board of Directors could, among other things, adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a person or group to gain control of the Company.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant
the issuance of Preferred Stock. At the date of this Prospectus, there are no
plans, agreements or understandings relative to the issuance of any shares of
Preferred Stock.
FORMER PREFERRED STOCK
Immediately prior to the consummation of the Offering, the Company had
5,204,082 shares of Series A Preferred Stock, 4,300 shares of Series B
Preferred Stock and 1,147,725 shares of Series C Preferred Stock issued and
outstanding. Concurrent with the Offering, the Company will convert the Series
A and Series C Preferred Stock into Common Stock and will redeem the Series B
Preferred Stock. After the redemption and conversion of the Series A, Series B
and Series C Preferred Stock, no shares of Preferred Stock will be
outstanding.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the General Corporation Law of the State of Delaware
and of the Company's Certificate of Incorporation and Bylaws, summarized in
the following paragraphs, may be considered to have an anti-takeover effect
and may delay, deter or prevent a tender offer, proxy contest or other
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including such an attempt as might result in payment of a
premium over the market price for shares held by stockholders.
Delaware Anti-takeover Law. The Company, a Delaware corporation, is subject
to the provisions of the General Corporation Law of the State of Delaware,
including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (i) prior to such
date, the Board of Directors
54
<PAGE>
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the
business combination is approved by both the Board of Directors and by holders
of at least 66 2/3% of the corporation's outstanding voting stock, excluding
shares owned by the interested stockholder. For these purposes, the term
"business combination" includes mergers, asset sales and other similar
transactions with an "interested stockholder." An "interested stockholder" is
a person who, together with affiliates and associates, owns (or, within the
prior three years, did own) 15% or more of the corporation's voting stock.
Although Section 203 permits a corporation to elect not to be governed by its
provisions, the Company to date has not made this election.
Classified Board of Directors. The Certificate of Incorporation provides for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the Board
of Directors will be elected each year. Classification of the Board of
Directors expands the time required to change the composition of a majority of
directors and may tend to discourage a takeover bid for the Company. Moreover,
under the General Corporation Law of the State of Delaware, in the case of
corporation having a classified Board of Directors, the stockholders may
remove a director only for cause. The Company's Certificate of Incorporation
and Bylaws so provide. These provisions, when coupled with provisions of the
Company's Certificate of Incorporation and Bylaws authorizing only the Board
of Directors to fill vacant directorships, will preclude stockholders of the
Company from removing incumbent directors without cause, simultaneously
gaining control of the Board of Directors by filling the vacancies with their
own nominees.
Special Meetings of Stockholders; Action By Consent. The Company's Bylaws
provide that special meetings of stockholders may be called only by the
Chairman of the Board or at the request in writing of a majority of the Board
of Directors of the Company. The Company's Bylaws also provide that any action
required to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote upon the
written consent of the minimum number of stockholders necessary to authorize
such action.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Company's Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual or a special meeting of stockholders,
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal
executive office of the Company, not less than 60 days prior to the scheduled
annual meeting, regardless of any postponements, deferrals or adjournments of
the meeting. The Bylaws also specify certain requirements pertaining to the
form and substance of a stockholder's notice. These provisions may preclude
some stockholders from making nominations for directors at an annual or
special meeting or from bringing other matters before the stockholders at a
meeting.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston, Canton, Massachusetts.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Stockholder have agreed to sell to the
Underwriters, and each of the Underwriters, for whom Salomon Brothers Inc,
First Albany Corporation and L. H. Friend, Weinress, Frankson & Presson, Inc.
are acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholder, the number of shares
set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Salomon Brothers Inc..................................... 1,155,000
First Albany Corporation................................. 808,500
L.H. Friend, Weinress, Frankson & Presson, Inc. ......... 346,500
Oppenheimer & Co., Inc. ................................. 231,000
Prudential Securities Incorporated....................... 231,000
Robertson, Stephens & Company, L.P. ..................... 231,000
Allen & Company Incorporated............................. 154,000
Tucker Anthony Incorporated.............................. 154,000
Wheat, First Securities, Inc. ........................... 154,000
Crowell, Weedon & Co. ................................... 77,000
Needham & Company, Inc. ................................. 77,000
Pennsylvania Merchant Group Ltd.......................... 77,000
Punk, Ziegel & Knoell, L.P. ............................. 77,000
Scott & Stringfellow, Inc. .............................. 77,000
---------
Total................................................ 3,850,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase the 3,850,000
shares of Common Stock offered hereby (other than the shares of Common Stock
covered by the over-allotment option described below), if any such shares of
Common Stock are purchased. In the event of a default by any Underwriter, the
Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated. The Company has been advised by the
Representatives that the several Underwriters propose initially to offer such
shares of Common Stock at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $0.62 per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per share to other dealers.
After the initial offering, the public offering price and such concessions may
be changed.
The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 262,500 and 315,000 additional shares of Common
Stock, respectively, (577,500 shares in the aggregate) at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover over-
allotments in the sale of the shares of Common Stock that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment. In the event that the Underwriters exercise
less than their full over-allotment option, the number of shares to be sold
pursuant thereto by each of the Company and the Selling Stockholder shall be
allocated in proportion to the number of such person's shares subject to such
option.
The Company and the Selling Stockholder have agreed not to offer, sell or
contract to sell, or otherwise dispose of, or announce the offering of, any
shares of Common Stock, or any securities convertible into, or exchangeable
for, shares of Common Stock, except the shares of Common Stock
56
<PAGE>
offered hereby, for a period of 180 and 270 days, respectively, from the date
of this Prospectus without the prior written consent of the Representatives;
provided, however, that the Company may issue and sell Common Stock pursuant
to any employee stock option plan, stock ownership plan or dividend
reinvestment plan in effect on the date of this Prospectus and the Company may
issue Common Stock issuable upon the conversion of securities or the exercise
of warrants outstanding on the date of this Prospectus. Furthermore, all
directors and executive officers of the Company have agreed that they will not
offer, sell or contract to sell, or otherwise dispose of, or announce the
offering of any shares of Common Stock for a period of 180 days from the date
of this Prospectus without the prior written consent of the Representatives
(other than shares disposed of as bona fide gifts or shares of Common Stock
delivered to the Company in order to exercise, but not dispose of shares of
Common Stock received pursuant to the exercise of, stock options pursuant to
the terms of such stock options).
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
In January and February 1995, a person affiliated with Scott & Stringfellow,
Inc. and a person affiliated with Prudential Securities Incorporated purchased
5,000 and 7,000 shares of Common Stock, respectively, at $7.13 per share from
an executive officer of the Company. Although the parties involved have stated
that such sales and purchases were not made in contemplation of the Offering,
under applicable rules of the National Association of Securities Dealers,
Inc., Scott & Stringfellow, Inc. and Prudential Securities Incorporated may be
deemed to have received underwriting compensation in connection with the
Offering on account of these transactions. The purchasers have agreed that
they will not offer, sell or contract to sell, or otherwise dispose of, such
shares of Common Stock for a period of one year following completion of the
Offering.
Prior to this offering there has been no public market for the Common Stock.
The price to public for the Common Stock has been determined by negotiation
between the Company and the Representatives and is based on, among other
things, the Company's financial and operating history and condition, the
prospects of the Company and its industry in general, the management of the
Company and the market prices of securities of companies engaged in businesses
similar to those of the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Hunton & Williams, Richmond, Virginia. Certain legal matters
relating to this Offering will be passed upon for the Underwriters by Goodwin,
Procter & Hoar, Boston, Massachusetts.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1993 and
for each of the years in the three-year period ended December 31, 1994, and
the related financial statement schedule included herein and in the
Registration Statement have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
57
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement"), pursuant to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, for the registration of the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and financial statements and notes filed as a
part thereof. Statements made in this Prospectus concerning the contents of
any contract or other document are not necessarily complete. With respect to
each such contract or other document filed with the Commission as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed by the Company with the
Commission may be inspected at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Common Stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports as it may
determine or as may be required by law.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
58
<PAGE>
GLOSSARY
ADJUNCT is an auxiliary device connected to a telephone line. For example, a
Caller ID adjunct is a device with a small screen to display the number of the
incoming caller.
ACCESS DEVICE is a device which allows a user to interact with a host
system. Access devices such as smart telephones can be used to obtain
information, transmit information or communications and initiate transactions.
ADMS OR ACCESS DEVICE MESSAGING STANDARD is a standard established by Visa
Interactive to define the communication protocol for use between Visa
Interactive's host and a remote device such as a personal computer, smart
telephone or voice response unit. It is designed primarily to facilitate
electronic banking and bill payment.
ADSI OR AN ANALOG DISPLAY SERVICES INTERFACE is a Bellcore standard defining
a protocol on the flow of information between something (a switch, a voice
mail system, a service bureau) and a subscriber's telephone, personal
computer, data terminal, smart telephone or other communicating device with a
screen.
AUDIO RESPONSE UNIT is a device which translates computer output into spoken
voice. These devices process calls based on the caller's input, information
received from a host data base and information carried with the incoming call
(e.g., time of day). ARUs are used to increase the number of information calls
handled and to provide consistent quality in information retrieval.
CALLER ID is a service which displays information about the incoming call
(including the number and directory name of the caller as well as the time and
date of the call) on a display screen located on the telephone or on a unit
connected to the telephone.
CLASS OR CUSTOM LOCAL AREA SIGNALING SERVICES are services, available from
most local exchange carriers, which provide a variety of ways to set up and
manage telephone calls by using the intelligence of the local telephone
switch. These services can be accessed by entering codes on a standard touch-
tone telephone keypad. Some of these services, such as Caller ID, require the
customer to use special equipment. Services currently offered include customer
originated trace, selective call rejection, distinctive ringing, distinctive
call waiting, selective call forwarding, selective call acceptance, automatic
callback, cancel call waiting, and speed calling.
DES OR DATA ENCRYPTION STANDARD is an algorithm for encrypting (coding) data
for security purposes.
DSP OR DIGITAL SIGNAL PROCESSOR is a specialized computer chip designed to
perform operations on analog signals (e.g. voice) that have been converted to
digital format. DSP chips also can perform the same mathematical computations
and control functions performed by the general-purpose microprocessors
commonly found in personal computers. DSP chips used in smart telephones can
be programmed to process voice and data signals and interface with both audio
and visual outputs.
DTMF OR DUAL TONE MULTI-FREQUENCY is a term describing push button or touch-
tone dialing. In DTMF, when you touch a button on a pushbutton pad, it makes a
tone, actually a combination of two tones, one high frequency and one low
frequency, thus the name Dual Tone Multi Frequency.
EBMS OR ELECTRONIC BANKING MESSAGING STANDARD is a standard established by
Visa Interactive to define the communication protocol and message formats for
use between Visa Interactive's host and a Visa member institution to support
electronic home banking.
59
<PAGE>
HOME BANKING is the exchange of financial information or execution of
financial transactions between a customer and a financial institution using an
access device whose location is determined by the customer (typically at a
home or office).
ELECTRONIC BILL PAYMENT is bill payment system that accepts bill payment
orders from a customer through an access device and executes those payment
instructions.
EPAY is the Visa payment system for the electronic execution of customer
bill payment transactions. This system supports debiting the customer account,
crediting the biller account, and providing the biller with information to
post customer account payments.
HOST is an intelligent server attached to a communication network. In a
transaction processing system the host manages the data flow between access
devices, itself and other systems. The host also processes information and
transactions sent to it by the access devices of other systems.
INDEPENDENT is a local exchange carrier not formerly owned by AT&T, such as
GTE.
INTEGRATED CALLER ID ON CALL WAITING is a service that integrates Caller ID
information for incoming calls on Call Waiting enabling a subscriber to
identify a caller while otherwise using the telephone.
INTELLIGENT NETWORK is a network that allows functionality to be distributed
flexibly at a variety of nodes on and off the network and allows the
architecture to be modified to control the services; an advanced network
concept that is envisioned to offer such things as (i) distributed call-
processing capabilities across multiple network modules, (ii) real-time
authorization code verification, (iii) one-number services, and (iv) flexible
private network services (including (a) reconfiguration by subscriber, (b)
traffic analyses, (c) service restrictions, (d) routing control, and (e) data
on call histories).
INTERACTIVE APPLICATION is a service which allows a customer to obtain
information, transmit information or communications, and initiate transactions
through an access device.
INTERACTIVE SOLUTION is a system which delivers interactive services to a
customer efficiently and economically.
ISO 9000 is a set of standards for quality assurance published by the
International Standards Organization.
LEC OR LOCAL EXCHANGE CARRIER is the company operating the local switch
which connects a residential telephone customer to the telephone network.
Commonly known as the local telephone company.
QWERTY is a standard typewriter keyboard. The left side top row of letter
keys on the keyboard spell QWERTY. In reality, the last "standard" keyboard
was IBM's Selectric keyboard.
RBOCS are the regional Bell operating companies formed following the breakup
of AT&T. The seven RBOCs are Ameritech Communications Inc., Bell Atlantic
Corp., BellSouth Corp. Telecommunications, NYNEX Corp., Southwestern Bell
Corporation, Pacific Telesis Group and U S WEST, Inc.
SMART TELEPHONE is an access device which adds computing to a telephone. In
addition to standard telephone features, smart telephones incorporate a
display screen and a variety of user input devices, including QWERTY keyboards
and card readers. Smart telephones combine some of the functionality of high-
end telephones, personal organizers and Caller ID display devices in an easy-
to-use package.
60
<PAGE>
TRANSACTION PROCESSING SYSTEM See Host.
VOICE RECOGNITION is the ability of a computer to understand human speech.
VRU OR VOICE RESPONSE UNIT is an access device which uses a standard touch-
tone telephone as the user interface. A VRU converts digital information to
audio format for presentation to the user and interprets the signals from the
touch-tone keypad. Advanced VRU systems also interpret voice signals from the
user (also known as voice recognition). Common applications of simple voice
response technology include electronic banking and voice mail systems.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements
Independent Auditors' Report............................................ F-2
Balance Sheets as of December 31, 1993 and 1994......................... F-3
Statements of Operations for the Years Ended December 31, 1992, 1993 and
1994................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1992, 1993 and 1994................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1992, 1993 and
1994................................................................... F-6
Notes to Financial Statements........................................... F-7
Unaudited Financial Statements
Condensed Balance Sheet as of March 31, 1995............................ F-19
Condensed Statements of Operations for the Three Months Ended March 31,
1994
and 1995............................................................... F-20
Condensed Statements of Cash Flows for the Three Months Ended March 31,
1994
and 1995............................................................... F-21
Notes to Condensed Financial Statements................................. F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
US Order, Inc.:
We have audited the accompanying balance sheets of US Order, Inc. as of
December 31, 1994 and 1993, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1994. In connection with our audits of
the financial statements, we also have audited the related financial statement
schedule as listed in Item 16(b) herein. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of US Order, Inc. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1994,
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Washington, D.C.
January 20, 1995, except as to
note 4(b), which is as of
February 16, 1995, and note 13,
which is as of April 6, 1995
F-2
<PAGE>
US ORDER, INC.
BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
ASSETS 1993 1994
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,443,967 2,567,838
Accounts receivable, net of allowance for doubt-
ful accounts of $45,500 and $34,400 in 1994 and
1993, respectively............................... 63,226 442,379
Prepaid expenses (note 4)......................... 36,058 293,164
------------ ------------
Total current assets............................ 3,543,251 3,303,381
------------ ------------
Assets held for sale (note 4)...................... 1,274,730 316,140
------------ ------------
Property and equipment (notes 4 and 12):
Terminals......................................... 2,124,913 1,873,033
Terminal components............................... 240,000 --
Computer equipment................................ 1,489,104 560,591
Furniture and fixtures............................ 69,241 72,591
Leasehold improvements............................ 13,927 39,250
------------ ------------
Total property and equipment.................... 3,937,185 2,545,465
Less accumulated depreciation and amortization.... (1,061,659) (1,338,819)
------------ ------------
Net property and equipment...................... 2,875,526 1,206,646
------------ ------------
Total assets.................................... $ 7,693,507 4,826,167
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............. 858,803 1,191,430
Accrued wages and taxes payable................... 278,276 192,997
Deferred contract fees............................ 174,000 --
Due to affiliates (note 4)........................ 199,699 209,168
Obligations under capital leases--current in-
stallments (note 12)............................. 233,205 81,746
------------ ------------
Total current liabilities....................... 1,743,983 1,675,341
Obligations under capital leases, net of current
installments (note 12)............................ 731,491 182,978
Notes payable to affiliates (notes 4, 5 and 8)..... 3,500,000 4,632,570
Other payables..................................... -- 16,964
------------ ------------
Total liabilities............................... 5,975,474 6,507,853
------------ ------------
Series B redeemable, nonvoting preferred stock,
$.001 par value; authorized 10,000 shares; issued
and outstanding 7,550 and 4,300 shares in 1993 and
1994, respectively (redeemable at $1,000 per share
plus accrued but unpaid dividends through March
30, 1998; liquidation preference of $7,567,302 and
$4,783,105 in 1993 and 1994, respectively) (notes
4 and 6).......................................... 7,567,302 4,783,105
------------ ------------
Stockholders' equity (deficit) (notes 4, 7, 8 and
13):
Series A convertible preferred stock, $0.001 par
value; authorized 6,000,000 shares; issued and
outstanding 5,204,082 shares in 1993 and 1994
(liquidation preference of $7,209,267 and
$7,703,655 in 1993 and 1994, respectively)....... 5,204 5,204
Series C convertible preferred stock, $0.001 par
value; authorized 5,000,000 shares; issued and
outstanding 1,683,031 and 1,147,725 shares in
1993 and 1994, respectively (liquidation prefer-
ence of $13,833,316 and $10,195,491 in 1993 and
1994,respectively)............................... 1,683 1,148
Common stock, $0.001 par value; authorized
30,000,000 shares; issued and outstanding
5,000,000 and 5,120,789 shares in 1993 and 1994,
respectively..................................... 5,000 5,121
Additional paid-in capital........................ 16,817,135 12,489,226
Receivable from sale of stock (note 8)............ (2,500,000) (2,500,000)
Accumulated deficit............................... (20,178,291) (16,465,490)
------------ ------------
Total stockholders' equity (deficit)............ (5,849,269) (6,464,791)
------------ ------------
Commitments and contingencies (notes 3, 4, 6, 7, 8,
9 and 12)
Total liabilities and stockholders' equity (def-
icit).......................................... $ 7,693,507 4,826,167
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
US ORDER, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Service fees.......................... $ 48,766 882,716 1,341,096
Miscellaneous revenue................. 13,770 21,794 90,745
----------- ----------- -----------
Total revenue....................... 62,536 904,510 1,431,841
----------- ----------- -----------
Cost of revenue......................... 125,904 907,927 1,012,601
----------- ----------- -----------
Gross margin........................ (63,368) (3,417) 419,240
----------- ----------- -----------
Operating expenses:
Research and development.............. 684,795 963,694 1,769,029
Advertising and promotion............. 1,317,697 1,569,282 847,334
General and administrative (note 7)... 4,058,441 6,470,474 7,968,046
Write-down of terminals and terminal
components (note 4).................. 430,420 1,535,833 --
----------- ----------- -----------
Total operating expenses............ 6,491,353 10,539,283 10,584,409
----------- ----------- -----------
Operating loss...................... (6,554,721) (10,542,700) (10,165,169)
----------- ----------- -----------
Other income (expense):
Gain on sale of electronic banking and
bill pay operations (note 9)......... -- -- 14,523,217
Interest income....................... 13,784 6,236 71,635
Interest expense (notes 4, 5 and 8)... (264,743) (736,452) (649,653)
Other income, net..................... -- 48,252 2,771
----------- ----------- -----------
Total other income (expense)........ (250,959) (681,964) 13,947,970
----------- ----------- -----------
Income (loss) before income taxes... (6,805,680) (11,224,664) 3,782,801
Income tax expense (note 11)............ -- -- 70,000
----------- ----------- -----------
Net income (loss)................... (6,805,680) (11,224,664) 3,712,801
Preferred dividend requirement (note 2). (391,950) (1,042,823) (1,894,582)
----------- ----------- -----------
Net income (loss) applicable to com-
mon stockholders................... $(7,197,630) (12,267,487) 1,818,219
=========== =========== ===========
Net income (loss) per common share...... $ (1.18) (2.01) .28
=========== =========== ===========
Shares used for computation............. 6,089,979 6,089,979 8,243,436
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
US ORDER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
SERIES A SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------- ----------------- ---------------- PAID-IN FROM SALE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OF STOCK DEFICIT TOTAL
--------- ------ --------- ------ --------- ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Decem-
ber 31, 1991.... 2,411,511 $2,412 -- $ -- 5,000,000 $5,000 $ 2,533,425 $ -- $ (2,147,947) $ 392,890
Sale of pre-
ferred stock,
$1.0116 per
share.......... 2,767,893 2,767 -- -- -- -- 2,797,232 -- -- 2,799,999
Net loss........ -- -- -- -- -- -- -- -- (6,805,680) (6,805,680)
Series B
redeemable
preferred stock
accumulated
dividends...... -- -- -- -- -- -- (20,260) -- -- (20,260)
--------- ------ --------- ------ --------- ------ ----------- ----------- ------------ ------------
Balance at Decem-
ber 31, 1992.... 5,179,404 5,179 -- -- 5,000,000 5,000 5,310,397 -- (8,953,627) (3,633,051)
Sale of pre-
ferred stock... 24,678 25 726,967 727 -- -- 5,207,521 -- -- 5,208,273
Conversion of
debt and other
liabilities to
preferred
stock.......... -- -- 605,433 605 -- -- 4,316,128 -- -- 4,316,733
Issuance of
preferred stock
for advertising
credits........ -- -- 350,631 351 -- -- 2,499,649 (2,500,000) -- --
Series B
redeemable
preferred stock
accumulated
dividends...... -- -- -- -- -- -- (516,560) -- -- (516,560)
Net loss........ -- -- -- -- -- -- -- -- (11,224,664) (11,224,664)
--------- ------ --------- ------ --------- ------ ----------- ----------- ------------ ------------
Balance at Decem-
ber 31, 1993.... 5,204,082 5,204 1,683,031 1,683 5,000,000 5,000 16,817,135 (2,500,000) (20,178,291) (5,849,269)
Sale of common
stock.......... -- -- -- -- 120,789 121 136,800 -- -- 136,921
Redemption of
preferred
stock.......... -- -- (381,309) (381) -- -- (2,718,353) -- -- (2,718,734)
Redemption of
preferred stock
through
issuance of
note payable... -- -- (153,997) (154) -- -- (1,097,846) -- -- (1,098,000)
Dividends paid--
Series C, $.64
per share...... -- -- -- -- -- -- (182,707) -- -- (182,707)
Series B
redeemable
preferred stock
accumulated
dividends...... -- -- -- -- -- -- (465,803) -- -- (465,803)
Net income...... -- -- -- -- -- -- -- -- 3,712,801 3,712,801
--------- ------ --------- ------ --------- ------ ----------- ----------- ------------ ------------
Balance at Decem-
ber 31, 1994.... 5,204,082 $5,204 1,147,725 $1,148 5,120,789 $5,121 $12,489,226 $(2,500,000) $(16,465,490) $ (6,464,791)
========= ====== ========= ====== ========= ====== =========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
US ORDER, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $(6,805,680) (11,224,664) 3,712,801
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization.......... 219,339 796,433 748,986
Write-down of terminals and terminal
components............................ 430,420 1,535,833 --
Gain on sale of assets................. -- (139,730) (2,771)
Gain on sale of bill pay operations.... -- -- (14,523,217)
Deferred interest expense on note pay-
able to affiliate..................... -- -- 34,570
Loss on debt extinguishment............ -- 91,478 --
Changes in certain assets and
liabilities, net of effects of non-
cash transactions:
Increase in accounts receivable...... (12,097) (41,332) (379,153)
Increase in prepaid expenses......... (25,635) (1,724) (257,106)
Increase (decrease) in accounts pay-
able and accrued expenses........... 821,162 (124,474) 414,354
(Decrease) increase in accrued wages
and taxes payable................... 118,769 114,392 (85,279)
(Decrease) increase in deferred con-
tract fees.......................... -- 174,000 (174,000)
Increase in other accounts payable... -- -- 16,964
(Decrease) increase in due to affili-
ates................................ (45,375) 1,600,963 9,469
----------- ----------- -----------
Net cash used by operating activi-
ties................................. (5,299,097) (7,218,825) (10,484,382)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.... (1,261,215) (3,055,604) (314,420)
Proceeds from sale of bill pay opera-
tions, net............................ -- -- 14,645,101
Sales or maturities of short-term in-
vestments............................. 79,386 -- --
Proceeds from sale of terminals and
terminal components................... -- 1,368,187 1,455,773
----------- ----------- -----------
Net cash provided (used) by investing
activities........................... (1,181,829) (1,687,417) 15,786,454
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt......... -- 7,051,000 --
Proceeds from issuance of common stock. -- -- 136,921
Proceeds from issuance of convertible
preferred stock....................... 2,799,999 5,208,273 --
Proceeds from the issuance of redeem-
able preferred stock.................. 3,750,000 1,249,000 --
Payments for redemption of redeemable
preferred stock....................... -- -- (3,250,000)
Payments for redemption of convertible
preferred stock....................... -- -- (2,718,734)
Principal payments under capital lease
obligations........................... (84,280) (181,868) (163,681)
Payments under product financing agree-
ment.................................. (175,074) (522,916) --
Payment of accumulated redeemable pre-
ferred stock dividends................ -- (519,518) --
Payments of dividends on Series C pre-
ferred stock.......................... -- -- (182,707)
----------- ----------- -----------
Net cash (used) provided by financing
activities........................... 6,290,645 12,283,971 (6,178,201)
----------- ----------- -----------
(Decrease) increase in cash and cash
equivalents.......................... (190,281) 3,377,729 (876,129)
Cash and cash equivalents, beginning of
period................................. 256,519 66,238 3,443,967
----------- ----------- -----------
Cash and cash equivalents, end of peri-
od..................................... $ 66,238 3,443,967 2,567,838
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest. $ 185,383 348,278 593,863
=========== =========== ===========
Supplemental schedule of noncash financ-
ing and investing activities:
Capital lease obligations incurred for
new equipment......................... $ 417,281 496,440 235,352
Obligations incurred under product
financing agreements for terminal
components............................ 974,331 1,253,141 --
Conversion of debt to preferred stock.. -- 3,551,000 --
Redemption of convertible preferred
stock through issuance of note pay-
able.................................. -- -- 1,098,000
Capital lease and other obligations
assumed by purchaser of bill pay
operations............................ -- -- 853,370
Issuance of stock for amount of receiv-
ables from investor................... 800,000 -- --
Issuance of stock in exchange for
cancellation of accounts payable and
product financing payable............. -- 3,316,733 --
Issuance of stock for advertising cred-
its................................... -- 2,500,000 --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
(1) ORGANIZATION
US Order, Inc. (the Company), a Delaware corporation, was established during
1990 and was a development stage enterprise from inception through 1993. The
Company was organized to provide interactive applications (including home
banking and home shopping) primarily to individual customers on a smart
telephone. On August 1, 1994 the Company sold its electronic banking and bill
pay operations (see note 9) to Visa International Service Association (Visa).
As a result, the Company was designated as a "preferred provider" to supply
certain of its interactive content, support services and smart phones to
Visa's members, with Visa acting as a direct marketer and reseller. The
Company also offers its interactive products and services to companies within
the telecommunications industry.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months
or less to be cash equivalents.
(b) Property and Equipment
Property and equipment is stated at cost. Equipment under capital lease is
stated at the lower of the present value of minimum lease payments at the
beginning of the lease term or the estimated fair value of the equipment at
the inception of the lease. The capitalized cost of terminal components
acquired under product financing arrangements includes the present value of
future product financing payments.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of three to seven years. The Company
begins depreciating terminals when they have been assembled and shipped to
customers. Equipment held under capital lease is amortized using the straight-
line method over the lease term or its estimated useful life, whichever is
shorter.
(c) Revenue Recognition
The Company recognizes service fee revenue as the services are provided.
Prior to the sale of its electronic banking and bill payment operations, the
Company recognized transaction revenue upon the transmission of a customer
order via a terminal.
(d) Income Taxes
Income taxes are accounted for in accordance with Financial Accounting
Standards Board Statement No. 109 (Statement 109). The Company adopted
Statement 109 effective January 1, 1992. Prior to January 1, 1992, the Company
accounted for income taxes using the provisions of Statement of Financial
Accounting Standards Statement No. 96. The implementation of Statement 109 did
not result in any cumulative adjustment in the accompanying financial
statements.
Under the asset and liability method of Statement 109, 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.
F-7
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(e) Income (Loss) per Common Share
Primary income (loss) per common share is computed by dividing net income
(loss), after deducting preferred stock dividend requirements, by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents are comprised of stock
options and warrants. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin Topic 4:D, stock issued and stock options granted during
the 12-month period preceding the date of the Company's planned initial public
offering have been included in the calculation of weighted average shares of
common stock and common stock equivalents outstanding for all periods using
the treasury stock method based on the initial public offering price of $14.75
per share.
The computation of fully diluted earnings per share includes all other
shares of common stock that potentially may be issued as a result of
conversion privileges. Any reduction of less than 3% in the aggregate has not
been considered dilutive in the presentation of fully diluted earnings per
share. For the years ended December 31, 1992, 1993 and 1994, the computations
of fully diluted earnings per share were not dilutive.
The Company had undeclared dividends on all Series of its preferred stock at
December 31, 1993 and 1994. The accumulated unpaid dividends are deducted from
net income or loss in order to calculate income or loss per common share. The
preferred dividend requirements of $391,950, $1,042,823 and $1,894,582 for the
years ended December 31, 1992, 1993 and 1994, respectively, include undeclared
dividends for each of the respective years of $391,950, $523,305, and
$1,711,875 or $.07, $.09 and $.21 per common share, respectively.
(3) OPERATING ENVIRONMENT
The Company has generated operating losses since its inception. In the
second half of 1994, the Company sold its electronic bill pay operations to
Visa for approximately $15 million and a 72 month royalty obligation (see note
9 for additional information). The gain on this sale offset the operating loss
incurred in 1994, resulting in net earnings of approximately $3.7 million in
1994. The Company is currently seeking additional equity financing as well as
attempting to monetize certain of its assets, including its $2.5 million
advertising credit. However, there can be no assurance that such financing
will be obtained.
The Company's interactive products and services are subject to the risks
inherent in the marketing and development of new products. The market for the
Company's products and services is relatively new and is characterized by
rapid technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. In
addition, the industry for these products and services is intensely
competitive. The Company experiences direct competition from manufacturers of
smart telephones and from high technology companies which develop software
solutions and applications for interactive transaction processing and remote
banking facilities management services. To date, the Company has generated
limited revenues through the sale of its products and services and there can
be no assurance as to what level of future royalties the Company will receive
from Visa.
In order for the Company to achieve positive operating results during 1995,
it will need to successfully leverage its relationship with Visa as a
preferred provider and identify alternative channels for its smart phone
technology. The Company believes that the majority of banks which will be
using Visa for various bill pay operations will utilize some form of the
Company's services. In addition, in
F-8
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
January 1995, the Company signed a two-way exclusive strategic alliance with a
leading manufacturer of Caller ID units, Colonial Data Technologies Corp.
(Colonial Data), to jointly develop and distribute the Company's next
generation of consumer telephones to the telecommunications industry.
The Company believes that the combination of its existing cash balances and
the operating and additional financing plans described above will be
sufficient to allow the Company to meet its operating and capital requirements
during 1995.
(4) RELATED-PARTY TRANSACTIONS
(a) Principal Supplier
An officer and shareholder of the Company was a member of the board of
directors of the Company's primary supplier of the terminal components until
August 1993. During 1992, 1993 and 1994, the Company purchased approximately
$2,400,000, $2,800,000 and $32,000, respectively, of terminal components from
this supplier. Interest expense related to product financing arrangements was
$59,000, $164,000 and $0 in 1992, 1993 and 1994, respectively. Amounts due
under product financing arrangements and trade payables to the supplier were
converted to Series C preferred stock on December 21, 1993 (see note 8).
In 1993, the Company elected to offer the third-generation screen-based
telephone called the PhonePlus to its existing customers and all new
customers, as it had done with the ScanFone in 1992 and 1993. However, with
the sale of its electronic banking and bill pay operations (see note 9) the
Company will now offer the PhonePlus to banks, Regional Bell Operating
Companies (RBOCs), and long-distance phone companies under wholesale
arrangements. The Company is selling all of its first- and second-generation
ScanFone equipment as it is returned from customers. The total carrying value
of assets held for sale by the Company as of December 31, 1993 and 1994 was
$1,274,730 and $316,140, respectively. The Company expects that substantially
all of the ScanFone terminals currently held by customers (with a net book
value of approximately $744,000 at December 31, 1994) will be returned to the
Company during 1995. Provisions of approximately $430,000 and $1,536,000 were
recorded as other operating expense in the fourth quarters of 1992 and 1993,
respectively, to reduce the carrying values of first- and second-generation
equipment to their estimated net realizable values.
The Company had previously agreed to purchase 25,000 PhonePlus terminals
from the supplier for approximately $5,750,000. In conjunction with the sale
of the Company's bill pay operations, the Company negotiated an amendment to
this agreement. Under the terms of the amended agreement, the Company made a
prepayment of $230,000 for 1,000 PhonePlus terminals in August 1994 and is
required to purchase a minimum of 2,000 additional PhonePlus terminals for a
total additional commitment of $460,000. The Company expects to receive all
3,000 PhonePlus terminals in the first half of 1995. The $230,000 prepayment
is included as prepaid expenses in the accompanying December 31, 1994 balance
sheet.
(b) Primary Investor
An officer and shareholder of the Company is the chairman of the board of
directors of WorldCorp, Inc. (WorldCorp), the Company's primary investor.
Another officer of the Company is also a member of the board of directors of
WorldCorp. As of December 31, 1994, WorldCorp, through its ownership of all
the Series A preferred stock, 236,083 shares of Series C preferred stock and
489,836 shares of common stock, owned approximately 52 percent of the
Company's outstanding voting stock. WorldCorp also owns all of the Series B
preferred stock and has an option to purchase the Company's common stock held
by the founding shareholders, pursuant to a Stock Restriction Agreement
entered into on September 14, 1990. As of December 31, 1994, WorldCorp had
exercised part of its option and purchased 489,836 shares of the Company's
outstanding common stock for $400,000 in cash. On February 16, 1995, WorldCorp
exercised the remainder of its option to purchase 4,267,843 shares
F-9
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the Company's outstanding common stock in exchange for a combination of
cash, notes payable and WorldCorp common stock, totaling $3,485,249. This
transaction increased WorldCorp's ownership of the Company's outstanding
voting stock to approximately 89 percent. The Company did not receive any of
the proceeds from this stock purchase.
The Company subleased approximately 6,000 square feet of office space from
WorldCorp on a month-to-month basis prior to November 1994. Expense related to
the lease totaled approximately $71,200, $138,000 and $92,000 in 1992, 1993
and 1994, respectively. In November 1994 the Company terminated its lease with
WorldCorp. During 1994, the Company also entered into a 3 year capital lease
with WorldCorp for telephone equipment. WorldCorp also pays certain of the
Company's personnel costs, including salary, benefits, business, and other
related costs, for which the Company is then billed. During 1992, 1993 and
1994, the Company paid WorldCorp approximately $790,400, $500,000 and
$103,000, respectively, related to these arrangements. At December 31, 1993
and 1994, the Company was indebted to WorldCorp in the amount of $124,699 and
$189,475, respectively. These amounts are included in due to affiliates in the
accompanying balance sheets.
During 1992, WorldCorp loaned $1,250,000 to the Company for working capital
purposes under a line of credit facility, collateralized by 8,300 ScanFone
terminals. Additionally during 1992, WorldCorp loaned $500,000 to the Company
under a short-term borrowing agreement for working capital purposes. In 1992,
the Company incurred approximately $102,000 of interest expense related to
these borrowings. Effective December 31, 1992, WorldCorp converted these
borrowings to 1,750 shares of Series B redeemable, nonvoting preferred stock
(see note 6).
During the fourth quarter of 1992, WorldCorp advanced the Company $2,000,000
and agreed to advance an additional $800,000 which was received by the Company
on January 6, 1993. In 1992, WorldCorp received 2,800 shares of Series B
redeemable, nonvoting preferred stock in exchange for the $2,800,000. In
connection with this purchase of Series B preferred shares, the Company
granted WorldCorp the exclusive right to certain technology developed by the
Company. On August 1, 1994 WorldCorp relinquished its rights to this
technology as part of the Company's sale of its electronic banking operations
(see note 9).
In 1993, WorldCorp advanced an additional $2,551,000 of short-term debt to
the Company at an interest rate of 7.5 percent. On April 1, 1993, the Company
exercised its option to convert this loan into 2,551 shares of Series B
redeemable, nonvoting preferred stock (see note 6). During 1993, WorldCorp
also purchased an additional 449 shares of Series B preferred stock for
$449,000. In August 1994, the Company redeemed 3,250 shares of WorldCorp's
Series B preferred stock for $3,250,000 with proceeds from the sale of its
bill pay operations.
In June 1993, WorldCorp advanced $3,500,000 to the Company in the form of a
long-term note due on the date of any public sale of equity securities
aggregating $3 million plus the outstanding principal amount on the note. The
note granted WorldCorp 271,429 warrants to purchase common stock at $4.00 per
share. In connection with this loan, the Company agreed to issue 200,000
additional warrants to purchase common stock at $4.00 per share. These
warrants were issued during 1994. The Company determined that the value of the
warrants at the date of grant was not significant. The note had a variable
interest rate until February 28, 1994, when the interest rate on the loan was
fixed at an annual rate of 14 percent.
WorldCorp is subject to two indentures expiring in 1997 and 2004 under which
it is obligated to cause the Company not to pay dividends under certain
limited circumstances. As of December 31, 1994, WorldCorp is obligated under
the indenture terminating in 1997 to cause the Company not to pay dividends on
its common stock.
F-10
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
---------- ---------
<S> <C> <C>
14% note payable to WorldCorp due on date of a public
sale of equity securities (see note 4(b))............. $3,500,000 3,500,000
7.5% unsecured promissory note due the earlier of
February 15, 1998 or the date of a public sale of
equity securities (see note 8)........................ -- 1,132,570
---------- ---------
$3,500,000 4,632,570
========== =========
</TABLE>
(6) REDEEMABLE PREFERRED STOCK
The par value of Series B redeemable preferred stock was amended in 1993
from $1,000 per share to $0.001 per share.
Series B preferred stockholders have no voting rights. They are entitled and
have preference to cumulative dividends at the annual rate of $75 per share,
payable quarterly, when, as, and if declared by the Board of Directors.
Dividends accrue from the date of issuance. No dividends may be paid to common
stockholders until all cumulative payments have been paid on the Series B
preferred shares. In December 1993, the Company paid approximately $520,000 of
accrued dividends on Series B preferred stock. As of December 31, 1993 and
1994, cumulative undeclared dividends approximated $17,000 and $483,000,
respectively.
At any time prior to March 30, 1998, the Company may redeem all or part of
the Series B preferred stock for $1,000 per share. On March 30, 1998, the
Company is required to redeem all of the shares of Series B preferred stock
outstanding on such date at $1,000 per share. Accrued and unpaid dividends are
payable at redemption.
In the event of any liquidation, dissolution, or winding up of the Company,
the Series B stockholders are entitled to and have preference to the amount of
$1,000 per share plus any accrued and unpaid dividends on each share.
(7) STOCKHOLDERS' EQUITY
(a) Series A Convertible Preferred Stock
Under a September 14, 1990 Stock Purchase Agreement, as amended (the
Agreement), the Company agreed to sell to WorldCorp 1,250,000 shares of the
Company's Series A preferred stock for a total purchase price of $1,325,000.
Additionally, the Company granted WorldCorp an option to purchase up to
3,954,082 shares of Series A preferred stock for $4,000,000 (approximately
$1.0116 per share). As of December 31, 1993, WorldCorp had fully exercised
this option.
The Series A preferred stock is convertible into the Company's common stock
at the holder's option. Conversion may occur at any time. The number of shares
of common stock obtainable upon conversion is based upon the issue price of
the Series A preferred stock to be converted. On December 31, 1994, each share
of Series A preferred stock was convertible into one share of common stock.
The conversion price is subject to adjustment under certain circumstances. In
the event of
F-11
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
certain public distributions of additional shares of common stock, the Series
A preferred shares will be automatically converted into shares of common stock
at the conversion price then in effect ($1.06 at December 31, 1994). The
Company shall at all times reserve sufficient shares of authorized but
unissued common stock to effect the conversion of all outstanding shares of
the Series A preferred stock.
The Series A preferred stockholder has one vote for each share of common
stock into which the Series A preferred stock is convertible. The shareholder
is entitled and has preference to cumulative dividends at the annual rate of
$0.095 per share, payable quarterly, when and if declared by the Board of
Directors. No dividends may be paid to common stockholders until all
cumulative payments have been paid on the Series A preferred shares. Dividends
shall accrue daily on each share from the later of March 1, 1992, or the issue
date, whether or not earned or declared. As of December 31, 1993 and 1994,
cumulative undeclared dividends approximated $865,000 and $1,360,000,
respectively.
In the event of any liquidation, dissolution, or winding up of the Company,
the Series A preferred stockholder is entitled and has preference to the
amount of $1.06 per share and a premium of $0.159 per share plus any accrued
but unpaid dividends on each share.
If the holders of Registrable Securities, as defined in the Agreement,
request that the Company file a registration statement covering any of its
outstanding securities, under certain circumstances, the Company may purchase,
at the then-prevailing market price, the requesting stockholders' shares
rather than filing the registration statement. The stockholders also have
certain other registration rights.
Beginning March 15, 1992, all directors were elected by the common and
Series A preferred stockholders as a single class. Beginning December 21,
1993, directors are elected by the Series A preferred stockholders, Series C
preferred stockholders and the common stockholders, as a single class.
(b) Series C Convertible Preferred Stock
The Series C preferred shares are convertible into the Company's common
stock at the option of the holder, at any time. The number of shares of common
stock obtainable upon conversion is based upon the issue price of the Series C
preferred stock. On December 31, 1994, each share of Series C preferred stock
was convertible into one share of common stock. The conversion price is
subject to adjustment under certain circumstances, including in the event that
a qualifying equity offering of the Company's stock does not occur at certain
prices and by certain dates in 1995. In the event of certain public
distributions of additional shares of common stock, the Series C preferred
shares shall be automatically converted into shares of common stock at the
conversion price then in effect ($7.13 at December 31, 1994). The Company
shall at all times reserve sufficient shares of authorized but unissued common
stock to effect the conversion of all outstanding shares of the Series C
preferred stock.
The Series C preferred stockholder has one vote for each share of common
stock into which the Series C preferred stock is convertible.
Series C stockholders are entitled and have preference to cumulative
dividends at the annual rate of $0.64 per share, payable quarterly, when and
if declared by the Board of Directors. No dividends may be paid to common
stockholders until all cumulative payments have been paid on the Series C
preferred shares. Dividends accrue from the later of December 17, 1993, or
date of issuance. In the event of any liquidation, dissolution, or winding up
of the Company, the Series C preferred
F-12
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
stockholders are entitled and have preference to the amount of $7.13 per share
and a premium of $1.07 per share plus any accrued and unpaid dividends. In
August 1994, the Company paid $182,707 of accrued dividends on the Series C
preferred stock. As of December 31, 1993 and 1994, cumulative undeclared
dividends were approximately $32,000 and $784,000, respectively.
In the event amounts available for distribution to preferred stockholders
upon liquidation are insufficient to pay the total amounts due to Series A, B,
and C stockholders, the total assets of the corporation legally available for
distribution shall be distributed among the holders of the Series A, B, and C
preferred stock pro rata, based on the proportions that the aggregate Series A
liquidation preference, aggregate Series B liquidation preference and
aggregate Series C liquidation preference bears to the sum of the aggregate
Series A, Series B, and Series C liquidation preferences.
In the event sufficient amounts are available for distribution to Series A,
B, and C preferred stockholders upon liquidation of the Company and upon
completion of the distribution of liquidation preferences, the remaining
assets of the corporation available for distribution shall be distributed
among the holders of common, Series A, and Series C preferred stock.
(c) Stock Options
The Company sponsors a stock option plan which covers substantially all
employees and certain directors. The Company has reserved 3,000,000 shares of
common stock for the exercise of options. As of December 31, 1994, 2,547,133
options had been granted for purchases of the same number of shares of the
Company's common stock. The options vest monthly over a period of three to
five years. However, no vesting occurs until after the employee has completed
one year of service with the Company. Of the 2,429,469 options outstanding at
year-end, 953,789, 45,847, 113,424, and 1,316,409 have exercise prices of
$.98, $2.50, $4.00, and $7.13 per share, respectively. As of December 31,
1994, 1,003,852 options were vested and exercisable, and 113,507, 2,294, and
4,987 options had been exercised for the same number of shares of the
Company's common stock at prices of $.98, $2.50, and $4.00 per share,
respectively.
In August 1994, the Company paid $3,250,000 to certain employees to cancel
675,334 outstanding vested options. This amount is included in general and
administrative expense in the accompanying 1994 statement of operations.
(8) PRIVATE PLACEMENT OFFERING
In December 1993, the Company reached agreements with WorldCorp and four
other investors in a private placement offering. The financing was structured
as follows:
. On November 12, 1993, the Company issued notes payable to two unrelated
parties in exchange for $1,000,000. On December 21, 1993, those notes
were converted into 140,253 shares of Series C convertible preferred
stock.
. WorldCorp purchased 236,083 shares of Series C convertible preferred
stock for $1,683,272.
. The principal supplier received 465,180 shares of Series C convertible
preferred stock for the forgiveness and cancellation of $1,612,360 in
trade accounts payable and $1,704,373 in product financing fees due the
supplier. In addition, upon the occurrence of certain events such as the
bankruptcy of the Company, the principal supplier would receive a fully
paid, non-exclusive, worldwide license to certain of the Company's
licensed technology.
. Another investor purchased 841,515 shares of Series C convertible
preferred stock for $3.5 million cash and $2.5 million in future
advertising services. This investor has a representative on
F-13
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the Board of Directors, and had the option to acquire an additional 3
percent of the Company's fully diluted common and convertible preferred
equity until December 20, 1994. The investor did not exercise the option.
The $2.5 million in future advertising credits is included in the
accompanying balance sheet as a reduction of stockholders' equity. The
Company plans to attempt to sell this advertising credit, which carries
certain restrictions as to its use.
In connection with the private placement, each of the other Series C
stockholders received certain registration rights which may require the Company
to register the Series C stock for sale in a public offering.
In August 1994, in conjunction with the sale of the Company's bill pay
operations (see note 9), the Company purchased all 465,180 of the principal
supplier's Series C convertible preferred stock at $7.13 per share and paid
$182,707 in cumulative dividends. The aggregate amount paid consisted of
approximately $2,400,000 in cash and a $1,098,000 unsecured promissory note
(the Note) which bears interest at an annual rate of 7.5% compounded quarterly,
and is due when the note matures. The Note is due the earlier of February 15,
1998 or the date of any public sale of debt or equity securities of the Company
which exceeds an aggregate amount equal to at least five times the then-
outstanding principal balance of the Note. Additionally, in the event the
royalties received from Visa in the future (see note 9), exceed certain amounts
specified in the Note, the Company will be required to make quarterly
prepayments based upon a formula set forth in the Note. Based on this
provision, the Company does not expect to make any prepayments on the Note
during 1995. In conjunction with the stock redemption, the principal supplier
relinquished any and all rights to the Company's licensed technology.
At the same time, the Company also retired 70,126 of another investor's
841,515 shares of Series C convertible preferred stock for $500,000 in cash.
(9) SALE OF ELECTRONIC BANKING AND BILL PAY OPERATIONS
On August 1, 1994, the Company sold its electronic banking and bill pay
operations (the System) to Visa for $14,645,101 in cash (net of closing costs
of $227,978), the assumption of certain of the Company's capital lease
obligations and other miscellaneous liabilities totaling $853,370, 100 shares
of Visa Interactive's redeemable preferred stock, and a 72 month royalty
obligation commencing January 1, 1995 and ending December 31, 2000 (the
"Royalty Period"). Visa subsequently transferred these assets to Visa
Interactive, its wholly owned subsidiary. The System consisted of certain
tangible assets with a net book value of approximately $975,000 and certain
intangible assets, including patents, computer software, firmware, and
databases. The Company and Visa granted each other perpetual, royalty-free,
worldwide licenses to certain intellectual property rights of the Company,
including those in software, source code and know-how. The Company recognized a
gain of $14,523,217 from the sale, which is included in other non-operating
income in the accompanying 1994 statement of operations. Visa also purchased
options to acquire 109,789 shares of the Company's common stock from certain of
the Company's employees and subsequently exercised the options for $136,921.
Royalties due to the Company will be equal to $.666 per month per Visa
Interactive bill pay customer whose transactions are processed by the System,
and will be paid by Visa Interactive quarterly during the Royalty Period. Under
the terms of the agreement, Visa Interactive is not required to pay the Company
for the first $73,315 of royalties earned during each quarter on a cumulative
basis for a total of twelve quarters. Due to the uncertainties which exist
regarding the number of Visa Interactive's customers that will use the System
during the Royalty Period and the possible effect of
F-14
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
technological advances, it is not possible to predict the amount of royalties
which the Company may earn pursuant to the agreement. Any royalties received
will be recognized as revenue during the period in which the royalties are
earned. The Company does not expect to receive any Visa royalty payments in
1995.
The Company was designated as Visa's "preferred provider" for certain of the
Company's services, such that the Company provides these services at certain
predetermined prices and established standards during the Royalty Period. Visa
agreed to inform its members/banks through Visa's customary communications
that the Company is a preferred provider of Visa with respect to the Company's
services. Until August 1, 1995, Visa also agreed not to designate any third
party as a "preferred provider" of the Company's services.
The Company pays Visa Interactive a monthly fee of $6.40 for each of the
Company's bill pay customers which are not yet a customer of a Visa member
bank. During 1994, the Company paid Visa Interactive approximately $208,000 in
such fees.
As part of the Visa transaction, the Company's president was appointed to,
and the Company's chairman and chief executive officer was named an advisor
to, the board of directors of Visa Interactive.
(10) EMPLOYEE 401(K) SAVINGS PLAN
Effective June 1, 1991, the Company adopted a defined contribution plan (the
Plan), available to all full-time employees following three months of
employment. The Plan is trusteed and qualifies for preferential tax treatment
under Section 401(a) of the Internal Revenue Code. Employee contributions are
voluntary and are determined on an individual basis with a maximum annual
amount for 1992, 1993 and 1994 equal to 20 percent of compensation paid during
the plan year, not to exceed the annual IRS contribution limitations. All
participants are fully vested in their contributions.
There are no employer contributions under the Plan. Administrative expenses
for the Plan were incurred and paid by the Company.
(11) INCOME TAXES
Income tax expense attributable to income from operations consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1992 1993 1994
-------------------------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- -- 1,028,000
State.......................................... -- -- 10,000
Utilization of net operating loss
carryforwards................................. -- -- (968,000)
------ ----- -----------
Total current................................ -- -- 70,000
Deferred......................................... -- -- --
------ ----- -----------
Total income tax expense..................... $ -- -- 70,000
====== ===== ===========
</TABLE>
In 1994, the difference between the statutory federal income tax rate on
earnings before income taxes and the Company's effective income tax rate is
due primarily to the utilization of net operating loss carryforwards.
F-15
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of taxes computed at the statutory Federal tax rate on
earnings before income taxes to the actual income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1992 1993 1994
----------- ---------- ----------
<S> <C> <C> <C>
Tax provision (credit) computed at the
statutory rate........................ $(2,314,000) (3,817,000) 1,293,000
Book expenses not deductible for tax
purposes.............................. 32,000 35,000 54,000
Federal alternative minimum and
environmental taxes................... -- -- 60,000
Generation of net operating loss
carryforwards......................... 2,282,000 3,782,000 --
Change in the valuation allowance for
deferred tax assets allocated to
income tax expense.................... -- -- (1,337,000)
----------- ---------- ----------
Income tax expense................. $ -- -- 70,000
=========== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1993 and 1994, are as
follows:
<TABLE>
<CAPTION>
1993 1994
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 5,660,000 4,729,000
Capitalized start-up expenditures............... 2,216,000 961,000
Equipment and property, primarily due to asset
write-downs and differences in depreciation
methods and lives, net......................... 182,000 467,000
General business credit carryforward............ 243,000 392,000
Alternative minimum tax carryforward............ -- 60,000
Other, net...................................... 41,000 56,000
----------- ----------
Total gross deferred tax asset................ 8,342,000 6,665,000
Less valuation allowance........................ (8,342,000) (6,665,000)
----------- ----------
Net deferred tax asset........................ $ -- --
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets was $3,689,000 as of
December 31, 1992. The net changes in the total valuation allowance for the
years ended December 31, 1993 and 1994, were an increase of approximately
$4,653,000 and a decrease of approximately $1,677,000, respectively.
At December 31, 1994, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $12,125,000 which expire in 2005
through 2008, general business tax credits of approximately $392,000 which
expire in 2005 through 2009, and an alternative minimum tax credit
carryforward of approximately $60,000.
F-16
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
(a) Capital Leases
As of December 31, 1993 and 1994, computer equipment includes approximately
$1,252,000 and $367,000, respectively, of equipment held under capital lease.
Accumulated amortization on leased equipment was approximately $344,000 and
$129,000 at December 31, 1993 and 1994, respectively.
Future minimum lease payments under capital leases as of December 31, 1994,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1995............................................................... $113,018
1996............................................................... 110,230
1997............................................................... 79,692
1998............................................................... 18,219
1999............................................................... 4,259
--------
Total minimum lease payments..................................... 325,418
Less amount representing interest.................................. (60,694)
--------
Present value of net minimum capital lease payment............... 264,724
Obligations under capital leases--current installments............. 81,746
--------
Obligations under capital leases,net of current installments..... $182,978
========
</TABLE>
(b) Operating Leases
The Company has entered into various facility lease agreements. The future
minimum lease payments under the facility leases as of December 31, 1994, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1995................................................................ $233,000
1996................................................................ 201,000
1997................................................................ 200,000
1998................................................................ 205,000
1999................................................................ 40,000
--------
Total minimum lease payments...................................... $879,000
========
</TABLE>
Rent expense was approximately $158,000, $289,000 and $214,000 in 1992, 1993
and 1994, respectively.
(c) Patent Matters
In conjunction with the Company's August 1, 1994 sale of its bill pay
operations (see note 9), the Company transferred to Visa all of its rights as
they related to a patent which covered various proprietary aspects of the
Company's ScanFone automated order and payment system. Although not
technically pending or threatened, the Company has received notices from third
parties claiming potential infringement of previously issued patents to these
third parties. The Company has also received a notice of a third party patent
infringement claim related to a product currently under development by the
Company. The Company and its counsel believe that the Company has substantial
defenses to any potential claims of infringement, should that occur. However,
there can be no assurance that such third parties will not make a formal claim
of infringement or that the Company would prevail in any proceedings in
relation thereto.
F-17
<PAGE>
US ORDER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(d) Strategic Partner Commissions
The Company has entered into agreements with two strategic partners to
market ScanFones under the partners' brand names. One agreement required the
Company to pay a per-customer fee throughout the six-month marketing trial
which ended in December 1994. The other agreement requires the Company to pay
a per-customer fee in addition to a percentage of related revenues through
March 1996, as long as those customers use their ScanFones.
(e) Employment Contract
The Company entered into an employment contract with an officer of the
Company, for a period of three years commencing on August 1, 1994. As of
December 31, 1994, the Company is committed to pay this employee a minimum of
approximately $646,000.
(f) State Sales and Use Tax Audit
The Company is currently undergoing an audit of its Virginia sales and use
taxes. Since the audit is in its early stages, the ultimate outcome of this
matter cannot presently be determined. The Company does not believe that the
disposition of this matter will have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(13) SUBSEQUENT EVENTS
(a) Stock Exchange Agreement
On April 6, 1995, the Company entered into a stock exchange agreement with
Colonial Data. Under the terms of the agreement, on the date of closing of a
US Order public offering of equity securities, the Company will exchange
230,000 shares of its restricted common stock, valued at the initial public
offering price, for that number of 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
equals the value of the US Order stock exchanged.
As part of the agreement, the Company also agreed to exchange $3,000,000 of
its restricted common stock on April 15, 1996 for $3,000,000 of Colonial
Data's unregistered common stock, subject to certain limitations. Each
company's stock will be valued at the average closing price of their
respective common stock as reported on the Nasdaq National Market and American
Stock Exchange, respectively, for each of the twenty trading days prior to
April 10, 1996. Both companies will have certain "piggyback" registration
rights and rights of first refusal with respect to each others' stock.
(b) Stock Options
Between January 1, 1995 and April 3, 1995, the Company granted options to
acquire 204,850 and 50,000 shares of the Company's common stock at exercise
prices of $7.13 and $9.50, respectively, to certain employees and members of
the Board of Directors.
F-18
<PAGE>
US ORDER, INC.
CONDENSED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1995
------------
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................... $ 1,290,371
Accounts receivable, net.................... 305,892
Inventory................................... 49,713
Prepaid expenses............................ 366,117
------------
Total current assets...................... 2,012,093
------------
Assets held for sale.......................... 302,721
------------
Property and equipment:
Terminals................................... 1,769,363
Computer equipment.......................... 980,048
Furniture and fixtures...................... 155,400
Leasehold improvements...................... 57,629
------------
Total property and equipment.............. 2,962,440
Less accumulated depreciation and amortiza-
tion....................................... (1,485,252)
------------
Net property and equipment................ 1,477,188
------------
Total assets.............................. 3,792,002
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable and accrued expenses....... 1,031,038
Accrued wages and taxes payable............. 465,348
Due to affiliates........................... 234,595
Obligations under capital leases--current
installments............................... 120,004
------------
Total current liabilities................. 1,850,985
Obligations under capital leases, net of cur-
rent installments............................ 220,755
Notes payable to affiliates................... 4,653,806
Other payables................................ 15,625
------------
Total liabilities......................... 6,741,171
------------
Series B redeemable, nonvoting preferred
stock, issued and outstanding 4,300 shares
(redeemable at $1,000 per share plus accrued
dividends; liquidation preference of
$4,863,730 at March 31, 1995)................ 4,863,730
------------
<CAPTION>
PRO FORMA
MARCH 31, 1995
--------------
<S> <C> <C>
Stockholders' equity (deficit):
Series A convertible preferred stock,
5,204,082 shares issued and outstanding; pro
forma none issued and outstanding (liquida-
tion preference of $7,827,252 at March 31,
1995)....................................... 5,204 --
Series C convertible preferred stock,
1,147,725 shares issued and outstanding; pro
forma none issued and outstanding (liquida-
tion preference of $10,379,127 at March 31,
1995)....................................... 1,148 --
Common stock, $0.001 par value; 5,198,039
shares issued and outstanding; pro forma
11,549,846 shares issued and outstanding.... 5,198 11,550
Additional paid-in capital................... 12,969,727 10,518,469
Deferred compensation........................ (459,684) (459,684)
Receivable from sale of stock................ (2,500,000) (2,500,000)
Accumulated deficit.......................... (17,834,492) (17,834,492)
------------ ------------
Total stockholders' equity (deficit)...... (7,812,899) (10,264,157)
------------ ============
Total liabilities and stockholders' equity
(deficit)................................ $ 3,792,002
============
</TABLE>
See accompanying notes to condensed financial statements.
F-19
<PAGE>
US ORDER, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Revenue:
Service fees......................................... $ 299,925 458,641
System sales......................................... -- 209,007
Phone sales.......................................... -- 71,295
Miscellaneous revenue................................ 17,218 5,749
----------- ----------
Total revenue...................................... 317,143 744,692
----------- ----------
Cost of revenue:
Service fees......................................... 221,855 224,449
System and phone sales............................... -- 252,923
----------- ----------
Total cost of revenue.............................. 221,855 477,372
----------- ----------
Gross margin....................................... 95,288 267,320
----------- ----------
Operating expenses:
Research and development............................. 230,572 308,899
Advertising and promotion............................ 518,120 4,709
General and administrative........................... 1,556,313 1,184,486
----------- ----------
Total operating expenses........................... 2,305,005 1,498,094
----------- ----------
Operating loss..................................... (2,209,717) (1,230,774)
----------- ----------
Other income (expense):
Interest income...................................... 14,167 14,484
Interest expense..................................... (169,001) (154,666)
Other, net........................................... 2,408 1,954
----------- ----------
Total other income (expense)....................... (152,426) (138,228)
----------- ----------
Net loss........................................... (2,362,143) (1,369,002)
Preferred dividend requirement......................... (529,726) (387,858)
----------- ----------
Net loss applicable to common shareholders......... $(2,891,869) (1,756,860)
=========== ==========
Net loss per common share.............................. $ (0.47) (0.29)
=========== ==========
Shares used for computation............................ 6,089,979 6,089,979
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-20
<PAGE>
US ORDER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(2,362,143) (1,369,002)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization....................... 192,730 148,006
Deferred compensation............................... -- 25,811
Gain on sale of assets.............................. (2,408) (1,954)
Deferred interest expense on note payable to affili-
ate................................................ -- 21,236
Changes in certain assets and liabilities, net of
effects of non-cash transactions:
Decrease (increase) in accounts receivable......... (1,556) 136,487
Decrease (increase) in prepaid expenses............ 4,358 (72,953)
Increase in inventory.............................. -- (49,713)
Decrease in accounts payable and accrued expenses.. (250,326) (354,444)
Increase in accrued wages and taxes payable........ 18,082 272,351
Increase in due to affiliates...................... 196,982 25,427
Decrease in deferred contract fees................. (36,000) --
Decrease in other payables......................... -- (1,339)
----------- ----------
Net cash used by operating activities............... (2,240,281) (1,220,087)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment.................. (35,386) (211,452)
Proceeds from sale of terminals and terminal compo-
nents............................................... 13,075 117,088
----------- ----------
Net cash used by investing activities............... (22,311) (94,364)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock............... -- 75,708
Principal payments under capital lease obligations... (91,216) (38,724)
----------- ----------
Net cash (used) provided by financing activities.... (91,216) 36,984
----------- ----------
Net decrease in cash and cash equivalents........... (2,353,808) (1,277,467)
Cash and cash equivalents, beginning of period........ 3,443,967 2,567,838
----------- ----------
Cash and cash equivalents, end of period.............. $ 1,090,159 1,290,371
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-21
<PAGE>
US ORDER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed balance sheet of US Order, Inc. ("US Order" or the "Company")
as of March 31, 1995, and the related condensed statements of operations and
cash flows for the three-month periods ended March 31, 1994 and 1995, are
unaudited. In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year.
The condensed financial statements and notes are presented in accordance
with the requirements for interim financial information, and do not contain
certain information included in the Company's annual audited financial
statements and notes. These financial statements should be read in conjunction
with the annual audited financial statements and the notes thereto.
(2) REVENUE RECOGNITION
The Company recognizes service fee revenue as the services are provided and
system sales when title passes, which is generally upon shipment of the
system. Prior to the sale of its electronic banking and bill payment
operations, the Company recognized transaction revenue upon the transmission
of a customer order via a terminal.
(3) COMMON STOCK OPTIONS
Between January 1, 1995 and May 5, 1995, the Company granted options to
acquire 189,850 and 106,500 shares of the Company's common stock at exercise
prices of $7.13 and $9.50, respectively, to certain employees and members of
the Board of Directors. During the first quarter of 1995, the Company
recognized approximately $26,000 of compensation expense in connection with
the options granted at exercise prices below the estimated fair market value
of the Company's common stock at the date of grant.
(4) SUBSEQUENT EVENTS
(a) On April 6, 1995, the Company entered into a stock exchange agreement
with Colonial Data Technologies Corp. ("Colonial Data"), a strategic alliance
partner. Under the terms of the agreement, on the date of closing of a US
Order public offering of equity securities, the Company will exchange 230,000
shares of its restricted common stock, valued at the initial public offering
price, for that number of 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 equals the value
of the US Order stock exchanged.
As part of the agreement, the Company also agreed to exchange $3,000,000 of
its restricted common stock on April 15, 1996 for $3,000,000 of Colonial
Data's unregistered common stock, subject to certain limitations. Each
company's stock will be valued at the average closing price of their
respective common stock as reported on The Nasdaq National Market and American
Stock Exchange, respectively, for each of the twenty trading days prior to
April 10, 1996. Both companies will have certain "piggyback" registration
rights and rights of first refusal with respect to each others' stock.
(b) On April 6, 1995, the Company filed a Form S-1 registration statement,
as subsequently amended, with the Securities and Exchange Commission to
register 3,850,000 shares (exclusive of
F-22
<PAGE>
the underwriters' over-allotment option) of the Company's common stock, par
value $.001 per share. Of the 3,850,000 shares to be offered, 2,800,000 are
being issued and sold by the Company, and 1,050,000 shares are being sold by
WorldCorp.
(c) The pro forma unaudited stockholders' equity (deficit) shown on the
accompanying condensed balance sheet reflects the assumed conversion of the
Company's Series A and Series C Preferred Stock into Common Stock and the
payment of the related $2,451,258 of cumulative undeclared and unpaid
dividends as of March 31, 1995.
(d) In May 1995, the Company adopted a new stock option and incentive plan
(the "1995 Plan"). Under the 1995 Plan, up to an aggregate of 1,000,000 shares
of the Company's common stock may be issued to employees of the Company as a
result of the grant of stock options, stock appreciation rights, and certain
other stock and incentive awards. All grants under the 1995 Plan will be at
the discretion of the Company's Board of Directors. Upon completion of the
Company's initial public offering of common stock and adoption of the 1995
Plan, no further grants of stock options will occur under the Company's 1991
Stock Option Plan.
F-23
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCK-
HOLDER OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS
OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 25
Management................................................................ 41
Principal and Selling Stockholders........................................ 50
Certain Relationships and Transactions.................................... 51
Shares Eligible for Future Sale........................................... 52
Description of Capital Stock.............................................. 53
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 58
Glossary.................................................................. 59
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL JUNE 26, 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
3,850,000 SHARES
US ORDER, INC.
COMMON STOCK
($.001 PAR VALUE)
[LOGO OF US ORDER APPEARS HERE]
SALOMON BROTHERS INC
FIRST ALBANY CORPORATION
L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
PROSPECTUS
DATED JUNE 1, 1995
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(b) Pro Forma Financial Information
WORLDCORP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
March 31, Pro Forma March 31,
1995 Adjustments 1995
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including $1,424
restricted cash at March 31, 1995 $ 7,922 $ 60,239 /(a)/ $ 68,161
Restricted short-term investments 662 662
Trade accounts receivable, less allowance
for doubtful accounts of $83 at March 31, 1995 3,050 3,050
Other receivables 3,251 3,251
Prepaid expenses and other current assets 7,790 7,790
Assets held for sale 2,500 2,500
-------- ---------
-------
Total current assets 25,175 60,239 85,414
-------- ------- ---------
ASSETS HELD FOR SALE 11,290 11,290
EQUIPMENT AND PROPERTY
Flight and other equipment 31,333 31,333
Equipment under capital leases 12,108 12,108
-------- -------
43,441 43,441
Less accumulated depreciation and amortization 13,526 13,526
-------- -------
Net equipment and property 29,915 29,915
-------- -------
LONG-TERM OPERATING DEPOSITS 14,733 14,733
OTHER ASSETS AND DEFERRED CHARGES 8,940 8,940
INTANGIBLE ASSETS 10,458 (1,931) /(b)/ 8,527
-------- ------- -------
TOTAL ASSETS $ 100,511 $ 58,308 $ 158,819
======== ======= ========
(Continued)
</TABLE>
<PAGE>
WORLDCORP, INC.
PRO FORMA CONDENDSED CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
March 31, Pro Forma March 31,
1995 Adjustments 1995
----------- ----------- ----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable $ 17,210 $ 17,210
Current maturities of long-term obligations 10,375 10,375
Deferred aircraft rent 925 925
Accounts payable 9,720 9,720
Unearned revenue 16,649 16,649
Accrued maintenance in excess of reserves paid 5,284 5,284
Accrued salaries and wages 7,991 7,991
Accrued interest 2,571 2,571
Accrued taxes 1,830 350 /(f)/ 2,180
--------- ---------- --------
Total current liabilities 72,555 350 72,905
--------- ---------- --------
LONG-TERM OBLIGATIONS, NET
Subordinated convertible debt 65,000 65,000
Subordinated notes, net 24,947 24,947
Deferred aircraft rent, net of current portion 1,437 1,437
Equipment financing and other long-term obligations 16,347 16,347
--------- --------
Total long-term obligations, net 107,731 107,731
--------- --------
OTHER LIABILITIES
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $32,610 at March 31, 1995 8,107 8,107
Accrued postretirement benefits 2,437 2,437
Accrued maintenance in excess of reserves paid 4,672 4,672
Other 422 422
--------- --------
Total other liabilities 15,638 15,638
--------- --------
TOTAL LIABILITIES 195,924 350 196,274
--------- ---------- -------
MINORITY INTEREST -- 12,516 /(c)(g)(h)/ 12,516
STOCKHOLDERS' DEFICIT
Common stock, $1 par value (60,000,000 shares
authorized, 15,861,870 shares issued and
15,799,285 shares outstanding at March 31, 1995) 15,862 15,862
Additional paid-in capital 40,127 40,127
Deferred compensation (1,279) (1,279)
Accumulated deficit (148,260) 45,442 (102,818)
ESSOP guaranteed bank loan (1,523) (1,523)
Treasury stock, at cost (340) (340)
--------- ---------- ---------
TOTAL COMMON STOCKHOLDERS' DEFICIT (95,413) 45,442 (49,971)
--------- ---------- ---------
TOTAL LIABILITIES AND COMMON
STOCKHOLDERS' DEFICIT $ 100,511 $ 58,308 $ 158,819
========= ========== ==========
</TABLE>
<PAGE>
WORLDCORP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
For the three For the three
months ended months ended
March 31, Pro Forma March 31,
1995 Adjustments 1995
--------- ----------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Contract flight operations $ 39,384 $ 39,384
Flight operations subcontracted to other carriers 693 693
Other 487 487
Transaction processing-US Order 745 745
------- -------
Total operating revenues 41,309 41,309
------- -------
OPERATING EXPENSES
Flight 12,905 12,905
Maintenance 8,013 8,013
Aircraft costs 13,522 13,522
Fuel 3,086 3,086
Flight operations subcontracted to other carriers 667 667
Depreciation and amortization 1,530 1,530
Selling and administrative 5,400 5,400
Transaction processing-US Order 1,834 1,834
------- -------
Total operating expenses 46,957 46,957
------- -------
OPERATING LOSS (5,648) (5,648)
------- -------
OTHER INCOME (EXPENSE)
Interest expense (3,171) (3,171)
Interest income 163 163
Other, net 202 202
------- -------
Total other income (expense) (2,806) (2,806)
------- -------
LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (8,454) (8,454)
INCOME TAX EXPENSE -- --
MINORITY INTEREST -- 545 /(h)/ 545
------- -------
NET EARNINGS (LOSS) $ (8,454) $ 545 $ (7,909)
======= ======= =======
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE
Primary $ (0.55) $ 0.04 $ (0.51)
======= ======= =======
Fully diluted $ * $ *
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 15,477,596 15,477,596
========== ==========
Fully diluted * *
========== ==========
</TABLE>
* Fully diluted earnings per share are anti-dilutive
<PAGE>
WORLDCORP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma
For the twelve For the twelve
months ended months ended
December 31, Pro Forma December 31,
1994 Adjustments 1994
--------- ----------- ----------
<S> <C> <C> <C>
OPERATING REVENUES
Contract flight operations $ 196,218 $ 196,218
Flight operations subcontracted to other carriers 5,378 5,378
Other 1,412 1,412
Transaction processing - US Order 1,432 1,432
-------- --------
Total operating revenues 204,440 204,440
-------- --------
OPERATING EXPENSES
Flight 65,372 65,372
Maintenance 26,212 26,212
Aircraft costs 53,860 53,860
Fuel 31,628 31,628
Flight operations subcontracted to other carriers 5,549 5,549
Depreciation and amortization 5,212 5,212
Selling and administrative 24,635 24,635
Transaction processing - US Order 10,681 10,681
-------- --------
Total operating expenses 223,149 223,149
-------- --------
OPERATING LOSS (18,709) (18,709)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (12,154) (12,154)
Interest income 863 863
Loss on investments, net (308) (308)
Gain on sale of US Order banking operations 14,547 14,547
Gain on sale of US Order stock -- 19,714 /(d)/ 19,714
Gain on sale of stock by US Order -- 27,010 /(e)/ 27,010
Gain on sale of World Airways, Inc. stock 26,922 26,922
Other, net (665) (665)
-------- ------- --------
Total other income (expense) 29,205 46,724 75,929
-------- ------- --------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEM AND
CHANGE IN ACCOUNTING PRINCIPLE 10,496 46,724 57,220
INCOME TAX EXPENSE 159 350 /(f)/ 509
MINORITY INTEREST (2,029) (1,477)/(g)/ (3,506)
-------- ------- --------
NET EARNINGS $ 8,308 $ 44,897 $ 53,205
======== ======= ========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
Primary $ 0.54 $ 2.89 $ 3.43
==== ==== ====
Fully diluted $ 0.53 $ 2.84 $ 3.37
==== ==== ====
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 15,516,063 15,516,063
========== ==========
Fully diluted 15,793,046 15,793,046
========== ==========
</TABLE>
<PAGE>
WORLDCORP, INC.
SUMMARY
The pro forma condensed consolidated balance sheet reflects the adjustments
necessary to record the sale of 30.2% interest in US Order, Inc. as if the sale
had occurred as of January 1, 1994.
The pro forma condensed consolidated income statements reflect the adjustments
necessary to reflect the sale of an interest in US Order, Inc. as if the sale
had occurred as of January 1, 1994. The estimated gain on sale has been
calculated based on the estimated amount of WorldCorp's investment in US Order,
Inc. as of June 1, 1995, the date of sale. No pro forma adjustments have been
made for possible interest cost savings from the proceeds received at the time
of the sale.
DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) Record cash received from the sale of an interest in US Order, Inc.
$18.6 million of this amount is received by WorldCorp, Inc. in exchange for
1,365,000 of its common stock in US Order, Inc., and $41.6 million is
received by US Order, Inc. from the sale of 3,062,500 shares of its common
stock.
(b) Reverse a pro rata portion of goodwill related to US Order.
(c) Establish minority interest portion from sale of US Order, Inc.
(d) Record gain from WorldCorp's sale of 1,365,000 shares of US Order common
stock.
(e) Record gain from US Order's sale of 3,062,500 shares of common stock.
(f) Estimated income tax expense on gain from sale of US Order common stock.
(g) Portion of US Order, Inc. 1994 net income which is allocated to the
minority interest.
(h) Portion of US Order, Inc. net loss for three months ended March 31, 1995
which is allocated to the minority interest.
(c) Exhibits
23.1 Consent of KPMG Peat Marwick LLP
99.1 WorldCorp, Inc. Press Release issued June 2, 1995.
<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.
/s/ Andrew M. Paalborg
----------------------
Andrew M. Paalborg
Vice President & General Counsel
Date: June 9, 1995
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
23.1 Consent of KPMG Peat Marwick LLP.
99.1 WorldCorp, Inc. Press Release issued June 2, 1995.
<PAGE>
EXHIBIT 99.1
Contact: Coleman Andrews
Chief Executive Officer & President
(703) 834-9201
or
Doug Poretz (703) 506-1778
FOR IMMEDIATE RELEASE
---------------------
June 2, 1995
WorldCorp Completes $65.3 Million Equity Carve-Out OF US Order
--------------------------------------------------------------
HERNDON, VIRGINIA, June 2, 1995 -- WorldCorp, Inc.
(NYSE:WOA) today announced that it has completed its equity carve-out of US
Order, Inc. (NASDAQ:USOR) WorldCorp sold 1,365,000 shares of common stock of US
Order at $14.75 per share in the public offering which became effective
yesterday. Prior to the offering, WorldCorp's beneficial ownership in US Order
was 88%; subsequent to the offering, WorldCorp owns 8,832,844 shares of common
stock with a beneficial ownership of 61% in US Order.
T. Coleman Andrews, III, President and Chief Executive Officer of WorldCorp
said: "We are delighted to announce the successful closing of the US Order
equity carve-out. The transaction significantly strengthens the balance sheets
of both WorldCorp and US Order. WorldCorp receives net proceeds of
approximately $18.6 million from the sale of a portion of its ownership in US
Order, and approximately $10.2 million from US Order's repayment of debt and
accrued dividends. US Order will have approximately $29.0 million in cash to
fund its future growth, and has no long-term debt on its balance sheet."
WorldCorp owns majority positions in companies that operate in two
distinct business areas: transaction processing through US Order (NASDAQ:USOR),
and air transportation (through World Airways). Knight Ridder (NYSE:KRI) is an
equity investor in US Order. MHS Berhad of Malaysia (KLSE:MHS) is an equity
investor in World Airways.
<PAGE>
Exhibit 23.1
------------
Consent of Independent Accountants
The Board of Directors
WorldCorp, Inc.:
We consent to the use of our report with respect to the balance sheets of US
Order, Inc. as of December 31, 1994 and 1993, and the related statements of
operations, stockholders' equity (deficit) and cash flows and the related
financial statement schedule for each of the years in the three-year period
ended December 31, 1994, dated January 20, 1995, except as to note 4(b), which
is as of February 16, 1995, and note 13, which is as of April 6, 1995, included
in the US Order, Inc. prospectus dated June 1, 1995 which is included in the
Form 8-K of WorldCorp, Inc. dated June 9, 1995.
KPMG PEAT MARWICK LLP
Washington, D.C.
June 9, 1995
