SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
For the fiscal year ended: DECEMBER 31, 1996 Commission File Number 1-5351
WORLDCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3040585
(State of incorporation) (I.R.S. Employer Identification Number)
13873 Park Center Road, Suite 490, Herndon, VA 22071
(Address of Principal Executive Offices)
(703) 834-9200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
State by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 26, 1997 was approximately $45,060,795.
The number of shares of the registrant's Common Stock outstanding on March 26,
1997 was 15,020,265.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of WorldCorp, Inc.'s Notice of Annual Stockholder's Meeting and Proxy
Statement, to be filed within 120 days after the end of the registrant's fiscal
year, are incorporated into Part III of this Report.
1
<PAGE>
WORLDCORP, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Item 1. Business.........................................................................................3
Item 2. Properties......................................................................................19
Item 3. Legal Proceedings...............................................................................19
Item 4. Submission of Matters to a Vote of Security Holders.............................................19
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters........................20
Item 6. Selected Financial Data.........................................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................................22
Item 8. Financial Statements and Supplementary Data.....................................................42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................................77
PART III
Item 10. Directors and Executive Officers of the Registrant..............................................77
Item 11. Executive Compensation..........................................................................78
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................78
Item 13. Certain Relationships and Related Transactions..................................................78
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................79
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
WorldCorp, Inc., a Delaware corporation ("WorldCorp" or the "Company"),
was organized in March 1987 to serve as the holding company for World Airways,
Inc., a Delaware corporation ("World Airways"), which was organized in March
1948 and is the predecessor to the Company. Currently, WorldCorp owns positions
in companies that operate in two distinct business areas.
WorldCorp's aviation services subsidiary, World Airways, is a leading
provider of long-range passenger and cargo air transportation outsourcing
services to major international airlines under fixed rate, multi-year contracts.
World Airways also leads a contractor teaming arrangement that is the largest
single supplier of commercial aircraft to the United States Air Force's Air
Mobility Command ("U.S. Air Force" of "USAF"). World Airways was a wholly-owned
subsidiary in 1993. In February 1994, pursuant to an October 1993 agreement,
WorldCorp sold 24.9% of its ownership in World Airways to MHS Berhad ("MHS"), a
Malaysian aviation company. Effective December 31, 1994, the Company increased
its ownership in World Airways to 80.1% through the purchase of 5% of World
Airways common stock held by MHS. In October 1995, World Airways completed an
initial public offering in which 2,000,000 shares of its common stock were
issued and sold by World Airways and 900,000 shares were sold by WorldCorp. At
December 31, 1996, WorldCorp and MHS owned 6,915,915 shares, or 61.3%, and
1,990,000 shares, or 17.6%, respectively, of the outstanding common stock of
World Airways. The balance was publicly traded.
On March 14, 1997, World Airways announced that Charles W. Pollard
departed as President and Chief Executive Officer. Pursuant to the company's
bylaws, T. Coleman Andrews, III, Chairman of the Board, will act as President on
an interim basis pending the hiring of a new CEO.
The managements of WorldCorp and World Airways are currently exploring
ways to maximize value for the shareholders of each company. WorldCorp is
currently evaluating the feasibility of a disposition of its interest in World
Airways through a secondary offering or a sale to a third party. There can be no
assurances, however, that any such transactions will ultimately be consummated.
WorldCorp also had an ownership interest in US Order, Inc. ("US Order"),
a company which provided products and services for two markets: home banking and
smart telephones. In August 1996, US Order and Colonial Data Technologies Corp.
("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which
US Order and Colonial Data would be merged with and into a new public company,
InteliData Technologies Corporation ("InteliData"). Pursuant to this Merger
which was consummated on November 7, 1996, InteliData became the successor
corporation to US Order. The Merger was treated as a purchase of Colonial Data
by US Order. InteliData concentrates on three markets: (1) consumer
telecommunications; (2) electronic commerce; and (3) interactive services. At
December 31, 1996, WorldCorp owned 9,179,273 shares of InteliData, or an
ownership interest of approximately 28.9%. Following this merger, the Company
reports its proportionate share of InteliData's financial results using the
equity method of accounting.
In September 1996, the Company announced its intention to purchase up to
2.5 million shares of its publicly-traded Common Stock pursuant to open market
transactions. As of March 24, 1997, the Company had purchased 1,362,500 shares
of its Common Stock for an aggregate cost of $7.8 million. WorldCorp does not
intend to purchase any additional shares at this time.
The Private Securities Litigation Reform Act of 1995 (the "Act") was
recently passed by Congress. The Company desires to take advantage of the new
"safe harbor" provisions in the Act. Therefore, this report contains forward
looking statements that are subject to risks and uncertainties, including, but
not limited to, the impact of competitive products, product demand and market
acceptance risks, reliance on key strategic alliances, fluctuations in operating
results and other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission. These risks could cause the Company's
actual results for 1996 and beyond to differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company.
The principal executive offices of WorldCorp are located at Washington
Dulles International Airport in The Hallmark Building, 13873 Park Center Road,
Herndon, Virginia 20171. WorldCorp's telephone number is (703) 834-9200.
3
<PAGE>
OVERVIEW
WorldCorp owns positions in companies that operate in two distinct
business areas. World Airways (Nasdaq:WLDA) provides worldwide passenger and
cargo air transportation to major international airlines, the U.S. Air Force,
and international tour operators, with a fleet of MD-11 and DC10-30 aircraft.
InteliData (Nasdaq:INTD) concentrates on three markets: (1) consumer
telecommunications; (2) electronic commerce; and (3) interactive services.
WORLD AIRWAYS
World Airways is a leading global provider of long-range passenger and
cargo air transportation outsourcing services to major international airlines
under fixed rate, multi-year contracts. Airline operations account for 100% of
its operating revenue and operating income. World Airways' passenger and freight
operations employ 13 wide- body aircraft which are operated under contracts,
primarily with Pacific Rim airlines. These contracts generally require World
Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet
lease"), while its customers are responsible for a large portion of the other
operating costs, including fuel. World Airways' airline customers have
determined that outsourcing a portion of their wide-body passenger and cargo
requirements can be less expensive, and offer greater operational and financial
flexibility, than purchasing new aircraft and additional spare parts required
for such aircraft. World Airways also leads a contractor teaming arrangement
that is the largest single supplier of commercial aircraft to the United States
Air Force's Air Mobility Command (" U.S. Air Force" or "USAF").
In July 1996, World Airways restructured its business to focus on the
growing and profitable ACMI contract services. As such, World Airways ceased all
scheduled passenger and scheduled charter services as of October 27, 1996,
taking a one-time charge of $21.0 million (see Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A")).
World Airways' operating philosophy is to build on its existing ACMI
contracts to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts because such contracts shift yield, load factor
and cost risks to the customer. The customer bears the risk of filling the
aircraft with passengers or cargo and assumes a large portion of the operating
expenses, including fuel. World Airways maximizes profitability by combining its
multi-year ACMI contracts with short term, higher-yielding ACMI agreements which
meet the peak seasonal requirements of its customers. World Airways responds
opportunistically to rapidly changing market conditions by maintaining a
flexible fleet of aircraft that can be deployed in a variety of configurations.
World Airways focuses its marketing efforts on the Pacific Rim, where
rapid economic development drives demand for its services. World Airways
believes that its modern fleet of long-range medium-density wide-body MD- 11 and
DC10-30 aircraft are ideally suited to the Pacific Rim market. World Airways'
aircraft permit its customers to serve less dense international routes where a
Boeing 747 would provide excess capacity. World Airways has operated in the
Pacific Rim almost since its inception, and believes that it has developed the
ability to serve this market well.
World Airways substantially increases its potential customer base by
being able to serve both passenger and cargo customers. The Company flies
passenger, cargo and passenger/cargo convertible aircraft that the Company
believes permit the Company to target emerging opportunities. World Airways has
been providing safe, reliable ACMI services for almost 50 years. World Airways
has flown for the USAF since 1956, for Malaysian Airlines System Berhad
("Malaysian Airlines") since 1981 and for Garuda Indonesia ("Garuda") since
1973.
CUSTOMERS
Over the years, World Airways has developed long-term relationships with
a number of major international airlines and with the USAF (see "MD&A -
Customers"). World Airways' growth strategy is based, first and foremost, upon
providing the highest level of service to these customers, thereby maintaining
and expanding the amount of business being done through long-term contracts.
These contracts have increased the year-round usage of its aircraft fleet,
reduced the seasonality of its business and contributed to its recently improved
operating performance.
4
<PAGE>
Malaysian Airlines. World Airways has provided wet lease service to
Malaysian Airlines since 1981, providing wet lease services for Malaysian
Airlines' scheduled passenger and cargo operations as well as transporting
passengers for the annual Hadj pilgrimage. MHS, which owns 17.6% of World
Airways as of December 31, 1996, also owns 29.1% of Malaysian Airlines. In late
1994, World Airways entered into a series of multi-year contracts, with
expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian
Airlines. In 1996, World Airways provided three aircraft for Hadj operations.
World Airways recently entered into a new 32-month agreement for year-round
operations (including the Hadj) with Malaysian Airlines whereby it will provide
two aircraft with cockpit crews, maintenance and insurance to Malaysian
Airlines' newly-formed charter division through May 1999. World Airways is
currently in preliminary discussions with Malaysian Airlines regarding a
potential eleven-month reduction in the utilization of one of these aircraft
during the 32-month term of the contract.
Until recently, World Airways operated four passenger aircraft for
Malaysian Airlines under the multi-year agreements described above. The contract
for two of the four passenger aircraft for Malaysian Airlines expired in March
1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and
will actively re-market the aircraft thereafter, it can provide no assurance
that it will be able to redeploy the two aircraft, beginning June 1997, at price
and utilization levels at least as favorable as under the terms of the Malaysian
Airlines contracts.
World Airways originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contracts. World Airways and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contract's original obligations. World Airways can provide no assurances,
however, that it will, in fact, be able to redeploy these two aircraft back into
Malaysian Airlines' operations to meet the contract's original obligations.
Revenues associated with these contracted obligations are included in World
Airways' backlog included herein.
Garuda. World Airways has flown for Garuda periodically since 1973 and
yearly since 1988. Since 1988, World Airways has been one of the largest
providers of passenger services to Indonesia for the Hadj pilgrimage. The
Indonesian Hadj pilgrimage is the world's largest due to the size of Indonesia's
Islamic population. In 1996, approximately 200,000 Indonesians traveled to
Jeddah for the Hadj pilgrimage. During the 1996 Hadj pilgrimage, World Airways
provided passenger service to Garuda with seven aircraft, flying approximately
40,000 Indonesians on Company aircraft. Due to World Airways' capacity
constraints during the period of Hadj flying, World Airways reached an agreement
with Garuda to operate six aircraft during the 1997 pilgrimage.
Philippine Airlines. In May 1996, World Airways entered into a new ACMI
contract with Philippine Airlines, thereby further expanding its presence in the
Pacific Rim. World Airways presently operates four MD-11 passenger aircraft for
Philippine Airlines under an agreement, with high minimum monthly utilization
levels. World Airways, however, has recently received a written communication
from Philippine Airlines in which the airline contends that its leases for all
four aircraft expire on November 15, 1997. World Airways believes that this
position is contrary to the understanding of the parties that each of the MD-11s
are to be leased by Philippine Airlines for a period of 18 months from delivery
of each aircraft. The parties are currently discussing the length of the lease
term for these aircraft. World Airways can provide no assurances, however, that
Philippine Airlines will agree to lease any of the four MD-11 passenger aircraft
beyond November 15, 1997, or that it will be able to secure other business at as
favorable price and utilization levels.
Also, subsequent to year-end, at Philippine Airlines' request, World
Airways agreed to a payment plan with respect to Philippine Airlines' wet lease
obligations for several months beginning in March 1997. Although Philippine
Airlines is current on this payment plan to date, if Philippine Airlines
defaults on this payment plan, or fails to meet its monthly aircraft lease
obligations, this development, if not offset by other business, would have a
material adverse effect on the cash flows, financial condition and results of
operation of World Airways.
U.S. Air Force. World Airways has provided international air
transportation to the U.S. Air Force since 1956. The overall downsizing of the
U.S. military, combined with a need to respond quickly to the growing number of
global regional conflicts places a premium on the mobility of the U.S. armed
forces. This is reflected in the stable size over the past several years of the
USAF's procurement of commercial airlift services. Although World Airways'
agreements with the USAF provide for full service contracts with certain minimum
performance requirements, it has risks similar to an ACMI agreement because the
USAF agreements are cost-plus contracts at attractive rates.
5
<PAGE>
The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. World Airways utilizes such teaming arrangements to maximize
the value of potential awards. World Airways leads a contractor teaming
arrangement that enjoys a 44% market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, World Airways' portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the
government's 1996-97 fiscal year.
The current annual contract commenced on October 1, 1996 and expires on
September 30, 1997. These contracts provide for a fixed level of scheduled
business from the U.S. Air Force with opportunities for additional short-term
expansion business on an ad hoc basis as needs arise. Due to the utilization of
a significant number of its aircraft under multi-year contracts and other
contractual commitments, it is unlikely that World Airways will be able to
accept all of the available expansion business. Although overall Defense
Department spending is being reduced, the level of the U.S. Air Force's contract
awards has remained relatively constant in recent years. World Airways, however,
cannot determine how future cuts in military spending may affect future
operations with the U.S.
Air Force.
Although World Airways' customers bear the financial risk of filling the
World Airways' aircraft with passengers or cargo, World Airways can be affected
adversely if its customers are unable to operate its aircraft profitably, or if
one or more of World Airways' customers experience a material adverse change in
their market demand, financial condition or results of operations. Under these
circumstances, World Airways can be adversely affected by receiving delayed or
partial payments or by receiving customer demands for rate and utilization
reductions, flight cancellations, and/or early termination of their agreements.
As a result of these and other contracts, World Airways had an overall
contract backlog at December 31, 1996 of $468.0 million, compared to $462.0
million at December 31, 1995. Approximately $253.5 million of the backlog
relates to 1997 operations. World Airways' backlog for each contract is
determined by multiplying the minimum number of block hours (defined as the
elapsed time computed from the moment the aircraft first moves under its own
power at the point of origin to the time it comes to rest at its destination)
guaranteed under the applicable contract by the specified hourly rate under such
contract. Approximately 60% and 20% of the backlog relates to its multi-year
contracts with Malaysian Airlines and Philippine Airlines, respectively. While
the percentage of its 1997 block hour capacity that is currently under contract
exceeds the comparable percentage in the past several years, World Airways still
has substantial uncontracted capacity in the third and fourth quarters of 1997.
In addition, a significant portion of World Airways' current contracts expire
near the end of 1997. Although there can be no assurance that it will be able to
secure additional business to reduce this excess capacity, World Airways is
actively seeking customers for 1997 and beyond. World Airways' financial results
and financial condition would be affected adversely if it is unable to secure
additional business to reduce this excess capacity.
The information regarding major customers and foreign revenue is
contained in Note 18 "Segments and Major Customers" of the Company's "Notes to
Financial Statements" in Item 8.
Information concerning the classification of products within the air
transportation industry comprising 10% or more of World Airways' operating
revenues from continuing operations is presented in the following table (in
millions):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Flight Operations - Passenger $ 257.6 $ 168.0 $ 134.6
Flight Operations - Cargo 39.3 64.6 39.3
</TABLE>
COMPETITION
The market for outsourcing air passenger and cargo ACMI services is
highly competitive. Certain of the passenger and cargo air carriers against
which World Airways competes possess substantially greater financial resources
and more extensive facilities and equipment than those which are now, or will in
the foreseeable future become, available to World Airways. World Airways
believes that the most important bases for competition in the ACMI outsourcing
business are the age of the aircraft fleet, the passenger, payload and cubic
capacities of the
6
<PAGE>
aircraft, and the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the ACMI outsourcing market
include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of World Airways to achieve the growth anticipated by its
strategic plan depends upon its success in convincing major international
airlines that outsourcing some portion of their air passenger and cargo business
remains more cost-effective than undertaking passenger or cargo operations with
their own incremental capacity and resources. The allocation of military air
transportation contracts by the USAF is based upon the number and type of
aircraft a carrier, alone or through a teaming arrangement, makes available for
use in times of national emergencies. The formation of competing teaming
arrangements comprised of larger partners than those sponsored by World Airways,
an increase by other air carriers in their commitment of aircraft to the
emergency program, or the withdrawal of its current partners, could adversely
affect the size of the USAF contracts, if any, which are awarded to World
Airways in future years.
SEASONALITY
Historically, World Airways' business has been significantly affected by
seasonal factors. During the first quarter, World Airways typically experiences
lower levels of utilization and yields due to lower demand for passenger and
cargo services relative to other times of the year. World Airways experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1997, World Airways' flight operations associated with the Hadj
pilgrimage will occur from March 15 to May 20. Because the Islamic calendar is a
lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days
earlier each year relative to the Western (Gregorian) calendar. As a result,
revenues resulting from future Hadj pilgrimage contracts will continue to shift
from the second quarter to the first quarter over the next several years. World
Airways believes that its contracts with Malaysian Airlines and the USAF should
lessen the effect of these seasonal factors.
The quarterly financial data is contained in Note 21 "Unaudited Quarterly
Results" of the Company's "Notes to Financial Statements" in Item 8.
NEW MD-11ER AIRCRAFT
In 1996, World Airways entered into two 24-year leases with McDonnell
Douglas to operate a new extended- range model of the McDonnell Douglas MD-11
(see "MD&A - Liquidity and Capital Resources - Capital Commitments"). The
aircraft, known as the MD-11ER, is capable of flying nonstop between such cities
as Zurich and Santiago, New York and Johannesburg, and Los Angeles and Shanghai.
The jetliner's increased range is due to a combination of the following:
engineering innovations; aerodynamics improvements that minimize aircraft drag;
major reductions in the airframe weight; significantly increased fuel capacity;
and a higher allowable maximum takeoff weight that provides the heavier fuel
load without loss of payload.
AVIATION FUEL
World Airways' source of aviation fuel is primarily from major oil
companies, under annual delivery contracts, at often frequented commercial
locations, and from United States military organizations at military bases.
World Airways' current fuel purchasing policy consists of the purchase of fuel
within seven days in advance of all flights based on current prices set by
individual suppliers. More than one supplier is under contract at several
locations. World Airways purchases no fuel under long-term contracts nor does it
enter into futures or fuel swap contracts.
The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant impact on World
Airways' operations in recent years because, in general, its ACMI contracts with
its customers limit World Airways' exposure to increases in fuel prices.
However, a substantial increase in the price or the unavailability of aviation
fuel could have a material adverse effect on the air transportation industry in
general and the financial condition and results of operations of World Airways.
7
<PAGE>
REGULATORY MATTERS
World Airways is subject to government regulation and control under the
U.S. laws and the laws of the various countries in which it operates. It is also
governed by bilateral services agreements between the U.S. and the countries to
which it provides airline service. World Airways is subject to Title 49 of the
United States Code (the "Transportation Code"), under which the DOT and the
Federal Aviation Administration (the "FAA") exercise regulatory authority.
Additionally, foreign governments assert jurisdiction over air routes and fares
to and from the U.S., airport operation rights, and facilities access.
World Airways has periodically received correspondence from the FAA with
respect to minor noncompliance matters. Most recently, as the FAA has increased
its scrutiny of U.S. airlines, it was assessed a preliminary fine of $810,000 in
connection with certain minor security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. In each
of these instances, World Airways was in compliance with international
regulations, but not the more stringent U.S. requirements. World Airways has
taken steps to comply with the U.S. requirements and believes that any fines
ultimately imposed by the FAA will not have a material adverse effect on the
financial condition or results of operations of the company. World Airways is
subject to the Transportation Code, under which the DOT and the FAA exercise
regulatory authority. Generally, the FAA has regulatory jurisdiction over flight
operations, including equipment, personnel, maintenance and other safety
matters. To assure compliance with its operational standards, the FAA requires
air carriers to obtain operating, airworthiness and other certificates, which
may be suspended or revoked for cause. The FAA also conducts safety audits and
has the power to impose fines and other sanctions for violations of airline
safety regulations. The DOT maintains authority over international aviation,
subject to review by the President of the U.S. and has jurisdiction over unfair
trade practices and consumer protection policies on domestic and international
routes and fares. Additionally, foreign governments assert jurisdiction over air
routes and fares to and from the U.S., airport operation rights and facilities
access.
World Airways is subject to the jurisdiction of the FAA with respect to
aircraft maintenance and operations, including flight operations, equipment,
aircraft noise, ground facilities, dispatch, communications, training weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using specified
equipment. These certificates and specifications are subject to amendment,
suspension, revocation or termination by the FAA. In addition, all of World
Airways' aircraft must have and maintain certificates of airworthiness issued or
approved by the FAA. World Airways currently holds an FAA air carrier operating
certificate and operations specifications under Part 121 of the Federal Aviation
Regulations. The FAA has the authority to suspend temporarily or revoke
permanently the authority of World Airways or its licensed personnel for failure
to comply with regulations promulgated by the FAA and to assess civil penalties
for such failures.
Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, World Airways' aircraft fleet must comply with certain Stage 3
noise restrictions by certain specified deadlines. All of its aircraft currently
meet the Stage 3 noise reduction requirement, which is currently the most
stringent FAA noise requirement. FAA regulations require compliance with the
Traffic Alert and Collision Avoidance System ("TCAS"), approved airborne
windshear warning system and aging aircraft regulations.
Additional laws and regulations have been proposed from time to time
which could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations have
been considered from time to time that would prohibit or restrict the ownership
and transfer of airline routes or slots. There is no assurance that laws and
regulations currently enacted or enacted in the future will not adversely affect
World Airways' ability to maintain its current level of operating results.
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the DOT or FAA. For instance, labor
relations in the air transportation industry are generally regulated under the
Railway Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and labor unions
arising under collective bargaining agreements. In addition, World Airways is
subject to the jurisdiction of other governmental entities, including (i) the
FCC regarding its use of radio facilities pursuant to the Federal Communications
Act of 1934, as amended, (ii) the Commerce Department, the Customs Service, the
Immigration and Naturalization Service, and the Animal and Plant Health
Inspection Service of the Department of Agriculture regarding its international
operations, (iii) the Environmental Protection Agency (the
8
<PAGE>
"EPA") regarding compliance with standards for aircraft exhaust emissions and
(iv) the Department of Justice regarding certain merger and acquisition
transactions. The EPA regulates operations, including air carrier operations,
which affect the quality of air in the U.S. World Airways has made all necessary
modifications to its operating fleet to meet fuel-venting requirements and smoke
emissions standards issued by the EPA.
World Airways' international operations are generally governed by the
network of bilateral civil air transport agreements providing for the exchange
of traffic rights between governments which then select and designate air
carriers authorized to exercise such rights. In the absence of a bilateral
agreement, such international air services are governed by principles of comity
and reciprocity. Bilateral provisions pertaining to the charter services in
which it is primarily engaged vary considerably depending on the particular
country. Most bilateral agreements into which the U.S. has entered permit either
country to terminate the agreement with one year's notification to the other. In
the event a bilateral agreement is terminated, international air service between
the affected countries is governed by the principles of comity and reciprocity.
Certain airports served by World Airways are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, World Airways has generally been
successful in obtaining the slots it needs in order to conduct planned
operations. There can be no assurance, however, that it will be able to do so in
the future because, among other factors, government policies regulating the
distribution of slots, both in the U.S., and in foreign countries, are subject
to change.
Pursuant to federal law, no more than 25% of the voting interest in World
Airways may be owned or controlled by foreign citizens. In addition, under
existing precedent and policy, actual control must reside in U.S. citizens. As a
matter of regulatory policy, the DOT has stated that it would not permit
aggregate equity ownership of a domestic air carrier by foreign citizens in an
amount in excess of 49%. World Airways fully complies as of the date hereof with
these U.S. citizen ownership requirements.
Due to its participation in CRAF, World Airways is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1996 and the next is anticipated to occur in 1998. As a result of
such inspections, it has been required to implement measures, such as the
establishment of a crew resource management course, beyond those required by the
DOT, FAA and other government agencies. The USAF may terminate its contract with
World Airways if it fails to pass such inspection or otherwise fails to maintain
satisfactory performance levels, if it loses its airworthiness certificate or if
the aircraft pledged to the contracts lose their U.S. registry or are leased to
unapproved carriers.
World Airways believes it is in compliance in all material respects with
all requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of its DOT or FAA authorizations
or certificates could have a material adverse effect upon World Airways. World
Airways also is subject to state and local laws and regulations at locations
where it operates and the regulations of various local authorities which operate
the airports it serves. Certain airport operations have adopted local
regulations which, among other things, impose curfews and noise abatement
regulations. While it believes it is currently in compliance in all material
respects with all appropriate standards and has all required licenses and
authorities, any material non-compliance by World Airways therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on World Airways.
EMPLOYEES
As of March 1, 1997, World Airways had 726 full time employees classified
as follows:
<TABLE>
<CAPTION>
Number of
Classification Full-Time Employees
-------------- -------------------
<S> <C>
Management..................................................... 9
Administrative and Operations.................................. 324
Cockpit Crew (including pilots)................................ 323
Flight Attendants (active)..................................... 70
---
Total Employees............................................ 726
===
</TABLE>
9
<PAGE>
World Airways' cockpit crew members, who are represented by the
International Brotherhood of Teamsters (the "Teamsters"), are subject to a
four-year collective bargaining agreement that will become amendable in June
1998.
World Airways' flight attendants are also represented by the Teamsters
under a collective bargaining agreement that became amendable in 1992. The
parties exchanged their opening contract proposals in 1992. In June 1996, World
Airways signed a new four year labor agreement with the Teamsters which provides
for retroactive pay increases for the flight attendants and work rule
flexibility and lengthened duty time rules for World Airways. The agreement was
ratified by the flight attendants in August 1996. World Airways' flight
attendants challenged the use of foreign flight attendant crews on its flights
for Malaysian Airlines and Garuda Indonesia which has historically been World
Airways' operating procedure. World Airways is contractually obligated to permit
its Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter recently denied the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that World Airways' contract with its flight attendants requires it to
first actively seek profitable business opportunities that require using its
flight attendants, before World Airways may accept wet lease business
opportunities that use the flight attendants of its customers. World Airways can
provide no assurances as to how the imposition of this requirement will affect
its financial condition and results of operations.
World Airways' aircraft dispatchers are represented by the Transport
Workers Union (the "TWU"). This contract became amendable on June 30, 1993. In
May 1995, the parties reached agreement with respect to a new four-year
contract. This contract was ratified on February 7, 1996. Fewer than 12 Company
employees are covered by this collective bargaining agreement.
World Airways is unable to predict whether any of its employees not
currently represented by a labor union, such as its maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election of such employees for representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial results of World Airways.
INTELIDATA
InteliData was incorporated in order to effect the merger ("Merger") of US
Order and Colonial Data. The Merger was announced on August 5, 1996, when US
Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger
Agreement"). On November 7, 1996, the Merger was consummated with each share of
outstanding US Order and Colonial Data common stock being exchanged for one
share of InteliData common stock. The Merger was treated as a purchase of
Colonial Data by US Order. At December 31, 1996, WorldCorp's ownership in
InteliData was 28.9%. Following this Merger, the Company reports its
proportionate share of InteliData's financial results using the equity method of
accounting.
Effective September 30, 1996, US Order acquired the business of Braun,
Simmons & Co. ("Braun Simmons") for approximately $7.0 million consisting of
cash and US Order common stock and including US Order transaction costs pursuant
to the merger of Braun Simmons into US Order. Braun Simmons was an information
engineering firm specializing in the development of home banking and electronic
commerce solutions for financial institutions. The acquisition expands
InteliData's product line for both large and small financial institutions.
The business of InteliData consists of the businesses previously
conducted by US Order, Colonial Data and Colonial Data's subsidiaries.
InteliData develops and markets products and services for the telecommunications
and financial services industries through its three business divisions: consumer
telecommunications, electronic commerce and interactive services.
The consumer telecommunications division designs, develops and markets
telecommunications products that support intelligent network services being
developed and implemented by the regional Bell operating companies ("RBOCS") and
other telephone companies ("telcos"). InteliData has concentrated its product
development and marketing efforts on products that support Caller ID and other
emerging intelligent network services, including a smart telephone, the
Telesmart 4000/Intelifone(TM), which provides consumers call management features
and the ability to access numerous network services and interactive applications
via telephones. InteliData currently offers a line of Caller ID adjunct units
and telephones with integrated Caller ID, small business telecommunications
systems and high-end consumer telecommunications products for commercial
customers and provides other services that support the development and
implementation of intelligent network services.
The electronic commerce division develops and markets products and
services to assist financial institutions in their home banking and electronic
bill payment initiatives. The products are designed to assist consumers in
accessing and transacting business with their banks and credit unions
electronically, and to assist financial institutions in connecting to and
transacting business with third parties, including data processors and billers.
The services focus on a financial institution's back office, offering
outsourcing for data entry, telemarketing, customer service and technical
support. InteliData currently receives its electronic commerce revenues largely
from the sale of products and services to Visa International Service
Association, Inc. ("Visa") member banks.
10
<PAGE>
On August 1, 1994, US Order sold its bill payment operations and
technology (the "Visa Bill-Pay System") to Visa for cash and the right to future
royalty payments which are based on the number of customers utilizing the Visa
Bill-Pay System. InteliData's right to future royalty payments from Visa is
subject to a cumulative offset amount aggregating $880,000 and, accordingly,
InteliData does not expect to begin receiving royalty payments until at least
the second half of 1997. Visa formed Visa InterActive, Inc. ("Visa InterActive")
around the technology and personnel acquired from US Order, including 54 former
employees of US Order. Visa InterActive also has agreed, through 2000, to inform
Visa member banks that InteliData is a preferred provider of certain electronic
commerce products and services.
The interactive services division was established to provide interactive
applications for use on smart telephones and other small screen devices, such as
alpha-numeric pagers, Personal Communication Systems ("PCS") devices and
personal digital assistants ("PDAs"). InteliData intends to sell interactive
applications directly to end users and through other companies, including telcos
and wireless communications companies. InteliData's current interactive
applications include electronic national directory assistance lookup, one-way
alpha-numeric paging, one-way internet e-mail, a personal directory data save
and restore function and information services such as news, weather, sports
scores, stock quotes, lottery results and horoscopes.
INDUSTRY BACKGROUND
InteliData maintains operations in three primary markets: consumer
telecommunications, electronic commerce and interactive services.
Consumer Telecommunications. The consumer telecommunications division
designs, develops and markets telecommunications products that support
intelligent network services being developed and implemented by RBOCs and other
telcos. Deregulation and technological advances have intensified competition
among existing operators of telecommunication networks and encouraged the
entrance of new service providers. In addition, there are mergers pending among
certain RBOCs and further industry consolidation may occur in the future. In the
United States, competition among RBOCs, other telcos and long distance carriers
and new service providers that have entered the local and long distance markets,
has increased and may increase further as a result of the Telecommunications Act
of 1996 (the "Telecommunications Act") or industry consolidation. RBOCs and
other telcos are responding to increasing competition by, among other things,
introducing value-added, intelligent network services.
In order to deploy intelligent network services, the telcos have been
upgrading their telecommunications networks to support a set of standards, known
as the Intelligent Networks ("IN"). IN supports open, distributed switching and
processing capabilities and allows the telcos to create, modify and deploy new
services quickly and economically. In addition, Bell Communications Research,
Inc. has developed the Analog Display Services Interface ("ADSI"), a standard
protocol for the simultaneous transmission of data and voice information between
an information source and a subscriber's telephone or other communications
device such as a smart telephone.
One of the first intelligent network service offerings by RBOCs and telcos
was Caller ID, a service that provides information about the incoming call
(including the number and name of the caller and the time and date of the call)
enabling that information to be displayed on a device located near the telephone
(in the case of an adjunct unit) or on a display screen located on the telephone
(in the case of an integrated Caller ID telephone). InteliData estimates that
the current penetration rate of Caller ID service is approximately 15% of the
total subscribers in those areas in the United States that have Caller ID
capabilities.
By deploying the ADSI protocol in the telecommunications network, RBOCs
and other telcos will be able to offer additional intelligent network services
and third-party interactive applications. ADSI-based services will include
Caller ID on Call Waiting together with call disposition. By subscribing to
Caller ID on Call Waiting with call disposition, a subscriber who receives a
call waiting signal can look at the display screen on the smart telephone and
see the name and number of the calling party before deciding whether to answer
the call, send a prerecorded message telling the calling party to wait, forward
the call to voice mail or drop the line. Additional services which can be
supported through ADSI include on-line directory assistance, e-mail, paging,
news, weather, stock quotes and other information.
The regulatory environment relating to the telecommunications industry is
undergoing rapid and significant changes. The Telecommunications Act of 1996 has
effected basic changes in the telecommunications regulatory
11
<PAGE>
scheme. The intention of the Telecommunications Act is to enhance competition in
all telecommunications markets and bring new packages, lower prices and
increased innovation to U.S. telephone customers in the United States. The
Federal Communications Commission ("FCC") issued its first major order under the
Telecommunications Act in August 1996 which constitutes the FCC's initial
measures to implement sections of the Telecommunications Act relating to
interconnection between carriers and the provision of access to unbundled
services. However, this order has been challenged and, as of March 1, 1997, the
effectiveness has been stayed in the U.S. Court of Appeals for the Eighth
Circuit. In December 1996, the FCC issued a Notice of Proposed Rule Making which
suggests rules concerning the implementation of the Telecommunications Act
provisions relating to RBOC manufacture of telecommunications and customer
premises equipment. Although the FCC has not yet implemented the regulations
relating to those provisions, the proposed regulations would permit RBOCs to
manufacture products that support Caller ID and other emerging intelligent
network services subject to certain conditions. InteliData is unable to predict
what effect, if any, the Telecommunications Act and the emerging regulatory
scheme under the Telecommunications Act will have on Caller ID service or
InteliData's business generally.
Electronic Commerce. The electronic commerce division provides products
and services to financial institutions whose processes and systems are subject
to regulatory approvals. Electronic commerce is a developing marketplace.
Financial institutions are expanding their electronic home banking services to
permit customers not only to review historical account information, but also to
engage in transactions such as paying bills and transferring funds. InteliData's
future growth and profitability will depend, in part, upon consumer acceptance
of electronic home banking.
Interactive Services. The interactive services division provides
SmartTime(R) services to customers delivering personalized information to a
variety of small screen devices, including screen telephones, alpha-numeric
pagers, PCS/cellular telephones and addressable personal communicators. The
division provides operating online and batch interactive services directed at
consumers of small screen devices. Although it builds some of its services,
InteliData is essentially an aggregator of other data sources and purchases data
from many of the same suppliers as its competitors.
PRODUCTS AND SERVICES
InteliData's business strategy is to develop products and services to meet
the needs of its customers in each of its three markets: consumer
telecommunications, electronic commerce and interactive services. InteliData
develops products and services for the RBOCs and other telcos, financial
institutions and their customers. InteliData strives to develop products with
broad appeal that are easy-to-use, practical, inexpensive and built around
common industry standards. InteliData believes that its products position
InteliData to offer support services and interactive service applications which
are expected to generate recurring monthly fee revenue.
Consumer Telecommunications. Since introducing the first commercially
available Caller ID unit in 1987, InteliData has developed and marketed Caller
ID products with increased functionality to meet the needs of its RBOC and other
telco customers. A substantial majority of InteliData's revenues are derived
from the sale and leasing of its Caller ID products. InteliData's other consumer
telecommunications products and services include integrated telephones,
ADSI-compatible smart telephones, small business telecommunication systems, and
repair and refurbishment.
Electronic Commerce. InteliData's strategy in the electronic commerce
market is to support financial institutions by providing products and services
that help them deploy home banking to their customers. In addition, InteliData
supports Visa InterActive with products and services which facilitate bill
payment and bill presentment. InteliData's products and services are designed to
provide consumers the ability to access and utilize their bank account
information. They are also designed to provide financial institutions with
connectivity to the Visa InterActive host computer system as well as to other
third party payment processors.
Interactive Services. InteliData's strategy is to deploy its interactive
services on its smart telephones as well as other smart telephones and small
screen devices, such as alpha-numeric pagers and PDAs, manufactured by other
companies. InteliData intends to sell interactive service applications to RBOCs,
telcos and end users through retail markets and direct sales programs.
InteliData's current interactive service applications include electronic
national directory assistance lookup, one-way alpha-numeric paging, one-way
internet e-mail and a personal directory data save and restore function.
Additionally, InteliData offers services providing news, weather, stock quotes,
sports
12
<PAGE>
scores, and horoscopes. These are applications that will allow the smart
telephone user to receive periodically updated application-specific information
in an on-line format. In the future, InteliData expects to expand its
interactive services by offering two-way internet e-mail, which will enable the
user to not only send an e-mail message to an internet address, but also to
receive an e-mail message from an internet address. As of December 31, 1996,
InteliData has not generated revenues from its interactive services division.
MARKETING AND DISTRIBUTION
InteliData sells its products and services to telephone operating
companies, retailers and financial institutions in the United States. Revenues
from InteliData's joint venture partner, an RBOC and an electronic banking
service provider, were approximately 20%, 13% and 11% of total revenues for the
year ended December 31, 1996.
Consumer Telecommunications. InteliData markets its consumer
telecommunications products and services through employees in its direct sales
force and marketing department as well as independent sales representative
firms. InteliData's distribution strategy is to make its products available to
potential end users through multiple distribution channels including: direct
fulfillment arrangements with RBOCs, direct marketing, direct sales, and retail.
InteliData maintains direct fulfillment arrangements with Ameritech
Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell Atlantic"),
BellSouth Corporation ("BellSouth"), NYNEX Corporation ("NYNEX") and Pacific
Bell ("PacBell") and continually seeks to strengthen its current telco marketing
alliances and to develop new alliances.
Electronic Commerce. There are three distinct marketing channels within the
electronic commerce market: bill payment, bill presentment and account access.
Visa InterActive has designated the Company as a preferred provider of
certain of the Company's bill payment products and services. One of the
Company's strategies with Visa is to increase the number of subscribers for the
Company's bill pay products and services with the goal of growing monthly fee
revenues. Visa is the largest consumer payment system in the world.
Visa markets its bill payment and bill presentment services directly to
its member banks. Once a Visa member bank signs a commitment to deploy
electronic commerce services through the Visa Bill-Pay System, an extended
roll-out period of the bank's electronic commerce services begins. In March
1996, Microsoft, Inc. entered into an agreement with Visa InterActive to include
an interface that will allow users of Microsoft's Money personal finance
software package to access Visa InterActive's electronic bill payment system.
Royalties due InteliData from Visa will be equal to $.666 per month per bill pay
customer whose transactions are processed by Visa InterActive's bill pay system.
InteliData's right to receive these quarterly royalty payments is subject to a
cumulative offset of $73,000 per quarter beginning January 1, 1995 through
December 31, 1997.
As of December 31, 1996, Visa InterActive had announced commitments from
69 financial institutions for the Visa Bill-Pay System. However, due to the time
necessary to install and implement the system for each bank, only 58 banks have
rolled out the system in small, limited markets and have enrolled a relatively
small number of customers. There can be no assurances as to the banks' ultimate
success with this program or the number of customers that ultimately will use
the program. Announced customers of Visa InterActive include Merrill Lynch,
Fleet Bank, First Union, Fidelity Investments, First Tennessee Bank National
Association, Star Bank, Zions Bank and Deposit Guarantee. InteliData believes
its relationship with Visa InterActive keeps the Company in close contact with
Visa, its banks and the end users of electronic commerce services. InteliData
believes that this relationship will enable the Company to continue to develop
complementary products and services, such as applications software for Visa
member banks, and potentially enable it to have access to Visa's worldwide
member banks. There can be no assurance, however, that InteliData's marketing
efforts will be successful or that Visa will not reassess its commitment to
InteliData at any time in the future.
InteliData's marketing strategy in the bill presentment channel is to
offer its bill presentment products and services directly to financial
institutions as well as to billers using the Visa ePay system. In December 1995,
Visa commenced its ePay electronic bill-payment programs with several major U.S.
financial institutions. Visa's two-way ePay standard allows financial
institutions to implement a fully electronic, seamless, back-end bill payment
system. The ePay system is patented in the United States and is expected to
significantly reduce remittance-processing
13
<PAGE>
inefficiencies for participating financial institutions and organizations that
bill for goods and services. In addition, the system will enable billers to send
invoices electronically to their customers who pay bills on-line.
InteliData also is developing products and services for financial
institutions who want to provide their customers with products and services that
allow customers the ability to access certain information from their banking
accounts, much as they do with touch tone telephones today, but over personal
computers and screen based telephones as well.
Interactive Services. InteliData's strategy in the interactive services
market is to build a subscriber base for its bundle of interactive service
applications on its own smart telephones and on small screen devices
manufactured by other companies. In this regard, InteliData gains access to
telco customers through its existing relationships with the RBOCs and other
telcos. InteliData believes that the marketing of smart telephones and the
interactive services will be more successful when a consumer can subscribe to
network services and purchase the telephone 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. In 1996
InteliData began selling its interactive content through retail stores and
related outlets. InteliData expects to be able to expand this channel during
1997 and also make its services available on telephones and other small screen
devices manufactured by others. InteliData has identified additional
distribution channels for its interactive services that it will begin to develop
during 1997 such as wireless communications or paging companies.
COMPETITION
Consumer Telecommunications. The market for InteliData's products and
services is highly competitive and subject to increased competition resulting
from rapid technological change as well as increased competition resulting from
changes in the telecommunications industry consolidation and the emergence of
new market entrants. At present, InteliData's principal competitors in the
market for Caller ID products are CIDCO Incorporated ("CIDCO"), Lucent
Technologies, Inc. ("Lucent") and Northern Telecom, Ltd. ("Northern Telecom").
InteliData's Caller ID products also compete with Caller ID telephones offered
by Panasonic Co. ("Panasonic"), Sony Corp. ("Sony"), Thomson Consumer
Electronics, Inc. ("Thomson") and US Electronics, Inc. ("US Electronics") and
other companies.
The smart telephone marketed by InteliData is subject to competition from
smart telephones marketed by Philips Electronics, N.V. ("Phillips"), Northern
Telecom and CIDCO as well as other emerging platforms for interactive service
applications delivered through personal computers and cable television.
InteliData's competitors, including Philips and Northern Telecom, have
already introduced smart telephones that include technological features
incorporated in its Telesmart 4000 smart telephone product. Visa InterActive and
Philips have 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. Any bill pay
transaction generated by a Phillips smart telephone that is processed by Visa
InterActive will potentially generate a royalty payment due to InteliData from
Visa.
InteliData expects competition in the markets for its consumer
telecommunications products and services to increase in the future and expects
competition from existing and new competitors, possibly including RBOCs, other
telcos or other current customers, as well as from network switch-based services
and from the increased application of cellular technology. InteliData's primary
current and potential competitors in the market for its consumer
telecommunications products and services have substantially greater financial,
marketing and technical resources than InteliData. Increased competition could
materially and adversely affect InteliData's results of operations through,
among other things, price reductions and loss of market share.
InteliData's Telesmart 4000/IntelifoneTM smart telephone product
incorporates newer DSP technology. Although it is currently unaware of any
efforts by its competitors to deploy DSP technology in their smart telephones,
InteliData expects that its competitors will attempt to replicate the Telesmart
4000/IntelifoneTM smart telephone DSP design if it is commercially successful.
InteliData 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, Inc., Prodigy, Inc. and CompuServe Corp, as well as from
personal computer software companies such as Intuit, Inc. ("Intuit") and Novell,
Inc.
14
<PAGE>
InteliData competes with a large number of competitors for its repair
services and other services supporting the development and implementation of
intelligent network services. Several of InteliData's competitors in the market
for such services have substantially greater financial, marketing and
technological resources than InteliData. There can be no assurance that
InteliData will be able to continue to compete successfully against its existing
competitors or that it will be able to compete successfully against new
competitors.
InteliData believes that the principal competitive factors in the markets
for its consumer telecommunications products and services are knowledge of the
requirements of the various RBOCs and other telcos, product reliability, product
design, the quality of its repair and support services, customer service and
support, and price relative to performance. InteliData competes in the market
for its consumer telecommunications products and services principally on the
basis of its relationships with telcos, product design and reliability, low
product pricing and flexibility of marketing alternatives, including leasing.
Electronic Commerce. InteliData's electronic commerce products and
services compete with services offered by a number of competitors and
competition may intensify as a result of new market entrants. Banks such as
Citibank, NationsBank and Bank of America have developed electronic commerce
products for their own customers and, in the future, may offer these services to
other banks. Non-banks, such as EDS and First Data Corporation, also may develop
electronic commerce products to offer to banks. Computer software and data
processing companies, such as Intuit, also offer electronic commerce services.
Visa competes with other organizations, including MasterCard International, Inc.
("MasterCard"), which offers its Masterbanking electronic commerce service
through CheckFree Corporation. InteliData's success in electronic commerce
depends in large part on the ultimate success of Visa and on the ability of Visa
InterActive and Visa member banks to successfully market electronic commerce to
their customers. In addition, the success of InteliData's electronic commerce
strategy depends on the ability of Visa member banks to maintain market share in
an environment of disintermediation.
Many competitors exist for InteliData's various banking products,
including other manufacturers of touch-tone response systems, such as
Periphonics Corporation and Syntellect Inc., other financial software companies,
such as ACI, and financial services software and service companies, such as
Hogan Systems, Inc. and M&I Data Services, Inc. InteliData believes that its
primary competition for its customer support services to the customer will come
from financial institutions and third parties that choose to offer customer
support services either directly through Visa's customer support messaging
standard ("CSMS") product or on their own.
InteliData expects that competition in all of these areas will increase
in the near future. InteliData believes that a principal competitive factor in
its markets is the ability to offer an integrated system, in conjunction with
Visa, of various electronic commerce products and services. Competition will be
based upon price, performance, customer service and the effectiveness of
marketing and sales efforts. InteliData competes in its various markets on the
basis of its relationships with strategic partners, by developing many of the
products required for complete solutions, and by building reliable products and
offering those products at reasonable prices.
Interactive Services. The industry for interactive services is emerging and
there is potential for a number of companies to enter the marketplace.
Currently, InteliData's primary competitor is SmartServe Online, Inc.
PRODUCT DEVELOPMENT
InteliData operates in industries that are rapidly growing and changing.
In efforts to improve InteliData's position with respect to its competition,
InteliData has increased its product development efforts by increasing the
number of personnel in the product development department and focusing
management efforts in the area of product development. InteliData's product
development efforts are focused on new products that support intelligent network
services, product enhancements, international standards compliance and the
continued improvement of hardware components to reduce manufacturing costs.
The electronic commerce division's product development efforts are
focused on software and systems for electronic banking. In particular,
InteliData applies its research and development expenditures to audio and data
transaction processing and messaging software and customer support services. The
electronic commerce industry is characterized by rapid change. To keep pace with
this change, InteliData maintains an aggressive program of new product
development and dedicates considerable resources to research and development to
further enhance its existing products and to create new products and
technologies. InteliData's ability to attract and retain highly skilled research
15
<PAGE>
and development personnel is important to InteliData's continued success.
The interactive services division's product development efforts are
focused on expanding the services and the range of content that can be provided
as well as the number of devices to which the services can be delivered.
MANUFACTURING
InteliData's primary equipment manufacturer is STL and certain of its
affiliates, which have ISO 9000 series certified facilities located in Hong Kong
and the People's Republic of China, for the manufacture of its Caller ID units,
smart telephones and other products. In addition, InteliData has established
relationships with other ISO 9000 series certified Asian manufacturers for its
integrated corded and cordless telephones and small business telecommunications
products. The facilities of InteliData's suppliers are supplemented, in part, by
its own limited manufacturing facilities in Connecticut. The availability or
cost of its products may be affected by political, economic or labor conditions
in the countries where those products are manufactured, including the 1997
return of Hong Kong to China, by fluctuations in currency exchange rates and by
other factors. In addition, a change in the tariff structure or other trade
policies of the United States could adversely affect InteliData's foreign
manufacturing strategies.
InteliData does not have any production contracts with its assembly
contractors. InteliData's principal manufacturer performs comprehensive
inspection and statistical process control testing, utilizing its internally
designed automated testing equipment. To date, InteliData has not experienced
significant returns of defective products.
In the United States, InteliData's manufacturing operations are limited
to the testing, quality control and shipping of finished products and the
purchase and inventory management of two key components of its products.
The key components used in InteliData's products are currently being
purchased from two sources, except for its application specific integrated
circuit ("ASIC") chips, which are purchased from a single source. Although it
believes it could develop other sources for each of the components for its
products, the process could take several months, and the inability or refusal of
any such source to continue to supply components could have a material adverse
effect on InteliData pending the development of an alternative source.
GOVERNMENT REGULATION
Consumer Telecommunications. The regulatory environment relating to the
telecommunications industry is undergoing rapid and significant changes. The
Telecommunications Act has effected basic changes in the telecommunications
regulatory scheme. The intention of the Telecommunications Act is to enhance
competition in all telecommunications markets and bring new packages, lower
prices and increased innovations to telephone customers in the United States.
The FCC issued its first major order under the Telecommunications Act in August
1996, which constitutes the FCC's initial measures to implement certain sections
of the Telecommunications Act relating to interconnection between carriers and
the provision of access to unbundled services. However, this order has been
challenged and, as of March 1, 1997, the effectiveness of some of its provisions
has been stayed in the U.S. Court of Appeals for the Eighth Circuit. In December
1996, the FCC issued a Notice of Proposed Rule Making which suggests rules
concerning the implementation of the Telecommunications Act provisions relating
to the RBOC manufacture of telecommunications and customer premises equipment.
Although the FCC has not yet implemented the regulations relating to those
provisions, the proposed regulations would permit RBOCs to manufacture products
that support Caller ID and other intelligent network services. The Company is
unable to predict what effect, if any, the Telecommunications Act and the
emerging regulatory scheme under the Telecommunications Act will have on Caller
ID service or InteliData's business generally.
In the United States, Caller ID and other intelligent network services
offered by telcos are subject to federal and state regulation. Although Caller
ID is currently available in all 50 states and the District of Columbia.
However, during the past several years, protests by special interest groups and
regulatory concerns regarding the privacy aspects of the service have been
effective in both slowing down the regulatory approval process and, in most
states, requiring free per-call or per-line call blocking to be offered by the
telcos, thereby allowing a caller to prevent the display of his or her name and
number.
16
<PAGE>
An FCC order, which rules promulgated thereunder became effective
December 1, 1995 (the "FCC Order"), requires all U.S. telephone service
providers with SS7 switching architecture to transmit to each other without
charge Caller ID number information on interstate calls within the United States
(except for public pay phones and party lines). The FCC's order also requires
that telcos that offer Caller ID service must provide to their telephone
subscribers without charge a per-call blocking mechanism to block the
transmission of their Caller ID information on interstate calls and must inform
subscribers that their telephone numbers may be identified to a called party and
how to use this blocking capability.
Although the FCC Order was implemented December 1, 1995, several factors
may delay, prevent or substantially limit the implementation or market
acceptance of Caller ID. The availability of Caller ID service in a particular
area requires end-to-end interconnection of SS7 networks between telcos and
other carriers. Further, the FCC Order requires telcos to offer free per-call
blocking for interstate calls to all customers to protect privacy interests and
permits state public utility commissions to authorize per-line blocking for
interstate calls. Such blocking, if widely adopted, could limit the usefulness
and marketability of the Caller ID service.
The California Public Utilities Commission and AT&T Corp. ("AT&T") filed
petitions for review of the FCC Order in federal court challenging portions of
the FCC Order. Although the FCC Order withstood that particular challenge, other
parties have also objected to, sought delays in the implementation of or sought
clarification of the FCC Order. In addition, in the future, Caller ID service
may be subject to additional state and federal legislation, regulation and court
challenges. InteliData is unable to predict what effect, if any, further
legislation, regulation, court challenges or other objections may have on the
FCC Order or Caller ID service.
InteliData's smart telephone products are subject to regulation by the
FCC. Among other requirements, its smart telephones must comply with Parts 15
and 68 of the FCC's regulations.
Electronic Commerce. The banking market which InteliData has targeted for
marketing is highly regulated. The banking industry, although it has recently
undergone significant deregulation, remains quite regulated at both the federal
and state levels. Interpretation, implementation or revision of banking and
telecommunications regulations can accelerate or hinder the ultimate success of
InteliData and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
InteliData holds limited patent or registered intellectual property
rights with respect to its products. It has been issued a patent for its "Block
the Blocker" feature and has also applied for a patent on certain aspects of its
Caller ID on Call Waiting product. However, there can be no assurance that a
patent will be issued to InteliData for its Caller ID on Call Waiting product or
that such patent, if issued, will afford effective protection of its technology.
InteliData filed for patents on certain new features developed by itself for use
in the 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.
InteliData additionally relies on trade secret laws to establish and
maintain its proprietary rights to its products. Although InteliData has
obtained confidentiality agreements from its key executives and engineers in its
product development group, there can be no assurance that third parties will not
independently develop the same or similar alternative technology, obtain
unauthorized access to its proprietary technology or misuse the technology to
which it has granted access.
InteliData has rights to practice the inventions under certain of
Lucent's Caller ID patents. These patents are also licensed to others, including
InteliData's competitors. Lucent receives royalties from sales and leases of
InteliData's Caller ID products other than to Lucent. The Lucent license
agreement has no expiration date but is terminable by Lucent for breach on two
months' written notice unless within such time all specified breaches have been
remedied. If the Lucent license were terminated and InteliData were unable to
negotiate a new patent license agreement with Lucent, InteliData would no longer
be authorized to manufacture or sell Caller ID products in the United States
other than to the RBOCs and to Lucent. Additionally, under the agreement,
InteliData granted Lucent a non-exclusive, royalty-free license to all patents
on inventions which are improvements or modifications based upon the technology
licensed from Lucent.
17
<PAGE>
InteliData does not believe that its products and services infringe on
the rights of third parties. From time to time, third parties assert
infringement claims against InteliData. There can be no assurance that any such
assertion will not result in costly litigation or require it to cease using, or
obtain a license to use, intellectual property rights of such parties.
EMPLOYEES
At December 31, 1996, InteliData had approximately 348 employees, of whom
327 were full-time. Of the employees, 62 were engaged in product development or
research and development, 104 were engaged in customer service, and 44 were
engaged in selling and marketing. InteliData has no collective bargaining
agreements with its employees and believes that its relationship with its
employees is good.
18
<PAGE>
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
At December 31, 1996, World Airways' aggregate operating fleet consisted
of thirteen leased aircraft as follows (see Note 13 "Long-Term Obligations" of
the Company's "Notes to Consolidated Financial Statements" in Item 8):
<TABLE>
<CAPTION>
Capacity
------------------------------------
Aircraft (a) Passenger (seats)(b) Cargo (Tons) Total (c)
---------------------------- -------------------- ------------ ---------
<S> <C> <C> <C>
McDonnell Douglas MD-11 409 -- 4
McDonnell Douglas MD-11F -- 95 1
McDonnell Douglas MD-11CF 410 90 2
McDonnell Douglas MD-11ER 409 -- 2
McDonnell Douglas DC10-30 350 -- 3
McDonnell Douglas DC10-30CF 380 65 1
----
Total 13
</TABLE>
Notes
(a) "F" aircraft are freighters, "CF" are convertible freighters and
may operate in either passenger or freight configurations. "ER"
aircraft maintain extended-range capabilities. Aircraft with no
letter designation are passenger-only aircraft.
(b) Based on standard operating configurations. Other configurations
are occasionally used.
(c) Lease terms expire between 1997 and 2020 (assuming exercise of all
lease extensions).
GROUND FACILITIES
WorldCorp and World Airways lease office space located near Washington
Dulles International Airport which houses their corporate headquarters and
substantially all of the administrative employees.
In addition, World Airways leases additional office and warehouse space
in Wilmington, Delaware; Philadelphia, Pennsylvania; New York, New York; Los
Angeles, California; Kuala Lumpur, Malaysia; Yakota, Japan; and Frankfurt,
Germany. Additional small offices and maintenance material storage space are
leased at often frequented airports to provide administrative and maintenance
support for commercial and military contracts.
InteliData is headquartered in Herndon, Virginia, where it leases 30,000
square feet of office space from an unaffiliated party. InteliData also leases
other, less significant sales and product development facilities. Additionally,
InteliData owns a building located in New Milford, Connecticut. Certain
environmental contamination occurred in the part of the facility formerly
occupied by another tenant and the Connecticut Department of Environmental
Protection performed a clean-up and removed such contamination.
InteliData does not believe the foregoing will have a materially adverse effect
on the company.
ITEM 3. LEGAL PROCEEDINGS
For a description of the Company's current legal proceedings, see Note
20, "Commitments and Contingencies" of the Company's "Notes to Consolidated
Financial Statements" in Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security stockholders during the
fourth quarter of 1996.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK & RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "WOA". The high and low sales prices of the Company's common stock,
as reported on the New York Stock Exchange for each quarter in the last two
fiscal years, are as follows:
<TABLE>
<CAPTION>
Common Stock
---------------------
High Low
---- ----
1996
<S> <C> <C>
Fourth Quarter $ 6 1/2 $ 4
Third Quarter 6 3/4 4 1/2
Second Quarter 9 3/4 6 3/8
First Quarter 10 3/4 8 5/8
1995
Fourth Quarter $ 12 1/4 $ 7 7/8
Third Quarter 13 5/8 9 3/4
Second Quarter 12 7/8 8 3/4
First Quarter 10 7 1/4
</TABLE>
In March 1992, the Company filed with the Securities and Exchange
Commission ("SEC") a registration statement on Form S-3 registering $60.0 to
$90.0 million of Convertible Subordinated Debentures due 2004 (the
"Debentures"). On May 26, 1992, $65.0 million of the Debentures were issued. The
Debentures are convertible into WorldCorp common stock at $11.06 per share and
bear an annual interest rate of 7%. Semi-annual interest payments are due on May
15 and November 15. In September 1996, the Company issued $10.0 million, 10%
Senior Subordinated Notes due September 2000 (The "Notes").
The Company did not declare any cash dividends in 1996 or 1995 and does not
plan to do so in the foreseeable future. The Purchase Agreement governing the
Notes, and the Indenture governing the Company's Debentures, in certain
circumstances, restrict the Company from paying dividends or making
distributions on its common stock. Under the terms of certain borrowing
arrangements, WorldCorp granted to the lenders a security interest in all of the
World Airways and InteliData shares owned by the Company. (See Notes 12 and 13
of the Company's "Notes to Consolidated Financial Statements" in Item 8).
The approximate number of shareholders of record at March 15, 1997 is 2,518
and does not include those shareholders who hold shares in street name accounts.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
WORLDCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ --------
RESULTS OF OPERATIONS:
- ----------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 313,672 $ 246,572 $ 182,147 $ 179,932 $ 180,416
Operating expenses 310,935 240,279 200,959(c) 203,177(e) 217,271
Operating income (loss) 2,737 6,293 (18,812) (23,245) (36,855)(f)
Earnings (loss) from continuing operations
before income taxes, minority interest,
extraordinary item and change in
accounting principle 8,509(a) 65,685(b) 10,496(d) (33,698) (44,692)
Earnings (loss) from continuing operations
before extraordinary item and change in
accounting principle 7,437 64,158 8,308 (30,945) (42,891)
Discontinued operations, net of tax and
minority interest (19,191) (3,950)
Extraordinary gain (loss) on acquisition
of debt, net -- -- -- -- (3,253)
Change in accounting principle -- -- -- -- (1,973)
Net earnings (loss) (11,754) 60,208 8,308 (30,945) (48,117)
Primary earnings (loss) per share:
Continuing operations $ 0.45 $ 3.75 $ 0.54 $ (2.12) $ (3.02)
Discontinued operations (1.15) (0.23) -- -- --
Gain (loss) from acquisition of debt -- -- -- -- (0.23)
Change in accounting principle -- -- -- -- (0.14)
Net earnings (loss) (0.70) 3.52 0.54 (2.12) (3.39)
Fully diluted earnings (loss) per share:
Continuing operations $ * $ 2.99 $ 0.53 $ * $ *
Discontinued operations * (0.17) -- -- --
Gain (loss) from acquisition of debt -- -- -- -- --
Change in accounting principle -- -- -- -- --
Net earnings (loss) * 2.82 0.53 * *
FINANCIAL POSITION:
Cash and short-term investments $ 14,509 $ 78,661 $ 8,828 $ 17,584 $ 14,769
Total assets 178,963 202,089 98,536 98,119 93,346
Long-term obligations including
current maturities 114,794 122,700 119,032 129,049 104,192
Common stockholders' deficit (40,337) (23,297) (88,193) (101,073) (76,362)
</TABLE>
* Fully diluted earnings per share are anti-dilutive.
(a) Includes the $41.3 million net gain realized on the issuance of stock by
InteliData to effect the Merger of US Order and Colonial Data in November
1996; a $2.4 million net loss on other stock transactions of World Airways
and InteliData; partially offset by approximately $23.6 million of one-time
noncash Merger related charges (see Notes 4 and 5).
(b) Includes the $51.3 million gain realized on US Order's offering in June
1995 and other stock transactions (see Note 5) and the $16.0 million gain
realized on World Airways' offering in October 1995 (see Note 4).
(c) Includes a $4.2 million reversal of excess accrued maintenance reserves
associated with the expiration of three DC10 aircraft leases in 1994.
(d) Includes a $27.0 million gain on the sale of 24.9% of World Airways common
stock (see Note 4) and a $14.5 million gain on the sale of US Order's bill
payment operations (see Note 5).
(e) Includes $2.3 million of termination fees related to the early return of
three DC10-30 aircraft.
(f) Includes a $31.4 million loss on the sale of Key Airlines, Incorporated,
and $4.1 million related to settlement of contract claims with the U.S.
Government related to Operation Desert Shield/Desert Storm.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below relates to the operations of WorldCorp, Inc.
("WorldCorp" or "the Company") as reflected in its consolidated financial
statements. These statements primarily include the accounts of World Airways,
Inc. ("World Airways"). On February 28, 1994, pursuant to an October 1993
agreement, the Company sold 24.9% of its ownership in World Airways to MHS
Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994,
WorldCorp repurchased 5% of World Airways' common stock from MHS. In October
1995, World Airways completed an initial public offering in which 2,000,000
shares were issued and sold by World Airways and 900,000 shares were sold by
WorldCorp. At December 31, 1996, WorldCorp and MHS owned 6,915,915 shares, or
61.3%, and 1,990,000 shares, or 17.6%, respectively, of World Airways'
outstanding common stock. The remaining balance was publicly traded. The
managements of WorldCorp and World Airways are currently exploring ways to
maximize value for the shareholders of each company. WorldCorp is currently
evaluating the feasibility of a disposition of its interest in World Airways
through a secondary offering or a sale to a third party. There can be no
assurances, however, that any such transactions will ultimately be consummated.
On March 14, 1997, World Airways announced that Charles W. Pollard
departed as President and Chief Executive Officer. Pursuant to the company's
bylaws, T. Coleman Andrews, III, Chairman of the Board, will act as President on
an interim basis pending the hiring of a new CEO.
WorldCorp also had an ownership interest in US Order, Inc. ("US Order"), a
company which provided products and services for two markets: home banking and
smart telephones. In August 1996, US Order and Colonial Data Technologies Corp.
("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which
US Order and Colonial Data would be merged with and into a new public company,
InteliData Technologies Corporation ("InteliData"). Pursuant to this Merger,
which was consummated on November 7, 1996, InteliData became the successor
corporation to US Order. The Merger was treated as a purchase of Colonial Data
by US Order. InteliData concentrates on three markets: (1) consumer
telecommunications; (2) electronic commerce; and (3) interactive services. At
December 31, 1996, WorldCorp owned 9,179,273 shares of InteliData, or an
ownership interest of approximately 28.9%. Following this Merger, the Company
reports its proportionate share of InteliData's financial results using the
equity method of accounting.
During the third quarter of 1996, the Company announced its intention to
purchase up to 2.5 million shares of its publicly-traded Common Stock pursuant
to open market transactions. As of March 24, 1997, the Company had purchased
1,362,500 shares of its Common Stock for an aggregate cost of $7.8 million.
WorldCorp does not intend to purchase any additional shares at this time.
The Private Securities Litigation Reform Act of 1995 (the "Act") was
recently passed by Congress. The Company desires to take advantage of the new
"safe harbor" provisions in the Act. Therefore, this report contains forward
looking statements that are subject to risks and uncertainties, including, but
not limited to, the impact of competitive products, product demand and market
acceptance risks, reliance on key strategic alliances, fluctuations in operating
results and other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission. These risks could cause the Company's
actual results for 1997 and beyond to differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company.
OVERVIEW
WorldCorp owns positions in companies that operate in two distinct
business areas. World Airways (Nasdaq:WLDA) provides worldwide passenger and
cargo air transportation to major international airlines, the U.S. Air Force,
and international tour operators, with a fleet of MD-11 and DC10-30 aircraft.
InteliData (Nasdaq:INTD) concentrates on three markets: (1) consumer
telecommunications; (2) electronic commerce; and (3) interactive services.
The Company is a highly leveraged holding company. As a holding company,
all of WorldCorp's funds are generated through its positions in World Airways
and InteliData, neither of whom intend to pay dividends in the foreseeable
future. In addition, World Airways' ability to pay dividends is currently
restricted under a borrowing arrangement. As of December 31, 1996, WorldCorp has
substantial parent company debt service obligations. In order to meet these
obligations and its
22
<PAGE>
general and administrative costs in 1997, the Company must use its existing cash
and either sell shares of World Airways or InteliData, or issue additional debt
or equity. Under the terms of certain borrowing arrangements, WorldCorp has
pledged all of its shares of World Airways and InteliData as collateral for the
borrowings.
WORLD AIRWAYS
World Airways is a leading global provider of long-range passenger and
cargo air transportation outsourcing services to major international airlines
under fixed rate, multi-year contracts. World Airways' passenger and freight
operations employ 13 wide-body aircraft which are currently operated under
contracts, primarily with Pacific Rim airlines. These contracts generally
require World Airways to supply aircraft, crew, maintenance and insurance
("ACMI" or "wet lease"), while it's customers are responsible for a large
portion of the other operating expenses, including fuel. World Airways' airline
customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offer greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is the largest single supplier of commercial
airlift services to the United States Air Force's Air Mobility Command ("U.S.
Air Force" or "USAF").
In July 1996, World Airways restructured its business to focus on the
growing and profitable ACMI contract services. As such, World Airways ceased all
scheduled passenger and scheduled charter services as of October 27, 1996,
taking a one-time charge of $21.0 million.
World Airways generally charges customers on a block hour basis rather
than a per seat or per pound basis. "Block hours" are defined as the elapsed
time computed from the moment the aircraft first moves under its own power at
the point of origin to the time it comes to rest at its final destination. World
Airways provides most services under two types of contracts: wet lease contracts
and full service contracts. Under wet lease contracts, World Airways provides
the aircraft, cockpit crew, maintenance and insurance and the customer provides
all other operating services and bears all other operating expenses, including
fuel and fuel servicing, marketing costs associated with obtaining passengers
and/or cargo, airport passenger and cargo handling fees, landing fees, cabin
crews, catering, ground handling and aircraft push-back and de-icing services.
Under full service contracts, World Airways provides fuel, catering, ground
handling, cabin crew and all related support services as well. Accordingly,
World Airways generally charges a lower rate per block hour for wet lease
contracts than full service contracts, although it does not necessarily earn a
lower profit. Because of shifts in the mix between full service contracts and
wet lease contracts, fluctuations in revenues are not necessarily indicative of
volume trends or profitability. It is important, therefore, to measure World
Airways' business volume by block hours flown and to measure profitability by
operating income per block hour.
As is common in the air transportation industry, World Airways has
relatively high fixed aircraft costs. While it believes that the lease rates on
its MD-11 aircraft are favorable relative to lease rates of other MD-11
operators, World Airways' MD-11 aircraft have higher lease costs (although lower
operating costs) than its DC10-30 aircraft. Therefore, achieving high average
daily utilization of its aircraft (particularly its MD-11 aircraft) at
attractive yields are important factors to it financial results. In addition to
fixed aircraft costs, a portion of its labor costs are fixed due to monthly
minimum guarantees to cockpit crewmembers and flight attendants.
CUSTOMERS
Historically, World Airways' business has relied heavily on its contracts
with Malaysian Airline System Berhad ("Malaysian Airlines"), P.T. Garuda
Indonesia ("Garuda") and the U.S. Air Force. These customers provided
approximately 34%, 13%, and 25%, respectively, of World Airways' revenues and
42%, 14%, and 17%, respectively, of total block hours from continuing operations
during 1996. For 1995, these customers provided approximately 42%, 11%, and 21%,
respectively, of its revenues and 48%, 11%, and 13%, respectively, of total
block hours from continuing operations. In 1996, World Airways commenced
operations for Philippine Airlines, Inc. ("Philippine Airlines") providing four
MD-11 aircraft under year-round wet lease contracts. These operations provided
approximately 15% and 17% of World Airways' revenues and block hours from
continuing operations, respectively, during 1996. World Airways expects that the
agreement with Philippine Airlines will continue to have a substantial impact on
its revenues and block hours in 1997.
Malaysian Airlines. World Airways has provided wet lease services to
Malaysian Airlines since 1981, providing wet lease services for Malaysian
Airlines' scheduled passenger and cargo operations as well as transporting
passengers for the annual Hadj pilgrimage. MHS, which owns 17.6% of World
Airways as of December 31, 1996,
23
<PAGE>
also owns 29.1% of Malaysian Airlines. In late 1994, World Airways entered into
a series of multi-year contracts, with expiration dates ranging from 1997 to
2000, to provide aircraft to Malaysian Airlines. In 1996, World Airways provided
three aircraft for Hadj operations. World Airways recently entered into a new
32-month agreement for year-round operations (including the Hadj) with Malaysian
Airlines whereby it will provide two aircraft with cockpit crews, maintenance
and insurance to Malaysian Airlines' newly-formed charter division through May
1999. World Airways is currently in preliminary discussions with Malaysian
Airlines regarding a potential eleven-month reduction in the utilization of one
of these aircraft during the 32-month term of the contract.
Until recently, World Airways operated four passenger aircraft for
Malaysian Airlines under the multi-year agreements described above. The contract
for two of the four passenger aircraft for Malaysian Airlines expired in March
1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and
will actively re-market the aircraft thereafter, World Airways can provide no
assurance that it will be able to redeploy the two aircraft, beginning June
1997, at price and utilization levels at least as favorable as under the terms
of the Malaysian Airlines contracts.
World Airways originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contract. World Airways and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contracts' original obligations. World Airways can provide no assurances,
however, that it will, in fact, be able to redeploy these two aircraft back into
Malaysian Airlines' operation to meet the contracts' original obligations.
Revenues associated with these contractual obligations are included in World
Airways' backlog amount included herein.
Garuda. World Airways has flown for Garuda periodically since 1973 and
yearly since 1988. Since 1988, World Airways has been one of the largest
providers of passenger services to Indonesia for the Hadj pilgrimage. The
Indonesian Hadj pilgrimage is the world's largest due to the size of Indonesia's
Islamic population. In 1996, approximately 200,000 Indonesians traveled to
Jeddah for the Hadj pilgrimage. During the 1996 Hadj pilgrimage, World Airways
provided passenger service to Garuda with seven aircraft, flying approximately
40,000 Indonesians on company aircraft. Due to World Airways' capacity
constraints during the period of Hadj flying, World Airways reached an agreement
with Garuda to operate six aircraft during the 1997 pilgrimage.
Philippine Airlines. In May 1996, World Airways entered into a new ACMI
contract with Philippine Airlines, thereby further expanding its presence in the
Pacific Rim. World Airways presently operates four MD-11 passenger aircraft for
Philippine Airlines under an agreement, with high minimum monthly utilization
levels. World Airways, however, has recently received a written communication
from Philippine Airlines in which the airline contends that its leases for all
four aircraft expire on November 15, 1997. World Airways believes that this
position is contrary to the understanding of the parties that each of the MD-11s
are to be leased by Philippine Airlines for a period of 18 months from delivery
of each aircraft. The parties are currently discussing the length of the lease
term for these aircraft. World Airways can provide no assurances, however, that
Philippine Airlines will agree to lease any of the four MD-11 passenger aircraft
beyond November 15, 1997, or that World Airways will be able to secure other
business at as favorable price and utilization levels.
Also, subsequent to year-end, at Philippine Airlines' request, World
Airways agreed to a payment plan with respect to Philippine Airlines' wet lease
obligations for several months beginning in March 1997. Although Philippine
Airlines is current on this payment plan to date, if Philippine Airlines
defaults on this payment plan, or fails to meet its monthly aircraft lease
obligations, this development, if not offset by other business, would have a
material adverse effect on the cash flows, financial condition and results of
operation of World Airways.
U.S. Air Force. World Airways has provided international air
transportation to the U.S. Air Force since 1956. The overall downsizing of the
U.S. military, combined with a need to respond quickly to the growing number of
global regional conflicts places a premium on the mobility of the U.S. armed
forces. This is reflected in the stable size over the past several years of the
USAF's procurement of commercial airlift services. Although World Airways'
agreements with the USAF provide for full service contracts with certain minimum
performance requirements, World Airways has risks similar to an ACMI agreement
because the USAF agreements are cost-plus contracts at attractive rates.
24
<PAGE>
The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. World Airways utilizes such teaming arrangements to maximize
the value of potential awards. World Airways leads a contractor teaming
arrangement that enjoys a 44% market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, World Airways' portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the
government's 1996-97 fiscal year.
The current annual contract commenced on October 1, 1996 and expires on
September 30, 1997. These contracts provide for a fixed level of scheduled
business from the U.S. Air Force with opportunities for additional short-term
expansion business on and ad hoc basis as needs arise. Due to the utilization of
a significant number of World Airways' aircraft under multi-year contracts and
other contractual commitments, it is unlikely that it will be able to accept all
of the available expansion business. Although overall Defense Department
spending is being reduced, the level of the U.S. Air Forces contract awards has
remained relatively constant in recent years. World Airways, however, cannot
determine how future cuts in military spending may affect future operations with
the U.S. Air Force.
Although World Airways's customers bear the financial risk of filling the
World Airways' aircraft with passengers or cargo, World Airways can be affected
adversely if its customers are unable to operate its aircraft profitably, or if
one or more of World Airways' customers experience a material adverse change in
their market demand, financial condition or results of operations. Under these
circumstances, World Airways can be adversely affected by receiving delayed or
partial payments or by receiving customer demands for rate and utilization
reductions, flight cancellations, and/or early termination of their agreements.
As a result of these and other contracts, World Airways had an overall
contract backlog at December 31, 1996 of $468.0 million, compared to $462.0
million at December 31, 1995. Approximately $253.5 million of the backlog
relates to 1997 operations. World Airways' backlog for each contract is
determined by multiplying the minimum number of block hours (defined as the
elapsed time computed from the moment the aircraft first moves under its own
power at the point of origin to the time it comes to rest at its destination)
guaranteed under the applicable contract by the specified hourly rate under such
contract. Approximately 60% and 20% of the backlog relates to its contracts with
Malaysian Airlines and Philippine Airlines, respectively. While the percentage
of its 1997 block hour capacity that is currently under contract exceeds the
comparable percentage in the past several years, World Airways still has
substantial uncontracted capacity in the third and fourth quarters of 1997. In
addition, a significant portion of World Airways' current contracts expire near
the end of 1997. Although there can be no assurance that it will be able to
secure additional business to reduce this excess capacity, World Airways is
actively seeking customers for 1997 and beyond. World Airways' financial results
and financial condition would be affected adversely if it is unable to secure
additional business to reduce this excess capacity.
The information regarding major customers and foreign revenue is
contained in Note 18 "Segments and Major Customers" of the Company's "Notes to
Financial Statements" in Item 8.
COMPETITION
The market for outsourcing air passenger and cargo ACMI services is
highly competitive. Certain of the passenger and cargo air carriers against
which World Airways competes possess substantially greater financial resources
and more extensive facilities and equipment than those which are now, or will in
the foreseeable future become, available to World Airways. World Airways
believes that the most important bases for competition in the ACMI outsourcing
business are the age of the aircraft fleet, the passenger, payload and cubic
capacities of the aircraft, and the price, flexibility, quality and reliability
of the air transportation service provided. Competitors in the ACMI outsourcing
market include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of World Airways to achieve the growth anticipated by its
strategic plan depends upon its success in convincing major international
airlines that outsourcing some portion of their air passenger and cargo business
remains more cost-effective than undertaking passenger or cargo operations with
their own incremental capacity and resources. The allocation of military air
transportation contracts by the USAF is based upon the number and type of
aircraft a carrier, alone or through a teaming arrangement, makes available for
use in times of national emergencies. The formation of competing teaming
arrangements comprised of larger partners than those sponsored by World Airways,
an increase by other air carriers in their commitment of
25
<PAGE>
aircraft to the emergency program, or the withdrawal of it current partners,
could adversely affect the size of the USAF contracts, if any, which are awarded
to World Airways in future years.
CYCLICAL NATURE OF AIR CARRIER BUSINESS
World Airways operates in a challenging business environment. The air
transportation industry is highly sensitive to general economic conditions.
Since a substantial portion of passenger airline travel (both business and
personal) is discretionary, the industry tends to experience severe adverse
financial results during general economic downturns and can be adversely
affected by unexpected global political developments. The financial results of
air cargo carriers are also adversely affected by general economic downturns due
to the reduced demand for air cargo transportation. In 1993 and 1994, the
combination of a generally weak global economy and the depressed state of the
air transportation industry adversely affected its operating performance.
Although World Airways recently has experienced a growth in demand, such that
block hours flown from continuing operations increased in 1996 by 23% over 1995,
there can be no assurance that this level of growth will continue.
SEASONALITY
Historically, World Airways' business has been significantly affected by
seasonal factors. During the first quarter, World Airways typically experiences
lower levels of utilization and yields due to lower demand for passenger and
cargo services relative to other times of the year. World Airways experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1997, World Airways' flight operations associated with the Hadj
pilgrimage will occur from March 15 to May 20. Because the Islamic calendar is a
lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days
earlier each year relative to the Western (Gregorian) calendar. As a result,
revenues resulting from future Hadj pilgrimage contracts will continue to shift
from the second quarter to the first quarter over the next several years. World
Airways believes that its contracts with Malaysian Airlines and the USAF should
lessen the effect of these seasonal factors.
GEOGRAPHIC CONCENTRATION
World Airways derives a significant percentage of its revenues and block
hours from its operations in the Pacific Rim region. While it believes the
Pacific Rim region is a growth market for air transportation, any economic
decline or any military or political disturbance in this area may interfere with
World Airways' ability to provide service in this area and could have a material
adverse effect on the financial condition or results of operations of the
company.
UTILIZATION OF AIRCRAFT
Due to the large capital costs of leasing and maintaining its aircraft,
each of World Airways' aircraft must have high utilization at attractive rates
in order for it to operate profitably. Although World Airways' strategy is to
enter into long-term contracts with its customers, the terms of its existing
customer contracts are substantially shorter than the terms of World Airways'
lease obligations with respect to the aircraft. There can be no assurance that
World Airways will be able to enter into additional contracts with new or
existing customers or that it will be able to obtain enough additional business
to fully utilize each aircraft. World Airways' financial results could be
materially adversely affected even by relatively brief periods of low aircraft
utilization and yields. In order to maximize aircraft utilization, World Airways
does not intend to acquire new aircraft unless such aircraft would be necessary
to service existing needs or it has obtained additional ACMI contracts for the
aircraft to service. World Airways is seeking to obtain additional ACMI
contracts with new and existing customers, to which such new aircraft would be
dedicated when placed in service, but it can provide no assurance that it will
obtain new ACMI contracts or that existing ACMI contracts will be renewed or
extended.
MAINTENANCE
Engine maintenance accounts for most of World Airways' annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. World Airways outsources major airframe maintenance and power
plant work to several suppliers. World Airways has a 10-year contract expiring
in August 2003 with United Technologies Corporation's Pratt & Whitney Group for
all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft.
Under this contract, the manufacturer agreed to provide such maintenance
services
26
<PAGE>
at a cost not to exceed specified rates per hour during the term of the
contract. Its maintenance costs associated with the MD-11 aircraft and PW 4462
engines have been significantly reduced due in part to manufacturer guarantees
and warranties which began to expire in 1995 and which will fully expire by
1998. In addition, the specified rates per hour are subject to annual
escalation, increasing substantially in 1998. Accordingly, while World Airways
believes the terms of this agreement have resulted in lower engine maintenance
costs than it otherwise would incur, engine maintenance costs will increase
substantially during the last five years of the agreement. World Airways will
begin to accrue these increased expenses in 1997. Therefore, World Airways
expects that maintenance expenses will continue to increase during the remainder
of the term of the contract as its aircraft fleet ages.
OPERATING LOSSES
While World Airways generated operating income each year from 1987
through 1992 and in 1995, it sustained operating losses in 1993 and 1994 of $7.3
million and $5.2 million, respectively, and net losses of $9.0 million in each
of these two years. For the year ended December 31, 1996, World Airways incurred
a net loss of $14.0 million, which resulted from operating losses incurred in
its scheduled service operations, which were discontinued in 1996, and the
related estimated loss on disposal. Earnings from continuing operations were
$18.4 million for 1996. There can be no assurance that World Airways will be
able to generate operating income in 1997 or future years.
INTELIDATA
InteliData was incorporated in order to effect the mergers of US Order and
Colonial Data. The Merger was announced on August 5, 1996, when US Order and
Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement").
On November 7, 1996, the Merger was consummated with each share of outstanding
US Order and Colonial Data common stock being exchanged for one share of
InteliData common stock. The Merger was treated as a purchase of Colonial Data
by US Order. At December 31, 1996, WorldCorp's ownership in InteliData was
approximately 28.9%. Following this Merger, WorldCorp reports its proportionate
share of InteliData's financial results using the equity method of accounting.
On October 4, 1996, US Order acquired the business of Braun, Simmons &
Co., ("Braun Simmons"), for approximately $7.0 million consisting of cash and US
Order common stock and including US Order transaction costs. Braun Simmons was
an information engineering firm specializing in the development of home banking
and electronic commerce solutions for financial institutions. The acquisition
expands InteliData's product line for both large and small financial
institutions.
The business of InteliData consists of the businesses previously
conducted by US Order, Colonial Data and Colonial Data's subsidiaries.
InteliData develops and markets products and services for the telecommunications
and financial services industries through its three business divisions: consumer
telecommunications, electronic commerce and interactive services.
The consumer telecommunications division designs, develops and markets
telecommunications products that support intelligent network services being
developed and implemented by the regional Bell operating companies ("RBOCs") and
other telephone companies ("telcos"). InteliData has concentrated its product
development and marketing efforts on products that support Caller ID and other
emerging intelligent network services, including a smart telephone, the
Telesmart 4000/IntelifoneTM, which provide consumers call management features
and the ability to access numerous network services and interactive applications
via telephone. InteliData currently offers a line of Caller ID adjunct units and
telephones with integrated Caller ID, small business telecommunications systems
and high-end consumer telecommunications equipment. InteliData also repairs and
refurbishes telecommunications products for commercial customers and provides
other services that support the development and implementation of intelligent
network services.
The electronic commerce division develops and markets products and
services to assist financial institutions in their home banking and electronic
bill payment initiatives. The products are designed to assist consumers in
accessing and transacting business with their banks and credit unions
electronically, and to assist financial institutions in connecting to and
transacting business with third parties, including data processors and billers.
The services focus on a financial institution's back office, offering
outsourcing for data entry, telemarketing, customer service and technical
support. InteliData currently receives its electronic commerce revenues largely
from the sale of products and services to Visa International Service
Association, Inc. ("Visa") member banks.
27
<PAGE>
The interactive services division was established to provide interactive
applications for use on smart telephones and other small screen devices, such as
alpha-numeric pagers, Personal Communication Systems ("PCS") telephones and
personal digital assistants ("PDAs"). InteliData intends to sell interactive
applications directly to end users and through other companies, including telcos
and wireless communications companies. InteliData's current interactive
applications include electronic national directory assistance lookup, one-way
alpha-numeric paging, one-way internet e-mail, a personal directory data save
and restore function and information services such as news, weather, sports
scores, stock quotes, lottery results and horoscopes.
UNCERTAINTY AS TO FUTURE FINANCIAL RESULTS
InteliData believes that the Merger will offer opportunities for
long-term efficiencies that should positively affect future operating results of
the combined companies. However, the combined companies will be more complex and
diverse than either US Order or Colonial Data individually, and the combination
and continued operation of their distinct business operations will present
difficult challenges for its management due to the increased time and resources
required in the management effort. While the management and the board of
InteliData believe that the combination can be effected in a manner that will
realize the value of the two companies, neither management group has experience
in combinations of this size or complexity. Accordingly, there can be no
assurance that the process of effecting the business combination can be
effectively managed to realize the operational efficiencies anticipated to
result from the Merger.
Following the Merger, in order to maintain and increase profitability,
the combined company will need to successfully integrate and streamline
overlapping functions. The two predecessor companies had different systems and
procedures in many operational areas that must be rationalized and integrated.
There can be no assurances that integration will be accomplished smoothly or
successfully. The difficulties of such integration may be increased by the
necessity of coordinating geographically separated organizations. The
integration of certain operations following the Merger will require the
dedication of management resources that may temporarily distract attention from
the day-to-day business of the combined companies. Failure to effectively
accomplish the integration of the two companies' operations could have an
adverse effect on InteliData's results of operation and financial condition.
DEVELOPING MARKETPLACE
Home banking and smart telephones are developing markets. Consumer
preferences in interactive technologies are difficult to predict. InteliData'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 InteliData's products and services will be commercially
successful or benefit from such growth.
Much of InteliData's success in the smart telephone market depends on
InteliData's ability to meet design specifications and delivery requirements for
its products and services. There can be no assurance of the timing of
introduction of, necessary regulatory approvals for, or market acceptance of
these services and applications. InteliData faces competition in these markets
from other emerging interactive applications delivered through personal
computers, cable television and Integrated Service Digital Network ("ISDN").
FLUCTUATIONS IN OPERATING RESULTS
Historically, US Order and Colonial Data have experienced fluctuations in
quarterly operating results, and accordingly, InteliData may experience
fluctuations in quarterly operating results due to a variety of factors, some of
which are beyond InteliData's control. These include the size and timing of
customer orders or the royalty payments from Visa InterActive, if any, changes
in InteliData's pricing policies or those of its competitors, new product
introductions or enhancements by competitors, delays in the introduction of new
products or product enhancements by InteliData 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, marketing, and research and
development expenses by InteliData and its competitors, the timing of programs
offering Caller ID or other intelligent network services by a telco, disruptions
in sources of supply, the effects of regulation on Caller ID and other
intelligent network services, the timing and extent of promotional activities by
a telco, changes in service charges by a telco, other changes in operating
expenses, personnel changes and general economic conditions. Additionally,
certain regional Bell operating companies have entered into merger agreements.
InteliData is unable to assess the
28
<PAGE>
future effect on the company of these mergers, if consummated, and of other
possible consolidations in the telecommunications industry. No assurance can be
given that such quarterly variations will not occur in the future and,
accordingly, the results of any one quarter may not be indicative of the
operating results for future quarters.
RELIANCE ON CALLER ID REVENUES
A substantial majority of InteliData's revenues are derived from sales
and leases of its Caller ID products. The sale or lease of these products is
directly linked to the implementation and promotion of Caller ID service by
telcos. The timing of such implementation may be affected by government
regulation, by changes in the telecommunications industry resulting from changes
in the regulatory and competitive environment, by switch and software upgrades
and by other factors. There can be no assurance that telcos will continue to
introduce and promote this service successfully or that it will gain widespread
market acceptance. Delays in the introduction of Caller ID service in local
markets or failure of this service to gain widespread market acceptance would
materially and adversely affect InteliData's business, operating results and
financial condition.
CONCENTRATION OF DISTRIBUTION OF PRODUCTS AND SERVICES
InteliData sells its telecommunications products and services to telcos,
individual telephone subscribers, other equipment manufacturers on a private
label basis ("private label customers") and retail chains. In addition,
InteliData leases its products to individual telco subscribers. Sales and leases
to individual telco subscribers are largely dependent on direct fulfillment
distribution arrangements with certain RBOCs and other telcos. Since InteliData
views the telcos with which it maintains direct fulfillment relationships as its
customers, it considers its customer base to be highly concentrated.
InteliData's current telco fulfillment arrangements are not exclusive and may be
terminated by either party. The loss of any one or more of InteliData's major
customers or the termination of its distribution arrangements with any telco or
the failure to be selected for significant orders or programs by a telco could
materially and adversely affect InteliData's business, operating results, and
financial condition. In addition, consolidation in the telecommunications
industry or changes in the telecommunications regulatory environment could
result in the loss of such customers or business.
TECHNOLOGICAL CONSIDERATIONS
InteliData's business activities are concentrated in fields characterized
by rapid and significant technological advances. There can be no assurance that
InteliData will remain competitive technologically or that its 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 its business, operating
results and financial condition. There can be no assurance that InteliData will
not encounter unanticipated technical, marketing or other problems or delays
relating to new products, features or services which it has recently introduced
or which it may introduce in the future. Moreover, there can be no assurance
that its new products, features or services will be successful, that the
introduction of new products, features or services by its competitors will not
materially and adversely affect the sales of InteliData's existing products or
that it will be able to adapt to future changes in the telecommunications
industry. Most of InteliData's competitors and potential competitors have
significantly greater financial, technological and research and development
resources than InteliData.
DEPENDENCE ON FOREIGN PRODUCTION
InteliData's Caller ID units and certain other products, including the
smart telephone, the Telesmart 4000/IntelifoneTM, are manufactured by companies
with facilities in Hong Kong, Malaysia, and the People's Republic of China.
These facilities are supplemented, in part, by other manufacturers in Asia for
certain integrated telephone and small business system products and by limited
manufacturing facilities in Connecticut. The availability or cost of these
Caller ID units and smart telephones may be adversely affected by political,
economic or labor conditions in Hong Kong, Malaysia or the People's Republic of
China, 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 InteliData will
import products could adversely affect InteliData's foreign manufacturing
strategies.
RESTRICTIONS FROM THE VISA AGREEMENT
As a condition of Visa's acquisition of InteliData's bill payment
operations and technology (the "Visa Bill-Pay
29
<PAGE>
System"), InteliData 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 its reliance upon Visa. InteliData's
dependence on Visa, and the terms of the agreement between the parties, may have
a material adverse effect on InteliData.
IMPORTANCE OF STRATEGIC ALLIANCES
One of InteliData's business strategies is to manufacture or sell its
products and services through strategic alliances. The success of this strategy
will depend to an extent both on the ultimate success of its strategic partners
as well as on the ability of its partners to successfully market InteliData's
products and services. There can be no assurance that any alliance partners will
view their alliance with InteliData as significant for their own businesses or
that they will not reassess their commitment to InteliData at any time in the
future.
COMPETITION
Consumer Telecommunications. The market for InteliData's products is
highly competitive and subject to rapid technological change. At present,
InteliData's principal competitors are CIDCO, Lucent and Northern Telecom.
InteliData's Caller ID products also compete with Caller ID telephones offered
by Panasonic, Sony, Thomson and US Electronics.
Marketing of InteliData's smart telephone is subject to competition from
smart telephones marketed or developed by Philips, Northern Telecom and CIDCO as
well as other emerging platforms for interactive applications delivered through
personal computers and cable television. InteliData expects competition in the
markets for its consumer telecommunications products and services to increase in
the future and expects competition from existing and new competitors, possibly
including RBOCs, other telcos or other current customers, as well as from
network switch-based services and from the increased application of cellular
technology. InteliData's primary current and potential competitors in the market
for its consumer telecommunications products and services have substantially
greater financial, marketing and technical resources than itself. Competition
could materially and adversely affect InteliData's results of operations through
price reductions and loss of market share.
InteliData competes with a large number of competitors for its repair
services and other services supporting the development and implementation of
intelligent network services. Several of its competitors in the market for such
services have substantially greater financial, marketing and technological
resources than InteliData. There can be no assurance that InteliData will be
able to continue to compete successfully against its existing competitors or
that it will be able to compete successfully against new competitors.
Electronic Commerce. 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.
InteliData'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 have developed home banking products for their own customers
and, in the future, may offer these services to other banks. Non-banks also may
develop home banking products to offer to banks. Computer software and data
processing companies also offer home banking services. Visa competes with other
organizations, including MasterCard International, Inc. ("MasterCard"), which
offers its Masterbanking home banking service through CheckFree Corporation.
Many competitors exist for its various banking products including other
manufacturers of touch-tone response systems, other financial software companies
and financial services software and service companies. InteliData believes that
its primary competition for its customer support services will come from
financial institutions and third parties that choose to offer customer support
services either directly through Visa's customer support messaging standard
("CSMS") product or on their own. InteliData expects that competition in all of
these areas will increase in the near future.
Interactive Services. The industry for interactive services is emerging and
there is potential for a number of companies to enter the marketplace.
Currently, InteliData's primary competitor is SmartServe Online, Inc.
RELATIONSHIP WITH VISA
US Order sold the Visa Bill-Pay System to Visa on August 1, 1994, for
approximately $15.0 million in cash, the assumption of certain liabilities and
rights to a 72-month royalty period commencing January 1, 1995 and ending
30
<PAGE>
December 31, 2000 (the "Royalty Period"). Visa subsequently 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.
Royalties to InteliData are calculated and paid by Visa InterActive
quarterly during the Royalty Period. Because the amount of the royalties to
InteliData is dependent upon the number of customers that use the Visa Bill-Pay
System on a monthly basis during the Royalty Period, InteliData cannot provide
any assurances of the amount of royalties, if any, that will be payable by Visa
InterActive to InteliData. The royalty payment will be reduced for each quarter
through December 31, 1997, by an offset amount (the "Visa Offset") which was
initially set at $73,000. 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 InteliData, and the difference between $73,000
and the royalty otherwise due will increase the size of the Visa Offset for the
next quarter. The aggregate amount of the Visa Offset for the Royalty Period is
$880,000. InteliData did not receive any royalty revenue from Visa in 1996 due
to the Visa Offset and does not expect to receive any royalty revenue after
application of the Visa Offset through at least the end of the second quarter of
1997.
In addition, under the terms of its agreement with Visa, Visa InterActive
is not obligated to pay royalties to InteliData 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 its
technology, this could have a material adverse effect on the amount of royalties
payable by Visa InterActive to InteliData. As a condition of Visa's acquisition
of the Visa Bill-Pay System, InteliData 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 InteliData's reliance
upon Visa.
DEPENDENCE ON KEY EMPLOYEES
InteliData is highly dependent on certain key executive officers and
technical employees to manage the operations and business of InteliData as well
as to implement the business plans of InteliData on an ongoing basis. The loss
of any such key employees could have an adverse impact on the future operations
of InteliData.
REGULATION
The Telecommunications Act of 1996 and regulations or orders promulgated
thereunder may result in or accelerate changes in various aspects of the
telecommunications industry, including the competitive environment, the delivery
and pricing of various telecommunications products and services and possible
consolidation. Although InteliData is unable to predict what effect, if any, the
Telecommunications Act of 1996 or other regulatory developments may have upon
the telecommunications industry or InteliData's business, any such effects could
have a material adverse impact on the future operations of InteliData.
In the United States, Caller ID and other intelligent network services
are subject to federal and state regulation. Caller ID and other intelligent
network services may in the future be subject to further regulation by the
federal government, state public utility commissions and other regulatory
authorities, as well as court challenges, including possible challenges due to
protests from special interest groups that object to such services on the basis
of privacy concerns. An order issued by the FCC effective December 1, 1995,
requires all United States telephone service providers with Signaling System 7
switching architecture to transmit to each other without charge Caller ID number
information on interstate calls within the United States (except for public pay
phones and party lines). The FCC's order also requires that telcos that offer
Caller ID service must provide to their telephone subscribers without charge a
per-call blocking mechanism to block the transmission of their Caller ID
information on interstate calls and must inform subscribers that their telephone
numbers may be identified to a called party and how to use this blocking
capability.
VOLATILITY OF STOCK PRICE
The market price of InteliData's stock has experienced significant
volatility. 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.
31
<PAGE>
Factors such as announcements of the introduction of new products or services by
InteliData 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 it or its competitors may have a significant
impact on the market price of InteliData's stock.
LIMITED PROPRIETARY PROTECTION
InteliData possesses limited patent or registered intellectual property
rights with respect to its technology. InteliData depends in part upon its
proprietary technology and know-how to differentiate its products from those of
its competitors and works independently and from time to time with third parties
with respect to the design and engineering of its own products. InteliData also
relies on a combination of contractual rights and trade secret laws to protect
its proprietary technology. There can be no assurance, however, that InteliData
will be able to protect its technology or successfully develop new technology or
gain access to such technology or that third parties will not be able to develop
similar technology independently or that competitors will not obtain
unauthorized access to its proprietary technology, that third parties will not
misuse the technology to which InteliData has granted access, or that
InteliData's contractual or legal remedies will be sufficient to protect
InteliData's interests in its proprietary technology.
Certain of Lucent's Caller ID patents are licensed by Lucent to
InteliData and others, including its competitors. If the Lucent license were
terminated and InteliData were unable to negotiate a new patent license
agreement with Lucent, InteliData would no longer be authorized to manufacture
or sell Caller ID products in the United States other than to the RBOCs and to
Lucent, and InteliData's business would be materially and adversely affected.
LIMITED SOURCES OF SUPPLY
The key components used in InteliData's products are currently being
purchased from multiple sources, except for its application specific integrated
circuit ("ASIC") chips, which are purchased from a single source. Although it
believes it could develop other sources for each of the components for its
products, the process could take several months, and the inability or refusal of
any such source to continue to supply components could have a material adverse
effect on InteliData pending the development of an alternative source.
RESULTS OF OPERATIONS
WORLD AIRWAYS
- -------------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996
from 37,342 hours in 1995, with an average of 14.1 available aircraft per day in
1996 compared to 10.3 in 1995. Average daily utilization (block hours flown per
day per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In
1996, World Airways continued to obtain a higher percentage of its revenues
under wet lease contracts as opposed to full service contracts. In 1996, wet
lease contracts accounted for 68% of total block hours, consistent with 70% in
1995. Total operating revenues increased $67.2 million, or 28%, to $309.6
million in 1996 from $242.4 million in 1995.
Continuing Operations
- ---------------------
Block hours from continuing operations increased 8,269 hours, or 23%, to
43,897 hours in 1996 from 35,628 hours in 1995.
Operating Revenues. Revenues from flight operations increased $64.3
million, or 28%, to $296.9 million in 1996 from $232.6 million in 1995. This
increase was primarily attributable to an increase in military flying and an
increase in revenues generated from its 1996 Hadj operations and services to
certain international carriers, partially offset by a decrease in cargo
operations resulting from a shift in the mix of business during 1996.
Operating Expenses. Total operating expenses increased $61.4 million, or
27%, in the 1996 to $287.9 million from $226.5 million in 1995.
32
<PAGE>
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $5.9 million, or 9%, in
1996 to $71.1 million from $65.2 million in 1995. This increase resulted
primarily from an increase in block hours flown and higher crew costs and
up-front training expenses in connection with the integration of additional
aircraft into the fleet. These increases were partially offset by a decrease in
accrued profit sharing expenses. In 1995, World Airways accrued profit sharing
expenses as a result of earnings experienced during that period. No such accrual
is necessary in 1996 as a result of losses from the discontinuation of scheduled
service operations. In addition, World Airways expects that its training costs
will increase in 1997 as a result of crewmember attrition.
Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5
million from $41.8 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown. In addition, World Airways experienced an increase in
costs associated with the MD-11 aircraft and related engines as a result of
certain manufacturer guarantees and warranties which began to expire in 1995 and
will fully expire by 1998. As discussed previously, World Airways expects its
maintenance expense to increase in 1997 due to escalations in the specified
rates per hour under its maintenance agreement.
Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million
from $67.3 million in 1995. This increase was primarily due to the lease of two
MD-11ER aircraft in the first quarter of 1996 and the lease of incremental
DC10-30 aircraft which began in the second and fourth quarters of 1995 and the
first quarter of 1996, partially offset by the return of two DC10-30 aircraft to
the lessor in the third quarter of 1995.
Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million
from $16.7 million in 1995. This increase is due primarily to an increase in
fuel utilized in connection with its military operations and a slight increase
in price per gallon.
Promotions, sales and commissions increased $4.2 million in 1996 to $6.2
million from $2.0 million in 1995. This increase resulted primarily from
commissions paid in connection with the new Philippine Airlines contract and an
increase in teaming arrangement commissions associated with the larger
fixed-award contract received from the U.S. Air Force beginning October 1995.
Depreciation and amortization increased $1.9 million, or 31%, in 1996 to
$8.0 million from $6.1 million in 1995. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above.
General and administrative expenses increased $6.5 million, or 36%, in
1996 to $24.7 million from $18.2 million in 1995. This increase was primarily
due to the hiring of additional administrative personnel necessary to support
the growth in its core business and an increase in certain legal and
professional fees.
Discontinued Operations
- -----------------------
For its scheduled service operations, World Airways commenced service
between Tel Aviv and New York in July 1995 and commenced service between the
United States and South Africa in June 1996. In addition, World Airways
commenced scheduled charter operations between the United States and Germany,
Switzerland, Ireland, and the United Kingdom in May 1996. World Airways,
however, was unable to operate these scheduled service operations profitably.
In July 1996, World Airways announced its decision to exit its scheduled
service operations by October 1996 and focus its operations on its core
business: operating aircraft under contracts with international carriers, the
U.S. Government, and international tour operators. Consistent with this
decision, World Airways ceased all scheduled operations as of October 27, 1996.
As a result, World Airways' scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results have been
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) which was recorded as of
June 30, 1996, included the following: $13.6 million for estimated operating
losses during the phase-out period; a $2.6 million estimated loss to be incurred
in connection with sub-leasing DC-10 aircraft which will not be utilized in its
operations subsequent to the phase-out of scheduled service operations; a $2.3
million writeoff of related leasehold improvements; and $2.0 million for
passenger
33
<PAGE>
reprotection expenses. World Airways incurred approximately $18.9 million of
these costs during the six months ended December 31, 1996 and it believes that
its remaining accrual for estimated losses on disposal will be adequate to meet
the remaining costs to be incurred during the phase-out period. In connection
with the discontinuance of its scheduled service operations, World Airways is
subject to claims by various third parties and may be subject to further claims
in the future (see "Other Matters - Legal and Administrative Proceedings").
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total block hours increased 10,885 hours, or 41%, to 37,342 hours in 1995
from 26,457 hours in 1994, with an average of 10.3 available aircraft per day in
1995 compared to 8.2 in 1994. Average daily utilization (block hours flown per
day per aircraft) increased to 9.9 hours in 1995 from 8.8 hours in 1994. In
1995, World Airways continued to obtain a higher percentage of its revenues
under wet lease contracts as opposed to full service contracts. In 1995, wet
lease contracts accounted for 70% of total block hours, up from 63% in 1994.
Total operating revenues increased $78.8 million, or 44%, to $259.5 million in
1995 from $180.7 million in 1994.
Continuing Operations
- ---------------------
Block hours from continuing operations increased 9,171 hours, or 35%, to
35,628 hours in 1995 from 26,457 hours in 1994.
Operating Revenues. Revenues from flight operations increased $58.7
million, or 34%, to $232.6 million in 1995 from $173.9 million in 1994. This
increase was primarily attributable to a $58.4 million increase in revenues
generated from the new multi-year contracts with Malaysian Airlines. Average
daily utilization for these contracts was 11.2 hours in 1995. In addition, World
Airways realized an increase in revenues associated with services to certain
international carriers. Partially offsetting these increases was a decrease in
revenues associated with the 1995 summer charter programs to Europe.
Revenues from flight operations subcontracted to other carriers increased
$3.2 million for 1995 to $8.6 million from $5.4 million in 1994. This increase
resulted primarily from its need to subcontract certain flights to other
carriers due to peak airlift requirements for the 1995 Hadj pilgrimage. This
increase was partially offset by the subservice of certain contracts in the
fourth quarter of 1994 primarily to make aircraft capacity available for the
commencement of operations under its multi-year contracts with Malaysian
Airlines.
Operating Expenses. Total operating expenses increased $40.6 million, or
22%, in 1995 to $226.5 million from $185.9 million in 1994.
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $7.4 million, or 13%, in
1995 to $65.2 million from $57.8 million in 1994. This increase resulted
primarily from the following: an increase in block hours flown; higher cockpit
crew levels associated with the integration of additional aircraft into the
fleet in 1995; and an increase in accruals under World Airways' profit sharing
plans for its crewmembers during 1995. These factors were partially offset by a
shift from full service to basic contracts.
Maintenance expenses increased $15.6 million, or 60%, in 1995 to $41.8
million from $26.2 million in 1994. This increase resulted primarily from a
non-recurring 1994 reversal of $4.2 million of excess reserves associated with
the expiration of three DC10-30 aircraft leases and the increase in block hours
flown in 1995 and lower costs associated with reduced maintenance requirements
of new MD-11 aircraft and the guarantees and warranties received from the engine
and aircraft manufacturers of the MD-11 aircraft and related engines, which
guaranties and warranties began to expire in 1995.
Aircraft costs increased $13.4 million, or 25%, in 1995 to $67.3 million
from $53.9 million in 1994. This increase was primarily due to the lease of two
additional MD-11 convertible aircraft in the first quarter of 1995 and the
short-term lease of incremental DC10-30 aircraft which began in the fourth
quarter of 1994 and second quarter of 1995, partially offset by the return of
three lower-cost DC10-30 aircraft to the lessor in the third quarter of 1994.
34
<PAGE>
Fuel expenses decreased $0.2 million in 1995 to $16.7 million from $16.9
million in 1994. This decrease is due primarily from a shift from full service
to basic contracts in 1995 under which World Airways is not responsible for
fuel, partially offset by an increase in fuel uplifted for military and
scheduled service operations.
Promotions, sales and commissions increased $0.9 million in 1995 to $2.0
million from $1.1 million in 1994. This increase resulted primarily from an
increase in joint venture commissions associated with the larger fixed-award
contract received from the U.S. Air Force beginning October 1995.
Depreciation and amortization increased $2.1 million, or 53%, in 1995 to
$6.1 million from $4.0 million in 1994. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above as well as the amortization of
certain MD-11 aircraft integration costs and other deferred costs.
General and administrative expenses decreased $2.3 million, or 11%, in
1995 to $18.2 million from $20.5 million in 1994. This decrease was primarily
due to a decrease in certain legal and professional fees, partially offset by
the hiring of additional marketing personnel.
INTELIDATA
- ----------
As previously discussed, in August 1996, US Order and Colonial Data
entered into an Agreement and Plan of Merger pursuant to which US Order and
Colonial Data were merged with and into a new public company, InteliData.
Pursuant to this Merger on November 7, 1996, InteliData became the successor
corporation to US Order. As of November 7, 1996, WorldCorp's ownership interest
in InteliData was approximately 28.9%.
The Company's consolidated results for 1996 and 1995 include the results
of US Order for the period in 1996 prior to the Merger, and for the twelve
months ended December 31, 1995, respectively. Following the Merger, the Company
reports its proportionate share of InteliData's financial results using the
equity method of accounting.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenue. InteliData's operating revenues reported by WorldCorp
decreased by $0.1 million from $4.2 million for the full year of 1995 to $4.1
million for the period of 1996 prior to the Merger, primarily due to a reduced
10-month 1996 reporting period versus a 12-month reporting period in 1995.
Operating Expenses. InteliData's operating expenses reported by WorldCorp
increased by $9.7 million from $9.5 million for the twelve months ended December
31, 1995 to $19.2 million for the period of 1996 prior to the Merger.
InteliData's operating expenses include cost of revenue, general and
administrative expenses, research and development costs, and advertising and
promotion expenses. The increases in InteliData's operating expenses were
attributable to employee related expenses for increases in personnel,
amortization of intangible assets, increases in research and development costs,
higher sales and marketing expenses and the write-off of in-process research and
development expenses related to technology that had not reached technological
feasibility and did not have alternative future uses, which was purchased in the
Braun Simmons acquisition in September 1996.
In the future, InteliData expects that aggregate recurring general and
administrative expenses will increase as the company grows. The amount of any
increase will depend on the products and services offered by InteliData and its
alliances and strategic partners. In particular, InteliData expects that these
expenses will increase as it upgrades its systems and operations in anticipation
of the potential for increased business in 1997. InteliData also expects its
advertising and promotion expenses will increase substantially in 1997 due to
the further marketing efforts within the consumer telecommunications and
interactive services division.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Operating Revenue. US Order's operating revenues increased by $2.8
million from $1.4 million in 1994 to $4.2 million in 1995. The increase was
primarily related to the sale of US Order's products, such as its smart
telephones, which it began selling through its "preferred provider" relationship
with Visa in 1995.
35
<PAGE>
Operating Expenses. US Order's operating expenses decreased by $1.9
million from $11.4 million in 1994 to $9.5 million in 1995. The decrease was
primarily from a one time payment to certain employees in August 1994 of $3.3
million made in conjunction with the August 1, 1994 sale of US Order's bill pay
operations where Visa required that all US Order employees who became employees
of Visa InterActive cancel their vested options to eliminate any potential
conflict of interest. The decrease was also due to reduced advertising and
promotion expenses in 1995.
WORLDCORP
- ---------
General and administrative expenses decreased $0.5 million for the year
ended December 31, 1996 to $3.8 million from $4.3 million in the comparable 1995
period. This decrease was primarily due to a reduction in legal and professional
fees.
General and administrative expenses increased $0.7 million for the year
ended December 31, 1995 to $4.3 million from $3.6 million during the comparable
1994 period. This increase resulted primarily from goodwill amortization and
compensation expense associated with executive stock options in 1995.
OTHER INCOME (EXPENSE)
- ----------------------
Equity in Loss of Affiliate. On November 7, 1996, US Order and Colonial
Data were merged with and into InteliData. As described above, following the
Merger, WorldCorp reports its share of InteliData's financial results under the
equity method of accounting. As a result of the Merger, InteliData reported
one-time, noncash merger related charges of approximately $72.3 million, of
which WorldCorp recorded its 28.9% share, or $20.9 million. These charges
related to the write-off of in-process research and development expenses for
purchased in-house technology that had not reached technological feasibility as
of the date of the Merger with Colonial Data and did not have alternative future
uses. The remaining $2.4 million loss represents WorldCorp's proportionate share
of InteliData's operating results for the period following the Merger.
Gain (Loss) on Issuances (Purchases) of Equity by Subsidiaries, Net and
Gain on Sales of Subsidiaries' Stock. As a result of the US Order and Colonial
Data merger, WorldCorp recognized a gain on the issuance of equity by InteliData
of $42.6 million which was offset by the elimination of approximately $1.3
million of goodwill related to US Order. Also, in 1996, the Company recognized a
gain of $1.8 million associated with US Order's issuance of stock to acquire
Braun Simmons. Finally, the Company recorded a loss of approximately $4.2
million as a result of World Airways purchase of treasury stock during 1996.
In April 1995, US Order filed a registration statement on Form S-1 with
the Securities and Exchange Commission to register 4,427,500 shares of US
Order's common stock. The offering was completed in June 1995. Of the shares
registered, 3,062,500 were issued and sold by US Order, and 1,365,000 shares
were sold by WorldCorp. In June 1995, US Order exchanged 230,000 shares of its
restricted common stock for 170,743 shares of Colonial Data's unregistered
common stock. In October 1995, US Order acquired a 40% interest in HomeNet
through the issuance of 296,746 shares of its common stock in exchange for 40%
of HomeNet. In August 1995, World Airways filed a registration statement on Form
S-1 with the Securities and Exchange Commission to register 2,900,000 shares of
World Airways' common stock. The offering was completed in October 1995. Of the
shares registered, 2,000,000 were issued and sold by World Airways and 900,000
shares were sold by WorldCorp. The Company recognized a gain of $43.7 million as
result of these sales of stock by US Order and World Airways, and a gain of
$23.7 million from its sales of US Order and World Airways stock.
In February 1994, WorldCorp recognized a gain of $26.9 million from the
sale of 24.9% of World Airways common stock, pursuant to an October 1993
agreement. Also, in August 1994, US Order sold its electronic banking and bill
payment operations to Visa. As a result of this transaction, the Company
recognized a gain of $14.5 million.
Other, Net. Other expenses increased by $3.3 million from income of $1.7
million in 1995 to expense of $1.6 million in 1996, primarily due to a $1.6
million loss representing US Order's proportionate share of losses of an
affiliate accounted for under the equity method. Other expenses decreased $2.6
million in 1995 from 1994 primarily due to a $0.7 million loss on the sale of a
DC10 engine by World Airways in 1994. In addition, World Airways recognized a
$0.8 million gain in 1995 resulting from a settlement with the lessor relating
to the return of two DC10 aircraft in 1993.
36
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company is a highly leveraged holding company. As a holding company,
all of WorldCorp's funds are generated through its positions in World Airways
and InteliData which have not paid dividends on common stock since 1992. At
December 31, 1996, World Airways has a working capital deficit of $29.6 million
and has substantial debt and lease commitments. At December 31, 1996, InteliData
has working capital of $63.5 million, with no long-term debt. World Airways'
ability to pay dividends is currently restricted under a borrowing arrangement.
Additionally, the provisions of the Indenture governing WorldCorp's Debentures
causes World Airways not to pay dividends upon the occurence of any events of
default by WorldCorp under such Indenture. World Airways and InteliData
currently intend to retain their future earnings, if any, to fund the growth and
development of their business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.
Of the $12.5 million in cash and cash equivalents at December 31, 1996,
approximately $7.0 million is held by World Airways and, therefore, is not
available to satisfy WorldCorp's obligations. As of December 31, 1996, WorldCorp
had parent company repayment obligations, including principal and interest, of
approximately $22.4 million for 1997. In order to meet these obligations and its
general and administrative costs, the Company must use its existing cash and
either sell shares of World Airways or InteliData, or issue additional debt or
equity. Under the terms of certain borrowing arrangements however, WorldCorp has
pledged all of its shares of World Airways and InteliData as collateral for the
borrowings.
The Company is currently evaluating the feasibility of a disposition of its
interest in World Airways through a secondary offering or a sale to a third
party. Any such transaction would require the approval of certain other parties
(See Notes 6,12 and 13). Additionally, management believes it will be successful
in reducing the amount of collateral securing its borrowings, either by
renegotiating the terms of the loan or by entering into a new loan with another
financial institution. Although there can be no assurance that WorldCorp will be
successful in consummating these transactions, management believes that its
existing cash and the anticipated proceeds from a combination of sales of stock
of World Airways or InteliData, renegotiations of its existing borrowing
arrangements, or new financing arrangements, will be sufficient to allow the
Company to meet its operating requirements and repayment obligations for 1997.
At December 31, 1996, based on quoted market prices, the market value of the
Company's 6,915,915 shares of World Airways and 9,179,273 shares of InteliData,
approximated $56.2 million and $66.5 million, respectively, although these
values have declined since year-end.
World Airways is also highly leveraged. World Airways incurred
substantial debt and lease commitments during the past three years in connection
with its acquisition of MD-11 aircraft and related spare parts. At December 31,
1996, World Airways had total long-term indebtedness of approximately $30.1
million and notes payable and current maturities of long-term obligations of
$20.4 million. In addition, World Airways has significant future long-term
obligations under aircraft lease obligations relating to its aircraft. World
Airways has historically financed its working capital and capital expenditure
requirements out of cash flow from operating activities, public and private
sales of its common stock, secured borrowings, and other financings from banks
and other lenders. The degree to which World Airways is leveraged could have
important consequences to holders of Common Stock, including the following: (i)
its ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or other purposes may be limited; (ii) its
degree of leverage and related debt service obligations, as well as its
obligations under operating leases for aircraft, may make it more vulnerable
than some of its competitors in a prolonged economic downturn; and (iii) its
financial position may restrict its ability to pursue new business opportunities
and limit its flexibility in responding to changing business conditions.
World Airways' cash and cash equivalents at December 31, 1996 and December
31, 1995 were $7.0 million and $25.3 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit. At
December 31, 1996 World Airways' current assets were $44.4 million and current
liabilities were $74.0 million. World Airways believes that the combination of
the financings consummated to date, income from continuing operations and
certain additional financings will be sufficient to allow it to meet its cash
requirements related to the remaining phase-out of its discontinued operations
and the operating and capital requirements for its continuing operations for the
next twelve months.
At December 31, 1996, InteliData had $39.0 million in cash, cash
equivalents and short-term investments. InteliData has generated operating
losses since its inception. InteliData's smart telephone and home banking
products and services are subject to the risks inherent in the marketing and
development of new products. The market for these products and services is
relatively new and is characterized by rapid technological change, evolving
standards, changes in end-user requirements and frequent new product
introductions and enhancements. However, the acquisition of Colonial Data has
provided InteliData with established product lines and sales channels in large
telecommunications markets. The industry for InteliData's products and services
is intensely competitive. InteliData experiences direct competition from
manufacturers of smart telephones, caller ID units, and cordless phones and from
37
<PAGE>
companies that develop transaction processing software for interactive
applications and customer support services. The acquisition of Colonial Data has
provided InteliData with a revenue stream that totaled approximately $74.2
million and $50.2 million, respectively, for the twelve months ended December
31, 1995 and the nine months ended September 30, 1996. There can be no assurance
as to what level of future sales or royalties, if any, that InteliData will
receive from Visa, Visa member banks and retail markets for its smart telephone
and home banking products and services.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities used $25.4 million in cash for the year ended December
31, 1996 compared to providing $1.1 million of cash in the comparable period in
1995. This decrease in cash in 1996 resulted primarily from an increase in
losses, and increase in accounts receivable, and a decrease in unearned revenue,
partially offset by an increase in accounts payable during 1996.
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities used $26.0 million in cash for the year ended December
31, 1996 compared to using $22.7 million in the comparable period in 1995. This
decrease in cash used resulted primarily from the purchase of rotable spare
parts required for the integration of two MD-11 aircraft and incremental DC-10
aircraft in 1995, as compared to the acquisition of engines and spare parts
which were financed in 1996. In addition, the Company's consolidated cash was
reduced as a result of the Merger and the Company's change to the equity method
of accounting for its investment in InteliData.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $10.6 million in cash for the year ended December
31, 1996 compared to providing $87.9 million in the comparable period in 1995.
In 1995, the Company received $93.4 million from the sale of World Airways and
US Order's common stock and made net repayments of $9.0 million on its
borrowings. In 1996, the Company and World Airways purchased 1,337,500 and
718,000 shares, respectively, of their common stock in the fourth quarter of
1996. In addition, the Company increased its net borrowings by $1.0 million.
CAPITAL COMMITMENTS
World Airways
- -------------
In October 1992 and January 1993, World Airways signed a series of
agreements to lease seven new MD-11 aircraft for initial lease terms of two to
five years, renewable for up to 10 years (and in the case of one aircraft, for
13 years) by the Company with increasing rent costs. As of March 1995, World
Airways had taken delivery of all seven aircraft, consisting of four passenger
MD-11 aircraft, one freighter MD-11, and two passenger/cargo convertible MD-11s.
As part of the lease agreements, World Airways was assigned purchase options for
four additional MD-11 aircraft. In 1992, World Airways made non-refundable
deposits of $1.2 million toward the option aircraft. In March 1996, World
Airways signed an agreement with the manufacturer to lease two MD-11ER aircraft.
Under the agreement, it leased each aircraft for a term of 24 years with an
option to return the aircraft after a seven year period with certain fixed
termination fees. As part of the agreement, the above-mentioned deposits were
applied towards the deposits required on these two aircraft. In addition, World
Airways agreed to assume an existing lease of two additional MD-11 freighter
aircraft for 20 years, beginning in 1999, in the event that the existing lessee
terminates its lease with the manufacturer at that time. As of December 31,
1996, annual minimum payments required under its aircraft and lease obligations
totaled $86.2 million for 1997.
As a result of its decision to discontinue scheduled service operations,
World Airways reached an agreement with the lessor to terminate the leases of
two DC10-30 aircraft effective December 31, 1996. As of March 31, 1997, World
Airways leases one short-term DC10-30 aircraft and four long-term DC10-30
aircraft with terms expiring in 1999, 2003, and two in 1997.
In August 1995, World Airways amended its aircraft spare parts facility
under the Credit Agreement to provide for a variable rate borrowing of $10.5
million. Approximately $2.5 million of this facility was used to pay off the
previously outstanding balance of the spare parts loan facility and $0.8 million
was used to purchase additional spare parts for MD-11s required during the
remainder of 1995. The balance of this loan facility was used to increase cash
balances which were drawn down during the first half of 1995 to purchase MD-11
spare parts.
38
<PAGE>
In September 1995, World Airways agreed to purchase a spare engine which
was delivered in March 1996. The engine cost approximately $8.0 million. World
Airways entered into an agreement with the engine's manufacturer to finance 80%
of the purchase price over a seven-year term. World Airways made payments of
$1.2 million and $0.4 million towards this purchase in September 1995 and
January 1996, respectively.
As discussed above, World Airways signed an agreement for the lease of
two MD-11ER aircraft beginning in the first quarter of 1996 to provide
additional capacity for growth opportunities. As part of the agreement for the
MD-11 aircraft, World Airways received spare parts financing from the lessor of
$9.0 million of which $3.0 million was made available with the delivery of each
aircraft, and the remaining $3.0 million was made available in December 1996. As
of December 31, 1996, approximately $6.4 million had been received. In January
1996, World Airways agreed to purchase an additional engine and received a
commitment from the engine manufacturer to finance 85% of its purchase price
over a seven-year term with an interest rate to be fixed at the time of
delivery, which is expected to be during 1997.
World Airways' fixed assets increased approximately $17.7 million during
1996. The majority of this amount relates to assets which were financed. World
Airways anticipates that its total capital expenditures in 1997, which includes
the spare engine, will approximate $10.2 million of which it will receive
approximately $6.1 million in financing. World Airways expects that the
remaining balance will be funded from its operating cash flow and available cash
balances. In March 1996, the Credit Agreement was amended to increase the limit
on capital expenditures by World Airways to no more than $35.0 million and $25.0
million in 1996 and 1997, respectively.
As of December 31, 1996, World Airways held approximately $3.9 million
(at book value) of aircraft spare parts currently available for sale.
InteliData
- ----------
InteliData's principal needs for cash in 1996 were for investments in
property and equipment and to fund working capital, primarily related to
inventories and accounts receivable. InteliData's primary needs for cash in the
future are for investments in product development, working capital, the
financing of operations, strategic ventures, potential acquisitions, capital
expenditures and the upgrade of its systems and operations. In order to meet its
needs for cash over the next twelve months, InteliData will utilize proceeds
from its 1995 initial public offering and cash received in the Merger.
Additionally, InteliData may utilize funds it expects to generate from
operations in the second half of 1997.
FINANCING DEVELOPMENTS
WorldCorp. On August 29, 1996, the Company entered into a bridge loan (the
"Bridge Loan") with a financial institution pursuant to which the Company
borrowed $25.0 million and subsequently retired its existing 13 7/8%
Subordinated Notes of the same amount. The Bridge Loan is due September 29, 1997
and earns interest of LIBOR plus 2.5%, payable monthly. Under the terms of the
Bridge Loan, the borrowings are collateralized by all of the shares of World
Airways and InteliData owned by WorldCorp, a first priority security interest in
WorldCorp's assets, and certain cash collateral. On September 30, 1996, the
Company entered into a purchase agreement (the "Purchase Agreement") which
contained a series of Senior Subordinated Notes ("Notes") totaling $10.0 million
which was used to retire $10.0 million of the Bridge Loan in October 1996. The
Notes are payable in three installments through September 2000, earn interest of
10%, payable semi-annually, and are included in long-term obligations at
December 31, 1996. On December 31, 1996, the Company refinanced the Bridge Loan,
which resulted in a decrease in the interest rate to LIBOR plus 1.75%, and
reduced the cash collateral under the loan to $1.0 million. The interest rate
was 7.99% at December 31, 1996. The Purchase Agreement and the Bridge Loan
generally restrict the amount of stock repurchases by WorldCorp based on certain
specified conditions. These borrowings also contain a number of covenants that,
among other things, restrict the ability of WorldCorp to dispose of assets, make
certain acquisitions of the stock of other entities, incur additional
indebtedness, and make capital expenditures. The Bridge Loan also contains
certain covenants which, among other things, require WorldCorp to maintain at
least a 50.1% ownership of World Airways.
In the first quarter of 1997, WorldCorp entered into a $1.0 million margin
loan with Scott & Stringfellow, Inc., whereby WorldCorp pledged approximately
400,000 shares of InteliData common stock which WorldCorp owns as collateral for
such loan (the "Margin Loan"). The Bridge Loan was amended to permit this loan.
World Airways. In October 1995, World Airways completed an initial public
offering pursuant to which World Airways and WorldCorp received approximately
$22.8 million and $10.2 million in net proceeds, respectively. Each company used
its proceeds to increase cash reserves.
Effective June 30, 1996, World Airways amended its Credit Agreement with
BNY Financial Corporation ("BNY") to include the following: a $10.0 million
spare parts loan and an $8.0 million revolving line of credit. This amended
Credit Agreement is collateralized by certain receivables, inventory, and
equipment. As of December 31, 1996, the outstanding balance of the spare parts
loan and revolving line of credit was $7.6 million and $6.8 million,
respectively, with minimal capacity available on the revolving line of credit.
39
<PAGE>
Under the terms of the amended Credit Agreement, World Airways is not
permitted to (i) incur indebtedness in excess of $25.0 million (excluding
capital leases), (ii) declare, pay, or make any dividend or distribution in any
six month period which aggregate in excess of the lesser of $4.5 million or 50%
of net income for the previous six months, (iii) declare or pay dividends if
after giving effect to such dividends World Airways' cash or cash equivalents
would be less than $7.5 million or (iv) make capital expenditures in 1996 and
1997 of more than $35.0 million and $25.0 million, respectively, or in any
subsequent year of more than $15.0 million. World Airways must also maintain a
certain quarterly net worth and net income (loss) requirements. At December 31,
1996, World Airways was not in compliance with one covenant, but obtained a
waiver from the financial institution. This waiver also extended the date that
World Airways is required to pay any outstanding amounts under the line of
credit to December 31, 2000. The aircraft security agreement remains payable in
1999. No assurances can be given, however, that World Airways will meet these
covenants prospectively or, if necessary, obtain the required waivers. In
addition, World Airways granted warrants to BNY in October 1996 to purchase up
to 50,000 shares of common stock.
In September 1995 World Airways entered into an agreement with a lessor
to purchase a spare engine, previously under lease, for $5.5 million. World
Airways paid $0.5 million upon closing and signed a note for the $5.0 million
balance. The note bears interest at a rate of 7.25% and is payable over a
40-month period at $69,000 a month, with the balance of $3.3 million due on
January 29, 1999. In addition, World Airways purchased an additional spare
engine which was delivered in March 1996 at a cost of approximately $8.0
million. World Airways entered into an agreement with the engine's manufacturer
to finance 80% of the purchase price over a seven-year term. World Airways made
payments of $1.2 million and $0.4 million towards this purchase in September
1995 and January 1996, respectively. In January 1996, World Airways agreed to
purchase an additional engine and received a commitment from the engine
manufacturer to finance 85% if its purchase price over a seven-year term with an
interest rate to be fixed at the time of delivery.
InteliData. In June 1995, US Order completed an initial public offering
pursuant to which US Order and WorldCorp received $41.6 million and $18.7
million in net proceeds, respectively. US Order used part of its proceeds to
satisfy debt obligations (including those to WorldCorp). The remaining balance
was added to US Order's cash reserves. WorldCorp used its proceeds to fund its
debt service requirements and increase its cash position.
InteliData maintains three credit facilities aggregating $20 million. The
first credit agreement covers the period through May 1997 and is a revolving
line of credit of $1.0 million. The second credit agreement is a $4.0 million
line of credit utilized for the purpose if issuing letters of credit. The third
credit agreement is a credit facility totaling $15.0 million for cash advances
and letters of credit. As of December 31, 1996, InteliData had outstanding $2.0
million under a line of credit and had available $13.5 million to fund draw
downs and letters of credit.
OTHER MATTERS
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company and World Airways (the "World Defendants") are defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation (the "Committee") in August 1992, captioned Washington
Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the
"Boster Litigation"). The complaint asserts that the World Defendants received
preferential transfers or fraudulent conveyances from Washington Bancorporation
when the World Defendants received payment at maturity on May 4, 1990 of
Washington Bancorporation commercial paper purchased on May 3, 1990. Washington
Bancorporation filed for relief under the Federal Bankruptcy Code on August 1,
1990. The Committee seeks recovery of approximately $4.8 million from World
Airways and approximately $2.0 million from WorldCorp. Under a settlement
agreement which remains subject to certain contingencies, the plaintiff has
agreed to dismiss with prejudice the Boster Litigation against all defendants,
including the World Defendants, with each party to bear its own costs. In that
event, the World Defendants would not have any further liability in the Boster
Litigation. On January 28, 1997, the U.S. District Court conditionally dismissed
the Boster Litigation subject to reinstatement if the settlement is not
finalized by May 15, 1997. In any event, the Company believes it has substantial
defenses to this action, although no assurance can be given of the eventual
outcome of this litigation. Depending upon the timing of the resolution of this
claim, if the Committee were successful in recovering the full amount claimed,
the resolution could have a material adverse effect on the financial condition
or results of operations of the Company.
40
<PAGE>
World Airways has periodically received correspondence from the FAA with
respect to minor noncompliance matters. Most recently, as the FAA has increased
its scrutiny of U.S. airlines, it was assessed a preliminary fine of $810,000 in
connection with certain minor security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. In each
of these instances, World Airways was in compliance with international
regulations, but not the more stringent U.S. requirements. World Airways has
taken steps to comply with the U.S. requirements and believes that any fines
ultimately imposed by the FAA will not have a material adverse effect on the
financial condition or results of operations of World Airways. World Airways
believes the amount of fines it will ultimately be assessed will be below the
preliminary assessment. This estimated amount is included in liabilities in the
accompanying balance sheet at December 31, 1996.
In connection with the discontinuance of World Airways' scheduled service
operations, it is subject to claims by various third parties and may be subject
to further claims in the future. One claim has been filed in connection with its
discontinuance of scheduled service to South Africa, seeking approximately $37.8
million in compensatory and punitive damages. World Airways believes it has
substantial defenses to this action, although no assurance can be given of the
eventual outcome of this litigation. Depending upon the timing
of the resolution of this claim, if the plaintiff were successful in recovering
the full amount claimed, the resolution could have a material adverse effect on
its financial condition or results of operations.
In addition, the Company is party to routine litigation and
administrative proceedings incidental to its business, none of which is believed
by the Company to be likely to have a material adverse effect on the financial
condition of the Company.
EMPLOYEES
The Company employs four individuals. The majority of its administrative
requirements are performed by employees of World Airways. The Company is charged
an appropriate monthly fee for these services.
World Airways cockpit crew members, who are represented by the
International Brotherhood of Teamsters (the "Teamsters"), are subject to a
four-year collective bargaining agreement that will become amendable in June
1998.
World Airways' flight attendants are also represented by the Teamsters
under a collective bargaining agreement that became amendable in 1992. The
parties exchanged their opening contract proposals in 1992. In June 1996, World
Airways signed a new four year labor agreement with the Teamsters which provides
for retroactive pay increases for the flight attendants and work rule
flexibility and lengthened duty time rules for the Company. The agreement was
ratified by the flight attendants in August 1996. World Airways flight
attendants challenged the use of foreign flight attendant crews on its flights
for Malaysian Airlines and Garuda Indonesia which has historically been its
operating procedure. World Airways is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter recently denied the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that World Airways' contract with its flight attendants requires it to
first actively seek profitable business opportunities that require using its
flight attendants, before World Airways may accept wet lease business
opportunities that use the flight attendants of its customers. World Airways can
provide no assurances as to how the imposition of this requirement will affect
its financial condition and results of operations.
World Airways' aircraft dispatchers are represented by the Transport
Workers Union (the "TWU"). This contract became amendable on June 30, 1993. In
May 1995, the parties reached agreement with respect to a new four-year
contract. This contract was ratified on February 7, 1996. Fewer than 12 Company
employees are covered by this collective bargaining agreement.
World Airways' is unable to predict whether any of its employees not
currently represented by a labor union, such as its maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election by such employees of representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial results of the Company.
41
<PAGE>
DIVIDEND POLICY
WorldCorp has never paid any dividends and does not plan to do so for the
foreseeable future. The Purchase Agreement governing the Notes, and the
Indenture governing the Company's Debentures, in certain circumstances, restrict
the Company from paying dividends or making distributions on its common stock.
As a holding company, all of WorldCorp's funds are generated through its
positions in World Airways and InteliData, neither of whom intend to pay
dividends in the foreseeable future. In addition, World Airways' ability to pay
dividends is currently restricted under a borrowing arrangement.
ESSOP
The Board of Directors of World Airways adopted an Employee Savings and
Stock Ownership Plan (the "Plan") effective October 1, 1996. The Plan is
intended to allow participating employees to share in the growth and prosperity
of World Airways, to encourage participants to save on a tax-favored basis, and
to provide participants an opportunity to accumulate capital for their future
economic security.
The Plan is an amendment and continuation of the WorldCorp Employee
Savings and Stock Ownership Plan (the "WorldCorp KSOP"). As a result of various
business developments, the vast majority of the participants in the WorldCorp
KSOP were World Airways employees. For that reason, WorldCorp and World Airways
agreed that World Airways should assume WorldCorp's obligation under the
WorldCorp KSOP. In connection with that action, the Trustees exchanged the
unallocated shares of WorldCorp common stock held by the WorldCorp KSOP for a
like-value of shares in World Airways common stock. World Airways also made a
special contribution of $50,000 to the Plan.
The Plan will continue to hold the shares of WorldCorp common stock that
were allocated the participants' accounts before October 1, 1996. No additional
shares of WorldCorp common stock will be allocated under the Plan on or after
that date. Instead, participants will have the opportunity to receive future
allocations of World Airways common stock.
INCOME TAXES
At December 31 1996, WorldCorp had approximately $53.1 million in net
operating loss carryforwards ("NOLs") that are available to offset future
federal taxable income.
There can be no assurance that the Company will generate taxable income
in future years so as to allow the Company to realize a tax benefit from its
NOLs. The NOLs are subject to examination by the IRS and, thus, are subject to
adjustment or disallowance resulting from any such IRS examination. In addition,
ownership changes of the Company, pursuant to the Internal Revenue Code, may
occur in the future and may result in the imposition of an annual limitation on
the Company's NOLs existing at the time of any such ownership change. In
addition, a portion of World Airways' NOLs are subject to an annual limitation
as a result of a previous ownership change, for tax purposes, which occurred in
1991. World Airways does not file a consolidated income tax return with the
Company.
INFLATION
The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.
42
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $447 at December 31, 1996 and $625
at December 31, 1995 (Note 20) $ 12,462 $ 74,443
Restricted cash and short-term investments (Notes 8, 12 and 20) 2,047 4,218
Trade accounts receivable, less allowance for doubtful accounts of $413 at
December 31, 1996 and $322
at December 31, 1995 (Notes 12 and 18) 19,427 12,476
Other receivables 4,667 4,438
Due from affiliate, net (Note 6) 4,181 2,981
Prepaid expenses and other current assets (Notes 9 and 19) 8,314 11,668
Assets held for sale (Notes 10 and 13) 500 700
-------- --------
Total current assets 51,598 110,924
------- -------
ASSETS HELD FOR SALE (Notes 10 and 13) 3,425 2,383
EQUIPMENT AND PROPERTY (Notes 5, 10 and 13)
Flight and other equipment 75,191 60,794
Equipment under capital leases 11,639 11,734
------- -------
86,830 72,528
Less accumulated depreciation and amortization 21,357 17,878
------- -------
Net equipment and property 65,473 54,650
------- -------
LONG-TERM OPERATING DEPOSITS (Note 13) 15,951 16,157
INVESTMENT IN AFFILIATE (Notes 5 and 12) 36,299 --
OTHER ASSETS AND DEFERRED CHARGES, NET (Notes 5, 6 and 9) 5,145 15,384
INTANGIBLE ASSETS, NET (Note 11) 1,072 2,591
-------- -------
TOTAL ASSETS $ 178,963 $ 202,089
======= =======
</TABLE>
(Continued)
43
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable (Note 12) $ 26,386 $ 6,764
Current maturities of long-term obligations (Note 13) 9,990 11,355
Accounts payable 24,339 17,363
Net liabilities of discontinued operations (Note 3) 1,834 --
Unearned revenue 3,046 10,421
Air traffic liability -- 2,332
Accrued maintenance in excess of reserves paid 13,737 8,919
Accrued salaries and wages (Note 19) 10,344 10,804
Accrued interest 981 2,061
Accrued taxes 1,249 1,283
------- -------
Total current liabilities 91,906 71,302
------- -------
LONG-TERM OBLIGATIONS, NET (Note 13) 104,804 111,345
------- -------
OTHER LIABILITIES
Deferred gain from sale leaseback transactions, net of
accumulated amortization of $19,099 as of December 31,
1996 and $18,041 as of December 31, 1995 6,252 7,310
Accrued postretirement benefits (Note 16) 2,545 2,596
Accrued maintenance in excess of reserves paid 6,867 3,579
Other 3,378 2,035
-------- --------
Total other liabilities 19,042 15,520
------- -------
TOTAL LIABILITIES 215,752 198,167
------- -------
MINORITY INTEREST (Notes 4, 5 and 6) 3,548 27,219
COMMON STOCKHOLDERS' DEFICIT (Notes 5, 12, 13, 14, 15, 16 and 19)
Common stock,$1 par value, (60,000,000 shares authorized,
16,420,350 shares issued and 15,020,265 shares outstanding
at December 31, 1996 and 16,416,134 shares issued and
16,353,549 shares outstanding at December 31, 1995) 16,617 16,354
Additional paid-in capital 43,824 42,210
Deferred compensation (591) (553)
Accumulated deficit (91,366) (79,598)
ESOP guaranteed bank loan (Notes 13 and 16) (805) (1,370)
Treasury stock, at cost(1,596,766 and 62,585 shares in 1996 and 1995,
respectively)(Notes 1, 4 and 16) (8,016) (340)
-------- --------
TOTAL COMMON STOCKHOLDERS' DEFICIT (40,337) (23,297)
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 6, 12, 13, 15, 16,
17, 18 and 20)
TOTAL LIABILITIES AND COMMON STOCKHOLDERS'
DEFICIT $ 178,963 $ 202,089
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
44
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES (Note 18)
World Airways $ 309,587 $ 242,386 $ 180,715
US Order 4,085 4,186 1,432
------- ------- -------
Total operating revenues 313,672 246,572 182,147
------- ------- -------
OPERATING EXPENSES
World Airways:
Flight 71,121 65,223 57,792
Maintenance (Notes 6, 13 and 20) 60,462 41,843 26,212
Aircraft costs (Notes 6 and 13) 85,227 67,331 53,860
Fuel 19,255 16,704 16,915
Flight operations subcontracted to other carriers 12,932 9,096 5,549
Promotions, sales and commissions 6,236 1,995 1,060
Depreciation and amortization 8,032 6,056 4,006
General and administrative 24,677 18,240 20,522
------- ------- -------
Total operating expenses - World Airways 287,942 226,488 185,916
------- ------- -------
US Order:
Total operating expenses - US Order 19,190 9,457 11,429
------- ------- -------
WorldCorp:
General and administrative 3,803 4,334 3,614
------- -------- -------
Total operating expenses 310,935 240,279 200,959
------- ------- -------
OPERATING INCOME (LOSS) 2,737 6,293 (18,812)
------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense (Notes 12 and 13) (11,680) (12,586) (12,154)
Interest income 3,389 2,909 863
Equity in loss of affiliate (Note 5) (23,273) -- --
Gain (loss) on issuances (purchases) of equity by
subsidiaries, net (Notes 4 and 5) 38,886 43,676 10,524
Gain on sales of subsidiaries' stock (Notes 4 and 5) -- 23,717 16,398
Gain on sale of US Order banking operations (Note 5) -- -- 14,547
Other, net (1,550) 1,676 (870)
------- ------- -------
Total other income 5,772 59,392 29,308
------- ------- -------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 8,509 65,685 10,496
INCOME TAX EXPENSE (Note 17) (504) (661) (159)
MINORITY INTEREST (568) (866) (2,029)
------- ------- -------
EARNINGS FROM CONTINUING OPERATIONS 7,437 64,158 8,308
DISCONTINUED OPERATIONS (Note 3)
Loss from discontinued operations (less applicable
income tax benefit of $83 in 1996 and $306 in 1995) (11,720) (5,250) --
Loss on disposal (less applicable income tax benefit
of $562 in 1996) (20,655) -- --
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS BEFORE
MINORITY INTEREST (32,375) (5,250) --
MINORITY INTEREST 13,184 1,300 --
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS (19,191) (3,950) --
------- ------- -------
NET EARNINGS (LOSS) $ (11,754) $ 60,208 $ 8,308
======= ======= =======
</TABLE>
(Continued)
45
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON
EQUIVALENT SHARE
Continuing operations $ 0.45 $ 3.75 $ 0.54
Discontinued operations (1.15) (0.23) --
------ ------ ------
Net earnings (loss) $ (0.70) $ 3.52 $ 0.54
====== ====== ======
PRIMARY WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 16,676,889 17,103,669 15,516,063
========== ========== ==========
FULLY DILUTED EARNINGS (LOSS) PER COMMON
EQUIVALENT SHARE
Continuing operations $ * $ 2.99 $ 0.53
Discontinued operations * (0.17) --
------ ------ ------
Net earnings (loss) $ * $ 2.82 $ 0.53
====== ====== ======
FULLY DILUTED WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING * 22,994,866 15,793,046
========== ========== ==========
</TABLE>
* Fully diluted earnings per share are anti-dilutive.
See accompanying Notes to Consolidated Financial Statements
46
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Employee
Stock Owner- Total
Additional ship Plan Treasury Common
Common Paid-in Deferred Accumulated Guaranteed Stock, Stockholders'
Stock Capital Compensation Deficit Bank Loan at cost Deficit
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1993 $ 15,224 $ 34,071 $ -- $ (148,114) $ (1,914) $ (340) $(101,073)
Exercise of 266,723 options
and warrants 268 1,160 -- -- -- -- 1,428
Employee Stock Ownership Plan
guaranteed bank loan -- -- -- -- 1,914 -- 1,914
Grant of stock options -- 2,217 (2,217) -- -- -- --
Amortization of deferred
compensation -- -- 1,115 -- -- -- 1,115
Other -- 115 -- -- -- -- 115
Net earnings -- -- -- 8,308 -- -- 8,308
------ ------ ------ --------- ------- ------ --------
BALANCE AT
DECEMBER 31, 1994 $ 15,492 $ 37,563 $ (1,102) $ (139,806) $ -- $ (340) $ (88,193)
Exercise of 559,568 options
and warrants (Notes 14 and 15) 560 2,503 -- -- -- -- 3,063
Employee Stock Ownership Plan
guaranteed bank loan -- -- -- -- (1,370) -- (1,370)
Grant of stock options -- 615 (615) -- -- -- --
Amortization of deferred
compensation -- (260) 1,164 -- -- -- 904
Issuance of stock (Note 5) 302 1,789 -- -- -- -- 2,091
Net earnings -- -- -- 60,208 -- -- 60,208
------ ------ ------- --------- ------- ------ --------
BALANCE AT
DECEMBER 31, 1995 $ 16,354 $ 42,210 $ (553) $ (79,598) $ (1,370) $ (340) $ (23,297)
Exercise of 254,456 options
and warrants 254 1,245 -- -- -- -- 1,499
Employee Stock Ownership Plan
guaranteed bank loan (Note 16) -- -- -- -- 565 -- 565
Grant of stock options
and warrants (Notes 13 and 14) 9 594 (200) -- -- -- 403
Amortization of deferred
compensation -- (225) 162 -- -- -- (63)
Purchase of common stock, at
cost (Note 1) -- -- -- -- -- (7,676) (7,676)
Other -- -- -- (14) -- -- (14)
Net loss -- -- -- (11,754) -- -- (11,754)
------ ------ ------- -------- ------- ------- --------
BALANCE AT
DECEMBER 31, 1996 $ 16,617 $ 43,824 $ (591) $ (91,366) $ (805) $ (8,016) $ (40,337)
====== ====== ======= ======== ======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
47
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR (Note 7) $ 74,443 $ 8,160 $ 16,916
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) (11,754) 60,208 8,308
Adjustments to reconcile net earnings (loss) to cash
provided (used) by operating activities:
Depreciation and amortization 10,361 8,043 5,212
Deferred gain recognition (1,058) (1,063) (1,949)
Deferred aircraft rent payments, net -- 153 576
Gain on sales of equity by subsidiaries, net (38,886) (43,676) (10,524)
Gain on sales of subsidiaries' stock -- (23,717) (16,398)
Gain on sale of US Order banking operations -- -- (14,547)
Minority interest in earnings (loss) of subsidiaries (12,616) (434) 2,029
Equity loss in affiliate 23,273 -- --
Equity loss in investee of subsidiary 1,641 -- --
(Gain) loss on sale of equipment and property (32) (462) 669
Writedown of assets held for sale 400 -- --
Deferred compensation expense 162 904 1,115
Reversal of excess maintenance reserves -- -- (4,200)
Loss on disposal of discontinued operations 1,734 -- --
Other 870 570 889
Changes in certain assets and liabilities net of
effects of non-cash transactions:
(Increase) decrease in accounts receivable (10,607) (11,013) 5,230
Increase in restricted short-term investments (2,171) (3,550) --
Decrease(increase) in deposits, prepaid expenses
and other assets 399 (3,528) (10,461)
Increase in accounts payable, accrued expenses
and other liabilities 22,195 11,500 3,842
(Decrease)increase in unearned revenue (7,206) 4,806 1,159
(Decrease)increase in air traffic liability (2,073) 2,332 --
-------- -------- --------
Net cash provided (used) by operating activities (25,368) 1,073 (29,050)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property (12,620) (24,286) (4,854)
Proceeds from disposal of equipment and property 735 1,768 3,893
Proceeds from sale of US Order banking operations -- -- 14,750
Purchase of investments (1,345) (219) (6,533)
Cash of InteliData at date of Merger (12,800) -- --
Proceeds from sales of short-term investments, net -- -- 6,029
-------- -------- --------
Net cash provided (used) by investing activities (26,030) (22,737) 13,285
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in line of credit borrowing arrangement, net 5,031 (1,051) (4,275)
Issuance of debt 47,144 25,278 6,034
Repayment of debt (51,172) (33,187) (18,065)
Proceeds from stock transactions 1,499 4,353 1,428
Proceeds from sales of equity by subsidiaries 2,177 64,453 12,488
Proceeds from sales of subsidiaries' stock -- 28,986 12,300
Purchase of common stock (7,676) -- --
Purchase of common stock by subsidiary (7,361) -- --
Debt issuance costs (225) -- --
Purchase of preferred stock by subsidiary -- -- (2,718)
Payment of dividends by subsidiary -- (885) --
Other -- -- (183)
-------- -------- --------
Net cash provided(used) by financing activities (10,583) 87,947 7,009
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (61,981) 66,283 (8,756)
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END
OF YEAR (Note 7) $ 12,462 $ 74,443 $ 8,160
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
48
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
WorldCorp, Inc. ("WorldCorp" or "the Company") was organized in March 1987
to serve as the holding company for World Airways, Inc., ("World Airways").
WorldCorp owns positions in companies that operate in two distinct business
areas. World Airways provides worldwide passenger and cargo air transportation
to major international airlines, the U.S. Air Force, and international tour
operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData Technologies
Corporation ("InteliData") concentrates on three markets: (1) consumer
telecommunications; (2) electronic commerce; and (3) interactive services.
WorldCorp's aviation services subsidiary, World Airways, is a leading
provider of long range passenger and cargo air transportation, serving customers
in three distinct markets: major international air carriers; the U.S. Government
and international tour operators in leisure passenger markets. World Airways'
business relies heavily on its contracts with Malaysian Airline System Berhad
("Malaysian Airlines"), Philippine Airlines, Inc. ("Philippine Airlines"), P.T.
Garuda Indonesia ("Garuda") and the U.S. Air Force (see Note 18).
WorldCorp also has an ownership interest in InteliData, a company which is
engaged in providing products and services for three primary markets: consumer
telecommunications, electronic commerce and interactive services. InteliData
designs, develops and markets consumer telecommunications products including
Caller ID adjuncts, integrated telephones and smart telephones. InteliData also
develops products and services for financial institutions to assist in home
banking and electronic bill payment initiatives and designs and markets
interactive service applications for smart telephones and other small screen
devices.
During the third quarter of 1996, the Company announced its intention to
purchase up to 2.5 million shares of its publicly-traded common stock pursuant
to open market transactions. During the fourth quarter of 1996, the Company
purchased 1,337,500 shares of its common stock for an aggregate cost of $7.7
million. In February 1997, the Company purchased an additional 25,000 shares of
its common stock for an aggregate cost of $0.1 million. WorldCorp does not
intend to purchase any additional shares at this time.
WorldCorp is highly leveraged, and therefore requires substantial funds to
cover its debt service (see Note 2). Of the $12.5 million in cash and cash
equivalents at December 31, 1996, approximately $7.0 million is held by World
Airways and, therefore, is not available to satisfy WorldCorp's obligations.
WorldCorp's investment in the net assets of World Airways and US Order
aggregates $41.9 million as of December 31, 1996.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
WorldCorp; its approximately 61.3% ownership interest in the outstanding common
stock of World Airways; its wholly owned subsidiaries: WorldCorp Investments,
Inc., World Flight Crew Services, Inc., World Airways Cargo, Inc., and World
Games, Inc., and through November 7, 1996, its interest in US Order, Inc. ("US
Order"). On November 7, 1996, US Order and Colonial Data Technologies
Corporation ("Colonial Data") merged with and into InteliData ("Merger")(see
Note 5). Effective with this merger, InteliData became the successor corporation
to US Order. As a result of the Merger, WorldCorp's ownership percentage in
InteliData was reduced to 28.9% and, as such, beginning November 7, 1996,
WorldCorp reports its share of InteliData's net assets and results of operations
under the equity method of accounting. All significant intercompany balances
have been eliminated.
FINANCIAL STATEMENT RECLASSIFICATION
Certain items in the prior year consolidated financial statements included
herein have been reclassified to conform to the 1996 financial statement
presentation.
49
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of ninety days or
less to be cash equivalents.
REVENUE RECOGNITION
Revenues are recognized as the services are provided.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares include warrants
and options. Fully diluted earnings (loss) per common and common equivalent
shares, including convertible debt, have not been presented where the results
are anti-dilutive.
EQUIPMENT AND PROPERTY
Equipment and property are stated at cost or, if acquired under capital
leases, at the present value of the minimum lease payments.
Provisions for depreciation and amortization of equipment and property are
computed over estimated useful lives or the term of the lease, if shorter, for
capital leases, by the straight-line method, with estimated residual values of 0
- - 15%. Estimated useful lives of equipment and property are as follows:
DC10 and MD-11 flight equipment 15-16 years
Other equipment and property 5-10 years
Deferred gains realized in connection with sale-leasebacks of aircraft and
equipment are amortized over the periods of the respective leases.
AIRCRAFT MAINTENANCE
Major airframe maintenance and engine overhauls are expensed using the
accrual method of accounting. The accrual method provides for estimating the
cost of the initial overhaul and accruing the cost, based on an hourly rate, to
the overhaul. At that time, the actual cost of overhaul is charged to the
accrual, with any deficiency or excess charged or credited to expense. The cost
of the next overhaul is then estimated, based on the new rate, and accrued to
that overhaul, at which time the process is repeated. Certain of the World
Airways' leases require it to make monthly payments to the lessor for estimated
maintenance costs to be incurred. Modifications performed in response to
Airworthiness Directives issued by the Federal Aviation Administration are
capitalized at cost. Routine maintenance and general repairs are expensed as
incurred.
ASSETS HELD FOR SALE
Assets held for sale are recorded at the lower of cost or estimated net
realizable value. Net realizable value is based on the estimated fair value
(measured by using a current selling price for similar assets) less estimated
selling costs.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the
50
<PAGE>
carrying amount of an asset may not be recoverable. To the extent that the
future undiscounted net cash flows expected to be generated from an asset are
less than the carrying amount of the asset, an impairment loss will be
recognized based on the difference between the asset's carrying amount and its
estimated fair market value.
INTANGIBLE ASSETS
The excess of cost over the estimated fair value of the Company's share of
its affiliate's net assets at the date of acquisition is being amortized over
approximately 6 years, using the straight-line method (see Note 11).
AIR TRAFFIC LIABILITY
The air traffic liability in 1995 relates to World Airways' scheduled
service flying to Tel Aviv, Israel, which World Airways began in July 1995 and
ceased in October 1996 (see Note 3). Scheduled service passenger ticket sales
were initially recorded in the air traffic liability account. When
transportation was provided by World Airways, revenue was recognized and the
liability was reduced. The liability was also reduced by any refunds to
passengers or billings from other airlines that provide the passenger
transportation.
OTHER ASSETS AND DEFERRED CHARGES
Contract enhancements and pre-operating costs are amortized on a straight
line basis over certain estimated periods (see Notes 6 and 9).
INCOME TAXES
The Company computes income taxes in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, ("FAS #109"). Under the asset and liability method of FAS
#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. Under FAS #109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The results of World Airways' operations prior to February 28, 1994 are
included in the Company's consolidated income tax returns. As a result of
certain transactions with MHS Berhad during 1994 (see Note 4), the results of
World Airways' operations for the period from February 28, 1994 to December 1994
and subsequent periods are not included in WorldCorp's consolidated income tax
returns. In addition, InteliData's results of operations are not included in the
Company's consolidated income tax returns.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
World Airways' cockpit crewmembers and eligible dependents are covered
under postretirement health care benefits to age 65. The Company accounts for
the benefit costs in accordance with Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions
("FAS #106"). The Company funds the benefit costs on a pay-as-you-go (cash)
basis.
TRANSACTIONS IN SUBSIDIARIES' STOCK
Gains or losses realized in connection with the issuance, sale or purchase
of stock by a subsidiary are recognized in income by the Company (see Notes 4
and 5).
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123,
51
<PAGE>
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123 (see Note 15). In addition, in accordance with SFAS 123, the
Company applies fair value as the measurement basis for transactions in which
equity instruments are issued to nonemployees (as defined) (see Note 14).
2. OPERATING ENVIRONMENT
The Company is a highly leveraged holding company. As a holding company,
all of WorldCorp's funds are generated through its positions in World Airways
and InteliData, which have not paid dividends on common stock since 1992. At
December 31, 1996, World Airways has a working capital deficit of $29.6 million
and has substantial debt and lease commitments. At December 31, 1996, InteliData
has working capital of $63.5 million, with no long-term debt. World Airways'
ability to pay dividends is currently restricted under a borrowing arrangement.
Additionally, the provisions of the Indenture governing WorldCorp's Debentures
causes World Airways not to pay dividends upon the occurrence of any events of
default by WorldCorp under such Indenture. World Airways and InteliData
currently intend to retain their future earnings, if any, to fund the growth and
development of their business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.
Of the $12.5 million in cash and cash equivalents at December 31, 1996,
approximately $7.0 million is held by World Airways and, therefore, is not
available to satisfy WorldCorp's obligations. As of December 31, 1996, WorldCorp
had parent company repayment obligations, including principal and interest, of
approximately $22.4 million for 1997. In order to meet these obligations and its
general and administrative costs, the Company must use its existing cash and
either sell shares of World Airways or InteliData, or issue additional debt or
equity. Under the terms of certain borrowing arrangements however, WorldCorp has
pledged all of its shares of World Airways and InteliData as collateral for the
borrowings(see Notes 12 and 13).
The Company is currently evaluating the feasibility of a disposition of its
interest in World Airways through a secondary offering or a sale to a third
party. Any such transaction would require the approval of certain other
parties(see Notes 6, 12 and 13). Additionally, management believes it will be
successful in reducing the amount of collateral securing its borrowings, either
by renegotiating the terms of the loan or by entering into a new loan with
another financial institution. Although there can be no assurance that WorldCorp
will be successful in consummating these transactions, management believes that
its existing cash and the anticipated proceeds from a combination of sales of
stock of World Airways or InteliData, renegotiations of its existing borrowing
arrangements, or new financing arrangements, will be sufficient to allow the
Company to meet its operating requirements and repayment obligations for 1997.
At December 31, 1996, based on quoted market prices, the market value of the
Company's 6,915,915 shares of World Airways and 9,179,273 shares of InteliData,
approximated $56.2 million and $66.5 million, respectively, although these
values have declined since year-end.
3. DISCONTINUED OPERATIONS
World Airways commenced its scheduled service operations between Tel Aviv
and New York in July 1995 and commenced its scheduled service operations between
the U.S. and South Africa in June 1996. In addition, in May 1996 World Airways
commenced its scheduled charter operations between the United States and
Germany, Switzerland, Ireland, and the United Kingdom. However, World Airways
was unable to operate these scheduled service operations profitably.
Therefore, in July 1996, World Airways announced its decision to exit its
scheduled service operations by October 1996 and focus its operations on its
core business: operating aircraft under contracts with international carriers,
the U.S. Government, and international tour operators. Consistent with this
decision, World Airways ceased all scheduled operations as of October 27, 1996.
As a result, World Airways' scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results have been
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) which was recorded as of
June 30, 1996, included the following: $13.6
52
<PAGE>
million for estimated operating losses during the phase-out period; a $2.6
million estimated loss to be incurred in connection with sub-leasing DC-10
aircraft which will not be utilized in World Airways' operations subsequent to
the phase-out of scheduled service operations; a $2.3 million writeoff of
related leasehold improvements; and $2.0 million for passenger reprotection
expenses. World Airways incurred approximately $18.9 million of these costs
during the six months ended December 31, 1996 and believes that its remaining
accrual for estimated losses on disposal will be adequate to meet the remaining
costs to be incurred during the phase-out period. Effective December 31, 1996,
World Airways and a lessor mutually agreed to terminate the lease agreements
relating to two DC10-30 aircraft which were acquired in March 1996 as a result
of World Airways' expansion of its scheduled service operations (see Note 6).
These additional aircraft were not expected to be utilized after the
discontinuation of World Airways' scheduled service operations. World Airways
does not have any other significant assets related to its discontinued
operations. World Airways is involved in several claims and legal actions
arising as a result of the discontinuance of its scheduled service operations
(see Note 20).
4. INVESTMENT IN WORLD AIRWAYS
On February 28, 1994, pursuant to an October 1993 agreement, the Company
sold 24.9% of its 100% ownership in World Airways to MHS Berhad ("MHS"), a
Malaysian aviation company. Effective December 31, 1994, WorldCorp repurchased
5% of World Airways' common stock from MHS (see Note 6).
On August 8, 1995, World Airways filed a registration statement on Form
S-1 with the Securities and Exchange Commission to register 2,900,000 shares of
World Airways' common stock. The offering was completed on October 12, 1995 at
an offering price of $12.50 per share. Of the 2,900,000 shares registered,
2,000,000 shares were issued and sold by World Airways which resulted in an
$11.9 million net gain to the Company, and 900,000 shares were sold by the
Company, resulting in a $4.1 million net gain. Net proceeds received from the
offering by the Company and World Airways approximated $10.2 million and $22.8
million, respectively. At December 31, 1996, the Company and MHS owned
approximately 61.3% and 17.6%, respectively, of the outstanding common stock of
World Airways. The remaining shares were publicly traded.
In the third quarter of 1996, World Airways announced its intention to
purchase up to one million shares of its publicly-traded common stock pursuant
to open market transactions. During the fourth quarter of 1996, World Airways
purchased 718,000 shares of its common stock for an aggregate cost of $7.4
million. In January 1997, World Airways repurchased an additional 52,000 shares
of its common stock for an aggregate cost of $0.5 million. World Airways does
not intend to purchase any additional shares at this time. As a result of the
1996 treasury stock purchases, the Company recognized a $4.2 million loss on
purchases of equity by subsidiaries.
As discussed in Note 2, WorldCorp is evaluating the feasibility of a
disposition of its interest in World Airways through a secondary offering or a
sale to a third party. There can be no assurances, however, that any such
transactions will ultimately be consummated.
5. INVESTMENT IN INTELIDATA
FORMATION
On September 10, 1990, the Board of Directors of WorldCorp unanimously
authorized WorldCorp to enter into and consummate a Stock Purchase Agreement
dated as of September 14, 1990 (the "Stock Purchase Agreement"), under which
WorldCorp agreed to purchase Series A Preferred Stock ("the Preferred Stock")
issued by US Order. The Board of Directors of the Company authorized the
purchase of US Order as part of the Company's continuing efforts to diversify
its interests. In connection with this agreement, the Company was granted an
option to purchase the common stock held by the founding shareholders. Mr. Gorog
is Chairman of the Board of InteliData and is Chairman of the Board of Directors
of WorldCorp. Mr. Gorog, together with certain members of his immediate family
(the "Founders"), were majority owners of US Order.
On August 25, 1994, the Company's Board of Directors approved the exercise
of WorldCorp's option to purchase 4.8 million shares of US Order common stock
held by the Founders. Under the terms of this agreement, prior to December 31,
1994, WorldCorp paid $0.4 million in cash to the Founders in exchange for
498,794 shares of US Order common stock, increasing WorldCorp's ownership of
voting stock to 52%. Effective February 16, 1995, WorldCorp purchased the
remaining 4.3 million shares of US Order common stock with 302,282 shares of
WorldCorp common stock, $0.3 million in cash, and $1.1 million in the form of
notes due to the Founders. These
53
<PAGE>
notes were paid in 1995. As a result of this option exercise, WorldCorp
increased its ownership in US Order's voting stock to approximately 89% in
February 1995.
In August 1996, WorldCorp exercised 346,429 warrants to purchase an
equivalent number of shares of US Order's common stock at $4.00 per share.
SALE OF BANKING OPERATIONS
On August 1, 1994, US Order sold its electronic banking and bill payment
operations to Visa International Services Association, Inc. ("Visa") (which
subsequently transferred these assets to the wholly owned subsidiary, Visa
InterActive) for $14.6 million in cash (net of closing costs of $0.2 million),
the assumption of certain of US Order's capital lease obligations and other
miscellaneous liabilities totaling $0.9 million, 100 shares of Visa
InterActive's redeemable preferred stock, and a 72 month royalty stream
commencing January 1, 1995 and ending December 31, 2000 (the "Royalty Period").
The Company recognized a gain of $14.5 million (before minority interest of $3.9
million) from this sale. Of the proceeds received by US Order, $9.4 million was
used to retire a portion of its preferred stock (of which WorldCorp received
$3.3 million) and to cancel vested employee options. The royalty amount is based
on the number of Visa InterActive customers using the electronic banking and
bill payment technology sold by US Order to Visa. Under the terms of the
agreement, Visa InterActive is not required to pay US Order for the first
$73,000 of royalties earned during each quarter on a cumulative basis for a
total of twelve quarters. US Order has not received any Visa royalty payments to
date and does not expect to receive any royalty payments through the first half
of 1997.
INITIAL PUBLIC OFFERING
In June 1995, US Order completed an initial public offering of 4,427,500
shares of its common stock at an offering price of $14.75 per share. Of the
4,427,500 shares sold, 3,062,500 were issued and sold by US Order which resulted
in a gain of approximately $27.0 million to the Company, and 1,365,000 shares
were sold by the Company resulting in a gain of approximately $19.6 million. Net
proceeds from the offering to the Company and US Order approximated $18.7
million and $41.6 million, respectively. In conjunction with the offering, the
US Order preferred stock previously held by the Company was converted to common
stock. As a result of the above transactions, WorldCorp owned 56.9% of the
outstanding common stock of US Order at December 31, 1995.
ACQUISITIONS
On October 18, 1995, US Order acquired a 40% equity interest in Home
Financial Network, Inc. ("HFN"), a newly formed, development stage personal
computer software company that plans to develop and deliver electronic financial
products and services to consumers, through the issuance of 296,746 shares of
its common stock valued at $5.0 million. As a result, the Company recognized a
$2.5 million gain on issuances of equity by subsidiaries.
Effective September 30, 1996, US Order acquired all of the outstanding
capital stock of Braun, Simmons & Co. ("Braun Simmons"), an information
engineering firm specializing in the development of home banking and commerce
solutions for financial institutions, for $2.0 million and 375,000 shares of US
Order common stock. As a result, the Company recorded a gain on issuances of
equity by subsidiary of $1.8 million as of September 30, 1996. The acquisition
was accounted for under the purchase method of accounting. US Order expensed
$4.9 million of the purchase price which was allocated to in-process research
and development with no alternative future use.
COLONIAL DATA MERGER
On April 6, 1995, US Order entered into a stock exchange agreement with
Colonial Data. Pursuant to the terms of the agreement, on June 8, 1995, US Order
exchanged 230,000 shares of its common stock, valued at the initial public
offering price of $14.75 per share, or $3.4 million, for 170,743 shares of
Colonial Data's unregistered common stock (valued based on the average closing
price of Colonial Data's stock for the twenty trading days preceding the date of
the exchange) which was equivalent to the value of US Order stock exchanged. The
Company recognized a gain on issuances of equity by subsidiaries of $2.0 million
as a result of the exchange of this stock. The fair value of this investment at
December 31, 1995 was approximately $3.5 million, based on the quoted market
price of the stock, and was held for purposes other than trading.
54
<PAGE>
On November 7, 1996, US Order and Colonial Data were merged with and into
InteliData, a newly formed corporation, through an exchange of stock ("Merger").
Upon consummation of the Merger, each outstanding share of US Order common stock
was converted into one share of InteliData common stock and each outstanding
share of Colonial Data common stock was converted into one share of InteliData
common stock. The transaction was accounted for as a purchase of Colonial Data
by US Order. Pursuant to this transaction, InteliData became the successor
corporation to US Order. As a result of the Merger, WorldCorp recognized a gain
on issuances of equity by subsidiaries of $42.6 million, which was offset by the
elimination of approximately $1.3 million of goodwill related to US Order. As a
result of the Merger, WorldCorp's ownership percentage in InteliData was reduced
to 28.9% and, as such, WorldCorp began reporting its share of InteliData's net
assets and results of operations under the equity method of accounting. As such,
WorldCorp's investment in InteliData is included in investment in affiliate in
the accompanying balance sheet at December 31, 1996, and its share of
InteliData's losses for the period from November 7, 1996 through December 31,
1996 are shown as equity in loss of affiliate in the accompanying statement of
operations for the year ended December 31, 1996. As a result of the Merger,
InteliData reported non-cash, merger related charges of approximately $72.3
million, of which the Company recorded its pro rata share, or $20.9 million.
These charges related to the write-off of in-process research and development
expenses for purchased in-process technology that had not reached technological
feasibility as of the date of the Merger and did not have alternative future
uses. The remaining $2.4 million equity in loss of affiliate represents the
Company's share of InteliData's operating results for the period following the
Merger.
Summarized financial information of InteliData is as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
Results of operations:
---------------------
<S> <C> <C> <C>
Revenues $ 13,899 $ 4,186 $ 1,432
Cost of revenues 10,448 2,470 1,013
Gross profit 3,451 1,716 419
Operating loss 96,112 5,161 10,165
Net income (loss) applicable to common shareholders (95,727) (5,399) 1,818
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1995
------------ ------------
Financial position:
------------------
<S> <C> <C>
Current assets $ 82,989 $ 27,068
Noncurrent assets 60,757 13,184
Current liabilities 19,457 2,519
Noncurrent liabilities -- --
</TABLE>
Shown below is the Company's unaudited pro forma consolidated results of
operations for the years ended December 31, 1996 and 1995, excluding the impact
of the non-recurring charges for acquired in-process research and development
and the impact of the gain on issuances of equity by subsidiaries relating to
the Braun Simmons and Colonial Data acquisitions and as though both companies
had been acquired and merged into InteliData as of the beginning of InteliData's
fiscal years 1996 and 1995 (in thousands except for per share data):
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 309,587 $ 242,386
Net income (loss) (27,252) 64,925
Net income (loss) per share:
Primary (1.63) 3.80
Fully diluted * 3.02
</TABLE>
* Fully dilutive earnings per share are anti-dilutive.
55
<PAGE>
This method of combining historical financial statements for the
preparation of the unaudited pro forma condensed consolidated financial
information is for presentation only. The unaudited pro forma condensed
consolidated financial information is provided for illustrative purposes only
and is not necessarily indicative of the consolidated financial position or
consolidated results of operations that would have been reported had the mergers
occurred at the beginning of the year, nor do they represent a forecast of the
consolidated financial position or results of operations for any future period.
6. TRANSACTIONS WITH MHS AND MALAYSIAN AIRLINES
On October 30, 1993, the Company, World Airways, and MHS entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which MHS,
subject to satisfactory completion of its due diligence investigations, agreed
to purchase 24.9% of World Airways' common stock for $27.4 million in cash.
Under this Agreement, World Airways would receive upon closing $12.4 million to
fund its working capital requirements. The remaining $15.0 million would be paid
to the Company to add to its cash reserves. WorldCorp received $2.7 million
prior to December 31, 1993 as an advance on the sales price. At the time of the
signing of the Stock Purchase Agreement, World Airways was a wholly-owned
subsidiary of the Company. On February 28, 1994, the Company, World Airways, and
MHS concluded the transaction according to the terms described above. Under the
agreement, if at any time after October 30, 1996 World Airways registers
additional common stock under the Securities Act of 1933, MHS has the right to
demand the registration of its shares of World Airways' common stock. Under a
shareholders agreement, MHS agreed not to transfer, sell, or pledge any of its
shares of common stock prior to February 28, 1997 without the prior written
consent of the Company. MHS has the right to nominate two members to World
Airways' board of directors and the Company has agreed to vote its shares of
common stock to elect such nominees. Also, if without the prior written consent
of MHS: (1) World Airways sells all or substantially all of its business; or (2)
World Airways fundamentally changes its line of business, then MHS has the
option (a) to sell or transfer all or a portion of its shares to a third party
prior to February 28, 1997, and/or (b) to require the Company to purchase all or
part of MHS's shares at fair market value. Fair market value is defined to be
not less than the aggregate of the costs borne by MHS in acquiring and holding
its World Airways shares. Management has indicated that it does not have any
current intent to take any such actions without the prior consent of MHS or the
directors nominated by MHS. The shareholders agreement also provides that if the
Company's ownership interest in World Airways falls below 51% of the outstanding
shares of common stock, then MHS may either sell its shares to a third party or
require the Company to sell a pro rata number of shares held by MHS to the party
purchasing the Company's shares. MHS also has a right of first refusal to
purchase shares of common stock issued by World Airways or sold by the Company
and to purchase additional shares of common stock to maintain its ownership
percentage in World Airways.
During 1994, MHS acquired 32% of Malaysian Airline System Berhad, the flag
carrier of Malaysia. Due to the issuance of additional shares of common stock by
Malaysian Airlines during 1996, MHS owns 29.1% of Malaysian Airlines at December
31, 1996. World Airways has provided service to Malaysian Airlines since 1981,
providing aircraft for integration into Malaysian Airlines' scheduled passenger
and cargo operations as well as transporting passengers for the annual Hadj
pilgrimage. World Airways provided three aircraft for Hadj operations in 1996
and 1995, and, pursuant to the contract described below, will provide three
aircraft for the 1997 Hadj operations.Malaysian Airlines is World Airways's
largest customer (see Note 18).
Effective December 31, 1994, the Company entered into a 6% note payable to
MHS in the amount of $8.5 million, due December 31, 1995, in exchange for 5% of
World Airways' common stock held by MHS and the execution of certain multi-year
contracts between World Airways and Malaysian Airlines. The shares were pledged
as security for the note payable. The note was repaid in accordance with the
agreement. As a result of this transaction, effective December 31, 1994, MHS
owned 19.9% of World Airways' common stock. As a result of World Airways's
initial public offering (see Note 4), MHS owned approximately 16.6% of World
Airways's common stock as of December 31, 1995. Due to World Airways's common
stock repurchases in the fourth quarter of 1996 (see Note 4), MHS owned
approximately 17.6% of World Airways's common stock as of December 31, 1996.
Of the $8.5 million consideration paid by WorldCorp to MHS, $3.0 million
was attributable to the contract enhancements discussed above. This amount is
included in other assets and deferred charges in the accompanying balance
sheets, and is being amortized over the terms of the related Malaysian Airlines
contracts, approximately two to five years. As of December 31, 1996, the
unamortized balance of the deferred contract cost is $1.5 million, net of $1.5
million of accumulated amortization (see Note 9).
56
<PAGE>
In late 1994, World Airways entered into a series of multi-year contracts,
with expiration dates ranging from 1997 to 2000, to provide aircraft to
Malaysian Airlines. In 1996, World Airways provided three aircraft for Hadj
operations. World Airways recently entered into a new 32-month agreement for
year-round operations (including the Hadj) with Malaysian Airlines whereby World
Airways will provide two aircraft with cockpit crews, maintenance and insurance
to Malaysian Airlines' newly-formed charter division through May 1999. World
Airways is currently in preliminary discussions with Malaysian Airlines
regarding a potential eleven-month reduction in the utilization of one of these
aircraft during the 32-month term of the contract.
Until recently, World Airways operated four passenger aircraft for
Malaysian Airlines under the multi-year agreements described above. The contract
for two of the four passenger aircraft for Malaysian Airlines expired in March
1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and
will actively re-market the aircraft thereafter, World Airways can provide no
assurance that it will be able to redeploy the two aircraft, beginning June
1997, at price and utilization levels at least as favorable as under the terms
of the Malaysian Airlines contracts.
World Airways originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contract. World Airways and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contract's original obligations. World Airways can provide no assurances,
however, that it will, in fact, be able to redeploy these two aircraft back into
Malaysian Airlines' operation to meet the contract's original obligations.
Certain operating costs incurred by World Airways pursuant to the currently
operated contracts are reimbursed by Malaysian Airlines. As of December 31, 1996
and 1995, World Airways had $4.2 million, which consists of trade receivables of
$9.2 million offset by $5.0 million of aircraft rent due to Malaysian Airlines,
and $3.0 million, respectively, included in due from affiliate in the
accompanying balance sheets relating to these contracts.
World Airways and Malaysian Airlines entered into an agreement in March
1995 pursuant to which Malaysian Airlines provides routine maintenance checks,
structural inspections and other necessary work for World Airways' aircraft in
Kuala Lumpur. World Airways expensed approximately $1.7 million and $1.5 million
during 1996 and 1995, respectively, related to these services.
During 1995, World Airways entered into agreements with Malaysian Airlines
to lease two DC10-30 aircraft. The aircraft were delivered in June and December
1995 and have lease terms of 26 and 36 months, respectively. In March 1996,
World Airways leased two additional DC10-30 aircraft from Malaysian Airlines.
These aircraft had initial lease terms of 36 months with monthly rent expense
and other lease terms similar to the aircraft leased during 1995. These
additional aircraft were not expected to be utilized after the discontinuation
of World Airways' scheduled service operations in October 1996 (see Note 3).
Therefore, effective December 31, 1996, the parties mutually agreed to terminate
the lease agreements for the additional two aircraft. Rent expense and
maintenance reserve payments related to all of the aircraft leased from
Malaysian Airlines totalled $12.6 million and $1.6 million in 1996 and 1995,
respectively.
In March 1997, World Airways entered into an agreement with Malaysian
Airlines to lease an incremental DC10- 30 aircraft on a short-term basis to
support its peak flying season. The aircraft will be returned at the end of the
Hadj program.
7. SUPPLEMENTAL INFORMATION -- STATEMENTS OF CASH FLOWS
Additional information pertaining to certain cash payments and noncash
investing and financing activities is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for:
Interest $ 12,377 $ 12,130 $ 11,550
Income taxes 412 711 140
</TABLE>
57
<PAGE>
World Airways purchased a spare engine which was delivered in March 1996.
The engine cost approximately $8.0 million. World Airways entered into an
agreement with the engine's manufacturer to finance 80% of the purchase price
over a seven-year term (see Note 13). World Airways made payments of $1.2
million and $0.4 million towards this purchase in September 1995 and January
1996, respectively.
In March 1996, World Airways entered into an agreement with McDonnell
Douglas to lease two MD-11ER aircraft (see Note 13). World Airways entered into
a simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts.
World Airways can borrow a total of $9.0 million of which $3.0 million became
available with the delivery of each aircraft and an additional $3.0 million
became available in December 1996. Borrowings under the agreement were $6.4
million during 1996, of which $0.5 million was repaid at December 31, 1996.
World Airways paid approximately $1.8 million and exchanged a DC10 engine
valued at approximately $1.0 million in connection with the settlement of
maintenance reserves due on the return of three DC10 aircraft in 1994.
During 1994, US Order redeemed preferred stock through the issuance of a
note payable of $0.9 million.
8. SHORT-TERM INVESTMENTS
At December 31, 1996 and 1995, short-term investments consist of cash
pledged as collateral for letters of credit with original maturities in excess
of ninety days, and expiration dates within one year, and cash collateralizing a
loan with a financial institution (Note 12).
9. OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Debt issuance costs, net $ 1,763 $ 2,036
Long-term notes receivable (Note 19) 529 868
Deferred contract cost (Note 6) 1,509 2,285
Aircraft integration costs, net 1,094 1,968
Long-term investments of US Order (Note 5) -- 8,227
------- -------
$ 4,895 $ 15,384
======= =======
</TABLE>
Debt issuance costs consist of the costs of issuing the Convertible
Subordinated Debentures due 2004, the Bridge Loan due in 1997 and revolving
lines of credit agreements. These costs are being amortized over the term of the
respective debt instruments using the effective interest method (see Notes 12
and 13). The debt issuance costs relating to the 13 7/8% Subordinated Notes were
included in the accompanying balance sheet at December 31, 1995, but were
written off when the Notes were retired in 1996.
Aircraft integration costs consist of pre-operating costs incurred in
connection with integrating the new MD-11 aircraft into World Airways' fleet
(see Note 13). These costs, consisting primarily of flight crew training, are
being amortized on a straight-line basis over a five-year period.
Prepaid expenses and other current assets at December 31, 1996 and 1995
includes prepaid insurance of approximately $4.9 million and $5.9 million,
respectively, and prepaid rent of approximately $2.5 million and $1.5 million,
respectively. Included in the December 31, 1995 balance is a deposit on a spare
engine of approximately $1.2 million.
10. ASSETS HELD FOR SALE
Assets held for sale consist primarily of DC10 and B727 rotables with a net
book value of $3.9 million and $3.0 million as of December 31, 1996 and 1995,
respectively. World Airways has consigned these parts with a third party to be
sold over a reasonable period of time with the objective of maximizing the
proceeds from the sales. As a result of the discontinuance of World Airways'
scheduled service operations in 1996 (see Note 3), and the termination of two
DC10 lease agreements in December 1996 (see Notes 6 and 13), World Airways
consigned
58
<PAGE>
additional DC10 rotables with the third party during 1997. Accordingly, the net
book value of these parts of $1.7 million was reclassified from flight and other
equipment to assets held for sale in the accompanying balance sheet at December
31, 1996. During the fourth quarter of 1996, World Airways wrote-down assets
held for sale by $0.4 million to reflect the estimated fair value of the parts
less estimated selling costs.
11. INTANGIBLE ASSETS
As a result of various transactions in the capital stock of US Order
through 1995, the Company recorded approximately $5.2 million of goodwill, which
is being amortized over approximately six years using the straight-line method.
As a result of the sale of a portion of its stock of US Order pursuant to US
Order's initial public offering during 1995, approximately $1.9 million of this
goodwill was eliminated and offset against the gain on sale of stock. As a
result of the merger of US Order and Colonial Data with and into InteliData
during 1996, approximately $1.3 million of goodwill was eliminated and offset
against the gain on issuances of equity by subsidiaries (see Note 5).
12. NOTES PAYABLE
In 1993, World Airways entered into an $8.0 million revolving line of
credit borrowing arrangement which is collateralized by certain receivables
which were sold to the bank with recourse. Borrowing availability under the line
is based on the amount of eligible receivables. This borrowing arrangement was
amended effective June 30, 1996 (see Note 13). World Airways had minimal unused
borrowing capacity at December 31, 1996 and 1995. Borrowings under the line of
credit were $6.8 million and $1.7 million at December 31, 1996 and 1995,
respectively, and bear interest at the greater of the federal funds rate plus
2.5% or the prime rate plus 2%. The interest rate was 10.25% and 10.5% at
December 31, 1996 and 1995, respectively. This agreement contains certain
covenants related to World Airways' financial condition and operating results,
including minimum quarterly net worth and net income (loss) tests. At December
31, 1996, World Airways was not in compliance with one covenant, but obtained a
waiver of the covenant from the lender. This waiver also extended the date that
World Airways is required to pay any outstanding amounts under the line of
credit to December 31, 2000. No assurances can be given that World Airways will
meet these covenants in the future or, if necessary, obtain the required
waivers. The agreement also requires an unused facility fee of 0.5% per year.
A $4.6 million note and a $5.0 million note, both bearing interest at
3.8%, are included in notes payable at December 31, 1996 and 1995, respectively.
The $5.0 million note was fully paid during 1996. The $4.6 million note requires
monthly principal and interest payments, and will be paid in full in 1997.
In the first quarter of 1995, World Airways received approximately $6.0
million in working capital and short-term financing from certain of its
equipment lessors, bearing interest at approximately 11%. The balance was repaid
during 1995.
On August 29, 1996, the Company entered into a bridge loan (the "Bridge
Loan") with a financial institution pursuant to which the Company borrowed $25.0
million and subsequently retired its existing 13 7/8% Subordinated Notes of the
same amount. The Bridge Loan is due September 29, 1997 and earns interest of
LIBOR plus 2.5%, payable monthly. Under the terms of the Bridge Loan, the
borrowings are collateralized by all of the shares of World Airways and
InteliData beneficially owned by WorldCorp, a first priority security interest
in WorldCorp's assets, and certain cash collateral. On September 30, 1996, the
Company entered into a purchase agreement (the "Purchase Agreement") which
contained a series of Senior Subordinated Notes ("Notes") totaling $10.0 million
which was used to retire $10.0 million of the Bridge Loan in October 1996. The
Notes are payable in three installments through September 2000, earn interest of
10%, payable semi-annually, and are included in long-term obligations at
December 31, 1996 (see Note 13). On December 31, 1996, the Company refinanced
the Bridge Loan, which resulted in a decrease in the interest rate to LIBOR plus
1.75%, and reduced the cash collateral under the loan to $1.0 million. The
interest rate was 7.99% at December 31, 1996. The Purchase Agreement and the
Bridge Loan generally restrict the amount of stock repurchases by WorldCorp
based on certain specified conditions. These borrowings also contain a number of
covenants that, among other things, restrict cash dividends, restrict the
ability of WorldCorp to dispose of assets, make certain acquisitions of the
stock of other entities, incur additional indebtedness, and make capital
expenditures. The Bridge Loan also contains certain covenants which, among other
things, require WorldCorp to maintain at least a 50.1% ownership of World
Airways.
In the first quarter of 1997, WorldCorp entered into a $1.0 million margin
loan with Scott & Stringfellow, Inc., whereby WorldCorp pledged approximately
400,000 shares of InteliData
59
<PAGE>
common stock which WorldCorp owns as collateral for such loan (the "Margin
Loan"). The Bridge Loan was amended to permit this loan.
13. LONG-TERM OBLIGATIONS
LONG-TERM DEBT
Long-term obligations of the Company at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
WorldCorp:
Senior Subordinated Notes -- with interest at 10% payable semi-annually beginning
March 31, 1997 (net of unamortized discount of $0.3 million) (Note 12). 9,675 --
Convertible Subordinated Debentures due 2004 -- with interest at 7% payable
semi-annually beginning May 15, 1992. 65,000 65,000
13 7/8 Subordinated Notes, retired in August 1996 (net of
unamortized discount of $0.1 million in 1995). -- 24,961
Unsecured promissory note due 1997 -- with interest at 6% payable
quarterly beginning May 8, 1994. 900 900
World Airways:
Note payable due 1999 -- with principal and interest at 7.25% payable
monthly, collateralized by one Pratt & Whitney PW4462 engine. $ 4,393 $ 4,883
Note payable due 2003 -- with principal and interest at 9.98% payable
monthly, collateralized by one Pratt and Whitney
PW4462 engine. 6,018 --
Spare parts loan due 1998 -- with principal and interest at 8.5%
payable monthly, collateralized by certain MD-11 spare parts. 3,229 3,617
Spare parts loan due 2003 -- with principal and interest at 8.5% payable
monthly collateralized by certain
MD-11 spare parts. 2,581 2,857
Spare parts loan due 2003 -- with principal and interest at 10%
payable monthly, collateralized by certain MD-11 spare parts. 5,929 --
Aircraft spare parts security agreement payable to a bank due 1999, net of
discount of $0.2 million -- with interest at the greater of the federal
funds rate plus 2.5% or the prime rate plus 2% (10.25% at December 31,
1996 and 10.5% at December 31, 1995),
collateralized by certain rotables. 7,372 8,568
Employee Saving and Stock Ownership Plan guaranteed bank loan (Note 16) 805 1,370
Capitalized lease obligations 7,750 8,869
Deferred aircraft rent 1,142 1,675
-------- --------
Total 114,794 122,700
Less current maturities 9,990 11,355
-------- --------
Total long-term obligations, net $ 104,804 $ 111,345
======= =======
</TABLE>
The estimated fair value of the Convertible Subordinated Debentures at
December 31, 1996 approximated $44.5
60
<PAGE>
million. The Company believes that the carrying values of the other amounts
outstanding under the above debt agreements approximate fair value.
In May 1992, the Company issued $65.0 million of Convertible Subordinated
Debentures due 2004 (the "Debentures"). The Debentures are convertible into
WorldCorp common stock at $11.06 per share, subject to adjustment in certain
events, and bear an annual interest rate of 7%. Semi-annual interest payments
are due on May 15 and November 15. The terms of this indenture cause World
Airways not to pay dividends upon the occurrence of any events of default by the
Company under the indenture. The indenture also restricts the Company's ability
to pay dividends or make other distributions on its common stock.
On August 29, 1996, the Company entered into a bridge loan (the "Bridge
Loan") with a financial institution pursuant to which the Company borrowed $25.0
million and subsequently retired its existing 13 7/8% Subordinated Notes of the
same amount (see Note 12).
The Company entered into a purchase agreement (the "Purchase Agreement") on
September 30, 1996 which contained a series of Senior Subordinated Notes
totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan
in October 1996. The Notes are payable in three installments through September
2000 and earn interest of 10%, payable semi-annually. In connection with the
Purchase Agreement, the Company granted warrants to the lenders to purchase up
to 120,000 shares of the Company's common stock, at $6.00 per share, subject to
certain adjustments. The Company may also be required to issue up to an
additional 80,000 warrants contingent upon certain market conditions. These
warrants were valued at approximately $0.6 million (see Note 14). Under the
terms of the Purchase Agreement, the Company is not permitted to pay cash
dividends. Also, WorldCorp is obligated under certain conditions to make certain
mandatory prepayments of the Notes. If the Asset Value, as defined, at the end
of any fiscal year is less than $70.0 million, then WorldCorp must prepay 50% of
each of the then outstanding Notes within 60 days. If the Asset Value at the end
of any fiscal quarter is less than $50.0 million, then WorldCorp must prepay all
of the then outstanding Notes within 60 days. If WorldCorp sells any shares of
common stock of InteliData, 20% of the net proceeds received by WorldCorp upon
such sale must be used to prepay the then outstanding Notes within 30 days.
"Asset Value" is defined to mean (A) the market value of the common stock of
World Airways and InteliData beneficially owned by the Company and the common
stock of any other subsidiary of the Company beneficially owned by the Company
which is listed on an exchange or quoted on the NASDAQ National Market, plus (B)
the value of all other tangible assets of the Company. As of December 31, 1996,
the Asset Value was $130.4 million, although this value has declined since
year-end. Also under the Purchase Agreement, senior indebtedness of the Company
shall not exceed $50.0 million.
As described in Note 2, in order to meet its debt service obligations for
1997, WorldCorp must use its cash and either sell shares of World Airways or
InteliData, or issue additional debt or equity. Under the terms of certain loan
agreements, WorldCorp has pledged all of its shares of World Airways and
InteliData as collateral for the loans (see Note 12).
Effective June 30, 1996, World Airways amended its Credit Agreement with
BNY Financial Corporation ("BNY"), which includes the aircraft security
agreement and the $8.0 million revolving line of credit borrowing (see Note 12).
This amended Credit Agreement is collateralized by certain receivables,
inventory, and equipment. Under the terms of the amended Credit Agreement, World
Airways is not permitted to (i) incur indebtedness in excess of $25.0 million
(excluding capital leases), (ii) declare, pay, or make any dividend or
distribution in any six month period which aggregate in excess of the lesser of
$4.5 million or 50% of net income for the previous six months, (iii) declare or
pay dividends if after giving effect to such dividends World Airways' cash or
cash equivalents would be less than $7.5 million or (iv) make capital
expenditures in 1996 and 1997 of more than $35.0 million and $25.0 million,
respectively, or in any subsequent year of more than $15.0 million. World
Airways must also maintain a certain quarterly net worth and net income (loss)
requirements. At December 31, 1996, World Airways was not in compliance with one
covenant, but obtained a waiver of the covenant from the financial institution.
This waiver also extended the date that World Airways is required to pay any
outstanding amounts under the line of credit to December 31, 2000. The aircraft
security agreement remains payable in 1999. No assurances can be given that
World Airways will meet these covenants in the future or, if necessary, obtain
the required waivers.
In conjunction with the amendment, World Airways granted warrants to BNY to
purchase up to 50,000 shares of authorized, but unissued common stock. The
warrants were granted at an exercise price of $8.00 per share which was
61
<PAGE>
equal to the market price of World Airways' stock at the date of grant. All
warrants were vested and became fully exercisable at the date of grant and
expire on December 31, 1999. The per share weighted-average fair value of
warrants granted was $3.62 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield of 0.0%, risk free interest rate of 5.99%, expected life of 3
years and expected volatility of 61%. World Airways recorded $0.2 million
related to the warrants which will be amortized into interest expense over the
terms of the related debt.
During 1996, World Airways amended its spare parts loan originally due in
1997 which required semi-annual payments of principal and interest. The amended
agreement expires in 2003 and requires monthly payments of principal and
interest.
In September 1995, World Airways entered into an agreement with a lessor to
purchase a spare engine, previously under lease, for $5.5 million. World Airways
paid $0.5 million upon closing and signed a note for the $5.0 million balance.
The note bears interest at a rate of 7.25% and is payable over a 40-month period
at $69,000 a month, with the balance of $3.3 million due on January 29, 1999.
World Airways purchased an additional spare engine, which was delivered in March
1996, at a cost of approximately $8.0 million. World Airways entered into an
agreement with the engine's manufacturer to finance 80% of the purchase price
over a seven-year term at an interest rate of 9.98%. World Airways made payments
of $1.2 million and $0.4 million towards this purchase in September 1995 and
January 1996, respectively.
In January 1996, World Airways agreed to purchase an additional engine for
approximately $7.2 million and received a commitment from the engine
manufacturer to finance 85% of its purchase price over a seven-year term with an
interest rate to be fixed at the time of delivery. World Airways expects to take
delivery of the engine during 1997.
During 1993, World Airways negotiated with several of its lessors to defer
approximately $14.7 million of lease payments on eight aircraft. In addition,
during 1995 and 1994 World Airways deferred approximately $0.7 million of rent,
pursuant to the 1993 agreement. Of these amounts, World Airways repaid
approximately $14.3 million through 1996.
The following table shows the aggregate annual amount of scheduled
principal maturities (in thousands) of debt outstanding at December 31, 1996,
excluding capital lease obligations:
<TABLE>
<S> <C>
1997 $ 8,826
1998 8,676
1999 9,211
2000 8,662
2001 2,215
Thereafter 69,454
-------
Total $ 107,044
=======
</TABLE>
CAPITAL LEASES
The present value of the obligations under capital leases at December 31,
1996 is calculated using rates ranging from 6.1% to 10.7%. The following are
scheduled minimum capital lease payments (in thousands) due in the succeeding
five years and thereafter, together with the present value of such obligations:
<TABLE>
<S> <C>
1997 $ 1,720
1998 3,376
1999 1,317
2000 2,940
2001 --
Thereafter --
-------
Total minimum lease payments 9,353
Less: imputed interest 1,603
-------
Present value of obligations under capital lease $ 7,750
=======
</TABLE>
Property under capital leases consists of equipment leases and are
amortized over the lease terms or expected useful life of the assets.
Accumulated amortization under capital leases was $4.3 million and $3.7 million
at December 31,
62
<PAGE>
1996 and 1995, respectively. Amortization expense of property under capital
leases totaled approximately $0.7 million for the years ended December 31, 1996
and 1995.
OPERATING LEASES
In October 1992 and January 1993, World Airways signed a series of
agreements with International Lease Finance Corporation ("ILFC"), McDonnell
Douglas Corporation, GATX Capital Corporation, and United Technologies
Corporation's Pratt & Whitney Group ("Pratt and Whitney") to lease seven new
McDonnell Douglas MD-11 aircraft under initial lease terms of two to five years.
Six of the seven aircraft leases contain annual renewal options in years six
through fifteen of the lease term. If these renewal options are not exercised,
World Airways is required to pay a substantial penalty to the lessor. Under the
terms of the lease agreements, World Airways may be required to pay additional
rent in excess of the fixed monthly amounts depending on block hours flown.
In February 1992, World Airways signed 12-year operating leases for two
McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways
returned these aircraft to their lessor. Certain matters related to the
termination of these leases were resolved in 1995 and resulted in a gain to
World Airways of approximately $0.8 million. This gain is included in other
income in 1995 (see Note 20).
In 1994, World Airways recorded a $4.2 million reversal of excess accrued
maintenance reserves associated with the expiration of three additional DC10-30
aircraft leases in 1994. The reversal is recorded as a reduction to maintenance
expense.
World Airways' MD-11 leases contain options to purchase the aircraft at
various times throughout the lease terms. Long-term deposits consist primarily
of deposits on the MD-11 leases. As part of the lease agreements, World Airways
was assigned purchase options for four additional MD-11 aircraft. In 1992, World
Airways made non-refundable deposits to McDonnell Douglas toward the option
aircraft. In March 1996, World Airways entered into an agreement with McDonnell
Douglas to lease two MD-11ER aircraft. Under this agreement, World Airways is
leasing each aircraft for a term of 24 years with an option to return the
aircraft after a seven year period, subject to fixed termination fees of $2.8
million per aircraft. The non-refundable deposits of $1.2 million previously
paid to McDonnell Douglas towards options on four MD-11 aircraft were applied to
the deposits required on the MD-11ER aircraft. World Airways entered into a
simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts.
World Airways can borrow a total of $9.0 million of which $3.0 million became
available with the delivery of each aircraft and an additional $3.0 million
became available in December 1996. Net borrowings under the agreement were $5.9
million at December 31, 1996. McDonnell Douglas retains a purchase money lien in
the purchased parts. In connection with this lease agreement, World Airways
agreed to assume an existing lease of two additional MD-11 freighter aircraft
for 20 years, beginning in 1999, in the event the existing lessee terminates its
lease with McDonnell Douglas at that time.
World Airways ultimately plans to exit DC10 aircraft and standardize its
fleet around the MD-11 aircraft. However, to the extent World Airways can obtain
DC10 aircraft at favorable lease terms, it will continue to utilize these
aircraft to supplement the MD-11 fleet during peak flying times until the MD-11
fleet is sufficient to fulfill its obligations. Therefore, in 1995, World
Airways entered into three DC10-30 aircraft leases with lease terms expiring in
August 1997, September 1997 and December 1998. In March 1996, World Airways
leased two additional DC10-30 aircraft (see Note 6). However, due to the
discontinuation of World Airways' scheduled service operations (see Note 3),
World Airways entered into an agreement in December 1996 to terminate the leases
of the two aircraft delivered in March 1996.
As of December 31, 1996, World Airways' fleet consisted of four passenger
MD-11 aircraft, one freighter MD-11 aircraft, two convertible MD-11 aircraft,
two MD-11ER aircraft, three passenger DC10-30 aircraft, and one DC10-30
convertible aircraft.
World Airways extended the lease terms on two spare engines during 1996.
One lease, originally expiring on December 31, 1995, was extended until February
1998. This lease was classified as a capital lease at December 31, 1995, but
became an operating lease under the new agreement. The other engine was extended
three years from its original April 20, 1996 termination date.
In 1997, World Airways entered into an agreement with Malaysian Airlines to
lease an incremental DC10-30 aircraft on a short-term basis to support its peak
flying season. The aircraft will be returned at the end of the Hadj
63
<PAGE>
program.
Rental expense from continuing operations, primarily relating to aircraft
leases, totaled approximately $84.6 million, $66.7 million, and $54.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
The following is a schedule of future annual minimum rental payments,
principally aircraft rentals (excluding variable portions), required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997 $ 86,209
1998 83,606
1999 74,003
2000 71,462
2001 71,579
Thereafter 679,354
---------
Total $1,066,213
=========
</TABLE>
These future annual minimum rental payments include all option years. Under
the terms of certain of the MD-11 leases, if the options are not exercised,
World Airways must pay a substantial penalty to the lessor, consisting of either
a fixed penalty or a penalty based on the number of block hours flown since
delivery of the aircraft. World Airways intends to exercise the options under
these leases. World Airways' lease relating to office space for its corporate
headquarters expires in 1997 and is therefore not included above. World Airways
intends to either extend the current agreement or enter into an alternative
lease with similar terms.
14. COMMON STOCK PURCHASE WARRANTS
BNYFC WARRANTS
On December 7, 1993, in connection with a revolving line of credit facility
and an aircraft parts security agreement (see Notes 12 and 13), the Company
granted to Bank of New York Financial Corporation ("BNYFC") warrants expiring
December 7, 1996 to purchase 250,000 shares of the Company's common stock, at a
price of $6.15 per share. During 1996, 150,000 warrants were exercised and the
remaining 100,000 warrants expired unexercised. Therefore, at December 31, 1996,
there were no BNYFC warrants outstanding.
1986 EXECUTIVE WARRANTS
During 1986, the Company entered into agreements with certain officers of
the Company to issue 3,600,000 warrants, expiring May 24, 1994, each to purchase
one share of the Company's common stock at a price of $5.00 per share, subject
to certain anti-dilution adjustments (the "Executive Warrants"). During 1994,
90,000 of these warrants were exercised. During 1994, the remaining 2,272,336
unexercised 1986 Executive Warrants expired.
1989 EXECUTIVE WARRANTS
During 1989, the Company entered into warrant agreements with certain
officers of the Company providing for the issuance of warrants ("the 1989
Executive Warrants") to purchase a total of 745,000 shares of the Company's
common stock at an exercise price of $5.50; such warrants vest at differing
rates over 60 months. The 1989 Executive Warrants expire on August 31, 1997.
During 1995, 141,083 warrants were exercised. As of December 31, 1996, 453,417
of these warrants had been cancelled and there were 150,500 1989 Executive
Warrants fully vested and outstanding.
1996 PURCHASE AGREEMENT WARRANTS
On September 30, 1996, in connection with the Purchase Agreement (see Note
13), the Company entered into an agreement to issue up to 200,000 warrants. The
warrants are fully exercisable when granted. 120,000 of the warrants were
granted on September 30, 1996 and expire on September 30, 2000. The remaining
80,000 warrants are issuable as to 40,000 each on October 1, 1997 and October 1,
1998 and expire on September 30, 2001 and September 30, 2002, respectively, and
are contingent upon certain market conditions. The warrants have an exercise
64
<PAGE>
price of $6.00 per share, subject to certain adjustments.
The per share weighted-average fair value of warrants granted during 1996
was $2.99 on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: dividend yield of 0.0%, risk-free
interest rate of 6.11%, expected life of 4 years and expected volatility of
61.51%.
The Company recorded $0.6 million related to the warrants which will be
amortized into interest expense over the term of the related debt. During 1996,
the Company recognized $21,000 of interest expense relating to the warrants.
15. STOCK OPTIONS
On July 19, 1988, the Board of Directors approved the WorldCorp, Inc. 1988
Stock Option Plan (the "1988 Plan"). The 1988 Plan was amended and restated on
May 13, 1992. The 1988 Plan calls for one share of WorldCorp common stock to be
issued upon exercise of one stock option. Warrants issuable under the 1988 Plan,
as amended, shall not exceed 2,800,000 in the aggregate. Options may be granted
to employees and directors at the discretion of the Administrative Committee of
the 1988 Plan. In 1990, the 1988 Plan was amended to change the vesting
percentage to 20% per year beginning on the grant date provided that the grantee
was still an employee of the Company or a subsidiary. These options expire at
the earlier of the stated expiration, which shall not exceed ten years from the
date of grant, or at a certain period of time after the termination of the
participants' employment with the Company. Stock options are granted with an
exercise price at least equal to the stock's fair market value at the date of
grant.
In August 1994, the Company granted 1,050,000 options to an officer and a
board member of the Company. These options become vested at various times
through May 2004. During 1996, 1995 and 1994, approximately $0.2 million, $0.7
million and $1.1 million, respectively, of compensation expense was recognized
in connection with the vested portion of these options. These options expire at
the earlier of the stated expiration, or a certain period of time after the
termination of the participants' employment with the Company.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.59 and $7.21, respectively, on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 6.2% to 6.5% 5.3% to 5.6%
Expected life (in years) 5 to 10 5 to 8
Expected volatility 56% to 59% 58% to 59%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
which were granted with an exercise price at least equal to the stock's fair
market value at the date of grant, in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net income (loss) As reported $ (11,754) $ 60,208
Pro forma (12,760) 59,433
Primary earnings (loss) per
common equivalent share As reported $ (0.70) $ 3.52
Pro forma (0.77) 3.47
Fully diluted earnings (loss) per
common equivalent share As reported $ * $ 2.82
Pro forma * 2.78
</TABLE>
* Fully diluted earnings per share are anti-dilutive
65
<PAGE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 17 months to 10 years and compensation cost for options granted prior
to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of
Options Weighted-Average
Outstanding Exercise Prices
----------- ---------------
<S> <C> <C>
Balance at December 31, 1993 1,648,362 $ 6.69
Granted 1,100,000 4.50
Exercised (176,723) 5.53
Forfeited (216,235) 6.96
Expired (33,000) 9.21
---------
Balance at December 31, 1994 2,322,404 $ 5.68
Granted 50,000 7.06
Exercised (418,485) 5.47
Forfeited (100,000) 9.64
Expired (25,000) 10.59
---------
Balance at December 31, 1995 1,828,919 $ 5.48
Granted 225,000 6.14
Exercised (104,456) 8.87
Forfeited -- --
Expired (125,845) 6.28
---------
Balance at December 31, 1996 1,823,618 $ 5.50
=========
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $4.50 to $12.23 and 8.8
years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
1,324,244 and 1,434,601, respectively, and the weighted-average exercise price
of those options was $5.50 and $5.48, respectively.
World Airways has adopted separate stock option plans for members of its
board of directors, employees and consultants.
16. EMPLOYEE BENEFIT PLANS
During 1989, the Company adopted an Employee Stock Ownership Plan (the
"ESOP") for the benefit of employees not covered by collective bargaining
agreements. The ESOP is designed as a stock bonus plan which qualifies for
favorable tax treatment under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and as an employee stock ownership plan under
Section 4975(e)(7) of the Code. In addition, the ESOP includes a "cash or
deferred arrangement" under Section 401(k) of the Code.
During 1989, the ESOP acquired 450,000 shares of common stock from Violet
June Daly and 450,000 shares of common stock from the Estate of Edward J. Daly.
The purchase price in each transaction was $4.00 per share or a total of $3.6
million.
In 1990, the ESOP was replaced by the Employee Savings and Stock Ownership
Plan ("the ESSOP"). Participation in the ESSOP was limited to employees not
covered under a collective bargaining agreement. Employees could elect to invest
Salary Deferral Contributions in either the WorldCorp Stock Fund or in other
investment funds. The ESSOP provided employer matching contributions in the
WorldCorp Stock Fund at a rate determined by the Board of Directors, but at no
less than 50% of the salary deferral contribution. The employer matching
contribution rate in the WorldCorp Stock Fund for 1996, 1995, and 1994 was 100%.
The employer
66
<PAGE>
matching contribution in other investment funds was at the rate of 33 1/3% of
the Salary Deferral Contribution. The Company charged approximately $0.2
million, $0.3 million and $0.4 million to expense for its contributions to the
ESSOP in 1996, 1995 and 1994, respectively.
Effective October 1, 1996, the Board of Directors of World Airways adopted
an Employee Savings and Stock Ownership Plan (the "Plan"). The Plan is intended
to allow employees not covered by collective bargaining agreements, as well as
certain WorldCorp and WorldCorp Investments, Inc. employees, to share in the
growth and prosperity of the Company, to encourage participants to save on a
tax-favored basis, and to provide participants an opportunity to accumulate
capital for their future economic security. The Plan is an amendment and
continuation of the ESSOP. As a result of various business developments, the
vast majority of the participants in the ESSOP were World Airways' employees.
For that reason, the Company and World Airways agreed that World Airways should
assume the Company's obligation under the ESSOP. In connection with that action,
the Trustees exchanged 196,681 unallocated shares of WorldCorp common stock held
by the ESSOP for a like-value of shares in World Airways common stock. World
Airways also made a special contribution of $50,000 to the Plan.
The ESSOP originally assumed bank financing from its predecessor plan, the
WorldCorp Employee Stock Ownership Plan. This obligation was paid off by
WorldCorp in 1994 and the ESSOP agreed to repay WorldCorp the amount of the bank
loan. The ESSOP refinanced its debt to WorldCorp through a margin loan obtained
in January 1995 and amended in May 1996 in the amount of $1.5 million. Principal
payments of $90,000 are due quarterly and a final principal payment of $1.0
million is due May 1997. Interest is payable quarterly at the call loan rate
plus 1.5%. The margin loan is collateralized by 158,256 of the unallocated
shares of common stock owned by the Plan at December 31, 1996. Through September
30, 1996, WorldCorp was required to make minimum annual discretionary
contributions to the Plan in an amount necessary to pay principal and interest
due on the margin loan to the extent that other contributions to the Plan are
insufficient to make such payments. Beginning October 1, 1996, World Airways
assumed this responsibility. Contributions were sufficient to make the required
principal and interest payments during 1996. World Airways guarantees payment on
the margin loan.
The Plan will continue to hold the shares of WorldCorp common stock that
were allocated the participants' accounts before October 1, 1996. No additional
shares of WorldCorp common stock will be allocated under the Plan on or after
that date. Instead, participants will have the opportunity to receive future
allocations of World Airways common stock. The Plan has 447,417 allocated shares
at December 31, 1996.
The World Airways' Crewmembers Target Benefit Plan and the World Airways'
Flight Attendants Target Benefit Plan are defined contribution plans covering
flight engineers and pilots, and flight attendants, respectively, with
contributions based upon defined wages. These are both tax-qualified retirement
plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Under the collective bargaining agreement between World Airways and the
flight attendants, represented by the International Brotherhood of Teamsters
("Teamsters"), that was signed in June 1996 and ratified by the flight
attendants in August 1996, the World Airways' Flight Attendant Target Benefit
Plan was terminated in September 1996. World Airways is required under the
agreement to make certain monthly payments on behalf of the flight attendants to
the Teamsters subsequent to the termination of the previous plan. Pension
expense for both of the Target Benefit plans totaled $2.5 million, $1.9 million,
and $1.4 million for the years ended December 31, 1996, 1995, and 1994,
respectively. Pension contributions made to the Teamsters on behalf of the
flight attendants in the fourth quarter of 1996 totaled $0.1 million.
Effective January 1, 1994, World Airways adopted the World Airways, Inc.
Retroactivity and Profit Sharing Bonus Plan ("the 1994 Profit Sharing Plan").
The 1994 Profit Sharing Plan provides for the payment of retroactive pay to
certain DC10 crewmembers for the period July 1, 1992 to August 15, 1994, as well
as for certain profit sharing payments. Distributions under the 1994 Profit
Sharing Plan are equal to 20% of World Airways defined earnings, subject to an
annual limitation of 10% of the total annual aggregate compensation of World
Airways employees participating in the 1994 Profit Sharing Plan in that year.
This is not a tax-qualified retirement plan under Section 401(a) of the Code.
World Airways made no distributions in 1995 pertaining to 1994 financial
results. World Airways distributed approximately $1.7 million in 1996 pertaining
to 1995 results, which included the retroactive payment required under the plan.
World Airways does not plan to make any 1997 distributions pertaining to 1996
results.
World Airways' cockpit crewmembers and eligible dependents are covered
under postretirement health care benefits to age 65. World Airways accounts for
the cost of health benefits in accordance with FAS #106 which requires accrual
accounting for all postretirement benefits other than pensions. World Airways
funds the benefit costs
67
<PAGE>
on a pay-as-you-go (cash) basis.
A summary of the net periodic postretirement benefit costs for the years
ended December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ --------
<S> <C> <C> <C>
Service cost $ 176,000 $ 118,000 $ 145,000
Interest cost on accumulated
postretirement benefit obligation 100,000 134,000 143,000
Net amortized gain (38,000) (40,000) --
-------- -------- -----------
Net periodic postretirement benefit cost $ 238,000 $ 212,000 $ 288,000
======== ======== ========
</TABLE>
The components of the Accumulated Postretirement Benefit Obligation for the
years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Retirees and dependents $ 789,000 $ 951,000
Fully eligible, active participants 229,000 165,000
Not fully eligible participants 1,527,000 1,480,000
--------- ---------
$ 2,545,000 $ 2,596,000
Less: plan assets 0 0
--------- ---------
Accrued postretirement benefit obligation $ 2,545,000 $ 2,596,000
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligation for 1996 and 1995 were 6.75% and 6.0%, respectively. The
medical cost trend rate in 1997 was 7.5% trending down to an ultimate rate in
2021 of 4.0%. A one percentage point increase in the assumed health care cost
trend rates for each future year would have increased the aggregate of the
service and interest cost components of 1996 net periodic postretirement benefit
cost by $31,000 and would have increased the accumulated postretirement benefit
obligation as of December 31, 1996 by $124,000.
17. FEDERAL AND STATE INCOME TAXES
Income tax expense attributable to income from continuing operations
consists of (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ --------
<S> <C> <C> <C>
U.S. Federal $ 504 $ 573 $ 131
State -- 88 28
-------- -------- -------
Income tax expense $ 504 $ 661 $ 159
======= ======== =======
</TABLE>
There is no deferred tax expense or benefit for the years ended December
31, 1996, 1995, and 1994.
Income tax expense attributable to income (loss) from continuing
operations for the years ended December 31, 1996, 1995, and 1994 differed from
the amounts computed by applying the U.S. Federal income tax rate of 34 percent
as a result of the following (in thousands):
68
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Expected Federal income tax expense
at the statutory rate $ 2,700 $ 22,038 $ 2,879
Amounts attributable to (earnings)/loss of subsidiaries
not consolidated for tax purposes 6,833 (3,115) 1,520
Income tax expense of subsidiaries not
consolidated for tax purposes -- 296 44
Gain on sales of equity by subsidiaries not
consolidated for tax purposes (13,221) (14,850) --
Amortization of goodwill 184 283 35
Book/tax difference in gain on sales of subsidiaries stock -- (252) (2,170)
Generation (utilization) of net operating
loss and capital loss carryforwards 3,911 (3,640) (3,056)
Federal alternative minimum tax and environmental tax -- 231 115
State income tax expense, net of Federal benefit -- 58 18
Other 97 (388) 774
-------- -------- -------
Income tax expense 504 $ 661 $ 159
========= ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 18,111 $ 14,763
Investment in subsidiary 14,480 10,209
Deferred compensation 199 --
Accruals not deductible for tax 24 --
Compensated absences, primarily due to accrual for
financial statement purposes 10 5
------ ------
Gross deferred tax assets 32,824 24,977
Less: valuation allowance 23,277 20,113
------ ------
Net deferred tax assets 9,547 4,864
------ ------
Deferred tax liabilities:
Investment in affiliate 9,499 4,571
Property and equipment 48 105
Bonus amortization -- 188
------ ------
Gross deferred tax liabilities 9,547 4,864
------ ------
Net deferred income taxes $ -- $ --
====== ======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 was
$13.9 million. The net change in the total valuation allowance for the year
ended December 31, 1995 was an increase of $6.2 million and an increase of $3.2
million for the year ended December 31, 1996.
As a result of certain transactions with MHS in 1994 (see Note 6), World
Airways is no longer consolidated with the Company for income tax purposes. As a
result, approximately $100.4 million of the Company's previous consolidated net
operating loss carryforward ("NOLs") was allocated to World Airways in 1994, and
therefore, is only available to offset future federal taxable income of World
Airways. Of this amount, $38.1 million is subject to a $6.9 million annual
limitation resulting from an ownership change, pursuant to the Internal Revenue
Code of 1986, as amended, which occurred in 1991. In addition, future
transactions in the Company's or World Airways' stock could cause an additional
ownership change at World Airways. The valuation allowance for World Airways'
deferred tax assets as of December 31, 1996 was $43.3 million. World Airways'
estimate of the required valuation allowance is based on a number of factors,
including historical operating results. World Airways generated earnings from
continuing operations in 1996 and net earnings for the year ended 1995 as
compared to net losses in both 1996 and 1994. If World Airways generates net
earnings in 1997, it is possible that a change in the estimate of the required
valuation allowance will occur in the near term, and could differ materially
from the amount recorded at December 31, 1996.
As of December 31, 1996, the Company has approximately $53.1 million of
net operating loss carryforwards, which expire as follows (in millions):
<TABLE>
<S> <C>
2005 5.8
2007 15.2
2008 11.2
2009 10.0
2010 1.1
2011 9.8
------
$ 53.1
</TABLE>
69
<PAGE>
There can be no assurance that the operations of the Company will generate
taxable income in future years so as to allow the Company to realize a tax
benefit from its NOLs. The NOLs are subject to examination by the IRS and thus,
are subject to adjustment or disallowance resulting from any such IRS
examination. In addition, an ownership change of the Company, as defined in the
Internal Revenue Code, may occur in the future and may result in the imposition
of a lower annual limitation on the Company's NOLs existing at the time of any
such ownership change.
18. SEGMENTS AND MAJOR CUSTOMERS
The Company owns positions in companies that operate in two distinct
business areas. The Company owns approximately 61.3% of the outstanding common
stock of World Airways, a provider of worldwide passenger and cargo air
transportation for commercial and government customers. The Company also owns
28.9% of InteliData, a company which concentrates on three markets: (1) consumer
telecommunications, (2) electronic commerce, and (3) interactive services.
Results of operations for World Airways and InteliData are reflected in the
accompanying statements of operations.
Information concerning customers for years in which their revenues
comprised 10% or more of the Company's consolidated operating revenues is
presented in the following table (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Malaysian Airlines $ 105,410 $ 100,934 $ 32,773
U.S. Department of Defense (including U.S. Air Force) 79,029 52,889 44,572
Philippine Airlines 46,516 -- --
P. T. Garuda Indonesia 39,849 26,263 32,356
Look Charters 3,749 3,677 21,222
</TABLE>
World Airways has provided service to Malaysian Airlines since 1981,
providing aircraft for integration into Malaysian Airlines' scheduled passenger
and cargo operations as well as transporting passengers for the annual Hadj
pilgrimage. The Malaysian Airlines' Hadj contract which was entered into in 1992
expired in 1996. World Airways recently entered into a new 32-month agreement
for year-round operations (including the Hadj) with Malaysian Airlines whereby
World Airways will provide two aircraft with cockpit crews, maintenance and
insurance to Malaysian Airlines' newly-formed charter division through May 1999.
World Airways is currently in preliminary discussions with Malaysian Airlines
regarding a potential eleven-month reduction in the utilization of one of these
aircraft during the 32-month term of the contract. World Airways provided three
aircraft for the 1996 and 1995 Hadj operations, and will provide three aircraft
for the 1997 Hadj operations.
Until recently, World Airways operated four passenger aircraft for
Malaysian Airlines under multi-year agreements. The contract for two of the four
passenger aircraft for Malaysian Airlines expired in March 1997. While World
Airways is deploying these two aircraft in the 1997 Hadj, and will actively
re-market the aircraft thereafter, World Airways can provide no assurance that
it will be able to redeploy the two aircraft, beginning June 1997, at price and
utilization levels at least as favorable as under the terms of the Malaysian
Airlines contracts.
World Airways originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contract. World Airways and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contract's original obligations. World Airways can provide no assurances,
however, that World Airways will, in fact, be able to redeploy these two
aircraft back into Malaysian Airlines' operation to meet the contract's original
obligations.
World Airways' contract with the U.S. Air Force expires in September 1997.
World Airways anticipates that future renewals of the U.S. Air Force contract
will be on an annual basis.
World Airways has provided service to PT Garuda Indonesia ("Garuda") since
1973 and has operated under an
70
<PAGE>
annual Hadj contract since 1988. World Airways operated seven aircraft in the
1996 Garuda Hadj and five aircraft in the 1995 Garuda Hadj. World Airways will
operate six aircraft for the 1997 Garuda Hadj.
In May 1996, World Airways entered into a new ACMI contract with Philippine
Airlines, thereby further expanding its presence in the Pacific Rim. World
Airways presently operates four MD-11 passenger aircraft for Philippine Airlines
under an agreement, with high minimum monthly utilization levels. World Airways,
however, has recently received a written communication from Philippine Airlines
in which the airline contends that its leases for all four aircraft expire on
November 15, 1997. World Airways believes that this position is contrary to the
understanding of the parties that each of the MD-11s are to be leased by
Philippine Airlines for a period of 18 months from delivery of each aircraft.
The parties are currently discussing the length of the lease term for these
aircraft. World Airways can provide no assurances, however, that Philippine
Airlines will agree to lease any of the four MD-11 passenger aircraft beyond
November 15, 1997, or that World Airways will be able to secure other business
at as favorable price and utilization levels.
Also, subsequent to year-end, at Philippine Airlines' request, World
Airways agreed to a payment plan with respect to Philippine Airlines' wet lease
obligations for several months beginning in March 1997. Although Philippine
Airlines is current on this payment plan to date, if Philippine Airlines
defaults on this payment plan, or fails to meet its monthly aircraft lease
obligations, this development, if not offset by other business, would have a
material adverse effect on the cash flows, financial condition and results of
operation of World Airways.
World Airways has provided service to Look Charters under an annual
contract since 1992. In 1996, 1995 and 1994, World Airways performed operations
for a summer charter program transporting passengers between Paris, France and
various locations in the United States and Mexico.
Although World Airways' customers bear the financial risk of filling the
World Airways' aircraft with passengers or cargo, World Airways can be affected
adversely if its customers are unable to operate its aircraft profitably, or if
one or more of World Airways' customers experience a material adverse change in
their market demand, financial condition or results of operations. Under these
circumstances, World Airways can be adversely affected by receiving delayed or
partial payments or by receiving customer demands for rate and utilization
reductions, flight cancellations, and/or early termination of their agreements.
World Airways derives a significant percentage of its revenues and block
hours from its operations in the Pacific Rim region. While World Airways
believes the Pacific Rim region is a growth market for air transportation, any
economic decline or any military or political disturbance in this area may
interfere with World Airways' ability to provide service in this area and could
have a material adverse effect on the financial condition or results of
operations of World Airways.
All export contracts are denominated in U.S. dollars as are substantially
all of the related expenses. The classification between domestic and export
revenues is based on entity definitions prescribed in the economic regulations
of the Department of Transportation. Information concerning World Airways'
export revenues from continuing operations is presented in the following table
(in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
Operating Revenues:
<S> <C> <C> <C>
Domestic $ 91,516 $ 59,278 $ 63,156
Export - Malaysia 105,410 100,934 32,773
- Philippines 46,516 -- --
- Indonesia 39,849 26,263 32,356
- France 3,749 6,897 22,217
- Other 22,547 49,014 30,213
------- ------- -------
Total $ 309,587 $ 242,386 $ 180,715
======= ======= =======
</TABLE>
19. RELATED PARTY TRANSACTIONS
Effective November 10, 1988, T. Coleman Andrews, III employment agreement
to serve as Chief Executive Officer and President of WorldCorp, which was
originally entered into in August 1986, was extended an additional five years to
August 1, 1994. In connection with the employment agreement, Mr. Andrews had
also entered into a
71
<PAGE>
Supplemental Incentive Agreement ("the Incentive Agreement") with WorldCorp that
provided for a bonus in the amount of $1.3 million plus interest earned at 8.91%
to be paid to Mr. Andrews on August 1, 1994, provided he was still an employee
of WorldCorp at that time. In connection with this employment arrangement, the
Company loaned Mr. Andrews $1.3 million on January 10, 1989. Mr. Andrews
executed and delivered to the Company a full recourse promissory note dated
January 10, 1989. The principal amount of the note was due and payable on
December 31, 1994 and interest accrued quarterly and was payable at maturity at
a fixed rate of 8.91% per annum. Effective December 1993, the Company and Mr.
Andrews terminated the Incentive Agreement and entered into a new agreement. In
connection with the new agreement, the Company paid Mr. Andrews in December 1993
(approximately seven months early) $0.2 million due him under the Incentive
Agreement. The new agreement delays payment to Mr. Andrews of the balance due
under the Incentive Agreement and provides that the Company will make four
annual installment payments of $0.4 million beginning January 2, 1995, plus
interest earned at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. The first
three payments were made as scheduled in 1995, 1996 and 1997. At the same time,
Mr. Andrews agreed to cancel his previous promissory note dated January 10, 1989
and issue a full recourse promissory note dated December 29, 1993. The principal
amount of $1.8 million is payable in annual installments of varying amounts
beginning January 1, 1994 and payable every February 1 thereafter until 1998.
Interest is payable at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. Mr.
Andrews has reduced the principal balance of his obligation to the Company by
$1.1 million through March 15, 1997. On August 19, 1994, the Company and Mr.
Andrews extended Mr. Andrews' employment agreement to serve as Chief Executive
Officer and President of WorldCorp through December 31, 1997. The Incentive
Agreement amounts are included in accrued wages in the accompanying consolidated
balance sheets. As of December 31, 1996 and 1995, $0.4 million and $0.5 million,
respectively, of the promissory note are included in prepaid expenses and other
current assets and $0.5 million and $0.9 million, respectively, are included in
other assets and deferred charges in the accompanying consolidated balance
sheets.
As of December 31, 1996, WorldCorp owns approximately 28.9% of the
outstanding common stock of InteliData (see Note 5). The Chairman of the Board
of Directors of WorldCorp is also one of the founders of US Order, and is
currently the Chairman of the Board of InteliData.
Effective December 31, 1996, MHS owns approximately 17.6% and 29.1% of the
outstanding common stock of World Airways and Malaysian Airlines, respectively.
Malaysian Airlines is World Airways' largest commercial customer (see Notes 6
and 18).
Bain & Company, Inc. provided consulting services of approximately $0.2
million and $0.4 million to the Company during 1995 and 1994, respectively. A
principle of Bain & Company is also a member of the Board of Directors of
WorldCorp.
W. Jerrold Scoutt, Jr., a member of the Board of Directors of WorldCorp
until May 1994, is a member of the law firm of Zuckert, Scoutt & Rasenberger,
Washington, D.C. Zuckert, Scoutt & Rasenberger rendered legal services to the
Company during 1996, 1995, and 1994.
20. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
The Company and World Airways (the "World Defendants") are defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation (the "Committee") in August 1992, captioned Washington
Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the
"Boster Litigation"). The complaint asserts that the World Defendants received
preferential transfers or fraudulent conveyances from Washington Bancorporation
when the World Defendants received payment at maturity on May 4, 1990 of
Washington Bancorporation commercial paper purchased on May 3, 1990. The
Committee seeks recovery of approximately $4.8 million from World Airways and
approximately $2.0 million from WorldCorp. Under a settlement agreement which
remains subject to certain contingencies, the plaintiff has agreed to dismiss
with prejudice the Boster Litigation against all defendants, including the World
Defendants, with each party to bear its own costs. In that event, the World
Defendants would not have any further liability in the Boster Litigation. On
January 28, 1997, the U.S. District Court conditionally dismissed the Boster
Litigation subject to reinstatement if the settlement is not finalized by May
15, 1997. In any event, the Company believes it has substantial defenses to this
action, although no assurance can be given of the eventual outcome of this
litigation. Depending upon the timing of the
72
<PAGE>
resolution of this claim, if the Committee was successful in recovering the full
amount claimed, the resolution could have a material adverse effect on the
financial condition or results of operations of the Company.
World Airways' flight attendants are represented by the Teamsters under a
collective bargaining agreement that became amendable in 1992. The parties
exchanged their opening contract proposals in 1992. In June 1996, World Airways
signed a new four year labor agreement with the Teamsters which provides for
retroactive pay increases for the flight attendants and work rule flexibility
and lengthened duty time rules for World Airways. The agreement was ratified by
the flight attendants in August 1996. World Airways' flight attendants
challenged the use of foreign flight attendant crews on World Airways' flights
for Malaysian Airlines and Garuda Indonesia which has historically been World
Airways' operating procedure. World Airways is contractually obligated to permit
its Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter recently denied the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that World Airways' contract with its flight attendants requires World
Airways to first actively seek profitable business opportunities that require
using World Airways' flight attendants, before World Airways may accept wet
lease business opportunities that use the flight attendants of World Airways'
customers. World Airways can provide no assurances as to how the imposition of
this requirement will affect World Airways' financial condition and results of
operations.
World Airways has periodically received correspondence from the FAA with
respect to minor noncompliance matters. Most recently, as the FAA has increased
its scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of
$810,000 in connection with certain minor security violations by ground handling
crews contracted by World Airways for services at foreign airport locations. In
each of these instances, World Airways was in compliance with international
regulations, but not the more stringent U.S. requirements. World Airways has
taken steps to comply with the U.S. requirements and believes that any fines
ultimately imposed by the FAA will not have a material adverse effect on the
financial condition or results of operations of World Airways. World Airways has
accrued a liability for its estimate of the ultimate fine that will be assessed,
which is less than the amount of the preliminary assessment, in the accompanying
balance sheet at December 31, 1996.
In connection with the discontinuance of World Airways's scheduled service
operations, World Airways is subject to claims by various third parties and may
be subject to further claims in the future. One claim has been filed in
connection with World Airways's discontinuance of scheduled service to South
Africa, seeking approximately $37.8 million in compensatory and punitive
damages. World Airways believes it has substantial defenses to this action,
although no assurance can be given of the eventual outcome of this litigation.
Depending upon the timing of the resolution of this claim, if the plaintiff were
successful in recovering the full amount claimed with respect to this claim, the
resolution could have a material adverse effect on the financial condition or
results of operations of World Airways.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
CONTINGENT RENTAL PAYMENTS
In July 1993, World Airways returned certain DC10-30 aircraft to the lessor
(see Note 13). As a result of this early lease termination, World Airways is
responsible, until 2004 for one aircraft and 2005 for the second aircraft, for
one-third of any deficit in rent incurred in future leases of the aircraft, up
to $100,000 monthly per plane, with an overall combined cap of $1,850,000. World
Airways has recorded $984,000 for rent shortfalls through December 1996. The
estimated shortfall liabilities relating to these aircraft are accrued in the
accompanying balance sheets at December 31, 1996 and 1995. World Airways'
remaining contingent liability related to this matter approximates $866,000.
COMMITMENTS TO PURCHASE SPARE ENGINES
World Airways has a commitment to purchase a spare engine for which World
Airways expects to take delivery in 1997 (See Note 13).
73
<PAGE>
LETTERS OF CREDIT
At December 31, 1996 and 1995, restricted cash and short-term investments
include customer deposits held in escrow and cash pledged as collateral for
various letters of credit facilities issued by a bank on World Airways' behalf
totaling $1.0 million, with expiration dates principally occurring in 1997.
MD-11 ENGINE MAINTENANCE AGREEMENT
Engine maintenance accounts for most of World Airways's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. World Airways outsources major airframe maintenance and power
plant work to several suppliers. World Airways has a 10-year contract expiring
in August 2003 with United Technologies Corporation's Pratt & Whitney Group for
all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft.
Under this contract, the manufacturer agreed to provide such maintenance
services at a cost not to exceed specified rates per hour during the term of the
contract. World Airways's maintenance costs associated with the MD-11 aircraft
and PW 4462 engines have been significantly reduced due in part to manufacturer
guarantees and warranties which began to expire in 1995 and which will fully
expire by 1998. In addition, the specified rates per hour are subject to annual
escalation, increasing substantially in April 1998. Accordingly, while World
Airways believes the terms of this agreement have resulted in lower engine
maintenance costs than it otherwise would incur, engine maintenance costs will
increase substantially during the last five years of the agreement. World
Airways will begin to accrue these increased expenses in 1997. Therefore, World
Airways expects that maintenance expenses will continue to increase during the
remainder of the term of the contract as World Airways's aircraft fleet ages.
74
<PAGE>
21. UNAUDITED QUARTERLY RESULTS
The results of the Company's quarterly operations (unaudited) for 1996 and
1995 are as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total Year
---------- ---------- ---------- ---------- ----------
1996
<S> <C> <C> <C> <C> <C>
Operating revenues $ 66,691 $ 87,056 $ 76,461 $ 83,464 $ 313,672
Operating income (loss) (6,673) 11,449 (5,738) 3,699 (1) 2,737
Earnings (loss) from
continuing operations (6,592) 4,379 (4,147) 13,797 (2) 7,437
Discontinued operations (less
applicable tax benefit) (2,481) (16,897) 107 80 (19,191)
Net earnings (loss) $ (9,073) $ (12,518) $ (4,040) $ 13,877 $ (11,754)
Primary earnings (loss) per
common equivalent share:
Continuing operations $ (0.41) $ 0.25 $ (0.24) $ 0.89 $ 0.45
Discontinued operations (0.15) (0.98) 0.01 0.01 (1.15)
------ ------ ------ ------ ------
Net earnings (loss) $ (0.56) $ (0.73) $ (0.23) $ 0.90 $ (0.70)
====== ====== ====== ====== ======
Fully diluted earnings (loss) per
common equivalent share:
Continuing operations $ * $ 0.24 $ * $ 0.70 $ *
Discontinued operations * * * 0.01 *
------ ------ ------ ------ -----
Net earnings (loss) $ * $ * $ * $ 0.71 $ *
====== ====== ====== ====== =====
1995
Operating revenues $ 41,282 $ 76,725 $ 70,602 $ 57,963 $ 246,572
Operating income (loss) (5,532) 9,940 2,989 (1,104) 6,293
Earnings (loss) from
continuing operations (8,338) 55,680 (3) 93 16,723 (4) 64,158
Discontinued operations (less
applicable tax benefit) (116) (931) (912) (1,991) (3,950)
Net earnings (loss) $ (8,454) $ 54,749 $ (819) $ 14,732 $ 60,208
Primary earnings (loss) per
common equivalent share:
Continuing operations $ (0.54) $ 3.27 $ 0.01 $ 0.97 $ 3.75
Discontinued operations (0.02) (0.05) (0.06) (0.12) (0.23)
------ ------ ------ ------ ------
Net earnings (loss) $ (0.56) $ 3.22 $ (0.05) $ 0.85 $ 3.52
====== ====== ====== ====== ======
Fully diluted earnings (loss) per
common equivalent share:
Continuing operations $ * $ 2.48 $ * $ 0.77 $ 2.99
Discontinued operations * (0.04) * (0.08) (0.17)
------ ------ ------ ------ ------
Net earnings $ * $ 2.44 $ * $ 0.69 $ 2.82
====== ====== ====== ====== ======
</TABLE>
75
<PAGE>
* Fully diluted earnings are anti-dilutive.
(1) - Includes the reversal of maintenance costs, which had been accrued
throughout 1996, of $1.5 million relating to the termination of two
DC10-30 aircraft in December 1996 (see Notes 6 and 13).
(2) - Includes a net gain of $37.1 million on issuances (purchases) of
equity by subsidiaries (see Notes 4 and 5).
(3) - Includes the $46.6 million gain realized on US Order's offering in
June 1995 (see Note 5).
(4) Includes the following:
- Includes a gain of approximately $0.8 million on a settlement relating
to the return of two DC10-30 aircraft in 1993 (see Note 13).
- Includes the $16.0 million gain realized on World Airways' offering in
October 1995 (see Note 4).
76
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
WORLDCORP, INC.:
We have audited the accompanying consolidated balance sheets of WorldCorp,
Inc. and subsidiaries (WorldCorp) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in common stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1996. In connection with our audits of the consolidated financial
statements, we also have audited the related financial statement schedules as
listed in Item 14(a)(2) herein. These consolidated financial statements and
financial statement schedules are the responsibility of WorldCorp's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits. We did not
audit the consolidated financial statements of InteliData Technologies
Corporation and subsidiaries ("InteliData"), a 28.9% investee company, as of and
for the year ended December 31, 1996. WorldCorp's investment in InteliData was
$37.4 million, and its equity in the loss of InteliData was $31.8 million for
the year ended December 31, 1996. The consolidated financial statements of
InteliData were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for InteliData,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of WorldCorp, Inc. and subsidiaries as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
WASHINGTON, D.C.
FEBRUARY 14, 1997
77
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Directors
The Company incorporates herein by reference the information concerning
directors contained in its Notice of Annual Stockholder's Meeting and Proxy
Statement to be filed within 120 days after the end of the Company's fiscal year
(the "1997 Proxy Statement").
Executive Officers
The following table sets forth the names and ages of all executive officers
of the Company and all positions and offices within the Company presently held
by such executive officers:
<TABLE>
<CAPTION>
Name Age Position Held
-------- -------------
<S> <C> <C>
T. Coleman Andrews, III 42 Chief Executive Officer and President (WorldCorp,
World Airways (Acting)), and Principal Accounting
Officer, WorldCorp
William F. Gorog 71 Chief Executive Officer, InteliData, and
Chairman of the Board, WorldCorp
Andrew M. Paalborg 41 Vice President and General Counsel
</TABLE>
T. Coleman Andrews, III was elected Chief Executive Officer, President and
a Director of the Company in June 1987. He has served as Chairman of the Board
of World Airways since 1986. On March 14, 1997, World Airways announced that
Charles W. Pollard departed as President and Chief Executive Officer. Pursuant
to World Airways' bylaws, Mr. Andrews will act as President and Chief Executive
Officer on an interim basis pending the hiring of a new CEO. In 1986, Mr.
Andrews was recruited by the Board to lead a strategic turnaround and financial
restructuring of World Airways, which in the previous seven years had lost $201
million. Since that time, the team led by Mr. Andrews has generated profitable
results in seven of the ten years and has rebuilt World Airways successfully
around its current strategy. He has served as a Director of InteliData
Technologies Corporation (and its predecessor, US Order, Inc.) since 1990. From
1978 through 1986, he was affiliated with Bain & Company, Inc., an international
strategy consulting firm. At Bain, he was elected partner in 1982, and was a
founding general partner in 1984 of The Bain Capital Fund, a private venture
capital partnership. Prior to his experience with Bain, Mr. Andrews served in
several appointed positions in the White House for the Ford Administration.
Mr. William F. Gorog has served as Chief Executive Officer of InteliData
(and its predecessor, US Order) since May 1, 1990. He was elected a director of
WorldCorp in April 1989 and was elected Chairman of the WorldCorp Board of
Directors in May 1993. From October 1987 until founding US Order in May 1990, he
served as Chairman of the Board of Arbor International, an investment management
firm. From 1982, he served as President and Chief Executive Officer of Magazine
Publishers of America, a trade 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 White House Council on International Economic Policy. Prior to
that time, he founded and served as Chief Executive Officer of Data Corporation,
which developed the LEXIS and NEXIS information systems for legal and media
research and which was subsequently sold to the Mead Corporation.
78
<PAGE>
Mr. Andrew M. Paalborg joined World Airways as General Counsel in October
1989 and was elected Vice President and General Counsel of WorldCorp in May
1992. From 1984 to 1989 Mr. Paalborg practiced law with Hogan & Hartson, McLean,
Virginia. From 1982 to 1984 he was an associate with Morgan, Lewis & Bockius,
New York, New York. Mr. Paalborg received his law degree cum laude from
Georgetown University in 1982 and is a member of the New York, Virginia and
District of Columbia Bars.
Beneficial Ownership Reporting
The Company incorporates herein by reference the information required by
Item 405 of Regulation S-K contained in its 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1997 Proxy
Statement.
79
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements of WorldCorp, Inc. and
subsidiaries are filed herewith:
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Operations, Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Common Stockholders'
Deficit, Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial Statement Schedules
Schedule
Number
------
I. Condensed Financial Information of Registrant
II. Valuation and Qualifying Accounts
NOTE: All other schedules are omitted because the requisite
information is either presented in the financial
statements or notes thereto or is not present in amounts
sufficient to require submission of the schedules.
STATUS OF PRIOR DOCUMENTS
WorldCorp's Annual Report on Form 10-K for the year ended December 31,
1996, at the time of filing with the Securities and Exchange Commission, shall
modify and supersede all prior documents filed pursuant to Sections 13, 14, and
15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales
of any securities after the date of such filing pursuant to any Registration
Statement or Prospectus filed pursuant to the Securities Act of 1933, as
amended, which incorporates by reference such Annual Report on Form 10-K.
(3) Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<S> <C> <C>
3.1 Certificate of Incorporation of WorldCorp, Inc. dated March 16, 1987. Incorporated
[Filed as Exhibit 3.1 to WorldCorp, Inc.'s Registration Statement on by reference
Form S-4 (Commission File No. 33012735) filed on March 19, 1987 and
incorporated herein by reference.]
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C>
3.2 Amended and Restated Bylaws of WorldCorp, Inc. dated November 13, Incorporated
1987. (Filed as Exhibit 3.1 to WorldCorp, Inc.'s Annual Report on by reference
Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference.)
4.6 First Supplemental Indenture dated as of February 22, 1994 between Incorporated
WorldCorp, Inc. and The First National Bank of Boston, as Trustee. by reference
(Filed as Exhibit 4.6 to WorldCorp, Inc's Form S-3 Registration Statement
(Commission file No. 33-60247) filed on June 15, 1995 and incorporated
herein by reference.)
4.8 Stock Option Agreement dated as of April 1, 1995 between WorldCorp, Incorporated
Inc. and Patrick F. Graham. (Filed as Exhibit 4.8 to WorldCorp Inc's by reference
Form S-3 Registration Statement (Commission file No. 33-60247)
filed on June 15, 1995 and incorporated herein by reference.)
10.4 Aircraft Lease Agreement dated as of March 30, 1987 between Incorporated
World Incorporated Airways, Inc. and The Connecticut National by reference
Bank, not in its individual by reference capacity, but solely
as Owner Trustee. (Filed as Exhibit 10.34 to World Airways,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1986 and incorporated herein by reference.)
10.5 Merger Agreement and Plan of Reorganization dated as of April 28, Incorporated
1987 by and among World Airways, Inc., World Merger Corporation by reference
and WorldCorp, Inc. [Filed as Exhibit 10.50 to WorldCorp, Inc.'s
Form S-2 Registration Statement (Commission File No. 33-1358276)
filed on July 31, 1987 and incorporated herein by reference.]
10.9 Form of Assumption Agreement dated as of June 23, 1987 among Incorporated
WorldCorp, Inc., World Airways, Inc. and each Indemnified Party. by reference
[Filed as Exhibit 10.60 to WorldCorp, Inc.'s Form S-2 Registration
Statement (Commission File No. 33-1358276) filed on July 31, 1987
and incorporated herein by reference.]
10.11 Agreement between World Airways, Inc. and Flight Attendants Incorporated
represented by International Brotherhood of Teamsters. [Filed by reference
reference as Exhibit 10.67 to WorldCorp, Inc.'s Form S-3 Registration
Statement (Commission File No. 2-91998) filed on December 10, 1987
and incorporated herein by reference.]
10.12 Agreement between World Airways, Inc. and Mechanics represented by Incorporated
the International Brotherhood of Teamsters. (Filed as Exhibit 10.41 by reference
to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 and incorporated herein by reference.)
10.13 Agreement between World Airways, Inc. and Stock Clerks and Store Incorporated
Room Employees represented by the International Brotherhood of by reference
by reference Teamsters. (Filed as Exhibit 10.42 to WorldCorp,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 and incorporated herein by reference.)
10.14 Office Lease - The Hallmark Building dated as of May 16, 1987 Incorporated
Incorporated between WorldCorp, Inc. and GT Renaissance Centre by reference
Limited by reference Partnership. (Filed as Exhibit 10.36 to
WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1989 and incorporated herein by
reference.)
</TABLE>
81
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Lease Amendment dated as of June 27, 1989 between WorldCorp, Inc. Incorporated
and GT Renaissance Centre Limited Partnership. (Filed as Exhibit by reference
10.37 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1989 and incorporated herein by reference.)
10.16 Office Lease - The Hallmark Building dated as of September 20, 1989 Incorporated
between World Airways, Inc. and GT Renaissance Centre Limited by reference
Partnership. (Filed as Exhibit 10.38 to WorldCorp, Inc's Annual
Report on form 10-K for the fiscal year ended December 31, 1989
and incorporated herein by reference.)
10.17 Warrant Agreement dated as of July 22, 1989 between WorldCorp, Incorporated
Inc. and Charles W. Pollard. (Filed as Exhibit 10.45 to WorldCorp, by reference
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 and incorporated herein by reference.)
10.20 WorldCorp, Inc. Employee Savings and Stock Ownership Plan. (Filed Incorporated
as Exhibit 10.49 to WorldCorp, Inc.'s Annual Report on Form 10-K by reference
for the fiscal year ended December 31, 1989 and incorporated
herein by reference.)
10.21 Amendment No. 1 to WorldCorp Inc. Employee Savings and Stock Incorporated
Ownership Plan. (Filed as Exhibit 10.50 to WorldCorp, Inc.'s by reference
Annual Report on Form 10-K for the fiscal year ended December 31,
1989 and incorporated herein by reference.)
10.27 Aircraft Warranty Bill of Sale dated as of January 15, 1991 between Incorporated
World Airways, Inc. and First Security Bank of Utah, N.A., not in its by reference
individual capacity, but solely as Owner Trustee. (Filed as Exhibit
10.46 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 and incorporated herein by reference.)
10.28 Aircraft Lease Agreement dated as of January 15, 1991 between World Incorporated
Airways, Inc. and First Security Bank of Utah, N.A., not in its by reference
individual capacity, but solely as Owner Trustee. (Filed as Exhibit
10.47 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 and incorporated herein by reference.)
10.30 Aircraft Lease Agreement I dated as of February 12, 1992 between Incorporated
McDonnell Douglas Finance Corporation and World Airways, Inc. by reference
(Filed as Exhibit 10.39 to WorldCorp, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1991 and incorporated
herein by reference.)
10.31 Aircraft Lease Agreement II dated as of February 12, 1992 between Incorporated
McDonnell Douglas Finance Corporation and World Airways, Inc. by reference
(Filed as Exhibit 10.40 to WorldCorp, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1991 and incorporated
herein by reference.)
10.32 Aircraft Engine Purchase Agreement dated as of April 26, 1991 between Incorporated
Terandon Leasing Corporation and World Airways, Inc. (Filed as by reference
Exhibit 10.41 to WorldCorp, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 and incorporated herein by
reference.)
</TABLE>
82
<PAGE>
<TABLE>
<S> <C> <C>
10.33 Aircraft Engine Lease Agreement dated as of April 26, 1991 between Incorporated
Terandon Leasing Corporation and World Airways, Inc. (Filed as by reference
Exhibit 10.42 to WorldCorp, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 and incorporated herein by
reference.)
10.34 Guaranty Agreement I dated as of February 12, 1992 between Incorporated
McDonnell Incorporated Douglas Finance Corporation and World by reference
Airways, Inc. (Filed as Exhibit by reference 10.43 to
WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 and incorporated herein by
reference.)
10.35 Guaranty Agreement II dated as of February 12, 1992 between Incorporated
McDonnell Incorporated Douglas Finance Corporation and World by reference
Airways, Inc. (Filed as Exhibit by reference 10.44 to
WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 and incorporated herein by
reference.)
10.38 Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.39 Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.40 Aircraft Lease Agreement for Aircraft Serial Number 48520 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.41 Aircraft Lease Agreement for Aircraft Serial Number 48633 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.42 Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.43 Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as Incorporated
of September 30, 1992 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.46 Accounts Receivable Management and Security Agreement dated as Incorporated
of December 7, 1993 between World Airways, Inc. and BNY by reference
Financial Corporation.
10.47 Aircraft Parts Security Agreement dated as of December 7, 1993 Incorporated
between World Airways, Inc. and BNY Financial Corporation. by reference
10.48 Warrant Certificate dated as of December 7, 1993 between WorldCorp, Incorporated
Inc. and BNY Financial Corporation. by reference
10.62 Consignment Agreement dated as of September 30, 1993 between World Incorporated
Airways Inc. and The Memphis Group. by reference
10.63 Assignment and Assumption and Consent and Release for Aircraft Incorporated
Serial Number 47818 dated as of July 20, 1993 among World by reference
Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and
</TABLE>
83
<PAGE>
<TABLE>
<S> <C> <C>
McDonnell Douglas Finance Corporation.
10.64 Assignment and Assumption and Consent and Release for Aircraft Incorporated
Serial Number 46999 dated as of July 9, 1993 among World by reference
Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and
McDonnell Douglas Finance Corporation.
10.65 Aircraft Lease Agreement for Aircraft Serial Number 48458 dated as Incorporated
of January 15, 1993 between World Airways, Inc. and Wilmington by reference
Trust Company/GATX Capital Corporation.
10.66 Aircraft Lease Supplement for Aircraft Serial Number 48458 dated as Incorporated
of April 23, 1993 between World Airways, Inc. and Wilmington Trust by reference
Company/GATX Capital Corporation.
10.67 Aircraft Spare Parts Lease Agreement dated as of April 15, 1993 Incorporated
between World Airways, Inc. and GATX Capital Corporation. by reference
10.68 Amendment No. 1 To Aircraft Lease Agreement for Aircraft Serial Incorporated
Number 48518 dated as of November 1993 between World Airways, by reference
Inc. and International Lease Finance Corporation.
10.69 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Number 48518 dated as of March 8, 1993 between World Airways, by reference
Inc. and International Lease Finance Corporation.
10.70 Assignment of Rights for Aircraft Serial Number 48518 dated as of Incorporated
March 8, 1993 between World Airways, Inc. and International Lease by reference
Finance Corporation.
10.71 Assignment of Rights for Aircraft Engines Serial Numbers P723942, Incorporated
P723945, and P723943 dated as of March 1, 1993 between World by reference
Airways, Inc. and International Lease Finance Corporation.
10.72 Agency Agreement for Aircraft Serial Number 48518 dated as of Incorporated
January 15, 1993 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.73 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Number 48437 dated as of March 31, 1993 between World Airways, by reference
Inc. and International Lease Finance Corporation.
10.74 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Number 48437 dated as of April 15, 1993 between World Airways, by reference
Inc. and International Lease Finance Corporation.
10.75 Agency Agreement for Aircraft Serial Number 48437 dated as of Incorporated
January 15, 1993 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.76 Assignment of Rights for Aircraft Serial Number 48437 dated as of Incorporated
April 15, 1993 between World Airways, Inc. and International Lease by reference
Finance Corporation.
10.77 Assignment of Rights for Aircraft Engines Serial Numbers P723913, Incorporated
</TABLE>
84
<PAGE>
<TABLE>
<S> <C> <C>
P723912, and P723914 dated as of April 15, 1993 between World by reference
Airways, Inc. and International Lease Finance Corporation.
10.78 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Number 48520 dated as of April 22, 1993 between World Airways, by reference
Inc. and International Lease Finance Corporation.
10.79 Agency Agreement for Aircraft Serial Number 48520 dated as of Incorporated
January 15, 1993 between World Airways, Inc. and International by reference
Lease Finance Corporation.
10.80 Assignment of Rights for Aircraft Serial Number 48520 dated as of Incorporated
April 22, 1993 between World Airways, Inc. and International Lease by reference
Finance Corporation.
10.81 Assignment of Rights for Aircraft Engines Serial Numbers P723957, Incorporated
P723958, and P723956 dated as of March 1, 1993 between World by reference
Airways, Inc. and International Lease Finance Corporation.
10.82 Aircraft Charter Agreement dated as of July 24, 1993 between World Incorporated
Airways, Inc. and Malaysian Airline System Berhad. by reference
10.83 Amendment No. 1 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Numbers 46835, 46837, and 46820 dated as of May 14, 1993 between by reference
World Airways, Inc. and The Connecticut National Bank (assigned to
Federal Express Corporation).
10.84 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated
Numbers 46835, 46837, and 47820 dated as of May 14, 1993 between by reference
World Airways, Inc. and The Connecticut National Bank (assigned to
Federal Express Corporation).
10.85 Return Agreement for Aircraft Serial Numbers 47818 and 46999 dated Incorporated
as of July 9, 1993 among World Airways, Inc., WorldCorp, Inc., by reference
International Lease Finance Corporation, McDonnell Douglas
Corporation, and McDonnell Douglas Finance Corporation.
10.861 Acquisition Agreement Among VISA International Service Association, Incorporated
US Order, Inc, and WorldCorp, Inc, dated as of July 15, 1994. by reference
10.87 Stock Purchase Agreement by and among World Airways, Inc., Incorporated
WorldCorp, Inc., and Malaysian Helicopter Services Berhad dated as by reference
of October 30, 1993.
10.88 Stock Registration Rights Agreement between World Airways, Inc. Incorporated
and Malaysian Helicopter Services Berhad dated as of October 30, by reference
1993.
10.89 Shareholders Agreement between Malaysian Helicopter Services Incorporated
Berhad and WorldCorp, Inc., and World Airways, Inc. dated as of by reference
February 3, 1994.
10.90 Amendment No. 1 to Shareholders Agreement dated as of February 28, Incorporated
1994, among WorldCorp, World Airways, and MHS. by reference
</TABLE>
85
<PAGE>
<TABLE>
<S> <C> <C>
10.94 Stock Option Agreement dated as of August 1, 1994 ("Grant Date") Incorporated
between WorldCorp, Inc. and William F. Gorog. by reference
10.95 Employment Agreement dated as of August 1, 1994 between US Incorporated
Order, Inc. and John C. Backus, Jr. by reference
10.96 Employment Agreement dated as of August 19, 1994 between Incorporated
WorldCorp, Inc. and T. Coleman Andrews, III. by reference
10.97 Stock Option Agreement dated as of August 19, 1994 ("Grant Date") Incorporated
by and between WorldCorp, Inc. and T. Coleman Andrews, III. by reference
10.98 Agreement between World Airways, Inc. and the International Incorporated
Brotherhood of Teamsters representing the Cockpit Crewmembers by reference
employed by World Airways, Inc. dated August 15, 1994-June 30, 1998.
10.101 Aircraft Services Agreement dated September 26, 1994 by and between Incorporated
World Airways, Inc. ("World") and Malaysian Airlines. by reference
10.102 Freighter Services Agreement dated October 1, 1994 by and between Incorporated
World Airways, Inc. and Malaysian Airline System Berhad. by reference
10.103 World Airways, Inc. 1995 AMC Contract F11626-94-D0027 dated Incorporated
October 1, 1994 between World Airways, Inc. and Air Mobility Command. by reference
10.105 Stock Purchase Agreement (the "Agreement") dated as of December Incorporated
31, 1994 by and between MHS Berhad, a Malaysian corporation (the by reference
"Shareholder") and WorldCorp, Inc., a Delaware corporation (the
"Purchaser").
10.107 Amendment No. 1 to Passenger Aircraft Services and Freighter Incorporated
Services Agreement dated December 31, 1994 by and between World by reference
Airways, Inc. and Malaysian Airline System Berhad.
10.109 Customer Agreement between WorldCorp ESSOP and Scott & Incorporated
Stringfellow, Inc. dated January 11, 1995 for a margin loan. by reference
10.110 Side Letter dated January 11, 1995 from Scott & Stringfellow, Inc. to Incorporated
William F. Gorog, Trustee of WorldCorp Employee Savings and Stock by reference
Ownership Plan for a margin loan to the WorldCorp ESSOP.
10.111 Guarantee Agreement dated January 11, 1995 by WorldCorp, Inc. Incorporated
("Guarantor") for the benefit of Scott & Stringfellow, Inc. (the by reference
"Lender").
10.112 Registration Rights Agreement dated as of January 11, 1995 by and Incorporated
between WorldCorp, Inc. and Scott & Stringfellow, Inc. by reference
10.113 Side Letter dated January 11, 1995 from WorldCorp, Inc. to Scott & Incorporated
Stringfellow, Inc. regarding commitment to make contributions to the by reference
WorldCorp Employee Savings and Stock Ownership Plan (the "ESSOP"),
for the duration of the Scott & Stringfellow loan to the ESSOP.
10.115 Amendment No. 2 to Passenger Aircraft Services and Freighter Incorporated
Aircraft Service Agreement dated February 9, 1995 by and between by reference
World Airways, Inc. and Malaysian Airline System Berhad.
</TABLE>
86
<PAGE>
<TABLE>
<S> <C> <C>
10.116 Form 10-K for the fiscal year ended December 31, 1996 for
InteliData Technologies Corporation, Inc. Filed Herewith
11 Statement on Calculation of Earnings (Loss) Per Common Share. Filed Herewith
21 Subsidiaries of the Registrant WorldCorp, Inc. Filed Herewith
23.1 Consent of KPMG Peat Marwick LLP. Filed Herewith
23.2 Consent of Deloitte & Touche LLP. Filed Herewith
27 Financial Data Schedule for the year ended December 31, 1996. Filed Herewith
</TABLE>
1 Confidential treatment of portions of the Agreement has been granted
by the Commission. The copy filed as an exhibit omits the
information subject to confidentiality request. Confidential
portions so omitted have been filed separately with the Commission.
(b) Reports on Form 8-K
Form 8-K dated November 22, 1996 was filed with the Securities and
Exchange Commission on November 22, 1996.
Form 8-K/A dated November 22, 1996, was filed with the Securities and
Exchange Commission on December 17, 1996
* * * * * * * * * * *
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WORLDCORP, INC.
By /s/ T. Coleman Andrews, III
--------------------------
T. Coleman Andrews, III
Chief Executive Officer, President,
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ T. Coleman Andrews, III Chief Executive Officer, March 31, 1997
- -------------------------- President, and Principal
(T. Coleman Andrews, III) Accounting Officer
/s/ William F. Gorog Director and March 31, 1997
- -------------------- Chairman of the Board
(William F. Gorog)
/s/ Gideon Argov Director
- -------------------- March 31, 1997
(Gideon Argov)
/s/ John C. Backus, Jr. Director March 31, 1997
- -----------------------
(John C. Backus, Jr.)
/s/ James E. Colburn Director March 31, 1997
- --------------------
(James E. Colburn)
/s/ Patrick F. Graham Director March 31, 1997
- ---------------------
(Patrick F. Graham)
/s/ Geoffrey S. Rehnert Director March 31, 1997
- -----------------------
(Geoffrey S. Rehnert)
</TABLE>
<PAGE>
SCHEDULE I
WORLDCORP, INC.
CONDENSED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents, including restricted short-
term investments of $109 and $6 at December 31, 1996
and 1995, respectively $ 5,434 $ 24,050
Restricted cash 1,000 --
Other receivables 284 552
Prepaid expenses and other current assets 536 715
------- -------
Total current assets 7,254 25,317
------- ------
EQUIPMENT AND PROPERTY
Equipment 3,102 3,075
Equipment under capital leases 173 173
------- -------
3,275 3,248
Less accumulated depreciation and amortization 2,804 2,474
------- -------
Net equipment and property 471 774
-------- -------
INVESTMENT IN SUBSIDIARIES AND AFFILIATE 41,919 40,854
OTHER ASSETS AND DEFERRED CHARGES, NET 2,458 2,904
INTANGIBLE ASSETS, NET 1,072 2,591
------- ------
TOTAL ASSETS $ 53,174 $ 72,440
======= ======
</TABLE>
(Continued)
<PAGE>
SCHEDULE I
(Continued)
WORLDCORP, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---------- ----------
CURRENT LIABILITIES
<S> <C> <C>
Note payable $ 15,000 $ --
Current maturities of long-term obligations 944 1,410
Accounts payable 223 421
Accrued salaries and wages 993 1,349
Accrued interest 824 1,877
Accrued taxes 24 (250)
-------- ---------
Total current liabilities 18,008 4,807
-------- ---------
LONG-TERM OBLIGATIONS, NET
Senior Subordinated Notes, net 9,675 --
Subordinated convertible debt 65,000 65,000
Subordinated notes, net -- 24,961
Other long-term obligations 23 969
-------- ---------
Total long-term obligations, net 74,698 90,930
-------- --------
TOTAL LIABILITIES 92,706 95,737
-------- --------
COMMON STOCKHOLDERS' DEFICIT
Common stock, $1 par value, (60,000,000 shares authorized, 16,420,350
shares issued and 15,020,265 shares outstanding at December 31, 1996
and 16,416,134 shares issued and 16,353,549 shares outstanding at
December 31, 1995) 16,617 16,354
Additional paid-in capital 43,824 42,210
Deferred compensation (591) (553)
Accumulated deficit (91,366) (79,598)
ESOP guaranteed bank loan -- (1,370)
Treasury stock, at cost (1,576,766 and 62,585 shares in 1996 and 1995,
respectively) (8,016) (340)
-------- ---------
TOTAL COMMON STOCKHOLDERS' DEFICIT (39,532) (23,297)
-------- --------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND COMMON STOCKHOLDERS'
DEFICIT $ 53,174 $ 72,440
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
SCHEDULE I
(Continued)
WORLDCORP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
OPERATING EXPENSES:
<S> <C> <C> <C>
General and administrative $ 3,803 $ 4,334 $ 3,614
-------- -------- --------
OPERATING LOSS (3,803) (4,334) (3,614)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (8,150) (9,071) (8,354)
Interest income 1,072 1,263 900
Equity in earnings (loss) of subsidiaries and affiliate (39,964) 4,612 (7,152)
Gain (loss) on issuances (purchases) of equity
by subsidiaries, net 38,886 43,676 10,524
Gain on sales of subsidiaries' stock, net -- 23,717 16,398
Other, net 30 404 (279)
-------- -------- --------
Total other income (expense) (8,126) 64,601 12,037
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES (11,929) 60,267 8,423
INCOME TAX (EXPENSE) BENEFIT 175 (59) (115)
-------- -------- --------
NET EARNINGS (LOSS) $ (11,754) $ 60,208 $ 8,308
======== ======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
SCHEDULE I
(Continued)
WORLDCORP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR $ 24,050 $ 1,536 $ 2,388
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) (11,754) 60,208 8,308
Adjustments to reconcile net earnings (loss) to cash
used by operating activities:
Depreciation and amortization 1,378 1,368 457
Gain (loss) on issuances (purchases) of equity
by subsidiaries, net (38,886) (43,676) (10,524)
Gain on sales of subsidiaries' stock, net -- (23,717) (16,398)
Equity in (earnings) loss of subsidiaries 39,964 (4,612) 7,152
Deferred compensation expense 162 678 1,115
Other (354) (827) 52
Changes in certain assets and liabilities net of
effects of non-cash transactions:
Decrease in accounts receivable 610 419 852
Increase in restricted cash (1,000) -- --
(Increase) decrease in prepaid expenses
and other assets 181 1,862 (1,537)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (1,339) (1,521) (5,569)
-------- -------- ---------
Net cash provided (used) by operating activities (11,038) (9,818) (16,092)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property (29) (12) (199)
Proceeds from disposal of equipment and property 185 -- 609
Purchase of investments (1,126) (282) (400)
Proceeds from collection of note receivable from subsidiary -- 3,500 --
---------- -------- --------
Net cash provided (used) by investing activities (970) 3,206 10
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 35,000 -- 20
Repayment of debt (35,040) (9,648) (1,768)
Proceeds from stock transactions 1,499 3,064 1,428
Proceeds from sales of subsidiaries' stock -- 28,986 12,300
Proceeds from redemption of preferred stock in subsidiary -- 4,300 3,250
Repurchases of common stock (7,676) -- --
Discounts on debt issued (391) -- --
Dividends from subsidiary -- 2,424 --
--------- ---------- ---------
Net cash provided by financing activities (6,608) 29,126 15,230
-------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (18,616) 22,514 (852)
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 5,434 $ 24,050 $ 1,536
======== ======== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
SCHEDULE I
(Continued)
WORLDCORP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995
A. The condensed financial statements of WorldCorp, Inc. ("parent company")
should be read in conjunction with the consolidated financial statements
and accompanying notes thereto of WorldCorp, Inc, and subsidiaries as of
and for the year ended December 31, 1996.
B. The parent company's long-term obligations at December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Senior Subordinate Notes -- with interest at 10% payable semi-annually
beginning March 31, 1997 (net of unamortized discount of $0.3 million) 9,675 --
Convertible Subordinated Debentures due 2004 -- with interest at 7%
payable semi-annually beginning May 15, 1992. The Debentures are
convertible into WorldCorp common stock at $11.06 per share
subject to adjustment in certain events. 65,000 65,000
13 7/8% Subordinated Notes, retired in 1996 (net of
unamortized discount of $0.1 million in 1995). -- 24,961
Unsecured promissory note due 1997 -- with interest at 6% payable
quarterly beginning May 8, 1994. 900 900
Guaranteed bank loan due 1996 -- with interest at the call loan rate plus
1.5% (8.45% at December 31, 1995), collateralized by 286,681 shares of
WorldCorp common stock held by the WorldCorp Employee
Savings and Stock Ownership Plan. $ -- $ 1,370
Capitalized lease obligations 67 109
-------- -------
Total 75,642 92,340
Less: current maturities 944 1,410
-------- -------
Total long-term obligations, net 74,698 $ 90,930
======= =======
</TABLE>
See Note 13 of the Company's "Notes to Consolidated Financial Statements"
for further description of the above obligations.
The following table shows the aggregate amount of scheduled principal
maturities (in thousands) of debt and capitalized lease obligations
outstanding at December 31, 1996:
<TABLE>
<S> <C>
1997 $ 860
1998 1,933
1999 1,513
2000 6,336
2001 --
Thereafter 65,000
------
Total $75,642
======
</TABLE>
In addition, the parent company has a $15.0 million note payable
outstanding, which is due in September 1997. Also, in the first quarter of
1997, the parent company entered into a $1.0 million margin loan with Scott
& Stringfellow, Inc. whereby WorldCorp pledged approximately 400,000 shares
of InteliData common stock which WorldCorp owns as collateral for such
loan.
<PAGE>
SCHEDULE II
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance
beginning costs and charged to at end of
of period expenses reserves period
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
- -------------------------------
Year ended December 31, 1996 $ 322 $ 236 $ 145 $ 413
======== ======== ======= =======
Year ended December 31, 1995 $ 81 $ 414 $ 173 $ 322
======== ======== ======= =======
Year ended December 31, 1994 $ 311 $ 436 $ 666 $ 81
======== ======== ======= =======
Valuation Allowance for
Deferred Tax Assets
-------------------
Year ended December 31, 1996 $ 20,113 $ 3,164 $ -- $ 23,277
====== ====== ======== ======
Year ended December 31, 1995 $ 13,973 $ 6,140 $ -- $ 20,113
====== ======== ====== ======
Year ended December 31, 1994 $ 73,003 $ -- $ 59,030 $ 13,973
====== ======== ====== ======
</TABLE>
<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
______________
For the fiscal year ended: DECEMBER 31, 1996
Commission File Number 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of incorporation) (I.R.S. Employer Identification Number)
13100 Worldgate Drive, Suite 600, Herndon, VA 20170
(Address of Principal Executive Offices)
(703) 834-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------- ____________
State by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 1, 1997, was approximately $116,206,000. In determining
this figure, the Registrant has assumed that all of its directors and executive
officers are affiliates. Such assumptions should not be deemed to be conclusive
for any other purpose.
The number of shares of the registrant's Common Stock outstanding on March 1,
1997 was 31,816,693.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 1997
Annual Stockholder Meeting, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Report.
================================================================================
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
- ------
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 21
Item 3. Legal Proceedings................................................... 21
Item 4. Submission of Matters to a Vote of Stockholders..................... 21
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 22
Item 6. Selected Financial Data............................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ............................................... 24
Item 8. Financial Statements and Supplementary Data......................... 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................... 66
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant.................. 66
Item 11. Executive Compensation.............................................. 68
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 68
Item 13. Certain Relationships and Related Transactions...................... 69
PART IV
- --------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 70
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
InteliData Technologies Corporation ("InteliData" or the "Company"), was
incorporated on August 23, 1996 under the Delaware General Corporation Law in
order to effect the mergers ("Mergers") of US Order, Inc. ("US Order") and
Colonial Data Technologies Corp. ("Colonial Data"). The Mergers were announced
on August 5, 1996, when US Order and Colonial Data entered into an Agreement and
Plan of Merger ("Merger Agreement"). On November 7, 1996, the Mergers were
consummated with each share of outstanding US Order and Colonial Data common
stock being exchanged for one share of InteliData common stock. Accounting for
the Mergers was treated as a purchase of Colonial Data by US Order. Accordingly,
financial statements of the Company included herein reflect the results of US
Order through November 7, 1996 and the consolidated results of US Order and
Colonial Data thereafter.
Effective September 30, 1996, US Order acquired the business of Braun,
Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7
million consisting of cash and US Order common stock and including US Order
transaction costs pursuant to the merger of Braun Simmons into US Order (the
"Braun Simmons Acquisition"). Braun Simmons was an information engineering firm
specializing in the development of home banking and electronic commerce
solutions for financial institutions. The acquisition expands the Company's
product line for both large and small financial institutions.
The business of the Company consists of the businesses previously conducted
by US Order, Colonial Data and Colonial Data's subsidiaries. The Company
develops and markets products and services for the telecommunications and
financial services industries through its three business divisions: consumer
telecommunications, electronic commerce and interactive services.
The consumer telecommunications division designs, develops and markets
telecommunications products that support intelligent network services being
developed and implemented by the regional Bell operating companies ("RBOCs") and
other telephone companies ("telcos"). The Company has concentrated its product
development and marketing efforts on products that support Caller ID and other
emerging intelligent network services, including a smart telephone, the
Telesmart 4000/Intelifone/TM/, which provide consumers call management features
and the ability to access numerous network services and interactive applications
via telephone. The Company currently offers a line of Caller ID adjunct units
and telephones with integrated Caller ID, small business telecommunications
systems and high-end consumer telecommunications equipment. The Company also
repairs and refurbishes telecommunications products for commercial customers and
provides other services that support the development and implementation of
intelligent network services.
3
<PAGE>
The electronic commerce division develops and markets products and services
to assist financial institutions in their home banking and electronic bill
payment initiatives. The products are designed to assist consumers in accessing
and transacting business with their banks and credit unions electronically, and
to assist financial institutions in connecting to and transacting business with
third parties, including data processors and billers. The services focus on a
financial institution's back office, offering outsourcing for data entry,
telemarketing, customer service and technical support. The Company currently
receives its electronic commerce revenues largely from the sale of products and
services to Visa International Service Association, Inc. ("Visa") member banks.
On August 1, 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 which are based on the number of customers utilizing the Visa
Bill-Pay System. The Company's right to future royalty payments from Visa is
subject to a cumulative offset amount aggregating $880,000 and, accordingly, the
Company does not expect to begin receiving royalty payments until at least the
second half of 1997. Visa formed Visa InterActive, Inc. ("Visa InterActive")
around the technology and personnel acquired from the Company, including 54
former Company employees. Visa InterActive also has agreed through 2000 to
inform Visa member banks that the Company is a preferred provider of certain
electronic commerce products and services.
The interactive services division was established to provide interactive
applications for use on smart telephones and other small screen devices, such as
alpha-numeric pagers, Personal Communication Systems ("PCS") devices and
personal digital assistants ("PDAs"). The Company intends to sell interactive
applications directly to end users and through other companies, including telcos
and wireless communications companies. The Company's current interactive
applications include electronic national directory assistance lookup, one-way
alpha-numeric paging, one-way internet e-mail, a personal directory data save
and restore function and information services such as news, weather, sports
scores, stock quotes, lottery results and horoscopes.
The Company's principal executive offices are located at 13100 Worldgate
Drive, Suite 600, Herndon, Virginia 20170 and its telephone number is (703) 834-
8500.
INDUSTRY BACKGROUND
The Company maintains operations in three primary markets: consumer
telecommunications, electronic commerce and interactive services.
Consumer Telecommunications
The consumer telecommunications division designs, develops and markets
telecommunications products that support intelligent network services being
developed and implemented by RBOCs and other telcos. Deregulation and
technological advances have intensified competition among existing operators of
telecommunication networks and encouraged the
4
<PAGE>
entrance of new service providers. In addition, there are mergers pending among
certain RBOCs and further industry consolidation may occur in the future. In the
United States, competition among RBOCs, other telcos and long distance carriers
and new service providers that have entered the local and long distance markets,
has increased and may increase further as a result of the Telecommunications Act
of 1996 (the "Telecommunications Act") or industry consolidation. RBOCs and
other telcos are responding to increasing competition by, among other things,
introducing value-added, intelligent network services .
In order to deploy intelligent network services, the telcos have been
upgrading their telecommunications networks to support a set of standards, known
as the Intelligent Networks ("IN"). IN supports open, distributed switching and
processing capabilities and allows the telcos to create, modify and deploy new
services quickly and economically. In addition, Bell Communications Research,
Inc. has developed the Analog Display Services Interface ("ADSI"), a standard
protocol for the simultaneous transmission of data and voice information between
an information source and a subscriber's telephone or other communications
device such as a smart telephone.
One of the first intelligent network service offerings by RBOCs and telcos was
Caller ID, a service that provides information about the incoming call
(including the number and name of the caller and the time and date of the call)
enabling that information to be displayed on a device located near the telephone
(in the case of an adjunct unit) or on a display screen located on the telephone
(in the case of an integrated Caller ID telephone). InteliData estimates that
the current penetration rate of Caller ID service is approximately 15% of the
total subscribers in those areas in the United States that have Caller ID
capabilities .
By deploying the ADSI protocol in the telecommunications network, RBOCs and
other telcos will be able to offer additional intelligent network services and
third-party interactive applications. ADSI-based services will include Caller
ID on Call Waiting together with Call Disposition. By subscribing to Caller ID
on Call Waiting with Disposition, a subscriber who receives a Call Waiting
signal can look at the display screen on the smart telephone and see the name
and number of the calling party before deciding whether to answer the call, send
a prerecorded message telling the calling party to wait, forward the call to
voice mail or drop the line. Additional services which can be supported through
ADSI include on-line directory assistance, e-mail, paging, news, weather, stock
quotes and other information.
The regulatory environment relating to the telecommunications industry is
undergoing rapid and significant changes. The Telecommunications Act has
effected basic changes in the telecommunications regulatory scheme. The
intention of the Telecommunications Act is to enhance competition in all
telecommunications markets and bring new packages, lower prices and increased
innovation to telephone customers in the United States. The Federal
Communications Commission ("FCC") issued its first major order under the
Telecommunications Act in August, 1996 which constitutes the FCC's initial
measures to implement sections of the Telecommunications Act relating to
interconnection between carriers and the provision of access to unbundled
services. However, this order has been challenged and, as of March 1, 1997, the
effectiveness of some of its provisions has been stayed in the U.S. Court of
Appeals for the Eighth
5
<PAGE>
Circuit. In December 1996, the FCC issued a Notice of Proposed Rulemaking which
suggests rules concerning the implementation of the Telecommunications Act
provisions relating to RBOC manufacture of telecommunications and customer
premises equipment. Although the FCC has not yet implemented the regulations
relating to those provisions, the proposed regulations would permit RBOCs to
manufacture products that support Caller ID and other emerging intelligent
network services subject to certain conditions. The Company is unable to predict
what effect, if any, the Telecommunications Act and the emerging regulatory
scheme under the Telecommunications Act will have on Caller ID service or the
Company's business generally.
Electronic Commerce
The electronic commerce division provides products and services to financial
institutions whose processes and systems are subject to regulatory approvals.
Electronic commerce is a developing marketplace. Financial institutions are
expanding their electronic home banking services to permit customers not only to
review historical account information, but also to engage in transactions such
as paying bills and transferring funds. The Company's future growth and
profitability will depend, in part, upon consumer acceptance of electronic home
banking.
Interactive Services
The interactive services division provides SmartTime/(R)/ services to
customers delivering personalized information to a variety of small screen
devices, including screen telephones, alpha-numeric pagers, PCS/cellular
telephones and addressable personal communicators. The division provides
operating online and batch interactive services directed at consumers of small
screen devices. Although the Company builds some of its services, the Company is
essentially an aggregator of other data sources and purchases data from many of
the same suppliers as its competitors.
PRODUCTS AND SERVICES
The Company's business strategy is to develop products and services to meet
the needs of its customers in each of three markets: consumer
telecommunications, electronic commerce and interactive services. The Company
develops products and services for the RBOCs and other telcos, financial
institutions 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. The Company believes its products position the
Company to offer support services and interactive service applications which are
expected to generate recurring monthly fee revenue.
Consumer Telecommunications
Since introducing the first commercially available Caller ID unit in 1987,
the Company has developed and marketed Caller ID products with increased
functionality to meet the needs of its RBOC and other telco customers. A
substantial majority of the Company's revenues are derived from
6
<PAGE>
the sale and leasing of its Caller ID products. The following represent the
Company's consumer telecommunications products and services:
Entry Level Caller ID Adjunct Devices
-------------------------------------
The Company provides low-priced, entry level Caller ID devices primarily to
support RBOC marketing and promotional campaigns in which a telco may give away
or subsidize the purchase of a Caller ID adjunct device when a consumer
subscribes for the service. The Company believes that RBOCs utilize lower-priced
products to reduce or eliminate the initial consumer expenditure required to
obtain the service and, as a result, may subsequently achieve higher penetration
rates for Caller ID in selected markets. The Company's entry level Caller ID
adjunct devices have suggested retail prices of $29.99 to $39.99.
Full-Featured Caller ID Adjunct Devices
---------------------------------------
The Company's full-featured products display all transmitted information
before the incoming telephone call is answered and store this information in
memory. Among the features available on the Company's full-featured products are
memory capacity for up to 99 calls, a "blocked call"/"new call" light, a
patented "Block the Blocker" feature, a bilingual display and a "message waiting
alert" light that indicates to a network voice mail subscriber that a new voice
mail message has been received. "Block the Blocker" is a feature that detects
when call block is used by a caller, delivers a message to that caller that the
Caller ID subscriber does not accept blocked calls and disconnects the call. The
Company's full-featured Caller ID adjunct devices have suggested retail prices
of $39.99 to $69.99.
Caller ID on Call Waiting
-------------------------
Caller ID on Call Waiting allows a subscriber to combine both Caller ID and
Call Waiting network services, to view the directory name and telephone number
of an incoming call as the Call Waiting signal is delivered. The Company's
Caller ID on Call Waiting adjunct device also allows a consumer to store
approximately 85 names and numbers in memory. InteliData has applied for a
patent on certain aspects of its Caller ID on Call Waiting device. The Caller
ID on Call Waiting adjunct device has a suggested retail price of $79.99.
Call Manager
------------
The Call Manager is a sophisticated Caller ID device that works with both
single-data and multi-data message services. The Call Manager stores up to 75
of the most recent names and numbers called. The product incorporates a wide
variety of telco provided network services, including Caller ID on Call Waiting
with Disposition, into a compact adjunct. The Call Manager has a suggested
retail price of $99.99.
7
<PAGE>
Integrated Telephones
---------------------
The Company offers a line of corded and cordless telephones with integrated
Caller ID functionality which have suggested retail prices of $59.99 to $199.99.
ADSI-Compatible Smart Telephones
--------------------------------
The Telesmart 4000/Intelifone/TM/ smart telephone was designed and developed
by the Company and is being marketed under the Telesmart brand name in the telco
channel and under the Intelifone/TM/ brand name in the retail channel. Its
design is based on a Digital Signal Processing ("DSP") architecture. The smart
telephone is an ADSI telephone device that incorporates a graphics display
screen, magnetic card reader, alpha-numeric keypad, V.22 modem and a processor.
The smart telephone supports Caller ID with Disposition, the integration of
Caller ID on Call Waiting and a visual message waiting indicator. The Telesmart
4000/Intelifone/TM/ smart telephone will also support the Company's protocol for
information, transaction and communication services. The Company began shipping
units in late 1996.
Small Business Telecommunications Systems
-----------------------------------------
The Company, through one of its subsidiaries, distributes small business
telecommunications systems. These systems include analog and digital key
systems that allow up to 24 individual telephone lines to be serviced from the
same operating system. These small business systems are sold through
independent dealers that install and service the product, and in some instances
through retail stores. The Company markets its small business
telecommunications systems to small business/home office consumers who are
looking for an easy-to-install communications system at a reasonable price.
Repair and Refurbishment
------------------------
The Company has provided telephone repair and refurbishment services to RBOCs,
other telcos and certain telephone equipment manufacturers for a wide variety of
telecommunications products, including corded and cordless telephones, key
telephone business systems, cellular telephones and leased telephone products.
The Company believes that its capabilities in this area have strengthened its
relationship with the RBOCs and other telcos. During the year ended December 31,
1996, the Company's service customer base included Nitsuko America Corp.,
TIE/communications, Inc. ("TIE"), Conair Corp., Southern New England Telephone
Company ("SNET") and Motorola, Inc.
Electronic Commerce
The Company's strategy in the electronic commerce market is to support
financial institutions by providing products and services that help them deploy
home banking to their customers. In addition, the Company supports Visa
InterActive with products and services which facilitate bill payment and bill
presentment. The Company's products and services are designed to provide
consumers the ability to access and utilize their bank account information.
They are
8
<PAGE>
also designed to provide financial institutions with connectivity to the Visa
InterActive host computer system as well as to other third party payment
processors. The following represent the Company's electronic commerce products
and services:
Consumer Access Products
------------------------
Remote Banking Systems. The remote banking system product line, which runs on
an InterVoice platform, was developed by the Company for sale to Visa
InterActive financial institutions. The Company is an authorized value-added
reseller of InterVoice's hardware products. The remote banking system product
line is an advanced touch-tone telephone-based bill payment system with built-in
connectivity to the Visa Bill-Pay System. The products are custom-branded for
each individual bank or credit union customer. The products offer three levels
of touch-tone interaction. The first application allows a customer to establish
a list of payees identified by numerical codes. The customer then uses the
remote banking system to pay bills using the telephone by pressing the
appropriate payee code and desired payment amount. The second application allows
a customer to establish a list of payees identified by numerical codes and
record the customer's own voice identifying the payee by name. The customer then
uses the remote banking system to pay bills using the telephone by pressing the
appropriate payee code. After the customer's voice recording confirms that the
proper payee has been selected, the customer keys in the desired amount of
payment. The third application allows a customer, after establishing a list of
payees identified by numerical codes and recording the customer's own voice
identifying the payee by name, to pay bills by telephone by speaking the name of
the payee and then touching in the desired amount of the payment.
Financial Power Tools 2000. The Financial Power Tools 2000 ("FPT 2000") is a
front end internet interface that offers full-service banking and bill payment
and gives a financial institution the flexibility to add services such as
electronic bill presentment, brokerage, insurance, loan applications and service
requests. Customers access their accounts in real-time, getting accurate and
timely information on account balances and pending transactions. FPT 2000's
secure, real-time connection to the host protects the bank and its customers by
utilizing the latest browser-level security systems on the internet and accesses
control at the host.
Mainframe Connectivity Products
-------------------------------
Unigate/(TM)/ ADMS Gateway Server. One of a family of server products
connecting access devices to the banks, the Company's gateway connectivity
product supports the Visa Bill-Pay System and provides a real time connection
between banks and their customers. It is a data translator which enables a real
time connection between a customer's access device and a bank's host data
processor, allowing the customer to access all of his or her account activity
from the bank's mainframe CICS or IMS system. The product runs on a Sun SPARC 5
platform (or larger) and can communicate with almost any mainframe host.
Unipay/(TM)/ Automated Billing Systems. The Company is developing automated
payment systems, including a biller workstation. The biller workstation will
allow merchants to design bill
9
<PAGE>
templates, transmit customized marketing information, and give customers direct
access to statement information in partnership with their financial
institutions. The product family incorporates the Visa InterActive and ePay
standards for electronic exchange of bill payment information with Visa banks
and supports formatting and delivery of bill information to consumers. Billers
will also be able to send and receive payment and invoice information
electronically to and from their commercial banks through the Visa Bill-Pay
System. The Company expects to introduce this product line in the second half of
1997.
Services
--------
Customer Support Services. The Company offers bank-branded, turnkey customer
service to financial institutions in support of its consumer access products.
The Company's customer service operation is open seven days a week, 18 hours a
day. If a bank chooses the Company to provide customer service, the Company
typically receives a start-up fee from that bank and a per minute fee per
customer.
Product Support Services. The Company offers its clients consulting services
to assist in implementation, training and customization on a time and materials
basis and provides maintenance services and software upgrades pursuant to
agreements which are renewable on an annual basis.
Interactive Services
The Company's strategy is to deploy its interactive services on its smart
telephones as well as other smart telephones and small screen devices, such as
alpha-numeric pagers and PDAs, manufactured by other companies. The Company
intends to sell interactive service applications to RBOCs, telcos and end users
through retail markets and direct sales programs. The Company's current
interactive service applications include electronic national directory
assistance lookup, one-way alpha-numeric paging, one-way internet e-mail and a
personal directory data save and restore function. Alpha-numeric paging and
internet e-mail allow the users to send notes and messages to individuals
carrying a paging device and to individuals with an internet e-mail address,
respectively. The data save and restore service is an application that provides
remote backup capability and data retrieval for information that is stored in
the smart telephone memory. Additionally, the Company offers services providing
news, weather, stock quotes, sports scores and horoscopes. These are
applications that will allow the smart telephone user to receive periodically
updated application-specific information in an on-line format. In the future,
the Company expects to expand its interactive services by offering two-way
internet e-mail, which will enable the user to not only send an e-mail message
to an internet address, but also to receive an e-mail message from an internet
address. As of December 31, 1996, the Company has not generated revenues from
its interactive services division.
MARKETING AND DISTRIBUTION
The Company sells its products and services to telephone operating companies,
retailers and
10
<PAGE>
financial institutions in the United States. Revenues from the Company's joint
venture partner, an RBOC and an electronic banking service provider, were
approximately 20%, 13% and 11% of total revenues for the year ended December 31,
1996.
Consumer Telecommunications
The Company markets its consumer telecommunications products and services
through 20 employees in its direct sales force and marketing department, and
currently uses 28 independent sales representative firms. The Company's
distribution strategy is to make its products available to potential end users
through multiple distribution channels including: direct fulfillment
arrangements with RBOCs, direct marketing, direct sales, and retail as described
below.
Direct Fulfillment Arrangements
-------------------------------
The Company sells consumer telecommunications products to RBOC subscribers and
other telco subscribers through direct fulfillment arrangements with Ameritech
Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell Atlantic"),
BellSouth Corporation ("BellSouth"), NYNEX Corporation ("NYNEX") and Pacific
Bell ("PacBell"). In most instances, the telco representatives market both
Caller ID service and the Company's equipment to subscribers and transmit
equipment orders to the Company electronically on a daily basis. The Company
then ships its equipment directly to the subscribers and bills the telco which,
in turn, bills its subscribers directly or through a third party. As part of
promotional campaigns, some RBOCs may elect to purchase Caller ID units from the
Company and distribute them to their subscribers free of charge. The Company
provides an 800 number service and support to help the subscriber understand how
to utilize the Caller ID service and equipment. In addition, during 1996, the
Company entered into a three-year arrangement with PacBell whereby the Company
supplies adjunct Caller ID units and cordless Caller ID telephones to PacBell's
direct fulfillment vendor.
The Company continually seeks to strengthen its current telco marketing
alliances and to develop new alliances. The Company believes that marketing of
Caller ID service and equipment is more successful when the subscriber can
subscribe to Caller ID service and purchase or lease Caller ID equipment from a
single source, especially when payment for equipment can be made either on an
installment basis or by monthly lease payments through the subscriber's
telephone bill. The Company believes that subscriber satisfaction with Caller
ID service is enhanced when the subscriber receives Caller ID equipment promptly
after ordering the service and is provided an 800 number for service and
support.
Direct Marketing on Behalf of Telcos
------------------------------------
In May 1995, the Company entered into a joint venture agreement with the
direct marketing firm of Blau Marketing Technologies, Inc. The joint venture
operates through a jointly owned corporation, Worldwide Telecom Partners, Inc.
("Worldwide Telecom"), which is 50% owned by each of the joint venturers. The
joint venture agreement is terminable by either party upon
11
<PAGE>
sufficient advance notice to the other to enable Worldwide Telecom to complete
performance of any outstanding contracts with telcos.
Worldwide Telecom has provided direct marketing services to Ameritech, Bell
Atlantic and NYNEX under several separate programs and has completed numerous
programs for Caller ID, Call Answering and Call Waiting Services. InteliData
supplies Caller ID units and product management services for Worldwide Telecom.
Direct Sales
------------
Through its direct sales force and sales representatives, the Company sells
Caller ID units in quantity to a number of telcos, including Ameritech, Bell
Atlantic, BellSouth, NYNEX, and others, which units may be redistributed either
under the Company's trade name or the respective telco's trade name.
Retail and Other Customer Sales
-------------------------------
The Company sells Caller ID units and smart telephones to national, regional
and local retailers and private label customers. A substantial portion of the
Company's retail sales are made through manufacturers' representatives or
distributors with the support of the Company's sales personnel. The Company's
retail customers include Sears, Roebuck & Co., CompUSA, Inc. and Staples, Inc.
The Company has identified the wireless communications or paging companies as
additional distribution channels that it will begin to develop during 1997.
Electronic Commerce
There are three distinct marketing channels within the electronic commerce
market: bill payment, bill presentment and account access.
Bill Payment Channel
--------------------
Visa InterActive has designated the Company as a preferred provider of certain
of the Company's bill payment products and services. One of the Company's
strategies with Visa is to increase the number of subscribers for the Company's
bill pay products and services with the goal of growing monthly fee revenues.
Visa is the largest consumer payment system in the world.
Visa markets its bill payment and bill presentment services directly to its
member banks. Once a Visa member bank signs a commitment to deploy electronic
commerce services through the Visa Bill-Pay System (the "Commitment Date"), an
extended roll-out period of the bank's electronic commerce services begins.
During the first ninety days following the Commitment Date, Visa InterActive
begins technical and operational implementation of the electronic commerce
service for the Visa member bank and the member bank determines which consumer
access devices it will offer to its
12
<PAGE>
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 the Company to provide its Unigate/TM/ or
other products, customer support services or the bank may choose any number of
other suppliers. Typically, during the second ninety days following the
Commitment Date, the Visa member bank completes the technical trial phase and
begins a market trial of its electronic commerce system, including any selected
InteliData-provided products and services. Approximately six to twelve months
following the Commitment Date, the member bank completes its market trial and
can begin a market roll-out of its electronic commerce services.
In March 1996, Microsoft, Inc. entered into an agreement with Visa InterActive
to include an interface that will allow users of Microsoft's Money personal
finance software package to access Visa InterActive's electronic bill payment
system. Previously, banks working with the Money software were only able to
process bill payments through CheckFree Corporation. With the signing of this
agreement and the release of the most recent Money software upgrade, banks
working with the Money software are able to choose between Visa InterActive and
CheckFree as their electronic bill pay processor. Royalties due the Company
from Visa will be equal to $.666 per month per bill pay customer whose
transactions are processed by Visa InterActive's bill pay system. The Company's
right to receive these quarterly royalty payments is subject to a cumulative
offset of $73,000 per quarter beginning January 1, 1995 through December 31,
1997.
As of December 31, 1996, Visa InterActive had announced commitments from 69
financial institutions for the Visa Bill-Pay System. However, due to the time
necessary to install and implement the system for each bank, only 58 banks have
rolled out the system in small, limited markets and have enrolled a relatively
small number of customers. There can be no assurances as to the banks' ultimate
success with this program or the number of customers that ultimately will use
the program. Announced customers of Visa InterActive include Merrill Lynch,
Fleet Bank, First Union, Fidelity Investments, First Tennessee Bank National
Association, Star Bank, Zions Bank and Deposit Guarantee. The Company believes
its relationship with Visa InterActive keeps the Company in close contact with
Visa, its banks and the end users of electronic commerce services. The Company
believes that this relationship will enable the Company to continue to develop
complementary products and services, such as applications software for Visa
member banks, and potentially enable the Company to have access to Visa's
worldwide member banks. There can be no assurance, however, that the Company's
marketing efforts will be successful or that Visa will not reassess its
commitment to the Company at any time in the future.
Bill Presentment Channel
------------------------
The Company's marketing strategy in the bill presentment channel is to offer
its bill presentment products and services directly to financial institutions as
well as to billers using the Visa ePay system. In December 1995, Visa commenced
its ePay electronic bill-payment programs with major U.S. financial
institutions, including Banc One Corp., Barnett Banks, The Chase Manhattan Bank,
Crestar Bank, First Bank System, First Interstate Bank, First Chicago,
13
<PAGE>
First Tennessee Bank, First Union National Bank, Mellon Bank, Norwest Banks,
Star Bank and U.S. Bancorp. Visa's two-way ePay standard allows financial
institutions to implement a fully electronic, seamless, back-end bill payment
system. The ePay system is patented in the United States and is expected to
significantly reduce remittance-processing inefficiencies for participating
financial institutions and organizations that bill for goods and services. In
addition, the system will enable billers to send invoices electronically to
their customers who pay bills on-line.
Account Access Channel
----------------------
The Company also is developing products and services for financial
institutions who want to provide their customers with the ability to access
certain information from their banking accounts, much as they do with touch tone
telephones today, but over personal computers and screen based telephones.
Interactive Services
The Company's strategy in the interactive services market is to build a
subscriber base for its bundle of interactive service applications on its own
smart telephones and on small screen devices manufactured by other companies.
The following represent the Company's marketing channels for interactive
services:
Telecommunications Channel
--------------------------
The Company's strategy is to gain access to telco customers through the
Company's existing relationships with the RBOCs and other telcos. The Company
believes that the marketing of smart telephones and the interactive services
will be more successful when a consumer can subscribe to network services and
purchase the telephone 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.
Other Distribution Channels
---------------------------
In 1996 the Company began selling its interactive content through retail
stores and related outlets. The Company expects to be able to expand this
channel during 1997 and also make its services available on telephones and other
small screen devices manufactured by others. The Company has identified
additional distribution channels for its interactive services that it will begin
to develop during 1997 such as wireless communications or paging companies.
COMPETITION
Consumer Telecommunications
The market for the Company's products and services is highly competitive and
subject to increased competition resulting from rapid technological change as
well as increased competition
14
<PAGE>
resulting from changes in the telecommunications regulatory environment,
telecommunications industry consolidation and the emergence of new market
entrants. At present, the Company's principal competitors in the market for
Caller ID products are CIDCO Incorporated ("CIDCO"), Lucent Technologies, Inc.
("Lucent") and Northern Telecom, Ltd. ("Northern Telecom"). The Company's Caller
ID products also compete with Caller ID telephones offered by Panasonic, Sony
Corp. ("Sony"), Thomson Consumer Electronics, Inc. ("Thomson"), US Electronics,
Inc. ("US Electronics") and other companies.
The smart telephone marketed by the Company is subject to competition from
smart telephones marketed by Philips Electronics, N.V. ("Philips"), Northern
Telecom and CIDCO as well as other emerging platforms for interactive service
applications delivered through personal computers and cable television.
The Company's competitors, including Philips and Northern Telecom, have
already introduced smart telephones that include technological features
incorporated in the Company's smart telephone product. Visa InterActive and
Philips have 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. Any bill pay
transaction generated by a Philips smart telephone that is processed by Visa
InterActive will potentially generate a royalty payment due to the Company from
Visa.
The Company expects competition in the markets for its consumer
telecommunications products and services to increase in the future and expects
competition from existing and new competitors, possibly including RBOCs, other
telcos or other current customers, as well as from network switch-based services
and from the increased application of cellular technology. The Company's primary
current and potential competitors in the market for its consumer
telecommunications products and services have substantially greater financial,
marketing and technical resources than the Company. Increased competition could
materially and adversely affect the Company's results of operations through,
among other things, price reductions and loss of market share.
The Company's Telesmart 4000/Intelifone/TM/ smart telephone product
incorporates newer DSP technology. Although the Company is currently unaware of
any efforts by its competitors to deploy DSP technology in their smart
telephones, the Company expects that its competitors will attempt to replicate
the Telesmart 4000/Intelifone/TM/ smart telephone DSP 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, Inc., Prodigy, Inc. and
CompuServe Corp., as well as from personal computer software companies such as
Intuit, Inc. ("Intuit") and Novell, Inc.
The Company competes with a large number of competitors for its repair
services and other services supporting the development and implementation of
intelligent network services. Several of the Company's competitors in the market
for such services have substantially greater financial, marketing and
technological resources than the Company. There can be no assurance that the
Company will be able to continue to compete successfully against its existing
competitors or that it will be able to compete successfully against new
competitors.
15
<PAGE>
The Company believes that the principal competitive factors in the markets for
its consumer telecommunications products and services are knowledge of the
requirements of the various RBOCs and other telcos, product reliability, product
design, the quality of repair and support services, customer service and
support, and price relative to performance. The Company competes in the market
for its consumer telecommunications products and services principally on the
basis of its relationships with telcos, product design and reliability, low
product pricing and flexibility of marketing alternatives, including leasing.
Electronic Commerce
The Company's electronic commerce 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, NationsBank and Bank of America
have developed electronic commerce products for their own customers and, in the
future, may offer these services to other banks. Non-banks, such as EDS and
First Data Corporation, also may develop electronic commerce products to offer
to banks. Computer software and data processing companies, such as Intuit, also
offer electronic commerce services. Visa competes with other organizations,
including MasterCard International, Inc. ("MasterCard"), which offers its
Masterbanking electronic commerce service through CheckFree Corporation. The
Company's success in electronic commerce depends in large part on the ultimate
success of Visa and on the ability of Visa InterActive and Visa member banks to
successfully market electronic commerce to their customers. In addition, the
success of the Company's electronic commerce 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 various banking products, including
other manufacturers of touch-tone response systems, such as Periphonics
Corporation and Syntellect Inc., other financial software companies, such as
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 financial
institutions and third parties that choose to offer customer support services
either directly through Visa's customer support messaging standard ("CSMS")
product or on their own.
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 electronic commerce 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.
16
<PAGE>
Interactive Services
The industry for interactive services is emerging and there is potential for a
number of companies to enter the marketplace. Currently, the Company's primary
competitor is SmartServe Online, Inc.
PRODUCT DEVELOPMENT
The Company operates in industries that are rapidly growing and changing. In
efforts to improve the Company's position with respect to its competition, the
Company has increased its product development efforts by increasing the number
of personnel in the product development department and focusing management
efforts in the area of product development. In 1996, 1995 and 1994, the
Company's research and development expenditures, exclusive of nonrecurring in-
process research and development expenses were $2,649,000, $1,067,000 and
$1,769,000, respectively.
At December 31, 1996, 62 employees were engaged in product development
including 17 in the consumer telecommunications division, 35 in the electronic
commerce division and 10 in the interactive services division.
Consumer Telecommunications
The Company's product development efforts are focused on new products that
support intelligent network services, product enhancements, international
standards compliance and the continued improvement of hardware components to
reduce manufacturing costs. The Company's product development group is
experienced in engineering products for high-volume assembly, stressing low-cost
manufacturing design while maintaining quality, consistency and reliability.
The Company's products utilize proprietary electrical, mechanical and software
design.
Standard Telecommunications Ltd. ("STL") of Hong Kong, an affiliate of the
Company's principal manufacturer, provides additional design, engineering and
product development support services to the Company from time to time on a
subcontract basis. The Company also utilizes the engineering resources of some
of its other manufacturers.
Electronic Commerce
The electronic commerce division's product development efforts are focused on
software and systems for electronic banking. In particular, the Company applies
its research and development expenditures to audio and data transaction
processing and messaging software and customer support services. The electronic
commerce industry is characterized by rapid change. To keep pace with this
change, the Company maintains an aggressive program of new product development
and dedicates considerable resources to research and development to further
enhance its existing products and to create new products and technologies. The
Company's
17
<PAGE>
ability to attract and retain highly skilled research and development personnel
is important to the Company's continued success.
Interactive Services
The interactive services division's product development efforts are focused on
expanding the services and the range of content that can be provided as well as
the number of devices to which the services can be delivered.
MANUFACTURING
The Company's primary equipment manufacturer is STL and certain of its
affiliates, which have ISO 9000 series certified facilities located in Hong Kong
and the People's Republic of China, for the manufacture of its Caller ID units,
smart telephones and other products. In addition, the Company has established
relationships with other ISO 9000 series certified Asian manufacturers for its
integrated corded and cordless telephones and small business telecommunications
products. The facilities of the Company's suppliers are supplemented, in part,
by the Company's own limited manufacturing facilities in Connecticut. The
availability or cost of the Company's products may be affected by political,
economic or labor conditions in the countries where those products are
manufactured, including the 1997 return of Hong Kong to China, by fluctuations
in currency exchange rates and by other factors. In addition, a change in the
tariff structure or other trade policies of the United States could adversely
affect the Company's foreign manufacturing strategies.
The Company does not have any production contracts with its assembly
contractors. The Company's principal manufacturer performs comprehensive
inspection and statistical process control testing, utilizing the Company's
internally designed automated testing equipment. To date, the Company has not
experienced significant returns of defective products.
In the United States, the Company's manufacturing operations are limited to
the testing, quality control and shipping of finished products and the purchase
and inventory management of two key components of the Company's products.
The key components used in the Company's products are currently being
purchased from two sources, except for its application specific integrated
circuit ("ASIC") chips, which are purchased from a single source. Although the
Company believes it could develop other sources for each of the components for
its products, the process could take several months, and the inability or
refusal of any such source to continue to supply components could have a
material adverse effect on the Company pending the development of an alternative
source.
18
<PAGE>
GOVERNMENT REGULATION
Consumer Telecommunications
The regulatory environment relating to the telecommunications industry is
undergoing rapid and significant changes. The Telecommunications Act has
effected basic changes in the telecommunications regulatory scheme. The
intention of the Telecommunications Act is to enhance competition in all
telecommunications markets and bring new packages, lower prices and increased
innovation to telephone customers in the United States. The FCC issued its first
major order under the Telecommunications Act in August 1996 which constitutes
the FCC's initial measures to implement certain sections of the Telcommunicatons
Act relating to interconnection between carriers and the provision of access to
unbundled services. However, this order has been challenged and, as of March 1,
1997, the effectiveness of some of its provisions has been stayed in the U.S.
Court of Appeals for the Eighth Circuit. In December 1996, the FCC issued a
Notice of Proposed Rulemaking which suggests rules concerning the implementation
of the Telecommunications Act provisions relating to RBOC manufacture of
telecommunications and customer premises equipment. Although the FCC has not yet
implemented the regulations relating to those provisions, the proposed
regulations would permit RBOCs to manufacture products that support Caller ID
and other intelligent network services subject to certain conditions. The
Company is unable to predict what effect, if any, the Telecommunications Act and
the emerging regulatory scheme under the Telecommunications Act will have on
Caller ID service or the Company's business generally .
In the United States, Caller ID and other intelligent network services offered
by telcos are subject to federal and state regulation. Caller ID is currently
available in all 50 states and the District of Columbia. However, during the
past several years, protests by special interest groups and regulatory concerns
regarding the privacy aspects of the service have been effective in both slowing
down the regulatory approval process and, in most states, requiring free per-
call or per-line call blocking to be offered by the telcos, thereby allowing a
caller to prevent the display of his or her name and number.
An FCC order, which rules promulgated thereunder became effective December 1,
1995 (the "FCC Order"), requires all U.S. telephone service providers with SS7
switching architecture to transmit to each other without charge Caller ID number
information on interstate calls within the United States (except for public pay
phones and party lines). The FCC's order also requires that telcos that offer
Caller ID service must provide to their telephone subscribers without charge a
per-call blocking mechanism to block the transmission of their Caller ID
information on interstate calls and must inform subscribers that their telephone
numbers may be identified to a called party and how to use this blocking
capability.
Although the FCC Order was implemented December 1, 1995, several factors may
delay, prevent or substantially limit the implementation or market acceptance of
Caller ID. The availability of Caller ID service in a particular area requires
end-to-end interconnection of SS7 networks between telcos and other carriers.
Further, the FCC Order requires telcos to offer free per-call blocking for
interstate calls to all customers to protect privacy interests and permits state
public utility commissions to authorize per-line blocking for interstate calls.
Such blocking, if widely adopted, could limit the usefulness and marketability
of the Caller ID service.
The California Public Utilities Commission and AT&T Corp. ("AT&T") filed
petitions for review of the FCC Order in federal court challenging portions of
the FCC Order. Although the FCC Order withstood that particular challenge, other
parties have also objected to, sought delays in the implementation of or sought
clarification of the FCC Order. In addition, in the future, Caller ID service
may be subject to additional state and federal legislation, regulation and court
challenges. The Company is unable to predict what effect, if any, further
legislation, regulation, court challenges or other objections may have on the
FCC Order or Caller ID service.
The Company's smart telephone products are subject to regulation by the FCC.
Among other requirements, the Company's smart telephones must comply with Parts
15 and 68 of the FCC's regulations.
Electronic Commerce
The banking market which the Company has targeted for marketing is highly
regulated. The banking industry, although it has recently undergone significant
deregulation, remains quite
19
<PAGE>
regulated at both the federal and state levels. Interpretation, implementation
or revision of banking and telecommunications regulations can accelerate or
hinder the ultimate success of the Company and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company holds limited patent or registered intellectual property rights
with respect to its products. The Company has been issued a patent for its
"Block the Blocker" feature and has also applied for a patent on certain aspects
of its Caller ID on Call Waiting product. However, there can be no assurance
that a patent will be issued to the Company for its Caller ID on Call Waiting
product or that such patent, if issued, will afford effective protection of the
Company's technology. The Company filed for patents on certain new features
developed by the Company for use in the 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.
The Company additionally relies on trade secret laws to establish and maintain
its proprietary rights to its products. Although the Company has obtained
confidentiality agreements from its key executives and engineers in its product
development group, there can be no assurance that third parties will not
independently develop the same or similar alternative technology, obtain
unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.
The Company has rights to practice the inventions under certain of Lucent's
Caller ID patents. These patents are also licensed to others, including the
Company's competitors. Lucent receives royalties from sales and leases of the
Company's Caller ID products other than to Lucent. The Lucent license agreement
has no expiration date but is terminable by Lucent for breach on two months'
written notice unless within such time all specified breaches have been
remedied. If the Lucent license were terminated and the Company were unable to
negotiate a new patent license agreement with Lucent, the Company would no
longer be authorized to manufacture or sell Caller ID products in the United
States other than to the RBOCs and to Lucent. Additionally, under the agreement,
the Company granted Lucent a non-exclusive, royalty-free license to all patents
on inventions which are improvements or modifications based upon the technology
licensed from Lucent.
The Company does not believe that its products and services infringe on the
rights of third parties. From time to time, third parties assert infringement
claims against the Company. There can be no assurance 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.
EMPLOYEES
At December 31, 1996, the Company had approximately 348 employees, of whom 327
were
20
<PAGE>
full-time. The Company has no collective bargaining agreements with its
employees and believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
- -------------------
The Company is headquartered in Herndon, Virginia, where it leases 30,000
square feet of office space from an unaffiliated party. The lease covers a
fifty-three month period from its commencement date of July 1, 1996. The
Company also leases 15,000 square feet of office space in Herndon, Virginia from
unaffiliated parties under two leases expiring in 1999 for its consumer
telecommunications and interactive services divisions and 10,000 square feet of
office space in Herndon, Virginia for its customer service department from an
unaffiliated party. The Company also leases other, less significant sales and
product development facilities.
Additionally, the Company owns a building located in New Milford, Connecticut
which consists of approximately 63,000 square feet. Certain environmental
contamination occurred in the part of the facility formerly occupied by another
tenant and the Connecticut Department of Environmental Protection performed a
clean-up and removed such contamination. The Company does not believe the
foregoing will have a materially adverse effect on the Company.
The Company believes that its facilities are suitable and adequate for the
current and foreseeable future business of the Company, however, the Company
will continue to assess its warehousing and office space needs as the Company
expands its business.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not currently a party to any material litigation. From time to
time, the Company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of any or all of such routine
litigation will be likely to have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
By a unanimous written consent of stockholders of the Company dated
November 7, 1996, the stockholders of the Company approved the following
actions:
1. The following persons were elected to serve as Directors of the Company
for the following respective terms: (a) CLASS I, term expiring at 1997 Annual
Stockholders Meeting: William F. Gorog, Patrick F. Graham, Constantine S.
Macricostas; (b) CLASS II, term expiring at 1998 Annual Stockholders Meeting: T.
Coleman Andrews, III, Walter M. Fiederowicz, Timothy R. Welles; and (c) CLASS
III, term expiring at 1999 Annual Stockholders Meeting: John C. Backus, Jr.,
Wesley C. Tallman and Robert J. Schock.
2. The Agreement and Plan of Merger, dated as of August 5, 1996, and as
amended by Amendment No. 1, dated as of November 7, 1996, by and among US Order,
Colonial Data and the Company was ratified and approved.
3. The InteliData Non-Employee Directors' Stock Option Plan was approved.
4. The InteliData Incentive Plan was approved.
5. The InteliData Employee Stock Purchase Plan was approved.
6. The assumption by the Company of the obligations of US Order and
Colonial Data in connection with: (i) all outstanding options granted under the
(a) US Order 1991 Stock Option Plan, (b) US Order 1995 Incentive Plan, (c) US
Order Non-Employee Directors Stock Option Plan, (d) US Order 1995 Outside
Directors Plan and (e) USO Employee Stock Purchase Plan; (ii) all other
outstanding options granted by US Order and not yet exercised; (iii) all
outstanding options granted under the (a) Colonial Data 1983 Stock Option Plan
and (b) Colonial Data 1994 Long-Term Incentive Plan and (iv) all outstanding
warrants issued by Colonial Data and not yet exercised.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
Since November 8, 1996, the Company's common stock has been traded on the
Nasdaq National Market under the symbol INTD. US Order common stock prices were
reported for the period beginning June 2, 1995 through November 7, 1996 and were
traded on the Nasdaq National Market under the symbol USOR. Colonial Data's
common stock prices are reported for the period prior through November 7, 1996.
Subsequent to February 9, 1996, Colonial Data common stock was traded on the
Nasdaq National Market under the symbol CDTX. Prior to February 9, 1996,
Colonial Data common stock was traded on the American Stock Exchange. The table
below sets forth the high and low quarterly sales prices for the common stock of
US Order, Colonial Data and InteliData as reported in published financial
sources for each quarter during the last two years:
<TABLE>
<CAPTION>
Price Range of Common Stock
-------------------------------------------------------
US Order Colonial Data InteliData
-------------------- ------------------ -------------
High Low High Low High Low
-------- ---------- -------- -------- -------- ---
<S> <C> <C> <C> <C> <C> <C>
1996
Fourth Quarter $11 7/8 $ 8 1/4 $11 5/8 $ 8 3/8 $10 7/8 $6
Third Quarter 15 1/4 8 15/16 15 1/4 8 1/2 * *
Second Quarter 22 1/2 13 23 5/8 14 7/8 * *
First Quarter 24 1/4 16 3/4 25 1/4 15 7/8 * *
1995
Fourth Quarter 23 1/4 13 1/4 23 13 1/2 * *
Third Quarter 26 1/2 14 1/4 27 1/4 16 3/4 * *
Second Quarter 17 1/4 14 1/4 22 3/8 14 1/8 * *
First Quarter * * 19 1/8 12 1/4 * *
</TABLE>
* No established public trading market for InteliData common stock existed
prior to November 8, 1996. No established public trading market for US
Order common stock existed prior to the completion of US Order's initial
public offering on June 1, 1995.
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 Company's 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.
The number of stockholders of record at March 1, 1997 was 498, and does not
include those stockholders who hold shares in street name accounts.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
INTELIDATA TECHNOLOGIES CORPORATION /(1)/
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
- ----------------------
Revenues $ 13,899 $ 4,186 $ 1,432 $ 905 $ 63
Cost of revenues 10,448 2,470 1,013 908 126
Operating expenses 99,563 6,877 10,584 /(2)/ 10,540 /(4)/ 6,492/(4)/
-------- ------- -------- -------- --------
Operating loss (96,112) (5,161) (10,165) (10,543) (6,555)
Net income (loss) (95,727) (4,718) 3,713 /(3)/ (11,225) (6,806)
Preferred dividend requirement -- 681 1,895 1,042 392
-------- ------- -------- -------- --------
Net income (loss) available to common
shareholders $(95,727) $(5,399) $ 1,818 $(12,267) $ (7,198)
Net income (loss) per common share $ (5.21) $ (0.50) $ 0.28 $ (2.01) $ (1.18)
Weighted average shares outstanding 18,370 10,772 8,243 6,090 6,090
FINANCIAL POSITION (AS OF DECEMBER 31):
- ---------------------------------------
Cash, cash equivalents and
short-term investments $ 39,062 $25,120 $ 2,568 $ 3,444 $ 66
Total assets 143,746 40,252 4,637 7,694 4,681
Long-term obligations -- -- 4,833 4,231 1,033
Stockholders' equity (deficit) 124,289 37,733 (6,466) (5,849) (3,613)
</TABLE>
(1) Results reflect the operations of US Order for the periods presented and
operations of Braun Simmons since September 30, 1996 and Colonial Data since
November 7, 1996. Operating expenses for 1996 include $77,214,000 of
nonrecurring in-process research and development expenses related to the
Mergers and Braun Simmons Acquisition.
(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 Company's bill pay operations to Visa. Visa required that
all employees of the Company who became employees of Visa InterActive cancel
their outstanding vested options to eliminate any potential conflicts of
interest. As a result, the Company's shareholders and Board of Directors
agreed to pay all active and full-time employees of the Company (excluding
William F. Gorog, Chief Executive Officer and Chairman of the Board) 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 employees of the Company who became Visa InterActive employees as of
August 1, 1994.
(3) Includes gain of approximately $14.5 million on the sale of the Company's
electronic banking and bill pay operations to Visa on August 1, 1994.
(4) Operating expenses in 1993 and 1992 include write-downs of terminals and
terminal components of approximately $1.5 million and $430,000,
respectively.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
InteliData Technologies Corporation ("InteliData" or the "Company"), was
incorporated on August 23, 1996 under the Delaware General Corporation Law in
order to effect the mergers ("Mergers") of US Order, Inc. ("US Order") and
Colonial Data Technologies Corp. ("Colonial Data"). The Mergers were announced
on August 5, 1996, when US Order and Colonial Data entered into an Agreement and
Plan of Merger ("Merger Agreement"). On November 7, 1996, the Mergers were
consummated with each share of outstanding US Order and Colonial Data common
stock being exchanged for one share of InteliData common stock. Accounting for
the Mergers was treated as a purchase of Colonial Data by US Order. Accordingly,
the financial statements of the Company included herein reflect the results of
US Order through November 7, 1996 and the consolidated results of US Order and
Colonial Data thereafter.
On October 4, 1996, US Order acquired the business of Braun, Simmons & Co., an
Ohio corporation ("Braun Simmons"), for approximately $7 million consisting of
cash and US Order common stock and including US Order transaction costs pursuant
to a merger of Braun Simmons into US Order (the "Braun Simmons Acquisition").
Braun Simmons was an information engineering firm specializing in the
development of home banking and electronic commerce solutions for financial
institutions. The acquisition expands the Company's product line for both large
and small financial institutions.
The excess purchase price over the fair value of net assets acquired resulted
in goodwill of $49,483,000 in connection with the Mergers, and $1,898,000 in
connection with the Braun Simmons Acquisition which is being amortized on a
straight-line basis over fifteen years and seven years, respectively.
In connection with the Mergers and the Braun Simmons Acquisition, the Company
charged, as of the respective dates of such transactions, in-process research
and development expenses of $72,300,000 for the Mergers and $4,914,000 for the
Braun Simmons Acquisition, for purchased in-process technology that had not
reached technological feasibility as of the respective dates of such
transactions and which did not have alternative future uses.
The business of the Company consists of the businesses previously conducted by
US Order, Colonial Data and Colonial Data's subsidiaries. The Company develops
and markets products and services for the telecommunications and financial
services industries through its three business divisions: consumer
telecommunications, electronic commerce and interactive services.
The consumer telecommunications division designs, develops and markets
telecommunications products that support intelligent network services being
developed and implemented by the regional Bell operating companies ("RBOCs") and
other telephone companies ("telcos"). The Company has concentrated its product
development and marketing efforts on products that support Caller ID and other
emerging intelligent network services,
24
<PAGE>
including a smart telephone, the Telesmart 4000/Intelifone(TM), which provide
consumers call management features and the ability to access numerous network
services and interactive applications via telephone. The Company currently
offers a line of Caller ID adjunct units and telephones with integrated Caller
ID, small business telecommunications systems and high-end consumer
telecommunications equipment. The Company also repairs and refurbishes
telecommunications products for commercial customers and provides other services
that support the development and implementation of intelligent network services.
The electronic commerce division develops and markets products and services to
assist financial institutions in their home banking and electronic bill payment
initiatives. The products are designed to assist consumers in accessing and
transacting business with their banks and credit unions electronically, and to
assist financial institutions in connecting to and transacting business with
third parties, including data processors and billers. The services focus on a
financial institution's back office, offering outsourcing for data entry,
telemarketing, customer service and technical support. The Company currently
receives its electronic commerce revenues largely from the sale of products and
services to Visa International Service Association, Inc. ("Visa") member banks.
The interactive services division was established to provide interactive
applications for use on smart telephones and other small screen devices, such as
alpha-numeric pagers, Personal Communication Systems ("PCS") telephones and
personal digital assistants ("PDAs"). The Company intends to sell interactive
applications directly to end users and through other companies, including telcos
and wireless communications companies. The Company's current interactive
applications include electronic national directory assistance lookup, one-way
alpha-numeric paging, one-way internet e-mail, a personal directory data save
and restore function and information services such as news, weather, sports
scores, stock quotes, lottery results and horoscopes.
RESULTS OF OPERATIONS - 1996 COMPARED WITH 1995
The consummation of the Mergers on November 7, 1996 and the required
accounting presentation of the historical financial statements had a significant
impact on the results of operations for 1996 compared to 1995. Consolidated
total revenues and all categories of expenses are significantly greater in 1996
than 1995 because 1996 results include approximately two months of Colonial
Data's operations and 1995 results do not include any of Colonial Data's
operations.
Revenues
The Company's revenues were $13,899,000 in 1996 compared to $4,186,000 in
1995. Product revenues increased $6,772,000 to $8,589,000 in 1996 from
$1,817,000 in 1995. Product revenues in 1996 consisted of $5,955,000 from
Caller ID products and $2,634,000 from small business and smart telephone
equipment. Contributing to the product revenues in 1996 were
25
<PAGE>
sales of $2,845,000 to the Company's direct marketing joint venture, Worldwide
Telecom Partners, Inc. The Company's lease revenues of $1,838,000 in 1996 are
primarily related to revenues from the Company's leasing program in the US West
Communications region. Service fees in 1996 and 1995 were generated primarily
from three sources: (1) customer support services, (2) monthly service fees and
(3) nonrecurring development fees for smart telephone applications. The
Company's customer support services were remarketed by Visa InterActive, Inc.
("Visa Interactive") to Visa member banks under the Company's reseller agreement
with Visa InterActive. Repair and refurbishment services provided by the
consumer telecommunications division contributed 19% of the total 1996 service
revenues.
Cost of Revenues
The Company's cost of revenues increased by $7,978,000 to $10,448,000 for 1996
compared to $2,470,000 in 1995. Product cost of revenues contributed 62% to the
total cost of revenues for 1996. Product cost of revenues consisted of
$4,173,000 from Caller ID products and $2,284,000 from small business and smart
telephone equipment. As a result of the Mergers, the Braun Simmons Acquisition
and change in product mix in 1996, gross margins related to product revenues
were 25% in 1996 compared to 4% in 1995, while gross margins related to services
revenues decreased to 17% from 69%, resulting in a decrease in the Company's
overall gross margin to 25% in 1996 from 41% in 1995. Gross margins from the
Company's leasing activities were approximately 40% for 1996. The Company
expects its gross margin percentages to vary in future periods based upon the
revenue mix between product sales and services revenues and based upon the
composition of services revenues earned during the period.
General and Administrative
General and administrative expenses increased $10,338,000 to $16,121,000 in
1996 from $5,783,000 during the comparable period in 1995. The increase was
primarily attributable to expenses related to the write-off in the fourth
quarter of $2,801,000 related to the Company's investment in Home Financial
Network, Inc. ("HFN"), a development stage personal computer software company,
and the associated goodwill. The Company believes its investment in HFN was
impaired based on its history of losses. Also contributing to the increase was
rent expense of $907,000, employee related expenses for the increase of
personnel, amortization of intangible assets and nonrecurring charges for
certain customer service operations.
In the future, the Company expects that aggregate recurring general and
administrative expenses will 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. During 1997, the Company expects that
general and administrative expenses will increase as the Company upgrades its
systems and operations in anticipation of the potential for increased business
in 1997.
Research and Development
Research and development costs were $2,649,000 in 1996 compared to $1,067,000
in 1995.
26
<PAGE>
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 related expenses for 1996
were largely attributable to developing, designing and testing the Company's
next generation smart telephone, the Telesmart 4000/Intelifone/TM/ smart
telephone, and electronic bill payment software for the electronic commerce
division.
Selling and Marketing
Selling and marketing expenses increased $1,984,000 to $2,011,000 in 1996 from
$27,000 in 1995. The increase is attributed primarily to selling expenses of
$914,000 for the consumer telecommunications division and selling expenses of
$714,000 for the interactive services division relating to an increase in sales
personnel and a substantial increase in advertising and marketing for smart
telephones which were introduced in retail stores and outlets in the fourth
quarter of 1996. The Company expects its advertising and promotion expenses will
increase substantially in 1997 due to the further marketing efforts within the
consumer telecommunications and interactive services divisions.
Provision for Corporate Restructuring
The Company recorded a provision for corporate restructuring during the fourth
quarter of 1996 of $1,568,000. This amount consists of $1,323,000 in facilities
consolidations, $175,000 in relocation expenses for certain employees and
$70,000 for the write-down of processing equipment.
In-Process Research and Development
In connection with the Braun Simmons Acquisition and the Mergers in
September and November 1996, respectively, the Company charged in-process
research and development expenses for purchased in-process technology that had
not reached technological feasibility as of the date of the Mergers and the
Braun Simmons Acquisition and did not have alternative future uses. Amounts
charged to in-process research and development were based on independent
appraisals and totaled $4,914,000 and $72,300,000 for the Braun Simmons
Acquisition and the Mergers respectively.
Other Income, Net
Other income decreased $33,000 or 7% to $410,000 in 1996 from $443,000 in
1995. The decrease is largely associated with recognizing the Company's
proportionate share of losses of HFN and the amortization of the excess of the
purchase price over the Company's share of the equity in net assets of HFN.
This decrease was offset in part by an increase in interest income attributed to
the Company investing funds raised in its June 1995 initial public offering.
27
<PAGE>
Income Taxes
Income taxes increased to $25,000 in 1996 from $0 in 1995 based primarily on
state income taxes incurred in connection with the Company's operations. At
December 31, 1996, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $38,415,000 which expire by 2010. However,
use of these net operating losses in future years may be limited under
applicable tax laws and regulations as a result of the Mergers and the Braun
Simmons Acquisition.
Net Loss and Weighted Average Shares
As a result of the foregoing factors, net loss applicable to common
shareholders increased to $(95,727,000) in 1996 from $(4,718,000) in 1995. The
weighted average shares increased to 18,370,000 in 1996 from 10,772,000 in 1995.
The increase resulted primarily from the shares issued in connection with the
Mergers.
FOURTH QUARTER 1996 COMPARED WITH FOURTH QUARTER 1995 (UNAUDITED)
The following table sets forth selected consolidated statement of operations
data for the three months ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Revenues $ 10,962 $ 1,286
Cost of revenues 8,474 229
-------- -------
Gross profit 2,488 1,057
Operating expenses 85,022 2,492
Other income 525 164
-------- -------
Net loss $(82,009) $(1,271)
======== =======
</TABLE>
The Company's revenues increased 752% to $10,962,000 for the quarter ended
December 31, 1996 from $1,286,000 for the same period last year. The increase
is attributed to the operations of the consumer telecommunications division
subsequent to the Mergers. Revenues from the sale or lease of Caller ID
products represented $7,793,000 or 71% of the total revenues for the fourth
quarter of 1996.
The cost of revenues represented 77% of total revenues, yielding a gross
margin of 23% for the fourth quarter of 1996. The decrease in margins is
attributed to the product mix. In 1995, the Company earned most of its revenues
from services and software programs with low direct costs of revenues. Most
product sales in 1996 were for lower-end model Caller ID adjuncts which yield a
lower margin.
The increase in operating expenses is largely attributed to the in-process
research and development costs, aggregating $77,214,000 that were expensed in
connection with the Mergers and the Braun Simmons Acquisition. Other operating
expenses include
28
<PAGE>
nonrecurring charges for $4,369,000 for restructuring costs and revaluation of a
long-term investment in HFN. The remaining increase is attributable to
operational costs associated with additional personnel and operating facilities
in Connecticut, Ohio and Virginia as a result of the Company's growth and the
Mergers and the Braun Simmons Acquisition.
1995 COMPARED WITH 1994
Revenues
The Company's revenues increased by $2,754,000 from $1,432,000 in 1994 to
$4,186,000 in 1995. This increase was primarily related to the sale of the
Company's products, such as its smart telephones, which the Company began
selling through its "preferred provider" relationship with Visa in 1995. All of
the Company's product sales for 1995 were generated from the sale of its smart
telephones and electronic commerce products. Service fees for 1995 were
generated primarily from three sources: (1) customer support services, (2)
monthly service fees and (3) non-recurring development fees for smart telephone
applications. The Company's customer support services, amounting to $505,000 for
1995, were remarketed by Visa InterActive to Visa member banks under the
Company's reseller agreement with Visa InterActive. The monthly service fees,
which accounted for $911,000 of the Company's service revenues, were from its
customers who used its smart telephones and interactive applications during the
year, compared to $1,235,000 during the same period in 1994. The decrease of
$325,000 was primarily due to the fact that the Company was in the process of
converting these customers to Visa member banks and over time expects to be
offering these services strictly on a wholesale basis. In addition, in 1995,
the Company earned approximately $575,000 in fees for development of smart
telephone applications.
Cost of Revenues
The Company's cost of revenue increased by $1,457,000 for 1995 compared to
1994, due to the sale of its products such as its voice response systems and
smart telephones. The Company's cost of revenue prior to 1995 had consisted of
bill pay processing costs and depreciation of the Company's smart telephones
being utilized by customers for a monthly fee. Beginning in 1995, the Company
began selling its smart telephones and voice response systems pursuant to a
market penetration strategy designed to build an installed base of subscribers
who are potential sources of revenue from monthly fees. Accordingly, in 1995
gross margins related to product sales were 4%, while gross margins related to
service fees increased from 27% to 69%, resulting in an increase in the
Company's overall gross margin from 29% in 1994 to 41% in 1995.
General and Administrative
General and administrative expenses were $5,783,000 in 1995 versus $7,968,000
during the comparable period in 1994. The decrease of $2,185,000 was primarily
due to a one time payment to certain administrative employees in conjunction
with a $3.25 million payment for the August 1, 1994 sale of the Company's bill
pay operations whereby Visa required that all
29
<PAGE>
Company employees who became employees of Visa InterActive cancel their vested
options to eliminate any potential conflict of interest. Of the $3.25 million,
approximately $2.1 million was paid to the Company employees who became Visa
InterActive employees as of August 1, 1994 and $1.1 million was paid to
employees who remained with the Company. This decrease was partially offset by
reduced costs in 1994 associated with certain of the Company's personnel
becoming Visa InterActive employees.
Research and Development
Research and development costs were $1,067,000 in 1995 compared to $1,769,000
in 1994. Research and development related expenses for 1995 were largely
attributable to developing, designing and testing the Company's next generation
smart telephone, the Telesmart 4000/Intelifone/TM/ smart telephone.
The decrease of $702,000 from 1994 was partially due to a one time payment to
product development employees in August 1994 in conjunction with $3.25 million
payment for the cancellation of their vested options (see "general and
administrative" above) of which approximately $350,000 was attributed to
research and development employees. In addition, the decrease was due to
reduced costs associated with approximately 60% of the Company's personnel
becoming Visa Interactive employees effective August 1, 1994.
Selling and Marketing
Selling and marketing expenses decreased by $820,000 from $847,000 in 1994 to
$27,000 in 1995. Advertising expenses were significant prior to 1995. The
Company curtailed advertising after the sale of the Company's electronic bill
pay system to Visa in August 1994.
Other Income, Net
In August 1994, the Company sold its electronic banking and bill pay
operations to Visa and recognized a one-time non-operating gain of $14,523,000
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
electronic commerce. 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.
Interest income was $970,000 for 1995 compared to $72,000 in 1994. The
increase of $898,000 was due to the significant increase in the Company's cash
balances and short-term investments resulting from its June 1995 initial public
offering.
The Company's interest expense consists of interest incurred in connection
with capital leases for computer equipment and outstanding borrowings with
WorldCorp, Inc. ("WorldCorp") and VeriFone, Inc. ("VeriFone"). Interest expense
was $286,000 in 1995 compared to $650,000 in 1994. The
30
<PAGE>
decrease of $364,000 was primarily due to two factors: (i) in June 1995, the
Company retired substantially all long-term debt as it related to its capital
leases and outstanding borrowings with WorldCorp and VeriFone with proceeds
derived from its initial public offering and (ii) in August 1994, in addition to
purchasing the Company's electronic banking and bill pay operations, Visa
assumed $853,000 of the Company's capital lease obligations and miscellaneous
liabilities.
Equity in loss of affiliate was $316,000 in 1995 compared to $0 in 1994. The
increase was due to the Company recording its proportionate share of losses of
HFN and the amortization of the excess of the purchase price over the Company's
share of the equity in net assets of HFN, following the Company's 40% investment
in HFN in October 1995.
Income Taxes
Income taxes decreased from $70,000 in 1994 to $0 in 1995 based primarily on
state income taxes incurred on the Company's 1994 income before income taxes of
$3,783,000.
Net Income (Loss) and Weighted Average Shares
As a result of the foregoing factors, net income (loss) applicable to common
shareholders decreased to a net loss of $(5,399,000) in 1995 from a net income
of $1,818,000 in 1994. The weighted average shares increased to 10,772,000 in
1995 from 8,243,000 in 1994. The increase resulted primarily from the issuance
of 3,062,500 shares offered by the Company in an initial public offering on June
2, 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's cash, equivalents and short-term investments
increased by $13,942,000 resulting from the Mergers in November 1996, offset in
part by cash used in operations and the funding of certain equipment purchases.
At December 31, 1996, the Company had $39,062,000 in cash, cash equivalents and
short-term investments. To improve the yield on its cash and equivalent
holdings, in 1996, the Company invested in financial instruments that are
diversified among high credit quality securities. The investments are reported
at cost, which approximates market value, and are classified as short-term
investments and cash equivalents. Additionally, at December 31, 1996, the
Company had working capital of $63,532,000 with no long-term debt. The Company's
total assets exceeded total liabilities by $124,289,000.
The Company's cash requirements for operating and investing activities in
1996 were financed primarily by the net proceeds from an initial public offering
in June 1995 aggregating approximately $41.6 million. In connection with the
offering, the Company issued and sold 3,062,500 shares at $14.75 per share.
The Company's principal needs for cash in 1996 were for investments in
property and equipment and to fund working capital, primarily related to
inventories and accounts receivable.
31
<PAGE>
Capital expenditures for the year ended December 31, 1996 aggregated $2,304,000.
The Company funded an increase in accounts receivable, prepaid expenses and
inventories of $2,318,000, $1,404,000, and $1,020,000, respectively for the year
ended December 31, 1996. The increase in accounts receivable is attributed to
the timing of receipts for products shipped relating to the consumer
telecommunications division. The increase in prepaid expenses is related to
deposits paid, prepaid insurance and prepaid advertising and other charges. The
increase in inventories was made to ensure that units were available for the
timely fulfillment of sales orders. During 1996, the Company increased its
accounts payable, accrued expenses and other liabilities by $5,123,000 from
1995.
On July 1, 1996, the Company began leasing a facility under an operating
lease for 30,000 additional square feet of office space. The lease covers a
fifty-three month period from July 1, 1996 with aggregate minimum lease payments
equal to approximately $2,700,000.
The Company maintains three credit agreements aggregating $20,000,000. The
first credit agreement covers the period through May 1997 and is a revolving
line of credit of $1,000,000. The second credit agreement is a $4,000,000 line
of credit utilized for the purpose of issuing letters of credit. The third
credit agreement is a credit facility totaling $15,000,000 for cash advances and
letters of credit. As of December 31, 1996, the Company had outstanding
$2,000,000 under a line of credit and had available $13,500,000 to fund draw
downs and letters of credit.
The Company's primary needs for cash in the future are for investments in
product development, working capital, the financing of operations, strategic
ventures, potential acquisitions, capital expenditures and the upgrade of the
Company's systems and operations. In order to meet the Company's needs for cash
over the next twelve months, the Company will utilize proceeds from its 1995
initial public offering and cash received in the Mergers. Additionally, the
Company may utilize funds it expects to generate from operations in the second
half of 1997.
INFLATION
The Company believes that inflation has not had a material effect on the
Company's sales and revenue during the past three years.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers that the following important factors, among others, in some cases have
affected the Company's actual results, and could cause the Company's actual
results for 1997 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
32
<PAGE>
Uncertainty as to Future Financial Results
The Company believes that the Mergers will offer opportunities for long-term
efficiencies that should positively affect future operating results of the
combined companies. However, the combined companies will be more complex and
diverse than either US Order or Colonial Data individually, and the combination
and continued operation of their distinct business operations will present
difficult challenges for the Company's management due to the increased time and
resources required in the management effort. While the management and the Board
believe that the combination can be effected in a manner that will realize the
value of the two companies, neither management group has experience in
combinations of this size or complexity. Accordingly, there can be no assurance
that the process of effecting the business combination can be effectively
managed to realize the operational efficiencies anticipated to result from the
Mergers.
Following the Mergers, in order to maintain and increase profitability, the
combined Company will need to successfully integrate and streamline overlapping
functions. The two predecessor companies had different systems and procedures in
many operational areas that must be rationalized and integrated. There can be no
assurances that integration will be accomplished smoothly or successfully. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of certain
operations following the Mergers will require the dedication of management
resources that may temporarily distract attention from the day-to-day business
of the combined companies. Failure to effectively accomplish the integration of
the two companies' operations could have an adverse effect on the Company's
results of operation and financial condition.
Developing Marketplace
Home banking and smart telephones 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 the Company's products and services will be commercially
successful or benefit from such growth.
Much of the Company's success in the smart telephone market depends on the
Company's ability to meet design specifications and delivery requirements for
its products and services. There can be no assurance of the timing of
introduction of, necessary regulatory approvals for, or market acceptance of
these services and applications. The Company faces competition in these markets
from other emerging interactive applications delivered through personal
computers, cable television and Integrated Service Digital Network ("ISDN").
33
<PAGE>
Fluctuations in Operating Results
Historically, US Order and Colonial Data have experienced fluctuations in
quarterly operating results, and accordingly, the Company may experience
fluctuations in quarterly operating results due to a variety of factors, some of
which are beyond the Company's control. These include the size and timing of
customer orders or the royalty payments from Visa InterActive, if any, changes
in the Company's pricing policies or those of its competitors, new product
introductions or enhancements by competitors, delays in the introduction of new
products or product enhancements by the Company 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, marketing, and research and
development expenses by the Company and its competitors, the timing of programs
offering Caller ID or other intelligent network services by a telco, disruptions
in sources of supply, the effects of regulation on Caller ID and other
intelligent network services, the timing and extent of promotional activities by
a telco, changes in service charges by a telco, other changes in operating
expenses, personnel changes and general economic conditions. Additionally,
certain RBOCs have entered into merger agreements. The Company is unable to
assess the future effect on the company of these mergers, if consummated, and of
other possible consolidations in the telecommunications industry. No assurance
can be given that such quarterly variations will not occur in the future and,
accordingly, the results of any one quarter may not be indicative of the
operating results for future quarters.
Reliance on Caller ID Revenues
A substantial majority of the Company's revenues are derived from sales and
leases of its Caller ID products. The sale or lease of these products is
directly linked to the implementation and promotion of Caller ID service by
telcos. The timing of such implementation may be affected by government
regulation, by changes in the telecommunications industry resulting from changes
in the regulatory and competitive environment, by switch and software upgrades
and by other factors. There can be no assurance that telcos will continue to
introduce and promote this service successfully or that it will gain widespread
market acceptance. Delays in the introduction of Caller ID service in local
markets or failure of this service to gain widespread market acceptance would
materially and adversely affect the Company's business, operating results and
financial condition.
Concentration of Distribution of Products and Services
The Company sells its telecommunications products and services to telcos,
individual telephone subscribers, other equipment manufacturers on a private
label basis ("private label customers") and retail chains. In addition, the
Company leases its products to individual telco subscribers. Sales and leases to
individual telco subscribers are largely dependent on direct fulfillment
distribution arrangements with certain RBOCs and other telcos. Since the
Company views the telcos with which it maintains direct fulfillment
relationships as its customers, it considers its customer base to be highly
concentrated. The Company's current telco fulfillment arrangements are not
exclusive and may
34
<PAGE>
be terminated by either party. The loss of any one or more of the Company's
major customers or the termination of its distribution arrangements with any
telco or the failure to be selected for significant orders or programs by a
telco could materially and adversely affect the Company's business, operating
results, and financial condition. In addition, consolidation in the
telecommunications industry or changes in the telecommunications regulatory
environment could result in the loss of such customers or business.
InteliData Common Stock Owned by WorldCorp
As of December 31, 1996, WorldCorp beneficially owned approximately 29% of the
outstanding common stock of the Company. WorldCorp is highly leveraged, and
therefore requires substantial funds to meet debt service requirements each
year. As a result of the Company's cash requirements, it may be required to sell
shares of the Company's common stock 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. In addition, the Company's Board of Directors
has nine members, four of whom also serve on the Board of Directors of
WorldCorp. As a result of membership on the Company's Board and stock ownership,
WorldCorp may have a significant influence on the decisions made by the Company.
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. There can be no assurance that the
Company will not encounter unanticipated technical, marketing or other problems
or delays relating to new products, features or services which the Company has
recently introduced or which it may introduce in the future. Moreover, there
can be no assurance that the Company's new products, features or services will
be successful, that the introduction of new products, features or services by
the Company's competitors will not materially and adversely affect the sales of
the Company's existing products or that the Company will be able to adapt to
future changes in the telecommunications industry. Most of the Company's
competitors and potential competitors have significantly greater financial,
technological and research and development resources than the Company.
Dependence on Foreign Production
The Company's Caller ID units and certain other products, including the smart
telephone, the Telesmart 4000/Intelifone/TM, are manufactured by companies with
facilities in Hong Kong, Malaysia, and the People's Republic of China. These
facilities are supplemented, in part, by other manufacturers in Asia for certain
integrated telephone and small business system products and by limited
manufacturing facilities in Connecticut. The availability or cost of these
Caller ID units and smart telephones may be adversely affected by political,
economic or labor conditions
35
<PAGE>
in Hong Kong, Malaysia or the People's Republic of China, 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 InteliData will import products could adversely
affect InteliData's foreign manufacturing strategies.
Restrictions from the Visa Agreement
As a condition of Visa's acquisition of the Company's bill payment operations
and technology (the "Visa Bill-Pay System"), the Company 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 the Company's reliance upon Visa. The Company's dependence on Visa, and
the terms of the agreement between the parties, may have a material adverse
effect on the Company.
Importance of Strategic Alliances
One of the Company's business strategies is to manufacture or sell its
products and services through strategic alliances. The success of this strategy
will depend to an extent both on the ultimate success of its strategic partners
as well as on the ability of its partners to successfully market the Company's
products and services. There can be no assurance that any alliance partners will
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.
Competition
Consumer Telecommunications
---------------------------
The market for the Company's products is highly competitive and subject to
increased competition resulting from rapid technological change as well as
resulting from changes in the telecommunications regulatory environment,
telecommunications industry consolidation and the emergence of new market
entrants. At present, the Company's principal competitors are CIDCO, Lucent and
Northern Telecom. The Company's Caller ID products also compete with Caller ID
telephones offered by Panasonic, Sony, Thomson and US Electronics.
Marketing of the Company's smart telephone is subject to competition from
smart telephones marketed or developed by Philips, Northern Telecom and CIDCO as
well as other emerging platforms for interactive applications delivered through
personal computers and cable television. The Company expects competition in the
markets for its consumer telecommunications products and services to increase in
the future and expects competition from existing and new competitors, possibly
including RBOCs, other telcos or other current customers, as well as from
network switch-based services and from the increased application of cellular
technology. The Company's primary current and potential competitors in the
market for its consumer telecommunications products and services have
substantially greater financial, marketing and technical resources than the
Company. Competition could materially and adversely affect the Company's results
of operations through price reductions and loss of market share.
The Company competes with a large number of competitors for its repair
services and other services supporting the development and implementation of
intelligent network services. Several
36
<PAGE>
of the Company's competitors in the market for such services have substantially
greater financial, marketing and technological resources than the Company. There
can be no assurance that the Company will be able to continue to compete
successfully against its existing competitors or that it will be able to compete
successfully against new competitors.
Electronic Commerce
-------------------
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. 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 have
developed home banking products for their own customers and, in the future, may
offer these services to other banks. Non-banks also may develop home banking
products to offer to banks. Computer software and data processing companies also
offer home banking services. Visa competes with other organizations, including
MasterCard International, Inc. ("MasterCard"), which offers its Masterbanking
home banking service through CheckFree Corporation. Many competitors exist for
the Company's various banking products including other manufacturers of touch-
tone response systems, other financial software companies and financial services
software and service companies. The Company believes that its primary
competition for its customer support services will come from financial
institutions and third parties that choose to offer customer support services
either directly through Visa's customer support messaging standard ("CSMS")
product or on their own. The Company expects that competition in all of these
areas will increase in the near future.
Relationship with Visa
The Company sold the Visa Bill-Pay System to Visa on August 1, 1994, for
approximately $15 million in cash, the assumption of certain liabilities and
rights to a 72-month royalty period 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 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.
Royalties to the Company are calculated and paid by Visa InterActive quarterly
during the Royalty Period. Because the amount of the royalties to the Company 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 the Company. The royalty payment will be reduced for each quarter
through December 31, 1997, by an offset amount (the "Visa Offset") which was
initially set at $73,000. 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 the Company, and the difference between $73,000
and the royalty otherwise due will increase the size of the Visa Offset for the
next quarter. The aggregate amount of the Visa Offset for the Royalty Period
37
<PAGE>
is $880,000. The Company did not receive any royalty revenue from Visa in 1996
due to the Visa Offset and does not expect to receive any royalty revenue after
application of the Visa Offset through at least the end of the second quarter of
1997.
In addition, under the terms of its agreement with Visa, Visa InterActive is
not obligated to pay royalties to the Company 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 the
Company's technology, this could have a material adverse effect on the amount of
royalties payable by Visa InterActive to the Company. As a condition of Visa's
acquisition of the Visa Bill-Pay System, the Company 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 the Company's reliance upon Visa.
Dependence on Key Employees
The Company is highly dependent on certain key executive officers and
technical employees to manage the operations and business of the Company as well
as to implement the business plans of the Company on an ongoing basis. The loss
of any such key employees could have an adverse impact on the future operations
of the Company.
Regulation
The Telecommunications Act of 1996 and regulations or orders promulgated
thereunder may result in or accelerate changes in various aspects of the
telecommunications industry, including the competitive environment, the delivery
and pricing of various telecommunications products and services and possible
consolidation. Although the Company is unable to predict what effect, if any,
the Telecommunications Act of 1996 or other regulatory developments may have
upon the telecommunications industry or the Company's business, any such effects
could have a material adverse impact on the future operations of the Company.
In the United States, Caller ID and other intelligent network services are
subject to federal and state regulation. Caller ID and other intelligent network
services may in the future be subject to further regulation by the federal
government, state public utility commissions and other regulatory authorities,
as well as court challenges, including possible challenges due to protests from
special interest groups that object to such services on the basis of privacy
concerns. An order issued by the FCC effective December 1, 1995, requires all
United States telephone service providers with Signaling System 7 switching
architecture to transmit to each other without charge Caller ID number
information on interstate calls within the United States (except for public pay
phones and party lines). The FCC's order also requires that telcos that offer
Caller ID service must provide to their telephone subscribers without charge a
per-call blocking mechanism to block the transmission of their Caller ID
information on interstate calls and must inform subscribers that their telephone
numbers may be identified to a called party and how to use this blocking
capability.
38
<PAGE>
Volatility of Stock Price
The market price of the Company's stock has experienced significant
volatility. 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 stock.
Limited Proprietary Protection
The Company possesses limited patent or registered intellectual property
rights with respect to its technology. The Company depends in part upon its
proprietary technology and know-how to differentiate its products from those of
its competitors and works independently and from time to time with third parties
with respect to the design and engineering of its own products. The Company also
relies on a combination of contractual rights and trade secret laws to protect
its proprietary technology. There can be no assurance, however, that the Company
will be able to protect its technology or successfully develop new technology or
gain access to such technology or that third parties will not be able to develop
similar technology independently or that competitors will not obtain
unauthorized access to the Company's proprietary technology, that third parties
will not misuse the technology to which the Company has granted access, or that
the Company's contractual or legal remedies will be sufficient to protect the
Company's interests in its proprietary technology.
Certain of Lucent's Caller ID patents are licensed by Lucent to the Company
and others, including the Company's competitors. If the Lucent license were
terminated and the Company were unable to negotiate a new patent license
agreement with Lucent, the Company would no longer be authorized to manufacture
or sell Caller ID products in the United States other than to the RBOCs and to
Lucent, and the Company's business would be materially and adversely affected.
Limited Sources of Supply
The key components used in the Company's products are currently being
purchased from multiple sources, except for its application specific integrated
circuit ("ASIC") chips, which are purchased from a single source. Although the
Company believes it could develop other sources for each of the components for
its products, the process could take several months, and the inability or
refusal of any such source to continue to supply components could have a
material adverse effect on the Company pending the development of an alternative
source.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995................... 41
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994............................................. 42
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1995 and 1994............................................. 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994............................................. 44
Independent Auditors' Reports ...................................................... 64
</TABLE>
40
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,644 $ 25,120
Short-term investments 12,418 --
Accounts receivable, net of reserves of $1,788
in 1996 and $63 in 1995 (Note 16) 12,925 841
Inventories (Note 5) 28,420 801
Prepaid expenses and other current assets 2,582 306
--------- --------
Total current assets 82,989 27,068
--------- --------
NONCURRENT ASSETS
Costs in excess of net assets acquired (Note 3) 50,061 --
Property, plant and equipment, net (Note 6) 9,143 1,448
Long-term investments (Note 10) -- 8,228
Restricted cash -- 3,309
Other assets 1,553 199
--------- --------
TOTAL ASSETS $143,746 $ 40,252
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,684 $ 1,651
Accrued expenses and other liabilities (Note 7) 12,773 868
Short-term borrowings (Note 8) 2,000 --
--------- --------
TOTAL LIABILITIES 19,457 2,519
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY (Note 11)
Preferred stock, $0.001 par value; authorized 5,000,000 shares in 1996 and
1995; no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 60,000,000 shares in 1996
and 30,000,000 shares in 1995; issued and outstanding 31,816,693 shares
in 1996 and 15,529,818 shares in 1995 32 16
Additional paid-in capital 243,757 61,650
Receivable from sale of stock (2,456) (2,488)
Deferred compensation (133) (261)
Accumulated deficit (116,911) (21,184)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 124,289 37,733
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $143,746 $ 40,252
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
REVENUES
Product $ 8,589 $ 1,817 $ --
Leasing 1,838 -- --
Services 3,472 2,369 1,432
-------- ------- --------
Total revenues 13,899 4,186 1,432
-------- ------- --------
COST OF REVENUES
Product 6,457 1,747 1,013
Leasing 1,105 -- --
Services 2,886 723 --
-------- ------- --------
Total cost of revenues 10,448 2,470 1,013
-------- ------- --------
Gross profit 3,451 1,716 419
OPERATING EXPENSES (Notes 3, 9, and 10)
General and administrative 16,121 5,783 7,968
Research and development 2,649 1,067 1,769
Selling and marketing 2,011 27 847
Provision for corporate restructuring (Note 12) 1,568 -- --
In-process research and development 77,214 -- --
-------- ------- --------
Total operating expenses 99,563 6,877 10,584
-------- ------- --------
Operating loss (96,112) (5,161) (10,165)
-------- ------- --------
OTHER INCOME (EXPENSE)
Gain on sale of bill pay operations (Note 13) -- -- 14,523
Interest, net 1,445 684 (578)
Other, net (Note 10) (1,035) (241) 3
-------- ------- --------
Total other income, net 410 443 13,948
-------- ------- --------
Income (loss) before income taxes (95,702) (4,718) 3,783
Income taxes (Note 15) 25 -- 70
-------- ------- --------
Net income (loss) (95,727) (4,718) 3,713
Preferred dividend requirement (Note 13) -- (681) (1,895)
-------- ------- --------
Net income (loss) applicable to common shareholders $(95,727) $(5,399) $ 1,818
======== ======= ========
Net income (loss) per common share $ (5.21) $ (0.50) $ 0.28
======== ======= ========
Weighted average shares 18,370 10,772 8,243
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
Series A Series C
Convertible Convertible
preferred stock preferred stock Common stock Additional
-------------------- -------------------- ----------------------- paid-in
Shares Amount Shares Amount Shares Amount capital
--------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,1993 5,204 $ 5 1,683 $ 2 5,000 $ 5 $ 16,817
Sale of common stock -- -- -- -- 121 -- 137
Redemption of preferred
stock -- -- (535) (1) -- -- (3,816)
Dividends paid--Series C,
$.64 per share -- -- -- -- -- -- (183)
Series B redeemable
preferred stock accumu-
lated dividends -- -- -- -- -- -- (466)
Net income -- -- -- -- -- -- --
------ ------ ------ ----- ------ ------ --------
Balance at December 31,1994 5,204 5 1,148 1 5,121 5 12,489
Sale of common stock
in public offering, net -- -- -- -- 3,062 3 41,643
Conversion of preferred
stock to common stock (5,204) (5) (1,148) (1) 6,352 6 --
Issuance of common stock
for long-term investment -- -- -- -- 230 -- 3,392
Issuance of common stock
for investment in
affiliate, net -- -- -- -- 297 1 5,046
Issuance of common stock
upon exercise of options
and warrants -- -- -- -- 468 1 1,419
Deferred compensation on
grant of stock options -- -- -- -- -- -- 486
Compensation expense -- -- -- -- -- -- --
Dividends paid - Series A -- -- -- -- -- -- (1,577)
Dividends paid - Series C -- -- -- -- -- -- (1,107)
Dividends accumulated and
paid - Series B -- -- -- -- -- -- (141)
Use of advertising credits -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------ ------ ------ ----- ------- ------ --------
Balance at December 31,1995 -- -- -- -- 15,530 16 61,650
Issuance of common stock
related to the
Braun Simmons Acqusition -- -- -- -- 375 -- 4,170
Issuance of common stock
related to merger with
Colonial Data -- -- -- -- 15,406 15 179,103
Retirement of common
stock for long-term
investment -- -- -- -- (230) -- (3,392)
Issuance of common stock
upon exercise of
options and warrants -- -- -- -- 730 1 2,176
Issuance of common stock
related to employee
stock purchase plan -- -- -- -- 6 -- 50
Use of advertising credits -- -- -- -- -- -- --
Compensation expense -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------ ------ ------ ----- ------- ------ --------
Balance at December 31,1996 -- $ -- -- $ -- 31,817 $ 32 $243,757
====== ====== ====== ===== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Receivable
from sale Deferred Accumulated
of stock compensation deficit Total
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31,1993 $ (2,500) $ -- $ (20,179) $ (5,850)
Sale of common stock -- -- -- 137
Redemption of preferred
stock -- -- -- (3,817)
Dividends paid--Series C,
$.64 per share -- -- -- (183)
Series B redeemable
preferred stock accumu-
lated dividends -- -- -- (466)
Net income -- -- 3,713 3,713
--------- ------------ ----------- ------------
Balance at December 31,1994 (2,500) -- (16,466) (6,466)
Sale of common stock
in public offering, net -- -- -- 41,646
Conversion of preferred
stock to common stock -- -- -- --
Issuance of common stock
for long-term investment -- -- -- 3,392
Issuance of common stock
for investment in
affiliate, net -- -- -- 5,047
Issuance of common stock
upon exercise of options
and warrants -- -- -- 1,420
Deferred compensation on
grant of stock options -- (486) -- --
Compensation expense -- 225 -- 225
Dividends paid - Series A -- -- -- (1,577)
Dividends paid - Series C -- -- -- (1,107)
Dividends accumulated and
paid - Series B -- -- -- (141)
Use of advertising credits 12 -- -- 12
Net loss -- -- (4,718) (4,718)
--------- ------------ ----------- ------------
Balance at December 31,1995 (2,488) (261) (21,184) 37,733
Issuance of common stock
related to the Braun
Simmons Acquisition -- -- -- 4,170
Issuance of common stock
related to merger with
Colonial Data -- -- -- 179,118
Retirement of common
stock for long-term
investment -- -- -- (3,392)
Issuance of common stock
upon exercise of
options and warrants -- -- -- 2,177
Issuance of common stock
related to employee
stock purchase plan -- -- -- 50
Use of advertising credits 32 -- -- 32
Compensation expense -- 128 -- 128
Net loss -- -- (95,727) (95,727)
--------- ------------ ----------- ------------
Balance at December 31,1996 $ (2,456) $ (133) $(116,911) $124,289
======== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(95,727) $(4,718) $ 3,713
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
In-process research and development 77,214 -- --
Depreciation and amortization 2,725 619 749
Equity in loss of long-term investments 2,801 316 --
Receipt of affiliate stock for services provided -- (87) --
Deferred compensation expense 128 225 --
Gain on sale of bill pay operations and other assets (231) (75) (14,526)
Other noncash activities 130 -- 35
Changes in certain assets and liabilities, net of effects of non-cash
transactions including acquisitions:
Accounts receivable (2,318) (681) (96)
Prepaid expenses and other current assets (1,404) 155 (219)
Inventories (1,020) (802) --
Other assets 3,742 (87) (38)
Accounts payable, accrued expenses and other liabilities 5,123 1,079 191
Due from (to) affiliates -- (113) (293)
-------- ------- --------
Net cash used in operating activities (8,837) (4,169) (10,484)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (12,418) -- --
Purchases of property, plant and equipment (2,304) (1,064) (314)
Change in restricted cash 3,309 (3,309) --
Proceeds from sale of bill pay operations and other assets, net 231 683 16,100
Acquisitions, net of cash acquired 17,578 -- --
-------- ------- --------
Net cash provided by (used in) investing activities 6,396 (3,690) 15,786
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) related to borrowings 2,000 (4,633) --
Proceeds from issuances of common stock, net of discount 2,177 43,420 137
Payments for redemption of preferred stock -- (4,925) (5,968)
Payment of preferred stock dividends -- (2,684) (183)
Other financing activities (212) (767) (164)
-------- ------- --------
Net cash provided by (used in) financing activities 3,965 30,411 (6,178)
-------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,524 22,552 (876)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,120 2,568 3,444
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,644 $25,120 $ 2,568
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION
InteliData Technologies Corporation ("InteliData" or the "Company"), is
engaged in providing products and services for three primary markets: consumer
telecommunications, electronic commerce and interactive services. The Company
designs, develops and markets consumer telecommunications products including
Caller ID adjuncts, integrated telephones and smart telephones. The Company
also develops products and services for financial institutions to assist in home
banking and electronic bill payment initiatives and designs and markets
interactive service applications for smart telephones and other small screen
devices.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation - The consolidated financial statements include the accounts
of the Company after elimination of all intercompany balances and transactions.
Certain items from the 1995 and 1994 financial statements have been reclassified
to conform to the 1996 financial statement presentation.
(b) Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. The Company
considers the impairment of long-lived assets based on an assessment of the
asset's ability to contribute to the profitability of the Company using
estimates of expected future cash flows.
(c) Revenue Recognition - Revenue is recorded when products and repair
merchandise are shipped to the customer. Lease revenue is recorded based on the
units in service at the end of the prior month since these leases are cancelable
at any time. The Company recognizes service revenue from consulting and
maintenance contracts as the services are provided.
(d) Cash and Cash Equivalents - The Company considers all non-restricted highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents are stated at cost, which approximates
market.
(e) Inventories - Inventories are stated at the lower of cost or market, with
cost determined on a weighted average basis.
45
<PAGE>
(f) Property, plant and equipment - Property, plant 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.
Depreciation of property and equipment is calculated using the straight-
line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Building and improvements 5-20
Leasehold improvements 5-15
Leased equipment 2-5
Equipment 3-7
Molds and tools 3-5
</TABLE>
Equipment held under capital lease and leasehold improvements are amortized
using the straight-line method over the lease term or estimated useful life,
whichever is shorter. The cost and accumulated depreciation of assets sold or
retired are removed from the respective accounts and any gain or loss is
reflected in income. Maintenance and repairs are charged to expense as
incurred.
(g) Long-term Investments - Long-term investments at December 31, 1995 consisted
of stock in Colonial Data Technologies Corp. ("Colonial Data") and an investment
in Home Financial Network, Inc. ("HFN"). The investment in Colonial Data was
recorded at its original cost at December 31, 1995. The Company used the equity
method of accounting for its investment in and earnings of HFN in which the
Company had the ability to exert significant influence, but not control, over
the operating and financial policies of HFN. The excess of purchase cost of
investments in affiliate over the Company's proportional amount of the fair
value of net assets acquired was considered to be goodwill and was being
amortized over a five year period on a straight-line basis.
(h) Intangible Assets - The Company carries its intangible assets, including
costs in excess of net assets acquired and other intangible assets, at cost
which are amortized using the straight-line method over 2 to 15 years. Other
intangible assets are reported in other assets on the balance sheet.
(i) Income Taxes - Income taxes are accounted for in accordance with the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
46
<PAGE>
(j) Accounting for Stock-Based Compensation - The Company applies APB Opinion
No. 25 and related interpretations in accounting for its plans. Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the Financial Accounting Standards Board in 1995 and,
if fully adopted, changes the methods for recognition of cost on plans similar
to those of the Company. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
(k) Net 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 entirely of stock options and warrants. Stock issued
and stock options granted during the 12-month period preceding the date of the
Company's initial public offering on June 2, 1995 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.
Dividend requirements on all series of the Company's preferred stock prior
to the redemption or conversion of such preferred stock are deducted from net
income or loss applicable to common shareholders in computing income (loss) per
common share. The preferred dividend requirements were $0, $681,000 and
$1,895,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
and included undeclared dividends for 1994 of $1,712,000, or $.21 per common
share.
(3) ACQUISITIONS
On November 7, 1996 US Order, Inc. ("US Order") and Colonial Data were merged
with and into InteliData Technologies Corporation, a newly formed corporation,
through an exchange of stock ("Mergers"). Upon consummation of the Mergers, each
outstanding share of US Order common stock was converted into one share of
InteliData common stock and each outstanding share of Colonial Data common stock
was converted into one share of InteliData common stock. The transaction was
accounted for as a purchase of Colonial Data by US Order. Accordingly, the
historical financial results of US Order are the historical financial results of
InteliData.
Effective September 30, 1996 Braun Simmons & Co., Inc. ("Braun Simmons"), a
firm specializing in the development of home banking and electronic commerce
solutions for financial institutions, was merged into US Order (the "Braun
Simmons Acquisition"). This merger was accounted for as a purchase of Braun
Simmons by US Order. US Order acquired all of the outstanding stock of Braun
Simmons for $2 million and 375,000 shares of the Company's common stock.
47
<PAGE>
(a) Unaudited Pro Forma Condensed Consolidated Financial Information
The unaudited pro forma condensed consolidated statements of operations for
the years ended December 31, 1996 and 1995 give effect to the Mergers and the
Braun Simmons Acquisition as if each was completed as of January 1, 1995 and
combines US Order's, Braun Simmons' and Colonial Data's statements of operations
for each of those periods. Such statements of operations do not include the
combined effect of the $77 million nonrecurring charges for in-process research
and development. However, such statements do reflect adjustments for the
elimination of historical transactions between US Order, Braun Simmons and
Colonial Data, amortization of goodwill and related income tax effects.
The unaudited pro forma condensed consolidated financial information is
provided for illustrative purposes only and is not necessarily indicative of the
consolidated financial information that would have been reported had the mergers
occurred on the dates indicated, nor do they represent a forecast of the
consolidated financial information for any future period. The unaudited pro
forma condensed consolidated financial information should be read in conjunction
with the historical financial statements and accompanying notes of the Company.
Shown below is the unaudited pro forma condensed consolidated statements of
operations for the combined businesses of US Order, Braun Simmons and Colonial
Data (in thousands, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995:
Historical Pro Forma
---------------------------------------- ----------
US Order Braun Simmons Colonial Data Adjustments Reference InteliData
-------- ------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 4,186 $1,841 $74,194 $ -- $ 80,221
Cost of revenues............... 2,470 1,024 44,240 1,089 (2) 48,823
Gross profit................... 1,716 817 29,954 (1,089) (2) 31,398
Operating expenses............. 6,877 826 11,056 5,494 (3) 24,253
Operating income (loss)........ (5,161) (9) 18,898 (6,583) (2)(3) 7,145
Net income (loss).............. (4,718) (29) 12,523 (4,313) (2)(3)(4)(5) 3,463
Net income (loss) per share.... $ (0.50) $ 0.85 $ 0.11
</TABLE>
YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
---------------------------------------- ----------
US Order Braun Simmons Colonial Data Adjustments Reference InteliData
-------- ------------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 4,227 $3,653 $63,987 $(1,894) (1) $ 69,973
Cost of revenues............... 3,832 2,272 43,490 101 (1)(2) 49,695
Gross profit................... 395 1,381 20,497 (1,995) (2) 20,278
Operating expenses............. 19,911 1,284 18,312 2,285 (3) 41,792
Operating income (loss)........ (19,516) 97 2,185 (4,280) (2)(3) (21,514)
Net income (loss).............. (19,349) 67 688 4,011 (2)(3)(4)(5) (14,583)
Net income (loss) per share.... $ (1.20) $ 0.04 $ (0.46)
</TABLE>
Pro Forma Adjustments
The following pro forma adjustments have been made to the unaudited pro forma
condensed consolidated financial information:
48
<PAGE>
(1) Reflects the elimination of intercorporate transactions.
(2) Reflects the amortization associated with an allocation of the purchase
price of Colonial Data for its lease base of $1.9 million to recognize the
excess of the estimated fair market value over the carrying amount and its
amortization on a straight-line basis over five years.
(3) Reflects the allocation of purchase price to developed technology and
goodwill. Such developed technology is amortized on a straight-line basis over
two years; goodwill is amortized on a straight-line basis over 7 years for
Braun Simmons and 15 years for Colonial Data.
(4) Reflects accrual of the transactions and other related costs. Estimated
costs incurred by Colonial Data relating to the Mergers of $2 million have
been reflected as expenses in the pro forma statement of operations for the
year ended December 31, 1995. Estimated costs incurred by Braun Simmons
relating to the Braun Simmons Acquisition of $50,000 have been reflected as
expenses in the pro forma consolidated condensed statement of operations for
the year ended December 31, 1995.
(5) Reflects the effect of the combination of Braun Simmons', US Order's
and Colonial Data's operations and the above adjustments on income taxes. A
valuation allowance has been recognized for the pro forma net deferred tax
assets of InteliData, relating primarily to operating loss carryforwards
generated by US Order prior to the Mergers and the Braun Simmons Acquisition,
based on an assessment of the likelihood of recoverability of such amounts. As
a result of the Mergers and the Braun Simmons Acquisition, the use of US
Order's operating loss carryforwards may be limited in future years.
(b) Purchase Accounting
The purchase amount of Braun Simmons was:
<TABLE>
<S> <C>
Fair value of common stock issued.. $4,170
Cash consideration................. 2,000
US Order transaction costs......... 913
------
Total........................... $7,083
======
</TABLE>
The purchase amount was allocated for Braun Simmons as follows:
<TABLE>
<S> <C>
Current assets..................... $ 700
Equipment and other................ 286
In-process research and development 4,914
Goodwill........................... 1,898
Liabilities assumed................ (715)
------
Total........................... $7,083
======
</TABLE>
49
<PAGE>
The purchase amount of Colonial Data was:
<TABLE>
<S> <C>
Fair value of common stock issued..................... $179,118
Fair value of employee stock options and warrants..... 2,805
Cost of previous investment in Colonial Data.......... 3,393
US Order transaction costs............................ 1,309
--------
Total......................................... $186,625
========
</TABLE>
The purchase amount was allocated for Colonial Data as follows:
<TABLE>
<S> <C>
Current assets....................... $ 60,488
Lease base........................... 3,747
Equipment and other.................. 5,754
In-process research and development.. 72,300
Developed technology................. 1,418
Goodwill............................. 49,483
Liabilities assumed.................. (6,565)
--------
Total....................... $186,625
========
</TABLE>
The allocation of the purchase amounts to both Braun Simmons and Colonial Data
tangible and identifiable intangible assets was based on independent appraisals
of the estimated fair value of certain of those assets. Such appraisals
indicated approximately $5 million and $72 million, respectively, for purchased
in-process research and development for Braun Simmons and Colonial Data,
respectively, which was expensed by the Company upon each closing, as the
technologies had not reached technological feasibility and did not have
alternative future uses. The unaudited pro forma condensed consolidated
statements of operations do not include this one-time charge for purchased in-
process technology as it represents a material nonrecurring charge. The Company
is waiting for certain information pertaining to the collection of certain
outstanding receivables and legal matters related to these transactions.
(c) Net Income (Loss) Per Share
US Order's historical loss per share for the year ended December 31, 1995
includes $681,000 of preferred dividend requirement which has been deducted from
historical net loss in determining net loss attributable to common stockholders.
All of US Order's series of preferred stock, including accumulated dividends,
were redeemed or converted to common stock in June 1995. The historical
preferred dividend requirement has been excluded from the computations of pro
forma income per share.
The weighted average shares used in the computations of pro forma income
(loss) per share assumes that the shares issued in the acquisition of Braun
Simmons and the total number of shares exchanged in the Mergers and the Braun
Simmons Acquisition, net of canceled intercorporate investment shares, were
outstanding for all periods presented. The impact of outstanding stock options
and warrants of the Company has been considered using the treasury stock method.
50
<PAGE>
(4) SEGMENT REPORTING
The Company maintains operations in three primary markets: consumer
telecommunications, electronic commerce and interactive services. Intersegment
sales are not material. Operating loss represents total revenues less operating
expenses, and excludes general corporate expenses, other income and expense and
income taxes. Identifiable assets are those assets employed in each segment's
operation, including an allocated value to each segment of cost in excess of net
assets acquired. Corporate assets consist primarily of cash and cash
equivalents, investments, and assets not employed in the production of goods or
services. Segment financial information is as follows (in thousands):
<TABLE>
<CAPTION>
Consumer Electronic Interactive
Telecommunications Commerce Services Corporate Consolidated
------------------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
1996
Revenues $ 10,942 $ 2,957 $ -- $ -- $ 13,899
Operating loss (79,014) (9,072) (2,479) (5,547) (96,112)
Identifiable assets 97,801 7,932 234 37,779 143,746
Depreciation and amortization 1,484 198 41 1,002 2,725
Capital expenditures 110 771 267 1,156 2,304
</TABLE>
Operating loss for consumer telecommunications and electronic commerce include
in-process research and development expenses of $72,300,000 and $4,914,000,
respectively. Segment information for 1995 and 1994 is not presented as the
Company did not operate under separate business markets during these periods.
(5) INVENTORIES
Inventories consist of the following at December 31 (in thousands):
<TABLE>
1996 1995
------- -----
<S> <C> <C>
Raw materials $ 4,843 $ --
Finished goods 23,577 801
------- -----
$28,420 $ 801
======= =====
</TABLE>
51
<PAGE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and building $ 1,482 $ --
Equipment 4,491 2,206
Leased equipment 4,366 656
Leasehold improvements 852 95
Furniture and fixtures 678 398
------- -------
11,869 3,355
Accumulated depreciation (2,726) (1,907)
------- -------
$ 9,143 $ 1,448
======= =======
</TABLE>
(7) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at
December 31 (in thousands):
<TABLE>
<S> <C> <C>
1996 1995
------- --------
Accrued compensation expense $ 2,805 $ --
Accrued corporate restructuring and acquisition 2,476 --
Accrued wages and related expenses 2,387 782
Accrued tax liabilities 1,100 --
Accrued royalties and commissions 740 --
Accrued inventory and equipment 713 --
Accrued professional and insurance 669 --
Other liabilities 1,883 86
------- --------
$12,773 $ 868
======= ========
</TABLE>
(8) BORROWINGS
In May 1996, the Company entered into three credit agreements with two
banks that provide for borrowings of up to $20,000,000. The first credit
agreement covers the period through May 1997 and is a revolving line of credit
of $1,000,000 that is fully collateralized by a bank certificate of deposit.
The second credit agreement is $4,000,000 available to be utilized for the
purpose of issuing letters of credit. The advances and/or face amounts of
letters of credit issued under this agreement are collateralized by either 100%
of pledged certificates of deposit or 90% of pledged U.S. Treasury investments
acceptable to the bank. These agreements provide for various interest rates at
the Company's election and do not have a commitment fee on the unused portion of
the credit lines. These agreements also contain certain covenants including,
but not limited to, restrictions related to certain financial ratios as well as
restrictions with respect to acquisitions and the sale of assets. As of
December 31, 1996, the Company had no borrowings related to these credit
facilities.
52
<PAGE>
Additionally, the Company maintains a credit facility totaling $15,000,000
for cash advances and letters of credit. The loan is secured by substantially
all of the Company's assets and bears interest at an annual rate equal to the
bank's prime rate. The bank's prime rate was 8.25% as of December 31, 1996. As
of December 31, 1996, the Company had $2,000,000 outstanding under the line of
credit and had available $13,500,000 for cash advances and letters of credit.
The loan agreement contains restrictive covenants, the most significant of which
are certain financial ratios and prohibition of dividends. Interest expense
was $2,000, $286,000 and $650,000 for the years ended December 31, 1996, 1995
and 1994, respectively. Cash paid for interest was $16,000, $324,000 and
$594,000 in 1996, 1995 and 1994, respectively.
(9) RELATED-PARTY TRANSACTIONS
(a) Strategic Business Partner
In August 1994, the Company sold its electronic banking and bill pay
operations (the "Visa Bill-Pay System") to Visa (see note 13). As part of the
Visa transaction, the Company's president was appointed to, and the Company's
chairman was named an advisor to, the board of directors of Visa InterActive.
Included in service fee revenues are $1,219,000, $737,000 and $156,000 in 1996,
1995 and 1994, respectively, related to services provided by the Company to Visa
InterActive and Visa banks/members. Included in the accompanying consolidated
balance sheets are receivables due from Visa InterActive totaling $581,000 and
$315,000 as of December 31, 1996 and 1995, respectively.
(b) Primary Investor
The chairman of the board of directors of the Company is a director of
WorldCorp, Inc. ("WorlCorp") the Company's primary investor. Another officer
and certain directors of the Company are also members of the board of directors
of WorldCorp.
WorldCorp owned approximately 29% and 58% of the Company's outstanding
voting stock as of December 31, 1996 and 1995, respectively. The decrease in
ownership percentage is a direct result of the issuance of additional shares
from the Mergers and the Braun Simmons Acquisition.
The Company had a $3,500,000 long-term note that was redeemed in June 1995
with a portion of the proceeds from the sale of common stock in its initial
public offering. Interest expense on this long-term note was $216,000 and
$510,000 for the years ended December 31, 1995 and 1994, respectively.
WorldCorp also paid certain of the Company's personnel costs including
salary, benefits, business and other related costs for which the Company was
billed on a cost-reimbursed basis. In November 1996, the Company terminated
this relationship with WorldCorp. During the years ended December 31, 1996,
1995 and 1994, the Company paid WorldCorp approximately $439,000, $207,000 and
$103,000, respectively, related to these arrangements. At December 31, 1996 and
1995, the Company was not indebted to WorldCorp for significant amounts.
53
<PAGE>
(10) LONG-TERM INVESTMENTS
On October 18, 1995, the Company acquired a 40% equity interest in HFN,
a newly formed, development stage personal computer software company that plans
to develop and deliver electronic financial products and services to consumers.
In this transaction, the Company paid an aggregate purchase price of $5,015,000,
through the issuance of 296,746 shares of its common stock, in exchange for 40%
of HFN. The number of the Company's common shares issued in this transaction was
based on the $5,015,000 purchase price divided by the average closing price of
the Company's common stock on the Nasdaq National Market for each of the five
business days immediately preceding the third day prior to the closing date of
October 18, 1995. The purchase price exceeded the Company's proportionate share
of the equity in net assets of HFN at October 18, 1995 by approximately $3.1
million. This component of the investment was considered to be goodwill and was
being amortized over a period of five years on a straight-line basis.
During the fourth quarter of 1996, the Company wrote-off its remaining
investment in affiliate and the related goodwill. The Company believes its
investment in HFN was impaired based on its history of losses. The carrying
value of the investment at December 31, 1996 and 1995 was $0 and $4,835,000,
respectively. For the period ended December 31, 1996, HFN had no revenues and
incurred a net loss of $3,619,000. For the period ended December 31, 1995, HFN
had no revenues and incurred a net loss of $408,000. As of December 31, 1996,
HFN had total assets, total liabilities and total stockholders' equity of
$4,941,000, $172,000 and $4,769,000, respectively.
Additionally, as of December 31, 1995 the Company held shares of stock in
Colonial Data which were canceled upon consummation of the Mergers (see note 3).
(11) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In June 1995, the Company completed an initial public offering of 4,427,500
shares of the Company's common stock, par value $.001, at an offering price of
$14.75. Of the 4,427,500 shares sold, 3,062,500 were issued and sold by the
Company, and 1,365,000 shares were sold by WorldCorp, the Company's largest
shareholder. The Company did not receive any of the proceeds from the sale of
shares by WorldCorp. The Company received approximately $41.6 million in net
proceeds (after deducting issuance costs) from the stock sale. A portion of the
net proceeds from the offering were used by the Company to redeem its Series B
redeemable preferred stock for $4,925,000, including accumulated dividends of
$625,000, pay $2,684,000 of cumulative undeclared dividends on its Series A and
C convertible preferred stock, and redeem $4,887,000 in notes payable and
related accrued interest.
(b) Redeemable Preferred Stock
In conjunction with the Company's initial public offering in June 1995, the
Company redeemed all of its 4,300 outstanding shares of Series B redeemable
preferred stock for
54
<PAGE>
$4,300,000 and rescinded the authorization to issue any additional shares. The
Series B preferred stockholders were entitled to and had preference to
cumulative dividends at the annual rate of $75 per share. The dividends accrued
from the date of issuance. At redemption, in June 1995, the Company paid all of
the remaining accrued and unpaid dividends, totaling $625,000, with a portion of
the proceeds from its initial public offering.
(c) Stock Options
The Company sponsors the following stock option plans which cover
substantially all employees and certain directors: the US Order 1991 Stock
Option Plan ("1991 Plan"), the Colonial Data 1994 Long-Term Incentive Plan
("Colonial Data Plan"), the US Order 1995 Incentive Plan ("1995 Plan"), the US
Order 1995 Non-Employee Directors' Stock Option Plan ("1995 Directors' Plan"),
the InteliData 1996 Incentive Plan ("1996 Plan"), and the InteliData 1996 Non-
Employee Directors' Stock Option Plan ("1996 Non-Employee Directors' Plan").
1991 Plan
---------
The Company had reserved 3,000,000 shares of common stock for the exercise of
options under this plan. Options are granted for purchases of the same number
of shares of the Company's common stock. For the 1991 Plan, options typically
vest monthly over a period of three to five years and expire after eight years.
However, no vesting occurs until after the employee has completed one year of
service with the Company. The 1991 Plan was terminated in May 1995. As of
December 31, 1996, there were 1,383,180 shares vested and exercisable under the
1991 Plan.
Colonial Data Plan
------------------
Colonial Data's board of directors authorized the issuance of options for
purchase of common stock for key employees. The options entitle the holder to
purchase the Company's common stock at the fair market value at the date of
grant. Colonial Data's board of directors as part of its 1994 Long-Term
Incentive Plan authorized 500,000 shares of stock to be available for grants.
The options vest periodically through 2000 and expire in 2006 and expire after
10 years from the date of grant. The Colonial Data Plan was terminated in
November 1996. As of December 31, 1996, there were 101,647 shares vested and
exercisable under the Colonial Data Plan.
1995 Plan
---------
The Company had reserved 1,000,000 shares of common stock for the exercise of
options under this plan. Options are granted for purchases of the same number
of shares of the Company's common stock. For the 1995 Plan, options typically
vest monthly over a period of three to five years and expire after eight years
from the date of grant. However, no vesting occurs until after the employee has
completed one year of service with the Company. The 1995 Plan was terminated in
November 1996. As of December 31, 1996, there were 70,056 shares vested and
exercisable under the 1995 Plan.
55
<PAGE>
1995 Directors' Plan
--------------------
The Company had reserved 250,000 shares of common stock for the exercise of
options under this plan. Options are granted for purchases of the same number
of shares of the Company's common stock. For the 1995 Directors' Plan, options
will vest monthly over a three year period beginning on the date of grant and
expire ten years subsequent to the date of grant. The grant price for the plan
was based on the average of the closing Nasdaq market price of the Company's
stock on the thirty trading days preceding the date of the grant. The 1995
Directors' Plan was terminated in November 1996. As of December 31, 1996, there
were 1,458 shares vested and exercisable under the 1995 Directors' Plan.
1996 Plan
---------
The Company had reserved 1,500,000 shares of common stock for the exercise of
options under this plan. Options are granted for purchases of the same number
of shares of the Company's common stock. The exercise price of each option shall
not be less than eight-five percent (85%) of the fair market value of the
Company's common stock on the date the option is granted and an option's maximum
term is 10 years. Options for existing employees are granted by the board of
directors and typically vest ratably at the end of the fourth year. Options
granted to new hires are awarded at the discretion of the Company's management
in accordance with guidelines approved by the board of directors. However, no
vesting occurs until after the employee has completed one year of service with
the Company. As of December 31, 1996, there were no shares vested and
exercisable under the 1996 Plan.
1996 Non-Employee Directors' Plan
---------------------------------
The Company reserved 200,000 shares of common stock for the exercise of
options under this plan. Options are granted for each non-employee director who
qualifies for participation under the plan. The exercise price of each option
shall be the fair market value as defined in the plan of the Company's common
stock and an option's maximum term is 10 years. For the 1996 Non-Employee
Directors' Plan, options vest monthly over a period of one year. As of December
31, 1996, there were no options granted under the 1996 Non-Employee Directors'
Plan.
56
<PAGE>
A summary of the changes in stock options for each of the Company's stock option
plans is as follows:
<TABLE>
<CAPTION>
1991 Plan 1995 Plan
------------------------ --------------------------
Exercise Number Exercise Number
Prices of Options Prices of Options
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
December 31, 1993 $0.98-$4.00 1,482,168 -- --
Granted $4.00-$7.13 1,320,410 -- --
Exercised $0.98 (120,788) -- --
Canceled $0.98-$4.00 (250,869) -- --
--------- -------
December 31, 1994 $0.98-$7.13 2,430,921 -- --
Granted $7.13-$9.50 226,350 $14.50-$23.75 110,050
Exercised $0.98-$7.13 (373,106) -- --
Canceled $0.98-$7.13 (21,010) $21.00 (1,500)
--------- -------
December 31, 1995 $0.98-$9.50 2,263,155 $14.50-$23.75 108,550
Granted -- -- $ 9.00-$23.50 747,630
Exercised $0.98-$9.50 (353,013) $14.75-$18.75 (169)
Canceled $2.50-$9.50 (109,613) $ 9.88-$23.13 (71,930)
--------- -------
December 31, 1996 $0.98-$9.50 1,800,529 $ 9.00-$23.75 784,081
========= =======
</TABLE>
<TABLE>
<CAPTION>
1995 Directors' Plan 1996 Plan
----------------------- -------------------------
Exercise Number Exercise Number
Prices of Options Prices of Options
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
December 31, 1995 -- -- -- --
Granted $18.86 7,500 $7.00 1,400
Exercised -- -- -- --
Canceled -- -- -- --
--------- -------
December 31, 1996 $18.86 7,500 $7.00 1,400
========= =======
</TABLE>
In addition to options issued in 1995 under both the 1991 and 1995 Plans, the
Company issued 15,000 options to three of its five non-affiliate directors and
25,000 options to a non-affiliate who helped in arranging a placement of Series
C preferred stock. Each of these grants has a $7.13 exercise price. The 45,000
options issued to non-affiliate directors vest monthly over a three-year period,
and the 25,000 options granted to the non-affiliate vested immediately. As of
December 31, 1996, of these 45,000 options, 13,751 options were canceled during
1996, options for 25,415 shares of common stock are exercisable with a weighted
average exercise price of $7.13.
During 1996 and 1995, the Company recognized $128,000 and $225,000 of
compensation expense, respectively, in connection with options granted at
exercise prices below the estimated fair market value of the Company's common
stock at the date of grant. As of December 31, 1996, deferred compensation
relating to these grants was $133,000, which will be recognized over the
remaining vesting period.
In August 1994, as a requirement of the sale of the Visa bill payment system
to Visa InterActive, the Company paid $3,250,000 to certain employees to cancel
675,334 outstanding vested options. This amount is allocated between general
and administrative and research and development expenses in the accompanying
1994 statement of operations.
57
<PAGE>
(d) Stock Compensation Plans
At December 31, 1996, the Company has six stock-based compensation plans. The
Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for stock options granted under the stock
compensation plans. Had compensation cost for the Company's stock compensation
plans been determined based on the fair value at the grant dates for the 1996
and 1995 awards under those plans, the Company's net loss and net loss per share
for the years ended December 31 1996 and 1995 would have been $(99,341,000) and
$(5.41) per share and $(5,674,000) and $(0.53) per share, respectively. Stock
compensation expense for 1995 was calculated for the period from the initial
public offering to the end of the year.
The weighted average fair value of options granted during 1996 and 1995 was
$14.75 per share. The fair value of options granted was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield, expected volatility of 65%,
and a risk free interest rate of 6.14%.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------
Weighted Weighted
Range of Number Weighted Average Number Average
Plan Description Exercise Prices of Options Average Life Exercise Price Exercisable Exercise Price
--------------- ---------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1991 Plan $ 0.98-$9.50 1,800,529 5.8 years $ 5.62 1,383,180 $ 5.19
Colonial Data Plan $0.21-$20.38 474,800 9.5 years $10.92 101,647 $ 8.54
1995 Plan $9.00-$23.75 784,081 8.0 years $16.68 70,056 $17.95
1995 Directors' Plan $ 18.86 7,500 10.0 years $18.86 1,458 $18.86
1996 Plan $ 7.00 1,400 10.0 years $ 7.00 -- --
1996 Non-Employee -- -- -- -- -- --
Directors' Plan
</TABLE>
(e) Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, approved in 1996, the Company is
authorized to issue up to 500,000 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Under the terms of
the Plan, employees can choose each period to have up to twenty percent of their
annual base earnings withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the lower of its beginning-of-
period or end-of-period market price. The Employee Stock Purchase Plan's first
period will begin January 2, 1997. The Company had an employee stock purchase
plan in existence during 1996, however, there was not a significant number of
shares of stock sold under the Plan in 1996.
(f) Receivable from Sale of Stock
In connection with a private placement offering in 1993, the Company received
$2,500,000 in advertising credits. The Company has recognized advertising
credits aggregating $32,000 and $12,000 in 1996 and 1995, respectively. The
advertising credits are included in the accompanying balance sheet as a
reduction of stockholders' equity.
58
<PAGE>
(12) CORPORATE RESTRUCTURING
The Company recorded a provision for corporate restructuring during the
fourth quarter of 1996 of $1,568,000. This amount consists of $1,323,000 in
facilities consolidations, $175,000 in relocation expenses for certain
employees, and $70,000 for the write-down of duplicative processing equipment.
Such provisions remained in corporate restructurings at December 31, 1996.
(13) SALE OF ELECTRONIC BANKING AND BILL PAY OPERATIONS
On August 1, 1994, the Company sold its electronic banking and bill pay
operations (the "Visa Bill-Pay System") to Visa for $14,645,000 in cash (net of
closing costs of $228,000), the assumption of certain of the Company's capital
lease obligations and other miscellaneous liabilities totaling $853,000; 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 $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 $14,523,000 from the sale, which is
included in other non-operating income.
Royalties due to the Company will equal $.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 $73,000 of royalties earned during each quarter on a cumulative basis for
a total of twelve quarters. The Company did not receive any Visa royalty
payments in 1996 and 1995.
Through July 1995, the Company paid Visa InterActive a monthly fee of $6.40
for each of the Company's bill pay customers which were not yet customers of a
Visa member bank. This fee was reduced to $4.00 per bill pay customer on August
1, 1995. During 1996, 1995 and 1994, respectively, the Company paid Visa
InterActive $54,000, $205,000 and $208,000 in such fees, which is included in
service fees cost of revenues.
As part of the Visa transaction, the Company's president was appointed to,
and the Company's chairman was named an advisor to, the board of directors of
Visa InterActive.
(14) EMPLOYEE 401(K) SAVINGS PLAN
The Company adopted a defined contribution plan ("Plan") that qualifies for
preferential tax treatment under Section 401(a) of the Internal Revenue Code.
Participation in the Plan is
59
<PAGE>
available to employees who are at least twenty-one years of age and have six
months of service. Company contributions to the Plan are based on a percentage
of employee contributions and were not significant. Administrative expenses for
the Plan were paid for by the Company.
(15) INCOME TAXES
Income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $1,028
State 25 -- 10
Utilization of net operating loss carryforwards.. -- -- (968)
----- ----- ------
Total current tax expense....................... $ 25 $ -- $ 70
===== ===== ======
</TABLE>
A reconciliation of taxes computed at the statutory Federal tax rate on
income before income taxes to the actual income tax expense is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---------- --------- --------
<S> <C> <C> <C>
Income taxes (benefit) computed at the
statutory rate................................ $(33,496) $(1,604) $ 1,293
Book expenses not deductible for tax purposes... 28,378 129 54
Federal alternative minimum and
environmental taxes........................... -- -- 60
Generation of net operating loss carryforwards.. 5,118 1,475 --
State income tax net of federal benefit......... 25 -- --
Change in the valuation allowance for
deferred tax assets allocated to income tax
expense....................................... -- -- (1,337)
-------- ------- -------
Income taxes............................ $ 25 $ -- $ 70
======== ======= =======
</TABLE>
60
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 15,942 $ 7,955
Capitalized start-up expenditures.............. 341 641
Accounts receivable and inventory revaluation.. 6,394 --
Equipment and property......................... 137 --
General business credit carryforward........... 489 489
Alternative minimum tax carryforward........... 60 60
Other.......................................... 128 56
-------- -------
Total gross deferred tax asset............ 23,491 9,201
Valuation allowance............................ (22,210) (8,974)
-------- -------
Net deferred tax assets..................... 1,281 227
Deferred tax liability:
Equipment and property......................... -- (227)
Accounts payable and accrued liabilities....... (1,281) --
-------- -------
Net deferred taxes........................... $ -- $ --
======== =======
</TABLE>
The net changes in the total valuation allowance for the years ended
December 31, 1996 and 1995 were an increase of $13,239,000 and $2,309,000,
respectively.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $38,415,000, which expire in 2007
through 2011, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Included in the Company's net operating
loss carryforward is approximately $3,520,000, related to exercises of employee
stock options, which, if utilized in the future to reduce taxable income, will
be credited directly to additional paid-in capital. In the event a greater than
50% change in control of the Company occurs for tax purposes, use of these net
operating losses may be limited in future years.
Cash paid for taxes was $0, $65,000 and $0 in 1996, 1995 and 1994,
respectively.
(16) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company sells its products
primarily to telephone operating companies, retailers and financial institutions
in the United States. The Company believes that the concentration of credit
risk in its trade receivables is substantially mitigated by the Company's
ongoing credit evaluation process. The Company does not generally require
61
<PAGE>
collateral from customers. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. Historically, the Company has not
incurred any significant credit related losses.
Revenues from three customers were approximately 20%, 13% and 11% of total
revenues for the year ended December 31, 1996. The Company had two customers
that represented approximately 24% and 12% of total accounts receivable at
December 31, 1996. Revenues from two customers were approximately 27% and 11%
of total revenues for the year ended December 31, 1995. The Company had two
customers which represented approximately 38% and 14% of total accounts
receivable at December 31, 1995.
(17) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities and equipment under cancelable and
noncancellable operating lease agreements. The facility leases are for terms
from one to nine years. Rent expense was $907,000, $234,000 and $214,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating leases with
initial or remaining terms in excess of one year at December 31, 1996, were as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1997.......................... $1,091
1998.......................... 1,114
1999.......................... 947
2000.......................... 796
2001.......................... 12
------
Total minimum lease payments.. $3,960
======
</TABLE>
Capital lease obligations incurred for new equipment was $28,000 and $235,000
in 1995 and 1994, respectively.
(b) Royalties
The Company has a license relating to certain Caller ID patents and
technology with Lucent Technologies, Inc. ("Lucent"). For licensed products
leased, sold or put in use, the Company pays a royalty to Lucent. Royalty
expense was $106,000 for the period from November 7, 1996 through December 31,
1996.
(c) Letters of Credit
The Company was contingently liable for outstanding letters of credit for
overseas
62
<PAGE>
purchases totaling $4,500,000 and $3,309,000 on December 31, 1996 and
1995, respectively.
(d) Patent Matters
The Company does not believe that its products and services infringe on the
rights of third parties. From time to time, third parties assert infringement
claims against InteliData. There can be no assurance that any such assertion
will not result in costly litigation or require the Company to cease using, or
obtain a license to use, intellectual property rights of such parties.
(e) Environmental Matters
The Company was informed that certain environmental contamination existed in
the part of the Company's premises formerly occupied by another tenant and that
the Connecticut Department of Environmental Protection has performed a clean-up
and removed such contamination. The Company does not believe that the foregoing
will have a material adverse effect on the Company's consolidated financial
position or results of operations.
(18) UNAUDITED QUARTERLY FINANCIAL DATA
The results of the Company's quarterly operations for the years ended
December 31, 1996 and 1995 were (in thousands except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth /(1)/ Total
-------- -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1996
Revenues $ 1,326 $ 548 $ 1,063 $ 10,962 $ 13,899
Operating loss (2,033) (3,145) (8,451) (82,483) (96,112)
Loss before income taxes (1,988) (3,206) (8,524) (81,984) (95,702)
Net loss (1,988) (3,206) (8,524) (82,009) (95,727)
Net loss per common share/(2)/ $ (0.13) $ (0.20) $ (0.53) $ (3.21) $ (5.21)
1995
Revenues $ 745 $ 947 $ 1,208 $ 1,286 $ 4,186
Operating loss (1,231) (1,219) (1,276) (1,435) (5,161)
Loss before income taxes (1,369) (1,231) (847) (1,271) (4,718)
Net loss (1,369) (1,231) (847) (1,271) (4,718)
Net loss applicable to common
stockholders (1,757) (1,524) (847) (1,271) (5,399)
Net loss per common share/(2)/ $ (0.29) $ (0.20) $ (0.06) $ (0.08) $ (0.50)
</TABLE>
/(1)/ On November 7, 1996, US Order, Inc. and Colonial Data Technologies
Corp. consummated a Plan and Agreement of Merger. Operations of the
Company subsequent to November 7, 1996 reflect the operations of the
business of US Order and Colonial Data combined. Financial data also
includes in-process research and development charges of $77,214,000 and
restructuring charges of $1,568,000.
/(2)/ Net loss per share numbers are not necessarily additive due to current
year activities and rounding differences.
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
INTELIDATA TECHNOLOGIES CORPORATION
HERNDON, VIRGINIA
We have audited the accompanying consolidated balance sheet of InteliData
Technologies Corporation and subsidiaries (the "Company") as of
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InteliData
Technologies Corporation and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 5, 1997
64
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
INTELIDATA TECHNOLOGIES CORPORATION:
We have audited the accompanying consolidated balance sheet of InteliData
Technologies Corporation and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the two-year period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InteliData
Technologies Corporation and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Washington, D.C.
February 5, 1996
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
KPMG Peat Marwick LLP was previously the principal accountants for US Order,
which merged with and into InteliData , successor to US Order on November 7,
1996. On November 22, 1996, that firm's appointment as principal accountants
was terminated and Deloitte & Touche LLP was engaged by the Company as
principal accountants. On November 7, 1996, US Order and Colonial Data merged
with and into the Company with the Company being the survivor. Prior to the
mergers, Deloitte & Touche LLP had been engaged as the principal accountants
for Colonial Data. The decision to engage Deloitte & Touche and dismiss Peat
Marwick was approved by the management of the Company and was not submitted to
the Board of Directors of the Company and was based in part on the prior
engagement of Deloitte & Touche LLP by Colonial Data.
In connection with the audits of the three fiscal years ended December 31,
1995, and the subsequent interim period through November 22, 1996, there were no
disagreements with KPMG Peat Marwick LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of
disagreement.
The audit reports of KPMG Peat Marwick LLP on the consolidated financial
statements of US Order, Inc. as of December 31, 1995 and 1994, and for each of
the years in the three-year period ended December 31, 1995, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Directors
The Company incorporates herein by reference the information concerning
directors contained in its Proxy Statement for its 1997 Stockholder's Meeting to
be filed within 120 days after the end of the Company's fiscal year (the "1997
Proxy Statement").
Executive Officers
The following table sets forth the names and ages of all executive officers
of the Company and all positions and offices within the Company presently held
by such executive officers:
<TABLE>
<CAPTION>
Name Age Position Held
- ---- --- -------------
<S> <C> <C>
William F. Gorog 71 Chairman of the Board
Robert J. Schock 55 Chief Executive Officer
John C. Backus, Jr. 38 President
Timothy R. Welles 38 Executive Vice President,
Consumer Telecommunications Division
Joseph E. Smith 46 Executive Vice President,
Electronic Commerce Division
John W. Hillyard 40 Vice President and Chief Financial Officer
Albert N. Wergley 49 Vice President, General Counsel and Secretary
Mark L. Baird 42 Vice President, Operations
</TABLE>
WILLIAM F. GOROG has served as Chairman and director of the Company since
November 1996. Mr. Gorog had served as Chairman of US Order from May 1990 to
November 1996. From October 1987 until founding US Order in May 1990, he served
as chairman of the board of Arbor
66
<PAGE>
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 was subsequently sold
to the Mead Corporation. He currently serves as chairman of the board of
WorldCorp.
ROBERT J. SCHOCK has served as Chief Executive Officer and director of
the Company since November 1996. Prior to November 1996, Mr. Schock had served
as President and Chief Executive Officer of Colonial Data since September 1989
and as President of Colonial Technologies Corp., a wholly-owned subsidiary of
Colonial Data, since 1981. From 1977 to 1980, Mr. Schock was director of
national operations for ICOT Corporation, a telecommunications equipment
manufacturer. From 1966 to 1977, Mr. Schock held a variety of positions with
Xerox Corporation, including product manager, regional sales operations manager
and regional manager for microsystems.
JOHN C. BACKUS, JR. has been President and director of the Company since
November 1996. Prior to November 1996, he had worked at US Order since its
inception in 1990 and had served as President, Chief Operating Officer and a
director of US Order 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 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, Home Financial Network and Visa InterActive.
TIMOTHY R. WELLES has been an Executive Vice President, Consumer
Telecommunications Division and director of the Company since November 1996.
Mr. Welles had served as Executive Vice President and Chief Operating Officer of
Colonial Data since March 1996. Prior to joining Colonial Data, Mr. Welles was
Senior Vice President of First Albany Corporation, an investment banking firm,
from January 1994 to March 1996, with responsibilities related primarily to
corporate finance activities. Prior to joining First Albany, Mr. Welles held
various positions, most recently as Managing Director, at Advest, Inc., an
investment banking firm, from August 1989 to January 1994. Prior to joining
Advest, Inc., Mr. Welles practiced securities and corporate law at Cahill Gordon
& Reindel in its New York office.
JOSEPH E. SMITH has served as Executive Vice President, Electronic Commerce
Division for the Company since November 1996. Mr. Smith had served as Executive
Vice President, Financial Services of US Order since March 1996. Prior to
joining US Order, Mr. Smith was senior vice president of client services, sales
and marketing at Deluxe Data Systems, Inc. an electronic funds transfer services
company. He was responsible for strategic market expansion and operations. Prior
to that Mr. Smith was senior vice president, worldwide sales and marketing at
Calcomp, Inc. in Anaheim, CA and also served at IBM for ten years.
67
<PAGE>
JOHN W. HILLYARD has served as Vice President and Chief Financial Officer of
the Company since January 1997. Prior thereto, Mr. Hillyard was executive vice
president and chief financial officer of Vision Technologies LLC, an assembler
and seller of computers and peripherals from August 1996 to January 1997.
From May 1985 to August 1996, he was the chief financial officer of Deluxe
Data Systems, Inc., an electronic funds transfer services company. From May
1982 to May 1985, he was vice president of finance for Hogan Systems, Inc., a
developer of an integrated line of application software for large financial
institutions. Mr. Hillyard is a Certified Public Accountant.
ALBERT N. WERGLEY has served as Vice President and General Counsel of the
Company since November 1996. From May 1995 to November 1996, he served as
Vice president and General Counsel of US Order. 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. Previous
to that he was associated with the McLean, Virginia office of the law firm of
Reed Smith Shaw & McClay and with the law firm of Howrey & Simon in Washington,
D.C.
MARK L. BAIRD has served as Vice President of Operations of the Company
since November 1996. Mr. Baird had served as Director of Staff Operations and
then as Vice President of Operations for Colonial Data since July 1994. Prior
to joining Colonial Data, Mr. Baird was vice president of Consolidated Asset
Recovery Corporation, a subsidiary of the Chase Manhattan Bank of Connecticut,
N.A., with responsibilities related primarily to special asset management. Prior
to joining Chase Manhattan, Mr. Baird held various positions, most recently as
Assistant Vice President of The Bank Mart, a mutual savings bank. Prior to that,
Mr. Baird was Assistant to the Chairman of the Bodine Corporation, a privately
held machine tool manufacturer.
Beneficial Ownership Reporting
The Company incorporates herein by reference the information required by Item
405 of Regulation S-K contained in its 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------
MANAGEMENT
----------
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
1997 Proxy Statement.
68
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1997 Proxy
Statement.
69
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -----------------------------------------------------------------
FORM 8-K
--------
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
See Item 8 of this Report
3. EXHIBITS (* denotes filed herewith)
Status of Prior Documents
InteliData's Annual Report on Form 10-K for the year ended December 31,
1996, at the time of filing with the Securities and Exchange Commission,
shall modify and supersede all prior documents filed pursuant to Sections
13, 14, and 15(d) of the Securities Exchange Act of 1934 for purposes of
any offers or sales of any securities after the date of such filing
pursuant to any Registration Statement or Prospectus filed pursuant to the
Securities Act of 1933, as amended, which incorporates by reference such
Annual Report on Form 10-K.
2.1 Agreement and Plan of Merger dated as of August 5, 1996, between
Colonial Data Technologies Corp. and US Order, Inc. (Incorporated
herein by reference to the Company's Registration Statement on Form
S-4, File Number 333-11081).
2.2 Amendment No. 1 dated as of November 7, 1996, by and among US Order,
Inc., Colonial Data Technologies Corp. and InteliData Technologies
Corporation to the Agreement and Plan of Merger. (Incorporated herein
by reference to the Company's Current Report on Form 8-K filed with
the Commission on November 12, 1996).
3.1 Certificate of Incorporation of InteliData Technologies Corporation.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-4, File Number 333-11081).
3.2 Bylaws of InteliData Technologies Corporation. (Incorporated herein
by reference to the Company's Registration Statement on Form S-4,
File Number 333-11081).
4.1 Form of Warrant, as amended. (Incorporated by reference to the
Colonial Data Registration Statement on Form S-4, File Number 33-
30242).
70
<PAGE>
10.1 Memorandum of Understanding regarding Personnel Services between
WorldCorp, Inc. and InteliData Technologies Corporation, dated
February 11, 1994. (Incorporated herein by reference to the US Order
Registration Statement on Form S-1, dated June 1, 1995, File Number
33-90978).
10.2 Sales and Service Subcontract Agreement, dated December 20, 1994,
between US Order, Inc. and Visa Interactive, Inc. (Incorporated
herein by reference to the US Order Registration Statement on Form S-
1, File Number 33-90978).
10.3 Acquisition Agreement, as amended, dated July 15, 1994, among Visa
International Service Association, US Order, Inc. and WorldCorp, Inc.
(Incorporated herein by reference to the US Order Registration
Statement on Form S-1, File Number 33-90978).
10.4 US Order, Inc. 1991 Stock Option Plan. (Incorporated herein by
reference to the US Order Registration Statement on Form S-1, File
Number 33-90978).
10.5 US Order, Inc. 1995 Incentive Plan. (Incorporated herein by reference
to the US Order Registration Statement on Form S-1, File Number 33-
90978).
10.6 US Order, Inc. Non-Employee Directors' and Directors' Stock Option
Plans. (Incorporated herein by reference to the US Order Registration
Statements on Form S-8, File Numbers 333-2348 and 333-2346).
10.7 Employment Agreement, dated as of August 1, 1994, between US Order,
Inc. and John C. Backus, Jr. (Incorporated herein by reference to the
US Order Registration Statement on Form S-1, File Number 33-90978).
10.8 Stock Option Agreement, dated as of August 1, 1995, between US Order,
Inc. and John C. Backus, Jr. (Incorporated herein by reference to the
US Order Registration Statement on Form S-1, dated June 1, 1995, File
Number 33-90978).
10.9 Stock Restriction Agreement, as amended, dated September 14, 1990,
among US Order, Inc. and certain founders of US Order, Inc..
(Incorporated herein by reference to the US Order Registration
Statement on Form S-1, File Number 33-90978).
10.10 Investment Agreement, dated December 20, 1993, between US Order, Inc.
and Knight-Ridder, Inc. (Incorporated herein by reference to the US
Order Registration Statement on Form S-1, File Number 33-90978).
10.11 Letter Agreement dated April 5, 1995 between Visa International
Service Association and US Order, Inc.. (Incorporated herein by
reference to the US Order Registration Statement on Form S-1, File
Number 33-90978).
71
<PAGE>
10.12 Amendment No. 1, dated as of May 1, 1995, to Stock Option Agreement
between US Order, Inc. and John C. Backus, Jr. (Incorporated herein
by reference to the US Order Registration Statement on Form S-1, File
Number 33-90978).
10.13 Employment Agreement, dated as of July 1, 1996, between Colonial
Data Technologies Corp. and Robert J. Schock. (Incorporated herein by
reference to the Company's Registration Statement on Form S-4, File
Number 333-11081).
10.14 Technical Information and Patent License Agreement effective as of
August 1, 1987 by and between American Telephone and Telegraph and
Colonial Data Technologies Corp. (Incorporated herein by reference to
the Colonial Data Report on Form 10-Q for the quarter
ended September 30, 1989, File Number 0-15562).
10.15 Colonial Data Technologies Corp. 401(k) Plan. (Incorporated herein
by reference to the Colonial Data Report on Form 10-K for the year
ended December 31, 1994, File Number 0-15562).
10.16 Agreement, dated as of March 1, 1996 between Colonial Data
Technologies Corp. and Robert J. Schock. (Incorporated herein by
reference to the Colonial Data Report on Form 10-Q
for the quarter ended March 31, 1996, File Number 0-15562).
10.17 Amended and Restated Loan and Security Agreement between Colonial
Technologies Corp. and People's Bank, dated May 3, 1996.
(Incorporated herein by reference to the Colonial Data Report on
Form 10-Q for the quarter ended June 30, 1996, File Number 0-15562).
10.18 Revolving Credit Note between Colonial Technologies Corp. and
People's Bank, dated May 3, 1996. (Incorporated herein by reference
to the Colonial Data Report on Form 10-Q for the quarter ended June
30, 1996, File Number 0-15562).
10.19 Guaranty Agreement between Colonial Data Technologies Corp. and
People's Bank, dated May 3, 1996. (Incorporated herein by reference
to the Colonial Data Report on Form 10-Q for the quarter ended June
30, 1996, File Number 0-15562).
10.20 Master Trademark License Agreement between Colonial Data
Technologies Corp. and Pacific Bell. (Incorporated herein by
reference to the Colonial Data Report on Form 10-Q for the quarter
ended June 30, 1996, File Number 0-15562).
72
<PAGE>
10.21 Bond Purchase Agreement by and among CDT Realty Corp. and 80
Pickett District Associates, L.L.C., dated as of September 13, 1996.
(Incorporated herein by reference to the Company's Report on Form 10-
Q for the quarter ended September 30, 1996, File Number 000-21685).
10.22 InteliData Technologies Corporation 1996 Incentive Plan.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-8, File Number 333-16115).
10.23 InteliData Technologies Corporation Non-Employee Directors' Stock
Option Plan. (Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number 333-16117).
10.24 InteliData Technologies Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-8, File Number 333-16121).
*10.25 Restricted Shares Award Agreement between Colonial Data
Technologies Corp. and Timothy R. Welles.
*10.26 Award Agreement between Colonial Data Technologies Corp. and
Timothy R. Welles.
*10.27 Aircraft Lease Agreement between CDT Corp. and Colonial Data
Technologies Corp.
16.1 Letter from KPMG Peat Marwick LLP. (Incorporated herein by reference
to the Company's Current Report on Form 8-K filed with the Commission
on November 27, 1996).
*21.1 InteliData Technologies Corporation List of Significant
Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The Company filed Current Reports on Form 8-K with the Securities and
Exchange Commission on November 12, 1996 and November 27, 1996.
* * * * * * * *
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By /s/Robert J. Schock
-------------------
ROBERT J. SCHOCK
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/s/ Robert J. Schock Chief Executive Officer and Director March 28, 1997
- ----------------------------- (Principal Executive Officer)
ROBERT J. SCHOCK
/s/ William F. Gorog Chairman of the Board and Director March 28, 1997
- -----------------------------
(WILLIAM F. GOROG)
/s/ John C. Backus, Jr. President, Chief Operating March 28, 1997
- ----------------------------- Officer and Director
JOHN C. BACKUS, JR.
/s/ John W. Hillyard Vice President - Finance and Chief March 28, 1997
- ----------------------------- Financial Officer (Principal Financial
JOHN W. HILLYARD and Accounting Officer)
/s/ Timothy R. Welles Executive Vice President and Director March 28, 1997
- -----------------------------
TIMOTHY R. WELLES
/s/ T. Coleman Andrews, III Director March 28, 1997
- -----------------------------
T. COLEMAN ANDREWS, III
/s/ Walter M. Fiederowicz Director March 28, 1997
- -----------------------------
WALTER M. FIEDEROWICZ
/s/ Patrick F. Graham Director March 28, 1997
- -----------------------------
PATRICK F. GRAHAM
- ----------------------------- Director
CONSTANTINE S. MACRICOSTAS
- ----------------------------- Director
WESLEY C. TALLMAN
</TABLE>
74
EXHIBIT 11
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES
CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Continuing earnings (loss) applicable to
common stock $ 7,437 $ 64,158 $ 8,308
Discontinued loss applicable to common stock,
net of tax benefit and minority interest (19,191) (3,950) --
----------- ------------ -----------
Net earnings (loss) applicable to common stock $ (11,754) $ 60,208 $ 8,308
=========== =========== ===========
Weighted average common shares outstanding 16,153,227 15,988,365 15,277,954
Weighted average options and warrants treated
as common stock equivalents 523,662 1,115,304 238,109
----------- ---------- -----------
Primary number of shares 16,676,889 17,103,669 15,516,063
Incremental weighted average options and
warrants treated as common stock
equivalents for fully diluted purposes -- 5,891,197 276,983
------------- ---------- -----------
Fully diluted number of shares 16,676,889 22,994,866 15,793,046
========== ========== ==========
Primary net earnings (loss) per share of common stock from:
Continuing operations $ 0.45 $ 3.75 $ 0.54
Discontinued operations $ (1.15) $ (0.23) $ --
------ ------ -------
Net earnings $ (0.70) $ 3.52 $ 0.54
====== ====== ======
Fully diluted net earnings (loss) per share of common stock from:
Continuing operations $ * $ 2.99 $ 0.53
Discontinued operations $ * $ (0.17) $ --
------- ------ -------
Net earnings $ * $ 2.82 $ 0.53
======= ====== ======
</TABLE>
* Fully diluted earnings per share are anti-dilutive
EXHIBIT 21
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction
World Airways, Inc. Delaware
World Airways Cargo, Inc. Delaware
WorldCorp Investments, Inc. Delaware
World Flight Crew Services, Inc. Delaware
WorldGames, Inc. Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
WORLDCORP, INC.:
We consent to the incorporation by reference in the registration statements
(Nos. 33-44245, 33-46443, 33-62864, and 33-60247) on Form S-3 and registration
statements (Nos. 33-33468 and 33-51944) on Form S-8 of WorldCorp, Inc. of our
report dated February 14, 1997, relating to the consolidated balance sheets of
WorldCorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in common stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related financial statement schedules, which report
appears in the December 31, 1996 annual report on Form 10-K of WorldCorp, Inc.
KPMG PEAT MARWICK LLP
WASHINGTON, D.C.
MARCH 31, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
WorldCorp, Inc.
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-44245, 33-46443, 33-62864, and 33-60247) on Form S-3 and Registration
Statements (Nos. 33-33468 and 33-51944) on Form S-8 of WorldCorp, Inc. of our
report dated February 5, 1997, relating to the consolidated balance sheet of
InteliData Technologies Corporation, Inc. and subsidiaries as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended, which report appears in the
December 31, 1996 annual report on Form 10-K of WorldCorp, Inc.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 13,462
<SECURITIES> 0
<RECEIVABLES> 19,841
<ALLOWANCES> 413
<INVENTORY> 0
<CURRENT-ASSETS> 51,598
<PP&E> 86,830
<DEPRECIATION> 21,357
<TOTAL-ASSETS> 178,963
<CURRENT-LIABILITIES> 91,906
<BONDS> 0
0
0
<COMMON> 16,617
<OTHER-SE> 56,954
<TOTAL-LIABILITY-AND-EQUITY> 178,963
<SALES> 0
<TOTAL-REVENUES> 313,672
<CGS> 0
<TOTAL-COSTS> 310,935
<OTHER-EXPENSES> (5,772)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,680
<INCOME-PRETAX> 8,509
<INCOME-TAX> 504
<INCOME-CONTINUING> 7,437
<DISCONTINUED> (19,191)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,754)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> 0
</TABLE>
