SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 11, 1998
WORLDCORP, INC.
(Exact name of registrant as specified in charter)
Delaware 1-5351 94-3040585
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
13873 Park Center Road, Suite 490, Herndon, Virginia 20171
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(703) 834-9200
<PAGE>
ITEM 5. OTHER EVENTS.
On April 20, 1998, WorldCorp, Inc. ("WorldCorp") consummated a transaction
pursuant to which it acquired an 80% interest in Paper Acquisition Corp., a
Delaware corporation ("Paper").
Attached hereto as an Exhibit to this Current Report on Form 8-K are unaudited
financial statements of Paper as of and for the eight months ended August 31,
1997, the date of Paper's most recent fiscal year-end. On May 5, 1998, WorldCorp
filed the Current Report on Form 8-K required in connection with its acquisition
of Paper and stated that, as permitted by SEC regulations, the required
financial information will be filed by amendment to that Current Report on Form
8-K not later than July 6, 1998. The Company is currently in the process of
preparing this financial information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Exhibits.
99.1 Unaudited financial statements of Paper Acquisition Corp. as of and for the
eight months ended August 31, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WORLDCORP, INC.
By:_______/s/______________
Patrick F. Graham
President and Chief Executive
Officer
Date: June 12, 1998
Paper Acquisition Corp.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
August 31, 1998
<CAPTION>
ASSETS
<S> <C> <C>
Current assets:
Cash $ 355,648
Accounts receivable, less allowance for doubtful accounts
And sales returns of $323,998 5,426,699
Inventories
Raw materials 750,534
Work-in-progress and finished goods 473,761
Deferred income taxes 1,207,019
Prepaid expenses and other current assets 207,188
-------
Total current assets 8,420,849
Note receivable from related party 500,000
Property and equipment, net 3,380,190
Property held for sale 425,000
Deferred income taxes, net 223,664
Goodwill and other assets, net 26,646,362
----------
Total assets $ 39,596,065
==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current maturities of long-term debt $ 4,612,546
Current maturities of Product Purchase Agreement 875,000
Accounts payable 2,892,532
Accrued expenses 4,355,734
Income taxes payable 1,481,295
---------
Total current liabilities 14,217,107
Long-term debt 14,788,244
Other long-term liabilities 2,511,766
---------
Total liabilities 31,517,117
Stockholders' equity:
Class A voting common stock, $0.01 par value, 1,000,000 shares
authorized, 493,764 shares issued and outstanding 4,938
Class B non-voting common stock, $0.01 par value, 10,000 shares
authorized, 1,000 shares issued and outstanding 10
Additional paid-in capital 4,411,716
Cumulative translation adjustment (28,582)
Historical cost basis of continuing shareholder interest
in excess of fair value of purchase price 3,184,769
Retained earnings 506,097
-----------
Total stockholders' equity 8,078,948
------------
Total liabilities and stockholders' equity $ 39,596,065
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Paper Acquisition Corp.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
For the period from
December 31, 1996
(Inception) through
August 31, 1997
<S> <C> <C>
Sales $ 34,506,609
Cost of sales 21,173,378
----------
Gross margin 13,333,231
----------
Operating expenses:
Selling, general and administrative 3,093,695
Amortization expense 5,029,570
---------
Total operating expenses 8,123,265
---------
Operating income 5,209,966
---------
Other (income) expense:
Interest expense 1,931,057
Other, net 169,034
-------
Total other (income) expense 2,100,091
---------
Income before income taxes 3,109,875
Income tax expense 2,603,778
---------
Net income $ 506,097
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Paper Acquisition Corp.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the period from
December 31, 1996
(Inception) through
August 31, 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 506,087
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for uncollectible accounts receivable 290,000
Depreciation 179,375
Amortization 5,264,713
Write-off of inventory "step-up" to fair value 292,386
Deferred income taxes (536,236)
Loss on disposal of property and equipment 46,264
Changes in operating assets and liabilities:
Accounts receivable 260,082
Inventories 2,042,738
Prepaid expenses and other assets 83,176
Accounts payable 61,875
Accrued expenses and other long-term liabilities 140,067
Income taxes payable (606,599)
--------------
Net cash provided by operating activities 8,023,938
--------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (Note 2) (16,781,468)
Proceeds from sale of property and equipment 742,578
Capital expenditures (49,774)
---------------
Net cash used in investing activities (16,088,664)
-------------
Cash flows from financing activities:
Proceeds from long-term debt 21,500,000
Refinancing of assumed debt (10,892,348)
Proceeds from issuance of common stock 4,000,000
Principal payments on long-term debt (3,534,752)
Borrowings under revolving credit facility, net 232,964
Repurchase and retirement of common stock (593,336)
Loan to related party (500,000)
Payment of loan origination fees (1,763,572)
-------------
Net cash provided by financing activities 8,448,956
Cumulative translation adjustment (28,582)
Net change in cash 355,648
Cash at beginning of period --
Cash at end of period $ 355,648
===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 781,095
Income taxes 2,583,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Paper Acquisition Corp.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Statement of Stockholders' Equity
Class A Class B Additional Cumulative Total
common common paid-in translation Dangling Retained stockholders'
stock stock capital adjustment Credit earnings equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 (inception) -- -- -- -- -- -- --
Issuance of Class A common stock for cash 4,000 -- 3,996,000 -- -- -- 4,000,000
Issuance of Class A common stock for
acquisition 1,000 -- 999,000 -- -- -- 1,000,000
Issuance of Class B common stock for services -- 10 9,990 -- -- -- 10,000
Historical cost basis of continuing
shareholder interest in excess of fair
value of purchase price ("Dangling
Credit") -- -- -- -- 3,184,769 -- 3.184,769
Net income -- -- -- -- -- 506,097 506,097
Repurchase and retirement of common
stock owned be Employee Stock
Purchase Plan (Note 10) (62) -- (593,274) -- -- -- (593,336)
Cumulative translation adjustment -- -- -- (28,582) -- -- (28,582)
------- ------- ------- ------- ------- ------ -------
Balance as of August 31, 1997 4,938 10 4,411,716 (28,582) 3,184,769 506,097 8,078,948
=== ==== ===== == ========= ======= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
Paper Acquisition Corp., a Delaware corporation, was organized in
December 1996 to acquire and operate specialty paper businesses. On
December 30, 1996, Paper Acquisition Corp. ("Paper") acquired all of the
common stock of Frye Acquisition, Inc. and, simultaneously, Paper
acquired, through its wholly-owned indirect subsidiary Frye Copysystems,
Inc., selected assets and assumed certain liabilities of Technicarbon
Company, L.P. (collectively the "Acquisitions"). See Note 2 for further
discussion of the Acquisitions.
The consolidated financial statements for the period from December 31,
1996 to August 31, 1997 include the accounts of Paper Acquisition Corp.
and its wholly-owned subsidiaries Frye Acquisition, Inc.; Frye Carbon
Products, Inc.; FryeTech, Inc. (formerly Frye Copysystems, Inc.); and
Frye Carbon Products, Ltd., a Canadian company (collectively, the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company manufactures and supplies carbon paper products and
specialty inks and ribbons to customers in the United States, Canada and
numerous foreign markets. The Company is headquartered in Des Moines,
Iowa and currently has operating plants located in Dallas, Texas;
Newburgh, New York; Indianapolis, Indiana; Parsons, Kansas and Corcoran,
California.
2. ACQUISITIONS
Effective December 30, 1996, in accordance with the Stock Purchase
Agreement dated December 26, 1996, Paper acquired all of the outstanding
stock of Frye Acquisition, Inc. (the "Predecessor"). The purchase price
of $2,865,144 (excluding refinanced and assumed debt of $10,892,348)
consisted of cash consideration of $985,122, a senior subordinated note
with a face value of $937,640 (fair value of $880,022) and common stock
of Paper valued at $1,000,000, which represents a 20% interest in Paper.
As a result of the 20% continuing interest by shareholders of the
Predecessor, the acquisition was accounted for under the purchase method
of accounting in accordance with Issue No. 88-16 of the Emerging Issues
Task Force of the Financial Accounting Standards Board, "Basis in
Leveraged Buyout Transactions" ("EITF 88-16"). Accordingly, 80% of the
purchase price was allocated to the assets and liabilities acquired at
their respective fair values with the remainder allocated at the
Predecessor's historical book values as of the date of acquisition.
Simultaneous with Paper's acquisition of the Predecessor, and in
accordance with the Asset Purchase Agreement dated December 27, 1996,
Paper acquired, though its wholly-owned indirect subsidiary Frye
Copysystems, Inc. ("Frye"), selected assets and assumed certain
liabilities of Technicarbon Company, L.P. ("Technicarbon") for
$15,995,600 of cash. Paper's and Frye's acquisition of Technicarbon was
accounted for pursuant to the purchase method of accounting. The
Acquisitions were financed primarily with the cash equity proceeds to
Paper and through the borrowings described in Note 7.
<PAGE>
The application of the purchase method of accounting for the acquisition
of Technicarbon and 80% of the Predecessor and the application of EITF
88-16 with respect to 20% of the acquisition of the Predecessor,
resulted in excess aggregate purchase price (including aggregate direct
acquisition costs of $417,725) over the fair value of net assets
acquired of $30,054,732 ("Goodwill") and an allocation of excess
historical carryover basis of the Predecessor over the related purchase
price of $3,184,769 ("Dangling Credit").
The purchase price allocations for the Acquisitions are summarized as
follows:
Price of Acquisitions, including acquisition
costs, issuance of Paper common stock and
issuance of senior subordinated notes
payable, net of $616,979 of cash acquired $ 18,661,490
----------
Fair market value of assets acquired and liabilities assumed and
Dangling Credit was allocated as follows:
Assets
Accounts receivable $ 5,976,781
Inventory 3,559,419
Prepaid and other current assets 290,364
Property and equipment 4,723,633
Deferred income taxes 1,392,818
Goodwill and other assets 31,911,075
----------
Total Assets 47,854,090
Liabilities
Accounts payable $ 2,830,657
Accrued expenses 4,751,881
Other long-term liabilities 1,131,909
Income taxes payable 2,087,894
Deferred income taxes 498,371
Debt assumed 2,934,749
Assumed and refinanced debt 10,892,348
Senior subordinated notes payable 880,022
-------------
Total liabilities 26,007,831
Dangling Credit 3,184,769
Total purchase price allocations $ 18,661,490
===========
Subsequent to the Acquisitions, Frye Copysystems, Inc. changed its name to
FryeTech, Inc.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
All highly liquid assets with an original maturity of three months or
less are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out method. In connection with the
Acquisitions, inventories were stepped-up to fair value in accordance
with the purchase method of accounting in the amount of $292,386. Such
amount was fully amortized to cost of goods sold during the period
December 31, 1996 to August 31, 1997 and had the one-time effect of
reducing gross margins of the Company during this period.
PROPERTY AND EQUIPMENT
Property and equipment acquired as part of the Acquisitions are recorded
at fair value and all subsequently acquired property and equipment is
recorded at cost. Depreciation for financial reporting purposes is
provided by the straight-line method over the following estimated useful
lives:
Machinery and equipment 5-10 years
Buildings and building improvements 15 years
Furniture and fixtures 5-10 years
Expenditures for renewals and betterments are capitalized and
maintenance and repairs are charged to operations.
PROPERTY HELD FOR SALE
Property held for sale consists of land and a building which is expected
to be sold. This property is carried at its estimated net realizable
value.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of the Company's Canadian subsidiary (Frye Carbon
Products, Ltd.) are translated using the exchange rates in effect at the
balance sheet date and the cumulative translation adjustment has been
included in stockholders' equity. Results of operations are translated
using the average exchange rates prevailing throughout the year.
Realized gains and losses from foreign currency translations, which were
not material, are included in operations for the period.
GOODWILL
The excess cost over the fair value of net assets acquired is recorded
as goodwill and is amortized by the straight-line method over four
years. Management periodically evaluates the recoverability of goodwill
based on undiscounted cash flows (see Note 5).
DEFERRED FINANCING COSTS
Deferred financing costs relating to long-term debt are amortized by the
straight-line method over the terms of the related debt obligations (see
Note 5).
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations
(including goodwill) when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which is an asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences, utilizing currently enacted
tax rates, for temporary differences between the carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets are
recognized, net of any necessary valuation allowance, for the estimated
future tax effects of deductible temporary differences and tax operating
loss and credit carryforwards. Deferred tax expense or benefit
represents the change in the deferred tax asset or liability balances.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentration of credit risk include trade receivables generated by the
Company as a result of selling carbon paper and specialty ink and ribbon
products. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed and reserves are
maintained. The Company typically does not require collateral.
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,
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 materially differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of variable rate long-term debt equals fair value.
The carrying value of fixed rate long-term debt was recorded at fair
value on the date of the Acquisitions and is considered to approximate
fair value as the fixed rate approximates current rates that could be
obtained by the Company if refinancing occurred.
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment as of August 31, 1997 consists of:
Machinery and equipment $ 1,986,875
Buildings and building improvements 1,220,000
Land and Land improvements 300,000
Furniture and fixtures 52,690
--------------
3,559,565
Accumulated depreciation (179,375)
--------
Property and equipment, net $ 3,380,190
============
5. GOODWILL AND OTHER ASSETS
Goodwill and other assets (accumulated amortization is provided in
parentheses) as of August 31, 1997 consist of:
Goodwill ($5,009,122) $ 30,054,732
Deferred financing costs ($235,143) 1,763,572
Noncompete agreements ($20,448) 92,771
------------
31,911,075
Accumulated amortization (5,264,713)
Goodwill and other assets, net $ 26,646,362
=============
6. ACCRUED EXPENSES
Employee costs and benefits $ 1,571,983
Restructuring, severance and relocation 1,041,487
Interest 460,178
Other 1,282,086
---------
Accrued expenses $ 4,355,734
=========
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of the following at August 31, 1997:
Revolving credit facility $ 232,964
Term loan 18,275,000
Senior subordinated notes payable to Predecessor
shareholders, Fixed rate of 8%, payable in
three annual installments Beginning December
30, 1997 (Note 13) 937,640
------------
19,445,604
Current maturities of long-term debt (4,612,546)
Unamortized discount on notes payable (44,814)
-------
Long-term debt $ 14,788,244
==========
REVOLVING CREDIT AND TERM LOAN AGREEMENT
In connection with the financing of the Acquisitions (Note 2), the
Company's wholly-owned indirect subsidiary, FryeTech, Inc. (formerly
Frye Copysystems, Inc.), entered into a revolving credit and term loan
agreement (the "Agreement") with a bank. The Agreement provides
borrowings under a revolving credit facility of up to $13,000,000 and
term loan of $21,500,000. The borrowings are secured by the assets of
the Company and each of its wholly owned subsidiaries, except for the
Company's Canadian subsidiary (Frye Carbon Products, Ltd.). Borrowings
under the Agreement are restricted to financing the Acquisitions, future
investments and acquisitions, working capital requirements and general
corporate purposes.
The amounts available under the revolving credit facility are
automatically reduced by $2,600,000 annually, beginning on December 31,
1997. As of August 31, 1997, $10,056,200 was available to be borrowed
under the revolving credit facility. The term loan requires twenty
consecutive quarterly payments of $1,075,000 commencing on March 31,
1997. The revolving credit facility and term loan, through an amendment
to the Agreement, are renewable annually (at the Company's option);
however, not to be extended beyond December 30, 2001.
As part of the aggregate amount available under the revolving credit
facility, the Agreement provides for the issuance of standby letters of
credit. At August 31, 1997, outstanding letters of credit amounted to
$75,000.
Borrowings under the Agreement bear interest at the Company's option, at
either (1) the banks' prime rate plus applicable margin or (2) the
eurodollar rate plus applicable margin. The applicable margin is
computed based upon the leverage ratio of FryeTech, Inc. at various
dates, as specified in the Agreement. As of August 31, 1997, the
Company's borrowing rate under the Agreement is 8.37%, the eurodollar
rate option plus applicable margin.
<PAGE>
Under the terms of the Agreement, FryeTech, Inc. is restricted from
paying dividends and is required to comply with various financial
covenants, including a leverage ratio and cumulative EBITDA
requirements. At August 31, 1997, FryeTech, Inc. is in compliance with
such covenants.
SENIOR SUBORDINATED NOTES PAYABLE
On December 30, 1996, as partial consideration for the Frye acquisition,
the Company issued 8% Senior Subordinated Notes (the "Notes") to the
shareholders of the Predecessor at a face value of $937,640. The terms
of the Notes require principal payments to be made in three annual
installments of $312,547 commencing on December 31, 1997. The Notes are
unsecured and bear interest at 8%, payable each March 31; June 30;
September 30; and December 31 through the maturity date of December 30,
1999. The difference between the face value of the Notes and the
estimated fair value ($880,022) recorded by the Company on the date of
the Frye acquisition of $57,618 is being amortized over the life of the
Notes using the straight-line method. The Notes are subordinated to the
prior payment and satisfaction of indebtedness outstanding under the
revolving credit and term loan agreement.
Annual maturities of long-term debt are as follows:
1998 $ 4,612,546
1999 4,612,547
2000 4,612,546
2001 4,300,000
2002 1,307,965
Thereafter --
------------------
Total $ 19,445,604
==========
8. OTHER LONG-TERM LIABILITIES
PRODUCT PURCHASE AGREEMENT
The Company entered into a product purchase and loan agreement (the
"Product Purchase Agreement") that provides for the Company to purchase
annually a minimum amount of carbonizing tissue through August 31, 1999.
Under terms of the Product Purchase Agreement, the Company borrowed
$3,500,000 on an unsecured basis. As of August 31, 1997, $2,625,000 of
the borrowed funds are outstanding, of which $875,000 is classified as
current and $1,750,000 is classified within other long-term liabilities.
The repayment terms of the Product Purchase Agreement require annual
installments of $875,000 which began in September 1996. The Company
imputes interest expense on the Product Purchase Agreement borrowings at
an interest rate that varies with the price of carbonizing tissue
purchased (approximately 7% at August 31, 1997), which is paid for at
the time of purchase of carbonizing tissue.
<PAGE>
9. INCOME TAXES
Provision for income taxes for the period from December 31, 1996 to
August 31, 1997 includes:
Current income taxes $ 3,140,014
Deferred income taxes (536,236)
------------
$ 2,603,778
=================
Total deferred tax assets were $1,929,054 and total deferred tax
liabilities were $498,371 as of August 31, 1997 (and primarily relate to
property and equipment depreciation, goodwill amortization and various
liability accounts). The Company's effective tax rate differs from the
U.S. statutory rate primarily because of state taxes, meals and
entertainment expenses and nondeductible goodwill amortization.
10. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has defined benefit plans (a non-union plan and a bargaining
plan) covering certain employees and former employees of the
Predecessor. Benefits under these plans are based on an employee's years
of service and compensation during the years immediately preceding
retirement. The plan's assets include common stock, corporate bonds,
long and short-term investments and cash. The Company's funding policy
is based on an actuarially determined cost method allowable under
Internal Revenue Service regulations. The Company's contribution to the
pension plans for the period from December 31, 1996 to August 31, 1997
was $352.
<PAGE>
The funded status as of August 31, 1997 is reconciled to the prepaid
(accrued) pension expense as follows:
Non-Union Bargaining
Plan Plan
Actuarial present value of benefit obligations:
Vested benefit obligation $ 1,769,473 $ 933,436
Nonvested benefit obligation -- --
--------------- -------------
Accumulated benefit obligation and projected
Benefit obligation 1,769,473 933,436
Plan assets at fair value 1,941,275 919,514
--------- -------
Plan assets in excess (deficit) of projected
benefit obligation 171,802 (13,922)
Unrecognized net loss from past experience
different from that assumed (66,634) (36,043)
---------- ----------
Prepaid (accrued) pension expense $ 105,168 $ (49,965)
======== =========
Assumptions used for the period from December 31, 1996 to August 31,
1997 were as follows:
Non-Union Bargaining
Plan Plan
Weighted average discount rate 7.50% 7.50%
Expected long-term rate of return on assets 8.00% 8.00%
RETIREMENT PLAN
The Company maintains two qualified Profit Sharing/401(k) Plans (the
"Plans") covering substantially all employees. The Company's
contributions to the Plans for the period December 31, 1996 to August
31, 1997 were $0. Costs under the Plan amounted to $8,122 during the
period from December 31, 1996 to August 31, 1997.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan ("ESOP"), with a
savings and profit sharing plan feature, covering substantially all
employees of the Predecessor. In connection with Paper's acquisition of
the Predecessor, as described in Note 2, ESOP shareholders received
approximately $118,000 of cash and 6,236 shares of Paper Class A common
stock.
During April 1997, Paper afforded participants of the ESOP with the
opportunity to sell their shares of Paper for approximately $95.15 per
share. In connection with this offer, Paper acquired all 6,236 shares of
its Class A stock for approximately $593,336 of cash which was
distributed to participants in accordance with the terms of the ESOP.
The Company made no contributions to the ESOP during the period from
December 31, 1996 to August 31, 1997. The Company plans to terminate the
ESOP during fiscal 1998.
11. CLASS B COMMON STOCK
On December 26, 1996, the Company issued 1,000 shares of its Class B
common stock, par value $.01 per share in
<PAGE>
consideration of services rendered to the Company in connection with
consummating the Acquisitions. The Class B common stock is non-voting.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has a number of operating lease agreements primarily
involving office space, automobiles, computers and office equipment. The
Company's rent expense for the period from December 31, 1996 to August
31, 1997 was $358,521. Minimum lease payments required under the
operating leases as of August 31, 1997 are as follows:
1998 $ 442,839
1999 321,862
2000 141,104
2001 40,128
2002 --
Thereafter --
-----------
$ 945,933
============
LITIGATION
The Company is involved in various litigation and one environmental
proceeding (which is currently in settlement discussions) arising in the
normal course of business. In the opinion of management the Company's
ultimate liability beyond amounts recorded of $630,000, if any, under
pending litigation and one environmental matter would not materially
affect its financial condition or the results of its operations.
INCOME TAX CONTINGENCY
At August 31, 1997, the Company has recorded a contingent liability for
a federal income tax matter. On the basis of information furnished by
counsel and others, management believes that the range of estimated
loss, if any, to be incurred in connection with this matter in excess of
the amount recorded at August 31, 1997 will not have a material adverse
impact on the results of operations or the financial position of the
Company.
INDEMNIFICATION PROVISIONS
The Frye Acquisition, Inc. Stock Purchase Agreement contains certain
indemnification provisions which provide for cancellation of up to all
of the senior subordinated seller notes face value of $937,640 in the
event that the ultimate settlement of the litigation, environmental and
income tax contingency matters discussed above exceeds amounts recorded
by the Company.
<PAGE>
13. RELATED PARTY TRANSACTIONS AND BALANCES
In connection with the Acquisitions, the Company issued senior
subordinated notes payable to the sellers of the Predecessor, also
common stockholders of the Company. During the period from December 31,
1996 through August 31, 1997, interest paid to the related common
stockholders was approximately $37,800. As of August 31, 1997, interest
payable to the related common stockholders was approximately $12,200.
During the period from December 31, 1996 to August 31, 1997, the Company
incurred management fees of $150,000 to the Company's majority common
stockholder.
The Company has a non-current note receivable from the Company's
majority common stockholder of $500,000 at August 31, 1997. The note is
payable in full on December 30, 2001 and bears interest at 10%.
