SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K/A1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 20, 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>
EXPLANATORY NOTE: Pursuant to Item 7, this Form 8-K/A1 amends Item 7 of
WorldCorp, Inc.'s ("WorldCorp") Current Report on Form 8-K filed on May 5, 1998,
to provide the financial statements of the business being acquired and the pro
forma financial information required by Item 7. The remaining items have not
been amended and have not been restated in this Form 8-K/A1.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
Audited financial statements of Paper Acquisition Corp.
("Paper") as of and for the period ended December 27, 1997.
(b) Pro forma financial information (unaudited).
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1997. Unaudited Pro
Forma Condensed Consolidated Balance Sheet as of
December 31, 1997 and Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
(c) Exhibits
Subscription and Contribution Agreement*;
Guaranty*;
Five-Year Senior Secured Promissory Note*;
One-Year Senior Secured Promissory Note*;
Pledge Agreement*;
WorldCorp Option Agreement*;
WorldCorp Acquisition Corp. Option Agreement*;
Financial Consulting Agreement*; and
Form of Warrant and Purchase Agreement.*
---------------------
*Previously filed on May 5, 1998.
<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: ____________________________________
Patrick F. Graham
President and Chief Executive Officer
Date: July __, 1998
<PAGE>
PAPER ACQUISITION
CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Paper Acquisition Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Paper
Acquisition Corp. and its subsidiaries at December 27, 1997, and the results of
their operations and their cash flows for the period from December 31, 1996
(inception) through December 27, 1997 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
June 5, 1998
<PAGE>
PAPER ACQUISITION CORP.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 27,
1997
<S> <C>
ASSETS
Current assets:
Cash $ 89,444
Accounts receivable, less allowance for doubtful accounts
and sales returns of $294,000 4,046,740
Inventories
Raw materials 1,204,804
Work-in-progress and finished goods 606,587
Deferred income taxes 1,065,008
Prepaid expenses and other current assets 201,363
------------
Total current assets 7,213,946
Note receivable from related party 2,250,000
Property and equipment, net 2,064,724
Property held for sale 640,000
Deferred income taxes, net 449,024
Goodwill and other assets, net 24,785,529
----------
Total assets $ 37,403,223
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,612,547
Current maturities of Product Purchase Agreement 525,000
Accounts payable 1,942,170
Accrued expenses 3,705,228
Income taxes payable 2,427,143
---------
Total current liabilities 13,212,088
==========
Long-term debt 13,486,682
Other long-term liabilities 2,887,594
-----------
Commitments and contingencies --
-----------
Total liabilities 29,586,364
==========
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 (61,420)
Historical cost basis of continuing shareholder interest
in excess of fair value of purchase price 3,184,769
Retained earnings 276,846
-----------
Total stockholders' equity 7,816,859
------------
Total liabilities and stockholders' equity $ 37,403,223
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAPER ACQUISITION CORP.
Consolidated Statement of Income
For the period from
December 31, 1996
(inception) through
December 27, 1997
Sales $ 48,072,537
Cost of sales 29,033,720
----------
Gross margin 19,038,817
Selling, general and administrative 12,319,929
----------
Operating income 6,718,888
----------
Other expense:
Interest expense 2,769,780
Other, net 87,018
-----------
Total other expense 2,856,798
---------
Income before income taxes 3,862,090
Income tax expense 3,585,244
---------
Net income $ 276,846
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAPER ACQUISITION CORP.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
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 -- -- -- -- -- 276,846 276,846
Repurchase and retirement of common
stock owned be Employee Stock
Purchase Plan (Note 10) (62) -- (593,274) -- -- -- (593,336)
Cumulative translation adjustment -- -- -- (61,420) -- -- (61,420)
------- ------- ---------- ---------- ---------- -------- ------------
Balance as of December 27, 1997 4,938 10 4,411,716 (61,420) 3,184,769 276,846 7,816,859
======= ===== =========== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAPER ACQUISITION CORP.
Consolidated Statement of Cash Flows
For the period from
December 31, 1996
(inception) through
December 27, 1997
Cash flows from operating activities:
Net income $ 276,846
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation 8,335,855
Write-off of inventory "step-up" to fair value 292,386
Deferred income taxes (619,585)
Loss on disposal of property and equipment 28,383
Changes in operating assets and liabilities:
Accounts receivable 1,938,229
Inventories 1,455,642
Prepaid expenses and other assets 89,001
Accounts payable, accrued expenses and
other long-term liabilities (1,226,695)
Income taxes payable 339,249
------------
Net cash provided by operating activities 10,909,311
-----------
Cash flows from investing activities:
Acquisitions, net of cash acquired (Note 2) (16,781,468)
Proceeds from sale of property and equipment 746,243
Capital expenditures (114,214)
----------------
Net cash used in investing activities (16,149,439)
-------------
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 (4,609,752)
Borrowings under revolving credit facility, net --
Repurchase and retirement of common stock (593,336)
Loans to related party (2,250,000)
Payment of loan origination fees (1,763,572)
-------------
Net cash provided by financing activities 5,390,992
--------------
Effect of exchange rate changes (61,420)
---------------
Net change in cash 89,444
Cash at beginning of period --
----------------
Cash at end of period $ 89,444
==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,402,909
Income taxes 3,855,966
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAPER ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (inception) to December 27, 1997 include the accounts of Paper 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 speciality coated papers, inks
and ribbons to business forms manufacturers in the United States,
Canada and numerous foreign markets. The Company is headquartered in
Urbandale, Iowa and currently has operating plants located in Dallas,
Texas; Newburgh, New York; and Indianapolis, Indiana. The Company
purchases the majority of its tissue paper from one supplier (Note 8).
The Company considers its relationship with this supplier to be strong;
however, alternative suppliers of tissue paper exist and are considered
adequate by the Company for its requirements.
FISCAL YEAR
Prior to the transaction on April 20, 1998 (Note 14), the Company's
fiscal year end was August 31. All other fiscal months end on the
Saturday closest to the calendar month end. Accordingly, the
accompanying consolidated financial statements have been presented as
of and for the period ended December 27, 1997, which represents the
December fiscal month end for the Company. The period from December 31,
1996 (inception) through December 27, 1997 represents 362 days of
operations. The difference between the Company's results for this
period and a full fiscal year is not material.
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 borrowings (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 $31,083,235 ("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
----------
<TABLE>
<CAPTION>
Fair market value of assets acquired and liabilities assumed and
Dangling Credit was allocated as follows:
<S> <C>
Assets
Accounts receivable $ 5,984,969
Inventory 3,559,419
Prepaid and other current assets 290,364
Property and equipment (including property held for sale) 3,546,942
Deferred income taxes 1,392,818
Goodwill and other assets 32,939,578
----------
Total Assets 47,714,090
----------
Liabilities
Accounts payable 2,830,657
Accrued expenses 4,611,881
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 25,867,831
----------
Dangling Credit 3,184,769
---------
Total purchase price allocations $ 18,661,490
===========
</TABLE>
Subsequent to the Acquisitions, Frye Copysystems, Inc. changed its name to
FryeTech, Inc.
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.
REVENUE RECOGNITION
Sales revenue is recognized upon shipment of orders. Accounts receivable
consists of the amounts estimated to be collectible on sales, after
provision for uncollectible amounts.
<PAGE>
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out method. Inventories are reduced
for estimated excess and obsolete inventory as considered necessary. At
December 27, 1997, the reserve for estimated excess and obsolete
inventory was $248,000. 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 ended December 27, 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 25 years
Furniture and fixtures 5-10 years
Expenditures for renewals and betterments are capitalized and
maintenance and repairs are charged to operations.
PROPERTIES HELD FOR SALE
Properties held for sale consists primarily of land and a building each
in Parsons, Kansas and Corcoran, California. In February 1998, the
Company closed its Parsons, Kansas and its Corcoran, California plants.
The closing of these plants was contemplated as part of the Acquisitions
(Note 2). The costs associated with such plant closings were recorded in
the accounting for the Acquisitions.
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 transactions, which were
not material, are included in operations for the period.
GOODWILL AND NONCOMPETE AGREEMENTS
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. The noncompete agreements, which were entered into by the
Predecessor in 1995, are being amortized over the lives of the
agreements which range from 5 to 10 years. Management periodically
evaluates the recoverability of goodwill and noncompete agreements based
on undiscounted cash flows (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
(Note 5).
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.
ENVIRONMENTAL POLICY
The Company accrues for environmental expenses resulting from existing
conditions that relate to past operations and are reasonably estimable.
<PAGE>
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 speciality coated papers, inks and
ribbons. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed and reserves are
maintained. The Company typically does not require collateral.
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. The Company has
determined that the fair value of cash, accounts receivable and accounts
payable approximate book value at December 27, 1997, based upon the
short-term nature of these assets and liabilities.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). The
Company will implement SFAS 130 and SFAS 131 as required in 1998, which
will require the Company to report and display separately certain
information related to comprehensive income and operating segments but
will not result in any changes to previously recorded amounts.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 27, 1997 consists of:
Machinery and equipment $ 1,474,710
Buildings and building improvements 490,000
Land and Land improvements 240,000
Furniture and fixtures 41,820
--------------
2,246,530
Accumulated depreciation (181,806)
--------
Property and equipment, net $ 2,064,724
============
<PAGE>
5. GOODWILL AND OTHER ASSETS
Goodwill and other assets (accumulated amortization is provided in
parentheses) as of December 27, 1997 consist of:
Goodwill ($7,770,809) $ 31,083,235
Deferred financing costs
($352,714 included in interest expense) 1,763,572
Noncompete agreements ($30,526) 92,771
------------
32,939,578
Accumulated amortization (8,154,049)
----------
Goodwill and other assets, net $ 24,785,529
=============
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 27, 1997:
Employee costs and benefits $ 1,163,560
Restructuring, severance and relocation 898,821
Interest 357,428
Other 1,285,419
---------
Accrued expenses $ 3,705,228
=========
RESTRUCTURING, SEVERANCE AND RELOCATION
In connection with the Acquisitions (Note 2), the Company developed and
implemented a plan (the "Restructuring Plan") to reduce costs and
improve operating efficiencies. The principal actions in the
Restructuring Plan involved: (i) the closing of operating facilities in
Sturgis, Michigan (completed in January 1997); Springfield,
Massachusetts (completed in February 1997); Conyers, Georgia (completed
in March 1997); Parsons, Kansas (completed in February 1998) and
Corcoran, California (completed in February 1998); (ii) consolidation of
support infrastructure and (iii) termination of employees.
The major components of the Restructuring Plan liability, which was
recorded as part of the accounting for the Acquisitions, and
related activity for the period ended December 27, 1997 are as follows:
Balance at Balance at
December 31, 1997 December 27,
1996 Charges 1997
----------- ------- ------------
Plant closings and
reconfiguration $ 1,194,323 $ 770,782 $ 423,541
Lease commitment 417,370 126,264 291,106
Severance 523,648 416,133 107,515
Relocation 53,000 8,000 45,000
Moving expenses and other 56,000 24,341 31,659
---------- -------- ---------
$ 2,244,341 $ 1,345,520 $ 898,821
============ =========== ===========
<PAGE>
7. LONG-TERM DEBT
December 27,
1997
Revolving credit facility $ --
Term loan 17,200,000
Senior subordinated notes payable
to Predecessor shareholders, Fixed
rate of 8%, payable in three annual
installments Beginning December 30,
1997 (Note 13 and 14) 937,640
------------
18,137,640
Current maturities of long-term debt (4,612,547)
Unamortized discount on notes payable (38,411)
------------
Long-term debt $ 13,486,682
==========
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 for
borrowings under a revolving credit facility of up to $13,000,000 and
for 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 December 27, 1997, (after giving effect to the mandatory
reduction of $2,600,000 on December 31, 1997), $10,400,000 was available
to be borrowed under the revolving credit facility. Fees for unused
commitments on the revolving credit facility were $60,426 for the period
ended December 27, 1997. 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 December 27,
1997, outstanding letters of credit amounted to $0.
Borrowings under the Agreement bear interest at the Company's option,
at either (i) the banks' prime rate plus applicable margin or (ii) the
eurodollar rate plus applicable margin, provided that the relevant
portion of the borrowings is in excess of $500,000. The applicable
margin is computed based upon the leverage ratio of FryeTech, Inc. at
various dates, as specified in the Agreement. As of December 27, 1997,
the Company's borrowing rate under the Agreement is 8.375%, the
eurodollar rate option plus applicable margin for $16,775,000 of the
borrowings and 9.5%, the banks' prime rate plus applicable margin for
$425,000 of the borrowings.
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. In accordance with the terms of the Agreements, the
financial covenants are computed on a quarterly basis (November 30;
February 28; May 31 and August 31). FryeTech, Inc. was in compliance
with such covenants throughout 1997.
<PAGE>
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.
Currently, the principal payment due on December 31, 1997 has not been
paid by the mutual consent of the shareholders of the Predecessor and
the Company as a result of certain pending indemnification claims (Note
12).
Annual maturities of long-term debt as of December 27, 1997 are as
follows:
1998 $ 4,612,547
1999 4,612,547
2000 4,612,546
2001 4,300,000
2002 --
Thereafter --
------------------
Total $ 18,137,640
===========
8. OTHER LONG-TERM LIABILITIES
PRODUCT PURCHASE AGREEMENT
The Company entered into an amended product purchase and loan agreement
(the "Product Purchase Agreement") that provides for the Company to
purchase annually a fixed percentage of its tissue paper through July
14, 2002. Under the terms of the amended Product Purchase Agreement, the
Company was advanced $3,500,000 on an unsecured basis. As of December
27, 1997, $2,625,000 of the funds are outstanding, of which $525,000 is
classified as a current liability and $2,100,000 is classified within
other long-term liabilities. The amended repayment terms of the Product
Purchase Agreement require annual payments of $525,000 which will begin
in July 1998. The Company imputes interest expense on the Product
Purchase Agreement at an interest rate that varies with the price of
tissue paper purchased (approximately 8% at December 27, 1997), which is
paid for at the time of purchase of tissue paper.
9. INCOME TAXES
Provision (benefit) for income taxes for the period ended December 27,
1997 includes:
Current:
Federal $ 3,491,072
State 713,757
----------
4,204,829
---------
Deferred:
Federal (514,406)
State (105,179)
--------
(619,585)
--------
$ 3,585,244
=========
<PAGE>
During the period ended December 27, 1997, the Company's Canadian
subsidiary's (Frye Carbon Products Ltd.) pre-tax loss was approximately
$122,000, which related primarily to amortization of non-deductible
goodwill. On the basis of materiality, a separate provision for foreign
income taxes has not been presented.
A summary of the composition of gross deferred income tax assets and
liabilities at December 27, 1997 is as follows:
Assets:
Amortization of goodwill $ 665,480
Accrued liabilities 774,594
Restructuring, severance and relocation liabilities 363,960
Inventory differences 103,621
Other 152,395
----------
Gross deferred tax assets $ 2,060,050
============
Liabilities:
Unremitted earnings of foreign subsidiary $ (413,315)
Depreciation (132,703)
------------
Gross deferred tax liabilities $ (546,018)
============
The differences between income tax at the statutory federal income tax
rate and income tax as reported in the statement of operations for the
period ended December 27, 1997 are as follows:
Income tax expense at federal statutory rate (34%) $ 1,313,111
Nondeductible goodwill amortization 1,836,680
State income taxes, net of federal benefit 401,661
Other 33,792
-----------
$ 3,585,244
=========
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
which were frozen prior to the Acquisitions. 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.
Net periodic pension cost (income) of the defined benefit plans was as
follows for the period ended December 27, 1997:
Non-Union Bargaining
Plan Plan
Service cost on benefits earned during
the period $ -- $ --
Interest cost on projected benefit
obligation 125,575 66,673
Actual (return)/loss on plan assets (246,273) (116,835)
Net amortization and deferral 98,238 46,408
----------- -----------
Net periodic pension cost (income) $ (22,460) $ (3,754)
========= ============
<PAGE>
The funded status as of December 27, 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 $(1,880,824) $ (979,930)
Nonvested benefit obligation -- --
------------ -------------
Accumulated benefit obligation
and projected benefit
obligation (1,880,824) (979,930)
Plan assets at fair value 1,994,309 933,291
--------- -------
Plan assets in excess (deficit)
of projected benefit
obligation 113,485 (46,639)
Unrecognized net gain (loss)
from past experience
different from that assumed 638 (1,396)
---------- ---------
Prepaid (accrued) pension
expense $ 114,123 $ (48,035)
========== =========
Assumptions used for the period ended December 27, 1997 were as
follows:
Non-Union Bargaining
Plan Plan
Weighted average discount rate 6.75% 6.75%
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 ended December 27, 1997 were
$0.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan ("ESOP") option
available through the Plans 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.
Concurrently, the Company terminated the employees option to participate
in the ESOP.
The Company made no contributions to the ESOP during the period ended
December 27, 1997.
<PAGE>
11. CLASS B COMMON STOCK
In connection with consummating the Acquisitions, the Company issued
1,000 shares of its Class B common stock, par value $.01 per share in
consideration of services rendered to the Company. 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 ended December 27, 1997 was
$467,769. Minimum lease payments required under the operating leases as
of December 27, 1997 are as follows:
1998 $ 446,790
1999 274,381
2000 150,861
2001 30,653
2002 25,544
Thereafter --
--------------
$ 928,229
==============
ENVIRONMENTAL MATTER
In 1995, the Predecessor, and several other companies, were sued by a
third party (the "Plaintiff") for costs incurred by the Plaintiff in
investigating and cleaning up a Superfund site ("Site") in the state of
New York pursuant to an order issued by the Environmental Protection
Agency ("EPA"). The Plaintiff alleges that the Predecessor's facility in
Newburgh, New York sent waste to the Site during the 1960's and 1970's
when the Site was operated as a dump for local residences and
businesses. In July 1997, the EPA issued an order ("Order") to the
Company and several other companies requiring them to assist the
Plaintiff in cleanup of the Site. Pursuant to this Order, the Company
was requested to pay $440,000 plus 10% of any shortfalls in the ongoing
cleanup efforts of the Site, plus $90,000 towards the EPA's past costs
at this Site, plus approximately $42,500 in other costs incurred by the
EPA. The Company made a payment of $125,000 to the Plaintiff in February
1998 relating to this matter. Settlement discussions are continuing
however, it is likely that the Company will settle this matter generally
in accordance with the terms outlined above. Because additional
potentially responsible parties, who may also be required to contribute
to the remediation of the Site, continue to be identified, and because
the proposed settlement does not address possible groundwater
remediation at the Site, it is not clear what the Company's ultimate
liability for this matter may be.
Management believes the Company's probable, nondiscounted liability at
December 27, 1997 associated with the above environmental matter is
$630,000 ($504,000 included in other long-term liabilities and $126,000
included in accrued expenses). A portion of the liability was
established by the Predecessor prior to the Acquisitions and the
remainder was established in connection with the accounting for the
Acquisitions (Note 2).
FEDERAL INCOME TAX MATTER
The Internal Revenue Service ("IRS") is currently challenging certain
deductions taken by the Predecessor during its taxable years 1991
through 1994. In February 1998, the IRS issued a Notice of Deficiency to
the Company regarding this matter. The Company filed a petition with the
United States Tax Court in May 1998 challenging the proposed adjustment
for additional tax made by the IRS and the Company is currently waiting
for a reply from the IRS.
At December 27, 1997, the Company has recorded an estimated contingent
liability, which was established by the Predecessor prior to the
Acquisitions (Note 2), for the above 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 by the
Company as a component of income taxes payable at December 27, 1997,
will not have a material adverse impact on the results of operations or
the financial position of the Company.
<PAGE>
LITIGATION
The Company is involved in various litigation arising in the normal
course of business. In the opinion of management, the Company's ultimate
liability beyond amounts recorded, if any, under pending litigation
would not materially affect its financial condition or the results of
its operations.
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 matters discussed above exceeds amounts recorded by the
Company.
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 ended December 27,
1997, interest paid to the related common stockholders was approximately
$56,000. As of December 27, 1997, interest payable to the related common
stockholders was approximately $19,000.
During the period ended December 27, 1997, the Company incurred
management fees of $500,000 to the Company's majority common
stockholder; such expense is included in selling, general and
administrative expense. At December 27, 1997, $300,000 of such expense
is included in accrued expenses and was paid in the first quarter of
1998.
The Company has two non-current notes receivable from the Company's
majority common stockholder in the amounts of $500,000 and $1,750,000 at
December 27, 1997. The notes are payable in full on July 21, 2002 and
October 6, 2002, respectively and bear interest at 10% payable at least
50% in cash and the remainder at the option of the majority common
stockholder, payable in-kind.
14. SUBSEQUENT EVENTS
REPURCHASE OF SENIOR SUBORDINATED NOTES AND COMMON STOCK
On March 31, 1998, the Company entered into an agreement with certain of
the Predecessor shareholders to repurchase 24,116 shares of its Class A
voting common stock and a portion of the total senior subordinated notes
for cash of $372,768. Of the cash payment made by the Company, $241,160
was allocated to the paydown of senior subordinated notes payable and
$131,608 was allocated to the repurchase and retirement of Class A
common stock. As a result of the transaction, which was completed on
April 15, 1998, all obligations of the Company relative to the portion
of the repurchased senior subordinated notes were extinguished and all
rights of the redeemed Predecessor shareholders were terminated.
SALE OF THE COMPANY
On April 20, 1998, the Company's shareholders consummated a transaction
pursuant to which 100% of the outstanding common stock was acquired by
a newly formed corporation. In exchange for their stock, the
shareholders of the Company received non-cash consideration consisting
of a 20% voting interest in the newly formed corporation, warrants to
purchase up to an additional 35% voting interest in such corporation,
and promissory notes as well as contingent cash consideration based
upon the results of Paper Acquisition Corp.'s operating performance
over the five year period beginning September 1, 1997. Subsequent to
the transaction, the Company changed its fiscal year end to December
31.
<PAGE>
WORLDCORP, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1997
<PAGE>
The following unaudited pro forma condensed financial information gives effect
to WorldCorp, Inc., a Delaware corporation ("WorldCorp") acquiring an 80%
interest in Paper Acquisition Corp., a Delaware corporation ("Paper") on April
20, 1998. Paper was organized by Sun Capital Partners, Inc. ("Sun Capital") to
acquire and operate specialty paper businesses. In December 1996, Paper acquired
and consolidated two companies that produce a variety of coated papers,
specialty inks and ribbons which are sold to business forms manufacturers. The
purchase price of Paper was approximately $19.6 million and was allocated as
follows: (1) approximately ($17.0) million to the tangible and identifiable
intangible assets net of liabilities assumed, (2) approximately ($1.3) million
to minority interest and (3) approximately $37.9 million to the cost in excess
of the net assets acquired ("goodwill"). The goodwill will be amortized over a
20 year period on a straight-line basis.
The unaudited pro forma condensed balance sheet has been prepared as if the
acquisition was consummated as of December 31, 1997. The unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1997 has been prepared as if the acquisition was consummated as of January 1,
1997.
This method of combining historical financial statements for the preparation of
the pro forma condensed consolidated financial information is for presentation
only. Actual statements of operations of WorldCorp will reflect the operating
results of Paper from the closing date of the acquisition with no retroactive
restatements. 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 acquisition occurred on the
dates indicated, nor do they represent a forecast of the consolidated financial
position or results of operations for any future period. The unaudited pro forma
condensed consolidated financial information should be read in conjunction with
the historical financial statements and related notes of WorldCorp and Paper,
incorporated by reference or included herein.
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
WORLDCORP PAPER ADJUSTMENTS WORLDCORP
<S> <C> <C> <C> <C>
OPERATING REVENUES
World Airways $ 216,092 $ -- $ -- $ 216,092
Paper -- 48,073 -- 48,073
------------ -------- ----------- --------
Total operating revenues 216,092 48,073 -- 264,165
OPERATING EXPENSES
World Airways:
Flight 47,892 -- -- 47,892
Maintenance 44,698 -- -- 44,698
Aircraft costs 65,046 -- -- 65,046
Fuel 10,660 -- -- 10,660
Flight operations subcontracted to other carriers 2,367 -- -- 2,367
Promotions, sales, and commissions 6,919 -- -- 6,919
Depreciation and amortization 5,795 -- -- 5,795
General and administrative 17,818 -- -- 17,818
-------- -------- --------- ---------
Total operating expenses - World Airways 201,195 -- -- 201,195
Paper:
Cost of Sales -- 29,034 -- 29,034
Selling, general and administrative -- 12,320 (7,780) (i) 4,540
----------- -------- ---------- ---------
Total operating expenses - Paper -- 41,354 (7,780) 33,574
WorldCorp - general and administrative 2,198 -- 1,896 (g) 5,134
540 (l)
500 (m)
------------- ------------ ---------- ---------
Total operating expenses 203,393 41,354 (4,844) 239,903
------- ------ ---------- ---------
OPERATING INCOME 12,699 6,719 4,844 24,262
-------- ------- ------- ----------
OTHER INCOME (EXPENSE)
Interest expense (9,575) (2,770) (1,280) (h) (13,625)
Interest income 931 -- -- 931
Equity in earnings (loss) of affiliates (26,975) -- -- (26,975)
Loss on purchase of equity by affiliates, net (8,726) -- -- (8,726)
Gain on sale of subsidiaries' stock 17,615 -- -- 17,615
Other, net 31 (87) -- (56)
------- --------- ------------- -------------
Total other income (expense), net (26,699) (2,857) (1,280) (30,836)
----------- --------- ---------- -----------
EARNINGS (LOSS) BEFORE TAXES AND
MINORITY INTEREST (14,000) 3,862 3,564 (6,574)
INCOME TAX EXPENSE (350) (3,585) 2,870 (j) (1,065)
MINORITY INTEREST (4,778) -- (1,929) (k) (6,707)
---------- --------- ---------- ----------
NET EARNINGS (LOSS) $ (19,128) $ 277 $ 4,505 $ (14,346)
========== ========= =========== =========
BASIC LOSS PER SHARE $ (1.29) $ (0.97)
========== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 14,804,356 14,804,356
=========== ==========
</TABLE>
Diluted earnings (loss) per share are anti-dilutive.
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
WORLDCORP PAPER ADJUSTMENTS WORLDCORP
<S> <C> <C> <C> <C>
Cash $ 4,659 $ 89 $ -- $ 4,748
Trade accounts receivable -- 4,047 -- 4,047
Other receivables 214 -- -- 214
Deferred income taxes -- 1,065 (852) (b) 213
Prepaid expenses and other current assets 57 201 -- 258
Inventories -- 1,811 240 (f) 2,051
---------- ------- ------- -----------
Total current assets 4,930 7,213 (612) 11,531
--------- --------- ---------- ----------
Note receivable from related party -- 2,250 -- 2,250
Deferred income taxes, net -- 449 (359) (b) 90
Property and equipment, net 261 2,065 -- 2,326
Property held for sale -- 640 -- 640
Investment in affiliates 8,344 -- 5,633 (a) 13,977
Other assets and deferred charges, net 2,454 -- -- 2,454
Goodwill and other assets, net 843 24,786 33,235 (f) 38,753
(18,701) (e)
(1,410) (f)
--------- --------- ---------- ----------
TOTAL ASSETS $ 16,832 $ 37,403 $ 17,786 $ 72,021
======= ======= ======== =======
Current maturities of long-term obligations $ 9,626 $ 4,613 $ 1,000 (a) $ 15,239
Current maturities of Product Purchase Agreement -- 525 -- 525
Accounts payable 187 1,942 -- 2,129
Due to affiliate, net 259 -- -- 259
Accrued salaries and wages 610 -- -- 610
Accrued interest 818 -- -- 818
Accrued taxes 99 2,427 -- 2,526
Accrued expenses -- 3,705 -- 3,705
------------ -------- ------------ --------
Total current liabilities 11,599 13,212 1,000 25,811
-------- -------- -------- --------
Long-term obligations, net 65,000 13,487 15,000 (a) 92,077
(1,410) (f)
Other long term liabilities 163 2,887 2,090 (a) 5,140
--------- -------- -------- ---------
TOTAL LIABILITIES 76,762 29,586 16,680 123,028
-------- --------- -------- --------
Minority interest -- -- (3,200) (d) 2,714
1,563 (d)
4,351 (d)
Common stock 16,643 5 (5) (c) 16,643
Additional paid-in capital 43,966 4,413 (4,413) (c) 43,966
Deferred compensation (25) -- -- (25)
Cumulative translation adjustment -- (62) 62 (c) --
Historical cost basis of continuing shareholder
interest in excess of fair value of purchase price -- 3,184 (3,184) (c) --
Unrealized gain on investments of affiliates 125 -- -- 125
Retained earnings (accumulated deficit) (110,494) 277 (277) (c) (104,285)
576 (f)
5,633 (n)
Treasury Stock (10,145) -- -- (10,145)
--------- ---------- ----------- ----------
Total common stockholders' equity (deficit) (59,930) 7,817 (1,608) (53,721)
--------- --------- --------- ----------
TOTAL LIABILITIES AND COMMON
STOCKHOLDERS' EQUITY (DEFICIT) $ 16,832 $ 37,403 $ 17,786 $ 72,021
========= ======== ======== ==========
</TABLE>
<PAGE>
WORLDCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(in thousands)
NOTE 1 - PURCHASE PRICE OF PAPER
The purchase price of the acquisition of Paper is comprised of the
following (in thousands):
Estimated fair value of warrants to acquire 35%
of WorldCorp Acquisition Corp. $ 2,090
20% of fair value of World Airways at date of acquisition 4,351
80% of WorldCorp Acquisition Corp. 8% interest-only
promissory notes due April 2003 12,000
80% of WorldCorp Acquisition Corp. 8% promissory notes
due March 1999 800
Estimated WorldCorp transaction costs 400
---------
Total $ 19,641
=========
The purchase price is expected to be allocated as follows:
Current assets $ 7,014
Equipment 2,582
Other assets 495
Goodwill 37,910
Liabilities assumed (9,730)
Debt assumed (17,303)
Minority interest (1,327)
---------
Total $ 19,641
=========
The allocation of the purchase price to Paper's tangible and identifiable
intangible assets was based on management's preliminary estimate of the fair
value of those assets. The final estimation of the fair value of assets and
liabilities assumed may result in differences in the final allocation of the
purchase price.
NOTE 2 - PRO FORMA PURCHASE ADJUSTMENTS - PAPER ACQUISITION
The following pro forma adjustments have been made to the unaudited pro forma
condensed consolidated financial information:
(a) Represents the debt assumed, and warrants issued in connection with the
acquisition of Paper, and the related investment in Paper.
(b) Eliminates 80% of the net deferred tax assets of Paper, for which
realization is not considered more likely than not.
(c) Elimination of the historical equity of Paper.
<PAGE>
(d) Reflects the minority interest to be recorded as a result of the above
adjustments.
(e) Reflects the elimination of 80% of the historical goodwill recorded by
Paper.
(f) Reflects the fair value adjustments recorded in connection with the
preliminary allocation of the purchase price to the assets acquired and
liabilities assumed and the goodwill resulting from the acquisition,
which will be amortized over a 20 year period.
(g) Reflects amortization of the preliminary allocation of purchase price
to goodwill. This amount is being amortized on a straight-line basis
over a 20 year period.
(h) Reflects the interest expense on the $15 million, 8% interest-only
promissory notes of WorldCorp Acquisition Corp. and the $1 million, 8%
promissory notes of WorldCorp Acquisition Corp., issued in connection
with the acquisition of Paper.
(i) Reflects the elimination of Paper's historical amortization of
goodwill.
(j) Reflects pro forma adjustments relating to income tax expense.
(k) Reflects the recording of the 20% minority interest of Paper by
WorldCorp.
(l) Reflects the amortization of seven-year management options to acquire
20% and 10% of stock of WorldCorp and WorldCorp Acquisition Corp.,
respectively.
(m) Reflects the annual consulting fee of $0.5 million to be paid by
WorldCorp to Sun Capital.
(n) WorldCorp will recognize a gain on the acquisition of Paper of
approximately $5.6 million, which is not reflected in the accompanying
unaudited pro forma condensed consolidated statement of operations.
