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 operates in two business areas: air transportation services and transaction processing.
WorldCorp's air transportation subsidiary, World Airways, is a leading worldwide provider of air transportation for commercial and government customers. World Airways was a wholly-owned subsidiary in 1993. In February 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of its ownership 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.
WorldCorp's transaction processing business consists of its ownership interest in US Order, Inc. ("US Order"), a company which designs, develops and markets transaction processing software, interactive applications, customer support services and enabling hardware for two industries: home banking and telephone company intelligent network services. In December 1993, US Order completed a $12.0 million private equity placement. On August 1, 1994, US Order sold its electronic banking and bill payment operations to VISA International Services Association, Inc. ("VISA"). As of December 31, 1994, WorldCorp owned 52% of the voting stock of US Order. In addition, WorldCorp exercised an option to purchase additional shares of the voting stock of US Order for consideration equal to $3.9 million which increased its voting ownership percentage to 89% in February 1995 (see "Management's Discussions and Analysis of Financial Condition and Results of Operations - Business Trends").
The principal executive offices of WorldCorp are located at Washington Dulles International Airport in The Hallmark Building, 13873 Park Center Road, Herndon, Virginia 22071. WorldCorp's telephone number is (703) 834-9200.
Air Transportation
World Airways is a certificated air carrier, operations of which are limited to the air transportation industry ("Airline Operations"). Airline Operations accounted for 100% of the Company's operating revenue and operating income in 1986 through 1991. In 1992, 1993, and 1994, revenue from other business areas represented less than 1% of the Company's total operating revenues. World Airways provides supplemental air transportation to major international airlines, freight forwarders, small package shippers, international vacation tour operators and the U.S. government. World Airways' customers purchase the use of the entire aircraft and then sell either passenger seats or cargo space directly to their customers. In most cases, World Airways' customers assume the risk of filling the aircraft with passengers or cargo. In addition, World Airways has obtained regulatory approval from the Government of Israel to operate a scheduled service between New York and Tel Aviv commencing in July 1995.
World Airways uses several quick-change passenger/cargo convertible aircraft to target different seasonal peaks throughout the year and to respond rapidly to demands for supplemental airlift which arise on short notice, such as Operation Desert Storm. World Airways' fleet of MD-11 and DC10-30 aircraft appeal to customers who desire long-range, non-stop, international service. Some of World Airways' competitors fly shorter-range aircraft which must make inconvenient and time-consuming refueling and technical stops.
World Airways uses specialized operating techniques in pursuit of its strategic objective of maintaining consistently high levels of on-time reliability. For example, World Airways implements programs that are designed to maintain World Airways' aircraft to exacting standards, has converted most of its fleet to new, state-of-the-art MD-11 aircraft, extensively trains all flight and technical personnel, and carries maintenance representatives and extensive spare parts kits on board its aircraft.
On October 30, 1993, WorldCorp, World Airways, and MHS Berhad ("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. At the time of the signing of the Stock Purchase Agreement, World Airways was a wholly owned subsidiary of WorldCorp. On February 28,
1994, WorldCorp, World Airways, and MHS concluded the transaction according to the terms described above. Effective December 31, 1994, WorldCorp purchased 5% of World Airways' common stock held by MHS, increasing its ownership to 80.1%. In addition, MHS acquired, in 1994, 32% of Malaysian Airline System Berhad ("MAS"), the flag carrier of Malaysia. MAS is one of World Airways' largest commercial customers.
Aviation Fuel -------------
The Company's 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. The Company's 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.
The Company purchases no fuel under long-term contracts nor does the Company enter into futures or fuel swap contracts. Although the crisis in the Persian Gulf resulted in substantially higher fuel prices during the third and fourth quarters of 1990 and the first quarter of 1991, the Company has experienced no difficulty purchasing fuel during the past four years and does not expect availability to be a problem in the foreseeable future. The availability and price of aviation fuels remain subject to the various unpredictable economic and market factors that affect the supply of all petroleum products.
The Company manages fuel price risk by making the Company's customers responsible (in all of the Company's contracts) for potential fuel price fluctuations in excess of five percent. Although rapidly escalating fuel costs may cause a decrease in the overall level of activity in the industry, the Company does not anticipate that any future industry-wide energy problems would have a substantial adverse effect upon the profitability of Airline Operations.
Seasonality -----------
The contract air carrier transportation business is significantly affected by seasonal factors. Typically, Airline Operations experience lower levels of utilization during the first quarter as demand for passenger and cargo services are lower relative to other times of the year. Airline Operations generally experience higher levels of utilization in the second and third quarters due to demand for commercial passenger service including the annual Hadj pilgrimage. Fourth quarter utilization generally depends upon the overall world economic climate, global trade patterns and the resulting demand for air cargo services. Airline Operations experienced soft demand and weak yields in worldwide cargo and passenger markets in the fourth quarters of 1994, 1993, and 1992. The quarterly financial data is contained in Note 20 "Unaudited Quarterly Results" of the Company's Notes to Consolidated Financial Statements in Item 8.
Customers ---------
Significant customers of WorldCorp's Airline Operations are the U.S. Air Mobility Command ("AMC"), MAS, and P.T. Garuda Indonesia ("Garuda"). The loss of any of these customers or a substantial reduction in business from any of these sources, if not replaced, would have a material adverse effect on the Company.
AMC has awarded annual contracts to World Airways since 1956. World Airways' current annual contract with AMC will expire in September 1995. The minimum contract amount for 1995 of $33.4 million is a 73% increase over 1994, and will be augmented by further expansion business. Expansion business totalled 92% of the minimum contract amount for 1994 and 161% for 1993. World Airways cannot determine how any future cuts in military spending may affect future operations with AMC.
World Airways has provided service to MAS since 1981, providing aircraft for integration into MAS' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owns 19.9% of World Airways as of December 31, 1994, acquired a 32% ownership interest in MAS from the Malaysian government during 1994. As a result of the strengthening of the MHS/MAS relationship, World Airways recently entered into a series of long-term contracts with MAS. World Airways has agreed to provide five aircraft to MAS under long-term contracts with expirations ranging from March 1997 to September 2000 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Trends"). As a result of these contracts, World Airways expects that the percentage of its total revenue generated from MAS in
1995 will increase significantly over historical levels. The current MAS Hadj contract, which was entered into in 1992, expires in 1996. In 1993, World Airways provided two aircraft for Hadj operations. World Airways expects to provide three aircraft for the 1995 MAS Hadj operations.
World Airways has provided service to Garuda since 1988 under an annual contract. World Airways provided six aircraft for the 1994 Garuda Hadj operations and expects to provide five aircraft for the 1995 operations. In addition, World Airways has provided aircraft for Garuda's cargo operations in previous years.
The information regarding major customers and foreign revenue is contained in Note 17 "Segment Information" of the Company's Notes to Consolidated Financial Statements in Item 8.
Information concerning classification of products within the air transportation industry comprising 10% or more of the Company's consolidated operating revenues is presented in the following table (in millions):
Competition -----------
The Company's Airline Operations compete to varying degrees for commercial contract revenue with other air carriers and, indirectly, suppliers of surface transportation. The Company believes that the basis for competition is price, availability of scheduled passenger air transportation to a destination, speed of delivery for cargo, and performance characteristics of aircraft. In addition, other competitors could choose to enter contract flight services at any time, thereby significantly increasing competition.
The allocation of military air transportation contracts by AMC is based upon the number and type of aircraft a carrier, alone and/or through joint venture, makes available to the Civil Reserve Air Fleet ("CRAF"). An increase by other air carriers in their commitment of aircraft to the CRAF, a reduction in the number of aircraft controlled by the Company, a reduction of AMC's air transportation requirements or federal appropriations for such purpose, the failure to renew joint venture arrangements, or a change in AMC's policy concerning the method of awarding AMC contracts, among other things, could adversely affect the amount of AMC contracts, if any, which are awarded in future years.
Regulatory Matters ------------------
All certificated air carriers, including the Company's Airline Operations, are subject to regulation by the Federal Aviation Administration (the "FAA") under the Federal Aviation Act of 1958, as amended (collectively the "Federal Aviation Act"). 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. Under the Act, the Department of Transportation has jurisdiction over certain aviation matters such as antitrust concerns (mergers, acquisitions and unfair competitive practices), accounts and records, and international routes and fares. Additionally, foreign governments assert jurisdiction over air routes and fares to and from the United States, airport operation rights and facilities access.
Airline Operations must comply with FAA noise standard regulations promulgated under the Federal Aviation Act, as amended by the Noise Control Act of 1972 and the Quiet Communities Act of 1978, and with Environmental Protection Agency engine emissions regulations promulgated under the Clean Air Act of 1970, as amended. In addition, certain of the operations of World Airways are subject to laws and regulations relating to the disposal of hazardous wastes.
Certain airport operations have adopted local regulations which, among other things, impose curfews and noise abatement regulations.
By virtue of the extensive use of radio and other communications facilities in its Airline Operations, the Company is also subject to the Federal Communications Act of 1934, as amended.
Labor relations in the air transport industry are generally regulated under the Federal Railway Labor Act, as amended, which vests certain regulatory powers in the National Mediation Board with respect to disputes between airlines and labor unions arising under collective bargaining agreements. Airlines certificated prior to October 24, 1978, including the Company's Airline Operations, are also subject to regulations issued by the Department of Labor which implements the statutory preferential hiring rights granted by the Airline Deregulation Act of 1978 to certain airline employees who have been furloughed or terminated.
The Company's Airline Operations are also subject to regulations of the Department of Defense whenever flights are conducted for the military, as well as other regulations which all U.S. corporations experience as a result of doing business pursuant to state and federal legal requirements.
Employees ---------
At March 24, 1995, WorldCorp and World Airways employed approximately 520 persons. Airline Operations provide various employee benefits customary in the air transportation industry. Approximately 294, or 56.5%, of the employees are covered by collective bargaining agreements with various labor unions. The following table presents additional information concerning Airline Operations' labor agreements.
/(a)/ As of March 24, 1995 the contract has not been amended.
World Airways' cockpit and flight attendant crewmembers are covered by collective bargaining agreements which expired in July 1992. On August 15, 1994, World Airways and the International Brotherhood of Teamsters ("Teamsters") executed a four-year agreement on behalf of World Airways' cockpit members, which was ratified on September 9, 1994. The agreement contains modifications to the crewmember work rules which will permit World Airways to take greater advantage of the operational capabilities of the MD-11 aircraft fleet in exchange for crewmember pay increases.
On July 16, 1987, World Airways and the Teamsters executed a five-year agreement on behalf of the World Airways' flight attendants, which was ratified on August 5, 1987. The contract expired in July 1992 and since that time the flight attendants have been employed under the terms of their prior contract pursuant to the provisions of the Railway Labor Act. The Company is currently in active negotiations with the Teamsters concerning renewal of the contract for the flight attendants. In December 1994, World Airways and the Teamsters jointly requested the assistance of a federal mediator to facilitate negotiations between World Airways and its flight attendants. The outcome of the negotiations cannot be determined at this time.
The agreements between World Airways and the Teamsters, on behalf of both groups, incorporate letters of agreement which require World Airways to give notice to the Teamsters of any acquisition or merger and would require World Airways and any successor of World Airways, among other things, to provide severance pay for employees furloughed within eighteen months of such acquisition or merger when such furlough results from the merger. The agreements also make provision for integration of seniority lists if World Airways' operations are merged with another air carrier.
On February 21, 1990, World Airways and the Transport Workers Union executed a three and one-half year contract on behalf of the World Airways' Dispatchers, which was ratified on February 27, 1990. As of March 31, 1995 this contract has not been amended.
Transaction Processing
US Order designs, develops and markets transaction processing software, interactive applications, customer support services and enabling hardware for two industries: home banking and telephone company intelligent network services. Home banking includes services offered by financial institutions that allow consumers to pay bills, check account balances and receive other bank information from their home. Telephone company intelligent network services are new services offered by telephone companies that utilize a simple in-home display screen incorporated into or attached to a telephoning device to deliver textual messages to residential customers, such as Caller ID. To date, US Order has generated limited revenues from the sale of its products and services. US Order has entered into strategic alliances with Visa Interactive, Inc. ("Visa Interactive") a wholly owned subsidiary of Visa International Services Association, Inc. ("VISA"), in the financial services industry and Colonial Data Technologies Corp. ("Colonial Data") in the telecommunications industry.
On August 1, 1994, US Order sold its electronic banking and bill pay operations to VISA International Services Association, Inc. ("VISA") for approximately $15.0 million in cash and a 72-month royalty stream commencing January 1, 1995 and ending December 31, 2000. The royalty amount is based on the number of customers who use the electronic banking and billing payment technology sold to VISA. No assurances can be given as to the amount of the royalty payments that will be received from VISA. US Order does not expect to receive any significant royalty payments in 1995 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing Developments").
As a result of the purchase of US Order's banking operations by VISA, US Order has agreed to certain restrictions on its operations with respect to the banking and financial services industry. Similarly, VISA has agreed to certain restrictions on its activities as they might relate to the ongoing businesses of US Order. Additionally, the VISA agreement designates US Order as a "preferred provider" to supply certain products and services including smart telephones, consumer applications, and customer service throughout the royalty period. Under the agreement, VISA must make its member banks aware of the preferred provider status of US Order and its products and services, although it is under no obligation to guarantee any minimum purchases of any such US Order products or services by VISA or any of its members. Until August 1, 1995, VISA also agreed not to designate any third party as a provider of US Order's services. In January 1995, US Order signed a two-way exclusive strategic alliance with a leading manufacturer of Caller ID units, Colonial Data Technologies, to jointly develop and distribute US Order's next generation of smart telephones to the telecommunications industry.
As of December 31, 1994, WorldCorp owned 52% of the voting stock of US Order. In addition, WorldCorp exercised an option to purchase additional shares of the voting stock of US Order for consideration equal to $3.9 million which increased its voting ownership percentage to 89% in February 1995 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Trends").
Competition -----------
The market for US Order's products and services is highly competitive and subject to rapid technological change. At present, US Order's principal competitors in the market for smart telephones are Phillips, Northern Telecom, and AT&T. US Order expects competition to increase in the future from existing and new competitors and expects new competitors to include electronics manufacturers, such as Sony and Panasonic. US Order's competition for interactive content generally comes from device manufacturers. US Order expects that as the installed base of smart telephones increases, it will see competition from traditional personal computer on-line providers, such as America On Line, Prodigy, and Compuserve, as well as from personal computer software companies such as Microsoft, Intuit, and Novell.
Regulatory Matters ------------------
US Order's smart telephone products are subject to regulations by the Federal Communications Commission ("FCC"). Among other requirements, US Order's smart phones must comply with Parts 15 and 68 of the FCC's regulations.
The two markets which US Order has targeted are highly regulated. The banking industry, although it has recently undergone significant deregulation, remains quite restrictive at both the federal and state levels. Similarly,
the telecommunications industry has undergone rapid change in the past decade. Federal and state regulations are currently undergoing constant review and revision. Interpretation, implementation, or revision of banking and telecommunications regulations can accelerate or hinder the ultimate success of the company and its products.
Employees ---------
At December 31, 1994, US Order had approximately 65 employees, of which approximately 40 were full-time. Eight of those employees were engaged in research and development, four were engaged in sales and marketing and seven were engaged in administration and finance on a full-time equivalent basis. US Order has no collective bargaining agreements with its employees and believes that its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES -------------------
Flight Equipment
At December 31, 1994, Airline Operations' aggregate operating fleet consisted of eight leased aircraft as follows:
Notes -----
/(a)/ Based on standard operating configurations. Other configurations are occasionally used. /(b)/ The terms of the leases expire between 1995 and 2003. /(c)/ Subsequent to December 31, 1994, World Airways took delivery of two leased McDonnell Douglas DC10-30CF aircraft and one leased McDonnell Douglas DC10-30 passenger aircraft.
Ground Facilities
WorldCorp, World Airways, and US Order lease office space located near Washington Dulles International Airport which houses its corporate headquarters and substantially all of the administrative employees of the airline and transaction processing operations.
Airline Operations lease additional office and warehouse space for their principal ground facilities in Wilmington, Delaware; Philadelphia, Pennsylvania; Miami, Florida; Los Angeles, California; Kuala Lumpur, Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small office and maintenance material storage space are leased at often frequented airports to provide administrative and maintenance support for commercial and military contracts.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS --------------------------
For a description of the Company's current legal proceedings, see Note 19, "Commitments and Contingencies" of the Company's Notes to Consolidated Financial Statements in Item 8.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------
No matters were submitted to a vote of security holders during 1994.
PART II
ITEM 5.
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. The high and low closing 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:
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.
The Company did not declare any cash dividends in 1994 or 1993 and does not plan to do so in the foreseeable future. The Indenture governing the Company's Debentures and 13 7/8% Subordinated Notes due 1997 in certain circumstances may restrict the Company from paying dividends or making other distributions on its common stock.
The approximate number of shareholders of record at March 24, 1995 is 2,714.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA --------------------------------
WORLDCORP, INC. AND SUBSIDIARIES Selected Financial Data (in thousands except per share data)
* Fully diluted earnings per share are anti-dilutive.
/(a)/ Includes a $27.0 million gain on the sale of 24.9% of World Airways common stock and a $14.5 million gain on the sale of US Order's electronic banking and bill payment operations. /(b)/ Includes a $31.4 million loss on the sale of Key Airlines, Incorporated.
ITEM 7.
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 the contract flight operations of World Airways, Inc. ("World Airways") and Key Airlines, Incorporated ("Key Air") until October 23, 1992, when WorldCorp sold 100% of Key Air. 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.
WorldCorp also has an ownership interest in US Order, Inc. ("US Order"), a company which designs, develops, and markets transaction processing software, interactive applications, customer support services, and enabling hardware for two industries: home banking and telephone company intelligent network services. In December 1993, US Order completed a $12.0 million private equity placement. On August 1, 1994, US Order sold its electronic banking and bill payment operations to VISA International Services Association, Inc. ("VISA"). As of December 31, 1994, WorldCorp owned 52% of the voting stock of US Order. In addition, WorldCorp exercised an option to purchase additional shares of the voting stock of US Order for consideration equal to $3.9 million which increased its voting ownership percentage to 89% in February 1995 (see "Business Trends").
General
WorldCorp owns majority positions in companies that operate in two distinct business areas: air transportation (through World Airways) and transaction processing (through US Order). MHS Berhad of Malaysia is an equity investor in World Airways.
Air Transportation ------------------
World Airways is a contract air carrier that generally charges customers based on a block hour basis rather than a per seat or per pound basis. A "block hour" is defined as the elapsed time computed from the moment the aircraft moves at its point of origin to the time it comes to rest at its destination. Fluctuations in flight revenues are not necessarily indicative of true growth because of shifts in the mix between full service contracts and basic contracts. Under the terms of full service contracts, World Airways is responsible for all costs associated with operating these contracts and receives a higher rate per hour. Under the terms of basic contracts, World Airways provides only certain services associated with the contract including aircraft, crews, insurance, and maintenance ("basic contracts"). World Airways typically charges a lower rate per hour for basic contracts since the customer is responsible for other operating costs. For this reason, it is important to measure pure growth through block hours flown rather than actual revenues earned. Typically, U.S. military contracts are full service contracts where the rate paid is set annually and consists of all flying costs, including fuel and ground handling of the aircraft and cargo.
The Company's 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. In addition, the Company receives certain volume discounts. The Company purchases no fuel under long-term contracts nor does the Company enter into futures or fuel swap contracts. The Company manages fuel price risk by making the Company's customers responsible (in all of the Company's contracts) for potential fuel price fluctuations in excess of five percent.
Customers ---------
World Airways' business relies heavily on its U.S. Air Mobility Command ("AMC"), Malaysian Airline System Berhad ("MAS"), and P.T. Garuda Indonesia ("Garuda") contracts, which provided 22%, 19%, and 24%, respectively, of consolidated revenues in 1994, and 14%, 23%, and 20%, respectively, of total block hours in 1994. During 1993, AMC, MAS, and Garuda contracts provided 24%, 17%, and 21%, respectively, of consolidated revenues, and 19%, 16%, and 16%, respectively, of total block hours. The loss of any of these contracts or a substantial reduction in business from any of these contracts, if not replaced, would have a material adverse effect on the Company's revenues and financial condition.
AMC has awarded contracts to World Airways since 1956. The minimum contract amount for 1995 of $33.4 million is a 73% increase over 1994, and will be augmented by further expansion business. Expansion business
totaled 92% of the minimum contract amount for 1994 compared to 161% for 1993. World Airways cannot determine how any future cuts in military spending may affect future operations with AMC.
World Airways has provided service to MAS since 1981, providing aircraft for integration into MAS' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owns 19.9% of World Airways as of December 31, 1994, acquired a 32% ownership interest in MAS from the Malaysian government during 1994. As a result of the strengthening of the MHS/MAS relationship, World Airways recently entered into a series of long-term contracts with MAS. World Airways has agreed to provide five aircraft to MAS under long-term contracts with expirations ranging from March 1997 to September 2000 (see "Financing Developments"). The current MAS Hadj contract, which was entered into in 1992, expires in 1996. In 1994, World Airways provided two aircraft for Hadj operations. World Airways expects to provide three aircraft for the 1995 MAS Hadj operations.
World Airways has provided service to Garuda since 1988 under an annual contract. World Airways provided six aircraft for the 1994 Garuda Hadj operations and expects to provide five aircraft for the 1995 operations. In addition, World Airways has provided aircraft for Garuda's cargo operations in previous years.
Transaction Services --------------------
US Order designs, develops and markets transaction processing software, interactive applications, customer support services and enabling hardware for two industries: home banking and telephone company intelligent network services. Home banking includes services offered by financial institutions that allow consumers to pay bills, check account balances and receive other bank information from their home. Telephone company intelligent network services are new services offered by telephone companies that utilize a simple in-home display screen incorporated into or attached to a telephoning device to deliver textual messages to residential customers, such as Caller ID. To date, US Order has generated limited revenues from the sale of its products and services. US Order has entered into strategic alliances with Visa Interactive, inc. ("Visa Interactive") a wholly owned subsidiary of Visa International Services Association, Inc. ("VISA"), in the financial services industry and Colonial Data Technologies Corp. ("Colonial Data") in the telecommunications industry.
On August 1, 1994, US Order sold its electronic banking and bill pay operations to VISA International Services Association, Inc. ("VISA") for approximately $15.0 million in cash and a 72-month royalty stream commencing January 1, 1995 and ending December 31, 2000. The royalty amount is based on the number of customers who use the electronic banking and billing payment technology sold to VISA. No assurances can be given as to the amount of the royalty payments that will be received from VISA. US Order does not expect to receive any significant royalty payments in 1995.
As a result of the purchase of US Order's banking operations by VISA, US Order has agreed to certain restrictions on its operations with respect to the banking and financial services industry. Similarly, VISA has agreed to certain restrictions on its activities as they might relate to the ongoing businesses of US Order. Additionally, the VISA agreement designates US Order as a "preferred provider" to supply certain products and services including smart telephones, consumer applications, and customer service throughout the royalty period. Under the agreement, VISA must make its member banks aware of the preferred provider status of US Order and its products and services, although it is under no obligation to guarantee any minimum purchases of any such US Order products or services by VISA or any of its members. Until August 1, 1995, VISA also agreed not to designate any third party as a provider of US Order's services. In January 1995, US Order signed a two-way exclusive strategic alliance with a leading manufacturer of Caller ID units, Colonial Data Technologies, to jointly develop and distribute US Order's next generation of smart telephones to the telecommunications industry.
Results of Operations
1994 Compared with 1993 -----------------------
Operating Revenue -----------------
Although operating revenues have remained relatively unchanged over the past year, the Company continues to experience an increase in 1994 quarterly block hours when compared to the same periods in 1993. Block hours increased 13% to 26,455 in 1994 from 23,482 in 1993. Despite the increase in block hours, World Airways
experienced an 11% decrease in revenue per block hour to $7,674 in 1994 from $8,589 in 1993 (excluding revenue from guaranteed block hours). This decrease is primarily due to the fact that block hours under full service contracts were 62% of total block hours in 1994 and 85% in 1993. In addition, guaranteed minimum payments related to the 1994 Hadj of $0.2 million were significantly below guaranteed minimum payments of $8.3 million in 1993.
Aircraft capacity, the number of days that the Company's aircraft are available for service (including days in maintenance), decreased to 8.2 available aircraft per day in 1994 from 8.8 in 1993. This decrease was offset by a 21% increase in daily aircraft utilization to 8.8 hours in 1994 from 7.3 hours in 1993. Aircraft utilization is measured by the total block hours that the Company's aircraft were in use divided by the number of days that the aircraft were available for service (including days in maintenance).
Operating Expenses ------------------
Maintenance costs decreased $2.5 million (9%) in 1994. This decrease resulted primarily from a $4.2 million reversal of excess accrued maintenance reserves associated with the expiration of three DC10-30 aircraft leases during 1994. Excluding the effect of this reversal, maintenance expense increased $1.7 million, primarily due to a 13% increase in block hours flown in 1994.
Despite the increase in block hours flown, operating expenses decreased in 1994, generally due to the shift to more basic contracts in 1994. However, this decrease was partially offset by increases in the following areas: rent costs associated with the addition of higher cost MD-11 aircraft, flight operations subcontracted to other carriers, and selling and administrative expenses. Selling and administrative costs increased $3.7 million (18%) primarily as a result of increased legal and professional fees and marketing efforts. In addition, the Company granted stock options to certain executives which resulted in compensation expense being incurred.
Transaction Services - US Order -------------------------------
In 1994, the Company recorded $1.2 million of net income (net of $2.5 million of minority interest) relating to US Order, compared to $9.2 million of losses (net of $2.9 million of minority interest) in 1993. This $10.4 million increase is due to a $10.7 million gain (net of minority interest) resulting from the VISA transaction. To date, US Order has generated limited revenue from the sale of its products and services.
Non-Operating Items -------------------
Interest expense increased $1.0 million (9%) in 1994 as a result of MD-11 rotables financing and aircraft rent deferrals in 1993, and use of a bank line of credit in 1994. In addition, WorldCorp recognized a gain of $26.9 million from the sale of 24.9% of World Airways common stock in 1994, pursuant to an October 1993 agreement.
1993 Compared with 1992 -----------------------
Operating Revenue -----------------
In 1993, operating revenues increased $2.3 million (1%) to $202.7 million primarily due to an increase in block hours flown. Block hours increased five percent to 23,482 in 1993 from 22,263 in 1992. Due to peak airlift requirements of World Airways' customers for the 1992 Hadj pilgrimage, certain flights were subcontracted to other carriers which resulted in $11.5 million of revenue in 1992 with no corresponding block hours flown. This was not necessary in 1993. This increase was partially offset by a five percent decrease in revenue per block hour to $8,589 in 1993 from $8,996 in 1992. Block hours under full service contracts were 85% of total block hours in 1993 and 84% in 1992.
Aircraft capacity, the number of days that the Company's aircraft are available for service (including days in maintenance), increased to 8.8 available aircraft per day in 1993 from 7.2 in 1992. This increase was offset by a 13% decrease in daily aircraft utilization to 7.3 hours from 8.4 hours. Aircraft utilization is measured by the total block hours that the Company's aircraft were in use divided by the number of days that the aircraft were available for service (including days in maintenance). Included in other revenues in 1992 is $4.1 million related to settlements of contract claims from AMC.
Operating Expenses ------------------
Flight costs increased $10.6 million (20%) due to costs associated with the integration of MD-11 aircraft (see "Capital Plans"). The Company maintained the maximum number of crews available during the first six months of 1993 in order to support intensive crewmember training for the MD-11 aircraft while maintaining the previous year's level of flight operations. This resulted in higher crew costs than normal given the low level of utilization during the first quarter of 1993.
Maintenance costs decreased by $5.8 million (17%) due to lower maintenance costs for new MD-11 aircraft and lower engine overhaul repair expense for the DC10-30 fleet. Maintenance cost per block hour was $1,222 in 1993 compared with $1,548 in 1992. The reduced maintenance costs are due, in part, to guarantees and warranties received from the engine and aircraft manufacturers of the MD-11 aircraft. Because the MD-11 is a relatively new aircraft, cost experience on the maintenance of the aircraft is unavailable. Therefore, the Company is, in part, relying on manufacturers' guidelines to estimate future maintenance costs on the MD-11 aircraft.
Aircraft costs increased by $17.1 million (49%) in 1993. This increase was primarily due to a $20.5 million increase in rent cost associated with the delivery of four MD-11 aircraft during March and April 1993. In July 1993, two DC10-30 aircraft were returned to their lessors, resulting in a $1.5 million early termination payment of which $1.1 million was expensed in 1993. Partially offsetting these increases was a reduction of $5.4 million in rent costs associated with the return of the two DC10 aircraft and short-term aircraft leases not required in 1993.
Flight operations subcontracted to other carriers decreased by $10.3 million (89%). In 1992, World Airways subcontracted a portion of its AMC contract award in order to redeploy one of its aircraft for commercial passenger flying. This was not necessary in 1993.
Selling and administrative costs increased $2.2 million (12%) primarily as a result of a $0.9 million settlement associated with the return of a DC10-30 aircraft, increased legal fees, and the formation of World Flight Crew Services, a new subsidiary of WorldCorp.
Loss on Sale of Key Airlines ----------------------------
On October 23, 1992, WorldCorp sold 100% of the outstanding common stock of KeyAir. Loss on sale of KeyAir in 1993 primarily consists of the write-off of a $0.3 million uncollateralized line of credit and $0.3 million drawdown of a letter of credit. Loss on the sale of Key Air in 1992 consists principally of the non-cash write-down of the B727 aircraft and related rotables to estimated net realizable values and the write-off of the remaining goodwill associated with the purchase of Key Air in 1987.
Transaction Processing-US Order -------------------------------
On July 1, 1992, the Company purchased an incremental 6% of the preferred stock of US Order for $1.0 million which increased the Company's ownership in US Order to 51%. Accordingly, US Order's results of operations are consolidated in the accompanying financial statements beginning on July 1, 1992. In December 1993, US Order completed a $12.0 million private equity placement. Following this transaction, WorldCorp owned 46% of the voting stock of US Order. WorldCorp had an option through December 15, 1994 to purchase additional shares of the voting stock of US Order for consideration equal to $5.0 million, which would increase its ownership of the voting stock to 79%. The accompanying statements of operations include 59% of the results of operations of US Order beginning December 1993. This 59% is based on liquidation preferences. In 1993, the Company recorded $9.2 million of losses (net of minority interest) relating to US Order, compared to $2.4 million of losses in 1992. This $6.8 million increase resulted primarily from an increase in overhead costs associated with expanded research and development and the writedown of an older generation of terminal components.
Non-Operating Items -------------------
Interest income decreased as a result of lower investment balances and lower interest rates in 1993. Interest expense decreased $0.1 million in 1993 as a result of partially replacing the 13 7/8% Subordinated Notes ("the Notes") with the 7% convertible debentures (the "Debentures") and lower debt balances. Offsetting these decreases was interest associated with MD-11 rotables financing, aircraft rent deferrals, and a bank line of credit.
Liquidity and Capital Resources
The Company's air transportation subsidiary operates in a very challenging business environment. In recent years, the combination of a generally weak economy and the depressed state of the airline industry has adversely affected the Company's operating performance. Although there has been recent growth in demand within the industry, such that World Airways experienced a 13% increase in block hours flown in 1994 over 1993, yields generally remain low.
The Company is highly leveraged, primarily due to losses sustained by World Airways' scheduled operations between 1979 and 1986, debt restructurings in 1984 and 1987, and losses the Company incurred in the past several years. In addition, the Company incurred substantial debt and operating lease committments during 1993 in connection with acquiring MD-11 aircraft and related spare parts. The Company has historically financed its working capital and capital expenditure requirements out of cash flow from operating activities, secured borrowings, and other financings from banks and other lenders.
US Order has generated operating losses since its inception. US Order's interactive products and services are subject to the risks inherent in the marketing and development of new products. The market for US Order's products and services is relatively new and is characterized by rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. To date, US Order has generated limited revenues through the sale of its products and services, although in 1994, a substantial gain was generated on the sale of certain operations to VISA, and future revenue and cash flow are likely to be generated by the 72-month revenue stream from VISA.
Cash Flows from Operating Activities ------------------------------------
During 1994, operating activities used $29.1 million compared to $8.6 million in the prior year. This increase in cash used was primarily due to operating losses incurred in 1994, MD-11 aircraft security deposits, and fluctuations in the level of accounts payable since 1992. In addition, the Company deferred certain aircraft rental payments in 1993. No such deferrals occurred in 1994.
Cash Flows from Investing Activities ------------------------------------
Cash flows from investing activities provided $13.3 million in 1993 as compared to using $14.6 million in 1993. In 1994, the Company purchased spare parts for one MD-11 aircraft integrated into the fleet in April. In 1993, the Company purchased spare parts for four MD-11 aircraft integrated into the fleet in March and April. In addition, US Order sold its banking operations to VISA for $14.7 million (net of related expenses) in 1994.
Cash Flows from Financing Activities ------------------------------------
In 1994, financing activities provided $7.1 million compared to $26.4 million in the prior year. In 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of World Airways to MHS for $24.7 million in cash. In addition, US Order repurchased $2.7 million of preferred stock. The Company made $16.2 million of net repayments for debt and a revolving bank line of credit in 1994 versus acquiring $18.5 million of additional debt and a bank line of credit in 1993. Finally, the Company received $1.4 million from stock transactions in 1994 versus $4.9 million in 1993.
Capital Plans -------------
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. As of March 31, 1995, World Airways has taken delivery of four passenger MD-11 aircraft, one freighter MD-11, and two 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 toward four of the option aircraft. During 1995, the options' exercise dates were extended to May 31, 1995, with scheduled aircraft delivery dates beginning no earlier than 1996. If the options are exercised, World Airways intends to obtain financing for the purchases. World Airways plans to exit DC10 aircraft and ultimately standardize its fleet around the MD-11 aircraft. World Airways, however, has recently entered into two short-term DC10 aircraft leases with lease terms expiring June 1995 and August 1995, and one DC10 aircraft lease
expiring in September 1997. World Airways may choose to lease additional DC10 aircraft to meet short-term peak demand requirements.
World Airways made $6.7 million of capital expenditures and cash deposits for MD-11 integration in 1994. World Airways estimates that its required capital expenditures for MD-11 integration will be approximately $9.8 million in 1995. In addition, World Airways will require approximately $8.0 million to purchase a spare engine in the fourth quarter of 1995. While World Airways is currently seeking financing for the purchase of the engine and additional spare parts relating to the MD-11 aircraft recently acquired, no assurances can be given that the Company will obtain the necessary financing.
World Airways has obtained regulatory approval from the government of Israel to operate a scheduled service commencing in July 1995. World Airways anticipates working capital requirements of approximately $2.0 million in connection with the start of scheduled service.
US Order's working capital and capital expenditure requirements for the next twelve months are expected to be approximately $4.0 million. On August 1, 1994, US Order sold its electronic banking and bill payment operations to VISA for $15.0 million plus certain future payments. As of December 31, 1994, approximately $2.5 million of these proceeds are available to fund future working capital requirements of US Order. US Order is currently seeking additional equity financing as well as attempting to sell certain of its assets, including its $2.5 million advertising credit. However, there can be no assurance that such financing will be obtained.
In 1995, WorldCorp has parent company repayment obligations totaling $16.5 million, consisting primarily of an $8.5 million (excluding interest thereon) note payable to MHS due in December 1995 and approximately $8.1 million of annual debt service on subordinated notes and debentures. WorldCorp intends to satisfy these obligations by one or more of the following: intercompany loans, further sales of equity securities of its subsidiaries, and/or external financing.
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 its founders (the "Founders"). Under the terms of this agreement, WorldCorp would pay $3.9 million in consideration as follows: $2.1 million in shares of WorldCorp common stock and $1.8 million in cash. Prior to year-end, 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 notes are due in 1995. As a result of this option exercise, WorldCorp increased its ownership of US Order's voting stock to 89% in February 1995.
As of March 31, 1995, WorldCorp has invested $14.2 million of equity (net of $3.3 million received from the retirement of a portion of US Order preferred stock - see "Financing Developments") and $3.5 million of unsecured debt in US Order. WorldCorp does not plan to provide additional financing to US Order in 1995.
As of December 31, 1994, the Company holds approximately $14.1 million (at book value) of aircraft spare parts and transaction processing terminals currently available for sale.
Financing Developments ----------------------
The Company has closed certain transactions which, in aggregate, have provided additional cash to WorldCorp, World Airways, and US Order.
First, on October 30, 1993, WorldCorp, 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. On February 28, 1994, WorldCorp, World Airways, and MHS concluded this transaction. World Airways received upon closing (the "Closing") $12.4 million to fund its working capital requirements. The remaining $15.0 million (less a $2.7 million deposit received in November 1993) was paid to WorldCorp to add to its cash reserves. At the time of the signing of the Stock Purchase Agreement, World Airways was a wholly-owned subsidiary of WorldCorp. As a result of this transaction, WorldCorp recognized a gain of approximately $26.9 million in the first quarter of 1994.
Effective December 31, 1994, WorldCorp agreed to pay MHS $8.5 million in exchange for the repurchase of 5% of World Airways' common stock from MHS and the execution of a series of long-term contracts between World Airways and MAS. The $8.5 million note to MHS is due in December 1995.
Second, in 1993, World Airways closed an agreement with a financial institution for a $20.0 million credit facility collateralized by certain receivables and spare parts. This agreement contains certain covenants related to World Airways' financial condition and operating results. Approximately $10.8 million of the proceeds from this transaction were used to retire existing obligations. The balance was added to cash reserves. As of December 31, 1994, $2.8 million of the $8.0 million portion of the credit facility collateralized by receivables was utilized, with no borrowing capacity currently available. World Airways was not in compliance with its debt covenants at the end of the fourth quarter, but has obtained a waiver of these covenants from the financial institution. In 1995, World Airways amended this agreement to adjust certain covenants beginning in the first quarter of 1995 and extended the credit facility's term to 1998. No assurances can be given that the Company will meet these revised covenants or, if required, obtain the required waivers. In addition, the amended agreement provides for up to an additional $2.0 million in borrowing capacity, subject to spare part valuations, beginning in October 1995.
Third, on August 1, 1994, US Order sold its electronic banking and bill payment operations to VISA for $15.0 million, assumption of certain liabilities, and a 72 month royalty stream commencing January 1, 1995 and ending December 31, 2000 (the "Royalty Period"). 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 vested employee options. As of December 31, 1994, approximately $2.5 million of these proceeds is available to fund future working capital requirements of US Order. The royalty amount is based on the number of VISA customers using the electronic banking and bill payment technology sold by US Order to VISA. The first $75,000 of royalties earned during each quarter on a cumulative basis for a total of ten quarters, will be applied by VISA to offset certain liabilities assumed by VISA pursuant to the acquisition. To date, VISA has commitments from more than 40 U.S.-based financial institutions (including six of the nation's top 20 banks) to offer the VISA bill pay system. No assurances can be given as to the amount of the royalty payments that will be received from VISA. US Order does not expect to receive any significant royalty payments in 1995.
Fourth, World Airways has concluded a series of contracts with MAS and other commercial customers which have resulted in substantial increases in its backlog of business to approximately $475 million today from approximately $80 million a year ago. Under the terms of its new long-term contracts with MAS, World Airways will operate three freighter aircraft for at least 400 hours per aircraft per month (or a total of at least 1,200 hours per month). One freighter is currently in service and will operate through September 1999; two additional freighters will begin service in June 1995 and operate through September 2000. These contracts provide for hourly rates that reflect generally improved market conditions. Also under the new contracts, MAS has extended through March 1997 the operation of two MD-11 passenger aircraft that had been previously contracted by MAS to operate from October 1994 through March 1995. Each aircraft will operate a minimum of 320 hours per month (or a total minimum of 640 hours per month) at rates that reflect generally improved market conditions.
In the first quarter of 1995, World Airways received approximately $6.0 million in working capital and short-term financing. This financing bears interest at approximately 11%. Approximately $5.2 million of this financing is due in the second quarter of 1995. The remaining balance will be repaid in monthly installments through December 1995.
The company believes that the combination of the financings consummated to date and the operating and additional financing plans described above will be sufficient to allow the Company to meet its operating and capital requirements in 1995.
Business Trends
The Company's air transportation business is highly seasonal. Typically, World Airways experiences reduced demand during the first quarter for passenger and cargo services relative to other times of the year. World Airways generally experiences stronger results in the second and third quarters due to demand for commercial passenger services including the annual Hadj pilgrimage. Fourth quarter results depend upon the overall world economic climate and global trade patterns. In recent years, soft demand and weakening yields have adversely affected worldwide cargo and passenger markets.
As a result of its marketing alliance with MAS and increased marketing efforts, World Airways entered into several important contracts in 1994. World Airways recently concluded a series of contracts with MAS that will result in World Airways' operation of two passenger aircraft until 1997, one freighter aircraft until 1999, and two freighter aircraft until 2000 (see "Financing Developments"). These contracts and related rate improvements, along with recent agreements with other commercial customers, have absorbed a substantial portion of the Company's aircraft capacity in 1995 and 1996 and resulted in substantial increases in the Company's backlog of business to approximately $475 million today from approximately $80 million a year ago. Approximately 90% of the $475 million backlog represents contracts in place with MAS, which is 32% owned by MHS, a 19.9% shareholder of World Airways. As a result of these contracts, World Airways expects that the percentage of the Company's total revenue generated from MAS in 1995 will increase significantly over historical levels. In addition, World Airways has obtained regulatory approval from the Government of Israel to operate a scheduled service between New York and Tel Aviv commencing in July 1995.
In order to make World Airways more cost-competitive with certain passenger and cargo carriers, and to improve cash flow, World Airways' management has taken a series of steps to reduce operating costs. These steps generally involve eliminating business activities that are not essential to World Airways' operations, including eliminating those costs which customers are not prepared to compensate for in the form of higher prices. World Airways' management believes that these actions, which began in the second half of 1994, should result in improved operating income and cash flow. Management also believes that the shift in the Company's business to more patterned flying, made possible by the long-term contracts it has obtained, should also enable the Company to achieve certain operating cost efficiencies.
US Order's research indicated that consumers prefer to receive banking services through their local bank. The VISA transaction in August 1994 postures the company to deliver its products and services to 13,000 VISA member banks in the United States. The Company believes that the VISA transaction improves the prospects of US Order's future performance by expanding the business opportunities available to US Order through customization services, smart telephones, non-financial applications, customer service, and facilities management.
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 its founders. Under the terms of this agreement, WorldCorp would pay $3.9 million, consisting of $2.1 million in shares of WorldCorp common stock and $1.8 million in cash. Prior to year-end, 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 notes are due 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.
Other Matters
On August 11, 1992, WorldCorp, World Airways, and certain other commercial paper customers of Washington Bancorporation ("WBC") were served with a complaint by WBC as debtor-in-possession by and through the Committee of Unsecured Creditors of WBC (the "Committee"). The complaint arises from investment proceeds totaling $6.8 million received by WorldCorp and World Airways from WBC in May 1990 in connection with the maturity of WBC commercial paper. The Committee seeks to recover this amount on the grounds that these payments constituted voidable preferences and/or fraudulent conveyances under the Federal Bankruptcy Code and under applicable state law. On June 9, 1993, the Company filed a motion to dismiss this litigation and intends to vigorously contest the claim. No assurances can be given of the eventual outcome of this litigation.
World Airways' cockpit and flight attendant crewmembers are covered by collective bargaining agreements which expired in July 1992. On August 15, 1994, World Airways and the International Brotherhood of Teamsters ("Teamsters") executed a four-year agreement on behalf of World Airways' cockpit members, which was ratified on September 9, 1994. The agreement contains modifications to the crewmember work rules which will permit World Airways to take greater advantage of the operational capabilities of the MD-11 aircraft fleet in exchange for crewmember pay increases.
On July 16, 1987, World Airways and the Teamsters executed a five-year agreement on behalf of the World Airways' flight attendants, which was ratified on August 5, 1987. The contract expired in July 1992 and since that time the flight attendants have been employed under the terms of their prior contract pursuant to the provisions of the Railway Labor Act. The Company is currently in active negotiations with the Teamsters concerning renewal of the contract for the flight attendants. In December 1994, World Airways and the Teamsters jointly requested the assistance of a federal mediator to facilitate negotiations between World Airways and its flight attendants. The outcome of the negotiations cannot be determined at this time.
WorldCorp has never paid any cash dividends and does not plan to do so in the foreseeable future. Both the 13 7/8% Subordinated Notes Indenture and the indenture pursuant to which the Debentures were issued (the "Indentures") restrict the Company's ability to pay dividends or make other distributions on its common stock. In addition, the Indentures originally restricted the ability of World Airways to pay dividends other than to the Company. In 1994, however, the Company received approval from the holders of the Indentures to allow World Airways to pay dividends to parties other than the Company.
The $20 million credit facility also contains restrictions on World Airways' ability to pay dividends. Under this agreement, World Airways cannot declare, pay, or make any dividend or distribution in excess of the lesser of $4.5 million or 50% of net income for the previous nine months. In addition, World Airways must have a cash balance of at least $7.5 million immediately after giving effect to such dividend.
All of the funds from operations are generated by the Company's subsidiaries. The ability of the Company and its subsidiaries to pay principal and interest on their respective short and long-term obligations is substantially dependent upon the payment to the Company of dividends, interest or other charges by its subsidiaries and upon funds generated by the operations of the subsidiaries.
The availability of net operating loss, investment tax credit, and alternative minimum tax credit carryforwards to reduce the Company's future Federal income tax liability is subject to limitations under the Internal Revenue Code of 1986, as amended (the "Code"). Generally, these limitations restrict the availability of net operating loss and investment tax credit carryforwards upon certain changes in stock ownership by five percent shareholders which, in aggregate, exceed 50 percentage points in value in the three-year testing period ("Ownership Change"). In August 1991, 5.7 million shares of common stock were sold by a group of existing shareholders. This transaction constituted an Ownership Change, which reduced the annual utilization of net operating loss, alternative minimum tax credit, and investment tax credit carryforwards ("Carryforwards") available to the Company in 1991 and future years. As of December 31, 1994, the Company had net operating loss carryforwards for federal income tax purposes of $72.6 million [subject to a $6.3 million annual limitation based on the value of the outstanding Common Stock immediately prior to the Ownership Change and the statutorily provided long-term tax exempt rate (the "Limitation")] and $89.9 million (generated after the Ownership Change) which are available to offset future federal taxable income. These carryforwards expire between 1997 and 2009. As a result of the transactions between the Company and MHS during 1994 (see Note 4), approximately $113.5 million of the consolidated net operating loss carryforwards for federal income tax purposes (subject to the Limitation) will be allocated to World Airways, and therefore, will only be available to offset future federal taxable income of World Airways.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (in thousands)
(Continued)
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT (in thousands except share data) (Continued)
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except share data)
(Continued)
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
* Fully diluted earnings per share are anti-dilutive.
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' DEFICIT Years ended December 31, 1994, 1993, and 1992 (in thousands except share data)
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying Notes to Consolidated Financial Statements
WORLDCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
A. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WorldCorp, Inc. ("WorldCorp" or the "Company"), its wholly-owned subsidiaries: World Airways, Inc. ("World Airways"); Key Airlines, Incorporated ("KeyAir") (see Note 5); WorldCorp Leasing, Inc.; WorldCorp Leasing II, Inc.; WorldCorp Services, Inc.; World Airways Cargo, Inc.; WorldCorp Investments, Inc.; World Flight Crew Services, Inc.; and a 52% ownership interest in the voting stock in US Order, Inc. ("US Order") (see Note 4). All significant intercompany balances have been eliminated.
B. Financial Statement Reclassifications Certain items in prior year financial statements included herein have been reclassified to conform to 1994 financial statement presentation.
C. 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.
D. Revenue Recognition Contract flight operations and transaction processing revenues are recognized as the services are provided.
E. Earnings (Loss) Per Common Share Primary earnings (loss) per common share have been computed by dividing earnings (loss) by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include warrants and options. Fully diluted earnings per common and common equivalent shares, including convertible debt, have not been presented where the results are anti-dilutive.
F. Investments Short-term investments are carried at the lower of aggregate cost or market value.
G. 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. Engine overhauls and major airframe maintenance and repairs are charged to operating expense on an accrual basis. Modifications performed in response to Airworthiness Directives issued by the Federal Aviation Administration are capitalized at cost.
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.
H. Assets Held for Sale Assets held for sale are recorded at the lower of cost or estimated net realizable value.
I. Intangible Assets The excess of cost over the estimated fair value of the Company's share of its subsidiaries' net assets at the date of acquisition is being amortized over periods ranging from 6 to 20 years, using the straight-line method.
J. Income Taxes In February 1992, the Financial Accounting Standards Board issued 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.
Effective January 1, 1992, the Company adopted FAS #109 which did not result in any cumulative adjustment to the accompanying consolidated financial statements.
K. Postretirement Benefits Other Than Pensions World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. Effective January 1, 1992, World Airways adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS #106"). The Company elected to immediately recognize the cumulative effect of the change in accounting for postretirement benefits of $2.0 million. The Company funds the benefit costs on a pay-as-you-go (cash) basis.
L. Transactions in Subsidiaries' Stock Gains or losses realized in connection with the sale of stock by a subsidiary are recognized in income by the Company.
2. OPERATING ENVIRONMENT
The Company's air transportation subsidiary operates in a very challenging business environment. In recent years, the combination of a generally weak economy and the depressed state of the airline industry has adversely affected the Company's operating performance. Although there has been recent growth in demand within the industry, such that World Airways experienced a 13% increase in block hours flown in 1994 over 1993, yields remain low.
The Company is highly leveraged primarily due to losses sustained by World Airways' scheduled operations between 1979 and 1986, debt restructurings in 1984 and 1987, and losses the Company incurred in the past several years. In addition, the Company incurred substantial debt and operating lease commitments during 1993 in connection with acquiring MD-11 aircraft and related spare parts. As of December 31, 1994, the Company was not in compliance with certain covenants related to World Airways' financial condition and operating results under a bank credit facility. The Company obtained a waiver of these covenants from the financial institution.
The Company's investment in its US Order subsidiary has also required substantial support by WorldCorp in recent years. US Order has generated operating losses since its inception. US Order's interactive products and services are subject to the risks inherent in the marketing and development of new products. The market for US Order's products and services is new and is characterized by rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. To date, US Order has generated limited revenues through the sale of its products and services.
The Company has historically financed its working capital and capital expenditure requirements out of cash flow from operating activities, secured borrowings, and other financings from banks and other lenders. In addition, during 1994, the Company completed two transactions which provided cash which was utilized to help meet its operating and debt service requirements in 1994. First, on February 28, 1994, pursuant to an October 1993 agreement, WorldCorp, World Airways, and MHS Berhad ("MHS") entered into a stock purchase agreement in which MHS purchased 24.9% of World Airways' common stock for $27.4 million in cash. During 1994, MHS also acquired 32% of Malaysian Airline System Berhad ("MAS"), the flag carrier of Malaysia. MAS is one of World Airways' largest commercial customers (see Note 4). Second, in August 1994, US Order sold its electronic bill pay operations to VISA International Services Association, Inc. ("VISA") for $15.0 million, assumption of certain liabilities, and a 72 month royalty stream commencing January 1, 1995 and ending December 31, 2000. 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 vested employee options. As of December 31, 1994, approximately $2.5 million of these proceeds were available to fund future working capital requirements of US Order. US Order does not expect to receive any significant royalty payments in 1995 (see Note 3).
As noted above, the Company has substantial debt service and operating lease obligations in 1995 (see Notes 11 and 12). In addition, World Airways estimates that its required capital expenditures for MD-11 integration will be approximately $9.8 million in 1995 and it will also require approximately $8.0 million to purchase a spare engine in the fourth quarter of 1995. While World Airways is currently seeking financing for the purchase of the engine and additional spare parts relating to the MD-11 aircraft recently acquired, no assurances can be given that the Company will obtain the necessary financing. World Airways has also obtained regulatory approval from the government of Israel to operate a scheduled service between New York and Tel Aviv commencing in the Summer of 1995. World Airways anticipates working capital requirements of approximately $2.0 million in 1995 in connection with the start of this scheduled service.
The Company has taken, and continues to pursue, a number of actions which it believes will enable it to meet its obligations in 1995. World Airways recently concluded a series of contracts with MAS that will result in World Airways' operation of two passenger aircraft until 1997, one freighter aircraft until 1999, and two freighter aircraft until 2000 (see Note 4). These contracts and related rate improvements, along with recent agreements with other commercial customers, have absorbed a substantial portion of the Company's 1995 aircraft capacity and resulted in substantial increases in the Company's backlog of business. Approximately 90% of this backlog represents contracts in place with MAS. As a result of these contracts, World Airways expects that the percentage of the Company's total revenue generated from MAS will increase significantly over historical levels.
In addition, in order to make World Airways more cost-competitive with certain passenger and cargo carriers, and to improve cash flow, World Airways' management has taken a series of steps to reduce operating costs. These steps generally involve eliminating business activities that are not essential to World Airways' operations, including eliminating those costs which customers are not prepared to compensate for in the form of higher prices. World Airways' management believes that these actions, which began in the second half of 1994, should result in improvements in operating income and cash flow. The shift in the Company's business to more patterned flying, made possible by the long-term contracts it has obtained, should also enable the Company to achieve certain operating cost efficiencies.
In 1995, World Airways amended its $20.0 million credit facility agreement to adjust certain covenants beginning in the first quarter of 1995 and extended the credit facility's term to 1998. In addition, the amended agreement provides for up to an additional $2.0 million in borrowing capacity, subject to spare part valuations, beginning in October 1995. Also, in the first quarter of 1995, World Airways received approximately $6.0 million in working capital and short- term financing, bearing interest at approximately 11%. Approximately $5.2 million of this financing is due in the second quarter of 1995. The remaining balance will be repaid in monthly installments through December 1995.
In 1994 and in January 1995, respectively, US Order entered into strategic alliances with VISA in the financial services industry and Colonial Data in the telecommunications industry (see Note 3). The Company believes that these alliances will increase revenues for US Order. US Order is also currently seeking additional equity financing as well as attempting to sell certain of its assets, including its $2.5 million advertising credit. However, there can be no assurance that such financing will be obtained.
As of December 31, 1994, the Company holds approximately $14.1 million (at book value) of aircraft spare parts and transaction processing terminals currently available for sale.
The Company believes that the combination of the financings consummated to date and the operating and additional financing plans described above will be sufficient to allow the Company to meet its operating and capital requirements in 1995.
3. INVESTMENT IN US ORDER
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, which has had limited revenue to date, 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 US Order 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 July 1, 1992, the Company purchased an incremental 6% of the preferred stock of US Order for $1.0 million which increased the Company's ownership in US Order to 51%. Accordingly, US Order's financial position, results of operations, and statement of cash flows have been consolidated in the accompanying financial statements for the period subsequent to July 1, 1992. All significant intercompany balances have been eliminated. Prior to July 1, 1992, WorldCorp's investment was accounted for using the equity method.
In December 1992, WorldCorp agreed to convert $7.6 million in principal amount of loans from WorldCorp to US Order into 7,550 shares of redeemable preferred stock of US Order. The preferred stock earns quarterly dividends at a rate of 7.5%. As part of this transaction, WorldCorp's option to purchase additional shares of the capital stock of US Order was extended from September 15, 1993 to December 15, 1994, and WorldCorp received an exclusive license to apply US Order's transaction processing technology to lottery and gaming applications. In August 1994, US Order redeemed $3.3 million (or 3,250 shares) of this redeemable preferred stock.
In December 1993, US Order completed a private equity placement for $12.0 million with financial and strategic partners. WorldCorp invested $1.7 million in this equity offering. Following this transaction, the Company owned 46% of the voting stock of US Order. At that time, US Order was still in the development stage and, therefore, the gain of $0.8 million resulting from this transaction was recorded as additional paid-in capital in the accompanying consolidated financial statements. As of December 1993, WorldCorp had purchased for $5.3 million a total of 5,204,082 shares of US Order preferred stock, which are convertible into common stock.
As of December 31, 1994, WorldCorp owns 52% of the voting stock of US Order. WorldCorp and the financial and strategic partners of US Order own stock which carry liquidation preferences pursuant to which WorldCorp, at December 31, 1994, is entitled to 64% of any distributions. The results of operations of US Order are allocated based on liquidation preferences.
WorldCorp provided consulting services to assist US Order's management during 1994, 1993 and 1992. US Order paid consulting fees to WorldCorp equal to the cost of the salary and benefits of WorldCorp personnel who performed these services.
On August 1, 1994, US Order sold its electronic banking and bill payment operations to VISA International Services Association, Inc. ("VISA") for $14,645,101 in cash (net of closing costs of $227,978), the assumption of certain of US Order's capital lease obligations and other miscellaneous liabilities totaling $853,370, 100 shares of VISA'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. As of December 31, 1994, approximately $2.5 million of these proceeds were available to fund future working capital requirements of US Order. The royalty amount is based on the number of VISA customers using the electronic banking and bill payment technology sold by US Order to VISA. The first $75,000 of royalties earned during each quarter on a cumulative basis for a total of ten quarters will be applied by VISA to offset certain liabilities assumed by VISA pursuant to the acquisition. No assurances can be given as to the amount of the royalty payments that will be received from VISA. US Order does not expect to receive any significant royalty payments in 1995.
As a result of the purchase of US Order's banking operations by VISA, US Order has agreed to certain restrictions on its operations with respect to the banking and financial services industry. Similarly, VISA has agreed to certain restrictions on its activities as they might relate to the ongoing businesses of US Order. Additionally, the VISA agreement designates US Order as a "preferred provider" to supply certain products and services including smart telephones, consumer applications, and customer service throughout the royalty period. Under the agreement, VISA must make its member banks aware of the preferred provider status of US Order and its products and services, although it is under no obligation to guarantee any minimum purchases of any such US Order products or services
by VISA or any of its members. Until August 1, 1995, VISA also agreed not to designate any third party as a preferred provider of the Company's services. In January 1995, US Order signed a two-way exclusive strategic alliance with a leading manufacturer of Caller ID units, Colonial Data Technologies, to jointly develop and distribute US Order's next generation of smart telephones to the telecommunications industry.
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 its the founders. Under the terms of this agreement, WorldCorp would pay $3.9 million, consisting of $2.1 million in shares of WorldCorp common stock and $1.8 million in cash. Prior to year-end, 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 notes are due 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.
4. TRANSACTIONS WITH MHS/MAS
On October 30, 1993, WorldCorp, Inc., World Airways, Inc., and MHS Berhad ("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 WorldCorp to add to its cash reserves. The Company 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 WorldCorp. On February 28, 1994, WorldCorp, World Airways, and MHS concluded the transaction according to the terms described above. As a result of this transaction, WorldCorp recognized a gain of approximately $27.0 million in the first quarter of 1994. Under this agreement, if at any time after October 30, 1996 World Airways registers its common stock under the Securities Act of 1993, MHS has the right to demand the registration of its shares. 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 notwithstanding the aforementioned three-year holding period; and/or (b) to require WorldCorp to purchase all or part of MHS's shares at fair market value. Fair market value may not be 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 intend to take any such actions without the prior consent of MHS.
During 1994, MHS acquired 32% of Malaysian Airline System Berhad ("MAS"), the flag carrier of Malaysia. World Airways has provided service to MAS since 1981, providing aircraft for integration into MAS' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. The current MAS Hadj contract, which was entered into in 1992, expires in 1996. In 1994, World Airways provided two aircraft for Hadj operations. World Airways expects to provide three aircraft for the 1995 Hadj operations. MAS is one of World Airways' largest commercial customers (see Note 17).
Effective December 31, 1994, WorldCorp agreed to pay MHS $8.5 million in exchange for 5% of World Airways' common stock held by MHS and the execution of a series of long-term contracts between World Airways and MAS. The $8.5 million note to MHS is due in December 1995 (see Note 11). As a result of this transaction, effective December 31, 1994, MHS owns 19.9% of World Airways' common stock.
Under the terms of its new long-term contracts with MAS, World Airways will operate three freighter aircraft for at least 400 hours per aircraft per month (or a total of at least 1,200 hours per month). One freighter is currently in service and will operate through September 1999; two additional freighters will begin service in June 1995 and operate through September 2000. These contracts provide for hourly rates that reflect generally improved market conditions. Also under the new contracts, MAS has extended through March 1997 the operation of two MD-11 passenger aircraft that had been previously contracted by MAS to operate from October 1994 through March 1995. Each aircraft will operate a minimum of 320 hours per month (or a total minimum of 640 hours per month) at rates that reflect generally improved market conditions.
Of the $8.5 million consideration paid to MHS, $3.0 million is attributable to the contract enhancements
discussed above. This amount is included in other assets and deferred charges in the accompanying December 31, 1994 consolidated balance sheet, and is being amortized over the terms of the MAS contracts, approximately two to five years.
5. SALE OF KEY AIRLINES
In September 1992, WorldCorp decided to dispose of its wholly-owned subsidiary, KeyAir, and on October 6, 1992, WorldCorp entered into a letter of intent to sell the stock of KeyAir to Savannah Aviation Group ("SAG"). The sale of KeyAir was completed on October 23, 1992. Accordingly, KeyAir's net loss for 1992 is reflected in the accompanying financial statements, under the caption "Loss from operation of Key Airlines". Included in "Loss from operation of Key Airlines" in 1992 is $40.7 million of KeyAir operating revenues and $46.7 million of KeyAir operating expenses. Under the terms of the stock purchase agreement, WorldCorp sold all of the outstanding common shares of KeyAir for $6.5 million. As consideration for the shares, WorldCorp accepted a $3.5 million Senior Secured Note (the "Note") and a $3.0 million Convertible Subordinated Debenture (the "Debenture") from SAG, which were not recorded by the Company due to uncertainty regarding realization of these amounts. WorldCorp recorded an estimated loss on the sale of KeyAir of $31.4 million in the accompanying financial statements as of December 31, 1992. Loss on sale of KeyAir in 1992 consisted primarily of a writedown of the B727 aircraft and related rotables to estimated net realizable values and a write-off of the remaining goodwill associated with the purchase of KeyAir in 1987. As a result of the sale of KeyAir and the Company's inability to deploy the aircraft in other long-term opportunities beyond 1992, the Company discontinued operating the B727-100 aircraft after December 31, 1992. The Company entered into a consignment agreement with a third party to dismantle and sell certain of the B727-100 aircraft and the related rotables beginning in November 1992. As a result, in 1992, the Company reduced the carrying values of the B727 aircraft to estimated net realizable values and classified these amounts as assets held for sale in the accompanying balance sheet (see Note 9).
On February 8, 1993, KeyAir filed a voluntary petition for bankruptcy protection under Chapter 11 and certain disputes arose between the Company and the purchasers of KeyAir. During 1993, in connection with the settlement of these disputes, the Company relinquished all rights to collection of the Notes and the Debentures. The Company recorded a loss of approximately $0.8 million in 1993 related to amounts outstanding under a line of credit and certain letters of credit related to KeyAir which will not be recovered by the Company.
6. SUPPLEMENTAL INFORMATION -- STATEMENTS OF CASH FLOWS
Additional information pertaining to certain cash payments and noncash investing and financing activities is as follows (in thousands):
In December 1994, WorldCorp agreed to pay MHS $8.5 million in exchange for the 5% of World Airways' common stock held by MHS and the execution of a series of long-term contracts with MAS (see Note 4). Additionally, 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 and 1993, US Order entered into capital leases and other long- term obligations of $0.2 million and $1.7 million, respectively, in connection with the purchase of transaction processing equipment. Additionally, during 1994, $0.8 million of capital leases and other obligations were assumed by VISA (see Note 3).
During 1994, US Order redeemed preferred stock through the issuance of a note payable of $0.9 million.
During 1993, US Order completed a $12.0 million private equity placement in which WorldCorp invested $1.7 million (see Note 3). Included in the remaining $10.3 million investment was $2.5 million received in the form of an advertising credit and $4.3 million received in the form of forgiveness of various liabilities of US Order.
During 1993, the Company sold $9.5 million of MD-11 aircraft spare parts and leased the parts back under a 79 month capital lease. The following is a summary of the transaction (in thousands):
During 1992, the Company purchased $48.8 million of its 13 7/8% Subordinated Notes (the "Notes"). The following is a summary of the transaction (in thousands):
7. SHORT-TERM INVESTMENTS
At December 31, 1994 and 1993, short-term investments consist of cash pledged as collateral for letters of credit with expiration dates in excess of ninety days.
8. OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consist of the following (in thousands):
Debt issuance costs consist of the costs of issuing the 13 7/8% Subordinated Notes due 1997, the Convertible Subordinated Debentures due 2004, 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 11 and 12).
Aircraft integration costs consist of pre-operating costs incurred in connection with integrating the new MD-11 aircraft into the Company's fleet (see Note 12). 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, 1994 includes prepaid insurance of approximately $4.8 million.
9. ASSETS HELD FOR SALE
Assets held for sale consist primarily of DC10 and B727 rotables with a net book value of $11.8 million and two DC10 engines with a net book value of $2.0 million. The Company has consigned these parts with a third party to sell these parts over a reasonable period of time with the objective of maximizing the proceeds from sale. During 1993, US Order recorded a $1.8 million writedown associated with its older generation of terminal components, a portion of which are available for sale.
10. INTANGIBLE ASSETS
As a result of various transactions in the capital stock of US Order during 1994 (see Note 3), the Company recorded approximately $1.7 million of goodwill, which is being amortized over approximately six years using the straight-line method.
Effective December 31, 1994, the Company agreed to purchase 500,000 shares of MHS's 2,490,000 shares of World Airways common stock for $8.5 million, resulting in goodwill of $5.5 million (see Note 4). This amount is being amortized over 20 years using the straight-line method.
11. 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. At December 31, 1994, World Airways had no unused borrowing capacity available. Borrowings under the line of credit were $2.8 million at December 31, 1994 and bear interest at the greater of the federal funds rate plus 2.5% or the prime rate plus 2%. At December 31, 1994, the interest rate was 10.5%. World Airways is required to pay any outstanding amounts under the line of credit on January 7, 1998. This agreement contains certain covenants related to World Airways' financial condition and operating results, including minimum quarterly net income tests. World Airways was not in compliance with its debt covenants as of December 31, 1994, but has obtained a waiver of these covenants from the financial institution. In 1995, World Airways amended this agreement to adjust certain covenants beginning in the first quarter of 1995. No assurances can be given that the Company will meet these revised covenants or, if required, obtain the required waivers. There is also an unused facility fee of 0.5% per year (see Note 12).
Also included in notes payable as of December 31, 1994 are the following: a $4.38% note payable in the amount of $4.4 million with principal and interest payable monthly in 1995; and a 6.0% note payable to MHS in the amount of $8.5 million with principal and interest due December 31, 1995 (see Note 4).
Subsequent to December 31, 1994, the Company entered into notes payable of $1.1 million, due during 1995, to the founders of US Order, in connection with the purchase of the founders' stock in US Order (see Note 3). Also, in the first quarter of 1995, World Airways received approximately $6.0 million in working capital and short-term financing. This financing bears interest at approximately 11%. Approximately $5.2 million of this financing is due in the second quarter of 1995. The balance will be repaid in installments through December 1995.
12. LONG-TERM OBLIGATIONS
Long-Term Debt
The Company's long-term obligations at December 31 are as follows (in thousands):
The Indenture pursuant to which the 13 7/8% Subordinated Notes (the "Indenture") were issued may restrict the Company's ability to pay dividends on its common stock. Under the Indenture, the Notes are redeemable beginning August 15, 1992, at which time they are redeemable at 104% of par value and at rates declining thereafter.
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. During the second and third quarters of 1992, the Company used $47.1 million of the proceeds from this borrowing to retire a portion of its 13 7/8% Subordinated Notes due 1997 (the "Notes").
WorldCorp has never paid any cash dividends and does not plan to do so in the foreseeable future. Both the 13 7/8% Subordinated Notes Indenture and the indenture pursuant to which the Debentures were issued (the "Indentures") restrict the Company's ability to pay dividends or make other distributions on its common stock. In addition, the Indentures originally restricted the ability of World Airways to pay dividends other than to the Company. In 1994, however, the Company received approval from the holders of the Indentures to allow World Airways to pay dividends to parties other than the Company.
The aircraft parts security agreement is subject to the terms of the $8.0 million revolving line of credit borrowing (see Note 11). Under this agreement the borrowing must be reduced by the amount of proceeds received from the sale of excess DC10 and B727 spare parts, but at a minimum of $0.5 million each month. The borrowing facility also restricts World Airways' ability to pay dividends. Under this agreement, World Airways cannot declare, pay, or make any dividend or distribution in excess of the lesser of $4.5 million or 50% of net income for the previous six months. In addition, World Airways must have a cash balance of at least $7.5 million immediately after giving effect to such dividend. In 1995, World Airways amended this agreement to adjust certain covenants beginning in the first quarter of 1995, extend the credit facility to 1998, and to defer payments of principal due in February and March, 1995 until the second quarter of 1995. No assurances can be given that the Company will meet these revised covenants or, if required, obtain the required waivers. In addition, the amended agreement provides for up to an additional $2.0 million in borrowing capacity, subject to spare part valuations, beginning in October 1995.
The following table shows the aggregate amount of scheduled principal maturities (in thousands) of debt outstanding at December 31, 1994:
In January 1995, the ESSOP refinanced its debt to the Company through a margin loan (the "Refinanced ESSOP Loan") in the amount of $1.5 million. Principal payments of $90,000 are due quarterly and a final principal payment of $1,050,000 is due May 1996. Interest is payable quarterly at the call loan rate plus 1.5%. The Refinanced ESSOP Loan is collateralized by 361,401 of unallocated shares of common stock owned by the ESSOP (see Note 15).
Deferred Aircraft Rent
During 1993, the Company negotiated with several of its lessors to defer approximately $14.7 million of lease payments on eight aircraft. Of this amount, $12.9 million was repaid during 1993 and 1994. The remaining deferrals bear interest at rates ranging from 7% to 12%, and are due as follows (in thousands):
Capital Leases
The present values of the obligations under capital leases at December 31, 1994 are calculated using rates ranging from 6.14% to 11.7%. 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:
Property under capital leases consists of equipment leases and are amortized on a straight-line basis over the lease terms or expected useful lives of the assets. Accumulated amortization under capital leases was $3.0 million and $3.2 million at December 31, 1994 and 1993, respectively. Amortization expense of property under capital leases totaled $970,000, $658,000, and $522,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
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 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 three through fifteen of the lease term. 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. As of December 31, 1994, World Airways' fleet consisted of four passenger MD-11 aircraft, one freighter MD-11 aircraft, two convertible DC10 aircraft, and one freighter DC10 aircraft. Subsequent to December 31, 1994, World Airways took delivery of two convertible MD-11's and one DC10 aircraft. The 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 toward four of the option aircraft. During 1995, the options' exercise dates were extended to May 31, 1995, with scheduled aircraft delivery dates beginning no earlier than 1996. If the options are exercised, World Airways intends to obtain financing for the purchases.
World Airways plans to exit DC10 aircraft and ultimately standardize its fleet around the MD-11 aircraft. World Airways, however, has recently entered into two short-term DC10 aircraft leases with lease terms expiring June 1995 and August 1995, and one DC10 aircraft lease term expiring in September 1997. World Airways may choose to lease additional DC10 aircraft to meet short-term peak demand requirements.
In February 1992, World Airways signed twelve-year operating leases for two McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways returned these aircraft to their lessor which resulted in a $1.5 million early termination payment of which $1.1 million was expensed in 1993.
In October 1993, the Company returned an aircraft to its lessor and recorded an expense of $1.2 million related to the early termination of the lease.
Rental expense, primarily relating to aircraft leases, totaled approximately $53.9 million, $52.1 million, and $39.6 million for the years ended December 31, 1994, 1993, and 1992, 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, 1994, including the leases entered into subsequent to year-end (in thousands):
These future annual minimum rental payments include all option years.
13. COMMON STOCK PURCHASE WARRANTS
Drexel Warrants
On June 30, 1988, the Company issued to Drexel Burnham Lambert, Incorporated ("Drexel") warrants expiring May 24, 1994 to purchase 1,000,000 shares of the Company's common stock at a price of $8.00 per share, subject to certain anti- dilution adjustments (the "Drexel Warrants"). On July 31, 1989, the Company purchased 500,000 of these warrants from Drexel for $1.3 million. In 1992, 37,500 of these warrants were exercised. During 1994, the remaining 462,500 Drexel Warrants expired.
BNYFC Warrants
On December 7, 1993, in connection with a revolving line of credit facility and an aircraft parts security agreement (see Notes 11 and 12), 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. At December 31, 1994, these warrants were fully vested and outstanding. These warrants expire on December 7, 1996.
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 "1986 Executive Warrants"). During 1994 and 1993, 90,000 and 779,875, respectively, of these warrants were exercised. No warrants were exercised in 1992. During 1994, the remaining 2,272,336 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 Company common stock at an exercise price of $5.50; such warrants to vest, at differing rates, over 60 months. The 1989 Executive Warrants expire on August 31, 1997. On November 1, 1990, Mr. T. Coleman Andrews cancelled his right to receive 250,000 warrants granted to him under his 1989 Executive Warrant agreement, and the agreement was terminated. Mr. Andrews agreed to cancel his right to receive the 250,000 warrants so that equity compensation under the 1988 Stock Option Plan could be granted in 1990 to officers of the Company and its subsidiaries. During 1991, 163,417 of the warrants were cancelled. During 1992, 40,000 of these warrants were cancelled. At December 31, 1994 and 1993, there were 291,583 1989 Executive Warrants fully vested and outstanding.
14. 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. Shares 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.
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 1994, approximately $1.1 million of compensation expense was recognized in connection with the vested portion of these options.
A summary of option transactions under the 1988 Plan for the years ended December 31, 1992, 1993, and 1994 is presented below:
A total of 1,528,099 options have vested and are exercisable by the participants under the 1988 Plan as of December 31, 1994.
15. 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 is limited to employees not covered under a collective bargaining agreement. Employees may elect to invest Salary Deferral Contributions in either the WorldCorp Stock Fund or in Other Investment Funds. The ESSOP provides employer matching contributions in the WorldCorp Stock Fund at a rate determined by the Board of Directors, but at least 50% of the Salary Deferral Contribution. The employer matching contribution rate in the WorldCorp Stock Fund for 1994, 1993, and 1992 was 100%. The employer matching contribution in Other Investment Funds is at the rate of 33 1/3% of the Salary Deferral Contribution. The Company charged approximately $367,000, $416,000, and $394,000 to expense for its contributions to the ESSOP in 1994, 1993, and 1992, respectively.
The ESOP obtained bank financing of $3.6 million (the "ESOP Loan") which required quarterly principal payments of $90,000 and a final principal payment of $1,080,000. Interest was payable monthly at 85% of the bank's prime rate. During 1994, the Company paid off the balance of the ESOP loan in the amount of $1.7 million. ESSOP agreed to repay to the Company the amount of the bank loan and pledged 472,500 shares to the Company as collateral, subject to release of shares in connection with each quarterly principal payment. In January 1995, the ESSOP refinanced its debt to the Company through a margin loan (the "Refinanced ESSOP Loan") in the amount of $1.5 million. Principal payments of $90,000 are due quarterly and a final principal payment of $1,050,000 is due May 1996. Interest is payable quarterly at the call loan rate plus 1.5% The Refinanced ESSOP Loan is collateralized by 361,401 of the unallocated shares of common stock owned by the ESSOP. The Company is required to make minimum annual discretionary contributions to the ESSOP in an amount necessary to pay principal and interest due on the ESSOP Loan to the extent that other contributions to the ESSOP are insufficient to make such payments. In 1992, contributions from employees combined with employer matching contributions were sufficient to make required principal and interest payments. The Company expensed $0.2 million of principal and interest for the ESOP loan in both 1994 and 1993.
The World Airways' Crewmembers Target Benefit Plan is a defined contribution plan covering flight engineers and pilots with contributions based upon defined wages. This is a tax-qualified retirement plan under Section 401(a) of the Code. The World Airways' Flight Attendants Target Benefit Plan is a defined contribution plan covering flight attendants with contributions based upon defined wages. This is a tax-qualified retirement plan under Section 401(a) of the Code. Pension expense for both plans totaled approximately $1,382,000, $1,524,000, and $1,288,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
Effective January 1, 1987, World Airways adopted the World Airways, Inc. Profit Sharing Bonus Plan (the "1987 Profit Sharing Plan"). Contributions to the 1987 Profit Sharing Plan are equal to 20% of World Airways' defined operating income, subject to an annual limitation of 10% of the total annual aggregate compensation of World Airways' employees participating in the 1987 Profit Sharing Plan in that year. This is not a tax-qualified retirement plan under Section 401(a) of the Code. Prior to 1993, contributions to the 1987 Profit Sharing Plan were allocated first to payments to all persons or their beneficiaries whose wages were reduced during the time from December 1, 1982 to January 31, 1985. The total wage reduction for this period was approximately $5.8 million. World Airways had repaid the entire $5.8 million as of December 31, 1992. Approximately $0.8 million was distributed in 1993 pertaining to 1992 financial results. The Company made no distributions in 1994 pertaining to 1993 financial results and the Company does not anticipate any distributions in 1995 pertaining to 1994 financial results.
World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. Effective January 1, 1992, World Airways adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS #106"). FAS #106 requires accrual accounting for all postretirement benefits other than pensions. Prior to the adoption of FAS #106, the cost of health benefits for cockpit retirees was recognized by charging claims to expense as they were incurred. The Company elected to immediately recognize the cumulative effect of the change in accounting for postretirement benefits of $2.0 million in 1992. World Airways funds the benefit costs on a pay-as-you-go (cash) basis.
A summary of the net periodic postretirement benefit costs for the years ended December 31, 1994, 1993, and 1992 is as follows:
The components of the Accumulated Postretirement Benefit Obligation at December 31, 1994 and 1993 are as follows:
The assumed discount rates used to measure the accumulated postretirement benefit obligation for 1994 and 1993 were 8.0% and $6.25%, respectively. The medical cost trend rate in 1994 was 9.75% trending down to an ultimate rate in 2010 of 6.0%. 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 1994 net periodic postretirement benefit cost by $26,000 and would have increased the accumulated postretirement benefit obligation as of December 31, 1994 by $128,000.
16. FEDERAL AND STATE INCOME TAXES
Effective January 1, 1992, the Company adopted FAS #109. There was no adjustment necessary for the cumulative effect of this change in accounting for income taxes as of January 1, 1992. The consolidated provision for income taxes related to continuing operations consists entirely of current income taxes.
Income tax expense attributable to income from continuing operations consists of (in thousands):
There is no deferred tax expense or benefit for the years ended December 31, 1994, 1993, and 1992.
Income tax expense attributable to income (loss) from continuing operations for the years ended December 31, 1994, 1993, and 1992 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):
The effect of the alternative minimum tax as set forth in the above table is caused by the limitation on the utilization of net operating loss carryforwards for alternative minimum tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1994 are as follows (in thousands):
The valuation allowance for deferred tax assets as of January 1, 1994 was $73.0 million. The net change in the total valuation allowance for the year ended December 31, 1994 was a decrease of $5.5 million.
The availability of net operating loss, investment tax credit, and alternative minimum tax credit carryforwards to reduce the Company's future Federal income tax liability is subject to limitations under the Internal Revenue Code of 1986, as amended (the "Code"). Generally, these limitations restrict the availability of net operating loss and investment tax credit carryforwards upon certain changes in stock ownership by five percent shareholders which, in aggregate, exceed 50 percentage points in value in the three-year testing period ("Ownership Change").
In August 1991, 5.7 million shares of common stock were sold by a group of existing shareholders. This transaction constituted an Ownership Change, which reduced the annual utilization of net operating loss, alternative minimum tax credit, and investment tax credit carryforwards ("the Carryforwards") available to the Company in 1991 and future years. As of December 31, 1994, the Company had net operating loss carryforwards for federal income tax purposes of $72.6 million [subject to a $6.3 million annual limitation based on the value of the outstanding Common Stock immediately prior to the Ownership Change and the statutorily provided long-term tax exempt rate
(the "Limitation")] and $89.9 million (generated after the Ownership Change) which are available to offset future federal taxable income. These carryforwards expire between 1997 and 2009.
As a result of the transactions between the Company and MHS during 1994 (see Note 4), approximately $113.5 million of the consolidated net operating loss carryforwards for federal income tax purposes (subject to the Limitation) will be allocated to World Airways, and therefore, will only be available to offset future federal taxable income of World Airways.
17. SEGMENT INFORMATION
The Company operates in two business segments: air transportation and transaction processing. The air transportation segment consists of the operations of World Airways, a worldwide provider of air transportation for commercial and government customers. The Company's transaction processing business consists of its 52% ownership of the voting stock of US Order, a company that designs, develops, and markets information-oriented products and services that enable wholesalers and resellers to deliver interactive solutions to their customers.
Summarized financial information by business segment is as follows (in thousands):
There were no significant intersegment sales or transfers during 1994 and 1993.
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):
The Company's contract with the United States Air Mobility Command ("AMC") expires in September 1995. The Company anticipates that future renewals of the AMC contract will be on an annual basis.
World Airways has provided service to MAS since 1981, providing aircraft for integration into MAS' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. World Airways recently entered into a series of long-term contracts with MAS (see Note 4). World Airways has agreed to provide five aircraft to MAS under long-term contracts with expirations ranging from March 1997 to September 2000. As a result of these contracts, World Airways expects that the percentage of the Company's total revenue generated from MAS in 1995 will increase significantly over the historical levels shown above. The current MAS Hadj contract,
which was entered into in 1992, expires in 1996. In 1993, World Airways provided two aircraft for Hadj operations. World Airways expects to provide three aircraft for the 1995 Hadj operations.
World Airways has provided service to Garuda since 1988 under an annual contract. World Airways provided six aircraft for the 1994 Garuda Hadj operations and expects to provide five aircraft for the 1995 operations. In addition, World Airways has provided aircraft for Garuda's cargo operations in previous years.
World Airways has provided service to Look Charters under an annual contract since 1992. In 1994, World Airways performed operations for a summer charter program transporting passengers between Paris, France, and various locations in the United States and Mexico. World Airways has recently entered into a contract with Look Charters to provide operations for a 1995 summer charter program.
World Airways provided service to Burlington Air Express in 1992 and 1993 and a limited amount in 1994. At this time, World Airways has no contract for services in 1995.
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 the Company's export revenues is presented in the following table (in thousands):
18. 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 Supplemental Incentive Agreement ("the Incentive Agreement") with WorldCorp that provided for a bonus in the amount of $1,300,000 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 $1,300,000 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 modified the Incentive Agreement by terminating it and entering into a new agreement. In connection with the new agreement, the Company paid Mr. Andrews in December 1993 (approximately seven months early) $200,830 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 $420,000 beginning January 2, 1995, plus interest earned at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. 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 $1,763,000 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 $280,000 through March 13, 1995. 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 1994 and 1993 balance sheets. As of December 31, 1994, $0.4 million of the promissory note is included in prepaid expenses and other current assets and $1.2 million is included in other assets and deferred charges in the accompanying
consolidated balance sheets. As of December 31, 1993, the promissory note amount of $1.8 million is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
As of December 31, 1994, WorldCorp owns 52% of the voting stock of US Order. In addition, WorldCorp exercised an option to purchase additional shares of the voting stock of US Order for consideration equal to $3.9 million which increased its voting ownership percentage to 89% in February 1995 (see Note 3). The Chairman of the Board of Directors of WorldCorp is also one of the founders of, and currently the Chairman of the Board of, US Order.
Effective December 31, 1994, MHS Berhad ("MHS") owns 19.9% of World Airways. During 1994, MHS acquired 32% of Malaysian Airline System Berhad ("MAS"), the flag carrier of Malaysia. MAS is one of World Airways' largest commercial customers (see Notes 4 and 17).
Bain & Company, Inc. provided consulting services of approximately $400,000 to the Company during 1994. 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 1994, 1993, and 1992.
19. COMMITMENTS AND CONTINGENCIES
Litigation and Claims
On August 11, 1992, WorldCorp, World Airways, and certain other commercial paper customers of Washington Bancorporation ("WBC") were served with a complaint by WBC as debtor-in-possession by and through the Committee of Unsecured Creditors of WBC (the "Committee"). The complaint arises from investment proceeds totaling $6.8 million received by WorldCorp and World Airways from WBC in May 1990 in connection with the maturity of WBC commercial paper. The Committee seeks to recover $2.0 million from WorldCorp and $4.8 million from World Airways on the grounds that these payments constituted voidable preferences and/or fraudulent conveyances under the Federal Bankruptcy Code and under applicable state law. On June 9, 1993, the Company filed a motion to dismiss this complaint and intends to defend vigorously against these claims. No assurances can be given of the eventual outcome of this litigation.
In conjunction with US Order's August 1, 1994 sale of its banking operations, US Order transferred to VISA all of its rights as they related to a patent which covered various proprietary aspects of the Company's ScanFone automated order and payment system. Although not technically pending or threatened, US Order has received notices from these third parties claiming potential infringement of previously issued patents to these third parties. US Order has also received a notice of a third party patent infringement claim related to a product currently under development by the company. US Order and its counsel believe that the company has substantial defenses to any potential claims of infringement, should that occur. However, there can be no assurance that such third parties will not make a formal claim of infringement or that the company would prevail in any proceedings in relation thereto.
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 consolidated financial position.
Letters of Credit
At December 31, 1994 and 1993, restricted cash and short-term investments included customer deposits held in escrow and cash pledged as collateral for various letters of credit facilities issued by a bank on the Company's behalf totaling $0.7 million and $1.0 million, respectively, with expiration dates principally occurring in 1995.
Options on MD-11 Aircraft
The Company has options to purchase four MD-11 aircraft, which, if exercised, would require a downpayment equal to five percent of the purchase price upon exercise.
20. UNAUDITED QUARTERLY RESULTS
The results of the Company's quarterly operations for 1994 and 1993 are as follows (in thousands except per share amounts):
* Fully dilutive earnings per share are anti-dilutive.
/(a)/ Includes the $27.0 million gain realized on the sale of 24.9% of World Airways common stock (see Note 4). /(b)/ Includes the $14.5 million gain realized on the sale of US Order's electronic banking and bill payment operations (see Note 3). /(c)/ Includes the effects of the aircraft lease termination expenses of approximately $2.7 million and a write-down of $1.5 million for older generation transaction processing equipment.
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, 1994 and 1993, 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, 1994. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 14(a)2 herein. These consolidated financial statements and financial statement schedule are the responsibility of WorldCorp's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WorldCorp, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 15 and 16 to the consolidated financial statements, effective January 1, 1992, WorldCorp adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
KPMG PEAT MARWICK LLP
Washington, D.C. March 13, 1995
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
PART III
ITEM 10.
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 "1995 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:
Mr. T. Coleman Andrews, III was elected Chief Executive Officer, President and a director of World Airways in August 1986 and of WorldCorp in June 1987. From 1978 through 1986, he was affiliated with Bain & Company, an international management consulting firm. At Bain, he was elected partner in 1982 and was a founding general partner of Bain Capital Fund, a private venture capital partnership, in 1984. Prior to his experience with Bain & Company, Mr. T. Coleman Andrews, III served in several appointed positions in the Ford Administration.
Mr. William F. Gorog has served as Chief Executive Officer of US Order since May 1, 1990. He was elected a director of WorldCorp in April 1989 and was elected Vice-Chairman of the WorldCorp Board of Directors in October 1992. From October 1987 until founding US Order, he served as Chairman of the Board of Arbor International, an investment management firm. From 1982 to 1987, he served as President and Chief Executive Officer of 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. He currently serves as a director of NationsBank (Maryland), a bank holding company.
Mr. Charles W. Pollard was elected President of World Airways in May 1992. He was elected General Counsel and Secretary of WorldCorp in October 1987, and Vice President, Administration and Legal Affairs in October 1990. From August 1983 to October 1987, he practiced law in the corporate department of Skadden, Arps, Slate, Meagher & Flom, Washington, D.C. Mr. Pollard is a member of the District of Columbia Bar.
John C. Backus, Jr. has worked with US Order since its inception in 1990 and has served as President and Chief Operating Officer of US Order since 1994. Prior to joining US Order on a full time basis in 1992, Mr. Backus worked for six years at WorldCorp holding a variety of executive positions including Vice President of Corporate Development and Vice President of Finance at a WorldCorp subsidiary. Prior to joining WorldCorp, Mr. Backus worked for Bain & Company, Inc. in its consulting and venture capital group where he focused on consumer products and services. Mr. Backus serves on the board of directors of WorldCorp, US Order, and Visa Interactive. Mr. Backus received both his B.S. and M.B.A. from Stanford University.
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 1995 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION --------------------------------
The Company incorporates herein by reference the information concerning executive compensation contained in the 1995 Proxy Statement.
ITEM 12.
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 1995 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --------------------------------------------------------
The Company incorporates herein by reference the information concerning certain relationships and related transactions contained in the 1995 Proxy Statement.
PART IV
ITEM 14.
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, 1994 and 1993
Consolidated Statements of Operations, Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Changes in Common Stockholders' Deficit, Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial Statement Schedule
Schedule Number --------
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.
(b) Reports on Form 8-K
Form 8-K, dated February 28, 1994, was filed with the Securities and Exchange Commission on March 24, 1994.
* * * * * * * * * * * * * *
Status of Prior Documents
WorldCorp's Annual Report on Form 10-K for the year ended December 31, 1994, 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
Exhibit No. Exhibit ------------------------------------ ------------
3.1 Certificate of Incorporation of Incorporated WorldCorp, Inc. dated March 16, 1987. [Filed as Exhibit 3.1 to WorldCorp, by reference Inc.'s Registration Statement on Form S-4 (Commission File No. 33012735) filed on March 19, 1987 and incorporated herein by reference.]
3.2 Amended and Restated Bylaws of Incorporated WorldCorp, Inc. dated November 13, 1987. (Filed as Exhibit 3.1 to by reference WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference.)
4.1 Indenture dated as of August 1, Incorporated 1987 between WorldCorp, Inc. and Norwest Bank of Minneapolis, N.A. by reference (Filed as Exhibit 4.1 to Amendment No. 2 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed August 13, 1987 and incorporated herein by reference.]
4.2 First Supplemental Indenture dated Incorporated as of March 1, 1988 between WorldCorp, Inc. and Norwest Bank of by reference Minneapolis, N.A. (Filed as Exhibit 4.2 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference.)
10.1 Warrant Agreement between Incorporated WorldCorp, Inc. and Drexel Burnham Lambert, Incorporated ("Drexel") by reference dated as of June 30, 1988. (Filed as Exhibit 10.1 to WorldCorp, Inc.'s Form 10-Q for the quarter ended March 31, 1989 and incorporated herein by reference.)
10.4 Aircraft Lease Agreement dated as Incorporated of March 30, 1987 between World Airways, Inc. and The Connecticut by reference National Bank, not in its individual 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.)
Exhibit No. Exhibit ------- -------
10.5 Merger Agreement and Plan of Incorporated Reorganization dated as of April 28, 1987 by and among World Airways, by reference Inc., World Merger Corporation 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.]
10.6 Assumption Agreement dated as of Incorporated June 23, 1987 among WorldCorp, Inc., World Airways, Inc. and T. by reference Coleman Andrews, III. [Filed as Exhibit 10.51 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.]
10.7 Assumption Agreement dated as of Incorporated June 23, 1987 among WorldCorp, Inc., World Airways, Inc. and D. by reference Fraser Bullock. [Filed as Exhibit 10.52 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.]
10.8 Guaranty and Amendment Agreement Incorporated dated as of June 23, 1987 between WorldCorp, Inc. and The by reference Connecticut National Bank, a national banking association, as Owner Trustee, with Burnham Leasing Corporation, as Owner Participant. [Filed as Exhibit 10.55 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed July 31, 1987 and incorporated herein by reference.]
10.9 Form of Assumption Agreement dated Incorporated as of June 23, 1987 among WorldCorp, Inc., World Airways, Inc. by reference and each Indemnified Party. [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, Incorporated Inc. and Flight Attendants represented by International by reference Brotherhood of Teamsters. [Filed 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, Incorporated Inc. and Mechanics represented by the International Brotherhood of by reference Teamsters. (Filed as Exhibit 10.41 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, Incorporated Inc. and Stock Clerks and Store Room Employees represented by the by reference International Brotherhood of 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.)
Exhibit No. Exhibit ------- -------
10.14 Office Lease - The Hallmark Building Incorporated dated as of May 16, 1987 between WorldCorp, Inc. and GT Renaissance by reference Centre Limited 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.)
10.15 Lease Amendment dated as of June 27, 1989 Incorporated between WorldCorp, Inc. and GT Renaissance Centre Limited Partnership. by reference (Filed as Exhibit 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 Incorporated dated as of September 20, 1989 between World Airways, Inc. and GT by reference Renaissance Centre Limited 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 Incorporated July 22, 1989 between WorldCorp, Inc. and Charles W. Pollard. (Filed as by reference Exhibit 10.45 to WorldCorp, 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 Incorporated Stock Ownership Plan. (Filed as Exhibit 10.49 to WorldCorp, Inc.'s Annual by reference Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
10.21 Amendment No. 1 to WorldCorp, Inc. Incorporated Employee Savings and Stock Ownership Plan. (Filed as Exhibit 10.50 by reference to WorldCorp, Inc.'s 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 Incorporated dated as of January 15, 1991 between World Airways, Inc. and First Security by reference Bank of Utah, N.A., not in its 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 Incorporated January 15, 1991 between World Airways, Inc. and First Security Bank of Utah, N.A., by reference not in its 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.)
10.29 Loan and Security Agreement dated as of Incorporated February 26, 1992 between WorldCorp, Inc. and US Order Incorporated. (Filed as by reference Exhibit 10.38 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.)
Exhibit No. Exhibit ------- -------
10.30 Aircraft Lease Agreement I dated as Incorporated of February 12, 1992 between McDonnell Douglas Finance by reference Corporation and World Airways, Inc. (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 Incorporated as of February 12, 1992 between McDonnell Douglas Finance by reference Corporation and World Airways, Inc. (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 Incorporated dated as of April 26, 1991 between Terandon Leasing Corporation and by reference World Airways, Inc. (Filed as 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.)
10.33 Aircraft Engine Lease Agreement Incorporated dated as of April 26, 1991 between Terandon Leasing Corporation and by reference World Airways, Inc. (Filed as 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 Incorporated February 12, 1992 between McDonnell Douglas Finance Corporation and by reference World Airways, Inc. (Filed as Exhibit 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 Incorporated February 12, 1992 between McDonnell Douglas Finance Corporation and by reference World Airways, Inc. (Filed as Exhibit 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.)
10.36 Series A Preferred Stock Purchase Incorporated Agreement dated as of September 14, 1990 between US Order, Inc. and by reference WorldCorp, Inc. (Filed as Exhibit 10.45 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.)
10.37 Stock Restriction Agreement dated Incorporated as of September 14, 1990 between WorldCorp, Inc., William F. Gorog, by reference Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter. (Filed as Exhibit 10.46 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 Incorporated Aircraft Serial Number 48518 dated as of September 30, 1992 between by reference World Airways, Inc. and International Lease Finance Corporation.
10.39 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48519 dated as of September 30, 1992 between by reference World Airways, Inc. and International Lease Finance Corporation.
Exhibit No. Exhibit ------- -------
10.40 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48520 dated as of September 30, 1992 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.41 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48633 dated as of September 30, 1992 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.42 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48631 dated as of September 30, 1992 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.43 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48632 dated as of September 30, 1992 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.45 MD-11 Aircraft Charter Agreement Incorporated dated as of March 18, 1993 between World Airways, Inc. and PT. by reference Garuda Indonesia.
10.45 DC10-30 Aircraft Charter Agreement Incorporated dated as of March 18, 1993 between World Airways, Inc. and PT. by reference Garuda Indonesia.
10.46 Accounts Receivable Management and Incorporated Security Agreement dated as of December 7, 1993 between World by reference Airways, Inc. and BNY Financial Corporation.
10.47 Aircraft Parts Security Agreement Incorporated dated as of December 7, 1993 between World Airways, Inc. and BNY by reference Financial Corporation.
10.48 Warrant Certificate dated as of Incorporated December 7, 1993 between WorldCorp, Inc. and BNY Financial Corporation. by reference
10.50 Subscription and Preferred Stock Incorporated Purchase Agreement dated as of December 20, 1993 between US Order, by reference Inc. and Knight-Ridder, Inc.
10.51 Subscription and Preferred Stock Incorporated Purchase Agreement dated as of December 21, 1993 between US Order, by reference Inc. and WorldCorp, Inc.
10.52 Subscription and Preferred Stock Incorporated Purchase Agreement dated as of December 20, 1993 between US Order, by reference Inc. and Jerome Kohlberg, Jr.
10.53 Subscription and Preferred Stock Incorporated Purchase Agreement dated as of December 21, 1993 between US Order, by reference Inc. and Hoechst Celanese Corporation Employee Benefit Master Trust
10.54 Series C Preferred Stock Purchase Incorporated Agreement dated as of December 21, 1993 between US Order, Inc. and by reference VeriFone, Inc.
10.55 Registration Rights Agreement dated Incorporated as of December 21, 1993 between US Order, Inc. and VeriFone, by reference Inc.
Exhibit No. Exhibit ------- -------
10.57 Investment Agreement dated as Incorporated of December 21, 1993 by and among US Order, Inc., WorldCorp, by reference Inc., and VeriFone, Inc.
10.58 Settlement Agreement dated as Incorporated of February 8, 1994 between World Airways, Inc, WorldCorp, by reference Inc., Concord Asset Management, Inc., Concord Leasing, Inc., and The CIT Group.
10.59 Lease Agreement dated as of Incorporated June 1, 1993 between World Airways, Inc. and Mattei by reference Corporation.
10.60 Lease Agreement dated as of Incorporated March 30, 1993 between World Airways, Inc. and Tinicum by reference Properties Associates Limited Partnership, as amended by First Amendment to Lease dated July 9, 1993.
10.61 Lease Agreement dated as of Incorporated January 25, 1993 between World Flight Crew Services, Inc. by reference and Sakioka Farms.
10.62 Consignment Agreement dated Incorporated as of September 30, 1993 between World Airways Inc. and by reference The Memphis Group.
10.63 Assignment and Assumption and Incorporated Consent and Release for Aircraft Serial Number 47818 dated by reference as of July 20, 1993 among World Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and McDonnell Douglas Finance Corporation.
10.64 Assignment and Assumption and Incorporated Consent and Release for Aircraft Serial Number 46999 dated by reference as of July 9, 1993 among World Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and McDonnell Douglas Finance Corporation.
10.65 Aircraft Lease Agreement for Incorporated Aircraft Serial Number 48458 dated as of January 15, 1993 by reference between World Airways, Inc. and Wilmington Trust Company/GATX Capital Corporation.
10.66 Aircraft Lease Supplement for Incorporated Aircraft Serial Number 48458 dated as of April 23, 1993 by reference between World Airways, Inc. and Wilmington Trust Company/GATX Capital Corporation.
10.67 Aircraft Spare Parts Lease Incorporated Agreement dated as of April 15, 1993 between World Airways, by reference Inc. and GATX Capital Corporation.
10.68 Amendment No. 1 To Aircraft Incorporated Lease Agreement for Aircraft Serial Number 48518 dated as of by reference November 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.69 Amendment No. 2 to Aircraft Incorporated Lease Agreement for Aircraft Serial Number 48518 dated as of by reference March 8, 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.70 Assignment of Rights for Incorporated Aircraft Serial Number 48518 dated as of March 8, 1993 by reference between World Airways, Inc. and International Lease Finance Corporation.
Exhibit No. Exhibit ------- -------
10.71 Assignment of Rights for Aircraft Incorporated Engines Serial Numbers P723942, P723945, and P723943 dated as of by reference March 1, 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.72 Agency Agreement for Aircraft Serial Incorporated Number 48518 dated as of January 15, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.73 Amendment No. 2 to Aircraft Lease Incorporated Agreement for Aircraft Serial Number 48437 dated as of March 31, by reference 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.74 Amendment No. 3 to Aircraft Lease Incorporated Agreement for Aircraft Serial Number 48437 dated as of April 15, by reference 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.75 Agency Agreement for Aircraft Serial Incorporated Number 48437 dated as of January 15, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.76 Assignment of Rights for Aircraft Incorporated Serial Number 48437 dated as of April 15, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.77 Assignment of Rights for Aircraft Incorporated Engines Serial Numbers P723913, P723912, and P723914 dated as of by reference April 15, 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.78 Amendment No. 2 to Aircraft Lease Incorporated Agreement for Aircraft Serial Number 48520 dated as of April 22, by reference 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.79 Agency Agreement for Aircraft Serial Incorporated Number 48520 dated as of January 15, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.80 Assignment of Rights for Aircraft Incorporated Serial Number 48520 dated as of April 22, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation.
10.81 Assignment of Rights for Aircraft Incorporated Engines Serial Numbers P723957, P723958, and P723956 dated as of by reference March 1, 1993 between World Airways, Inc. and International Lease Finance Corporation.
10.82 Aircraft Charter Agreement dated as Incorporated of July 24, 1993 between World Airways, Inc. and Malaysian Airline by reference System Berhad.
10.83 Amendment No. 1 to Aircraft Lease Incorporated Agreement for Aircraft Serial Numbers 46835, 46837, and 46820 by reference dated as of May 14, 1993 between World Airways, Inc. and The Connecticut National Bank (assigned to Federal Express Corporation).
Exhibit No. Exhibit ------- -------
10.84 Amendment No. 2 to Aircraft Lease Incorporated Agreement for Aircraft Serial Numbers 46835, 46837, and 47820 by reference dated as of May 14, 1993 between World Airways, Inc. and The Connecticut National Bank (assigned to Federal Express Corporation).
10.85 Return Agreement for Aircraft Incorporated Serial Numbers 47818 and 46999 dated as of July 9, 1993 among World by reference Airways, Inc., WorldCorp, Inc., International Lease Finance Corporation, McDonnell Douglas Corporation, and McDonnell Douglas Finance Corporation.
10.86/1/ Acquisition Agreement Among VISA Incorporated International Service Association, US Order, Inc, and WorldCorp, by reference Inc, dated as of July 15, 1994.
10.87 Stock Purchase Agreement by and Incorporated among World Airways, Inc., WorldCorp, Inc., and Malaysian by reference Helicopter Services Berhad dated as of October 30, 1993.
10.88 Stock Registration Rights Incorporated Agreement between World Airways, Inc. and Malaysian Helicopter Services by reference Berhad dated as of October 30, 1993.
10.89 Shareholders Agreement between Incorporated Malaysian Helicopter Services Berhad and WorldCorp, Inc., and by reference World Airways, Inc. dated as of February 3, 1994.
10.90 Amendment No. 1 to Shareholders Incorporated Agreement dated as of February 28, 1994, among WorldCorp, World by reference Airways, and MHS.
10.91 Right of First Refusal Agreement Incorporated dated as of February 28, 1994, between US Order, Inc. ("US by reference Order") and Technology Resources, Inc. Berhad ("TRI")
10.92 Amendment No. 1 dated as of Filed Herewith August 29, 1991 to the US Order, Inc. Stock Restriction Agreement dated as of September 14, 1990 among WorldCorp, Inc., a Delaware corporation ("WorldCorp"), William F. Gorog, Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter (collectively, the "Founders" and each a "Founder"), and the Employees.
10.93 Amendment No. 2 dated as of March Filed Herewith 31, 1993 to the US Order, Inc. Stock Restriction Agreement dated as of September 14, 1990 among WorldCorp, Inc., a Delaware corporation ("WorldCorp"), William F. Gorog, Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter (collectively, the "Founders" and each a "Founder"), and the Employees.
10.94 Stock Option Agreement dated as Filed Herewith of August 1, 1994 ("Grant Date") between WorldCorp, Inc. and William F. Gorog.
10.95 Employment Agreement dated as of Filed Herewith August 1, 1994 between US Order, Inc. and John C. Backus, Jr.
Exhibit No. Exhibit ------- -------
10.96 Employment Agreement dated as of Filed Herewith August 19, 1994 between WorldCorp, Inc. and T. Coleman Andrews, III.
10.97 Stock Option Agreement dated as of Filed Herewith August 19, 1994 ("Grant Date") by and between WorldCorp, Inc. and T. Coleman Andrews, III.
10.98 Agreement between World Airways, Filed Herewith Inc. and the International Brotherhood of Teamsters representing the Cockpit Crewmembers employed by World Airways, Inc. dated August 15, 1994-June 30, 1998.
10.99 Letter Employment Agreement of Filed Herewith William F. Gorog dated August 25, 1994.
10.100 Amendment No. 3 dated as of Filed Herewith September 1, 1994 to the US Order, Inc. Stock Restriction Agreement dated as of September 14, 1990 among WorldCorp, Inc., a Delaware corporation ("WorldCorp"), William F. Gorog, Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter (collectively, the "Founders" and each a "Founder"), and the Employees.
10.101 Aircraft Services Agreement dated Filed Herewith September 26, 1994 by and between World Airways, Inc. ("World") and Malaysian Airline System Berhad ("MAS").
10.102 Freighter Services Agreement dated Filed Herewith October 1, 1994 by and between World Airways, Inc. and Malaysian Airline System Berhad.
10.103 World Airways, Inc. 1995 AMC Filed Herewith Contract-94-D0027 dated October 1, 1994 between World Airways, Inc. and Air Mobility Command.
10.104 Amendment No. 4 dated as of Filed Herewith December 1, 1994 to the US Order, Inc. Stock Restriction Agreement dated as of September 14, 1990 among WorldCorp, Inc., a Delaware corporation ("WorldCorp"), William F. Gorog, Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter (collectively, the "Founders" and each a "Founder"), and the Employees.
10.105 Stock Purchase Agreement (the Filed Herewith "Agreement") dated as of December 31, 1994 by and between MHS Berhad, a Malaysian corporation (the "Shareholder") and WorldCorp, Inc., a Delaware corporation (the "Purchaser").
10.106 Promissory Note dated December 31, Filed Herewith 1994 for $8,500,000 between WorldCorp, Inc., a Delaware corporation ("Borrower") and Malaysian Helicopter Services Berhad, a Malaysian corporation ("Lender").
10.107 Amendment No. 1 to Passenger Filed Herewith Aircraft Services and Freighter Services Agreement dated December 31, 1994 by and between World
Airways, Inc. and Malaysian Airline System Berhad.
Exhibit No. Exhibit ------- -------
10.108 Amendment No. 5 dated January 2, Filed Herewith 1995 to the US Order, Inc. Stock Restriction Agreement dated as of September 14, 1990 among WorldCorp, Inc., a Delaware corporation ("WorldCorp"), William F. Gorog, Jonathan M. Gorog, Peter M. Gorog, Henry R. Nichols, William N. Melton and John Porter (collectively, the "Founders" and each a "Founder"), and the Employees.
10.109 Customer Agreement between Filed Herewith WorldCorp ESSOP and Scott & Stringfellow, Inc. dated January 11, 1995 for a margin loan.
10.110 Side Letter dated January 11, 1995 Filed Herewith from Scott & Stringfellow, Inc. to William F. Gorog, Trustee of WorldCorp Employee Savings and Stock Ownership Plan for a margin loan to the WorldCorp ESSOP.
10.111 Guarantee Agreement dated January Filed Herewith 11, 1995 by WorldCorp, Inc. ("Guarantor") for the benefit of Scott & Stringfellow, Inc. (the "Lender").
10.112 Registration Rights Agreement Filed Herewith dated as of January 11, 1995 by and between WorldCorp, Inc. and Scott & Stringfellow, Inc.
10.113 Side Letter dated January 11, 1995 Filed Herewith from WorldCorp, Inc. to Scott & Stringfellow, Inc. regarding commitment to make contributions to the WorldCorp Employee Savings and Stock Ownership Plan (the "ESSOP"), for the duration of the Scott & Stringfellow loan to the ESSOP.
10.114 Strategic Alliance Agreement dated Filed Herewith January 16, 1995 by and between Colonial Data Technologies Corp. and US Order.
10.115 Amendment No. 2 to Passenger Filed Herewith Aircraft Services and Freighter Aircraft Service Agreement dated February 9, 1995 by and between World Airways, Inc. and Malaysian Airline System Berhad.
11.1 Statement on Calculation of Filed Herewith Earnings Per Common Share.
22.1 Subsidiaries of the Registrant Filed Herewith WorldCorp, Inc.
23.1 Consent of Independent Auditors Filed Herewith
/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.
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.
Signature Title Date --------- ----- ----
/s/ T. Coleman Andrews, III Chief Executive Officer, March 31, 1995 --------------------------- (T. Coleman Andrews, III) President, and Principal Accounting Officer
/s/ William F. Gorog Director and March 31, 1995 -------------------- (William F. Gorog) Chairman of the Board
/s/ John C. Backus, Jr. Director March 31, 1995 ----------------------- (John C. Backus, Jr.)
/s/ James E. Colburn Director March 31, 1995 -------------------- (James E. Colburn)
/s/ Patrick F. Graham Director March 31, 1995 --------------------- (Patrick F. Graham)
/s/ Juan C. O'Callahan Director March 31, 1995 ---------------------- (Juan C. O'Callahan)
/s/ Geoffrey S. Rehnert Director March 31, 1995 ----------------------- (Geoffrey S. Rehnert)
SCHEDULE II
WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1994, 1993 and 1992 (in thousands)