-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WnEGogrygbsa0EtqD58ypImkYMf2abR4YVvM+TB4Cckp2CFSVSNge3Il2PQJl9NJ B8b8+at+DaSqUMDPTMUsjg== 0000811664-98-000015.txt : 19980615 0000811664-98-000015.hdr.sgml : 19980615 ACCESSION NUMBER: 0000811664-98-000015 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 ITEM INFORMATION: FILED AS OF DATE: 19980612 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDCORP INC CENTRAL INDEX KEY: 0000811664 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 943040585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-09591 FILM NUMBER: 98646894 BUSINESS ADDRESS: STREET 1: 13873 PARK CTR RD STE 490 CITY: HERNDON STATE: VA ZIP: 20171 BUSINESS PHONE: 7038349200 MAIL ADDRESS: STREET 1: 13873 PARK CENTER ROAD CITY: HERNDON STATE: VA ZIP: 22071 8-K 1 WORLDCORP 8-K CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): June 11, 1998 WORLDCORP, INC. (Exact name of registrant as specified in charter) Delaware 1-5351 94-3040585 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 13873 Park Center Road, Suite 490, Herndon, Virginia 20171 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 834-9200 ITEM 5. OTHER EVENTS. On April 20, 1998, WorldCorp, Inc. ("WorldCorp") consummated a transaction pursuant to which it acquired an 80% interest in Paper Acquisition Corp., a Delaware corporation ("Paper"). Attached hereto as an Exhibit to this Current Report on Form 8-K are unaudited financial statements of Paper as of and for the eight months ended August 31, 1997, the date of Paper's most recent fiscal year-end. On May 5, 1998, WorldCorp filed the Current Report on Form 8-K required in connection with its acquisition of Paper and stated that, as permitted by SEC regulations, the required financial information will be filed by amendment to that Current Report on Form 8-K not later than July 6, 1998. The Company is currently in the process of preparing this financial information. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. Exhibits. 99.1 Unaudited financial statements of Paper Acquisition Corp. as of and for the eight months ended August 31, 1997. SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WORLDCORP, INC. By:_______/s/______________ Patrick F. Graham President and Chief Executive Officer Date: June 12, 1998 EX-99 2 FINANCIALS FOR PAPER Paper Acquisition Corp. Consolidated Balance Sheet (Unaudited) August 31, 1998
ASSETS Current assets: Cash $ 355,648 Accounts receivable, less allowance for doubtful accounts And sales returns of $323,998 5,426,699 Inventories Raw materials 750,534 Work-in-progress and finished goods 473,761 Deferred income taxes 1,207,019 Prepaid expenses and other current assets 207,188 ------- Total current assets 8,420,849 Note receivable from related party 500,000 Property and equipment, net 3,380,190 Property held for sale 425,000 Deferred income taxes, net 223,664 Goodwill and other assets, net 26,646,362 ---------- Total assets $ 39,596,065 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 4,612,546 Current maturities of Product Purchase Agreement 875,000 Accounts payable 2,892,532 Accrued expenses 4,355,734 Income taxes payable 1,481,295 --------- Total current liabilities 14,217,107 Long-term debt 14,788,244 Other long-term liabilities 2,511,766 --------- Total liabilities 31,517,117 Stockholders' equity: Class A voting common stock, $0.01 par value, 1,000,000 shares authorized, 493,764 shares issued and outstanding 4,938 Class B non-voting common stock, $0.01 par value, 10,000 shares authorized, 1,000 shares issued and outstanding 10 Additional paid-in capital 4,411,716 Cumulative translation adjustment (28,582) Historical cost basis of continuing shareholder interest in excess of fair value of purchase price 3,184,769 Retained earnings 506,097 ----------- Total stockholders' equity 8,078,948 ------------ Total liabilities and stockholders' equity $ 39,596,065 ==========
The accompanying notes are an integral part of these financial statements. Paper Acquisition Corp. Consolidated Statement of Income (Unaudited)
For the period from December 31, 1996 (Inception) through August 31, 1997 Sales $ 34,506,609 Cost of sales 21,173,378 ---------- Gross margin 13,333,231 ---------- Operating expenses: Selling, general and administrative 3,093,695 Amortization expense 5,029,570 --------- Total operating expenses 8,123,265 --------- Operating income 5,209,966 --------- Other (income) expense: Interest expense 1,931,057 Other, net 169,034 ------- Total other (income) expense 2,100,091 --------- Income before income taxes 3,109,875 Income tax expense 2,603,778 --------- Net income $ 506,097 ===========
The accompanying notes are an integral part of these financial statements. Paper Acquisition Corp. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For the period from December 31, 1996 (Inception) through August 31, 1997 Cash flows from operating activities: Net income $ 506,087 Adjustments to reconcile net income to net cash provided by operating activities: Provision for uncollectible accounts receivable 290,000 Depreciation 179,375 Amortization 5,264,713 Write-off of inventory "step-up" to fair value 292,386 Deferred income taxes (536,236) Loss on disposal of property and equipment 46,264 Changes in operating assets and liabilities: Accounts receivable 260,082 Inventories 2,042,738 Prepaid expenses and other assets 83,176 Accounts payable 61,875 Accrued expenses and other long-term liabilities 140,067 Income taxes payable (606,599) -------------- Net cash provided by operating activities 8,023,938 -------------- Cash flows from investing activities: Acquisitions, net of cash acquired (Note 2) (16,781,468) Proceeds from sale of property and equipment 742,578 Capital expenditures (49,774) --------------- Net cash used in investing activities (16,088,664) ------------- Cash flows from financing activities: Proceeds from long-term debt 21,500,000 Refinancing of assumed debt (10,892,348) Proceeds from issuance of common stock 4,000,000 Principal payments on long-term debt (3,534,752) Borrowings under revolving credit facility, net 232,964 Repurchase and retirement of common stock (593,336) Loan to related party (500,000) Payment of loan origination fees (1,763,572) ------------- Net cash provided by financing activities 8,448,956 Cumulative translation adjustment (28,582) Net change in cash 355,648 Cash at beginning of period -- Cash at end of period $ 355,648 =============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 781,095 Income taxes 2,583,000
The accompanying notes are an integral part of these financial statements. Paper Acquisition Corp. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Consolidated Statement of Stockholders' Equity Class A Class B Additional Cumulative Total common common paid-in translation Dangling Retained stockholders' stock stock capital adjustment Credit earnings equity Balance as of December 31, 1996 (inception) -- -- -- -- -- -- -- Issuance of Class A common stock for cash 4,000 -- 3,996,000 -- -- -- 4,000,000 Issuance of Class A common stock for acquisition 1,000 -- 999,000 -- -- -- 1,000,000 Issuance of Class B common stock for services -- 10 9,990 -- -- -- 10,000 Historical cost basis of continuing shareholder interest in excess of fair value of purchase price ("Dangling Credit") -- -- -- -- 3,184,769 -- 3.184,769 Net income -- -- -- -- -- 506,097 506,097 Repurchase and retirement of common stock owned be Employee Stock Purchase Plan (Note 10) (62) -- (593,274) -- -- -- (593,336) Cumulative translation adjustment -- -- -- (28,582) -- -- (28,582) ------- ------- ------- ------- ------- ------ ------- Balance as of August 31, 1997 4,938 10 4,411,716 (28,582) 3,184,769 506,097 8,078,948 === ==== ===== == ========= ======= ========= ======= =========
The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS BASIS OF PRESENTATION Paper Acquisition Corp., a Delaware corporation, was organized in December 1996 to acquire and operate specialty paper businesses. On December 30, 1996, Paper Acquisition Corp. ("Paper") acquired all of the common stock of Frye Acquisition, Inc. and, simultaneously, Paper acquired, through its wholly-owned indirect subsidiary Frye Copysystems, Inc., selected assets and assumed certain liabilities of Technicarbon Company, L.P. (collectively the "Acquisitions"). See Note 2 for further discussion of the Acquisitions. The consolidated financial statements for the period from December 31, 1996 to August 31, 1997 include the accounts of Paper Acquisition Corp. and its wholly-owned subsidiaries Frye Acquisition, Inc.; Frye Carbon Products, Inc.; FryeTech, Inc. (formerly Frye Copysystems, Inc.); and Frye Carbon Products, Ltd., a Canadian company (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. DESCRIPTION OF BUSINESS The Company manufactures and supplies carbon paper products and specialty inks and ribbons to customers in the United States, Canada and numerous foreign markets. The Company is headquartered in Des Moines, Iowa and currently has operating plants located in Dallas, Texas; Newburgh, New York; Indianapolis, Indiana; Parsons, Kansas and Corcoran, California. 2. ACQUISITIONS Effective December 30, 1996, in accordance with the Stock Purchase Agreement dated December 26, 1996, Paper acquired all of the outstanding stock of Frye Acquisition, Inc. (the "Predecessor"). The purchase price of $2,865,144 (excluding refinanced and assumed debt of $10,892,348) consisted of cash consideration of $985,122, a senior subordinated note with a face value of $937,640 (fair value of $880,022) and common stock of Paper valued at $1,000,000, which represents a 20% interest in Paper. As a result of the 20% continuing interest by shareholders of the Predecessor, the acquisition was accounted for under the purchase method of accounting in accordance with Issue No. 88-16 of the Emerging Issues Task Force of the Financial Accounting Standards Board, "Basis in Leveraged Buyout Transactions" ("EITF 88-16"). Accordingly, 80% of the purchase price was allocated to the assets and liabilities acquired at their respective fair values with the remainder allocated at the Predecessor's historical book values as of the date of acquisition. Simultaneous with Paper's acquisition of the Predecessor, and in accordance with the Asset Purchase Agreement dated December 27, 1996, Paper acquired, though its wholly-owned indirect subsidiary Frye Copysystems, Inc. ("Frye"), selected assets and assumed certain liabilities of Technicarbon Company, L.P. ("Technicarbon") for $15,995,600 of cash. Paper's and Frye's acquisition of Technicarbon was accounted for pursuant to the purchase method of accounting. The Acquisitions were financed primarily with the cash equity proceeds to Paper and through the borrowings described in Note 7. The application of the purchase method of accounting for the acquisition of Technicarbon and 80% of the Predecessor and the application of EITF 88-16 with respect to 20% of the acquisition of the Predecessor, resulted in excess aggregate purchase price (including aggregate direct acquisition costs of $417,725) over the fair value of net assets acquired of $30,054,732 ("Goodwill") and an allocation of excess historical carryover basis of the Predecessor over the related purchase price of $3,184,769 ("Dangling Credit"). The purchase price allocations for the Acquisitions are summarized as follows: Price of Acquisitions, including acquisition costs, issuance of Paper common stock and issuance of senior subordinated notes payable, net of $616,979 of cash acquired $ 18,661,490 ---------- Fair market value of assets acquired and liabilities assumed and Dangling Credit was allocated as follows: Assets Accounts receivable $ 5,976,781 Inventory 3,559,419 Prepaid and other current assets 290,364 Property and equipment 4,723,633 Deferred income taxes 1,392,818 Goodwill and other assets 31,911,075 ---------- Total Assets 47,854,090 Liabilities Accounts payable $ 2,830,657 Accrued expenses 4,751,881 Other long-term liabilities 1,131,909 Income taxes payable 2,087,894 Deferred income taxes 498,371 Debt assumed 2,934,749 Assumed and refinanced debt 10,892,348 Senior subordinated notes payable 880,022 ------------- Total liabilities 26,007,831 Dangling Credit 3,184,769 Total purchase price allocations $ 18,661,490 =========== Subsequent to the Acquisitions, Frye Copysystems, Inc. changed its name to FryeTech, Inc. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS All highly liquid assets with an original maturity of three months or less are considered to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method. In connection with the Acquisitions, inventories were stepped-up to fair value in accordance with the purchase method of accounting in the amount of $292,386. Such amount was fully amortized to cost of goods sold during the period December 31, 1996 to August 31, 1997 and had the one-time effect of reducing gross margins of the Company during this period. PROPERTY AND EQUIPMENT Property and equipment acquired as part of the Acquisitions are recorded at fair value and all subsequently acquired property and equipment is recorded at cost. Depreciation for financial reporting purposes is provided by the straight-line method over the following estimated useful lives: Machinery and equipment 5-10 years Buildings and building improvements 15 years Furniture and fixtures 5-10 years Expenditures for renewals and betterments are capitalized and maintenance and repairs are charged to operations. PROPERTY HELD FOR SALE Property held for sale consists of land and a building which is expected to be sold. This property is carried at its estimated net realizable value. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of the Company's Canadian subsidiary (Frye Carbon Products, Ltd.) are translated using the exchange rates in effect at the balance sheet date and the cumulative translation adjustment has been included in stockholders' equity. Results of operations are translated using the average exchange rates prevailing throughout the year. Realized gains and losses from foreign currency translations, which were not material, are included in operations for the period. GOODWILL The excess cost over the fair value of net assets acquired is recorded as goodwill and is amortized by the straight-line method over four years. Management periodically evaluates the recoverability of goodwill based on undiscounted cash flows (see Note 5). DEFERRED FINANCING COSTS Deferred financing costs relating to long-term debt are amortized by the straight-line method over the terms of the related debt obligations (see Note 5). IMPAIRMENT OF LONG-LIVED ASSETS Impairment losses are recorded on long-lived assets used in operations (including goodwill) when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which is an asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences, utilizing currently enacted tax rates, for temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are recognized, net of any necessary valuation allowance, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Deferred tax expense or benefit represents the change in the deferred tax asset or liability balances. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentration of credit risk include trade receivables generated by the Company as a result of selling carbon paper and specialty ink and ribbon products. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed and reserves are maintained. The Company typically does not require collateral. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of variable rate long-term debt equals fair value. The carrying value of fixed rate long-term debt was recorded at fair value on the date of the Acquisitions and is considered to approximate fair value as the fixed rate approximates current rates that could be obtained by the Company if refinancing occurred. 4. PROPERTY AND EQUIPMENT Property and equipment as of August 31, 1997 consists of: Machinery and equipment $ 1,986,875 Buildings and building improvements 1,220,000 Land and Land improvements 300,000 Furniture and fixtures 52,690 -------------- 3,559,565 Accumulated depreciation (179,375) -------- Property and equipment, net $ 3,380,190 ============ 5. GOODWILL AND OTHER ASSETS Goodwill and other assets (accumulated amortization is provided in parentheses) as of August 31, 1997 consist of: Goodwill ($5,009,122) $ 30,054,732 Deferred financing costs ($235,143) 1,763,572 Noncompete agreements ($20,448) 92,771 ------------ 31,911,075 Accumulated amortization (5,264,713) Goodwill and other assets, net $ 26,646,362 ============= 6. ACCRUED EXPENSES Employee costs and benefits $ 1,571,983 Restructuring, severance and relocation 1,041,487 Interest 460,178 Other 1,282,086 --------- Accrued expenses $ 4,355,734 ========= 7. LONG-TERM DEBT Long-term debt consists of the following at August 31, 1997: Revolving credit facility $ 232,964 Term loan 18,275,000 Senior subordinated notes payable to Predecessor shareholders, Fixed rate of 8%, payable in three annual installments Beginning December 30, 1997 (Note 13) 937,640 ------------ 19,445,604 Current maturities of long-term debt (4,612,546) Unamortized discount on notes payable (44,814) ------- Long-term debt $ 14,788,244 ========== REVOLVING CREDIT AND TERM LOAN AGREEMENT In connection with the financing of the Acquisitions (Note 2), the Company's wholly-owned indirect subsidiary, FryeTech, Inc. (formerly Frye Copysystems, Inc.), entered into a revolving credit and term loan agreement (the "Agreement") with a bank. The Agreement provides borrowings under a revolving credit facility of up to $13,000,000 and term loan of $21,500,000. The borrowings are secured by the assets of the Company and each of its wholly owned subsidiaries, except for the Company's Canadian subsidiary (Frye Carbon Products, Ltd.). Borrowings under the Agreement are restricted to financing the Acquisitions, future investments and acquisitions, working capital requirements and general corporate purposes. The amounts available under the revolving credit facility are automatically reduced by $2,600,000 annually, beginning on December 31, 1997. As of August 31, 1997, $10,056,200 was available to be borrowed under the revolving credit facility. The term loan requires twenty consecutive quarterly payments of $1,075,000 commencing on March 31, 1997. The revolving credit facility and term loan, through an amendment to the Agreement, are renewable annually (at the Company's option); however, not to be extended beyond December 30, 2001. As part of the aggregate amount available under the revolving credit facility, the Agreement provides for the issuance of standby letters of credit. At August 31, 1997, outstanding letters of credit amounted to $75,000. Borrowings under the Agreement bear interest at the Company's option, at either (1) the banks' prime rate plus applicable margin or (2) the eurodollar rate plus applicable margin. The applicable margin is computed based upon the leverage ratio of FryeTech, Inc. at various dates, as specified in the Agreement. As of August 31, 1997, the Company's borrowing rate under the Agreement is 8.37%, the eurodollar rate option plus applicable margin. Under the terms of the Agreement, FryeTech, Inc. is restricted from paying dividends and is required to comply with various financial covenants, including a leverage ratio and cumulative EBITDA requirements. At August 31, 1997, FryeTech, Inc. is in compliance with such covenants. SENIOR SUBORDINATED NOTES PAYABLE On December 30, 1996, as partial consideration for the Frye acquisition, the Company issued 8% Senior Subordinated Notes (the "Notes") to the shareholders of the Predecessor at a face value of $937,640. The terms of the Notes require principal payments to be made in three annual installments of $312,547 commencing on December 31, 1997. The Notes are unsecured and bear interest at 8%, payable each March 31; June 30; September 30; and December 31 through the maturity date of December 30, 1999. The difference between the face value of the Notes and the estimated fair value ($880,022) recorded by the Company on the date of the Frye acquisition of $57,618 is being amortized over the life of the Notes using the straight-line method. The Notes are subordinated to the prior payment and satisfaction of indebtedness outstanding under the revolving credit and term loan agreement. Annual maturities of long-term debt are as follows: 1998 $ 4,612,546 1999 4,612,547 2000 4,612,546 2001 4,300,000 2002 1,307,965 Thereafter -- ------------------ Total $ 19,445,604 ========== 8. OTHER LONG-TERM LIABILITIES PRODUCT PURCHASE AGREEMENT The Company entered into a product purchase and loan agreement (the "Product Purchase Agreement") that provides for the Company to purchase annually a minimum amount of carbonizing tissue through August 31, 1999. Under terms of the Product Purchase Agreement, the Company borrowed $3,500,000 on an unsecured basis. As of August 31, 1997, $2,625,000 of the borrowed funds are outstanding, of which $875,000 is classified as current and $1,750,000 is classified within other long-term liabilities. The repayment terms of the Product Purchase Agreement require annual installments of $875,000 which began in September 1996. The Company imputes interest expense on the Product Purchase Agreement borrowings at an interest rate that varies with the price of carbonizing tissue purchased (approximately 7% at August 31, 1997), which is paid for at the time of purchase of carbonizing tissue. 9. INCOME TAXES Provision for income taxes for the period from December 31, 1996 to August 31, 1997 includes: Current income taxes $ 3,140,014 Deferred income taxes (536,236) ------------ $ 2,603,778 ================= Total deferred tax assets were $1,929,054 and total deferred tax liabilities were $498,371 as of August 31, 1997 (and primarily relate to property and equipment depreciation, goodwill amortization and various liability accounts). The Company's effective tax rate differs from the U.S. statutory rate primarily because of state taxes, meals and entertainment expenses and nondeductible goodwill amortization. 10. EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has defined benefit plans (a non-union plan and a bargaining plan) covering certain employees and former employees of the Predecessor. Benefits under these plans are based on an employee's years of service and compensation during the years immediately preceding retirement. The plan's assets include common stock, corporate bonds, long and short-term investments and cash. The Company's funding policy is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. The Company's contribution to the pension plans for the period from December 31, 1996 to August 31, 1997 was $352. The funded status as of August 31, 1997 is reconciled to the prepaid (accrued) pension expense as follows: Non-Union Bargaining Plan Plan Actuarial present value of benefit obligations: Vested benefit obligation $ 1,769,473 $ 933,436 Nonvested benefit obligation -- -- --------------- ------------- Accumulated benefit obligation and projected Benefit obligation 1,769,473 933,436 Plan assets at fair value 1,941,275 919,514 --------- ------- Plan assets in excess (deficit) of projected benefit obligation 171,802 (13,922) Unrecognized net loss from past experience different from that assumed (66,634) (36,043) ---------- ---------- Prepaid (accrued) pension expense $ 105,168 $ (49,965) ======== ========= Assumptions used for the period from December 31, 1996 to August 31, 1997 were as follows: Non-Union Bargaining Plan Plan Weighted average discount rate 7.50% 7.50% Expected long-term rate of return on assets 8.00% 8.00% RETIREMENT PLAN The Company maintains two qualified Profit Sharing/401(k) Plans (the "Plans") covering substantially all employees. The Company's contributions to the Plans for the period December 31, 1996 to August 31, 1997 were $0. Costs under the Plan amounted to $8,122 during the period from December 31, 1996 to August 31, 1997. EMPLOYEE STOCK OWNERSHIP PLAN The Company has an employee stock ownership plan ("ESOP"), with a savings and profit sharing plan feature, covering substantially all employees of the Predecessor. In connection with Paper's acquisition of the Predecessor, as described in Note 2, ESOP shareholders received approximately $118,000 of cash and 6,236 shares of Paper Class A common stock. During April 1997, Paper afforded participants of the ESOP with the opportunity to sell their shares of Paper for approximately $95.15 per share. In connection with this offer, Paper acquired all 6,236 shares of its Class A stock for approximately $593,336 of cash which was distributed to participants in accordance with the terms of the ESOP. The Company made no contributions to the ESOP during the period from December 31, 1996 to August 31, 1997. The Company plans to terminate the ESOP during fiscal 1998. 11. CLASS B COMMON STOCK On December 26, 1996, the Company issued 1,000 shares of its Class B common stock, par value $.01 per share in consideration of services rendered to the Company in connection with consummating the Acquisitions. The Class B common stock is non-voting. 12. COMMITMENTS AND CONTINGENCIES LEASES The Company has a number of operating lease agreements primarily involving office space, automobiles, computers and office equipment. The Company's rent expense for the period from December 31, 1996 to August 31, 1997 was $358,521. Minimum lease payments required under the operating leases as of August 31, 1997 are as follows: 1998 $ 442,839 1999 321,862 2000 141,104 2001 40,128 2002 -- Thereafter -- ----------- $ 945,933 ============ LITIGATION The Company is involved in various litigation and one environmental proceeding (which is currently in settlement discussions) arising in the normal course of business. In the opinion of management the Company's ultimate liability beyond amounts recorded of $630,000, if any, under pending litigation and one environmental matter would not materially affect its financial condition or the results of its operations. INCOME TAX CONTINGENCY At August 31, 1997, the Company has recorded a contingent liability for a federal income tax matter. On the basis of information furnished by counsel and others, management believes that the range of estimated loss, if any, to be incurred in connection with this matter in excess of the amount recorded at August 31, 1997 will not have a material adverse impact on the results of operations or the financial position of the Company. INDEMNIFICATION PROVISIONS The Frye Acquisition, Inc. Stock Purchase Agreement contains certain indemnification provisions which provide for cancellation of up to all of the senior subordinated seller notes face value of $937,640 in the event that the ultimate settlement of the litigation, environmental and income tax contingency matters discussed above exceeds amounts recorded by the Company. 13. RELATED PARTY TRANSACTIONS AND BALANCES In connection with the Acquisitions, the Company issued senior subordinated notes payable to the sellers of the Predecessor, also common stockholders of the Company. During the period from December 31, 1996 through August 31, 1997, interest paid to the related common stockholders was approximately $37,800. As of August 31, 1997, interest payable to the related common stockholders was approximately $12,200. During the period from December 31, 1996 to August 31, 1997, the Company incurred management fees of $150,000 to the Company's majority common stockholder. The Company has a non-current note receivable from the Company's majority common stockholder of $500,000 at August 31, 1997. The note is payable in full on December 30, 2001 and bears interest at 10%. -----END PRIVACY-ENHANCED MESSAGE-----