-----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, QPS/oLRRe0nOjPpz86t1XsI8pyWGw5Y0ZSiFz2aSRrLgTm6i31hixEKFYv/Xgyma pDz0XVfNrLTD5AipFu/J7g== 0000928385-97-000588.txt : 19970401 0000928385-97-000588.hdr.sgml : 19970401 ACCESSION NUMBER: 0000928385-97-000588 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09591 FILM NUMBER: 97571710 BUSINESS ADDRESS: STREET 1: 13873 PARK CTR RD STE 490 CITY: HERNDON STATE: VA ZIP: 22071 BUSINESS PHONE: 7038349200 MAIL ADDRESS: STREET 1: 13873 PARK CENTER ROAD CITY: HERNDON STATE: VA ZIP: 22071 10-K 1 FORM 10-K FOR FYE 12/31/96 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------- For the fiscal year ended: DECEMBER 31, 1996 Commission File Number 1-5351 WORLDCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3040585 (State of incorporation) (I.R.S. Employer Identification Number) 13873 Park Center Road, Suite 490, Herndon, VA 22071 (Address of Principal Executive Offices) (703) 834-9200 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock par value $1.00 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the Common Stock held by non-affiliates of the registrant on March 26, 1997 was approximately $45,060,795. The number of shares of the registrant's Common Stock outstanding on March 26, 1997 was 15,020,265. DOCUMENTS INCORPORATED BY REFERENCE Portions of WorldCorp, Inc.'s Notice of Annual Stockholder's Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant's fiscal year, are incorporated into Part III of this Report. 1 WORLDCORP, INC. 1996 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page PART I Item 1. Business.........................................................................................3 Item 2. Properties......................................................................................19 Item 3. Legal Proceedings...............................................................................19 Item 4. Submission of Matters to a Vote of Security Holders.............................................19 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters........................20 Item 6. Selected Financial Data.........................................................................21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................................22 Item 8. Financial Statements and Supplementary Data.....................................................42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................................77 PART III Item 10. Directors and Executive Officers of the Registrant..............................................77 Item 11. Executive Compensation..........................................................................78 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................78 Item 13. Certain Relationships and Related Transactions..................................................78 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................79
2 PART I ITEM 1. BUSINESS WorldCorp, Inc., a Delaware corporation ("WorldCorp" or the "Company"), was organized in March 1987 to serve as the holding company for World Airways, Inc., a Delaware corporation ("World Airways"), which was organized in March 1948 and is the predecessor to the Company. Currently, WorldCorp owns positions in companies that operate in two distinct business areas. WorldCorp's aviation services subsidiary, World Airways, is a leading provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate, multi-year contracts. World Airways also leads a contractor teaming arrangement that is the largest single supplier of commercial aircraft to the United States Air Force's Air Mobility Command ("U.S. Air Force" of "USAF"). World Airways was a wholly-owned subsidiary in 1993. In February 1994, pursuant to an October 1993 agreement, WorldCorp sold 24.9% of its ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, the Company increased its ownership in World Airways to 80.1% through the purchase of 5% of World Airways common stock held by MHS. In October 1995, World Airways completed an initial public offering in which 2,000,000 shares of its common stock were issued and sold by World Airways and 900,000 shares were sold by WorldCorp. At December 31, 1996, WorldCorp and MHS owned 6,915,915 shares, or 61.3%, and 1,990,000 shares, or 17.6%, respectively, of the outstanding common stock of World Airways. The balance was publicly traded. On March 14, 1997, World Airways announced that Charles W. Pollard departed as President and Chief Executive Officer. Pursuant to the company's bylaws, T. Coleman Andrews, III, Chairman of the Board, will act as President on an interim basis pending the hiring of a new CEO. The managements of WorldCorp and World Airways are currently exploring ways to maximize value for the shareholders of each company. WorldCorp is currently evaluating the feasibility of a disposition of its interest in World Airways through a secondary offering or a sale to a third party. There can be no assurances, however, that any such transactions will ultimately be consummated. WorldCorp also had an ownership interest in US Order, Inc. ("US Order"), a company which provided products and services for two markets: home banking and smart telephones. In August 1996, US Order and Colonial Data Technologies Corp. ("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which US Order and Colonial Data would be merged with and into a new public company, InteliData Technologies Corporation ("InteliData"). Pursuant to this Merger which was consummated on November 7, 1996, InteliData became the successor corporation to US Order. The Merger was treated as a purchase of Colonial Data by US Order. InteliData concentrates on three markets: (1) consumer telecommunications; (2) electronic commerce; and (3) interactive services. At December 31, 1996, WorldCorp owned 9,179,273 shares of InteliData, or an ownership interest of approximately 28.9%. Following this merger, the Company reports its proportionate share of InteliData's financial results using the equity method of accounting. In September 1996, the Company announced its intention to purchase up to 2.5 million shares of its publicly-traded Common Stock pursuant to open market transactions. As of March 24, 1997, the Company had purchased 1,362,500 shares of its Common Stock for an aggregate cost of $7.8 million. WorldCorp does not intend to purchase any additional shares at this time. The Private Securities Litigation Reform Act of 1995 (the "Act") was recently passed by Congress. The Company desires to take advantage of the new "safe harbor" provisions in the Act. Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1996 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. The principal executive offices of WorldCorp are located at Washington Dulles International Airport in The Hallmark Building, 13873 Park Center Road, Herndon, Virginia 20171. WorldCorp's telephone number is (703) 834-9200. 3 OVERVIEW WorldCorp owns positions in companies that operate in two distinct business areas. World Airways (Nasdaq:WLDA) provides worldwide passenger and cargo air transportation to major international airlines, the U.S. Air Force, and international tour operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData (Nasdaq:INTD) concentrates on three markets: (1) consumer telecommunications; (2) electronic commerce; and (3) interactive services. WORLD AIRWAYS World Airways is a leading global provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate, multi-year contracts. Airline operations account for 100% of its operating revenue and operating income. World Airways' passenger and freight operations employ 13 wide- body aircraft which are operated under contracts, primarily with Pacific Rim airlines. These contracts generally require World Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet lease"), while its customers are responsible for a large portion of the other operating costs, including fuel. World Airways' airline customers have determined that outsourcing a portion of their wide-body passenger and cargo requirements can be less expensive, and offer greater operational and financial flexibility, than purchasing new aircraft and additional spare parts required for such aircraft. World Airways also leads a contractor teaming arrangement that is the largest single supplier of commercial aircraft to the United States Air Force's Air Mobility Command (" U.S. Air Force" or "USAF"). In July 1996, World Airways restructured its business to focus on the growing and profitable ACMI contract services. As such, World Airways ceased all scheduled passenger and scheduled charter services as of October 27, 1996, taking a one-time charge of $21.0 million (see Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")). World Airways' operating philosophy is to build on its existing ACMI contracts to achieve a strong platform for future growth. World Airways concentrates on ACMI contracts because such contracts shift yield, load factor and cost risks to the customer. The customer bears the risk of filling the aircraft with passengers or cargo and assumes a large portion of the operating expenses, including fuel. World Airways maximizes profitability by combining its multi-year ACMI contracts with short term, higher-yielding ACMI agreements which meet the peak seasonal requirements of its customers. World Airways responds opportunistically to rapidly changing market conditions by maintaining a flexible fleet of aircraft that can be deployed in a variety of configurations. World Airways focuses its marketing efforts on the Pacific Rim, where rapid economic development drives demand for its services. World Airways believes that its modern fleet of long-range medium-density wide-body MD- 11 and DC10-30 aircraft are ideally suited to the Pacific Rim market. World Airways' aircraft permit its customers to serve less dense international routes where a Boeing 747 would provide excess capacity. World Airways has operated in the Pacific Rim almost since its inception, and believes that it has developed the ability to serve this market well. World Airways substantially increases its potential customer base by being able to serve both passenger and cargo customers. The Company flies passenger, cargo and passenger/cargo convertible aircraft that the Company believes permit the Company to target emerging opportunities. World Airways has been providing safe, reliable ACMI services for almost 50 years. World Airways has flown for the USAF since 1956, for Malaysian Airlines System Berhad ("Malaysian Airlines") since 1981 and for Garuda Indonesia ("Garuda") since 1973. CUSTOMERS Over the years, World Airways has developed long-term relationships with a number of major international airlines and with the USAF (see "MD&A - Customers"). World Airways' growth strategy is based, first and foremost, upon providing the highest level of service to these customers, thereby maintaining and expanding the amount of business being done through long-term contracts. These contracts have increased the year-round usage of its aircraft fleet, reduced the seasonality of its business and contributed to its recently improved operating performance. 4 Malaysian Airlines. World Airways has provided wet lease service to Malaysian Airlines since 1981, providing wet lease services for Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owns 17.6% of World Airways as of December 31, 1996, also owns 29.1% of Malaysian Airlines. In late 1994, World Airways entered into a series of multi-year contracts, with expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. In 1996, World Airways provided three aircraft for Hadj operations. World Airways recently entered into a new 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby it will provide two aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. World Airways is currently in preliminary discussions with Malaysian Airlines regarding a potential eleven-month reduction in the utilization of one of these aircraft during the 32-month term of the contract. Until recently, World Airways operated four passenger aircraft for Malaysian Airlines under the multi-year agreements described above. The contract for two of the four passenger aircraft for Malaysian Airlines expired in March 1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and will actively re-market the aircraft thereafter, it can provide no assurance that it will be able to redeploy the two aircraft, beginning June 1997, at price and utilization levels at least as favorable as under the terms of the Malaysian Airlines contracts. World Airways originally operated three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July, 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into the Philippine Airlines contracts. World Airways and Malaysian Airlines are currently discussing the future redeployment of these aircraft back into Malaysian Airlines' operations in order to meet the contract's original obligations. World Airways can provide no assurances, however, that it will, in fact, be able to redeploy these two aircraft back into Malaysian Airlines' operations to meet the contract's original obligations. Revenues associated with these contracted obligations are included in World Airways' backlog included herein. Garuda. World Airways has flown for Garuda periodically since 1973 and yearly since 1988. Since 1988, World Airways has been one of the largest providers of passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj pilgrimage is the world's largest due to the size of Indonesia's Islamic population. In 1996, approximately 200,000 Indonesians traveled to Jeddah for the Hadj pilgrimage. During the 1996 Hadj pilgrimage, World Airways provided passenger service to Garuda with seven aircraft, flying approximately 40,000 Indonesians on Company aircraft. Due to World Airways' capacity constraints during the period of Hadj flying, World Airways reached an agreement with Garuda to operate six aircraft during the 1997 pilgrimage. Philippine Airlines. In May 1996, World Airways entered into a new ACMI contract with Philippine Airlines, thereby further expanding its presence in the Pacific Rim. World Airways presently operates four MD-11 passenger aircraft for Philippine Airlines under an agreement, with high minimum monthly utilization levels. World Airways, however, has recently received a written communication from Philippine Airlines in which the airline contends that its leases for all four aircraft expire on November 15, 1997. World Airways believes that this position is contrary to the understanding of the parties that each of the MD-11s are to be leased by Philippine Airlines for a period of 18 months from delivery of each aircraft. The parties are currently discussing the length of the lease term for these aircraft. World Airways can provide no assurances, however, that Philippine Airlines will agree to lease any of the four MD-11 passenger aircraft beyond November 15, 1997, or that it will be able to secure other business at as favorable price and utilization levels. Also, subsequent to year-end, at Philippine Airlines' request, World Airways agreed to a payment plan with respect to Philippine Airlines' wet lease obligations for several months beginning in March 1997. Although Philippine Airlines is current on this payment plan to date, if Philippine Airlines defaults on this payment plan, or fails to meet its monthly aircraft lease obligations, this development, if not offset by other business, would have a material adverse effect on the cash flows, financial condition and results of operation of World Airways. U.S. Air Force. World Airways has provided international air transportation to the U.S. Air Force since 1956. The overall downsizing of the U.S. military, combined with a need to respond quickly to the growing number of global regional conflicts places a premium on the mobility of the U.S. armed forces. This is reflected in the stable size over the past several years of the USAF's procurement of commercial airlift services. Although World Airways' agreements with the USAF provide for full service contracts with certain minimum performance requirements, it has risks similar to an ACMI agreement because the USAF agreements are cost-plus contracts at attractive rates. 5 The USAF awards points to air carriers acting alone or through teaming arrangements in proportion to the number and type of aircraft such carriers make available to CRAF. World Airways utilizes such teaming arrangements to maximize the value of potential awards. World Airways leads a contractor teaming arrangement that enjoys a 44% market share of the USAF's overall commercial airlift requirement. During a period in which the U.S. military downsized substantially, World Airways' portion of the fixed USAF award increased from $15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the government's 1996-97 fiscal year. The current annual contract commenced on October 1, 1996 and expires on September 30, 1997. These contracts provide for a fixed level of scheduled business from the U.S. Air Force with opportunities for additional short-term expansion business on an ad hoc basis as needs arise. Due to the utilization of a significant number of its aircraft under multi-year contracts and other contractual commitments, it is unlikely that World Airways will be able to accept all of the available expansion business. Although overall Defense Department spending is being reduced, the level of the U.S. Air Force's contract awards has remained relatively constant in recent years. World Airways, however, cannot determine how future cuts in military spending may affect future operations with the U.S. Air Force. Although World Airways' customers bear the financial risk of filling the World Airways' aircraft with passengers or cargo, World Airways can be affected adversely if its customers are unable to operate its aircraft profitably, or if one or more of World Airways' customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances, World Airways can be adversely affected by receiving delayed or partial payments or by receiving customer demands for rate and utilization reductions, flight cancellations, and/or early termination of their agreements. As a result of these and other contracts, World Airways had an overall contract backlog at December 31, 1996 of $468.0 million, compared to $462.0 million at December 31, 1995. Approximately $253.5 million of the backlog relates to 1997 operations. World Airways' backlog for each contract is determined by multiplying the minimum number of block hours (defined as the elapsed time computed from the moment the aircraft first moves under its own power at the point of origin to the time it comes to rest at its destination) guaranteed under the applicable contract by the specified hourly rate under such contract. Approximately 60% and 20% of the backlog relates to its multi-year contracts with Malaysian Airlines and Philippine Airlines, respectively. While the percentage of its 1997 block hour capacity that is currently under contract exceeds the comparable percentage in the past several years, World Airways still has substantial uncontracted capacity in the third and fourth quarters of 1997. In addition, a significant portion of World Airways' current contracts expire near the end of 1997. Although there can be no assurance that it will be able to secure additional business to reduce this excess capacity, World Airways is actively seeking customers for 1997 and beyond. World Airways' financial results and financial condition would be affected adversely if it is unable to secure additional business to reduce this excess capacity. The information regarding major customers and foreign revenue is contained in Note 18 "Segments and Major Customers" of the Company's "Notes to Financial Statements" in Item 8. Information concerning the classification of products within the air transportation industry comprising 10% or more of World Airways' operating revenues from continuing operations is presented in the following table (in millions):
Year Ended December 31, --------------------------------- 1996 1995 1994 ---- ---- ---- Flight Operations - Passenger $ 257.6 $ 168.0 $ 134.6 Flight Operations - Cargo 39.3 64.6 39.3
COMPETITION The market for outsourcing air passenger and cargo ACMI services is highly competitive. Certain of the passenger and cargo air carriers against which World Airways competes possess substantially greater financial resources and more extensive facilities and equipment than those which are now, or will in the foreseeable future become, available to World Airways. World Airways believes that the most important bases for competition in the ACMI outsourcing business are the age of the aircraft fleet, the passenger, payload and cubic capacities of the 6 aircraft, and the price, flexibility, quality and reliability of the air transportation service provided. Competitors in the ACMI outsourcing market include MartinAir Holland, Tower Air and American TransAir and all-cargo carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk, and scheduled and non-scheduled passenger carriers which have substantial belly capacity. The ability of World Airways to achieve the growth anticipated by its strategic plan depends upon its success in convincing major international airlines that outsourcing some portion of their air passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources. The allocation of military air transportation contracts by the USAF is based upon the number and type of aircraft a carrier, alone or through a teaming arrangement, makes available for use in times of national emergencies. The formation of competing teaming arrangements comprised of larger partners than those sponsored by World Airways, an increase by other air carriers in their commitment of aircraft to the emergency program, or the withdrawal of its current partners, could adversely affect the size of the USAF contracts, if any, which are awarded to World Airways in future years. SEASONALITY Historically, World Airways' business has been significantly affected by seasonal factors. During the first quarter, World Airways typically experiences lower levels of utilization and yields due to lower demand for passenger and cargo services relative to other times of the year. World Airways experiences higher levels of utilization and yields in the second quarter, principally due to peak demand for commercial passenger services associated with the annual Hadj pilgrimage. In 1997, World Airways' flight operations associated with the Hadj pilgrimage will occur from March 15 to May 20. Because the Islamic calendar is a lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days earlier each year relative to the Western (Gregorian) calendar. As a result, revenues resulting from future Hadj pilgrimage contracts will continue to shift from the second quarter to the first quarter over the next several years. World Airways believes that its contracts with Malaysian Airlines and the USAF should lessen the effect of these seasonal factors. The quarterly financial data is contained in Note 21 "Unaudited Quarterly Results" of the Company's "Notes to Financial Statements" in Item 8. NEW MD-11ER AIRCRAFT In 1996, World Airways entered into two 24-year leases with McDonnell Douglas to operate a new extended- range model of the McDonnell Douglas MD-11 (see "MD&A - Liquidity and Capital Resources - Capital Commitments"). The aircraft, known as the MD-11ER, is capable of flying nonstop between such cities as Zurich and Santiago, New York and Johannesburg, and Los Angeles and Shanghai. The jetliner's increased range is due to a combination of the following: engineering innovations; aerodynamics improvements that minimize aircraft drag; major reductions in the airframe weight; significantly increased fuel capacity; and a higher allowable maximum takeoff weight that provides the heavier fuel load without loss of payload. AVIATION FUEL World Airways' source of aviation fuel is primarily from major oil companies, under annual delivery contracts, at often frequented commercial locations, and from United States military organizations at military bases. World Airways' current fuel purchasing policy consists of the purchase of fuel within seven days in advance of all flights based on current prices set by individual suppliers. More than one supplier is under contract at several locations. World Airways purchases no fuel under long-term contracts nor does it enter into futures or fuel swap contracts. The air transportation industry in general is affected by the price and availability of aviation fuel. Both the cost and availability of aviation fuel are subject to many economic and political factors and events occurring throughout the world and remain subject to the various unpredictable economic and market factors that affect the supply of all petroleum products. Fluctuations in the price of fuel have not had a significant impact on World Airways' operations in recent years because, in general, its ACMI contracts with its customers limit World Airways' exposure to increases in fuel prices. However, a substantial increase in the price or the unavailability of aviation fuel could have a material adverse effect on the air transportation industry in general and the financial condition and results of operations of World Airways. 7 REGULATORY MATTERS World Airways is subject to government regulation and control under the U.S. laws and the laws of the various countries in which it operates. It is also governed by bilateral services agreements between the U.S. and the countries to which it provides airline service. World Airways is subject to Title 49 of the United States Code (the "Transportation Code"), under which the DOT and the Federal Aviation Administration (the "FAA") exercise regulatory authority. Additionally, foreign governments assert jurisdiction over air routes and fares to and from the U.S., airport operation rights, and facilities access. World Airways has periodically received correspondence from the FAA with respect to minor noncompliance matters. Most recently, as the FAA has increased its scrutiny of U.S. airlines, it was assessed a preliminary fine of $810,000 in connection with certain minor security violations by ground handling crews contracted by World Airways for services at foreign airport locations. In each of these instances, World Airways was in compliance with international regulations, but not the more stringent U.S. requirements. World Airways has taken steps to comply with the U.S. requirements and believes that any fines ultimately imposed by the FAA will not have a material adverse effect on the financial condition or results of operations of the company. World Airways is subject to the Transportation Code, under which the DOT and the FAA exercise regulatory authority. Generally, the FAA has regulatory jurisdiction over flight operations, including equipment, personnel, maintenance and other safety matters. To assure compliance with its operational standards, the FAA requires air carriers to obtain operating, airworthiness and other certificates, which may be suspended or revoked for cause. The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. The DOT maintains authority over international aviation, subject to review by the President of the U.S. and has jurisdiction over unfair trade practices and consumer protection policies on domestic and international routes and fares. Additionally, foreign governments assert jurisdiction over air routes and fares to and from the U.S., airport operation rights and facilities access. World Airways is subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including flight operations, equipment, aircraft noise, ground facilities, dispatch, communications, training weather observation, flight time, crew qualifications, aircraft registration and other matters affecting air safety. The FAA requires each air carrier to obtain an operating certificate and operations specifications authorizing the carrier to operate to particular airports on approved international routes using specified equipment. These certificates and specifications are subject to amendment, suspension, revocation or termination by the FAA. In addition, all of World Airways' aircraft must have and maintain certificates of airworthiness issued or approved by the FAA. World Airways currently holds an FAA air carrier operating certificate and operations specifications under Part 121 of the Federal Aviation Regulations. The FAA has the authority to suspend temporarily or revoke permanently the authority of World Airways or its licensed personnel for failure to comply with regulations promulgated by the FAA and to assess civil penalties for such failures. Under the Airport Noise and Capacity Act of 1990 and related FAA regulations, World Airways' aircraft fleet must comply with certain Stage 3 noise restrictions by certain specified deadlines. All of its aircraft currently meet the Stage 3 noise reduction requirement, which is currently the most stringent FAA noise requirement. FAA regulations require compliance with the Traffic Alert and Collision Avoidance System ("TCAS"), approved airborne windshear warning system and aging aircraft regulations. Additional laws and regulations have been proposed from time to time which could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations. Laws and regulations have been considered from time to time that would prohibit or restrict the ownership and transfer of airline routes or slots. There is no assurance that laws and regulations currently enacted or enacted in the future will not adversely affect World Airways' ability to maintain its current level of operating results. Several aspects of airline operations are subject to regulation or oversight by Federal agencies other than the DOT or FAA. For instance, labor relations in the air transportation industry are generally regulated under the Railway Labor Act, which vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines and labor unions arising under collective bargaining agreements. In addition, World Airways is subject to the jurisdiction of other governmental entities, including (i) the FCC regarding its use of radio facilities pursuant to the Federal Communications Act of 1934, as amended, (ii) the Commerce Department, the Customs Service, the Immigration and Naturalization Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture regarding its international operations, (iii) the Environmental Protection Agency (the 8 "EPA") regarding compliance with standards for aircraft exhaust emissions and (iv) the Department of Justice regarding certain merger and acquisition transactions. The EPA regulates operations, including air carrier operations, which affect the quality of air in the U.S. World Airways has made all necessary modifications to its operating fleet to meet fuel-venting requirements and smoke emissions standards issued by the EPA. World Airways' international operations are generally governed by the network of bilateral civil air transport agreements providing for the exchange of traffic rights between governments which then select and designate air carriers authorized to exercise such rights. In the absence of a bilateral agreement, such international air services are governed by principles of comity and reciprocity. Bilateral provisions pertaining to the charter services in which it is primarily engaged vary considerably depending on the particular country. Most bilateral agreements into which the U.S. has entered permit either country to terminate the agreement with one year's notification to the other. In the event a bilateral agreement is terminated, international air service between the affected countries is governed by the principles of comity and reciprocity. Certain airports served by World Airways are subject to slot allocations administered by the governments of the countries in which such airports are located or by coordinating committees comprising airline representatives. A "slot" is an authorization to take off or land at the designated airport within a specified time window. In the past, World Airways has generally been successful in obtaining the slots it needs in order to conduct planned operations. There can be no assurance, however, that it will be able to do so in the future because, among other factors, government policies regulating the distribution of slots, both in the U.S., and in foreign countries, are subject to change. Pursuant to federal law, no more than 25% of the voting interest in World Airways may be owned or controlled by foreign citizens. In addition, under existing precedent and policy, actual control must reside in U.S. citizens. As a matter of regulatory policy, the DOT has stated that it would not permit aggregate equity ownership of a domestic air carrier by foreign citizens in an amount in excess of 49%. World Airways fully complies as of the date hereof with these U.S. citizen ownership requirements. Due to its participation in CRAF, World Airways is subject to inspections approximately every two years by the military as a condition of retaining its eligibility to perform military charter flights. The last such inspection was undertaken in 1996 and the next is anticipated to occur in 1998. As a result of such inspections, it has been required to implement measures, such as the establishment of a crew resource management course, beyond those required by the DOT, FAA and other government agencies. The USAF may terminate its contract with World Airways if it fails to pass such inspection or otherwise fails to maintain satisfactory performance levels, if it loses its airworthiness certificate or if the aircraft pledged to the contracts lose their U.S. registry or are leased to unapproved carriers. World Airways believes it is in compliance in all material respects with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension or revocation of any of its DOT or FAA authorizations or certificates could have a material adverse effect upon World Airways. World Airways also is subject to state and local laws and regulations at locations where it operates and the regulations of various local authorities which operate the airports it serves. Certain airport operations have adopted local regulations which, among other things, impose curfews and noise abatement regulations. While it believes it is currently in compliance in all material respects with all appropriate standards and has all required licenses and authorities, any material non-compliance by World Airways therewith or the revocation or suspension of licenses or authorities could have a material adverse effect on World Airways. EMPLOYEES As of March 1, 1997, World Airways had 726 full time employees classified as follows:
Number of Classification Full-Time Employees -------------- ------------------- Management..................................................... 9 Administrative and Operations.................................. 324 Cockpit Crew (including pilots)................................ 323 Flight Attendants (active)..................................... 70 --- Total Employees............................................ 726 ===
9 World Airways' cockpit crew members, who are represented by the International Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year collective bargaining agreement that will become amendable in June 1998. World Airways' flight attendants are also represented by the Teamsters under a collective bargaining agreement that became amendable in 1992. The parties exchanged their opening contract proposals in 1992. In June 1996, World Airways signed a new four year labor agreement with the Teamsters which provides for retroactive pay increases for the flight attendants and work rule flexibility and lengthened duty time rules for World Airways. The agreement was ratified by the flight attendants in August 1996. World Airways' flight attendants challenged the use of foreign flight attendant crews on its flights for Malaysian Airlines and Garuda Indonesia which has historically been World Airways' operating procedure. World Airways is contractually obligated to permit its Southeast Asian customers to deploy their own flight attendants. While the arbitrator in this matter recently denied the Union's request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that World Airways' contract with its flight attendants requires it to first actively seek profitable business opportunities that require using its flight attendants, before World Airways may accept wet lease business opportunities that use the flight attendants of its customers. World Airways can provide no assurances as to how the imposition of this requirement will affect its financial condition and results of operations. World Airways' aircraft dispatchers are represented by the Transport Workers Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995, the parties reached agreement with respect to a new four-year contract. This contract was ratified on February 7, 1996. Fewer than 12 Company employees are covered by this collective bargaining agreement. World Airways is unable to predict whether any of its employees not currently represented by a labor union, such as its maintenance personnel, will elect to be represented by a labor union or collective bargaining unit. The election of such employees for representation in such an organization could result in employee compensation and working condition demands that could have a material adverse effect on the financial results of World Airways. INTELIDATA InteliData was incorporated in order to effect the merger ("Merger") of US Order and Colonial Data. The Merger was announced on August 5, 1996, when US Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement"). On November 7, 1996, the Merger was consummated with each share of outstanding US Order and Colonial Data common stock being exchanged for one share of InteliData common stock. The Merger was treated as a purchase of Colonial Data by US Order. At December 31, 1996, WorldCorp's ownership in InteliData was 28.9%. Following this Merger, the Company reports its proportionate share of InteliData's financial results using the equity method of accounting. Effective September 30, 1996, US Order acquired the business of Braun, Simmons & Co. ("Braun Simmons") for approximately $7.0 million consisting of cash and US Order common stock and including US Order transaction costs pursuant to the merger of Braun Simmons into US Order. Braun Simmons was an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions. The acquisition expands InteliData's product line for both large and small financial institutions. The business of InteliData consists of the businesses previously conducted by US Order, Colonial Data and Colonial Data's subsidiaries. InteliData develops and markets products and services for the telecommunications and financial services industries through its three business divisions: consumer telecommunications, electronic commerce and interactive services. The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by the regional Bell operating companies ("RBOCS") and other telephone companies ("telcos"). InteliData has concentrated its product development and marketing efforts on products that support Caller ID and other emerging intelligent network services, including a smart telephone, the Telesmart 4000/Intelifone(TM), which provides consumers call management features and the ability to access numerous network services and interactive applications via telephones. InteliData currently offers a line of Caller ID adjunct units and telephones with integrated Caller ID, small business telecommunications systems and high-end consumer telecommunications products for commercial customers and provides other services that support the development and implementation of intelligent network services. The electronic commerce division develops and markets products and services to assist financial institutions in their home banking and electronic bill payment initiatives. The products are designed to assist consumers in accessing and transacting business with their banks and credit unions electronically, and to assist financial institutions in connecting to and transacting business with third parties, including data processors and billers. The services focus on a financial institution's back office, offering outsourcing for data entry, telemarketing, customer service and technical support. InteliData currently receives its electronic commerce revenues largely from the sale of products and services to Visa International Service Association, Inc. ("Visa") member banks. 10 On August 1, 1994, US Order sold its bill payment operations and technology (the "Visa Bill-Pay System") to Visa for cash and the right to future royalty payments which are based on the number of customers utilizing the Visa Bill-Pay System. InteliData's right to future royalty payments from Visa is subject to a cumulative offset amount aggregating $880,000 and, accordingly, InteliData does not expect to begin receiving royalty payments until at least the second half of 1997. Visa formed Visa InterActive, Inc. ("Visa InterActive") around the technology and personnel acquired from US Order, including 54 former employees of US Order. Visa InterActive also has agreed, through 2000, to inform Visa member banks that InteliData is a preferred provider of certain electronic commerce products and services. The interactive services division was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communication Systems ("PCS") devices and personal digital assistants ("PDAs"). InteliData intends to sell interactive applications directly to end users and through other companies, including telcos and wireless communications companies. InteliData's current interactive applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail, a personal directory data save and restore function and information services such as news, weather, sports scores, stock quotes, lottery results and horoscopes. INDUSTRY BACKGROUND InteliData maintains operations in three primary markets: consumer telecommunications, electronic commerce and interactive services. Consumer Telecommunications. The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by RBOCs and other telcos. Deregulation and technological advances have intensified competition among existing operators of telecommunication networks and encouraged the entrance of new service providers. In addition, there are mergers pending among certain RBOCs and further industry consolidation may occur in the future. In the United States, competition among RBOCs, other telcos and long distance carriers and new service providers that have entered the local and long distance markets, has increased and may increase further as a result of the Telecommunications Act of 1996 (the "Telecommunications Act") or industry consolidation. RBOCs and other telcos are responding to increasing competition by, among other things, introducing value-added, intelligent network services. In order to deploy intelligent network services, the telcos have been upgrading their telecommunications networks to support a set of standards, known as the Intelligent Networks ("IN"). IN supports open, distributed switching and processing capabilities and allows the telcos to create, modify and deploy new services quickly and economically. In addition, Bell Communications Research, Inc. has developed the Analog Display Services Interface ("ADSI"), a standard protocol for the simultaneous transmission of data and voice information between an information source and a subscriber's telephone or other communications device such as a smart telephone. One of the first intelligent network service offerings by RBOCs and telcos was Caller ID, a service that provides information about the incoming call (including the number and name of the caller and the time and date of the call) enabling that information to be displayed on a device located near the telephone (in the case of an adjunct unit) or on a display screen located on the telephone (in the case of an integrated Caller ID telephone). InteliData estimates that the current penetration rate of Caller ID service is approximately 15% of the total subscribers in those areas in the United States that have Caller ID capabilities. By deploying the ADSI protocol in the telecommunications network, RBOCs and other telcos will be able to offer additional intelligent network services and third-party interactive applications. ADSI-based services will include Caller ID on Call Waiting together with call disposition. By subscribing to Caller ID on Call Waiting with call disposition, a subscriber who receives a call waiting signal can look at the display screen on the smart telephone and see the name and number of the calling party before deciding whether to answer the call, send a prerecorded message telling the calling party to wait, forward the call to voice mail or drop the line. Additional services which can be supported through ADSI include on-line directory assistance, e-mail, paging, news, weather, stock quotes and other information. The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act of 1996 has effected basic changes in the telecommunications regulatory 11 scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovation to U.S. telephone customers in the United States. The Federal Communications Commission ("FCC") issued its first major order under the Telecommunications Act in August 1996 which constitutes the FCC's initial measures to implement sections of the Telecommunications Act relating to interconnection between carriers and the provision of access to unbundled services. However, this order has been challenged and, as of March 1, 1997, the effectiveness has been stayed in the U.S. Court of Appeals for the Eighth Circuit. In December 1996, the FCC issued a Notice of Proposed Rule Making which suggests rules concerning the implementation of the Telecommunications Act provisions relating to RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other emerging intelligent network services subject to certain conditions. InteliData is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or InteliData's business generally. Electronic Commerce. The electronic commerce division provides products and services to financial institutions whose processes and systems are subject to regulatory approvals. Electronic commerce is a developing marketplace. Financial institutions are expanding their electronic home banking services to permit customers not only to review historical account information, but also to engage in transactions such as paying bills and transferring funds. InteliData's future growth and profitability will depend, in part, upon consumer acceptance of electronic home banking. Interactive Services. The interactive services division provides SmartTime(R) services to customers delivering personalized information to a variety of small screen devices, including screen telephones, alpha-numeric pagers, PCS/cellular telephones and addressable personal communicators. The division provides operating online and batch interactive services directed at consumers of small screen devices. Although it builds some of its services, InteliData is essentially an aggregator of other data sources and purchases data from many of the same suppliers as its competitors. PRODUCTS AND SERVICES InteliData's business strategy is to develop products and services to meet the needs of its customers in each of its three markets: consumer telecommunications, electronic commerce and interactive services. InteliData develops products and services for the RBOCs and other telcos, financial institutions and their customers. InteliData strives to develop products with broad appeal that are easy-to-use, practical, inexpensive and built around common industry standards. InteliData believes that its products position InteliData to offer support services and interactive service applications which are expected to generate recurring monthly fee revenue. Consumer Telecommunications. Since introducing the first commercially available Caller ID unit in 1987, InteliData has developed and marketed Caller ID products with increased functionality to meet the needs of its RBOC and other telco customers. A substantial majority of InteliData's revenues are derived from the sale and leasing of its Caller ID products. InteliData's other consumer telecommunications products and services include integrated telephones, ADSI-compatible smart telephones, small business telecommunication systems, and repair and refurbishment. Electronic Commerce. InteliData's strategy in the electronic commerce market is to support financial institutions by providing products and services that help them deploy home banking to their customers. In addition, InteliData supports Visa InterActive with products and services which facilitate bill payment and bill presentment. InteliData's products and services are designed to provide consumers the ability to access and utilize their bank account information. They are also designed to provide financial institutions with connectivity to the Visa InterActive host computer system as well as to other third party payment processors. Interactive Services. InteliData's strategy is to deploy its interactive services on its smart telephones as well as other smart telephones and small screen devices, such as alpha-numeric pagers and PDAs, manufactured by other companies. InteliData intends to sell interactive service applications to RBOCs, telcos and end users through retail markets and direct sales programs. InteliData's current interactive service applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail and a personal directory data save and restore function. Additionally, InteliData offers services providing news, weather, stock quotes, sports 12 scores, and horoscopes. These are applications that will allow the smart telephone user to receive periodically updated application-specific information in an on-line format. In the future, InteliData expects to expand its interactive services by offering two-way internet e-mail, which will enable the user to not only send an e-mail message to an internet address, but also to receive an e-mail message from an internet address. As of December 31, 1996, InteliData has not generated revenues from its interactive services division. MARKETING AND DISTRIBUTION InteliData sells its products and services to telephone operating companies, retailers and financial institutions in the United States. Revenues from InteliData's joint venture partner, an RBOC and an electronic banking service provider, were approximately 20%, 13% and 11% of total revenues for the year ended December 31, 1996. Consumer Telecommunications. InteliData markets its consumer telecommunications products and services through employees in its direct sales force and marketing department as well as independent sales representative firms. InteliData's distribution strategy is to make its products available to potential end users through multiple distribution channels including: direct fulfillment arrangements with RBOCs, direct marketing, direct sales, and retail. InteliData maintains direct fulfillment arrangements with Ameritech Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell Atlantic"), BellSouth Corporation ("BellSouth"), NYNEX Corporation ("NYNEX") and Pacific Bell ("PacBell") and continually seeks to strengthen its current telco marketing alliances and to develop new alliances. Electronic Commerce. There are three distinct marketing channels within the electronic commerce market: bill payment, bill presentment and account access. Visa InterActive has designated the Company as a preferred provider of certain of the Company's bill payment products and services. One of the Company's strategies with Visa is to increase the number of subscribers for the Company's bill pay products and services with the goal of growing monthly fee revenues. Visa is the largest consumer payment system in the world. Visa markets its bill payment and bill presentment services directly to its member banks. Once a Visa member bank signs a commitment to deploy electronic commerce services through the Visa Bill-Pay System, an extended roll-out period of the bank's electronic commerce services begins. In March 1996, Microsoft, Inc. entered into an agreement with Visa InterActive to include an interface that will allow users of Microsoft's Money personal finance software package to access Visa InterActive's electronic bill payment system. Royalties due InteliData from Visa will be equal to $.666 per month per bill pay customer whose transactions are processed by Visa InterActive's bill pay system. InteliData's right to receive these quarterly royalty payments is subject to a cumulative offset of $73,000 per quarter beginning January 1, 1995 through December 31, 1997. As of December 31, 1996, Visa InterActive had announced commitments from 69 financial institutions for the Visa Bill-Pay System. However, due to the time necessary to install and implement the system for each bank, only 58 banks have rolled out the system in small, limited markets and have enrolled a relatively small number of customers. There can be no assurances as to the banks' ultimate success with this program or the number of customers that ultimately will use the program. Announced customers of Visa InterActive include Merrill Lynch, Fleet Bank, First Union, Fidelity Investments, First Tennessee Bank National Association, Star Bank, Zions Bank and Deposit Guarantee. InteliData believes its relationship with Visa InterActive keeps the Company in close contact with Visa, its banks and the end users of electronic commerce services. InteliData believes that this relationship will enable the Company to continue to develop complementary products and services, such as applications software for Visa member banks, and potentially enable it to have access to Visa's worldwide member banks. There can be no assurance, however, that InteliData's marketing efforts will be successful or that Visa will not reassess its commitment to InteliData at any time in the future. InteliData's marketing strategy in the bill presentment channel is to offer its bill presentment products and services directly to financial institutions as well as to billers using the Visa ePay system. In December 1995, Visa commenced its ePay electronic bill-payment programs with several major U.S. financial institutions. Visa's two-way ePay standard allows financial institutions to implement a fully electronic, seamless, back-end bill payment system. The ePay system is patented in the United States and is expected to significantly reduce remittance-processing 13 inefficiencies for participating financial institutions and organizations that bill for goods and services. In addition, the system will enable billers to send invoices electronically to their customers who pay bills on-line. InteliData also is developing products and services for financial institutions who want to provide their customers with products and services that allow customers the ability to access certain information from their banking accounts, much as they do with touch tone telephones today, but over personal computers and screen based telephones as well. Interactive Services. InteliData's strategy in the interactive services market is to build a subscriber base for its bundle of interactive service applications on its own smart telephones and on small screen devices manufactured by other companies. In this regard, InteliData gains access to telco customers through its existing relationships with the RBOCs and other telcos. InteliData believes that the marketing of smart telephones and the interactive services will be more successful when a consumer can subscribe to network services and purchase the telephone from a single source, especially when the payment for the equipment can be made either on an installment basis or by monthly lease payments through the subscriber's telephone bill. In 1996 InteliData began selling its interactive content through retail stores and related outlets. InteliData expects to be able to expand this channel during 1997 and also make its services available on telephones and other small screen devices manufactured by others. InteliData has identified additional distribution channels for its interactive services that it will begin to develop during 1997 such as wireless communications or paging companies. COMPETITION Consumer Telecommunications. The market for InteliData's products and services is highly competitive and subject to increased competition resulting from rapid technological change as well as increased competition resulting from changes in the telecommunications industry consolidation and the emergence of new market entrants. At present, InteliData's principal competitors in the market for Caller ID products are CIDCO Incorporated ("CIDCO"), Lucent Technologies, Inc. ("Lucent") and Northern Telecom, Ltd. ("Northern Telecom"). InteliData's Caller ID products also compete with Caller ID telephones offered by Panasonic Co. ("Panasonic"), Sony Corp. ("Sony"), Thomson Consumer Electronics, Inc. ("Thomson") and US Electronics, Inc. ("US Electronics") and other companies. The smart telephone marketed by InteliData is subject to competition from smart telephones marketed by Philips Electronics, N.V. ("Phillips"), Northern Telecom and CIDCO as well as other emerging platforms for interactive service applications delivered through personal computers and cable television. InteliData's competitors, including Philips and Northern Telecom, have already introduced smart telephones that include technological features incorporated in its Telesmart 4000 smart telephone product. Visa InterActive and Philips have announced that they have entered into a letter of intent to collaborate on a series of projects, including the development of a Visa InterActive banking application on a Philips smart telephone. Any bill pay transaction generated by a Phillips smart telephone that is processed by Visa InterActive will potentially generate a royalty payment due to InteliData from Visa. InteliData expects competition in the markets for its consumer telecommunications products and services to increase in the future and expects competition from existing and new competitors, possibly including RBOCs, other telcos or other current customers, as well as from network switch-based services and from the increased application of cellular technology. InteliData's primary current and potential competitors in the market for its consumer telecommunications products and services have substantially greater financial, marketing and technical resources than InteliData. Increased competition could materially and adversely affect InteliData's results of operations through, among other things, price reductions and loss of market share. InteliData's Telesmart 4000/IntelifoneTM smart telephone product incorporates newer DSP technology. Although it is currently unaware of any efforts by its competitors to deploy DSP technology in their smart telephones, InteliData expects that its competitors will attempt to replicate the Telesmart 4000/IntelifoneTM smart telephone DSP design if it is commercially successful. InteliData expects that as the market for smart telephones grows, it will face competition from traditional personal computer on-line service providers, such as America Online, Inc., Prodigy, Inc. and CompuServe Corp, as well as from personal computer software companies such as Intuit, Inc. ("Intuit") and Novell, Inc. 14 InteliData competes with a large number of competitors for its repair services and other services supporting the development and implementation of intelligent network services. Several of InteliData's competitors in the market for such services have substantially greater financial, marketing and technological resources than InteliData. There can be no assurance that InteliData will be able to continue to compete successfully against its existing competitors or that it will be able to compete successfully against new competitors. InteliData believes that the principal competitive factors in the markets for its consumer telecommunications products and services are knowledge of the requirements of the various RBOCs and other telcos, product reliability, product design, the quality of its repair and support services, customer service and support, and price relative to performance. InteliData competes in the market for its consumer telecommunications products and services principally on the basis of its relationships with telcos, product design and reliability, low product pricing and flexibility of marketing alternatives, including leasing. Electronic Commerce. InteliData's electronic commerce products and services compete with services offered by a number of competitors and competition may intensify as a result of new market entrants. Banks such as Citibank, NationsBank and Bank of America have developed electronic commerce products for their own customers and, in the future, may offer these services to other banks. Non-banks, such as EDS and First Data Corporation, also may develop electronic commerce products to offer to banks. Computer software and data processing companies, such as Intuit, also offer electronic commerce services. Visa competes with other organizations, including MasterCard International, Inc. ("MasterCard"), which offers its Masterbanking electronic commerce service through CheckFree Corporation. InteliData's success in electronic commerce depends in large part on the ultimate success of Visa and on the ability of Visa InterActive and Visa member banks to successfully market electronic commerce to their customers. In addition, the success of InteliData's electronic commerce strategy depends on the ability of Visa member banks to maintain market share in an environment of disintermediation. Many competitors exist for InteliData's various banking products, including other manufacturers of touch-tone response systems, such as Periphonics Corporation and Syntellect Inc., other financial software companies, such as ACI, and financial services software and service companies, such as Hogan Systems, Inc. and M&I Data Services, Inc. InteliData believes that its primary competition for its customer support services to the customer will come from financial institutions and third parties that choose to offer customer support services either directly through Visa's customer support messaging standard ("CSMS") product or on their own. InteliData expects that competition in all of these areas will increase in the near future. InteliData believes that a principal competitive factor in its markets is the ability to offer an integrated system, in conjunction with Visa, of various electronic commerce products and services. Competition will be based upon price, performance, customer service and the effectiveness of marketing and sales efforts. InteliData competes in its various markets on the basis of its relationships with strategic partners, by developing many of the products required for complete solutions, and by building reliable products and offering those products at reasonable prices. Interactive Services. The industry for interactive services is emerging and there is potential for a number of companies to enter the marketplace. Currently, InteliData's primary competitor is SmartServe Online, Inc. PRODUCT DEVELOPMENT InteliData operates in industries that are rapidly growing and changing. In efforts to improve InteliData's position with respect to its competition, InteliData has increased its product development efforts by increasing the number of personnel in the product development department and focusing management efforts in the area of product development. InteliData's product development efforts are focused on new products that support intelligent network services, product enhancements, international standards compliance and the continued improvement of hardware components to reduce manufacturing costs. The electronic commerce division's product development efforts are focused on software and systems for electronic banking. In particular, InteliData applies its research and development expenditures to audio and data transaction processing and messaging software and customer support services. The electronic commerce industry is characterized by rapid change. To keep pace with this change, InteliData maintains an aggressive program of new product development and dedicates considerable resources to research and development to further enhance its existing products and to create new products and technologies. InteliData's ability to attract and retain highly skilled research 15 and development personnel is important to InteliData's continued success. The interactive services division's product development efforts are focused on expanding the services and the range of content that can be provided as well as the number of devices to which the services can be delivered. MANUFACTURING InteliData's primary equipment manufacturer is STL and certain of its affiliates, which have ISO 9000 series certified facilities located in Hong Kong and the People's Republic of China, for the manufacture of its Caller ID units, smart telephones and other products. In addition, InteliData has established relationships with other ISO 9000 series certified Asian manufacturers for its integrated corded and cordless telephones and small business telecommunications products. The facilities of InteliData's suppliers are supplemented, in part, by its own limited manufacturing facilities in Connecticut. The availability or cost of its products may be affected by political, economic or labor conditions in the countries where those products are manufactured, including the 1997 return of Hong Kong to China, by fluctuations in currency exchange rates and by other factors. In addition, a change in the tariff structure or other trade policies of the United States could adversely affect InteliData's foreign manufacturing strategies. InteliData does not have any production contracts with its assembly contractors. InteliData's principal manufacturer performs comprehensive inspection and statistical process control testing, utilizing its internally designed automated testing equipment. To date, InteliData has not experienced significant returns of defective products. In the United States, InteliData's manufacturing operations are limited to the testing, quality control and shipping of finished products and the purchase and inventory management of two key components of its products. The key components used in InteliData's products are currently being purchased from two sources, except for its application specific integrated circuit ("ASIC") chips, which are purchased from a single source. Although it believes it could develop other sources for each of the components for its products, the process could take several months, and the inability or refusal of any such source to continue to supply components could have a material adverse effect on InteliData pending the development of an alternative source. GOVERNMENT REGULATION Consumer Telecommunications. The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act has effected basic changes in the telecommunications regulatory scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovations to telephone customers in the United States. The FCC issued its first major order under the Telecommunications Act in August 1996, which constitutes the FCC's initial measures to implement certain sections of the Telecommunications Act relating to interconnection between carriers and the provision of access to unbundled services. However, this order has been challenged and, as of March 1, 1997, the effectiveness of some of its provisions has been stayed in the U.S. Court of Appeals for the Eighth Circuit. In December 1996, the FCC issued a Notice of Proposed Rule Making which suggests rules concerning the implementation of the Telecommunications Act provisions relating to the RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other intelligent network services. The Company is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or InteliData's business generally. In the United States, Caller ID and other intelligent network services offered by telcos are subject to federal and state regulation. Although Caller ID is currently available in all 50 states and the District of Columbia. However, during the past several years, protests by special interest groups and regulatory concerns regarding the privacy aspects of the service have been effective in both slowing down the regulatory approval process and, in most states, requiring free per-call or per-line call blocking to be offered by the telcos, thereby allowing a caller to prevent the display of his or her name and number. 16 An FCC order, which rules promulgated thereunder became effective December 1, 1995 (the "FCC Order"), requires all U.S. telephone service providers with SS7 switching architecture to transmit to each other without charge Caller ID number information on interstate calls within the United States (except for public pay phones and party lines). The FCC's order also requires that telcos that offer Caller ID service must provide to their telephone subscribers without charge a per-call blocking mechanism to block the transmission of their Caller ID information on interstate calls and must inform subscribers that their telephone numbers may be identified to a called party and how to use this blocking capability. Although the FCC Order was implemented December 1, 1995, several factors may delay, prevent or substantially limit the implementation or market acceptance of Caller ID. The availability of Caller ID service in a particular area requires end-to-end interconnection of SS7 networks between telcos and other carriers. Further, the FCC Order requires telcos to offer free per-call blocking for interstate calls to all customers to protect privacy interests and permits state public utility commissions to authorize per-line blocking for interstate calls. Such blocking, if widely adopted, could limit the usefulness and marketability of the Caller ID service. The California Public Utilities Commission and AT&T Corp. ("AT&T") filed petitions for review of the FCC Order in federal court challenging portions of the FCC Order. Although the FCC Order withstood that particular challenge, other parties have also objected to, sought delays in the implementation of or sought clarification of the FCC Order. In addition, in the future, Caller ID service may be subject to additional state and federal legislation, regulation and court challenges. InteliData is unable to predict what effect, if any, further legislation, regulation, court challenges or other objections may have on the FCC Order or Caller ID service. InteliData's smart telephone products are subject to regulation by the FCC. Among other requirements, its smart telephones must comply with Parts 15 and 68 of the FCC's regulations. Electronic Commerce. The banking market which InteliData has targeted for marketing is highly regulated. The banking industry, although it has recently undergone significant deregulation, remains quite regulated at both the federal and state levels. Interpretation, implementation or revision of banking and telecommunications regulations can accelerate or hinder the ultimate success of InteliData and its products. PATENTS, PROPRIETARY RIGHTS AND LICENSES InteliData holds limited patent or registered intellectual property rights with respect to its products. It has been issued a patent for its "Block the Blocker" feature and has also applied for a patent on certain aspects of its Caller ID on Call Waiting product. However, there can be no assurance that a patent will be issued to InteliData for its Caller ID on Call Waiting product or that such patent, if issued, will afford effective protection of its technology. InteliData filed for patents on certain new features developed by itself for use in the ADSI smart telephone and certain of its transaction processing technology, but there can be no assurances that such patents will be granted, or if granted, will have any commercial value. InteliData additionally relies on trade secret laws to establish and maintain its proprietary rights to its products. Although InteliData has obtained confidentiality agreements from its key executives and engineers in its product development group, there can be no assurance that third parties will not independently develop the same or similar alternative technology, obtain unauthorized access to its proprietary technology or misuse the technology to which it has granted access. InteliData has rights to practice the inventions under certain of Lucent's Caller ID patents. These patents are also licensed to others, including InteliData's competitors. Lucent receives royalties from sales and leases of InteliData's Caller ID products other than to Lucent. The Lucent license agreement has no expiration date but is terminable by Lucent for breach on two months' written notice unless within such time all specified breaches have been remedied. If the Lucent license were terminated and InteliData were unable to negotiate a new patent license agreement with Lucent, InteliData would no longer be authorized to manufacture or sell Caller ID products in the United States other than to the RBOCs and to Lucent. Additionally, under the agreement, InteliData granted Lucent a non-exclusive, royalty-free license to all patents on inventions which are improvements or modifications based upon the technology licensed from Lucent. 17 InteliData does not believe that its products and services infringe on the rights of third parties. From time to time, third parties assert infringement claims against InteliData. There can be no assurance that any such assertion will not result in costly litigation or require it to cease using, or obtain a license to use, intellectual property rights of such parties. EMPLOYEES At December 31, 1996, InteliData had approximately 348 employees, of whom 327 were full-time. Of the employees, 62 were engaged in product development or research and development, 104 were engaged in customer service, and 44 were engaged in selling and marketing. InteliData has no collective bargaining agreements with its employees and believes that its relationship with its employees is good. 18 ITEM 2. PROPERTIES FLIGHT EQUIPMENT At December 31, 1996, World Airways' aggregate operating fleet consisted of thirteen leased aircraft as follows (see Note 13 "Long-Term Obligations" of the Company's "Notes to Consolidated Financial Statements" in Item 8):
Capacity ------------------------------------ Aircraft (a) Passenger (seats)(b) Cargo (Tons) Total (c) ---------------------------- -------------------- ------------ --------- McDonnell Douglas MD-11 409 -- 4 McDonnell Douglas MD-11F -- 95 1 McDonnell Douglas MD-11CF 410 90 2 McDonnell Douglas MD-11ER 409 -- 2 McDonnell Douglas DC10-30 350 -- 3 McDonnell Douglas DC10-30CF 380 65 1 ---- Total 13
Notes (a) "F" aircraft are freighters, "CF" are convertible freighters and may operate in either passenger or freight configurations. "ER" aircraft maintain extended-range capabilities. Aircraft with no letter designation are passenger-only aircraft. (b) Based on standard operating configurations. Other configurations are occasionally used. (c) Lease terms expire between 1997 and 2020 (assuming exercise of all lease extensions). GROUND FACILITIES WorldCorp and World Airways lease office space located near Washington Dulles International Airport which houses their corporate headquarters and substantially all of the administrative employees. In addition, World Airways leases additional office and warehouse space in Wilmington, Delaware; Philadelphia, Pennsylvania; New York, New York; Los Angeles, California; Kuala Lumpur, Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small offices and maintenance material storage space are leased at often frequented airports to provide administrative and maintenance support for commercial and military contracts. InteliData is headquartered in Herndon, Virginia, where it leases 30,000 square feet of office space from an unaffiliated party. InteliData also leases other, less significant sales and product development facilities. Additionally, InteliData owns a building located in New Milford, Connecticut. Certain environmental contamination occurred in the part of the facility formerly occupied by another tenant and the Connecticut Department of Environmental Protection performed a clean-up and removed such contamination. InteliData does not believe the foregoing will have a materially adverse effect on the company. ITEM 3. LEGAL PROCEEDINGS For a description of the Company's current legal proceedings, see Note 20, "Commitments and Contingencies" of the Company's "Notes to Consolidated Financial Statements" in Item 8. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security stockholders during the fourth quarter of 1996. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK & RELATED SECURITY HOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange under the symbol "WOA". The high and low sales prices of the Company's common stock, as reported on the New York Stock Exchange for each quarter in the last two fiscal years, are as follows:
Common Stock --------------------- High Low ---- ---- 1996 Fourth Quarter $ 6 1/2 $ 4 Third Quarter 6 3/4 4 1/2 Second Quarter 9 3/4 6 3/8 First Quarter 10 3/4 8 5/8 1995 Fourth Quarter $ 12 1/4 $ 7 7/8 Third Quarter 13 5/8 9 3/4 Second Quarter 12 7/8 8 3/4 First Quarter 10 7 1/4
In March 1992, the Company filed with the Securities and Exchange Commission ("SEC") a registration statement on Form S-3 registering $60.0 to $90.0 million of Convertible Subordinated Debentures due 2004 (the "Debentures"). On May 26, 1992, $65.0 million of the Debentures were issued. The Debentures are convertible into WorldCorp common stock at $11.06 per share and bear an annual interest rate of 7%. Semi-annual interest payments are due on May 15 and November 15. In September 1996, the Company issued $10.0 million, 10% Senior Subordinated Notes due September 2000 (The "Notes"). The Company did not declare any cash dividends in 1996 or 1995 and does not plan to do so in the foreseeable future. The Purchase Agreement governing the Notes, and the Indenture governing the Company's Debentures, in certain circumstances, restrict the Company from paying dividends or making distributions on its common stock. Under the terms of certain borrowing arrangements, WorldCorp granted to the lenders a security interest in all of the World Airways and InteliData shares owned by the Company. (See Notes 12 and 13 of the Company's "Notes to Consolidated Financial Statements" in Item 8). The approximate number of shareholders of record at March 15, 1997 is 2,518 and does not include those shareholders who hold shares in street name accounts. 20 ITEM 6. SELECTED FINANCIAL DATA WORLDCORP, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ -------- RESULTS OF OPERATIONS: - ---------------------- Operating revenues $ 313,672 $ 246,572 $ 182,147 $ 179,932 $ 180,416 Operating expenses 310,935 240,279 200,959(c) 203,177(e) 217,271 Operating income (loss) 2,737 6,293 (18,812) (23,245) (36,855)(f) Earnings (loss) from continuing operations before income taxes, minority interest, extraordinary item and change in accounting principle 8,509(a) 65,685(b) 10,496(d) (33,698) (44,692) Earnings (loss) from continuing operations before extraordinary item and change in accounting principle 7,437 64,158 8,308 (30,945) (42,891) Discontinued operations, net of tax and minority interest (19,191) (3,950) Extraordinary gain (loss) on acquisition of debt, net -- -- -- -- (3,253) Change in accounting principle -- -- -- -- (1,973) Net earnings (loss) (11,754) 60,208 8,308 (30,945) (48,117) Primary earnings (loss) per share: Continuing operations $ 0.45 $ 3.75 $ 0.54 $ (2.12) $ (3.02) Discontinued operations (1.15) (0.23) -- -- -- Gain (loss) from acquisition of debt -- -- -- -- (0.23) Change in accounting principle -- -- -- -- (0.14) Net earnings (loss) (0.70) 3.52 0.54 (2.12) (3.39) Fully diluted earnings (loss) per share: Continuing operations $ * $ 2.99 $ 0.53 $ * $ * Discontinued operations * (0.17) -- -- -- Gain (loss) from acquisition of debt -- -- -- -- -- Change in accounting principle -- -- -- -- -- Net earnings (loss) * 2.82 0.53 * * FINANCIAL POSITION: Cash and short-term investments $ 14,509 $ 78,661 $ 8,828 $ 17,584 $ 14,769 Total assets 178,963 202,089 98,536 98,119 93,346 Long-term obligations including current maturities 114,794 122,700 119,032 129,049 104,192 Common stockholders' deficit (40,337) (23,297) (88,193) (101,073) (76,362)
* Fully diluted earnings per share are anti-dilutive. (a) Includes the $41.3 million net gain realized on the issuance of stock by InteliData to effect the Merger of US Order and Colonial Data in November 1996; a $2.4 million net loss on other stock transactions of World Airways and InteliData; partially offset by approximately $23.6 million of one-time noncash Merger related charges (see Notes 4 and 5). (b) Includes the $51.3 million gain realized on US Order's offering in June 1995 and other stock transactions (see Note 5) and the $16.0 million gain realized on World Airways' offering in October 1995 (see Note 4). (c) Includes a $4.2 million reversal of excess accrued maintenance reserves associated with the expiration of three DC10 aircraft leases in 1994. (d) Includes a $27.0 million gain on the sale of 24.9% of World Airways common stock (see Note 4) and a $14.5 million gain on the sale of US Order's bill payment operations (see Note 5). (e) Includes $2.3 million of termination fees related to the early return of three DC10-30 aircraft. (f) Includes a $31.4 million loss on the sale of Key Airlines, Incorporated, and $4.1 million related to settlement of contract claims with the U.S. Government related to Operation Desert Shield/Desert Storm. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the operations of WorldCorp, Inc. ("WorldCorp" or "the Company") as reflected in its consolidated financial statements. These statements primarily include the accounts of World Airways, Inc. ("World Airways"). On February 28, 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of its ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, WorldCorp repurchased 5% of World Airways' common stock from MHS. In October 1995, World Airways completed an initial public offering in which 2,000,000 shares were issued and sold by World Airways and 900,000 shares were sold by WorldCorp. At December 31, 1996, WorldCorp and MHS owned 6,915,915 shares, or 61.3%, and 1,990,000 shares, or 17.6%, respectively, of World Airways' outstanding common stock. The remaining balance was publicly traded. The managements of WorldCorp and World Airways are currently exploring ways to maximize value for the shareholders of each company. WorldCorp is currently evaluating the feasibility of a disposition of its interest in World Airways through a secondary offering or a sale to a third party. There can be no assurances, however, that any such transactions will ultimately be consummated. On March 14, 1997, World Airways announced that Charles W. Pollard departed as President and Chief Executive Officer. Pursuant to the company's bylaws, T. Coleman Andrews, III, Chairman of the Board, will act as President on an interim basis pending the hiring of a new CEO. WorldCorp also had an ownership interest in US Order, Inc. ("US Order"), a company which provided products and services for two markets: home banking and smart telephones. In August 1996, US Order and Colonial Data Technologies Corp. ("Colonial Data") entered into an Agreement and Plan of Merger pursuant to which US Order and Colonial Data would be merged with and into a new public company, InteliData Technologies Corporation ("InteliData"). Pursuant to this Merger, which was consummated on November 7, 1996, InteliData became the successor corporation to US Order. The Merger was treated as a purchase of Colonial Data by US Order. InteliData concentrates on three markets: (1) consumer telecommunications; (2) electronic commerce; and (3) interactive services. At December 31, 1996, WorldCorp owned 9,179,273 shares of InteliData, or an ownership interest of approximately 28.9%. Following this Merger, the Company reports its proportionate share of InteliData's financial results using the equity method of accounting. During the third quarter of 1996, the Company announced its intention to purchase up to 2.5 million shares of its publicly-traded Common Stock pursuant to open market transactions. As of March 24, 1997, the Company had purchased 1,362,500 shares of its Common Stock for an aggregate cost of $7.8 million. WorldCorp does not intend to purchase any additional shares at this time. The Private Securities Litigation Reform Act of 1995 (the "Act") was recently passed by Congress. The Company desires to take advantage of the new "safe harbor" provisions in the Act. Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. OVERVIEW WorldCorp owns positions in companies that operate in two distinct business areas. World Airways (Nasdaq:WLDA) provides worldwide passenger and cargo air transportation to major international airlines, the U.S. Air Force, and international tour operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData (Nasdaq:INTD) concentrates on three markets: (1) consumer telecommunications; (2) electronic commerce; and (3) interactive services. The Company is a highly leveraged holding company. As a holding company, all of WorldCorp's funds are generated through its positions in World Airways and InteliData, neither of whom intend to pay dividends in the foreseeable future. In addition, World Airways' ability to pay dividends is currently restricted under a borrowing arrangement. As of December 31, 1996, WorldCorp has substantial parent company debt service obligations. In order to meet these obligations and its 22 general and administrative costs in 1997, the Company must use its existing cash and either sell shares of World Airways or InteliData, or issue additional debt or equity. Under the terms of certain borrowing arrangements, WorldCorp has pledged all of its shares of World Airways and InteliData as collateral for the borrowings. WORLD AIRWAYS World Airways is a leading global provider of long-range passenger and cargo air transportation outsourcing services to major international airlines under fixed rate, multi-year contracts. World Airways' passenger and freight operations employ 13 wide-body aircraft which are currently operated under contracts, primarily with Pacific Rim airlines. These contracts generally require World Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet lease"), while it's customers are responsible for a large portion of the other operating expenses, including fuel. World Airways' airline customers have determined that outsourcing a portion of their wide-body passenger and cargo requirements can be less expensive, and offer greater operational and financial flexibility, than purchasing new aircraft and additional spare parts required for such aircraft. World Airways also leads a contractor teaming arrangement that is the largest single supplier of commercial airlift services to the United States Air Force's Air Mobility Command ("U.S. Air Force" or "USAF"). In July 1996, World Airways restructured its business to focus on the growing and profitable ACMI contract services. As such, World Airways ceased all scheduled passenger and scheduled charter services as of October 27, 1996, taking a one-time charge of $21.0 million. World Airways generally charges customers on a block hour basis rather than a per seat or per pound basis. "Block hours" are defined as the elapsed time computed from the moment the aircraft first moves under its own power at the point of origin to the time it comes to rest at its final destination. World Airways provides most services under two types of contracts: wet lease contracts and full service contracts. Under wet lease contracts, World Airways provides the aircraft, cockpit crew, maintenance and insurance and the customer provides all other operating services and bears all other operating expenses, including fuel and fuel servicing, marketing costs associated with obtaining passengers and/or cargo, airport passenger and cargo handling fees, landing fees, cabin crews, catering, ground handling and aircraft push-back and de-icing services. Under full service contracts, World Airways provides fuel, catering, ground handling, cabin crew and all related support services as well. Accordingly, World Airways generally charges a lower rate per block hour for wet lease contracts than full service contracts, although it does not necessarily earn a lower profit. Because of shifts in the mix between full service contracts and wet lease contracts, fluctuations in revenues are not necessarily indicative of volume trends or profitability. It is important, therefore, to measure World Airways' business volume by block hours flown and to measure profitability by operating income per block hour. As is common in the air transportation industry, World Airways has relatively high fixed aircraft costs. While it believes that the lease rates on its MD-11 aircraft are favorable relative to lease rates of other MD-11 operators, World Airways' MD-11 aircraft have higher lease costs (although lower operating costs) than its DC10-30 aircraft. Therefore, achieving high average daily utilization of its aircraft (particularly its MD-11 aircraft) at attractive yields are important factors to it financial results. In addition to fixed aircraft costs, a portion of its labor costs are fixed due to monthly minimum guarantees to cockpit crewmembers and flight attendants. CUSTOMERS Historically, World Airways' business has relied heavily on its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air Force. These customers provided approximately 34%, 13%, and 25%, respectively, of World Airways' revenues and 42%, 14%, and 17%, respectively, of total block hours from continuing operations during 1996. For 1995, these customers provided approximately 42%, 11%, and 21%, respectively, of its revenues and 48%, 11%, and 13%, respectively, of total block hours from continuing operations. In 1996, World Airways commenced operations for Philippine Airlines, Inc. ("Philippine Airlines") providing four MD-11 aircraft under year-round wet lease contracts. These operations provided approximately 15% and 17% of World Airways' revenues and block hours from continuing operations, respectively, during 1996. World Airways expects that the agreement with Philippine Airlines will continue to have a substantial impact on its revenues and block hours in 1997. Malaysian Airlines. World Airways has provided wet lease services to Malaysian Airlines since 1981, providing wet lease services for Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. MHS, which owns 17.6% of World Airways as of December 31, 1996, 23 also owns 29.1% of Malaysian Airlines. In late 1994, World Airways entered into a series of multi-year contracts, with expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. In 1996, World Airways provided three aircraft for Hadj operations. World Airways recently entered into a new 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby it will provide two aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. World Airways is currently in preliminary discussions with Malaysian Airlines regarding a potential eleven-month reduction in the utilization of one of these aircraft during the 32-month term of the contract. Until recently, World Airways operated four passenger aircraft for Malaysian Airlines under the multi-year agreements described above. The contract for two of the four passenger aircraft for Malaysian Airlines expired in March 1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and will actively re-market the aircraft thereafter, World Airways can provide no assurance that it will be able to redeploy the two aircraft, beginning June 1997, at price and utilization levels at least as favorable as under the terms of the Malaysian Airlines contracts. World Airways originally operated three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July, 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into the Philippine Airlines contract. World Airways and Malaysian Airlines are currently discussing the future redeployment of these aircraft back into Malaysian Airlines' operations in order to meet the contracts' original obligations. World Airways can provide no assurances, however, that it will, in fact, be able to redeploy these two aircraft back into Malaysian Airlines' operation to meet the contracts' original obligations. Revenues associated with these contractual obligations are included in World Airways' backlog amount included herein. Garuda. World Airways has flown for Garuda periodically since 1973 and yearly since 1988. Since 1988, World Airways has been one of the largest providers of passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj pilgrimage is the world's largest due to the size of Indonesia's Islamic population. In 1996, approximately 200,000 Indonesians traveled to Jeddah for the Hadj pilgrimage. During the 1996 Hadj pilgrimage, World Airways provided passenger service to Garuda with seven aircraft, flying approximately 40,000 Indonesians on company aircraft. Due to World Airways' capacity constraints during the period of Hadj flying, World Airways reached an agreement with Garuda to operate six aircraft during the 1997 pilgrimage. Philippine Airlines. In May 1996, World Airways entered into a new ACMI contract with Philippine Airlines, thereby further expanding its presence in the Pacific Rim. World Airways presently operates four MD-11 passenger aircraft for Philippine Airlines under an agreement, with high minimum monthly utilization levels. World Airways, however, has recently received a written communication from Philippine Airlines in which the airline contends that its leases for all four aircraft expire on November 15, 1997. World Airways believes that this position is contrary to the understanding of the parties that each of the MD-11s are to be leased by Philippine Airlines for a period of 18 months from delivery of each aircraft. The parties are currently discussing the length of the lease term for these aircraft. World Airways can provide no assurances, however, that Philippine Airlines will agree to lease any of the four MD-11 passenger aircraft beyond November 15, 1997, or that World Airways will be able to secure other business at as favorable price and utilization levels. Also, subsequent to year-end, at Philippine Airlines' request, World Airways agreed to a payment plan with respect to Philippine Airlines' wet lease obligations for several months beginning in March 1997. Although Philippine Airlines is current on this payment plan to date, if Philippine Airlines defaults on this payment plan, or fails to meet its monthly aircraft lease obligations, this development, if not offset by other business, would have a material adverse effect on the cash flows, financial condition and results of operation of World Airways. U.S. Air Force. World Airways has provided international air transportation to the U.S. Air Force since 1956. The overall downsizing of the U.S. military, combined with a need to respond quickly to the growing number of global regional conflicts places a premium on the mobility of the U.S. armed forces. This is reflected in the stable size over the past several years of the USAF's procurement of commercial airlift services. Although World Airways' agreements with the USAF provide for full service contracts with certain minimum performance requirements, World Airways has risks similar to an ACMI agreement because the USAF agreements are cost-plus contracts at attractive rates. 24 The USAF awards points to air carriers acting alone or through teaming arrangements in proportion to the number and type of aircraft such carriers make available to CRAF. World Airways utilizes such teaming arrangements to maximize the value of potential awards. World Airways leads a contractor teaming arrangement that enjoys a 44% market share of the USAF's overall commercial airlift requirement. During a period in which the U.S. military downsized substantially, World Airways' portion of the fixed USAF award increased from $15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the government's 1996-97 fiscal year. The current annual contract commenced on October 1, 1996 and expires on September 30, 1997. These contracts provide for a fixed level of scheduled business from the U.S. Air Force with opportunities for additional short-term expansion business on and ad hoc basis as needs arise. Due to the utilization of a significant number of World Airways' aircraft under multi-year contracts and other contractual commitments, it is unlikely that it will be able to accept all of the available expansion business. Although overall Defense Department spending is being reduced, the level of the U.S. Air Forces contract awards has remained relatively constant in recent years. World Airways, however, cannot determine how future cuts in military spending may affect future operations with the U.S. Air Force. Although World Airways's customers bear the financial risk of filling the World Airways' aircraft with passengers or cargo, World Airways can be affected adversely if its customers are unable to operate its aircraft profitably, or if one or more of World Airways' customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances, World Airways can be adversely affected by receiving delayed or partial payments or by receiving customer demands for rate and utilization reductions, flight cancellations, and/or early termination of their agreements. As a result of these and other contracts, World Airways had an overall contract backlog at December 31, 1996 of $468.0 million, compared to $462.0 million at December 31, 1995. Approximately $253.5 million of the backlog relates to 1997 operations. World Airways' backlog for each contract is determined by multiplying the minimum number of block hours (defined as the elapsed time computed from the moment the aircraft first moves under its own power at the point of origin to the time it comes to rest at its destination) guaranteed under the applicable contract by the specified hourly rate under such contract. Approximately 60% and 20% of the backlog relates to its contracts with Malaysian Airlines and Philippine Airlines, respectively. While the percentage of its 1997 block hour capacity that is currently under contract exceeds the comparable percentage in the past several years, World Airways still has substantial uncontracted capacity in the third and fourth quarters of 1997. In addition, a significant portion of World Airways' current contracts expire near the end of 1997. Although there can be no assurance that it will be able to secure additional business to reduce this excess capacity, World Airways is actively seeking customers for 1997 and beyond. World Airways' financial results and financial condition would be affected adversely if it is unable to secure additional business to reduce this excess capacity. The information regarding major customers and foreign revenue is contained in Note 18 "Segments and Major Customers" of the Company's "Notes to Financial Statements" in Item 8. COMPETITION The market for outsourcing air passenger and cargo ACMI services is highly competitive. Certain of the passenger and cargo air carriers against which World Airways competes possess substantially greater financial resources and more extensive facilities and equipment than those which are now, or will in the foreseeable future become, available to World Airways. World Airways believes that the most important bases for competition in the ACMI outsourcing business are the age of the aircraft fleet, the passenger, payload and cubic capacities of the aircraft, and the price, flexibility, quality and reliability of the air transportation service provided. Competitors in the ACMI outsourcing market include MartinAir Holland, Tower Air and American TransAir and all-cargo carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk, and scheduled and non-scheduled passenger carriers which have substantial belly capacity. The ability of World Airways to achieve the growth anticipated by its strategic plan depends upon its success in convincing major international airlines that outsourcing some portion of their air passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources. The allocation of military air transportation contracts by the USAF is based upon the number and type of aircraft a carrier, alone or through a teaming arrangement, makes available for use in times of national emergencies. The formation of competing teaming arrangements comprised of larger partners than those sponsored by World Airways, an increase by other air carriers in their commitment of 25 aircraft to the emergency program, or the withdrawal of it current partners, could adversely affect the size of the USAF contracts, if any, which are awarded to World Airways in future years. CYCLICAL NATURE OF AIR CARRIER BUSINESS World Airways operates in a challenging business environment. The air transportation industry is highly sensitive to general economic conditions. Since a substantial portion of passenger airline travel (both business and personal) is discretionary, the industry tends to experience severe adverse financial results during general economic downturns and can be adversely affected by unexpected global political developments. The financial results of air cargo carriers are also adversely affected by general economic downturns due to the reduced demand for air cargo transportation. In 1993 and 1994, the combination of a generally weak global economy and the depressed state of the air transportation industry adversely affected its operating performance. Although World Airways recently has experienced a growth in demand, such that block hours flown from continuing operations increased in 1996 by 23% over 1995, there can be no assurance that this level of growth will continue. SEASONALITY Historically, World Airways' business has been significantly affected by seasonal factors. During the first quarter, World Airways typically experiences lower levels of utilization and yields due to lower demand for passenger and cargo services relative to other times of the year. World Airways experiences higher levels of utilization and yields in the second quarter, principally due to peak demand for commercial passenger services associated with the annual Hadj pilgrimage. In 1997, World Airways' flight operations associated with the Hadj pilgrimage will occur from March 15 to May 20. Because the Islamic calendar is a lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days earlier each year relative to the Western (Gregorian) calendar. As a result, revenues resulting from future Hadj pilgrimage contracts will continue to shift from the second quarter to the first quarter over the next several years. World Airways believes that its contracts with Malaysian Airlines and the USAF should lessen the effect of these seasonal factors. GEOGRAPHIC CONCENTRATION World Airways derives a significant percentage of its revenues and block hours from its operations in the Pacific Rim region. While it believes the Pacific Rim region is a growth market for air transportation, any economic decline or any military or political disturbance in this area may interfere with World Airways' ability to provide service in this area and could have a material adverse effect on the financial condition or results of operations of the company. UTILIZATION OF AIRCRAFT Due to the large capital costs of leasing and maintaining its aircraft, each of World Airways' aircraft must have high utilization at attractive rates in order for it to operate profitably. Although World Airways' strategy is to enter into long-term contracts with its customers, the terms of its existing customer contracts are substantially shorter than the terms of World Airways' lease obligations with respect to the aircraft. There can be no assurance that World Airways will be able to enter into additional contracts with new or existing customers or that it will be able to obtain enough additional business to fully utilize each aircraft. World Airways' financial results could be materially adversely affected even by relatively brief periods of low aircraft utilization and yields. In order to maximize aircraft utilization, World Airways does not intend to acquire new aircraft unless such aircraft would be necessary to service existing needs or it has obtained additional ACMI contracts for the aircraft to service. World Airways is seeking to obtain additional ACMI contracts with new and existing customers, to which such new aircraft would be dedicated when placed in service, but it can provide no assurance that it will obtain new ACMI contracts or that existing ACMI contracts will be renewed or extended. MAINTENANCE Engine maintenance accounts for most of World Airways' annual maintenance expenses. Typically, the hourly cost of engine maintenance increases as the aircraft ages. World Airways outsources major airframe maintenance and power plant work to several suppliers. World Airways has a 10-year contract expiring in August 2003 with United Technologies Corporation's Pratt & Whitney Group for all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under this contract, the manufacturer agreed to provide such maintenance services 26 at a cost not to exceed specified rates per hour during the term of the contract. Its maintenance costs associated with the MD-11 aircraft and PW 4462 engines have been significantly reduced due in part to manufacturer guarantees and warranties which began to expire in 1995 and which will fully expire by 1998. In addition, the specified rates per hour are subject to annual escalation, increasing substantially in 1998. Accordingly, while World Airways believes the terms of this agreement have resulted in lower engine maintenance costs than it otherwise would incur, engine maintenance costs will increase substantially during the last five years of the agreement. World Airways will begin to accrue these increased expenses in 1997. Therefore, World Airways expects that maintenance expenses will continue to increase during the remainder of the term of the contract as its aircraft fleet ages. OPERATING LOSSES While World Airways generated operating income each year from 1987 through 1992 and in 1995, it sustained operating losses in 1993 and 1994 of $7.3 million and $5.2 million, respectively, and net losses of $9.0 million in each of these two years. For the year ended December 31, 1996, World Airways incurred a net loss of $14.0 million, which resulted from operating losses incurred in its scheduled service operations, which were discontinued in 1996, and the related estimated loss on disposal. Earnings from continuing operations were $18.4 million for 1996. There can be no assurance that World Airways will be able to generate operating income in 1997 or future years. INTELIDATA InteliData was incorporated in order to effect the mergers of US Order and Colonial Data. The Merger was announced on August 5, 1996, when US Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement"). On November 7, 1996, the Merger was consummated with each share of outstanding US Order and Colonial Data common stock being exchanged for one share of InteliData common stock. The Merger was treated as a purchase of Colonial Data by US Order. At December 31, 1996, WorldCorp's ownership in InteliData was approximately 28.9%. Following this Merger, WorldCorp reports its proportionate share of InteliData's financial results using the equity method of accounting. On October 4, 1996, US Order acquired the business of Braun, Simmons & Co., ("Braun Simmons"), for approximately $7.0 million consisting of cash and US Order common stock and including US Order transaction costs. Braun Simmons was an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions. The acquisition expands InteliData's product line for both large and small financial institutions. The business of InteliData consists of the businesses previously conducted by US Order, Colonial Data and Colonial Data's subsidiaries. InteliData develops and markets products and services for the telecommunications and financial services industries through its three business divisions: consumer telecommunications, electronic commerce and interactive services. The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by the regional Bell operating companies ("RBOCs") and other telephone companies ("telcos"). InteliData has concentrated its product development and marketing efforts on products that support Caller ID and other emerging intelligent network services, including a smart telephone, the Telesmart 4000/IntelifoneTM, which provide consumers call management features and the ability to access numerous network services and interactive applications via telephone. InteliData currently offers a line of Caller ID adjunct units and telephones with integrated Caller ID, small business telecommunications systems and high-end consumer telecommunications equipment. InteliData also repairs and refurbishes telecommunications products for commercial customers and provides other services that support the development and implementation of intelligent network services. The electronic commerce division develops and markets products and services to assist financial institutions in their home banking and electronic bill payment initiatives. The products are designed to assist consumers in accessing and transacting business with their banks and credit unions electronically, and to assist financial institutions in connecting to and transacting business with third parties, including data processors and billers. The services focus on a financial institution's back office, offering outsourcing for data entry, telemarketing, customer service and technical support. InteliData currently receives its electronic commerce revenues largely from the sale of products and services to Visa International Service Association, Inc. ("Visa") member banks. 27 The interactive services division was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communication Systems ("PCS") telephones and personal digital assistants ("PDAs"). InteliData intends to sell interactive applications directly to end users and through other companies, including telcos and wireless communications companies. InteliData's current interactive applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail, a personal directory data save and restore function and information services such as news, weather, sports scores, stock quotes, lottery results and horoscopes. UNCERTAINTY AS TO FUTURE FINANCIAL RESULTS InteliData believes that the Merger will offer opportunities for long-term efficiencies that should positively affect future operating results of the combined companies. However, the combined companies will be more complex and diverse than either US Order or Colonial Data individually, and the combination and continued operation of their distinct business operations will present difficult challenges for its management due to the increased time and resources required in the management effort. While the management and the board of InteliData believe that the combination can be effected in a manner that will realize the value of the two companies, neither management group has experience in combinations of this size or complexity. Accordingly, there can be no assurance that the process of effecting the business combination can be effectively managed to realize the operational efficiencies anticipated to result from the Merger. Following the Merger, in order to maintain and increase profitability, the combined company will need to successfully integrate and streamline overlapping functions. The two predecessor companies had different systems and procedures in many operational areas that must be rationalized and integrated. There can be no assurances that integration will be accomplished smoothly or successfully. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations following the Merger will require the dedication of management resources that may temporarily distract attention from the day-to-day business of the combined companies. Failure to effectively accomplish the integration of the two companies' operations could have an adverse effect on InteliData's results of operation and financial condition. DEVELOPING MARKETPLACE Home banking and smart telephones are developing markets. Consumer preferences in interactive technologies are difficult to predict. InteliData's future growth and profitability will depend, in part, upon consumer acceptance of electronic home banking and smart telephone technologies and a significant expansion in the consumer market for telephone-based interactive applications technologies. Even if these markets experience substantial growth, there can be no assurance that InteliData's products and services will be commercially successful or benefit from such growth. Much of InteliData's success in the smart telephone market depends on InteliData's ability to meet design specifications and delivery requirements for its products and services. There can be no assurance of the timing of introduction of, necessary regulatory approvals for, or market acceptance of these services and applications. InteliData faces competition in these markets from other emerging interactive applications delivered through personal computers, cable television and Integrated Service Digital Network ("ISDN"). FLUCTUATIONS IN OPERATING RESULTS Historically, US Order and Colonial Data have experienced fluctuations in quarterly operating results, and accordingly, InteliData may experience fluctuations in quarterly operating results due to a variety of factors, some of which are beyond InteliData's control. These include the size and timing of customer orders or the royalty payments from Visa InterActive, if any, changes in InteliData's pricing policies or those of its competitors, new product introductions or enhancements by competitors, delays in the introduction of new products or product enhancements by InteliData or by its competitors, customer order deferrals in anticipation of upgrades and new products, market acceptance of new products, the timing and nature of sales, marketing, and research and development expenses by InteliData and its competitors, the timing of programs offering Caller ID or other intelligent network services by a telco, disruptions in sources of supply, the effects of regulation on Caller ID and other intelligent network services, the timing and extent of promotional activities by a telco, changes in service charges by a telco, other changes in operating expenses, personnel changes and general economic conditions. Additionally, certain regional Bell operating companies have entered into merger agreements. InteliData is unable to assess the 28 future effect on the company of these mergers, if consummated, and of other possible consolidations in the telecommunications industry. No assurance can be given that such quarterly variations will not occur in the future and, accordingly, the results of any one quarter may not be indicative of the operating results for future quarters. RELIANCE ON CALLER ID REVENUES A substantial majority of InteliData's revenues are derived from sales and leases of its Caller ID products. The sale or lease of these products is directly linked to the implementation and promotion of Caller ID service by telcos. The timing of such implementation may be affected by government regulation, by changes in the telecommunications industry resulting from changes in the regulatory and competitive environment, by switch and software upgrades and by other factors. There can be no assurance that telcos will continue to introduce and promote this service successfully or that it will gain widespread market acceptance. Delays in the introduction of Caller ID service in local markets or failure of this service to gain widespread market acceptance would materially and adversely affect InteliData's business, operating results and financial condition. CONCENTRATION OF DISTRIBUTION OF PRODUCTS AND SERVICES InteliData sells its telecommunications products and services to telcos, individual telephone subscribers, other equipment manufacturers on a private label basis ("private label customers") and retail chains. In addition, InteliData leases its products to individual telco subscribers. Sales and leases to individual telco subscribers are largely dependent on direct fulfillment distribution arrangements with certain RBOCs and other telcos. Since InteliData views the telcos with which it maintains direct fulfillment relationships as its customers, it considers its customer base to be highly concentrated. InteliData's current telco fulfillment arrangements are not exclusive and may be terminated by either party. The loss of any one or more of InteliData's major customers or the termination of its distribution arrangements with any telco or the failure to be selected for significant orders or programs by a telco could materially and adversely affect InteliData's business, operating results, and financial condition. In addition, consolidation in the telecommunications industry or changes in the telecommunications regulatory environment could result in the loss of such customers or business. TECHNOLOGICAL CONSIDERATIONS InteliData's business activities are concentrated in fields characterized by rapid and significant technological advances. There can be no assurance that InteliData will remain competitive technologically or that its products, processes or services will continue to be reflective of such advances. Failure to introduce new products or product enhancements that achieve market acceptance on a timely basis could materially and adversely affect its business, operating results and financial condition. There can be no assurance that InteliData will not encounter unanticipated technical, marketing or other problems or delays relating to new products, features or services which it has recently introduced or which it may introduce in the future. Moreover, there can be no assurance that its new products, features or services will be successful, that the introduction of new products, features or services by its competitors will not materially and adversely affect the sales of InteliData's existing products or that it will be able to adapt to future changes in the telecommunications industry. Most of InteliData's competitors and potential competitors have significantly greater financial, technological and research and development resources than InteliData. DEPENDENCE ON FOREIGN PRODUCTION InteliData's Caller ID units and certain other products, including the smart telephone, the Telesmart 4000/IntelifoneTM, are manufactured by companies with facilities in Hong Kong, Malaysia, and the People's Republic of China. These facilities are supplemented, in part, by other manufacturers in Asia for certain integrated telephone and small business system products and by limited manufacturing facilities in Connecticut. The availability or cost of these Caller ID units and smart telephones may be adversely affected by political, economic or labor conditions in Hong Kong, Malaysia or the People's Republic of China, including the 1997 return of Hong Kong to China, and by fluctuations in currency exchange rates. In addition, a change in the tariff structure or other trade policies of the United States or countries from which InteliData will import products could adversely affect InteliData's foreign manufacturing strategies. RESTRICTIONS FROM THE VISA AGREEMENT As a condition of Visa's acquisition of InteliData's bill payment operations and technology (the "Visa Bill-Pay 29 System"), InteliData has agreed to work exclusively with Visa in certain areas and to refrain from certain activities that are in competition with Visa and its affiliates. These covenants may increase its reliance upon Visa. InteliData's dependence on Visa, and the terms of the agreement between the parties, may have a material adverse effect on InteliData. IMPORTANCE OF STRATEGIC ALLIANCES One of InteliData's business strategies is to manufacture or sell its products and services through strategic alliances. The success of this strategy will depend to an extent both on the ultimate success of its strategic partners as well as on the ability of its partners to successfully market InteliData's products and services. There can be no assurance that any alliance partners will view their alliance with InteliData as significant for their own businesses or that they will not reassess their commitment to InteliData at any time in the future. COMPETITION Consumer Telecommunications. The market for InteliData's products is highly competitive and subject to rapid technological change. At present, InteliData's principal competitors are CIDCO, Lucent and Northern Telecom. InteliData's Caller ID products also compete with Caller ID telephones offered by Panasonic, Sony, Thomson and US Electronics. Marketing of InteliData's smart telephone is subject to competition from smart telephones marketed or developed by Philips, Northern Telecom and CIDCO as well as other emerging platforms for interactive applications delivered through personal computers and cable television. InteliData expects competition in the markets for its consumer telecommunications products and services to increase in the future and expects competition from existing and new competitors, possibly including RBOCs, other telcos or other current customers, as well as from network switch-based services and from the increased application of cellular technology. InteliData's primary current and potential competitors in the market for its consumer telecommunications products and services have substantially greater financial, marketing and technical resources than itself. Competition could materially and adversely affect InteliData's results of operations through price reductions and loss of market share. InteliData competes with a large number of competitors for its repair services and other services supporting the development and implementation of intelligent network services. Several of its competitors in the market for such services have substantially greater financial, marketing and technological resources than InteliData. There can be no assurance that InteliData will be able to continue to compete successfully against its existing competitors or that it will be able to compete successfully against new competitors. Electronic Commerce. The market for interactive products and services is highly competitive and subject to rapid innovation and technological change, shifting consumer preferences and frequent new product introductions. InteliData's home banking products and services compete with services offered by a number of competitors and competition may intensify as a result of new market entrants. Banks have developed home banking products for their own customers and, in the future, may offer these services to other banks. Non-banks also may develop home banking products to offer to banks. Computer software and data processing companies also offer home banking services. Visa competes with other organizations, including MasterCard International, Inc. ("MasterCard"), which offers its Masterbanking home banking service through CheckFree Corporation. Many competitors exist for its various banking products including other manufacturers of touch-tone response systems, other financial software companies and financial services software and service companies. InteliData believes that its primary competition for its customer support services will come from financial institutions and third parties that choose to offer customer support services either directly through Visa's customer support messaging standard ("CSMS") product or on their own. InteliData expects that competition in all of these areas will increase in the near future. Interactive Services. The industry for interactive services is emerging and there is potential for a number of companies to enter the marketplace. Currently, InteliData's primary competitor is SmartServe Online, Inc. RELATIONSHIP WITH VISA US Order sold the Visa Bill-Pay System to Visa on August 1, 1994, for approximately $15.0 million in cash, the assumption of certain liabilities and rights to a 72-month royalty period commencing January 1, 1995 and ending 30 December 31, 2000 (the "Royalty Period"). Visa subsequently transferred these assets to Visa InterActive, its wholly owned subsidiary. The royalty obligation is based on the number of customers who use the Visa Bill-Pay System during the Royalty Period. The agreement with Visa expressly provides that the royalty will apply only if the means by which a customer makes an electronic bill payment involves the use of a "significant portion" of the Visa Bill-Pay System. Royalties to InteliData are calculated and paid by Visa InterActive quarterly during the Royalty Period. Because the amount of the royalties to InteliData is dependent upon the number of customers that use the Visa Bill-Pay System on a monthly basis during the Royalty Period, InteliData cannot provide any assurances of the amount of royalties, if any, that will be payable by Visa InterActive to InteliData. The royalty payment will be reduced for each quarter through December 31, 1997, by an offset amount (the "Visa Offset") which was initially set at $73,000. If the royalty payment that would otherwise be due in respect of a quarter is smaller than the offset amount for that quarter, no royalty payment will be made to InteliData, and the difference between $73,000 and the royalty otherwise due will increase the size of the Visa Offset for the next quarter. The aggregate amount of the Visa Offset for the Royalty Period is $880,000. InteliData did not receive any royalty revenue from Visa in 1996 due to the Visa Offset and does not expect to receive any royalty revenue after application of the Visa Offset through at least the end of the second quarter of 1997. In addition, under the terms of its agreement with Visa, Visa InterActive is not obligated to pay royalties to InteliData for active bank customers who utilize home banking and bill payment technology independently developed by Visa InterActive. If Visa InterActive independently develops or acquires its own home banking and bill payment technology which does not use or build upon its technology, this could have a material adverse effect on the amount of royalties payable by Visa InterActive to InteliData. As a condition of Visa's acquisition of the Visa Bill-Pay System, InteliData has agreed to work exclusively with Visa in certain areas and to refrain from certain activities that are in competition with Visa and its affiliates. These covenants may increase InteliData's reliance upon Visa. DEPENDENCE ON KEY EMPLOYEES InteliData is highly dependent on certain key executive officers and technical employees to manage the operations and business of InteliData as well as to implement the business plans of InteliData on an ongoing basis. The loss of any such key employees could have an adverse impact on the future operations of InteliData. REGULATION The Telecommunications Act of 1996 and regulations or orders promulgated thereunder may result in or accelerate changes in various aspects of the telecommunications industry, including the competitive environment, the delivery and pricing of various telecommunications products and services and possible consolidation. Although InteliData is unable to predict what effect, if any, the Telecommunications Act of 1996 or other regulatory developments may have upon the telecommunications industry or InteliData's business, any such effects could have a material adverse impact on the future operations of InteliData. In the United States, Caller ID and other intelligent network services are subject to federal and state regulation. Caller ID and other intelligent network services may in the future be subject to further regulation by the federal government, state public utility commissions and other regulatory authorities, as well as court challenges, including possible challenges due to protests from special interest groups that object to such services on the basis of privacy concerns. An order issued by the FCC effective December 1, 1995, requires all United States telephone service providers with Signaling System 7 switching architecture to transmit to each other without charge Caller ID number information on interstate calls within the United States (except for public pay phones and party lines). The FCC's order also requires that telcos that offer Caller ID service must provide to their telephone subscribers without charge a per-call blocking mechanism to block the transmission of their Caller ID information on interstate calls and must inform subscribers that their telephone numbers may be identified to a called party and how to use this blocking capability. VOLATILITY OF STOCK PRICE The market price of InteliData's stock has experienced significant volatility. The stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology and developmental stage companies and that has often been unrelated to the operating performance of such companies. 31 Factors such as announcements of the introduction of new products or services by InteliData or its competitors, announcements of joint development efforts or corporate partnerships in the interactive applications industry, market conditions in the banking, telecommunications and other emerging growth company sectors and rumors relating to it or its competitors may have a significant impact on the market price of InteliData's stock. LIMITED PROPRIETARY PROTECTION InteliData possesses limited patent or registered intellectual property rights with respect to its technology. InteliData depends in part upon its proprietary technology and know-how to differentiate its products from those of its competitors and works independently and from time to time with third parties with respect to the design and engineering of its own products. InteliData also relies on a combination of contractual rights and trade secret laws to protect its proprietary technology. There can be no assurance, however, that InteliData will be able to protect its technology or successfully develop new technology or gain access to such technology or that third parties will not be able to develop similar technology independently or that competitors will not obtain unauthorized access to its proprietary technology, that third parties will not misuse the technology to which InteliData has granted access, or that InteliData's contractual or legal remedies will be sufficient to protect InteliData's interests in its proprietary technology. Certain of Lucent's Caller ID patents are licensed by Lucent to InteliData and others, including its competitors. If the Lucent license were terminated and InteliData were unable to negotiate a new patent license agreement with Lucent, InteliData would no longer be authorized to manufacture or sell Caller ID products in the United States other than to the RBOCs and to Lucent, and InteliData's business would be materially and adversely affected. LIMITED SOURCES OF SUPPLY The key components used in InteliData's products are currently being purchased from multiple sources, except for its application specific integrated circuit ("ASIC") chips, which are purchased from a single source. Although it believes it could develop other sources for each of the components for its products, the process could take several months, and the inability or refusal of any such source to continue to supply components could have a material adverse effect on InteliData pending the development of an alternative source. RESULTS OF OPERATIONS WORLD AIRWAYS - ------------- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996 from 37,342 hours in 1995, with an average of 14.1 available aircraft per day in 1996 compared to 10.3 in 1995. Average daily utilization (block hours flown per day per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In 1996, World Airways continued to obtain a higher percentage of its revenues under wet lease contracts as opposed to full service contracts. In 1996, wet lease contracts accounted for 68% of total block hours, consistent with 70% in 1995. Total operating revenues increased $67.2 million, or 28%, to $309.6 million in 1996 from $242.4 million in 1995. Continuing Operations - --------------------- Block hours from continuing operations increased 8,269 hours, or 23%, to 43,897 hours in 1996 from 35,628 hours in 1995. Operating Revenues. Revenues from flight operations increased $64.3 million, or 28%, to $296.9 million in 1996 from $232.6 million in 1995. This increase was primarily attributable to an increase in military flying and an increase in revenues generated from its 1996 Hadj operations and services to certain international carriers, partially offset by a decrease in cargo operations resulting from a shift in the mix of business during 1996. Operating Expenses. Total operating expenses increased $61.4 million, or 27%, in the 1996 to $287.9 million from $226.5 million in 1995. 32 Flight operations expenses include all expenses related directly to the operation of the aircraft other than aircraft cost, fuel and maintenance. Also included are expenses related to flight dispatch and flight operations administration. Flight operations expenses increased $5.9 million, or 9%, in 1996 to $71.1 million from $65.2 million in 1995. This increase resulted primarily from an increase in block hours flown and higher crew costs and up-front training expenses in connection with the integration of additional aircraft into the fleet. These increases were partially offset by a decrease in accrued profit sharing expenses. In 1995, World Airways accrued profit sharing expenses as a result of earnings experienced during that period. No such accrual is necessary in 1996 as a result of losses from the discontinuation of scheduled service operations. In addition, World Airways expects that its training costs will increase in 1997 as a result of crewmember attrition. Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5 million from $41.8 million in 1995. This increase resulted primarily from the integration of additional aircraft into the fleet and a corresponding increase in block hours flown. In addition, World Airways experienced an increase in costs associated with the MD-11 aircraft and related engines as a result of certain manufacturer guarantees and warranties which began to expire in 1995 and will fully expire by 1998. As discussed previously, World Airways expects its maintenance expense to increase in 1997 due to escalations in the specified rates per hour under its maintenance agreement. Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million from $67.3 million in 1995. This increase was primarily due to the lease of two MD-11ER aircraft in the first quarter of 1996 and the lease of incremental DC10-30 aircraft which began in the second and fourth quarters of 1995 and the first quarter of 1996, partially offset by the return of two DC10-30 aircraft to the lessor in the third quarter of 1995. Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million from $16.7 million in 1995. This increase is due primarily to an increase in fuel utilized in connection with its military operations and a slight increase in price per gallon. Promotions, sales and commissions increased $4.2 million in 1996 to $6.2 million from $2.0 million in 1995. This increase resulted primarily from commissions paid in connection with the new Philippine Airlines contract and an increase in teaming arrangement commissions associated with the larger fixed-award contract received from the U.S. Air Force beginning October 1995. Depreciation and amortization increased $1.9 million, or 31%, in 1996 to $8.0 million from $6.1 million in 1995. This increase resulted primarily from an increase in spare parts required to support the additional MD-11 aircraft and incremental DC10-30 aircraft described above. General and administrative expenses increased $6.5 million, or 36%, in 1996 to $24.7 million from $18.2 million in 1995. This increase was primarily due to the hiring of additional administrative personnel necessary to support the growth in its core business and an increase in certain legal and professional fees. Discontinued Operations - ----------------------- For its scheduled service operations, World Airways commenced service between Tel Aviv and New York in July 1995 and commenced service between the United States and South Africa in June 1996. In addition, World Airways commenced scheduled charter operations between the United States and Germany, Switzerland, Ireland, and the United Kingdom in May 1996. World Airways, however, was unable to operate these scheduled service operations profitably. In July 1996, World Airways announced its decision to exit its scheduled service operations by October 1996 and focus its operations on its core business: operating aircraft under contracts with international carriers, the U.S. Government, and international tour operators. Consistent with this decision, World Airways ceased all scheduled operations as of October 27, 1996. As a result, World Airways' scheduled service operations were reflected as discontinued operations as of June 30, 1996, and prior period results have been restated to reflect scheduled service operations as discontinued operations. Loss from discontinued operations (net of income tax effect) approximated $11.7 million for the year ended December 31, 1996. In addition, an estimated loss on disposal of $21.0 million (net of income tax effect) which was recorded as of June 30, 1996, included the following: $13.6 million for estimated operating losses during the phase-out period; a $2.6 million estimated loss to be incurred in connection with sub-leasing DC-10 aircraft which will not be utilized in its operations subsequent to the phase-out of scheduled service operations; a $2.3 million writeoff of related leasehold improvements; and $2.0 million for passenger 33 reprotection expenses. World Airways incurred approximately $18.9 million of these costs during the six months ended December 31, 1996 and it believes that its remaining accrual for estimated losses on disposal will be adequate to meet the remaining costs to be incurred during the phase-out period. In connection with the discontinuance of its scheduled service operations, World Airways is subject to claims by various third parties and may be subject to further claims in the future (see "Other Matters - Legal and Administrative Proceedings"). YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total block hours increased 10,885 hours, or 41%, to 37,342 hours in 1995 from 26,457 hours in 1994, with an average of 10.3 available aircraft per day in 1995 compared to 8.2 in 1994. Average daily utilization (block hours flown per day per aircraft) increased to 9.9 hours in 1995 from 8.8 hours in 1994. In 1995, World Airways continued to obtain a higher percentage of its revenues under wet lease contracts as opposed to full service contracts. In 1995, wet lease contracts accounted for 70% of total block hours, up from 63% in 1994. Total operating revenues increased $78.8 million, or 44%, to $259.5 million in 1995 from $180.7 million in 1994. Continuing Operations - --------------------- Block hours from continuing operations increased 9,171 hours, or 35%, to 35,628 hours in 1995 from 26,457 hours in 1994. Operating Revenues. Revenues from flight operations increased $58.7 million, or 34%, to $232.6 million in 1995 from $173.9 million in 1994. This increase was primarily attributable to a $58.4 million increase in revenues generated from the new multi-year contracts with Malaysian Airlines. Average daily utilization for these contracts was 11.2 hours in 1995. In addition, World Airways realized an increase in revenues associated with services to certain international carriers. Partially offsetting these increases was a decrease in revenues associated with the 1995 summer charter programs to Europe. Revenues from flight operations subcontracted to other carriers increased $3.2 million for 1995 to $8.6 million from $5.4 million in 1994. This increase resulted primarily from its need to subcontract certain flights to other carriers due to peak airlift requirements for the 1995 Hadj pilgrimage. This increase was partially offset by the subservice of certain contracts in the fourth quarter of 1994 primarily to make aircraft capacity available for the commencement of operations under its multi-year contracts with Malaysian Airlines. Operating Expenses. Total operating expenses increased $40.6 million, or 22%, in 1995 to $226.5 million from $185.9 million in 1994. Flight operations expenses include all expenses related directly to the operation of the aircraft other than aircraft cost, fuel and maintenance. Also included are expenses related to flight dispatch and flight operations administration. Flight operations expenses increased $7.4 million, or 13%, in 1995 to $65.2 million from $57.8 million in 1994. This increase resulted primarily from the following: an increase in block hours flown; higher cockpit crew levels associated with the integration of additional aircraft into the fleet in 1995; and an increase in accruals under World Airways' profit sharing plans for its crewmembers during 1995. These factors were partially offset by a shift from full service to basic contracts. Maintenance expenses increased $15.6 million, or 60%, in 1995 to $41.8 million from $26.2 million in 1994. This increase resulted primarily from a non-recurring 1994 reversal of $4.2 million of excess reserves associated with the expiration of three DC10-30 aircraft leases and the increase in block hours flown in 1995 and lower costs associated with reduced maintenance requirements of new MD-11 aircraft and the guarantees and warranties received from the engine and aircraft manufacturers of the MD-11 aircraft and related engines, which guaranties and warranties began to expire in 1995. Aircraft costs increased $13.4 million, or 25%, in 1995 to $67.3 million from $53.9 million in 1994. This increase was primarily due to the lease of two additional MD-11 convertible aircraft in the first quarter of 1995 and the short-term lease of incremental DC10-30 aircraft which began in the fourth quarter of 1994 and second quarter of 1995, partially offset by the return of three lower-cost DC10-30 aircraft to the lessor in the third quarter of 1994. 34 Fuel expenses decreased $0.2 million in 1995 to $16.7 million from $16.9 million in 1994. This decrease is due primarily from a shift from full service to basic contracts in 1995 under which World Airways is not responsible for fuel, partially offset by an increase in fuel uplifted for military and scheduled service operations. Promotions, sales and commissions increased $0.9 million in 1995 to $2.0 million from $1.1 million in 1994. This increase resulted primarily from an increase in joint venture commissions associated with the larger fixed-award contract received from the U.S. Air Force beginning October 1995. Depreciation and amortization increased $2.1 million, or 53%, in 1995 to $6.1 million from $4.0 million in 1994. This increase resulted primarily from an increase in spare parts required to support the additional MD-11 aircraft and incremental DC10-30 aircraft described above as well as the amortization of certain MD-11 aircraft integration costs and other deferred costs. General and administrative expenses decreased $2.3 million, or 11%, in 1995 to $18.2 million from $20.5 million in 1994. This decrease was primarily due to a decrease in certain legal and professional fees, partially offset by the hiring of additional marketing personnel. INTELIDATA - ---------- As previously discussed, in August 1996, US Order and Colonial Data entered into an Agreement and Plan of Merger pursuant to which US Order and Colonial Data were merged with and into a new public company, InteliData. Pursuant to this Merger on November 7, 1996, InteliData became the successor corporation to US Order. As of November 7, 1996, WorldCorp's ownership interest in InteliData was approximately 28.9%. The Company's consolidated results for 1996 and 1995 include the results of US Order for the period in 1996 prior to the Merger, and for the twelve months ended December 31, 1995, respectively. Following the Merger, the Company reports its proportionate share of InteliData's financial results using the equity method of accounting. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Operating Revenue. InteliData's operating revenues reported by WorldCorp decreased by $0.1 million from $4.2 million for the full year of 1995 to $4.1 million for the period of 1996 prior to the Merger, primarily due to a reduced 10-month 1996 reporting period versus a 12-month reporting period in 1995. Operating Expenses. InteliData's operating expenses reported by WorldCorp increased by $9.7 million from $9.5 million for the twelve months ended December 31, 1995 to $19.2 million for the period of 1996 prior to the Merger. InteliData's operating expenses include cost of revenue, general and administrative expenses, research and development costs, and advertising and promotion expenses. The increases in InteliData's operating expenses were attributable to employee related expenses for increases in personnel, amortization of intangible assets, increases in research and development costs, higher sales and marketing expenses and the write-off of in-process research and development expenses related to technology that had not reached technological feasibility and did not have alternative future uses, which was purchased in the Braun Simmons acquisition in September 1996. In the future, InteliData expects that aggregate recurring general and administrative expenses will increase as the company grows. The amount of any increase will depend on the products and services offered by InteliData and its alliances and strategic partners. In particular, InteliData expects that these expenses will increase as it upgrades its systems and operations in anticipation of the potential for increased business in 1997. InteliData also expects its advertising and promotion expenses will increase substantially in 1997 due to the further marketing efforts within the consumer telecommunications and interactive services division. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Operating Revenue. US Order's operating revenues increased by $2.8 million from $1.4 million in 1994 to $4.2 million in 1995. The increase was primarily related to the sale of US Order's products, such as its smart telephones, which it began selling through its "preferred provider" relationship with Visa in 1995. 35 Operating Expenses. US Order's operating expenses decreased by $1.9 million from $11.4 million in 1994 to $9.5 million in 1995. The decrease was primarily from a one time payment to certain employees in August 1994 of $3.3 million made in conjunction with the August 1, 1994 sale of US Order's bill pay operations where Visa required that all US Order employees who became employees of Visa InterActive cancel their vested options to eliminate any potential conflict of interest. The decrease was also due to reduced advertising and promotion expenses in 1995. WORLDCORP - --------- General and administrative expenses decreased $0.5 million for the year ended December 31, 1996 to $3.8 million from $4.3 million in the comparable 1995 period. This decrease was primarily due to a reduction in legal and professional fees. General and administrative expenses increased $0.7 million for the year ended December 31, 1995 to $4.3 million from $3.6 million during the comparable 1994 period. This increase resulted primarily from goodwill amortization and compensation expense associated with executive stock options in 1995. OTHER INCOME (EXPENSE) - ---------------------- Equity in Loss of Affiliate. On November 7, 1996, US Order and Colonial Data were merged with and into InteliData. As described above, following the Merger, WorldCorp reports its share of InteliData's financial results under the equity method of accounting. As a result of the Merger, InteliData reported one-time, noncash merger related charges of approximately $72.3 million, of which WorldCorp recorded its 28.9% share, or $20.9 million. These charges related to the write-off of in-process research and development expenses for purchased in-house technology that had not reached technological feasibility as of the date of the Merger with Colonial Data and did not have alternative future uses. The remaining $2.4 million loss represents WorldCorp's proportionate share of InteliData's operating results for the period following the Merger. Gain (Loss) on Issuances (Purchases) of Equity by Subsidiaries, Net and Gain on Sales of Subsidiaries' Stock. As a result of the US Order and Colonial Data merger, WorldCorp recognized a gain on the issuance of equity by InteliData of $42.6 million which was offset by the elimination of approximately $1.3 million of goodwill related to US Order. Also, in 1996, the Company recognized a gain of $1.8 million associated with US Order's issuance of stock to acquire Braun Simmons. Finally, the Company recorded a loss of approximately $4.2 million as a result of World Airways purchase of treasury stock during 1996. In April 1995, US Order filed a registration statement on Form S-1 with the Securities and Exchange Commission to register 4,427,500 shares of US Order's common stock. The offering was completed in June 1995. Of the shares registered, 3,062,500 were issued and sold by US Order, and 1,365,000 shares were sold by WorldCorp. In June 1995, US Order exchanged 230,000 shares of its restricted common stock for 170,743 shares of Colonial Data's unregistered common stock. In October 1995, US Order acquired a 40% interest in HomeNet through the issuance of 296,746 shares of its common stock in exchange for 40% of HomeNet. In August 1995, World Airways filed a registration statement on Form S-1 with the Securities and Exchange Commission to register 2,900,000 shares of World Airways' common stock. The offering was completed in October 1995. Of the shares registered, 2,000,000 were issued and sold by World Airways and 900,000 shares were sold by WorldCorp. The Company recognized a gain of $43.7 million as result of these sales of stock by US Order and World Airways, and a gain of $23.7 million from its sales of US Order and World Airways stock. In February 1994, WorldCorp recognized a gain of $26.9 million from the sale of 24.9% of World Airways common stock, pursuant to an October 1993 agreement. Also, in August 1994, US Order sold its electronic banking and bill payment operations to Visa. As a result of this transaction, the Company recognized a gain of $14.5 million. Other, Net. Other expenses increased by $3.3 million from income of $1.7 million in 1995 to expense of $1.6 million in 1996, primarily due to a $1.6 million loss representing US Order's proportionate share of losses of an affiliate accounted for under the equity method. Other expenses decreased $2.6 million in 1995 from 1994 primarily due to a $0.7 million loss on the sale of a DC10 engine by World Airways in 1994. In addition, World Airways recognized a $0.8 million gain in 1995 resulting from a settlement with the lessor relating to the return of two DC10 aircraft in 1993. 36 LIQUIDITY AND CAPITAL RESOURCES The Company is a highly leveraged holding company. As a holding company, all of WorldCorp's funds are generated through its positions in World Airways and InteliData which have not paid dividends on common stock since 1992. At December 31, 1996, World Airways has a working capital deficit of $29.6 million and has substantial debt and lease commitments. At December 31, 1996, InteliData has working capital of $63.5 million, with no long-term debt. World Airways' ability to pay dividends is currently restricted under a borrowing arrangement. Additionally, the provisions of the Indenture governing WorldCorp's Debentures causes World Airways not to pay dividends upon the occurence of any events of default by WorldCorp under such Indenture. World Airways and InteliData currently intend to retain their future earnings, if any, to fund the growth and development of their business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Of the $12.5 million in cash and cash equivalents at December 31, 1996, approximately $7.0 million is held by World Airways and, therefore, is not available to satisfy WorldCorp's obligations. As of December 31, 1996, WorldCorp had parent company repayment obligations, including principal and interest, of approximately $22.4 million for 1997. In order to meet these obligations and its general and administrative costs, the Company must use its existing cash and either sell shares of World Airways or InteliData, or issue additional debt or equity. Under the terms of certain borrowing arrangements however, WorldCorp has pledged all of its shares of World Airways and InteliData as collateral for the borrowings. The Company is currently evaluating the feasibility of a disposition of its interest in World Airways through a secondary offering or a sale to a third party. Any such transaction would require the approval of certain other parties (See Notes 6,12 and 13). Additionally, management believes it will be successful in reducing the amount of collateral securing its borrowings, either by renegotiating the terms of the loan or by entering into a new loan with another financial institution. Although there can be no assurance that WorldCorp will be successful in consummating these transactions, management believes that its existing cash and the anticipated proceeds from a combination of sales of stock of World Airways or InteliData, renegotiations of its existing borrowing arrangements, or new financing arrangements, will be sufficient to allow the Company to meet its operating requirements and repayment obligations for 1997. At December 31, 1996, based on quoted market prices, the market value of the Company's 6,915,915 shares of World Airways and 9,179,273 shares of InteliData, approximated $56.2 million and $66.5 million, respectively, although these values have declined since year-end. World Airways is also highly leveraged. World Airways incurred substantial debt and lease commitments during the past three years in connection with its acquisition of MD-11 aircraft and related spare parts. At December 31, 1996, World Airways had total long-term indebtedness of approximately $30.1 million and notes payable and current maturities of long-term obligations of $20.4 million. In addition, World Airways has significant future long-term obligations under aircraft lease obligations relating to its aircraft. World Airways has historically financed its working capital and capital expenditure requirements out of cash flow from operating activities, public and private sales of its common stock, secured borrowings, and other financings from banks and other lenders. The degree to which World Airways is leveraged could have important consequences to holders of Common Stock, including the following: (i) its ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited; (ii) its degree of leverage and related debt service obligations, as well as its obligations under operating leases for aircraft, may make it more vulnerable than some of its competitors in a prolonged economic downturn; and (iii) its financial position may restrict its ability to pursue new business opportunities and limit its flexibility in responding to changing business conditions. World Airways' cash and cash equivalents at December 31, 1996 and December 31, 1995 were $7.0 million and $25.3 million, respectively. As is common in the airline industry, World Airways operates with a working capital deficit. At December 31, 1996 World Airways' current assets were $44.4 million and current liabilities were $74.0 million. World Airways believes that the combination of the financings consummated to date, income from continuing operations and certain additional financings will be sufficient to allow it to meet its cash requirements related to the remaining phase-out of its discontinued operations and the operating and capital requirements for its continuing operations for the next twelve months. At December 31, 1996, InteliData had $39.0 million in cash, cash equivalents and short-term investments. InteliData has generated operating losses since its inception. InteliData's smart telephone and home banking products and services are subject to the risks inherent in the marketing and development of new products. The market for these products and services is relatively new and is characterized by rapid technological change, evolving standards, changes in end-user requirements and frequent new product introductions and enhancements. However, the acquisition of Colonial Data has provided InteliData with established product lines and sales channels in large telecommunications markets. The industry for InteliData's products and services is intensely competitive. InteliData experiences direct competition from manufacturers of smart telephones, caller ID units, and cordless phones and from 37 companies that develop transaction processing software for interactive applications and customer support services. The acquisition of Colonial Data has provided InteliData with a revenue stream that totaled approximately $74.2 million and $50.2 million, respectively, for the twelve months ended December 31, 1995 and the nine months ended September 30, 1996. There can be no assurance as to what level of future sales or royalties, if any, that InteliData will receive from Visa, Visa member banks and retail markets for its smart telephone and home banking products and services. CASH FLOWS FROM OPERATING ACTIVITIES Operating activities used $25.4 million in cash for the year ended December 31, 1996 compared to providing $1.1 million of cash in the comparable period in 1995. This decrease in cash in 1996 resulted primarily from an increase in losses, and increase in accounts receivable, and a decrease in unearned revenue, partially offset by an increase in accounts payable during 1996. CASH FLOWS FROM INVESTING ACTIVITIES Investing activities used $26.0 million in cash for the year ended December 31, 1996 compared to using $22.7 million in the comparable period in 1995. This decrease in cash used resulted primarily from the purchase of rotable spare parts required for the integration of two MD-11 aircraft and incremental DC-10 aircraft in 1995, as compared to the acquisition of engines and spare parts which were financed in 1996. In addition, the Company's consolidated cash was reduced as a result of the Merger and the Company's change to the equity method of accounting for its investment in InteliData. CASH FLOWS FROM FINANCING ACTIVITIES Financing activities used $10.6 million in cash for the year ended December 31, 1996 compared to providing $87.9 million in the comparable period in 1995. In 1995, the Company received $93.4 million from the sale of World Airways and US Order's common stock and made net repayments of $9.0 million on its borrowings. In 1996, the Company and World Airways purchased 1,337,500 and 718,000 shares, respectively, of their common stock in the fourth quarter of 1996. In addition, the Company increased its net borrowings by $1.0 million. CAPITAL COMMITMENTS World Airways - ------------- In October 1992 and January 1993, World Airways signed a series of agreements to lease seven new MD-11 aircraft for initial lease terms of two to five years, renewable for up to 10 years (and in the case of one aircraft, for 13 years) by the Company with increasing rent costs. As of March 1995, World Airways had taken delivery of all seven aircraft, consisting of four passenger MD-11 aircraft, one freighter MD-11, and two passenger/cargo convertible MD-11s. As part of the lease agreements, World Airways was assigned purchase options for four additional MD-11 aircraft. In 1992, World Airways made non-refundable deposits of $1.2 million toward the option aircraft. In March 1996, World Airways signed an agreement with the manufacturer to lease two MD-11ER aircraft. Under the agreement, it leased each aircraft for a term of 24 years with an option to return the aircraft after a seven year period with certain fixed termination fees. As part of the agreement, the above-mentioned deposits were applied towards the deposits required on these two aircraft. In addition, World Airways agreed to assume an existing lease of two additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the event that the existing lessee terminates its lease with the manufacturer at that time. As of December 31, 1996, annual minimum payments required under its aircraft and lease obligations totaled $86.2 million for 1997. As a result of its decision to discontinue scheduled service operations, World Airways reached an agreement with the lessor to terminate the leases of two DC10-30 aircraft effective December 31, 1996. As of March 31, 1997, World Airways leases one short-term DC10-30 aircraft and four long-term DC10-30 aircraft with terms expiring in 1999, 2003, and two in 1997. In August 1995, World Airways amended its aircraft spare parts facility under the Credit Agreement to provide for a variable rate borrowing of $10.5 million. Approximately $2.5 million of this facility was used to pay off the previously outstanding balance of the spare parts loan facility and $0.8 million was used to purchase additional spare parts for MD-11s required during the remainder of 1995. The balance of this loan facility was used to increase cash balances which were drawn down during the first half of 1995 to purchase MD-11 spare parts. 38 In September 1995, World Airways agreed to purchase a spare engine which was delivered in March 1996. The engine cost approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term. World Airways made payments of $1.2 million and $0.4 million towards this purchase in September 1995 and January 1996, respectively. As discussed above, World Airways signed an agreement for the lease of two MD-11ER aircraft beginning in the first quarter of 1996 to provide additional capacity for growth opportunities. As part of the agreement for the MD-11 aircraft, World Airways received spare parts financing from the lessor of $9.0 million of which $3.0 million was made available with the delivery of each aircraft, and the remaining $3.0 million was made available in December 1996. As of December 31, 1996, approximately $6.4 million had been received. In January 1996, World Airways agreed to purchase an additional engine and received a commitment from the engine manufacturer to finance 85% of its purchase price over a seven-year term with an interest rate to be fixed at the time of delivery, which is expected to be during 1997. World Airways' fixed assets increased approximately $17.7 million during 1996. The majority of this amount relates to assets which were financed. World Airways anticipates that its total capital expenditures in 1997, which includes the spare engine, will approximate $10.2 million of which it will receive approximately $6.1 million in financing. World Airways expects that the remaining balance will be funded from its operating cash flow and available cash balances. In March 1996, the Credit Agreement was amended to increase the limit on capital expenditures by World Airways to no more than $35.0 million and $25.0 million in 1996 and 1997, respectively. As of December 31, 1996, World Airways held approximately $3.9 million (at book value) of aircraft spare parts currently available for sale. InteliData - ---------- InteliData's principal needs for cash in 1996 were for investments in property and equipment and to fund working capital, primarily related to inventories and accounts receivable. InteliData's primary needs for cash in the future are for investments in product development, working capital, the financing of operations, strategic ventures, potential acquisitions, capital expenditures and the upgrade of its systems and operations. In order to meet its needs for cash over the next twelve months, InteliData will utilize proceeds from its 1995 initial public offering and cash received in the Merger. Additionally, InteliData may utilize funds it expects to generate from operations in the second half of 1997. FINANCING DEVELOPMENTS WorldCorp. On August 29, 1996, the Company entered into a bridge loan (the "Bridge Loan") with a financial institution pursuant to which the Company borrowed $25.0 million and subsequently retired its existing 13 7/8% Subordinated Notes of the same amount. The Bridge Loan is due September 29, 1997 and earns interest of LIBOR plus 2.5%, payable monthly. Under the terms of the Bridge Loan, the borrowings are collateralized by all of the shares of World Airways and InteliData owned by WorldCorp, a first priority security interest in WorldCorp's assets, and certain cash collateral. On September 30, 1996, the Company entered into a purchase agreement (the "Purchase Agreement") which contained a series of Senior Subordinated Notes ("Notes") totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan in October 1996. The Notes are payable in three installments through September 2000, earn interest of 10%, payable semi-annually, and are included in long-term obligations at December 31, 1996. On December 31, 1996, the Company refinanced the Bridge Loan, which resulted in a decrease in the interest rate to LIBOR plus 1.75%, and reduced the cash collateral under the loan to $1.0 million. The interest rate was 7.99% at December 31, 1996. The Purchase Agreement and the Bridge Loan generally restrict the amount of stock repurchases by WorldCorp based on certain specified conditions. These borrowings also contain a number of covenants that, among other things, restrict the ability of WorldCorp to dispose of assets, make certain acquisitions of the stock of other entities, incur additional indebtedness, and make capital expenditures. The Bridge Loan also contains certain covenants which, among other things, require WorldCorp to maintain at least a 50.1% ownership of World Airways. In the first quarter of 1997, WorldCorp entered into a $1.0 million margin loan with Scott & Stringfellow, Inc., whereby WorldCorp pledged approximately 400,000 shares of InteliData common stock which WorldCorp owns as collateral for such loan (the "Margin Loan"). The Bridge Loan was amended to permit this loan. World Airways. In October 1995, World Airways completed an initial public offering pursuant to which World Airways and WorldCorp received approximately $22.8 million and $10.2 million in net proceeds, respectively. Each company used its proceeds to increase cash reserves. Effective June 30, 1996, World Airways amended its Credit Agreement with BNY Financial Corporation ("BNY") to include the following: a $10.0 million spare parts loan and an $8.0 million revolving line of credit. This amended Credit Agreement is collateralized by certain receivables, inventory, and equipment. As of December 31, 1996, the outstanding balance of the spare parts loan and revolving line of credit was $7.6 million and $6.8 million, respectively, with minimal capacity available on the revolving line of credit. 39 Under the terms of the amended Credit Agreement, World Airways is not permitted to (i) incur indebtedness in excess of $25.0 million (excluding capital leases), (ii) declare, pay, or make any dividend or distribution in any six month period which aggregate in excess of the lesser of $4.5 million or 50% of net income for the previous six months, (iii) declare or pay dividends if after giving effect to such dividends World Airways' cash or cash equivalents would be less than $7.5 million or (iv) make capital expenditures in 1996 and 1997 of more than $35.0 million and $25.0 million, respectively, or in any subsequent year of more than $15.0 million. World Airways must also maintain a certain quarterly net worth and net income (loss) requirements. At December 31, 1996, World Airways was not in compliance with one covenant, but obtained a waiver from the financial institution. This waiver also extended the date that World Airways is required to pay any outstanding amounts under the line of credit to December 31, 2000. The aircraft security agreement remains payable in 1999. No assurances can be given, however, that World Airways will meet these covenants prospectively or, if necessary, obtain the required waivers. In addition, World Airways granted warrants to BNY in October 1996 to purchase up to 50,000 shares of common stock. In September 1995 World Airways entered into an agreement with a lessor to purchase a spare engine, previously under lease, for $5.5 million. World Airways paid $0.5 million upon closing and signed a note for the $5.0 million balance. The note bears interest at a rate of 7.25% and is payable over a 40-month period at $69,000 a month, with the balance of $3.3 million due on January 29, 1999. In addition, World Airways purchased an additional spare engine which was delivered in March 1996 at a cost of approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term. World Airways made payments of $1.2 million and $0.4 million towards this purchase in September 1995 and January 1996, respectively. In January 1996, World Airways agreed to purchase an additional engine and received a commitment from the engine manufacturer to finance 85% if its purchase price over a seven-year term with an interest rate to be fixed at the time of delivery. InteliData. In June 1995, US Order completed an initial public offering pursuant to which US Order and WorldCorp received $41.6 million and $18.7 million in net proceeds, respectively. US Order used part of its proceeds to satisfy debt obligations (including those to WorldCorp). The remaining balance was added to US Order's cash reserves. WorldCorp used its proceeds to fund its debt service requirements and increase its cash position. InteliData maintains three credit facilities aggregating $20 million. The first credit agreement covers the period through May 1997 and is a revolving line of credit of $1.0 million. The second credit agreement is a $4.0 million line of credit utilized for the purpose if issuing letters of credit. The third credit agreement is a credit facility totaling $15.0 million for cash advances and letters of credit. As of December 31, 1996, InteliData had outstanding $2.0 million under a line of credit and had available $13.5 million to fund draw downs and letters of credit. OTHER MATTERS LEGAL AND ADMINISTRATIVE PROCEEDINGS The Company and World Airways (the "World Defendants") are defendants in litigation brought by the Committee of Unsecured Creditors of Washington Bancorporation (the "Committee") in August 1992, captioned Washington Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the "Boster Litigation"). The complaint asserts that the World Defendants received preferential transfers or fraudulent conveyances from Washington Bancorporation when the World Defendants received payment at maturity on May 4, 1990 of Washington Bancorporation commercial paper purchased on May 3, 1990. Washington Bancorporation filed for relief under the Federal Bankruptcy Code on August 1, 1990. The Committee seeks recovery of approximately $4.8 million from World Airways and approximately $2.0 million from WorldCorp. Under a settlement agreement which remains subject to certain contingencies, the plaintiff has agreed to dismiss with prejudice the Boster Litigation against all defendants, including the World Defendants, with each party to bear its own costs. In that event, the World Defendants would not have any further liability in the Boster Litigation. On January 28, 1997, the U.S. District Court conditionally dismissed the Boster Litigation subject to reinstatement if the settlement is not finalized by May 15, 1997. In any event, the Company believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation. Depending upon the timing of the resolution of this claim, if the Committee were successful in recovering the full amount claimed, the resolution could have a material adverse effect on the financial condition or results of operations of the Company. 40 World Airways has periodically received correspondence from the FAA with respect to minor noncompliance matters. Most recently, as the FAA has increased its scrutiny of U.S. airlines, it was assessed a preliminary fine of $810,000 in connection with certain minor security violations by ground handling crews contracted by World Airways for services at foreign airport locations. In each of these instances, World Airways was in compliance with international regulations, but not the more stringent U.S. requirements. World Airways has taken steps to comply with the U.S. requirements and believes that any fines ultimately imposed by the FAA will not have a material adverse effect on the financial condition or results of operations of World Airways. World Airways believes the amount of fines it will ultimately be assessed will be below the preliminary assessment. This estimated amount is included in liabilities in the accompanying balance sheet at December 31, 1996. In connection with the discontinuance of World Airways' scheduled service operations, it is subject to claims by various third parties and may be subject to further claims in the future. One claim has been filed in connection with its discontinuance of scheduled service to South Africa, seeking approximately $37.8 million in compensatory and punitive damages. World Airways believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation. Depending upon the timing of the resolution of this claim, if the plaintiff were successful in recovering the full amount claimed, the resolution could have a material adverse effect on its financial condition or results of operations. In addition, the Company is party to routine litigation and administrative proceedings incidental to its business, none of which is believed by the Company to be likely to have a material adverse effect on the financial condition of the Company. EMPLOYEES The Company employs four individuals. The majority of its administrative requirements are performed by employees of World Airways. The Company is charged an appropriate monthly fee for these services. World Airways cockpit crew members, who are represented by the International Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year collective bargaining agreement that will become amendable in June 1998. World Airways' flight attendants are also represented by the Teamsters under a collective bargaining agreement that became amendable in 1992. The parties exchanged their opening contract proposals in 1992. In June 1996, World Airways signed a new four year labor agreement with the Teamsters which provides for retroactive pay increases for the flight attendants and work rule flexibility and lengthened duty time rules for the Company. The agreement was ratified by the flight attendants in August 1996. World Airways flight attendants challenged the use of foreign flight attendant crews on its flights for Malaysian Airlines and Garuda Indonesia which has historically been its operating procedure. World Airways is contractually obligated to permit its Southeast Asian customers to deploy their own flight attendants. While the arbitrator in this matter recently denied the Union's request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that World Airways' contract with its flight attendants requires it to first actively seek profitable business opportunities that require using its flight attendants, before World Airways may accept wet lease business opportunities that use the flight attendants of its customers. World Airways can provide no assurances as to how the imposition of this requirement will affect its financial condition and results of operations. World Airways' aircraft dispatchers are represented by the Transport Workers Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995, the parties reached agreement with respect to a new four-year contract. This contract was ratified on February 7, 1996. Fewer than 12 Company employees are covered by this collective bargaining agreement. World Airways' is unable to predict whether any of its employees not currently represented by a labor union, such as its maintenance personnel, will elect to be represented by a labor union or collective bargaining unit. The election by such employees of representation in such an organization could result in employee compensation and working condition demands that could have a material adverse effect on the financial results of the Company. 41 DIVIDEND POLICY WorldCorp has never paid any dividends and does not plan to do so for the foreseeable future. The Purchase Agreement governing the Notes, and the Indenture governing the Company's Debentures, in certain circumstances, restrict the Company from paying dividends or making distributions on its common stock. As a holding company, all of WorldCorp's funds are generated through its positions in World Airways and InteliData, neither of whom intend to pay dividends in the foreseeable future. In addition, World Airways' ability to pay dividends is currently restricted under a borrowing arrangement. ESSOP The Board of Directors of World Airways adopted an Employee Savings and Stock Ownership Plan (the "Plan") effective October 1, 1996. The Plan is intended to allow participating employees to share in the growth and prosperity of World Airways, to encourage participants to save on a tax-favored basis, and to provide participants an opportunity to accumulate capital for their future economic security. The Plan is an amendment and continuation of the WorldCorp Employee Savings and Stock Ownership Plan (the "WorldCorp KSOP"). As a result of various business developments, the vast majority of the participants in the WorldCorp KSOP were World Airways employees. For that reason, WorldCorp and World Airways agreed that World Airways should assume WorldCorp's obligation under the WorldCorp KSOP. In connection with that action, the Trustees exchanged the unallocated shares of WorldCorp common stock held by the WorldCorp KSOP for a like-value of shares in World Airways common stock. World Airways also made a special contribution of $50,000 to the Plan. The Plan will continue to hold the shares of WorldCorp common stock that were allocated the participants' accounts before October 1, 1996. No additional shares of WorldCorp common stock will be allocated under the Plan on or after that date. Instead, participants will have the opportunity to receive future allocations of World Airways common stock. INCOME TAXES At December 31 1996, WorldCorp had approximately $53.1 million in net operating loss carryforwards ("NOLs") that are available to offset future federal taxable income. There can be no assurance that the Company will generate taxable income in future years so as to allow the Company to realize a tax benefit from its NOLs. The NOLs are subject to examination by the IRS and, thus, are subject to adjustment or disallowance resulting from any such IRS examination. In addition, ownership changes of the Company, pursuant to the Internal Revenue Code, may occur in the future and may result in the imposition of an annual limitation on the Company's NOLs existing at the time of any such ownership change. In addition, a portion of World Airways' NOLs are subject to an annual limitation as a result of a previous ownership change, for tax purposes, which occurred in 1991. World Airways does not file a consolidated income tax return with the Company. INFLATION The Company believes that inflation has not had a material effect on the Company's revenues during the past three years. 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS)
December 31, ------------------------- 1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents, including restricted cash of $447 at December 31, 1996 and $625 at December 31, 1995 (Note 20) $ 12,462 $ 74,443 Restricted cash and short-term investments (Notes 8, 12 and 20) 2,047 4,218 Trade accounts receivable, less allowance for doubtful accounts of $413 at December 31, 1996 and $322 at December 31, 1995 (Notes 12 and 18) 19,427 12,476 Other receivables 4,667 4,438 Due from affiliate, net (Note 6) 4,181 2,981 Prepaid expenses and other current assets (Notes 9 and 19) 8,314 11,668 Assets held for sale (Notes 10 and 13) 500 700 -------- -------- Total current assets 51,598 110,924 ------- ------- ASSETS HELD FOR SALE (Notes 10 and 13) 3,425 2,383 EQUIPMENT AND PROPERTY (Notes 5, 10 and 13) Flight and other equipment 75,191 60,794 Equipment under capital leases 11,639 11,734 ------- ------- 86,830 72,528 Less accumulated depreciation and amortization 21,357 17,878 ------- ------- Net equipment and property 65,473 54,650 ------- ------- LONG-TERM OPERATING DEPOSITS (Note 13) 15,951 16,157 INVESTMENT IN AFFILIATE (Notes 5 and 12) 36,299 -- OTHER ASSETS AND DEFERRED CHARGES, NET (Notes 5, 6 and 9) 5,145 15,384 INTANGIBLE ASSETS, NET (Note 11) 1,072 2,591 -------- ------- TOTAL ASSETS $ 178,963 $ 202,089 ======= =======
(Continued) 43 WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT (IN THOUSANDS EXCEPT SHARE DATA)
December 31, ------------------------- 1996 1995 ----------- ----------- CURRENT LIABILITIES Notes payable (Note 12) $ 26,386 $ 6,764 Current maturities of long-term obligations (Note 13) 9,990 11,355 Accounts payable 24,339 17,363 Net liabilities of discontinued operations (Note 3) 1,834 -- Unearned revenue 3,046 10,421 Air traffic liability -- 2,332 Accrued maintenance in excess of reserves paid 13,737 8,919 Accrued salaries and wages (Note 19) 10,344 10,804 Accrued interest 981 2,061 Accrued taxes 1,249 1,283 ------- ------- Total current liabilities 91,906 71,302 ------- ------- LONG-TERM OBLIGATIONS, NET (Note 13) 104,804 111,345 ------- ------- OTHER LIABILITIES Deferred gain from sale leaseback transactions, net of accumulated amortization of $19,099 as of December 31, 1996 and $18,041 as of December 31, 1995 6,252 7,310 Accrued postretirement benefits (Note 16) 2,545 2,596 Accrued maintenance in excess of reserves paid 6,867 3,579 Other 3,378 2,035 -------- -------- Total other liabilities 19,042 15,520 ------- ------- TOTAL LIABILITIES 215,752 198,167 ------- ------- MINORITY INTEREST (Notes 4, 5 and 6) 3,548 27,219 COMMON STOCKHOLDERS' DEFICIT (Notes 5, 12, 13, 14, 15, 16 and 19) Common stock,$1 par value, (60,000,000 shares authorized, 16,420,350 shares issued and 15,020,265 shares outstanding at December 31, 1996 and 16,416,134 shares issued and 16,353,549 shares outstanding at December 31, 1995) 16,617 16,354 Additional paid-in capital 43,824 42,210 Deferred compensation (591) (553) Accumulated deficit (91,366) (79,598) ESOP guaranteed bank loan (Notes 13 and 16) (805) (1,370) Treasury stock, at cost(1,596,766 and 62,585 shares in 1996 and 1995, respectively)(Notes 1, 4 and 16) (8,016) (340) -------- -------- TOTAL COMMON STOCKHOLDERS' DEFICIT (40,337) (23,297) -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 6, 12, 13, 15, 16, 17, 18 and 20) TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 178,963 $ 202,089 ======== =======
See accompanying Notes to Consolidated Financial Statements 44 WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA)
Years ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ OPERATING REVENUES (Note 18) World Airways $ 309,587 $ 242,386 $ 180,715 US Order 4,085 4,186 1,432 ------- ------- ------- Total operating revenues 313,672 246,572 182,147 ------- ------- ------- OPERATING EXPENSES World Airways: Flight 71,121 65,223 57,792 Maintenance (Notes 6, 13 and 20) 60,462 41,843 26,212 Aircraft costs (Notes 6 and 13) 85,227 67,331 53,860 Fuel 19,255 16,704 16,915 Flight operations subcontracted to other carriers 12,932 9,096 5,549 Promotions, sales and commissions 6,236 1,995 1,060 Depreciation and amortization 8,032 6,056 4,006 General and administrative 24,677 18,240 20,522 ------- ------- ------- Total operating expenses - World Airways 287,942 226,488 185,916 ------- ------- ------- US Order: Total operating expenses - US Order 19,190 9,457 11,429 ------- ------- ------- WorldCorp: General and administrative 3,803 4,334 3,614 ------- -------- ------- Total operating expenses 310,935 240,279 200,959 ------- ------- ------- OPERATING INCOME (LOSS) 2,737 6,293 (18,812) ------- ------- ------- OTHER INCOME (EXPENSE) Interest expense (Notes 12 and 13) (11,680) (12,586) (12,154) Interest income 3,389 2,909 863 Equity in loss of affiliate (Note 5) (23,273) -- -- Gain (loss) on issuances (purchases) of equity by subsidiaries, net (Notes 4 and 5) 38,886 43,676 10,524 Gain on sales of subsidiaries' stock (Notes 4 and 5) -- 23,717 16,398 Gain on sale of US Order banking operations (Note 5) -- -- 14,547 Other, net (1,550) 1,676 (870) ------- ------- ------- Total other income 5,772 59,392 29,308 ------- ------- ------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 8,509 65,685 10,496 INCOME TAX EXPENSE (Note 17) (504) (661) (159) MINORITY INTEREST (568) (866) (2,029) ------- ------- ------- EARNINGS FROM CONTINUING OPERATIONS 7,437 64,158 8,308 DISCONTINUED OPERATIONS (Note 3) Loss from discontinued operations (less applicable income tax benefit of $83 in 1996 and $306 in 1995) (11,720) (5,250) -- Loss on disposal (less applicable income tax benefit of $562 in 1996) (20,655) -- -- ------- ------- ------- LOSS FROM DISCONTINUED OPERATIONS BEFORE MINORITY INTEREST (32,375) (5,250) -- MINORITY INTEREST 13,184 1,300 -- ------- ------- ------- LOSS FROM DISCONTINUED OPERATIONS (19,191) (3,950) -- ------- ------- ------- NET EARNINGS (LOSS) $ (11,754) $ 60,208 $ 8,308 ======= ======= =======
(Continued) 45 WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ PRIMARY EARNINGS (LOSS) PER COMMON EQUIVALENT SHARE Continuing operations $ 0.45 $ 3.75 $ 0.54 Discontinued operations (1.15) (0.23) -- ------ ------ ------ Net earnings (loss) $ (0.70) $ 3.52 $ 0.54 ====== ====== ====== PRIMARY WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 16,676,889 17,103,669 15,516,063 ========== ========== ========== FULLY DILUTED EARNINGS (LOSS) PER COMMON EQUIVALENT SHARE Continuing operations $ * $ 2.99 $ 0.53 Discontinued operations * (0.17) -- ------ ------ ------ Net earnings (loss) $ * $ 2.82 $ 0.53 ====== ====== ====== FULLY DILUTED WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING * 22,994,866 15,793,046 ========== ========== ==========
* Fully diluted earnings per share are anti-dilutive. See accompanying Notes to Consolidated Financial Statements 46 WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN THOUSANDS EXCEPT SHARE DATA)
Employee Stock Owner- Total Additional ship Plan Treasury Common Common Paid-in Deferred Accumulated Guaranteed Stock, Stockholders' Stock Capital Compensation Deficit Bank Loan at cost Deficit ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1993 $ 15,224 $ 34,071 $ -- $ (148,114) $ (1,914) $ (340) $(101,073) Exercise of 266,723 options and warrants 268 1,160 -- -- -- -- 1,428 Employee Stock Ownership Plan guaranteed bank loan -- -- -- -- 1,914 -- 1,914 Grant of stock options -- 2,217 (2,217) -- -- -- -- Amortization of deferred compensation -- -- 1,115 -- -- -- 1,115 Other -- 115 -- -- -- -- 115 Net earnings -- -- -- 8,308 -- -- 8,308 ------ ------ ------ --------- ------- ------ -------- BALANCE AT DECEMBER 31, 1994 $ 15,492 $ 37,563 $ (1,102) $ (139,806) $ -- $ (340) $ (88,193) Exercise of 559,568 options and warrants (Notes 14 and 15) 560 2,503 -- -- -- -- 3,063 Employee Stock Ownership Plan guaranteed bank loan -- -- -- -- (1,370) -- (1,370) Grant of stock options -- 615 (615) -- -- -- -- Amortization of deferred compensation -- (260) 1,164 -- -- -- 904 Issuance of stock (Note 5) 302 1,789 -- -- -- -- 2,091 Net earnings -- -- -- 60,208 -- -- 60,208 ------ ------ ------- --------- ------- ------ -------- BALANCE AT DECEMBER 31, 1995 $ 16,354 $ 42,210 $ (553) $ (79,598) $ (1,370) $ (340) $ (23,297) Exercise of 254,456 options and warrants 254 1,245 -- -- -- -- 1,499 Employee Stock Ownership Plan guaranteed bank loan (Note 16) -- -- -- -- 565 -- 565 Grant of stock options and warrants (Notes 13 and 14) 9 594 (200) -- -- -- 403 Amortization of deferred compensation -- (225) 162 -- -- -- (63) Purchase of common stock, at cost (Note 1) -- -- -- -- -- (7,676) (7,676) Other -- -- -- (14) -- -- (14) Net loss -- -- -- (11,754) -- -- (11,754) ------ ------ ------- -------- ------- ------- -------- BALANCE AT DECEMBER 31, 1996 $ 16,617 $ 43,824 $ (591) $ (91,366) $ (805) $ (8,016) $ (40,337) ====== ====== ======= ======== ======= ======= ========
See accompanying Notes to Consolidated Financial Statements 47 WORLDCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 7) $ 74,443 $ 8,160 $ 16,916 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) (11,754) 60,208 8,308 Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities: Depreciation and amortization 10,361 8,043 5,212 Deferred gain recognition (1,058) (1,063) (1,949) Deferred aircraft rent payments, net -- 153 576 Gain on sales of equity by subsidiaries, net (38,886) (43,676) (10,524) Gain on sales of subsidiaries' stock -- (23,717) (16,398) Gain on sale of US Order banking operations -- -- (14,547) Minority interest in earnings (loss) of subsidiaries (12,616) (434) 2,029 Equity loss in affiliate 23,273 -- -- Equity loss in investee of subsidiary 1,641 -- -- (Gain) loss on sale of equipment and property (32) (462) 669 Writedown of assets held for sale 400 -- -- Deferred compensation expense 162 904 1,115 Reversal of excess maintenance reserves -- -- (4,200) Loss on disposal of discontinued operations 1,734 -- -- Other 870 570 889 Changes in certain assets and liabilities net of effects of non-cash transactions: (Increase) decrease in accounts receivable (10,607) (11,013) 5,230 Increase in restricted short-term investments (2,171) (3,550) -- Decrease(increase) in deposits, prepaid expenses and other assets 399 (3,528) (10,461) Increase in accounts payable, accrued expenses and other liabilities 22,195 11,500 3,842 (Decrease)increase in unearned revenue (7,206) 4,806 1,159 (Decrease)increase in air traffic liability (2,073) 2,332 -- -------- -------- -------- Net cash provided (used) by operating activities (25,368) 1,073 (29,050) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to equipment and property (12,620) (24,286) (4,854) Proceeds from disposal of equipment and property 735 1,768 3,893 Proceeds from sale of US Order banking operations -- -- 14,750 Purchase of investments (1,345) (219) (6,533) Cash of InteliData at date of Merger (12,800) -- -- Proceeds from sales of short-term investments, net -- -- 6,029 -------- -------- -------- Net cash provided (used) by investing activities (26,030) (22,737) 13,285 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in line of credit borrowing arrangement, net 5,031 (1,051) (4,275) Issuance of debt 47,144 25,278 6,034 Repayment of debt (51,172) (33,187) (18,065) Proceeds from stock transactions 1,499 4,353 1,428 Proceeds from sales of equity by subsidiaries 2,177 64,453 12,488 Proceeds from sales of subsidiaries' stock -- 28,986 12,300 Purchase of common stock (7,676) -- -- Purchase of common stock by subsidiary (7,361) -- -- Debt issuance costs (225) -- -- Purchase of preferred stock by subsidiary -- -- (2,718) Payment of dividends by subsidiary -- (885) -- Other -- -- (183) -------- -------- -------- Net cash provided(used) by financing activities (10,583) 87,947 7,009 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (61,981) 66,283 (8,756) -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7) $ 12,462 $ 74,443 $ 8,160 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements 48 WORLDCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION WorldCorp, Inc. ("WorldCorp" or "the Company") was organized in March 1987 to serve as the holding company for World Airways, Inc., ("World Airways"). WorldCorp owns positions in companies that operate in two distinct business areas. World Airways provides worldwide passenger and cargo air transportation to major international airlines, the U.S. Air Force, and international tour operators, with a fleet of MD-11 and DC10-30 aircraft. InteliData Technologies Corporation ("InteliData") concentrates on three markets: (1) consumer telecommunications; (2) electronic commerce; and (3) interactive services. WorldCorp's aviation services subsidiary, World Airways, is a leading provider of long range passenger and cargo air transportation, serving customers in three distinct markets: major international air carriers; the U.S. Government and international tour operators in leisure passenger markets. World Airways' business relies heavily on its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"), Philippine Airlines, Inc. ("Philippine Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air Force (see Note 18). WorldCorp also has an ownership interest in InteliData, a company which is engaged in providing products and services for three primary markets: consumer telecommunications, electronic commerce and interactive services. InteliData designs, develops and markets consumer telecommunications products including Caller ID adjuncts, integrated telephones and smart telephones. InteliData also develops products and services for financial institutions to assist in home banking and electronic bill payment initiatives and designs and markets interactive service applications for smart telephones and other small screen devices. During the third quarter of 1996, the Company announced its intention to purchase up to 2.5 million shares of its publicly-traded common stock pursuant to open market transactions. During the fourth quarter of 1996, the Company purchased 1,337,500 shares of its common stock for an aggregate cost of $7.7 million. In February 1997, the Company purchased an additional 25,000 shares of its common stock for an aggregate cost of $0.1 million. WorldCorp does not intend to purchase any additional shares at this time. WorldCorp is highly leveraged, and therefore requires substantial funds to cover its debt service (see Note 2). Of the $12.5 million in cash and cash equivalents at December 31, 1996, approximately $7.0 million is held by World Airways and, therefore, is not available to satisfy WorldCorp's obligations. WorldCorp's investment in the net assets of World Airways and US Order aggregates $41.9 million as of December 31, 1996. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of WorldCorp; its approximately 61.3% ownership interest in the outstanding common stock of World Airways; its wholly owned subsidiaries: WorldCorp Investments, Inc., World Flight Crew Services, Inc., World Airways Cargo, Inc., and World Games, Inc., and through November 7, 1996, its interest in US Order, Inc. ("US Order"). On November 7, 1996, US Order and Colonial Data Technologies Corporation ("Colonial Data") merged with and into InteliData ("Merger")(see Note 5). Effective with this merger, InteliData became the successor corporation to US Order. As a result of the Merger, WorldCorp's ownership percentage in InteliData was reduced to 28.9% and, as such, beginning November 7, 1996, WorldCorp reports its share of InteliData's net assets and results of operations under the equity method of accounting. All significant intercompany balances have been eliminated. FINANCIAL STATEMENT RECLASSIFICATION Certain items in the prior year consolidated financial statements included herein have been reclassified to conform to the 1996 financial statement presentation. 49 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents. REVENUE RECOGNITION Revenues are recognized as the services are provided. EARNINGS (LOSS) PER COMMON SHARE Primary earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include warrants and options. Fully diluted earnings (loss) per common and common equivalent shares, including convertible debt, have not been presented where the results are anti-dilutive. EQUIPMENT AND PROPERTY Equipment and property are stated at cost or, if acquired under capital leases, at the present value of the minimum lease payments. Provisions for depreciation and amortization of equipment and property are computed over estimated useful lives or the term of the lease, if shorter, for capital leases, by the straight-line method, with estimated residual values of 0 - - 15%. Estimated useful lives of equipment and property are as follows: DC10 and MD-11 flight equipment 15-16 years Other equipment and property 5-10 years Deferred gains realized in connection with sale-leasebacks of aircraft and equipment are amortized over the periods of the respective leases. AIRCRAFT MAINTENANCE Major airframe maintenance and engine overhauls are expensed using the accrual method of accounting. The accrual method provides for estimating the cost of the initial overhaul and accruing the cost, based on an hourly rate, to the overhaul. At that time, the actual cost of overhaul is charged to the accrual, with any deficiency or excess charged or credited to expense. The cost of the next overhaul is then estimated, based on the new rate, and accrued to that overhaul, at which time the process is repeated. Certain of the World Airways' leases require it to make monthly payments to the lessor for estimated maintenance costs to be incurred. Modifications performed in response to Airworthiness Directives issued by the Federal Aviation Administration are capitalized at cost. Routine maintenance and general repairs are expensed as incurred. ASSETS HELD FOR SALE Assets held for sale are recorded at the lower of cost or estimated net realizable value. Net realizable value is based on the estimated fair value (measured by using a current selling price for similar assets) less estimated selling costs. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the 50 carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset's carrying amount and its estimated fair market value. INTANGIBLE ASSETS The excess of cost over the estimated fair value of the Company's share of its affiliate's net assets at the date of acquisition is being amortized over approximately 6 years, using the straight-line method (see Note 11). AIR TRAFFIC LIABILITY The air traffic liability in 1995 relates to World Airways' scheduled service flying to Tel Aviv, Israel, which World Airways began in July 1995 and ceased in October 1996 (see Note 3). Scheduled service passenger ticket sales were initially recorded in the air traffic liability account. When transportation was provided by World Airways, revenue was recognized and the liability was reduced. The liability was also reduced by any refunds to passengers or billings from other airlines that provide the passenger transportation. OTHER ASSETS AND DEFERRED CHARGES Contract enhancements and pre-operating costs are amortized on a straight line basis over certain estimated periods (see Notes 6 and 9). INCOME TAXES The Company computes income taxes in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("FAS #109"). Under the asset and liability method of FAS #109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FAS #109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The results of World Airways' operations prior to February 28, 1994 are included in the Company's consolidated income tax returns. As a result of certain transactions with MHS Berhad during 1994 (see Note 4), the results of World Airways' operations for the period from February 28, 1994 to December 1994 and subsequent periods are not included in WorldCorp's consolidated income tax returns. In addition, InteliData's results of operations are not included in the Company's consolidated income tax returns. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. The Company accounts for the benefit costs in accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS #106"). The Company funds the benefit costs on a pay-as-you-go (cash) basis. TRANSACTIONS IN SUBSIDIARIES' STOCK Gains or losses realized in connection with the issuance, sale or purchase of stock by a subsidiary are recognized in income by the Company (see Notes 4 and 5). ACCOUNTING FOR STOCK-BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, 51 Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note 15). In addition, in accordance with SFAS 123, the Company applies fair value as the measurement basis for transactions in which equity instruments are issued to nonemployees (as defined) (see Note 14). 2. OPERATING ENVIRONMENT The Company is a highly leveraged holding company. As a holding company, all of WorldCorp's funds are generated through its positions in World Airways and InteliData, which have not paid dividends on common stock since 1992. At December 31, 1996, World Airways has a working capital deficit of $29.6 million and has substantial debt and lease commitments. At December 31, 1996, InteliData has working capital of $63.5 million, with no long-term debt. World Airways' ability to pay dividends is currently restricted under a borrowing arrangement. Additionally, the provisions of the Indenture governing WorldCorp's Debentures causes World Airways not to pay dividends upon the occurrence of any events of default by WorldCorp under such Indenture. World Airways and InteliData currently intend to retain their future earnings, if any, to fund the growth and development of their business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Of the $12.5 million in cash and cash equivalents at December 31, 1996, approximately $7.0 million is held by World Airways and, therefore, is not available to satisfy WorldCorp's obligations. As of December 31, 1996, WorldCorp had parent company repayment obligations, including principal and interest, of approximately $22.4 million for 1997. In order to meet these obligations and its general and administrative costs, the Company must use its existing cash and either sell shares of World Airways or InteliData, or issue additional debt or equity. Under the terms of certain borrowing arrangements however, WorldCorp has pledged all of its shares of World Airways and InteliData as collateral for the borrowings(see Notes 12 and 13). The Company is currently evaluating the feasibility of a disposition of its interest in World Airways through a secondary offering or a sale to a third party. Any such transaction would require the approval of certain other parties(see Notes 6, 12 and 13). Additionally, management believes it will be successful in reducing the amount of collateral securing its borrowings, either by renegotiating the terms of the loan or by entering into a new loan with another financial institution. Although there can be no assurance that WorldCorp will be successful in consummating these transactions, management believes that its existing cash and the anticipated proceeds from a combination of sales of stock of World Airways or InteliData, renegotiations of its existing borrowing arrangements, or new financing arrangements, will be sufficient to allow the Company to meet its operating requirements and repayment obligations for 1997. At December 31, 1996, based on quoted market prices, the market value of the Company's 6,915,915 shares of World Airways and 9,179,273 shares of InteliData, approximated $56.2 million and $66.5 million, respectively, although these values have declined since year-end. 3. DISCONTINUED OPERATIONS World Airways commenced its scheduled service operations between Tel Aviv and New York in July 1995 and commenced its scheduled service operations between the U.S. and South Africa in June 1996. In addition, in May 1996 World Airways commenced its scheduled charter operations between the United States and Germany, Switzerland, Ireland, and the United Kingdom. However, World Airways was unable to operate these scheduled service operations profitably. Therefore, in July 1996, World Airways announced its decision to exit its scheduled service operations by October 1996 and focus its operations on its core business: operating aircraft under contracts with international carriers, the U.S. Government, and international tour operators. Consistent with this decision, World Airways ceased all scheduled operations as of October 27, 1996. As a result, World Airways' scheduled service operations were reflected as discontinued operations as of June 30, 1996, and prior period results have been restated to reflect scheduled service operations as discontinued operations. Loss from discontinued operations (net of income tax effect) approximated $11.7 million for the year ended December 31, 1996. In addition, an estimated loss on disposal of $21.0 million (net of income tax effect) which was recorded as of June 30, 1996, included the following: $13.6 52 million for estimated operating losses during the phase-out period; a $2.6 million estimated loss to be incurred in connection with sub-leasing DC-10 aircraft which will not be utilized in World Airways' operations subsequent to the phase-out of scheduled service operations; a $2.3 million writeoff of related leasehold improvements; and $2.0 million for passenger reprotection expenses. World Airways incurred approximately $18.9 million of these costs during the six months ended December 31, 1996 and believes that its remaining accrual for estimated losses on disposal will be adequate to meet the remaining costs to be incurred during the phase-out period. Effective December 31, 1996, World Airways and a lessor mutually agreed to terminate the lease agreements relating to two DC10-30 aircraft which were acquired in March 1996 as a result of World Airways' expansion of its scheduled service operations (see Note 6). These additional aircraft were not expected to be utilized after the discontinuation of World Airways' scheduled service operations. World Airways does not have any other significant assets related to its discontinued operations. World Airways is involved in several claims and legal actions arising as a result of the discontinuance of its scheduled service operations (see Note 20). 4. INVESTMENT IN WORLD AIRWAYS On February 28, 1994, pursuant to an October 1993 agreement, the Company sold 24.9% of its 100% ownership in World Airways to MHS Berhad ("MHS"), a Malaysian aviation company. Effective December 31, 1994, WorldCorp repurchased 5% of World Airways' common stock from MHS (see Note 6). On August 8, 1995, World Airways filed a registration statement on Form S-1 with the Securities and Exchange Commission to register 2,900,000 shares of World Airways' common stock. The offering was completed on October 12, 1995 at an offering price of $12.50 per share. Of the 2,900,000 shares registered, 2,000,000 shares were issued and sold by World Airways which resulted in an $11.9 million net gain to the Company, and 900,000 shares were sold by the Company, resulting in a $4.1 million net gain. Net proceeds received from the offering by the Company and World Airways approximated $10.2 million and $22.8 million, respectively. At December 31, 1996, the Company and MHS owned approximately 61.3% and 17.6%, respectively, of the outstanding common stock of World Airways. The remaining shares were publicly traded. In the third quarter of 1996, World Airways announced its intention to purchase up to one million shares of its publicly-traded common stock pursuant to open market transactions. During the fourth quarter of 1996, World Airways purchased 718,000 shares of its common stock for an aggregate cost of $7.4 million. In January 1997, World Airways repurchased an additional 52,000 shares of its common stock for an aggregate cost of $0.5 million. World Airways does not intend to purchase any additional shares at this time. As a result of the 1996 treasury stock purchases, the Company recognized a $4.2 million loss on purchases of equity by subsidiaries. As discussed in Note 2, WorldCorp is evaluating the feasibility of a disposition of its interest in World Airways through a secondary offering or a sale to a third party. There can be no assurances, however, that any such transactions will ultimately be consummated. 5. INVESTMENT IN INTELIDATA FORMATION On September 10, 1990, the Board of Directors of WorldCorp unanimously authorized WorldCorp to enter into and consummate a Stock Purchase Agreement dated as of September 14, 1990 (the "Stock Purchase Agreement"), under which WorldCorp agreed to purchase Series A Preferred Stock ("the Preferred Stock") issued by US Order. The Board of Directors of the Company authorized the purchase of US Order as part of the Company's continuing efforts to diversify its interests. In connection with this agreement, the Company was granted an option to purchase the common stock held by the founding shareholders. Mr. Gorog is Chairman of the Board of InteliData and is Chairman of the Board of Directors of WorldCorp. Mr. Gorog, together with certain members of his immediate family (the "Founders"), were majority owners of US Order. On August 25, 1994, the Company's Board of Directors approved the exercise of WorldCorp's option to purchase 4.8 million shares of US Order common stock held by the Founders. Under the terms of this agreement, prior to December 31, 1994, WorldCorp paid $0.4 million in cash to the Founders in exchange for 498,794 shares of US Order common stock, increasing WorldCorp's ownership of voting stock to 52%. Effective February 16, 1995, WorldCorp purchased the remaining 4.3 million shares of US Order common stock with 302,282 shares of WorldCorp common stock, $0.3 million in cash, and $1.1 million in the form of notes due to the Founders. These 53 notes were paid in 1995. As a result of this option exercise, WorldCorp increased its ownership in US Order's voting stock to approximately 89% in February 1995. In August 1996, WorldCorp exercised 346,429 warrants to purchase an equivalent number of shares of US Order's common stock at $4.00 per share. SALE OF BANKING OPERATIONS On August 1, 1994, US Order sold its electronic banking and bill payment operations to Visa International Services Association, Inc. ("Visa") (which subsequently transferred these assets to the wholly owned subsidiary, Visa InterActive) for $14.6 million in cash (net of closing costs of $0.2 million), the assumption of certain of US Order's capital lease obligations and other miscellaneous liabilities totaling $0.9 million, 100 shares of Visa InterActive's redeemable preferred stock, and a 72 month royalty stream commencing January 1, 1995 and ending December 31, 2000 (the "Royalty Period"). The Company recognized a gain of $14.5 million (before minority interest of $3.9 million) from this sale. Of the proceeds received by US Order, $9.4 million was used to retire a portion of its preferred stock (of which WorldCorp received $3.3 million) and to cancel vested employee options. The royalty amount is based on the number of Visa InterActive customers using the electronic banking and bill payment technology sold by US Order to Visa. Under the terms of the agreement, Visa InterActive is not required to pay US Order for the first $73,000 of royalties earned during each quarter on a cumulative basis for a total of twelve quarters. US Order has not received any Visa royalty payments to date and does not expect to receive any royalty payments through the first half of 1997. INITIAL PUBLIC OFFERING In June 1995, US Order completed an initial public offering of 4,427,500 shares of its common stock at an offering price of $14.75 per share. Of the 4,427,500 shares sold, 3,062,500 were issued and sold by US Order which resulted in a gain of approximately $27.0 million to the Company, and 1,365,000 shares were sold by the Company resulting in a gain of approximately $19.6 million. Net proceeds from the offering to the Company and US Order approximated $18.7 million and $41.6 million, respectively. In conjunction with the offering, the US Order preferred stock previously held by the Company was converted to common stock. As a result of the above transactions, WorldCorp owned 56.9% of the outstanding common stock of US Order at December 31, 1995. ACQUISITIONS On October 18, 1995, US Order acquired a 40% equity interest in Home Financial Network, Inc. ("HFN"), a newly formed, development stage personal computer software company that plans to develop and deliver electronic financial products and services to consumers, through the issuance of 296,746 shares of its common stock valued at $5.0 million. As a result, the Company recognized a $2.5 million gain on issuances of equity by subsidiaries. Effective September 30, 1996, US Order acquired all of the outstanding capital stock of Braun, Simmons & Co. ("Braun Simmons"), an information engineering firm specializing in the development of home banking and commerce solutions for financial institutions, for $2.0 million and 375,000 shares of US Order common stock. As a result, the Company recorded a gain on issuances of equity by subsidiary of $1.8 million as of September 30, 1996. The acquisition was accounted for under the purchase method of accounting. US Order expensed $4.9 million of the purchase price which was allocated to in-process research and development with no alternative future use. COLONIAL DATA MERGER On April 6, 1995, US Order entered into a stock exchange agreement with Colonial Data. Pursuant to the terms of the agreement, on June 8, 1995, US Order exchanged 230,000 shares of its common stock, valued at the initial public offering price of $14.75 per share, or $3.4 million, for 170,743 shares of Colonial Data's unregistered common stock (valued based on the average closing price of Colonial Data's stock for the twenty trading days preceding the date of the exchange) which was equivalent to the value of US Order stock exchanged. The Company recognized a gain on issuances of equity by subsidiaries of $2.0 million as a result of the exchange of this stock. The fair value of this investment at December 31, 1995 was approximately $3.5 million, based on the quoted market price of the stock, and was held for purposes other than trading. 54 On November 7, 1996, US Order and Colonial Data were merged with and into InteliData, a newly formed corporation, through an exchange of stock ("Merger"). Upon consummation of the Merger, each outstanding share of US Order common stock was converted into one share of InteliData common stock and each outstanding share of Colonial Data common stock was converted into one share of InteliData common stock. The transaction was accounted for as a purchase of Colonial Data by US Order. Pursuant to this transaction, InteliData became the successor corporation to US Order. As a result of the Merger, WorldCorp recognized a gain on issuances of equity by subsidiaries of $42.6 million, which was offset by the elimination of approximately $1.3 million of goodwill related to US Order. As a result of the Merger, WorldCorp's ownership percentage in InteliData was reduced to 28.9% and, as such, WorldCorp began reporting its share of InteliData's net assets and results of operations under the equity method of accounting. As such, WorldCorp's investment in InteliData is included in investment in affiliate in the accompanying balance sheet at December 31, 1996, and its share of InteliData's losses for the period from November 7, 1996 through December 31, 1996 are shown as equity in loss of affiliate in the accompanying statement of operations for the year ended December 31, 1996. As a result of the Merger, InteliData reported non-cash, merger related charges of approximately $72.3 million, of which the Company recorded its pro rata share, or $20.9 million. These charges related to the write-off of in-process research and development expenses for purchased in-process technology that had not reached technological feasibility as of the date of the Merger and did not have alternative future uses. The remaining $2.4 million equity in loss of affiliate represents the Company's share of InteliData's operating results for the period following the Merger. Summarized financial information of InteliData is as follows (in thousands):
Year ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Results of operations: --------------------- Revenues $ 13,899 $ 4,186 $ 1,432 Cost of revenues 10,448 2,470 1,013 Gross profit 3,451 1,716 419 Operating loss 96,112 5,161 10,165 Net income (loss) applicable to common shareholders (95,727) (5,399) 1,818
At December 31, ----------------------------- 1996 1995 ------------ ------------ Financial position: ------------------ Current assets $ 82,989 $ 27,068 Noncurrent assets 60,757 13,184 Current liabilities 19,457 2,519 Noncurrent liabilities -- --
Shown below is the Company's unaudited pro forma consolidated results of operations for the years ended December 31, 1996 and 1995, excluding the impact of the non-recurring charges for acquired in-process research and development and the impact of the gain on issuances of equity by subsidiaries relating to the Braun Simmons and Colonial Data acquisitions and as though both companies had been acquired and merged into InteliData as of the beginning of InteliData's fiscal years 1996 and 1995 (in thousands except for per share data):
At December 31, ----------------------------- 1996 1995 ------------ ------------ Revenues $ 309,587 $ 242,386 Net income (loss) (27,252) 64,925 Net income (loss) per share: Primary (1.63) 3.80 Fully diluted * 3.02
* Fully dilutive earnings per share are anti-dilutive. 55 This method of combining historical financial statements for the preparation of the unaudited pro forma condensed consolidated financial information is for presentation only. The unaudited pro forma condensed consolidated financial information is provided for illustrative purposes only and is not necessarily indicative of the consolidated financial position or consolidated results of operations that would have been reported had the mergers occurred at the beginning of the year, nor do they represent a forecast of the consolidated financial position or results of operations for any future period. 6. TRANSACTIONS WITH MHS AND MALAYSIAN AIRLINES On October 30, 1993, the Company, World Airways, and MHS entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which MHS, subject to satisfactory completion of its due diligence investigations, agreed to purchase 24.9% of World Airways' common stock for $27.4 million in cash. Under this Agreement, World Airways would receive upon closing $12.4 million to fund its working capital requirements. The remaining $15.0 million would be paid to the Company to add to its cash reserves. WorldCorp received $2.7 million prior to December 31, 1993 as an advance on the sales price. At the time of the signing of the Stock Purchase Agreement, World Airways was a wholly-owned subsidiary of the Company. On February 28, 1994, the Company, World Airways, and MHS concluded the transaction according to the terms described above. Under the agreement, if at any time after October 30, 1996 World Airways registers additional common stock under the Securities Act of 1933, MHS has the right to demand the registration of its shares of World Airways' common stock. Under a shareholders agreement, MHS agreed not to transfer, sell, or pledge any of its shares of common stock prior to February 28, 1997 without the prior written consent of the Company. MHS has the right to nominate two members to World Airways' board of directors and the Company has agreed to vote its shares of common stock to elect such nominees. Also, if without the prior written consent of MHS: (1) World Airways sells all or substantially all of its business; or (2) World Airways fundamentally changes its line of business, then MHS has the option (a) to sell or transfer all or a portion of its shares to a third party prior to February 28, 1997, and/or (b) to require the Company to purchase all or part of MHS's shares at fair market value. Fair market value is defined to be not less than the aggregate of the costs borne by MHS in acquiring and holding its World Airways shares. Management has indicated that it does not have any current intent to take any such actions without the prior consent of MHS or the directors nominated by MHS. The shareholders agreement also provides that if the Company's ownership interest in World Airways falls below 51% of the outstanding shares of common stock, then MHS may either sell its shares to a third party or require the Company to sell a pro rata number of shares held by MHS to the party purchasing the Company's shares. MHS also has a right of first refusal to purchase shares of common stock issued by World Airways or sold by the Company and to purchase additional shares of common stock to maintain its ownership percentage in World Airways. During 1994, MHS acquired 32% of Malaysian Airline System Berhad, the flag carrier of Malaysia. Due to the issuance of additional shares of common stock by Malaysian Airlines during 1996, MHS owns 29.1% of Malaysian Airlines at December 31, 1996. World Airways has provided service to Malaysian Airlines since 1981, providing aircraft for integration into Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. World Airways provided three aircraft for Hadj operations in 1996 and 1995, and, pursuant to the contract described below, will provide three aircraft for the 1997 Hadj operations.Malaysian Airlines is World Airways's largest customer (see Note 18). Effective December 31, 1994, the Company entered into a 6% note payable to MHS in the amount of $8.5 million, due December 31, 1995, in exchange for 5% of World Airways' common stock held by MHS and the execution of certain multi-year contracts between World Airways and Malaysian Airlines. The shares were pledged as security for the note payable. The note was repaid in accordance with the agreement. As a result of this transaction, effective December 31, 1994, MHS owned 19.9% of World Airways' common stock. As a result of World Airways's initial public offering (see Note 4), MHS owned approximately 16.6% of World Airways's common stock as of December 31, 1995. Due to World Airways's common stock repurchases in the fourth quarter of 1996 (see Note 4), MHS owned approximately 17.6% of World Airways's common stock as of December 31, 1996. Of the $8.5 million consideration paid by WorldCorp to MHS, $3.0 million was attributable to the contract enhancements discussed above. This amount is included in other assets and deferred charges in the accompanying balance sheets, and is being amortized over the terms of the related Malaysian Airlines contracts, approximately two to five years. As of December 31, 1996, the unamortized balance of the deferred contract cost is $1.5 million, net of $1.5 million of accumulated amortization (see Note 9). 56 In late 1994, World Airways entered into a series of multi-year contracts, with expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. In 1996, World Airways provided three aircraft for Hadj operations. World Airways recently entered into a new 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby World Airways will provide two aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. World Airways is currently in preliminary discussions with Malaysian Airlines regarding a potential eleven-month reduction in the utilization of one of these aircraft during the 32-month term of the contract. Until recently, World Airways operated four passenger aircraft for Malaysian Airlines under the multi-year agreements described above. The contract for two of the four passenger aircraft for Malaysian Airlines expired in March 1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and will actively re-market the aircraft thereafter, World Airways can provide no assurance that it will be able to redeploy the two aircraft, beginning June 1997, at price and utilization levels at least as favorable as under the terms of the Malaysian Airlines contracts. World Airways originally operated three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July, 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into the Philippine Airlines contract. World Airways and Malaysian Airlines are currently discussing the future redeployment of these aircraft back into Malaysian Airlines' operations in order to meet the contract's original obligations. World Airways can provide no assurances, however, that it will, in fact, be able to redeploy these two aircraft back into Malaysian Airlines' operation to meet the contract's original obligations. Certain operating costs incurred by World Airways pursuant to the currently operated contracts are reimbursed by Malaysian Airlines. As of December 31, 1996 and 1995, World Airways had $4.2 million, which consists of trade receivables of $9.2 million offset by $5.0 million of aircraft rent due to Malaysian Airlines, and $3.0 million, respectively, included in due from affiliate in the accompanying balance sheets relating to these contracts. World Airways and Malaysian Airlines entered into an agreement in March 1995 pursuant to which Malaysian Airlines provides routine maintenance checks, structural inspections and other necessary work for World Airways' aircraft in Kuala Lumpur. World Airways expensed approximately $1.7 million and $1.5 million during 1996 and 1995, respectively, related to these services. During 1995, World Airways entered into agreements with Malaysian Airlines to lease two DC10-30 aircraft. The aircraft were delivered in June and December 1995 and have lease terms of 26 and 36 months, respectively. In March 1996, World Airways leased two additional DC10-30 aircraft from Malaysian Airlines. These aircraft had initial lease terms of 36 months with monthly rent expense and other lease terms similar to the aircraft leased during 1995. These additional aircraft were not expected to be utilized after the discontinuation of World Airways' scheduled service operations in October 1996 (see Note 3). Therefore, effective December 31, 1996, the parties mutually agreed to terminate the lease agreements for the additional two aircraft. Rent expense and maintenance reserve payments related to all of the aircraft leased from Malaysian Airlines totalled $12.6 million and $1.6 million in 1996 and 1995, respectively. In March 1997, World Airways entered into an agreement with Malaysian Airlines to lease an incremental DC10- 30 aircraft on a short-term basis to support its peak flying season. The aircraft will be returned at the end of the Hadj program. 7. SUPPLEMENTAL INFORMATION -- STATEMENTS OF CASH FLOWS Additional information pertaining to certain cash payments and noncash investing and financing activities is as follows (in thousands):
Year ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Cash paid for: Interest $ 12,377 $ 12,130 $ 11,550 Income taxes 412 711 140
57 World Airways purchased a spare engine which was delivered in March 1996. The engine cost approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term (see Note 13). World Airways made payments of $1.2 million and $0.4 million towards this purchase in September 1995 and January 1996, respectively. In March 1996, World Airways entered into an agreement with McDonnell Douglas to lease two MD-11ER aircraft (see Note 13). World Airways entered into a simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. World Airways can borrow a total of $9.0 million of which $3.0 million became available with the delivery of each aircraft and an additional $3.0 million became available in December 1996. Borrowings under the agreement were $6.4 million during 1996, of which $0.5 million was repaid at December 31, 1996. World Airways paid approximately $1.8 million and exchanged a DC10 engine valued at approximately $1.0 million in connection with the settlement of maintenance reserves due on the return of three DC10 aircraft in 1994. During 1994, US Order redeemed preferred stock through the issuance of a note payable of $0.9 million. 8. SHORT-TERM INVESTMENTS At December 31, 1996 and 1995, short-term investments consist of cash pledged as collateral for letters of credit with original maturities in excess of ninety days, and expiration dates within one year, and cash collateralizing a loan with a financial institution (Note 12). 9. OTHER ASSETS AND DEFERRED CHARGES Other assets and deferred charges consist of the following (in thousands):
December 31, ----------------------------- 1996 1995 ------------ ------------ Debt issuance costs, net $ 1,763 $ 2,036 Long-term notes receivable (Note 19) 529 868 Deferred contract cost (Note 6) 1,509 2,285 Aircraft integration costs, net 1,094 1,968 Long-term investments of US Order (Note 5) -- 8,227 ------- ------- $ 4,895 $ 15,384 ======= =======
Debt issuance costs consist of the costs of issuing the Convertible Subordinated Debentures due 2004, the Bridge Loan due in 1997 and revolving lines of credit agreements. These costs are being amortized over the term of the respective debt instruments using the effective interest method (see Notes 12 and 13). The debt issuance costs relating to the 13 7/8% Subordinated Notes were included in the accompanying balance sheet at December 31, 1995, but were written off when the Notes were retired in 1996. Aircraft integration costs consist of pre-operating costs incurred in connection with integrating the new MD-11 aircraft into World Airways' fleet (see Note 13). These costs, consisting primarily of flight crew training, are being amortized on a straight-line basis over a five-year period. Prepaid expenses and other current assets at December 31, 1996 and 1995 includes prepaid insurance of approximately $4.9 million and $5.9 million, respectively, and prepaid rent of approximately $2.5 million and $1.5 million, respectively. Included in the December 31, 1995 balance is a deposit on a spare engine of approximately $1.2 million. 10. ASSETS HELD FOR SALE Assets held for sale consist primarily of DC10 and B727 rotables with a net book value of $3.9 million and $3.0 million as of December 31, 1996 and 1995, respectively. World Airways has consigned these parts with a third party to be sold over a reasonable period of time with the objective of maximizing the proceeds from the sales. As a result of the discontinuance of World Airways' scheduled service operations in 1996 (see Note 3), and the termination of two DC10 lease agreements in December 1996 (see Notes 6 and 13), World Airways consigned 58 additional DC10 rotables with the third party during 1997. Accordingly, the net book value of these parts of $1.7 million was reclassified from flight and other equipment to assets held for sale in the accompanying balance sheet at December 31, 1996. During the fourth quarter of 1996, World Airways wrote-down assets held for sale by $0.4 million to reflect the estimated fair value of the parts less estimated selling costs. 11. INTANGIBLE ASSETS As a result of various transactions in the capital stock of US Order through 1995, the Company recorded approximately $5.2 million of goodwill, which is being amortized over approximately six years using the straight-line method. As a result of the sale of a portion of its stock of US Order pursuant to US Order's initial public offering during 1995, approximately $1.9 million of this goodwill was eliminated and offset against the gain on sale of stock. As a result of the merger of US Order and Colonial Data with and into InteliData during 1996, approximately $1.3 million of goodwill was eliminated and offset against the gain on issuances of equity by subsidiaries (see Note 5). 12. NOTES PAYABLE In 1993, World Airways entered into an $8.0 million revolving line of credit borrowing arrangement which is collateralized by certain receivables which were sold to the bank with recourse. Borrowing availability under the line is based on the amount of eligible receivables. This borrowing arrangement was amended effective June 30, 1996 (see Note 13). World Airways had minimal unused borrowing capacity at December 31, 1996 and 1995. Borrowings under the line of credit were $6.8 million and $1.7 million at December 31, 1996 and 1995, respectively, and bear interest at the greater of the federal funds rate plus 2.5% or the prime rate plus 2%. The interest rate was 10.25% and 10.5% at December 31, 1996 and 1995, respectively. This agreement contains certain covenants related to World Airways' financial condition and operating results, including minimum quarterly net worth and net income (loss) tests. At December 31, 1996, World Airways was not in compliance with one covenant, but obtained a waiver of the covenant from the lender. This waiver also extended the date that World Airways is required to pay any outstanding amounts under the line of credit to December 31, 2000. No assurances can be given that World Airways will meet these covenants in the future or, if necessary, obtain the required waivers. The agreement also requires an unused facility fee of 0.5% per year. A $4.6 million note and a $5.0 million note, both bearing interest at 3.8%, are included in notes payable at December 31, 1996 and 1995, respectively. The $5.0 million note was fully paid during 1996. The $4.6 million note requires monthly principal and interest payments, and will be paid in full in 1997. In the first quarter of 1995, World Airways received approximately $6.0 million in working capital and short-term financing from certain of its equipment lessors, bearing interest at approximately 11%. The balance was repaid during 1995. On August 29, 1996, the Company entered into a bridge loan (the "Bridge Loan") with a financial institution pursuant to which the Company borrowed $25.0 million and subsequently retired its existing 13 7/8% Subordinated Notes of the same amount. The Bridge Loan is due September 29, 1997 and earns interest of LIBOR plus 2.5%, payable monthly. Under the terms of the Bridge Loan, the borrowings are collateralized by all of the shares of World Airways and InteliData beneficially owned by WorldCorp, a first priority security interest in WorldCorp's assets, and certain cash collateral. On September 30, 1996, the Company entered into a purchase agreement (the "Purchase Agreement") which contained a series of Senior Subordinated Notes ("Notes") totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan in October 1996. The Notes are payable in three installments through September 2000, earn interest of 10%, payable semi-annually, and are included in long-term obligations at December 31, 1996 (see Note 13). On December 31, 1996, the Company refinanced the Bridge Loan, which resulted in a decrease in the interest rate to LIBOR plus 1.75%, and reduced the cash collateral under the loan to $1.0 million. The interest rate was 7.99% at December 31, 1996. The Purchase Agreement and the Bridge Loan generally restrict the amount of stock repurchases by WorldCorp based on certain specified conditions. These borrowings also contain a number of covenants that, among other things, restrict cash dividends, restrict the ability of WorldCorp to dispose of assets, make certain acquisitions of the stock of other entities, incur additional indebtedness, and make capital expenditures. The Bridge Loan also contains certain covenants which, among other things, require WorldCorp to maintain at least a 50.1% ownership of World Airways. In the first quarter of 1997, WorldCorp entered into a $1.0 million margin loan with Scott & Stringfellow, Inc., whereby WorldCorp pledged approximately 400,000 shares of InteliData 59 common stock which WorldCorp owns as collateral for such loan (the "Margin Loan"). The Bridge Loan was amended to permit this loan. 13. LONG-TERM OBLIGATIONS LONG-TERM DEBT Long-term obligations of the Company at December 31 are as follows (in thousands):
1996 1995 ---------- ---------- WorldCorp: Senior Subordinated Notes -- with interest at 10% payable semi-annually beginning March 31, 1997 (net of unamortized discount of $0.3 million) (Note 12). 9,675 -- Convertible Subordinated Debentures due 2004 -- with interest at 7% payable semi-annually beginning May 15, 1992. 65,000 65,000 13 7/8 Subordinated Notes, retired in August 1996 (net of unamortized discount of $0.1 million in 1995). -- 24,961 Unsecured promissory note due 1997 -- with interest at 6% payable quarterly beginning May 8, 1994. 900 900 World Airways: Note payable due 1999 -- with principal and interest at 7.25% payable monthly, collateralized by one Pratt & Whitney PW4462 engine. $ 4,393 $ 4,883 Note payable due 2003 -- with principal and interest at 9.98% payable monthly, collateralized by one Pratt and Whitney PW4462 engine. 6,018 -- Spare parts loan due 1998 -- with principal and interest at 8.5% payable monthly, collateralized by certain MD-11 spare parts. 3,229 3,617 Spare parts loan due 2003 -- with principal and interest at 8.5% payable monthly collateralized by certain MD-11 spare parts. 2,581 2,857 Spare parts loan due 2003 -- with principal and interest at 10% payable monthly, collateralized by certain MD-11 spare parts. 5,929 -- Aircraft spare parts security agreement payable to a bank due 1999, net of discount of $0.2 million -- with interest at the greater of the federal funds rate plus 2.5% or the prime rate plus 2% (10.25% at December 31, 1996 and 10.5% at December 31, 1995), collateralized by certain rotables. 7,372 8,568 Employee Saving and Stock Ownership Plan guaranteed bank loan (Note 16) 805 1,370 Capitalized lease obligations 7,750 8,869 Deferred aircraft rent 1,142 1,675 -------- -------- Total 114,794 122,700 Less current maturities 9,990 11,355 -------- -------- Total long-term obligations, net $ 104,804 $ 111,345 ======= =======
The estimated fair value of the Convertible Subordinated Debentures at December 31, 1996 approximated $44.5 60 million. The Company believes that the carrying values of the other amounts outstanding under the above debt agreements approximate fair value. In May 1992, the Company issued $65.0 million of Convertible Subordinated Debentures due 2004 (the "Debentures"). The Debentures are convertible into WorldCorp common stock at $11.06 per share, subject to adjustment in certain events, and bear an annual interest rate of 7%. Semi-annual interest payments are due on May 15 and November 15. The terms of this indenture cause World Airways not to pay dividends upon the occurrence of any events of default by the Company under the indenture. The indenture also restricts the Company's ability to pay dividends or make other distributions on its common stock. On August 29, 1996, the Company entered into a bridge loan (the "Bridge Loan") with a financial institution pursuant to which the Company borrowed $25.0 million and subsequently retired its existing 13 7/8% Subordinated Notes of the same amount (see Note 12). The Company entered into a purchase agreement (the "Purchase Agreement") on September 30, 1996 which contained a series of Senior Subordinated Notes totaling $10.0 million which was used to retire $10.0 million of the Bridge Loan in October 1996. The Notes are payable in three installments through September 2000 and earn interest of 10%, payable semi-annually. In connection with the Purchase Agreement, the Company granted warrants to the lenders to purchase up to 120,000 shares of the Company's common stock, at $6.00 per share, subject to certain adjustments. The Company may also be required to issue up to an additional 80,000 warrants contingent upon certain market conditions. These warrants were valued at approximately $0.6 million (see Note 14). Under the terms of the Purchase Agreement, the Company is not permitted to pay cash dividends. Also, WorldCorp is obligated under certain conditions to make certain mandatory prepayments of the Notes. If the Asset Value, as defined, at the end of any fiscal year is less than $70.0 million, then WorldCorp must prepay 50% of each of the then outstanding Notes within 60 days. If the Asset Value at the end of any fiscal quarter is less than $50.0 million, then WorldCorp must prepay all of the then outstanding Notes within 60 days. If WorldCorp sells any shares of common stock of InteliData, 20% of the net proceeds received by WorldCorp upon such sale must be used to prepay the then outstanding Notes within 30 days. "Asset Value" is defined to mean (A) the market value of the common stock of World Airways and InteliData beneficially owned by the Company and the common stock of any other subsidiary of the Company beneficially owned by the Company which is listed on an exchange or quoted on the NASDAQ National Market, plus (B) the value of all other tangible assets of the Company. As of December 31, 1996, the Asset Value was $130.4 million, although this value has declined since year-end. Also under the Purchase Agreement, senior indebtedness of the Company shall not exceed $50.0 million. As described in Note 2, in order to meet its debt service obligations for 1997, WorldCorp must use its cash and either sell shares of World Airways or InteliData, or issue additional debt or equity. Under the terms of certain loan agreements, WorldCorp has pledged all of its shares of World Airways and InteliData as collateral for the loans (see Note 12). Effective June 30, 1996, World Airways amended its Credit Agreement with BNY Financial Corporation ("BNY"), which includes the aircraft security agreement and the $8.0 million revolving line of credit borrowing (see Note 12). This amended Credit Agreement is collateralized by certain receivables, inventory, and equipment. Under the terms of the amended Credit Agreement, World Airways is not permitted to (i) incur indebtedness in excess of $25.0 million (excluding capital leases), (ii) declare, pay, or make any dividend or distribution in any six month period which aggregate in excess of the lesser of $4.5 million or 50% of net income for the previous six months, (iii) declare or pay dividends if after giving effect to such dividends World Airways' cash or cash equivalents would be less than $7.5 million or (iv) make capital expenditures in 1996 and 1997 of more than $35.0 million and $25.0 million, respectively, or in any subsequent year of more than $15.0 million. World Airways must also maintain a certain quarterly net worth and net income (loss) requirements. At December 31, 1996, World Airways was not in compliance with one covenant, but obtained a waiver of the covenant from the financial institution. This waiver also extended the date that World Airways is required to pay any outstanding amounts under the line of credit to December 31, 2000. The aircraft security agreement remains payable in 1999. No assurances can be given that World Airways will meet these covenants in the future or, if necessary, obtain the required waivers. In conjunction with the amendment, World Airways granted warrants to BNY to purchase up to 50,000 shares of authorized, but unissued common stock. The warrants were granted at an exercise price of $8.00 per share which was 61 equal to the market price of World Airways' stock at the date of grant. All warrants were vested and became fully exercisable at the date of grant and expire on December 31, 1999. The per share weighted-average fair value of warrants granted was $3.62 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk free interest rate of 5.99%, expected life of 3 years and expected volatility of 61%. World Airways recorded $0.2 million related to the warrants which will be amortized into interest expense over the terms of the related debt. During 1996, World Airways amended its spare parts loan originally due in 1997 which required semi-annual payments of principal and interest. The amended agreement expires in 2003 and requires monthly payments of principal and interest. In September 1995, World Airways entered into an agreement with a lessor to purchase a spare engine, previously under lease, for $5.5 million. World Airways paid $0.5 million upon closing and signed a note for the $5.0 million balance. The note bears interest at a rate of 7.25% and is payable over a 40-month period at $69,000 a month, with the balance of $3.3 million due on January 29, 1999. World Airways purchased an additional spare engine, which was delivered in March 1996, at a cost of approximately $8.0 million. World Airways entered into an agreement with the engine's manufacturer to finance 80% of the purchase price over a seven-year term at an interest rate of 9.98%. World Airways made payments of $1.2 million and $0.4 million towards this purchase in September 1995 and January 1996, respectively. In January 1996, World Airways agreed to purchase an additional engine for approximately $7.2 million and received a commitment from the engine manufacturer to finance 85% of its purchase price over a seven-year term with an interest rate to be fixed at the time of delivery. World Airways expects to take delivery of the engine during 1997. During 1993, World Airways negotiated with several of its lessors to defer approximately $14.7 million of lease payments on eight aircraft. In addition, during 1995 and 1994 World Airways deferred approximately $0.7 million of rent, pursuant to the 1993 agreement. Of these amounts, World Airways repaid approximately $14.3 million through 1996. The following table shows the aggregate annual amount of scheduled principal maturities (in thousands) of debt outstanding at December 31, 1996, excluding capital lease obligations: 1997 $ 8,826 1998 8,676 1999 9,211 2000 8,662 2001 2,215 Thereafter 69,454 ------- Total $ 107,044 =======
CAPITAL LEASES The present value of the obligations under capital leases at December 31, 1996 is calculated using rates ranging from 6.1% to 10.7%. The following are scheduled minimum capital lease payments (in thousands) due in the succeeding five years and thereafter, together with the present value of such obligations: 1997 $ 1,720 1998 3,376 1999 1,317 2000 2,940 2001 -- Thereafter -- ------- Total minimum lease payments 9,353 Less: imputed interest 1,603 ------- Present value of obligations under capital lease $ 7,750 =======
Property under capital leases consists of equipment leases and are amortized over the lease terms or expected useful life of the assets. Accumulated amortization under capital leases was $4.3 million and $3.7 million at December 31, 62 1996 and 1995, respectively. Amortization expense of property under capital leases totaled approximately $0.7 million for the years ended December 31, 1996 and 1995. OPERATING LEASES In October 1992 and January 1993, World Airways signed a series of agreements with International Lease Finance Corporation ("ILFC"), McDonnell Douglas Corporation, GATX Capital Corporation, and United Technologies Corporation's Pratt & Whitney Group ("Pratt and Whitney") to lease seven new McDonnell Douglas MD-11 aircraft under initial lease terms of two to five years. Six of the seven aircraft leases contain annual renewal options in years six through fifteen of the lease term. If these renewal options are not exercised, World Airways is required to pay a substantial penalty to the lessor. Under the terms of the lease agreements, World Airways may be required to pay additional rent in excess of the fixed monthly amounts depending on block hours flown. In February 1992, World Airways signed 12-year operating leases for two McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways returned these aircraft to their lessor. Certain matters related to the termination of these leases were resolved in 1995 and resulted in a gain to World Airways of approximately $0.8 million. This gain is included in other income in 1995 (see Note 20). In 1994, World Airways recorded a $4.2 million reversal of excess accrued maintenance reserves associated with the expiration of three additional DC10-30 aircraft leases in 1994. The reversal is recorded as a reduction to maintenance expense. World Airways' MD-11 leases contain options to purchase the aircraft at various times throughout the lease terms. Long-term deposits consist primarily of deposits on the MD-11 leases. As part of the lease agreements, World Airways was assigned purchase options for four additional MD-11 aircraft. In 1992, World Airways made non-refundable deposits to McDonnell Douglas toward the option aircraft. In March 1996, World Airways entered into an agreement with McDonnell Douglas to lease two MD-11ER aircraft. Under this agreement, World Airways is leasing each aircraft for a term of 24 years with an option to return the aircraft after a seven year period, subject to fixed termination fees of $2.8 million per aircraft. The non-refundable deposits of $1.2 million previously paid to McDonnell Douglas towards options on four MD-11 aircraft were applied to the deposits required on the MD-11ER aircraft. World Airways entered into a simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. World Airways can borrow a total of $9.0 million of which $3.0 million became available with the delivery of each aircraft and an additional $3.0 million became available in December 1996. Net borrowings under the agreement were $5.9 million at December 31, 1996. McDonnell Douglas retains a purchase money lien in the purchased parts. In connection with this lease agreement, World Airways agreed to assume an existing lease of two additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the event the existing lessee terminates its lease with McDonnell Douglas at that time. World Airways ultimately plans to exit DC10 aircraft and standardize its fleet around the MD-11 aircraft. However, to the extent World Airways can obtain DC10 aircraft at favorable lease terms, it will continue to utilize these aircraft to supplement the MD-11 fleet during peak flying times until the MD-11 fleet is sufficient to fulfill its obligations. Therefore, in 1995, World Airways entered into three DC10-30 aircraft leases with lease terms expiring in August 1997, September 1997 and December 1998. In March 1996, World Airways leased two additional DC10-30 aircraft (see Note 6). However, due to the discontinuation of World Airways' scheduled service operations (see Note 3), World Airways entered into an agreement in December 1996 to terminate the leases of the two aircraft delivered in March 1996. As of December 31, 1996, World Airways' fleet consisted of four passenger MD-11 aircraft, one freighter MD-11 aircraft, two convertible MD-11 aircraft, two MD-11ER aircraft, three passenger DC10-30 aircraft, and one DC10-30 convertible aircraft. World Airways extended the lease terms on two spare engines during 1996. One lease, originally expiring on December 31, 1995, was extended until February 1998. This lease was classified as a capital lease at December 31, 1995, but became an operating lease under the new agreement. The other engine was extended three years from its original April 20, 1996 termination date. In 1997, World Airways entered into an agreement with Malaysian Airlines to lease an incremental DC10-30 aircraft on a short-term basis to support its peak flying season. The aircraft will be returned at the end of the Hadj 63 program. Rental expense from continuing operations, primarily relating to aircraft leases, totaled approximately $84.6 million, $66.7 million, and $54.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. The following is a schedule of future annual minimum rental payments, principally aircraft rentals (excluding variable portions), required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1996 (in thousands): 1997 $ 86,209 1998 83,606 1999 74,003 2000 71,462 2001 71,579 Thereafter 679,354 --------- Total $1,066,213 =========
These future annual minimum rental payments include all option years. Under the terms of certain of the MD-11 leases, if the options are not exercised, World Airways must pay a substantial penalty to the lessor, consisting of either a fixed penalty or a penalty based on the number of block hours flown since delivery of the aircraft. World Airways intends to exercise the options under these leases. World Airways' lease relating to office space for its corporate headquarters expires in 1997 and is therefore not included above. World Airways intends to either extend the current agreement or enter into an alternative lease with similar terms. 14. COMMON STOCK PURCHASE WARRANTS BNYFC WARRANTS On December 7, 1993, in connection with a revolving line of credit facility and an aircraft parts security agreement (see Notes 12 and 13), the Company granted to Bank of New York Financial Corporation ("BNYFC") warrants expiring December 7, 1996 to purchase 250,000 shares of the Company's common stock, at a price of $6.15 per share. During 1996, 150,000 warrants were exercised and the remaining 100,000 warrants expired unexercised. Therefore, at December 31, 1996, there were no BNYFC warrants outstanding. 1986 EXECUTIVE WARRANTS During 1986, the Company entered into agreements with certain officers of the Company to issue 3,600,000 warrants, expiring May 24, 1994, each to purchase one share of the Company's common stock at a price of $5.00 per share, subject to certain anti-dilution adjustments (the "Executive Warrants"). During 1994, 90,000 of these warrants were exercised. During 1994, the remaining 2,272,336 unexercised 1986 Executive Warrants expired. 1989 EXECUTIVE WARRANTS During 1989, the Company entered into warrant agreements with certain officers of the Company providing for the issuance of warrants ("the 1989 Executive Warrants") to purchase a total of 745,000 shares of the Company's common stock at an exercise price of $5.50; such warrants vest at differing rates over 60 months. The 1989 Executive Warrants expire on August 31, 1997. During 1995, 141,083 warrants were exercised. As of December 31, 1996, 453,417 of these warrants had been cancelled and there were 150,500 1989 Executive Warrants fully vested and outstanding. 1996 PURCHASE AGREEMENT WARRANTS On September 30, 1996, in connection with the Purchase Agreement (see Note 13), the Company entered into an agreement to issue up to 200,000 warrants. The warrants are fully exercisable when granted. 120,000 of the warrants were granted on September 30, 1996 and expire on September 30, 2000. The remaining 80,000 warrants are issuable as to 40,000 each on October 1, 1997 and October 1, 1998 and expire on September 30, 2001 and September 30, 2002, respectively, and are contingent upon certain market conditions. The warrants have an exercise 64 price of $6.00 per share, subject to certain adjustments. The per share weighted-average fair value of warrants granted during 1996 was $2.99 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0%, risk-free interest rate of 6.11%, expected life of 4 years and expected volatility of 61.51%. The Company recorded $0.6 million related to the warrants which will be amortized into interest expense over the term of the related debt. During 1996, the Company recognized $21,000 of interest expense relating to the warrants. 15. STOCK OPTIONS On July 19, 1988, the Board of Directors approved the WorldCorp, Inc. 1988 Stock Option Plan (the "1988 Plan"). The 1988 Plan was amended and restated on May 13, 1992. The 1988 Plan calls for one share of WorldCorp common stock to be issued upon exercise of one stock option. Warrants issuable under the 1988 Plan, as amended, shall not exceed 2,800,000 in the aggregate. Options may be granted to employees and directors at the discretion of the Administrative Committee of the 1988 Plan. In 1990, the 1988 Plan was amended to change the vesting percentage to 20% per year beginning on the grant date provided that the grantee was still an employee of the Company or a subsidiary. These options expire at the earlier of the stated expiration, which shall not exceed ten years from the date of grant, or at a certain period of time after the termination of the participants' employment with the Company. Stock options are granted with an exercise price at least equal to the stock's fair market value at the date of grant. In August 1994, the Company granted 1,050,000 options to an officer and a board member of the Company. These options become vested at various times through May 2004. During 1996, 1995 and 1994, approximately $0.2 million, $0.7 million and $1.1 million, respectively, of compensation expense was recognized in connection with the vested portion of these options. These options expire at the earlier of the stated expiration, or a certain period of time after the termination of the participants' employment with the Company. The per share weighted-average fair value of stock options granted during 1996 and 1995 was $4.59 and $7.21, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1996 1995 -------------- -------------- Expected dividend yield 0.00% 0.00% Risk-free interest rate 6.2% to 6.5% 5.3% to 5.6% Expected life (in years) 5 to 10 5 to 8 Expected volatility 56% to 59% 58% to 59%
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options which were granted with an exercise price at least equal to the stock's fair market value at the date of grant, in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been changed to the pro forma amounts indicated below:
1996 1995 -------------- -------------- Net income (loss) As reported $ (11,754) $ 60,208 Pro forma (12,760) 59,433 Primary earnings (loss) per common equivalent share As reported $ (0.70) $ 3.52 Pro forma (0.77) 3.47 Fully diluted earnings (loss) per common equivalent share As reported $ * $ 2.82 Pro forma * 2.78
* Fully diluted earnings per share are anti-dilutive 65 Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 17 months to 10 years and compensation cost for options granted prior to January 1, 1995 is not considered. Stock option activity during the periods indicated is as follows:
Number of Options Weighted-Average Outstanding Exercise Prices ----------- --------------- Balance at December 31, 1993 1,648,362 $ 6.69 Granted 1,100,000 4.50 Exercised (176,723) 5.53 Forfeited (216,235) 6.96 Expired (33,000) 9.21 --------- Balance at December 31, 1994 2,322,404 $ 5.68 Granted 50,000 7.06 Exercised (418,485) 5.47 Forfeited (100,000) 9.64 Expired (25,000) 10.59 --------- Balance at December 31, 1995 1,828,919 $ 5.48 Granted 225,000 6.14 Exercised (104,456) 8.87 Forfeited -- -- Expired (125,845) 6.28 --------- Balance at December 31, 1996 1,823,618 $ 5.50 =========
At December 31, 1996, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $4.50 to $12.23 and 8.8 years, respectively. At December 31, 1996 and 1995, the number of options exercisable was 1,324,244 and 1,434,601, respectively, and the weighted-average exercise price of those options was $5.50 and $5.48, respectively. World Airways has adopted separate stock option plans for members of its board of directors, employees and consultants. 16. EMPLOYEE BENEFIT PLANS During 1989, the Company adopted an Employee Stock Ownership Plan (the "ESOP") for the benefit of employees not covered by collective bargaining agreements. The ESOP is designed as a stock bonus plan which qualifies for favorable tax treatment under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and as an employee stock ownership plan under Section 4975(e)(7) of the Code. In addition, the ESOP includes a "cash or deferred arrangement" under Section 401(k) of the Code. During 1989, the ESOP acquired 450,000 shares of common stock from Violet June Daly and 450,000 shares of common stock from the Estate of Edward J. Daly. The purchase price in each transaction was $4.00 per share or a total of $3.6 million. In 1990, the ESOP was replaced by the Employee Savings and Stock Ownership Plan ("the ESSOP"). Participation in the ESSOP was limited to employees not covered under a collective bargaining agreement. Employees could elect to invest Salary Deferral Contributions in either the WorldCorp Stock Fund or in other investment funds. The ESSOP provided employer matching contributions in the WorldCorp Stock Fund at a rate determined by the Board of Directors, but at no less than 50% of the salary deferral contribution. The employer matching contribution rate in the WorldCorp Stock Fund for 1996, 1995, and 1994 was 100%. The employer 66 matching contribution in other investment funds was at the rate of 33 1/3% of the Salary Deferral Contribution. The Company charged approximately $0.2 million, $0.3 million and $0.4 million to expense for its contributions to the ESSOP in 1996, 1995 and 1994, respectively. Effective October 1, 1996, the Board of Directors of World Airways adopted an Employee Savings and Stock Ownership Plan (the "Plan"). The Plan is intended to allow employees not covered by collective bargaining agreements, as well as certain WorldCorp and WorldCorp Investments, Inc. employees, to share in the growth and prosperity of the Company, to encourage participants to save on a tax-favored basis, and to provide participants an opportunity to accumulate capital for their future economic security. The Plan is an amendment and continuation of the ESSOP. As a result of various business developments, the vast majority of the participants in the ESSOP were World Airways' employees. For that reason, the Company and World Airways agreed that World Airways should assume the Company's obligation under the ESSOP. In connection with that action, the Trustees exchanged 196,681 unallocated shares of WorldCorp common stock held by the ESSOP for a like-value of shares in World Airways common stock. World Airways also made a special contribution of $50,000 to the Plan. The ESSOP originally assumed bank financing from its predecessor plan, the WorldCorp Employee Stock Ownership Plan. This obligation was paid off by WorldCorp in 1994 and the ESSOP agreed to repay WorldCorp the amount of the bank loan. The ESSOP refinanced its debt to WorldCorp through a margin loan obtained in January 1995 and amended in May 1996 in the amount of $1.5 million. Principal payments of $90,000 are due quarterly and a final principal payment of $1.0 million is due May 1997. Interest is payable quarterly at the call loan rate plus 1.5%. The margin loan is collateralized by 158,256 of the unallocated shares of common stock owned by the Plan at December 31, 1996. Through September 30, 1996, WorldCorp was required to make minimum annual discretionary contributions to the Plan in an amount necessary to pay principal and interest due on the margin loan to the extent that other contributions to the Plan are insufficient to make such payments. Beginning October 1, 1996, World Airways assumed this responsibility. Contributions were sufficient to make the required principal and interest payments during 1996. World Airways guarantees payment on the margin loan. The Plan will continue to hold the shares of WorldCorp common stock that were allocated the participants' accounts before October 1, 1996. No additional shares of WorldCorp common stock will be allocated under the Plan on or after that date. Instead, participants will have the opportunity to receive future allocations of World Airways common stock. The Plan has 447,417 allocated shares at December 31, 1996. The World Airways' Crewmembers Target Benefit Plan and the World Airways' Flight Attendants Target Benefit Plan are defined contribution plans covering flight engineers and pilots, and flight attendants, respectively, with contributions based upon defined wages. These are both tax-qualified retirement plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Under the collective bargaining agreement between World Airways and the flight attendants, represented by the International Brotherhood of Teamsters ("Teamsters"), that was signed in June 1996 and ratified by the flight attendants in August 1996, the World Airways' Flight Attendant Target Benefit Plan was terminated in September 1996. World Airways is required under the agreement to make certain monthly payments on behalf of the flight attendants to the Teamsters subsequent to the termination of the previous plan. Pension expense for both of the Target Benefit plans totaled $2.5 million, $1.9 million, and $1.4 million for the years ended December 31, 1996, 1995, and 1994, respectively. Pension contributions made to the Teamsters on behalf of the flight attendants in the fourth quarter of 1996 totaled $0.1 million. Effective January 1, 1994, World Airways adopted the World Airways, Inc. Retroactivity and Profit Sharing Bonus Plan ("the 1994 Profit Sharing Plan"). The 1994 Profit Sharing Plan provides for the payment of retroactive pay to certain DC10 crewmembers for the period July 1, 1992 to August 15, 1994, as well as for certain profit sharing payments. Distributions under the 1994 Profit Sharing Plan are equal to 20% of World Airways defined earnings, subject to an annual limitation of 10% of the total annual aggregate compensation of World Airways employees participating in the 1994 Profit Sharing Plan in that year. This is not a tax-qualified retirement plan under Section 401(a) of the Code. World Airways made no distributions in 1995 pertaining to 1994 financial results. World Airways distributed approximately $1.7 million in 1996 pertaining to 1995 results, which included the retroactive payment required under the plan. World Airways does not plan to make any 1997 distributions pertaining to 1996 results. World Airways' cockpit crewmembers and eligible dependents are covered under postretirement health care benefits to age 65. World Airways accounts for the cost of health benefits in accordance with FAS #106 which requires accrual accounting for all postretirement benefits other than pensions. World Airways funds the benefit costs 67 on a pay-as-you-go (cash) basis. A summary of the net periodic postretirement benefit costs for the years ended December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994 ------------- ------------ -------- Service cost $ 176,000 $ 118,000 $ 145,000 Interest cost on accumulated postretirement benefit obligation 100,000 134,000 143,000 Net amortized gain (38,000) (40,000) -- -------- -------- ----------- Net periodic postretirement benefit cost $ 238,000 $ 212,000 $ 288,000 ======== ======== ========
The components of the Accumulated Postretirement Benefit Obligation for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ----------- ----------- Retirees and dependents $ 789,000 $ 951,000 Fully eligible, active participants 229,000 165,000 Not fully eligible participants 1,527,000 1,480,000 --------- --------- $ 2,545,000 $ 2,596,000 Less: plan assets 0 0 --------- --------- Accrued postretirement benefit obligation $ 2,545,000 $ 2,596,000 ========= =========
The assumed discount rates used to measure the accumulated postretirement benefit obligation for 1996 and 1995 were 6.75% and 6.0%, respectively. The medical cost trend rate in 1997 was 7.5% trending down to an ultimate rate in 2021 of 4.0%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of 1996 net periodic postretirement benefit cost by $31,000 and would have increased the accumulated postretirement benefit obligation as of December 31, 1996 by $124,000. 17. FEDERAL AND STATE INCOME TAXES Income tax expense attributable to income from continuing operations consists of (in thousands):
For the years ended December 31, --------------------------------------------- 1996 1995 1994 ------------ ------------ -------- U.S. Federal $ 504 $ 573 $ 131 State -- 88 28 -------- -------- ------- Income tax expense $ 504 $ 661 $ 159 ======= ======== =======
There is no deferred tax expense or benefit for the years ended December 31, 1996, 1995, and 1994. Income tax expense attributable to income (loss) from continuing operations for the years ended December 31, 1996, 1995, and 1994 differed from the amounts computed by applying the U.S. Federal income tax rate of 34 percent as a result of the following (in thousands): 68
For the years ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ---------- Expected Federal income tax expense at the statutory rate $ 2,700 $ 22,038 $ 2,879 Amounts attributable to (earnings)/loss of subsidiaries not consolidated for tax purposes 6,833 (3,115) 1,520 Income tax expense of subsidiaries not consolidated for tax purposes -- 296 44 Gain on sales of equity by subsidiaries not consolidated for tax purposes (13,221) (14,850) -- Amortization of goodwill 184 283 35 Book/tax difference in gain on sales of subsidiaries stock -- (252) (2,170) Generation (utilization) of net operating loss and capital loss carryforwards 3,911 (3,640) (3,056) Federal alternative minimum tax and environmental tax -- 231 115 State income tax expense, net of Federal benefit -- 58 18 Other 97 (388) 774 -------- -------- ------- Income tax expense 504 $ 661 $ 159 ========= ======== =======
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, are as follows (in thousands):
1996 1995 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 18,111 $ 14,763 Investment in subsidiary 14,480 10,209 Deferred compensation 199 -- Accruals not deductible for tax 24 -- Compensated absences, primarily due to accrual for financial statement purposes 10 5 ------ ------ Gross deferred tax assets 32,824 24,977 Less: valuation allowance 23,277 20,113 ------ ------ Net deferred tax assets 9,547 4,864 ------ ------ Deferred tax liabilities: Investment in affiliate 9,499 4,571 Property and equipment 48 105 Bonus amortization -- 188 ------ ------ Gross deferred tax liabilities 9,547 4,864 ------ ------ Net deferred income taxes $ -- $ -- ====== ======
The valuation allowance for deferred tax assets as of January 1, 1995 was $13.9 million. The net change in the total valuation allowance for the year ended December 31, 1995 was an increase of $6.2 million and an increase of $3.2 million for the year ended December 31, 1996. As a result of certain transactions with MHS in 1994 (see Note 6), World Airways is no longer consolidated with the Company for income tax purposes. As a result, approximately $100.4 million of the Company's previous consolidated net operating loss carryforward ("NOLs") was allocated to World Airways in 1994, and therefore, is only available to offset future federal taxable income of World Airways. Of this amount, $38.1 million is subject to a $6.9 million annual limitation resulting from an ownership change, pursuant to the Internal Revenue Code of 1986, as amended, which occurred in 1991. In addition, future transactions in the Company's or World Airways' stock could cause an additional ownership change at World Airways. The valuation allowance for World Airways' deferred tax assets as of December 31, 1996 was $43.3 million. World Airways' estimate of the required valuation allowance is based on a number of factors, including historical operating results. World Airways generated earnings from continuing operations in 1996 and net earnings for the year ended 1995 as compared to net losses in both 1996 and 1994. If World Airways generates net earnings in 1997, it is possible that a change in the estimate of the required valuation allowance will occur in the near term, and could differ materially from the amount recorded at December 31, 1996. As of December 31, 1996, the Company has approximately $53.1 million of net operating loss carryforwards, which expire as follows (in millions): 2005 5.8 2007 15.2 2008 11.2 2009 10.0 2010 1.1 2011 9.8 ------ $ 53.1
69 There can be no assurance that the operations of the Company will generate taxable income in future years so as to allow the Company to realize a tax benefit from its NOLs. The NOLs are subject to examination by the IRS and thus, are subject to adjustment or disallowance resulting from any such IRS examination. In addition, an ownership change of the Company, as defined in the Internal Revenue Code, may occur in the future and may result in the imposition of a lower annual limitation on the Company's NOLs existing at the time of any such ownership change. 18. SEGMENTS AND MAJOR CUSTOMERS The Company owns positions in companies that operate in two distinct business areas. The Company owns approximately 61.3% of the outstanding common stock of World Airways, a provider of worldwide passenger and cargo air transportation for commercial and government customers. The Company also owns 28.9% of InteliData, a company which concentrates on three markets: (1) consumer telecommunications, (2) electronic commerce, and (3) interactive services. Results of operations for World Airways and InteliData are reflected in the accompanying statements of operations. Information concerning customers for years in which their revenues comprised 10% or more of the Company's consolidated operating revenues is presented in the following table (in thousands):
Year ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ---------- Malaysian Airlines $ 105,410 $ 100,934 $ 32,773 U.S. Department of Defense (including U.S. Air Force) 79,029 52,889 44,572 Philippine Airlines 46,516 -- -- P. T. Garuda Indonesia 39,849 26,263 32,356 Look Charters 3,749 3,677 21,222
World Airways has provided service to Malaysian Airlines since 1981, providing aircraft for integration into Malaysian Airlines' scheduled passenger and cargo operations as well as transporting passengers for the annual Hadj pilgrimage. The Malaysian Airlines' Hadj contract which was entered into in 1992 expired in 1996. World Airways recently entered into a new 32-month agreement for year-round operations (including the Hadj) with Malaysian Airlines whereby World Airways will provide two aircraft with cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed charter division through May 1999. World Airways is currently in preliminary discussions with Malaysian Airlines regarding a potential eleven-month reduction in the utilization of one of these aircraft during the 32-month term of the contract. World Airways provided three aircraft for the 1996 and 1995 Hadj operations, and will provide three aircraft for the 1997 Hadj operations. Until recently, World Airways operated four passenger aircraft for Malaysian Airlines under multi-year agreements. The contract for two of the four passenger aircraft for Malaysian Airlines expired in March 1997. While World Airways is deploying these two aircraft in the 1997 Hadj, and will actively re-market the aircraft thereafter, World Airways can provide no assurance that it will be able to redeploy the two aircraft, beginning June 1997, at price and utilization levels at least as favorable as under the terms of the Malaysian Airlines contracts. World Airways originally operated three MD-11 cargo aircraft for Malaysian Airlines. However, beginning in July, 1996, and as mutually agreed by the parties, World Airways redeployed two cargo aircraft, which had been operating under these contracts, into the Philippine Airlines contract. World Airways and Malaysian Airlines are currently discussing the future redeployment of these aircraft back into Malaysian Airlines' operations in order to meet the contract's original obligations. World Airways can provide no assurances, however, that World Airways will, in fact, be able to redeploy these two aircraft back into Malaysian Airlines' operation to meet the contract's original obligations. World Airways' contract with the U.S. Air Force expires in September 1997. World Airways anticipates that future renewals of the U.S. Air Force contract will be on an annual basis. World Airways has provided service to PT Garuda Indonesia ("Garuda") since 1973 and has operated under an 70 annual Hadj contract since 1988. World Airways operated seven aircraft in the 1996 Garuda Hadj and five aircraft in the 1995 Garuda Hadj. World Airways will operate six aircraft for the 1997 Garuda Hadj. In May 1996, World Airways entered into a new ACMI contract with Philippine Airlines, thereby further expanding its presence in the Pacific Rim. World Airways presently operates four MD-11 passenger aircraft for Philippine Airlines under an agreement, with high minimum monthly utilization levels. World Airways, however, has recently received a written communication from Philippine Airlines in which the airline contends that its leases for all four aircraft expire on November 15, 1997. World Airways believes that this position is contrary to the understanding of the parties that each of the MD-11s are to be leased by Philippine Airlines for a period of 18 months from delivery of each aircraft. The parties are currently discussing the length of the lease term for these aircraft. World Airways can provide no assurances, however, that Philippine Airlines will agree to lease any of the four MD-11 passenger aircraft beyond November 15, 1997, or that World Airways will be able to secure other business at as favorable price and utilization levels. Also, subsequent to year-end, at Philippine Airlines' request, World Airways agreed to a payment plan with respect to Philippine Airlines' wet lease obligations for several months beginning in March 1997. Although Philippine Airlines is current on this payment plan to date, if Philippine Airlines defaults on this payment plan, or fails to meet its monthly aircraft lease obligations, this development, if not offset by other business, would have a material adverse effect on the cash flows, financial condition and results of operation of World Airways. World Airways has provided service to Look Charters under an annual contract since 1992. In 1996, 1995 and 1994, World Airways performed operations for a summer charter program transporting passengers between Paris, France and various locations in the United States and Mexico. Although World Airways' customers bear the financial risk of filling the World Airways' aircraft with passengers or cargo, World Airways can be affected adversely if its customers are unable to operate its aircraft profitably, or if one or more of World Airways' customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances, World Airways can be adversely affected by receiving delayed or partial payments or by receiving customer demands for rate and utilization reductions, flight cancellations, and/or early termination of their agreements. World Airways derives a significant percentage of its revenues and block hours from its operations in the Pacific Rim region. While World Airways believes the Pacific Rim region is a growth market for air transportation, any economic decline or any military or political disturbance in this area may interfere with World Airways' ability to provide service in this area and could have a material adverse effect on the financial condition or results of operations of World Airways. All export contracts are denominated in U.S. dollars as are substantially all of the related expenses. The classification between domestic and export revenues is based on entity definitions prescribed in the economic regulations of the Department of Transportation. Information concerning World Airways' export revenues from continuing operations is presented in the following table (in thousands):
For the years ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ---------- Operating Revenues: Domestic $ 91,516 $ 59,278 $ 63,156 Export - Malaysia 105,410 100,934 32,773 - Philippines 46,516 -- -- - Indonesia 39,849 26,263 32,356 - France 3,749 6,897 22,217 - Other 22,547 49,014 30,213 ------- ------- ------- Total $ 309,587 $ 242,386 $ 180,715 ======= ======= =======
19. RELATED PARTY TRANSACTIONS Effective November 10, 1988, T. Coleman Andrews, III employment agreement to serve as Chief Executive Officer and President of WorldCorp, which was originally entered into in August 1986, was extended an additional five years to August 1, 1994. In connection with the employment agreement, Mr. Andrews had also entered into a 71 Supplemental Incentive Agreement ("the Incentive Agreement") with WorldCorp that provided for a bonus in the amount of $1.3 million plus interest earned at 8.91% to be paid to Mr. Andrews on August 1, 1994, provided he was still an employee of WorldCorp at that time. In connection with this employment arrangement, the Company loaned Mr. Andrews $1.3 million on January 10, 1989. Mr. Andrews executed and delivered to the Company a full recourse promissory note dated January 10, 1989. The principal amount of the note was due and payable on December 31, 1994 and interest accrued quarterly and was payable at maturity at a fixed rate of 8.91% per annum. Effective December 1993, the Company and Mr. Andrews terminated the Incentive Agreement and entered into a new agreement. In connection with the new agreement, the Company paid Mr. Andrews in December 1993 (approximately seven months early) $0.2 million due him under the Incentive Agreement. The new agreement delays payment to Mr. Andrews of the balance due under the Incentive Agreement and provides that the Company will make four annual installment payments of $0.4 million beginning January 2, 1995, plus interest earned at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. The first three payments were made as scheduled in 1995, 1996 and 1997. At the same time, Mr. Andrews agreed to cancel his previous promissory note dated January 10, 1989 and issue a full recourse promissory note dated December 29, 1993. The principal amount of $1.8 million is payable in annual installments of varying amounts beginning January 1, 1994 and payable every February 1 thereafter until 1998. Interest is payable at 3.83% in 1995 and 1996 and 5.07% in 1997 and 1998. Mr. Andrews has reduced the principal balance of his obligation to the Company by $1.1 million through March 15, 1997. On August 19, 1994, the Company and Mr. Andrews extended Mr. Andrews' employment agreement to serve as Chief Executive Officer and President of WorldCorp through December 31, 1997. The Incentive Agreement amounts are included in accrued wages in the accompanying consolidated balance sheets. As of December 31, 1996 and 1995, $0.4 million and $0.5 million, respectively, of the promissory note are included in prepaid expenses and other current assets and $0.5 million and $0.9 million, respectively, are included in other assets and deferred charges in the accompanying consolidated balance sheets. As of December 31, 1996, WorldCorp owns approximately 28.9% of the outstanding common stock of InteliData (see Note 5). The Chairman of the Board of Directors of WorldCorp is also one of the founders of US Order, and is currently the Chairman of the Board of InteliData. Effective December 31, 1996, MHS owns approximately 17.6% and 29.1% of the outstanding common stock of World Airways and Malaysian Airlines, respectively. Malaysian Airlines is World Airways' largest commercial customer (see Notes 6 and 18). Bain & Company, Inc. provided consulting services of approximately $0.2 million and $0.4 million to the Company during 1995 and 1994, respectively. A principle of Bain & Company is also a member of the Board of Directors of WorldCorp. W. Jerrold Scoutt, Jr., a member of the Board of Directors of WorldCorp until May 1994, is a member of the law firm of Zuckert, Scoutt & Rasenberger, Washington, D.C. Zuckert, Scoutt & Rasenberger rendered legal services to the Company during 1996, 1995, and 1994. 20. COMMITMENTS AND CONTINGENCIES LITIGATION AND CLAIMS The Company and World Airways (the "World Defendants") are defendants in litigation brought by the Committee of Unsecured Creditors of Washington Bancorporation (the "Committee") in August 1992, captioned Washington Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the "Boster Litigation"). The complaint asserts that the World Defendants received preferential transfers or fraudulent conveyances from Washington Bancorporation when the World Defendants received payment at maturity on May 4, 1990 of Washington Bancorporation commercial paper purchased on May 3, 1990. The Committee seeks recovery of approximately $4.8 million from World Airways and approximately $2.0 million from WorldCorp. Under a settlement agreement which remains subject to certain contingencies, the plaintiff has agreed to dismiss with prejudice the Boster Litigation against all defendants, including the World Defendants, with each party to bear its own costs. In that event, the World Defendants would not have any further liability in the Boster Litigation. On January 28, 1997, the U.S. District Court conditionally dismissed the Boster Litigation subject to reinstatement if the settlement is not finalized by May 15, 1997. In any event, the Company believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation. Depending upon the timing of the 72 resolution of this claim, if the Committee was successful in recovering the full amount claimed, the resolution could have a material adverse effect on the financial condition or results of operations of the Company. World Airways' flight attendants are represented by the Teamsters under a collective bargaining agreement that became amendable in 1992. The parties exchanged their opening contract proposals in 1992. In June 1996, World Airways signed a new four year labor agreement with the Teamsters which provides for retroactive pay increases for the flight attendants and work rule flexibility and lengthened duty time rules for World Airways. The agreement was ratified by the flight attendants in August 1996. World Airways' flight attendants challenged the use of foreign flight attendant crews on World Airways' flights for Malaysian Airlines and Garuda Indonesia which has historically been World Airways' operating procedure. World Airways is contractually obligated to permit its Southeast Asian customers to deploy their own flight attendants. While the arbitrator in this matter recently denied the Union's request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that World Airways' contract with its flight attendants requires World Airways to first actively seek profitable business opportunities that require using World Airways' flight attendants, before World Airways may accept wet lease business opportunities that use the flight attendants of World Airways' customers. World Airways can provide no assurances as to how the imposition of this requirement will affect World Airways' financial condition and results of operations. World Airways has periodically received correspondence from the FAA with respect to minor noncompliance matters. Most recently, as the FAA has increased its scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of $810,000 in connection with certain minor security violations by ground handling crews contracted by World Airways for services at foreign airport locations. In each of these instances, World Airways was in compliance with international regulations, but not the more stringent U.S. requirements. World Airways has taken steps to comply with the U.S. requirements and believes that any fines ultimately imposed by the FAA will not have a material adverse effect on the financial condition or results of operations of World Airways. World Airways has accrued a liability for its estimate of the ultimate fine that will be assessed, which is less than the amount of the preliminary assessment, in the accompanying balance sheet at December 31, 1996. In connection with the discontinuance of World Airways's scheduled service operations, World Airways is subject to claims by various third parties and may be subject to further claims in the future. One claim has been filed in connection with World Airways's discontinuance of scheduled service to South Africa, seeking approximately $37.8 million in compensatory and punitive damages. World Airways believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation. Depending upon the timing of the resolution of this claim, if the plaintiff were successful in recovering the full amount claimed with respect to this claim, the resolution could have a material adverse effect on the financial condition or results of operations of World Airways. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial condition. CONTINGENT RENTAL PAYMENTS In July 1993, World Airways returned certain DC10-30 aircraft to the lessor (see Note 13). As a result of this early lease termination, World Airways is responsible, until 2004 for one aircraft and 2005 for the second aircraft, for one-third of any deficit in rent incurred in future leases of the aircraft, up to $100,000 monthly per plane, with an overall combined cap of $1,850,000. World Airways has recorded $984,000 for rent shortfalls through December 1996. The estimated shortfall liabilities relating to these aircraft are accrued in the accompanying balance sheets at December 31, 1996 and 1995. World Airways' remaining contingent liability related to this matter approximates $866,000. COMMITMENTS TO PURCHASE SPARE ENGINES World Airways has a commitment to purchase a spare engine for which World Airways expects to take delivery in 1997 (See Note 13). 73 LETTERS OF CREDIT At December 31, 1996 and 1995, restricted cash and short-term investments include customer deposits held in escrow and cash pledged as collateral for various letters of credit facilities issued by a bank on World Airways' behalf totaling $1.0 million, with expiration dates principally occurring in 1997. MD-11 ENGINE MAINTENANCE AGREEMENT Engine maintenance accounts for most of World Airways's annual maintenance expenses. Typically, the hourly cost of engine maintenance increases as the aircraft ages. World Airways outsources major airframe maintenance and power plant work to several suppliers. World Airways has a 10-year contract expiring in August 2003 with United Technologies Corporation's Pratt & Whitney Group for all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under this contract, the manufacturer agreed to provide such maintenance services at a cost not to exceed specified rates per hour during the term of the contract. World Airways's maintenance costs associated with the MD-11 aircraft and PW 4462 engines have been significantly reduced due in part to manufacturer guarantees and warranties which began to expire in 1995 and which will fully expire by 1998. In addition, the specified rates per hour are subject to annual escalation, increasing substantially in April 1998. Accordingly, while World Airways believes the terms of this agreement have resulted in lower engine maintenance costs than it otherwise would incur, engine maintenance costs will increase substantially during the last five years of the agreement. World Airways will begin to accrue these increased expenses in 1997. Therefore, World Airways expects that maintenance expenses will continue to increase during the remainder of the term of the contract as World Airways's aircraft fleet ages. 74 21. UNAUDITED QUARTERLY RESULTS The results of the Company's quarterly operations (unaudited) for 1996 and 1995 are as follows (in thousands except per share amounts):
Quarter Ended ---------------------------------------------------------------------- March 31 June 30 September 30 December 31 Total Year ---------- ---------- ---------- ---------- ---------- 1996 Operating revenues $ 66,691 $ 87,056 $ 76,461 $ 83,464 $ 313,672 Operating income (loss) (6,673) 11,449 (5,738) 3,699 (1) 2,737 Earnings (loss) from continuing operations (6,592) 4,379 (4,147) 13,797 (2) 7,437 Discontinued operations (less applicable tax benefit) (2,481) (16,897) 107 80 (19,191) Net earnings (loss) $ (9,073) $ (12,518) $ (4,040) $ 13,877 $ (11,754) Primary earnings (loss) per common equivalent share: Continuing operations $ (0.41) $ 0.25 $ (0.24) $ 0.89 $ 0.45 Discontinued operations (0.15) (0.98) 0.01 0.01 (1.15) ------ ------ ------ ------ ------ Net earnings (loss) $ (0.56) $ (0.73) $ (0.23) $ 0.90 $ (0.70) ====== ====== ====== ====== ====== Fully diluted earnings (loss) per common equivalent share: Continuing operations $ * $ 0.24 $ * $ 0.70 $ * Discontinued operations * * * 0.01 * ------ ------ ------ ------ ----- Net earnings (loss) $ * $ * $ * $ 0.71 $ * ====== ====== ====== ====== ===== 1995 Operating revenues $ 41,282 $ 76,725 $ 70,602 $ 57,963 $ 246,572 Operating income (loss) (5,532) 9,940 2,989 (1,104) 6,293 Earnings (loss) from continuing operations (8,338) 55,680 (3) 93 16,723 (4) 64,158 Discontinued operations (less applicable tax benefit) (116) (931) (912) (1,991) (3,950) Net earnings (loss) $ (8,454) $ 54,749 $ (819) $ 14,732 $ 60,208 Primary earnings (loss) per common equivalent share: Continuing operations $ (0.54) $ 3.27 $ 0.01 $ 0.97 $ 3.75 Discontinued operations (0.02) (0.05) (0.06) (0.12) (0.23) ------ ------ ------ ------ ------ Net earnings (loss) $ (0.56) $ 3.22 $ (0.05) $ 0.85 $ 3.52 ====== ====== ====== ====== ====== Fully diluted earnings (loss) per common equivalent share: Continuing operations $ * $ 2.48 $ * $ 0.77 $ 2.99 Discontinued operations * (0.04) * (0.08) (0.17) ------ ------ ------ ------ ------ Net earnings $ * $ 2.44 $ * $ 0.69 $ 2.82 ====== ====== ====== ====== ======
75 * Fully diluted earnings are anti-dilutive. (1) - Includes the reversal of maintenance costs, which had been accrued throughout 1996, of $1.5 million relating to the termination of two DC10-30 aircraft in December 1996 (see Notes 6 and 13). (2) - Includes a net gain of $37.1 million on issuances (purchases) of equity by subsidiaries (see Notes 4 and 5). (3) - Includes the $46.6 million gain realized on US Order's offering in June 1995 (see Note 5). (4) Includes the following: - Includes a gain of approximately $0.8 million on a settlement relating to the return of two DC10-30 aircraft in 1993 (see Note 13). - Includes the $16.0 million gain realized on World Airways' offering in October 1995 (see Note 4). 76 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS WORLDCORP, INC.: We have audited the accompanying consolidated balance sheets of WorldCorp, Inc. and subsidiaries (WorldCorp) as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in common stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedules as listed in Item 14(a)(2) herein. These consolidated financial statements and financial statement schedules are the responsibility of WorldCorp's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We did not audit the consolidated financial statements of InteliData Technologies Corporation and subsidiaries ("InteliData"), a 28.9% investee company, as of and for the year ended December 31, 1996. WorldCorp's investment in InteliData was $37.4 million, and its equity in the loss of InteliData was $31.8 million for the year ended December 31, 1996. The consolidated financial statements of InteliData were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for InteliData, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WorldCorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP WASHINGTON, D.C. FEBRUARY 14, 1997 77 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Directors The Company incorporates herein by reference the information concerning directors contained in its Notice of Annual Stockholder's Meeting and Proxy Statement to be filed within 120 days after the end of the Company's fiscal year (the "1997 Proxy Statement"). Executive Officers The following table sets forth the names and ages of all executive officers of the Company and all positions and offices within the Company presently held by such executive officers:
Name Age Position Held -------- ------------- T. Coleman Andrews, III 42 Chief Executive Officer and President (WorldCorp, World Airways (Acting)), and Principal Accounting Officer, WorldCorp William F. Gorog 71 Chief Executive Officer, InteliData, and Chairman of the Board, WorldCorp Andrew M. Paalborg 41 Vice President and General Counsel
T. Coleman Andrews, III was elected Chief Executive Officer, President and a Director of the Company in June 1987. He has served as Chairman of the Board of World Airways since 1986. On March 14, 1997, World Airways announced that Charles W. Pollard departed as President and Chief Executive Officer. Pursuant to World Airways' bylaws, Mr. Andrews will act as President and Chief Executive Officer on an interim basis pending the hiring of a new CEO. In 1986, Mr. Andrews was recruited by the Board to lead a strategic turnaround and financial restructuring of World Airways, which in the previous seven years had lost $201 million. Since that time, the team led by Mr. Andrews has generated profitable results in seven of the ten years and has rebuilt World Airways successfully around its current strategy. He has served as a Director of InteliData Technologies Corporation (and its predecessor, US Order, Inc.) since 1990. From 1978 through 1986, he was affiliated with Bain & Company, Inc., an international strategy consulting firm. At Bain, he was elected partner in 1982, and was a founding general partner in 1984 of The Bain Capital Fund, a private venture capital partnership. Prior to his experience with Bain, Mr. Andrews served in several appointed positions in the White House for the Ford Administration. Mr. William F. Gorog has served as Chief Executive Officer of InteliData (and its predecessor, US Order) since May 1, 1990. He was elected a director of WorldCorp in April 1989 and was elected Chairman of the WorldCorp Board of Directors in May 1993. From October 1987 until founding US Order in May 1990, he served as Chairman of the Board of Arbor International, an investment management firm. From 1982, he served as President and Chief Executive Officer of Magazine Publishers of America, a trade association representing the principal consumer publications in the United States. During the Ford Administration, Mr. Gorog served as Deputy Assistant to the President for Economic Affairs and Executive Director of the White House Council on International Economic Policy. Prior to that time, he founded and served as Chief Executive Officer of Data Corporation, which developed the LEXIS and NEXIS information systems for legal and media research and which was subsequently sold to the Mead Corporation. 78 Mr. Andrew M. Paalborg joined World Airways as General Counsel in October 1989 and was elected Vice President and General Counsel of WorldCorp in May 1992. From 1984 to 1989 Mr. Paalborg practiced law with Hogan & Hartson, McLean, Virginia. From 1982 to 1984 he was an associate with Morgan, Lewis & Bockius, New York, New York. Mr. Paalborg received his law degree cum laude from Georgetown University in 1982 and is a member of the New York, Virginia and District of Columbia Bars. Beneficial Ownership Reporting The Company incorporates herein by reference the information required by Item 405 of Regulation S-K contained in its 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The Company incorporates herein by reference the information concerning executive compensation contained in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The Company incorporates herein by reference the information concerning security ownership of certain beneficial owners and management contained in the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The Company incorporates herein by reference the information concerning certain relationships and related transactions contained in the 1997 Proxy Statement. 79 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial Statements The following consolidated financial statements of WorldCorp, Inc. and subsidiaries are filed herewith: Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations, Years Ended December 31, 1996, 1995, and 1994 Consolidated Statements of Changes in Common Stockholders' Deficit, Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report (2) Financial Statement Schedules Schedule Number ------ I. Condensed Financial Information of Registrant II. Valuation and Qualifying Accounts NOTE: All other schedules are omitted because the requisite information is either presented in the financial statements or notes thereto or is not present in amounts sufficient to require submission of the schedules. STATUS OF PRIOR DOCUMENTS WorldCorp's Annual Report on Form 10-K for the year ended December 31, 1996, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Sections 13, 14, and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, as amended, which incorporates by reference such Annual Report on Form 10-K. (3) Index to Exhibits
Exhibit No. Exhibit ------- ------- 3.1 Certificate of Incorporation of WorldCorp, Inc. dated March 16, 1987. Incorporated [Filed as Exhibit 3.1 to WorldCorp, Inc.'s Registration Statement on by reference Form S-4 (Commission File No. 33012735) filed on March 19, 1987 and incorporated herein by reference.]
80 3.2 Amended and Restated Bylaws of WorldCorp, Inc. dated November 13, Incorporated 1987. (Filed as Exhibit 3.1 to WorldCorp, Inc.'s Annual Report on by reference Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference.) 4.6 First Supplemental Indenture dated as of February 22, 1994 between Incorporated WorldCorp, Inc. and The First National Bank of Boston, as Trustee. by reference (Filed as Exhibit 4.6 to WorldCorp, Inc's Form S-3 Registration Statement (Commission file No. 33-60247) filed on June 15, 1995 and incorporated herein by reference.) 4.8 Stock Option Agreement dated as of April 1, 1995 between WorldCorp, Incorporated Inc. and Patrick F. Graham. (Filed as Exhibit 4.8 to WorldCorp Inc's by reference Form S-3 Registration Statement (Commission file No. 33-60247) filed on June 15, 1995 and incorporated herein by reference.) 10.4 Aircraft Lease Agreement dated as of March 30, 1987 between Incorporated World Incorporated Airways, Inc. and The Connecticut National by reference Bank, not in its individual by reference capacity, but solely as Owner Trustee. (Filed as Exhibit 10.34 to World Airways, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1986 and incorporated herein by reference.) 10.5 Merger Agreement and Plan of Reorganization dated as of April 28, Incorporated 1987 by and among World Airways, Inc., World Merger Corporation by reference and WorldCorp, Inc. [Filed as Exhibit 10.50 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.] 10.9 Form of Assumption Agreement dated as of June 23, 1987 among Incorporated WorldCorp, Inc., World Airways, Inc. and each Indemnified Party. by reference [Filed as Exhibit 10.60 to WorldCorp, Inc.'s Form S-2 Registration Statement (Commission File No. 33-1358276) filed on July 31, 1987 and incorporated herein by reference.] 10.11 Agreement between World Airways, Inc. and Flight Attendants Incorporated represented by International Brotherhood of Teamsters. [Filed by reference reference as Exhibit 10.67 to WorldCorp, Inc.'s Form S-3 Registration Statement (Commission File No. 2-91998) filed on December 10, 1987 and incorporated herein by reference.] 10.12 Agreement between World Airways, Inc. and Mechanics represented by Incorporated the International Brotherhood of Teamsters. (Filed as Exhibit 10.41 by reference to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference.) 10.13 Agreement between World Airways, Inc. and Stock Clerks and Store Incorporated Room Employees represented by the International Brotherhood of by reference by reference Teamsters. (Filed as Exhibit 10.42 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference.) 10.14 Office Lease - The Hallmark Building dated as of May 16, 1987 Incorporated Incorporated between WorldCorp, Inc. and GT Renaissance Centre by reference Limited by reference Partnership. (Filed as Exhibit 10.36 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.)
81 10.15 Lease Amendment dated as of June 27, 1989 between WorldCorp, Inc. Incorporated and GT Renaissance Centre Limited Partnership. (Filed as Exhibit by reference 10.37 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.) 10.16 Office Lease - The Hallmark Building dated as of September 20, 1989 Incorporated between World Airways, Inc. and GT Renaissance Centre Limited by reference Partnership. (Filed as Exhibit 10.38 to WorldCorp, Inc's Annual Report on form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.) 10.17 Warrant Agreement dated as of July 22, 1989 between WorldCorp, Incorporated Inc. and Charles W. Pollard. (Filed as Exhibit 10.45 to WorldCorp, by reference Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.) 10.20 WorldCorp, Inc. Employee Savings and Stock Ownership Plan. (Filed Incorporated as Exhibit 10.49 to WorldCorp, Inc.'s Annual Report on Form 10-K by reference for the fiscal year ended December 31, 1989 and incorporated herein by reference.) 10.21 Amendment No. 1 to WorldCorp Inc. Employee Savings and Stock Incorporated Ownership Plan. (Filed as Exhibit 10.50 to WorldCorp, Inc.'s by reference Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference.) 10.27 Aircraft Warranty Bill of Sale dated as of January 15, 1991 between Incorporated World Airways, Inc. and First Security Bank of Utah, N.A., not in its by reference individual capacity, but solely as Owner Trustee. (Filed as Exhibit 10.46 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by reference.) 10.28 Aircraft Lease Agreement dated as of January 15, 1991 between World Incorporated Airways, Inc. and First Security Bank of Utah, N.A., not in its by reference individual capacity, but solely as Owner Trustee. (Filed as Exhibit 10.47 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by reference.) 10.30 Aircraft Lease Agreement I dated as of February 12, 1992 between Incorporated McDonnell Douglas Finance Corporation and World Airways, Inc. by reference (Filed as Exhibit 10.39 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.) 10.31 Aircraft Lease Agreement II dated as of February 12, 1992 between Incorporated McDonnell Douglas Finance Corporation and World Airways, Inc. by reference (Filed as Exhibit 10.40 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.) 10.32 Aircraft Engine Purchase Agreement dated as of April 26, 1991 between Incorporated Terandon Leasing Corporation and World Airways, Inc. (Filed as by reference Exhibit 10.41 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.)
82 10.33 Aircraft Engine Lease Agreement dated as of April 26, 1991 between Incorporated Terandon Leasing Corporation and World Airways, Inc. (Filed as by reference Exhibit 10.42 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.) 10.34 Guaranty Agreement I dated as of February 12, 1992 between Incorporated McDonnell Incorporated Douglas Finance Corporation and World by reference Airways, Inc. (Filed as Exhibit by reference 10.43 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.) 10.35 Guaranty Agreement II dated as of February 12, 1992 between Incorporated McDonnell Incorporated Douglas Finance Corporation and World by reference Airways, Inc. (Filed as Exhibit by reference 10.44 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.) 10.38 Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.39 Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.40 Aircraft Lease Agreement for Aircraft Serial Number 48520 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.41 Aircraft Lease Agreement for Aircraft Serial Number 48633 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.42 Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.43 Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as Incorporated of September 30, 1992 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.46 Accounts Receivable Management and Security Agreement dated as Incorporated of December 7, 1993 between World Airways, Inc. and BNY by reference Financial Corporation. 10.47 Aircraft Parts Security Agreement dated as of December 7, 1993 Incorporated between World Airways, Inc. and BNY Financial Corporation. by reference 10.48 Warrant Certificate dated as of December 7, 1993 between WorldCorp, Incorporated Inc. and BNY Financial Corporation. by reference 10.62 Consignment Agreement dated as of September 30, 1993 between World Incorporated Airways Inc. and The Memphis Group. by reference 10.63 Assignment and Assumption and Consent and Release for Aircraft Incorporated Serial Number 47818 dated as of July 20, 1993 among World by reference Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and
83 McDonnell Douglas Finance Corporation. 10.64 Assignment and Assumption and Consent and Release for Aircraft Incorporated Serial Number 46999 dated as of July 9, 1993 among World by reference Airways, Inc., WorldCorp, Inc., McDonnell Douglas Corporation, and McDonnell Douglas Finance Corporation. 10.65 Aircraft Lease Agreement for Aircraft Serial Number 48458 dated as Incorporated of January 15, 1993 between World Airways, Inc. and Wilmington by reference Trust Company/GATX Capital Corporation. 10.66 Aircraft Lease Supplement for Aircraft Serial Number 48458 dated as Incorporated of April 23, 1993 between World Airways, Inc. and Wilmington Trust by reference Company/GATX Capital Corporation. 10.67 Aircraft Spare Parts Lease Agreement dated as of April 15, 1993 Incorporated between World Airways, Inc. and GATX Capital Corporation. by reference 10.68 Amendment No. 1 To Aircraft Lease Agreement for Aircraft Serial Incorporated Number 48518 dated as of November 1993 between World Airways, by reference Inc. and International Lease Finance Corporation. 10.69 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated Number 48518 dated as of March 8, 1993 between World Airways, by reference Inc. and International Lease Finance Corporation. 10.70 Assignment of Rights for Aircraft Serial Number 48518 dated as of Incorporated March 8, 1993 between World Airways, Inc. and International Lease by reference Finance Corporation. 10.71 Assignment of Rights for Aircraft Engines Serial Numbers P723942, Incorporated P723945, and P723943 dated as of March 1, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation. 10.72 Agency Agreement for Aircraft Serial Number 48518 dated as of Incorporated January 15, 1993 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.73 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated Number 48437 dated as of March 31, 1993 between World Airways, by reference Inc. and International Lease Finance Corporation. 10.74 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Incorporated Number 48437 dated as of April 15, 1993 between World Airways, by reference Inc. and International Lease Finance Corporation. 10.75 Agency Agreement for Aircraft Serial Number 48437 dated as of Incorporated January 15, 1993 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.76 Assignment of Rights for Aircraft Serial Number 48437 dated as of Incorporated April 15, 1993 between World Airways, Inc. and International Lease by reference Finance Corporation. 10.77 Assignment of Rights for Aircraft Engines Serial Numbers P723913, Incorporated
84 P723912, and P723914 dated as of April 15, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation. 10.78 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated Number 48520 dated as of April 22, 1993 between World Airways, by reference Inc. and International Lease Finance Corporation. 10.79 Agency Agreement for Aircraft Serial Number 48520 dated as of Incorporated January 15, 1993 between World Airways, Inc. and International by reference Lease Finance Corporation. 10.80 Assignment of Rights for Aircraft Serial Number 48520 dated as of Incorporated April 22, 1993 between World Airways, Inc. and International Lease by reference Finance Corporation. 10.81 Assignment of Rights for Aircraft Engines Serial Numbers P723957, Incorporated P723958, and P723956 dated as of March 1, 1993 between World by reference Airways, Inc. and International Lease Finance Corporation. 10.82 Aircraft Charter Agreement dated as of July 24, 1993 between World Incorporated Airways, Inc. and Malaysian Airline System Berhad. by reference 10.83 Amendment No. 1 to Aircraft Lease Agreement for Aircraft Serial Incorporated Numbers 46835, 46837, and 46820 dated as of May 14, 1993 between by reference World Airways, Inc. and The Connecticut National Bank (assigned to Federal Express Corporation). 10.84 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Incorporated Numbers 46835, 46837, and 47820 dated as of May 14, 1993 between by reference World Airways, Inc. and The Connecticut National Bank (assigned to Federal Express Corporation). 10.85 Return Agreement for Aircraft Serial Numbers 47818 and 46999 dated Incorporated as of July 9, 1993 among World Airways, Inc., WorldCorp, Inc., by reference International Lease Finance Corporation, McDonnell Douglas Corporation, and McDonnell Douglas Finance Corporation. 10.861 Acquisition Agreement Among VISA International Service Association, Incorporated US Order, Inc, and WorldCorp, Inc, dated as of July 15, 1994. by reference 10.87 Stock Purchase Agreement by and among World Airways, Inc., Incorporated WorldCorp, Inc., and Malaysian Helicopter Services Berhad dated as by reference of October 30, 1993. 10.88 Stock Registration Rights Agreement between World Airways, Inc. Incorporated and Malaysian Helicopter Services Berhad dated as of October 30, by reference 1993. 10.89 Shareholders Agreement between Malaysian Helicopter Services Incorporated Berhad and WorldCorp, Inc., and World Airways, Inc. dated as of by reference February 3, 1994. 10.90 Amendment No. 1 to Shareholders Agreement dated as of February 28, Incorporated 1994, among WorldCorp, World Airways, and MHS. by reference
85 10.94 Stock Option Agreement dated as of August 1, 1994 ("Grant Date") Incorporated between WorldCorp, Inc. and William F. Gorog. by reference 10.95 Employment Agreement dated as of August 1, 1994 between US Incorporated Order, Inc. and John C. Backus, Jr. by reference 10.96 Employment Agreement dated as of August 19, 1994 between Incorporated WorldCorp, Inc. and T. Coleman Andrews, III. by reference 10.97 Stock Option Agreement dated as of August 19, 1994 ("Grant Date") Incorporated by and between WorldCorp, Inc. and T. Coleman Andrews, III. by reference 10.98 Agreement between World Airways, Inc. and the International Incorporated Brotherhood of Teamsters representing the Cockpit Crewmembers by reference employed by World Airways, Inc. dated August 15, 1994-June 30, 1998. 10.101 Aircraft Services Agreement dated September 26, 1994 by and between Incorporated World Airways, Inc. ("World") and Malaysian Airlines. by reference 10.102 Freighter Services Agreement dated October 1, 1994 by and between Incorporated World Airways, Inc. and Malaysian Airline System Berhad. by reference 10.103 World Airways, Inc. 1995 AMC Contract F11626-94-D0027 dated Incorporated October 1, 1994 between World Airways, Inc. and Air Mobility Command. by reference 10.105 Stock Purchase Agreement (the "Agreement") dated as of December Incorporated 31, 1994 by and between MHS Berhad, a Malaysian corporation (the by reference "Shareholder") and WorldCorp, Inc., a Delaware corporation (the "Purchaser"). 10.107 Amendment No. 1 to Passenger Aircraft Services and Freighter Incorporated Services Agreement dated December 31, 1994 by and between World by reference Airways, Inc. and Malaysian Airline System Berhad. 10.109 Customer Agreement between WorldCorp ESSOP and Scott & Incorporated Stringfellow, Inc. dated January 11, 1995 for a margin loan. by reference 10.110 Side Letter dated January 11, 1995 from Scott & Stringfellow, Inc. to Incorporated William F. Gorog, Trustee of WorldCorp Employee Savings and Stock by reference Ownership Plan for a margin loan to the WorldCorp ESSOP. 10.111 Guarantee Agreement dated January 11, 1995 by WorldCorp, Inc. Incorporated ("Guarantor") for the benefit of Scott & Stringfellow, Inc. (the by reference "Lender"). 10.112 Registration Rights Agreement dated as of January 11, 1995 by and Incorporated between WorldCorp, Inc. and Scott & Stringfellow, Inc. by reference 10.113 Side Letter dated January 11, 1995 from WorldCorp, Inc. to Scott & Incorporated Stringfellow, Inc. regarding commitment to make contributions to the by reference WorldCorp Employee Savings and Stock Ownership Plan (the "ESSOP"), for the duration of the Scott & Stringfellow loan to the ESSOP. 10.115 Amendment No. 2 to Passenger Aircraft Services and Freighter Incorporated Aircraft Service Agreement dated February 9, 1995 by and between by reference World Airways, Inc. and Malaysian Airline System Berhad.
86 10.116 Form 10-K for the fiscal year ended December 31, 1996 for InteliData Technologies Corporation, Inc. Filed Herewith 11 Statement on Calculation of Earnings (Loss) Per Common Share. Filed Herewith 21 Subsidiaries of the Registrant WorldCorp, Inc. Filed Herewith 23.1 Consent of KPMG Peat Marwick LLP. Filed Herewith 23.2 Consent of Deloitte & Touche LLP. Filed Herewith 27 Financial Data Schedule for the year ended December 31, 1996. Filed Herewith
1 Confidential treatment of portions of the Agreement has been granted by the Commission. The copy filed as an exhibit omits the information subject to confidentiality request. Confidential portions so omitted have been filed separately with the Commission. (b) Reports on Form 8-K Form 8-K dated November 22, 1996 was filed with the Securities and Exchange Commission on November 22, 1996. Form 8-K/A dated November 22, 1996, was filed with the Securities and Exchange Commission on December 17, 1996 * * * * * * * * * * * 87 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, 1997 - -------------------------- President, and Principal (T. Coleman Andrews, III) Accounting Officer /s/ William F. Gorog Director and March 31, 1997 - -------------------- Chairman of the Board (William F. Gorog) /s/ Gideon Argov Director - -------------------- March 31, 1997 (Gideon Argov) /s/ John C. Backus, Jr. Director March 31, 1997 - ----------------------- (John C. Backus, Jr.) /s/ James E. Colburn Director March 31, 1997 - -------------------- (James E. Colburn) /s/ Patrick F. Graham Director March 31, 1997 - --------------------- (Patrick F. Graham) /s/ Geoffrey S. Rehnert Director March 31, 1997 - ----------------------- (Geoffrey S. Rehnert)
SCHEDULE I WORLDCORP, INC. CONDENSED BALANCE SHEETS ASSETS (IN THOUSANDS)
December 31, ------------------------- 1996 1995 ---------- ---------- CURRENT ASSETS Cash and cash equivalents, including restricted short- term investments of $109 and $6 at December 31, 1996 and 1995, respectively $ 5,434 $ 24,050 Restricted cash 1,000 -- Other receivables 284 552 Prepaid expenses and other current assets 536 715 ------- ------- Total current assets 7,254 25,317 ------- ------ EQUIPMENT AND PROPERTY Equipment 3,102 3,075 Equipment under capital leases 173 173 ------- ------- 3,275 3,248 Less accumulated depreciation and amortization 2,804 2,474 ------- ------- Net equipment and property 471 774 -------- ------- INVESTMENT IN SUBSIDIARIES AND AFFILIATE 41,919 40,854 OTHER ASSETS AND DEFERRED CHARGES, NET 2,458 2,904 INTANGIBLE ASSETS, NET 1,072 2,591 ------- ------ TOTAL ASSETS $ 53,174 $ 72,440 ======= ======
(Continued) SCHEDULE I (Continued) WORLDCORP, INC. CONDENSED BALANCE SHEETS LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT (IN THOUSANDS) (CONTINUED)
December 31, ------------------------- 1996 1995 ---------- ---------- CURRENT LIABILITIES Note payable $ 15,000 $ -- Current maturities of long-term obligations 944 1,410 Accounts payable 223 421 Accrued salaries and wages 993 1,349 Accrued interest 824 1,877 Accrued taxes 24 (250) -------- --------- Total current liabilities 18,008 4,807 -------- --------- LONG-TERM OBLIGATIONS, NET Senior Subordinated Notes, net 9,675 -- Subordinated convertible debt 65,000 65,000 Subordinated notes, net -- 24,961 Other long-term obligations 23 969 -------- --------- Total long-term obligations, net 74,698 90,930 -------- -------- TOTAL LIABILITIES 92,706 95,737 -------- -------- COMMON STOCKHOLDERS' DEFICIT Common stock, $1 par value, (60,000,000 shares authorized, 16,420,350 shares issued and 15,020,265 shares outstanding at December 31, 1996 and 16,416,134 shares issued and 16,353,549 shares outstanding at December 31, 1995) 16,617 16,354 Additional paid-in capital 43,824 42,210 Deferred compensation (591) (553) Accumulated deficit (91,366) (79,598) ESOP guaranteed bank loan -- (1,370) Treasury stock, at cost (1,576,766 and 62,585 shares in 1996 and 1995, respectively) (8,016) (340) -------- --------- TOTAL COMMON STOCKHOLDERS' DEFICIT (39,532) (23,297) -------- -------- COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 53,174 $ 72,440 ======== ========
See accompanying Notes to Condensed Financial Statements SCHEDULE I (Continued) WORLDCORP, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS)
Year ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ---------- OPERATING EXPENSES: General and administrative $ 3,803 $ 4,334 $ 3,614 -------- -------- -------- OPERATING LOSS (3,803) (4,334) (3,614) -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense (8,150) (9,071) (8,354) Interest income 1,072 1,263 900 Equity in earnings (loss) of subsidiaries and affiliate (39,964) 4,612 (7,152) Gain (loss) on issuances (purchases) of equity by subsidiaries, net 38,886 43,676 10,524 Gain on sales of subsidiaries' stock, net -- 23,717 16,398 Other, net 30 404 (279) -------- -------- -------- Total other income (expense) (8,126) 64,601 12,037 -------- -------- -------- EARNINGS (LOSS) BEFORE INCOME TAXES (11,929) 60,267 8,423 INCOME TAX (EXPENSE) BENEFIT 175 (59) (115) -------- -------- -------- NET EARNINGS (LOSS) $ (11,754) $ 60,208 $ 8,308 ======== ======== ========
See accompanying Notes to Condensed Financial Statements SCHEDULE I (Continued) WORLDCORP, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ---------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 24,050 $ 1,536 $ 2,388 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) (11,754) 60,208 8,308 Adjustments to reconcile net earnings (loss) to cash used by operating activities: Depreciation and amortization 1,378 1,368 457 Gain (loss) on issuances (purchases) of equity by subsidiaries, net (38,886) (43,676) (10,524) Gain on sales of subsidiaries' stock, net -- (23,717) (16,398) Equity in (earnings) loss of subsidiaries 39,964 (4,612) 7,152 Deferred compensation expense 162 678 1,115 Other (354) (827) 52 Changes in certain assets and liabilities net of effects of non-cash transactions: Decrease in accounts receivable 610 419 852 Increase in restricted cash (1,000) -- -- (Increase) decrease in prepaid expenses and other assets 181 1,862 (1,537) Increase (decrease) in accounts payable, accrued expenses and other liabilities (1,339) (1,521) (5,569) -------- -------- --------- Net cash provided (used) by operating activities (11,038) (9,818) (16,092) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to equipment and property (29) (12) (199) Proceeds from disposal of equipment and property 185 -- 609 Purchase of investments (1,126) (282) (400) Proceeds from collection of note receivable from subsidiary -- 3,500 -- ---------- -------- -------- Net cash provided (used) by investing activities (970) 3,206 10 -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 35,000 -- 20 Repayment of debt (35,040) (9,648) (1,768) Proceeds from stock transactions 1,499 3,064 1,428 Proceeds from sales of subsidiaries' stock -- 28,986 12,300 Proceeds from redemption of preferred stock in subsidiary -- 4,300 3,250 Repurchases of common stock (7,676) -- -- Discounts on debt issued (391) -- -- Dividends from subsidiary -- 2,424 -- --------- ---------- --------- Net cash provided by financing activities (6,608) 29,126 15,230 -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,616) 22,514 (852) -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,434 $ 24,050 $ 1,536 ======== ======== =======
See accompanying Notes to Condensed Financial Statements SCHEDULE I (Continued) WORLDCORP, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 A. The condensed financial statements of WorldCorp, Inc. ("parent company") should be read in conjunction with the consolidated financial statements and accompanying notes thereto of WorldCorp, Inc, and subsidiaries as of and for the year ended December 31, 1996. B. The parent company's long-term obligations at December 31 are as follows (in thousands):
1996 1995 ---------- ---------- Senior Subordinate Notes -- with interest at 10% payable semi-annually beginning March 31, 1997 (net of unamortized discount of $0.3 million) 9,675 -- Convertible Subordinated Debentures due 2004 -- with interest at 7% payable semi-annually beginning May 15, 1992. The Debentures are convertible into WorldCorp common stock at $11.06 per share subject to adjustment in certain events. 65,000 65,000 13 7/8% Subordinated Notes, retired in 1996 (net of unamortized discount of $0.1 million in 1995). -- 24,961 Unsecured promissory note due 1997 -- with interest at 6% payable quarterly beginning May 8, 1994. 900 900 Guaranteed bank loan due 1996 -- with interest at the call loan rate plus 1.5% (8.45% at December 31, 1995), collateralized by 286,681 shares of WorldCorp common stock held by the WorldCorp Employee Savings and Stock Ownership Plan. $ -- $ 1,370 Capitalized lease obligations 67 109 -------- ------- Total 75,642 92,340 Less: current maturities 944 1,410 -------- ------- Total long-term obligations, net 74,698 $ 90,930 ======= =======
See Note 13 of the Company's "Notes to Consolidated Financial Statements" for further description of the above obligations. The following table shows the aggregate amount of scheduled principal maturities (in thousands) of debt and capitalized lease obligations outstanding at December 31, 1996: 1997 $ 860 1998 1,933 1999 1,513 2000 6,336 2001 -- Thereafter 65,000 ------ Total $75,642 ======
In addition, the parent company has a $15.0 million note payable outstanding, which is due in September 1997. Also, in the first quarter of 1997, the parent company entered into a $1.0 million margin loan with Scott & Stringfellow, Inc. whereby WorldCorp pledged approximately 400,000 shares of InteliData common stock which WorldCorp owns as collateral for such loan. SCHEDULE II WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
Balance at Charged to Deductions Balance beginning costs and charged to at end of of period expenses reserves period Allowance for Doubtful Accounts - ------------------------------- Year ended December 31, 1996 $ 322 $ 236 $ 145 $ 413 ======== ======== ======= ======= Year ended December 31, 1995 $ 81 $ 414 $ 173 $ 322 ======== ======== ======= ======= Year ended December 31, 1994 $ 311 $ 436 $ 666 $ 81 ======== ======== ======= ======= Valuation Allowance for Deferred Tax Assets ------------------- Year ended December 31, 1996 $ 20,113 $ 3,164 $ -- $ 23,277 ====== ====== ======== ====== Year ended December 31, 1995 $ 13,973 $ 6,140 $ -- $ 20,113 ====== ======== ====== ====== Year ended December 31, 1994 $ 73,003 $ -- $ 59,030 $ 13,973 ====== ======== ====== ======
EX-10.116 2 INTELIDATA FORM 10-K ============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ______________ For the fiscal year ended: DECEMBER 31, 1996 Commission File Number 000-21685 INTELIDATA TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 54-1820617 (State of incorporation) (I.R.S. Employer Identification Number) 13100 Worldgate Drive, Suite 600, Herndon, VA 20170 (Address of Principal Executive Offices) (703) 834-8500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $.001 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------- ____________ State by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ]. The aggregate market value of the Common Stock held by non-affiliates of the registrant on March 1, 1997, was approximately $116,206,000. In determining this figure, the Registrant has assumed that all of its directors and executive officers are affiliates. Such assumptions should not be deemed to be conclusive for any other purpose. The number of shares of the registrant's Common Stock outstanding on March 1, 1997 was 31,816,693. DOCUMENTS INCORPORATED BY REFERENCE Portions of InteliData Technologies Corporation's Proxy Statement for its 1997 Annual Stockholder Meeting, to be filed within 120 days after the end of the registrant's fiscal year, are incorporated into Part III of this Report. ================================================================================ INTELIDATA TECHNOLOGIES CORPORATION 1996 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I - ------ Item 1. Business............................................................ 3 Item 2. Properties.......................................................... 21 Item 3. Legal Proceedings................................................... 21 Item 4. Submission of Matters to a Vote of Stockholders..................... 21 PART II - ------- Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 22 Item 6. Selected Financial Data............................................. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation ............................................... 24 Item 8. Financial Statements and Supplementary Data......................... 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 66 PART III - -------- Item 10. Directors and Executive Officers of the Registrant.................. 66 Item 11. Executive Compensation.............................................. 68 Item 12. Security Ownership of Certain Beneficial Owners and Management...... 68 Item 13. Certain Relationships and Related Transactions...................... 69 PART IV - -------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 70
2 PART I ITEM 1. BUSINESS - ----------------- GENERAL InteliData Technologies Corporation ("InteliData" or the "Company"), was incorporated on August 23, 1996 under the Delaware General Corporation Law in order to effect the mergers ("Mergers") of US Order, Inc. ("US Order") and Colonial Data Technologies Corp. ("Colonial Data"). The Mergers were announced on August 5, 1996, when US Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement"). On November 7, 1996, the Mergers were consummated with each share of outstanding US Order and Colonial Data common stock being exchanged for one share of InteliData common stock. Accounting for the Mergers was treated as a purchase of Colonial Data by US Order. Accordingly, financial statements of the Company included herein reflect the results of US Order through November 7, 1996 and the consolidated results of US Order and Colonial Data thereafter. Effective September 30, 1996, US Order acquired the business of Braun, Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7 million consisting of cash and US Order common stock and including US Order transaction costs pursuant to the merger of Braun Simmons into US Order (the "Braun Simmons Acquisition"). Braun Simmons was an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions. The acquisition expands the Company's product line for both large and small financial institutions. The business of the Company consists of the businesses previously conducted by US Order, Colonial Data and Colonial Data's subsidiaries. The Company develops and markets products and services for the telecommunications and financial services industries through its three business divisions: consumer telecommunications, electronic commerce and interactive services. The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by the regional Bell operating companies ("RBOCs") and other telephone companies ("telcos"). The Company has concentrated its product development and marketing efforts on products that support Caller ID and other emerging intelligent network services, including a smart telephone, the Telesmart 4000/Intelifone/TM/, which provide consumers call management features and the ability to access numerous network services and interactive applications via telephone. The Company currently offers a line of Caller ID adjunct units and telephones with integrated Caller ID, small business telecommunications systems and high-end consumer telecommunications equipment. The Company also repairs and refurbishes telecommunications products for commercial customers and provides other services that support the development and implementation of intelligent network services. 3 The electronic commerce division develops and markets products and services to assist financial institutions in their home banking and electronic bill payment initiatives. The products are designed to assist consumers in accessing and transacting business with their banks and credit unions electronically, and to assist financial institutions in connecting to and transacting business with third parties, including data processors and billers. The services focus on a financial institution's back office, offering outsourcing for data entry, telemarketing, customer service and technical support. The Company currently receives its electronic commerce revenues largely from the sale of products and services to Visa International Service Association, Inc. ("Visa") member banks. On August 1, 1994, the Company sold its bill payment operations and technology (the "Visa Bill-Pay System") to Visa for cash and the right to future royalty payments which are based on the number of customers utilizing the Visa Bill-Pay System. The Company's right to future royalty payments from Visa is subject to a cumulative offset amount aggregating $880,000 and, accordingly, the Company does not expect to begin receiving royalty payments until at least the second half of 1997. Visa formed Visa InterActive, Inc. ("Visa InterActive") around the technology and personnel acquired from the Company, including 54 former Company employees. Visa InterActive also has agreed through 2000 to inform Visa member banks that the Company is a preferred provider of certain electronic commerce products and services. The interactive services division was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communication Systems ("PCS") devices and personal digital assistants ("PDAs"). The Company intends to sell interactive applications directly to end users and through other companies, including telcos and wireless communications companies. The Company's current interactive applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail, a personal directory data save and restore function and information services such as news, weather, sports scores, stock quotes, lottery results and horoscopes. The Company's principal executive offices are located at 13100 Worldgate Drive, Suite 600, Herndon, Virginia 20170 and its telephone number is (703) 834- 8500. INDUSTRY BACKGROUND The Company maintains operations in three primary markets: consumer telecommunications, electronic commerce and interactive services. Consumer Telecommunications The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by RBOCs and other telcos. Deregulation and technological advances have intensified competition among existing operators of telecommunication networks and encouraged the 4 entrance of new service providers. In addition, there are mergers pending among certain RBOCs and further industry consolidation may occur in the future. In the United States, competition among RBOCs, other telcos and long distance carriers and new service providers that have entered the local and long distance markets, has increased and may increase further as a result of the Telecommunications Act of 1996 (the "Telecommunications Act") or industry consolidation. RBOCs and other telcos are responding to increasing competition by, among other things, introducing value-added, intelligent network services . In order to deploy intelligent network services, the telcos have been upgrading their telecommunications networks to support a set of standards, known as the Intelligent Networks ("IN"). IN supports open, distributed switching and processing capabilities and allows the telcos to create, modify and deploy new services quickly and economically. In addition, Bell Communications Research, Inc. has developed the Analog Display Services Interface ("ADSI"), a standard protocol for the simultaneous transmission of data and voice information between an information source and a subscriber's telephone or other communications device such as a smart telephone. One of the first intelligent network service offerings by RBOCs and telcos was Caller ID, a service that provides information about the incoming call (including the number and name of the caller and the time and date of the call) enabling that information to be displayed on a device located near the telephone (in the case of an adjunct unit) or on a display screen located on the telephone (in the case of an integrated Caller ID telephone). InteliData estimates that the current penetration rate of Caller ID service is approximately 15% of the total subscribers in those areas in the United States that have Caller ID capabilities . By deploying the ADSI protocol in the telecommunications network, RBOCs and other telcos will be able to offer additional intelligent network services and third-party interactive applications. ADSI-based services will include Caller ID on Call Waiting together with Call Disposition. By subscribing to Caller ID on Call Waiting with Disposition, a subscriber who receives a Call Waiting signal can look at the display screen on the smart telephone and see the name and number of the calling party before deciding whether to answer the call, send a prerecorded message telling the calling party to wait, forward the call to voice mail or drop the line. Additional services which can be supported through ADSI include on-line directory assistance, e-mail, paging, news, weather, stock quotes and other information. The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act has effected basic changes in the telecommunications regulatory scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovation to telephone customers in the United States. The Federal Communications Commission ("FCC") issued its first major order under the Telecommunications Act in August, 1996 which constitutes the FCC's initial measures to implement sections of the Telecommunications Act relating to interconnection between carriers and the provision of access to unbundled services. However, this order has been challenged and, as of March 1, 1997, the effectiveness of some of its provisions has been stayed in the U.S. Court of Appeals for the Eighth 5 Circuit. In December 1996, the FCC issued a Notice of Proposed Rulemaking which suggests rules concerning the implementation of the Telecommunications Act provisions relating to RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other emerging intelligent network services subject to certain conditions. The Company is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or the Company's business generally. Electronic Commerce The electronic commerce division provides products and services to financial institutions whose processes and systems are subject to regulatory approvals. Electronic commerce is a developing marketplace. Financial institutions are expanding their electronic home banking services to permit customers not only to review historical account information, but also to engage in transactions such as paying bills and transferring funds. The Company's future growth and profitability will depend, in part, upon consumer acceptance of electronic home banking. Interactive Services The interactive services division provides SmartTime/(R)/ services to customers delivering personalized information to a variety of small screen devices, including screen telephones, alpha-numeric pagers, PCS/cellular telephones and addressable personal communicators. The division provides operating online and batch interactive services directed at consumers of small screen devices. Although the Company builds some of its services, the Company is essentially an aggregator of other data sources and purchases data from many of the same suppliers as its competitors. PRODUCTS AND SERVICES The Company's business strategy is to develop products and services to meet the needs of its customers in each of three markets: consumer telecommunications, electronic commerce and interactive services. The Company develops products and services for the RBOCs and other telcos, financial institutions and their customers. The Company strives to develop products with broad appeal that are easy-to-use, practical, inexpensive and built around common industry standards. The Company believes its products position the Company to offer support services and interactive service applications which are expected to generate recurring monthly fee revenue. Consumer Telecommunications Since introducing the first commercially available Caller ID unit in 1987, the Company has developed and marketed Caller ID products with increased functionality to meet the needs of its RBOC and other telco customers. A substantial majority of the Company's revenues are derived from 6 the sale and leasing of its Caller ID products. The following represent the Company's consumer telecommunications products and services: Entry Level Caller ID Adjunct Devices ------------------------------------- The Company provides low-priced, entry level Caller ID devices primarily to support RBOC marketing and promotional campaigns in which a telco may give away or subsidize the purchase of a Caller ID adjunct device when a consumer subscribes for the service. The Company believes that RBOCs utilize lower-priced products to reduce or eliminate the initial consumer expenditure required to obtain the service and, as a result, may subsequently achieve higher penetration rates for Caller ID in selected markets. The Company's entry level Caller ID adjunct devices have suggested retail prices of $29.99 to $39.99. Full-Featured Caller ID Adjunct Devices --------------------------------------- The Company's full-featured products display all transmitted information before the incoming telephone call is answered and store this information in memory. Among the features available on the Company's full-featured products are memory capacity for up to 99 calls, a "blocked call"/"new call" light, a patented "Block the Blocker" feature, a bilingual display and a "message waiting alert" light that indicates to a network voice mail subscriber that a new voice mail message has been received. "Block the Blocker" is a feature that detects when call block is used by a caller, delivers a message to that caller that the Caller ID subscriber does not accept blocked calls and disconnects the call. The Company's full-featured Caller ID adjunct devices have suggested retail prices of $39.99 to $69.99. Caller ID on Call Waiting ------------------------- Caller ID on Call Waiting allows a subscriber to combine both Caller ID and Call Waiting network services, to view the directory name and telephone number of an incoming call as the Call Waiting signal is delivered. The Company's Caller ID on Call Waiting adjunct device also allows a consumer to store approximately 85 names and numbers in memory. InteliData has applied for a patent on certain aspects of its Caller ID on Call Waiting device. The Caller ID on Call Waiting adjunct device has a suggested retail price of $79.99. Call Manager ------------ The Call Manager is a sophisticated Caller ID device that works with both single-data and multi-data message services. The Call Manager stores up to 75 of the most recent names and numbers called. The product incorporates a wide variety of telco provided network services, including Caller ID on Call Waiting with Disposition, into a compact adjunct. The Call Manager has a suggested retail price of $99.99. 7 Integrated Telephones --------------------- The Company offers a line of corded and cordless telephones with integrated Caller ID functionality which have suggested retail prices of $59.99 to $199.99. ADSI-Compatible Smart Telephones -------------------------------- The Telesmart 4000/Intelifone/TM/ smart telephone was designed and developed by the Company and is being marketed under the Telesmart brand name in the telco channel and under the Intelifone/TM/ brand name in the retail channel. Its design is based on a Digital Signal Processing ("DSP") architecture. The smart telephone is an ADSI telephone device that incorporates a graphics display screen, magnetic card reader, alpha-numeric keypad, V.22 modem and a processor. The smart telephone supports Caller ID with Disposition, the integration of Caller ID on Call Waiting and a visual message waiting indicator. The Telesmart 4000/Intelifone/TM/ smart telephone will also support the Company's protocol for information, transaction and communication services. The Company began shipping units in late 1996. Small Business Telecommunications Systems ----------------------------------------- The Company, through one of its subsidiaries, distributes small business telecommunications systems. These systems include analog and digital key systems that allow up to 24 individual telephone lines to be serviced from the same operating system. These small business systems are sold through independent dealers that install and service the product, and in some instances through retail stores. The Company markets its small business telecommunications systems to small business/home office consumers who are looking for an easy-to-install communications system at a reasonable price. Repair and Refurbishment ------------------------ The Company has provided telephone repair and refurbishment services to RBOCs, other telcos and certain telephone equipment manufacturers for a wide variety of telecommunications products, including corded and cordless telephones, key telephone business systems, cellular telephones and leased telephone products. The Company believes that its capabilities in this area have strengthened its relationship with the RBOCs and other telcos. During the year ended December 31, 1996, the Company's service customer base included Nitsuko America Corp., TIE/communications, Inc. ("TIE"), Conair Corp., Southern New England Telephone Company ("SNET") and Motorola, Inc. Electronic Commerce The Company's strategy in the electronic commerce market is to support financial institutions by providing products and services that help them deploy home banking to their customers. In addition, the Company supports Visa InterActive with products and services which facilitate bill payment and bill presentment. The Company's products and services are designed to provide consumers the ability to access and utilize their bank account information. They are 8 also designed to provide financial institutions with connectivity to the Visa InterActive host computer system as well as to other third party payment processors. The following represent the Company's electronic commerce products and services: Consumer Access Products ------------------------ Remote Banking Systems. The remote banking system product line, which runs on an InterVoice platform, was developed by the Company for sale to Visa InterActive financial institutions. The Company is an authorized value-added reseller of InterVoice's hardware products. The remote banking system product line is an advanced touch-tone telephone-based bill payment system with built-in connectivity to the Visa Bill-Pay System. The products are custom-branded for each individual bank or credit union customer. The products offer three levels of touch-tone interaction. The first application allows a customer to establish a list of payees identified by numerical codes. The customer then uses the remote banking system to pay bills using the telephone by pressing the appropriate payee code and desired payment amount. The second application allows a customer to establish a list of payees identified by numerical codes and record the customer's own voice identifying the payee by name. The customer then uses the remote banking system to pay bills using the telephone by pressing the appropriate payee code. After the customer's voice recording confirms that the proper payee has been selected, the customer keys in the desired amount of payment. The third application allows a customer, after establishing a list of payees identified by numerical codes and recording the customer's own voice identifying the payee by name, to pay bills by telephone by speaking the name of the payee and then touching in the desired amount of the payment. Financial Power Tools 2000. The Financial Power Tools 2000 ("FPT 2000") is a front end internet interface that offers full-service banking and bill payment and gives a financial institution the flexibility to add services such as electronic bill presentment, brokerage, insurance, loan applications and service requests. Customers access their accounts in real-time, getting accurate and timely information on account balances and pending transactions. FPT 2000's secure, real-time connection to the host protects the bank and its customers by utilizing the latest browser-level security systems on the internet and accesses control at the host. Mainframe Connectivity Products ------------------------------- Unigate/(TM)/ ADMS Gateway Server. One of a family of server products connecting access devices to the banks, the Company's gateway connectivity product supports the Visa Bill-Pay System and provides a real time connection between banks and their customers. It is a data translator which enables a real time connection between a customer's access device and a bank's host data processor, allowing the customer to access all of his or her account activity from the bank's mainframe CICS or IMS system. The product runs on a Sun SPARC 5 platform (or larger) and can communicate with almost any mainframe host. Unipay/(TM)/ Automated Billing Systems. The Company is developing automated payment systems, including a biller workstation. The biller workstation will allow merchants to design bill 9 templates, transmit customized marketing information, and give customers direct access to statement information in partnership with their financial institutions. The product family incorporates the Visa InterActive and ePay standards for electronic exchange of bill payment information with Visa banks and supports formatting and delivery of bill information to consumers. Billers will also be able to send and receive payment and invoice information electronically to and from their commercial banks through the Visa Bill-Pay System. The Company expects to introduce this product line in the second half of 1997. Services -------- Customer Support Services. The Company offers bank-branded, turnkey customer service to financial institutions in support of its consumer access products. The Company's customer service operation is open seven days a week, 18 hours a day. If a bank chooses the Company to provide customer service, the Company typically receives a start-up fee from that bank and a per minute fee per customer. Product Support Services. The Company offers its clients consulting services to assist in implementation, training and customization on a time and materials basis and provides maintenance services and software upgrades pursuant to agreements which are renewable on an annual basis. Interactive Services The Company's strategy is to deploy its interactive services on its smart telephones as well as other smart telephones and small screen devices, such as alpha-numeric pagers and PDAs, manufactured by other companies. The Company intends to sell interactive service applications to RBOCs, telcos and end users through retail markets and direct sales programs. The Company's current interactive service applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail and a personal directory data save and restore function. Alpha-numeric paging and internet e-mail allow the users to send notes and messages to individuals carrying a paging device and to individuals with an internet e-mail address, respectively. The data save and restore service is an application that provides remote backup capability and data retrieval for information that is stored in the smart telephone memory. Additionally, the Company offers services providing news, weather, stock quotes, sports scores and horoscopes. These are applications that will allow the smart telephone user to receive periodically updated application-specific information in an on-line format. In the future, the Company expects to expand its interactive services by offering two-way internet e-mail, which will enable the user to not only send an e-mail message to an internet address, but also to receive an e-mail message from an internet address. As of December 31, 1996, the Company has not generated revenues from its interactive services division. MARKETING AND DISTRIBUTION The Company sells its products and services to telephone operating companies, retailers and 10 financial institutions in the United States. Revenues from the Company's joint venture partner, an RBOC and an electronic banking service provider, were approximately 20%, 13% and 11% of total revenues for the year ended December 31, 1996. Consumer Telecommunications The Company markets its consumer telecommunications products and services through 20 employees in its direct sales force and marketing department, and currently uses 28 independent sales representative firms. The Company's distribution strategy is to make its products available to potential end users through multiple distribution channels including: direct fulfillment arrangements with RBOCs, direct marketing, direct sales, and retail as described below. Direct Fulfillment Arrangements ------------------------------- The Company sells consumer telecommunications products to RBOC subscribers and other telco subscribers through direct fulfillment arrangements with Ameritech Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell Atlantic"), BellSouth Corporation ("BellSouth"), NYNEX Corporation ("NYNEX") and Pacific Bell ("PacBell"). In most instances, the telco representatives market both Caller ID service and the Company's equipment to subscribers and transmit equipment orders to the Company electronically on a daily basis. The Company then ships its equipment directly to the subscribers and bills the telco which, in turn, bills its subscribers directly or through a third party. As part of promotional campaigns, some RBOCs may elect to purchase Caller ID units from the Company and distribute them to their subscribers free of charge. The Company provides an 800 number service and support to help the subscriber understand how to utilize the Caller ID service and equipment. In addition, during 1996, the Company entered into a three-year arrangement with PacBell whereby the Company supplies adjunct Caller ID units and cordless Caller ID telephones to PacBell's direct fulfillment vendor. The Company continually seeks to strengthen its current telco marketing alliances and to develop new alliances. The Company believes that marketing of Caller ID service and equipment is more successful when the subscriber can subscribe to Caller ID service and purchase or lease Caller ID equipment from a single source, especially when payment for equipment can be made either on an installment basis or by monthly lease payments through the subscriber's telephone bill. The Company believes that subscriber satisfaction with Caller ID service is enhanced when the subscriber receives Caller ID equipment promptly after ordering the service and is provided an 800 number for service and support. Direct Marketing on Behalf of Telcos ------------------------------------ In May 1995, the Company entered into a joint venture agreement with the direct marketing firm of Blau Marketing Technologies, Inc. The joint venture operates through a jointly owned corporation, Worldwide Telecom Partners, Inc. ("Worldwide Telecom"), which is 50% owned by each of the joint venturers. The joint venture agreement is terminable by either party upon 11 sufficient advance notice to the other to enable Worldwide Telecom to complete performance of any outstanding contracts with telcos. Worldwide Telecom has provided direct marketing services to Ameritech, Bell Atlantic and NYNEX under several separate programs and has completed numerous programs for Caller ID, Call Answering and Call Waiting Services. InteliData supplies Caller ID units and product management services for Worldwide Telecom. Direct Sales ------------ Through its direct sales force and sales representatives, the Company sells Caller ID units in quantity to a number of telcos, including Ameritech, Bell Atlantic, BellSouth, NYNEX, and others, which units may be redistributed either under the Company's trade name or the respective telco's trade name. Retail and Other Customer Sales ------------------------------- The Company sells Caller ID units and smart telephones to national, regional and local retailers and private label customers. A substantial portion of the Company's retail sales are made through manufacturers' representatives or distributors with the support of the Company's sales personnel. The Company's retail customers include Sears, Roebuck & Co., CompUSA, Inc. and Staples, Inc. The Company has identified the wireless communications or paging companies as additional distribution channels that it will begin to develop during 1997. Electronic Commerce There are three distinct marketing channels within the electronic commerce market: bill payment, bill presentment and account access. Bill Payment Channel -------------------- Visa InterActive has designated the Company as a preferred provider of certain of the Company's bill payment products and services. One of the Company's strategies with Visa is to increase the number of subscribers for the Company's bill pay products and services with the goal of growing monthly fee revenues. Visa is the largest consumer payment system in the world. Visa markets its bill payment and bill presentment services directly to its member banks. Once a Visa member bank signs a commitment to deploy electronic commerce services through the Visa Bill-Pay System (the "Commitment Date"), an extended roll-out period of the bank's electronic commerce services begins. During the first ninety days following the Commitment Date, Visa InterActive begins technical and operational implementation of the electronic commerce service for the Visa member bank and the member bank determines which consumer access devices it will offer to its 12 customers and how it will provide customer support services. During this period, the Company has opportunities to market its products and services directly to the member bank. The bank may choose the Company to provide its Unigate/TM/ or other products, customer support services or the bank may choose any number of other suppliers. Typically, during the second ninety days following the Commitment Date, the Visa member bank completes the technical trial phase and begins a market trial of its electronic commerce system, including any selected InteliData-provided products and services. Approximately six to twelve months following the Commitment Date, the member bank completes its market trial and can begin a market roll-out of its electronic commerce services. In March 1996, Microsoft, Inc. entered into an agreement with Visa InterActive to include an interface that will allow users of Microsoft's Money personal finance software package to access Visa InterActive's electronic bill payment system. Previously, banks working with the Money software were only able to process bill payments through CheckFree Corporation. With the signing of this agreement and the release of the most recent Money software upgrade, banks working with the Money software are able to choose between Visa InterActive and CheckFree as their electronic bill pay processor. Royalties due the Company from Visa will be equal to $.666 per month per bill pay customer whose transactions are processed by Visa InterActive's bill pay system. The Company's right to receive these quarterly royalty payments is subject to a cumulative offset of $73,000 per quarter beginning January 1, 1995 through December 31, 1997. As of December 31, 1996, Visa InterActive had announced commitments from 69 financial institutions for the Visa Bill-Pay System. However, due to the time necessary to install and implement the system for each bank, only 58 banks have rolled out the system in small, limited markets and have enrolled a relatively small number of customers. There can be no assurances as to the banks' ultimate success with this program or the number of customers that ultimately will use the program. Announced customers of Visa InterActive include Merrill Lynch, Fleet Bank, First Union, Fidelity Investments, First Tennessee Bank National Association, Star Bank, Zions Bank and Deposit Guarantee. The Company believes its relationship with Visa InterActive keeps the Company in close contact with Visa, its banks and the end users of electronic commerce services. The Company believes that this relationship will enable the Company to continue to develop complementary products and services, such as applications software for Visa member banks, and potentially enable the Company to have access to Visa's worldwide member banks. There can be no assurance, however, that the Company's marketing efforts will be successful or that Visa will not reassess its commitment to the Company at any time in the future. Bill Presentment Channel ------------------------ The Company's marketing strategy in the bill presentment channel is to offer its bill presentment products and services directly to financial institutions as well as to billers using the Visa ePay system. In December 1995, Visa commenced its ePay electronic bill-payment programs with major U.S. financial institutions, including Banc One Corp., Barnett Banks, The Chase Manhattan Bank, Crestar Bank, First Bank System, First Interstate Bank, First Chicago, 13 First Tennessee Bank, First Union National Bank, Mellon Bank, Norwest Banks, Star Bank and U.S. Bancorp. Visa's two-way ePay standard allows financial institutions to implement a fully electronic, seamless, back-end bill payment system. The ePay system is patented in the United States and is expected to significantly reduce remittance-processing inefficiencies for participating financial institutions and organizations that bill for goods and services. In addition, the system will enable billers to send invoices electronically to their customers who pay bills on-line. Account Access Channel ---------------------- The Company also is developing products and services for financial institutions who want to provide their customers with the ability to access certain information from their banking accounts, much as they do with touch tone telephones today, but over personal computers and screen based telephones. Interactive Services The Company's strategy in the interactive services market is to build a subscriber base for its bundle of interactive service applications on its own smart telephones and on small screen devices manufactured by other companies. The following represent the Company's marketing channels for interactive services: Telecommunications Channel -------------------------- The Company's strategy is to gain access to telco customers through the Company's existing relationships with the RBOCs and other telcos. The Company believes that the marketing of smart telephones and the interactive services will be more successful when a consumer can subscribe to network services and purchase the telephone from a single source, especially when the payment for the equipment can be made either on an installment basis or by monthly lease payments through the subscriber's telephone bill. Other Distribution Channels --------------------------- In 1996 the Company began selling its interactive content through retail stores and related outlets. The Company expects to be able to expand this channel during 1997 and also make its services available on telephones and other small screen devices manufactured by others. The Company has identified additional distribution channels for its interactive services that it will begin to develop during 1997 such as wireless communications or paging companies. COMPETITION Consumer Telecommunications The market for the Company's products and services is highly competitive and subject to increased competition resulting from rapid technological change as well as increased competition 14 resulting from changes in the telecommunications regulatory environment, telecommunications industry consolidation and the emergence of new market entrants. At present, the Company's principal competitors in the market for Caller ID products are CIDCO Incorporated ("CIDCO"), Lucent Technologies, Inc. ("Lucent") and Northern Telecom, Ltd. ("Northern Telecom"). The Company's Caller ID products also compete with Caller ID telephones offered by Panasonic, Sony Corp. ("Sony"), Thomson Consumer Electronics, Inc. ("Thomson"), US Electronics, Inc. ("US Electronics") and other companies. The smart telephone marketed by the Company is subject to competition from smart telephones marketed by Philips Electronics, N.V. ("Philips"), Northern Telecom and CIDCO as well as other emerging platforms for interactive service applications delivered through personal computers and cable television. The Company's competitors, including Philips and Northern Telecom, have already introduced smart telephones that include technological features incorporated in the Company's smart telephone product. Visa InterActive and Philips have announced that they have entered into a letter of intent to collaborate on a series of projects, including the development of a Visa InterActive banking application on a Philips smart telephone. Any bill pay transaction generated by a Philips smart telephone that is processed by Visa InterActive will potentially generate a royalty payment due to the Company from Visa. The Company expects competition in the markets for its consumer telecommunications products and services to increase in the future and expects competition from existing and new competitors, possibly including RBOCs, other telcos or other current customers, as well as from network switch-based services and from the increased application of cellular technology. The Company's primary current and potential competitors in the market for its consumer telecommunications products and services have substantially greater financial, marketing and technical resources than the Company. Increased competition could materially and adversely affect the Company's results of operations through, among other things, price reductions and loss of market share. The Company's Telesmart 4000/Intelifone/TM/ smart telephone product incorporates newer DSP technology. Although the Company is currently unaware of any efforts by its competitors to deploy DSP technology in their smart telephones, the Company expects that its competitors will attempt to replicate the Telesmart 4000/Intelifone/TM/ smart telephone DSP design if it is commercially successful. The Company expects that as the market for smart telephones grows, it will face competition from traditional personal computer on-line service providers, such as America Online, Inc., Prodigy, Inc. and CompuServe Corp., as well as from personal computer software companies such as Intuit, Inc. ("Intuit") and Novell, Inc. The Company competes with a large number of competitors for its repair services and other services supporting the development and implementation of intelligent network services. Several of the Company's competitors in the market for such services have substantially greater financial, marketing and technological resources than the Company. There can be no assurance that the Company will be able to continue to compete successfully against its existing competitors or that it will be able to compete successfully against new competitors. 15 The Company believes that the principal competitive factors in the markets for its consumer telecommunications products and services are knowledge of the requirements of the various RBOCs and other telcos, product reliability, product design, the quality of repair and support services, customer service and support, and price relative to performance. The Company competes in the market for its consumer telecommunications products and services principally on the basis of its relationships with telcos, product design and reliability, low product pricing and flexibility of marketing alternatives, including leasing. Electronic Commerce The Company's electronic commerce products and services compete with services offered by a number of competitors and competition may intensify as a result of new market entrants. Banks such as Citibank, NationsBank and Bank of America have developed electronic commerce products for their own customers and, in the future, may offer these services to other banks. Non-banks, such as EDS and First Data Corporation, also may develop electronic commerce products to offer to banks. Computer software and data processing companies, such as Intuit, also offer electronic commerce services. Visa competes with other organizations, including MasterCard International, Inc. ("MasterCard"), which offers its Masterbanking electronic commerce service through CheckFree Corporation. The Company's success in electronic commerce depends in large part on the ultimate success of Visa and on the ability of Visa InterActive and Visa member banks to successfully market electronic commerce to their customers. In addition, the success of the Company's electronic commerce strategy depends on the ability of Visa member banks to maintain market share in an environment of disintermediation. Many competitors exist for the Company's various banking products, including other manufacturers of touch-tone response systems, such as Periphonics Corporation and Syntellect Inc., other financial software companies, such as ACI, and financial services software and service companies, such as Hogan Systems, Inc. and M&I Data Services, Inc. The Company believes that its primary competition for its customer support services will come from financial institutions and third parties that choose to offer customer support services either directly through Visa's customer support messaging standard ("CSMS") product or on their own. The Company expects that competition in all of these areas will increase in the near future. The Company believes that a principal competitive factor in its markets is the ability to offer an integrated system, in conjunction with Visa, of various electronic commerce products and services. Competition will be based upon price, performance, customer service and the effectiveness of marketing and sales efforts. The Company competes in its various markets on the basis of its relationships with strategic partners, by developing many of the products required for complete solutions, and by building reliable products and offering those products at reasonable prices. 16 Interactive Services The industry for interactive services is emerging and there is potential for a number of companies to enter the marketplace. Currently, the Company's primary competitor is SmartServe Online, Inc. PRODUCT DEVELOPMENT The Company operates in industries that are rapidly growing and changing. In efforts to improve the Company's position with respect to its competition, the Company has increased its product development efforts by increasing the number of personnel in the product development department and focusing management efforts in the area of product development. In 1996, 1995 and 1994, the Company's research and development expenditures, exclusive of nonrecurring in- process research and development expenses were $2,649,000, $1,067,000 and $1,769,000, respectively. At December 31, 1996, 62 employees were engaged in product development including 17 in the consumer telecommunications division, 35 in the electronic commerce division and 10 in the interactive services division. Consumer Telecommunications The Company's product development efforts are focused on new products that support intelligent network services, product enhancements, international standards compliance and the continued improvement of hardware components to reduce manufacturing costs. The Company's product development group is experienced in engineering products for high-volume assembly, stressing low-cost manufacturing design while maintaining quality, consistency and reliability. The Company's products utilize proprietary electrical, mechanical and software design. Standard Telecommunications Ltd. ("STL") of Hong Kong, an affiliate of the Company's principal manufacturer, provides additional design, engineering and product development support services to the Company from time to time on a subcontract basis. The Company also utilizes the engineering resources of some of its other manufacturers. Electronic Commerce The electronic commerce division's product development efforts are focused on software and systems for electronic banking. In particular, the Company applies its research and development expenditures to audio and data transaction processing and messaging software and customer support services. The electronic commerce industry is characterized by rapid change. To keep pace with this change, the Company maintains an aggressive program of new product development and dedicates considerable resources to research and development to further enhance its existing products and to create new products and technologies. The Company's 17 ability to attract and retain highly skilled research and development personnel is important to the Company's continued success. Interactive Services The interactive services division's product development efforts are focused on expanding the services and the range of content that can be provided as well as the number of devices to which the services can be delivered. MANUFACTURING The Company's primary equipment manufacturer is STL and certain of its affiliates, which have ISO 9000 series certified facilities located in Hong Kong and the People's Republic of China, for the manufacture of its Caller ID units, smart telephones and other products. In addition, the Company has established relationships with other ISO 9000 series certified Asian manufacturers for its integrated corded and cordless telephones and small business telecommunications products. The facilities of the Company's suppliers are supplemented, in part, by the Company's own limited manufacturing facilities in Connecticut. The availability or cost of the Company's products may be affected by political, economic or labor conditions in the countries where those products are manufactured, including the 1997 return of Hong Kong to China, by fluctuations in currency exchange rates and by other factors. In addition, a change in the tariff structure or other trade policies of the United States could adversely affect the Company's foreign manufacturing strategies. The Company does not have any production contracts with its assembly contractors. The Company's principal manufacturer performs comprehensive inspection and statistical process control testing, utilizing the Company's internally designed automated testing equipment. To date, the Company has not experienced significant returns of defective products. In the United States, the Company's manufacturing operations are limited to the testing, quality control and shipping of finished products and the purchase and inventory management of two key components of the Company's products. The key components used in the Company's products are currently being purchased from two sources, except for its application specific integrated circuit ("ASIC") chips, which are purchased from a single source. Although the Company believes it could develop other sources for each of the components for its products, the process could take several months, and the inability or refusal of any such source to continue to supply components could have a material adverse effect on the Company pending the development of an alternative source. 18 GOVERNMENT REGULATION Consumer Telecommunications The regulatory environment relating to the telecommunications industry is undergoing rapid and significant changes. The Telecommunications Act has effected basic changes in the telecommunications regulatory scheme. The intention of the Telecommunications Act is to enhance competition in all telecommunications markets and bring new packages, lower prices and increased innovation to telephone customers in the United States. The FCC issued its first major order under the Telecommunications Act in August 1996 which constitutes the FCC's initial measures to implement certain sections of the Telcommunicatons Act relating to interconnection between carriers and the provision of access to unbundled services. However, this order has been challenged and, as of March 1, 1997, the effectiveness of some of its provisions has been stayed in the U.S. Court of Appeals for the Eighth Circuit. In December 1996, the FCC issued a Notice of Proposed Rulemaking which suggests rules concerning the implementation of the Telecommunications Act provisions relating to RBOC manufacture of telecommunications and customer premises equipment. Although the FCC has not yet implemented the regulations relating to those provisions, the proposed regulations would permit RBOCs to manufacture products that support Caller ID and other intelligent network services subject to certain conditions. The Company is unable to predict what effect, if any, the Telecommunications Act and the emerging regulatory scheme under the Telecommunications Act will have on Caller ID service or the Company's business generally . In the United States, Caller ID and other intelligent network services offered by telcos are subject to federal and state regulation. Caller ID is currently available in all 50 states and the District of Columbia. However, during the past several years, protests by special interest groups and regulatory concerns regarding the privacy aspects of the service have been effective in both slowing down the regulatory approval process and, in most states, requiring free per- call or per-line call blocking to be offered by the telcos, thereby allowing a caller to prevent the display of his or her name and number. An FCC order, which rules promulgated thereunder became effective December 1, 1995 (the "FCC Order"), requires all U.S. telephone service providers with SS7 switching architecture to transmit to each other without charge Caller ID number information on interstate calls within the United States (except for public pay phones and party lines). The FCC's order also requires that telcos that offer Caller ID service must provide to their telephone subscribers without charge a per-call blocking mechanism to block the transmission of their Caller ID information on interstate calls and must inform subscribers that their telephone numbers may be identified to a called party and how to use this blocking capability. Although the FCC Order was implemented December 1, 1995, several factors may delay, prevent or substantially limit the implementation or market acceptance of Caller ID. The availability of Caller ID service in a particular area requires end-to-end interconnection of SS7 networks between telcos and other carriers. Further, the FCC Order requires telcos to offer free per-call blocking for interstate calls to all customers to protect privacy interests and permits state public utility commissions to authorize per-line blocking for interstate calls. Such blocking, if widely adopted, could limit the usefulness and marketability of the Caller ID service. The California Public Utilities Commission and AT&T Corp. ("AT&T") filed petitions for review of the FCC Order in federal court challenging portions of the FCC Order. Although the FCC Order withstood that particular challenge, other parties have also objected to, sought delays in the implementation of or sought clarification of the FCC Order. In addition, in the future, Caller ID service may be subject to additional state and federal legislation, regulation and court challenges. The Company is unable to predict what effect, if any, further legislation, regulation, court challenges or other objections may have on the FCC Order or Caller ID service. The Company's smart telephone products are subject to regulation by the FCC. Among other requirements, the Company's smart telephones must comply with Parts 15 and 68 of the FCC's regulations. Electronic Commerce The banking market which the Company has targeted for marketing is highly regulated. The banking industry, although it has recently undergone significant deregulation, remains quite 19 regulated at both the federal and state levels. Interpretation, implementation or revision of banking and telecommunications regulations can accelerate or hinder the ultimate success of the Company and its products. PATENTS, PROPRIETARY RIGHTS AND LICENSES The Company holds limited patent or registered intellectual property rights with respect to its products. The Company has been issued a patent for its "Block the Blocker" feature and has also applied for a patent on certain aspects of its Caller ID on Call Waiting product. However, there can be no assurance that a patent will be issued to the Company for its Caller ID on Call Waiting product or that such patent, if issued, will afford effective protection of the Company's technology. The Company filed for patents on certain new features developed by the Company for use in the ADSI smart telephone and certain of its transaction processing technology, but there can be no assurances that such patents will be granted, or if granted, will have any commercial value. The Company additionally relies on trade secret laws to establish and maintain its proprietary rights to its products. Although the Company has obtained confidentiality agreements from its key executives and engineers in its product development group, there can be no assurance that third parties will not independently develop the same or similar alternative technology, obtain unauthorized access to the Company's proprietary technology or misuse the technology to which the Company has granted access. The Company has rights to practice the inventions under certain of Lucent's Caller ID patents. These patents are also licensed to others, including the Company's competitors. Lucent receives royalties from sales and leases of the Company's Caller ID products other than to Lucent. The Lucent license agreement has no expiration date but is terminable by Lucent for breach on two months' written notice unless within such time all specified breaches have been remedied. If the Lucent license were terminated and the Company were unable to negotiate a new patent license agreement with Lucent, the Company would no longer be authorized to manufacture or sell Caller ID products in the United States other than to the RBOCs and to Lucent. Additionally, under the agreement, the Company granted Lucent a non-exclusive, royalty-free license to all patents on inventions which are improvements or modifications based upon the technology licensed from Lucent. The Company does not believe that its products and services infringe on the rights of third parties. From time to time, third parties assert infringement claims against the Company. There can be no assurance that any such assertion will not result in costly litigation or require the Company to cease using, or obtain a license to use, intellectual property rights of such parties. EMPLOYEES At December 31, 1996, the Company had approximately 348 employees, of whom 327 were 20 full-time. The Company has no collective bargaining agreements with its employees and believes that its relationship with its employees is good. ITEM 2. PROPERTIES - ------------------- The Company is headquartered in Herndon, Virginia, where it leases 30,000 square feet of office space from an unaffiliated party. The lease covers a fifty-three month period from its commencement date of July 1, 1996. The Company also leases 15,000 square feet of office space in Herndon, Virginia from unaffiliated parties under two leases expiring in 1999 for its consumer telecommunications and interactive services divisions and 10,000 square feet of office space in Herndon, Virginia for its customer service department from an unaffiliated party. The Company also leases other, less significant sales and product development facilities. Additionally, the Company owns a building located in New Milford, Connecticut which consists of approximately 63,000 square feet. Certain environmental contamination occurred in the part of the facility formerly occupied by another tenant and the Connecticut Department of Environmental Protection performed a clean-up and removed such contamination. The Company does not believe the foregoing will have a materially adverse effect on the Company. The Company believes that its facilities are suitable and adequate for the current and foreseeable future business of the Company, however, the Company will continue to assess its warehousing and office space needs as the Company expands its business. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company is not currently a party to any material litigation. From time to time, the Company is a party to routine litigation incidental to its business. Management does not believe that the resolution of any or all of such routine litigation will be likely to have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS - -------------------------------------------------------- By a unanimous written consent of stockholders of the Company dated November 7, 1996, the stockholders of the Company approved the following actions: 1. The following persons were elected to serve as Directors of the Company for the following respective terms: (a) CLASS I, term expiring at 1997 Annual Stockholders Meeting: William F. Gorog, Patrick F. Graham, Constantine S. Macricostas; (b) CLASS II, term expiring at 1998 Annual Stockholders Meeting: T. Coleman Andrews, III, Walter M. Fiederowicz, Timothy R. Welles; and (c) CLASS III, term expiring at 1999 Annual Stockholders Meeting: John C. Backus, Jr., Wesley C. Tallman and Robert J. Schock. 2. The Agreement and Plan of Merger, dated as of August 5, 1996, and as amended by Amendment No. 1, dated as of November 7, 1996, by and among US Order, Colonial Data and the Company was ratified and approved. 3. The InteliData Non-Employee Directors' Stock Option Plan was approved. 4. The InteliData Incentive Plan was approved. 5. The InteliData Employee Stock Purchase Plan was approved. 6. The assumption by the Company of the obligations of US Order and Colonial Data in connection with: (i) all outstanding options granted under the (a) US Order 1991 Stock Option Plan, (b) US Order 1995 Incentive Plan, (c) US Order Non-Employee Directors Stock Option Plan, (d) US Order 1995 Outside Directors Plan and (e) USO Employee Stock Purchase Plan; (ii) all other outstanding options granted by US Order and not yet exercised; (iii) all outstanding options granted under the (a) Colonial Data 1983 Stock Option Plan and (b) Colonial Data 1994 Long-Term Incentive Plan and (iv) all outstanding warrants issued by Colonial Data and not yet exercised. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED - --------------------------------------------------------- STOCKHOLDER MATTERS ------------------- Since November 8, 1996, the Company's common stock has been traded on the Nasdaq National Market under the symbol INTD. US Order common stock prices were reported for the period beginning June 2, 1995 through November 7, 1996 and were traded on the Nasdaq National Market under the symbol USOR. Colonial Data's common stock prices are reported for the period prior through November 7, 1996. Subsequent to February 9, 1996, Colonial Data common stock was traded on the Nasdaq National Market under the symbol CDTX. Prior to February 9, 1996, Colonial Data common stock was traded on the American Stock Exchange. The table below sets forth the high and low quarterly sales prices for the common stock of US Order, Colonial Data and InteliData as reported in published financial sources for each quarter during the last two years:
Price Range of Common Stock ------------------------------------------------------- US Order Colonial Data InteliData -------------------- ------------------ ------------- High Low High Low High Low -------- ---------- -------- -------- -------- --- 1996 Fourth Quarter $11 7/8 $ 8 1/4 $11 5/8 $ 8 3/8 $10 7/8 $6 Third Quarter 15 1/4 8 15/16 15 1/4 8 1/2 * * Second Quarter 22 1/2 13 23 5/8 14 7/8 * * First Quarter 24 1/4 16 3/4 25 1/4 15 7/8 * * 1995 Fourth Quarter 23 1/4 13 1/4 23 13 1/2 * * Third Quarter 26 1/2 14 1/4 27 1/4 16 3/4 * * Second Quarter 17 1/4 14 1/4 22 3/8 14 1/8 * * First Quarter * * 19 1/8 12 1/4 * *
* No established public trading market for InteliData common stock existed prior to November 8, 1996. No established public trading market for US Order common stock existed prior to the completion of US Order's initial public offering on June 1, 1995. The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain its future earnings, if any, to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on the Company's common stock will depend upon the results of operations, financial condition and capital expenditure plans of the Company, as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant. The number of stockholders of record at March 1, 1997 was 498, and does not include those stockholders who hold shares in street name accounts. 22 ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- INTELIDATA TECHNOLOGIES CORPORATION /(1)/ SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- -------- --------- --------- --------- RESULTS OF OPERATIONS: - ---------------------- Revenues $ 13,899 $ 4,186 $ 1,432 $ 905 $ 63 Cost of revenues 10,448 2,470 1,013 908 126 Operating expenses 99,563 6,877 10,584 /(2)/ 10,540 /(4)/ 6,492/(4)/ -------- ------- -------- -------- -------- Operating loss (96,112) (5,161) (10,165) (10,543) (6,555) Net income (loss) (95,727) (4,718) 3,713 /(3)/ (11,225) (6,806) Preferred dividend requirement -- 681 1,895 1,042 392 -------- ------- -------- -------- -------- Net income (loss) available to common shareholders $(95,727) $(5,399) $ 1,818 $(12,267) $ (7,198) Net income (loss) per common share $ (5.21) $ (0.50) $ 0.28 $ (2.01) $ (1.18) Weighted average shares outstanding 18,370 10,772 8,243 6,090 6,090 FINANCIAL POSITION (AS OF DECEMBER 31): - --------------------------------------- Cash, cash equivalents and short-term investments $ 39,062 $25,120 $ 2,568 $ 3,444 $ 66 Total assets 143,746 40,252 4,637 7,694 4,681 Long-term obligations -- -- 4,833 4,231 1,033 Stockholders' equity (deficit) 124,289 37,733 (6,466) (5,849) (3,613)
(1) Results reflect the operations of US Order for the periods presented and operations of Braun Simmons since September 30, 1996 and Colonial Data since November 7, 1996. Operating expenses for 1996 include $77,214,000 of nonrecurring in-process research and development expenses related to the Mergers and Braun Simmons Acquisition. (2) Operating expenses in 1994 include a $3.25 million payment to certain employees to cancel certain outstanding vested options in connection with the sale of the Company's bill pay operations to Visa. Visa required that all employees of the Company who became employees of Visa InterActive cancel their outstanding vested options to eliminate any potential conflicts of interest. As a result, the Company's shareholders and Board of Directors agreed to pay all active and full-time employees of the Company (excluding William F. Gorog, Chief Executive Officer and Chairman of the Board) an aggregate of $3.25 million for the cancellation of 675,334 of their outstanding and vested options with exercise prices ranging between $0.98 and $4.00 per share. Of the $3.25 million, approximately $2.1 million was paid to employees of the Company who became Visa InterActive employees as of August 1, 1994. (3) Includes gain of approximately $14.5 million on the sale of the Company's electronic banking and bill pay operations to Visa on August 1, 1994. (4) Operating expenses in 1993 and 1992 include write-downs of terminals and terminal components of approximately $1.5 million and $430,000, respectively. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- OVERVIEW InteliData Technologies Corporation ("InteliData" or the "Company"), was incorporated on August 23, 1996 under the Delaware General Corporation Law in order to effect the mergers ("Mergers") of US Order, Inc. ("US Order") and Colonial Data Technologies Corp. ("Colonial Data"). The Mergers were announced on August 5, 1996, when US Order and Colonial Data entered into an Agreement and Plan of Merger ("Merger Agreement"). On November 7, 1996, the Mergers were consummated with each share of outstanding US Order and Colonial Data common stock being exchanged for one share of InteliData common stock. Accounting for the Mergers was treated as a purchase of Colonial Data by US Order. Accordingly, the financial statements of the Company included herein reflect the results of US Order through November 7, 1996 and the consolidated results of US Order and Colonial Data thereafter. On October 4, 1996, US Order acquired the business of Braun, Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7 million consisting of cash and US Order common stock and including US Order transaction costs pursuant to a merger of Braun Simmons into US Order (the "Braun Simmons Acquisition"). Braun Simmons was an information engineering firm specializing in the development of home banking and electronic commerce solutions for financial institutions. The acquisition expands the Company's product line for both large and small financial institutions. The excess purchase price over the fair value of net assets acquired resulted in goodwill of $49,483,000 in connection with the Mergers, and $1,898,000 in connection with the Braun Simmons Acquisition which is being amortized on a straight-line basis over fifteen years and seven years, respectively. In connection with the Mergers and the Braun Simmons Acquisition, the Company charged, as of the respective dates of such transactions, in-process research and development expenses of $72,300,000 for the Mergers and $4,914,000 for the Braun Simmons Acquisition, for purchased in-process technology that had not reached technological feasibility as of the respective dates of such transactions and which did not have alternative future uses. The business of the Company consists of the businesses previously conducted by US Order, Colonial Data and Colonial Data's subsidiaries. The Company develops and markets products and services for the telecommunications and financial services industries through its three business divisions: consumer telecommunications, electronic commerce and interactive services. The consumer telecommunications division designs, develops and markets telecommunications products that support intelligent network services being developed and implemented by the regional Bell operating companies ("RBOCs") and other telephone companies ("telcos"). The Company has concentrated its product development and marketing efforts on products that support Caller ID and other emerging intelligent network services, 24 including a smart telephone, the Telesmart 4000/Intelifone(TM), which provide consumers call management features and the ability to access numerous network services and interactive applications via telephone. The Company currently offers a line of Caller ID adjunct units and telephones with integrated Caller ID, small business telecommunications systems and high-end consumer telecommunications equipment. The Company also repairs and refurbishes telecommunications products for commercial customers and provides other services that support the development and implementation of intelligent network services. The electronic commerce division develops and markets products and services to assist financial institutions in their home banking and electronic bill payment initiatives. The products are designed to assist consumers in accessing and transacting business with their banks and credit unions electronically, and to assist financial institutions in connecting to and transacting business with third parties, including data processors and billers. The services focus on a financial institution's back office, offering outsourcing for data entry, telemarketing, customer service and technical support. The Company currently receives its electronic commerce revenues largely from the sale of products and services to Visa International Service Association, Inc. ("Visa") member banks. The interactive services division was established to provide interactive applications for use on smart telephones and other small screen devices, such as alpha-numeric pagers, Personal Communication Systems ("PCS") telephones and personal digital assistants ("PDAs"). The Company intends to sell interactive applications directly to end users and through other companies, including telcos and wireless communications companies. The Company's current interactive applications include electronic national directory assistance lookup, one-way alpha-numeric paging, one-way internet e-mail, a personal directory data save and restore function and information services such as news, weather, sports scores, stock quotes, lottery results and horoscopes. RESULTS OF OPERATIONS - 1996 COMPARED WITH 1995 The consummation of the Mergers on November 7, 1996 and the required accounting presentation of the historical financial statements had a significant impact on the results of operations for 1996 compared to 1995. Consolidated total revenues and all categories of expenses are significantly greater in 1996 than 1995 because 1996 results include approximately two months of Colonial Data's operations and 1995 results do not include any of Colonial Data's operations. Revenues The Company's revenues were $13,899,000 in 1996 compared to $4,186,000 in 1995. Product revenues increased $6,772,000 to $8,589,000 in 1996 from $1,817,000 in 1995. Product revenues in 1996 consisted of $5,955,000 from Caller ID products and $2,634,000 from small business and smart telephone equipment. Contributing to the product revenues in 1996 were 25 sales of $2,845,000 to the Company's direct marketing joint venture, Worldwide Telecom Partners, Inc. The Company's lease revenues of $1,838,000 in 1996 are primarily related to revenues from the Company's leasing program in the US West Communications region. Service fees in 1996 and 1995 were generated primarily from three sources: (1) customer support services, (2) monthly service fees and (3) nonrecurring development fees for smart telephone applications. The Company's customer support services were remarketed by Visa InterActive, Inc. ("Visa Interactive") to Visa member banks under the Company's reseller agreement with Visa InterActive. Repair and refurbishment services provided by the consumer telecommunications division contributed 19% of the total 1996 service revenues. Cost of Revenues The Company's cost of revenues increased by $7,978,000 to $10,448,000 for 1996 compared to $2,470,000 in 1995. Product cost of revenues contributed 62% to the total cost of revenues for 1996. Product cost of revenues consisted of $4,173,000 from Caller ID products and $2,284,000 from small business and smart telephone equipment. As a result of the Mergers, the Braun Simmons Acquisition and change in product mix in 1996, gross margins related to product revenues were 25% in 1996 compared to 4% in 1995, while gross margins related to services revenues decreased to 17% from 69%, resulting in a decrease in the Company's overall gross margin to 25% in 1996 from 41% in 1995. Gross margins from the Company's leasing activities were approximately 40% for 1996. The Company expects its gross margin percentages to vary in future periods based upon the revenue mix between product sales and services revenues and based upon the composition of services revenues earned during the period. General and Administrative General and administrative expenses increased $10,338,000 to $16,121,000 in 1996 from $5,783,000 during the comparable period in 1995. The increase was primarily attributable to expenses related to the write-off in the fourth quarter of $2,801,000 related to the Company's investment in Home Financial Network, Inc. ("HFN"), a development stage personal computer software company, and the associated goodwill. The Company believes its investment in HFN was impaired based on its history of losses. Also contributing to the increase was rent expense of $907,000, employee related expenses for the increase of personnel, amortization of intangible assets and nonrecurring charges for certain customer service operations. In the future, the Company expects that aggregate recurring general and administrative expenses will increase as the Company grows. The amount of any increase will depend on the products and services offered by the Company and its alliances with strategic partners. During 1997, the Company expects that general and administrative expenses will increase as the Company upgrades its systems and operations in anticipation of the potential for increased business in 1997. Research and Development Research and development costs were $2,649,000 in 1996 compared to $1,067,000 in 1995. 26 The Company has been actively engaged in research and development since its inception and expects that these activities will be essential to the operations of the Company in the future. Research and development related expenses for 1996 were largely attributable to developing, designing and testing the Company's next generation smart telephone, the Telesmart 4000/Intelifone/TM/ smart telephone, and electronic bill payment software for the electronic commerce division. Selling and Marketing Selling and marketing expenses increased $1,984,000 to $2,011,000 in 1996 from $27,000 in 1995. The increase is attributed primarily to selling expenses of $914,000 for the consumer telecommunications division and selling expenses of $714,000 for the interactive services division relating to an increase in sales personnel and a substantial increase in advertising and marketing for smart telephones which were introduced in retail stores and outlets in the fourth quarter of 1996. The Company expects its advertising and promotion expenses will increase substantially in 1997 due to the further marketing efforts within the consumer telecommunications and interactive services divisions. Provision for Corporate Restructuring The Company recorded a provision for corporate restructuring during the fourth quarter of 1996 of $1,568,000. This amount consists of $1,323,000 in facilities consolidations, $175,000 in relocation expenses for certain employees and $70,000 for the write-down of processing equipment. In-Process Research and Development In connection with the Braun Simmons Acquisition and the Mergers in September and November 1996, respectively, the Company charged in-process research and development expenses for purchased in-process technology that had not reached technological feasibility as of the date of the Mergers and the Braun Simmons Acquisition and did not have alternative future uses. Amounts charged to in-process research and development were based on independent appraisals and totaled $4,914,000 and $72,300,000 for the Braun Simmons Acquisition and the Mergers respectively. Other Income, Net Other income decreased $33,000 or 7% to $410,000 in 1996 from $443,000 in 1995. The decrease is largely associated with recognizing the Company's proportionate share of losses of HFN and the amortization of the excess of the purchase price over the Company's share of the equity in net assets of HFN. This decrease was offset in part by an increase in interest income attributed to the Company investing funds raised in its June 1995 initial public offering. 27 Income Taxes Income taxes increased to $25,000 in 1996 from $0 in 1995 based primarily on state income taxes incurred in connection with the Company's operations. At December 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $38,415,000 which expire by 2010. However, use of these net operating losses in future years may be limited under applicable tax laws and regulations as a result of the Mergers and the Braun Simmons Acquisition. Net Loss and Weighted Average Shares As a result of the foregoing factors, net loss applicable to common shareholders increased to $(95,727,000) in 1996 from $(4,718,000) in 1995. The weighted average shares increased to 18,370,000 in 1996 from 10,772,000 in 1995. The increase resulted primarily from the shares issued in connection with the Mergers. FOURTH QUARTER 1996 COMPARED WITH FOURTH QUARTER 1995 (UNAUDITED) The following table sets forth selected consolidated statement of operations data for the three months ended December 31, 1996 and 1995 (in thousands):
1996 1995 --------- -------- Revenues $ 10,962 $ 1,286 Cost of revenues 8,474 229 -------- ------- Gross profit 2,488 1,057 Operating expenses 85,022 2,492 Other income 525 164 -------- ------- Net loss $(82,009) $(1,271) ======== =======
The Company's revenues increased 752% to $10,962,000 for the quarter ended December 31, 1996 from $1,286,000 for the same period last year. The increase is attributed to the operations of the consumer telecommunications division subsequent to the Mergers. Revenues from the sale or lease of Caller ID products represented $7,793,000 or 71% of the total revenues for the fourth quarter of 1996. The cost of revenues represented 77% of total revenues, yielding a gross margin of 23% for the fourth quarter of 1996. The decrease in margins is attributed to the product mix. In 1995, the Company earned most of its revenues from services and software programs with low direct costs of revenues. Most product sales in 1996 were for lower-end model Caller ID adjuncts which yield a lower margin. The increase in operating expenses is largely attributed to the in-process research and development costs, aggregating $77,214,000 that were expensed in connection with the Mergers and the Braun Simmons Acquisition. Other operating expenses include 28 nonrecurring charges for $4,369,000 for restructuring costs and revaluation of a long-term investment in HFN. The remaining increase is attributable to operational costs associated with additional personnel and operating facilities in Connecticut, Ohio and Virginia as a result of the Company's growth and the Mergers and the Braun Simmons Acquisition. 1995 COMPARED WITH 1994 Revenues The Company's revenues increased by $2,754,000 from $1,432,000 in 1994 to $4,186,000 in 1995. This increase was primarily related to the sale of the Company's products, such as its smart telephones, which the Company began selling through its "preferred provider" relationship with Visa in 1995. All of the Company's product sales for 1995 were generated from the sale of its smart telephones and electronic commerce products. Service fees for 1995 were generated primarily from three sources: (1) customer support services, (2) monthly service fees and (3) non-recurring development fees for smart telephone applications. The Company's customer support services, amounting to $505,000 for 1995, were remarketed by Visa InterActive to Visa member banks under the Company's reseller agreement with Visa InterActive. The monthly service fees, which accounted for $911,000 of the Company's service revenues, were from its customers who used its smart telephones and interactive applications during the year, compared to $1,235,000 during the same period in 1994. The decrease of $325,000 was primarily due to the fact that the Company was in the process of converting these customers to Visa member banks and over time expects to be offering these services strictly on a wholesale basis. In addition, in 1995, the Company earned approximately $575,000 in fees for development of smart telephone applications. Cost of Revenues The Company's cost of revenue increased by $1,457,000 for 1995 compared to 1994, due to the sale of its products such as its voice response systems and smart telephones. The Company's cost of revenue prior to 1995 had consisted of bill pay processing costs and depreciation of the Company's smart telephones being utilized by customers for a monthly fee. Beginning in 1995, the Company began selling its smart telephones and voice response systems pursuant to a market penetration strategy designed to build an installed base of subscribers who are potential sources of revenue from monthly fees. Accordingly, in 1995 gross margins related to product sales were 4%, while gross margins related to service fees increased from 27% to 69%, resulting in an increase in the Company's overall gross margin from 29% in 1994 to 41% in 1995. General and Administrative General and administrative expenses were $5,783,000 in 1995 versus $7,968,000 during the comparable period in 1994. The decrease of $2,185,000 was primarily due to a one time payment to certain administrative employees in conjunction with a $3.25 million payment for the August 1, 1994 sale of the Company's bill pay operations whereby Visa required that all 29 Company employees who became employees of Visa InterActive cancel their vested options to eliminate any potential conflict of interest. Of the $3.25 million, approximately $2.1 million was paid to the Company employees who became Visa InterActive employees as of August 1, 1994 and $1.1 million was paid to employees who remained with the Company. This decrease was partially offset by reduced costs in 1994 associated with certain of the Company's personnel becoming Visa InterActive employees. Research and Development Research and development costs were $1,067,000 in 1995 compared to $1,769,000 in 1994. Research and development related expenses for 1995 were largely attributable to developing, designing and testing the Company's next generation smart telephone, the Telesmart 4000/Intelifone/TM/ smart telephone. The decrease of $702,000 from 1994 was partially due to a one time payment to product development employees in August 1994 in conjunction with $3.25 million payment for the cancellation of their vested options (see "general and administrative" above) of which approximately $350,000 was attributed to research and development employees. In addition, the decrease was due to reduced costs associated with approximately 60% of the Company's personnel becoming Visa Interactive employees effective August 1, 1994. Selling and Marketing Selling and marketing expenses decreased by $820,000 from $847,000 in 1994 to $27,000 in 1995. Advertising expenses were significant prior to 1995. The Company curtailed advertising after the sale of the Company's electronic bill pay system to Visa in August 1994. Other Income, Net In August 1994, the Company sold its electronic banking and bill pay operations to Visa and recognized a one-time non-operating gain of $14,523,000 from the sale. The transaction was structured as an asset sale with the Company retaining ownership of certain specific assets that were not related to electronic commerce. Visa granted the Company a perpetual, royalty-free, worldwide license to use intellectual property, which it purchased with the provision that the Company not compete with Visa through 2000. Similarly, the Company granted to Visa a perpetual, royalty-free, worldwide license to use intellectual property retained by the Company necessary for the operation of the Visa Bill-Pay System. Interest income was $970,000 for 1995 compared to $72,000 in 1994. The increase of $898,000 was due to the significant increase in the Company's cash balances and short-term investments resulting from its June 1995 initial public offering. The Company's interest expense consists of interest incurred in connection with capital leases for computer equipment and outstanding borrowings with WorldCorp, Inc. ("WorldCorp") and VeriFone, Inc. ("VeriFone"). Interest expense was $286,000 in 1995 compared to $650,000 in 1994. The 30 decrease of $364,000 was primarily due to two factors: (i) in June 1995, the Company retired substantially all long-term debt as it related to its capital leases and outstanding borrowings with WorldCorp and VeriFone with proceeds derived from its initial public offering and (ii) in August 1994, in addition to purchasing the Company's electronic banking and bill pay operations, Visa assumed $853,000 of the Company's capital lease obligations and miscellaneous liabilities. Equity in loss of affiliate was $316,000 in 1995 compared to $0 in 1994. The increase was due to the Company recording its proportionate share of losses of HFN and the amortization of the excess of the purchase price over the Company's share of the equity in net assets of HFN, following the Company's 40% investment in HFN in October 1995. Income Taxes Income taxes decreased from $70,000 in 1994 to $0 in 1995 based primarily on state income taxes incurred on the Company's 1994 income before income taxes of $3,783,000. Net Income (Loss) and Weighted Average Shares As a result of the foregoing factors, net income (loss) applicable to common shareholders decreased to a net loss of $(5,399,000) in 1995 from a net income of $1,818,000 in 1994. The weighted average shares increased to 10,772,000 in 1995 from 8,243,000 in 1994. The increase resulted primarily from the issuance of 3,062,500 shares offered by the Company in an initial public offering on June 2, 1995. LIQUIDITY AND CAPITAL RESOURCES During 1996, the Company's cash, equivalents and short-term investments increased by $13,942,000 resulting from the Mergers in November 1996, offset in part by cash used in operations and the funding of certain equipment purchases. At December 31, 1996, the Company had $39,062,000 in cash, cash equivalents and short-term investments. To improve the yield on its cash and equivalent holdings, in 1996, the Company invested in financial instruments that are diversified among high credit quality securities. The investments are reported at cost, which approximates market value, and are classified as short-term investments and cash equivalents. Additionally, at December 31, 1996, the Company had working capital of $63,532,000 with no long-term debt. The Company's total assets exceeded total liabilities by $124,289,000. The Company's cash requirements for operating and investing activities in 1996 were financed primarily by the net proceeds from an initial public offering in June 1995 aggregating approximately $41.6 million. In connection with the offering, the Company issued and sold 3,062,500 shares at $14.75 per share. The Company's principal needs for cash in 1996 were for investments in property and equipment and to fund working capital, primarily related to inventories and accounts receivable. 31 Capital expenditures for the year ended December 31, 1996 aggregated $2,304,000. The Company funded an increase in accounts receivable, prepaid expenses and inventories of $2,318,000, $1,404,000, and $1,020,000, respectively for the year ended December 31, 1996. The increase in accounts receivable is attributed to the timing of receipts for products shipped relating to the consumer telecommunications division. The increase in prepaid expenses is related to deposits paid, prepaid insurance and prepaid advertising and other charges. The increase in inventories was made to ensure that units were available for the timely fulfillment of sales orders. During 1996, the Company increased its accounts payable, accrued expenses and other liabilities by $5,123,000 from 1995. On July 1, 1996, the Company began leasing a facility under an operating lease for 30,000 additional square feet of office space. The lease covers a fifty-three month period from July 1, 1996 with aggregate minimum lease payments equal to approximately $2,700,000. The Company maintains three credit agreements aggregating $20,000,000. The first credit agreement covers the period through May 1997 and is a revolving line of credit of $1,000,000. The second credit agreement is a $4,000,000 line of credit utilized for the purpose of issuing letters of credit. The third credit agreement is a credit facility totaling $15,000,000 for cash advances and letters of credit. As of December 31, 1996, the Company had outstanding $2,000,000 under a line of credit and had available $13,500,000 to fund draw downs and letters of credit. The Company's primary needs for cash in the future are for investments in product development, working capital, the financing of operations, strategic ventures, potential acquisitions, capital expenditures and the upgrade of the Company's systems and operations. In order to meet the Company's needs for cash over the next twelve months, the Company will utilize proceeds from its 1995 initial public offering and cash received in the Mergers. Additionally, the Company may utilize funds it expects to generate from operations in the second half of 1997. INFLATION The Company believes that inflation has not had a material effect on the Company's sales and revenue during the past three years. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers that the following important factors, among others, in some cases have affected the Company's actual results, and could cause the Company's actual results for 1997 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. 32 Uncertainty as to Future Financial Results The Company believes that the Mergers will offer opportunities for long-term efficiencies that should positively affect future operating results of the combined companies. However, the combined companies will be more complex and diverse than either US Order or Colonial Data individually, and the combination and continued operation of their distinct business operations will present difficult challenges for the Company's management due to the increased time and resources required in the management effort. While the management and the Board believe that the combination can be effected in a manner that will realize the value of the two companies, neither management group has experience in combinations of this size or complexity. Accordingly, there can be no assurance that the process of effecting the business combination can be effectively managed to realize the operational efficiencies anticipated to result from the Mergers. Following the Mergers, in order to maintain and increase profitability, the combined Company will need to successfully integrate and streamline overlapping functions. The two predecessor companies had different systems and procedures in many operational areas that must be rationalized and integrated. There can be no assurances that integration will be accomplished smoothly or successfully. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations following the Mergers will require the dedication of management resources that may temporarily distract attention from the day-to-day business of the combined companies. Failure to effectively accomplish the integration of the two companies' operations could have an adverse effect on the Company's results of operation and financial condition. Developing Marketplace Home banking and smart telephones are developing markets. Consumer preferences in interactive technologies are difficult to predict. The Company's future growth and profitability will depend, in part, upon consumer acceptance of electronic home banking and smart telephone technologies and a significant expansion in the consumer market for telephone-based interactive applications technologies. Even if these markets experience substantial growth, there can be no assurance that the Company's products and services will be commercially successful or benefit from such growth. Much of the Company's success in the smart telephone market depends on the Company's ability to meet design specifications and delivery requirements for its products and services. There can be no assurance of the timing of introduction of, necessary regulatory approvals for, or market acceptance of these services and applications. The Company faces competition in these markets from other emerging interactive applications delivered through personal computers, cable television and Integrated Service Digital Network ("ISDN"). 33 Fluctuations in Operating Results Historically, US Order and Colonial Data have experienced fluctuations in quarterly operating results, and accordingly, the Company may experience fluctuations in quarterly operating results due to a variety of factors, some of which are beyond the Company's control. These include the size and timing of customer orders or the royalty payments from Visa InterActive, if any, changes in the Company's pricing policies or those of its competitors, new product introductions or enhancements by competitors, delays in the introduction of new products or product enhancements by the Company or by its competitors, customer order deferrals in anticipation of upgrades and new products, market acceptance of new products, the timing and nature of sales, marketing, and research and development expenses by the Company and its competitors, the timing of programs offering Caller ID or other intelligent network services by a telco, disruptions in sources of supply, the effects of regulation on Caller ID and other intelligent network services, the timing and extent of promotional activities by a telco, changes in service charges by a telco, other changes in operating expenses, personnel changes and general economic conditions. Additionally, certain RBOCs have entered into merger agreements. The Company is unable to assess the future effect on the company of these mergers, if consummated, and of other possible consolidations in the telecommunications industry. No assurance can be given that such quarterly variations will not occur in the future and, accordingly, the results of any one quarter may not be indicative of the operating results for future quarters. Reliance on Caller ID Revenues A substantial majority of the Company's revenues are derived from sales and leases of its Caller ID products. The sale or lease of these products is directly linked to the implementation and promotion of Caller ID service by telcos. The timing of such implementation may be affected by government regulation, by changes in the telecommunications industry resulting from changes in the regulatory and competitive environment, by switch and software upgrades and by other factors. There can be no assurance that telcos will continue to introduce and promote this service successfully or that it will gain widespread market acceptance. Delays in the introduction of Caller ID service in local markets or failure of this service to gain widespread market acceptance would materially and adversely affect the Company's business, operating results and financial condition. Concentration of Distribution of Products and Services The Company sells its telecommunications products and services to telcos, individual telephone subscribers, other equipment manufacturers on a private label basis ("private label customers") and retail chains. In addition, the Company leases its products to individual telco subscribers. Sales and leases to individual telco subscribers are largely dependent on direct fulfillment distribution arrangements with certain RBOCs and other telcos. Since the Company views the telcos with which it maintains direct fulfillment relationships as its customers, it considers its customer base to be highly concentrated. The Company's current telco fulfillment arrangements are not exclusive and may 34 be terminated by either party. The loss of any one or more of the Company's major customers or the termination of its distribution arrangements with any telco or the failure to be selected for significant orders or programs by a telco could materially and adversely affect the Company's business, operating results, and financial condition. In addition, consolidation in the telecommunications industry or changes in the telecommunications regulatory environment could result in the loss of such customers or business. InteliData Common Stock Owned by WorldCorp As of December 31, 1996, WorldCorp beneficially owned approximately 29% of the outstanding common stock of the Company. WorldCorp is highly leveraged, and therefore requires substantial funds to meet debt service requirements each year. As a result of the Company's cash requirements, it may be required to sell shares of the Company's common stock from time to time and such sales, or the threat of such sales, could have a material adverse effect on the market price for the Company's common stock. In addition, the Company's Board of Directors has nine members, four of whom also serve on the Board of Directors of WorldCorp. As a result of membership on the Company's Board and stock ownership, WorldCorp may have a significant influence on the decisions made by the Company. Technological Considerations The Company's business activities are concentrated in fields characterized by rapid and significant technological advances. There can be no assurance that the Company will remain competitive technologically or that the Company's products, processes or services will continue to be reflective of such advances. Failure to introduce new products or product enhancements that achieve market acceptance on a timely basis could materially and adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will not encounter unanticipated technical, marketing or other problems or delays relating to new products, features or services which the Company has recently introduced or which it may introduce in the future. Moreover, there can be no assurance that the Company's new products, features or services will be successful, that the introduction of new products, features or services by the Company's competitors will not materially and adversely affect the sales of the Company's existing products or that the Company will be able to adapt to future changes in the telecommunications industry. Most of the Company's competitors and potential competitors have significantly greater financial, technological and research and development resources than the Company. Dependence on Foreign Production The Company's Caller ID units and certain other products, including the smart telephone, the Telesmart 4000/Intelifone/TM, are manufactured by companies with facilities in Hong Kong, Malaysia, and the People's Republic of China. These facilities are supplemented, in part, by other manufacturers in Asia for certain integrated telephone and small business system products and by limited manufacturing facilities in Connecticut. The availability or cost of these Caller ID units and smart telephones may be adversely affected by political, economic or labor conditions 35 in Hong Kong, Malaysia or the People's Republic of China, including the 1997 return of Hong Kong to China, and by fluctuations in currency exchange rates. In addition, a change in the tariff structure or other trade policies of the United States or countries from which InteliData will import products could adversely affect InteliData's foreign manufacturing strategies. Restrictions from the Visa Agreement As a condition of Visa's acquisition of the Company's bill payment operations and technology (the "Visa Bill-Pay System"), the Company has agreed to work exclusively with Visa in certain areas and to refrain from certain activities that are in competition with Visa and its affiliates. These covenants may increase the Company's reliance upon Visa. The Company's dependence on Visa, and the terms of the agreement between the parties, may have a material adverse effect on the Company. Importance of Strategic Alliances One of the Company's business strategies is to manufacture or sell its products and services through strategic alliances. The success of this strategy will depend to an extent both on the ultimate success of its strategic partners as well as on the ability of its partners to successfully market the Company's products and services. There can be no assurance that any alliance partners will view their alliance with the Company as significant for their own businesses or that they will not reassess their commitment to the Company at any time in the future. Competition Consumer Telecommunications --------------------------- The market for the Company's products is highly competitive and subject to increased competition resulting from rapid technological change as well as resulting from changes in the telecommunications regulatory environment, telecommunications industry consolidation and the emergence of new market entrants. At present, the Company's principal competitors are CIDCO, Lucent and Northern Telecom. The Company's Caller ID products also compete with Caller ID telephones offered by Panasonic, Sony, Thomson and US Electronics. Marketing of the Company's smart telephone is subject to competition from smart telephones marketed or developed by Philips, Northern Telecom and CIDCO as well as other emerging platforms for interactive applications delivered through personal computers and cable television. The Company expects competition in the markets for its consumer telecommunications products and services to increase in the future and expects competition from existing and new competitors, possibly including RBOCs, other telcos or other current customers, as well as from network switch-based services and from the increased application of cellular technology. The Company's primary current and potential competitors in the market for its consumer telecommunications products and services have substantially greater financial, marketing and technical resources than the Company. Competition could materially and adversely affect the Company's results of operations through price reductions and loss of market share. The Company competes with a large number of competitors for its repair services and other services supporting the development and implementation of intelligent network services. Several 36 of the Company's competitors in the market for such services have substantially greater financial, marketing and technological resources than the Company. There can be no assurance that the Company will be able to continue to compete successfully against its existing competitors or that it will be able to compete successfully against new competitors. Electronic Commerce ------------------- The market for interactive products and services is highly competitive and subject to rapid innovation and technological change, shifting consumer preferences and frequent new product introductions. The Company's home banking products and services compete with services offered by a number of competitors and competition may intensify as a result of new market entrants. Banks have developed home banking products for their own customers and, in the future, may offer these services to other banks. Non-banks also may develop home banking products to offer to banks. Computer software and data processing companies also offer home banking services. Visa competes with other organizations, including MasterCard International, Inc. ("MasterCard"), which offers its Masterbanking home banking service through CheckFree Corporation. Many competitors exist for the Company's various banking products including other manufacturers of touch- tone response systems, other financial software companies and financial services software and service companies. The Company believes that its primary competition for its customer support services will come from financial institutions and third parties that choose to offer customer support services either directly through Visa's customer support messaging standard ("CSMS") product or on their own. The Company expects that competition in all of these areas will increase in the near future. Relationship with Visa The Company sold the Visa Bill-Pay System to Visa on August 1, 1994, for approximately $15 million in cash, the assumption of certain liabilities and rights to a 72-month royalty period commencing January 1, 1995 and ending December 31, 2000 (the "Royalty Period"). Visa subsequently transferred these assets to Visa InterActive, its wholly owned subsidiary. The royalty obligation is based on the number of customers who use the Visa Bill-Pay System during the Royalty Period. The agreement with Visa expressly provides that the royalty will apply only if the means by which a customer makes an electronic bill payment involves the use of a "significant portion" of the Visa Bill-Pay System. Royalties to the Company are calculated and paid by Visa InterActive quarterly during the Royalty Period. Because the amount of the royalties to the Company is dependent upon the number of customers that use the Visa Bill-Pay System on a monthly basis during the Royalty Period, the Company cannot provide any assurances of the amount of royalties, if any, that will be payable by Visa InterActive to the Company. The royalty payment will be reduced for each quarter through December 31, 1997, by an offset amount (the "Visa Offset") which was initially set at $73,000. If the royalty payment that would otherwise be due in respect of a quarter is smaller than the offset amount for that quarter, no royalty payment will be made to the Company, and the difference between $73,000 and the royalty otherwise due will increase the size of the Visa Offset for the next quarter. The aggregate amount of the Visa Offset for the Royalty Period 37 is $880,000. The Company did not receive any royalty revenue from Visa in 1996 due to the Visa Offset and does not expect to receive any royalty revenue after application of the Visa Offset through at least the end of the second quarter of 1997. In addition, under the terms of its agreement with Visa, Visa InterActive is not obligated to pay royalties to the Company for active bank customers who utilize home banking and bill payment technology independently developed by Visa InterActive. If Visa InterActive independently develops or acquires its own home banking and bill payment technology which does not use or build upon the Company's technology, this could have a material adverse effect on the amount of royalties payable by Visa InterActive to the Company. As a condition of Visa's acquisition of the Visa Bill-Pay System, the Company has agreed to work exclusively with Visa in certain areas and to refrain from certain activities that are in competition with Visa and its affiliates. These covenants may increase the Company's reliance upon Visa. Dependence on Key Employees The Company is highly dependent on certain key executive officers and technical employees to manage the operations and business of the Company as well as to implement the business plans of the Company on an ongoing basis. The loss of any such key employees could have an adverse impact on the future operations of the Company. Regulation The Telecommunications Act of 1996 and regulations or orders promulgated thereunder may result in or accelerate changes in various aspects of the telecommunications industry, including the competitive environment, the delivery and pricing of various telecommunications products and services and possible consolidation. Although the Company is unable to predict what effect, if any, the Telecommunications Act of 1996 or other regulatory developments may have upon the telecommunications industry or the Company's business, any such effects could have a material adverse impact on the future operations of the Company. In the United States, Caller ID and other intelligent network services are subject to federal and state regulation. Caller ID and other intelligent network services may in the future be subject to further regulation by the federal government, state public utility commissions and other regulatory authorities, as well as court challenges, including possible challenges due to protests from special interest groups that object to such services on the basis of privacy concerns. An order issued by the FCC effective December 1, 1995, requires all United States telephone service providers with Signaling System 7 switching architecture to transmit to each other without charge Caller ID number information on interstate calls within the United States (except for public pay phones and party lines). The FCC's order also requires that telcos that offer Caller ID service must provide to their telephone subscribers without charge a per-call blocking mechanism to block the transmission of their Caller ID information on interstate calls and must inform subscribers that their telephone numbers may be identified to a called party and how to use this blocking capability. 38 Volatility of Stock Price The market price of the Company's stock has experienced significant volatility. The stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology and developmental stage companies and that has often been unrelated to the operating performance of such companies. Factors such as announcements of the introduction of new products or services by the Company or its competitors, announcements of joint development efforts or corporate partnerships in the interactive applications industry, market conditions in the banking, telecommunications and other emerging growth company sectors and rumors relating to the Company or its competitors may have a significant impact on the market price of the Company's stock. Limited Proprietary Protection The Company possesses limited patent or registered intellectual property rights with respect to its technology. The Company depends in part upon its proprietary technology and know-how to differentiate its products from those of its competitors and works independently and from time to time with third parties with respect to the design and engineering of its own products. The Company also relies on a combination of contractual rights and trade secret laws to protect its proprietary technology. There can be no assurance, however, that the Company will be able to protect its technology or successfully develop new technology or gain access to such technology or that third parties will not be able to develop similar technology independently or that competitors will not obtain unauthorized access to the Company's proprietary technology, that third parties will not misuse the technology to which the Company has granted access, or that the Company's contractual or legal remedies will be sufficient to protect the Company's interests in its proprietary technology. Certain of Lucent's Caller ID patents are licensed by Lucent to the Company and others, including the Company's competitors. If the Lucent license were terminated and the Company were unable to negotiate a new patent license agreement with Lucent, the Company would no longer be authorized to manufacture or sell Caller ID products in the United States other than to the RBOCs and to Lucent, and the Company's business would be materially and adversely affected. Limited Sources of Supply The key components used in the Company's products are currently being purchased from multiple sources, except for its application specific integrated circuit ("ASIC") chips, which are purchased from a single source. Although the Company believes it could develop other sources for each of the components for its products, the process could take several months, and the inability or refusal of any such source to continue to supply components could have a material adverse effect on the Company pending the development of an alternative source. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1996 and 1995................... 41 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994............................................. 42 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994............................................. 43 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............................................. 44 Independent Auditors' Reports ...................................................... 64
40 INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (in thousands, except share data)
1996 1995 --------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 26,644 $ 25,120 Short-term investments 12,418 -- Accounts receivable, net of reserves of $1,788 in 1996 and $63 in 1995 (Note 16) 12,925 841 Inventories (Note 5) 28,420 801 Prepaid expenses and other current assets 2,582 306 --------- -------- Total current assets 82,989 27,068 --------- -------- NONCURRENT ASSETS Costs in excess of net assets acquired (Note 3) 50,061 -- Property, plant and equipment, net (Note 6) 9,143 1,448 Long-term investments (Note 10) -- 8,228 Restricted cash -- 3,309 Other assets 1,553 199 --------- -------- TOTAL ASSETS $143,746 $ 40,252 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,684 $ 1,651 Accrued expenses and other liabilities (Note 7) 12,773 868 Short-term borrowings (Note 8) 2,000 -- --------- -------- TOTAL LIABILITIES 19,457 2,519 --------- -------- COMMITMENTS AND CONTINGENCIES (Note 17) STOCKHOLDERS' EQUITY (Note 11) Preferred stock, $0.001 par value; authorized 5,000,000 shares in 1996 and 1995; no shares issued and outstanding -- -- Common stock, $0.001 par value; authorized 60,000,000 shares in 1996 and 30,000,000 shares in 1995; issued and outstanding 31,816,693 shares in 1996 and 15,529,818 shares in 1995 32 16 Additional paid-in capital 243,757 61,650 Receivable from sale of stock (2,456) (2,488) Deferred compensation (133) (261) Accumulated deficit (116,911) (21,184) --------- -------- TOTAL STOCKHOLDERS' EQUITY 124,289 37,733 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $143,746 $ 40,252 ========= ========
See accompanying notes to consolidated financial statements. 41 INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands, except per share data)
1996 1995 1994 -------- ------- -------- REVENUES Product $ 8,589 $ 1,817 $ -- Leasing 1,838 -- -- Services 3,472 2,369 1,432 -------- ------- -------- Total revenues 13,899 4,186 1,432 -------- ------- -------- COST OF REVENUES Product 6,457 1,747 1,013 Leasing 1,105 -- -- Services 2,886 723 -- -------- ------- -------- Total cost of revenues 10,448 2,470 1,013 -------- ------- -------- Gross profit 3,451 1,716 419 OPERATING EXPENSES (Notes 3, 9, and 10) General and administrative 16,121 5,783 7,968 Research and development 2,649 1,067 1,769 Selling and marketing 2,011 27 847 Provision for corporate restructuring (Note 12) 1,568 -- -- In-process research and development 77,214 -- -- -------- ------- -------- Total operating expenses 99,563 6,877 10,584 -------- ------- -------- Operating loss (96,112) (5,161) (10,165) -------- ------- -------- OTHER INCOME (EXPENSE) Gain on sale of bill pay operations (Note 13) -- -- 14,523 Interest, net 1,445 684 (578) Other, net (Note 10) (1,035) (241) 3 -------- ------- -------- Total other income, net 410 443 13,948 -------- ------- -------- Income (loss) before income taxes (95,702) (4,718) 3,783 Income taxes (Note 15) 25 -- 70 -------- ------- -------- Net income (loss) (95,727) (4,718) 3,713 Preferred dividend requirement (Note 13) -- (681) (1,895) -------- ------- -------- Net income (loss) applicable to common shareholders $(95,727) $(5,399) $ 1,818 ======== ======= ======== Net income (loss) per common share $ (5.21) $ (0.50) $ 0.28 ======== ======= ======== Weighted average shares 18,370 10,772 8,243 ======== ======= ========
See accompanying notes to consolidated financial statements. 42 INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands)
Series A Series C Convertible Convertible preferred stock preferred stock Common stock Additional -------------------- -------------------- ----------------------- paid-in Shares Amount Shares Amount Shares Amount capital --------- --------- --------- --------- ---------- --------- ---------- Balance at December 31,1993 5,204 $ 5 1,683 $ 2 5,000 $ 5 $ 16,817 Sale of common stock -- -- -- -- 121 -- 137 Redemption of preferred stock -- -- (535) (1) -- -- (3,816) Dividends paid--Series C, $.64 per share -- -- -- -- -- -- (183) Series B redeemable preferred stock accumu- lated dividends -- -- -- -- -- -- (466) Net income -- -- -- -- -- -- -- ------ ------ ------ ----- ------ ------ -------- Balance at December 31,1994 5,204 5 1,148 1 5,121 5 12,489 Sale of common stock in public offering, net -- -- -- -- 3,062 3 41,643 Conversion of preferred stock to common stock (5,204) (5) (1,148) (1) 6,352 6 -- Issuance of common stock for long-term investment -- -- -- -- 230 -- 3,392 Issuance of common stock for investment in affiliate, net -- -- -- -- 297 1 5,046 Issuance of common stock upon exercise of options and warrants -- -- -- -- 468 1 1,419 Deferred compensation on grant of stock options -- -- -- -- -- -- 486 Compensation expense -- -- -- -- -- -- -- Dividends paid - Series A -- -- -- -- -- -- (1,577) Dividends paid - Series C -- -- -- -- -- -- (1,107) Dividends accumulated and paid - Series B -- -- -- -- -- -- (141) Use of advertising credits -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- ------ ------ ------ ----- ------- ------ -------- Balance at December 31,1995 -- -- -- -- 15,530 16 61,650 Issuance of common stock related to the Braun Simmons Acqusition -- -- -- -- 375 -- 4,170 Issuance of common stock related to merger with Colonial Data -- -- -- -- 15,406 15 179,103 Retirement of common stock for long-term investment -- -- -- -- (230) -- (3,392) Issuance of common stock upon exercise of options and warrants -- -- -- -- 730 1 2,176 Issuance of common stock related to employee stock purchase plan -- -- -- -- 6 -- 50 Use of advertising credits -- -- -- -- -- -- -- Compensation expense -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- ------ ------ ------ ----- ------- ------ -------- Balance at December 31,1996 -- $ -- -- $ -- 31,817 $ 32 $243,757 ====== ====== ====== ===== ======= ====== ========
Receivable from sale Deferred Accumulated of stock compensation deficit Total --------- ------------ ----------- ------------ Balance at December 31,1993 $ (2,500) $ -- $ (20,179) $ (5,850) Sale of common stock -- -- -- 137 Redemption of preferred stock -- -- -- (3,817) Dividends paid--Series C, $.64 per share -- -- -- (183) Series B redeemable preferred stock accumu- lated dividends -- -- -- (466) Net income -- -- 3,713 3,713 --------- ------------ ----------- ------------ Balance at December 31,1994 (2,500) -- (16,466) (6,466) Sale of common stock in public offering, net -- -- -- 41,646 Conversion of preferred stock to common stock -- -- -- -- Issuance of common stock for long-term investment -- -- -- 3,392 Issuance of common stock for investment in affiliate, net -- -- -- 5,047 Issuance of common stock upon exercise of options and warrants -- -- -- 1,420 Deferred compensation on grant of stock options -- (486) -- -- Compensation expense -- 225 -- 225 Dividends paid - Series A -- -- -- (1,577) Dividends paid - Series C -- -- -- (1,107) Dividends accumulated and paid - Series B -- -- -- (141) Use of advertising credits 12 -- -- 12 Net loss -- -- (4,718) (4,718) --------- ------------ ----------- ------------ Balance at December 31,1995 (2,488) (261) (21,184) 37,733 Issuance of common stock related to the Braun Simmons Acquisition -- -- -- 4,170 Issuance of common stock related to merger with Colonial Data -- -- -- 179,118 Retirement of common stock for long-term investment -- -- -- (3,392) Issuance of common stock upon exercise of options and warrants -- -- -- 2,177 Issuance of common stock related to employee stock purchase plan -- -- -- 50 Use of advertising credits 32 -- -- 32 Compensation expense -- 128 -- 128 Net loss -- -- (95,727) (95,727) --------- ------------ ----------- ------------ Balance at December 31,1996 $ (2,456) $ (133) $(116,911) $124,289 ======== ============ =========== ============
See accompanying notes to consolidated financial statements. 43 INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(95,727) $(4,718) $ 3,713 Adjustments to reconcile net income (loss) to net cash used in operating activities: In-process research and development 77,214 -- -- Depreciation and amortization 2,725 619 749 Equity in loss of long-term investments 2,801 316 -- Receipt of affiliate stock for services provided -- (87) -- Deferred compensation expense 128 225 -- Gain on sale of bill pay operations and other assets (231) (75) (14,526) Other noncash activities 130 -- 35 Changes in certain assets and liabilities, net of effects of non-cash transactions including acquisitions: Accounts receivable (2,318) (681) (96) Prepaid expenses and other current assets (1,404) 155 (219) Inventories (1,020) (802) -- Other assets 3,742 (87) (38) Accounts payable, accrued expenses and other liabilities 5,123 1,079 191 Due from (to) affiliates -- (113) (293) -------- ------- -------- Net cash used in operating activities (8,837) (4,169) (10,484) -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short-term investments (12,418) -- -- Purchases of property, plant and equipment (2,304) (1,064) (314) Change in restricted cash 3,309 (3,309) -- Proceeds from sale of bill pay operations and other assets, net 231 683 16,100 Acquisitions, net of cash acquired 17,578 -- -- -------- ------- -------- Net cash provided by (used in) investing activities 6,396 (3,690) 15,786 -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds (payments) related to borrowings 2,000 (4,633) -- Proceeds from issuances of common stock, net of discount 2,177 43,420 137 Payments for redemption of preferred stock -- (4,925) (5,968) Payment of preferred stock dividends -- (2,684) (183) Other financing activities (212) (767) (164) -------- ------- -------- Net cash provided by (used in) financing activities 3,965 30,411 (6,178) -------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,524 22,552 (876) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,120 2,568 3,444 -------- ------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,644 $25,120 $ 2,568 ======== ======= ========
See accompanying notes to consolidated financial statements. 44 INTELIDATA TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (1) ORGANIZATION InteliData Technologies Corporation ("InteliData" or the "Company"), is engaged in providing products and services for three primary markets: consumer telecommunications, electronic commerce and interactive services. The Company designs, develops and markets consumer telecommunications products including Caller ID adjuncts, integrated telephones and smart telephones. The Company also develops products and services for financial institutions to assist in home banking and electronic bill payment initiatives and designs and markets interactive service applications for smart telephones and other small screen devices. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Consolidation - The consolidated financial statements include the accounts of the Company after elimination of all intercompany balances and transactions. Certain items from the 1995 and 1994 financial statements have been reclassified to conform to the 1996 financial statement presentation. (b) Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company considers the impairment of long-lived assets based on an assessment of the asset's ability to contribute to the profitability of the Company using estimates of expected future cash flows. (c) Revenue Recognition - Revenue is recorded when products and repair merchandise are shipped to the customer. Lease revenue is recorded based on the units in service at the end of the prior month since these leases are cancelable at any time. The Company recognizes service revenue from consulting and maintenance contracts as the services are provided. (d) Cash and Cash Equivalents - The Company considers all non-restricted highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates market. (e) Inventories - Inventories are stated at the lower of cost or market, with cost determined on a weighted average basis. 45 (f) Property, plant and equipment - Property, plant and equipment is stated at cost. Equipment under capital lease is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or the estimated fair value of the equipment at the inception of the lease. Depreciation of property and equipment is calculated using the straight- line method over the estimated useful lives of the assets as follows:
Category Years -------- ----- Building and improvements 5-20 Leasehold improvements 5-15 Leased equipment 2-5 Equipment 3-7 Molds and tools 3-5
Equipment held under capital lease and leasehold improvements are amortized using the straight-line method over the lease term or estimated useful life, whichever is shorter. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts and any gain or loss is reflected in income. Maintenance and repairs are charged to expense as incurred. (g) Long-term Investments - Long-term investments at December 31, 1995 consisted of stock in Colonial Data Technologies Corp. ("Colonial Data") and an investment in Home Financial Network, Inc. ("HFN"). The investment in Colonial Data was recorded at its original cost at December 31, 1995. The Company used the equity method of accounting for its investment in and earnings of HFN in which the Company had the ability to exert significant influence, but not control, over the operating and financial policies of HFN. The excess of purchase cost of investments in affiliate over the Company's proportional amount of the fair value of net assets acquired was considered to be goodwill and was being amortized over a five year period on a straight-line basis. (h) Intangible Assets - The Company carries its intangible assets, including costs in excess of net assets acquired and other intangible assets, at cost which are amortized using the straight-line method over 2 to 15 years. Other intangible assets are reported in other assets on the balance sheet. (i) Income Taxes - Income taxes are accounted for in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 46 (j) Accounting for Stock-Based Compensation - The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the Financial Accounting Standards Board in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. (k) Net Income (Loss) per Common Share - Primary income (loss) per common share is computed by dividing net income (loss), after deducting preferred stock dividend requirements, by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents are comprised entirely of stock options and warrants. Stock issued and stock options granted during the 12-month period preceding the date of the Company's initial public offering on June 2, 1995 have been included in the calculation of weighted average shares of common stock and common stock equivalents outstanding for all periods using the treasury stock method based on the initial public offering price of $14.75 per share. Dividend requirements on all series of the Company's preferred stock prior to the redemption or conversion of such preferred stock are deducted from net income or loss applicable to common shareholders in computing income (loss) per common share. The preferred dividend requirements were $0, $681,000 and $1,895,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and included undeclared dividends for 1994 of $1,712,000, or $.21 per common share. (3) ACQUISITIONS On November 7, 1996 US Order, Inc. ("US Order") and Colonial Data were merged with and into InteliData Technologies Corporation, a newly formed corporation, through an exchange of stock ("Mergers"). Upon consummation of the Mergers, each outstanding share of US Order common stock was converted into one share of InteliData common stock and each outstanding share of Colonial Data common stock was converted into one share of InteliData common stock. The transaction was accounted for as a purchase of Colonial Data by US Order. Accordingly, the historical financial results of US Order are the historical financial results of InteliData. Effective September 30, 1996 Braun Simmons & Co., Inc. ("Braun Simmons"), a firm specializing in the development of home banking and electronic commerce solutions for financial institutions, was merged into US Order (the "Braun Simmons Acquisition"). This merger was accounted for as a purchase of Braun Simmons by US Order. US Order acquired all of the outstanding stock of Braun Simmons for $2 million and 375,000 shares of the Company's common stock. 47 (a) Unaudited Pro Forma Condensed Consolidated Financial Information The unaudited pro forma condensed consolidated statements of operations for the years ended December 31, 1996 and 1995 give effect to the Mergers and the Braun Simmons Acquisition as if each was completed as of January 1, 1995 and combines US Order's, Braun Simmons' and Colonial Data's statements of operations for each of those periods. Such statements of operations do not include the combined effect of the $77 million nonrecurring charges for in-process research and development. However, such statements do reflect adjustments for the elimination of historical transactions between US Order, Braun Simmons and Colonial Data, amortization of goodwill and related income tax effects. The unaudited pro forma condensed consolidated financial information is provided for illustrative purposes only and is not necessarily indicative of the consolidated financial information that would have been reported had the mergers occurred on the dates indicated, nor do they represent a forecast of the consolidated financial information for any future period. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements and accompanying notes of the Company. Shown below is the unaudited pro forma condensed consolidated statements of operations for the combined businesses of US Order, Braun Simmons and Colonial Data (in thousands, except per share amounts).
YEAR ENDED DECEMBER 31, 1995: Historical Pro Forma ---------------------------------------- ---------- US Order Braun Simmons Colonial Data Adjustments Reference InteliData -------- ------------- ------------- ----------- ------------ ---------- Revenues....................... $ 4,186 $1,841 $74,194 $ -- $ 80,221 Cost of revenues............... 2,470 1,024 44,240 1,089 (2) 48,823 Gross profit................... 1,716 817 29,954 (1,089) (2) 31,398 Operating expenses............. 6,877 826 11,056 5,494 (3) 24,253 Operating income (loss)........ (5,161) (9) 18,898 (6,583) (2)(3) 7,145 Net income (loss).............. (4,718) (29) 12,523 (4,313) (2)(3)(4)(5) 3,463 Net income (loss) per share.... $ (0.50) $ 0.85 $ 0.11
YEAR ENDED DECEMBER 31, 1996:
Pro Forma Pro Forma ---------------------------------------- ---------- US Order Braun Simmons Colonial Data Adjustments Reference InteliData -------- ------------- ------------- ----------- --------- ---------- Revenues....................... $ 4,227 $3,653 $63,987 $(1,894) (1) $ 69,973 Cost of revenues............... 3,832 2,272 43,490 101 (1)(2) 49,695 Gross profit................... 395 1,381 20,497 (1,995) (2) 20,278 Operating expenses............. 19,911 1,284 18,312 2,285 (3) 41,792 Operating income (loss)........ (19,516) 97 2,185 (4,280) (2)(3) (21,514) Net income (loss).............. (19,349) 67 688 4,011 (2)(3)(4)(5) (14,583) Net income (loss) per share.... $ (1.20) $ 0.04 $ (0.46)
Pro Forma Adjustments The following pro forma adjustments have been made to the unaudited pro forma condensed consolidated financial information: 48 (1) Reflects the elimination of intercorporate transactions. (2) Reflects the amortization associated with an allocation of the purchase price of Colonial Data for its lease base of $1.9 million to recognize the excess of the estimated fair market value over the carrying amount and its amortization on a straight-line basis over five years. (3) Reflects the allocation of purchase price to developed technology and goodwill. Such developed technology is amortized on a straight-line basis over two years; goodwill is amortized on a straight-line basis over 7 years for Braun Simmons and 15 years for Colonial Data. (4) Reflects accrual of the transactions and other related costs. Estimated costs incurred by Colonial Data relating to the Mergers of $2 million have been reflected as expenses in the pro forma statement of operations for the year ended December 31, 1995. Estimated costs incurred by Braun Simmons relating to the Braun Simmons Acquisition of $50,000 have been reflected as expenses in the pro forma consolidated condensed statement of operations for the year ended December 31, 1995. (5) Reflects the effect of the combination of Braun Simmons', US Order's and Colonial Data's operations and the above adjustments on income taxes. A valuation allowance has been recognized for the pro forma net deferred tax assets of InteliData, relating primarily to operating loss carryforwards generated by US Order prior to the Mergers and the Braun Simmons Acquisition, based on an assessment of the likelihood of recoverability of such amounts. As a result of the Mergers and the Braun Simmons Acquisition, the use of US Order's operating loss carryforwards may be limited in future years. (b) Purchase Accounting The purchase amount of Braun Simmons was: Fair value of common stock issued.. $4,170 Cash consideration................. 2,000 US Order transaction costs......... 913 ------ Total........................... $7,083 ======
The purchase amount was allocated for Braun Simmons as follows: Current assets..................... $ 700 Equipment and other................ 286 In-process research and development 4,914 Goodwill........................... 1,898 Liabilities assumed................ (715) ------ Total........................... $7,083 ======
49 The purchase amount of Colonial Data was: Fair value of common stock issued..................... $179,118 Fair value of employee stock options and warrants..... 2,805 Cost of previous investment in Colonial Data.......... 3,393 US Order transaction costs............................ 1,309 -------- Total......................................... $186,625 ========
The purchase amount was allocated for Colonial Data as follows: Current assets....................... $ 60,488 Lease base........................... 3,747 Equipment and other.................. 5,754 In-process research and development.. 72,300 Developed technology................. 1,418 Goodwill............................. 49,483 Liabilities assumed.................. (6,565) -------- Total....................... $186,625 ========
The allocation of the purchase amounts to both Braun Simmons and Colonial Data tangible and identifiable intangible assets was based on independent appraisals of the estimated fair value of certain of those assets. Such appraisals indicated approximately $5 million and $72 million, respectively, for purchased in-process research and development for Braun Simmons and Colonial Data, respectively, which was expensed by the Company upon each closing, as the technologies had not reached technological feasibility and did not have alternative future uses. The unaudited pro forma condensed consolidated statements of operations do not include this one-time charge for purchased in- process technology as it represents a material nonrecurring charge. The Company is waiting for certain information pertaining to the collection of certain outstanding receivables and legal matters related to these transactions. (c) Net Income (Loss) Per Share US Order's historical loss per share for the year ended December 31, 1995 includes $681,000 of preferred dividend requirement which has been deducted from historical net loss in determining net loss attributable to common stockholders. All of US Order's series of preferred stock, including accumulated dividends, were redeemed or converted to common stock in June 1995. The historical preferred dividend requirement has been excluded from the computations of pro forma income per share. The weighted average shares used in the computations of pro forma income (loss) per share assumes that the shares issued in the acquisition of Braun Simmons and the total number of shares exchanged in the Mergers and the Braun Simmons Acquisition, net of canceled intercorporate investment shares, were outstanding for all periods presented. The impact of outstanding stock options and warrants of the Company has been considered using the treasury stock method. 50 (4) SEGMENT REPORTING The Company maintains operations in three primary markets: consumer telecommunications, electronic commerce and interactive services. Intersegment sales are not material. Operating loss represents total revenues less operating expenses, and excludes general corporate expenses, other income and expense and income taxes. Identifiable assets are those assets employed in each segment's operation, including an allocated value to each segment of cost in excess of net assets acquired. Corporate assets consist primarily of cash and cash equivalents, investments, and assets not employed in the production of goods or services. Segment financial information is as follows (in thousands):
Consumer Electronic Interactive Telecommunications Commerce Services Corporate Consolidated ------------------- ----------- ------------ ---------- ------------- 1996 Revenues $ 10,942 $ 2,957 $ -- $ -- $ 13,899 Operating loss (79,014) (9,072) (2,479) (5,547) (96,112) Identifiable assets 97,801 7,932 234 37,779 143,746 Depreciation and amortization 1,484 198 41 1,002 2,725 Capital expenditures 110 771 267 1,156 2,304
Operating loss for consumer telecommunications and electronic commerce include in-process research and development expenses of $72,300,000 and $4,914,000, respectively. Segment information for 1995 and 1994 is not presented as the Company did not operate under separate business markets during these periods. (5) INVENTORIES Inventories consist of the following at December 31 (in thousands): 1996 1995 ------- ----- Raw materials $ 4,843 $ -- Finished goods 23,577 801 ------- ----- $28,420 $ 801 ======= =====
51 (6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31 (in thousands):
1996 1995 -------- -------- Land and building $ 1,482 $ -- Equipment 4,491 2,206 Leased equipment 4,366 656 Leasehold improvements 852 95 Furniture and fixtures 678 398 ------- ------- 11,869 3,355 Accumulated depreciation (2,726) (1,907) ------- ------- $ 9,143 $ 1,448 ======= =======
(7) ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consists of the following at December 31 (in thousands): 1996 1995 ------- -------- Accrued compensation expense $ 2,805 $ -- Accrued corporate restructuring and acquisition 2,476 -- Accrued wages and related expenses 2,387 782 Accrued tax liabilities 1,100 -- Accrued royalties and commissions 740 -- Accrued inventory and equipment 713 -- Accrued professional and insurance 669 -- Other liabilities 1,883 86 ------- -------- $12,773 $ 868 ======= ========
(8) BORROWINGS In May 1996, the Company entered into three credit agreements with two banks that provide for borrowings of up to $20,000,000. The first credit agreement covers the period through May 1997 and is a revolving line of credit of $1,000,000 that is fully collateralized by a bank certificate of deposit. The second credit agreement is $4,000,000 available to be utilized for the purpose of issuing letters of credit. The advances and/or face amounts of letters of credit issued under this agreement are collateralized by either 100% of pledged certificates of deposit or 90% of pledged U.S. Treasury investments acceptable to the bank. These agreements provide for various interest rates at the Company's election and do not have a commitment fee on the unused portion of the credit lines. These agreements also contain certain covenants including, but not limited to, restrictions related to certain financial ratios as well as restrictions with respect to acquisitions and the sale of assets. As of December 31, 1996, the Company had no borrowings related to these credit facilities. 52 Additionally, the Company maintains a credit facility totaling $15,000,000 for cash advances and letters of credit. The loan is secured by substantially all of the Company's assets and bears interest at an annual rate equal to the bank's prime rate. The bank's prime rate was 8.25% as of December 31, 1996. As of December 31, 1996, the Company had $2,000,000 outstanding under the line of credit and had available $13,500,000 for cash advances and letters of credit. The loan agreement contains restrictive covenants, the most significant of which are certain financial ratios and prohibition of dividends. Interest expense was $2,000, $286,000 and $650,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for interest was $16,000, $324,000 and $594,000 in 1996, 1995 and 1994, respectively. (9) RELATED-PARTY TRANSACTIONS (a) Strategic Business Partner In August 1994, the Company sold its electronic banking and bill pay operations (the "Visa Bill-Pay System") to Visa (see note 13). As part of the Visa transaction, the Company's president was appointed to, and the Company's chairman was named an advisor to, the board of directors of Visa InterActive. Included in service fee revenues are $1,219,000, $737,000 and $156,000 in 1996, 1995 and 1994, respectively, related to services provided by the Company to Visa InterActive and Visa banks/members. Included in the accompanying consolidated balance sheets are receivables due from Visa InterActive totaling $581,000 and $315,000 as of December 31, 1996 and 1995, respectively. (b) Primary Investor The chairman of the board of directors of the Company is a director of WorldCorp, Inc. ("WorlCorp") the Company's primary investor. Another officer and certain directors of the Company are also members of the board of directors of WorldCorp. WorldCorp owned approximately 29% and 58% of the Company's outstanding voting stock as of December 31, 1996 and 1995, respectively. The decrease in ownership percentage is a direct result of the issuance of additional shares from the Mergers and the Braun Simmons Acquisition. The Company had a $3,500,000 long-term note that was redeemed in June 1995 with a portion of the proceeds from the sale of common stock in its initial public offering. Interest expense on this long-term note was $216,000 and $510,000 for the years ended December 31, 1995 and 1994, respectively. WorldCorp also paid certain of the Company's personnel costs including salary, benefits, business and other related costs for which the Company was billed on a cost-reimbursed basis. In November 1996, the Company terminated this relationship with WorldCorp. During the years ended December 31, 1996, 1995 and 1994, the Company paid WorldCorp approximately $439,000, $207,000 and $103,000, respectively, related to these arrangements. At December 31, 1996 and 1995, the Company was not indebted to WorldCorp for significant amounts. 53 (10) LONG-TERM INVESTMENTS On October 18, 1995, the Company acquired a 40% equity interest in HFN, a newly formed, development stage personal computer software company that plans to develop and deliver electronic financial products and services to consumers. In this transaction, the Company paid an aggregate purchase price of $5,015,000, through the issuance of 296,746 shares of its common stock, in exchange for 40% of HFN. The number of the Company's common shares issued in this transaction was based on the $5,015,000 purchase price divided by the average closing price of the Company's common stock on the Nasdaq National Market for each of the five business days immediately preceding the third day prior to the closing date of October 18, 1995. The purchase price exceeded the Company's proportionate share of the equity in net assets of HFN at October 18, 1995 by approximately $3.1 million. This component of the investment was considered to be goodwill and was being amortized over a period of five years on a straight-line basis. During the fourth quarter of 1996, the Company wrote-off its remaining investment in affiliate and the related goodwill. The Company believes its investment in HFN was impaired based on its history of losses. The carrying value of the investment at December 31, 1996 and 1995 was $0 and $4,835,000, respectively. For the period ended December 31, 1996, HFN had no revenues and incurred a net loss of $3,619,000. For the period ended December 31, 1995, HFN had no revenues and incurred a net loss of $408,000. As of December 31, 1996, HFN had total assets, total liabilities and total stockholders' equity of $4,941,000, $172,000 and $4,769,000, respectively. Additionally, as of December 31, 1995 the Company held shares of stock in Colonial Data which were canceled upon consummation of the Mergers (see note 3). (11) STOCKHOLDERS' EQUITY (a) Initial Public Offering In June 1995, the Company completed an initial public offering of 4,427,500 shares of the Company's common stock, par value $.001, at an offering price of $14.75. Of the 4,427,500 shares sold, 3,062,500 were issued and sold by the Company, and 1,365,000 shares were sold by WorldCorp, the Company's largest shareholder. The Company did not receive any of the proceeds from the sale of shares by WorldCorp. The Company received approximately $41.6 million in net proceeds (after deducting issuance costs) from the stock sale. A portion of the net proceeds from the offering were used by the Company to redeem its Series B redeemable preferred stock for $4,925,000, including accumulated dividends of $625,000, pay $2,684,000 of cumulative undeclared dividends on its Series A and C convertible preferred stock, and redeem $4,887,000 in notes payable and related accrued interest. (b) Redeemable Preferred Stock In conjunction with the Company's initial public offering in June 1995, the Company redeemed all of its 4,300 outstanding shares of Series B redeemable preferred stock for 54 $4,300,000 and rescinded the authorization to issue any additional shares. The Series B preferred stockholders were entitled to and had preference to cumulative dividends at the annual rate of $75 per share. The dividends accrued from the date of issuance. At redemption, in June 1995, the Company paid all of the remaining accrued and unpaid dividends, totaling $625,000, with a portion of the proceeds from its initial public offering. (c) Stock Options The Company sponsors the following stock option plans which cover substantially all employees and certain directors: the US Order 1991 Stock Option Plan ("1991 Plan"), the Colonial Data 1994 Long-Term Incentive Plan ("Colonial Data Plan"), the US Order 1995 Incentive Plan ("1995 Plan"), the US Order 1995 Non-Employee Directors' Stock Option Plan ("1995 Directors' Plan"), the InteliData 1996 Incentive Plan ("1996 Plan"), and the InteliData 1996 Non- Employee Directors' Stock Option Plan ("1996 Non-Employee Directors' Plan"). 1991 Plan --------- The Company had reserved 3,000,000 shares of common stock for the exercise of options under this plan. Options are granted for purchases of the same number of shares of the Company's common stock. For the 1991 Plan, options typically vest monthly over a period of three to five years and expire after eight years. However, no vesting occurs until after the employee has completed one year of service with the Company. The 1991 Plan was terminated in May 1995. As of December 31, 1996, there were 1,383,180 shares vested and exercisable under the 1991 Plan. Colonial Data Plan ------------------ Colonial Data's board of directors authorized the issuance of options for purchase of common stock for key employees. The options entitle the holder to purchase the Company's common stock at the fair market value at the date of grant. Colonial Data's board of directors as part of its 1994 Long-Term Incentive Plan authorized 500,000 shares of stock to be available for grants. The options vest periodically through 2000 and expire in 2006 and expire after 10 years from the date of grant. The Colonial Data Plan was terminated in November 1996. As of December 31, 1996, there were 101,647 shares vested and exercisable under the Colonial Data Plan. 1995 Plan --------- The Company had reserved 1,000,000 shares of common stock for the exercise of options under this plan. Options are granted for purchases of the same number of shares of the Company's common stock. For the 1995 Plan, options typically vest monthly over a period of three to five years and expire after eight years from the date of grant. However, no vesting occurs until after the employee has completed one year of service with the Company. The 1995 Plan was terminated in November 1996. As of December 31, 1996, there were 70,056 shares vested and exercisable under the 1995 Plan. 55 1995 Directors' Plan -------------------- The Company had reserved 250,000 shares of common stock for the exercise of options under this plan. Options are granted for purchases of the same number of shares of the Company's common stock. For the 1995 Directors' Plan, options will vest monthly over a three year period beginning on the date of grant and expire ten years subsequent to the date of grant. The grant price for the plan was based on the average of the closing Nasdaq market price of the Company's stock on the thirty trading days preceding the date of the grant. The 1995 Directors' Plan was terminated in November 1996. As of December 31, 1996, there were 1,458 shares vested and exercisable under the 1995 Directors' Plan. 1996 Plan --------- The Company had reserved 1,500,000 shares of common stock for the exercise of options under this plan. Options are granted for purchases of the same number of shares of the Company's common stock. The exercise price of each option shall not be less than eight-five percent (85%) of the fair market value of the Company's common stock on the date the option is granted and an option's maximum term is 10 years. Options for existing employees are granted by the board of directors and typically vest ratably at the end of the fourth year. Options granted to new hires are awarded at the discretion of the Company's management in accordance with guidelines approved by the board of directors. However, no vesting occurs until after the employee has completed one year of service with the Company. As of December 31, 1996, there were no shares vested and exercisable under the 1996 Plan. 1996 Non-Employee Directors' Plan --------------------------------- The Company reserved 200,000 shares of common stock for the exercise of options under this plan. Options are granted for each non-employee director who qualifies for participation under the plan. The exercise price of each option shall be the fair market value as defined in the plan of the Company's common stock and an option's maximum term is 10 years. For the 1996 Non-Employee Directors' Plan, options vest monthly over a period of one year. As of December 31, 1996, there were no options granted under the 1996 Non-Employee Directors' Plan. 56 A summary of the changes in stock options for each of the Company's stock option plans is as follows:
1991 Plan 1995 Plan ------------------------ -------------------------- Exercise Number Exercise Number Prices of Options Prices of Options ----------- ----------- ------------- ----------- December 31, 1993 $0.98-$4.00 1,482,168 -- -- Granted $4.00-$7.13 1,320,410 -- -- Exercised $0.98 (120,788) -- -- Canceled $0.98-$4.00 (250,869) -- -- --------- ------- December 31, 1994 $0.98-$7.13 2,430,921 -- -- Granted $7.13-$9.50 226,350 $14.50-$23.75 110,050 Exercised $0.98-$7.13 (373,106) -- -- Canceled $0.98-$7.13 (21,010) $21.00 (1,500) --------- ------- December 31, 1995 $0.98-$9.50 2,263,155 $14.50-$23.75 108,550 Granted -- -- $ 9.00-$23.50 747,630 Exercised $0.98-$9.50 (353,013) $14.75-$18.75 (169) Canceled $2.50-$9.50 (109,613) $ 9.88-$23.13 (71,930) --------- ------- December 31, 1996 $0.98-$9.50 1,800,529 $ 9.00-$23.75 784,081 ========= =======
1995 Directors' Plan 1996 Plan ----------------------- ------------------------- Exercise Number Exercise Number Prices of Options Prices of Options ----------- ---------- ------------- ---------- December 31, 1995 -- -- -- -- Granted $18.86 7,500 $7.00 1,400 Exercised -- -- -- -- Canceled -- -- -- -- --------- ------- December 31, 1996 $18.86 7,500 $7.00 1,400 ========= =======
In addition to options issued in 1995 under both the 1991 and 1995 Plans, the Company issued 15,000 options to three of its five non-affiliate directors and 25,000 options to a non-affiliate who helped in arranging a placement of Series C preferred stock. Each of these grants has a $7.13 exercise price. The 45,000 options issued to non-affiliate directors vest monthly over a three-year period, and the 25,000 options granted to the non-affiliate vested immediately. As of December 31, 1996, of these 45,000 options, 13,751 options were canceled during 1996, options for 25,415 shares of common stock are exercisable with a weighted average exercise price of $7.13. During 1996 and 1995, the Company recognized $128,000 and $225,000 of compensation expense, respectively, in connection with options granted at exercise prices below the estimated fair market value of the Company's common stock at the date of grant. As of December 31, 1996, deferred compensation relating to these grants was $133,000, which will be recognized over the remaining vesting period. In August 1994, as a requirement of the sale of the Visa bill payment system to Visa InterActive, the Company paid $3,250,000 to certain employees to cancel 675,334 outstanding vested options. This amount is allocated between general and administrative and research and development expenses in the accompanying 1994 statement of operations. 57 (d) Stock Compensation Plans At December 31, 1996, the Company has six stock-based compensation plans. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for stock options granted under the stock compensation plans. Had compensation cost for the Company's stock compensation plans been determined based on the fair value at the grant dates for the 1996 and 1995 awards under those plans, the Company's net loss and net loss per share for the years ended December 31 1996 and 1995 would have been $(99,341,000) and $(5.41) per share and $(5,674,000) and $(0.53) per share, respectively. Stock compensation expense for 1995 was calculated for the period from the initial public offering to the end of the year. The weighted average fair value of options granted during 1996 and 1995 was $14.75 per share. The fair value of options granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: no dividend yield, expected volatility of 65%, and a risk free interest rate of 6.14%.
Options Outstanding Options Exercisable ---------------------------------------------------------------- --------------------------- Weighted Weighted Range of Number Weighted Average Number Average Plan Description Exercise Prices of Options Average Life Exercise Price Exercisable Exercise Price --------------- ---------- ------------- -------------- ----------- -------------- 1991 Plan $ 0.98-$9.50 1,800,529 5.8 years $ 5.62 1,383,180 $ 5.19 Colonial Data Plan $0.21-$20.38 474,800 9.5 years $10.92 101,647 $ 8.54 1995 Plan $9.00-$23.75 784,081 8.0 years $16.68 70,056 $17.95 1995 Directors' Plan $ 18.86 7,500 10.0 years $18.86 1,458 $18.86 1996 Plan $ 7.00 1,400 10.0 years $ 7.00 -- -- 1996 Non-Employee -- -- -- -- -- -- Directors' Plan
(e) Employee Stock Purchase Plan Under the Employee Stock Purchase Plan, approved in 1996, the Company is authorized to issue up to 500,000 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose each period to have up to twenty percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85 percent of the lower of its beginning-of- period or end-of-period market price. The Employee Stock Purchase Plan's first period will begin January 2, 1997. The Company had an employee stock purchase plan in existence during 1996, however, there was not a significant number of shares of stock sold under the Plan in 1996. (f) Receivable from Sale of Stock In connection with a private placement offering in 1993, the Company received $2,500,000 in advertising credits. The Company has recognized advertising credits aggregating $32,000 and $12,000 in 1996 and 1995, respectively. The advertising credits are included in the accompanying balance sheet as a reduction of stockholders' equity. 58 (12) CORPORATE RESTRUCTURING The Company recorded a provision for corporate restructuring during the fourth quarter of 1996 of $1,568,000. This amount consists of $1,323,000 in facilities consolidations, $175,000 in relocation expenses for certain employees, and $70,000 for the write-down of duplicative processing equipment. Such provisions remained in corporate restructurings at December 31, 1996. (13) SALE OF ELECTRONIC BANKING AND BILL PAY OPERATIONS On August 1, 1994, the Company sold its electronic banking and bill pay operations (the "Visa Bill-Pay System") to Visa for $14,645,000 in cash (net of closing costs of $228,000), the assumption of certain of the Company's capital lease obligations and other miscellaneous liabilities totaling $853,000; 100 shares of Visa InterActive's redeemable preferred stock; and a 72 month royalty obligation commencing January 1, 1995 and ending December 31, 2000 (the "Royalty Period"). Visa subsequently transferred these assets to Visa InterActive, its wholly owned subsidiary. The System consisted of certain tangible assets with a net book value of $975,000 and certain intangible assets, including patents, computer software, firmware, and databases. The Company and Visa granted each other perpetual, royalty-free, worldwide licenses to certain intellectual property rights of the Company, including those in software, source code and know-how. The Company recognized a gain of $14,523,000 from the sale, which is included in other non-operating income. Royalties due to the Company will equal $.666 per month per Visa InterActive bill pay customer whose transactions are processed by the System, and will be paid by Visa InterActive quarterly during the Royalty Period. Under the terms of the agreement, Visa InterActive is not required to pay the Company for the first $73,000 of royalties earned during each quarter on a cumulative basis for a total of twelve quarters. The Company did not receive any Visa royalty payments in 1996 and 1995. Through July 1995, the Company paid Visa InterActive a monthly fee of $6.40 for each of the Company's bill pay customers which were not yet customers of a Visa member bank. This fee was reduced to $4.00 per bill pay customer on August 1, 1995. During 1996, 1995 and 1994, respectively, the Company paid Visa InterActive $54,000, $205,000 and $208,000 in such fees, which is included in service fees cost of revenues. As part of the Visa transaction, the Company's president was appointed to, and the Company's chairman was named an advisor to, the board of directors of Visa InterActive. (14) EMPLOYEE 401(K) SAVINGS PLAN The Company adopted a defined contribution plan ("Plan") that qualifies for preferential tax treatment under Section 401(a) of the Internal Revenue Code. Participation in the Plan is 59 available to employees who are at least twenty-one years of age and have six months of service. Company contributions to the Plan are based on a percentage of employee contributions and were not significant. Administrative expenses for the Plan were paid for by the Company. (15) INCOME TAXES Income taxes consists of (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ----- ------ ------ Current: Federal.......................................... $ -- $ -- $1,028 State 25 -- 10 Utilization of net operating loss carryforwards.. -- -- (968) ----- ----- ------ Total current tax expense....................... $ 25 $ -- $ 70 ===== ===== ======
A reconciliation of taxes computed at the statutory Federal tax rate on income before income taxes to the actual income tax expense is as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ---------- --------- -------- Income taxes (benefit) computed at the statutory rate................................ $(33,496) $(1,604) $ 1,293 Book expenses not deductible for tax purposes... 28,378 129 54 Federal alternative minimum and environmental taxes........................... -- -- 60 Generation of net operating loss carryforwards.. 5,118 1,475 -- State income tax net of federal benefit......... 25 -- -- Change in the valuation allowance for deferred tax assets allocated to income tax expense....................................... -- -- (1,337) -------- ------- ------- Income taxes............................ $ 25 $ -- $ 70 ======== ======= =======
60 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995, are as follows (in thousands):
1996 1995 --------- -------- Deferred tax assets: Net operating loss carryforwards............... $ 15,942 $ 7,955 Capitalized start-up expenditures.............. 341 641 Accounts receivable and inventory revaluation.. 6,394 -- Equipment and property......................... 137 -- General business credit carryforward........... 489 489 Alternative minimum tax carryforward........... 60 60 Other.......................................... 128 56 -------- ------- Total gross deferred tax asset............ 23,491 9,201 Valuation allowance............................ (22,210) (8,974) -------- ------- Net deferred tax assets..................... 1,281 227 Deferred tax liability: Equipment and property......................... -- (227) Accounts payable and accrued liabilities....... (1,281) -- -------- ------- Net deferred taxes........................... $ -- $ -- ======== =======
The net changes in the total valuation allowance for the years ended December 31, 1996 and 1995 were an increase of $13,239,000 and $2,309,000, respectively. At December 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $38,415,000, which expire in 2007 through 2011, general business tax credits of approximately $489,000, which expire in 2005 through 2010, and an alternative minimum tax credit carryforward of approximately $60,000, which may be carried forward indefinitely and used to offset future regular taxable income. Included in the Company's net operating loss carryforward is approximately $3,520,000, related to exercises of employee stock options, which, if utilized in the future to reduce taxable income, will be credited directly to additional paid-in capital. In the event a greater than 50% change in control of the Company occurs for tax purposes, use of these net operating losses may be limited in future years. Cash paid for taxes was $0, $65,000 and $0 in 1996, 1995 and 1994, respectively. (16) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company sells its products primarily to telephone operating companies, retailers and financial institutions in the United States. The Company believes that the concentration of credit risk in its trade receivables is substantially mitigated by the Company's ongoing credit evaluation process. The Company does not generally require 61 collateral from customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Historically, the Company has not incurred any significant credit related losses. Revenues from three customers were approximately 20%, 13% and 11% of total revenues for the year ended December 31, 1996. The Company had two customers that represented approximately 24% and 12% of total accounts receivable at December 31, 1996. Revenues from two customers were approximately 27% and 11% of total revenues for the year ended December 31, 1995. The Company had two customers which represented approximately 38% and 14% of total accounts receivable at December 31, 1995. (17) COMMITMENTS AND CONTINGENCIES (a) Leases The Company leases facilities and equipment under cancelable and noncancellable operating lease agreements. The facility leases are for terms from one to nine years. Rent expense was $907,000, $234,000 and $214,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases with initial or remaining terms in excess of one year at December 31, 1996, were as follows (in thousands):
Year ending December 31, - ------------------------ 1997.......................... $1,091 1998.......................... 1,114 1999.......................... 947 2000.......................... 796 2001.......................... 12 ------ Total minimum lease payments.. $3,960 ======
Capital lease obligations incurred for new equipment was $28,000 and $235,000 in 1995 and 1994, respectively. (b) Royalties The Company has a license relating to certain Caller ID patents and technology with Lucent Technologies, Inc. ("Lucent"). For licensed products leased, sold or put in use, the Company pays a royalty to Lucent. Royalty expense was $106,000 for the period from November 7, 1996 through December 31, 1996. (c) Letters of Credit The Company was contingently liable for outstanding letters of credit for overseas 62 purchases totaling $4,500,000 and $3,309,000 on December 31, 1996 and 1995, respectively. (d) Patent Matters The Company does not believe that its products and services infringe on the rights of third parties. From time to time, third parties assert infringement claims against InteliData. There can be no assurance that any such assertion will not result in costly litigation or require the Company to cease using, or obtain a license to use, intellectual property rights of such parties. (e) Environmental Matters The Company was informed that certain environmental contamination existed in the part of the Company's premises formerly occupied by another tenant and that the Connecticut Department of Environmental Protection has performed a clean-up and removed such contamination. The Company does not believe that the foregoing will have a material adverse effect on the Company's consolidated financial position or results of operations. (18) UNAUDITED QUARTERLY FINANCIAL DATA The results of the Company's quarterly operations for the years ended December 31, 1996 and 1995 were (in thousands except per share amounts):
First Second Third Fourth /(1)/ Total -------- -------- -------- ------------- --------- 1996 Revenues $ 1,326 $ 548 $ 1,063 $ 10,962 $ 13,899 Operating loss (2,033) (3,145) (8,451) (82,483) (96,112) Loss before income taxes (1,988) (3,206) (8,524) (81,984) (95,702) Net loss (1,988) (3,206) (8,524) (82,009) (95,727) Net loss per common share/(2)/ $ (0.13) $ (0.20) $ (0.53) $ (3.21) $ (5.21) 1995 Revenues $ 745 $ 947 $ 1,208 $ 1,286 $ 4,186 Operating loss (1,231) (1,219) (1,276) (1,435) (5,161) Loss before income taxes (1,369) (1,231) (847) (1,271) (4,718) Net loss (1,369) (1,231) (847) (1,271) (4,718) Net loss applicable to common stockholders (1,757) (1,524) (847) (1,271) (5,399) Net loss per common share/(2)/ $ (0.29) $ (0.20) $ (0.06) $ (0.08) $ (0.50)
/(1)/ On November 7, 1996, US Order, Inc. and Colonial Data Technologies Corp. consummated a Plan and Agreement of Merger. Operations of the Company subsequent to November 7, 1996 reflect the operations of the business of US Order and Colonial Data combined. Financial data also includes in-process research and development charges of $77,214,000 and restructuring charges of $1,568,000. /(2)/ Net loss per share numbers are not necessarily additive due to current year activities and rounding differences. 63 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS AND STOCKHOLDERS INTELIDATA TECHNOLOGIES CORPORATION HERNDON, VIRGINIA We have audited the accompanying consolidated balance sheet of InteliData Technologies Corporation and subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of InteliData Technologies Corporation and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Hartford, Connecticut February 5, 1997 64 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS AND STOCKHOLDERS INTELIDATA TECHNOLOGIES CORPORATION: We have audited the accompanying consolidated balance sheet of InteliData Technologies Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InteliData Technologies Corporation and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Washington, D.C. February 5, 1996 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - --------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- KPMG Peat Marwick LLP was previously the principal accountants for US Order, which merged with and into InteliData , successor to US Order on November 7, 1996. On November 22, 1996, that firm's appointment as principal accountants was terminated and Deloitte & Touche LLP was engaged by the Company as principal accountants. On November 7, 1996, US Order and Colonial Data merged with and into the Company with the Company being the survivor. Prior to the mergers, Deloitte & Touche LLP had been engaged as the principal accountants for Colonial Data. The decision to engage Deloitte & Touche and dismiss Peat Marwick was approved by the management of the Company and was not submitted to the Board of Directors of the Company and was based in part on the prior engagement of Deloitte & Touche LLP by Colonial Data. In connection with the audits of the three fiscal years ended December 31, 1995, and the subsequent interim period through November 22, 1996, there were no disagreements with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of disagreement. The audit reports of KPMG Peat Marwick LLP on the consolidated financial statements of US Order, Inc. as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Directors The Company incorporates herein by reference the information concerning directors contained in its Proxy Statement for its 1997 Stockholder's Meeting to be filed within 120 days after the end of the Company's fiscal year (the "1997 Proxy Statement"). Executive Officers The following table sets forth the names and ages of all executive officers of the Company and all positions and offices within the Company presently held by such executive officers:
Name Age Position Held - ---- --- ------------- William F. Gorog 71 Chairman of the Board Robert J. Schock 55 Chief Executive Officer John C. Backus, Jr. 38 President Timothy R. Welles 38 Executive Vice President, Consumer Telecommunications Division Joseph E. Smith 46 Executive Vice President, Electronic Commerce Division John W. Hillyard 40 Vice President and Chief Financial Officer Albert N. Wergley 49 Vice President, General Counsel and Secretary Mark L. Baird 42 Vice President, Operations
WILLIAM F. GOROG has served as Chairman and director of the Company since November 1996. Mr. Gorog had served as Chairman of US Order from May 1990 to November 1996. From October 1987 until founding US Order in May 1990, he served as chairman of the board of Arbor 66 International, an investment management firm. From 1982 to 1987, he served as president and chief executive officer of the Magazine Publishers of America, an association representing the principal consumer publications in the United States. During the Ford Administration, Mr. Gorog served as deputy assistant to the President for Economic Affairs and Executive Director of the Council on International Economic Policy. Prior to that time, he founded and served as chief executive officer of DataCorp., which developed the Lexis and Nexis information systems for legal and media research and which was subsequently sold to the Mead Corporation. He currently serves as chairman of the board of WorldCorp. ROBERT J. SCHOCK has served as Chief Executive Officer and director of the Company since November 1996. Prior to November 1996, Mr. Schock had served as President and Chief Executive Officer of Colonial Data since September 1989 and as President of Colonial Technologies Corp., a wholly-owned subsidiary of Colonial Data, since 1981. From 1977 to 1980, Mr. Schock was director of national operations for ICOT Corporation, a telecommunications equipment manufacturer. From 1966 to 1977, Mr. Schock held a variety of positions with Xerox Corporation, including product manager, regional sales operations manager and regional manager for microsystems. JOHN C. BACKUS, JR. has been President and director of the Company since November 1996. Prior to November 1996, he had worked at US Order since its inception in 1990 and had served as President, Chief Operating Officer and a director of US Order since 1994. Prior to working with US Order, Mr. Backus worked for six years at WorldCorp and its subsidiaries holding a variety of executive positions including vice president of corporate development, vice president of finance, and vice president of sales and marketing at a WorldCorp subsidiary. Prior to joining WorldCorp, Mr. Backus worked for Bain & Company, Inc., a worldwide strategy consulting firm with approximately 1,200 employees, in its consulting and venture capital groups where he focused on consumer products and services. Mr. Backus serves on the board of directors of WorldCorp, Home Financial Network and Visa InterActive. TIMOTHY R. WELLES has been an Executive Vice President, Consumer Telecommunications Division and director of the Company since November 1996. Mr. Welles had served as Executive Vice President and Chief Operating Officer of Colonial Data since March 1996. Prior to joining Colonial Data, Mr. Welles was Senior Vice President of First Albany Corporation, an investment banking firm, from January 1994 to March 1996, with responsibilities related primarily to corporate finance activities. Prior to joining First Albany, Mr. Welles held various positions, most recently as Managing Director, at Advest, Inc., an investment banking firm, from August 1989 to January 1994. Prior to joining Advest, Inc., Mr. Welles practiced securities and corporate law at Cahill Gordon & Reindel in its New York office. JOSEPH E. SMITH has served as Executive Vice President, Electronic Commerce Division for the Company since November 1996. Mr. Smith had served as Executive Vice President, Financial Services of US Order since March 1996. Prior to joining US Order, Mr. Smith was senior vice president of client services, sales and marketing at Deluxe Data Systems, Inc. an electronic funds transfer services company. He was responsible for strategic market expansion and operations. Prior to that Mr. Smith was senior vice president, worldwide sales and marketing at Calcomp, Inc. in Anaheim, CA and also served at IBM for ten years. 67 JOHN W. HILLYARD has served as Vice President and Chief Financial Officer of the Company since January 1997. Prior thereto, Mr. Hillyard was executive vice president and chief financial officer of Vision Technologies LLC, an assembler and seller of computers and peripherals from August 1996 to January 1997. From May 1985 to August 1996, he was the chief financial officer of Deluxe Data Systems, Inc., an electronic funds transfer services company. From May 1982 to May 1985, he was vice president of finance for Hogan Systems, Inc., a developer of an integrated line of application software for large financial institutions. Mr. Hillyard is a Certified Public Accountant. ALBERT N. WERGLEY has served as Vice President and General Counsel of the Company since November 1996. From May 1995 to November 1996, he served as Vice president and General Counsel of US Order. From 1986 to 1994, Mr. Wergley was vice president and general counsel of Verdix Corporation (now Rational Software Corporation), a manufacturer of software development tools. Previous to that he was associated with the McLean, Virginia office of the law firm of Reed Smith Shaw & McClay and with the law firm of Howrey & Simon in Washington, D.C. MARK L. BAIRD has served as Vice President of Operations of the Company since November 1996. Mr. Baird had served as Director of Staff Operations and then as Vice President of Operations for Colonial Data since July 1994. Prior to joining Colonial Data, Mr. Baird was vice president of Consolidated Asset Recovery Corporation, a subsidiary of the Chase Manhattan Bank of Connecticut, N.A., with responsibilities related primarily to special asset management. Prior to joining Chase Manhattan, Mr. Baird held various positions, most recently as Assistant Vice President of The Bank Mart, a mutual savings bank. Prior to that, Mr. Baird was Assistant to the Chairman of the Bodine Corporation, a privately held machine tool manufacturer. Beneficial Ownership Reporting The Company incorporates herein by reference the information required by Item 405 of Regulation S-K contained in its 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The Company incorporates herein by reference the information concerning executive compensation contained in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ------------------------------------------------------------- MANAGEMENT ---------- The Company incorporates herein by reference the information concerning security ownership of certain beneficial owners and management contained in the 1997 Proxy Statement. 68 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The Company incorporates herein by reference the information concerning certain relationships and related transactions contained in the 1997 Proxy Statement. 69 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON - ----------------------------------------------------------------- FORM 8-K -------- (a) 1. FINANCIAL STATEMENTS See Item 8 of this Report 2. FINANCIAL STATEMENT SCHEDULES See Item 8 of this Report 3. EXHIBITS (* denotes filed herewith) Status of Prior Documents InteliData's Annual Report on Form 10-K for the year ended December 31, 1996, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Sections 13, 14, and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, as amended, which incorporates by reference such Annual Report on Form 10-K. 2.1 Agreement and Plan of Merger dated as of August 5, 1996, between Colonial Data Technologies Corp. and US Order, Inc. (Incorporated herein by reference to the Company's Registration Statement on Form S-4, File Number 333-11081). 2.2 Amendment No. 1 dated as of November 7, 1996, by and among US Order, Inc., Colonial Data Technologies Corp. and InteliData Technologies Corporation to the Agreement and Plan of Merger. (Incorporated herein by reference to the Company's Current Report on Form 8-K filed with the Commission on November 12, 1996). 3.1 Certificate of Incorporation of InteliData Technologies Corporation. (Incorporated herein by reference to the Company's Registration Statement on Form S-4, File Number 333-11081). 3.2 Bylaws of InteliData Technologies Corporation. (Incorporated herein by reference to the Company's Registration Statement on Form S-4, File Number 333-11081). 4.1 Form of Warrant, as amended. (Incorporated by reference to the Colonial Data Registration Statement on Form S-4, File Number 33- 30242). 70 10.1 Memorandum of Understanding regarding Personnel Services between WorldCorp, Inc. and InteliData Technologies Corporation, dated February 11, 1994. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, dated June 1, 1995, File Number 33-90978). 10.2 Sales and Service Subcontract Agreement, dated December 20, 1994, between US Order, Inc. and Visa Interactive, Inc. (Incorporated herein by reference to the US Order Registration Statement on Form S- 1, File Number 33-90978). 10.3 Acquisition Agreement, as amended, dated July 15, 1994, among Visa International Service Association, US Order, Inc. and WorldCorp, Inc. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.4 US Order, Inc. 1991 Stock Option Plan. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.5 US Order, Inc. 1995 Incentive Plan. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33- 90978). 10.6 US Order, Inc. Non-Employee Directors' and Directors' Stock Option Plans. (Incorporated herein by reference to the US Order Registration Statements on Form S-8, File Numbers 333-2348 and 333-2346). 10.7 Employment Agreement, dated as of August 1, 1994, between US Order, Inc. and John C. Backus, Jr. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.8 Stock Option Agreement, dated as of August 1, 1995, between US Order, Inc. and John C. Backus, Jr. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, dated June 1, 1995, File Number 33-90978). 10.9 Stock Restriction Agreement, as amended, dated September 14, 1990, among US Order, Inc. and certain founders of US Order, Inc.. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.10 Investment Agreement, dated December 20, 1993, between US Order, Inc. and Knight-Ridder, Inc. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.11 Letter Agreement dated April 5, 1995 between Visa International Service Association and US Order, Inc.. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 71 10.12 Amendment No. 1, dated as of May 1, 1995, to Stock Option Agreement between US Order, Inc. and John C. Backus, Jr. (Incorporated herein by reference to the US Order Registration Statement on Form S-1, File Number 33-90978). 10.13 Employment Agreement, dated as of July 1, 1996, between Colonial Data Technologies Corp. and Robert J. Schock. (Incorporated herein by reference to the Company's Registration Statement on Form S-4, File Number 333-11081). 10.14 Technical Information and Patent License Agreement effective as of August 1, 1987 by and between American Telephone and Telegraph and Colonial Data Technologies Corp. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended September 30, 1989, File Number 0-15562). 10.15 Colonial Data Technologies Corp. 401(k) Plan. (Incorporated herein by reference to the Colonial Data Report on Form 10-K for the year ended December 31, 1994, File Number 0-15562). 10.16 Agreement, dated as of March 1, 1996 between Colonial Data Technologies Corp. and Robert J. Schock. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended March 31, 1996, File Number 0-15562). 10.17 Amended and Restated Loan and Security Agreement between Colonial Technologies Corp. and People's Bank, dated May 3, 1996. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended June 30, 1996, File Number 0-15562). 10.18 Revolving Credit Note between Colonial Technologies Corp. and People's Bank, dated May 3, 1996. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended June 30, 1996, File Number 0-15562). 10.19 Guaranty Agreement between Colonial Data Technologies Corp. and People's Bank, dated May 3, 1996. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended June 30, 1996, File Number 0-15562). 10.20 Master Trademark License Agreement between Colonial Data Technologies Corp. and Pacific Bell. (Incorporated herein by reference to the Colonial Data Report on Form 10-Q for the quarter ended June 30, 1996, File Number 0-15562). 72 10.21 Bond Purchase Agreement by and among CDT Realty Corp. and 80 Pickett District Associates, L.L.C., dated as of September 13, 1996. (Incorporated herein by reference to the Company's Report on Form 10- Q for the quarter ended September 30, 1996, File Number 000-21685). 10.22 InteliData Technologies Corporation 1996 Incentive Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16115). 10.23 InteliData Technologies Corporation Non-Employee Directors' Stock Option Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16117). 10.24 InteliData Technologies Corporation Employee Stock Purchase Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16121). *10.25 Restricted Shares Award Agreement between Colonial Data Technologies Corp. and Timothy R. Welles. *10.26 Award Agreement between Colonial Data Technologies Corp. and Timothy R. Welles. *10.27 Aircraft Lease Agreement between CDT Corp. and Colonial Data Technologies Corp. 16.1 Letter from KPMG Peat Marwick LLP. (Incorporated herein by reference to the Company's Current Report on Form 8-K filed with the Commission on November 27, 1996). *21.1 InteliData Technologies Corporation List of Significant Subsidiaries. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K The Company filed Current Reports on Form 8-K with the Securities and Exchange Commission on November 12, 1996 and November 27, 1996. * * * * * * * * 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELIDATA TECHNOLOGIES CORPORATION By /s/Robert J. Schock ------------------- ROBERT J. SCHOCK Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----- /s/ Robert J. Schock Chief Executive Officer and Director March 28, 1997 - ----------------------------- (Principal Executive Officer) ROBERT J. SCHOCK /s/ William F. Gorog Chairman of the Board and Director March 28, 1997 - ----------------------------- (WILLIAM F. GOROG) /s/ John C. Backus, Jr. President, Chief Operating March 28, 1997 - ----------------------------- Officer and Director JOHN C. BACKUS, JR. /s/ John W. Hillyard Vice President - Finance and Chief March 28, 1997 - ----------------------------- Financial Officer (Principal Financial JOHN W. HILLYARD and Accounting Officer) /s/ Timothy R. Welles Executive Vice President and Director March 28, 1997 - ----------------------------- TIMOTHY R. WELLES /s/ T. Coleman Andrews, III Director March 28, 1997 - ----------------------------- T. COLEMAN ANDREWS, III /s/ Walter M. Fiederowicz Director March 28, 1997 - ----------------------------- WALTER M. FIEDEROWICZ /s/ Patrick F. Graham Director March 28, 1997 - ----------------------------- PATRICK F. GRAHAM - ----------------------------- Director CONSTANTINE S. MACRICOSTAS - ----------------------------- Director WESLEY C. TALLMAN
74 EX-11 3 CALCULATION OF PER SHARE EARNINGS EXHIBIT 11 WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE (IN THOUSANDS EXCEPT SHARE DATA)
For the Years Ended December 31, -------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Continuing earnings (loss) applicable to common stock $ 7,437 $ 64,158 $ 8,308 Discontinued loss applicable to common stock, net of tax benefit and minority interest (19,191) (3,950) -- ----------- ------------ ----------- Net earnings (loss) applicable to common stock $ (11,754) $ 60,208 $ 8,308 =========== =========== =========== Weighted average common shares outstanding 16,153,227 15,988,365 15,277,954 Weighted average options and warrants treated as common stock equivalents 523,662 1,115,304 238,109 ----------- ---------- ----------- Primary number of shares 16,676,889 17,103,669 15,516,063 Incremental weighted average options and warrants treated as common stock equivalents for fully diluted purposes -- 5,891,197 276,983 ------------- ---------- ----------- Fully diluted number of shares 16,676,889 22,994,866 15,793,046 ========== ========== ========== Primary net earnings (loss) per share of common stock from: Continuing operations $ 0.45 $ 3.75 $ 0.54 Discontinued operations $ (1.15) $ (0.23) $ -- ------ ------ ------- Net earnings $ (0.70) $ 3.52 $ 0.54 ====== ====== ====== Fully diluted net earnings (loss) per share of common stock from: Continuing operations $ * $ 2.99 $ 0.53 Discontinued operations $ * $ (0.17) $ -- ------- ------ ------- Net earnings $ * $ 2.82 $ 0.53 ======= ====== ======
* Fully diluted earnings per share are anti-dilutive EX-21 4 SUBSIDIARIES EXHIBIT 21 WORLDCORP, INC. AND CONSOLIDATED SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction World Airways, Inc. Delaware World Airways Cargo, Inc. Delaware WorldCorp Investments, Inc. Delaware World Flight Crew Services, Inc. Delaware WorldGames, Inc. Delaware EX-23.1 5 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS WORLDCORP, INC.: We consent to the incorporation by reference in the registration statements (Nos. 33-44245, 33-46443, 33-62864, and 33-60247) on Form S-3 and registration statements (Nos. 33-33468 and 33-51944) on Form S-8 of WorldCorp, Inc. of our report dated February 14, 1997, relating to the consolidated balance sheets of WorldCorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in common stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1996, and the related financial statement schedules, which report appears in the December 31, 1996 annual report on Form 10-K of WorldCorp, Inc. KPMG PEAT MARWICK LLP WASHINGTON, D.C. MARCH 31, 1997 EX-23.2 6 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders WorldCorp, Inc. We consent to the incorporation by reference in the Registration Statements (Nos. 33-44245, 33-46443, 33-62864, and 33-60247) on Form S-3 and Registration Statements (Nos. 33-33468 and 33-51944) on Form S-8 of WorldCorp, Inc. of our report dated February 5, 1997, relating to the consolidated balance sheet of InteliData Technologies Corporation, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended, which report appears in the December 31, 1996 annual report on Form 10-K of WorldCorp, Inc. DELOITTE & TOUCHE LLP Hartford, Connecticut March 28, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 1 13,462 0 19,841 413 0 51,598 86,830 21,357 178,963 91,906 0 0 0 16,617 56,954 178,963 0 313,672 0 310,935 (5,772) 0 11,680 8,509 504 7,437 (19,191) 0 0 (11,754) (0.70) 0
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