<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-2
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended May 31, 1994 or
------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________
Commission File No. 1-10206
CONQUEST AIRLINES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0206582
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2215 E.M. FRANKLIN AVE.
AUSTIN, TEXAS 78723
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (512) 929-6706
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, $.001 par value Boston Stock Exchange
Common Stock Purchase Warrant Boston Stock Exchange
Series A 12% Cumulative Convertible Boston Stock Exchange
Redeemable Preferred Stock
</TABLE>
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 / /
Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and it 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.
Yes /X/ No / /
Aggregate market value of Common Stock held by non-affiliates as of
August 20, 1994:
$ 13,310,410
Number of shares of Common Stock outstanding as of the close of business on
August 20, 1994:
44,135,232
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
<PAGE> 2
PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Principal Market
Conquest's Common Stock is traded in the over-the-counter market and
included in the Automated Quotation System of the National Association of
Securities Dealers, Inc. ("NASDAQ") under the symbol "CAIR." Conquest's Common
Stock is also listed on the Boston Stock Exchange under the symbol "CAC."
The following table sets forth the reported high and low closing sales
price for Conquest's Common Stock for the fiscal quarters indicated. The
quotations represent prices between dealers, without retail mark-ups,
markdowns, or commissions.
<TABLE>
<CAPTION>
Fiscal Year 1993 High Low
------------------------------------------------------------------------------------
<S> <C> <C>
1st Quarter . . . . . . . . . . . . . . . . . 3-15/16 2-15/16
2nd Quarter . . . . . . . . . . . . . . . . . 4-5/16 3-1/16
3rd Quarter . . . . . . . . . . . . . . . . . 3-7/16 1-1/4
4th Quarter . . . . . . . . . . . . . . . . . 1-11/16 1
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1994 High Low
------------------------------------------------------------------------------------
<S> <C> <C>
1st Quarter . . . . . . . . . . . . . . . . . 3-7/16 1-1/32
2nd Quarter . . . . . . . . . . . . . . . . . 3-11/16 2-15/32
3rd Quarter . . . . . . . . . . . . . . . . . 2-13/16 1-1/2
4th Quarter . . . . . . . . . . . . . . . . . 1-11/16 1
</TABLE>
As of August 29, 1994, the closing price of the Common Stock was 21/32.
The number of record holders of Conquest's Common Stock as of August
29, 1994 was approximately 557. Management believes there are approximately
2,000 beneficial holders of Conquest's Common Stock.
Dividend Policy
The payment of dividends, if any, rests within the discretion of its
Board of Directors and, among other things, will depend upon Conquest's
earnings, capital requirements and financial condition, as well as other
relevant factors. Conquest has not declared any dividends since inception, and
has no present intention of paying any dividends on its Common Stock in the
foreseeable future, and it intends to use earnings, if any, to generate
increased growth.
ITEM 6. SELECTED FINANCIAL INFORMATION (1)
The following is a summary of Conquest's financial information
extracted from indicated year end Consolidated Financial Statements and is
qualified in its entirety by the detailed information appearing in the
Consolidated Financial Statements and the notes thereto.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $ 12,867,187 $ 9,527,945 $ 8,397,748 $ 10,263,487 $ 11,286,797
Interest expense . . . . . . . . . . . . . . . . 43,198 108,590 1,267,521 2,989,873 3,166,564
Loss before extraordinary gain . . . . . . . . . (4,458,057) (1,356,278) (1,320,414) (5,130,254) (5,200,489)
Extraordinary gain . . . . . . . . . . . . . . . 196,528 8,169,895 - -
Net income (loss) applicable to
Common stock . . . . . . . . . . . . . . . . $ (4,466,438) $ (1,175,567) $ 6,821,062 $ (5,130,254) $ (5,200,489)
</TABLE>
17
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C> <C>
Per share data:
Primary:
Loss before extraordinary gain . . . . . . . $ (0.25) $ (0.15) $ (0.19) $ (1.25) $ (1.27)
Extraordinary gain . . . . . . . . . . . . . 0.02 1.19 - -
------------- ------------ ------------ -------------- --------------
Net income (loss) . . . . . . . . . . . . . $ (0.25) $ (0.13) $ 1.00 $ (1.25) $ (1.27)
============= ============ ============ ============== ==============
Number of shares . . . . . . . . . . . . . . . 17,612,446 8,811,810 6,876,535 4,102,982 4,100,747
============= ============ ============ ============== ==============
Fully diluted:
Loss before extraordinary gain . . . . . . . $ (0.25) $ (0.15) $ (0.14) $ (1.25) $ (1.27)
Extraordinary gain . . . . . . . . . . . . . - 0.02 0.88 - -
------------- ------------ ------------ -------------- --------------
Net income (loss). . . . . . . . . . . . . . $ (0.25) $ (0.13) $ 0.74 $ (1.25) $ (1.27)
============= ============ ============ ============== ==============
Number of shares . . . . . . . . . . . . . . . . 17,612,446 8,811,810 9,332,084 4,102,982 4,100,747
============= ============ ============ ============== ==============
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
May 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 (2) 1990
------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) . . . . . . . . . . $ 3,160,249 $ 3,659,524 $ (726,031) $(34,586,990) $ (1,179,587)
Total Assets. . . . . . . . . . . . . . . . . . . 10,223,261 7,703,763 4,167,100 27,109,991 30,752,351
Long-term debt. . . . . . . . . . . . . . . . . . 215,962 350,962 1,006,903 289,017 29,298,737
Stockholders' equity . . . . . . . . . . . . . . $ 7,723,179 $ 5,847,491 $ 1,195,866 $ (8,787,038) $ (3,656,784)
</TABLE>
(1) Conquest commenced flight operations in April 1988 with the purchase
of two Beech 1900C aircrafts. The purchase was financed by an affiliate
of Beech, Beech Acceptance Corp. ("BAC"). During the next three years
Conquest purchased seven additional Beech aircrafts, all of which were
financed by BAC. The Beech aircrafts were equipped with two turbo prop jet
engines manufactured by Pratt & Whitney. During the period of operation of the
Beech aircrafts, Conquest experienced substantial operating losses. Conquest
determined at that time that a substantial portion of the losses were caused by
the higher than projected operating costs of the Beech aircrafts, generally
and, in particular, the costs of maintaining the engines. Faced with the
demand by BAC for the immediate payment of approximately $1,700,000, which
Conquest believed was not due, Conquest commenced legal action against Beech.
This action was settled in October 1991, and resulted in the return of the
Beech aircrafts and the release of all Conquest's obligations to BAC and the
recognition of an extraordinary gain of $8,169,895. In October 1991, Conquest
commenced another action against Pratt & Whitney and four other defendants
which was settled in fiscal 1993. Conquest realized approximately $1,215,000
in cash in the aggregate from these settlements (see note 5 to the
Consolidated Financial Statements). After return of the Beech aircrafts,
Conquest transitioned to a leased fleet of Metro III aircrafts beginning in
January 1992. The aforementioned factors materially affect the comparability
of the periods contained in the table.
(2) Includes the reclassification of $29,781,920 in long-term debt to current
liabilities as a result of certain alleged delinquent payments as of
May 31, 1991.
SELECTED FINANCIAL INFORMATION - WICO
The following is a summary of Wico's financial information extracted
from Financial Statements not presented herein. The interim financial
information for Wico reflects all adjustments which in the opinion of management
are necessary for a fair presentation of financial position and results of
operations for the interim periods presented. All such adjustments are of a
normal and recurring nature. The results of operations for the interim periods
are not necessarily indicative of the results attainable for a full fiscal year.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended September 30, Nine Months
------------------------------------------------------------ ended June 30,
1993 1992 1991 1990 1989 1994 (3) 1993
-------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 38,783 $ 38,653 $ 39,277 $ 45,747 $ 39,220 $ 30,677 $ 29,474
Cost of sales . . . . . . . . . . . . . . . 23,675 24,078 24,282 28,413 24,043 18,748 18,003
Net income (loss) . . . . . . . . . . . . . 443 (741) (1,742) (703) 427 550 350
Pro forma net income (loss) (1) . . . . . . 508 (516) (1,137) (488) 545 - -
Pro forma net income (loss) (2)
per share . . . . . . . . . . . . . . $ 0.01 $ (0.01) $ (0.01) $ (0.01) $ 0.01 $ 0.01 $ 0.00
Number of shares used in
computation . . . . . . . . . . . . . 102,443 91,587 91,587 91,587 102,443 102,443 102,443
</TABLE>
18
<PAGE> 4
BALANCE SHEET DATE
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------- June 30,
1993 1992 1991 1990 1989 1994 (4)
--------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $ 15,099 $ 15,713 $ 15,642 $ 18,145 $ 17,942 $ 16,859
Total assets . . . . . . . . . . . . . . . . . . 19,912 21,384 23,158 27,394 29,004 28,214
Current liabilities . . . . . . . . . . . . . . . 6,487 6,598 7,465 7,715 6,581 7,581
Long-term debt . . . . . . . . . . . . . . . . . 23,850 27,450 28,608 31,300 33,407 18,686
Stockholders' equity (deficiency) . . . . . . . . $ (10,425) $ (13,664) $(12,915) $(11,621) $(10,921) $ 1,948 (5)
</TABLE>
(1) Pro forma net income (loss) has been calculated after giving effect to
the pro forma adjustments to the income tax provision as if Wico had not
operated as an "S" corporation.
(2) Pro forma net income (loss) per share reflects the recapitalization of
Wico as a result of the merger and assumes the conversion of the Series B
Preferred Stock and the Series C Preferred Stock issued in conjunction
therewith. See discussion in PART I, ITEM 1. BUSINESS. Common stock
equivalents have been included in years where they produce a dilutive
effect.
(3) Includes the results of operations for the acquired Langworthy businesses
since June 20, 1994. Excludes the results of operations for the airline
operation.
(4) Includes the assets obtained in the merger and acquisition of Langworthy
which have been valued at their estimated fair values as of June 20,
1994.
(5) Wico had a negative net tangible book value at June 30, 1994 of
$5,600,000 or 6c. per share.
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 - CONQUEST
AIRLINE OPERATING STATISTICS (1)
<TABLE>
<CAPTION>
May 31, 1994 1993 1992 (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passengers carried . . . . . . . . . . . . . . . . . . . . . . . 197,417 153,813 123,754
Revenue passenger miles (000's) . . . . . . . . . . . . . . . . . 37,605 26,464 21,542
Available seat miles (000's) . . . . . . . . . . . . . . . . . . 104,436 63,641 53,265
Passenger load factor . . . . . . . . . . . . . . . . . . . . . . 36.0% 41.6% 40.4%
Break-even load factor . . . . . . . . . . . . . . . . . . . . . 51.4% 51.1% 46.7%
Average ticket price . . . . . . . . . . . . . . . . . . . . . . $ 65 $ 62 $ 68
Yield per revenue passenger mile . . . . . . . . . . . . . . . . 34c. 36c. 39c.
Cost per available seat mile . . . . . . . . . . . . . . . . . . 17c. 18c. 19c.
Average passenger trip (miles) . . . . . . . . . . . . . . . . . 190 172 174
Aircraft in service at end of year . . . . . . . . . . . . . . . 14 10 5
</TABLE>
(1) "Revenue passenger miles" (RPMs) represents the number of scheduled miles
flown by revenue passengers. "Available seat miles" (ASMs) represents the
number of seats available for passengers multiplied by the number of scheduled
miles those seats are flown. "Passenger load factor" represents revenue
passenger miles divided by available seat miles. "Break-even load factor"
means the percentage of seats which must be occupied by revenue passengers in
order for Conquest to break-even on a net income basis. "Average yield per
revenue passenger mile" represents the average revenue received for each mile a
revenue passenger is carried. "Cost per available seat mile" represents
operating expense and interest expense divided by available seat miles.
(2) As previously discussed, Conquest transitioned to a fleet of Metro III
aircrafts beginning in January 1992. Any comparison of operating results
should consider the significant changes in Conquest.
19
<PAGE> 5
RESULTS OF OPERATIONS
Fiscal Year 1994 as Compared to Fiscal Year 1993
Conquest's loss for the year ended May 31, 1994 was ($4,458,057), or
(25c.) per share, compared to ($1,356,278), or (15c.) per share, for the year
ended May 31, 1993. After recognition of an extraordinary gain in 1993, net
loss applicable to Common Stock was ($4,466,438) or (25c.) per share in fiscal
1994 compared to ($1,175,567) or (13c.) per share in fiscal 1993. The increase
in loss before extraordinary gain between years is principally attributable to
the 13.5% decrease in passenger load factor to 36%, a consequence of the
significant expansion undertaken by Conquest and the growth cycle of new
markets. To facilitate improvement in the load factor, Conquest recently
eliminated under-performing routes, including the Monterrey, Mexico route. The
Monterrey route was eliminated due to anti-competitive practices of a competing
carrier. Once alleviated, Conquest hopes to re-enter the market. Conquest
expects the load factor to improve as a result of these actions.
Passenger revenues for fiscal year 1994 increased by 35% to
$12,867,187. The increase is attributable to a 42.1% increase in revenue
passenger miles (RPMs) as partially offset by a 5.6% decrease in the yield per
revenue passenger mile.
The increase in RPMs is directly attributable to growth in passengers
carried and average passenger trip length. Total passengers carried increased
28.3% to 197,417 for fiscal year 1994 from 153,813 for the prior corresponding
year, a result of increased capacity. Average passenger trip length increased
10.5%, the result of the expansion into the longer segment length markets.
The yield per RPM decreased 5.6% to 34c. due to a 10.5% increase in
average passenger trip miles between years as only partially offset by the 4.8%
increase in average ticket price.
Available seat miles (ASMs) increased 64.1% due to the operation of an
average of 12 Metro III aircrafts during fiscal year 1994, as compared to an
average of 7 in the prior year, and the approximate 29% increase in regularly
scheduled weekday departures.
Passenger load factors decreased 13.5% to 36% in fiscal year 1994. The
decrease was largely attributable to the 64.1% increase in ASMs coupled with
only a 28.3% increase in passenger carried from the prior fiscal year and, to a
lesser extent, the 4.8% increase in average ticket price. The aforementioned
reductions in the flight schedule should beneficially affect passenger load
factor. The break-even load factor increased only slightly as the 5.6%
decrease in yield per RPM was offset by the 5.6% decrease in cost per ASM.
Operating expenses increased 57.6% to $18,357,911 for fiscal year 1994
from $11,647,930 in the prior fiscal year due to the increase in the number of
aircraft in service. The net result, however, was a 4.4% decrease in operating
expenses per ASM.
The following table compares major components of operating expense per
ASM:
<TABLE>
<CAPTION>
Year ended May 31, 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and employee benefits . . . . . . . . . 4.8c. 5.0c.
Fuel costs . . . . . . . . . . . . . . . . . . . 1.8 2.0
Aircraft rentals . . . . . . . . . . . . . . . . 2.7 2.1
Travel agent commissions . . . . . . . . . . . . .7 .8
Insurance costs . . . . . . . . . . . . . . . . . .9 .8
Direct maintenance costs (1) . . . . . . . . . . 2.6 2.9
Landing fees and other rentals . . . . . . . . . .6 .6
Depreciation and amortization . . . . . . . . . . .4 .7
Administration and other . . . . . . . . . . . . 3.0 3.4
-----------------------
Total . . . . . . . . . . . . . . . . . . . . . . 17.5c. 18.3c.
==== ====
</TABLE>
(1) Excludes labor and related costs.
20
<PAGE> 6
The following table compares major components of operating expense as
a percentage of total operating expense:
<TABLE>
<CAPTION>
Year ended May 31, 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and employee benefits . . . . . . . . . 27.1% 27.4%
Fuel costs . . . . . . . . . . . . . . . . . . . 10.3 11.1
Aircraft rentals . . . . . . . . . . . . . . . . 15.5 11.6
Travel agent commissions . . . . . . . . . . . . 4.2 4.3
Insurance costs . . . . . . . . . . . . . . . . . 4.9 4.3
Direct maintenance costs (1) . . . . . . . . . . 15.1 15.8
Landing fees and other rentals . . . . . . . . . 3.6 3.5
Depreciation and amortization . . . . . . . . . . 2.5 3.6
Administration and other . . . . . . . . . . . . 16.8 18.4
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
===== =====
</TABLE>
Salaries and employee benefit costs were $5 million in fiscal 1994 as
compared to $3.2 million in fiscal 1993. Expenses between years increased as a
result of a growing work force coupled with normal wage increases and related
employee benefits. However, salaries and employee benefit costs decreased on a
cost per ASM basis as well as a percentage of operating expenses. This was a
result of expansion, as shown by the increase in ASMs, with virtually no growth
in administrative staffing.
Fuel costs decreased 10% per ASM and 7.2% as a percentage of total
operating expenses as a result of lower average fuel prices and longer stage
length flights. Fuel consumption increased 71.6% as a result of the expansion
while the average price per gallon decreased 13.6% from the prior fiscal year.
Aircraft rental costs increased 28.6% per ASM and 33.6% as a
percentage of total operating expenses for the year ended May 31, 1994. The
significant increase is attributable to the addition of 5 leased aircraft in
fiscal 1994.
Travel agent commissions declined 12.5% on a per ASM basis and 2.3% as
a percentage of operating expenses from fiscal year 1993. Commissions as a
percentage of revenues increased to 5.9% from 5.2% principally as a result of
the 12.6% increase in travel agency sales as a percentage of total sales.
Direct maintenance costs decreased 10.3% on a per ASM basis and 4.4%
as a percentage of total operating expenses. Conquest attributes this
improvement to cost savings in maintaining and overhauling engines as a result
of the increased utilization of internal resources and to efficiencies realized
under a continuous maintenance program which extends allowable flight hours
and/or cycles of certain time controlled components.
Insurance costs increased 12.5% on a per ASM basis and 14% as a
percentage of operating expenses. The increase is principally due to higher
worker's compensation premiums during fiscal year 1994. The premium rate per
employee increased approximately 37% at the last renewal.
In August 1993, Conquest's former Executive Vice President passed
away. Conquest was the beneficiary of a $1,000,000 key-man life insurance
policy held on this former officer, the proceeds of which has been treated as
other income. Previously issued financial statements had reflected the
proceeds as extraordinary income. The restatement had no effect on net income
or stockholder's equity.
During the first quarter of fiscal 1994, Conquest adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
change in accounting for income taxes had no impact on the fiscal 1994 results.
Conquest continues to evaluate means of improving operational
efficiency and increasing load factors throughout the route system. During
fiscal 1994, Conquest continued to make changes in its operations, where
appropriate, to maximize operating efficiency and improve route performance.
In that regard, Conquest discontinued service to cities which it considered
unprofitable and introduced service into markets believed to have greater
potential. In addition, certain pricing incentives were introduced to improve
load factors. Conquest utilizes an expanded yield management system which
enables Conquest to monitor discount priced seat availability on all flights.
21
<PAGE> 7
Fiscal Year 1993 as Compared to Fiscal Year 1992
Conquest's net loss before extraordinary gain for fiscal 1993 was
($1,356,278), or (15c.) per share, compared to ($1,320,414), or (19c.) per
share, for fiscal year 1992, an increase of 2.7%. After recognition of
extraordinary gains, net income (loss) applicable to Common Stock was
($1,175,567) or (13c.) per share and $6,821,062 or $1.00 per share (74c. on a
fully diluted basis) for the years ended May 31, 1993 and 1992, respectively.
Passenger revenues increased by 13.5% in fiscal 1993 to $9,527,945.
The increase is attributable to a 22.8% increase in revenue passenger miles
offset by a 7.7% decrease in yield per revenue passenger mile. The increase in
RPMs is directly attributable to growth in passengers carried, a consequence of
increased seat capacity and greater trip availability. The yield per RPM
decreased 7.7% to $.36 primarily as a result of the 8.8% decrease in average
ticket price, a result of deep discounting in the industry at the beginning of
the year.
Total passengers carried increased 24.3% to 153,813 for the year ended
May 31, 1993 from 123,754 for the prior corresponding year, a result of
increased promotion and advertising aimed at stimulating traffic. Average
passenger trip length decreased only 1%, the result of limited changes in
Conquest's route system. Available seat miles increased 19.5% due to the
operation of six Metro III aircrafts during the year, as compared to five in
fiscal 1992, and the higher utilization of the fleet. Four additional Metro
III aircrafts were added on May 17, 1993 but, due to the short time frame, had
minimal effect on ASMs and RPMs.
Passenger load factors increased 3.0% to 41.6% for the year ended May
31, 1993. The increase was achieved largely through lower average fares and
additional promotional efforts.
Operating expenses increased 30.4% to $11,647,930 for the year ended
May 31, 1993 from $8,929,997 in the prior year. The net result was an increase
in operating expenses per ASM of 8.9% over fiscal 1992 levels as follows:
<TABLE>
<CAPTION>
Year ended May 31, 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and employee benefits . . . . . . . . . 5.0c. 5.6c.
Fuel costs . . . . . . . . . . . . . . . . . . . 2.0 2.3
Aircraft rentals . . . . . . . . . . . . . . . . 2.1 .9
Travel agent commissions . . . . . . . . . . . . .8 .9
Insurance costs . . . . . . . . . . . . . . . . . .8 .8
Direct maintenance costs (1) . . . . . . . . . . 2.9 1.7
Landing fees and other rentals . . . . . . . . . .6 .7
Depreciation and amortization . . . . . . . . . . .7 1.7
Other . . . . . . . . . . . . . . . . . . . . . . 3.4 2.2
---- ----
Total . . . . . . . . . . . . . . . . . . . . . . 18.3c. 16.8c.
==== ====
</TABLE>
(1) Excludes labor and related costs.
The following table compares major components of operating expense as
a percentage of total operating expense:
<TABLE>
<CAPTION>
Year ended May 31, 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and employee benefits . . . . . . . . . 27.4% 33.4%
Fuel costs . . . . . . . . . . . . . . . . . . . 11.1 13.8
Aircraft rentals . . . . . . . . . . . . . . . . 11.6 5.5
Travel agent commissions . . . . . . . . . . . . 4.3 5.2
Insurance costs . . . . . . . . . . . . . . . . . 4.3 4.9
Direct maintenance costs . . . . . . . . . . . . 15.8 10.3
Landing fees and other rentals . . . . . . . . . 3.5 4.1
Depreciation and amortization . . . . . . . . . . 3.6 9.9
Other . . . . . . . . . . . . . . . . . . . . . . 18.4 12.9
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
===== =====
</TABLE>
22
<PAGE> 8
Salaries and employee benefit costs decreased on a cost per ASM basis
as well as a percentage of operating expenses. This was accomplished through
expansion, as shown by the increase in ASMs, with no growth in administrative
staffing. In addition, Conquest instituted certain cost control measures
relating to employee benefits during the year which contributed to the decline
per ASM.
Fuel costs decreased 13% per ASM and 19.6% as a percentage of total
operating expenses. This is attributable to generally lower spot fuel prices
coupled with the lower fuel burn of the Metro III aircraft as compared to the
Beech. In addition, procedures have been implemented whereby the lowest cost
fueling facilities in the cities served are utilized combined with the daily
monitoring of fuel prices and supplier alternatives.
Aircraft rental costs were $1,347,000 and $487,000 in fiscal 1993 and
1992, respectively. The significant increase is attributable to the
transition to leased aircraft from owned aircraft in the middle of fiscal 1992
and the addition of four more leased aircraft at the end of fiscal 1993.
Conversely, depreciation expense decreased to $424,000 from $881,000 as a
result of this transition.
Travel agent commissions fell from 5.5% of passenger revenues in
fiscal 1992 to 5.2% of passenger revenues in fiscal 1993. The decrease is a
result of increased advance ticket sales, which is administered by Conquest's
reservation department, during fiscal 1993. This is a favorable result of
other airlines raising their fees, whereas Conquest did not, for this service.
Direct maintenance costs increased 70.1% on a per ASM basis and 53.4%
as a percentage of total operating expenses. Conquest attributes this increase
to the expansion of its operating fleet, and time controlled components,
including engines, progressively reaching required stages of overhaul. In
addition, Conquest experienced several premature removals during fiscal 1993
which were either subject to insurance deductibles or excluded from application
of engine reserves remitted to lessors.
Landing fees and other rentals fell on a cost per ASM basis as well as
a percentage of operating expenses. Landing fees, which are based upon
aircraft weight, decreased due to the lower weight of the Metro III aircrafts
compared to the Beech aircrafts. In addition, station rentals remained stable
while ASMs increased as a result of higher utilization of Conquest's fleet.
Other operating expenses increased primarily due to increases in
advertising and promotional expenses to stimulate traffic and expenditures
required to initiate service in Conquest's new hub, Birmingham.
Interest expense was $109,000 for fiscal 1993 compared to $1,268,000
for fiscal 1992. The decrease can be attributed to the transition from an
owned to a leased fleet of aircraft. Whereas previously the cost of capital
was classified as interest expense and depreciation, it is now classified as
aircraft rental expense.
Gain from settlement of lawsuit is a result of the settlement of
litigation with Pratt & Whitney and four other defendants in fiscal 1993.
Conquest received aggregate proceeds of $1,215,000, and after recognition of
deferred legal costs, realized a gain of $845,000.
During a portion of fiscal 1992, Conquest leased three of its Beech
aircraft to a third party. These leases were terminated with the settlement
with Beech Acceptance Corporation in October 1991. Accordingly, lease income
was eliminated.
The note payable to Beech Acceptance Corporation bearing interest at 7
1/2% per annum was retired in May 1993. The note was retired through the
payment of $325,455 and the return of the Beech 1900C rotable parts securing
the note. Conquest recognized an extraordinary gain of $196,528 as a result of
the early extinguishment of this debt.
In October 1991, Conquest settled certain litigation with Beech. In
connection with the return of the Beech aircrafts as part of the settlement of
this litigation, Conquest was released from the balance of its outstanding
indebtedness with respect to each aircraft plus accrued interest. Accordingly,
an extraordinary gain of $8,169,895 was recognized from the favorable financial
settlement.
23
<PAGE> 9
The following table summarizes the major components of the
extraordinary gain:
<TABLE>
<S> <C>
Return of assets:
Beech aircrafts (net of reserves) . . . . . . . ($22,413,009)
Aircraft engines (net of reserves) . . . . . . (1,042,672)
Beech inventory . . . . . . . . . . . . . . . . (250,000)
Release from debt:
Accrued interest . . . . . . . . . . . . . . . 2,201,997
Notes payable - parts . . . . . . . . . . . . . 400,000
Notes payable . . . . . . . . . . . . . . . . . 30,215,798
Assumption of debt:
Notes payable - parts . . . . . . . . . . . . . (945,000)
Other (net) . . . . . . . . . . . . . . . . . . . . . 2,781
----------
Extraordinary gain . . . . . . . . . . . . . . . . . $8,169,895
==========
</TABLE>
The settlement effected significant improvements in Conquest's
financial position. Conquest's working capital deficit decreased from
($34,586,990) at May 31, 1991 to ($726,031) at May 31, 1992 with a
corresponding improvement in the current ratio from .03:1 to .63:1. The
long-term debt to equity position improved to 46% debt and 54% equity in fiscal
1992.
Liquidity and Capital Resources
Net cash used in operating activities was ($4,395,176) for the year
ended May 31, 1994 compared to ($968,412) for the year ended May 31, 1993. The
principal source of funds for fiscal year 1994 was the redemption of its Class
B Warrants for net proceeds of $6,260,145 and, to a lesser degree, proceeds
from a key-man life insurance policy. Cash was principally used to fund
capital expenditures and the certification process of CSA, as well as
expensation of the regional operation. The result is a net increase in cash of
$109,363 for fiscal year 1994.
Conquest's working capital position improved to $4,857,162 as of May
31, 1994 from $3,632,017 as of May 31, 1993, while the related current ratio
decreased to 3.13:1 at May 31, 1994 from 3.37:1 at May 31, 1993. The long-term
debt to equity position improved to 2.7% debt and 97.3%% equity as of May 31,
1994 from 5.2% debt and 94.8% equity as of May 31, 1993. The improvement in
Conquest's working capital as well as the long-term debt to equity position is
largely attributable to the proceeds received from the exercise of the Class B
warrants.
During fiscal year 1994, Conquest leased five additional Metro III
aircraft under operating leases. Conquest now leases 15 Metro III aircraft,
all of which are leased from unaffiliated third parties. The aggregate monthly
lease cost of all of Conquest's aircraft is approximately $270,000. Conquest,
through its subsidiary CSA, agreed in principal to terms for the lease of a
Boeing 737 Aircraft on November 22, 1993. The aircraft was accepted by
Conquest on January 5, 1994 under an interim lease agreement pending FAA
certification. In addition, Conquest is required to pay varying rates per
engine hour which funds are deposited in an engine reserve account maintained
by the lessors to be utilized for engine and propeller overhauls. Conquest was
relieved of the obligation of the 737 lease when CSA was sold subsequent to
year-end. See note 15 to the Consolidated Financial Statements.
Capital expenditures of $905,604 for fiscal year 1994 were principally
for transportation, flight and ground equipment. Capital expenditures
associated with the current expansion and the development of CSA have been
financed from cash reserves.
The FAA has issued regulations 135.180 requiring air carriers to
install by February 9, 1995, subject to possible extension, Traffic Alert
Collision Avoidance Systems ("TCAS") on aircraft seating between 10 and 30
passengers. Conquest has determined that the cost of compliance with TCAS will
be $100,000.
Conquest believes the aircraft leasing market has and will continue to
become more favorable to users of the type of leased aircraft employed by
Conquest. Accordingly, management believes that at the expiration of its
current operation leases, or in the event Conquest expands its fleet in the
future, a sufficient supply of Metro III aircraft will be available to meet
Conquest's business needs on terms at least as favorable as lease agreements
currently in effect.
24
<PAGE> 10
Conquest has net operating losses available to offset against future
federal taxable income. Due to the issuance of additional securities of
Conquest in previous private and public offerings, Conquest has had, and may
have in the future, a change in ownership as defined by applicable federal
income tax rules. Such rules limit the use of net operating losses to offset
federal taxable income after a change in ownership. As a result, there can be
no assurance either of the total amount of such losses which Conquest will
eventually be able to use or the amounts available to offset future taxable
income in any given tax year. This limitation may have a material impact on
Conquest's cash flow in the future.
Conquest has incurred significant operating losses over the last seven
years. As a result, in recent years, Conquest has relied increasingly on
operating lease arrangements and proceeds from public and private offerings of
Common Stock to provide the funds necessary for its operations. Conquest has
no significant unencumbered assets which could be sold or pledged to raise
additional cash other than the operations of CSA.
Subsequent to year-end, Conquest completed the sale of its 93% owned
subsidiary, CSA, to AirTran Corporation for an agreed-upon purchase price of
$2,500,000. Simultaneous with the closing of the sale, Conquest purchased the
remaining 7% of the shares from an unaffiliated stockholder for Common Stock of
Conquest valued at $165,000 and a cash payment of $10,000. In addition, on
June 20, 1994, Conquest merged with Wico Holding Corp. and, concurrent with the
merger, used the $2,500,000 in proceeds from the sale of CSA and an additional
$3,250,000 of Conquest's available cash to reduce the debt level of Wico (see
discussion in the Liquidity and Capital Resources section of the MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - WICO
which follows) and to fund the acquisition of certain Langworthy divisions.
Management recently decided to sell the airline operations and focus on the
manufacturing and distribution operations of Wico and its subsidiaries (see
PART I, ITEM 1. BUSINESS and note 15 to the Consolidated Financial Statements).
Management plans to continue operating the airline until the sale is
consummated.
Conquest has been in a disagreement with PLM International, Inc.
("PLM") since April 1994 over matters involving PLM's failure to reimburse
Conquest for a scheduled engine overhaul as set forth in its lease agreements
for three (3) aircraft being all of the aircraft currently under lease from PLM
and Conquest's desire to sublease same aircraft. Accordingly, Conquest has
been withholding lease and reserve payments pending resolution of the
disagreement. On August 26, 1994, PLM notified Conquest that it was in default
of the respective leases for failure to make payment of rent within five
business days after the same became due. PLM has ordered the immediate return
of the aircraft and the payment of $104,000 in back rental payments and
$1,022,500 in unpaid basic rent which would have otherwise become due through
the expiration date of each lease. On August 30, 1994, Conquest filed suit
against PLM in the District Court of Hidalgo County, Texas claiming that PLM
breached the lease agreements, tortiously interfered with Conquest's
prospective sublease, violated the Texas Deceptive Trade Practices Act
("DTPA"), breached warranties, and committed fraud and negligent
misrepresentation. Conquest is seeking a declaratory judgment that it owes
nothing to PLM and an award of actual damages from PLM, plus additional damages
under the DTPA and punitive damages, reasonable and necessary attorneys' fees
and costs of court, interest before and after judgment on all sums as allowed
by law, and such other and further relief to which Conquest may justly show
itself entitled. Conquest is unable, at this time, to predict the eventual
outcome of this matter; however, Conquest does not anticipate any disruption of
its scheduled air service.
Seasonality
Conquest's operations are not subject to wide seasonal variations.
However, some seasonal decline does occur in holiday periods as a result of
reduced business traffic. Accordingly, Conquest reduced its flight schedule
approximately 20% during the third quarter of fiscal 1994. The increased size
of Conquest's fleet precipitated this action whereas in the past it was
unnecessary.
Inflation
To date, inflation has not had a material effect on Conquest's
operations.
25
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - WICO
OVERVIEW
Wico's results of operations are impacted by trends in the coin
operated machine market as well as those of consumer video game entertainment
activities. Sales of distribution are essentially flat reflecting the soft
condition of the coin operated machine market. Sales of consumer joysticks are
up reflecting the increased popularity of P.C. based video entertainment.
RESULTS OF OPERATIONS
Nine months ended June 30, 1994 as compared to nine months ended June 30, 1993:
<TABLE>
<CAPTION>
Nine months ended June 30, 1994 1993
- ----------------------------------------------------------------------------------------
(in Thousands)
<S> <C> <C>
Sales:
Distribution . . . . . . . . . . . . . . . . $ 24,836 $ 25,160
Consumer . . . . . . . . . . . . . . . . . . 5,841 4,314
-------- --------
30,677 29,474
Gross Profit:
Distribution . . . . . . . . . . . . . . . 9,686 9,895
Consumer . . . . . . . . . . . . . . . . . 2,243 1,577
-------- --------
11,929 11,472
Selling, Distribution and Administrative . . . 9,219 8,723
Amortization . . . . . . . . . . . . . . . . . 232 547
Interest Expense . . . . . . . . . . . . . . . 1,310 1,635
Other Expense . . . . . . . . . . . . . . . . . 295 3
Income Before Income Taxes . . . . . . . . . . 873 564
Net Income . . . . . . . . . . . . . . . . . . $ 550 $ 350
</TABLE>
Distribution sales decreased 1.3% to $24,836,000 while consumer sales
increased 35.4% to $5,841,000. Distribution sales continued to be hampered by
soft conditions in the coin operated machine market, particularly amusement
games. The consumer sales increase of 35.4% is attributable to the increased
acceptance of Suncom products at retail as well as significant OEM sales.
Gross profit for the nine months ended June 30, 1994 was $11,929,000
as compared to $11,472,000 for the nine months ended June 30, 1993. This 4%
increase was due to consumer gross margin dollars increasing 42.2% and consumer
gross margin increasing from 36.6% to 38.4%. The consumer margin overall
improvement is due to higher margin new products introduced in October 1993.
Selling, distribution and administrative expenses were $9,219,000 or
30% of sales as compared to $8,723,000 or 29.6% of sales in the prior year
period. The 5.7% increase in expenses was largely the result of an increase in
variable advertising and freight expense associated with consumer sales. The
amortization of intangibles resulting from previous acquisitions declined to
$232,000 as compared with $547,000 in the previous nine-month period as certain
intangibles became fully amortized.
During the nine months ended June 30, 1994, interest expense declined
to $1,310,000 as a result of lower principal amounts of long-term debt
outstanding, as well as lower interest rates. High and low interest rates were
8% and 6.7%, respectively, during the nine months ended June 30, 1994, and 10%
and 7%, respectively, during the nine months ended June 30, 1993.
26
<PAGE> 12
Wico recorded income from operations before taxes of $873,000 in the
nine months ended June 30, 1994 as compared to $564,000 in the prior
corresponding period. Improved sales in the consumer segment as well as
reduced amortization and interest expenses contributed significantly to this
result.
Fiscal Years Ended September 30, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
Year ended June 30, 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Sales:
Distribution . . . . . . . . . . . . . . . . $ 32,981 $ 32,480 $ 32,104
Consumer . . . . . . . . . . . . . . . . . . 5,802 6,173 7,173
-------- -------- --------
38,783 38,653 39,277
Gross Profit:
Distribution . . . . . . . . . . . . . . . . 12,706 12,359 12,496
Consumer . . . . . . . . . . . . . . . . . . 2,402 2,217 2,500
-------- -------- --------
15,108 14,576 14,996
Selling, Distribution and Administrative . . . . 11,620 10,895 11,393
Amortization . . . . . . . . . . . . . . . . . . 689 1,581 1,192
Interest ` . . . . . . . . . . . . . . . . . . . 2,063 2,684 3,569
Income (Loss) Before Income Taxes . . . . . . . . 728 (738) (1,727)
Pro Forma Net Income (Loss) (1) . . . . . . . . . 508 (516) (1,137)
Pro Forma (Loss) Per Share (1) . . . . . . . . . $ 0.12 $ (0.12) $ (0.26)
</TABLE>
(1) Pro forma net income (loss) has been calculated after giving effect to
the pro forma adjustments to the income tax provisions as if Wico had not
operated as an "S" corporation.
Fiscal Year Ended September 30, 1993 Compared to Fiscal Year Ended September
30, 1992:
Distribution sales increased 1.5% to $32,981,000, while consumer sales
declined 6.0% to $5,802,000. Distribution sales increases were adversely
affected by the slow economic recovery and the continued popularity of home
based video games. The consumer sales decline of $371,000 was largely
attributable to the decline of sales of digital based joysticks and the
constrained growth of analog joysticks designed for use with personal
computers, due to the continued popularity of home based video game systems.
Gross profits for the fiscal year ended September 30, 1993 was
$15,108,000 compared to $14,576,000 in the fiscal year ended September 30,
1992. This 3.6% increase was primarily the result of an increase in consumer
gross margin from 35.9% to 41.4% of sales. This increase occurred due to the
introduction of higher margin new products and a reduction in the amount of
close-out merchandise.
Selling, general and administrative expenses were $11,620,000 in
fiscal 1993, approximately 30% of sales, as compared with $10,895,000 in fiscal
1992, or 28.1% of sales. The 6.6% increase in expenses was the result of
marketing and product development expenditures for new consumer products, as
well as increased distribution marketing expenditures to support market share
in the coin operated machine parts and billiards markets. The amortization of
intangibles resulting from acquisition declined to $689,000 in fiscal 1993 as
compared with $1,581,000 in fiscal 1992 as certain intangibles were fully
amortized during 1992.
During fiscal 1993, interest expense declined to $2,063,000 as a
result of lower principal amounts outstanding, as well as lower interest rates.
High and low interest rates in relevant years were 8% and 6.7%, respectively,
in fiscal 1993, and 10% and 7%, respectively, in fiscal 1992.
27
<PAGE> 13
Wico recorded income before income taxes in fiscal 1993 of $728,000,
as compared to a loss before income taxes of ($738,000) in fiscal 1992.
Improved sales and gross margins in the distribution segment, as well as
reduced interest expense and amortization, contributed most significantly to
this result.
Fiscal Year Ended September 30, 1992 as compared to Fiscal Year Ended September
30, 1991
Net sales for fiscal 1992 were $38,653,000, compared to $39,277,000,
for the fiscal year ended September 30, 1991, or a decline of 1.6%.
Distribution sales increased 1.2% to $32,480,000, while consumer sales
declined 13.9% to $6,173,000. Management believes that distribution sales
increases were limited by the ongoing recession and reduced popularity of
amusement/arcade games. Consumer sales declines were caused by discontinuation
of private label sales to Radio Shack ($534,000) and a decline in 8 Bit
Nintendo accessory sales.
Gross profit for fiscal 1992 was $14,576,000, compared to $14,996,000
in fiscal 1991 due to a decrease in sales volume and a reduction in gross
margin from 38.2% to 37.7%. Distribution gross margin decreased to 38.1% from
38.9% due to competitive pressures. Consumer gross profit increased from 34.9%
to 35.9% due to a favorable mix caused by reduced Radio Shack private label
sales.
Selling, general and administrative expenses were $10,895,000 in
fiscal 1992, 28.1% of sales, as compared with $11,393,000 in fiscal 1991, or
29% of sales, as a result of lower variable sales expenses, as well as cost
containment/reduction measures on the part of management.
Interest expense decreased from $3,569,000 in fiscal 1991 to
$2,684,000 in fiscal 1992. Reduced interest expense was a result of lower
principal amounts outstanding ($30,974,000 in fiscal 1991 and $29,450,000 in
fiscal 1992), as well as reduced rates.
Wico recorded a loss before income taxes of $738,000 in fiscal 1992,
as compared to a loss before income taxes of $1,727,000 in fiscal 1991.
Reductions in other expenses and interest were significant factors leading to
this result.
Liquidity and Capital Resources
Wico's principal source of capital for operations has been its
combined Term Loan and Revolving Credit Loan pursuant to the Lending Agreement
between Wico and its institutional lender and cash flow from operations.
Wico's operations generated positive cash flow in 1993, 1992 and 1991 in the
amounts of $1,936,000, $1,300,000 and $2,800,000, respectively. Under the
terms of the Lending Agreement, Wico must be in compliance with certain
financial ratios. Certain of the covenant requirements include attaining
operating income before amortization of intangibles and other assets (as
defined in the Lending Agreement) of $3,100,000, current ratio of 1.75:1 and
working capital of $,6,300,000. Wico is currently in compliance with said
covenants. The Term Loan, maturing in October 1988, provides for monthly
installments of principal, and had a principal balance of approximately
$7,336,000 at June 30, 1994. The Revolving Credit Loan provides for a maximum
credit of $13,000,000, inclusive of letters of credit that may be established
at the request of Wico and at the present time, is in full use. At June 30,
1994, the aggregate amount of borrowings under Wico's Lending Agreement was
approximately $20,286,000. Repayment of the loans is secured by a first lien
on a substantial portion of Wico's assets, limited personal guarantees, each in
the amount of $1,000,000, from Stephen R. Feldman, Chairman of the Board and
Chief Executive Officer of the Company, and Bentley J. Blum, a principal
stockholder and director of the Company, and stock pledges in favor of the
institutional lender covering all of the outstanding shares of Conquest Common
Stock owned by certain of Wico's prior stockholders, which guarantees and stock
pledges will be released by the lender upon prepayment of the outstanding
$1,000,000 and the purchase of the Bank Warrant by September 30, 1994.
The maximum interest rates on the institutional loans are payable at
the option of Wico at either the prime rate plus 1-1/2% or LIBOR plus 3-1/4%.
Under certain circumstances related to earnings, the rates of interest may be
reduced to the prime rate or LIBOR plus 1-3/4%. Under the terms of the Lending
Agreement, the lender was granted a warrant to purchase 4.9% of Wico's Common
Stock which was exchanged for a warrant to purchase 4,000,000 shares of
Conquest Common Stock at the time of the merger (the "Bank Warrant"). In
connection with Wico's agreement to prepay $5,000,000, the lender consented to
the merger and the Langworthy acquisition. Wico used $4,000,000 in funds
obtained
28
<PAGE> 14
from the merger with Conquest to partially make such payment and has agreed to
pay the lender an additional $1,000,000 by September 39, 1994 and to purchase
the lender's warrant for $1,000,000 by September 30, 1994. In the event that
the Bank Warrant is not purchased by September 30, 1994, the Company may
purchase the Bank Warrant up to October 31, 1994 for $1,000,000, but will
receive only 3,592,000 shares issuable thereunder and 408,000 shares may be
retained by the lender. In addition, in the event that the Bank Warrant is not
purchased by September 30, 1994, the Company may purchase the Bank Warrant up
to November 30, 1994 for $1,000,000, but will receive only 3,184,000 shares
issuable thereunder and 816,000 shares may be retained by the lender. If the
Bank Warrant is not purchased by November 30, 1994,, the rate of interest
payable under the Lending Agreement will increase by 1.5% and Wico must pay the
lender a restructuring fee of $350,000.
The Lending Agreement presently provides for the mandatory repayment
of 55% of Wico's excess cash flow, as defined in the Agreement. Continuing
through September 30, 1994, this amount will be increased to 65%, and
thereafter to 75%. The Lending Agreement contains other restrictions requiring
the consent of the lender in connection with the making of any acquisition,
payment of dividends, issuance of additional securities or making of capital
expenditures in excess of $500,000.
Seasonality
Wico's consumer products segment experiences its peak sales relating
to the Christmas holiday selling season. Due to the importance of the
Christmas selling season, net sales relating thereto constitute a
disproportionate amount of net sales for the entire year and all of Wico's
income from operations of this segment. Unfavorable economic conditions
affecting retailers generally during the Christmas selling season in any year
could materially adversely affect Wico's results of operations for this
segment. Wico must also make decisions regarding how much inventory to buy in
advance of the season in which it will be sold. Significant deviations from
projected demand for products can have an adverse effect on Wico's sales and
profitability for this segment.
Inflation
To date, inflation has not had a material effect on Wico's operations.
ITEM 8. FINANCIAL STATEMENTS
See attached Consolidated Financial Statements of Conquest Airlines
Corp.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change in Conquest's independent accountants took place during
fiscal years ended May 31, 1994 and 1993, or during the subsequent interim
period.
29
<PAGE> 15
PART IV
ITEM 14. EXHIBITA, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements of Conquest are
included as PART II, ITEM 8 of this report:
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-2
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as of May 31, 1994 and 1993 . . . . . . . . . . F-4
Consolidated Statement os Operations for the years ended
May 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows for the years ended
May 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . F-6-7
Consolidated Statement of Stockholders' Equity (Deficit)
for the period from June 1, 1991 to May 31, 1994 . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-9
2. Financial Statement Schedules:
Schedule V - Property and Equipment . . . . . . . . . . . . . F-20
Schedule VI - Allowance for Depreciation . . . . . . . . . . . F-21
Schedule X - Supplementary Income Statement Information . . . F-22
</TABLE>
F-1
<PAGE> 16
Report of Independent Accountants
To the Board of Directors and Stockholders of Conquest Airlines Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Conquest Airlines Corp. and its subsidiary at May 31, 1994 and 1993, and the
results of their cash flows for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note 14, the statement of operations for the year ended May 31,
1994 has been restated to reflect the proceeds from a key-man life insurance
policy as other income. This restatement had no impact on net income or
stockholder's equity.
On June 20, 1994, the Company merged with Wico Holding Corp., a privately held
corporation, and subsequently announced its intention to sell the remaining
airline operations. This merger and management's intention to sell the
remaining airline operations are more fully described in Note 15.
Our audits of the aforementioned consolidated financial statements also
included audits of the financial statement schedules as of May 31, 1994 and
1993 and for the years then ended as listed in Item 14(a) of this Form 10-K.
In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
PRICE WATERHOUSE LLP
Fort Worth, Texas
July 22, 1994, except Note 14 as to which
the date is October 31, 1995
F-2
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Conquest Airlines Corp.
We have audited the accompanying statements of operations, stockholders'
equity (deficit), and cash flows of Conquest Airlines Corp. for the year ended
May 31, 1992. 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. We have
not audited the financial statements of Conquest Airlines Corp. for any period
subsequent to May 31, 1992.
In our opinion, the financial statements, as restated, referred to above
present fairly in all material respects, the results of operations and cash
flows of Conquest Airlines Corp. for the year ended May 31, 1992, in conformity
with generally accepted accounting principles.
In connection with our audit of the aforementioned statements, we also
audited the related financial statement schedules for the year ended May 31,
1993. In our opinion, such schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects,
the information set forth therein.
Hiltzik, Schneider, Ehrlich & Co.
Great Neck, New York
August 5, 1992 except for
Note 3 as to which the
date is January 9, 1993
F-3
<PAGE> 18
CONQUEST AIRLINES CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31,
1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,477,968 $ 4,368,605
Receivables, principally traffic . . . . . . . . . . . . . . . . . . . . . 497,117 540,371
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,103 55,985
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,696,913 -
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 267,418 199,873
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 7,137,519 5,164,834
Property and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . 2,304,834 1,696,937
Security deposits and other assets . . . . . . . . . . . . . . . . . . . . . . 627,950 518,218
Developmental and preoperating costs - net
of accumulated amortization of $327,160
and $171,454, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 139,958 295,664
Due from officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 28,110
--------------- --------------
$ 10,223,261 $ 7,703,763
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . $ 138,824 $ 144,982
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763,155 791,021
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,007,056 467,640
Air traffic liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,322 129,174
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 2,280,357 1,532,817
Long-term debt less current maturities . . . . . . . . . . . . . . . . . . . . 215,962 323,455
--------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,496,319 1,856,272
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,763 -
Stockholders' equity:
Series A, 12% Cumulative Convertible Redeemable
Preferred Stock, 10c. par value; 5,000,000
shares authorized, 7,550 and 14,250 issued and
outstanding (liquidation preference: $93,257) . . . . . . . . . . . . . 755 1,425
Common Stock, 1c. par value; 50,000,000 shares
authorized, 19,665,577 and 14,242,785 shares
issued and outstanding, respectively . . . . . . . . . . . . . . . . . . 19,665 14,242
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 22,160,482 15,831,490
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,457,723) (9,999,666)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 7,723,179 5,847,491
Commitment and Contingencies (See notes 11 and 15)
--------------- --------------
$ 10,223,261 $ 7,703,763
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 19
CONQUEST AIRLINES CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended May 31,
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
(Restated)
<S> <C> <C> <C>
PASSENGER REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,867,187 $ 9,527,945 $ 8,397,748
OPERATING EXPENSES:
Flight operations . . . . . . . . . . . . . . . . . . . . . . . . 6,766,231 4,061,237 2,840,527
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,101,523 2,517,783 1,482,896
Aircraft and traffic services . . . . . . . . . . . . . . . . . . 3,050,542 1,590,031 1,355,957
Promotion and sales . . . . . . . . . . . . . . . . . . . . . . . 2,529,584 1,621,544 1,381,519
General and administrative . . . . . . . . . . . . . . . . . . . . 1,456,618 1,433,239 988,001
Depreciation and amortization . . . . . . . . . . . . . . . . . . 453,413 424,096 881,097
------------- ------------- -------------
Total operating expenses . . . . . . . . . . . . . . 18,357,911 11,647,930 8,929,997
------------- ------------- -------------
Operating loss . . . . . . . . . . . . . . . . . . . (5,490,724) (2,119,985) (532,249)
OTHER EXPENSES (INCOME):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 43,198 108,590 1,267,521
Interest income . . . . . . . . . . . . . . . . . . . . . . . . (79,795) (40,184) (58,091)
Lease income . . . . . . . . . . . . . . . . . . . . . . . . . . - - (512,000)
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . 3,930 13,148 90,735
Gain from settlement of lawsuit . . . . . . . . . . . . . . . . - (845,261) -
Life insurance proceeds . . . . . . . . . . . . . . . . . . . . . 1,000,000
------------- ------------- -------------
Total other expenses . . . . . . . . . . . . . . . . (1,032,677) (763,707) 788,165
------------- ------------- --------------
LOSS BEFORE EXTRAORDINARY GAIN . . . . . . . . . . . . . . . . . . (4,458,057) (1,356,278) (1,320,414)
EXTRAORDINARY GAIN - EXTINGUISHMENT OF DEBT . . . . . . . . . . . - 196,528 8,169,895
------------- ------------- -------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,458,057) $ (1,159,750) $ 6,849,481
============= ============= =============
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK . . . . . . . . . . . $ (4,466,438) $ (1,175,567) $ 6,821,062
============= ============= =============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary:
Weighted average number of shares outstanding . . . . . . . . . 17,612,446 8,811,810 6,876,535
============= ============= =============
Loss before extraordinary gain . . . . . . . . . . . . . . . . . $ (0.25) $ (0.15) $ (0.19)
Extraordinary gain - extinguishment of debt . . . . . . . . . . - 0.02 1.19
------------- ------------- -------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (0.25) $ (0.13) $ 1.00
============= ============= =============
Fully diluted:
Weighted average number of shares outstanding . . . . . . . . . 17,612,446 8,811,810 9,332,084
============= ============= =============
Loss before extraordinary gain . . . . . . . . . . . . . . . . . $ (0.25) $ (0.15) $ (0.14)
Extraordinary gain - extinguishment of debt . . . . . . . . . . . - 0.02 0.88
------------- ------------- -------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (0.25) $ (0.13) $ 0.74
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 20
CONQUEST AIRLINES CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended May 31,
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . $ (4,458,057) $ (1,159,750) $ 6,849,481
Adjustments to reconcile net income (loss) to
cash used by operating activities:
Depreciation and amortization . . . . . . . . 453,413 424,096 881,097
Engine overhaul reserves . . . . . . . . . . - - 155,721
Life insurance proceeds . . . . . . . . . . . (1,000,000) (196,528) (8,169,895)
Noncash charges from stock grants
and warrants . . . . . . . . . . . . . . . - 9,750 58,500
Changes in certain assets and liabilities:
Accounts receivable . . . . . . . . . . . . 43,254 (115,288) (13,847)
Inventories . . . . . . . . . . . . . . . . (142,118) (8,311) 205,529
Prepaid expenses and other current assets . (67,545) 34,678 (101,097)
Deferred litigation costs . . . . . . . . . - 331,975 (331,975)
Other assets . . . . . . . . . . . . . . . 18,416 65,825 63,830
Accounts payable . . . . . . . . . . . . . (27,866) (39,968) (58,287)
Accrued expenses . . . . . . . . . . . . . 539,416 (318,099) 267,694
Air traffic liability . . . . . . . . . . . 242,148 3,208 (27,986)
Other . . . . . . . . . . . . . . . . . . . 3,763 - -
--------------- -------------- --------------
Net cash used by operating activities . . (4,395,176) (968,412) (221,235)
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . (905,604) (545,690) (639,697)
Proceeds from sale of assets . . . . . . . . . . - 188,143 106,500
Increase in unamortized engine overhaul costs . - - (468,333)
Proceeds from key-man policy . . . . . . . . . . 1,000,000 - -
(Increase) decrease in security deposits . . . . (128,148) (144,088) 1,386
Increase in developmental and preoperating costs - - (467,119)
Increase in assets held for sale . . . . . . . . (1,696,913) - -
(Increase) decrease in due from officer . . . . 15,110 (11,415) (16,695)
--------------- -------------- --------------
Net cash used by investing activities . . (1,715,555) (513,050) (1,483,958)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings . . . . . . - - 120,245
Payment of 10% Convertible Promissory Notes . . - - (662,430)
Payment of short-term borrowings . . . . . . . . - - (220,245)
Payment of long-term debt . . . . . . . . . . . (113,651) (457,550) (145,832)
Proceeds from issuance of Common Stock . . . . 6,333,745 5,776,625 220,005
Proceeds from issuance of Preferred Stock . . . - - 2,807,348
--------------- -------------- --------------
Net cash provided by financing activities 6,220,094 5,319,075 2,119,091
--------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . 109,363 3,837,613 413,898
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . 4,368,605 530,992 117,094
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . $ 4,477,968 $ 4,368,605 $ 530,992
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 21
CONQUEST AIRLINES CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Year ended May 31,
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest . . . . $ 45,007 $ 83,276 $ 835,764
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Settlement of litigation with Beech:
Extinguishment of long-term debt and
accrued interest . . . . . . . . . . . . . $ 32,151,382
Return of property and equipment, at
book value . . . . . . . . . . . . . . . . (23,981,487)
-------------
Extraordinary gain . . . . . . . . . . . . . $ 8,169,895
=============
Retirement of Beech Note:
Extinguishment of long-term debt . . . . . . $ 490,512
Interest forgiven . . . . . . . . . . . . . . 68,000
Aircraft rentals forgiven . . . . . . . . . . 29,456
Return of property and equipment, at
book value . . . . . . . . . . . . . . . . (391,440)
-------------
Extraordinary gain . . . . . . . . . . . . . $ 196,528
=============
Equipment acquired during the period upon
which debt was incurred:
Equipment purchased . . . . . . . . . . . . . $ 763,028
Equipment acquired through exchange . . . . . (8,840)
Debt incurred . . . . . . . . . . . . . . . . (208,498)
-------------
Net cash . . . . . . . . . . . . . . . . . $ 545,690
=============
Consulting services provided during the period upon
which debt was incurred:
Consulting services . . . . . . . . . . . . . . $ 62,333
Debt incurred . . . . . . . . . . . . . . . . . (62,333)
-------------
Net cash . . . . . . . . . . . . . . . . . . $ -
=============
Conversion of Series A Preferred Stock into Common
Stock:
Preferred stock . . . . . . . . . . . . . . . . $ (670)
Common stock . . . . . . . . . . . . . . . . . . 54
Additional paid-in capital . . . . . . . . . . . 616
-------------
Net cash . . . . . . . . . . . . . . . . . . $ -
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 22
CONQUEST AIRLINES CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE YEARS ENDED MAY 31, 1994
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1991 . . . . . . . . . . . 4,102,982 $ 4,103 - -
Issuance of stock grants . . . . . . . - - - -
Issuance of stock warrants . . . . . . - - - -
Sale of preferred stock ( net of stock
offering costs of $892,652) . . . . - - 400,000 40,000
Sale of Common Stock . . . . . . . . . 146,670 147 - -
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . 2,958,960 2,958 (369,870) (36,987)
Conversion of promissory notes to
Common Stock . . . . . . . . . . . . 475,700 476 - -
Net income for the year . . . . . . . - - - -
----------- ------- -------- -------
BALANCE AT MAY 31, 1992 . . . . . . . . . . . 7,684,312 7,684 30,130 3,013
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . 127,340 127 (15,880) (1,588)
Issuance of stock grants . . . . . . . 7,800 8 - -
Amortization of deferred compensation - - - -
Sale of Common Stock (net of stock
offering costs of $106,753) . . . . 750,000 750 - -
Exercise of warrants . . . . . . . . . 140,000 140 - -
Sale of Common Stock (net of stock
offering costs of $1,061,623) . . . 5,324,074 5,324 - -
Issuance of Common Stock to Bridge
Lenders . . . . . . . . . . . . . . 209,259 209 - -
Net loss for the year . . . . . . . . - - -
----------- -------- -------- -------
BALANCE AT MAY 31, 1993 . . . . . . . . . . . 14,242,785 14,242 14,250 1,425
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . 53,600 54 (6,700) (670)
Exercise of preferred stock warrants . 53,045 53 - -
Exercise of Class B Warrants (net of
stock redemption expenses
of $52,439) . . . . . . . . . . . . 5,316,147 5,316 - -
Net loss for the year . . . . . . . . - - - -
---------- ------- -------- -------
BALANCE AT MAY 31, 1994 . . . . . . . . . . . 19,665,577 $19,665 7,550 $ 755
========== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Additional
Deferred paid-in Accumulated
compensation capital deficit Total
------------ ------- ------- -----
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1991 . . . . . . . . . . . - $6,898,256 ($15,689,397) ($8,787,038)
Issuance of stock grants . . . . . . . (25,000) 39,750 - 14,750
Issuance of stock warrants . . . . . . - 43,750 - 43,750
Sale of preferred stock ( net of stock
offering costs of $892,652) . . . . - 2,767,348 - 2,807,348
Sale of Common Stock . . . . . . . . . - 219,858 - 220,005
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . - 34,029 - -
Conversion of promissory notes to
Common Stock . . . . . . . . . . . . - 47,094 - 47,570
Net income for the year . . . . . . . - - 6,849,481 6,849,481
-------- ---------- ------------ -----------
BALANCE AT MAY 31, 1992 . . . . . . . . . . . (25,000) 10,050,085 (8,839,916) 1,195,866
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . - 1,461 - -
Issuance of stock grants . . . . . . . - 9,742 - 9,750
Amortization of deferred compensation 25,000 - - 25,000
Sale of Common Stock (net of stock
offering costs of $106,753) . . . . - 1,017,497 - 1,018,247
Exercise of warrants . . . . . . . . . - 69,860 - 70,000
Sale of Common Stock (net of stock
offering costs of $1,061,623) . . . - 4,683,054 - 4,688,378
Issuance of Common Stock to Bridge
Lenders . . . . . . . . . . . . . . - (209) - -
Net loss for the year . . . . . . . . - - (1,159,750) (1,159,750)
-------- ---------- ------------ -----------
BALANCE AT MAY 31, 1993 . . . . . . . . . . . - 15,831,490 (9,999,666) 5,847,491
Conversion of preferred stock to common
stock . . . . . . . . . . . . . . . - 616 - -
Exercise of preferred stock warrants . - 73,547 - 73,600
Exercise of Class B Warrants (net of
stock redemption expenses of $52,439) - 6,254,829 - 6,260,145
Net loss for the year . . . . . . . . - - (4,458,057) (4,458,057)
-------- ---------- ------------ -----------
BALANCE AT MAY 31, 1994 . . . . . . . . . . . - $22,160,482 ($14,457,723) $7,723,179
======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 23
CONQUEST AIRLINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1994
1. DESCRIPTION OF BUSINESS AND PRESENTATION
Conquest Airlines Corp. ("CAC") is a regional airline providing regularly
scheduled non-stop and connecting service to cities located primarily in Texas.
Conquest Sun Airlines ("CSA)", a 93% owned subsidiary of Conquest, is a
start-up jet service in Fort Lauderdale, Florida. It was formed on September
30, 1993 when Conquest acquired certain assets of Sun Express Group, Inc.
("Sun") including all rights to a Certificate of Public Convenience and
Necessity issued by the U.S. Department of Transportation pursuant to Section
401 of the Federal Aviation Act of 1958, as amended, and the tradenames "Sun
Express" and "Destination Sun Airways" for use in connection with an airline in
the United States. In consideration of the contribution of such assets, Sun
received a minority interest (7%) in CSA and cash. This acquisition of this
start-up airline has been accounted for as a purchase; accordingly, CSA's
results of operations have been consolidated with CAC's since the date of
acquisition. Since CSA was a developmental stage enterprise at year-end, its
results did not contribute to operations in fiscal 1994, but instead have been
deferred as preoperating costs. See note 2 "Assets held for sale."
Collectively, the two companies are referred to as the "Company" throughout
these consolidated financial statements. CSA, subsequent to year-end, has
completed requirements in order to operate jet airliners and has concurrently
been sold to AirTran Corp. (see note 15).
Certain reclassifications have been made in prior years' financial statements
to conform to the 1994 presentation. The Company has no significant
concentration of credit risk by activity or region.
OPERATING LOSSES
The Company has incurred significant operating losses over the last seven
years. As a result, in recent years, the Company has relied increasingly on
operating lease arrangements and proceeds from public and private offerings of
Common Stock to provide the funds necessary for its operations. In addition,
the Company has no significant unencumbered assets which could be sold or
pledged to raise additional cash other than the operations of CSA.
During fiscal 1994, the Company's management took steps intended to stem the
significant operating losses including eliminating unprofitable routes to focus
on more mature and profitable routes inside of Texas and imposing strict cost
controls. The Company anticipates that the effects of the changes in the
structure and operations of the Company will produce positive results in
stabilizing operations and reducing or eliminating the need for additional
external funding; however, the Company might require additional funding to
support operations and capital expenditures over the next twelve months.
Subsequent to year-end, the Company merged with Wico Holding Corp. and,
correspondingly, management decided to sell the airline operations and focus on
the manufacturing and distribution operations of Wico and its subsidiaries (see
note 15).
HISTORICAL FINANCIAL PRESENTATION
For accounting purposes the merger with Wico will be treated as a reverse
acquisition; this will result in the recapitalization of Wico with Wico being
treated as the continuing entity. The historical financial statements located
herein are those of the airline operations of the Company. In future
Securities and Exchange Commission filings, the historical financial statements
presented prior to June 20, 1994 will be those of Wico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
REVENUE RECOGNITION
Passenger revenue is recognized when the transportation is provided. Tickets
sold but not yet used are reported as "Air traffic liability."
F-9
<PAGE> 24
INVENTORIES
Inventories of flight equipment expendable parts, materials and supplies are
valued at cost (first-in, first-out). These items are charged to expense as
used.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis for financial reporting purposes over estimated useful lives of 12 years
for aircraft engines, flight equipment and rotable parts; 5-7 years for all
other equipment; and 30 years for building and improvements. Leasehold
improvements are amortized over the shorter of the life of the lease or the
life of the asset. Accelerated cost recovery methods of depreciation are
applied for tax reporting purposes.
AIRCRAFT AND ENGINE MAINTENANCE
Routine maintenance and repairs are charged to operating expenses as incurred.
Overhaul costs associated with leased aircraft are paid monthly to the lessor
based on a contractual hourly-rate and are expensed accordingly. Overhaul
costs associated with Company owned engines are capitalized and amortized to
the date of the next scheduled event.
ASSETS HELD FOR SALE
On May 24, 1994, the Company entered into an agreement for the sale of CSA.
This transaction was completed subsequent to year-end (see note 15).
Accordingly, the assets of CSA have been classified on the Balance Sheet as
"Assets held for sale." The related balance is comprised of the following: 1)
$1,302,263 of preoperating costs associated with the integration of the 737
aircraft into the fleet; 2) $165,468 of property and equipment; 3) $162,863 of
security deposits; and 4) $66,319 of other current assets.
DEVELOPMENTAL AND PRE-OPERATING COSTS
During fiscal 1992, the Company incurred approximately $465,000 in connection
with the integration of new aircraft types, primarily flight crew training
costs, which costs have been deferred and are being amortized over three years.
Amortization expense relating to these costs approximated $156,000, $156,000
and $16,000 for the years ended May 31, 1994, 1993 and 1992, respectively. The
costs of developing new or extended passenger routes and pre-operating costs,
other than training incurred in connection with the introduction of new
aircraft types, are charged to expense as incurred.
EARNINGS (LOSS) PER SHARE
Net loss per share for the years ended May 31, 1994 and 1993 was computed by
dividing the net loss applicable to Common Stock by the weighted average common
shares outstanding for the respective periods. Outstanding options and
warrants were anti-dilutive and, as a result, were excluded from the
computation.
Primary net income per share for the year ended May 31, 1992 was computed by
dividing adjusted net income by the average number of common shares
outstanding, increased by common equivalent shares determined using the average
market price of common shares during the period under the modified treasury
stock method. Adjusted net income is net income less preferred stock dividends
plus: (a) the pro-forma reduction in interest expense, net of tax, on
application of a portion of the assumed proceeds from the exercise of options
and warrants, and (b) pro-forma interest income, net of tax, on application of
the remaining assumed proceeds from the exercise of options and warrants toward
investment in U.S. government securities as determined in accordance with the
modified treasury stock method. The average common shares outstanding for
fiscal 1992 included the effect of 1,823,889 common equivalent shares.
Fully diluted per-share amounts are similarly computed but include the effect,
when dilutive, of the Company's other potentially dilutive securities. The
Company's outstanding options and warrants are excluded from the fiscal 1994
and 1993 computations due to their anti-dilutive effect during those periods.
During fiscal 1992, the average common shares outstanding plus common share
equivalents were increased by the amount of common shares issuable upon the
assumed conversion of the Company's Series A, 12% Cumulative Convertible
Preferred Stock and its 10% Convertible Promissory Notes. Adjusted net income
in fiscal 1992 was increased by dividends associated with the preferred stock
and interest related to the convertible notes plus the interest adjustments as
determined by the application of the modified treasury method described above.
F-10
<PAGE> 25
Common shares outstanding increased to 19,665,579 at May 31, 1994, a 38%
increase over the prior year, principally due to the conversion of
substantially all of the Class B Warrants during the year. Had the conversions
taken place at the beginning of the respective periods of conversion, the loss
before extraordinary gain per share and net loss per share for the year ended
May 31, 1994 would have been 29c. and 24c., respectively.
OPERATING LEASES
Certain operating leases of the Company specify scheduled rent increases over
the lease term. Rental expense associated with these leases is recognized on a
straight-line basis over the lease term.
INCOME TAXES
During the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes." The adoption of FAS 109 modifies the Company's previous method of
accounting for income taxes on an asset and liability approach (FAS 96).
The Company has not recognized (nor reported) any cumulative effect resulting
from the change in method of accounting for income taxes since the Company did
not have any existing deferred tax balances as of the date of adoption (June 1,
1993).
FREQUENT FLYER AWARDS
The Company considers the incremental cost of providing free travel awards
earned under its Fast Pass frequent flyer program immaterial; accordingly, no
provision has been made for such costs in the Consolidated Financial
Statements.
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
As has been previously disclosed in the amended May 31, 1992 Form 10-K, the
Financial Statements as of and for the year ended May 31, 1992 have been
restated. The restatements were principally related to IRS penalties and
interest, certain unrecognized operating expenses relating to airline clearing
house expenses and selling costs, the calculation of earnings per share, and
warrant valuation. A summary of the impact of the restatement is shown below.
<TABLE>
<CAPTION>
Reported As
Previously Restated
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Passenger revenues . . . . . . . . . . . . . . . . . . . . . . $8,397,748 $8,397,748
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 8,738,585 8,929,997
Other (income) expense . . . . . . . . . . . . . . . . . . . . 678,032 788,165
Loss before extraordinary gain . . . . . . . . . . . . . . . . 1,018,869 1,320,414
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . 8,029,895 8,169,895
Net income . . . . . . . . . . . . . . . . . . . . . . . 7,011,026 6,849,481
Per share of Common Stock
Primary:
Loss before extraordinary gain . . . . . . . . . $ (0.17) $ (0.19)
Extraordinary gain . . . . . . . . . . . . . . . 1.33 1.19
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . 1.16 $ 1.00
========= =========
Fully diluted:
Loss before extraordinary gain . . . . . . . . . $ (0.12) $ (0.14)
Extraordinary gain . . . . . . . . . . . . . . . 0.95 0.88
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . $ 0.83 $ 0.74
========= =========
</TABLE>
F-11
<PAGE> 26
4. SECURITY DEPOSITS AND OTHER ASSETS
<TABLE>
<CAPTION>
May 31 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C>
Security deposits . . . . . . . . . . . . . . . . . . $ 599,852 $ 471,704
Other . . . . . . . . . . . . . . . . . . . . . . . . 28,098 46,514
--------- ---------
$ 627,950 $ 518,218
======== ========
</TABLE>
5. SETTLEMENT OF LAWSUITS
On August 29, 1991, the Company filed suit in the District Court of Hidalgo
County, Texas against Beech Acceptance Corporation, Beech Aircraft Corporation,
and their agents and affiliates (collectively, "Beech"). The suit sought to
recover damages caused by the excessive operating costs and other deficiencies
of the nine Beech 1900C airliners owned by the Company and purchased from and
financed by Beech.
On October 25, 1991, the Company entered into an agreement with Beech whereby
all existing litigation between the two parties was settled. Pursuant to the
settlement, the Company returned its fleet of nine 1900C aircraft to Beech and
was released from past indebtedness and accrued interest, aggregating
$32,151,382 at the date of settlement, incurred in connection with the original
purchase of these airliners. Beech also agreed to lease six of the airliners
to the Company, on a temporary basis, while the Company secured replacement
aircraft. The lease payments for all six aircraft amounted to approximately
$315,000 in fiscal 1992. All aircraft have been returned to Beech. In turn,
the Company agreed to: 1) return an aggregate amount of $50,000 in spare parts
to Beech with the return of each of the first five aircraft, deliver at least
$700,000 in spare parts or parts and cash, if necessary, to Beech at the
conclusion of the lease, against which the Company issued a five-year note in
the amount of $945,000 to Beech; 2) install two overhauled engines on the
aircraft prior to return to Beech; and 3) fully repay an existing note to Beech
for the Company's six seat Beech Baron.
In addition, the Company assigned its three operating leases with Markair
Express, Inc. to Beech. The Company realized an extraordinary gain of
$8,169,895 in fiscal 1992 as a result of the extinguishment of debt on
favorable terms. The parties have terminated all litigation, exchanged general
releases, and executed certain indemnification agreements.
In October 1991, the Company, prior to settling its lawsuit with Beech, named
Pratt & Whitney and four other defendants in the suit.
During fiscal 1993, the Company, Pratt & Whitney and four other defendants
entered into an agreement to conclude all litigation between the parties. In
consideration of a $2,400,000 cash payment to the Company, the parties agreed
to release, acquit and discharge each other from any and all claims, and
entered into a covenant not to sue for damages or any other relief relating to
these claims. The Company received net proceeds of $1,215,000 from the
settlements after payment of attorney fees. The settlement of these lawsuits,
net of deferred litigation costs of $369,970, has been recognized as a gain
from settlement of lawsuit in the accompanying Consolidated Statement of
Operations for fiscal 1993.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
May 31, 1994 1993
-------------------------------------------------------------------------------------------
<S> <C> <C>
Flight equipment . . . . . . . . . . . . . . . . . . $ 1,532,702 $ 964,380
Land and building . . . . . . . . . . . . . . . . . . 391,240 375,129
Furniture and office equipment . . . . . . . . . . . . 142,234 134,792
Other equipment . . . . . . . . . . . . . . . . . . . 971,195 790,017
Leasehold improvements . . . . . . . . . . . . . . . 218,397 85,846
----------- -----------
3,255,768 2,350,164
----------- -----------
Less: Allowance for depreciation . . . . . . . . . . . 950,934 653,227
---------- -----------
$ 2,304,834 $ 1,696,937
========= ===========
</TABLE>
F-12
<PAGE> 27
Depreciation expense totaled $297,707, $243,395 and $861,648 for the years
ended May 31, 1994, 1993 and 1992, respectively.
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
May 31, 1994 1993
-------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and payroll taxes payable . . . . . . . . . . $ 96,927 $ 125,574
Accrued lease expense . . . . . . . . . . . . . . . . 271,119 121,927
Accrued Sabre booking fees . . . . . . . . . . . . . . 143,935 -
Accrued reserves . . . . . . . . . . . . . . . . . . . 148,742 59,364
Other . . . . . . . . . . . . . . . . . . . . . . . . 346,333 160,775
----------- ---------
$ 1,007,056 $ 467,640
========== ========
</TABLE>
8. SHORT-TERM DEBT
In March 1993, in connection with the sale of Units, the Company sold $452,000
principal amount of 8% promissory notes to be repaid from the proceeds of the
offering. The note agreement also provided for the Bridge Lenders to receive
shares of Common Stock equal to 50% of the principal amount of the notes
divided by the offering price of the proposed Unit Offering. The notes were
retired with the completion of the Unit Offering in April 1993.
Correspondingly, 209,259 shares of Common Stock were issued to the Bridge
Lenders. The estimated fair market value of these shares at the date of
issuance has been treated as a reduction of equity. See note 12.
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
May 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate Lien Note; interest at 10%; payable
monthly; matures December 1999; secured
by corporate headquarters . . . . . . . . . . . . . . . . . . . . . . . $ 170,445 $ 192,168
Installment promissory note; interest at 12%;
payable monthly; matures February 1996;
secured by aircraft engine . . . . . . . . . . . . . . . . . . . . . . . 127,034 180,854
Commercial installment notes; interest from 0% to
11.5%; payable monthly; maturing from March
1995 to February 1996; secured by transportation
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,307 95,415
---------- -----------
354,786 468,437
Less: Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . (138,824) (144,982)
-------- ---------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,962 $ 323,455
======== =========
</TABLE>
The Company has no available credit lines or borrowing facilities. The
aforementioned loan agreements are not subject to any restrictive loan
covenants.
F-13
<PAGE> 28
Long-term debt principal payments due in the next five years are as follows:
<TABLE>
<CAPTION>
May 31,
--------------------------------------------------------------------------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,824
1996 . . . . . . . . . . . . . . . . . . . . . . . . 96,026
1997 . . . . . . . . . . . . . . . . . . . . . . . . . 29,287
1998 . . . . . . . . . . . . . . . . . . . . . . . . . 32,354
1999 . . . . . . . . . . . . . . . . . . . . . . . . . 35,742
Thereafter . . . . . . . . . . . . . . . . . . . . . . 22,553
--------
$ 354,786
========
</TABLE>
10. INCOME TAXES
The following is a reconciliation between the statutory rate for federal income
tax purposes and the total provision for taxes on income from continuing
operations.
<TABLE>
<CAPTION>
May 31, 1994 1993 1992
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax benefit . $ 1,549,739 $ 461,135 $ 448,940
Increase (decrease) in tax benefit:
Tax penalties . . . . . . . . . . . . (1,336) - (72,186)
Benefit not utilized . . . . . . . . . (1,548,403) (461,135) (376,754)
----------- ---------- ---------
$ 0 $ 0 $ 0
============== ============ ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
May 31, 1994
--------------------------------------------------------
<S> <C>
Loss carryforwards . . . . . . . . . . $ 4,544,387
Average rent adjustments . . . . . . . 88,709
Insurance reserve and other . . . . . . 17,003
------------
Deferred tax assets . . . . . . . . . 4,650,099
Valuation allowance . . . . . . . . . . (4,427,585)
-----------
Net deferred tax assets . . . . . . 222,514
------------
Depreciation . . . . . . . . . . . . . 174,928
Developmental & preoperating costs . . 47,586
------------
Deferred tax liabilities . . . . . 222,514
------------
Net deferred taxes . . . . . . $ 0
============
</TABLE>
The Company believes the valuation allowance is appropriate given the Company's
history of losses, and due to limitations in the utilization of the loss
carryforwards as a result of ownership changes.
At May 31, 1994, the Company has approximately $13,400,000 in tax net operating
loss carryforwards. These carryforwards will expire in years 2006 to 2009. As
a result of certain substantial changes in the Company's ownership, the
utilization of net operating loss carryforwards of $7,200,000 incurred prior to
May 1992 are subject to an annual limitation of approximately $471,000 and net
operating loss carryforwards generated between May 1992 and October 1993 of
approximately $2,600,000 are subject to an annual limitation of approximation
$1,929,000. Net operating loss carryforwards of approximately $3,500,000
incurred subsequent to October 1993 are currently not subject to an annual
limitation and may be utilized in future years subject to further limitations
if substantial additional changes in ownership occur. As of May 31, 1994, net
operating loss carryforwards of approximately $5,100,000 are available for
immediate utilization. Subsequent to year-end, another ownership change
occurred as a result of the merger with Wico (see note 15).
F-14
<PAGE> 29
11. LEASE COMMITMENTS
The Company leases hangar space, terminal facilities, certain office equipment
and airliners under operating leases expiring at various dates through 1998.
Aggregate rental expense for the years ended May 31, 1994, 1993 and 1992 was
$3,525,683, $1,456,750 and $927,337, respectively. Sub-lease income for the
year ended May 31, 1992 was $512,000.
During fiscal 1994, the Company entered into operating lease agreements for 5
additional Metro III airliners. The lease terms run from 48 to 60 months with
monthly lease payments ranging from $15,000 to $21,500 per aircraft. Four
leases provide for scheduled rent increases during the first two months of the
term. Generally, these leases are on a long-term basis whereby the Company
pays taxes, maintenance, insurance and certain other operating expenses
applicable to the leased property. Management expects that, in the normal
course of business, leases that expire will be renewed or replaced by other
leases.
Future minimum lease payments for non-cancelable operating leases having
initial or remaining terms in excess of one year:
<TABLE>
<CAPTION>
May 31,
--------------------------------------------------------------------------
<S> <C>
1995 $3,355,783
1996 2,940,772
1997 2,241,400
1998 1,176,500
1999 -
Thereafter -
</TABLE>
The Company has established letters of credit totaling $401,200 to assure
performance of certain contracts. These letters of credit are fully backed by
certificates of deposit which are reported as security deposits in the
accompanying May 31, 1994 Consolidated Balance Sheet.
The Company is not a party to any legal proceedings at this time and is not
aware of any pending litigation other than the action described in note 15.
12. STOCKHOLDERS' EQUITY
PUBLIC OFFERINGS
a) In May 1993, the Company completed the sale of 5,324,074 Units at a $1.08
per Unit. Each Unit consisted of one share of Common Stock and one Class B
Warrant. The Company realized $4,688,378 in proceeds after payment of
commissions and offering costs inclusive of the fair market value of the Common
Stock issued to the Bridge Lenders (see note 8). The Class B Warrants entitled
the holder to purchase one share of Common Stock for $1.188 subject to
adjustment in certain circumstances.
The Company redeemed the Class B Warrants at a price of 5c. per Warrant
effective the close of business on October 19, 1993. Substantially all of the
Class B Warrants were exercised at a price of $1.188 resulting in the issuance
of 5,316,147 shares of Common Stock and net proceeds to the Company of
$6,260,145.
b) In August 1991, the Company sold 400,000 shares of its Series A 12%
Cumulative Convertible Redeemable Preferred Stock at a price of $9.25 per
share. The Company realized proceeds of $2,807,348 after commissions and
offering costs. Dividends are payable semiannually in cash or in additional
shares of Series A Preferred Stock at the Company's discretion, when, and if
declared by the Board of Directors. The holders of Series A Preferred Stock
are entitled to one vote per share voting together with holders of Common Stock
as one class. Each share of Series A Preferred Stock is redeemable by the
Company, at its option, for $9.25 per share plus accumulated dividends, upon
not less than 30 days nor more than 60 days written notice commencing one year
from the effective date of the Offering, provided the closing bid price of the
Company's Common Stock is at least $3.00 for 30 consecutive business days
ending within 15 days of the notice of redemption. Each share of Series A
Preferred Stock is convertible into eight shares of Common Stock, subject to
adjustment under certain circumstances.
F-15
<PAGE> 30
As of May 31, 1994, a total of 392,450 shares of Preferred Stock have been
converted into 3,139,600 shares of Common Stock. The total dividend arrearage
is $23,420 as of May 31, 1994 or $3.10 per share of the remaining issued and
outstanding shares of Preferred Stock. A total of 60,400 shares of Common
Stock have been reserved for issuance upon conversion of the remaining
Preferred Stock.
PRIVATE PLACEMENTS
In October 1992, the Company completed a private placement, as amended, of
750,000 shares of unregistered Common Stock for $1.50 per share. The Company
realized proceeds of $1,018,247 after offering costs.
WARRANTS
The Company has 2,900,109 warrants outstanding issued in conjunction with
public offerings of securities and as compensation to certain consultants and
others. These warrants have exercise prices and expiration dates ranging from
$1.40 to $10.80 and November 18, 1994 to April 23, 1998, respectively. At May
31, 1994, there are 3,794,769 shares of Common Stock reserved for issuance upon
exercise of these warrants.
13. STOCK OPTION PLANS
The Company has stock option plans for key employees, directors and officers,
consultants, advisors, and independent representatives of the Company or of any
subsidiary. The plans serve to attract and retain the best available talent
and encourage the highest level of performance by providing long-term
incentives and rewards. The plans provide for four types of awards: stock
options, incentive stock rights, stock appreciation rights, and restricted
stock purchase agreements. Options are granted by the board of directors who
may, at the time of grant, designate them as incentive stock options ("ISO's")
with the attendant tax benefits under the Internal Revenue Code. The purchase
price of the stock underlying the options is established by the board of
directors, but in no event may it be less than the fair market value of a share
of the Common Stock at the date of grant for ISO's or 75% of the fair market
value for other options. The term of each option is also set by the board of
directors, but in no event may it exceed ten years from the date of grant. In
addition, the plans contain restrictions for participants owning 10% or more of
the outstanding Common Stock.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
Stock Appreciation Option
Options Rights Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, May 31, 1991 . . . . . . . 910,000 570,000
Granted . . . . . . . . . . . . . 118,000 - $ .875 - $1.25
Cancelled . . . . . . . . . . . . (200,000) (570,000) $1.44
--------- ---------
Balance, May 31, 1992 . . . . . . . 828,000 -
Granted . . . . . . . . . . . . . 485,000 - $1.08 - $4.625
Cancelled . . . . . . . . . . . . (110,000) - $1.44 - $4.625
--------- ---------
Balance, May 31, 1993 . . . . . . . 1,203,000 -
Granted . . . . . . . . . . . . . 615,000 - $1.50 - $3.75
Cancelled . . . . . . . . . . . . (80,000) - $1.75
---------- ---------
Balance, May 31, 1994 . . . . . . . 1,738,000 -
========== =========
</TABLE>
The 1,738,000 operations outstanding at May 31, 1994 are exercisable at prices
ranging from $.875 to $3.75. All options granted under the aforementioned
plans were done so at the fair market value of the Common Stock at the date of
grant. At May 31, 1994, 1,982,000 shares are available for future grant under
the stock option plans.
14. INSURANCE PROCEEDS
In August 1993, the Company's former Executive Vice President passed away. The
Company was the beneficiary of a $1,000,000 key-man life insurance policy held
on this former officer. Previously issued financial statements reflected the
proceeds as an extraordinary item. The May 31, 1994 statement of operations
has been restated to reflect the proceeds as other income thereby decreasing
the loss before extraordinary gain from $.31 per share to $.25 per share. This
restatement had no impact on net income or stockholders' equity.
F-16
<PAGE> 31
15. SUBSEQUENT EVENTS
SALE OF SUBSIDIARY
On June 16, 1994, the Company completed the sale of its 93% owned subsidiary,
CSA, to AirTran Corporation ("AirTran") for an agreed-upon purchase price of
$2,500,000. Simultaneous with the closing of the sale, the Company purchased
the remaining 7% of the shares from an unaffiliated stockholder for Common
Stock of the Company valued at $165,000 and a cash payment of $10,000.
CSA was a developmental stage company as of the date of sale therefore did not
contribute to operations in fiscal 1994. The Company's net book value at the
date of sale, inclusive of the purchase of the remaining 7% minority, interest,
approximated $2,100,000.
MERGER WITH WICO HOLDING CORP.
Conquest Airlines Corp., a Delaware corporation, was, until June 20, 1994,
primarily engaged in the business of operating a regional airline providing
regularly scheduled turbo-prop service to cities within the State of Texas. On
June 20, 1994, CAC Acquisition, Inc. ("CAC"), a Delaware corporation and newly
formed wholly owned subsidiary of Conquest Airlines Corp. ("Conquest") merged
with Wico Holding Corp. ("Wico"), a privately-held Delaware corporation,
pursuant to a Restated Agreement and Plan of Merger dated June 8, 1994. Upon
consummation of the merger, Wico became a wholly owned subsidiary of Conquest
and the separate existence of CAC ceased. In addition, simultaneous with the
merger, Wico Gaming Supply Corp. ("Wico Gaming"), a wholly-owned subsidiary of
Wico, acquired certain assets, liabilities and divisions of Langworthy Casino
Supply, Inc. ("Langworthy"). The operations of Conquest and Wico are
collectively referred to as the "Company" hereafter.
Wico, through its wholly-owned operating subsidiaries, is a leading distributor
of replacement parts, accessories, and supplies to game operators and
distributors of coin-operated amusement/arcade games, billiard tables, vending
machines, such as food, soft drink and snack machines, and gaming machines.
Wico also supplies parts and accessories to original equipment manufacturers of
arcade games. Additionally, Wico is a leading U.S. manufacturer and
distributor of consumer joysticks, which are entertainment computer control
devices, and related accessories, that it sells directly to retailers and
distributors located principally in the United States. Langworthy is a 56 year
old manufacturer and distributor of casino supplies located in Las Vegas,
Nevada. The assets being acquired are Langworthy's layout business, dice
manufacturing, furniture business, including custom built casino tables and
other furniture items and accessories, playing chips, and playing cards
businesses. The purchase price for the Langworthy acquisition is $1,750,000
and the assumption of liabilities to trade creditors.
Concurrent with the merger, the stockholders of Wico exchanged their Wico
securities for Conquest securities and became the controlling stockholders of
the Company. The basis of the control is that the former stockholders of Wico
now own approximately 80% of the issued and outstanding capital stock of
Conquest. More specifically, upon consummation of the merger, the following
exchange of Wico securities for Conquest securities occurred: (i) the holders
of Wico Common Stock acquired record ownership of 21,280,707 shares of Conquest
Common Stock and 3,185,750 shares of a new series of Conquest Preferred Stock
("Series C Preferred Stock") in exchange for 2,944,000 shares of Wico Common
Stock; (ii) certain holders of Wico Preferred Stock acquired record ownership
of 1,800,000 shares of another new series of Conquest Preferred Stock ("Series
B Preferred Stock") and the right to receive on the date that Conquest files a
Certificate of Amendment with the Secretary of State of the State of Delaware
to effect certain amendments, hereafter referred to as the "Adjustment Date,"
an additional 1,000,000 shares of Series B Preferred Stock in exchange for
2,800,000 shares of Wico 10% Series AA Convertible Preferred Stock ("Wico AA
Preferred Stock") and Wico 10% Series A Convertible Preferred Stock; and (iii)
certain other holders of Wico AA Preferred Stock acquired record ownership of
3,130,434 shares of Conquest Common Stock in exchange for 1,200,000 shares of
Wico AA Preferred Stock. On the Adjustment Date, each share of Series C
Preferred Stock shall automatically be converted into roughly 14.99 shares of
Conquest Common Stock and each share of Series B Preferred Stock, upon the
election of the holders of the requisite percentage of Series B Preferred
Stock, may be converted into 3.68 shares of Conquest Common Stock. In
addition, on the Adjustment Date, all of the options to purchase Wico Common
Stock granted under Wico's 1993 Stock Option Plan will be converted into
options to acquire 5,360,000 shares of Conquest Common Stock.
F-17
<PAGE> 32
Conquest also agreed to issue a warrant to each Conquest stockholder of record
on the close of business on June 20, 1994 (not including any persons or
entities receiving shares or rights to shares of Conquest Common Stock in
connection with the merger), exercisable until June 20, 1999, at a price of
$1.1875 per share (the "Class B Warrants"). In addition, Conquest issued two
warrants to purchase 4,000,000 (the "Bank Warrant") and 2,000,000 shares (the
"Blue Diamond Warrant") of Conquest Common Stock, respectively. The Class B
Warrants, the Bank Warrant and the Blue Diamond Warrant, which were both issued
for nominal consideration, are all subject to certain registration and
anti-dilution rights.
Immediately after the merger, Conquest's authorized capital stock consisted of
50,000,000 shares of which 44,135,232 shares were outstanding and 5,000,000
shares of Preferred Stock, of which 4,985,750 shares were outstanding.
Accordingly, in order to issue the securities on the "Adjustment Date" as
described above, it was necessary for Conquest to increase the authorized
shares of Conquest Common Stock. In addition, Conquest must reserve an
adequate number of its authorized shares of Common Stock to satisfy its
obligations to issue Common Stock upon the conversion of its Series B Preferred
Stock, the exercise of the Bank Warrant, the Blue Diamond Warrant, the Class B
Warrants and options issuable under Conquest's 1994 stock option plan (the
"1994 Stock Option Plan"). Giving effect to the issuance of the Series B
Preferred Stock and upon the conversion of all outstanding Series C Preferred
Stock into Common Stock on the Adjustment Date, but not the exercise of any
options or warrants, or Conquest Series A Preferred Stock, Conquest's
outstanding capital stock after the Adjustment Date will consist of 91,586,761
shares of Common Stock, 7,550 shares of Series A Preferred Stock and 2,800,000
Series B Preferred Stock.
In July 1994, the Company filed an Information Statement with the Securities
and Exchange Commission pursuant to Section 14(c) of the Securities Exchange
Act of 1934 (the "Information Statement"), relating to certain actions by the
Company's Board of Directors and the holders of more than a majority of its
outstanding voting stock which occurred in June and July 1994 as a result of
the merger. Such actions included the approval of the Board and such
stockholders to amendments to the Company's Certificate of Incorporation to (i)
change the name of the Company to Conquest Industries, Inc.; (ii) increase the
Company's authorized number of shares of Common Stock from 50,000,000 to
250,000,000; and (iii) increase the Company's authorized number of shares of
its Preferred Stock from 5,000,000 to 10,000,000 (collectively the
"Amendments"). Such Amendments are also required to enable the Company to
issue shares of Common Stock upon conversion of the aforementioned securities.
On August 10, 1994, the Board of Directors of the Company decided to change the
Company's fiscal year-end from May 31 to September 30 in order to coincide with
that of Wico. In addition, on August 17, 1994, the Board of Directors of the
Company voted to sell the airline operating unit within the next twelve months.
The Company plans to continue operating the airline until the sale is
consummated. Any difference in anticipated proceeds from the sale of the
airline from that contemplated at the date of acquisition will be treated as an
adjustment of purchase price. The sale of the airline operation could severely
limit the utilization of Conquest's net operating loss carryforwards in future
years to offset taxable income of the Company.
UNAUDITED PRO FORMA DATA
For accounting purposes the merger with Wico has been treated as a reverse
acquisition; this will result in the recapitalization of Wico with Wico treated
as the continuing entity. Hereafter, the historical financial statements of
the registrant will be those of Wico. The acquisition of Langworthy has been
treated as a purchase. Assets received in the transactions (inclusive of
Conquest and Langworthy) will be valued at their fair values at the date of
acquisition.
The following table summarizes selected pro forma combined results of
operations of Wico and Langworthy as though the acquisition had been
consummated at the beginning of each respective period and assuming the fiscal
year is September 30. It gives effect to adjustments for the amortization of
the excess of cost over fair value of net assets acquired at the effective date
of acquisition, reductions in Wico long-term debt and interest expense, income
taxes and the issuance of Common Stock. The results of operations for the
airline unit have been excluded, although normal flight operations are
continuing, due to the decision to sell the related assets. The pro forma
information is not necessarily indicative of the results of operations which
would have been attained had the acquisitions been consummated at either of the
foregoing dates or which may be attained in the future.
F-18
<PAGE> 33
<TABLE>
<CAPTION>
For the nine months
ended June 30, (1)
------------------------------
1994 1993
--------------------------------------------------------------------------
<S> <C> <C>
Revenues, net . . . . . . . . . . . . . $ 33,992,035 $32,802,979
Operating income . . . . . . . . . . . 3,017,964 3,077,916
Net income . . . . . . . . . . . . . . 918,000 702,000
Net income per share . . . . . . . . . $ 0.01 $ 0.01
</TABLE>
(1) Corresponds with the Company's new fiscal year.
The airline operation incurred losses before extraordinary gain of $3,858,000
and $1,222,000 and net losses of $3,858,000 and $1,026,000 for the nine months
ended June 30, 1994 and 1993, respectively. Therefore, the inclusion of the
airline operation in the aforementioned pro forma data would substantially
worsen the results.
LEGAL ACTION AGAINST LESSOR
Conquest has been in a disagreement with PLM International, Inc. ("PLM") since
April 1994 over matters involving PLM's failure to reimburse Conquest for a
scheduled engine overhaul as set forth in its lease agreements for three (3)
aircraft being all of the aircraft currently under lease from PLM and
Conquest's desire to sublease same aircraft. Accordingly, Conquest has been
withholding lease and reserve payments pending resolution of the disagreement.
On August 26, 1994, PLM notified Conquest that it was in default of the
respective leases for failure to make payment of rent within five business days
after the same became due. PLM has ordered the immediate return of the
aircraft and the payment of $104,000 in back rental payments and $1,022,500 in
unpaid basic rent which would have otherwise become due through the expiration
date of each lease.
On August 30, 1994, Conquest filed suit against PLM in the District Court of
Hidalgo County, Texas claiming that PLM breached the lease agreements,
tortiously interfered with Conquest's prospective sublease, violated the Texas
Deceptive Trade Practices Act ("DTPA"), breached warranties, and committed
fraud and negligent misrepresentation. Conquest is seeking a declaratory
judgment that it owes nothing to PLM and an award of actual damages from PLM,
plus additional damages under the DTPA and punitive damages, reasonable and
necessary attorneys' fees and costs of court, interest before and after
judgment on all sums as allowed by law, and such other and further relief to
which Conquest may justly show itself entitled.
Conquest is unable, at this time, to predict the eventual outcome of this
matter; however, Conquest does not anticipate any disruption of its schedule
air service. Conquest has properly accrued rental payments relating to the
fiscal 1994 financial statements. However, no further accruals related to the
issue have been recorded in the financial statements since the liability for
unpaid basic rent, if any, is not determinable at this time.
F-19
<PAGE> 34
CONQUEST AIRLINES CORP.
SCHEDULE V - PROPERTY AND EQUIPMENT
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Period at cost Retirements Other of Period
- ------------------------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED MAY 31, 1994
Flight equipment $ 964,380 $ 568,322 $ $ $ 1,532,702
Land and buildings 375,129 16,111 391,240
Furniture and office equipment 134,792 7,442 142,234
Other equipment 790,017 181,178 971,195
Leasehold improvements 85,846 132,551 218,397
-------------- ------------- -------------- ------------- --------------
Total $ 2,350,164 $ 905,604 $ 0 $ 0 $ 3,255,768
============== ============= ============== ============= ==============
FOR THE YEAR ENDED MAY 31, 1993
Flight equipment $ 404,016 $ 560,364 $ $ $ 964,380
Land and buildings 369,857 5,272 375,129
Furniture and office equipment 131,941 2,851 134,792
Other equipment 647,124 182,639 (39,746) 790,017
Leasehold improvements 73,944 11,902 85,846
-------------- ------------- -------------- ------------- --------------
Total $ 1,626,882 $ 763,028 $ (39,746) $ 0 $ 2,350,164
============== ============= ============== ============= ==============
FOR THE YEAR ENDED MAY 31, 1992
Flight equipment $ 28,045,861 $ 557,512 $ $ (28,199,357) $ 404,016
Land and buildings 365,944 3,913 369,857
Furniture and office equipment 127,501 4,440 131,941
Other equipment 604,768 57,356 (15,000) 647,124
Leasehold improvements 57,468 16,476 73,944
-------------- ------------- -------------- ------------- --------------
Total $ 29,201,542 $ 639,697 $ 0 $ (28,214,357) $ 1,626,882
============== ============= ============== ============= ==============
</TABLE>
F-20
<PAGE> 35
CONQUEST AIRLINES CORP.
SCHEDULE VI - ALLOWANCE FOR DEPRECIATION
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Period at cost Retirements Other of Period
- ------------------------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED MAY 31, 1994
Flight equipment $ 105,575 $ 121,357 $ $ $ 226,932
Land and buildings 32,919 10,712 43,631
Furniture and office equipment 73,666 15,848 89,514
Other equipment 370,491 132,125 502,616
Leasehold improvements 70,576 17,665 88,241
-------------- ------------- -------------- ------------- --------------
Total $ 653,227 $ 297,707 $ 0 $ 0 $ 950,934
============== ============= ============== ============= ==============
FOR THE YEAR ENDED MAY 31, 1993
Flight equipment $ 33,499 $ 72,076 $ $ $ 105,575
Land and buildings 23,182 9,737 32,919
Furniture and office equipment 54,654 19,012 73,666
Other equipment 268,907 117,496 (15,912) 370,491
Leasehold improvements 45,502 25,074 70,576
-------------- ------------- -------------- ------------- --------------
Total $ 425,744 $ 243,395 $ (15,912) $ 0 $ 653,227
============== ============= ============== ============= ==============
FOR THE YEAR ENDED MAY 31, 1992
Flight equipment $ 4,064,349 $ 707,041 $ $ (4,737,891) $ 33,499
Land and buildings 13,335 9,847 23,182
Furniture and office equipment 36,130 18,524 54,654
Other equipment 166,605 104,802 (2,500) 268,907
Leasehold improvements 24,068 21,434 45,502
-------------- ------------- -------------- ------------- --------------
Total $ 4,304,487 $ 861,648 $ 0 $ (4,740,391) $ 425,744
============== ============= ============== ============= ==============
</TABLE>
F-21
<PAGE> 36
CONQUEST AIRLINES CORP.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended May 31,
----------------------------------------------
1994 1993 1992
------------- -------------- -------------
<S> <C> <C> <C>
Advertising . . . . . . . . . . . . . . . . . $ 413,764 $ 257,173 $ 119,546
Property taxes . . . . . . . . . . . . . . . . $ 92,642 $ 105,278 $ 200,428
</TABLE>
F-22
<PAGE> 37
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.
CONQUEST AIRLINES CORP.
By /s/ STEPHEN R. FELDMAN
--------------------------
Chairman of the Board
Dated: November 9, 1995
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.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ STEPHEN R. FELDMAN Chairman of the Board of Directors
- ------------------------
Stephen R. Feldman
/s/ VICTOR M. RIVAS Director
- ------------------------
Victor M. Rivas
/s/ BENTLEY J. BLUM Director
- ------------------------
Bentley J. Blum
/s/ JERRY KARLIK Chief Financial Officer
- ------------------------ (Principal Financial and Accounting Officer)
Jerry Karlik
/s/ STEFFAN MAGNELL Chief Executive Officer
- ------------------------
Steffan Magnell
</TABLE>
48
