<PAGE> 1
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ------------
Commission file number: 1-10206
CONQUEST INDUSTRIES INC.
------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0206582
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
6400 West Gross Point Road, Niles, Illinois 60714
-------------------------------------------------
(Address of principal executive office) (Zip Code)
2215 Redwood, Austin, Texas 78723
--------------------------------------------------------------------
(Registrant's former address of Principal Executive Office) (Zip Code)
(708) 647-7500
-------------------------------------------------
(Registrant's telephone number including area code)
(512) 929-6706
----------------------------------------------------------
(Registrant's former telephone number including area code)
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
---
The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of June 30, 1995 was 9,158,677 shares.
<PAGE> 2
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 1-2
Consolidated Statement of Operations 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-23
PART II - OTHER INFORMATION 24
SIGNATURE 25
</TABLE>
<PAGE> 3
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30,
1995 June 30, September 30,
Pro-Forma 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 1,633,526 $ 1,909,276 $ 1,007,880
Trade accounts receivable, less allowance for
doubtful accounts 4,364,708 4,364,708 5,694,272
Other receivables 209,227 209,227 323,843
Inventories 7,942,219 7,942,219 8,495,479
Prepaid expenses and other current assets 881,741 881,741 235,344
----------- ----------- -----------
TOTAL CURRENT ASSETS 15,031,421 15,307,171 15,756,818
MACHINERY AND EQUIPMENT - NET 961,414 961,414 1,071,301
DEFERRED TAXES 1,857,900 1,857,900 753,000
INTANGIBLE AND OTHER ASSETS - NET 6,714,320 6,151,820 5,979,581
NET ASSETS OF BUSINESS TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENT 4,250,000 4,250,000 -
NET ASSETS OF DISCONTINUED OPERATIONS - - 4,250,000
----------- ----------- -----------
$28,815,055 $28,528,305 $27,810,700
=========== =========== ===========
</TABLE>
See notes to financial statements.
1
<PAGE> 4
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
1995 June 30, September 30,
Pro-Forma 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,273,625 $ 6,083,625 $ 4,634,545
Accrued expenses 2,609,436 2,609,436 3,331,344
Current portion of long-term debt - 1,500,000 1,500,000
Notes payable - shareholder - 150,000 -
Income taxes payable 72,340 72,340 25,018
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 7,955,401 10,415,401 9,490,907
LONG-TERM DEBT 18,396,349 17,443,349 16,705,849
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY :
Preferred stock, authorized 5,000,000 shares, issuable in series
Series A, preferred stock, $.10 par value; 7,550 issued and
outstanding (liquidation preference: $93,257) 755 755 755
Series B, convertible redeemable preferred stock, no par
value; 2,800,000 shares issued and outstanding 2,000,000 2,000,000 2,800,000
Series D, redeemable preferred stock, no par value;
600,000 shares issued and outstanding ($200,000
liquidation preference - 200,000 -
Series E redeemable Preferred stock, no par value;
800,000 shares issued and outstanding 800,000 800,000 -
Common stock, $.01 par value; 25,000,000 shares authorized;
10,273,921 shares issued and outstanding at June 30, 1995 112,512 102,739 91,587
Additional paid-in capital 18,378,289 15,846,430 12,748,815
Accumulated deficit (18,759,383) (18,200,633) (13,945,520)
Foreign currency translation adjustment (79,736) (79,736) (81,693)
------------ ------------ ------------
2,463,305 669,555 1,613,944
------------ ------------ ------------
$ 28,815,055 $ 28,528,305 $ 27,810,700
============ ============ ============
</TABLE>
See notes to financial statements.
2
<PAGE> 5
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 8,810,363 $ 9,262,559 $ 29,341,087 $ 30,676,828
COST OF SALES 5,631,474 5,746,151 18,779,667 18,748,075
------------ ------------ ------------ ------------
GROSS PROFIT 3,178,889 3,516,408 10,561,420 11,928,753
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, distribution and administrative expenses 3,679,248 2,887,071 10,655,338 9,218,380
Depreciation and amortization expense 136,328 92,328 391,985 232,270
Loss from commuter airline operation including
cumulative adjustment of $1,916,000 2,092,051 - 2,703,059 -
------------ ------------ ------------ ------------
5,907,127 2,979,399 13,750,382 9,450,650
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (2,728,738) 537,009 (3,188,962) 2,478,103
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME):
Interest expense 577,634 449,309 1,639,115 1,309,620
Amortization of debt discount 290,000 - 775,000 -
Write off of registration costs - 268,000 - 268,000
Other-net 76,522 19,233 181,036 27,758
------------ ------------ ------------ ------------
944,156 736,542 2,595,151 1,605,378
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (3,672,894) (199,533) (5,784,113) 872,725
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES (BENEFIT) (1,230,000) (101,450) (1,739,000) 323,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,442,894) $ (98,083) $ (4,045,113) $ 549,725
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE $ (0.26) $ (0.03) $ (0.46) $ 0.03
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 9,530,000 7,181,000 9,345,000 7,181,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
3
<PAGE> 6
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stocks
Series A Series B
Shares Amount Shares Amount
----- ------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 7,550 $ 755 2,800,000 $ 2,800,000
Net loss - - - -
Preferred stock dividend - - - -
Net effect of Reallocation of purchase accounting
for Conquest Airlines Corp.
Issuance of Series D preferred stock in exchange for
shareholder loans - - - -
Issuance of common stock - -
Translation of foreign currency - - - -
Issuance of warrants in connection with debt - - - -
Series B exchanged for Series E (800,000) (800,000)
----- ------- --------- ------------
BALANCE - June 30, 1995 (unaudited) 7,550 $ 755 2,000,000 $ 2,000,000
===== ======= ========= ============
<CAPTION>
Series D Series E Common Stock
Shares Amount Shares Amount Shares Amount
------- ------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 - - 9,158,676 $ 91,587
Net loss
Net effect of Reallocation of purchase accounting
for Conquest Airlines Corp.
Preferred stock dividend
Issuance of Series D preferred stock in exchange for
shareholder loans 200,000 200,000
Issuance of common stock 1,115,245 11,152
Translation of foreign currency
Issuance of warrants in connection with debt
Series B exchanged for Series E 800,000 800,000
------- ----------- ------- ------- ---------- ------------
BALANCE - June 30, 1995 (unaudited) 200,000 $ 200,000 800,000 800,000 10,273,921 $ 102,739
======= =========== ======= ======= ========== ============
<CAPTION>
Foreign
Retained Currency
Paid-in Treasury Earnings Translation
Capital Stock (Deficit) Adjustment Totals
---------- -------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 12,748,815 $ - $(13,945,520) $ (81,693) $1,613,944
Net loss 1,286,000 (4,045,113) (3,950,113)
Preferred stock dividend (210,000) (210,000)
Net effect of Reallocation of purchase accounting
for Conquest Airlines Corp.
Issuance of Series D preferred stock in exchange for
shareholder loans 102,000 302,000
Issuance of common stock 1,559,615 1,570,767
Translation of foreign currency 1,957 1,957
Issuance of warrants in connection with debt 150,000 150,000
---------- ------- ------------- --------- -----------
BALANCE - June 30, 1995 15,846,430 $ - $(18,200,633) $ (79,736) $ 669,555
========== ======= ============ ========= ===========
</TABLE>
See notes to financial statements.
4
<PAGE> 7
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended June 30,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,045,113) $ 549,725
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,650,687 557,196
Provision for bad debts 80,910 88,734
Issuance of warrants as compensation 102,000 -
Deferred income taxes (1,739,000) -
Cumulative losses from commuter airline operations 1,916,000 -
Write off of registration costs 268,000
Changes in assets and liabilities:
Decrease in trade and other accounts receivable 1,248,654 246,371
Decrease in inventories 553,260 350,749
Increase in prepaid expenses and other current assets (568,987) (8,170)
Increase in intangibles and other assets (325,864) (629,949)
Increase in accounts payable 1,449,080 198,332
Increase in income taxes payable 47,322 (336,415)
Decrease in accrued expenses (731,863) (228,160)
----------- -----------
TOTAL ADJUSTMENTS 3,682,199 506,688
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (362,914) 1,056,413
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (296,794) (195,786)
Cash paid for acquired business - (1,750,000)
Cash of acquired airline subsidiary - 5,934,663
Other - 12,058
----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (296,794) 4,000,935
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term financing (1,125,000) (5,096,755)
Preferred stock dividends (210,000) (300,000)
Proceeds from revolving credit line - 100,000
Proceeds from issuance of promissory notes, net 1,123,369 -
Proceeds from issuance of preferred stock 200,000 -
Proceeds from issuance of common stock 1,570,767
Effect of foreign currency exchange rate changes 1,968 26,294
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES 1,561,104 (5,270,461)
----------- -----------
NET INCREASE (DECREASE) IN CASH 901,396 (213,113)
CASH AT BEGINNING OF PERIOD 1,007,880 791,038
----------- -----------
CASH AT END OF PERIOD $ 1,909,276 $ 577,925
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE> 8
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Nine months ended June 30,
1995 1994
----------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,656,569 $1,310,000
=========== ==========
Income taxes $ - $ 614,000
=========== ==========
Noncash investing and financing activities:
Issuance of Series D preferred stock $ 102,000 $ -
=========== ==========
Assets acquired in exchange for common stock $ - $4,950,000
=========== ==========
</TABLE>
See notes to financial statements.
6
<PAGE> 9
CONQUEST INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. All
such adjustments are of a normal and recurring nature. The results of operations
for any interim period are not necessarily indicative of a full year.
Certain financial information which is normally included in the financial
statements prepared in accordance with generally accepted accounting principles,
which is not required for interim reporting purposes has been condensed or
omitted. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and notes thereto (the "Consolidated
Financial Statements") as filed by the Company with the Securities and Exchange
Commission in the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1994.
2. EARNINGS (LOSS) PER SHARE
The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the period
plus (in periods in which they have a dilutive effect) the effect of common
shares contingently issuable, primarily from stock options, exercise of warrants
and the conversion of preferred stock. Such dilutive securities included in the
number of common shares outstanding are based on the treasury stock method.
3. SALE OF CONQUEST AIRLINES CORP.
Effective as of June 30, 1995 the Company transferred pursuant to a
contractual arrangement all of the common stock of its wholly-owned subsidiary,
Conquest Airlines Corp. ("CAC") to Air L.A., Inc. ("Air LA"), for
consideration consisting of (1) a $3,000,000 convertible promissory note of
Air LA, (2) an 8% promissory note of Air LA in the principal amount of
$1,000,000 and (3) an additional 8% promissory note of Air LA in the principal
amount of $2,000,000 representing Air LA's assumption of certain intercompany
indebtedness previously owed by CAC to the Company.
At the closing of the sale, the Company loaned to CAC the sum of $250,000
which is repayable (together with interest at 8% per annum) out of the proceeds
of Air LA's next public offering or private equity offering, or otherwise on
demand made at any time after July 31, 1995. The aforementioned promissory
notes are collateralized by all of the assets of Air LA and CAC. The $250,000
loan is collateralized only by the assets of CAC.
During the nine months ended June 30, 1995 the Company recorded losses from
its commuter airline operation conducted by Conquest Air of approximately
$2,703,000 including cumulative adjustments of $1,916,000 which have been
treated as a real location of the purchase price of the commuter air operation
and recorded as a credit to additional paid in capital (net of tax benefits of
$630,000) at June 30, 1995.
7
<PAGE> 10
The $3,000,000 convertible promissory note will, upon Air LA's authorization
of such preferred stock, (which is anticipated to occur in the month of August
1995), automatically convert into $3,000,000 of non-dividend bearing
convertible preferred stock of Air LA, which in turn will be convertible, at the
option of the Company, commencing not later than December 31, 1995, into shares
of common stock of Air LA over a two year period at prevailing market prices for
such common stock. Such convertible promissory note, and the convertible
preferred stock, entitles the Company, at its discretion, to elect two members
to the Board of Directors of Air LA.
Subject to certain mandatory prepayments out of the proceeds of equity
offerings made by Air LA, the $1,000,000 promissory note and the $2,000,000
promissory note issued as part of the sale of CAC will be repayable in quarterly
installments of $75,000 each (in the aggregate as between the two notes)
commencing not later than September 30,1996, with all remaining unpaid principal
becoming due and payable in a balloon payment due June 30, 2000.
Prior to the sale, CAC was in default under certain of its aircraft leases
and although Air LA has agreed to cure the existing defaults under CAC's leases
with respect to six of its aircraft being operated by CAC at the time of the
sale, the Company will remain liable under such leases unless and until Air LA
provides satisfactory deposits and/or other assurances satisfactory to the
lessors, in order to obtain the release of the Company from the obligations
under such leases.
Air LA has received a financing commitment from a lender to provide a
refinancing of its indebtedness secured by all of its assets, including the
acquired assets owned by its CAC subsidiary. Air LA is also exploring the
possibility of a private placement of securities, as well as a secondary
public offering of its common shares. In light of the significance of Air
LA's recent operating losses as reported in documents filed with the Securities
and Exchange Commission, the consummation of such debt financing within the next
ninety days, as well as a contemplated offering of Air LA equity securities in
calendar 1995, is of material importance to Air LA's ability to both cure
the Company's defaults to the CAC aircraft lessors and to meet its obligations
to the Company arising from the sale of CAC. Because of the matters discussed
above, the Company has recorded the transaction as net assets of a business
transferred under contractual arrangement in the amount of $4,250,000. The
Company will account for its investment in Air LA on the equity method. At the
present time, based upon information provided by Air LA, the Company has been
informed that its equity ownership for purposes of accruing losses is
approximately 15%. In addition the Company will quarterly evaluate the
carrying value of its investment in Air LA for impairment purposes based upon
its estimate of the undiscounted cash flows it expects to receive from Air LA.
The above discussion is as of the date this financial information was
originally filed. For current information about Air L.A., see Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
4. PRIVATE PLACEMENT OF COMMON STOCK
In June and July 1995, the Company issued an aggregate of 2,094,500 shares
of common stock at a price of approximately $1.41 per share, yielding total
proceeds to the Company of approximately $2,950,000 of which approximately
$1,570,000 was received in June and $1,380,000 in July 1995. In July 1995,
the Company utilized $350,000 of such proceeds to redeem (for $200,000)
the outstanding shares of Series D Preferred Stock and to repay a $150,000
loan owed to an affiliate of an executive officer (collectively, the "Bridge
Repayment"). (see Note B)
8
<PAGE> 11
5. CONTEMPLATED CREDITOR AGREEMENTS
In June 1995 the Company reached tentative agreement with certain of its
trade creditors whereby, subject to the effectiveness of a registration
statement in respect of among others, these shares, and the further final
agreement of such creditors to accept such shares, creditors of the Company
holding trade indebtedness in the aggregate amount of approximately $700,000
have agreed to consider accepting up to 350,000 shares of common stock of he
Company in extinguishment of such claims. (See Management's Discussion and
Analysis for revised terms of the offer to such creditors.)
6. ACQUISITION OF LANGWORTHY CASINO SUPPLY
In June 1994 the company completed the aquisitions of Langworthy Casino
Supply. The following table sets forth pro-forma results of operations for the
Company and Langworthy Casino Supply as if the Langworthy acquisition took place
on October 1, 1993.
<TABLE>
<CAPTION>
Nine months ended June
30, 1994
----------------------
<S> <C>
Revenues, net $ 33,992,035
----------------------
Operating income $ 3,017,964
----------------------
Pro-forma net income $ 918,000
======================
Pro-forma income per share $ .07
======================
</TABLE>
7. ISSUANCE OF PREFERRED STOCK AND RELATED MATTERS
(a) In February 1995, the Company borrowed $200,000 from the Blum
Asset Trust ("BAT") an affiliate of Bentley J. Blum, a principal shareholder and
a director The loan was non-interest bearing and was repayable on demand. In
May 1995, pursuant to a prior agreement, the loan was converted into 600,000
shares of new Series D preferred Stock of the Company, and the Company
simultaneously issued to BAT warrants entitling BAT to purchase, at any time
on or before February 15, 2000, up to 600,000 shares of Common Stock at a price
of $.3333 per share (subject to adjustment under certain circumstances); and
one-third of such warrants are subject to cancellation if all of the shares of
Series D Preferred Stock are redeemed on or before August 15, 1995. BAT has the
right to pay the exercise price under such warrants by delivering to the
Company for cancellation a number of shares of Series D Preferred Stock having
an aggregate liquidation preference equal to the amount of the subject
exercise price.
9
<PAGE> 12
8. PRO-FORMA BALANCE SHEET
The June 30, 1995 historical balance sheet has been adjusted to give effect
to (1) the receipt of the balance of funds related to the completion of the
private placement of common stock (less estimated expenses of the offering)
(1) ($1,180,000) and (2) the redemption and repayment of the Series D
preferred stock and shareholder loan, respectively as referred to in
Note 4
9. SUMMARIZED FINANCIAL INFORMATION OF
CONQUEST AIRLINES CORP.
The following sets forth the summarized financial information of Conquest
Airlines Corp. as of June 30, 1995 and for the nine months then ended
Current assets $ 665,000
Property and equipment, net 2,035,000
Current liabilities 1,834,000
Long term debt 184,000
Revenues 6,440,000
Cost of operations 3,058,000
Loss from operations (1,753,000)
(a) Not included in the losses from commuter airline operations for the nine
months ended June 30, 1995 are losses from June 20, 1994 (acquisition date)
through Conquests fiscal year ended September 30, 1994 of approximately
$950,000.
10. ISSUANCE OF SERIES E PREFERRED STOCK
In May 1995, the holders of 800,000 shares of Series B Preferred Stock
agreed to exchange such shares of Series B Preferred Stock, on a
share-for-share basis, for 800,000 shares of new Series E Preferred Stock
of the Company. In conjunction with such exchange, the warrants issued to
such holders in May 1995 (in conjunction with the amendment of the Series B
Preferred Stock) were cancelled.
The Series E Preferred Stock (a) is entitled to one vote per share, voting
together with the Common Stock as a single class, (b) bears dividends
payable semi-annually before any dividends are declared and paid on the
Common Stock, but pari passu with the dividends on the Series B Preferred
Stock, (c) is entitled to a preference of $1.00 per share on liquidation,
dissolution or winding up of the Company (such amount to be junior to the
liquidating preferences in respect of the Series A Preferred Stock, pari
passu with the liquidation preferences in respect of the Series B Preferred
Stock, and senior to any distributions in respect of the Common Stock), (d)
is redeemable at the Company's option at any time and from time to time at
a price of $1.00 per share, (e) may be converted into Common Stock at any
time at the rate of 0.368 shares of Common Stock for each share of Series E
Preferred Stock (subject to adjustment under certain circumstances), and
(f) is subject to mandatory redemption, at the option of the holder, upon
the consummation by the Company of a public offering of its securities in
which the Company receives gross proceeds of $3,000,000 or more.
11. SUBSEQUENT EVENTS
At September 30, 1995, the Company was not in compliance with certain
financial covenants under its loan agreement with its institutional lender.
In connection with the October 20, 1995 refinancing of the Company's long
term debt, any defaults under this previous debt agreement were cured.
However, the Company is required to comply with several financial covenants
under the new credit agreements, commencing December 31, 1995.
10
<PAGE> 13
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
General
During the year ended September 30, 1994, the Company's continuing
operations operated with positive cash flow. However, as a result of
continuing cash demands of the Company's airline operation, as well as costs
associated with the consolidation of the Company's recently acquired gaming
subsidiary and a general softening of the coin-operated machine market, Wico
Holding Corporation, (the Company's principal operating subsidiaries)
generated lower than expected sales volume in the fourth quarter of fiscal 1994
and the first three quarters of fiscal 1995, resulting in a negative cash flow
in the 1995 fiscal year to date and a shortage of working capital. The
Company's principal sources of liquidity and working capital have been cash
flow from operations for the fiscal years ending 1994 and loans and equity
provided by investors, including certain affiliates, since September 30, 1994.
Wico's operations generated positive cash flow in fiscal 1994, 1993 and 1992 in
the amounts of approximately $1,761,000, $1,832,000 and $1,329,000,
respectively. However, for the nine months ended June 30, 1995, operating cash
flow was negative by $363,000 and total cash flow was positive by $901,000.
Senior Secured Financings
Prior Credit Agreement
In addition to the private placements of securities described below,
until October 20, 1995, the Company's principal sources of capital for
operations was a combined term loan and revolving credit loan granted by
National Westminster Bank USA (the "Bank") pursuant to a credit agreement
between Wico and its operating subsidiaries and the Bank. The term loan,
maturing in October 1998, had a principal balance of approximately $6,211,000
at June 30, 1995. The revolving credit loan provided for a maximum borrowing
of $13,000,000 (inclusive of outstanding letters of credit established for the
Company). At June 30, 1995 and September 30, 1995, the full $13,000,000
maximum line of credit borrowing had been drawn
11
<PAGE> 14
upon by the Company. At June 30, 1995, the aggregate amount of borrowings
under the credit agreement was approximately $18,786,000. The maximum annual
interest rates on both credit facilities was the Bank's prime rate plus 3.0% or
LIBOR plus 4.75%. Both loans were secured by a first lien on substantially
all of the Company's consolidated assets, limited unsecured personal
guarantees, each in the amount of $1,000,000, from Stephen R. Feldman, Chairman
of the Board, and Bentley J. Blum, a principal stockholder and director of the
Company, and stock pledges covering all of the Company's Common Stock now owned
or hereafter acquired by certain of the Company's principal stockholders.
Under the terms of the prior credit agreement, the Company was required
to be in compliance with certain financial covenants, including attaining a
minimum operating income before amortization of intangibles and other assets
(as defined), a current ratio of 1.75:1 and minimum working capital of
$6,300,000. At June 30, 1995 and at September 30, 1995, the Company was not in
compliance with the minimum operating income and ratio of interest expense to
operating income covenant. The Company obtained a waiver of its financial
covenant defaults at June 30, 1995 and such defaults at September 30, 1995 were
waived in connection with the refinancing described below.
The Refinancing
On October 20, 1995, the Company consummated a refinancing of its senior
secured indebtedness with Sanwa Business Credit Corp. ("Sanwa") and the Bank.
Set forth below is a summary of the terms of the refinancing.
Sanwa has provided a maximum $14,000,000 secured line of credit having a
three year term expiring September 30, 1998. Advances under such line of
credit are based upon percentages of eligible accounts receivable (85%),
eligible raw materials and finished goods inventories (55%) and eligible
work-in-process inventories (20%) of the "Borrower" (defined in the credit
agreement as Wico Corporation). The Borrower also received a $500,000
overadvance line which must be repaid on an annual basis. The line of credit
facility bears interest at a bank prime rate plus 1.5% or (at the Borrower's
option) based on the LIBOR rate plus 4.25%.
At the October 20, 1995 closing of the revolving credit facility, the
Borrower drew down advances of approximately $7,400,000, of which approximately
$6,000,000 was used to retire its revolving credit indebtedness to the Bank
under its existing credit agreement, and the balance was retained for working
capital purposes and the payment of certain accrued obligations.
Under the Sanwa line of credit facility, the following financial
covenants are required to be complied with:
* The Borrower and its parent corporation, Wico Holding Corp.
(the "Parent") are obligated to maintain an interest coverage
ratio of not less than 1.00 to 1.00. "Interest coverage
ratio" is defined as the ratio of (i) consolidated net income
of the Parent for the applicable period, plus interest and
income taxes deducted for such period, to (ii) interest of the
Borrower paid or accrued for such period.
* The Parent is obligated to maintain a debt service ratio of
not less than 1.25 to 1. "Debt service ratio" is defined as
the ratio of (i) consolidated net income of the Parent plus
interest, income taxes, depreciation, amortization and losses
attributable to the sale of assets outside the ordinary course
of business which are deducted in determinating such
consolidated net income in such period, to (ii) interest,
capital leases, taxes and preferred dividend payments by the
Parent and principal payments of indebtedness and capital
expenditures.
* For each of the fiscal periods set forth below, the Parent is
required to maintain not less than the following "EBITDA"
(defined as the Parent's consolidated net income (or loss)
before deductions for interest, taxes, depreciation and
amortization for such period):
<TABLE>
<CAPTION>
Period Amount
------ -----------
<S> <C>
10/1/95 through 12/31/95 $1,410,000
10/1/95 through 3/31/96 $2,270,000
10/1/95 through 6/30/96 $2,700,000
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
10/1/95 through 9/30/96 $3,567,100
10/1/96 through 12/31/96 $1,460,000
10/1/96 through 3/31/97 $2,360,000
10/1/96 through 6/30/97 $2,810,000
10/1/96 through 10/1/97 $3,717,000
Each October 1 thereafter
through the immediately
following December 31 $1,460,000
Each October 1 thereafter
through the immediately
following March 31 $2,360,000
Each October 1 thereafter
through the immediately
following June 30 $2,810,000
Each October 1 thereafter
through the immediately
following September 30 $3,717,000
</TABLE>
* For each of the fiscal periods set forth below, the Company is
required to maintain not less than the following "Adjusted Net
Worth" (defined as the consolidated net worth of the Company
and its consolidated subsidiaries, including the Parent, Wico
Corporation and the subsidiaries of Wico Corporation):
<TABLE>
<CAPTION>
Period Amount
------ -----------
<S> <C>
10/20/95 through 12/31/95 $1,800,000
1/1/96 through 3/31/96 $2,200,000
4/1/96 through 12/31/96 $2,800,000
1/1/97 through 3/31/97 $3,300,000
4/1/97 through 9/30/97 $3,700,000
10/1/97 through 12/31/97 $4,000,000
1/1/98 through 3/31/98 $4,300,000
From 4/1/98 and thereafter $4,700,000
</TABLE>
With respect to the foregoing covenants, the Adjusted Net Worth covenant
is the only financial covenant which is based upon the consolidated
stockholders' equity of the Company and its consolidated subsidiaries. All of
the remaining covenants are measured by the operating results of the Parent and
its subsidiaries. The interest coverage ratio, debt service ratio and minimum
EBITDA requirements under the credit agreement exclude corporate expenses
attributable to the Company which are unrelated to the Parent and its
subsidiaries, or any losses attributable to the business operated by Conquest
Air or resulting from its sale to Air LA. On a pro-forma basis, the Company's
Adjusted Net Worth was $2,463,000 at June 30, 1995. The Company also believes
that it and Wico and its consolidated subsidiaries will be in compliance with
such financial covenants as at December 31, 1995 (the first such compliance
period required under the credit agreement). There is, however, no assurance
that the Company or its subsidiaries will not be in default of any or all of
such financial covenants at December 31, 1995 or in future fiscal periods.
Simultaneous with the closing of the contemplated Sanwa revolving credit
facility, Wico and its subsidiaries entered into an amended and restated term
loan agreement with the Bank, pursuant to which the outstanding balance of
approximately $12,536,000 owed to the Bank (net of the $6,000,000 payment
from the Sanwa line of credit) was extended to September 2000 requiring the
payment of interest only (at an annual rate of the Bank's prime rate plus 1.5%)
through September 1996 and thereafter amortizing on a monthly basis as to
principal in the annual amount of $250,000 in fiscal 1997, $500,000 in fiscal
1998, $750,000 in fiscal 1999, $1,000,000 in fiscal 2000, with a final balloon
payment of approximately $10,100,000 due in September 2000.
Repayment of the Sanwa revolving credit facility is secured by a first
priority lien and security interest on all accounts receivables, inventories,
contract rights and general intangibles of the Borrower and other
13
<PAGE> 16
subsidiaries of the Parent. Repayment of the Bank's restated term loan is
secured by a first priority lien and security interest on all real property,
machinery, equipment, leasehold improvements other fixed assets of Wico and its
subsidiaries, by a second lien and security interest on the assets securing the
Sanwa revolving credit facility, and by the limited personal guarantees of
Stephen R. Feldman, Chairman of the Board of the Company (in the amount of
$1,000,000), and of Bentley J. Blum, a principal stockholder and director of
the Company (in the amount of $3,000,000), together with stock pledges in favor
of the Bank covering all of the outstanding shares of Common Stock of the
Company now owned or hereafter acquired by certain of its principal
stockholders, including Bentley J. Blum and Iris Feldman, the wife of Stephen
R. Feldman. In addition, Mr. Blum pledged to the Bank certain personal real
estate related assets as collateral for his $3,000,000 guaranty.
The obligations of the Company and its subsidiary under the credit
agreements are cross-defaulted, so that upon the occurrence of an event of
default under either of the credit agreements, both lenders could declare all
indebtedness to be immediately due and payable and would be entitled to
exercise the rights of secured credits and foreclose upon substantially all of
the assets of the Company, Wico and its subsidiaries.
The lending agreements with both Sanwa and the Bank contain other
restrictions on the Parent, the Borrower and its subsidiaries, requiring the
consent of the lenders in connection with the making of any acquisition,
incurred of additional indebtedness (other than specified permitted
indebtedness) payment of dividends, issuance of additional securities or making
of annual capital expenditures in excess of prescribed amounts.
Private Placements
In November 1994, the Company sold $2,737,500 of its securities in a
private placement of units. Each unit ("Unit") consisted of a $25,000
principal amount 10% convertible promissory note (the "Private Placement
Notes") due September 1996. The Private Placement Notes are convertible into
shares of the Company's Common Stock at a price per share equal to 80% of the
closing bid price of the Common Stock on the date of conversion. Pursuant to
the terms of the 1994 Private Placement, in the event and to the extent that
holders of the Private Placement Notes convert such notes into shares of
Company Common Stock, they would also receive warrants (the "1994 Private
Placement Warrants"), entitling them to purchase 0.02 shares of Company Common
Stock for each $1.00 of 10% Private Placement Notes so converted (a maximum of
54,750 warrants if all $2,737,500 of Private Placement Notes are converted), at
an exercise price of $11.75 per share. The 1994 Private Placement Warrants, if
and to the extent issued are exercisable through June 20, 1999.
In June 1995, the Company entered into an agreement with Rickel, pursuant
to which Rickel agreed to use its best efforts to solicit from the holders of
the Private Placement Notes their written consents to exchange their 10%
convertible Private Placement Notes for 12% non-convertible Exchange Notes.
In consideration of accepting such exchange offer of 12% non-convertible
Exchange Notes for 10% Private Placement Notes, the Company has agreed to pay
to holders of Private Placement Notes an amount in cash equal to $0.20 for each
$1.00 of Private Placement Notes exchanged for a like principal amount of 12%
Exchange Notes (an aggregate of $547,500 if all $2,737,500 of Private Placement
Notes are exchanged for $2,737,500 of 12% Exchange Notes). Cash payments are
to be made by the Company on or before the December 31, 1995 expiration date of
the exchange offer. Such cash payments are in addition to, and not in lieu of,
the Company's obligation to pay principal and interest on the 12% Exchange
Notes, when due.
In May 1995, pursuant to agreements entered into in April 1995, the
Company authorized for issuance 800,000 shares of redeemable Series E Preferred
Stock, in exchange for a like number of shares of Series B Preferred Stock.
The holders of the Series E Preferred Stock are entitled to demand redemption
of such securities, at par, in the event that the Company receives gross
proceeds of $3,000,000 or more from any public offering of securities.
Although the Company will not receive $3,000,000 of gross proceeds from the
sale of the 2,975,000 Company Shares, the holders of the Series E Preferred
Stock may seek to compel redemption in the event the Company receives proceeds
from the exercise of any or all of the 2,068,407 Class B Warrants,
Underwriter's Warrants and/or Class Z Warrants offered hereby. The Company (i)
does not believe that the intent of the agreement with the holders of the
Series E Preferred Stock was that cash proceeds which may be received at some
indefinite time in the future from exercise of an offering of Warrants were to
have been included in the $3,000,000 threshold, and (ii) based on an average
exercise price of approximately $5.02 per Warrant Share, does not anticipate
that such Class B Warrants, Underwriter's Warrants or Class Z Warrants will be
exercised in the foreseeable future.
14
<PAGE> 17
In June and July, 1995, the Company sold an aggregate of 2,082,147 shares
of Common Stock in the 1995 Private Placement, yielding gross proceeds of
approximately $2,935,827. Out of such gross proceeds, $350,000 has been
utilized to redeem $200,000 of the Company's Series D Preferred Stock held by
an affiliate of Bentley J. Blum and to repay a $150,000 loan made to the
Company by such affiliate, and the balance of such proceeds has been and
continues to be utilized for working capital.
15
<PAGE> 18
Sale of Conquest Air
From and after the Wico Merger, the Company's airline operation used
approximately $2,200,000 in cash through June 30, 1995. The airline operation
has continued to operate unprofitably and generate negative cash flow from its
operations. On January 1, 1995, the Company implemented across the board fare
increases, and in February 1995, the Company was successful in negotiating with
its lessors to terminate the leases of three of its aircraft which reduced the
fleet to six aircraft (compared with 16 aircraft at the time of the Wico
Merger). In connection with its termination of the leases on the three
aircraft, the Company agreed to settle the outstanding balance due under the
remaining term of such lease for approximately $350,000 and agreed to pay a
former supplier of maintenance services approximately $200,000. Both such
amounts are due by January 31, 1996.
The foregoing measures, together with other cost reductions, reduced (but
did not eliminate) the continuing losses in the airline operation. Due to the
negative cash flow in the airline operation, Conquest Air was also in default
of its lease payments under the leases for its six aircraft, and has received
default notices from the lessors in respect of four of the six aircraft. On
June 30, 1995, the Company sold the stock of Conquest Air to Air LA in
consideration for (i) a $3,000,000 convertible promissory note of Air LA
(automatically convertible into $3,000,000 of convertible preferred stock of
Air LA upon authorization of such shares by the Air LA stockholders), (ii) an
8% $1,000,000 Air LA note, and (iii) Air LA's assumption of the obligation to
repay to the Company $2,000,000 of accrued indebtedness of the former Conquest
Air subsidiary, evidenced by a separate 8% Air LA note. The $3,000,000
convertible note (and any preferred stock into which the note is converted)
will be convertible, at the option of the Company, either (a) commencing not
later than December 31, 1995, into shares of common stock of Air LA over a
two-year period at prevailing market prices for such common stock, or (b) if
Air LA has not completed a contemplated public financing by such date, the
preferred stock will be convertible at any time in whole or in part by the
Company from and after January 1, 1996 at prevailing market prices of Air LA
common stock. The $1,000,000 note and $2,000,000 note will, subject to certain
mandatory prepayments out of the proceeds of equity offerings by Air LA, be
repayable in quarterly principal installments of $75,000 each (in the aggregate
as between the two notes) commencing not later than September 30, 1996, with
all remaining unpaid principal becoming due and payable in a balloon payment
due June 30, 2000. To assist Air LA in closing the transaction pending receipt
of an anticipated debt refinancing of Air LA to be secured by both its assets
and the acquired Conquest Air assets, at the closing of the sale to Air LA, the
Company made Air LA a $250,000 loan due on the earlier of such refinancing or
July 31, 1995. Such loan remains outstanding, and the Company has not demanded
repayment pending Air LA's pursuit of debt refinancing.
Under the terms of the sale of Conquest Air, Air LA: (i) agreed to cure
certain defaults of Conquest Air to its six remaining aircraft lessors incurred
during prior to the June 30, 1995 sale date (an aggregate of approximately
$400,000 of overdue lease payment installments as at June 30, 1995), and (ii)
assumed the ongoing obligations under such aircraft leases. However, to date,
Air LA has been unable to cure $192,000 of such pre-existing defaults, and the
Company has been advised by certain of such lessors that Air LA has been late
in making approximately $248,000 of periodic monthly installment payments due
from July 1, 1995 to October 31, 1995. Monthly payments under each of the
remaining six aircraft leases, which have remaining terms at October 31, 1995
of between 18 and 24 months, range from $15,000 per month to $20,500 per month,
and aggregate $105,500 per month as to all such leases. Accordingly, the
Company remains contingently liable for such defaults in the aggregate amount
of $2,206,000 of rental payments, plus costs of collection and late fees,
unless paid by Air LA. Although Air LA has advised that it intends to bring
current all aircraft lease payment obligations incurred both prior and
subsequent to June 30, 1995 upon completion of its contemplated debt
refinancing, such refinancing and other projected financing which Air LA is
seeking to obtain have been delayed, and there is no assurance that it will be
successful in obtaining any financing or otherwise curing such lease payment
defaults.
Air LA has received a financing commitment from a lender to provide a
refinancing of its indebtedness secured by all of its assets, including the
acquired assets owned by its Conquest Air subsidiary. In light of its
significant recent losses from operations, the consummation of such debt
financing within the next 90 days, as well as a contemplated public offering of
Air LA equity securities (estimated to occur in the first half of calendar
1996), will be of material importance to Air LA's ability to both cure the
Company's defaults to the Conquest Air aircraft lessors and to meet its
purchase price obligations to the Company.
16
<PAGE> 19
OFFER OF CREDITORS SHARES
In order to reduce its indebtedness and improve its equity position, the
Company has entered into agreements with certain of its creditors, including
two law firms and the stockholders of Feldman Radin & Co., P.C., an accounting
firm with which Stephen R. Feldman is a principal stockholder, who hold
accounts payable and other indebtedness of the Company aggregating $931,000 at
October 31, 1995 to purchase from the Company an aggregate of 881,631 Creditors
Shares have been registered.
RESULTS AND PLAN OF OPERATIONS OF AIR LA
The following summarized financial data and discussion relates to the
financial statements, results of operations and plan of operations of Air LA
for the nine months ended March 31, 1995. Such information has been derived
from Air LA's Form 10-QSB filed with Securities and Exchange Commission for the
quarter ended March 31, 1995. The financial information as of March 31,
1995 and for the nine months then ended for Air LA is the most current
financial information on record with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Summary Results of Operations Data (In thousands)
----------------------------------
<S> <C>
Operating revenues $ 3,175
Operating expenses 8,325
Operating loss (5,150)
------
Net Loss $(5,376)
=====
Net Loss per share $ (.66)
=====
<CAPTION>
Certain Balance Sheet Data
--------------------------
<S> <C>
Current assets $ 672
Total assets 2,564
Current liabilities 3,577
Working capital deficiency (2,905)
Stockholders' equity $(1,013)
</TABLE>
Comparison of Nine Months Ended March 31, 1995 to Nine Months Ended March 31,
1994 for Air LA.
Operating Revenues. Revenues increased to $3,175,224 during the 1995 period
compared to $621,167 during the 1994 period. In the 1994 period, Air LA
operated two Metro 23 aircraft put into service late in March 1994. In the
1995 period, Air LA operated six Metro 23 aircraft and served 15 cities during
the period.
Operating Expenses. Flight operations increased to $3,575,113 in the nine
months ending March 31, 1995 compared to $777,648 in the nine months ended
March 31, 1994. This is primarily due to the additional aircraft and Air LA's
expansion of service.
Maintenance expenses increased to $1,297,377 for the nine months ended
March 31, 1995, compared to $479,680 for the nine months ended March 31, 1994.
A Metro 23 based in St. Paul required substantially more maintenance than
normal in the 1995 period. In April, 1995, the aircraft was returned to the
lessor.
Aircraft and traffic services increased to $1,394,879 during the nine
months ended March 31, 1994 compared to $368,402 for the nine months ended
March 31, 1994. The increase was due primarily to the addition of service to
new cities.
Sales and marketing increased substantially to $884,841 during the 1995
period compared with only $187,559 during the 1994 period.
General and administration increased to $1,175,073 during the nine months
March 31, 1995 compared with $182,559 for the nine months ended March 31, 1994.
Most of this increase was attributable to the increase in the number of
personnel required to run Air LA's expanded operations.
Other expenses increased overall to $124,367 for the nine months ended
March 31, 1995 compared with $24,128 for the nine months ended March 31, 1994.
Liquidity and Capital Resources for Air LA
On December 31, 1994 Air LA had $75,738 in cash and $289,289 in accounts
receivable. On March 31, 1995 Air LA had $(138,430) in cash and $423,165 in
accounts receivable. The reduction in cash resulted from losses incurred in
the quarter. Revenue increased from $231,725 in the three months ended
December 31, 1994 to $1,149,075 for the three months ended March 31, 1994.
Notwithstanding continuing growth in revenue, management views current cash as
inadequate to meet the ongoing operational requirements of Air
17
<PAGE> 20
LA. further, Air LA is seriously in arrears with many of its vendors. For the
most part, key vendors have continued to provide services and products, many
being paid on cash basis. However, several key vendors including Fairchild
aircraft, the lessor of Air L.A.'s five Metroliner aircraft, and the Los
Angeles Department of Airports have recently sent default notices to Air LA
requiring timely payment under threat of withdrawal of the goods or services
that they provide.
In order to raise additional cash for current operations and continuing
expansion, Air LA reduced the exercise price on 1.25 million options from $1.50
to $1.00. This offer, originally limited to the one month between November 15
and December 15, 1994 was extended until February 15, 1995. Air LA raised
$1,004,758 in additional working capital through the exercise of these options.
Further, through May 8, 1995, Spelman & Co., Inc. secured a $575,000 loan for
Air LA, based on a secured note. Air LA has sought an additional $500,000 in
debt financing and anticipates that, based on forecast cost reductions and
revenue growth, that it may still need to raise an additional $250,000 in order
to meet ongoing operational requirements for the next 60 to 90 days at which
time it is forecast that Air LA will have significantly reduced its losses or
achieved a breakeven. Preliminary indications of approval for this loan have
been received by Air LA, but there can be no guarantee that this transaction
will be completed. Furthermore, critical to the continuation of the business
will be the cooperation of current vendors with whom Air LA must reach
agreements for the continuing provision of goods and services until such time
as a larger financing or adequate positive cash flows can be achieved to settle
accounts owing.
In order to offset the continued losses incurred through its west coast
operations, on January 30, 1995 Air LA entered into a transaction to purchase
the assets, principally the goodwill and ongoing service, of Capitol Air
serving routes in the midwest between St. Paul, Chicago Midway Airport and
Milwaukee. Capital Air, whose assets were purchased in a non-cash transaction
in exchange for 800,000 shares of Air LA common stock and options to buy an
additional 700,000 shares at $1.75 per share, while not profitable at the time
of the acquisition, was generating significantly higher revenue per aircraft in
serve than Air LA on the west coast.
In June, 1994, with funds raised in its public offering, Air LA began an
expansion with the goal of having ten new aircraft in service within twelve
months. The business plan, based predominantly on an expansion into Mexico,
was modified to incorporate the recommendations of a consultant provided by
Fairchild Aircraft and an operational hub and maintenance facility was
established at Ontario Airport. Ontario had been newly designated an
international facility in February, 1994. Due to disappointing traffic, within
months all international service into Ontario. Due to disappointing traffic,
within months all international service into Ontario was withdrawn. Because of
continuing lease obligations on its maintenance facility, Air LA was the last
carrier to discontinue international service into Ontario. Air LA's operations
continued until Fall, 1994. It was not until February, 1995 that Air LA was
able to move, albeit on a temporary basis, its maintenance operations to Long
Beach. The disappointing results at Ontario ultimately resulting in the
company having to significantly change its hub-based strategy and resulted in
significant losses in second and third quarters of fiscal 1995.
Additional events outside the control of Air LA included financial
problems at Aeromexico, weather problems and heavy flooding in California from
the worst winter in decades, heavy competition and fare wars between Southwest
Airlines and the newly formed United Shuttle resulted in continuing high losses
as Air LA sought to find and establish itself in markets where it was
relatively protected from completion. As a result of rapidly accelerating
changes in the west coast market place and Air LA's deteriorating financial
condition, management sought to diversify its operations into other areas as a
way to broaden the base of Air LA's business. Air LA purchased the Capitol Air
routes based in St. Paul, Minnesota, and on January 27, 1995 began to deploy a
portion of its fleet to the midwest with the initiation of service on the route
between St. Paul City Airport and Chicago Midway Airport. Additional service
to Warroad, Minnesota is scheduled to commence in May, 1995.
In April, 1995, a number of the senior executive officers of Air LA
resigned their positions. A new management team was appointed by the Board of
directors based on a their plan to significantly reduce Air LA's expenses while
increasing revenue. At the time of the public offering it was difficult to
acquire reliable used Metroliner aircraft. Further, management believed that
as a start up operation Air LA's performance would be greatly enhanced through
the reliability of new aircraft and the warranties and other support from the
manufacturer would significantly reduce direct operating cost. Management
believed that the higher cost of new aircraft would be offset by these factors.
As a result Air LA entered into a contract to purchase ten new Fairchild
Metro-23 aircraft. At March 31, 1995, Air LA owes significant back payments
for aircraft leases to Fairchild, which has already notified Air LA of its
default, and there can be no guarantee that Air
18
<PAGE> 21
LA will be successful in its negotiations with Fairchild to retain the use of
the aircraft while replacements are sought.
Although the new management team's plan is for Air LA to achieve
approximately break even financial results within 60 to 90 days, those results
are predicated on Air LA successfully raising additional working capital of
between $500,000 and $750,000 in addition to the loans arranged through Spelman
& Co., Inc. There can be no guarantee that such additional funds will be
raised. The success of the plan is also predicated on continuing cooperation
from vendors, some of whom have already notified Air LA that a default exists.
There can be no guarantee that vendors will continue to provide goods and
services on an ongoing basis. Without additional working capital and the
ongoing provision of goods and services from vendors, the continuation of Air
LA's business will be in serious jeopardy.
EFFECTS OF CONQUEST AIR ON FUTURE COMPANY RESULTS OF OPERATIONS
The Company will account for its investment in Air L.A. on the equity
method. As the present time, based upon information provided by Air L.A., the
Company has been informed that its equity ownership for purposes of accruing
losses is 15%. In addition, the Company will quarterly evaluate the carrying
value of its investment for impairment based upon its estimate of the
undiscounted cash flows it expects to receive from Air L.A.
Seasonality
Wico's consumer products segment experiences its peak sales during 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. Signficant deviations from projected demand for products can
have an adverse effect on Wico' sales and profitability for this segment.
Inflation
To date, inflation has not had a material effect on Wico's operations.
19
<PAGE> 22
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Selected
Financial Data" included elsewhere in this Prospectus. Prior to the Wico
Merger, the Company's primary business was the operation of the turbo-prop
airline operations and its jet airline operations. The Company sold its jet
operations in June 1994 (prior to the Wico Merger) and has sold its turbo-prop
operations in June 1995.
OVERVIEW
The Company'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 the Company's distribution segment have
been essentially flat reflecting the soft condition of the coin-operated
machine market. Although sales of the Company's consumer segment are less in
the nine months ended June 30, 1995 than for the comparable nine-month period
in fiscal 1994, management expects an increase in consumer products in fiscal
1995 will equal or exceed sales levels in such segment for fiscal 1994,
Management believes that consumer products sales will continue to reflect the
increased popularity of personal computer based video entertainment.
Three Months Ended June 30, 1995 compared to Three Months Ended June 30, 1994:
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
-----------------------
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Sales:
Distribution $ 7,227 $ 7,820
Consumer 924 1,443
Gaming 659 -
-----------------------
8,810 9,263
Gross Profit:
Distribution 2,644 2,940
Consumer 416 576
Gaming 119 -
-----------------------
3,179 3,516
Selling, Distribution and Administrative 3,679 2,887
Amortization of intangibles 136 92
Interest and other amortization 867 449
Other Expense 77 16
Income (Loss)
Before Income Taxes (3,673) (199)
Net Income (Loss) (2,443) (98)
</TABLE>
Sales for the three months ended June 30, 1995 were $8,810,000 as compared
to $9,263,000 for the comparable prior year period. The 4.9% or $452,000
decrease was the result of consumer sales decreasing $518,000, or 35.9% and
distribution sales decreasing $593,000 (approximately
20
<PAGE> 23
7.6%).The aforementioned sales declines were partially offset by the inclusion
of Wico Gaming Supply Corp. ("Wico Gaming") of $659,000 as a result of the
acquisition of this division in June 1994.
Distribution sales declined primarily due to depressed demand for products
relating to coin - operated video games. Consumer sales declined due in part to
discontinued products for Nintendo and Sega video game machines. Additionally,
production problems in the Far East manufacturing facility restricted supply of
product, resulting in lost sales.
Additionally, sales of both coin - operated parts and consumer joysticks
were negatively affected in the quarter due to decreased availability of
inventory, in part a result of working capital constraints. Such lost sales will
not be recouped. Wico Gaming's sales were also negatively impacted by licensing
requirements of individual states and the length of time required in obtaining
such licenses. While applications have been submitted in all major gaming
states, the approval process is continuing..
Gross profit for the three months ended June 30, 1995 was $3,179,000 versus
$3,516,000 for the comparable prior year period. Distribution gross margin
percentage was 36.7% versus 36.4% for the comparable prior year period. Suncom
(the consumer division) gross margin percentage increased from approximately 40%
to 45%. Wico Gaming's gross margin of $119,000 represented a gross margin
percentage of approximately 18% of its net sales for the period.
Selling, distribution and administration expenses in the three months ended
June 30, 1995 were $3,679,000 (approximately 41.8% of sales) as compared to
$2,887,000 (approximately 31.2% of sales) for the comparable prior year period.
The increase is partially due to the inclusion of Wico Gaming expenses which
were higher than normal due to a reorganization and relocation of the physical
plant in Las Vegas.
Amortization of intangibles was $112,000 during this period and $92,000 in
the comparable prior year period.
During the three months ended June 30, 1995 the Company recorded losses
from its commuter air operation conducted by Conquest Air of approximately
$2,092,000 including cumulative adjustments of $1,916,000 which have been
treated as a reallocation of the purchase price of the commuter air operation.
Interest expense (including the amortization of deferred debt discounts and
fees of $290,000 in the current year period, as opposed to none in the
comparable prior year period) increased from $449,000 to $868,000. The increase
is attributable to a combination of higher borrowings at higher interest rates
as well as the amortization of deferred debt discounts in the current year
period.
The Company recorded a loss before taxes of $3,673,000 and a net loss of
$2,443,000 for the three - month period ended June 30, 1995. The result was
due to reduced parts and supplies sales, a change in the consumer product
division's product mix, as well as the reorganization of Wico Gaming,
amortization charges of $290,000 as discussed above, and a loss on airline
operations of $2,092,000.
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<PAGE> 24
Nine months ended June 30, 1995 compared to Nine months ended June 30, 1994:
<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
-------------------------
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Sales:
Distribution $ 23,230 $ 24,836
Consumer products 4,451 5,841
Gaming 1,660 -
-------------------------
29,341 30,677
Gross Profit:
Distribution 8,456 9,539
Consumer products 1,952 2,390
Gaming 153 -
-------------------------
10,561 11,929
Selling, Distribution and Administrative 10,655 9,218
Amortization 392 232
Loss From Airline Operations 2,703 -
Interest Expense 2,414 1,310
Amortization Of Debt Discount 775 -
Other Expense 181 296
Income (Loss) From Continuing
Operations Before Income Taxes (5,784) 873
Net Income (Loss) 4,045 550
</TABLE>
Sales for the nine months ended June 30, 1995 were $29,341,000 as compared
to $30,677,000 for the comparable prior year period. The 4% or $1,336,000
decrease was the result of distribution sales decreasing $1,606,000 and consumer
product sales decreasing $1,390,000, partially offset by sales of Wico Gaming,
acquired in June 1994, of $1,660,000.
Distribution sales decreased 6.5% to $23,230,000. Distribution sales
continued to be hampered by soft conditions in the coin machine market. Consumer
sales declined 23.8% from the comparable prior year period. This decline is
attributable to the soft Christmas market and the decline in consumer OEM sales.
Additionally, sales of both coin - operated parts and consumer joysticks
were negatively affected in the quarter due to decreased availability of
inventory, in part a result of working capital constraints. Such lost sales will
not be recouped. Wico Gaming's sales were also negatively impacted by licensing
requirements of individual states and the length of time required in obtaining
such licenses. While applications have been submitted in all major gaming
states, the approval process is continuing..
22
<PAGE> 25
Gross profit for the nine months ended June 30, 1995 was $10,561,000 as
compared to $11,929,000 for the comparable prior year period. Distribution gross
margin percentage was 36.3% as compared to 38.8% for the comparable prior year
period. The decline was the result of increased price competition in an overall
soft market. The consumer products division's gross margin percentage increased
from 41.2% to 43.9%. Wico Gaming's gross margin of $153,000 represented a gross
margin percentage of approximately 9.2% of its net sales for the period.
Selling, distribution and administration expenses for the nine months ended
June 30, 1995 were $10,655,000 (approximately 36.3% of sales) as compared to
$9,218,000 (30% of sales) for the comparable prior year period. The 15.6%
increase was largely the result of the inclusion of Wico Gaming, which accounted
for $634,000 of expenses.
Amortization of intangibles was approximately $392,000 in the current period
and $232,000 in the prior year period. This increase is primarily attributable
to amortization of goodwill and deferred costs incurred in connection with
acquisitions and debt refinancing.
During the nine months ended June 30, 1995, the Company recorded losses
from its commuter air operation conducted by Conquest Air of approximately
$2,703,000, including cumulative adjustments of $1,916,000 which have been
treated as a reallocation of the purchase of the commuter air operation.
Interest expense increased from $1,310,000 to $1,639,000. The increase is
a combination of higher borrowings as well as higher interest rates.
Amortization of debt discounts and deferred loan costs was $775,000 in the
current year period (none in the comparable prior year period).
The Company recorded a loss from continuing operations before tax benefit of
$5,784,000 and a net loss of $4,045,000 for the nine months ended June 30, 1995.
The result was due to reduced parts and supplies sales and gross margins, as
well as the reorganization of Wico Gaming, a charge of $775,000 relating to the
amortization of debt discounts recorded in the fourth quarter of fiscal 1994,
and a loss from airline operations of $2,703,000. A deferred income tax
benefit of approximately $1,739,000 was recorded as a result of the tax benefits
of the operating losses incurred. Management believes that the total deferred
tax benefits, aggregating approximately $1,857,000 as of June 30, 1995 will be
recovered by the generation of financial reporting and taxable income prior to
the expiration of such net operating losses.
23
<PAGE> 26
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - NONE
Item 2. CHANGES IN SECURITIES - NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
Item 5. OTHER INFORMATION - NONE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K -
(b) No reports on Form 8-K were filed by this registrant during
the quarter for which this report is filed
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements 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 INDUSTRIES INC.
/s/ Steffen Magnell
-------------------------------------
Steffen Magnell
President and Chief Executive Officer
/s/ Jerry Karlik
-------------------------------------
Jerry Karlik
Chief Financial Officer and Chief
Accounting Officer
Dated: November 2, 1995
25
