<PAGE>
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
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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.)
2215 E.M. Franklin Ave. Austin, Texas 78723
(Address of principal executive office) (Zip Code)
2215 Redwood, Austin, Texas 78723
(Registrant's former address of Principal Executive Office) (Zip Code)
(512) 929-6706
(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 March 31, 1995 was 9,158,677 shares.
<PAGE>
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
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 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II - OTHER INFORMATION 16
SIGNATURE 17
</TABLE>
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1994 1995
------------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,007,880 $ 871,130
Trade accounts receivable, less allowance for
doubtful accounts 5,694,272 5,190,743
Other receivables 323,843 191,006
Inventories 8,495,479 7,641,457
Prepaid expenses and other current assets 235,344 677,167
----------- -----------
TOTAL CURRENT ASSETS 15,756,818 14,571,503
MACHINERY AND EQUIPMENT - NET 1,071,301 1,001,072
DEFERRED TAX ASSET 753,000 1,257,900
INTANGIBLE AND OTHER ASSETS - NET 5,604,581 6,016,049
NET ASSETS OF DISCONTINUED OPERATIONS 4,250,000 4,250,000
----------- -----------
$27,435,700 $27,096,524
=========== ===========
</TABLE>
See notes to financial statements.
1
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1994 1995
------------ ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,634,545 $ 5,607,113
Accrued expenses 3,331,344 2,434,428
Current portion of long-term debt 1,500,000 1,500,000
Income taxes payable 25,018 0
TOTAL CURRENT LIABILITIES 9,490,907 9,541,542
LONG-TERM DEBT 16,705,849 17,528,349
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
Series B, convertible redeemable preferred
stock, no par value; 2,800,000 shares
issued and outstanding 2,800,000 2,800,000
Series D, redeemable preferred stock, no
par value; 600,000 shares issued and
outstanding ($200,000 liquidation preference) -- 200,000
Common stock, $.01 par value; 25,000,000 shares
authorized; 9,158,677 shares issued
and outstanding 91,587 91,587
Additional paid-in capital 12,373,815 12,625,815
Accumulated deficit (13,945,520) (15,616,739)
Foreign currency translation adjustment (81,693) (74,784)
------------ ------------
1,238,944 26,634
------------ ------------
$ 27,435,700 $ 27,096,524
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
---------------------------- -----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ........................................ $ 10,056,954 $ 10,353,224 $ 20,530,724 $ 21,414,269
COST OF SALES .................................... 6,557,746 6,391,450 13,148,193 13,001,924
------------ ------------ ------------ ------------
GROSS PROFIT ..................................... 3,499,208 3,961,774 7,382,531 8,412,345
OPERATING EXPENSES:
Selling, distribution and administrative expenses 3,481,919 3,047,299 6,976,090 6,238,981
Amortization expense ............................ 92,329 92,329 184,657 184,657
------------ ------------ ------------ ------------
3,574,248 3,139,628 7,160,747 6,423,638
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .......................... (75,040) 822,146 221,784 1,988,707
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME):
Interest expense ................................. 588,126 434,344 1,061,481 860,311
Amortization of debt discount ................... 290,000 -- 485,000 --
Other-net ....................................... 104,514 12,290 104,514 11,423
------------ ------------ ------------ ------------
982,640 446,634 1,650,995 871,734
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTlNUING OPERATIONS
BEFORE INCOME TAXES .............................. (1,057,680) 375,512 (1,429,211) 1,116,973
PROVISION FOR INCOME TAXES (BENEFIT) .............. (359,000) 142,695 (509,000) 424,450
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......... (698,680) 232,817 (920,211) 692,523
LOSS FROM DISCONTINUED OPERATIONS ................. (611,008) -- (611,008) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................. $ (1,309,688) $ 232,817 S(1,531,219) $ 692,523
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PRO-FORMA EARNINGS (LOSS) PER SHARE:
From continuing operations ....................... $ (0.08) $ 0.01 $ (0.12) $ 0.05
From discontinued operations ..................... (0.07) -- (0.07) --
------------ ------------ ------------ ------------
$ (0.15) $ 0.01 $ (0.19) $ 0.05
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES ................. 9,158,677 9,158,677 9,158,677 9,158,677
============ ============ ============ ============
</TABLE>
See notes to financial statements.
3
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCKS
--------------------------------------------------------------
SERIES A SERIES B SERIES D
------------------ --------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--SEPTEMBER 30, 1994 7,550 $755 2,800,000 $2,800,000 -- --
Net loss -- -- -- --
Preferred stock dividend -- -- -- --
Issuance of Series D preferred
stock in exchange for
shareholder loans 200,000 200,000
Translation of foreign
currency -- -- -- --
Issuance of warrants in
connection with debt -- -- -- --
------- ---- --------- ---------- ------- --------
BALANCE -- MARCH 31, 1995 7,550 $755 2,800,000 $2,800,000 200,000 $200,000
======= ==== ========= ========== ======= ========
<CAPTION>
FOREIGN
COMMON STOCK RETAINED CURRENCY
------------------ PAID-IN TREASURY EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL STOCK (DEFICIT) ADJUSTMENT TOTALS
--------- ------- ---------- ---- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--SEPTEMBER 30, 1994 9,158,676 $91,587 12,373,815 $ -- $(13,945,520) $(81,693) $1,238,944
Net loss (1,531,219) (1,531,219)
Preferred stock dividend (140,000) (140,000)
Issuance of Series D preferred
stock in exchange for
shareholder loans 102,000 302,000
Translation of foreign
currency 6,909 6,909
Issuance of warrants in
connection with debt 150,000 150,000
--------- ------- ---------- ---- ------------ -------- ---------
BALANCE--MARCH 31, 1995 9,158,676 $91,587 12,625,815 $ -- $(15,616,739) $(74,784) $ 26,634
========= ======= ========== ==== ============ ======== =========
</TABLE>
See notes to financial statements.
4
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended March 31
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $(1,531,219) $ 692,523
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ................................... 669,657 369,622
Provision for bad
debts ........................................................... 56,802 62,953
Issuance of Series D preferred stock ............................ 102,000 --
Loss from discontinued operations ............................... 611,008 --
Changes in assets and liabilities:
Decrease (increase) in trade and other accounts receivable ....... 446,727 (418,567)
Decrease (increase) in inventories ............................... 854,022 920,604
Decrease (increase) in prepaid expenses and other
current assets .................................................. (568,987) 31,911
Increase in intangibles and other assets ......................... (325,864) (300,739)
Increase (decrease) in accounts payable .......................... 851,157 (350,447)
Increase (decrease) in income taxes payable ...................... 225,406 42,538
Increase (decrease) in accrued expenses .......................... (1,143,213) 29,330
---------- ----------
TOTAL ADJUSTMENTS ............................................. 1,778,715 387,205
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ...................... 247,496 1,079,728
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (96,632) (121,380)
Cash used in discontinued operations ................................. (577,892) 6,427
---------- ----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES ...................... (674,524) (114,953)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term financing ...................................... (750,000) (620,871)
Preferred stock dividends ............................................ (140,000) (200,000)
Proceeds from revolving credit line .................................. -- 100,000
Proceeds from issuance of promissory notes, net ...................... 973,369 --
Proceeds from issuance of preferred stock ............................ 200,000 --
Effect of foreign currency exchange rate changes ..................... 6,909 (295)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES ................................. 290,278 (721,166)
---------- ----------
NET INCREASE (DECREASE) IN CASH ....................................... (136,750) 243,609
CASH AT BEGINNING OF PERIOD 1,007,880 791,038
---------- ----------
CASH AT END OF PERIOD ................................................. $ 871,130 $ 1,034,647
========== ==========
</TABLE>
See notes to financial statements.
5
<PAGE>
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------
1995 1994
----------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................... $ l,048,014 $860,311
----------- ---------
----------- ---------
Income taxes .................................. -- --
----------- ---------
----------- ---------
Noncash investing and financing activities:
Issuance of Series D preferred stock .......... $ 102,000 $
=========== =========
</TABLE>
See notes to financial statements.
6
<PAGE>
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. ACQUISITION 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>
Six months ended March
31, 1994
----------------------
<S> <C>
Revenues, net $23,535,000
-----------
Operating income $ 2,211,000
-----------
Pro-forma net income $ 1,382,000
===========
Pro-forma income per share $ .13
===========
</TABLE>
7
<PAGE>
4. INVENTORIES
Inventories are summarized as follows at March 31, 1995:
<TABLE>
<S> <C>
Manufacturing inventories:
Material and work-in-process $1,653,553
Finished products 1,076,819
----------
2,730,372
Purchased merchandise for resale 4,911,085
----------
$7,641,457
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
(a) In February 1995, the Company borrowed $200,000 from the Blum
Asset Trust ("BAT") an affiliate of Bentley J. Blum. 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital for operations has been the
combined Term Loan and Revolving Credit Loan pursuant to the Lending Agreement
between the Company's wholly-owned subsidiary Wico Corporation ("Wico") and its
institutional lender, as well as cash flow from operations. However, as
described in greater detail below, the Company has experienced negative cash
flow, and a shortage of working capital in the first two quarters of the year
ending September 30, 1995. Additionally, in November 1994, the Company completed
a Private Placement of its securities in the amount of $2,737,500, which yielded
net proceeds to the Company of approximately $2.3 million after the costs of the
financing.
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), current ratio of 1.75:1 and minimum working capital
of $6,300,000. As of March 31, 1995, Wico was not in compliance with two of such
financial covenants and has received a waiver from its lending institution with
respect thereto. The Term Loan, maturing in October 1998, provides for monthly
installments of principal, and had a principal balance of approximately
$6,211,000 at March 31, 1995. 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 as of the date of this report, the line of credit is
fully drawn upon. At March 31, 1995, the aggregate amount of borrowings under
the Lending Agreement was approximately $19,161,000. Repayment of the loan 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 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 common stock of the Company owned by
certain of Wico's prior stockholders.
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 rate 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 400,000 shares of common
stock of the Company at the time of the business combination between the Company
and Wico (the Wico Merger ). In consideration of Wico's agreement to make a
prepayment, the lender consented to the Wico Merger and the Langworthy
acquisition. Wico used $4,000,000 in funds obtained from the Wico Merger to make
such payment and agreed to pay the lender an additional $1,000,000 by December
31, 1994 and to purchase the lender's warrant for $1,000,000 by December 31,
1994, or in the alternative incur a 1-1/2 % per annum increase in the interest
rate paid on the loans and pay a fee of $375,000. The Company selected the
second option and paid
9
<PAGE>
$200,000 on December 15, 1994, and has accrued the balance as of March 31, 1995.
The Lending Agreement provides for mandatory prepayment of the term loan
in amounts equal to 75% of Wico's excess cash flow, as defined in the Lending
Agreement. The Lending Agreement contains other restrictions requiring the
consent of the lender in connection with making of any acquisition, payment of
dividends, issuance of additional securities or making of annual capital
expenditures in excess of $500,000.
The Company sold $2,737,500 of its securities in an private placement of
units in November 1994. Each unit ("Unit") consisted of a $25,000 principal
amount 10% convertible Promissory Note (the "Notes") due 24 months from
September 1994 (or earlier upon the occurrence of certain events). The Notes are
convertible into shares of the Company's Common Stock at a price per share equal
to eighty percent of the closing bid price of the Common Stock on the date of
conversion. Upon conversion, holders of the Notes will also have the right to
receive warrants to purchase 500 shares of common stock of the Company per Unit
at an exercise price of $11.875 per share for a four-year period commencing on
the effective date of a registration statement which includes such shares.
Since the Wico Merger, the Company's airline operation has used
approximately $2,000,000 in cash through March 31, 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, as compared to 16 aircraft at the time of the Wico Merger. These
measures, together with other cost reductions, have reduced the losses in the
airline operation. However, the Company expects to continue to incur losses in
the airline operation while the Company continues to seek a buyer for the
airline. Due to the negative cash flow in the airline operation, the airline is
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.
During the year ended September 30, 1994, Wico operated with positive cash
flow. However, as a result of continuing 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 demand for
certain of Wico's products, Wico generated lower than expected sales volume in
the fourth quarter of fiscal 1994 and the first two quarters of fiscal 1995,
resulting in a negative cash flow for the first two quarters of fiscal 1995 to
date and a shortage of working capital. The Company is attempting to obtain
additional working capital by refinancing its senior secured indebtedness under
its line of credit. Although it has received a financing proposal from an
institutional lender, such proposal does not constitute a financing commitment
In addition, consummation of such refinancing will require the agreement of the
Company's existing institutional lender to subordinate a portion of its debt to
the rights of such new lender. Accordingly, there is no assurance that the
Company will be able to effect such refinancing, or on terms that will relieve
10
<PAGE>
its liquidity and cash flow shortages.
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. 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.
11
<PAGE>
RESULTS OF OPERATIONS
The Company's results of continuing operations continue to be impacted by
trends in Wico's coin - operated machine and consumer video game markets. The
soft market for coin operated amusement machine parts has resulted in
essentially flat distribution sales. Consumer sales were impacted negatively in
this period by a soft post - Christmas selling season, and delayed orders from
retailers in anticipation of the Company's new product line unveiled at the
January 1995 Consumer Electronics show. The three and six - month 1994 periods
also benefited from increased sales to an original equipment manufacturer
("OEM"), which was not repeated in the 1995 periods. Additionally, both
distribution and consumer sales were negatively impacted by poor inventory
positions as a result of a shortage of working capital.
Three Months Ended March 31, 1995 compared to Three Months Ended March 31, 1994:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
--------------------
1995 1994
--------------------
(In Thousands)
Sales:
<S> <C> <C>
Distribution $ 8,598 $ 8,797
Consumer 1,025 1,556
Gaming 434 --
-----------------------
10,057 10,353
Gross Profit:
Distribution 3,151 3,398
Consumer 424 564
Gaming (76) --
-----------------------
3,499 3,962
Selling, Distribution and Administrative 3,482 3,047
Amortization of intangibles 92 92
Interest and other amortization 878 434
Other Expense 3 12
Income (Loss) from Continuing
Operations Before Income Taxes (1,058) 375
Net Income (Loss) (1,310) 233
</TABLE>
Sales for the three months ended March 31, 1995 were $10,057,000 as
compared to $10,353,000 for the comparable prior year period. The 2.9% or
$296,000 decrease was the result
12
<PAGE>
of consumer sales decreasing $531,000, or 34.1% and distribution sales
decreasing $199,000 (approximately 2.3%). These sales declines were partially
offset by the inclusion of Wico Gaming Supply Corp. ("Wico Gaming") of $434,000
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 March 31, 1995 was $3,499,000
versus $3,962,000 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 36.3% to
41.3%. Wico Gaming's negative gross margin of $76,000 represented a negative
gross margin percentage of approximately 17.5% of its net sales for the period.
Selling, distribution and administration expenses in the three months
ended March 31, 1995 were $3,482,000 (approximately 34.9% of sales) as compared
to $3,047,000 (approximately 29.4% of sales) for the comparable prior year
period. The increase is partially due to the inclusion of Wico Gaming expenses
of $266,000 which were higher than normal due to a reorganization and relocation
of the physical plant in Las Vegas.
Amortization of intangibles was $92,000 during this period and in the
comparable prior year period.
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 $434,000 to $878,000. The balance
of the increase is a combination of higher borrowings as well as higher interest
rates.
The Company recorded a loss from continuing operations before taxes
of $1,058,000 and a net loss of $1,319,000 for the three - month period
ended March 31, 1995. The result was due to reduced parts and supplies sales,
a change in the consumer product division's product mix, a ell as the
reorganization of Wico Gaming, amortization charges of $382,000 as
discussed above, and a loss from discontinued operations of $611,000.
13
<PAGE>
Six months ended March 31, 1995 compared to Six months ended March 31, 1994:
<TABLE>
<CAPTION>
Six Months
Ended
March 31,
--------------------
1995 1994
--------------------
(In Thousands)
<S> <C> <C> <C>
Sales:
Distribution $ 16,003 $ 17,015
Consumer products 3,527 4,399
Gaming 1,001 --
------------------------
20,531 21,414
Gross Profit:
Distribution 5,812 6,599
Consumer products 1,536 1,813
Gaming 34 --
------------------------
7,384 8,412
Selling, Distribution and Administrative 6,976 6,239
Amortization 185 185
Interest Expense 1,546 860
Other Expense 3 11
Income (Loss) From Continuing
Operations Before Income Taxes (1,429) 1,117
Net Income (Loss) (1,531) 693
</TABLE>
Sales for the six months ended March 31, 1995 were $20,531,000 as compared
to $21,414,000 for the comparable prior year period. The 4% or $883,000 decrease
was the result of distribution sales decreasing $1,012,000 and consumer product
sales decreasing $872,000, partially offset by sales of Wico Gaming, acquired in
June 1994, of $1,001,000.
Distribution sales decreased 6% to $16,003,000. Distribution sales
continued to be hampered by soft conditions in the coin machine market. Consumer
sales declined 19.8% from the comaparable 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
14
<PAGE>
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 six months ended March 31, 1995 was $7,384,000 as
compared to $8,412,000 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 43.6%. Wico Gaming's gross margin of $34,000 represented a gross
margin percentage of approximately 3.4% of its net sales for the period.
Selling, distribution and administration expenses for the six months ended
March 31, 1995 were $6,976,000 (approximately 33.3% of sales) as compared to
$6,239,000 (29.4% of sales) for the comparable prior year period. The 9.7%
increase was largely the result of the inclusion of Wico Gaming, which accounted
for $544,000 of expenses.
Amortization of intangibles was approximately $185,000 in both periods.
Interest expense increased from $860,000 to $1,061,000. The increase is a
combination of higher borrowings as well as higher interest rates. Amortization
of debt discounts and deferred loan costs was $485,000 in the current year
period (none in the comparable prior year period).
The Company recorded a loss from continuing operations before tax benefit
of $1,429,000 and a net loss of $1,531,000 for the six months ended March 31,
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 $485,000 relating to
the amortization of debt discounts recorded in the fourth quarter of fiscal
1994, and a provision for loss on discontinued operations of $611,000. A
deferred income tax benefit of approximately $509,000 was recorded during the
six months ended March 31, 1995 as a result of the tax benefits of the operating
losses incurred during this period.. Management believes that the total deferred
tax benefits, aggregating approximately $1,260,000 as of March 31, 1995 will be
recovered by the generation of financial reporting and taxable income prior to
the expiration of such net operating losses.
15
<PAGE>
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 -
(a) Exhibit 27-Financial Data Schedule
(b) No reports on Form 8-K were filed by this registrant during
the quarter for which this report is filed
16
<PAGE>
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/ Stephen R. Feldman,
_______________________________
Stephen R. Feldman,
Chairman
/s/ Jerry Karlik
_______________________________
Jerry Karlik
Chief Financial Officer and Chief
Accounting Officer
Dated : June 12, 1995
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Conquest Industries
Inc.'s Form 10-Q for the period ended March 31, 1995 and is qualified in its
entirety by reference to such financial information
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 871,130
<SECURITIES> 0
<RECEIVABLES> 5,381,749
<ALLOWANCES> 0
<INVENTORY> 7,641,457
<CURRENT-ASSETS> 677,167
<PP&E> 1,001,072
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,096,524
<CURRENT-LIABILITIES> 9,541,542
<BONDS> 0
<COMMON> 91,587
2,800,755
200,000
<OTHER-SE> (3,065,708)
<TOTAL-LIABILITY-AND-EQUITY> 27,096,524
<SALES> 20,530,724
<TOTAL-REVENUES> 20,530,724
<CGS> 13,148,193
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,265,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,546,481
<INCOME-PRETAX> (1,429,211)
<INCOME-TAX> (509,000)
<INCOME-CONTINUING> (920,211)
<DISCONTINUED> (611,008)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,531,219)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> 0
</TABLE>
