<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 March 31, 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 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
PART II - OTHER INFORMATION 18
SIGNATURE 19
</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 2,800,000 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;
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) $ (0.08) $ (0.46) $ 0.05
============ ============ ============ ============
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 - - - -
----- ------- --------- ------------
BALANCE - June 30, 1995 (unaudited) 7,550 $ 755 2,800,000 $ 2,800,000
===== ======= ========= ============
<CAPTION>
Series D Common Stock Paid-in Treasury
Shares Amount Shares Amount Capital Stock
------- ------------ ---------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 - - 9,158,676 $ 91,587 12,748,815 $ -
Net loss 1,286,000
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 200,000 200,000 102,000
Issuance of common stock 1,115,245 11,152 1,559,615
Translation of foreign currency
Issuance of warrants in connection with debt 150,000
------- ----------- ---------- ------------ ---------- -------
BALANCE - June 30, 1995 (unaudited) 200,000 $ 200,000 10,273,921 $ 102,739 15,846,430 $ -
======= =========== ========== ============ ========== =======
<CAPTION>
Foreign
Retained Currency
Earnings Translation
(Deficit) Adjustment Totals
------------- ----------- -----------
<S> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 $(13,945,520) $ (81,693) $1,613,944
Net loss (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 302,000
Issuance of common stock 1,570,767
Translation of foreign currency 1,957 1,957
Issuance of warrants in connection with debt 150,000
------------- --------- -----------
BALANCE - June 30, 1995 $(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.
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.
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.
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)
10
<PAGE> 13
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 three quarters of the
fiscal 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 June 30, 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 June 30, 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 June 30, 1995, the aggregate amount of borrowings under the
Lending Agreement was approximately $18,786,000. 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 $200,000 on December 15, 1994, and has accrued the
balance as of June 30, 1995.
11
<PAGE> 14
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.
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 (see Note 3 to these consolidated financial statements), 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 three 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 its liquidity and
cash flow shortages. If the company is unable to consumate such financing, the
Company is contemplating additional measures to raise capital including the
offering of additional equity securities.
12
<PAGE> 15
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.
13
<PAGE> 16
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 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
14
<PAGE> 17
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.
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 $176,000.
15
<PAGE> 18
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
Interest Expense 2,414 1,310
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..
16
<PAGE> 19
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 and the effect of a relatively fixed level of costs
being absorbed by less sales volume.
Amortization of intangibles was approximately $297,000 in the current period
and $232,000 in the prior year period.
Interest expense (which includes amortization of deferred debt discounts)
increased from $1,310,000 to $2,414,000. 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 $787,000. A deferred income tax
benefit of approximately $1,109,000 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.
17
<PAGE> 20
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
18
<PAGE> 21
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
19
