<PAGE> 1
As filed with the Securities and Exchange Commission on November 13, 1995
Registration No. 33-86326
-------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
CONQUEST INDUSTRIES INC.
(formerly Conquest Airlines Corp.)
(Exact name of Registrant as specified in Charter)
DELAWARE
(State or Other jurisdiction of Incorporation or Organization)
2500
(Primary Standard Industrial Classification Code Numbers)
76-0206582
(I.R.S. Employer Identification Number)
6400 WEST GROSS POINT ROAD
NILES, ILLINOIS 60714
(708) 647-7500
(Address, Including Zip Code and Telephone Number, Including Area
Code of Registrant's Principal Executive Offices)
STEFFEN I. MAGNELL
6400 WEST GROSS POINT ROAD
NILES, ILLINOIS 60714
(708) 647-7500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code of Agent for Service)
COPIES TO:
Stephen A. Weiss, Esq.
Solomon, Fornari, Weiss & Moskowitz, P.C.
650 Fifth Avenue
New York, New York 10019
(212) 265-1200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
<PAGE> 2
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box X .
---
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities Amount To Offering Price Aggregate Offering Registration
To Be Registered Be Registered(1) Per Security(2) Price Per Security(2) Fee
---------------- ---------------- --------------- -------------------- ---
<S> <C> <C> <C> <C>
Common Stock, $.001 par value
("Common Stock") 2,975,000 $3.00 $8,925,000 $ 3,102.30
Common Stock, $.001 par value
("Common Stock") 2,281,250(3) 1.20 2,737,500 943.62
Common Stock, $.001 par value
("Common Stock") 2,156,925(4) 5.00 10,784,625 3,717.46
Common Stock, $.001 par value
("Common Stock") 1,030,400(5) 3.00 3,091,200 1,065.54
Common Stock, $.001 par value
("Common Stock") 400,000(6) 3.00 1,200,000 413.76
Common Stock, $.001 par value
("Common Stock") 313,043(7) 3.00 939,130 323.86
Common Stock, $.001 par value
("Common Stock") 200,000(8) 3.00 600,000 206.90
Common Stock, $.001 par value
("Common Stock") 5,000(9) 3.00 15,000 5.18
Common Stock, $.001 par value
("Common Stock") 881,631(10) 1.00 881,631 303.89
Common Stock, $.001 par value
("Common Stock") 250,000(11) 3.00 750,000 310.36
Common Stock, $.001 par value
("Common Stock") 2,082,147(12) 3.00 6,286,500 2,167.58
Common Stock, $.001 par value,
underlying Underwriters Warrants 53,241 3.00 159,724 55.08
Common Stock, $.001 par value,
to be issued upon exercise of
Class Z Warrants issued to
Underwriter upon exercise of
Underwriters Warrants 53,241 3.00 159,724 55.08
Class B Common Stock Purchase
Warrants ("Class B Warrants") 1,961,925(13) .01 19,612 6.75
Class Z Common Stock Purchase
Warrants ("Class Z Warrants")
which are part of Underwriters
Warrants 53,241 3.00 159,724 55.08
Underwriters Warrants 53,241(14) -0- -0- -0-
Total Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,871.56 (*)
</TABLE>
- --------------------------------
(*) Of which $12,911.90 has previously been paid.
This Registration Statement incorporates Post-Effective Amendment No. 1
to Conquest Airlines Corp. (the Registrant's former name) Registration
Statement No. 33-60130, decared effective by the Securities and Exchange
Commission on April 23, 1993. The 195,000 shares of Common Stock
issuable upon exercise of 195,000 outstanding publicly traded warrants,
the 53,241 Underwriter's Warrants and the 53,241 shares of Common Stock
issuable upon exercise of the Underwriter's Warrants, the 53,241 Class Z
Warrants issuable upon exercise of the Underwriter's Warrants and the
53,241 shares of Common Stock issuable upon exercise of the Class Z
Warrants were previously registered pursuant to Registration No.
33-60131. Of the $12,911.90 filing fee identified above, $501.42 relates
to such securities. $4,859 was previously paid as a filing fee in
connection with Registration No. 33-60130 with respect to such
securities.
(1) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of Common Stock issuable upon:
(i) the exercise of the Class B Warrants, Underwriters Warrants and Class
Z Warrants pursuant to anti-dilution provisions contained therein, which
shares of Common Stock are registered hereunder; and (ii) the conversion
of an aggregate of $2,737,500 of 10% convertible promissory
<PAGE> 3
notes due October 1, 1996 (the "Private Placement Notes") which were
issued in the 1994 Private Placement (as hereinafter defined). Such
Private Placement Notes, by their terms, are convertible into Company
Common Stock at 80% of the prevailing market price of the Company's
Common Stock on the date(s) of conversion; all of which shares of Common
Stock issuable upon conversion of such Private Placement Notes (the
"Conversion Shares") are registered hereunder. For purposes of
calculating the registration fee, such market price is assumed to be
$1.50, and the conversion price is assumed to be $1.20 per share.
(2) Pursuant to Rule 457.
(3) Includes 2,281,250 Conversion Shares potentially issuable upon conversion
of $2,737,500 of Private Placement Notes at an assumed conversion price
of $1.20 per share.
(4) Common Stock underlying (i) 1,961,925 Class B Warrants (the "Class B
Warrants") to be issued on the effective date of this Registration
Statement to stockholders of the Company who were record holders of the
Company's Common Stock and Series A Preferred Stock immediately prior to
the Wico Merger (as hereafter defined); which Class B Warrants are
exercisable at $5.00 per share and, to the extent unexercised, expire on
June 20, 1999; and (ii) 195,000 publicly traded warrants (the "Public
Warrants") exercisable at $5.00 per share and expiring June 20, 1999.
(5) Common Stock issuable upon conversion of (a) 2,000,000 shares of Series B
Preferred Stock which were issued in June 1994 in connection with the
Wico Merger, and (b) 800,000 shares of Series E Preferred Stock issued in
May 1995 in exchange for a like number of shares of Series B Preferred
Stock.
(6) Common Stock underlying a warrant held by the Company's institutional
lender.
(7) Common Stock issued to certain Wico Series AA Preferred Stock holders of
record pursuant to the Wico Merger. The Wico Series AA Preferred Stock
was exchanged for 313,043 shares of Common Stock of the Company on June
17, 1994, the effective date of the Wico Merger.
(8) Common Stock issued upon exercise in June 1995 of a warrant issued
pursuant to the Wico Merger.
(9) Common Stock issued upon exercise in June 1995 of two warrants issued to
an unaffiliated private lender and unaffiliated finder in connection with
a loan of $500,000 to the Company in July 1994.
(10) Represents 881,631 shares of Common Stock issued to certain creditors of
the Company in exchange for cancellation of indebtedness and other
liabilities owed by the Company to such creditors.
(11) Common Stock underlying outstanding warrants held by an executive officer
of the Company.
(12) Consists of an aggregate of 2,082,147 shares of Common Stock sold at
$1.41 per share in a private placement consummated in July 1995.
(13) Consists of 1,961,925 Class B Warrants referred to in Note (4) above.
(14) The underwriter's warrant issued pursuant to the 1993 Registration
Statement has been exchanged for a new underwriters warrant (the
"Underwriter's Warrant") which entitles the holder thereof to purchase,
at an exercise price of $10.00, 53,241 units, each unit consisting of one
share of Common Stock and one warrant. The warrant underlying the
Underwriter's Warrant has been restated and reclassified as the Class Z
Warrant. The Underwriter's Warrant is exercisable for a period of four
years commencing April 23, 1993. The Class Z Warrant is exercisable for
a period of four years commencing on the effective date of this
Registration Statement. This Registration Statement will register the
Underwriter's Warrant, the Class Z Warrant and the Common Stock
underlying the Underwriter's Warrant and underlying the Class Z Warrant.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 4
Conquest Industries Inc.
CROSS-REFERENCE SHEET
Pursuant to S-K, Item 501(b)
Showing Location in the Prospectus of
Information Required by Items of Form S-1
<TABLE>
<CAPTION>
Item Number in Form S-1 Prospectus Location
----------------------- -------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors, Ratio of Prospectus Summary; Risk Factors; Inapplicable
Earnings to Fixed Charges as to Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Front Page of Prospectus; Risk Factors;
Underwriting
6. Dilution Dilution
7. Selling Security Holders Selling Stockholders and Plan of Distribution
8. Plan of Distribution Outside Front and Outside Back Cover Pages of
Prospectus; Underwriting
9. Description of Securities to be Registered Description of Securities; Underwriting
10. Interests of Named Experts and Counsel Inapplicable
11. Information with respect to the Registrant Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Dilution;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Stockholders;
Certain Transactions; Description of Securities;
Financial Statements
12. Disclosure of Commission Position on Securities Indemnification for Securities Act Liabilities
Act Liabilities
</TABLE>
ii
<PAGE> 5
PRELIMINARY PROSPECTUS DATED NOVEMBER 13, 1995 SUBJECT TO COMPLETION
CONQUEST INDUSTRIES INC.
(formerly, Conquest Airlines Corp.)
12,788,360 SHARES OF COMMON STOCK AND
1,961,925 CLASS B WARRANTS, 53,241 UNDERWRITER'S WARRANTS
AND 53,241 CLASS Z WARRANTS
This Prospectus relates to an offering (the "Offering") by Conquest
Industries Inc., a Delaware corporation (the "Company"), of an aggregate of up
to 12,788,360 shares of common stock, par value $.001 per share (the "Common
Stock"). A maximum of 3,276,482 shares of Common Stock are being offered by
the Company for its own account, including 2,975,000 shares being offered at an
offering price of $1.00 per share (the "Company Shares") and up to 301,482
shares underlying the Public Warrants, the Underwriter's Warrants and the Class
Z Warrants (as defined herein). 9,511,878 shares of Common Stock are being
offered for resale for the account of certain securityholders, including: (i)
3,481,821 shares (the "Selling Stockholders' Shares") currently outstanding and
issued to certain stockholders of the Company in the transactions described
below (the "Selling Stockholders"); (ii) shares (the "Warrant Shares") issuable
upon exercise of a variety of Common Stock purchase warrants (collectively, the
"Warrants"), including 2,718,407 Warrant Shares which have been previously
issued and are to be issued by the Company on the date of this Prospectus (the
"Effective Date") in connection with the transactions described below; (iii)
2,281,250 shares, subject to adjustment based upon applicable conversion prices
(the "1994 Private Placement Conversion Shares") issuable upon conversion of
$2,737,500 of Company 10% convertible notes due October 1, 1996 (the "Private
Placement Notes") sold by the Company in a November 1994 private placement (the
"1994 Private Placement"); and (iv) 1,030,400 shares (the "Preferred Stock
Conversion Shares") issuable upon conversion by the holders of shares of Series
B Preferred Stock and Series E Preferred Stock. An additional 195,000 Warrant
Shares are issuable upon exercise of 195,000 publicly traded warrants.
The Offering by the Company for its own account also includes an
aggregate of 2,068,405 Warrants, including: (i) 1,961,925 Redeemable Class B
Warrants (the "Class B Warrants") exercisable through June 20, 1999 at $5.00
per share (subject to adjustment), which Class B Warrants are, pursuant to a
restated agreement and plan of merger dated June 8, 1994 among Wico Holding
Corp. ("Wico"), the Company and its acquisition subsidiary (the "Wico Merger
Agreement"), to be issued on the Effective Date to stockholders of record of
the Company immediately prior to the June 20, 1994 consummation of the merger
of Wico into a newly-formed acquisition subsidiary of the Company (the "Wico
Merger"); (ii) 53,241 Warrants (the "Underwriter's Warrants") issued to Lew
Lieberbaum & Co., Inc. in June 1994, in exchange for warrants issued to such
firm in April 1993 in connection with its serving as underwriter for the
Company's initial public offering; and (iii) 53,241 Class Z Warrants (the
"Class Z Warrants") which are issuable upon exercise of the Underwriter's
Warrants.
The 2,975,000 Company Shares will be offered by the Company for its own
account at an offering price of $1.00 per share. On November 8, 1995, the
closing sale price of the Company's Common Stock, as traded on the Nasdaq
SmallCap Market ("NASDAQ") was $1.1875. The Offering of the Company Shares
will terminate on January 31, 1996. The Company will retain all proceeds from
the sale of all or any portion of the 2,975,000 Company Shares which have been
sold by such termination date, net of expenses of this Offering (estimated at
$200,000) and selling commissions of up to 10% which the Company may pay to
registered broker/dealers who assist it in the sale of the Company Shares. See
"Plan of Distribution".
The 3,481,821 Selling Stockholders' Shares were acquired by the Selling
Stockholders in a series of private placement transactions, including: (i)
313,043 shares issued on June 20, 1994 in connection with the Wico Merger; (ii)
205,000 shares purchased in June 1995 upon exercise of certain warrants; (iii)
2,082,147 shares (the "1995 Private Placement Shares") sold by the Company for
approximately $1.41 per share in June and July 1995 (the "1995 Private
Placement"); and (iv) 881,631 shares of Common Stock (the "Creditors Shares")
which have been issued pursuant to agreements entered into with certain
creditors of the Company to issue such Creditors Shares in satisfaction of
claims against the Company.
The 2,718,407 Warrant Shares are shares of Common Stock issuable upon
exercise of an aggregate of 2,665,166 Warrants (including the 2,068,407 Class B
Warrants, Underwriter's Warrants and Class Z Warrants being offered by the
Company for its own account) which were previously issued or are to be issued
on the Effective Date by the Company in various transactions, consisting of
Warrant Shares issuable upon exercise of: (i) 1,961,925 Class B Warrants; (ii)
400,000 warrants issued in the Wico Merger to the Company's principal lender in
consideration of certain financial accommodations (the "Bank Warrant"); (iii)
250,000 warrants issued in April 1995 to the Company's Chief Financial Officer
(the "Affiliate Warrants"); and (iv) 106,482 shares underlying the
Underwriter's Warrants and the Class Z Warrants. For information as to the
terms of these Warrants, see the next page of this cover page.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION TO THE PERCENTAGE EQUITY OF CURRENT STOCKHOLDERS,
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" (PAGE 6).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
(cover continued on next page)
The date of this Prospectus is November __, 1995
<PAGE> 6
The 1,961,925 Class B Warrants are exercisable at $5.00 per share
(subject to adjustment in certain events pursuant to the anti-dilution
provisions thereof) until June 20, 1999, when such Warrants expire. The Class
B Warrants are redeemable in whole or in part at a price of $.10 per Warrant,
at the option of the Company, upon 30 days' written notice at any time,
provided the closing bid price of the Company's Common Stock, as traded on
NASDAQ or in the over-the-counter market, is at least $6.84 for five
consecutive days ending on the day prior to the date of any notice of
redemption. The Class B Warrants are exercisable until the close of business
on the day preceding the date fixed for redemption. The Bank Warrant is
exercisable at any time prior to June 20, 1999 and entitles the holder to
purchase 400,000 Warrant Shares for an aggregate of $400. The Affiliate
Warrant is exercisable at $0.875 per share through April 2000, and was issued
in lieu of compensation to Jerry Karlik, the Company's Chief Financial Officer.
The Underwriter's Warrants entitle the holders to purchase, for $10.00 per
unit, through April 23, 1997, an aggregate of 53,241 units of securities of the
Company with each unit consisting of one share of Common Stock and one Class Z
Warrant. Upon issuance, each Class Z Warrant entitles the holder to purchase
one share of Common Stock for $1.00 per share until November 13, 1999, when
such Class Z Warrants expire. See "Description of Securities - Warrants."
Exercise of the Warrants may be prohibited in certain states. See "Risk
Factors - Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants."
The $2,737,500 of 10% Private Placement Notes due October 1, 1996 are
convertible into 1994 Private Placement Conversion Shares at 80% of the closing
bid price of the Company's publicly traded Common Stock on the date of
conversion. The 2,281,250 1994 Private Placement Conversion Shares referred to
in this Prospectus assume a closing bid price of $1.20 per share on each date
that such 10% Private Placements Notes are converted. However, based on the
$1.1875 closing bid price of the Company's Common Stock on November 8, 1995, if
all $2,737,500 of Private Placement Notes were converted into Common Stock on
such date, the effective conversion price would be $0.95 per share and an
aggregate of 2,881,579 1994 Private Placement Conversion Shares would be
issued. The registration statement of which this Prospectus is a part is
registering for resale an indeterminable number of additional Private Placement
Conversion Shares which are issuable from time to time upon conversion of
Private Placement Notes at the applicable conversion prices then in effect.
The Company has requested that the holders of the Private Placement Notes
exchange their 10% Private Placement Notes for: (i) a like amount of 12%
non-convertible notes of the Company due October 1, 1996 (the "Exchange
Notes"), and (ii) certain additional payments to be made on or before December
31, 1995, aggregating up to $547,500 ($0.20 for each $1.00 of Private Placement
Notes exchanged). The Company's offer to exchange 10% Private Placement Notes
for 12% Exchange Notes and cash will expire on December 31, 1995. Upon
delivery of the applicable amount of 12% Exchange Notes and cash, the Company
will remove from registration an appropriate number of 1994 Private Placement
Conversion Shares underlying the principal amount of Private Placement Notes
exchanged. See "Business - 1994 Private Placement".
The 1,030,400 Preferred Stock Conversion Shares are issuable upon
conversion, at $2.72 per share, of 2,000,000 shares of Series B Preferred Stock
of the Company issued in connection with the Wico Merger and 800,000 shares of
Series E Preferred Stock issued in June 1995 in exchange for other shares of
Series B Preferred Stock. The Series E Preferred Stock is subject to mandatory
redemption at $1.00 per share (plus accrued dividends), at the option of the
holders thereof, out of the gross proceeds, if any, received by the Company
from any public offering of securities of $3,000,000 or more (including, if
applicable, proceeds of this Offering). See "Description of Securities -
Preferred Stock."
Although the Company will receive proceeds, at their respective exercise
prices, from the exercise of Warrants, it will not receive any of the proceeds
from the sale of Class B Warrants, or from the sale of any of the Selling
Stockholders' Shares, any Warrant Shares, any 1994 Private Placement Conversion
Shares or any of the Preferred Stock Conversion Shares. The Class B Warrants,
Selling Stockholders' Shares, Warrant Shares, 1994 Private Placement Conversion
Shares and Preferred Stock Conversion Shares may be offered from time to time
by the holders thereof through ordinary brokerage transactions, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or
at negotiated prices. Persons effecting a distribution of such securities,
including the Selling Stockholders, may be deemed to be "underwriters" as
defined in the Securities Act of 1933, as amended (the "Securities Act"). If
any broker-dealers are used, any commissions paid to them and, if such
broker-dealers purchase such securities as principals, any profits received by
such broker-dealers on the resales of the shares may be deemed to be
underwriting discounts and commissions under the Securities Act. All costs and
expenses incurred in connection with the registration of the Class B Warrants,
Selling Stockholders' Shares, Warrant Shares, 1994 Private Placement Conversion
Shares and Preferred Stock Conversion Shares will be borne by the Company.
Brokerage commissions, if any, attributable to any resales of such securities
will be borne by the holders thereof. The Company has agreed to indemnify the
Selling Stockholders and the holders of the other securities offered hereby,
and may agree to indemnify brokers selling Company Shares on behalf of the
Company, against certain liabilities, including liabilities under the
Securities Act. See "Plan of Distribution" and "Selling Securityholders."
The actual or potential issuance of all or any material portion of the
Warrant Shares, the 1994 Private Placement Conversion Shares or the Preferred
Stock Conversion Shares represent substantial potential dilution to the
percentage ownership of existing stockholders and are likely to have a
significant depressive effect on the current market price of the Company's
publicly traded Common Stock. On October 10, 1995, the Company amended the
terms of 195,000 publicly traded warrants issued in 1989 in the Company's
initial public offering (the "Public Warrants"), to (i) reduce their exercise
price from $30.00 per share to $5.00 per share (subject to adjustment in
certain events pursuant to the anti-dilution provisions thereof), and (ii)
extend the term of the Public Warrants from November 30, 1995 to June 20, 1999.
The distribution of up to 301,482 of the Warrant Shares to holders of the
195,000 Public Warrants and the holders of the Underwriter's Warrants, as well
as the distribution of up to 53,241 Class Z Warrants issuable upon exercise of
the Underwriter's Warrants will consitute primary distributions of those
securites by the Company.
<PAGE> 7
The Company's publicly traded Common Stock and the Public Warrants are
traded on NASDAQ under the symbols "CAIR" and "CAIRW," respectively, and are
also listed on the Boston Stock Exchange under the symbols "CAC" and "CACWS,"
respectively. On November 8, 1995, the last reported sale price for the Common
Stock on NASDAQ was $1.1875 per share. The closing sale price for the Public
Warrants was $0.25.
ADDITIONAL INFORMATION
The holders of any: (i) Selling Stockholders' Shares, (ii) 1994 Private
Placement Conversion Shares or Preferred Stock Conversion Shares issuable upon
conversion of the Private Placement Notes, Series B Preferred Stock or Series E
Preferred Stock, or (iii) Warrant Shares issuable upon exercise of the Warrants
(collectively, the "Selling Securityholders") are obligated to deliver a
current Prospectus on each occasion that sales of their securities are made,
whether such sales are made directly by Selling Securityholders or through
broker-dealers. Such Prospectus must indicate the name of the beneficial
owner(s) of the securities and the aggregate amount of securities being
offered. See "Selling Securityholders and Plan of Distribution." The Company
has agreed (i) to file, during any period in which offers or sales of
securities are being made, a post-effective amendment to the registration
statement on Form S-1 under the Securities Act (the "Registration Statement")
of which this Prospectus is a part, (ii) to make available a Prospectus to each
Selling Securityholder upon request, (iii) to amend such Prospectus from time
to time after the date hereof through post-effective amendments to such
Registration Statement to reflect any facts or events which individually or in
the aggregate, represent a fundamental change in the information set forth in
the most recent Prospectus and (iv) to remove from registration by means of a
post-effective amendment of the Registration Statement any of the securities
which remain unsold at the termination of the offering which is anticipated to
occur on or about November 13, 1997 (two years from the Effective Date of this
Prospectus). The Selling Securityholders and any broker-dealer that acts in
connection with the sale of the securities owned by Selling Securityholders may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commission or profit received by a broker-dealer from
the purchase or resale of such securities as principals might be deemed to be
underwriting discounts and commissions under the Securities Act. The Company
and the Selling Securityholders have agreed to mutually indemnify each other
under certain conditions. See "Selling Securityholders and Plan of
Distribution."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement with respect to the securities being
offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at 7 World Trade Center, New York,
New York 10048 and at Northwestern Atrium Center, 500 West Madison Street
(Suite 1400), Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company has informed the Selling Securityholders that the
anti-manipulative rules under the Securities Exchange Act of 1934, Rules 10b-2,
10b-6 and 10b-7, may apply to their sales in the market and has furnished the
Selling Securityholders with a copy of these rules.
The Company will pay all expenses in connection with this offering, which
expenses are estimated to be approximately $200,000.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at Regional
Offices of the Commission located at Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60604, and 7 World Trade Center, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
<PAGE> 8
[This page intentionally left blank]
<PAGE> 9
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information,
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless the context indicates otherwise, (i) all references to the
term "Company" include Conquest Industries Inc., a Delaware corporation, and
its direct and indirect subsidiaries; (ii) all share and per share data
contained in this Prospectus give effect to a one-for-ten reverse stock split
declared by the Company in November 1994; and (iii) all references to "year" or
"fiscal year" means the Company's fiscal year which ends on September 30.
THE COMPANY
The Company, through Wico Corporation and its operating subsidiaries, is
a leading manufacturer and distributor of replacement parts, accessories, and
supplies to game operators and distributors of coin-operated amusement/arcade
games, billiard tables, vending machines, such as food, soft drink and snack
machines, and gaming machines. It also supplies parts and accessories to
original equipment manufacturers ("OEMs") of arcade games. An indirect
subsidiary, Wico Gaming Supply Corp. ("Wico Gaming"), is a manufacturer and
distributor of casino supplies, including layouts, dice, casino furniture,
custom-built casino tables, playing chips, playing cards, casino equipment and
roulette and other wheel games.
The Company's broad range of products enables the Company to offer single
sourcing to its customers. In 1988, the Company acquired Penn-Ray Sutra
Corporation ("Penn-Ray"), one of the largest competitors of its distribution
business in the areas of video monitors, power supplies and billiard equipment.
Penn-Ray sold its products by means of a telemarketing operation, primarily to
large game operators, distributors and small OEMs. Its telemarketing sales
strategy complemented the Company's then existing direct sales force, which
historically serviced smaller game operators. This portion of the Company's
business, referred to as its distribution business, accounted for approximately
85%, 85% and 80% of net sales, respectively, in 1992, 1993 and 1994.
The Company is also a leading U.S. manufacturer and distributor of
consumer joysticks, which are entertainment computer control devices, and
related accessories, that it sells directly to retailers and distributors
located principally in the United States. This portion of its business,
referred to as its consumer business, accounted for approximately 15%, 15% and
20% of net sales, respectively, in 1992, 1993 and 1994. In 1989, the Company
acquired Suncom Corporation ("Suncom"), a manufacturer and distributor of
joysticks and related accessories sold primarily to the consumer market. This
complemented and enhanced the Company's existing consumer joystick business,
which now markets both Suncom and Wico branded products. The Company's
strategy is to be a market leader by offering a broad selection of high quality
products. Presently, the Company believes that it offers one of the most
complete lines of joysticks available in the consumer market. In January
1995, the Company introduced a new line of four joysticks, designated as the
F-15 line. These joysticks are each 80%-scale replicas of the joysticks
equipped in F-15 fighter planes. The line was recently introduced at an
industry trade show, and the Company has received orders from major computer
retailers and retail stores for the entire initial production run of these
joysticks, which began to be shipped in May 1995. In their initial five months
of distribution, sales of the new joystick line were approximately $3,100,000
representing approximately 75% of Suncom's total sales during such period.
On June 20, 1994, the Wico Merger was consummated, and Wico became a
wholly-owned subsidiary of the Company. Simultaneous with the Wico Merger,
Wico Gaming acquired certain assets, liabilities and divisions of Langworthy
Casino Supply, Inc. ("Langworthy"). In April 1995, Wico Gaming purchased the
operating assets of the Dice Division of Shuffle Master, Inc. ("SMI").
Until it consummated the Wico Merger, the Company was primarily engaged
in the business of operating a regional airline providing regularly scheduled
turbo-prop service to cities within the State of Texas through its wholly-owned
subsidiary, Conquest Airlines Corp. ("Conquest Air"). In August 1994, the
Company announced its intention to sell Conquest Air. The operations of
Conquest Air incurred significant losses through June 30, 1995 and default
notices were received from certain of the lessors of its commuter aircraft.
On June 30, 1995, the Company sold the stock of Conquest Air to Air LA,
Inc. ("Air LA"), a commuter air carrier serving routes in Minnesota, in
consideration for notes and equity securities of Air LA aggregating $6,000,000.
As of the date of this Prospectus, such $6,000,000 of consideration is
represented by (i) a $3,000,000 convertible promissory note of Air LA due
August 31, 1995 and currently payable on demand, bearing annual interest from
September 1, 1995 at a bank prime rate plus 1%; which note (upon receipt of Air
LA stockholder authorization of such preferred stock) is automatically
convertible into $3,000,000 of non-dividend-bearing convertible preferred stock
of Air LA, which preferred stock in turn will be convertible, at the option of
the Company, into shares of Air LA common stock at prevailing market prices for
such common stock, and (ii) two additional promissory notes of Air LA (in the
respective principal amounts of $1,000,000 and $2,000,000) which bear interest
at 8% per annum, and are repayable, subject to certain mandatory prepayments
out of the proceeds of equity offerings by Air LA, 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
-1-
<PAGE> 10
principal becoming due and payable in a balloon payment due June 30, 2000. In
addition, the Company received options to purchase 250,000 shares of Air LA
common stock at $.50 per share at any time through June 30, 2000. Air LA also
agreed to pay certain accrued obligations of the Company to the lessors of
Conquest Air aircraft, but is currently in arrears in making certain
installment lease payments to such lessors. See "Business - Sale of Conquest
Air." The inability of Air LA to make payments to such aircraft lessors or
against the purchase price, when due, could expose the Company to significant
liabilities and materially and adversely effect its consolidated business and
financial condition. See "Risk Factors-Sale of Conquest Air; Continuing
Substantial Liabilities and Risk of Non-Payment" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results and
Plan of Operations of Air LA."
Except for specific references to Conquest Air and its airline
operations, as used in this Prospectus the term "the Company" refers to
Conquest Industries Inc., Wico (including Wico Corporation) and the operating
subsidiaries of Wico on a consolidated basis. The business operations of the
Company were established in 1940, as a distributor of pinball machine parts.
Its main distribution center, manufacturing, and executive and administrative
facilities are located at 6400 West Gross Point Road, Niles, Illinois
60714-4508; its telephone number is (708) 647-7500.
THE OFFERING
This Offering consists of a maximum aggregate of 12,788,360 shares of
Common Stock. A maximum of 3,276,482 shares of Common Stock are being offered
by the Company for its own account, including 2,975,000 Company Shares being
offered at an offering price of $1.00 per share and up to 301,482 shares
underlying the Public Warrants, the Underwriter's Warrants and the Class Z
Warrants (as defined herein). 9,511,878 shares of Common Stock are being
offered for resale for the account of certain securityholders, including: (i)
3,481,821 Selling Stockholders' Shares; (ii) 2,718,407 Warrant Shares issuable
upon exercise of Warrants which have been previously issued and are to be
issued by the Company on the Effective Date in connection with the transactions
described herein; (iii) 2,281,250 1994 Private Placement Conversion Shares,
subject to adjustment based upon applicable conversion prices on each
conversion date, which are issuable upon conversion of $2,737,500 of Private
Placement Notes; and (iv) 1,030,400 Preferred Stock Conversion Shares issuable
upon conversion by the holders of shares of Series B Preferred Stock and Series
E Preferred Stock. An additional 195,000 Warrant Shares are issuable upon
exercise of the Public Warrants.
The Offering by the Company also includes an aggregate of 2,068,407
Warrants, consisting of an aggregate of: (i) 1,961,925 Class B Warrants, (ii)
53,241 Underwriter's Warrants, and (iii) 53,241 Class Z Warrants issuable upon
full exercise of the Underwriter's Warrants.
The 2,975,000 Company Shares will be offered at an offering price of
$1.00. On November 8, 1995, the closing sale price of the Company's Common
Stock, as traded on NASDAQ, was $1.1875. The Offering of the Company Shares
will terminate on January 31, 1996. The Company will retain all proceeds from
the sale of Company Shares, net of expenses of this Offering and selling
commissions (not to exceed 10%), which the Company may pay to registered
broker/dealers assisting it in the sale of Company Shares, even if less than
2,975,000 of the Company Shares have been sold by such termination date. See
"Plan of Distribution."
The 3,481,821 Selling Stockholders' Shares being offered for resale were
acquired and are being acquired by the Selling Stockholders in a series of
transactions, including: (i) 313,043 shares issued in June 1994 in connection
with the consummation of the Wico Merger; (ii) 205,000 shares purchased in June
1995 upon exercise of certain warrants; (iii) 2,082,147 shares sold by the
Company for approximately $1.41 per share in the 1995 Private Placement; and
(iv) 881,631 Creditors Shares which have been issued pursuant to agreements
entered into since April 1995 with certain creditors of the Company to issue
such Creditors Shares in satisfaction of claims against the Company aggregating
approximately $981,631.
The maximum of 2,718,407 Warrant Shares being offered for resale are
shares of Common Stock underlying 2,665,166 Warrants of different classes and
types which were previously issued by the Company or are to be issued on the
Effective Date of this Offering in various transactions, consisting of Warrant
Shares issuable upon exercise of: (i) 1,961,925 Class B Warrants; (ii) 400,000
Bank Warrants; (iii) 250,000 Affiliate Warrants; and (iv) 53,241 Underwriter's
Warrants.
The 1,961,925 Class B Warrants are exercisable at $5.00 per share
(subject to adjustment in certain events pursuant to the anti- dilution
provisions thereof) until June 20, 1999, when such Warrants expire. The Class
B Warrants are redeemable in whole or in part at a price of $.10 per Warrant,
at the option of the Company, upon 30 days' written notice at any time,
provided the closing bid price of the Company's Common Stock, as traded on
NASDAQ or in the over-the-counter market, is at least $6.84 for five
consecutive days ending on the day prior to the date of any notice of
redemption. The Class B Warrants are exercisable until the close of business
on the day preceding the date fixed for redemption. The Bank Warrant is
exercisable at any time prior to June 20, 1999 and entitles the holder to
purchase 400,000 Warrant Shares for $400. The Underwriter's Warrants entitle
the holders to purchase, for $10.00 per unit, through April 23, 1997, an
aggregate of 53,241 units of securities of the Company with each unit
consisting of one share of Common Stock and one Class Z Warrant. Each Class Z
Warrant entitles the holder to purchase one share of Common Stock for $1.00 per
share for a period of four years from the Effective Date of this Offering. See
"Description of Securities - Warrants."
The $2,737,500 of 10% Private Placement Notes due October 1, 1996 are
convertible into 1994 Private Placement Conversion Shares at 80% of the closing
bid price of the Company's publicly traded Common Stock on the date of
conversion. For
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<PAGE> 11
purposes of this Offering, such closing bid price and the number of 1994
Private Placement Conversion Shares is assumed to be $1.20 per share and
2,281,250 shares, respectively. However, based on the $1.1875 closing bid
price of the Company's Common Stock on November 9, 1995, if all $2,737,500 of
Private Placement Notes were converted into Common Stock on such date, the
effective conversion price would be $0.95 per share and an aggregate of
2,881,579 1994 Private Placement Conversion Shares would be issued. The
registration statement of which this Prospectus is a part is registering for
resale an indeterminable number of additional Private Placement Conversion
Shares which are issuable from time to time upon conversion of Private
Placement Notes at the applicable conversion prices then in effect. The
Company has requested that the holders of the Private Placement Notes exchange
their 10% Private Placement Notes for: (i) a like amount of 12% non-convertible
Exchange Notes, and (ii) certain additional payments to be made on or before
December 31, 1995, aggregating up to $547,500 ($0.20 for each $1.00 of Private
Placement Notes exchanged). The Company's offer to exchange 10% Private
Placement Notes for 12% Exchange Notes and cash will expire on December 31,
1995. Upon delivery of the applicable amount of 12% Exchange Notes and cash,
the Company will remove from registration an appropriate number of 1994 Private
Placement Conversion Shares underlying the principal amount of Private
Placement Notes exchanged. In addition, the Company will pay to Rickel &
Associates, Inc., as solicitation agent for the Company, a fee of $2,500 for
each $25,000 of Private Placement Notes exchanged, or an aggregate of $273,500
if all Private Placement Notes are exchanged for 12% Exchange Notes. See
"Business - 1994 Private Placement".
The 1,030,400 Preferred Stock Conversion Shares are issuable upon
conversion, at $2.72 per share, of 2,000,000 shares of Series B Preferred Stock
and 800,000 shares of Series E Preferred Stock issued in June 1995 in exchange
for other shares of Series B Preferred Stock. The Series E Preferred Stock is
subject to mandatory redemption at $1.00 per share (plus accrued dividends), at
the option of the holders thereof, out of the gross proceeds, if any, received
by the Company from any public offering of securities of $3,000,000 or more.
See "Description of Securities - Preferred Stock."
SECURITIES CURRENTLY OUTSTANDING
<TABLE>
<S> <C>
Common Stock: 12,622,454 shares of Common Stock
Preferred Stock: 7,550 shares of convertible Series A Preferred Stock
2,000,000 shares of convertible Series B Preferred Stock (1)
800,000 shares of convertible Series E Preferred Stock (1)
Warrants: 195,000 Public Warrants (2)
250,000 Affiliate Warrant (3)
900,000 SGI Warrants (4)
53,241 Underwriter's Warrants
1,375,000 Warrants held by affiliates (5)
Convertible Notes (6): $2,737,500 Private Placement Notes due October 1, 1996.
</TABLE>
SECURITIES TO BE OUTSTANDING AFTER THE OFFERING (7)(8)
<TABLE>
<S> <C>
Common Stock: 15,597,454 shares of Common Stock (7)
Preferred Stock: 7,550 shares of convertible Series A Preferred Stock
2,000,000 shares of convertible Series B Preferred Stock (1)
800,000 shares of convertible Series E Preferred Stock (1)
Warrants: 195,000 Public Warrants (2)
250,000 Affiliate Warrant (3)
900,000 SGI Warrants (4)
1,375,000 Warrants held by affiliates (5)
1,961,925 Class B Warrants
53,241 Underwriter's Warrants
Convertible Notes (6): $2,737,500 Private Placement Notes due October 1, 1996.
</TABLE>
- --------------------------------
(1) Convertible into an aggregate of 1,030,400 Preferred Stock Conversion
Shares, at a conversion price of $2.72 per share. The 800,000 shares of
Series E Preferred Stock were issued in June 1995 in exchange for a like
number of shares of Series
-3-
<PAGE> 12
B Preferred Stock. The Series E Preferred Stock is subject to mandatory
redemption at $1.00 per share (plus accrued dividends), at the option of
the holders thereof, out of the gross proceeds, if any, received by the
Company from any public offering of securities of $3,000,000 or more.
See "Description of Securities - Preferred Stock."
(2) On October 10, 1995, the Company amended the terms of its Public
Warrants, to reduce their exercise price from $30.00 per share to $5.00
per share (subject to adjustment in certain events pursuant to the
anti-dilution provisions thereof) and extended their term from September
30, 1995 through June 20, 1999.
(3) Consists of Warrants expiring April 2000 to purchase 250,000 shares of
Common Stock at $0.875 per share issued to Jerry Karlik, the Chief
Financial Officer of the Company. See "Management - Compensation
Committee Interlocks and Insider Participation."
(4) Consists of five year warrants to purchase an aggregate of 900,000 shares
of Common Stock at $1.50 per share, issued to Strategic Growth
International, Inc. ("SGI"), in partial consideration for such firm
serving as investor relations consultant to the Company, pursuant to a
one year consulting agreement dated as of October 11, 1995. See "Certain
Relationships and Related Transactions."
(5) Includes: (i) warrants to purchase 625,000 shares of Common Stock at
$.333 per share issued in connection with the issuance of Series D
Preferred Stock to and a $150,000 loan made by an affiliate (which
Preferred Stock and loan have been redeemed and repaid in full); (ii)
500,000 warrants expiring April 2000 issued to officers and directors of
the Company (in addition to the Affiliate Warrants issued to Mr. Karlik),
of which 400,000 warrants are exercisable at $0.875 per share and 100,000
warrants are exercisable at $1.41 per share; and (iii) 250,000 warrants,
exercisable at $2.50 per share and expiring December 31, 1997 issued to a
former officer, which are redeemable by the Company for $50,000 at any
time after January 1, 1996.
(6) Convertible into shares of Common Stock at 80% of the closing bid price
of the Company's publicly traded Common Stock on the date of conversion.
For purposes of this Prospectus, an aggregate of 2,281,250 Private
Placement Conversion Shares are assumed based upon an assumed closing bid
price of $1.50 per share on the date of conversion. The Company has
requested that the holders of the Private Placement Notes exchange such
Private Placement Notes for a like principal amount of 12%
non-convertible Exchange Notes. The Company has offered to holders of
Private Placement Notes electing to exchange such notes for Exchange
Notes certain additional payments (to be made on or before December 31,
1995) equal to $.20 for each $1.00 principal amount of Private Placement
Notes exchanged for Exchange Notes (an aggregate of up to $547,500
assuming all Private Placement Notes are so exchanged). In addition, the
Company will pay a solicitation fee equal to $.10 for each $1.00 of
Private Placement Notes exchanged (a maximum of $273,750) to Rickel &
Associates, Inc., as solicitation agent for the Company, payable in the
same manner as payments are made to noteholders. Upon delivery of the
applicable amount of its 12% non-convertible Exchange Notes and cash, the
Company will remove from registration an applicable number of 1994
Private Placement Conversion Shares. See "Business - 1994 Private
Placement".
(7) Assumes the sale of all 2,975,000 Company Shares offered hereby. Also
includes all 881,631 Creditors Shares previously issued and being
registered for resale in this Offering in reduction of approximately
$981,631 of accrued Company obligations. See "Business - Settlement with
Certain Creditors" and "Plan of Distribution."
(8) Does not include: (i) warrants (the "1994 Private Placement Warrants")
issuable to the holders of 10% Private Placement Notes, entitling such
holders to purchase 0.02 shares of Company Common Stock at $11.75 per
share through June 20, 1999 for each $1.00 of 10% Private Placement Notes
converted into Company Common Stock (a maximum of 54,750 of such 1994
Private Placement Warrants if all $2,737,500 Private Placement Notes are
converted; (ii) five year warrants to purchase up to 1,250,000 shares
which are potentially issuable to Bentley J. Blum, a director of the
Company, in consideration for certain collateralized guarantees provided
by Mr. Blum in connection with an October 20, 1995 refinancing of the
Company's secured indebtedness; and (iii) options to purchase an
aggregate of 800,500 shares of Common Stock of the Company, including
770,500 options owned by certain officers and directors. See "Management
-- Compensation Committee Interlocks and Insider Participation," "Certain
Relationships and Related Party Transactions," "Principal Stockholders,"
"Management - Stock Options" and "Description of Securities - 1994
Private Placement Warrants."
USE OF PROCEEDS
Other than proceeds received from the sale of up to 2,975,000 Company
Shares and/or upon the exercise of options and/or Warrants, the Company will
not receive any of the proceeds from the sale of any 1994 Private Placement
Conversion Shares, 1995 Private Placement Shares, Creditor Shares, Class B
Warrants, Underwriter's Warrants, Class Z Warrants or other securities offered
hereby. Any net proceeds received by the Company from the sale of any or all
of the 2,975,000 Company Shares (estimated at a maximum of $2,477,500 after
maximum selling commission of $297,500 (10%) and other estimated offering
expenses of $200,000) will be used by the Company: (i) to repay up to $550,000
of accrued obligations retained by the Company in connection with its former
Conquest Air subsidiary; (ii) to pay up to $547,500 to holders of the Private
Placement Notes who agree to exchange such notes for 12% non-convertible
Exchange Notes, and up to $273,750 to the solicitation agent engaged by the
Company to obtain exchanges; and (iii) the balance for working capital and
general corporate purposes. To the extent that less than all 2,975,000 Company
Shares are sold, the Company will first allocate up to $550,000 of such net
proceeds to retire obligations incurred by
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<PAGE> 13
Conquest Air, second to make required payments (up to a maximum of $821,250) in
connection with 12% non-convertible Exchange Notes which are accepted in
exchange for its outstanding 10% convertible Private Placement Notes, and the
balance, if any, for working capital and general corporate purposes.
Any proceeds received from the exercise of the Class B Warrants,
Underwriter's Warrants and Class Z Warrants offered hereby, together with net
proceeds from the sale of Company Shares allocated to working capital, will be
initially used to the extent of up to $800,000 to redeem shares of outstanding
Series E Preferred Stock of the Company, if and as required. The balance, if
any, together with any proceeds received from the exercise of the Public
Warrants and other outstanding options and Warrants, shall be used for working
capital and general corporate purposes. See "Risk Factors - Potential
Obligation to Redeem Certain Securities." The issuance of the 881,631
Creditors Shares reduced existing Company indebtedness and accounts payable by
as much as $981,631. See "Business - Settlement with Certain Creditors."
RISK FACTORS
The securities offered hereby involve a high degree of risk and
substantial dilution to the percentage equity of current stockholders and
should only be purchased by investors able to sustain the loss of their entire
investment. See "Risk Factors."
SUMMARY FINANCIAL INFORMATION
The following sets forth summary financial information regarding the
Company. The summary financial information as of September 30, 1994, September
30, 1993, September 30, 1992 and September 30, 1991 and for each of the three
years in the period ended September 30, 1994 has been abstracted from the
financial statements of the Company included elsewhere herein.
SUMMARY FINANCIAL INFORMATION (1) (In Thousands, except per share data)
The following is a summary of the Company's financial information
extracted from indicated year-end Consolidated Financial Statements and is
qualified in its entirety by the detailed information appearing in the audited
Consolidated Financial Statements and unaudited interim Financial Statements
and the notes thereto. The unaudited statements and data at June 30, 1994 and
1995, and for the respective nine months then ended, are not necessarily
indicative of future results and should not be considered as a forecast for the
year as a whole or for any future periods.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (3)
Nine Months Ended
June 30, Years Ended September 30,
--------------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . $29,341 $30,677 $41,992 $38,783 $38,653 $39,277 $45,747
Cost of sales . . . . . . . . . . 18,780 18,748 26,078 23,675 24,078 24,282 28,413
Net income (loss) . . . . . . . . (4,045) 550 284 443 (741) (1,742) (703)
Pro forma net income (loss)(1). . (4,045) 550 284 508 (516) (1,137) (488)
Pro forma net income (loss)
per share (2) . . . . . . . . . . $ (.46) $ .05 $ .00 $ .06 $(.07) $(.16) $(.07)
Number of shares used in
computation . . . . . . . . . . . 9,345 7,181 7,675 7,181 7,181 7,181 7,181
<CAPTION>
BALANCE SHEET DATA (4)
September 30, June 30, 1995
1994 Actual ProForma(5)
------------ -------------------
<S> <C> <C> <C>
Current assets . . . . . . $ 15,757 $ 15,307 $15,031
Total assets . . . . . . . 27,811 28,528 28,815
Current liabilities . . . . 9,491 10,415 7,955
Long term debt . . . . . . 16,706 17,443 18,396
Stockholders' equity 1,614 670 2,463
(deficiency) . . . . . . .
</TABLE>
- -------------------------
(1) Pro forma net income (loss) has been calculated after giving effect to
the pro forma adjustments to the income tax provision as if the Company
had not operated as an "S" corporation. As of January 1, 1994, the
Company ceased operating as an "S" corporation.
(2) Pro forma net income (loss) per share reflects the recapitalization of
the Company as a result of the Wico Merger. Common Stock equivalents
have been included in years where they produce a dilutive effect.
(3) Includes the results of operations for the acquired Langworthy businesses
since June 20, 1994. Results of the airline operations have been
excluded from sales and cost of sales, but are included in net income
(loss) and pro-forma net income (loss).
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<PAGE> 14
(4) Includes the assets and liabilities resulting from the Wico Merger and
acquisition of Langworthy which have been valued at their estimated fair
values as of June 20, 1994.
(5) Pro forma to give effect to (i) the completion of the 1995 Private
Placement of an aggregate of 2,082,147 shares of Common Stock in July
1995, (ii) and the redemption of $200,000 of Series D Preferred Stock and
$150,000 note payable to an affiliate, and (ii) the issuance of
Creditors Shares in reduction of approximately $810,000 of accrued
Company obligations which were recorded at June 30, 1995.
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL INVESTMENT RISKS.
ACCORDINGLY, COMMON STOCK AND WARRANTS SHOULD BE PURCHASED OR EXERCISED AND
COMPANY NOTES CONVERTED INTO COMMON STOCK ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING AN INVESTMENT IN THE COMPANY
AND ITS BUSINESS PRIOR TO PURCHASE, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS OTHER INFORMATION SET FORTH
ELSEWHERE IN THIS PROSPECTUS.
RECENT LOSSES
Although the Company had net income of approximately $284,000 for the
year ended September, 30, 1994, and $443,000 for the year ended September 30,
1993, the Company reported a net loss of approximately $4,045,000 for the
nine-month period ended June 30, 1995, compared with net income of
approximately $550,000 for the nine-month period ended June 30, 1994.
Approximately $2,703,000 of the losses in the nine-month period ended June 30,
1995 are attributable to losses incurred by Conquest Air (including a
cumulative adjustment of $1,916,000) and $775,000 relate to the amortization of
debt discounts. The balance of such losses are attributable to adverse trends
in the business operated by Wico Corporation (the principal operating
subsidiary of the Company). In addition, Wico Corporation had net losses of
approximately $741,000 and $1,742,000 for the fiscal years ended September 30,
1992 and September 30, 1991, respectively. There can be no assurance that the
Company will operate profitably in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DECREASE IN STOCKHOLDERS' EQUITY; DEFICIT TANGIBLE NET WORTH
As of September 30, 1994 (partially as a result of the Wico Merger), the
Company's stockholders' equity was approximately $1,614,000. However, due to
losses in the nine months ended June 30, 1995, and notwithstanding the receipt
of approximately $1,570,000 from the issuance of Common Stock in the third
quarter of 1995, stockholders' equity at June 30, 1995 was reduced to
approximately $670,000. Although such stockholders' equity increased
subsequent to June 30, 1995 as a result of the receipt in July 1995 of an
additional $1,180,000 of net proceeds from the sale of 1995 Private Placement
Shares, and will further increase upon the issuance of up to 881,631 Creditors
Shares in reduction of up to $981,631 of liabilities, there can be no assurance
that the Company will not continue to incur significant net losses which would
result in future reductions of stockholders' equity. In addition, at June 30,
1995, the Company's tangible net worth (tangible assets less liabilities) was a
deficit of approximately $5,500,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations- Pro Forma Balance Sheet" and
"Business - Sale of Conquest Air; 1995 Private Placement; and Settlements with
Certain Creditors."
SUBSTANTIAL INDEBTEDNESS AND DEFAULTS UNDER PRIOR CREDIT AGREEMENT
The Company is subject to substantial indebtedness for money borrowed,
including an aggregate of approximately $19.7 million outstanding at October
31, 1995 under a revolving credit facility due September 30, 1998 and a
separate senior secured term loan maturing in 2000, and $2.737 million of
Private Placement Notes due October 1996. To the extent that the Company is
able to exchange such Private Placement Notes for $2.737 million of 12%
Exchange Notes, any remaining Private Placement Notes and all newly issued
Exchange Notes will be due and payable in full on October 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources (Private Placements)" and "Business
- -1994 Private Placement."
The Company's revolving credit and term loan facilities with
institutional lenders are secured by substantially all of the assets of the
Company, limited personal guarantees from Stephen R. Feldman, Chairman of the
Board of the Company, and Bentley J. Blum, a principal stockholder and
director, in the amounts of $1.0 million and $3.0 million, respectively, and by
pledges in favor of one of such institutional
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<PAGE> 15
lenders of all of the Company's Common Stock owned by certain principal
stockholders, representing approximately 60% of the Company's outstanding
Common Stock. (see "Possible Change in Control" below).
At June 30, 1995 and at September 30, 1995, the Company had drawn the
maximum $13.0 million available under its prior line of credit facility and, as
of both such dates, was not in compliance with certain financial covenants
under the credit agreement with its then institutional lender. Such lender
waived non-compliance with such covenants on June 30, 1995, and recently waived
non-compliance with such covenants at September 30, 1995 in connection with a
refinancing of the Company's senior secured indebtedness effected October 20,
1995.
On October 20, 1995, the Company's operating subsidiaries completed a
refinancing of its senior secured indebtedness with its existing institutional
lender and another commercial lender. Pursuant to the terms of the
refinancing, the Company's operating subsidiaries received a maximum $14.0
million senior secured revolving credit facility with the new commercial
institutional lender due in September 1998, out of which $6.0 million was
applied in reduction of its indebtedness to its current institutional term
lender, and the remaining outstanding balance due such lender was restated as a
$12.6 million term loan facility payable in installments with a final payment
of approximately $10 million due in 2000. The terms of the refinancing
requires the Company and its subsidiaries to comply with a number of ongoing
covenants, including revised financial covenants. There is no assurance that
the Company or its subsidiaries will be able to comply with such financial
covenants or that additional waivers would be forthcoming in the event of such
non-compliance in the future. In the event such waivers are required and are
not obtained, the lenders could declare all indebtedness to be immediately due
and payable and would be entitled to exercise their remedies under the credit
agreements. See "Risk Factors - Security Interests and Restrictive Loan
Covenants" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
CASH FLOW AND LIQUIDITY PROBLEMS
The Company is also suffering from liquidity and cash flow problems,
primarily as a result of negative cash flow in the Company's recently sold
airline business, and losses in the Company's gaming business. However, as a
result of costs associated with the consolidation of its recently acquired
gaming subsidiary and weakness in demand for certain of the products
distributed by Wico, the Company's manufacturing and distribution businesses
also suffered losses due to a lack of working capital and attendant inventory
shortages. The operations from the Company's continuing businesses generated
positive cash flow in fiscal 1994, 1993 and 1992 in the amounts of
approximately $1,761,000, $1,832,000 and $1,300,000, respectively. However,
for the nine months ended June 30, 1995, operating cash flow from such
businesses was negative by $363,000 and total cash flow, exclusive of
approximately $1,570,000 received from the issuance of Common Stock in June
1995, was negative by approximately $669,000. Although the Company's believes
that the recent refinancing of its senior debt will relieve its current cash
flow shortages, there is no assurance that the Company will not incur
additional cash flow shortages in the future or default in payment of its
indebtedness, including the $2,737,500 aggregate amount of Private Placement
Notes and/or Exchange Notes due in October 1996. See "Management's Discussion
and Analyses of Financial Conditions and Results of Operations - Liquidity and
Capital Resources."
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SECURITY INTERESTS AND RESTRICTIVE LOAN COVENANTS
Wico, a wholly-owned subsidiary of the Company, and the operating
subsidiaries of Wico are parties to lending agreements with its two
institutional lenders which provide for a term loan and a revolving credit
facility and which contain various financial and other covenants. Such
covenants, among other things, require that Wico and its consolidated
subsidiaries maintain certain minimum levels of adjusted net worth and
consolidated cash flow and minimum ratios of debt service coverage and interest
expense to indebtedness, and prohibit the Company and its subsidiaries, without
the lenders consent, from declaring any dividends, making any acquisitions,
incurring additional indebtedness and engaging in certain other transactions.
Substantially all of the Company's consolidated assets are pledged as
collateral to secure its indebtedness to the institutional lenders. The
obligations of the Company and its subsidiaries 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 creditors and foreclose upon substantially all of the assets of the
Company, Wico and its subsidiaries. In such event, it is unlikely that the
stockholders of the Company would realize any value on their investment in the
equity of the Company. Moreover, to the extent that the Company's consolidated
assets serve as collateral to secure outstanding indebtedness, or are
restricted from being used as security for outstanding indebtedness, such
assets will not be available to secure future indebtedness, which may adversely
affect the Company's future borrowing ability.
At June 30, 1995 and September 30, 1995 Wico was in default of its
operating income covenant and ratio of interest expense to operating income
covenant under the prior credit agreement with one of its institutional
lenders. Although the institutional lender waived this requirement through
September 30, 1995 in connection with the senior debt refinancing consummated
on October 20, 1995, there can be no assurance that the Company will be in
compliance with these and other requirements of the new credit agreements
following September 30, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
SALE OF CONQUEST AIR; CONTINUING SUBSTANTIAL LIABILITIES AND RISK OF NON-PAYMENT
The operations of the Company's Conquest Air commuter airline business
incurred significant losses which adversely affected the Company's working
capital and liquidity position through June 30, 1995. As a result, the lessors
of the aircraft operated by Conquest Air issued default notices and the Company
was unable to pay certain other obligations of Conquest Air. The Company has
agreed to pay by January 1996 approximately $550,000 to one of such lessors and
a former Conquest Air supplier. See "Use of Proceeds."
On June 30, 1995, the Company sold the stock of Conquest Air to Air L.A.,
Inc. ("Air LA"), a publicly-owned operator of a regional commuter airline. In
consideration for such sale, the Company received an aggregate of $6 million of
Air LA equity securities and notes. As part of the sale, in consideration for
250,000 Air LA stock options exercisable at $.50 per share through June 2000,
the Company provided Air LA with a secured $250,000 bridge loan pending a
contemplated debt refinancing by Air LA. At June 30, 1995, the Company was
also in default in payments to lessors of the six remaining aircraft formerly
operated by the Conquest Air in the amount of approximately $400,000. Although
Air LA assumed such obligations, as at October 31, 1995 $192,000 of such
$400,000 amount still remain outstanding. In addition, the Company has
recently been advised that Air LA was in arrears in payment of approximately
$248,000 of monthly aircraft lease installments due from July 1, 1995 through
October 31, 1995. Air LA reported net losses of $5,376,802 for the nine month
period ended March 31, 1995. Accordingly, even if it completes its debt
refinancing and repays the Company's bridge loan, should Air LA not be able to
pay its purchase price obligations to the Company, or be unable to cure prior
defaults and pay ongoing obligations to its aircraft lessors on a timely basis,
the Company could ultimately incur both a substantial financial loss from the
sale of Conquest Air and be required to pay damages aggregating in excess of
$2.2 million to the aircraft lessors. See "Management's Discussion and
Analyses of Financial Conditions and Results of Operations - Results and Plan
of Operations of Air LA" and "Business - Sale of Conquest Air."
POTENTIAL OBLIGATION TO REDEEM CERTAIN SECURITIES
Pursuant to the terms of the Company's 800,000 outstanding shares of
Series E Preferred Stock, the holders of such Series E Preferred Stock can
require the Company to redeem such securities at $1.00 per share in the event
that the Company consummates any public offering of its securities resulting in
its receipt of gross
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<PAGE> 17
proceeds of $3,000,000 or more. Although the Company's offering of the
2,975,000 Company Shares at $1.00 per share will not result in its receipt of
gross proceeds of $3,000,000, to the extent that the Company receives cash
proceeds from the exercise of all or any portion of the 1,961,925 Class B
Warrants, the 53,241 Underwriter's Warrants or the 53,241 Class Z Warrants
offered hereby, the aggregate gross proceeds received by the Company from the
exercise of any of such 2,068,407 Warrants offered hereby could arguably be
deemed to be coupled with gross proceeds received from the sale of the
2,975,000 Company Shares, resulting in the Company being obligated to redeem
all or a portion of such Series E Preferred Stock. 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 the offering of such 2,068,407 Warrants
would constitute an event potentially triggering redemption of the Series E
Preferred Stock, and (ii) does not anticipate, based upon the current market
price of the Company's Common Stock ($1.1875 per share at November 8, 1995) and
an average exercise price of approximately $5.02 per Warrant Share, that such
Class B Warrants, Underwriter's Warrants or Class Z Warrants will be exercised
in the foreseeable future. However, if the holders of the Series E Preferred
Stock are subsequently able, upon exercise of any of such 2,068,407 Warrants,
to compel the Company to repurchase the Series E Preferred Stock for up to
$800,000, the required redemption of the Series E Preferred Stock would reduce
amounts otherwise available for working capital and expansion of the Company's
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," and "Description of
Securities - Preferred Stock (Series E Preferred Stock)."
LICENSING AND REGULATION
The Langworthy acquisition provided a significant product line expansion
for the portion of Wico's prior business operations in the gaming industry,
consisting principally of the supply of replacement parts for slot machines.
However, such acquisition required the Company to secure additional licenses in
order to expand the acquired business operations. The Company plans to engage
in the gaming supply business in Connecticut, Indiana, Iowa, Louisiana,
Missouri, Nevada, New Jersey, Mississippi and other jurisdictions where
gambling is authorized. The Company has received approval for its license in
Wisconsin and Mississippi, and has received a conditional license in New
Jersey. However, there can be no assurance that the Company will not encounter
delays in obtaining necessary licenses in other jurisdictions, and that such
delays will not adversely affect the Company's planned casino supply business.
While additional licenses or authorizations are not required for the
continuation of the Company's sale and distribution of replacement parts for
slot machines or its continuation of substantially all of the Langworthy
operations in Nevada, and the Company has obtained approvals or conditional
licenses in Mississippi and New Jersey, the Company will still be required to
obtain licenses in other jurisdictions where gambling is authorized and the
Company plans to engage in the gaming supply business. It should be noted,
however, that Nevada accounted for approximately 50% of Langworthy's casino
supply business in 1993.
Any beneficial holder of securities of the Company may be subject to
investigation by the gaming authorities in any or all of the jurisdictions in
which the Company (or any of its subsidiaries) operates if such authorities
have reason to believe that such ownership may be inconsistent with such
state's gaming policies. Persons who acquire beneficial ownership of more than
certain designated percentages of securities will be subject to certain
reporting and qualification procedures established by such gaming authorities,
as well as local licensing authorities.
The failure of the Company or its key personnel to obtain or retain
required licenses, permits or approvals in one or more jurisdictions could have
an adverse effect on this aspect of the Company's gaming supply business and
could adversely affect the ability of the Company and its key personnel to
obtain or retain licenses in other jurisdictions. No assurance can be given
that such licenses, permits or approvals will be obtained, retained or renewed
in the future in the jurisdictions where the Company may seek to operate or
that competitors will not succeed in obtaining licenses where the licensing of
the Company is delayed or not approved.
CONTROL BY PRINCIPAL STOCKHOLDERS
The Company's officers and directors and their affiliates and family
members beneficially own approximately 55.9% of the issued and outstanding
Common Stock of the Company and hold options and warrants which, if fully
exercised, would entitle such persons to own an aggregate of approximately 37%
of
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<PAGE> 18
the outstanding Common Stock on a fully-diluted basis, assuming exercise or
conversion of all warrants, options and other securities exercisable for or
convertible into Company Common Stock as at the Effective Date. Under Delaware
law, the vote of only the holders of a majority of the outstanding voting
capital stock is required to elect the entire Board of Directors and to effect
fundamental corporate changes. There are no cumulative voting rights under the
Company's Certificate of Incorporation, and thus such stockholders may possess
the ability to elect all of the members of the Board of Directors of the
Company, to increase its authorized capital, to dissolve or merge the Company
or to sell its assets, if they so choose, and to generally exert substantial
and effective control over the business and operations of the Company.
POSSIBLE CHANGE OF CONTROL
Pursuant to its current credit agreement with its institutional lender,
Bentley J. Blum, Stephen R. Feldman, Iris Feldman, Miriam Katowitz and Paul E.
Hannesson (collectively, the "Pledgors") have pledged to the lender all of the
outstanding capital stock of the Company now owned or hereafter acquired by
each of them. Such shares represent approximately 60% of the total number of
Company shares of Common Stock currently outstanding. Accordingly, upon the
occurrence of an event of default (as defined), any and all shares of pledged
stock held by the lender may, at the option of such lender or its nominee, be
registered in the name of the lender or its nominee, and the lender or its
nominee will succeed to all rights pertaining to such shares. In the event
that the contemplated refinancing is consummated, it is anticipated that the
Pledgors will continue to be required to pledge all of their shares of Company
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
CERTAIN POTENTIAL BENEFITS TO INSIDER
In connection with the recent refinancing of the Company's senior
indebtedness, Bentley J. Blum, a principal stockholder and director of the
Company, increased his limited personal guaranty of such indebtedness from $1.0
million to $3.0 million, and has also collateralized the $2.0 million increase
in his personal guaranty with certain assets independent of his interests in
the Company. In consideration for his commitment to furnish such increased
guaranty and collateral, in September 1995 the Company's Board of Directors
agreed to issue to Mr. Blum, simultaneous with the closing of such refinancing
and issuance of his increased collateralized guaranty, an aggregate 500,000
shares of Company Common Stock, at $.001 per share. Such shares were issued to
Mr. Blum contemporaneous with the October 20, 1995 closing of the refinancing
and the issuance of his collateralized increased guaranty. In addition to such
500,000 shares, the Company further agreed that on each anniversary of the date
of closing of the refinancing, to the extent that Mr. Blum's $3.0 million
collateralized guaranty shall then remain in effect, he shall receive five year
warrants to purchase an additional 250,000 Company shares. Inasmuch as the
terms of the refinancing contemplate a five year maximum term of the credit
facility, Mr. Blum would potentially be entitled to receive warrants to
purchase an aggregate of 1,250,000 additional Company shares. All such
warrants, if and to the extent issued, shall have a term expiring five years
from the date of issuance and will be exercisable at the closing sale price of
the Company's publicly traded Common Stock on the date of issuance. On
November 8, 1995, the closing sale price of the Company's Common Stock, as
reported on NASDAQ, was $1.1875 per share. The 500,000 shares issued in
October 1995 to Mr. Blum for $.001 per share represent a substantial potential
for profit upon resale. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Management - Compensation Committee Interlocks and Insider Participation."
POTENTIAL CHARGE TO FUTURE EARNINGS.
The excess, if any, between the closing sale price of the Company's
Common Stock and the average value of approximately $1.11 per share for the
Creditors Shares, could represent a charge to earnings to the Company in an
amount equal to the difference between the closing sale price of the Company's
Common Stock and value of the Creditors Shares on the date of issuance thereof.
Although such charges to earnings will not impact consolidated stockholders'
equity, it may have a material adverse effect on the market price of the
Company's Common Stock. See "Management - Compensation Committee Interlocks
and Insider Participation" and "Business - Settlement with Certain Creditors."
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<PAGE> 19
SEASONALITY
Wico's consumer products segment experiences its peak sales relating to
the Christmas holiday selling season. Due to the importance of the Christmas
selling season, net sales relating thereto constitute a disproportionate amount
of net sales for the entire year and all of Wico's income from operations of
this segment. Unfavorable economic conditions affecting retailers generally
during the Christmas selling season in any year could materially adversely
affect Wico's results of operations for this segment. Wico must also make
decisions regarding how much inventory to buy in advance of the season in which
it will be sold. Significant deviations from projected demand for products can
have an adverse effect on Wico's sales and profitability for this segment.
DEPENDENCE UPON KEY EXECUTIVE
The success of the Company is largely dependent on the personal efforts
of Steffen I. Magnell, its Chief Executive Officer and President, who devotes
substantially all of his business time to the affairs of the Company and Wico.
Mr. Magnell has entered into an employment agreement with the Company and Wico
expiring March 31, 1998. Under the terms such agreement, Mr. Magnell is
restricted from entering into competition with the Company. However, the
Company does not currently maintain key employee life insurance on the life of
Mr. Magnell. In the event that it became necessary to replace such person, the
Company believes that another suitable executive would be available, although
there can be no assurance that the terms and conditions of employment of such
employee will not be less favorable to the Company. See "Management."
DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS.
The Company's consumer products business has been largely dependent upon
a principal supplier located in the Far East. Sales of such consumer products
decreased by $1,390,000 (approximately 24%) in the nine months ended June 30,
1995 as compared to the comparable nine month period in fiscal 1994, primarily
as a result of production difficulties encountered by such supplier. Although
the Company continues to purchase products from such vendor and is seeking
alternative sources of supply, there is no assurance that such sources will be
available, or that its present supplier will not incur further production
difficulties, either of which events may continue to adversely affect future
sales of the Company's consumer products. See ""Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
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<PAGE> 20
NO MINIMUM NUMBER OF COMPANY SHARES OR UNDERWRITER FOR SALE OF COMPANY SHARES.
There is no minimum number of Company Shares or net proceeds therefrom
that must be sold or received by the Company in order to consummate the
offering of the 2,975,000 Company Shares being offered pursuant to this
Prospectus; which offering of Company Shares will terminate on January 31,
1996. Accordingly, the net proceeds, if any, received from the sale of Company
Shares may be insufficient to cover offering expenses or otherwise enable the
Company to discharge certain obligations intended to be paid with such
proceeds. In addition, no funds provided by investors purchasing Company
Shares will be returned, irrespective of the number of Company Shares sold.
See "Use of Proceeds" and "Plan of Distribution - The Company Shares."
The 2,975,000 Company Shares are also being offered directly by the
Company, without the services of any underwriter or placement agent either
purchasing such Company Shares on a "firm commitment" basis or selling such
shares as agent on a "best efforts" basis. In view of the absence of an
underwriter or placement agent, the offering price for the 2,975,000 Company
Shares has been determined solely by the Company, without the involvement or
participation of any independent party and no underwriter or other
broker-dealer participated in the preparation of the offering documents.
Although the Company may engage the services of registered broker-dealers to
assist in the sale of the Company Shares, without the services of a recognized
underwriter for such securities, there is a lesser likelihood of a successful
completion of such offering for the account of the Company. See "Plan of
Distribution - The Company Shares"
NO DIVIDENDS
The payment of dividends, if any, on the Company's Common Stock rests
within the discretion of its Board of Directors and, among other things, will
depend upon the Company's earnings, capital requirements and financial
condition, as well as other relevant factors. The Company has not declared any
dividends since inception, and has no present intention of paying any dividends
on its Common Stock in the foreseeable future, and it intends to use earnings,
if any, to generate increased growth. Wico, the Company's principal operating
subsidiary, is also prohibited by the terms of its banking agreements from
paying any dividends to the Company, other than certain limited amounts. The
Company does not expect to declare or pay any dividends in the foreseeable
future. The Company intends to retain future earnings for investment in its
business.
RISK OF DELISTING FROM NASDAQ
The Company's Common Stock is currently traded on the SmallCap Market of
NASDAQ. NASDAQ imposes certain minimum criteria for continued listing of
securities. These requirements include minimums for total assets, total
capital and surplus, and share bid price of $2,000,000, $1,000,000 and $1.00,
respectively. Any issue which falls below the $1.00 bid price, but has a
market value of public float of $1,000,000 and equity of $2,000,000, is exempt
from the minimum bid price requirement.
In June 1995, NASDAQ notified the Company that, based on its consolidated
balance sheet at March 31, 1995, the Company's capital and surplus had fallen
below the minimum $1,000,000 amount necessary to maintain continued eligibility
for listing on NASDAQ. Such notice advised that the Company would be subject
to delisting unless it either demonstrated, through a periodic report filed
with the Securities and Exchange Commission, compliance with the $1,000,000
minimum capital and surplus test, or requested a temporary exception to be
considered by the NASDAQ Listing Qualifications Committee. Such exception
request is applicable when a corporation has developed a plan of action that
will result in full compliance, but requires additional time to implement.
In response to the NASDAQ notification, in July 1995, the Company filed
its required reports with the Securities and Exchange Commission and attended a
hearing with NASDAQ. Based primarily upon receipt of proceeds aggregating
approximately $2.9 million from its 1995 Private Placement, the Company was
able to demonstrate its renewed compliance with the listing requirements; and
as a result, NASDAQ withdrew its notice to the Company.
If the Company's Common Stock were delisted from NASDAQ, it would trade
on either the NASD Bulletin Board or in the over the counter market in what is
commonly referred to as the "pink sheets", and be subject to the "penny stock"
rules of the Securities and Exchange Commission. As a consequence of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the price
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<PAGE> 21
of, the Company's Common Stock or other securities. If this were to occur, the
market for the Company's Common Stock would be materially and adversely
affected.
SIGNIFICANT DILUTION TO PERCENTAGE EQUITY INTERESTS OF PRESENT STOCKHOLDERS AND
DEPRESSIVE EFFECT ON MARKET PRICE OF COMMON STOCK
As at October 31, 1995, the Company's outstanding capital stock consists
of (i) 7,550 shares of convertible Series A Preferred Stock, (ii) 2,000,000
shares of convertible Series B Preferred Stock, (iii) 800,000 shares of
convertible Series E Preferred Stock, and (iv) 12,622,454 shares of Common
Stock. An aggregate of 881,631 Creditors Shares were recently issued to
certain creditors of the Company in exchange for accrued obligations
aggregating up to $981,631, and an additional 2,975,000 Company Shares are
being offered hereby by the Company at $1.00 per share until not later than
January 31, 1996. See "Plan of Distribution - The Company Shares."
In addition to the aggregate of 12,622,454 shares of Common Stock
presently outstanding and the maximum of 2,975,000 additional shares to be
outstanding upon the sale of all 2,975,000 Company Shares offered hereby,
6,420,057 additional shares of Common Stock are being registered pursuant to
the Registration Statement of which this Prospectus is a part and are issuable
in connection with (i) the 2,718,407 Warrant Shares underlying the Class B
Warrants, the Bank Warrant, the Affiliate Warrant and the Underwriter's
Warrants, (ii) an estimated 2,281,250 Private Placement Conversion Shares,
(iii) the 1,030,400 Preferred Stock Conversion Shares, and (iv) 195,000 Warrant
Shares issuable upon exercise of the outstanding Public Warrants. The
foregoing does not include a maximum of 4,075,500 additional shares issuable
and potentially issuable in connection with other outstanding options and
warrants, including an aggregate of 1,895,500 shares underlying outstanding
warrants and options held by officers and directors of the Company and their
affiliates, and up to an additional 1,250,000 shares underlying warrants which
may be issued in connection with the Company's senior debt refinancing to
Bentley J. Blum, a principal stockholder and director, in consideration for his
increased personal guaranty of institutional indebtedness and his providing
personal collateral to secure such increased guaranty. See "Management -
Compensation Committee Interlocks and Insider Participation."
The potential issuance of an additional 13,470,557 shares of Common Stock
(including the maximum 1,250,000 shares potentially issuable to Mr. Blum in
connection with the contemplated refinancing) represents 51.6% of the
26,093,011 shares of Common Stock which would be outstanding on a fully-diluted
basis, assuming exercise or conversion of all such options, warrants and
convertible securities.
In addition, the Private Placement Conversion Shares are issuable at 80%
of the applicable closing bid price of the Company's publicly traded Common
Stock on each date that Private Placement Notes may be converted into Common
Stock. The 2,281,250 Private Placement Conversion Shares referred to above are
assumed based upon a $1.20 conversion price. However, based on the $1.1875
closing bid price of the Company's Common Stock at November 8, 1995, the
conversion price on such date would have been $0.95 and an aggregate of
2,881,579 Private Placement Conversion Shares would have been issued if all
$2,737,500 of Private Placement Notes had been converted on such date.
Accordingly, the 26,093,011 shares of Common Stock potentially issued on a
fully-diluted basis may be significantly increased depending upon the
applicable conversion prices of Private Placement Notes in effect on the date
of conversion, and otherwise adjusted depending upon whether and to the extent
that holders of the convertible Private Placement Notes accept non-convertible
12% Exchange Notes and cash in exchange for such Private Placement Notes. See
"Business - 1994 Private Placement."
The issuance of such additional shares of Common Stock would represent
substantial dilution to the interests of present stockholders in the percentage
equity ownership of the Company, and such issuances (or even the potential
thereof) is likely to have a significant depressive effect on the current
market price of the Company's publicly traded Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
At October 31, 1995, there were an aggregate of 12,622,454 shares of
Common Stock outstanding, including 3,481,821 shares which are being registered
for immediate resale pursuant to this Prospectus; and an additional maximum
2,975,000 Company Shares which may be sold by the Company shortly after the
Effective Date of this Prospectus. In the four fiscal 1995 quarters ended
September 30, 1995, the market price of the Company's publicly traded Common
Stock has fluctuated between a low of approximately $.25
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<PAGE> 22
per share to a high of $3.125 per share. The existence on the Effective Date
of this Prospectus of an aggregate of 6,481,821 shares of Common Stock
available for immediate resale into the market is likely to have a significant
depressive effect on the market price of the Company's publicly traded Common
Stock, and could render difficult the sales of Common Stock by investors. In
addition, the potential issuance of up to 6,420,057 additional registered
shares of Common Stock upon the exercise of Warrants and the conversion of
Company Private Placement Notes and Series B and Series E Preferred Stock
represents a further potential "overhang" on the future market price of the
Company's Common Stock.
Upon the Effective Date of this Prospectus, approximately 7,500,000
shares of Common Stock will be "restricted securities," as that term is defined
under Rule 144 promulgated under the Securities Act, in that such shares were
issued and sold by the Company in transactions not involving a public offering.
In general, under Rule 144 as currently in effect, subject to the satisfaction
of certain other conditions, after at least two years have elapsed since the
purchase of such shares from the Company or its affiliate, the holder of the
shares can (along with any person with whom such individual is required to
aggregate sales) sell, within any three-month period, a number of shares of
restricted securities that does not exceed the greater of 1% of the total
number of outstanding shares of the same class, or, if the Common Stock is
quoted on NASDAQ or a stock exchange, the average weekly trading volume during
the four calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least three months may, after at least three
years have elapsed from the purchase of the restricted securities from the
Company or an affiliate, sell such restricted shares under Rule 144 without
regard to any of the limitations described above.
Because substantially all of the Company's outstanding restricted shares
of Common Stock will become eligible for sale pursuant to Rule 144 on or before
July 1997 (three years from the closing of the Wico Merger), the possible or
actual sales of Common Stock by stockholders of the Company pursuant to Rule
144 could have a further depressive effect upon the price of the Common Stock
in any market that may develop therefor, and could also render difficult the
sales of Common Stock by investors.
NECESSITY OF CONTINUING POST-EFFECTIVE AMENDMENTS TO THE COMPANY'S REGISTRATION
STATEMENT AND STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS; OBLIGATION TO
SELLING SECURITYHOLDERS
In order to exercise the Class B Warrants, the Public Warrants, the
Underwriter's Warrants and Class Z Warrants and purchase the underlying Common
Stock, it is necessary that such warrants and underlying Common Stock be
registered or otherwise exempt from applicable registration requirements. In
addition, the conversion of the Private Placement Notes into 1994 Private
Placement Conversion Shares will likewise require the registration of such
shares. The Company would be unable to issue Common Stock to those persons
desiring to exercise their Class B Warrants and convert their Private Placement
Notes unless and until the underlying Common Stock are qualified for sale in
jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions. There can be no assurance that the
Company will be able to effect any required qualification.
The Class B Warrants, the Public Warrants, the Underwriter's Warrants and
the Class Z Warrants will not be exercisable and the Private Placement Notes
may not be converted unless the Company maintains a current Registration
Statement on file with the Commission through post-effective amendments to the
Registration Statement containing this Prospectus. The Class B Warrants may
not be redeemed by the Company at any time when a current registration is not
maintained. However, the failure to maintain an effective registration
statement will not extend the term of the Class B Warrants, the Public
Warrants, the Underwriter's Warrants and the Class Z Warrants. Although the
Company plans to file appropriate post-effective amendments to the Registration
Statement containing this Prospectus, and to maintain a current Registration
Statement on file with the Commission relating to the Class B Warrants, the
Public Warrants, the Underwriter's Warrants, the Class Z Warrants, the shares
of Common Stock underlying such Class B Warrants and the 1994 Private Placement
Conversion Shares, there can be no assurance that such will be accomplished or
that the Class B Warrants, the Public Warrants, the Underwriter's Warrants or
the Class Z Warrants will continue to be so registered. See "Description of
Securities - Warrants."
In addition to the Class B Warrants, the Public Warrants, the
Underwriter's Warrants, the Class Z Warrants, the shares of Common Stock
underlying such Warrants and the 1995 Private Placement Conversion Shares, the
Company has undertaken to maintain a current registration statement with regard
to the other Selling Securityholders' securities after the date of this
Prospectus until all such securities have been resold
-14-
<PAGE> 23
or are otherwise capable of being resold pursuant to an exemption from the
registration requirements of the Securities Act. The obligation to maintain a
current registration statement may impose a financial burden on the Company and
create a contractual liability of the Company to the Selling Securityholders.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
5,000,000 shares of "blank check" preferred stock (the "Preferred Stock") with
such designations, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. As of the date of this Prospectus, there are
outstanding 7,550 shares of Series A Preferred Stock, 2,000,000 shares of
Series B Preferred Stock, and 800,000 shares of Series E Preferred Stock, which
are convertible, at the option of the holders, into an aggregate of
approximately 1,036,440 shares of Common Stock. There can be no assurance that
additional Preferred Stock of the Company will not be issued in the future.
USE OF PROCEEDS
Other than proceeds received from the sale of up to 2,975,000 Company
Shares and/or upon exercise of outstanding options and/or warrants, the Company
will not receive any of the proceeds from the sale of any 1994 Private
Placement Conversion Shares, 1995 Private Placement Shares, Creditor Shares,
Class B Warrants, Underwriter's Warrants or other securities offered hereby.
Any net proceeds received by the Company from the sale of any or all of up to
2,975,000 Company Shares (estimated at up to approximately $2,477,500 after
payment of maximum selling commissions of $297,500 (10% of the gross proceeds)
and approximately $200,000 in other offering expenses) will be used by the
Company: (i) to repay up to $550,000 of accrued obligations retained by the
Company related to its former Conquest Air subsidiary; (ii) to pay up to
$547,500 to holders of the Private Placement Notes who agree to exchange such
notes for the Company's 12% non-convertible Exchange Notes, and up to $273,750
to Rickel & Associates, Inc., as soliciting agent in connection with such note
exchange offer; and (iii) the balance for working capital purposes.
The $550,000 of accrued obligations are represented by approximately
$350,000 due to an unaffiliated former aircraft lessor to Conquest Air and
$200,000 due to an unaffiliated third party who rendered aircraft maintenance
services to Conquest Air prior to June 1995. Both such obligations are due and
payable in full, without interest, on or before January 31, 1996.
To the extent that less than all 2,975,000 Company Shares are sold, the
Company will: (i) first allocate up to $550,000 of such net proceeds to retire
the accrued obligations incurred by Conquest Air, (ii) second, to make required
payments (up to a maximum of $821,250) in connection with 12% non-convertible
Exchange Notes accepted in exchange for the Company's currently outstanding
convertible 10% Private Placement Notes, and (iii) the balance, if any, for
working capital and general corporate purposes.
Any proceeds received from the exercise of the Class B Warrants,
Underwriter's Warrants and Class Z Warrants offered hereby, together with net
proceeds from the sale of Company Shares allocated to working capital, will be
initially used to the extent of up to $800,000 to redeem shares of outstanding
Series E Preferred Stock of the Company, if and as required. The balance, if
any, together with any proceeds received from the exercise of the Public
Warrants and other outstanding options and Warrants, shall be used for working
capital and general corporate purposes. See "Risk Factors - Potential
Obligation to Redeem Certain Securities." The issuance of the 881,631
Creditors Shares reduced existing Company indebtedness and accounts payable by
as much as $981,631. See "Business - Settlement with Certain Creditors."
The maximum amount of proceeds receivable from the exercise of the Class
B Warrants, Public Warrants and Underwriter's Warrants (and underlying Class Z
Warrants) is approximately $10,000,000. However, inasmuch as the current per
share exercise prices of the Class B Warrants, Public Warrants, Underwriter's
Warrants and Class Z Warrants is significantly in excess of the current market
price of the Company's Common Stock, it is unlikely that such Warrants will be
exercised in the near future unless there is an appreciable increase in the
market price of the Company's outstanding Common Stock. Such market price may
be significantly adversely affected by the large number of additional shares of
Common Stock being registered for sale in this Prospectus. See "Risk
-15-
<PAGE> 24
Factors - Significant Dilution to Present Stockholders and Depressive Effect on
Market Price of Common Stock; Shares Eligible for Future Sale" and "Selling
Securityholders."
MARKET PRICES OF THE COMPANY'S PUBLICLY TRADED SECURITIES
The Company's Common Stock is traded on NASDAQ under the symbol "CAIR."
NASDAQ is the principal market for all of the Company's securities. The
Company's Common Stock is also listed on the Boston Stock Exchange ("BSE")
under the symbol "CAC."
The Company's 195,000 Public Warrants are included in NASDAQ under the
symbol "CAIRW." Such Warrants are also listed on the BSE under the symbol
"CACWS." The Public Warrants are exercisable at $5.00 per share and expire on
June 20, 1999. In accordance with their original terms, the Public Warrants
are redeemable in whole or in part at a price of $.10 per Public Warrant, at
the option of the Company, upon 30 days' written notice at any time, provided
the closing bid price of the Company's Common Stock, as traded on NASDAQ or in
the over-the-counter market, is at least $6.84 for five consecutive days ending
on the day prior to the date of any notice of redemption. The Public Warrants
are exercisable until the close of business on the day preceding the date fixed
for redemption.
The Company's Series A Preferred Stock is traded on the BSE under the
symbol "CACP" and was traded on NASDAQ in the first and second quarters of the
Company's fiscal year ended September 30, 1993. The NASDAQ quotes are noted
with an asterisk in the table below.
[the balance of this page intentionally left blank]
-16-
<PAGE> 25
The following table sets forth high and low sale prices for the Common
Stock, Public Warrants and Series A Preferred Stock, as reported on NASDAQ and
on the BSE (with respect to the Series A Preferred Stock). Reported prices are
adjusted to reflect the reverse one-for-ten stock split of the Company's common
stock effective in November 1994.
<TABLE>
<CAPTION>
Public Series A
Common Stock Warrants Preferred
-------------------------------------------------------------
Fiscal Year 1993 High Low High Low High Low
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter . . . . . . . . 43 3/4 23 3/4 14 3/8 5 32 1/2 17
2nd Quarter . . . . . . . . 25 6 7/8 6 7/8 3 1/8 17 8
3rd Quarter . . . . . . . . 18 1/8 9 3/8 5 19/20 1 5/8 12 7
4th Quarter . . . . . . . . 3 7/8 1 1/16 1 3/8 5/16 24 7
<CAPTION>
Fiscal Year 1994 High Low High Low High Low
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter . . . . . . . . 38 1/8 17 1/2 14 3/8 6 1/4 24 14
2nd Quarter . . . . . . . . 23 3/4 12 1/2 8 1/4 3 3/4 16 10
3rd Quarter . . . . . . . . 18 3/8 6 1/2 6 1/4 1 1/4 10 7
4th Quarter . . . . . . . . 1 1/2 3/8 1/16 8 4
<CAPTION>
Fiscal Year 1995 High Low High Low High Low
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter . . . . . . . . 3 5/8 1/8 1/32 6 4
2nd Quarter . . . . . . . . 1 7/8 13/16 1 1/32 6 4
3rd Quarter . . . . . . . . 3 1/8 7/8 7/8 1/8 6 4
4th Quarter . . . . . . . 3 11/16 1 1/2 7/8 1/8 8 2
</TABLE>
As of November 8, 1995, the closing sale price of the Common Stock was
$1.1875, the closing sale price of the Public Warrants was $0.25, and the
closing sale price of the Series A Preferred Stock was $3.00.
The number of record holders of Common Stock, Public Warrants and Series
A Preferred Stock as of November 8, 1995 was approximately 667, one and four,
respectively.
DIVIDEND POLICY
The payment of dividends, if any, on the Company's Common Stock rests
within the discretion of the Company's Board of Directors and, among other
things, will depend upon the Company's earnings, capital requirements and
financial condition, as well as other relevant factors. The Company has not
declared any dividends since inception, and has no present intention of paying
any dividends on its Common Stock in the foreseeable future. The Company
intends to use earnings, if any, to further the growth of its business. Wico
and the Company's principal operating subsidiaries, are also prohibited by the
terms of its credit agreements from declaring or paying any dividends to
Company stockholders.
[the balance of this page intentionally left blank]
-17-
<PAGE> 26
SELECTED FINANCIAL DATA
The selected financial data as of September 30, 1994, 1993 and 1992 and
for each of the three years in the period ended September 30, 1994 has been
abstracted from the audited financial statements of the Company included
elsewhere herein; the selected financial data as of September 30, 1992 and
September 30, 1991 and for the period ended September 30, 1990 has been
abstracted from audited financial statements of the Company not presented
herein. The selected financial data as of June 30, 1995 and for the nine-month
periods ended June 30, 1995 and 1994 are derived from the Company's unaudited
financial statements, and, in the opinion of management have been prepared on
the same basis as the Company's audited financial statements and include all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of such interim financial data. The results of operations for the
interim periods presented are not necessarily indicative of results of
operations that may be expected for the year ending September 30, 1995. The
selected financial data should be read in conjunction with such financial
statements and related notes included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Statement of Operations Data (3)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Nine Months Ended
June 30, Years Ended September 30,
--------------------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . $29,341 $30,677 $41,992 $38,783 $38,653 $39,277 $45,747
Cost of sales . . . . . . 18,780 18,748 26,078 23,675 24,078 24,282 28,413
Net income (loss) . . . . (4,045) 550 284 443 (741) (1,742) (703)
Pro forma net income (4,045) 550 284 508 (516) (1,137) (488)
(loss)(1) . . . . . . . .
Pro forma net income
(loss) $ (.46) $. 06 $ .00 $ .06 $ (.07) $ (.16) $ (.07)
per share (2) . . . . .
Number of shares used
in computation . . . . 9,345 7,181 7,675 7,181 7,181 7,181 7,181
</TABLE>
Balance Sheet Data (4)
<TABLE>
<CAPTION>
June 30, September 30,
----------- ----------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Current assets . . . . . . $ 15,307 $ 15,757 $ 15,099 $ 15,713 $ 15,642 $ 18,145
Total assets . . . . . . . 28,528 27,811 19,912 21,384 23,158 27,394
Current liabilities . . . . 10,415 9,491 6,487 6,598 7,465 7,715
Long term debt . . . . . . 17,443 16,706 23,850 27,450 28,608 31,300
Stockholders' equity 670 1,614 (10,425) (13,664) (12,915) (11,621)
(deficiency) . . . . . . .
</TABLE>
- ---------------------------------
(1) Pro forma net income (loss) has been calculated after giving effect to
the pro forma adjustments to the income tax provision as if the Company
had not operated as an "S" corporation. As of January 1, 1994, the
Company ceased operating as an "S" corporation.
(2) Pro forma net income (loss) per share reflects the recapitalization of
the Company as a result of the Wico Merger. Common Stock equivalents
have been included in years where they produce a dilutive effect.
(3) Includes the results of operations for the acquired Langworthy businesses
since June 20, 1994. Results of airline operations are excluded from
sales and cost of sales, but are included in net income (loss) and pro
forma net income (loss).
(4) Includes the assets and liabilities resulting from the Wico Merger and
acquisition of Langworthy which have been valued at their estimated fair
values as of June 20, 1994.
-18-
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND 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 its 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. See "Business - Sale of Conquest Airlines."
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 sales in
the fourth quarter of fiscal 1995 so that total sales of 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.
RESULTS OF OPERATIONS
Nine months ended June 30, 1995 compared to Nine months ended June 30, 1994:
<TABLE>
<CAPTION>
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 Commuter Airline Operation 2,703 _
Interest Expense 1,639 1,310
Amortization of Debt Discount 775 -0-
Other Expense 181 296
Income (Loss) From Before Income Taxes (Benefit) (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 1994 nine month period. The
aggregate $1,336,000 decrease (4.4%) was the result of distribution sales
decreasing by $1,606,000 and consumer product sales decreasing by $1,390,000
from the comparable nine month period in 1994, including the discontinuation of
certain Sega and Nintendo products which represented an immaterial portion of
the consumer products business. Consumer products sales were adversely
affected primarily by production difficulties experienced by one of the
Company's vendors located in the Far East. Although the Company continues to
purchase products from such vendor, it is currently seeking alternative sources
of supply and believes that such alternatives sources will be available by the
end
-19-
<PAGE> 28
of the second quarter of fiscal 1996. During the nine months ended June 30,
1995, decreased Company sales were partially offset by $1,660,000 of sales of
Wico Gaming subsequent to its acquisition in June 1994.
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 a 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 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 for the nine months ended June 30, 1995 was 36.4% as
compared to 38.4% 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 40.9% 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 (30.0% of sales) for the comparable prior year. This 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 nine months
ended June 30, 1995, as compared to approximately $232,000 in the comparable
prior year period. This increase is primarily attributable to amortization of
goodwill incurred in connection with acquisitions and amortization of debt
financing costs.
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 price of the commuter air operation.
Interest expense (including amortization of 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 debt discounts were recorded in the fourth
quarter of fiscal 1994 as a result of the Company's refinancing of its
principal bank debt and the private placement of securities (see Note F to
Notes to Financial Statements).
The Company recorded a loss from 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 provision for loss on the Company's commuter airline
operations of $2,703,000. A deferred income tax benefit of approximately
$1,739,000 was recorded during the nine months ended June 30, 1995 as a result
of the tax benefits of the operating losses incurred during this period.
Management believes that the deferred tax benefits will be recovered by the
generation of financial reporting and taxable income prior to the expiration of
such net operating losses.
-20-
<PAGE> 29
Fiscal years Ended September 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Year Ended September 30, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Sales:
Distribution . . . . . . . . . . . . . . . $ 32,203 $32,981 $32,480
Consumer . . . . . . . . . . . . . . . . . 8,595 5,802 5,173
Gaming (1) . . . . . . . . . . . . . . . . 1,194 --- ---
-------- ------ ------
41,992 38,783 38,653
Gross Profit:
Distribution . . . . . . . . . . . . . . . 12,639 12,706 12,359
Consumer . . . . . . . . . . . . . . . . . 3,163 2,402 2,217
Gaming . . . . . . . . . . . . . . . . . . 111 --- ---
------ ------ ------
15,913 15,108 14,576
Selling, Distribution and
Administrative . . . . . . . . . . . . . . 12,593 11,620 10,895
Amortization of Intangibles . . . . . . . . . 375 689 978
Amortization of Debt Discount . . . . . . . . 282 -- --
Interest Expense . . . . . . . . . . . . . . 1,732 2,063 2,684
Other Charges . . . . . . . . . . . . . . . . 441 8 608
Net Income (loss) before income taxes . . . . 490 728 (738)
Pro Forma Net Income (loss) (1) . . . . . . . 284 508 (516)
Pro Forma Net Income (loss)
per share (1) . . . . . . . . . . . . . . . .00 0.06 (0.07)
</TABLE>
- ---------------------
(1) For the period June 20, 1994 through September 30, 1994.
Fiscal Year Ended September 30, 1994 Compared with Fiscal Year Ended
September 30, 1993
Distribution sales decreased 2.4% to $32,203,000 while consumer sales
increased 48.1% to $8,595,000, and gaming amounted to $1,194,000. Distribution
sales continued to be hampered by soft conditions in the coin-operated machine
market, particularly amusement games. The consumer sales increase of 48.1% was
attributable to the increased acceptance of Suncom products at retail as well
as significant OEM sales.
Gross profit for the twelve months ended September 30, 1994 was
$15,913,000, as compared with $15,108,000 in the twelve months ended September
30, 1993. This 5.3% increase was due to higher consumer sales at gross margins
of 36.8%, as compared with 41.4% consumer margins in the previous year. The
change reflected higher volume to an OEM customer at lower gross margins.
Distribution margins increased slightly to 39.2% from 38.5% in the previous
year.
Selling, distribution and administrative expenses were approximately
$12,593,000 for the twelve months ended September 30, 1994 versus $11,620,000
for the twelve months ended September 30, 1993, which was approximately 30% of
total sales in each year. The 8.4% increase in expenses was the largely the
result of an increase in variable advertising and freight expenses associated
with improved consumer sales. Depreciation and amortization expense declined
to $375,000 as compared with $689,000 in the previous twelve-month period, as
certain intangibles were fully amortized. Due to debt discounts and related
amortization, the Company anticipates amortization charges of approximately
$1.3 million in the fiscal year ending September 30, 1995.
During the twelve months ended September 30, 1994, interest expense
declined to $1,732,000 as a result of lower principal amounts outstanding, as
well as lower interest rates. High and low per annum interest rates were 8.5%
and 6.7%, respectively, in the twelve months ended September 30, 1994, they
were 10% and 7%, respectively, in the twelve months ended September 30, 1993.
-21-
<PAGE> 30
Other charges in 1994 included approximately $175,000 and $240,000
related to the write-offs of deferred registration costs and deferred financing
fees, respectively.
As a result of the aforementioned, the Company recorded income from
operations before taxes of $490,000 in the twelve months ended September 30,
1994 as compared with income from operations before taxes of $728,000 in the
twelve months ended September 30, 1993.
Fiscal Year Ended September 30, 1993 Compared with Fiscal Year Ended September
30, 1992
Distribution sales increased 1.5% to $32,981,000, while consumer sales
increased 12.2% to $5,802,000. Distribution sales increases were adversely
affected by the slow economic recovery and the continued popularity of
home-based video games. The consumer sales increase of $629,000 was largely
attributable to the increased popularity of personal computer-based video
entertainment.
Gross profit for the fiscal year ended September 30, 1993 was
$15,108,000, compared with $14,576,000 in the fiscal year ended September 30,
1992. This 3.6% increase was primarily the result of an increase in consumer
gross margin from 42.9% to 41.4% of sales. This increase occurred due to the
introduction of higher-margin new products and a reduction in the amount of
close-out merchandise.
Selling, general and administrative expenses were $11,620,000 in fiscal
1993, approximately 30% of sales, as compared with $10,895,000 in fiscal 1992,
or 28.1% of sales. The 6.6% increase in expenses was the result of marketing
and product development expenditures for new consumer products, as well as
increased distribution marketing expenditures to support market share in the
coin- operated machine parts and billiards markets. The amortization of
intangibles resulting from acquisitions declined to $689,000 in fiscal 1993 as
compared with $978,000 in fiscal 1992, as certain intangibles were fully
amortized during 1992.
During fiscal 1993, interest expense declined to $2,063,000 as a result
of lower principal amounts outstanding, as well as lower interest rates. High
and low per annum interest rates were 8% and 6.7%, respectively, in fiscal
1993, and 10% and 7%, respectively, in fiscal 1992.
Wico recorded income before income taxes in fiscal 1993 of $728,000, as
compared with a loss before income taxes of ($738,000) in fiscal 1992.
Improved sales and gross margins in the distribution segment, as well as
reduced interest expense and amortization, contributed most significantly to
this result.
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
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
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<PAGE> 31
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>
-23-
<PAGE> 32
<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. See "Pro-Forma
Consolidated Balance Sheet." 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. See "Risk Factors
- - Security Interests and Restrictive Loan Covenants."
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
-24-
<PAGE> 33
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. See
"Management - Compensation Committee Interlocks and Insider Participation."
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.
-25-
<PAGE> 34
See "Risk Factors-Potential Obligation to Redeem Certain Securities."
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.
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. See "Use of Proceeds."
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
-26-
<PAGE> 35
otherwise curing such lease payment defaults. See "Risk Factors - Sale of
Conquest Air; Continuing Substantial Liabilities and Risks of Non-Payment" and
"Business - Sale of Conquest Air."
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 $981,631 at
October 31, 1995, to purchase from the Company an aggregate of 881,631
Creditors Shares. All 881,631 Creditors Shares are being registered under the
Registration Statement of which this Prospectus is a part. See "Selling
Securityholders."
-27-
<PAGE> 36
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.
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
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
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<PAGE> 37
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
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<PAGE> 38
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 relating to
the Christmas holiday selling season. Due to the importance of the Christmas
selling season, net sales relating thereto constitute a disproportionate amount
of net sales for the entire year and all of Wico's income from operations of
this segment. Unfavorable economic conditions affecting retailers generally
during the Christmas selling season in any year could materially adversely
affect Wico's results of operations for this segment. Wico must also make
decisions regarding how much inventory to buy in advance of the season in which
it will be sold. Significant deviations from projected demand for products can
have an adverse effect on Wico's sales and profitability for this segment.
INFLATION
To date, inflation has not had a material effect on the Company's
operations.
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<PAGE> 39
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
The following pro-forma consolidated financial statements sets forth on a
pro-forma basis the Company's consolidated balance sheet as at June 30, 1995
its results of operations for the nine months then ended and the year ended
September 30, 1994 after giving effect to: (i) the completion of the sale of
the 2,082,147 Private Placement Shares in July 1995, (ii) the redemption for
$200,000 of 600,000 shares of Series D Preferred Stock owned by an affiliate,
iii) the repayment of a $150,000 loan owed to an affiliate, (iv) the exchange
of an aggregate of $981,631 of Company obligations for 881,631 Creditors
Shares, (v) the exchange offer related to the 10% Private Placement Notes and
(vi) for the year ended September 30, 1994, the acquisition of certain assets
(subject to certain liabilities) of Langworthy Casino Supply on June 20, 1994.
<TABLE>
<CAPTION>
PROFORMA BALANCE SHEET
Pro-Forma Adjustments
--------------------------------------
Historical Dr. Cr. As Adjusted
--------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 1,909,276 1,180,000 (1) 350,000 (2) $ 1,633,526
273,750 (3)
547,000 (4)
285,000 (5)
Trade accounts receivable 4,364,708 4,364,708
Other receivables 209,227 209,227
Inventories 7,942,219 7,942,219
Prepaid expenses and other current assets 881,741 881,741
---------- ---------- ----------- ----------
TOTAL CURRENT ASSETS 15,307,171 1,180,000 1,455,750 15,031,421
MACHINERY AND EQUIPMENT - NET 961,414 961,414
DEFERRED TAX ASSET 1,857,900 1,857,900
INTANGIBLE AND OTHER ASSETS - NET 6,151,820 562,500(6) 6,714,320
NET ASSETS OF BUSINESS TRANSFERRED (B) 4,250,000 4,250,000
----------- ---------- ----------- -----------
$28,528,305 $1,742,500 $1,455,750 $28,815,055
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 6,083,625 $810,000 (10) $ $ 5,273,625
Accrued expenses 2,681,776 2,681,776
Current portion of long-term debt 1,500,000 1,500,000 (11) -
Notes payable - stockholder 150,000 150,000 (2) -
------- ---------
TOTAL CURRENT LIABILITIES 10,415,401 2,460,000 7,955,401
---------- ---------
LONG-TERM DEBT 17,443,349 547,000 (4) 1,500,000 (11) 18,396,349
----------- ------- --------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock-Series A 755 755
Preferred stock-Series B and E 2,800,000 2,800,000
Preferred stock-Series D 200,000 200,000 (2) -
Common stock 102,739 9,773 (1) 123,380
5,625 (6)
5,243 (10)
Additional paid-in capital 15,846,430 1,170,227 (1) 18,378,389
556,875 (6)
804,757 (10)
Accumulated deficit (18,200,633) 273,750 (3) (18,759,383)
285,000 (5)
Foreign currency translation adjustment (79,736) (79,736)
----------- ---------- --------- ----------
669,555 1,305,750 2,463,305
------------ -----------
$28,528,305 $3,765,750 $4,052,500 $28,815,055
========== ========= ========= ==========
</TABLE>
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<PAGE> 40
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Pro-Forma Adjustments
--------------------------------------
Historical Dr. Cr. As Adjusted
--------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $29,341,087 $29,341,087
COST OF SALES 18,779,667 18,779,667
---------- ----------- ---------- -----------
GROSS PROFITS 10,561,420 - - 10,561,420
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Selling, distribution and administrative 10,655,338 10,665,338
expenses 391,985 391,985
Depreciation and amortization expenses 2,703,059 2,703,059
---------- ----------- ---------- ----------
Loss from airline operations
13,750,382 - - 13,750,387
---------- ----------- ---------- ----------
OPERATING INCOME (LOSS) (3,188,692) - - (3,188,962)
----------- ----------- ----------- -----------
OTHER EXPENSES (INCOME):
Interest Expense 1,639,115 (7) 230,000 1,869,115
Amortization of debt discount 775,000 (8) 84,375 859,375
Other-net 181,036 181,036
--------- --------- --------- -----------
2,595,151 314,375 - 2,909,526
---------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,784,113) 314,375 - (6,098,488)
PROVISION FOR INCOME TAXES (BENEFIT) (1,739,000) (9) 119,463 (4,240,025)
------------ --------- --------- ------------
NET INCOME (LOSS) $(4,045,113) $ 314,375 $ 119,463 $(4,240,025
=========== ======= ======= ==========
EARNINGS (LOSS PER SHARE) $ (0.46) $ (0.48)
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 9,345,000 9,345,000
========== ==========
</TABLE>
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<PAGE> 41
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
FOR YEAR ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Conquest
Industries, Inc. Pro-Forma Adjustments
and subsidiaries ---------------------------
as reported Langworthy Dr. Cr. As Adjusted
------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
NET SALES $41,991,512 $3,315,207 $45,306,719
COST OF SALES 26,078,087 2,323,663 28,401,750
---------- ---------- ---------- -------- -----------
GROSS PROFITS 15,913,425 991,544 - - 16,904,969
---------- ---------- ---------- -------- -----------
OPERATING EXPENSES:
Selling, distribution and administrative
expenses 12,592,710 683,948 13,276,658
Moving costs 375,232 (12) 58,000 433,232
---------- ---------- ---------- -------- -----------
Amortization expense
12,967,942 683,948 58,000 - 13,709,890
---------- ---------- ---------- -------- -----------
OPERATING INCOME 2,945,483 307,596 58,000 - 3,195,079
---------- ---------- ---------- -------- -----------
OTHER EXPENSES (INCOME):
Interest Expense 1,731,377 (7) 20,000 1,751,377
Amortization of debt discount 282,500 (8) 112,500 395,000
Write off of registration costs 175,394 175,394
Other 266,387 266,387
---------- ---------- ---------- -------- -----------
2,445,658 132,500 2,588,158
---------- ---------- ---------- -------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 489,825 307,596 190,500 - 606,921
PROVISION FOR INCOME TAXES 206,201 107,043 (9) 79,244 234,000
---------- ---------- ---------- -------- -----------
NET INCOME (LOSS) 283,624 200,553 190,500 79,244 372,291
PRO-FORMA INCOME TAXES (BENEFIT) -
---------- ---------- ---------- -------- -----------
PRO-FORMA NET INCOME $ 283,624 $200,553 $ 190,500 $ 79,244 $ 372,921
========= ======== ========= ======== ===========
PRO-FORMA EARNINGS (LOSS) PER SHARE $ 0.00 $ .01
========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES 7,675,000 7,675,000
========== =========
</TABLE>
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<PAGE> 42
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO PRO-FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended June 30, 1995 and Year Ended September 30, 1995
(A) Pro-forma adjustments have been made to the historical June 30, 1995
unaudited consolidated financial statement to give effect to the
following:
(1) The receipt in July 1995 of additional net proceeds of approximately
$1,180,000 from the 1995 Private Placement.
(2) The redemption in July 1995 of $200,000 of Series D Preferred Stock for
an aggregate price of $200,000 and the repayment in July 1995 of a
$150,000 loan owed to an affiliate of a director.
(3) The payment of $273,750 made in October 1995 to the agent in connection
with the restructuring of the Company's Private Placement Notes due
October 1, 1996.
(4) The payment of $547,000 to the holders of the Private Placement Notes due
October 1, 1996.
(5) The payment of expenses associated with the Nat West and Private
Placement Notes refinancings.
(6) The issuance of 500,000 common shares to one of the Company's principal
stockholders in connection with the Nat West refinancing, valued at 75%
of the approximate fair market value of such shares on the date of their
issuance.
(7) Additional interest expense calculated based upon the revised effective
interest rate of the restructured Private Placement Notes due October 1,
1996.
(8) Amortization of deferred debt costs recorded in number 5 above as
follows: (1) 84,375 for the nine months ended June 30, 1995 and (2)
$112,500 for the year ended September 30, 1994.
(9) The tax benefit related to the additional interest and amortization in
footnotes 7, 8 and 12.
(10) The conversion of accrued liabilities of $810,000 at June 30, 1995 and
additional obligations of $171,630 incurred subsequent to June 30, 1995,
in the approximate aggregate amount of $981,631 into an aggregate of
881,631 Creditors Shares of Common Stock.
(11) To reclassify the current portion of long term as a result of the Nat
West refinancing.
(12) The amortization of goodwill related to the purchase of certain of the
assets (subject to certain liabilities) of Langworthy Casino Supply over
30 years.
(B) In June 1995, the Company completed the sale of the common stock of
Conquest Air for $6,000,000 in securities of the purchaser, Air LA. The
carrying value of the airline has not been adjusted for pro-forma
purposes. See "Business - Sale of Conquest Air."
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<PAGE> 43
BUSINESS
INTRODUCTION
The Company, through Wico Corporation and its wholly-owned operating
subsidiaries, is a leading manufacturer and distributor of replacement parts,
accessories, and supplies to game operators and distributors of coin-operated
amusement/arcade games, billiard tables, vending machines, such as food, soft
drink and snack machines, and gaming machines. It also supplies parts and
accessories to original equipment manufacturers ("OEMs") of arcade games. An
indirect subsidiary, Wico Gaming, is a manufacturer and distributor of casino
supplies, including layouts, dice, casino furniture, custom-built casino
tables, playing chips, playing cards, casino equipment and roulette and other
wheel games.
The Company's broad range of products enables the Company to offer single
sourcing to its customers. In 1988, the Company acquired Penn-Ray Sutra
Corporation ("Penn-Ray"), one of the largest competitors of its distribution
business in the areas of video monitors, power supplies and billiard equipment.
Penn-Ray sold its products by means of a telemarketing operation, primarily to
large game operators, distributors and small OEMs. Its telemarketing sales
strategy complemented the Company's then existing direct sales force, which
historically serviced smaller game operators. This portion of the Company's
business, referred to as its distribution business, accounted for approximately
85%, 85% and 80% of net sales, respectively, in 1992, 1993 and 1994.
The Company is also a leading U.S. manufacturer and distributor of
consumer joysticks, which are entertainment computer control devices, and
related accessories, that it sells directly to retailers and distributors
located principally in the United States. This portion of its business,
referred to as its consumer business, accounted for approximately 15%, 15% and
20% of net sales, respectively, in 1992, 1993 and 1994. In 1989, the Company
acquired Suncom Corporation ("Suncom"), a manufacturer and distributor of
joysticks and related accessories sold primarily to the consumer market. This
complemented and enhanced the Company's existing consumer joystick business,
which now markets both Suncom and Wico branded products. The Company's
strategy is to be a market leader by offering a broad selection of high quality
products. Presently, the Company believes that it offers one of the most
complete lines of joysticks available in the consumer market.
Until it consummated the Wico Merger, the Company was primarily engaged
in the business of operating a regional airline providing regularly scheduled
turbo-prop service to cities within the State of Texas. The Company's
wholly-owned subsidiary, Conquest Air, is still engaged in conducting limited
aviation operations in Texas on a reduced basis. In August 1994, the Company
announced its intention to sell Conquest Air. The airline business of Conquest
Air incurred significant operating losses through June 30, 1995 (approximately
$2,703,000 for the nine months then ended), and represented a drain on the
Company's cash flow. In addition, the Company has recently been notified by
certain of its aircraft lessors of defaults under the current leases.
On June 30, 1995, Air LA purchased the stock of Conquest Air from the
Company. The consideration received by the Company, and Air LA thereby
indirectly assumed responsibility for Conquest Air's aircraft leases (although
the Company remains contingently liable thereon as of the date of this
Prospectus). The consideration received by the Company consisted of three
separate notes aggregating $6,000,000, one of which in $3,000,000 principal
amount (currently payable on demand) will be automatically exchanged for
$3,000,000 of Air LA non-dividend paying voting convertible preferred stock
upon authorization of such securities by the Air LA stockholders. The
remaining two notes, aggregating $3,000,000, bear interest at 8% per annum and
are payable in installments through June 2000 (subject to certain mandatory
prepayment provisions), and include $2,000,000 of intercompany obligations from
Conquest Air to the Company which have been assumed by Air LA. See "Business -
Sale of Conquest Air."
THE WICO MERGER
Until June 20, 1994, the Company was primarily engaged in the business of
operating a regional airline providing regularly scheduled turbo-prop service
to cities within the State of Texas. On June 20, 1994, CAC Acquisition, Inc.
("CAC"), a Delaware corporation and newly formed wholly-owned subsidiary of the
Company, merged with Wico Holding Corp. ("Wico"), a privately-held Delaware
corporation, pursuant to a Restated Agreement and Plan of Merger dated June 8,
1994. Upon consummation of the merger on June 20, 1994, Wico became a
wholly-owned subsidiary of the Company and the separate existence of CAC
ceased. In addition, simultaneous with the merger, Wico Gaming Supply Corp.
("Wico Gaming"), a wholly-owned subsidiary of Wico, acquired certain assets,
liabilities and divisions of Langworthy Casino Supply, Inc. ("Langworthy").
Concurrent with the Wico Merger, the stockholders of Wico exchanged their
Wico securities for Company securities and became the controlling stockholders
of the Company. The basis of the control is that the former stockholders of
Wico became
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<PAGE> 44
the owners of approximately 80% of the issued and outstanding capital stock of
the Company. Under the terms of the merger, following exchanges of Wico
securities for Company securities, the following Company securities were
issued: (i) the holders of Wico common stock acquired record ownership of
approximately 6,900,000 shares of Company Common Stock in exchange for
2,944,000 shares of Wico common stock; (ii) certain holders of Wico preferred
stock acquired record ownership of 2,800,000 shares of Company Series B
Preferred Stock in exchange for 2,800,000 shares of Wico 10% Series AA
convertible preferred stock ("Wico AA Preferred Stock") and Wico 10% Series A
convertible preferred stock; and (iii) certain other holders of Wico AA
Preferred Stock acquired record ownership of 313,043 shares of Company Common
Stock in exchange for 1,200,000 shares of Wico AA Preferred Stock. All of the
options to purchase Wico common stock granted under Wico's 1993 Stock Option
Plan were converted into options to acquire 536,000 shares of Company Common
Stock.
The Company also agreed to issue five year Class B Warrants to purchase
an aggregate of 1,961,925 shares of Common Stock to the stockholders of record
of the Company on the close of business on June 20, 1994 (not including any
persons or entities affiliated with Wico receiving shares or rights to shares
of Common Stock in connection with the Wico Merger). The Class B Warrants are
issuable subject to the effectiveness of a registration statement covering such
Class B Warrants and the underlying Warrant Shares. Originally intended to be
exercisable at a price of $11.875 per share, in June 1995 the Company agreed to
reduce the exercise price of such 1,961,925 Class B Warrants to $5.00 per
share. Such Class B Warrants, when issued, will be exercisable by the holder
at any time until their June 20, 1999 expiration date, subject to the right of
the Company to redeem such Class B Warrants under certain conditions. See
"Description of Securities - Class B Warrants." In addition, on closing of the
Wico Merger, the Company issued, for nominal consideration, to its
institutional lender 400,000 Bank Warrants and to Blue Diamond Trading, Ltd.,
an affiliate of its former law firm, 200,000 Warrants. The Blue Diamond
Warrants were exercised for $200 in June 1995.
After giving effect to the Wico Merger, and the pro forma conversion of
all shares of Series B Preferred Stock, the nineteen former stockholders of
Wico owned approximately 80% of the Company's outstanding Common Stock. The
stockholders of the Company who prior to the effectiveness of the Wico Merger
held all of its capital stock continued to hold approximately 20% of its
capital stock giving effect to the Wico Merger and the aforesaid issuance and
pro forma conversion.
For accounting purposes, the merger with Wico has been treated as a
reverse acquisition. This resulted in the recapitalization of Wico with Wico
being treated as the continuing entity. The historical financial statements
contained herein are those of the business and operations of Wico. The
acquisition of Langworthy has been treated as a purchase. Assets received in
the transactions (inclusive of Conquest Air and Langworthy) have been valued at
their fair value at the date of acquisition.
On August 10, 1994, the Board of Directors of the Company elected to
change the Company's fiscal year end from May 31 to September 30 in order to
coincide with that of Wico. In addition, on August 17, 1994, the Board of
Directors of the Company determined to dispose of the airline operating unit
within the next twelve months. The Company's plan contemplated the
continuation of airline operations until the sale was consummated.
THE DISTRIBUTION BUSINESS
The Company is a supplier of replacement parts, accessories and related
supplies to the coin-operated machine market generally. The Company is focused
on supplying operators with replacement parts and accessories in the shortest
possible period of time in order to limit the downtime of their machines.
Operators purchase the machines from regional distributors or directly from the
machine manufacturers. Typically, amusement, billiards and vending operators
purchase machines from a variety of regional distributors and operate them in
factories, offices, bars, convenience stores, and arcades.
Marketing and Sales
Providing customers with a single source for a broad variety of parts and
accessories is a key component of the Company's marketing approach. While the
Company believes that its products are priced competitively, low prices are not
the overriding consideration of its marketing program. Operators of
coin-operated machines strive to minimize machine downtime, and therefore
prompt availability of parts is critical to the profitability of their
operation. A single source of supply eliminates the costs and delay involved
in dealing with multiple suppliers. While the Company is required to maintain
levels of inventory consistent with this plan, the variety of product
offerings, together with timely deliveries, becomes a value-added feature which
often supports a price premium.
The Company estimates that more than 80% of all orders are shipped within
24 to 48 hours. Customers are provided toll-free telephone numbers, and orders
are entered by an on-line data entry system. The Company attempts to provide
customers with personalized business relationships through regional salesmen,
supplemented by a telemarketing staff. The
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<PAGE> 45
distribution segment is not dependent on any customer and no customer of this
segment accounts for more than 3% of its net sales. Historically, bad debts
for customers have not been significant, and accounts receivable are normally
outstanding between 45 and 60 days, which the Company believes are within
industry norms.
In 1988, the Company acquired Penn-Ray, one of its largest competitors in
the areas of video monitors, power supplies and billiard equipment, selling its
products by means of a telemarketing operation. Penn-Ray's expertise in the
amusement and billiards segments of the market complemented the Company's then
existing product mix in this area. Penn-Ray had strong product offerings in
these areas with an emphasis on large game operators, distributors and small
OEMs, which the Company was able to service through its regular field sales
force. In February 1991, the coin-operated amusement customers of Penn-Ray
were integrated into the Company's marketing system. The Penn-Ray division now
focuses exclusively on the sale and distribution of billiard supplies to retail
billiard outlets.
Within the Company's distribution segment. approximately 9% of 1994 sales
were derived from direct sales of products to OEMs. Due to the Company's
position as a manufacturer of joysticks and related control products, video
game manufacturers requested that the Company supply parts directly to their
manufacturing facilities. As a result, the majority of sales in the OEM
segment have been generated by the supply of joysticks and related accessories.
The Company has a direct sales staff of 41 employees, differentiating it
from its competitors, which the Company believes rely heavily on telemarketing
operations, with a limited direct sales force. The Company has completed a
major upgrade in its sales communication effort by implementing an electronic
voice mail and message system with beeper interface to allow prompt
salesperson/customer communication, order processing and similar functions.
Within the Company's parts distribution business, salespersons focus
primarily on the operators of coinoperated machines and are granted exclusive
territories. They are paid commissions averaging 6% of net sales, and
salespersons pay their own expenses, although the Company pays for health and
fringe benefits.
The Company also utilizes a telemarketing sales force of approximately 10
persons. Telemarketers provide double coverage for large accounts and are also
able to provide service for smaller customers. The telemarketing sales force
is paid an hourly wage plus a small commission.
Additionally, the Company receives incoming orders for its products
through its 648-page catalog, which is distributed annually to over 15,000
customers worldwide and offers more than 16,000 products. The Company also
distributes specialty catalogs annually for the vending, gaming and OEM
industries, and Penn-Ray produces a separate catalog for its more than 2,000
customers.
The Company periodically offers special promotions for a variety of
products. The Company's advertising department produces monthly brochures that
are mailed to active customers and inserted with merchandise shipments. These
mailings inform customers of newly available parts as well as special pricing
programs.
In an effort to provide customers with prompt deliveries, the Company
maintains five additional distribution centers throughout the United States and
one in the United Kingdom where it maintains an inventory of its most popular
products. All distribution branches are linked to the main Niles, Illinois
facility through the IBM System 4381 main frame computer that provides on-line
information and support. This system is capable of performing multiple tasks
simultaneously. It processes and stores the purchase orders for billing
purposes and develops complete accounts receivable data. Approximately 800
proprietary programs process orders, replenish inventories and provide
management information.
Competition
The Company's distribution segment has approximately eight principal
competitors, none of which carry all of the product lines maintained by the
Company and none of which have multiple distribution centers similar to those
of the Company. In order to enter this industry segment, it would be necessary
to accumulate broad knowledge regarding the product lines and customer bases
and would likely require substantial capital in order to maintain necessary
levels of inventory. The Company believes that these factors constitute
substantial barriers to entry.
THE CONSUMER BUSINESS
The Company has developed its consumer joystick business through the
acquisition of Suncom, new product development, and marketing. The Company is
a supplier of analog-based entertainment control devices designed for use with
personal computer based entertainment software, including joysticks, palm-held
game pads, and yokes, which resemble aircraft controllers (collectively,
"joysticks"). This segment currently markets a diversified line of the Company
and Suncom joysticks
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<PAGE> 46
to consumers primarily using the Suncom name, and management believes that it
maintains a market share estimated by the Company at 20%.
In late 1992, Suncom launched two new products, the FX 2000 joystick and
the Command Control game pad. The FX 2000 is an ergonomic joystick and the
Command Control pad allows computer games to be played with a controller
similar to those used with home video game systems. In mid-1993, Suncom
introduced a G Force Yoke, "My First Joystick," and AXYS joystick. The G Force
Yoke is targeted at the flight simulation computer software market. "My First
Joystick" is targeted at parents who buy educational computer software for
their children. AXYS was the first joystick with an "office" appearance, which
is installed on personal computers to allow entertainment programs to be
controlled by joysticks designed to incorporate ergonomic wrist strain relief
features, more generally found in office oriented products. This product may
also be used with production-based office and business programs, such as
graphic design and spread sheet programs. In late 1993, the Flight Max
platform joystick and Gameport 2000 game card were introduced. Product
development is also ongoing to respond to the developing joystick market for
Macintosh computers.
In January 1995, the Company introduced a new line of four joysticks,
designated as the F-15 line. These joysticks are each 80%- scale replicas of
the joysticks equipped in F-15 fighter planes. The line was introduced at a
major trade show, and the Company has received orders from major computer
retailers and retail stores for the entire initial production run of these
joysticks, which began to be shipped in May 1995. Since May 1995, the Company
has sold approximately $3,100,000 of these items, representing approximately
75% of Suncom's total sales during such period.
In June 1995, the Suncom division of the Company entered into an
agreement with Spectrum Holobyte, Inc. a software developer for the marketing,
sale and distribution of Suncom products in the United Kingdom, France and
Germany.
Marketing and Sales
The primary marketing strategy for the sale of consumer joysticks and
related accessories is to provide a broad selection for the Company's customers
and their retail customers. The major component of this strategy is single
sourcing for virtually all joysticks and entertainment controller needs,
providing a focus on high quality and value pricing. The Company has targeted
the high-volume personal computer mass market rather than high-tech "ultra
niche" products. Accordingly, ten customers accounted for 59% and 49% of the
Company's net sales in this market segment for the fiscal years ended September
30, 1994 and 1993, respectively.
The Company employs independent sales representatives to sell the
Company's consumer joysticks and related products to distributors, retail
representatives and major outlets. These representatives are assigned
exclusive sales territories covering the United States and also market other
complementary noncompetitive products manufactured by others. The sales
representatives are paid commissions of approximately 5% of net sales of
products sold and are not paid any salary or furnished any benefits.
Advertising and promotional efforts are comprised of a number of key
elements. The Company uses print media to target specific end users and enters
into cooperative advertising retail programs to generate retail support and
customer awareness. In addition, the Company utilizes comprehensive catalog
and collateral materials for sales support and participates in all major
domestic and foreign trade shows.
Competition
The Company competes with approximately six other companies in this
industry segment. Competition is based primarily on price and product
features. Manufacturers and vendors of personal computers, many of whom are
substantially larger than the Company, are potential competitors of the Company
in this segment.
WICO GAMING
In June 1994, and in conjunction with the Wico Merger, Wico Gaming, a
wholly-owned subsidiary of Wico, acquired certain divisions of Langworthy, a
56-year-old manufacturer and distributor of casino supplies, located in Las
Vegas, Nevada. The purchase price for the Langworthy acquisition was
$1,750,000 and assumption of certain liabilities to trade creditors. The
assets acquired were Langworthy's layout business, dice manufacturing,
furniture business, including custom-built casino tables and other furniture
items and accessories, playing chips, and playing cards businesses. Layouts
are specially screened felt pieces of billiard cloth for gaming tables, such as
blackjack, roulette and poker tables. At the time of acquisition, most of the
Langworthy business was transacted with casinos located in Nevada, and Wico
Gaming presently has the necessary regulatory authorizations to continue
substantially all of this business. Wico Gaming plans to expand the operation
and distribute these
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<PAGE> 47
products in other states in which casinos operate in the United States. Such
plans require that the Company obtain various additional licenses or
authorizations.
The Langworthy acquisition constituted a substantial product line
expansion for the Company's existing business in the gaming industry,
consisting principally of replacement parts for slot machines and certain
non-gaming supplies and products used by casinos. In addition to a dedicated
sales force for the gaming supply business, the Company's distribution
business' national sales force and telemarketing operation will provide
immediate sales support on a national basis.
The Langworthy business supplies casinos with products for table games
(including blackjack, roulette and poker). Langworthy's sales were
historically divided between replacement parts and new installations. The
replacement business involved two custom manufacturing operations, dice and
layouts. New installation products consist of furniture, gaming tables, slot
machine stands, change racks and similar items. Products not manufactured by
Wico Gaming are acquired from various suppliers. Wico Gaming is not dependent
upon any individual supplier.
Management believes that the Langworthy acquisition enabled the Company
to position itself as a single-source casino gaming parts supplier, of
particular significance to smaller locations such as riverboat operations and
Native American casinos. The useful lives of Wico Gaming's products range from
several hours in the case of playing cards and dice to several months in the
case of layouts and several years in the case of casino chips and gaming
furniture.
In April 1995, Wico Gaming purchased the operating assets of the Dice
Division of Shuffle Master, Inc. ("SMI"). Annual sales of the SMI Dice
Division were approximately $300,000 in its fiscal year ended immediately prior
to the purchase by Wico Gaming. The purchase price for the assets was
$240,000, of which $60,000 was paid in cash, with the balance payable in
quarterly installments (with interest at 6% per annum) through April 2000.
This acquisition expands Wico Gaming's customer base in its dice business, with
the customers of the acquired business including casinos, riverboats and other
gaming establishments located primarily in Nevada, Mississippi and New Jersey.
There are a number of companies that are in competition with Wico Gaming
in each of its product lines. With regard to layouts, management believes that
the key competitive factors are cloth quality, enhanced graphics, and clarity
and range of colors. The primary competitive factor for dice sales are quality
and pricing, and casinos generally purchase dice from more than one supplier.
In the area of gaming furniture, competition is based on quality, price and
durability. The key competitive factor for playing chips are durability,
graphics, ease of handling and security, and with regard to playing cards, the
key competitive factors are price, ease of handling, durability, brand name
identification and reputation.
Approximately 50% of Wico Gaming's business is comprised of sales to
casinos located in Las Vegas, Nevada. Wico Gaming is not dependent upon any
individual customer.
The casino industry, and the gaming industry in general, have experienced
substantial growth in recent years. As interest in gambling establishments
continues to grow, the demand for machines and parts is expected to increase
significantly. Management believes, although there can be no assurance, that
the growth prospects for the acquired Langworthy and SMI businesses are
favorable, and should mirror developments in the gaming industry generally.
Management believes, although there can be no assurance, that with a more
aggressive sales and marketing effort, which is planned, Wico Gaming will be
able to expand its market share even if the gambling industry is unable to
sustain its recent growth rate.
The manufacture and distribution of gaming equipment and supplies are
subject to certain federal, state and local regulations. Regulations may vary
significantly among jurisdictions, although virtually all require licenses,
permits and approvals in connection with the manufacture, distribution or
supply of some or all of the Wico Gaming products.
The manufacture and distribution of gaming equipment and associated
products in Nevada are subject to extensive state and local regulations.
Except with respect to the manufacture and sale of roulette and other gaming
wheels, Wico Gaming holds the necessary authorizations required for its gaming
supply business to continue the Langworthy and SMI business in Nevada.
However, sales of roulette wheels and similar devices have not historically
been material to Langworthy. Wico Gaming is subject to licensing and
regulatory control by the Nevada Gaming Commission, the Nevada State Gaming
Control Board and various local regulatory agencies.
Under the New Jersey Casino Control Act, a license to sell the Langworthy
products must be obtained, since an existing New Jersey license maintained for
the Company's distribution business does not permit the sale of these products
in New Jersey. Wico Gaming has submitted the appropriate applications in New
Jersey, and has received a conditional license to sell its products in that
state.
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<PAGE> 48
Wico Gaming also plans to operate the gaming supply business in other
jurisdictions, including Connecticut, Indiana, Iowa, Louisiana, Missouri and
Mississippi, where gambling is authorized. It will be necessary that Wico
Gaming qualify and obtain licenses in each of these jurisdictions, and in this
connection, Wico Gaming has been approved for licensing in Wisconsin and
Mississippi, and has submitted applications in substantially all of its other
intended jurisdictions for business. Although the regulatory schemes in these
jurisdictions are not identical, their material attributes are substantially
similar. There can be no assurance that such licenses, approvals or findings
of suitability will be obtained and, if obtained, will not be revoked,
suspended or conditional or that Wico Gaming will be able to obtain the
necessary approvals for its future products as they are developed. If a
license, approval or finding of suitability is required by a regulatory
authority and Wico Gaming fails to seek or does not receive the necessary
license, approval or finding of suitability, Wico Gaming may be prohibited from
selling its products in such jurisdiction or may be required to sell its
products through other entities at a reduced margin.
MANUFACTURING OPERATIONS
With respect to the Company's parts distribution business, approximately
90% of the products sold by the Company are purchased from other manufacturers
or distributors, and approximately 10% are internally produced or assembled.
Approximately 73% of the products purchased by the Company in this segment are
purchased domestically. Within the Company's consumer segment, approximately
90% of the products sold are produced for the Company using company-owned molds
and dies and relying upon utility and design patents and specifications owned
by the Company. Substantially all of such products are produced in Taiwan and
China. All foreign transactions are denominated in U.S. dollars, thereby
reducing transactional risks associated with fluctuations in foreign currency
exchange. Within the consumer segment, approximately 10% of the products sold
are assembled at the Company's facilities in Niles, Illinois.
Taken as a whole, the Company deals with over 1,000 suppliers. In 1994,
the top 10 suppliers accounted for approximately 38% of total purchases. The
Company believes that it maintains good relationships with all of its major
vendors and has relationships with secondary vendors for all major product
categories and believes that it could obtain products from alternative sources
at comparable prices and terms.
PRODUCT LIABILITY
The Company currently has $1,000,000 of product liability insurance for
its current products and does not intend to increase coverage. There can be no
assurance that the Company's existing coverage will be sufficient to cover any
liability resulting from any product liability claims or that the Company would
have available funds to pay any claims over the limit of its insurance. Either
an underinsured or an uninsured claim could have a material adverse effect on
the Company.
TRADEMARKS, PATENTS AND PROPRIETARY RIGHTS
The Company is dependent upon the development and maintenance of strong
brand recognition for its current and proposed products sold in the consumer
segment. The Company maintains numerous trademark registrations in the United
States and certain foreign countries. The Company believes that brand name
identification differentiates its consumer products from those of its
competitors and reflects the Company's marketing strategy of providing
customers and consumers with a high-quality, value oriented product.
The Company also holds numerous utility and design patents in the United
States and certain foreign countries for its distribution and consumer segment
products. All such patents and trademarks are owned by the Company, which is
not obligated to pay any license or royalty fees in connection therewith. No
one patent or small number of patents are material to either the Company's
distribution or consumer products business segments.
GOVERNMENTAL REGULATION
In order to sell a number of its products in New Jersey, the Company
maintains a Casino Service Industry License, authorizing it to offer casinos or
casino applicants goods and services not directly related to casino or gaming
activity. No other jurisdictions where the Company currently sells its
products requires licensure for such associated gaming products. The sale of
products comprising the business of Wico Gaming requires that additional
licenses and authorizations be obtained, subjecting the Company to additional
governmental regulation. Any beneficial holder of securities of the Company
may be subject to investigation by the gaming authorities in any or all of the
jurisdictions in which Wico Gaming operates or sells products if such
authorities have reason to believe that their ownership may be inconsistent
with such state's gaming policies. Persons who acquire beneficial ownership of
more than certain designated percentages of securities will be subject to
certain reporting and qualification procedures established by such gaming
authorities as well as local licensing authorities.
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<PAGE> 49
EMPLOYEES
As at June 30, 1995 the Company employed approximately 193 full-time
employees, 128 of whom are located at the Niles, Illinois facility, 27 in its
six distribution branches, and 38 in field sales. Of such employees, 51
persons are salaried and the balance are employed on an hourly basis. The
executive, administrative, central warehouse, distribution branches, sales and
marketing, and purchasing and manufacturing departments, employ 3, 28, 29, 27,
97 and 9 persons, respectively. None of the Company's employees are
represented by a labor union, and management believes that the Company's
relations with its employees are good. In connection with the Company's gaming
supply business resulting from the Langworthy acquisition, the Company employs
34 additional persons consisting of 10 salaried sales and administrative
employees and 24 hourly warehouse and production employees. None of such
employees are represented by any union, and management believes that labor
relations are also satisfactory.
SALE OF CONQUEST AIR
Conquest Air is a regional airline providing regularly scheduled non-stop
and connecting service to seven cities. Conquest Air provides service to
Abilene, Austin, Beaumont, Corpus Christi, McAllen, San Antonio and Tyler,
Texas, operating as a point-to-point, low-cost carrier offering one-class
seating and convenience for business and leisure travelers.
Until the sale of Conquest Air to Air LA, the Company leased six Metro
III commuter aircraft on behalf of Conquest Air. All aircraft were leased from
unaffiliated third parties. Exclusive of residual or penalty payments in
respect of aircraft for which the Company effected an early termination of its
lease, the aggregate monthly lease cost of all such aircraft leases is
approximately $106,000. In addition, the Company was required to pay varying
rates per engine hour which is deposited in an engine reserve account
maintained by the lessors which is utilized for engine overhauls. In May and
June 1995, the Company received default notices from the lessors of four of its
six aircraft.
On June 30, 1995, the Company consummated the sale of the capital stock
of Conquest Air to Air LA, for consideration consisting of a $3,000,000
convertible promissory note of Air LA, and an additional 8% promissory note in
the principal amount of $1,000,000. The Company also received from Air LA an
additional 8% promissory note in the amount of $2,000,000, representing Air
LA's assumption of certain intercompany indebtedness previously owed by
Conquest Air to the Company. In conjunction with the closing, the Company
loaned to Conquest Air the sum of $250,000, which will be repayable (together
with interest at 8% per annum) out of the proceeds of Air LA's next public or
private equity offering, or otherwise on demand made at any time after July 31,
1995. Such $250,000 loan remains outstanding on the date of this Prospectus,
and the Company has not demanded repayment thereof pending Air LA's pursuit of
its debt refinancing. In consideration of such $250,000 loan, Air LA issued to
the Company options, exercisable at $.50 per share through June 30, 2000, to
purchase 250,000 shares of Air LA common stock. All of the $6,000,000 of
promissory notes issued to the Company by Air LA in the transaction are secured
by all of the assets of Air LA and Conquest Air, except that the $250,000 loan
made by the Company to Air LA is secured solely by the assets of Conquest Air.
The $3,000,000 convertible promissory note is currently payable on demand
and bears interest at a bank prime rate plus 1%. Such convertible note will,
upon Air LA's authorization of preferred stock (anticipated to occur in
November 1995), be automatically converted into $3,000,000 of non-dividend
bearing convertible preferred stock of Air LA. Such preferred stock is
convertible, at the option of the Company over a two year period commencing
December 31, 1995 if Air LA completes a contemplated public financing by such
date. If, as expected, such Air LA public financing is delayed beyond calendar
1995, the preferred stock will then be convertible, at the option of the
Company, at any time or from time to time (without restriction of the
conversion period), into shares of Air LA common stock at prevailing market
prices for such common stock. Such convertible promissory note, and the
preferred stock into which it is convertible, entitles the Company, in its
discretion, to elect two members to the Board of Directors of Air LA. The
Company has no present intention of electing any members to the Air LA Board of
Directors.
Subject to certain mandatory prepayments out of the proceeds of equity
offerings by Air LA, the $1,000,000 promissory note and the $2,000,000
promissory note issued as part of the sale of Conquest Air 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.
As part of the sale to Air LA, Air LA has agreed to cure the existing
defaults under the leases for the six aircraft being operated by Conquest Air
at the time of the sale, although the Company will remain contingently liable
under such leases unless and until Air LA provides satisfactory deposits and/or
other assurances to the lessors, in order to obtain the release of the Company
from the obligations under such leases. The Company has been advised by
certain of such aircraft lessors that Air LA has only paid $192,000 of
approximately $400,000 of lease payments in arrears during the Company's
operation of
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<PAGE> 50
Conquest Air. In addition, Air LA has been late in making certain of the
$105,500 aggregate monthly installment payments due under such leases. At
October 31, 1995, approximately $248,000 in monthly lease payment installments
are overdue. Air LA's obligation to make the required lease payments and
obtain the release of the Company from liability under the leases is secured by
a pledge of the outstanding capital stock of Conquest Air.
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. See "Risk Factors -Sale of Conquest
Air; Continuing Liabilities and Risk of Non-Payment."
PROPERTIES
The Company occupies a 115,000 square foot facility located in Niles,
Illinois, approximately 10 miles outside of Chicago, Illinois, which contains
its main distribution and manufacturing facilities and executive offices. The
facilities are leased through June 1996 and the Company has a ten-year lease
extension option upon substantially the same terms and conditions presently in
effect. The current monthly rent is approximately $53,000 (inclusive of real
estate taxes and other charges).
The Company also maintains six other distribution centers which are
located in New Jersey, California, Georgia, Texas, Nevada and the United
Kingdom. These facilities vary in size from approximately 4,800 square feet to
approximately 15,000 square feet, with a current aggregate monthly rent of
approximately $24,000. These are all leased facilities that warehouse and
stock the fastest moving inventory items.
The Company has combined its existing Las Vegas, Nevada operations with
the acquired businesses of Langworthy and relocated to a single facility of
approximately 21,000 square feet located in the Hughes Airport Center adjacent
to McCarran Airport. The terms of the five-year lease require rental payments
at the rate of $11,000 per month, plus payment of certain operating expenses.
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
However, litigation has been threatened against the Company for non-payment of
certain obligations by a number of creditors, including the lessors of certain
of the six remaining aircraft. The Company believes that it will be able to
settle certain of such threatened litigation in connection with a portion of
the proceeds of this Offering, and anticipates that Air LA will, upon
completion of its contemplated financings, be able to relieve the Company from
its contingent liabilities in respect of the remaining aircraft leases. There
is no assurance, however, that Air LA will complete such intended financings or
otherwise be able to reestablish and maintain current payments under such
assumed aircraft leases. See "Use of Proceeds," "Risk Factors - Sale of
Conquest Air; Continuing Substantial Liabilities and Risk of Non-Payment" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results and Plan of Operations of Air LA."
SETTLEMENTS WITH CERTAIN CREDITORS
In order to reduce its indebtedness and improve its equity position, the
Company has entered into agreements with certain of its creditors holding
accounts payable and other indebtedness of the Company aggregating
approximately $981,631 at October 31, 1995, including professionals who
rendered services to the Company, pursuant to which such creditors agreed to
purchase from the Company an aggregate of 881,631 Creditors Shares.
All of the Creditors Shares have been exchanged at $1.00 per share,
except for one creditor which has agreed to accept 100,000 Creditors Shares for
$200,000 of Company obligations.
An aggregate of 15 creditors, including two law firms and stockholders of
Messrs. Feldman Radin & Co., P.C., an accounting firm with which Stephen R.
Feldman is a principal stockholder, have accepted 881,631 Creditors Shares in
exchange for all Company obligations owed to such creditors.
The holders of 881,631 of the Creditors Shares are Selling
Securityholders in this Prospectus. See "Selling Securityholders." As such,
each such creditor and any broker/dealer that may act on its behalf in
connection with the sale of any Creditors Shares may be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Act. Under
the terms of the Company's agreements with each of such creditors who are
Selling Securityholders, the Company agreed to deliver to such creditor a
current prospectus, either through a new registration statement or a
post-effective amendment to the
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<PAGE> 51
Registration Statement of which this Prospectus is a part. The Company also
agreed to indemnify each creditor from certain liabilities under the Securities
Act.
1994 PRIVATE PLACEMENT
In September 1994, the Company completed a private placement of
$2,737,500 principal amount of 10% convertible Private Placement Notes due
October 1, 1996. The Private Placement Notes are convertible into shares of
Common Stock at 80% of the prevailing market price of such Common Stock on the
date such notes are converted. Assuming a prevailing market price of $1.50 per
share, if fully converted, an aggregate of 2,281,250 1994 Private Placement
Conversion Shares would be issuable if all Private Placement Notes were
converted by the holders. An aggregate of 109.5 units of securities were sold
in the 1994 Private Placement, consisting of the 10% Private Placement Notes
and 54,750 1994 Private Placement Warrants issuable (at the rate of 0.02
Private Placement Warrants for each $1.00 of Private Placement Notes converted
into Common Stock) only upon conversion of the Private Placement Notes into
Common Stock. Such 1994 Private Placement Warrants, if and to the extent
issued upon conversion of 10% Private Placement Notes, are exercisable at
$11.75 per share and expire June 20, 1999, to the extent unexercised.
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 12% Exchange Notes). Cash payments are to be made by
the Company on or before December 31, 1995, when the exchange offer will
expire. 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.
Each holder of 10% Private Placement Notes has been requested to execute
and deliver to the Company an Election to Exchange setting forth their
agreement to participate in the exchange offer described above. The period of
the exchange offer of notes expires on December 31, 1995.
In consideration of its acting as soliciting agent for the Company in
connection with the exchange offer, the Company has agreed to pay to Rickel
$0.10 for each $1.00 principal amount of Private Placement Notes exchanged for
12% Exchange Notes. Accordingly, if the holders of all of the $2,737,500 of
Private Placement Notes elect to exchange such Private Placement Notes for 12%
Exchange Notes and cash payments, Rickel & Associates, Inc. will receive fees
aggregating $273,750.
Holders of 10% Private Placement Notes who accept the 12% non-convertible
notes will represent to the Company that such 12% non- convertible notes have
been acquired for investment purposes only and are restricted securities within
the meaning of the Securities Act. The Company believes that the exchange of
the Company's 10% Private Placement Notes for a like amount of 12%
non-convertible notes due October 1, 1996 and the other consideration paid to
the holders of the Private Placement Notes is a private transaction exempt from
the registration requirements of the Securities Act.
To the extent that holders of 10% Private Placement Notes exchange such
notes for 12% Exchange Notes and cash, the Company will remove a like principal
amount of 10% Private Placement Conversion Shares from the registration
statement of which this Prospectus is a part. See "Selling Securityholders."
1995 PRIVATE PLACEMENT
In June and July 1995, the Company sold an aggregate of 2,082,147 shares
of its Common Stock for approximately $2,935,827 ($1.41 per share) in a private
placement to 50 unaffiliated accredited investors and to Steffen I. Magnell,
the President and Chief Executive Officer of the Company, who purchased 142,000
of such 1995 Private Placement Shares. Under the terms of a securities
purchase agreement with such investors, the Company agreed to register, at its
expense, the 1995 Private Placement Shares under the Securities Act in
connection with any registration statement covering securities being offered
for the account of any persons other than the Company. The Company has
included such 1995 Private Placement Shares in the registration statement of
which this Prospectus is a part. See "Selling Securityholders."
Mr. Magnell purchased his 142,000 1995 Private Placement Shares by
delivering to the Company his $200,000 8% promissory note due December 31,
1995, which is secured by a pledge of such 142,000 shares. Mr. Magnell has
agreed not
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to publicly sell any of his 142,000 1995 Private Placement Shares for a period
of two years from the date of purchase (July 1997). All other investors in the
1995 Private Placement paid cash for their 1995 Private Placement Shares.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company and key personnel are as
follows:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Stephen R. Feldman(1) . . . . . . . . . 52 Chairman of the Board
Victor M. Rivas(2) . . . . . . . . . . 51 Director
Steffen I. Magnell. . . . . . . . . . . 50 Chief Executive Officer of the Company and
Wico, President of the Company, and
Director
Jerry Karlik . . . . . . . . . . . . . 40 Chief Financial Officer
Nolan A. Lameka . . . . . . . . . . . . 57 Vice President and Chief Financial Officer
of Wico
Bentley J. Blum . . . . . . . . . . . . 54 Director
David Schoon(1). . . . . . 43 Director
Harry E. McKillop(2) . . . . . . . . . 64 Director
</TABLE>
- --------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Under the Company's Certificate of Incorporation, the Board of Directors
is divided into classes with the members of each class (one-third of the Board)
elected each year at the Company's annual meeting of stockholders to serve for
a period of three years and until their respective successors have been duly
elected and qualified. Since no annual meeting has been held in the previous
three years, the term of each director will expire at the next annual meeting.
The provisions of the Certificate of Incorporation which provide for the
staggered Board of Directors may not be amended or repealed without the
affirmative vote of at least 75% of the Company's outstanding shares entitled
to vote. Since this provision extends the time required to change a majority
of the Board of Directors to at least two years, it may have the effect of
discouraging a tender offer for the Company's stock or other takeover bid. The
Company's officers are appointed at the first Board meeting following the
annual meeting of stockholders and serve at the pleasure of the Board of
Directors.
Stephen R. Feldman has served as Chairman of the Board of the Company
since June 1994 and of Wico since 1986. From such respective dates until April
1995, he was also Chief Executive Officer of the Company and Wico. From 1986
until the Wico Merger, he was Chairman of the Board and Chief Executive Officer
of Wico Holding Corp. He is also a certified public accountant and a principal
shareholder of the accounting firm, Feldman Radin & Co., P.C., New York, New
York. Mr. Feldman devotes approximately 80% of his time to the business of
Feldman Radin & Co., P.C. and approximately 20% of his time to the business of
the Company.
Victor M. Rivas has served as Chairman of the Board and Chief Executive
Officer of the Company from inception until June 1994, and as President of
Conquest Air until the sale of Conquest Air to Air LA on June 30, 1995.
Steffen I. Magnell has been Chief Executive Officer of the Company and
Wico and President of the Company since April 1, 1995. From January 1994 to
March 1995, Mr. Magnell was President of Tol-O-Matic, Inc., a supplier of fluid
power components for factory automation systems. For five years immediately
prior to his association with Tol-O-Matic, Mr. Magnell was President and Chief
Operating Officer of Sanborn Compressor Company, Inc., a manufacturer of air
compressors and related products, located in Minneapolis, Minnesota.
Jerry Karlik has been Chief Financial Officer of the Company since
September 1994. He is the treasurer and a director of Commodore Environmental
Services, Inc., a publicly held corporation providing environmental services,
headquartered in
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<PAGE> 53
New York. He serves as an officer and director of various companies owned or
controlled by or affiliated with Bentley J. Blum, a director and principal
stockholder of the Company. Mr. Karlik devotes approximately 20% of his
business and professional time to the affairs of the Company.
Nolan A. Lameka joined Wico in 1975 as Corporate Controller and Vice
President-Finance, and was promoted to his current position in 1986. Prior
thereto, he held senior positions in accounting and finance with Mason-Barron
Laboratories and Ampex Corporation.
Bentley J. Blum has been a Director of the Company since June 1994.
Previously, Mr. Blum was a Director and principal stockholder of Wico Holding
Corp. He is Chairman of the Board and majority stockholder of Commodore
Environmental Services, Inc., a corporation providing environmental services,
headquartered in New York, and a director and principal stockholder of Lanxide
Corporation, a developer of patented ceramic composite technology and
materials. He is also Chairman of the Board and majority stockholder of
Federal Resources Corp., a corporation engaged in the mining business, located
in Utah. In addition, he is Chairman of the Board of Specialty Retail
Services, Inc., a corporation formerly engaged in specialty retailing and
presently inactive. He also manages numerous personal investments in the areas
of real estate and oil and gas properties.
David Schoon has been providing financial consulting services since 1992
as a principal of Stock Portfolio Management, Inc., Grand Rapids, Michigan. A
chartered life insurance underwriter, certified financial planner and chartered
financial analyst, Mr Schoon has been involved in insurance and financial
consulting since 1983 in the Michigan area. He is a director of Sparton
Corporation (NYSE), a manufacturer of electronic surveillance and automotive
parts.
Harry E. McKillop has served as a Director of the Company since June
1994. He had previously served as a Director of Conquest Air since August
1989. Mr. McKillop is presently President of Alliance International, Inc.
where he has been employed since 1993. Prior to joining Alliance, Mr. McKillop
was the director of travel for EDS Corporation, a subsidiary of General Motors
Corporation. Prior to joining EDS, he served as a Vice President of Pan
American Airways ("Pan Am") for Commuter Affairs. Prior to joining Pan Am, Mr.
McKillop was employed by Braniff International for 15 years and served as Vice
President International based in Paris and London. Mr. McKillop also was
employed by United Airlines for 15 years in various capacities in the passenger
and cargo fields.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth the aggregate cash compensation (including
incentive compensation) paid by the Company and its subsidiaries for services
rendered during the fiscal year ended September 30, 1995 to its Chief Executive
Officer and to each of the three other most highly compensated executive
officers of the Company whose aggregate cash compensation from the Company and
its subsidiaries for that period exceeded $100,000. As the Company only had
two other executive officers whose aggregate compensation in 1995 exceeded
$100,000, only those persons are reported here.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL
COMPENSATION (1) Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options # Compensation
- --------------------------- ---- ------ ----- --------- ------------
<S> <C> <C> <C> <C> <C>
Stephen R. Feldman . . . . . . 1995 --- --- --- ---
Chairman of the Board of Directors 1994 --- --- 300,000(3) ---
Former Chief Executive Officer 1993 --- --- --- ---
Steffan I. Magnell . . . . . . 1995 $138,461 $25,000 350,000(6) $5,600
President, Chief Executive Officer 1994 --- --- --- ---
and Director 1993 --- --- --- ---
Victor M. Rivas(2) . . . . . . 1995 $127,500 --- --- $10,000(4)
President and Director 50,500(5)
1994 $127,500 --- 70,000 $10,000(4)
1993 $125,500 $25,000 35,000 $10,000(4)
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C> <C> <C> <C> <C>
Edward G. Sokolofski (7) . . . 1995 $165,422 --- $7,660
President of Wico 1994 $198,093 --- 236,000(3) ---
1993 $188,834 --- --- ---
</TABLE>
(1) The Company did not grant any restricted stock awards or long term
incentive plan payouts ("LTIPs") to any of the named executive officers
in this table nor does the Company maintain any LTIPs. Additionally,
certain incidental personal benefits to executive officers of the Company
may result from expenses incurred by the Company in interacting with the
financial community and identifying potential acquisition targets. The
above summary compensation table does not describe such incidental
personal benefits made available to executive officers during 1995,
because the incremental cost to the Company of such benefits is below the
Securities and Exchange Commission disclosure threshold. These benefits
may include personal use of automobiles leased by the Company and its
subsidiaries.
(2) Victor M. Rivas had been an officer and director of the Company prior to
the Wico Merger, and his compensation prior to such date reflects that
paid to him by Conquest Air.
(3) On June 30, 1993 and prior to the Wico Merger, Mr. Feldman was granted
options to purchase 150,000 shares of common stock of Wico at an exercise
price of $5.00 per share and Mr. Sokolofski was granted options to
purchase 118,000 shares of common stock of Wico at $5.00 per share.
Subsequently, coinciding with the Wico Merger, Mr. Feldman's and Mr.
Sokolofski's options were exchanged, so that each of Mr. Feldman and Mr.
Sokolofski would have options to purchase the same percentage of shares
of the Company and at the same relative price as they had in Wico. As a
result, Mr. Feldman was issued options to purchase 300,000 shares and Mr.
Sokolofski was issued options to purchase 236,000 shares of the Company's
Common Stock at an exercise price of $2.50 per share. In addition, Mr.
Sokolofski and the Company agreed that, in the event of his resignation
as an officer of the Company, Mr. Sokolofski would receive warrants to
purchase 250,000 shares of Common Stock at $2.50 per share, which
warrants will expire on December 31, 1997, and unless exercised, may be
redeemed by the Company at $.20 each at any time after January 1, 1996.
On September 29, 1995, Mr. Sokolofski tendered his resignation as an
officer of the Company and Wico and received such redeemable warrants.
As a result of his resignation, all 236,000 stock options previously
issued to him, and unexercised, were terminated.
(4) Consists of the payment of $10,000 life insurance premiums paid by the
Company for the benefit of Mr. Rivas to be repaid only out of the
proceeds of such policy upon his death. Simultaneously with the Wico
Merger, the Company agreed to forego repayment of these amounts until
such repayment can be made out of the proceeds of the policy.
(5) In July 1989, Mr. Rivas received options to purchase 2,000 shares of
Common Stock at an exercise price of $19.25 per share. In March 1990,
March 1991, March 1992, and March 1993, he received options to purchase
4,500, 4,500, 4,500 and 5,000 shares, respectively, at exercise prices of
$15.80 per share. In March 1993, he was also issued options to purchase
30,000 shares at $10.80 per share. On August 31, 1994, all of Mr.
Rivas's options to purchase an aggregate of 50,500 shares of Common Stock
were cancelled and Mr. Rivas was issued options to purchase 50,500 shares
of Common Stock at an exercise price of $11.875 per share. In June 1995,
the exercise price of such options was reduced to $5.00 per share.
(6) Consists of options to purchase up to 350,000 shares of Common Stock at a
price of $1.25 per share (subject to adjustment under certain
circumstances) which were issued in connection with Mr. Magnell's
employment agreement. Mr. Magnell became President and Chief Executive
Officer of the Company effective April 1, 1995. See "Employment
Agreements."
(7) Mr. Sokolofski resigned as an officer of the Company on September 29,
1995.
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<PAGE> 55
STOCK OPTION GRANTS
The following table sets forth the information noted for all grants of
stock options made to each of the executive officers of the Company named in
the Summary Compensation Table during fiscal year 1995. The 236,000 stock
options previously granted to Edward Sokolofski have not been exercised and
terminated on September 29, 1995, simultaneous with his resignation as an
officer of the Company.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rate of
Stock Price Appreciation
for Option Term
---------------------------
Name(5) Number of % of Total Exercise Expiration 5% ($) 10% ($)
Options Options Price Date ------ -------
Granted Granted ----- ---
------- -------
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Feldman . . 100,000(1) 12.50 $0.875 3/31/00 $24,175 $53,420
Edward Sokolofski . . . 250,000(2) 31.25 2.50 12/31/97(2) $64,063 $131,250
Steffan I. Magnell . . 350,000(3) 43.75 $1.25 3/31/04 $241,606 $594,102
Steffan I. Magnell . . 100,000(3) 12.50 $1.41 6/30/00 $38,956 $86,082
Victor M. Rivas . . . . -0-(5) --- --- ---
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION> # of
Shares Number of
Acquired Securities Value of Unexercised
Name on Value Underlying Unexercised in-the money Options at
---- Exercise Realized Options at Fiscal Year-End Fiscal Year-End
-------- -------- Exercisable/Unexercisable Exercisable/Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Feldman . . 0 0 400,000(1)(4) n/a $350,000 n/a
Edward Sokolofski (2) . 0 0 236,000 n/a n/a n/a
Steffen I. Magnell (3) 0 0 250,000 200,000 $109,000 $100,000
Victor M. Rivas (5) . . 0 0 120,500 n/a n/a n/a
</TABLE>
In accordance with rules promulgated by the Securities and Exchange
Commission, this table reflects hypothetical gains or "options spreads" that
would exist for the respective options based on assumed annual compound stock
price appreciations of 5% and 10% from the date the options were granted over
the full option term until expiration.
(1) Includes 100,000 Directors Warrants issued to Mr. Feldman in April 1995.
See "Compensation Committee Interlocks and Insider Participation."
(2) Includes warrants to purchase 250,000 shares of Common Stock at $2.50 per
share issued to Mr. Sokolofski in connection with the resignation of his
employment on September 29, 1995. Such warrants will expire on December
31, 1997, and unless exercised, may be redeemed by the Company at $.20
each at any time after January 1, 1996. On September 29, 1995, Mr.
Sokolofski tendered his resignation as an officer of the Company and Wico
and as a result, all 236,000 stock options previously issued to him, and
unexercised, were terminated.
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<PAGE> 56
(3) Includes (i) options to purchase an aggregate of 350,000 shares of Common
Stock at $1.25 per share issued to Mr. Magnell in connection with his
employment agreement effective as of April 1, 1995, of which 150,000
options are immediately exercisable, 100,000 options are subject to a
three-year extension of his employment agreement commencing April 1,
1998, and the remaining 100,000 options are exercisable subject to a
second three year extension of such employment agreement, commencing
April 1, 2001; and (ii) 100,000 immediately exercisable five year
warrants at $1.41 per share issued to Mr. Magnell in June 1995. See
"Employment Agreements" and "Compensation Committee Interlocks and
Insider Participation."
(4) Includes 300,000 options originally issued to Mr. Feldman in connection
with the Wico Merger and subsequently repriced in April 1995 to $0.875
per share. See "Compensation Committee Interlocks and Insider
Participation."
(5) On August 31, 1994, the Company cancelled options to purchase 50,500
shares of the Company's Common Stock belonging to Mr. Rivas with an
exercise price ranging from $19.25 per share to $10.80 per share and in
their place issued options to purchase 50,500 shares of the Company's
Common Stock at an exercise price of $11.875 per share. In June 1995,
the exercise price of such options was reduced to $5.00 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Steffen I.
Magnell, pursuant to which Mr. Magnell is to serve as Chief Executive Officer
of the Company and of Wico through March 31, 1998. Mr. Magnell is also serving
as President of the Company at this time. The employment agreement provides
for a base salary of $240,000 per annum (subject to annual cost-of-living
increases), a $25,000 bonus payable on September 30, 1995, additional annual
bonuses tied to the Company's achievement of net income targets, and benefits
comparable to those provided to other senior executives of the Company.
In conjunction with Mr. Magnell's employment agreement, the Company
granted to Mr. Magnell options to purchase up to 350,000 shares of Common Stock
at a price of $1.25 per share (subject to adjustment under certain
circumstances). Such options are exercisable (a) as to the first 150,000
shares, at any time prior to the expiration of the options, (b) as to the next
100,000 shares, subject to and after the execution of the first three-year
extension of Mr. Magnell's employment agreement with the Company, and (c) as to
the final 100,000 shares, subject to and after the execution of the second
three-year extension of Mr. Magnell's employment agreement. Subject to prior
termination as provided in the option agreement, all such options expire on
March 31, 2004.
The Company entered into an agreement in June 1994 with Mr. Rivas,
terminating a prior employment agreement and retaining Mr. Rivas to serve as
President of Conquest Air until January 17, 1995, and thereafter subject to
termination following sixty days' notice. Pursuant to this agreement, the
Company is obligated to pay Mr. Rivas $10,625 per month and issue options to
purchase 70,000 shares of Common Stock at an exercise price of $6.5625 per
share, subject to the 1994 Stock Option Plan. In connection with this
agreement, the Company also agreed to pay Mr. Rivas an aggregate amount of
$250,000 in consideration of his agreement and release of the Company's
obligations pursuant to his prior employment agreement with the Company. Of
such amount, $85,000 has been paid to date in the 1995 fiscal year, with the
balance of $165,000 remaining owing. The Company also agreed that certain
indebtedness of Mr. Rivas to the Company not in excess of $65,000 arising from
the Company's payment of life insurance premiums on his behalf shall be payable
only upon his death from the proceeds of such life insurance policy. In
addition, the Company is required to provide Mr. Rivas with the use of his
present automobile.
Since June 1989, Stephen R. Feldman, Chairman of the Board of Directors,
has had an oral management consulting agreement with the Company, entitling him
to payment of a fee of $150,000 per annum for services provided to the Company.
Mr. Feldman has agreed with the Company's institutional lender that any such
payments would not be paid in any fiscal year in which the Company's
consolidated income before interest and taxes in the prior year was not equal
to or greater than $5,000,000. As a result, no payments under this consulting
agreement have been paid to date.
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<PAGE> 57
STOCK OPTION PLANS
Prior to the Wico Merger, the Company had adopted several stock option
plans, pursuant to which a total of 158,000 options were outstanding on the
date of the Wico Merger. In connection with the Wico Merger, the Company
terminated all of such plans and adopted the 1994 Stock Option Plan described
below. Accordingly, no further options may be granted under the terminated
plans.
The Company undertook to adopt the 1994 Stock Option Plan to permit the
holders of Wico stock options at the time of the Wico Merger to convert them
into options to purchase Common Stock of the Company. All of the options to
purchase Wico common stock granted under Wico's 1993 Stock Option Plan have
been converted into options to acquire 536,000 shares of Common Stock.
The 1994 Stock Option Plan was adopted on June 16, 1994 and provides for
the grant of options to acquire an aggregate of 2,000,000 shares of Common
Stock to employees, officers or directors of, or counsel to, the Company. The
1994 Stock Option Plan authorized the Board to issue incentive stock options
("ISO's"), as defined in Section 422A of the Internal Revenue Code (the
"Code"), and stock options that do not conform to the requirements of that Code
section ("Non-ISO's"). Officers, directors and consultants who are not
employees of the Company or any subsidiary thereof may only be granted
Non-ISO's.
The Board administers the 1994 Stock Option Plan with full power and
authority to take any action required or permitted to be taken under the 1994
Stock Option Plan. The Board has discretionary authority to determine the
types of stock options to be granted, the persons among those eligible to whom
options will be granted, the number of shares to be subject to such options and
the terms of the stock option agreements.
The exercise price of each ISO shall not be less than 100% of the fair
market value of the Company's Common Stock at the time of grant, except that in
the case of a grant to an employee who owns (within the meaning of Code Section
422A(b)(6)) 10% or more of the outstanding stock of the Company (a "10%
Stockholder"), the exercise price shall not be less than 110% of such fair
market value. For purposes of the 1994 Stock Option Plan, the fair market
value of shares of the Company's Common Stock on a given date is the average of
the closing bid and asked prices per share of Common Stock as reported on
NASDAQ. The exercise price of each Non-ISO is determined by the Board at the
time of the grant of the Non-ISO.
Options may be exercised in the manner and at such times as may be fixed
by the Board, but may not be exercisable on or after the tenth anniversary
(fifth anniversary in the case of an ISO granted to a 10% Stockholder) of the
grant of such options. Payment by option holders upon exercise of an option
may be made (as determined by the Board), in cash, or by check, promissory
note, delivery of shares of stock or cancelling an appropriate portion of the
options.
No option granted under the Plan is transferable by the optionee other
than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee. Upon
the termination of the option holder's employment or other relationship with
the Company and any subsidiary, his options, to the extent not theretofore
exercised, will expire immediately or, in certain cases, after a three or six
month period.
As at September 30, 1995, options to purchase 800,500 shares of Common
Stock, including 770,500 options held by officers and directors of the Company,
were issued and outstanding.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors of the Company who are not employees each received $300 for
each meeting attended by them for their services as such during the 1994 fiscal
year. Such fees have been increased to $500 per meeting attended in the 1995
fiscal year.
Salvatore Palacino, who was the Secretary and a director of the Company
until his resignation on June 17, 1994, had served on the compensation
committee of the Board. Although Mr. Palacino served as Secretary of the
Company during its last fiscal year, he received no compensation for serving as
such.
In April 1995, the Board of Directors appointed an Audit Committee and a
Compensation Committee. Messrs. Feldman and Schoon were appointed to the Audit
Committee and Messrs. Rivas and McKillop were appointed to the Compensation
Committee.
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<PAGE> 58
In April 1995, the Board of Directors of the Company authorized for
issuance of 100,000 five-year warrants to each of Messrs. Feldman, Blum,
Schoon and McKillop (an aggregate of 400,000 warrants), in their capacities as
members of the Company's Board of Directors (the "Directors Warrants"), and
250,000 five-year warrants to Jerry Karlik, the Company's Chief Financial
Officer. All 400,000 Directors Warrants and the 250,000 warrants issued to Mr.
Karlik are exercisable at $0.875 per share (the closing sale price of the
Company's Common Stock on NASDAQ on the date of grant of such warrants).
All warrants issuable to directors as authorized by the Company's Board
of Directors in April 1995 are exercisable at $0.875 per share, the closing
sale price of the Company's Common Stock on the date of grant, and expire on
March 31, 2000. In addition, in April 1995, the 300,000 stock options issued
to Stephen R. Feldman in connection with the Wico Merger and exercisable at
$2.50 per share, were repriced as 300,000 stock options exercisable at $0.875
per share.
In February 1995, The Blum Asset Trust ("BAT"), an affiliate of Bentley
J. Blum, made a non-interest-bearing demand loan to the Company in the amount
of $200,000. In May 1995, pursuant to a prior agreement between the Company
and BAT, the Company issued to BAT, in repayment of the demand loan, 600,000
shares of new Series D Preferred Stock of the Company. In conjunction with the
issuance of the Series D Preferred Stock, the Company issued to BAT warrants
entitling the holder 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). In July 1995, the Company redeemed
all of the Series D Preferred Stock, and in connection therewith, 200,000 of
the 600,000 warrants were cancelled.
In May 1995, BAT also lent to the Company the additional sum of $150,000.
In consideration of such additional loan, the Company issued to BAT additional
five-year warrants to purchase 450,000 shares of Common Stock at a price of
$.3333 per share. On July 5, 1995, the Company repaid such loan in full, and
in connection therewith, 225,000 of the 450,000 warrants were cancelled.
In June 1995, the Company issued to Steffen I. Magnell, the Company's
President and Chief Executive Officer, five-year warrants to purchase an
aggregate of 100,000 shares of Company Common Stock at an exercise price of
$1.41 per share, the same price per share at which he purchased 142,000 shares
of Common Stock in the 1995 Private Placement.
In connection with the contemplated refinancing of the Company's senior
indebtedness, Bentley J. Blum had been requested by the Bank to increase his
limited personal guaranty of the proposed restated term loan due 2000 from
$1,000,000 to $3,000,000, and had also been requested to collateralize the
$2,000,000 increase in his personal guaranty with certain personal assets
independent of his equity in the Company. Mr. Blum agreed to furnish such
increased guaranty and collateral. In consideration for such commitment, in
September 1995 the Company's Board of Directors agreed to issue to Mr. Blum,
simultaneous with the closing of such refinancing and issuance of his increased
guaranty and pledge of collateral an aggregate of 500,000 shares of Company
Common Stock at $.001 per share. In addition, on each anniversary of the date
of closing of such refinancing, to the extent that Mr. Blum's guaranty
continues to remain in force and is collateralized by his personal assets
(excluding his equity in the Company), he shall receive five year warrants to
purchase an additional 250,000 Company shares. Inasmuch as the proposed terms
of the refinancing contemplate a five year maximum term loan from the Bank, Mr.
Blum would potentially be entitled to receive warrants to purchase an aggregate
of 1,250,000 additional Company shares. On October 20, 1995, such refinancing
was consummated and Mr. Blum increased his personal guaranty of the restated
term loan to $3.0 million, provided the bank with a collateral assignment of
certain personal real estate assets owned by him, and received 500,000 shares
of Company Common Stock for $500. All of the 1,250,000 warrants issuable to
Mr. Blum, if and to the extent issued pursuant to his agreement with the
Company, will expire five years from their respective dates of issuance and
will be exercisable at the closing sale price of the Company's publicly traded
Common Stock on the date of issuance of such warrants. On November 8, 1995,
the closing sale price of the Company's Common Stock, as reported on NASDAQ,
was $1.1875 per share.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Preferred Stock as of
the Effective Date by (i) each stockholder known by the Company to be a
beneficial owner of more than 5% of the Company's Common Stock or any Series of
Preferred Stock, (ii) each of the directors of the Company, (iii) the Company's
President, and (iv) all directors and officers of the Company as a group. The
12,622,454 shares of Common Stock outstanding as at the Effective Date of this
Prospectus, include the recently issued 881,631 Creditors Shares, but do not
include any of the 2,975,000 Company Shares to be offered for sale by the
Company through January 31, 1996. Unless otherwise indicated, all shares are
directly owned as of October 31, 1995.
<TABLE>
<CAPTION>
Name and Address Amount & Nature of Percent Percent Percent
Title of Class of Beneficial Ownership Beneficial Ownership(1) Common Preferred Voting
-------------- ----------------------- ----------------------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Common Iris Feldman 2,918,842(2) 23.1% __ 23.1%
6400 West Gross Point Road
Niles, IL 60714
Common Bentley J. Blum 3,828,050(3) 28.6% * 28.6%
150 East 58th Street
New York, NY 10155
Common Paul E. Hannesson 858,483 6.8% __ 6.8%
150 East 58th Street
New York, NY 10155
Preferred Ignace Rey and 2,000,000(4) -0-% 71.2% -0-%
Georges Bonvin,
Trustees
Common Ignace Rey and 736,000(5) 5.8% __ 5.8%
Georges Bonvin,
Trustees,
Preferred Felice F. Mischel 300,000(6) -0-% 10.7% -0-%
1285 Avenue of the Americas
New York, NY 10019
Common Felice F. Mischel 412,900(7) 3.2% __ 3.2%
1285 Avenue of the Americas
New York, NY 10019
Common Stephen R. Feldman 3,405,842(8) 26.2% __ 26.2%
6400 West Gross Point Road
Niles, IL 60515
Common Steffen I. Magnell 392,000(9) 3.1% __ 3.1%
6400 West Gross Point Road
Niles, IL 60515
Common Victor M. Rivas 125,500(10) 1.0% __ 1.0%
2215 E.M. Franklin Avenue
Austin, TX 78723
Common Strategic Growth 900,000(11) 6.7% -- 6.7%
International, Inc.
111 Great Neck Road
Great Neck NY 11021
Common Harry McKillop 115,670(12) 1.0% __ 1.0%
801 North College Street
McKinney, TX 75089
Common David Schoon 100,000(13) 1.0% __ 1.0%
6400 West Gross Point Road
Niles, IL 60741-4508
Common All directors and executive 8,192,062(14) 57.5% * 57.5%
officers as a group
(8 persons)
</TABLE>
- --------------
*Less than one percent.
-51-
<PAGE> 60
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power or investment power with
respect to securities. Shares of Common Stock subject to warrants and
options currently exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding the warrants or
options but are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated in footnotes to this
table, the persons named in the table above have sole investment power
with respect to all shares of Common Stock shown as beneficially owned by
them.
(2) Excludes an option to purchase 300,000 shares and a Directors Warrant to
purchase 100,000 shares at $0.875 per share held by Ms. Feldman's
husband, Stephen R. Feldman, at $0.875 per share (see "Compensation
Committee Interlocks and Insider Participation.") Mrs. Feldman disclaims
beneficial ownership of the options or warrants and the underlying shares
of Common Stock to be acquired by Mr. Feldman upon exercise thereof.
(3) Includes (i) 3,075,450 shares of Common Stock owned of record by Mr. Blum
(including 500,000 shares issued to him in connection with the October
20, 1995 Company debt refinancing), (ii) 75,000 shares of Series B
Preferred Stock held by the Blum Family Trust U/A/D May 9, 1990 which are
convertible into 27,600 shares of Common Stock, (iii) 100,000 Directors
Warrants exercisable at $0.875 a share, and (iv) warrants held by BAT to
purchase a maximum of 625,000 shares of Common Stock at $0.333 per share.
Does not includes the potential issuance of warrants to purchase up to
1,250,000 additional shares of Common Stock issuable under certain
conditions in connection with certain financing accomodations which will
be provided by Mr. Blum in the event of the Company's contemplated debt
refinancing. See "Compensation Committee Interlocks and Insider
Participation."
(4) Messrs. Rey and Bonvin are trustees of Caisse De Retraite Et De
Prevoyance Du Personnel en Seignant Du Canton Du Valais, a Cantonal
teachers' pension fund. At any time prior to any exercise of a certain
warrant currently held by the Caisse De Retraite (see Note (5) below),
the Series B Preferred Stock owned by the Caisse De Retraite may be
converted into 736,000 shares of Common Stock. Such Trustees may
presently be deemed the beneficial holders of such shares of Common Stock
since they maintain the requisite votes to effectuate such conversion or
exercise such warrant in lieu of conversion.
(5) At the holder's option, at any time prior to any exercise of a certain
warrant currently held by the Caisse De Retraite, all shares of Series B
Preferred Stock owned by each holder (but not a portion thereof) can be
immediately converted into shares of Common Stock at the rate of .368
shares of Common Stock for each share of Series B Preferred Stock. Such
warrant, issued in May 1995 as part of an amendment to the terms of the
Series B Preferred Stock, is exercisable between September 30, 1995 and
March 31, 2000, and may be exercised by the holder only in lieu of
converting its or their shares of Series B Preferred Stock into Common
Stock. The warrant entitles each holder to purchase the same number of
shares of Common Stock into which its or their Series B Preferred Stock
would be convertible (an aggregate of 736,000 shares) at an exercise
price equal to $0.68 below the mean average closing price of the
Company's publicly traded Common Stock over a 30 day period prior to
exercise (subject to a minimum exercise price of $.50 per share). Such
warrant and its underlying shares of Common Stock are restricted
securities and will not be registered by the Company under the Securities
Act of 1933, as amended, including the Registration Statement of which
this Prospectus is a part. See "Description of Securities - Series B
Preferred Stock."
(6) Consists of Series E Preferred Stock owned by Ms. Mischel which may be
converted into 110,400 shares of Common Stock (at the rate of 0.368
shares of Common Stock for each share of Series E Preferred Stock). The
Series E Preferred Stock is subject to mandatory redemption at $1.00 per
share (plus all unpaid accrued dividends) under certain circumstances.
See "Description of Securities - Series E Preferred Stock."
(7) Includes (i) 110,400 shares issuable upon conversion of Series E
Preferred Stock owned by Ms. Mischel; (ii) 200,000 shares of Common Stock
owned by Blue Diamond Trading, Ltd., a company owned by Ms. Mischel;
(iii) 100,000 Creditors Shares issued to SWH&M, a law firm with which Ms.
Mischel is affiliated; and (iv) 2,500 additional shares owned directly by
Ms. Mischel. See "Selling Securityholders."
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<PAGE> 61
(8) Consists of (i) 300,000 shares of Common Stock issuable upon exercise of
an option under the 1994 Stock Option Plan, (ii) 100,000 Directors
Warrants exercisable at $0.875 per share, (iii) 87,000 Creditors Shares
issued to Mr. Feldman; and (iv) 2,918,842 shares of Common Stock held by
Mr. Feldman's wife, Iris Feldman. Mr. Feldman disclaims beneficial
ownership of any shares held by Iris Feldman.
(9) Consists of 150,000 stock options issued in March 1995 which are
immediately exercisable at $1.25 per share 142,000 shares purchased by
Mr. Magnell for approximately $1.41 per share in the 1995 Private
Placement, and an additional 100,000 five year warrants exercisable at
$1.41 per share issued to Mr. Magnell in June 1995. Does not include
200,000 additional stock options at $1.25 per share through March 31,
2004, which were issued under Mr. Magnell's employment agreement and are
exercisable, as to 50% in April 1998 and as to the balance commencing
April 2001.
(10) Includes options to purchase 120,500 shares of Common Stock.
(11) Consists of five year warrants issued as of October 11, 1995 entitling
the holder to purchase an aggregate of 900,000 shares of Common Stock at
an exercise price of $1.50 per share (the "SGI Warrants"). Such SGI
Warrants were issued in partial consideration for investor relations
services to be rendered pursuant to a one year consulting agreement with
SGI. Messrs. Stanley Altshuler and Richard Cooper, the principals of
SGI, are each the beneficial owners of 450,000 of such SGI Warrants. See
"Certain Relationships and Related Transactions."
(12) Includes five year Directors Warrants exercisable at $0.875 per share to
purchase 100,000 shares of Common Stock.
(13) Consists of five year Directors Warrants exercisable at $0.875 per share
to purchase 100,000 shares of Common Stock.
(14) Includes all shares listed in the column entitled "Amount & Nature of
Beneficial Ownership" for Messrs. Stephen R. Feldman, Blum, Magnell,
Rivas, McKillop, Schoon, and Jerry Karlik, the Company's Chief Financial
Officer who holds immediately exercisable warrants to purchase 250,000
shares at $0.875 per share, expiring April 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1989, the Board of Directors of Wico authorized a distribution of
$12,000,000 to Wico's then stockholders. The stockholders gave Wico demand
notes for the amount of the distribution, payable with interest at 12% per
annum to commence following maturity. The loan was made with proceeds of
Wico's bank debt refinancing in June 1989. In 1991, a dividend in the
principal amount of the loans was declared in satisfaction of the stockholders'
obligations thereunder.
In 1992, Bentley J. Blum, a Director and principal stockholder of Wico,
and Stephen R. Feldman, Chairman of the Board and Chief Executive Officer of
Wico, made subordinated loans to Wico, each in the amount of $500,000, bearing
interest at the prime rate plus 1-1/2%, not to exceed 10% per annum, maturing
on July 31, 1994, and each furnished Wico's institutional lender with personal
guarantees in the amount of $1,000,000, as additional collateral to secure
Wico's obligations to the lender. Total interest expense relating to these
loans for the year ended September 30, 1992, amounted to approximately $16,000.
The principal amounts of these subordinated loans were cancelled in connection
with the issuance and sale in 1993 of Wico Series A preferred stock described
below.
In 1993, Wico sold 656,250 shares, 1,000,000 shares and 343,750 shares of
Wico Series A preferred stock to Iris Feldman, a principal stockholder of Wico
and spouse of Stephen R. Feldman, the Blum Family Trust, of which Bentley J.
Blum is a co-trustee and principal beneficiary, and Arthur Radin, who is a
principal shareholder of Feldman Radin & Co., P.C., of which Stephen R. Feldman
is also a principal shareholder, and is the spouse of Miriam E. Katowitz, a
principal stockholder of Wico, respectively, for $1,800,000, the same net price
paid by the unaffiliated purchaser discussed below, consisting of cash and
cancellation of subordinated notes. During 1993, dividends with respect to
Wico Series A preferred stock in the amounts
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<PAGE> 62
of approximately $36,350, $23,850 and $12,500 were paid by Wico to the Blum
Family Trust, Iris Feldman and Arthur Radin, respectively. In September 1993,
1,850,000 of the shares of preferred stock owned by such holders were sold at
the full face amount of such shares ($1,850,000) to eight persons, none of whom
was an officer, director, or affiliate of Wico.
Simultaneously with the issuance of Wico Series A preferred stock
described above, Wico issued 2,000,000 shares of Wico Series A preferred stock
for $1,800,000 (net of selling commissions) cash to a foreign pension plan,
unaffiliated with Wico. These shares of Wico Series A preferred stock were
convertible into 368,000 shares of Wico common stock, approximately 9.2% of the
then issued and outstanding Wico common stock.
In January 1994, the eight persons who acquired Wico Series A preferred
stock in September 1993 as described above, entered into agreements with Wico
to exchange their shares of Wico preferred stock into Wico Series AA preferred
stock on a share-for-share basis. This exchange was completed in March 1994.
The Wico Series AA preferred stock did not contain voting rights or any
liquidation preferences.
In connection with the Wico Merger, the Company also agreed, subject to
the effectiveness of the Registration Statement of which this Prospectus is a
part, to issue the Class B Warrants to each Company stockholder of record on
the close of business on June 20, 1994 (not including any persons or entities
affiliated with Wico who received shares or rights to shares of Common Stock in
connection with the Wico Merger).
Concurrent with the Wico Merger, the stockholders of Wico exchanged their
Wico securities for Company securities and became the controlling stockholders
of the Company. The former holders of Wico Common Stock now own approximately
60% of the issued and outstanding Common Stock of the Company. More
specifically, by the terms of the Wico Merger, and following the exchange of
Wico securities for Company securities: (i) the holders of Wico common stock
acquired record ownership of approximately 6,900,000 shares of Company Common
Stock in exchange for 2,944,000 shares of Wico common stock; (ii) certain
holders of Wico preferred stock acquired record ownership of 2,800,000 shares
of Company Series B Preferred Stock in exchange for 2,800,000 shares of Wico
preferred stock ; and (iii) certain other holders of Wico preferred stock
acquired record ownership of 313,043 shares of Company Common Stock in exchange
for 1,200,000 shares of such Wico preferred stock. All of the options to
purchase Wico common stock granted to Stephen R. Feldman and Edward Sokolofski
under Wico's 1993 Stock Option Plan were converted into options to acquire
536,000 shares of Company Common Stock. The 236,000 Company options issued to
Mr. Sokolofski terminated in September 1995 upon his resignation as an officer
of the Company.
The table on the following page sets forth (i) the number of shares of
Wico common stock owed by the principal owners of Wico common stock and Wico
preferred stock immediately prior to the Wico Merger, (ii) the number of shares
of Company Common Stock (including shares underlying options and Company Series
B Preferred Stock) issued to the owners of such Wico securities pursuant to the
Wico Merger, and (iii) shares of Common Stock then held by other directors and
executive officers and holders of 5% or more of the Company's Common Stock at
the time of the Wico Merger.
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<TABLE>
<CAPTION>
Shares held in the Company
Shares held in Wico Immediately
Prior to the Merger After the Merger
------------------- ----------------
<S> <C> <C>
Iris Feldman . . . . . . . . . . . . . . . . . . . 1,418,300(1) 2,918,842(1)
Greater than 5% holder and
wife of Stephen R. Feldman
Bentley J. Blum . . . . . . . . . . . . . . . . . . 1,251,200(1) 2,575,450(1)(2)
Greater than 5% holder and Director
Paul E. Hannesson . . . . . . . . . . . . . . . . . 417,067(1) 858,483(1)
Miriam Katowitz . . . . . . . . . . . . . . . . . . 250,288(1) 515,090(1)(3)
Victor M. Rivas . . . . . . . . . . . . . . . . . . --- 125,500(4)
Executive Officer and Director
Stephen R. Feldman . . . . . . . . . . . . . . . . 1,418,300 (5) 3,218,842(5)
Felice F. Mischel . . . . . . . . . . . . . . . . 300,000(6) 110,400(6)(7)
Caisse De Retraite . . . . . . . . . . . . . . . . 2,000,000(6) 736,000(6)
Greater than 5% holder
</TABLE>
- --------------------------------
(1) Represents shares of Common Stock of Wico and of the Company, as
indicated.
(2) Does not include an additional 752,600 shares of Common Stock issuable
upon (i) conversion of 75,000 shares of Series B Preferred Stock held by
the Blum Family Trust U/A/D May 9, 1990 which are convertible into 27,600
shares of Common Stock, (ii) exercise of 100,000 Directors Warrants at
$0.875 a share, and (iii) exercise of warrants held by BAT to purchase a
maximum of 625,000 shares of Common Stock at $0.333 per share. Also does
not includes the issuance in October 1995 of 500,000 shares of Common
Stock to Mr. Blum in connection with the Company senior debt
refinancing, and warrants to purchase up to 1,250,000 additional shares
of Common Stock issuable under certain conditions in connection with the
financing accomodations provided by Mr. Blum at closing of such debt
refinancing. See "Compensation Committee Interlocks and Insider
Participation."
(3) Does not include 75,000 shares of Wico preferred stock exchanged in the
Wico Merger for 75,000 shares of Company Series B Preferred Stock which
are owned by Arthur Radin, the husband of Miriam Katowitz. Such shares
of Series B Preferred Stock are immediately convertible into 27,600
shares of Company Common Stock. Mr. Radin is a principal stockholder in
Feldman Radin & Co., P.C., an accounting firm in which Stephen R.
Feldman, the Chairman of the Board and principal stockholder of the
Company is also a principal stockholder. Mr. Radin received an
additional 87,000 Creditors Shares. Mr. Radin disclaims beneficial
ownership of any shares held by Miriam Katowitz. See "Business -
Settlement with Certain Creditors" and "Selling Securityholders."
(4) Consists of 5,000 shares of Common Stock and options to purchase 120,500
additional shares of Common Stock
(5) Consists of (i) 300,000 shares of Common Stock issuable upon exercise of
options under the 1994 Stock Option Plan granted to Stephen R. Feldman in
the Wico Merger, and (ii) 2,918,842 shares of Common Stock issued to Iris
Feldman in the Wico Merger in exchange for 1,418,300 shares of Wico
common stock owned by her. Iris Feldman is the wife of Stephen R.
Feldman. Mr. Feldman disclaims beneficial ownership of any shares held
by Iris Feldman. Does not include: (i) 100,000 Directors Warrants
exercisable at $0.875 per share, which were subsequently issued to
Stephen R. Feldman, or (ii) 87,000 Creditors Shares issued to Mr.
Feldman. See "Management - Compensation Committee Interlocks and Insider
Participation" and "Selling Securityholders."
(6) Represents (i) 2,000,000 shares of Wico preferred stock owned by Caisse
De Retraite exchanged for 2,000,000 shares of Company Series B Preferred
Stock in the Wico Merger; which Series B Preferred Stock is immediately
convertible into 736,000 shares of Common Stock; and (ii) 300,000 shares
of Wico preferred stock owned by Felice F. Mischel exchanged for 300,000
shares of Company Series B
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Preferred Stock in the Wico Merger; which Series B Preferred Stock is
immediately convertible into 110,400 shares of Common Stock.
(7) Does not include: (i) 100,000 shares of Wico preferred stock exchanged in
the Wico Merger for 100,000 shares of Company Series B Preferred Stock
(immediately convertible into 36,800 shares of Common Stock) which was
owned by Edward Weltman, the law partner of Felice F. Mischel; (ii)
202,500 shares of Company Common Stock issued to Ms. Mischel, for nominal
consideration, upon exercise of warrants granted to her in connection
with the Wico Merger; and (iii) 100,000 Creditors Shares issuable to
Schneck Weltman Hasmall & Mischel LLP, a law firm in which Ms. Mischel
and Mr. Weltman are partners. The shares of Series B Preferred Stock
issued to Ms. Mischel and Mr. Weltman, together with 400,000 additional
shares of Series B Preferred Stock issued to certain other individuals
were exchanged by the Company in June 1995 for Series E Preferred Stock
(convertible into the same number of shares of Company Common Stock)
which Series E Preferred Stock is redeemable at the option of the holders
under certain conditions. See below and "Selling Securityholders."
In connection with the loan agreement dated June 14, 1989, as amended,
between Wico Corporation and the Bank, Bentley J. Blum, Iris Feldman, Miriam
Katowitz and Paul E. Hannesson (collectively, the "Pledgors") pledged to the
Bank, for itself and as agent, all of the outstanding capital stock of Wico
Corporation then owned or thereafter acquired by each of them. On June 20,
1994, such shares of capital stock were exchanged into shares of capital stock
of the Company in accordance with the Wico Merger. Upon the occurrence of an
event of default (as defined), any and all shares of pledged stock held by the
Bank may, at the option of the Bank or its nominee, be registered in the name
of the Bank or its nominee, and the Bank or its nominee will succeed to all
rights pertaining to such shares. Events of default under the credit agreement
include any failure to pay installments of principal or interest when due
(including indebtedness to the Company's revolving credit lender), failure to
comply with various financial ratios and earnings tests beyond any applicable
grace periods, and customary cross-default and bankruptcy-related occurrences.
In connection with the October 20, 1995 refinancing of the Company's
senior secured indebtedness the Bank, as Wico's term lender under the restated
senior secured term loan continued to retain under a restated pledge agreement
all such shares of Company Common Stock now or hereafter owned by the Pledgors.
In connection with the Wico Merger, Wico was required by the Bank to
prepay $4,000,000 of the term loan and either (a) prepay an additional
$1,000,000 and repurchase the Bank Warrant for an additional $1,000,000, or (b)
pay the Bank a fee of $375,000 and increase the rate of interest payable under
the term loan by 1-1/2% per annum. The Company selected the second option and
paid $200,000 on December 15, 1994. In connection with the senior debt
refinancing in October 1995, the Company agreed to pay the Bank the $175,000
balance, without interest, in 16 equal quarterly installments of $10,937.50,
commencing January 1997 and payable on the first day of each succeeding April,
July, October and January.
Felice F. Mischel and Edward Weltman, partners in the law firm of Schneck
Weltman Hashmall & Mischel LLP ("SWH&M"), owned 300,000 and 100,000 shares of
Series B Preferred Stock, respectively, which they received upon the Wico
Merger, in exchange for an identical number of shares of Wico Series AA
preferred stock which had been purchased by them in 1993 for $300,000 and
$100,000, respectively. Such shares of Series B Preferred Stock were
convertible into 110,400 and 36,800 shares of Common Stock. In June 1995, the
holders of 800,000 shares of Series B Preferred Stock, including Ms. Mischel
and Mr. Weltman, exchanged such shares for 800,000 shares of Series E
Preferred Stock. Each share of Series E Preferred Stock is convertible into
0.368 shares of Common Stock (the same conversion ratio as the Series B
Preferred Stock). However, the holders of the Series E Preferred Stock have
the right to compel redemption of such Series E Preferred Stock at $1.00 per
share (a maximum of $800,000) in the event that the Company consummates a
public offering of securities (including this offering) and receives proceeds
of $3,000,000 or more. See "Description of Securities - Series E Preferred
Stock." The 294,400 shares of Common Stock issuable upon conversion of the
Series E Preferred Stock are being registered for sale in the Registration
Statement of which this Prospectus is a part. See "Selling Securityholders."
In connection with the Wico Merger, Blue Diamond Trading Ltd., a company
owned by Ms. Mischel, was granted warrants to purchase 200,000 shares of Common
Stock, exercisable for a period of ten years at a price of $.001 per share (the
"Blue Diamond Warrant"), as a fee for the introduction of the Company to
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<PAGE> 65
Wico. In June 1995, the Blue Diamond Warrant was exercised in full. In
addition, in July 1994, Ms. Mischel arranged for a private secured loan to be
made to her in the amount of $500,000, which in turn, was loaned to the Company
on an unsecured basis. This loan has been repaid. In consideration for making
such loan, the Company paid a fee of $50,000 to Ms. Mischel which fee was paid
over by her directly to the private lender. The Company also issued warrants
to purchase 2,500 shares of Common Stock, exercisable at a price of $.001 per
share for a period of five years to each the private lender and Ms. Mischel.
Prior to the Wico Merger, SWH&M acted as general counsel to each of Wico and
the Company. Ms. Mischel was also a director of the Company until June 20,
1994 (although she abstained from voting in connection with the Wico Merger).
SWH&M did not act as counsel to either Wico or the Company in connection with
the Wico Merger.
In April 1995, the Company entered into an agreement with SWH&M pursuant
to which SWH&M agreed to accept an aggregate of 100,000 shares of Common Stock
(at a price of $2.00 per share) in exchange for the extinguishment of
approximately $200,000 of accrued professional fees owed to such firm by the
Company. Such agreement also provided that SWH&M would be a Selling
Securityholder with respect to such 100,000 Creditors Shares.
In 1994, the Company accrued approximately $163,000 for professional
accounting and tax services rendered to Wico by Feldman Radin & Co., P.C.,
approximately $38,000 of which has been paid to date. An additional $125,000
of accounting and tax services were rendered by such firm to the Company in
fiscal 1995. Stockholders of Feldman Radin & Co., P.C. have agreed to accept
an aggregate of 250,000 Creditors Shares in exchange for $250,000 of accrued
obligations owed to Feldman Radin & Co., P.C. by the Company and assigned by
such firm to its stockholders in September 1995. It is anticipated that
Feldman Radin & Co., P.C. will continue to furnish professional accounting and
tax services to the Company upon competitive terms.
On October 12, 1995, the Company entered into a one year consulting
agreement effective as of October 11, 1995 with SGI, pursuant to which SGI
agreed to establish a comprehensive investor relations program for the Company,
including relations with the financial community, providing research coverage
and general public and investor relations. For its services, the Company
agreed to pay SGI a fee of $7,000 per month and issued the SGI Warrants. Such
SGI warrants expire October 11, 2000, and entitle SGI and its affiliates to
purchase up to 900,000 shares of Company Common Stock at an exercise price of
$1.50 per share (the closing sale price of the Company's Common Stock on NASDAQ
on the effective date of grant). Pursuant to the terms of the consulting
agreement, the Company granted SGI certain future registration rights with
respect to shares of Common Stock issuable upon exercise of such SGI Warrants.
DESCRIPTION OF SECURITIES
GENERAL
The Company's Certificate of Incorporation authorizes the Company to
issue 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock. The Company's outstanding capital stock as of the date hereof consists
of 12,622,454 shares of Common Stock (including 2,082,147 shares sold in the
1995 Private Placement), 7,550 shares of convertible Series A Preferred Stock,
2,000,000 shares of convertible Series B Preferred Stock, and 800,000 shares of
convertible Series E Preferred Stock.
COMMON STOCK
Subject to the rights of the holders of the Preferred Stock, and any
shares of Preferred Stock which may be issued in the future, holders of shares
of Common Stock are entitled to cast one vote for each share held at all
stockholders' meetings for all purposes, including the election of directors.
Common stockholders have the right to share ratably in such dividends on
shares of Common Stock as may be declared by the Board of Directors out of
funds legally available therefor. Upon liquidation, dissolution or winding up
of the affairs of the Company, each outstanding share of Common Stock will be
entitled to share equally in the assets of the Company legally available for
distribution to stockholders after the payment of all debts and liabilities,
subject to the rights of the holders of Preferred Stock then outstanding.
Common stockholders have no preemptive rights. There are no conversion
or redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock
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are, and all of the shares of Common Stock issued upon conversion of currently
outstanding Preferred Stock will be, validly issued, fully paid and
non-assessable.
The holders of shares of Common Stock do not have cumulative voting
rights, which means that the holders of more than 50% of the Company's voting
securities (including the Series A, Series B and Series E Preferred Stock,
voting one vote per share with the Common Stock as a single class), voting for
the election of Directors, can elect all of the Directors to be elected, if
they so choose; and in such event, the holders of the remaining shares will not
be able to elect any of the Company's directors.
Section 203 of the Delaware General Corporation Law provides that a
corporation shall not engage in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder (the "Date"). An interested
stockholder is defined as an owner of 15% or more of the outstanding voting
stock of the corporation. A business combination is allowed under certain
circumstances, including, among other provisions, if prior to the Date, the
Board of Directors of the corporation approved the business combination or the
transaction which resulted in the stockholder becoming interested.
Accordingly, pursuant to Section 203, the Company cannot, for a period of three
years commencing June 20, 1994, enter into a business combination with Iris
Feldman or Bentley J. Blum. Both Ms. Feldman and Mr. Blum became interested
stockholders pursuant to the Wico Merger.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred Stock,
from time to time in one or more series. The Board may issue a series of
Preferred Stock having the right to vote on any matter submitted to
stockholders, including, without limitation, the right to vote by itself as a
series, or as a class together with the Common Stock and/or any other or all
series of Preferred Stock. The Board of Directors may determine that the
holders of Preferred Stock voting as a class will have the right to elect one
or more additional members of the Board of Directors, or the majority of the
members of the Board of Directors. In the event the holders of Preferred Stock
are given the right to elect a majority of the Board of Directors, the holders
of the Preferred Stock would be able to control the Company's policies and
affairs.
The Board of Directors may also grant to holders of any series of
Preferred Stock, preferential rights to dividends and amounts payable in
liquidation. Furthermore, the Board of Directors may determine whether the
shares of any series of Preferred Stock may be convertible into shares of
Common Stock or any other series of Preferred Stock at a specified conversion
price or rate, and upon other terms and conditions as determined by the Board
of Directors.
The power of the Board of Directors to issue Preferred Stock with
preferential voting, dividend and other rights may make the Company a less
attractive acquisition candidate. Such power may also discourage or impede
offers to acquire the Company not approved by the Board of Directors, including
offers for some or all of the shares of any class or series of the Company's
capital stock at substantial premiums above the then current market value of
such shares.
As at the date of this Prospectus, there were outstanding (i) 7,550
shares of Series A Preferred Stock convertible, at any time at the option of
the holders, into a total of approximately 6,040 shares of Common Stock; (ii)
2,000,000 shares of Series B Preferred Stock convertible, at any time at the
option of the holders, into a total of 736,000 shares of Common Stock (or in
lieu thereof, subject to a warrant entitling the holder to purchase the same
number of shares of Common Stock into which the Series B Preferred Stock is
convertible), and (iii) 800,000 shares of Series E Preferred Stock convertible,
at any time at the option of the holders, into a total of 294,400 shares of
Common Stock.
Series A Preferred Stock
The holders of Series A Preferred Stock are entitled to one vote per
share voting together with holders of Common Stock as one class. Dividends are
payable semiannually in cash or in additional shares of Series A Preferred
Stock at the Company's discretion, when and if declared by the Board of
Directors. Each share of Series A Preferred Stock is redeemable by the
Company, at its option, for $9.25 per share plus accumulated dividends, upon
not less than 30 days nor more than 60 days written notice, provided the
closing bid price of the Company's Common Stock is at least $3.00 for 30
consecutive business days ending within 15 days prior to the notice of
redemption. Each share of Series A Preferred Stock is convertible into 0.8
shares of
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Common Stock, subject to adjustment under certain circumstances. There are
currently 7,550 shares of Series A Preferred Stock outstanding.
Series B Preferred Stock
The holders of Series B Preferred Stock are entitled to one vote per
share voting together with holders of Common Stock as one class. Dividends are
payable semiannually before any dividends are declared and paid on the Common
Stock, but after dividends are declared and paid on the Series A Preferred
Stock, in cash only, when and if declared by the Board of Directors. Each
share of Series B Preferred Stock is redeemable by the Company, at its option,
for $1.00 per share plus accumulated dividends (payable in cash or other
consideration as the Company and the holders of a majority of Series B
Preferred Stock may agree), upon not less than 30 days written notice. In the
event of such optional redemption by the Company, at least an aggregate of
100,000 shares, or an integral multiple thereof, must be redeemed and
repurchased. The Series B Preferred Stock was also subject to mandatory
redemption by the Company at $1.00 per share under certain conditions, if
requested by the holders of a majority of such Series B Preferred Stock. The
liquidation amount is subordinate to the Series A Preferred Stock and is $1.00
per share plus accumulated dividends. The holders of the Series B Preferred
Stock may elect to convert the Series B Preferred Stock into Common Stock as
described below.
In April 1995, the Series B Preferred Stock was amended so as to eliminate
all mandatory redemption rights of the holders of the Series B Preferred Stock.
In consideration of such amendments, the holders of the outstanding shares of
Series B Preferred Stock were issued warrants to purchase an aggregate of
1,030,400 shares of Common Stock (although 294,400 of such warrants were
thereafter cancelled in conjunction with the exchange of 800,000 shares of
Series B Preferred Stock for 800,000 shares of Series E Preferred Stock as
described below). Such remaining outstanding warrants, entitling the holders
to purchase an aggregate of 736,000 shares of Common Stock, are exercisable at
any time from September 30, 1995 through March 31, 2000, at an exercise price
per share equal to an amount which is $.68 less than the mean average closing
price of the Common Stock during the 30 calendar day period ending on the day
before the date of exercise (subject to a minimum price of $.50 per share).
Each holder of Series B Preferred Stock has reserved the right to convert, at
any time prior to any exercise of any of such holder's warrants, all (but not
less than all) of such holder's shares of Series B Preferred Stock into a
number of shares of Common Stock equal to the total number of shares then
issuable upon the exercise in full of such holder's aforesaid warrant (a
conversion ratio of 0.368 shares of Common Stock for each share of Series B
Preferred Stock). Upon each such conversion of Series B Preferred Stock into
Common Stock, such holder's warrant automatically terminate.
Series E Preferred Stock
In April 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.
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WARRANTS
The description of the various warrants set forth below do not include
the Company's 195,000 outstanding Public Warrants exercisable at $5.00 per
share through June 20, 1999, and, in addition, do not include: (i) five year
warrants to purchase an aggregate of 650,000 shares of Common Stock at $0.875
per share, including the Affiliate Warrant, which were issued in April 1995 to
the Company's Chief Financial Officer and to four members of the Board of
Directors of the Company, (ii) five year warrants to purchase 100,000 shares of
Common Stock at $1.41 per share issued in June 1995 to the Company's President,
or (iii) five year warrants which may be issued under certain conditions, at
the rate of 250,000 warrants per year over a five year period, in connection
with the proposed refinancing of the Company's senior secured indebtedness,
which, if issued, would entitle Bentley J. Blum, a director and principal
stockholder of the Company to purchase up to a maximum of 1,250,000 shares of
Common Stock at exercises prices equal to the closing sale price of the
Company's Common Stock, as reported on NASDAQ of each date such contingent
warrants are issued. See "Management - Compensation Committee Interlocks and
Insider Participation."
Class B Warrants
In connection with the Wico Merger, and subject to the effectiveness of
the Registration Statement of which this Prospectus is a part, in June 1994 the
Company authorized for issuance an aggregate of 1,961,925 Class B Warrants to
the holders of Common Stock on the close of business on the effective date of
the Wico Merger (not including any persons or entities receiving shares or
rights to shares of Common Stock in connection with the Wico Merger).
Each of the Class B Warrants will entitle the holder thereof to purchase
one share of Common Stock at an exercise price of $5.00 per share until June
20, 1999, when the warrants expire.
The Company may redeem the Class B Warrants, at a price of $.10 each, in
whole or in part, at the option of the Company, provided that the bid price of
the Common Stock is at least $6.84 for five consecutive trading days ending 15
days prior to the date of the notice of redemption. The Class B Warrants may
not be redeemed at any time when holders are unable to exercise due to the
absence of a current registration statement although the absence of the
registration statement will not extend the expiration date. In the event that
the Company exercises its right to redeem the Class B Warrants, such Warrants
will be exercisable until the close of business on the date immediately prior
to the date fixed for redemption in such notice. If any Class B Warrant or
Private Placement Warrant called for redemption is not exercised by such time,
it will cease to be exercisable and the holder thereof will be entitled only to
the redemption price.
In order for a holder to exercise a Class B Warrant, there must be a
current registration statement on file with the Commission relating to the
shares of Common Stock underlying the Class B Warrants, and such shares must be
registered or qualified for sale under the securities laws of the state in
which such warrantholder resides. The Company will be required to file
post-effective amendments to the Registration Statement filed in connection
with the issuance of such Class B Warrants when events require such amendments.
There can be no assurance that such Registration Statement (or any other
registration statement filed by the Company to cover shares of Common Stock
underlying the Class B Warrants) will be kept current. If a registration
statement covering such shares of Common Stock is not kept current for any
reason, or if the shares underlying the Class B Warrants are not registered in
the state in which a holder resides, the Class B Warrants will not be
exercisable and the holders thereof will be deprived of any value therefor.
1994 Private Placement Warrants
Pursuant to the terms of the 1994 Private Placement, the holders of the
Company's 10% $2,737,500 convertible Private Placement Notes due October 1,
1996 are entitled to receive, upon conversion of such Private Placement Notes
into 1994 Private Placement Conversion Shares, a 1994 Private Placement Warrant
entitling such holder to purchase shares of Company Common Stock, at the rate
of 0.02 shares for each $1.00 of Private Placement Notes so converted int
Private Placement Conversion Shares. In the event all $2,737,500 of 10%
Private Placement Notes are converted into Private Placement Conversion Shares,
an aggregate of 54,750 Private Placement Warrants would be issued. The Private
Placement Warrants entitle the holder to purchase Company Common Stock at an
exercise price of $11.75 per share at any time prior to June 20, 1999, when the
1994 Private Placement Warrants expire. The 1994 Private Placement Warrants
are redeemable at the option of the Company, upon 30 days' written notice at
any time, provided the closing bid
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price of the Company's Common Stock, as traded on NASDAQ or in the
over-the-counter market, is at least $6.84 for five consecutive days ending on
the day prior to the date of any notice of redemption. The Private Placement
Warrants are exercisable until the close of business on the day preceding the
date fixed for redemption. Holders of 1994 Private Placements Warrants, if and
when issued, are entitled to certain registration rights related to such
Warrants and the underlying shares of Common Stock.
BAT Warrants
In conjunction with the issuance of Series D Preferred Stock and the
borrowing of a $150,000 loan, the Company issued to the Blum Asset Trust
("BAT"), an affiliate of Bentley J. Blum, certain warrants (the "BAT
Warrants"). The BAT Warrants originally entitled the holder thereof to
purchase, at any time on or before February 15, 2000, up to 1,050,000 shares of
Common Stock at a price of $.3333 per share (subject to adjustment under
certain circumstances). In connection with the redemption of the Series D
Preferred Stock and the repayment of such $150,000 loan in July 1995, 425,000
of the BAT Warrants were cancelled, leaving 625,000 BAT Warrants outstanding.
SGI Warrants
In connection with a one year investor relations consulting agreement
entered into as of October 11, 1995, the Company issued five year warrants
entitling SGI to purchase an aggregate of 900,000 shares of Company Common
Stock at an exercise price of $1.50 per share (the closing sale price of the
Company's publicly traded Common Stock on the date of issuance). See "Certain
Relationships and Related Transactions."
Underwriter's Warrants
Pursuant to the Company's prospectus dated April 23, 1993, the Company
sold to Lew Lieberbaum & Co., Inc., the underwriter in that transaction (the
"Underwriter"), 53,241 common stock purchase warrants. In June 1994, such
warrants were exchanged for 53,241 Warrants (the "Underwriter's Warrants")
which entitled the Underwriter to purchase 53,241 units of securities (the
"Units") at an aggregate exercise price of $10.00 per Unit for a period of four
years commencing on the date of such prospectus. Each Unit consists of one
share of Common Stock and one Class Z Warrant to purchase one share of Common
Stock.
Class Z Warrants
As a component of the 53,241 Underwriter's Warrants, the Underwriter may
purchase units which are comprised of one share of Common Stock and one Class Z
Warrant at an exercise price of $10.00 per Warrant. Each Class Z Warrant is
exercisable for one share of Common Stock at an exercise price of $1.00 per
share. Upon issuance the Class Z Warrants are exercisable until November 14,
1999, when such Class Z Warrants expire. If all 53,241 Underwriter's Warrants
are exercised, an aggregate of 53,241 Class Z Warrants will be issued.
DIVIDENDS
The holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available therefor. The Company has never paid
dividends on its Common Stock, and it currently intends to retain all earnings
for use in its business. Accordingly, it is anticipated that no dividends will
be paid in the foreseeable future.
STOCKHOLDER REPORTS
The Company distributes annual reports to its stockholders containing
audited financial statements with a report thereon by independent certified
public accountants after the end of each fiscal year. In addition, the Company
may furnish to its stockholders quarterly reports for the first three quarters
of each fiscal year containing unaudited financial statements and other
information after the end of the fiscal quarter.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Certificate of Incorporation and By-Laws of the Company provide that
the Company shall indemnify to the fullest extent permitted by Delaware law any
person whom it may indemnify thereunder, including directors, officers,
employees and agents of the Company. Such indemnification (other than as
ordered by
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<PAGE> 70
a court) shall be made by the Company only upon a determination that
indemnification is proper in the circumstances because the individual met the
applicable standard of conduct. Advances for such indemnification may be made
pending such determination. Such determination shall be made by a majority
vote of a quorum consisting of disinterested directors, or by independent legal
counsel or by the stockholders. In addition, the Certificate of Incorporation
provides for the elimination, to the extent permitted by Delaware law, of
personal liability of directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty as directors. This provision
does not affect the standard of conduct with which directors must comply, the
availability of equitable relief, and causes of action based upon federal law,
including the federal securities laws.
The Company maintains directors and officers insurance and company
reimbursement policy. The policy insures directors and officers against
unindemnified losses arising from certain wrongful acts in their capacities and
would reimburse the Company for such losses for which the Company has lawfully
indemnified the directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
TRANSFER BANK AND REGISTRAR
The transfer agent for the Common Stock and Warrant Bank for the
Company's Warrants is American Stock Transfer & Trust Company, New York, New
York.
SELLING SECURITYHOLDERS
All securities offered for the account of Selling Securityholders (i) are
issuable to such individuals pursuant to the terms of the Company's 1994
Private Placement, as amended, (ii) were issued as part of or in connection
with the Wico Merger, (iii) were issued or are issuable upon the exercise of
Warrants currently outstanding or to be issued on or immediately after the
Effective Date, or upon conversion of outstanding Series B Preferred Stock and
Series E Preferred Stock, (iv) are issuable to creditors of the Company who
have agreed to accept Creditors Shares in payment of outstanding obligations
owed to such creditors by the Company or (v) were issued pursuant to the 1995
Private Placement of 2,082,147 shares of Common Stock. Upon the sale of the
securities offered by each Selling Securityholder, except as otherwise noted,
he/she will, to the best of the Company's knowledge, have no further beneficial
interest in the Company's securities.
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
Steven M. Johnson 31,250(1) *
Helen G. Johnson
Wood Alexander Breazeale III 10,417(1) *
John A. Nelson 10,417(1) *
Robert W. Vonderhorst 10,417(1) *
Mitchell S. Rothstein 83,332(1) *
Terence D. Jung 10,417(1) *
</TABLE>
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<PAGE> 71
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
Michael T. Merlob 20,833(1) *
Richard S. Gebelein 10,417(1) *
Jan Arnett 20,833(1) *
Scott W. Waters, Jr. 41,666(1) *
Julian Lee Johnson, IRA 41,666(1) *
Oppenheimer & Company, Inc. C/F
Marion J. Creel 10,417(1) *
Alexander Properties Group, Inc.
c/o Andrew Alexander 10,417(1) *
Marvin Numeroff (TE) 83,332(1) *
Nancy Davis 83,332(1) *
Kenneth D. Rickel Trustee 41,666(1) *
Evelyn Rickel Grantor
Retired Income Trust
Kenneth D. Rickel Trustee
Robert Rickel Grantor
Retired Income Trust 41,666(1) *
Oppenheimer & Company, Inc. C/
Helen R. Hernandez 41,666(1) *
Oppenheimer & Company, Inc. C/F
Luis Hernandez 20,833(1) *
William A. Cauldwell 20,833(1) *
Dennis P. Smith 20,833(1) *
Charles H. Vath 10,417(1) *
Theresa Karwacki C/F
Nicole D. Karwacki 10,417(1) *
Theresa Karwacki C/F
Jason P. Karwacki 10,417(1) *
Oppenheimer & Company, Inc. C/F
M. Steven Shannon, IRA 20,833(1) *
James B. Perry and
Judith A. Perry 20,833(1) *
Hugh M. Lokey 10,417(1) *
David Safar C/F
Elena Safar UGMA N.J. 10,417(1) *
Rachelle Safar 10,417(1) *
David and Rachelle Safar (JT) 10,417(1) *
Jeffrey E. Baker 187,497(1) *
Sol Feldman 83,332(1) *
Ken Holmgren and
Alicia Holmgren (TE) 41,666(1) *
Oppenheimer & Company, Inc. C/F
Alice W. Baldwin, IRA 31,250(1) *
Alice W. Baldwin 72,916(1) *
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
Allen Thomas Davis, Jr. 20,833(1) *
E. Hoke Sullivan 20,833(1) *
Del. Charter Guarantee & Trust Co.
TTEE FBO: H. Werner Teichert 20,833(1) *
Oppenheimer & Company, Inc. C/F
Jaya Padmanabhan, MD (IRA) 166,664(1) *
Jaya Padmanabhan 125,000(1) *
Oppenheimer & Company, Inc. C/F
Waters Bros. Enterprises, Inc.
Profit Sharing Plan & Trust 83,332(1) *
Oppenheimer & Company, Inc. C/F
Waters Bros. Ent., Inc.
Pension Plan & Trust 41,666(1) *
Oppenheimer & Company, Inc. C/F
Beauchamp Hardware Supply, Inc.
Profit Sharing Plan & Trust
F/B/O Eustis W. Beauchamp and
Patricia Beauchamp co-TTES and
co-Custodians DTD 2/25/92 20,833(1) *
Oppenheimer & Company, Inc. C/F
K.C. Padmanabhan, IRA 10,417(1) *
O. Gray Sheppard, Jr. 28,833(1) *
Donna Franco 10,417(1) *
Cornelius N. Vetten 10,417(1) *
Lois M. Ritter 41,666(1) *
Winifred L. Libby Trust
Winifred L. Libby TTEE 62,500(1) *
David G. and Maria Hauser (JT) 10,417(1) *
Wayne Malen 83,332(1) *
Jeffrey Feldman 20,833(1) *
Saul and Shelly Pomerantz (TE) 20,833(1) *
Alan Feldman 20,833(1) *
Kenneth Hollins 20,833(1) *
Frederic J. Paschkes 20,833(1) *
Michael Schneider 20,833(1) *
Wayne Batson 10,417(1) *
Wade H. Hicks III 20,833(1) *
Harold A. Wright and
Sue Wright 10,417(1) *
Thomas A. Grillo 20,833(1) *
Robert E. Woodard 20,833(1) *
Trisha Hawthorne 41,666(1) *
Oppenheimer & Company, Inc. C/F
William D. McGaha, IRA 10,417(1) *
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
Robert R. Pavese 20,833(1) *
Robert R. Pavese TTEE u/w/o
Lynn Kolp FBO Chris Kolp u/w/o 10,417(1) *
Wesley Weili Pan and 10,417(1) *
Jian Zhang (JT)
Hector E. Perez 10,417(1) *
Fred K. Ogilvie 10,417(1) *
Caisse De Retraite
Et De Prevoyance
Du Personnel en
Seignant Du Canton
Du Valais 736,000(2) - *
Felice F. Mischel 110,400(2) *
Edward Weltman 36,800(2) *
Arthur Radin 27,600(2) *(13)
Blum Family Trust 27,600(2) *
Richard M. Brooks 9,568(2) *
Howard Levin 5,152(2) *
Ronald Feldman
as Trustee for Julie 22,080(2) *
and Melissa Levin
717 Associates 55,200(2) *
Blue Diamond Trading Ltd. 200,000(3) *
Felice F. Mischel 2,500(4) *
Jordan Barness 2,500(4) *
Bianca Trading, Inc. 104,348 *
Bjorn Trading, Inc. 104,348 *
Ignot Holdings, SA 104,348 *
National Westminster Bank USA 400,000(5) *
Jerry Karlik 250,000(6) 70,000
Stephen R. Feldman(11) 87,000(7) __ 400,000(12)
Arthur Radin(11) 87,000(7) __ *(13)
Elliott Glass(11) 25,000(7) __ *
Steven Sherb(11) 20,000(7) __ *
Paul Ehrlich(11) 16,000(7) __ *
Marsha Ellowitz(11) 10,000(7) __ *
Carl Vogt(11) 5,000(7) -- *
Schneck, Weltman, Hashmall & Mischel LLP 100,000(7)
Potter Anderson & Corroon 21,034(7) -- *
Judson Enterprises Ltd. 2,000(7) __ *
Kronish, Lieb, Wiener *
& Hellman, L.L.P. 279,597(7) __
</TABLE>
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<PAGE> 74
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
Packquisition Corp. 65,000(7) -- *
Mark Gasarch, Esq. 31,000(7) -- *
Lew Lieberbaum & Co., Inc. 108,000(7) ___ *(14)
Gary Petrucci 71,000(10) -- *
Burton Toles 35,500(10) -- *
William Toles 71,000(10) -- *
Tol-O-Matic, Inc. Profit Sharing Trust 71,000(10) -- *
Delos v. Stenson 35,500(10) -- *
Richard J. Stream 50,000(10) -- *
R. Hunt Greene 35,500(10) -- *
David Brink 50,000(10) -- *
James A. Beltz 35,500(10) -- *
Marshall Chernin 17,750(10) -- *
Howard Goldberger 17,750(10) -- *
Robert D. Goldberger 17,750(10) -- *
Scott F. Drill 40,000(10) -- *
Thomas A. Sherman 17,750(10) -- *
R.J. Petrucci 17,750(10) -- *
Todd M. Morgan Separate Property Trust 53,250(10) -- *
Randall L. Johnson 20,000(10) -- *
Peter A. Vogt 35,500(10) -- *
Revis Stephenson, III 17,750(10) -- *
James Vieburg 17,750(10) -- *
Applecrest Family Ltd. Partnership 17,750(10) -- *
Ed Koehler 35,500(10) -- *
G & T Trading Co. 50,000(10) -- *
Larry E. Miller 71,000(10) -- *
Ralph Burnett 71,000(10) -- *
Steven C. Simon 71,000(10) -- *
Robert Paymar 71,000(10) -- *
Thomas A. Sellars 17,750(10) -- *
Gary Petrucci - IRA 24,849(10) -- *
Bryan E. Zins - IRA 17,750(10) -- *
Stephen M. Carnes 28,399(10) -- *
Addison Piper 35,500(10) -- *
Jack Swenson 42,500(10) -- *
James T. Weinert 71,000(10) -- *
Jerry R. Kenline 20,000(10) -- *
Jonathon P. Wilke 71,000(10) -- *
Reed E. Halladay 53,250(10) -- *
Jeffrey Peterson - IRA 17,750(10) -- *
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
Beneficial Ownership
after the Offering
Common if all Shares and
Stockholder Stock Warrants Warrants are Sold
----------- ------ -------- --------------------
<S> <C> <C> <C>
G. Terri McNellis 17,750(10) -- *
Duane R. Jacobs 36,000(10) -- *
Quynh v. Dang 21,299(10) -- *
Ken Norman 24,850(10) -- *
Daniel and Adele Bivona 50,000(10) __ *
Robert Weeman 50,000(10) __ *
Thomas E. Miller 35,500(10) __ *
J.P. Buldac 142,000(10) __ *
Robert I. Karon 17,750(10) -- *
Edward Sokolofski 30,000(10) -- 250,000(15)*
Steffen I. Magnell 142,000(10) -- 250,000(16)*
Lew Lieberbaum & Co., Inc. 106,482(8) 106,482(9) *
</TABLE>
- -----------------------------------------
* Less than one percent
(1) The persons listed in the foregoing table are holders of $2,737,500 of
the Company's outstanding 10% Private Placement Notes due October 1,
1996. The number of shares of Common Stock listed opposite the names of
such persons assumes the issuance to each of them of 1994 Private
Placement Conversion Shares at the rate of 20,833 Private Placement
Conversion Shares issuable upon conversion (at an assumed conversion
price of $1.20 per share) of each $25,000 principal amount of Private
Placement Notes. The $2,737,500 of currently outstanding 10% Private
Placement Notes are convertible at 80% of the closing bid price of the
Company's Common Stock at each date that notice of conversion is given to
the Company by a holder of such notes. The 2,281,250 Private Placement
Conversion Shares referred to in this Prospectus, assumes a closing bid
price of $1.50 and a conversion price of $1.20 per share. At November 8,
1995, such closing bid price was $1.1875 per share, and if all $2,737,500
of Private Placement Notes had been converted by the holders on such
date, the conversion price would have been $0.95 per share and an
aggregate of 2,881,579 Private Placement Conversion Shares would have
been issued to the above persons, pro-rata based on their individual
ownership of 1994 Private Placement Notes. The registration statement of
which this Prospectus is a part includes an indeterminable number of 1994
Private Placement Conversion Shares which are potentially issuable at
various conversion prices to the holders of Private Placement Notes. The
Company has offered to exchange, at any time through December 31, 1995,
all or any portion of such 10% convertible Private Placement Notes for
12% non-convertible Exchange Notes due October 1, 1996, plus additional
cash payments to be made by December 31, 1995. See "Business - 1994
Private Placement."
(2) Represents (i) an aggregate of 736,000 shares of Common Stock issuable
upon conversion of 2,000,000 shares of Series B Preferred Stock, and (ii)
an aggregate of 294,400 shares of Common Stock issuable upon conversion
of 800,000 shares of Series E Preferred Stock, at the rate of 0.368
shares of Common Stock for each full share of Series B Preferred Stock or
Series E Preferred Stock. All shares of Series B Preferred Stock and
Series E Preferred Stock are immediately convertible. The Series E
Preferred Stock is subject to mandatory redemption under certain
conditions. See "Description Securities - Series E Preferred Stock."
(3) Represents shares of Common Stock issued to Blue Diamond, an affiliate of
Felice F. Mischel, upon exercise of the Blue Diamond Warrant.
(4) Represents shares of Common Stock issued pursuant to warrants issued to
Ms. Mischel and Mr. Barness in connection with a $500,000 loan made by
Mr. Barness to the Company in July 1994 and since repaid. The warrants
representing these shares are immediately exercisable.
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<PAGE> 76
(5) Represents shares of Common Stock issuable to National Westminster Bank
USA upon exercise of a warrant held by such bank, which warrant is
immediately exercisable.
(6) Represents shares of Common Stock issuable pursuant to 250,000 Affiliate
Warrants issued to Mr. Karlik.
(7) Represents Creditors Shares issued for indebtedness owed by the Company
to such stockholders.
(8) Represents 53,241 shares of Common Stock at $10.00 per share issuable
upon exercise of the Underwriter's Warrants, and 53,241 additional shares
issuable at $1.00 per share upon exercise of the Class Z Warrants
issuable (at the rate of one Class Z Warrant for each Underwriter's
Warrant) upon the exercise of the Underwriter's Warrant.
(9) Consists of 53,241 Underwriter's Warrants and 53,241 Class Z Warrants
issuable upon exercise of the Underwriter's Warrants. The Class Z
Warrants, if issued, have an exercise price of $1.00 and are exercisable
immediately upon issuance through November 13, 1999.
(10) Represents the 1995 Private Placement Shares purchased in June and July
1995.
(11) Represents Creditors Shares issuable for services rendered by Feldman
Radin & Co., P.C., and distributed by such accounting firm to its
stockholders, consisting of Messrs. Feldman Radin, Glass, Sherb, Ehrlich,
Ellowitz and Vogt. Feldman Radin & Co., P.C. rendered $250,000 of
accounting services to the Company and Wico through September 1995. In
September 1995, such accounting firm assigned its accounts receivable
from the Company to its stockholders, and such persons agreed to exchange
such accrued accounts payable for 125,000 Creditors Shares. Mr. Feldman,
Chairman of the Board and of the Company has advised the Company that he
will not offer or sell any of his Selling Stockholders' Shares or other
shares of Common Stock issuable upon exercise of options and warrants
described in footnote (12) below for a period of at least six months from
the date of this Prospectus.
(12) Represents (i) options to purchase 300,000 shares and (ii) a Directors
Warrant to purchase 100,000 shares, which options and warrants are
exercisable at $0.875 per share. (See "Management - Compensation
Committee Interlocks and Insider Participation.") Does not include
2,918,842 shares of Common Stock owned of record and beneficially by Iris
Feldman, the wife of Stephen R. Feldman. Mr. Feldman disclaims
beneficial ownership in the 2,918,842 shares of Common Stock owned by his
wife Iris Feldman.
(13) Does not include 515,090 shares owned of record and beneficially by
Miriam Katowitz, the wife of Arthur Radin. Mr. Radin disclaims
beneficial ownership in such shares.
(14) Represents Creditors Shares issued to Lew Lieberbaum & Co., Inc. in lieu
of $108,000 of accrued financial consulting fees owed by the Company.
Does not include 106,481 shares of Common Stock issuable upon exercise of
the Underwriter's Warrants and upon exercise of the Class Z Warrants
issuable upon exercise of the Underwriter's Warrants issued to such firm.
See footnote (9) above.
(15) Represents immediately exercisable warrants granted to Mr. Sokolofsky to
purchase 250,000 shares of Common Stock at $2.50 per share through
December 31, 1997 issued in connection with his September 30, 1995
resignation as an officer of the Company. Such warrants may be redeemed
for $50,000 ($.20 per warrant) by the Company at any time after January
1996 and prior to their December 31, 1997 expiration. See "Management -
Executive Compensation."
(16) Represents (i) options expiring March 31, 2004 granted to Mr. Magnell to
purchase 350,000 shares of Common Stock at $1.25 per share, of which
150,000 options are immediately exercisable, and (ii) 100,000 Directors
Warrants issued to Mr. Magnell in June 1995 and exercisable at $1.41 per
share.
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<PAGE> 77
PLAN OF DISTRIBUTION
By the Company
A maximum of 3,276,482 shares of Common Stock are being offered by the
Company for its own account.
The Company intends to commence the offer and sale of the 2,975,000
Company Shares immediately upon the Effective Date of this Prospectus. Such
Offering of Company Shares will terminate the earlier to occur of (i) the sale
of all 2,975,000 Company Shares, or (ii) January 31, 1996 (the "Termination
Date"). The Company intends to sell all or any portion of the Company Shares
at a price of $1.00 per share. On November 8, 1995, the closing sale price of
the Company's Common Stock, as traded on NASDAQ, was $1.1875 per share. The
Company may engage registered broker/dealers to solicit and/or effect sales on
the Company's behalf, and pay such broker/dealers commissions not to exceed 10%
of the gross sales prices of the Company Shares. The Company does not
presently have any agreements with any such broker/dealers with respect to the
offer or sale of Company Shares, although the Company may hereafter do so, and
in connection therewith, may agree to indemnify such broker/dealers against
certain liabilities, including liabilities under the Securities Act.
No director, officer or affiliate of the Company is affiliated with any
broker-dealer or shall receive any commissions or other compensation in
connection with the sale of any of the Company Shares.
If all 2,975,000 Company Shares are sold, the Company will receive gross
proceeds aggregating $2,975,000, less selling commissions payable to registered
broker/dealers aggregating not more than $297,500 (10% of the gross proceeds of
the offering of Company Shares) and approximately $200,000 in other expenses of
this Offering. On the Termination Date, the Company will retain the net
proceeds (a maximum of $2,477,500 assuming all 2,975,000 Company Shares are
sold and 10% selling commissions are paid in connection therewith) from the
sale of the Company Shares sold as of the Termination Date, irrespective of the
aggregate number of Company Shares then sold.
The distribution of up to 301,482 of the Warrant Shares to holders of the
195,000 Public Warrants and the holders of the Underwriter's Warrants, as well
as the distribution of up to 53,241 Class Z Warrants issuable upon exercise of
the Underwriter's Warrants, will constitute primary distributions of these
securities by the Company.
Selling Securityholders
Each holder of any: (i) Class B Warrants, (ii) Underwriter's Warrants,
(iii) Class Z Warrants, (iv) Selling Stockholders' Shares, (v) 1994 Private
Placement Conversion Shares or Preferred Stock Conversion Shares issuable upon
conversion of the Private Placement Notes, Series B Preferred Stock or Series E
Preferred Stock, or (vi) Warrant Shares issuable upon exercise of the Warrants
(individually a "Selling Securityholder" and collectively, the "Selling
Securityholders") is free to offer and sell his or her shares of Common Stock
or Warrants at such times, in such manner and at such prices as he or she may
determine. Such shares may be offered by Selling Securityholders in one or
more types of transactions, which may or may not involve brokers, dealers or
cash transactions. The Selling Securityholders may also use Rule 144 under the
Securities of 1933 (the "Securities Act"), to sell such securities, if they
meet the criteria and conform to the requirements of such Rule. There is no
underwriter or coordinating broker acting in connection with the proposed sale
of shares or warrants by the Selling Securityholders. It is unlikely that
Class B Warrants, Underwriter's Warrants or Class Z Warrants will be exercised
or that the shares of Common Stock underlying such Warrants will become subject
to a distribution while the exercise prices for such Warrants exceed the market
value of the Company's common stock ($1.1875 on November 8, 1995). However,
those shares of Common Stock which are already outstanding and being offered
hereunder by the Selling Securityholders may be expected to be distributed
currently, although there can be no assurance as to whether, when or to what
extent such distribution may occur.
The Company has agreed to register the securities owned by the Selling
Securityholders pursuant to the Registration Statement of which this Prospectus
is a part and to pay all expenses in connection therewith, other than brokerage
commissions and fees and expenses of counsel to the Selling Securityholders in
connection with any subsequent sales of their securities.
Under the Securities Act, each Selling Securityholder is obligated to
deliver a current Prospectus on each occasion that such Selling Securityholder
elects to offer or sell any of his or her securities; which Prospectus must
indicate the name of the beneficial owner(s) of the securities and the
aggregate amount of securities being offered. Accordingly, only the Selling
Securityholders designated above may effect offers and sales of securities
pursuant to this Prospectus.
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<PAGE> 78
In accordance with its undertakings pursuant to Rule 415 under the
Securities Act, the Company has agreed (i) to file, during any period in which
offers or sales of Selling Securityholders' securities are being made, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part, (ii) to make available a Prospectus to each Selling Securityholder
upon request, (iii) to amend such Prospectus from time to time after the date
hereof through post-effective amendments to such Registration Statement to
reflect any facts or events which individually or in the aggregate, represent a
fundamental change in the information set forth in the most recent Prospectus,
and (iv) to remove from registration by means of a post-effective amendment of
the Registration Statement any of the securities which remain unsold at the
termination of the offering.
The Company and each of the Selling Securityholders have entered into an
agreement pursuant to which the Company has agreed to indemnify such Selling
Securityholders and each person who controls such Selling Securityholders,
generally against any and all losses, claims, damages, liabilities and expenses
arising out of or based on a breach of covenant, agreement, representation or
warranty made by the Company in such agreement or any untrue statement of a
material fact in the Registration Statement, including this Prospectus, or any
amendment or supplement thereto. Each of the Selling Securityholders has
agreed to indemnify the Company, the officers and directors and each person who
controls the Company, but only with respect to information relating to such
Selling Securityholder expressly provided for use in the Registration
Statement, Prospectus, or any amendment or supplement thereto, including but
not limited to information contained in this section entitled "Selling
Securityholders." In the event that any other securityholder subsequently
elects to become a "Selling Securityholder," it is anticipated that the Company
will enter into a similar indemnity agreement with such securityholder.
The Selling Securityholders named above have advised the Company that
sales of their securities may be effected from time to time in transactions
(which may include block transactions), in the over-the-counter market, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices that may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. The Selling Securityholders may effect such transactions
by selling the securities directly to purchasers or through broker-dealers that
act as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the securities for whom such
broker-dealers may act as agents or to whom they sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The Selling Securityholders and any broker-dealers that act in connection
with the sale of securities as principals may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act and any commissions
received by them and any profit on the resale of securities as principals might
be deemed to be underwriting discounts and commissions under the Securities
Act. The Selling Securityholders may elect to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the
securities against certain liabilities, including liabilities under the
Securities Act.
The Company has not engaged the services of any broker-dealer either to
purchase securities from Selling Securityholders or to act as agent for any of
the Selling Securityholders in connection with any distribution of such
securities.
In order to comply with the securities laws of certain jurisdictions, the
securities may not be offered or resold by any Selling Securityholder unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and the requirements
of such exemption have been satisfied. The Company does not currently intend
to register or qualify the resale of the securities in any such jurisdictions.
However, an exemption is generally available for sales to registered
broker-dealers and certain institutional buyers. Other exemptions under
applicable state securities laws may also be available.
The Company will not receive any of the proceeds from sales of any of the
securities by any of the Selling Securityholders.
-70-
<PAGE> 79
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Price Waterhouse LLP, the Company's former independent accountants, was
dismissed, effective November 29, 1994, in an action approved by the Board of
Directors of the Company. Price Waterhouse LLP has previously issued audit
reports to the Company for the years ended May 31, 1994 and May 31, 1993, which
reports did not contain any adverse opinion or disclaimer of opinion, or were
modified as to uncertainty, audit scope, or accounting principles. There were
no disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of the former accountants, would have caused them to make
reference to the subject matter of the disagreement in its reports.
On November 29, 1994, the Company engaged Grant Thornton LLP as its
independent accountants for the year ended September 30, 1994. Grant Thornton
LLP had previously served as the independent accountants for Wico Holding Corp.
and its wholly-owned subsidiaries.
In October 1995, the Board of Directors engaged BDO Seidman, LLP as its
independent accountants for the year ended September 30, 1995. The audit
report for the year ended September 30, 1994 issued by Grant Thorton LLP did
not contain any adverse opinion or disclaimer of opinion, or were modified as
to uncertainty, audit scope, or accounting principles. There were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of Grant Thorton LLP, would have caused them to make reference
to the subject matter of the disagreement in its reports.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Solomon,
Fornari, Weiss & Moskowitz, P.C., 650 Fifth Avenue, New York, New York 10019.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement of which this Prospectus is a part have
been audited by Grant Thornton LLP, independent certified public accountants to
the extent indicated in their reports with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports. Said firm's opinion includes an explanatory
paragraph.
The financial statements of Langworthy Casino Supply included in this
Prospectus have been audited by Allen G. Roth, independent certified public
accountant, to the extent and for the period set forth in his report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of said individual as an expert in auditing and accounting.
-71-
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
September 30, 1994, 1993 and 1992
Independent Auditor's Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Deficit F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-9
June 30, 1995 (Unaudited)
Consolidated Balance Sheet F-25
Consolidated Statements of Operations F-27
Consolidated Statements of Changes in Stockholders' Deficit F-28
Consolidated Statements of Cash Flows F-29
Notes to Financial Statements F-31
LANGWORTHY CASINO SUPPLY
September 30, 1993
Independent Auditor's Report F-35
Balance Sheet F-36
Statement of Income F-37
Statement of Divisional Equity F-38
Statement of Cash Flows F-39
Notes to Financial Statements F-40
September 30, 1992
Independent Auditor's Report F-43
Balance Sheet F-44
Statement of Income F-45
Statement of Divisional Equity F-46
Statement of Cash Flows F-47
Notes to Financial Statements F-48
Pro-Forma Consolidated Statement of Operations F-50
Notes to Pro-Forma Consolidated Statement of Operations F-51
</TABLE>
F-1
<PAGE> 81
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Stockholders
CONQUEST INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of Conquest
Industries, Inc. (formerly Wico Holding Corp.) as of September 30, 1994 and
1993, and the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for each of the three years in the period
ended September 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Conquest
Industries, Inc. as of September 30, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1994, in conformity with generally accepted accounting principles.
As described in Note L (1), the Company has recorded an estimate of the value
upon the disposition of its aviation operations at $4,250,000. It is
reasonably possible that the ultimate amount, if any, obtained upon disposition
of the aviation operations could be lower than the carrying value.
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THORNTON LLP
New York, New York
December 9, 1994, except as to Note L (1),
which is as of January 20, 1995
F - 2
<PAGE> 82
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,007,880 $ 791,037
Trade accounts receivable, less allowance for
doubtful accounts of $179,337 and $156,647 at
September 30, 1994 and 1993, respectively 5,694,272 5,234,424
Other receivables, principally income tax refunds 323,843 --
Inventories 8,495,479 8,946,352
Prepaid expenses and other current assets 235,344 126,818
----------- -----------
TOTAL CURRENT ASSETS 15,756,818 15,098,631
MACHINERY AND EQUIPMENT - NET 1,071,301 1,158,350
DEFERRED TAX ASSET 753,000 --
INTANGIBLE AND OTHER ASSETS - NET 5,979,581 3,655,189
NET ASSETS OF DISCONTINUED OPERATIONS 4,250,000 --
----------- -----------
$27,810,700 $19,912,170
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F - 3
<PAGE> 83
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------------
1994 1993
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 4,634,545 $ 3,185,596
Accrued expenses 3,331,344 1,692,911
Current portion of long-term debt 1,500,000 1,333,334
Income taxes payable 25,018 275,000
------------ ------------
TOTAL CURRENT LIABILITIES 9,490,907 6,486,841
LONG-TERM DEBT 16,705,849 23,850,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIENCY):
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 -
Series B, convertible redeemable preferred stock, no par
value; 2,800,000 and 4,000,000 shares issued and outstanding
in 1994 and 1993, respectively 2,800,000 3,424,983
Common stock, $.01 par value; 25,000,000 shares authorized;
9,158,677 and 7,180,907 shares issued and outstanding in 1994
and 1993, respectively 91,587 71,809
Additional paid-in capital 12,748,815 428,191
Treasury stock warrant - (360,000)
Accumulated deficit (13,945,520) (13,863,145)
Foreign currency translation adjustment (81,693) (126,509)
------------ ------------
1,613,944 (10,424,671)
------------ ------------
$ 27,810,700 $ 19,912,170
============ ============
</TABLE>
See notes to financial statements.
F - 4
<PAGE> 84
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $41,991,512 $38,782,856 $38,653,304
COST OF SALES 26,078,087 23,674,578 24,077,535
----------- ----------- -----------
GROSS PROFIT 15,913,425 15,108,278 14,575,769
----------- ----------- -----------
OPERATING EXPENSES:
Selling, distribution and administrative expenses 12,592,710 11,620,056 10,895,368
Moving costs - - 148,563
Amortization expense 375,231 689,207 977,835
----------- ----------- -----------
12,967,941 12,309,263 12,021,766
----------- ----------- -----------
OPERATING INCOME 2,945,484 2,799,015 2,554,003
----------- ----------- -----------
OTHER EXPENSES (INCOME):
Interest expense 1,731,377 2,062,605 2,683,917
Amortization of debt discount 282,500 - -
Write off of registration costs 175,394 - -
Other 266,387 8,351 608,240
----------- ----------- -----------
2,455,658 2,070,956 3,292,157
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 489,826 728,059 (738,154)
PROVISION FOR INCOME TAXES 206,201 285,000 2,504
----------- ----------- -----------
NET INCOME (LOSS) 283,625 443,059 (740,658)
PRO-FORMA INCOME TAXES (BENEFIT) - (65,000) (225,000)
----------- ----------- -----------
PRO-FORMA NET INCOME (LOSS) $ 283,625 $ 508,059 $ (515,658)
=========== =========== ===========
PRO-FORMA EARNINGS (LOSS) PER SHARE $ 0.00 $ 0.06 $ (0.07)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 7,675,000 7,181,000 7,181,000
=========== =========== ===========
</TABLE>
See notes to financial statements.
F - 5
<PAGE> 85
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Series A Preferred Stock Series B
------------------------ ------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1991 - $ - - $ -
Translation of foreign currency - - - -
Net loss - - - -
---------- ------------ ---------- ----------
BALANCE - SEPTEMBER 30, 1992 - -
Issuance of preferred stock costs of $575,017 - - 2,800,000 2,800,000
Repurchase of stock warrants - - - -
Translation of foreign currency - - - -
Net income - - - -
Preferred stock dividends - - - -
---------- ------------ ---------- ----------
BALANCE - SEPTEMBER 30, 1993 - - 2,800,000 2,800,000
Acquisition of Conquest Airlines Corp., less costs of $468,000 7,550 755
Translation of foreign currency
Retirement of treasury stock warrant
Preferred stock dividends
Net income
Debt discounts recorded in connection with borrowings
Warrants and shares issued in connection with debt offerings
---------- ------------ ---------- ----------
BALANCE - SEPTEMBER 30, 1994 7,550 $ 755 2,800,000 $2,800,000
========== ============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Paid-in Treasury
-----------------------
Shares Amount Capital Stock
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1991 7,180,908 $ 71,809 428,191 $
Translation of foreign currency - -
Net loss - -
----------- --------- ---------- ---------
BALANCE - SEPTEMBER 30, 1992 7,180,908 71,809 428,191
Issuance of preferred stock less costs of $575,017 - - 624,983
Repurchase of stock warrants - - (360,000)
Translation of foreign currency - -
Net income - -
Preferred stock dividends - -
----------- --------- ---------- ---------
BALANCE - SEPTEMBER 30, 1993 7,180,908 71,809 1,053,174 (360,000)
Acquisition of Conquest Airlines Corp., less costs of $468,000 1,977,769 19,778 8,618,141
Translation of foreign currency
Retirement of treasury stock warrant (360,000) 360,000
Preferred stock dividends
Net income
Debt discounts recorded in connection with borrowings 3,400,000
Warrants and shares issued in connection with debt offerings 37,500
----------- --------- ---------- ---------
BALANCE - SEPTEMBER 30, 1994 9,158,677 $ 91,587 12,748,815 $ -
=========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Foreign
Retained Currency
Earnings Translation
(Deficit) Adjustment Totals
------------ ----------- ------------
<S> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1991 $(13,415,774) $ - $(12,915,774)
Translation of foreign currency - (7,509) (7,509)
Net loss (740,658) - (740,658)
------------ --------- ------------
BALANCE - SEPTEMBER 30, 1992 (14,156,432) (7,509) (13,663,941)
Issuance of preferred stock less costs of $575,017 - - 3,424,983
Repurchase of stock warrants - - (360,000)
Translation of foreign currency - (119,000) (119,000)
Net income 443,059 - 443,059
Preferred stock dividends (149,772) - (149,772)
------------ --------- ------------
BALANCE - SEPTEMBER 30, 1993 (13,863,145) (126,509) (10,424,671)
Acquisition of Conquest Airlines Corp., less costs of $468,000 8,638,674
Translation of foreign currency 44,816 44,816
Retirement of treasury stock warrant -
Preferred stock dividends (366,000) (366,000)
Net income 283,625 283,625
Debt discounts recorded in connection with borrowings 3,400,000
Warrants and shares issued in connection with debt offerings 37,500
------------ --------- ------------
BALANCE - SEPTEMBER 30, 1994 $(13,945,520) $ (81,693) $ 1,613,944
============ ========= ============
</TABLE>
All share information has been retroactively adjusted for the WICO Merger
and the reverse 1 For 10 split of common shares in November, 1994.
See notes to financial statements.
F - 6
<PAGE> 86
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 283,625 $ 443,059 $ (740,658)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 944,132 1,159,126 2,255,226
Provision for bad debts 179,337 972 67,047
Loss (gain) on disposal of fixed assets - 217 (38,755)
Write off of deferred registration costs 175,394
Write off of deferred loan costs 239,987
Warrants and shares issued in connection with
debt offering 37,500
Deferred income taxes 89,815 - -
Changes in assets and liabilities:
Decrease (increase) in trade and other accounts receivable (963,028) (224,648) (403,843)
Decrease (increase) in inventories 450,873 959,630 (382,401)
Decrease (increase) in prepaid expenses and other
current assets (108,526) (61,484) 73,418
Increase in intangibles and other assets (680,212) - -
Increase (decrease) in accounts payable 1,448,949 (416,720) 591,626
Increase (decrease) in income taxes payable (249,982) 275,000 -
Increase (decrease) in accrued expenses (86,567) (303,425) (92,627)
----------- ----------- -----------
TOTAL ADJUSTMENTS 1,477,672 1,388,668 2,069,691
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,761,297 1,831,727 1,329,033
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash of businesses acquired, less acquisition costs 4,965,584 - -
Capital expenditures (286,850) (197,923) (144,760)
Proceeds on sale of assets - 50,002 83,151
Cash used for business acquisitions (1,939,019) - -
----------- ----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 2,739,715 (147,921) (61,609)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term financing (5,272,485) (3,266,667) (3,474,000)
Preferred stock dividends (366,000) (149,772) -
Proceeds from issuance of promissory notes 1,309,500 - -
Proceeds from preferred stock offering - 2,424,983 -
Proceeds from long-term financing - - 950,000
Proceeds from stockholder and other loans - - 1,000,000
Acquisition of treasury stock - warrants - (360,000) -
Deferred financing costs - (153,368) (260,150)
Effect of foreign currency exchange rate changes 44,816 (14,490) (424)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (4,284,169) (1,519,314) (1,784,574)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 216,843 164,492 (517,150)
CASH AT BEGINNING OF YEAR 791,037 626,545 1,143,695
----------- ----------- -----------
CASH AT END OF YEAR $ 1,007,880 $ 791,037 626,545
=========== =========== ===========
</TABLE>
See notes to financial statements.
F - 7
<PAGE> 87
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY WICO HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,576,700 $2,091,000 $2,414,000
========== ========== ==========
Income taxes $ 331,000 $ - $ 3,000
========== ========== ==========
Noncash investing and financing activities:
Conversion of stockholder and other loans to preferred stock $ - $1,000,000
========== ==========
Issuance of warrants in connection with debt $3,300,000 $ -
========== ==========
See Note L for noncash investing and financing activities regarding
acquisitions
</TABLE>
See notes to financial statements.
F - 8
<PAGE> 88
Conquest Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1994 and 1993
NOTE A - ORGANIZATION AND SIGNIFICANT EVENTS
Conquest Industries, Inc. ("Conquest") was, until June 20, 1994,
primarily engaged in the business of operating a regional airline
providing regularly schedule turbo-prop service to cities within the
State of Texas. On June 20, 1994, CAC Acquisition, Inc. ("CAC"), a
Delaware corporation and newly formed wholly owned subsidiary of
Conquest merged with Wico Holding Corp. ("Wico"), a privately-held
Delaware corporation, pursuant to a Restated Agreement and Plan of
Merger dated June 8, 1994 (the "Wico Merger"). Upon consummation of the
merger, Wico became a wholly owned subsidiary of Conquest and the
separate existence of CAC ceased. In addition, simultaneous with the
merger, Wico Gaming Supply Corp. ("Wico Gaming"), a wholly-owned
subsidiary of Wico, acquired certain assets and liabilities of
divisions of Langworthy Casino Supply, Inc. ("Langworthy"). The
operations of Conquest and Wico and subsidiaries are collectively
referred to herein as the "Company". In August 1994, the Company
announced its intention to sell its aviation operations.
The financial statements give effect to an increase in authorized
shares approved in July 1994 and the 1 for 10 reverse stock split of
its common stock which became effective on November 18, 1994. On that
date, each ten shares of the Company's issued and outstanding shares of
common stock automatically converted into one share of common stock.
Also, all securities convertible or exercisable for common stock were
similarly effected.
Wico, through its wholly-owned operating subsidiaries, is a distributor
of replacement parts and supplies to game operators and distributors of
billiard tables, coin-operated vending machines, arcade games and other
gaming related accessories. Wico Gaming is a manufacturer and
distributor of casino supplies, including layouts, dice, casino
furniture, custom built casino tables, playing chips, playing cards,
casino equipment and roulette and other wheel games.
Giving effect to the Wico Merger, the former shareholders of Wico owned
approximately
F-9
<PAGE> 89
80% of Conquest's common stock. Stockholders of Conquest who
immediately prior to the effectiveness of the Wico Merger held all of
its capital stock, now hold approximately 20% of its capital stock
after the Wico Merger .
For accounting purposes, the merger has been treated as a
recapitalization and reverse acquisition with Wico as the acquirer. In
connection with the acquisition, Wico has valued the assets and
liabilities received in the transaction at their fair values. Such
assets and liabilities included (in addition to cash acquired) the
estimated value to be received upon the disposition of the aviation
operations, liabilities assumed, and the related deferred tax effects.
SALE OF CONVERTIBLE PREFERRED STOCK BY WICO
On May 21, 1993, Wico issued $4 million of 10% cumulative convertible
Series A preferred stock (Wico Series A preferred). The proceeds
involved the receipt of $2.4 million of net cash and the conversion of
$1 million of subordinated debt. The proceeds were used as part of a
prepayment of $2.5 million of outstanding term indebtedness and for the
repurchase from its bank lender of an outstanding warrant to acquire
17-1/2% of the common stock for $360,000. If the preferred shares were
converted into common shares, the holders of the preferred stock would
have owned approximately 20% of the outstanding common stock of Wico.
The preferred stock was also entitled to vote on all matters at
stockholders' meetings with the voting rights determined as if such
shares had been converted into common stock.
In connection with the issuance of $4 million of the Wico Series A
preferred, $2 million of these shares were acquired by Wico common
stockholders at the same net price as paid by the unaffiliated
purchasers (a foreign pension plan), $1.8 million.
The purchase price for the shares acquired by the Wico common
stockholders was paid in cash and the retirement of $1 million of
subordinated stockholder loans to Wico. Approximately 1,850,000 of the
shares of preferred stock owned by such holders were sold at the full
face amount of such shares from September 1993 to January 1994 to eight
persons, none of whom was an officer, director or affiliate of Wico.
In January 1994, the eight persons who acquired Wico Series A preferred
as described above, entered into agreements with Wico to exchange their
shares of Wico Series A preferred into Wico Series AA preferred stock
on a share-for-share basis. This exchange was completed in March 1994.
The Wico Series AA preferred stock did not contain voting rights or any
liquidation preferences and was convertible into approximately 13% of
the common stock.
THE CONQUEST/WICO MERGER ("WICO MERGER")
F-10
<PAGE> 90
As a result of the June 1994 Wico merger, all stockholders of Wico
exchanged their Wico securities for securities of Conquest. More
specifically, upon consummation of the Wico Merger, (i) the holders of
Wico common stock acquired ownership of 6,879,000 shares of Conquest
common stock in exchange for 2,944,000 shares of Wico common stock;
(ii) certain holders of Wico Series A and Series AA preferred stock
acquired ownership of 2,800,000 shares of Conquest Series B voting
preferred stock; and (iii) certain holders of 1,200,000 shares of Wico
Series AA preferred stock converted their shares and acquired record
ownership of 313,044 shares of Conquest common stock. Each share of
Conquest Series B preferred stock may be converted into .368 shares of
Conquest common stock. In addition, all of the options to purchase Wico
common stock granted under Wico's 1993 Stock Option Plan were converted
into options to acquire 536,000 shares of Conquest common stock.
Upon the Wico Merger, Conquest also agreed, subject to the
effectiveness of a Registration Statement to issue 1,978,000 warrants
to Conquest stockholders of record on the close of business on June 20,
1994 (not including any persons or entities receiving shares or rights
to shares of Conquest common stock in connection with the Merger),
exercisable until June 20, 1999, at a price of $11.88 per share (the
"Class B Warrants"). Conquest also issued two warrants to purchase
400,000 (the "Bank Warrant") and 200,000 shares (the "Blue Diamond
Warrant") of Conquest common stock, respectively. The Class B Warrants,
the Bank Warrant and the Blue Diamond Warrant are all subject to
certain registration and anti-dilution rights. The Blue Diamond Warrant
was issued to a partner in the firm which serves as general counsel to
the Company as a finders fee for the Wico merger.
Giving effect to the Wico Merger, and the conversion of all shares of
Conquest Series B preferred stock into Conquest common stock, the
former stockholders of Wico will own approximately 80% of Conquest's
outstanding common stock. The stockholders of Conquest who immediately
prior to the effectiveness of the Wico Merger held all of its capital
stock will continue to hold approximately 20% of its capital stock
giving effect to the Wico Merger and the aforesaid issuance and
conversion.
Also in June 1994, in connection with the Wico Merger, the Company,
through its wholly-owned subsidiary Wico Gaming, acquired assets and
assumed certain liabilities, consisting primarily of trade payables,
comprising certain divisions of Langworthy, a 56-year old Las Vegas,
Nevada manufacturer and distributor of casino supplies for a purchase
price of $1,750,000.
A summary of the assets acquired and liabilities assumed in connection
with the above acquisitions is included in Note L.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-11
<PAGE> 91
1. Basis of Consolidation The financial statements include the accounts
of Conquest and its wholly-owned subsidiaries, Wico, Suncom-UK,
Limited and Wico Gaming. All material intercompany accounts and
transactions have been eliminated.
2. Revenue Recognition - Revenue is recognized at the time merchandise
is shipped to customers.
3. Inventories - The inventories are valued at the lower of cost
(weighted average method) or market.
4. Machinery and Equipment - Machinery and equipment acquired as a
result of acquisitions are stated at fair value at the date of
acquisition, after considering their age and condition, in
accordance with the guidelines set forth in Accounting Principles
Board Opinion No. 16 (APB 16); subsequent additions are recorded at
cost. Depreciation for machinery and equipment is calculated on a
straight-line basis over ten years.
5. Intangible Assets - Identifiable intangible assets resulting from
various acquisitions in prior years were valued based upon
independent appraisals in accordance with APB 16. Other intangible
assets are valued at cost. Intangible assets are amortized on a
straight-line basis over their estimated remaining economic lives.
The Company reviews the recoverability of its intangible assets
(primarily goodwill) upon the occurrence of a significant adverse
event or if an operating division has not been profitable and
expects that trend to continue. Such assessments are performed at
each balance sheet date. Recoverabilty will be evaluated using
undiscounted cash flows.
Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets" ("SFAS 121") is effective for
fiscal years beginning after December 15, 1995. The Company
believes that the adoption of SFAS 121 will not have a material
effect on its financial statements.
6. Warranty Costs - The Company has certain sales agreements that
provide for free warranty service for periods ranging from one to
five years (principally in the consumer division). For the years
ended September 30, 1994, 1993 and 1992, a total of $167,000,
$33,000, and $26,000, respectively, has been provided to cover the
costs of providing such service. These costs are included in
selling, distribution and administrative expenses.
7. Co-Op Advertising - The Company grants certain of its customers an
advertising allowance based upon qualified sales. The Company's
policy is to accrue a liability in an amount equal to its estimate
of claims at the time sales are made.
8. Foreign Currency Translation Adjustment - All balance sheet accounts
of foreign operations are translated into U.S. dollars at the
year-end rate of exchange, and statement of operations items are
translated at the weighted average exchange rates for the year. The
resulting translation adjustments are made directly to a separate
component of stockholders' equity.
Foreign currency transaction gains (losses) were $(44,000),
$(38,000) and $42,000 for the
F-12
<PAGE> 92
years ended September 30, 1994, 1993 and 1992, respectively.
9. Income Taxes - Effective January 1, 1993, provisions for income
taxes include deferred taxes resulting from temporary differences in
income for financial reporting and tax purposes, using the liability
method under Statement of Financial Accounting Standards No. 109.
Such temporary differences result primarily from differences in the
carrying value of assets and liabilities.
Prior to January 1, 1993, the Company was treated as a Subchapter S.
Corporation.
10. Earnings Per Share - Earnings per share is based upon the average
shares outstanding increased by the effect, if dilutive, of common
stock equivalents (options and warrants) from date of issue using
the 20% rule. The outstanding preferred shares are not common stock
equivalents. Net earnings are adjusted for dividends on outstanding
preferred shares.
For all periods presented, the effect of potentially dilutive
securities were excluded because their effect would be
anti-dilutive.
11. Reclassifications - Certain amounts in prior years have been
reclassified to conform with classifications used in 1994.
NOTE C - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Manufacturing inventories
Materials and work-in-process $ 1,619,694 $ 1,825,241
Finished products 1,520,439 1,694,960
----------- -----------
3,140,133 3,520,201
Purchased merchandise for resale 5,355,346 5,426,151
----------- -----------
$ 8,495,479 $ 8,946,352
=========== ===========
</TABLE>
F-13
<PAGE> 93
NOTE D- MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Machinery and tooling $3,281,523 $3,080,956
Furniture, fixtures and equipment 704,393 648,898
Leasehold improvements 982,777 950,145
---------- ----------
4,968,693 4,679,999
Less accumulated depreciation and amortization 3,897,392 3,521,649
---------- ----------
$1,071,301 $1,158,350
========== ==========
</TABLE>
All machinery and equipment is pledged as collateral under certain loan
agreements, as described in Note F.
NOTE E - INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
Life 1994 1993
----- ---------- ----------
<S> <C> <C> <C>
Goodwill 10-25 $6,116,102 $4,041,529
Customer lists 7-10 - 160,000
Deferred financing costs (Note G) 2-5 1,012,433 360,999
Patents 10-13 710,000 710,000
Work force in place 6-10 - 36,500
Computer software 8 264,000 264,000
Other assets - principally gaming licenses 3-10 181,959 17,942
---------- ----------
8,284,494 5,590,970
Less: accumulated amortization 2,304,913 1,935,781
---------- ----------
$5,979,581 $3,655,189
========== ==========
</TABLE>
F-14
<PAGE> 94
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1994 and
1993:
<TABLE>
<CAPTION>
<S> <C> <C>
Term and Revolving Credit Loan, net of
deferred debt discount of $2,905,000 in
1994 (a) $ 16,905,849 $ 25,183,333
Convertible notes payable, interest at
10% due in September, 1996, net of
deferred debt discount of $200,000 (b) 1,300,000 -
------------- -------------
Total long-term debt 18,205,849 25,183,334
Less: current portion (1,500,000) (1,333,334)
------------- -------------
Long-term debt $ 16,705,849 $ 23,850,000
============= =============
</TABLE>
(a) Conquest's principal borrowing has been its combined Term Loan and
Revolving Credit Loan pursuant to the Lending Agreement between
Wico and its bank lender. 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
items (as defined in the Lending Agreement) of $3,100,000, current
ration of 1.75:1 and working capital of $6,300,000. The Term Loan,
maturing in October 1998, provides for monthly installment payment
of principal, and had a principal balance of approximately
$6,900,000 at September 30, 1994. The Revolving Credit Loan
provides for a maximum credit of $13,000,000 inclusive of letters
of credit that may be established at the request of Wico and at
the present time is in full use. Repayment of the loan is
collateralized by a first lien on a substantial portion of Wico
assets, limited personal guarantees, each in the amount of
$1,000,000 from Stephen R. Feldman, Chairman of the Board and
Chief Executive Officer of the Company, and Bentley J. Blum, a
principal stockholder and director of the Company, and stock
pledges in favor of the institutional lender covering all of the
outstanding shares of Conquest common stock owned by certain
stockholders. Repayment of the loan is also collateralized by all
of the outstanding shares of Wico Gaming Supply Corp.
The interest rate payable at September 30, 1994 on the loans are
at the option of Wico, at either the prime rate plus 1-1/2% or
LIBOR plus 3-1/4%.
F-15
<PAGE> 95
In connection with obtaining the lender's consent to the Wico
Merger and Langworthy Acquisition, the Company agreed to a
prepayment on a portion of the loans and to exchange the
warrant to purchase Wico shares for a warrant to acquire
400,000 shares of Conquest stock. The Company prepaid
$4,000,000 at the time of the Wico Merger and agreed to either
(a) prepay an additional $1,000,000 and to purchase the
lender's warrant for $1,000,000 by December 31, 1994; or (b)
an increase in the rate of interest payable under the Lending
Agreement by 1.5% and fee of $375,000. The Company chose the
second option and accordingly, an accrual of the $375,000 was
provided at September 30, 1994, of which $200,000 was paid
December 15, 1994 and the balance is due March 15, 1995.
The Lending Agreement presently provides for a mandatory
repayment of 75% of Wico's excess cash flow, as defined in the
Agreement. The Lending Agreement contains other restrictions
requiring the consent of the lender in connection with making
any acquisition, payment of dividends, issuance of additional
securities or making of annual capital expenditures in excess
of $500,000.
The aggregate amount of borrowings under the Term Note and
Revolving Credit is $19.9 million. At September 30, 1994, the
borrowings are to be repaid as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $1.5 million
1996 1.8 million
1997 2.0 million
1998 14.6 million
</TABLE>
(b) In November 1994, Conquest completed the final stage of its
private placement of $2,737,500 of notes (of which $1,500,000
had been closed by September 30, 1994). Each 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 options to purchase 500 shares of common stock per
unit converted at an exercise price of $11.88 per share until
June 1999.
Conquest has allocated a portion of the proceeds received from its
lenders for certain rights and concessions granted to them. The amount
of such rights and concessions has been based upon the estimated fair
value of the Company's securities and discounted for blockage and other
factors. The amount of discount attributable to the bank lender was
$3,200,000 and to the private placement lenders $350,000 (of which
$200,000 has been
F-16
<PAGE> 96
recognized at September 30, 1994). The fee paid in connection with
this transaction has been changed to to deferred costs and will be
amortized over the remainding term of the loan.
The debt discount will be amortized to expense over the lives of the
respective debt.
Included in 1992 and 1994 other expenses is a charge of $603,000 and
$240,000, respectively, related to the July 1992 and June 1994
renegotiations of the bank lending agreement. The charges result from
the accelerated amortization of previously deferred financing costs and
other costs associated with obtaining financing.
NOTE G - STOCKHOLDER TRANSACTIONS AND OTHER LOANS
During fiscal 1992, certain stockholders and an executive of Wico: (i)
made subordinated loans to the Company in an aggregate principal amount
of $1,000,000 with interest at prime plus 1-1/2% with a cap of 10% and
maturing on July 31, 1994 and (ii) guaranteed $2,000,000 of the loans
made under the loan agreement. Total interest expense relating to these
loans for the years ended September 30, 1993 and 1992 amounted to
approximately $24,000 and $16,000, respectively. During fiscal 1993,
the loans were used as part of the purchase price of the Wico Series A
preferred.
The Company has entered into an agreement with its Chairman of the
Board that he shall receive compensation of $150,000 per annum if
certain earnings levels are attained. For the three years ended
September 30, 1994, the earnings levels were not attained.
NOTE H - INCOME TAXES
The Company elected, with the consent of its stockholders, on October
1, 1988, to be taxed as a Subchapter S corporation under the provisions
of the Internal Revenue Code. The stockholders were required to report
the Company's taxable income or loss in their personal income tax
returns. Accordingly, Federal income taxes are not reflected in the
financial statements prior to January 1, 1993, when the Subchapter S
corporation election was terminated.
In 1993, the Company adopted the method of accounting for income taxes
pursuant to the Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the
liability method of computing deferred income taxes.
The Company's provision for income taxes for 1994 and 1993 consists of
$31,000 and $35,000 in state taxes and $175,200 and $250,000 in Federal
taxes.
Pro-forma taxes (benefits) have been calculated assuming the losses
incurred during the
F-17
<PAGE> 97
period the Company was treated under Subchapter S of the Internal
Revenue Code would have resulted in a tax refund or deferred tax asset
at an approximate 38% effective rate. The pretax profits and losses
have been adjusted for the effect of nondeductible goodwill. In 1993,
the additional benefit relates solely to losses incurred during the
part of the fiscal year (to December 31, 1992) until the Subchapter S
election was terminated.
The following is a reconciliation for the U.S. Federal statutory rate
and the effective tax rate at September 30, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Pretax earnings $ 490,000 $ 728,000
Loss incurred during period prior
to termination of Subchapter S
election - 272,000
------------ ------------
Adjusted corporate pretax earnings $ 490,000 $ 1,000,000
============ ============
Tax at Federal statutory rate $ 167,000 $ 340,000
General business credits
carryforward from 1988 - (85,000)
State income taxes, net of
Federal benefit 19,200 23,000
Tax effect of amortization of
goodwill 48,000 48,000
Reduction in valuation allowance (28,000) (47,000)
Other 6,000
------------ ------------
$ 206,200 $ 285,000
============ ============
</TABLE>
At September 30, 1994, the principal temporary differences consist of
the following:
<TABLE>
<S> <C>
Deferred tax debits:
Inventory 205,000
Accounts receivable 68,000
Liabilities assumed for Conquest 630,000
---------
903,000
Valuation allowance (100,000)
---------
Net deferred tax debits 803,000
Deferred tax credits
Depreciation and amortization (50,000)
---------
Deferred tax asset $ 753,000
=========
</TABLE>
F-18
<PAGE> 98
NOTE I - RETIREMENT PLAN
The Company has a 401(k) Retirement Plan which is generally available
to all employees who have reached the age of 21 and who have one year
of service. The Plan is a defined contribution plan and meets the
requirements of Section 401(a) and Section 501(a) of the Internal
Revenue Code. The Company does not make any contributions under the
plan.
NOTE J - LEASE COMMITMENTS
The Company leases its principal office under an agreement which
expires in 1996. Under this agreement, the Company is liable to the
lessor for real estate taxes and shall maintain owner's and tenant's
liability insurance. The lease contains a renewal option for an
additional ten-year term, and a provision for yearly increases based
upon increases in the CPI index.
The Company also leases its seven distribution facilities under
agreements which expire at various dates through 1998. Wico is liable
to the lessor for property taxes under these agreements.
Noncancellable long-term operating lease commitments at September 30,
1994 are summarized as follows:
<TABLE>
<CAPTION>
Real
Property Equipment Total
---------- ---------- ----------
<S> <C> <C> <C>
1995 $ 775,000 $ 48,000 $ 823,000
1996 573,000 41,000 614,000
1997 126,000 30,000 156,000
1998 - 18,000 18,000
---------- ---------- ----------
$1,474,000 $ 137,000 $1,611,000
========== ========== ==========
</TABLE>
Total rent expense for the years ended September 30, 1994, 1993 and
1992 amounted to approximately $1,059,000, $1,027,000 and $1,023,000,
respectively.
NOTE K - MOVING COSTS
During fiscal 1991, the Company closed one of its leased facilities and
consolidated those operations into its main location in Niles,
Illinois. In fiscal 1991, the Company estimated its cost to settle its
lease obligation, net of sublease income, was $77,400 and charged such
amount to earnings. During fiscal 1992, that estimate was revised and
an additional $149,000 charged to operations. There are no other
commitments under this lease.
F-19
<PAGE> 99
NOTE L - ACQUISITIONS
1. Wico Merger - The Wico Merger has been treated as a recapitalization
and reverse acquisition of Conquest. The Company has decided to dispose
of all of the operating assets of Conquest. Thus, the assets acquired
consisted primarily of cash, estimated value to be received upon
disposition of the aviation operations, liabilities assumed and the
related tax effect. In August, 1994 the Company decided that it would
sell the aviation operations because of the Company's projection that
the aviation operations were incurring significant cash losses. In
January, 1995 the Company took certain actions to reduce the cash
losses of the aviation operations. Those actions included an increase
in airfares and reducing the number of planes under lease.
An aviation consultant was hired by the Company to evaluate the
aviation operations. The report of the consultant concluded that the
actions taken by the Company, if ultimately combined with a track
record of future earnings, would permit the Company to obtain a
valuation of between five million and six million dollars. In
consideration of the report, the Company established a value of
$4,250,000.
The Company is engaged in discussions with a number of potential buyers
for the aviation operations, however, no definitive agreements have
been reached. Accordingly, although it believes its estimate of
$4,250,000 as the amount to be realized upon sale is reasonable, the
ultimate amount attained will be dependent upon the outcome of
negotiations. The current discussions indicate that the Company could
receive some package of securities, such as notes or restricted stock,
whose values will have to be evaluated.
In the event the Company is unable to find a buyer for its aviation
operation it will consider other alternatives to dispose of the
airline.
Presented below are the assets acquired and liabilities assumed.
Operating lease obligations (principally for turbo-prop airplanes) at
September 30, 1994 is presented later in the notes.
<TABLE>
<S> <C>
Cash $ 6,168,000
Deferred tax asset 890,000
Net assets of discontinued Airline operation (a) 4,250,000
Estimated costs to dispose of Airline operation (a) (1,951,000)
Other costs and liabilities assumed (a) (718,000)
-----------
$ 8,639,000
===========
</TABLE>
(a) The net assets of the airline operation consist principally of
accounts receivable, inventory and property and equipment. Prior
to the Wico Merger, Conquest Airlines had net assets of
approximately $8.0 million.
At September 30, 1994, the aviation operation had operating leases,
principally for turbo prop aircraft aggregating $6,150,000. The amounts
due over the next five years are
F-20
<PAGE> 100
approximately as follows:
<TABLE>
<S> <C>
1995 $ 2,213,000
1996 2,066,000
1997 1,523,000
1998 348,000
-----------
Total $ 6,150,000
</TABLE>
2. Langworthy - As discussed in Note A, during June 1994, the Company
acquired certain assets and liabilities of Langworthy. The purchase
price paid, including costs related to the transaction, amounted to
approximately $2,128,000. The acquisition has been accounted for by the
purchase method of accounting and accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on
their estimated market value at the date of acquisition. The excess of
the purchase price over the fair market values of net assets acquired
has been recorded as goodwill. The fair market values of these assets
and liabilities are summarized as follows:
<TABLE>
<S> <C>
Accounts receivable $ 386,000
Inventories 189,000
Machinery and equipment 14,000
Other assets 28,000
Goodwill 1,939,000
Accounts payable and accruals (including
customer deposits of $125,000) (428,000)
-----------
$ 2,128,000
===========
</TABLE>
Summarized below are the consolidated results of operations on a
pro-forma basis as if the acquired Langworthy business had been
acquired as of the beginning of the periods presented. The pro forma
information is based on Langworthy and Wico's audited historical
results of operations, giving effect for certain pro-forma adjustments.
Such pro-forma adjustments consist of (i) elimination of the write off
of registration costs in 1994 and the write off of certain deferred
debt issuance costs in 1994 net of applicable taxes; and, (ii) the
amortization of goodwill related to the Langworthy acquisition in 1994
and 1993 over twenty-five years.
<TABLE>
<CAPTION> Year Ended September 30,
------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Net sales $45,306,719 $43,440,791
Net income 458,000 721,000
Net income per common share $ .02 $ .07
</TABLE>
F-21
<PAGE> 101
NOTE M - SEGMENT INFORMATION
Summary information for the Company's industry segments is as follows:
FOR THE YEAR ENDED SEPTEMBER 30, 1994:
<TABLE>
<CAPTION>
Gaming Distribution Consumer Total
------ ------------ -------- -----
<S> <C> <C> <C> <C>
Sales $1,194,381 $32,202,147 $8,594,984 $41,991,512
Operating income (loss) (91,813) 2,851,018 486,279 3,245,484
General corporate expense 300,000
Other expenses 2,395,658
Income before taxes 549,826
Identifiable assets 2,232,602 15,007,755 6,000,872 23,241,229
Corporate assets 4,194,471
Total assets 27,435,700
Other information:
Depreciation and 29,165 767,282 87,684 884,131
Amortization
Capital acquisitions 28,042 133,379 127,271 288,692
</TABLE>
F-22
<PAGE> 102
FOR THE YEAR ENDED SEPTEMBER 30, 1993:
<TABLE>
<CAPTION>
DISTRIBUTION CONSUMER TOTAL
------------ -------- -----
<S> <C> <C> <C>
Sales $32,980,709 $ 5,801,877 $38,782,586
Operating income 3,091,850 7,165 3,099,015
General corporate expenses 300,000
Other expenses 2,070,956
Income before taxes 728,059
Identifiable assets 12,801,635 6,757,398 19,559,033
Corporate assets 353,137
Total assets 19,912,170
Other information
Depreciation and amortization 927,101 231,425 1,159,126
Capital acquisitions 120,387 77,536 197,923
FOR THE YEAR ENDED SEPTEMBER 30, 1992:
<CAPTION>
DISTRIBUTION CONSUMER TOTAL
------------ -------- -----
<S> <C> <C> <C>
Sales $32,479,774 $ 6,173,530 $38,653,304
Operating income 2,162,313 88,690 2,251,003
General corporate expenses 300,000
Other expenses 2,689,157
Loss before taxes (738,154)
Identifiable assets 14,458,287 6,698,575 21,156,862
Corporate assets 227,587
Total assets 21,384,449
Other information
Depreciation and amortization 1,989,869 295,357 2,255,226
Capital acquisitions 51,399 93,361 144,760
</TABLE>
F-23
<PAGE> 103
NOTE N - STOCKHOLDERS' EQUITY
At September 30, 1994, Conquest has the following outstanding
securities which may result in the issuance of common stock:
<TABLE>
<CAPTION>
SHARES OF EXERCISE EXPIRATION
DESCRIPTION COMMON PRICE DATES
------ -------- ----------
<S> <C> <C> <C>
10% Convertible Notes Varying (a) 1996
Options for convertible noteholders 55,000 11.88 -
Series B preferred 1,030,000 (b) -
Series A preferred 8,000 11.50 -
Class B Warrants 2,173,000 $11.88 (d)
Bank Warrant 400,000 (a) 2003
Blue Diamond Warrant 200,000 (a) 2004
Options and warrants issued to
executives, employees and
Board members (c) 739,500 2.50 - 17.50 1998-1999
Underwriters warrants 106,000 10.00 - 12.50 1999
</TABLE>
(a) Convertible at 80% of market price on date of conversion. Had
the notes been converted at September 30, 1994, there would
have been 610,000 shares issued. In addition, all noteholders
who convert receive an option to purchase 500 shares of common
stock for every $25,000 of notes converted.
(b) Convertible at .368 shares of common for each share of
preferred.
(c) All options to executives, employees and Board members were
issued in fiscal 1994 at fair value or were assumed on the
consummation of the Wico merger. No options were exercised or
canceled during the year.
(d) Expires five years after the date the Company is able to have
an effective registration.
NOTE O - SUBSEQUENT EVENT (UNAUDITED)
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.
F-24
<PAGE> 104
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 AIRLINE TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENT 4,250,000 4,250,000 -
NET ASSETS OF AIRLINE HELD FOR SALE - - 4,250,000
----------- ----------- -----------
$28,815,055 $28,528,305 $27,810,700
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-25
<PAGE> 105
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 123,380 102,739 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.
F-26
<PAGE> 106
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 airline operations 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 SHARE
Net inncome (loss) $ (0.26) $ (0.03) $ (0.46) $ 0.03
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 9,530,000 7,181,000 9,345,000 7,181,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-27
<PAGE> 107
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 - - - -
Reallocation of purchase of CAC.
Preferred stock dividend - - - -
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 Paid-in Treasury
Shares Amount Shares Amount Shares Amount Capital Stock
------- -------- ------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 - - 9,158,676 $ 91,587 $12,748,815 $ -
Net loss 1,286,000
Reallocation of Purchase of CAC.
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
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 $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) (4,045,113)
Reallocation of Purchase of CAC, Net of tax
benefit pf $630,000 1,286,000
Preferred stock dividend (210,000) (210,000)
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.
F-28
<PAGE> 108
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 Series D Preferred Stock 102,000 -
Deferred income taxes (1,739,000) -
Cumulative losses from 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 (decrease) 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.
F-29
<PAGE> 109
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.
F-30
<PAGE> 110
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 10, 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 reallocation of the purchase of the commuter air operation and
recorded as a creit to additional paid in capital (net of tax benefits of
$630,000) of June 30, 1995.
F-31
<PAGE> 111
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 L.A. on the equity method. At
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
approximately 15%. In addition, the Company will quarterly evaluate the
carrying value of its investment for impairment purposes based upon its
estimate of the undiscounted cash flows it expects to receive from Air L.A.
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 8)
F-32
<PAGE> 112
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.
F-33
<PAGE> 113
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 (a) (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.
F-34
<PAGE> 114
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Langworthy Casino Supply
I have audited the accompanying balance sheet of Langworthy Casino
Supply as of September 30, 1993 and the related statements of income,
divisional equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Langworthy Casino
Supply as of September 30, 1993 and the results of its operations and cash
flows for the year the ended in conformity with generally accepted accounting
principles.
/s/ ALLEN G. ROTH
---------------------------
Allen G. Roth
Certified Public Accountant
New York, New York
January 10, 1994
F-35
<PAGE> 115
LANGWORTHY CASINO SUPPLY
BALANCE SHEET
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 344,056
Accounts receivable,
less allowance for doubtful accounts of $56,000 438,900
Inventories (Note 2) 283,222
----------
TOTAL CURRENT ASSETS 1,066,178
LEASEHOLD AND EQUIPMENT,
less accumulated depreciation of $97,926 28,694
----------
$1,094,872
==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND DIVISIONAL EQUITY
---------------------------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 582,457
Accrued taxes and expenses 21,850
Customer deposits 110,282
----------
TOTAL CURRENT LIABILITIES 714,589
COMMITMENTS (Note 4)
DIVISIONAL EQUITY 380,283
----------
$1,094,872
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 116
LANGWORTHY CASINO SUPPLY
STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1993
<TABLE>
<S> <C>
SALES $4,657,935
COST OF SALES 3,282,064
----------
GROSS PROFIT 1,375,871
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (Notes 3 and 4) 872,033
----------
INCOME BEFORE PRO-FORMA INCOME TAXES 503,838
PRO-FORMA INCOME TAXES 175,000
----------
PRO-FORMA NET INCOME $ 328,838
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 117
LANGWORTHY CASINO SUPPLY
STATEMENT OF DIVISIONAL EQUITY
YEAR ENDED SEPTEMBER 30, 1993
<TABLE>
<S> <C>
BALANCE AT BEGINNING OF YEAR $ 21,626
Income before pro-forma income taxes 503,838
---------
525,464
Interdivisional transfers and distributions (145,181)
---------
BALANCE AT END OF YEAR $ 380,283
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 118
LANGWORTHY CASINO SUPPLY
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1993
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before pro-forma income taxes $ 503,838
Items not requiring the use of cash:
Depreciation 13,427
Increase in allowance for doubtful accounts 31,000
Change in assets and liabilities:
Accounts receivable (69,439)
Inventories (139,535)
Accounts payable and accrued expenses (26,275)
Customer deposits 2,681
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 315,697
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (33,803)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interdivisional transfers and distributions (145,181)
---------
NET INCREASE IN CASH 136,713
CASH AT BEGINNING OF YEAR 207,343
---------
CASH AT END OF YEAR $ 344,056
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -
=========
Income taxes $ -
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 119
LANGWORTHY CASINO SUPPLY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1993
1. SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The financial statements include
the financial position and results of operations of certain operating
divisions owned by Langworthy Casino Supply, Inc. (the "Corporation")
that are engaged in the manufacture of dice, gaming table layouts and
casino chips and also the distribution of casino furniture, playing
cards and various other accessories used in the gaming industry
(hereinafter the "Company").
On November 24, 1993, Langworthy signed a letter of
intent to sell the above described businesses to Wico Holding Corp.
subject to the execution of a definitive purchase agreement.
B. Inventories - Inventories are valued at the lower of
cost (first-in, first-out method) or market.
C. Depreciation and Amortization - Furniture, fixtures and
equipment are depreciated by the straight-line method over five years,
the estimated useful lives of such assets. Leasehold improvements are
amortized over the lesser of the lease terms or the estimated useful
lives of the improvements.
D. Federal income taxes have been provided on a pro-forma
basis as if the Company filed a separate tax return from that of its
affiliated entities. Income taxes were computed using a Federal tax
rate of 34.75%.
2. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
September 30,
1993 1992
-------- --------
<S> <C> <C>
Finished goods $ 84,967 $ 44,440
Work-in-process 19,826 10,369
Raw materials and supplies 178,429 88,878
------- -------
$283,222 $143,687
======= =======
</TABLE>
F-40
<PAGE> 120
3. RELATED PARTY TRANSACTIONS
During the year ended September 30, 1993, Langworthy (the
Corporation) charged the Company $872,000 for management, selling and
administrative services. During that same period, the Company
transferred merchandise valued at $109,000 to a retail store owned by
Langworthy's sole stockholder.
4. LEASE COMMITMENTS
The Company rents its operating facilities from two officers
of Langworthy. Aggregate annual rentals of $110,880 are payable for
such facilities through March 31, 1998. Rent expense for the year ended
September 30, 1993 was $58,505.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Retirements Balance at
Beginning Additions and other End of
Classification of Period at Cost Changes Period
-------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Leasehold $ 4,104 $13,607 $ - $ 17,711
Equipment 88,713 20,196 - 108,909
------- ------- ------- --------
$92,817 $33,803 $ - $126,620
======= ======= ======= ========
</TABLE>
6. ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Retirements Balance at
Beginning Additions and other End of
Classification of Period at Cost Changes Period
-------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Leasehold $ 4,104 $ 2,415 $ - $ 6,519
Equipment 80,395 11,012 - 91,407
------- ------- ------- -------
$84,499 $13,427 $ - $97,926
======= ======= ======= =======
</TABLE>
F-41
<PAGE> 121
7. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning to End of
Classification of Period Expense Deductions Period
-------------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts $25,000 $31,000 $ - $56,000
======= ======= ======= =======
8. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance and repairs $81,935
=======
</TABLE>
Other items are less than 1% of sales.
F-42
<PAGE> 122
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Langworthy Casino Supply
I have audited the accompanying balance sheet of Langworthy Casino
Supply as of September 30, 1992 and the related statements of income,
divisional equity and cash flows for the years ended September 30, 1992 and
1991. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Langworthy Casino
Supply as of September 30, 1992 and 1991 in conformity with generally accepted
accounting principles.
/s/ ALLEN G. ROTH
------------------------------
Allen G. Roth
Certified Public Accountant
New York, New York
May 20, 1994
F-43
<PAGE> 123
LANGWORTHY CASINO SUPPLY
BALANCE SHEET
SEPTEMBER 30, 1992
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $207,343
Accounts receivable,
less allowance for doubtful accounts of $25,000 400,461
Inventories (Note 2) 143,687
--------
TOTAL CURRENT ASSETS 751,491
LEASEHOLD AND EQUIPMENT,
less accumulated depreciation of $84,499 8,318
--------
$759,809
========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND DIVISIONAL EQUITY
---------------------------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $596,992
Accrued taxes and expenses 33,590
Customer deposits 107,601
--------
TOTAL CURRENT LIABILITIES 738,183
DIVISIONAL EQUITY 21,626
--------
$759,809
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 124
LANGWORTHY CASINO SUPPLY
STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1992 1991
---------- ----------
<S> <C> <C>
SALES $3,256,633 $2,832,667
COST OF SALES 2,218,782 1,974,694
---------- ----------
GROSS PROFIT 1,037,851 857,973
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
(NOTE 3) 837,732 759,584
---------- ----------
INCOME BEFORE PRO-FORMA INCOME TAXES 200,119 98,389
PRO-FORMA INCOME TAXES 74,044 36,404
---------- ----------
PRO-FORMA NET INCOME $ 126,075 $ 61,985
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 125
LANGWORTHY CASINO SUPPLY
STATEMENT OF DIVISIONAL EQUITY
YEARS ENDED SEPTEMBER 30, 1992 AND 1991
<TABLE>
<S> <C>
BALANCE AT OCTOBER 1, 1990 $ 242,450
Income before pro-forma income taxes 98,389
---------
340,839
Interdivisional transfers and distributions 40,321
---------
BALANCE AT SEPTEMBER 30, 1991 381,160
Income before pro-forma income taxes 200,119
---------
581,279
Interdivisional transfers and distributions (559,653)
---------
BALANCE AT SEPTEMBER 30, 1992 $ 21,626
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE> 126
LANGWORTHY CASINO SUPPLY
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1992 1991
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before pro-forma income taxes $ 200,119 $ 98,389
Items not requiring the use of cash:
Depreciation 13,000 13,000
Change in assets and liabilities:
Accounts receivable (148,821) (58,401)
Inventories 30,253 (18,363)
Accounts payable and accrued expenses 256,133 186,064
Customer deposits 41,076 (28,027)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 391,760 192,662
CASH FLOWS FROM INVESTING ACTIVITIES - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Interdivisional transfers and distributions (559,653) 40,321
--------- --------
NET INCREASE IN CASH (167,893) 232,983
CASH AT BEGINNING OF PERIOD 375,236 142,253
--------- --------
CASH AT END OF PERIOD $ 207,343 $375,236
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ -
========= ========
Income taxes $ - $ -
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE> 127
LANGWORTHY CASINO SUPPLY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1992 AND 1991
1. SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The financial statements include
the financial position and results of operations of certain operating
divisions owned by Langworthy Casino Supply, Inc. (the "Corporation")
that are engaged in the manufacture of dice, gaming table layouts and
casino chips and also the distribution of casino furniture, playing
cards and various other accessories used in the gaming industry
(hereinafter the "Company").
On November 24, 1993, Langworthy signed a letter of
intent to sell the above described businesses to Wico Holding Corp.
subject to the execution of a definitive purchase agreement.
B. Inventories - Inventories are valued at the lower of cost
(first-in, first-out method) or market.
C. Depreciation and Amortization - Furniture, fixtures and
equipment are depreciated by the straight-line method over five years,
the estimated useful lives of such assets. Leasehold improvements are
amortized over the lesser of the lease terms or the estimated useful
lives of the improvements.
D. Federal income taxes have been provided on a pro-forma
basis as if the Company filed a separate tax return from that of its
affiliated entities. Income taxes were computed using a Federal tax
rate of 34 percent.
2. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
1992
--------
<S> <C>
Finished goods $ 44,440
Work-in-process 10,369
Raw materials and supplies 88,878
--------
</TABLE>
F-48
<PAGE> 128
<TABLE>
<S> <C>
$143,687
========
</TABLE>
3. RELATED PARTY TRANSACTIONS
During the years ended September 30, 1992 and 1991, Langworthy
(the Corporation) charged the Company $837,000 and $759,000 for
management, selling and administrative services. During the same
period, the Company transferred merchandise valued at $77,000 and
$66,000, respectively to a retail store owned by Langworthy's sole
stockholder.
F-49
<PAGE> 129
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Conquest Industries Inc.
& Subsidiaries Pro-Forma
As Reported Langworthy Combined Adjustments Pro-Forma
------------------------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES $41,991,512 $3,315,207 $45,306,719 $ $45,306,719
COST OF SALES 26,078,087 2,323,663 28,401,750 28,401,750
----------- ---------- ----------- -------- -----------
GROSS PROFIT 15,913,425 991,544 16,904,969 16,904,969
OPERATING EXPENSES:
Selling, distribution and
administrative expenses 12,592,710 683,948 13,276,658 13,276,658
Amortization expense 375,232 375,232(1) 58,000 433,232
----------- ---------- ----------- ------- -----------
Total operating expenses 12,967,942 683,948 13,651,890 58,000 13,709,890
----------- ---------- ----------- ------- -----------
OPERATING INCOME 2,945,483 307,596 3,253,079 3,195,079
OTHER INCOME (EXPENSE):
Interest expense (1,731,377) -- (1,731,377) (1,731,377)
Amortization of debt discount (282,500) -- (282,500) (282,500)
Write off of registration costs (175,394) -- (175,394) (175,394)
Other (266,387) -- (266,387) (266,387)
----------- ---------- ----------- -------- ----------
Total other income (expense) (2,455,658) -- (2,455,658) (2,455,658)
----------- ---------- ----------- -------- ----------
INCOME (LOSS) BEFORE TAXES 489,825 307,596 797,421 58,000 739,421
PROVISION FOR INCOME TAXES 206,201 107,043 313,244(4) 32,244 281,000
----------- ---------- ---------- -------- ----------
NET INCOME $ 283,624 $ 200,553 $ 484,177 $283,574 $ 458,421
=========== ========== ========== ======== ==========
</TABLE>
See Notes to Pro-Forma Consolidated Statement of Operations
F-50
<PAGE> 130
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1994
(UNAUDITED)
Pro forma adjustments have been made to reflect:
1. The amortization of goodwill related to the purchase of certain of the
assets (subject to certain liabilities) of Langworthy Casino Supply over
30 years.
2. The income tax effect of the above at 38%.
F-51
<PAGE> 131
LANGWORTHY CASINO SUPPLY
BALANCE SHEET
JUNE 30, 1994
(UNAUDITED)
ASSETS
CURRENT ASSETS:
[S] [C]
Cash $ 34,663
Accounts receivable:
less allowance for doubtful accounts of $40,865 255,892
Inventories 228,136
------------
TOTAL CURRENT ASSETS 518,691
LEASEHOLD AND EQUIPMENT:
less accumulated depreciation of $104,726 28,694
------------
$ 547,385
============
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 288,572
------------
TOTAL CURRENT LIABILITIES 288,572
DIVISIONAL EQUITY 258,813
------------
$ 547,385
============
F-52
<PAGE> 132
LANGWORTHY CASINO SUPPLY
STATEMENTS OF INCOME
NINE MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
SALES $3,315,207 $3,328,675
COST OF SALES 2,323,663 2,345,444
---------- ----------
GROSS PROFIT 991,544 983,231
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 683,948 654,025
---------- ----------
INCOME BEFORE PRO-FORMA INCOME TAXES 307,596 329,206
PRO-FORMA INCOME TAXES 107,043 114,564
---------- ----------
PRO-FORMA NET INCOME $ 200,553 $ 214,642
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE> 133
LANGWORTHY CASINO SUPPLY
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before pro-forma income taxes $ 307,595 $ 329,206
Items not requiring the use of cash:
Depreciation 6,800 6,800
Increase (Decrease) in allowance for doubtful accounts (17,135) 10,000
Change in assets and liabilities:
Accounts receivable 237,868 (34,719)
Inventories (139,042) (6,292)
Accounts payable and accrued expenses (285,839) (8,311)
Customer deposits 156,107 1,341
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 266,354 298,025
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (26,231)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interdivisional transfers and distributions (575,747) (203,458)
--------- ---------
NET INCREASE (DECREASE) IN CASH (309,393) 68,356
CASH AT BEGINNING OF PERIOD 344,056 207,343
--------- ---------
CASH AT END OF PERIOD $ 34,663 $ 275,699
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ -
========= =========
Income taxes $ - $ -
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-54
<PAGE> 134
LANGWORTHY CASINO SUPPLY
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1994
(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 statement prepared in accordance with generally accepted accounting
principles, which is not required for interim reporting purpose has been
condensed or omitted. The accompanying financial statements should be read in
conjunction with the consolidated financial statements and notes thereto.
F-55
<PAGE> 135
<TABLE>
-------------------------------------------------------------------------------------------------------
<S> <C>
No underwriter, dealer, salesman or any other person
has been authorized to give any information or to make
any representation, other than those contained in this 12,788,360 SHARES OF COMMON STOCK
Prospectus, in connection with the offering described
herein, and, if given or made, such information or and
representations must not be relied upon as having been
authorized by the Company. The delivery of this
Prospectus at any time does not imply that there has 2,068,407 COMMON STOCK PURCHASE
not been any change in the information set forth herein WARRANTS
or in the affairs of the Company since the date hereof.
This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any security other
than the securities offered hereby, or an offer to sell CONQUEST
or solicitation of an offer to buy such securities in
any jurisdiction in which such offer or solicitation is INDUSTRIES
not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any INC.
person to whom such offer or solicitation would be
unlawful.
---------------------
TABLE OF CONTENTS
PAGE
Additional Information . . . . . . . . . . . . . . . .
Prospectus Summary . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . 14 ------------------------
Market Price fo the Company's Publicly Traded
Securities . . . . . . . . . . . . . . . . . . . . . 15 Prospectus
Dividend Policy . . . . . . . . . . . . . . . . . . . 16
Selected Financial Data . . . . . . . . . . . . . . . 17 ------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 18
Consolidated Pro-Forma Statements of Income . . . . . 30
Pro-Forma Consolidated Balance Sheet . . . . . . . . 29
Consolidated Pro-Forma Statement of Operations . . . 31
Notes to Pro-Forma Unaudited Consolidated
Financial Statements . . . . . . . . . . . . . . 32
Business . . . . . . . . . . . . . . . . . . . . . . 33
Management . . . . . . . . . . . . . . . . . . . . . 42
Principal Stockholders . . . . . . . . . . . . . . . 49
Certain Relationships and Related Transactions . . . 51
Description of Securities . . . . . . . . . . . . . . 55
Selling Securityholders . . . . . . . . . . . . . . . 60
Plan of Distribution . . . . . . . . . . . . . . . . 67
Legal Matters . . . . . . . . . . . . . . . . . . . . 69
Experts . . . . . . . . . . . . . . . . . . . . . . . 69
Index to Financial Statements . . . . . . . . . . . F-1
NOVEMBER __, 1995
-------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature
to procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, in a proceeding not by or in
the right of the corporation, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such suit or
proceeding, if he acted in good faith and in a manner believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no rea0son to believe his conduct was
unlawful. Delaware law further provides that a corporation will not indemnify
any person against expenses incurred in connection with an action by or in the
right of the corporation if such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for the expenses which such court shall deem proper.
The By-Laws of the Company provide for indemnification of officers and
directors of the Company to the greatest extent permitted by Delaware law for
any and all fees, costs and expenses incurred in connection with any action or
proceeding, civil or criminal, commenced or threatened, arising out of services
by or on behalf of the Company, providing such officer's or director's acts
were not committed in bad faith. The By-Laws also provide for advancing funds
to pay for anticipated costs and authorizes the Board to enter into an
indemnification agreement with each officer or director.
In accordance with Delaware law, the Company's Certificate of
Incorporation contains provisions eliminating the personal liability of
directors, except for breach of a director's fiduciary duty of loyalty to the
Company or to its stockholders, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, or in respect
of any transaction in which a director receives an improper personal benefit.
These provisions only pertain to breaches of duty by directors as such, and not
in any other corporate capacity, e.g., as an officer. As a result of the
inclusion of such provisions, neither the Company nor stockholders may be able
to recover monetary damages against directors for actions taken by them which
are ultimately found to have constituted negligence or gross negligence, or
which are ultimately found to have been in violation of their fiduciary duties,
although it may be possible to obtain injunctive or equitable relief with
respect to such actions. If equitable remedies are found not to be available
to stockholders in any particular case, stockholders may not have an effective
remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and therefore is
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,911.90
Printing Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000.00
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000.00
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088.10
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000.00
</TABLE>
II-1
<PAGE> 137
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In February and May 1991, the Company sold $710,000 in principal amount of
10% convertible promissory notes in private transactions as bridge financing
pending the completion of a public offering, of which $285,000 was purchased by
directors of the Company including Victor M. Rivas, the Company's Chairman of
the Board, and $300,000 was purchased by Edmund Shea, a stockholder of the
Company. Up to 6.7% of the principal amount of the notes were convertible into
shares of the Company's Common Stock at the rate of $1.00 per share. The notes
were subsequently retired following successful completion of the offering as
herein described. As of March 1, 1992, the holders of the notes exercised the
conversion rights provided for in the notes and accordingly the shares were
issued. This transaction was a private transaction not involving a public
offering and was exempt from the registration provisions of the Securities Act
pursuant to Sections 4(2) and 4(6) thereof. Commonwealth Associates acted as
placement agent in connection with the offering and received commissions and
other compensation for its services.
In May 1992, the Company sold 14,667 shares of Common Stock at $15.00 per
share to six individuals. This transaction was a private transaction not
involving a public offering and was exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof and Regulation D and Rule
506 promulgated thereunder.
In October 1992, the Company completed the sale of 75,000 shares of Common
Stock to 39 unaffiliated individuals at $15.00 per share. This transaction was
a private transaction not involving a public offering and was exempt from the
registration provisions of the Securities Act pursuant to Section 4(2) thereof
and Regulation D and Rule 506 promulgated thereunder.
In April 1991, the Company exchanged existing warrants (held by one
entity) to purchase in the aggregate 19,500 shares of Common Stock at $25.00
per share for a new warrant to purchase 10,000 shares at $10.00 per share.
This warrant was subsequently exchanged for a new warrant to purchase 10,000
shares at $5.00 per share in January 1992. These warrants were exercised in
April 1993. This transaction was a private transaction not involving a public
offering and was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
In April 1991, the Company lowered the exercise price of a warrant to
purchase 4,000 shares of Common Stock to $10.00 per share, and thereafter
lowered the exercise price to $5.00 per share in January 1992, for services
rendered in connection with a financial consulting agreement. These warrants
were exercised in April 1993. This transaction was a private transaction not
involving a public offering and was exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof.
In March 1992, the Company issued warrants to purchase 10,000 shares of
Common Stock at $23.75 per share to each of two consultants. This transaction
was a private transaction not involving a public offering and was exempt from
the registration provisions of the Securities Act pursuant to Section 4(2)
thereof.
In June 1992, the Company issued warrants to purchase 10,000 shares of
Common Stock at $30.00 per share in consideration of the use of certain
facilities provided by Mr. Hunt during the previous four years and Mr. Hunt's
agreement to continue to permit the use of such facilities for an additional
two years. This transaction was a private transaction not involving a public
offering and was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
In March 1993, the Company sold $452,000 principal amount of 8% promissory
notes due the earlier of one year from the date of issuance or the sale of any
public debt or equity offering from which the Company realized net proceeds of
$385,740. The Company also agreed to issue to the noteholders shares of Common
Stock equal to 50% of the principal amount of the notes divided by the public
offering price of the unit offering through the Underwriter as described below.
This transaction was a private transaction not involving a public offering and
was exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof. Lew Lieberbaum & Co., Inc. acted as placement agent in
the offering.
In April 1993, in connection with the offering of units of the Company,
the Company issued to Lew Lieberbaum & Co., Inc., the underwriter in that
transaction (the "Underwriter"), certain Warrants in registered form. The
Class B Warrants were part of units which were purchasable by the Underwriter
upon exercise of certain units. In June 1994, the Company exchanged the
registered Warrants issued to the
II-2
<PAGE> 138
Underwriter for 53,241 unregistered Underwriter's Warrants of the Company in a
transaction in which the securities were exempted pursuant to Section 3(a) of
the Securities Act.
In November 1994, the Company sold to 69 purchasers an aggregate of 109.5
units of securities for a total price of $2,737,500. Each unit consisted of
(i) a $25,000 principal amount 10% convertible promissory note (the "Notes")
and (ii) the right to receive warrants, only upon the conversion of each Note,
to purchase 500 shares of Common Stock exercisable at a price of $5.00 per
share until June 20, 1999 (the "Private Placement Warrrants"). The Notes are
convertible at any time at 80% of the closing bid price of the Company's
publicly traded Common Stock on the date of conversion. If such price were
$1.50 per share, an aggregate of 2,281,250 1994 Private Placement Conversion
Shares would be issuable. The Notes were sold through Rickel & Associates,
Inc. ("Rickel") as placement agent. Rickel received a commission equal to 10%
($273,750) of the gross proceeds of the offering and an additional 3% ($82,125)
of the gross proceeds of the offering as a non-accountable expense allowance.
This transaction was a private transaction not involving a public offering and
was exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof.
In September 1995, the Company engaged Rickel to solicit the holders of
the Notes to amend the terms of such securities to eliminate the conversion
provisions thereof. In consideration for such amendment, the Company has
offered to those Noteholders electing to waive such conversion privileges: (i)
the Company's 12% non-convertible notes due October 1, 1996 in exchange for a
like principal amount of Notes currently held, and (ii) payments equal to
$5,000 for each $25,000 principal amount of Notes held by them. In addition,
the Company agreed to compensate Rickel at the rate of $2,500 for each $25,000
of Notes electing to exchange for 12% non-convertible notes. This exchange of
Notes for a like principal amount of 12% non-convertible notes was a private
transaction not involving a public offering and was exempt from the
registration provisions of the Securities Act pursuant to Section 4(2) thereof.
In April 1995, the Board of Directors of the Company authorized for
issuance to certain of its officers and directors five year warrants to
purchase an aggregate of 650,000 shares of Company Common Stock at an exercise
price of $0.875 per share.
In May 1995, the Company issued to an affiliate of a director 600,000
shares of Series D Preferred Stock, and warrants to purchase 1,050,000 shares
of Common Stock at $.3333 per share. The consideration paid for such
securities was the conversion of a $200,000 demand loan made by such director's
affiliate to the Company in February 1995, and an additional $150,000 loan made
in May 1995. (In July 1995, the Company redeemed such Series D Preferred Stock
and repaid such loan, and in connection therewith, one-third of such warrants
were cancelled.) This transaction was a private transaction not involving a
public offering and was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
In June 1995, the Company issued 800,000 shares of Series E Preferred
Stock, which shares were issued for consideration consisting of 800,000 shares
of Series B Preferred Stock of the Company, and the cancellation of certain
warrants held by the holders of such Series B Preferred Stock. This
transaction was a private transaction not involving a public offering and was
exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof.
In June and July 1995, the Company sold an aggregate of 2,082,147 shares
of Common Stock at approximately $1.41 per share in a private placement to 50
investors. This transaction was a private transaction not involving a public
offering and was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
In October 1995, the Company issued to a director and principal
stockholder an aggregate of 500,000 shares of Common Stock, for $500, and
agreed to the potential issuance of five year warrants entitling the holder to
purchase up to 1,250,000 shares of Common Stock. Such shares were issued upon
consummation of a refinancing of the Company's senior secured indebtedness,
pursuant to which such affiliate increased his personal guaranty to a lender
from $1.0 million to $3.0 million and provided independent collateral to the
Company's lender. The issuance of the warrants will be made in annual
increments of 250,000 warrants on each anniversary of a contemplated five year
term loan if such collateralized guaranty is then in force. The exercise
prices of such warrants, if and when issued, will be equal to the then
prevailing closing sale price of the Company's Common Stock on the date of each
warrant issuance. This transaction was a private
II-3
<PAGE> 139
transaction not involving a public offering and exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
Between April and October 1995, the Company entered into a series of
agreements with fifteen creditors, pursuant to which obligations aggregating
$981,631 as of October 31, 1995 were exchanged for an aggregate of 881,631
shares of Common Stock, designated as "Creditors Shares." This transaction was
a private transaction not involving a public offering and exempt from the
registration provisions of the Securities Act pursuant to Section 4(2) thereof.
In October 1995, the Board of Directors issued to Strategic Growth
International, Inc. five year warrants entitling the holder to purchase 900,000
shares of Common Stock of the Company for $1.50 per share. Such warrants were
issued pursuant to a consulting agreement entered into between the Company and
SGI. This transaction was a private transaction not involving a public
offering and exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
II-4
<PAGE> 140
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit Description of Exhibit Page No.
------- ---------------------- --------
<S> <C>
3(a) Certificate of Incorporation (as amended including preferred
stock designations) (1)
3(b) By-Laws(1)
3(c) Certificate of Designations with respect to Series E Redeemble
Preferred Stock (5)
4(b) Form of Redeemable Common Stock Purchase Warrant (1)
5 Opinion of Solomon, Fornari, Weiss & Moskowitz, P.C. (4)
10(a) Employment Agreement between the Company and Edward G. Sokolofski
(1)
10(b) Lease between Wico Corporation and LaSalle National Bank, as
Trustee(1)
10(c) Loan Agreement between Wico Corporation and National Westminster
Bank USA (1)
10(d) Amended and restated guarantees of Stephen Feldman and Bentley
Blum in favor of National Westminster Bank USA (1)
10(e) Security Agreement between Wico Corporation and National
Westminster Bank USA (1)
10(f) Termination of Employment Agreement and Consulting Agreement
between Victor M. Rivas and Conquest Airlines Corp. dated June
17, 1994 (1)
10(g) Agreement by and between the Company and American Stock Transfer
& Trust Co., Inc.*
10(h) Asset Purchase Agreement by and between Wico Acquisition Co. and
Langworthy Casino Supply(1)
10(i) Securities Purchase Agreement among the
Company and the purchasers of 2,082,147
shares of Common Stock (2)
10(j) Stock Purchase Agreement and exhibits between the Company and Air
L.A., Inc. (2)
10(k) Agreements in connection with amendment to Series B Preferred
Stock and issuance of Series E Preferred Stock (2)
10(l) Agreements in connection with issuance of Series D Preferred
Stock and related $150,000 Note to Blum Asset Trust (2)
10(m) Forms of agreements in connection with issuance of Creditors
Shares in exchange for Company obligations (2)
10(n) Employment agreement between the Company and Steffen I. Magnell
10(o) Revolving credit loan agreement between Wico Corporation and
subsidiary and Sanwa Business Credit Corp. (4)
10(p) Restated term loan agreement between Wico Corporation and
National Westminster Bank USA (4)
10(q) Agreements among the Company and certain creditors regarding
issuance of Creditors Shares (3)
10(r) Form of Letter of Transmittal and related Election to Exchange
and Notice of Rescission of Election submitted to holders of
$2,737,500 10% Company promissory notes due October 1, 1996 (3)
</TABLE>
II-5
<PAGE> 141
<TABLE>
<S> <C>
10(s) Form of letter to Selling Securityholders and Indemnification
Agreement. (3)
10(t) Consulting agreement, dated October 12, 1995, between the Company
and Strategic Growth International, Inc. (3)
10(u) Amendment to agreements among the Company and certain creditors
regarding issuance of Creditors Shares (4)
10(v) Amended and Restated form of Letter of Transmittal and related
Election to Exchange submitted to holders of $2,737,500 10%
Company promissory notes due October 1, 1996 (4)
10(w) Amended and Restated form of letter to Selling Securityholders
and Indemnification Agreement. (4)
23.1 Consent of Grant Thornton (5)
23.2 Consent of Allen G. Roth (5)
</TABLE>
* to be filed by amendment.
- ---------------------------
(1) Filed as an exhibit with the original filing of this Registration
Statement, filed on November 14, 1994
(2) Filed as an exhibit with Amendment No. 1 to this Registration Statement,
filed on July 13, 1995
(3) Filed as an exhibit with Amendment No. 2 to this Registration Statement.
(4) Filed as an exhibit with Amendment No. 3 to this Registration Statement.
(5) Filed with this Amendment No. 4 to the Registration Statement.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement; and (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.
(4) To file a post-effective amendment to the registration to
include any financial statements required by Rule 3-19 of Regulation S-X at the
start of any delayed offering or throughout a continuous offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
II-6
<PAGE> 142
action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 4 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on November 9, 1995.
CONQUEST INDUSTRIES INC. CONQUEST INDUSTRIES INC.
By: /s/ Stephen R. Feldman By: /s/ Jerry Karlik
------------------------------ -------------------------------
Stephen R. Feldman Jerry Karlik
Chairman of the Board Chief Financial Officer
(Principal Executive Officer) (Principal Financial or
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen R. Feldman and Jerry Karlik,
jointly and severally, as his true and lawful attorney-in-fact and agent, each
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorney-in-fact or agent or substitute lawfully
does or causes to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to the Registration Statement on Form S-1 has been signed
below by the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- --------- ------------------------ ----
<S> <C> <C>
/s/ Stephen R. Feldman Chairman of the Board November 9, 1995
- --------------------------------
Stephen R. Feldman
/s/ Victor M. Rivas Director November 9, 1995
- --------------------------------
Victor M. Rivas
/s/ Steffen I. Magnell Chief Executive Officer November 9, 1995
- -------------------------------- of the Company and Wico, President
Steffen I. Magnell of the Company, and Director
/s/ Jerry Karlik Chief Financial Officer November 9, 1995
- --------------------------------
Jerry Karlik
/s/ Bentley J. Blum Director November 9, 1995
- --------------------------------
Bentley J. Blum
/s/ Harry McKillop Director November 9, 1995
- --------------------------------
Harry McKillop
/s/ David Schoon Director November 9, 1995
- --------------------------------
David Schoon
</TABLE>
<PAGE> 144
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Description of Exhibit Page No.
------- ---------------------- --------
<S> <C>
3(a) Certificate of Incorporation (as amended including preferred
stock designations) (1)
3(b) By-Laws(1)
3(c) Certificate of Designations with respect to Series E Redeemble
Preferred Stock (5)
4(b) Form of Redeemable Common Stock Purchase Warrant (1)
5 Opinion of Solomon, Fornari, Weiss & Moskowitz, P.C. (4)
10(a) Employment Agreement between the Company and Edward G. Sokolofski
(1)
10(b) Lease between Wico Corporation and LaSalle National Bank, as
Trustee(1)
10(c) Loan Agreement between Wico Corporation and National Westminster
Bank USA (1)
10(d) Amended and restated guarantees of Stephen Feldman and Bentley
Blum in favor of National Westminster Bank USA (1)
10(e) Security Agreement between Wico Corporation and National
Westminster Bank USA (1)
10(f) Termination of Employment Agreement and Consulting Agreement
between Victor M. Rivas and Conquest Airlines Corp. dated June
17, 1994 (1)
10(g) Agreement by and between the Company and American Stock Transfer
& Trust Co., Inc.*
10(h) Asset Purchase Agreement by and between Wico Acquisition Co. and
Langworthy Casino Supply(1)
10(i) Securities Purchase Agreement among the
Company and the purchasers of 2,082,147
shares of Common Stock (2)
10(j) Stock Purchase Agreement and exhibits between the Company and Air
L.A., Inc. (2)
10(k) Agreements in connection with amendment to Series B Preferred
Stock and issuance of Series E Preferred Stock (2)
10(l) Agreements in connection with issuance of Series D Preferred
Stock and related $150,000 Note to Blum Asset Trust (2)
10(m) Forms of agreements in connection with issuance of Creditors
Shares in exchange for Company obligations (2)
10(n) Employment agreement between the Company and Steffen I. Magnell
10(o) Revolving credit loan agreement between Wico Corporation and
subsidiary and Sanwa Business Credit Corp. (4)
10(p) Restated term loan agreement between Wico Corporation and
National Westminster Bank USA (4)
10(q) Agreements among the Company and certain creditors regarding
issuance of Creditors Shares (3)
10(r) Form of Letter of Transmittal and related Election to Exchange
and Notice of Rescission of Election submitted to holders of
$2,737,500 10% Company promissory notes due October 1, 1996 (3)
</TABLE>
<PAGE> 145
<TABLE>
<S> <C>
10(s) Form of letter to Selling Securityholders and Indemnification
Agreement. (3)
10(t) Consulting agreement, dated October 12, 1995, between the Company
and Strategic Growth International, Inc. (3)
10(u) Amendment to agreements among the Company and certain creditors
regarding issuance of Creditors Shares (4)
10(v) Amended and Restated form of Letter of Transmittal and related
Election to Exchange submitted to holders of $2,737,500 10%
Company promissory notes due October 1, 1996 (4)
10(w) Amended and Restated form of letter to Selling Securityholders
and Indemnification Agreement. (4)
23.1 Consent of Grant Thornton (5)
23.2 Consent of Allen G. Roth (5)
</TABLE>
* to be filed by amendment.
- ---------------------------
(1) Filed as an exhibit with the original filing of this Registration
Statement, filed on November 14, 1994
(2) Filed as an exhibit with Amendment No. 1 to this Registration Statement,
filed on July 13, 1995
(3) Filed as an exhibit with Amendment No. 2 to this Registration Statement.
(4) Filed as an exhibit with Amendment No. 3 to this Registration Statement.
(5) Filed with this Amendment No. 4 to the Registration Statement.
<PAGE> 1
State of Delaware
PAGE 1
Office of the
-----------------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "CONQUEST INDUSTRIES INC.", FILED IN THIS OFFICE ON THE TWELFTH
DAY OF MAY, A.D. 1995, AT 9:02 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ EDWARD J. FREEL
[SEAL] ------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
2103386 8100 7573335
DATE:
950105622 07-14-95
<PAGE> 2
CERTIFICATE OF STOCK DESIGNATION
OF
CONQUEST INDUSTRIES INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is CONQUEST INDUSTRIES INC.
2. The certificate of incorporation of the Corporation authorizes
the issuance of 5,000,000 shares of redeemable convertible preferred stock of
the Corporation having a par value of ten cents ($.10) per share, and expressly
vests in the Board of Directors of the Corporation the authority provided
therein to fix by resolution or resolutions the designation, number,
preferences and relative, participating, optional and other special rights and
the qualifications, limitations, restrictions and other distinguishing
characteristics of each series of Preferred Stock to be issued.
3. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating a Series E issue of the Preferred Stock of the Corporation
as follows:
RESOLVED: That there shall be created a series of the
Preferred Stock of the Corporation, to be designated as
"Series E" of such Preferred Stock and to consist of 800,000
shares of such Preferred Stock, which will have relative
rights, preferences and limitations as follows:
1. DESIGNATION. A series of Preferred Stock hereby
created, consisting of 800,000 authorized shares, shall be designated "Series E
Preferred Stock" and is hereafter called the "Series E Preferred Stock." Each
share of Series E Preferred Stock shall have a par value of $.10.
2. DIVIDENDS. In each year, the holders of shares of
the Series E Preferred Stock shall be entitled to receive, before any dividends
shall be declared and paid upon or set aside for the Common Stock, par value
$.001, of the Corporation ("Common Stock") in such year, when and as declared
by the Board of Directors of the Corporation, out of funds legally available
for that purpose,
-1-
<PAGE> 3
dividends in cash at the rate of $.10 per annum per share, and no more, payable
semi-annually (except that the first dividend payment shall be an amount equal
to accumulated dividends from the date of initial issuance at the rate of 10%
per annum, at which time there shall also be due and payable to the initial
holders of Series E Preferred Stock all unpaid accrued dividends (the
"Accumulated Series B Dividends"), to the date of tender thereof, on the shares
of Series B Preferred Stock tendered as payment (in whole or in part) for the
Series E Preferred Stock), on each September 1 and March 1, commencing on
September 1, 1995 (each of the semi-annual periods commencing on each September
1 and March 1, respectively, including the period commencing with the date of
initial issuance, being hereinafter called a "Dividend Period"). Dividends on
the Series E Preferred Stock shall be cumulative from the date on which payment
is made on account of the initial issue of such stock (whether or not there
shall be surplus of the Company legally available for the payment of such
dividends), so that, if at any time Full Cumulative Dividends (as defined
below) upon the Series E Preferred Stock to the end of the last completed
Dividend Period shall not have been paid or declared and a sum sufficient for
payment thereof set apart, the amount of the deficiency in such dividends
(compounded annually from the due date thereof at the rate of 10% per annum)
shall be fully paid, or dividends in such amount (including such compounding)
shall be declared on the shares of the Series E Preferred Stock and a sum
sufficient for the payment thereof shall be set aside for such payment, before
any sum or sums shall be set aside for or applied to the purchase or redemption
of the Common Stock or upon any shares of any other class of stock ranking as
to dividends or upon liquidation junior to the Series E Preferred Stock and
before any dividend shall be declared or paid or any other distribution ordered
or made upon any of the Common Stock or upon any shares of any other class of
stock ranking as to dividends junior to the Series E Preferred Stock; provided,
however, that nothing contained in this Section shall be construed to limit the
right of the Corporation to purchase or redeem any outstanding warrants or
options of the Corporation. Furthermore, for all purposes of paying and/or
setting aside dividends, dividends on the Series E Preferred Stock shall, on a
per share basis, be pari passu with the dividends on the Series B Preferred
Stock, as if the Series E Preferred Stock and the Series B Preferred Stock were
treated as a single series. As used herein, the term "Accrued Dividends" with
respect to the Series E Preferred Stock shall mean Full Cumulative Dividends to
the date as of which accrued dividends are to be computed, less the amount of
all dividends theretofore paid, upon the relevant shares of Series E Preferred
Stock. As used herein, the term "Full Cumulative Dividends" with respect to
the Series E Preferred Stock shall mean (whether or not in any Dividend Period,
or any part thereof, with respect to which such term is used there shall have
been stated capital, capital surplus, or earned surplus of the Corporation
legally available for the payment of such dividends) that amount which shall be
equal to dividends at the full rate fixed for the
-2-
<PAGE> 4
Series E Preferred Stock as provided herein for the period of time elapsed from
the date of issuance thereof to the date as of which Full Cumulative Dividends
is to be computed.
3. REDEMPTION.
(a) So long as any shares of Series E Preferred
Stock are outstanding, the Corporation may, at the option of the Board of
Directors, at any time or from time to time, redeem the whole or any part of
such Series E Preferred Stock pursuant to the provisions hereof. Any
redemption pursuant to this Section 3(a) shall be at a redemption price equal
to $1.00 per share (payable in cash or other consideration as the Company and
the holders of a majority of the Series E Preferred Stock may agree), plus an
amount equal to Accrued Dividends (plus any compounding thereof in accordance
with Section 2 above) on the shares of Series E Preferred Stock being redeemed.
If less than all the shares of Series E Preferred Stock at any time outstanding
shall be called for redemption, the redemption shall be made pro rata with
respect to such shares and in such manner as may be prescribed by resolution of
the Board of Directors; and in the event that any shares of Series B Preferred
Stock at any time outstanding shall be called for redemption, then the
Corporation shall simultaneously redeem a portion of the outstanding shares of
Series E Preferred Stock (ratably among the holders thereof as aforesaid), such
portion to be equal, on a percentage basis, to that portion of the Series B
Preferred Stock then being redeemed. The date of each such redemption is
herein referred to as a "Redemption Date".
(b) Notice of every redemption pursuant to
Section 3(a) above shall be sent by registered or certified mail, postage
prepaid, to the holders of record of the shares of Series E Preferred Stock so
to be redeemed at their respective addresses as the same shall appear on the
books of the Corporation. Such notice shall be deposited in the United States
mail not less than thirty (30) days in advance of the Redemption Date. The
holders of the shares of Series E Preferred Stock to be redeemed shall be
entitled, before such Redemption Date, to convert any such shares called for
redemption pursuant to Section 5 below. The holders of the shares of Series E
Preferred Stock to be redeemed shall surrender to the Corporation the
certificates for the shares of Series E Preferred Stock so redeemed and not
converted; provided, that on and after the Redemption Date all rights of the
holders of shares of Series E Preferred Stock as stockholders of the
Corporation with respect to those shares of Series E Preferred Stock to be
redeemed, except the right to receive the redemption price, shall cease and
terminate and the shares designated for redemption shall no longer be
outstanding whether or not the certificates for the shares so redeemed have
been received by the Corporation.
-3-
<PAGE> 5
(c) In the event that the Corporation proposes to
consummate a public offering of securities of the Corporation pursuant to a
registration statement filed under the Securities Act of 1933, as amended (the
"Act"), other than a registration statement on Form S-8 or S-4 or any
equivalent form then in effect, then the Corporation shall give written notice
thereof by registered or certified mail, postage prepaid, to the holders of
record of the shares of Series E Preferred Stock so to be redeemed at their
respective addresses as the same shall appear on the books of the Corporation,
not less than thirty (30) days in advance of the effectiveness of the subject
registration statement under the Act. Without prejudice to such holder's right
or obligation to convert shares of Series E Preferred Stock into Common Stock
of the Corporation in accordance with Section 5 below, each holder of Series E
Preferred Stock shall have the right, at its option, exercisable during the
30-day period following the giving of the Corporation's notice hereunder, to
require the Corporation to redeem all or any portion of such holder's shares of
Series E Preferred Stock upon the consummation of the subject public offering
if and only if the Corporation receives gross proceeds from such public
offering of not less than $3,000,000 (with the consummation of such public
offering being deemed to occur at the time that the Corporation receives the
minimum $3,000,000 gross proceeds following the effectiveness of the applicable
registration statement under the Act), at a redemption price equal to $1.00 per
share plus an amount equal to Accrued Dividends and any unpaid Accumulated
Series B Dividends (plus any compounding thereof in accordance with Section 2
above) on the subject shares being redeemed. Upon the consummation of the
subject public offering with the minimum $3,000,000 gross proceeds received by
the Corporation, those holders of shares of Series E Preferred Stock who have
elected to have any of such shares redeemed hereunder shall surrender to the
Corporation the certificates for the shares of Series E Preferred Stock to be
redeemed hereunder; provided, that on and after the date of the consummation of
the subject public offering with the minimum $3,000,000 gross proceeds received
by the Corporation, all rights of the holders of such shares as stockholders of
the Corporation with respect to those shares of Series E Preferred Stock to be
redeemed, except the right to receive the redemption price, shall cease and
terminate and such shares shall no longer be outstanding whether or not the
certificates for the shares so redeemed have been received by the Corporation.
In the event that any proposed public offering for which the Corporation has
given notice hereunder shall not be consummated for any reason, or shall be
consummated with less than $3,000,000 of gross proceeds received by the
Corporation, any and all redemption election(s) made under this Section 3(c) in
connection with such proposed public offering shall be deemed rescinded and
terminated upon the abandonment of such proposed public offering or the
conclusion of such public offering.
-4-
<PAGE> 6
4. RIGHTS ON LIQUIDATION, DISSOLUTION OR WINDING UP. In
the event of any liquidation, dissolution or winding up of the Corporation, the
holders of shares of the Series E Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether from stated capital, capital surplus,
earned surplus or other amounts, before any payment shall be made to the
holders of any Common Stock, or any other class of stock ranking, as to
liquidation, dissolution or winding up, junior to the Series E Preferred Stock,
an amount equal to $1.00 per share plus an amount equal to Accrued Dividends
and any unpaid Accumulated Series B Dividends (plus any compounding thereof in
accordance with Section 2 above); provided, however, that the holders of the
Series E Preferred Stock shall not be entitled to receive such liquidation
payment until the liquidation payments on all outstanding shares of Series A
Preferred Stock and any other securities ranking senior to the Series E
Preferred Stock as to liquidation, if any, shall have been paid in full. If
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation available for distribution to its stockholders shall be
insufficient to pay to the holders of shares of the Series B Preferred Stock
and the Series E Preferred Stock the full amounts to which they respectively
shall be entitled, the holders of shares of the Series B Preferred Stock and
the Series E Preferred Stock shall share ratably in any distribution of assets
according to the respective amounts which would be payable on or with respect
to the shares held by them upon such distribution if all amounts payable on or
with respect to said shares were paid in full. In the event of any
liquidation, dissolution or winding up of the Corporation, after payment shall
have been made to the holders of shares of the Series E Preferred Stock of the
full amount to which they shall be entitled as aforesaid, the holders of any
shares of Common Stock, or any other class of stock ranking, as to liquidation,
dissolution or winding up, junior to the Series E Preferred Stock, shall be
entitled, to the exclusion of the holders of shares of Series E Preferred
Stock, to share, according to their respective rights and preferences, in all
remaining assets of the Corporation available for distribution to its
stockholders.
5. CONVERSION.
(a) Each holder of Series E Preferred Stock shall
have the right, from time to time at its option, to convert any or all of such
shares of Series E Preferred Stock (in units of 1,000 shares or any whole
multiple thereof) into fully paid and nonassessable shares of Common Stock of
the Corporation, at the rate of one (1) share of Series E Preferred Stock for
.368 shares of Common Stock, subject to adjustment as provided in Section 5(d)
below. To the extent permitted by law, when shares of Series E Preferred Stock
are converted, all dividends accrued and unpaid (including any compounding
thereof in accordance with Section 2 above) on the stock so converted to the
date of conversion (whether
-5-
<PAGE> 7
or not currently payable) shall be automatically waived and canceled effective
upon such conversion.
(b) In order to convert shares of Series E
Preferred Stock into shares of Common Stock pursuant to the right of conversion
set forth in Section 5(a), the holder(s) thereof shall surrender the
certificate or certificates representing the subject Series E Preferred Stock,
duly endorsed to the Corporation or in blank, at the principal office of the
Corporation and shall give written notice to the Corporation that such
holder(s) elects to convert the same, stating in such notice the name or names
in which such holder(s) wishes the certificate or certificates representing
shares of Common Stock to be issued. The Corporation shall, within five
business days, deliver at said office or other place to such holder of Series E
Preferred Stock, or to such holder's nominee(s), a certificate or certificates
for the number of shares of Common Stock to which such holder(s) shall be
entitled as aforesaid, together with cash to which such holder(s) shall be
entitled in lieu of fractional shares in an amount equal (calculated in
accordance with Section 5(f) below) to the same fraction of the conversion
amount of a whole share of Common Stock on the business day preceding the day
of conversion. Shares of Series E Preferred Stock shall be deemed to have been
converted as of the date of the surrender of such shares for conversion as
provided above, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
(c) The issuance of certificates for shares of
Common Stock upon the conversion of shares of Series E Preferred Stock shall be
made without charge to the converting stockholder for any original issue or
transfer tax in respect of the issuance of such certificates and any such tax
shall be paid by the Corporation.
(d) The number of shares of Common Stock into
which the shares of Series E Preferred Stock may be converted shall be subject
to the following adjustments:
(i) If the Corporation shall declare and
pay to the holders of Common Stock a dividend or other distribution
payable in shares of Common Stock, the number of shares of Common
Stock into which Series E Preferred Stock may be converted immediately
prior thereto shall be adjusted so that the holders of Series E
Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which such
holders would have owned or been entitled to receive after the
declaration and payment of such dividend or other distribution if such
shares of Series E Preferred Stock had been converted immediately
-6-
<PAGE> 8
prior to the record date for the determination of stockholders
entitled to receive such dividend or other distribution.
(ii) If the Corporation shall subdivide
the outstanding shares of Common Stock into a greater number of shares
of Common Stock, or combine the outstanding shares of Common Stock
into a lesser number of shares, or issue by reclassification of its
shares of Common Stock any shares of the Corporation, the number of
shares of Common Stock into which Series E Preferred Stock may be
converted shall be adjusted so that the holders of Series E Preferred
Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock which such holder would
have owned or been entitled to receive after the happening of any of
the events described above if such shares of Series E Preferred Stock
had been converted immediately prior to the happening of such event on
the day upon which such subdivision, combination or reclassification,
as the case may be, becomes effective.
(iii) The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held
by or for the account of the Corporation, and the disposition of such
shares shall be considered an issue or sale of Common Stock, for the
purposes of this Section 5(d).
(iv) All calculations under this Section
5(d) shall be made to the nearest one-thousandth of a share.
(e) The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of Series E Preferred Stock,
the full number of shares of Common Stock then deliverable upon the conversion
or exchange of all shares of Series E Preferred Stock at the time outstanding.
The Corporation shall take at all times such corporate action as shall be
necessary in order that the Corporation may validly and legally issue fully
paid and nonassessable shares of Common Stock upon the conversion of Series E
Preferred Stock in accordance with the provisions hereof.
(f) No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issued upon any
conversion of Series E Preferred Stock. If any such conversion would otherwise
require the issuance of a fractional share of Common Stock, then the
Corporation shall pay in lieu of issuing any fractional share an amount in cash
equal to the same fraction of the market value of one share of Common Stock,
based on the average closing price of the Corporation's Common Stock on NASDAQ
for the five trading days immediately preceding such conversion.
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<PAGE> 9
6. VOTING RIGHTS.
(a) Except as otherwise provided herein, or as
required by the General Corporation Law of the State of Delaware, the holders
of shares of Series E Preferred Stock shall have the right to vote, together
with the holders of all the outstanding shares of capital stock of the
Corporation as a single class, and not as a separate class, on all matters on
which holders of Common Stock shall have the right to vote. The holders of
shares of Series E Preferred Stock shall have the right to cast one vote for
each share of Series E Preferred Stock held by them.
(b) In addition to any other vote or
authorization that may be required therefor, any amendment or modification from
time to time of the relative rights, preferences, powers, limitations or other
attributes of the Series E Preferred Stock, and/or any increase from time to
time in the number of authorized shares of Series E Preferred Stock, shall only
be effected upon the affirmative vote or written consent of the holders of not
less than eighty-five (85%) percent of the outstanding shares of Series E
Preferred Stock.
(c) Whenever holders of Series E Preferred Stock
are required or permitted to take any action by vote, such action may be taken
without a meeting on written consent, setting forth the action so taken and
signed by the holders of the outstanding capital stock of the Corporation
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all such shares entitled to
vote thereon were present and voted.
7. PRIORITY. All Series E Preferred Stock shall rank
junior upon liquidation, dissolution and winding up to all Series A Preferred
Stock outstanding on the date hereof, shall rank pari passu in dividends,
liquidation, dissolution and winding up to all Series B Preferred Stock
outstanding following the issuance of Series E Preferred Stock, and shall rank
senior in dividends, liquidation, dissolution and winding up to all Series D
Preferred Stock.
8. CONSIDERATION FOR ISSUANCE. Shares of Series E
Preferred Stock may only be issued for consideration which includes a like
number of shares of outstanding Series B Preferred Stock. Upon tender to the
Corporation of shares of outstanding Series B Preferred Stock as consideration
(in whole or in part) for the issuance of a like number of shares of Series E
Preferred Stock, the Corporation shall, upon issuance of such shares of Series
E Preferred Stock, cancel the tendered shares of Series B Preferred Stock, and
shall not reissue such canceled shares of Series B Preferred Stock.
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<PAGE> 10
RESOLVED: That the statements contained in the foregoing
resolution creating and designating the said "Series E" issue
of the Preferred Stock of the Corporation and fixing the
number, powers, preferences and relative, optional,
participating and other special rights and the qualifications,
limitations, restrictions and other distinguishing
characteristics thereof shall, upon the effective date of said
Series, be deemed to be included in and be a part of the
certificate of incorporation of the Corporation pursuant to
the provisions of Sections 104 and 151 of the Delaware General
Corporation Law.
Signed and attested to on May 9, 1995.
/s/ STEPHEN R. FELDMAN
-----------------------------
Stephen R. Feldman, Chairman
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<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated December 9, 1994 (except as to Note L (1),
which is as of January 20, 1995), accompanying the consolidated financial
statements and schedules of Conquest Industries, Inc. contained in the
Registration statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under caption "Experts."
GRANT THORNTON LLP
New York, New York
November 9, 1995
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
I consent to the use in this Registration Statement on Form S-1 of my
reports dated January 10, 1994 and May 20, 1994 relating to the financial
statements of Langworthy Casino Supply and the reference to my firm under the
Captions "EXPERTS" in the Prospectus.
/s/ Allen G. Roth
Allen G. Roth
Certified Public Accountant
New York, New York
November 13, 1995
