<PAGE> 1
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number: 1-10206
---------
CONQUEST INDUSTRIES INC.
----------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0206582
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2215 E.M. Franklin Ave. Austin, Texas 78723
---------------------------------------------------
(Address of principal executive office) (Zip Code)
2215 Redwood, Austin, Texas 78723
-----------------------------------------------------------------------
(Registrant's former address of Principal Executive Office) (Zip Code)
(512) 929-6706
---------------------------------------------------
(Registrant's telephone number including area code)
(512) 929-6706
----------------------------------------------------------
(Registrant's former telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of March 31, 1995 was 9,158,677 shares.
<PAGE> 2
CONQUEST INDUSTRIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 1-2
Consolidated Statement of Operations 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 9-15
PART II - OTHER INFORMATION 16
SIGNATURE 17
</TABLE>
<PAGE> 3
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1994 1995
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,007,880 $ 871,130
Trade accounts receivable, less allowance for
doubtful accounts 5,694,272 5,190,743
Other receivables 323,843 191,006
Inventories 8,495,479 7,641,457
Prepaid expenses and other current assets 235,344 677,167
----------- -----------
TOTAL CURRENT ASSETS 15,756,818 14,571,503
MACHINERY AND EQUIPMENT - NET 1,071,301 1,001,072
DEFERRED TAX ASSET 753,000 1,257,900
INTANGIBLE AND OTHER ASSETS - NET 5,979,581 6,343,049
----------- -----------
NET ASSETS OF DISCONTINUED OPERATIONS 4,250,000 4,250,000
----------- -----------
$27,810,700 $27,423,524
=========== ===========
</TABLE>
See notes to financial statements.
-1-
<PAGE> 4
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1994 1995
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,634,545 $ 5,607,113
Accrued expenses 3,331,344 2,434,428
Current portion of long-term debt 1,500,000 1,500,000
Income taxes payable 25,018 --
------------ ------------
TOTAL CURRENT LIABILITIES 9,490,907 9,541,541
LONG-TERM DEBT 16,705,849 17,528,349
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY :
Preferred stock, authorized 5,000,000 shares, issuable in series
Series A, preferred stock, $.10 par value; 7,550 issued and
outstanding (liquidation preference: $93,257) 755 755
Series B, convertible redeemable preferred stock, no par
value; 2,800,000 shares issued and outstanding 2,800,000 2,800,000
Series D, redeemable preferred stock, no par value;
600,000 shares issued and outstanding ($200,000
liquidation preference) -- 200,000
Common stock, $.01 par value; 25,000,000 shares authorized;
9,158,677 shares issued and outstanding 91,587 91,587
Additional paid-in capital 12,748,815 13,000,815
------------ ------------
Accumulated deficit (13,945,520) (15,664,739)
------------ ------------
Foreign currency translation adjustment (81,693) (74,784)
------------ ------------
1,613,944 353,634
------------ ------------
$ 27,810,700 $ 27,423,524
============ ============
</TABLE>
See notes to financial statements.
-2-
<PAGE> 5
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
----------------------------- -----------------------------
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES $ 10,056,954 $10,353,224 $ 20,530,724 $21,414,269
COST OF SALES 6,557,746 6,391,450 13,148,193 13,001,924
------------ ----------- ------------ -----------
GROSS PROFIT 3,499,208 3,961,774 7,382,531 8,412,345
------------ ----------- ------------ -----------
OPERATING EXPENSES:
Selling, distribution and administrative expenses 3,481,919 3,047,299 6,976,090 6,238,981
Amortization expense 116,329 92,329 232,657 184,657
Loss from airline operations 611,008 -- 611,008 --
------------ ----------- ------------ -----------
4,209,256 3,139,628 7,819,755 6,423,638
------------ ----------- ------------ -----------
OPERATING INCOME (LOSS) (710,048) 822,146 (437,224) 1,988,707
------------ ----------- ------------ -----------
OTHER EXPENSES (INCOME):
Interest expense 588,126 434,344 1,061,481 860,311
Amortization of debt discount 290,000 -- 485,000 --
Other-net 104,514 12,290 104,514 11,423
------------ ----------- ------------ -----------
982,640 446,634 1,650,995 871,734
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,692,688) 375,512 (2,088,219) 1,116,973
PROVISION FOR INCOME TAXES (BENEFIT) (359,000) 142,695 (509,000) 424,450
------------ ----------- ------------ -----------
NET INCOME (LOSS) $ (1,333,688) $ 232,817 $ (1,579,219) $ 692,523
============ =========== ============ ===========
PRO-FORMA EARNINGS (LOSS) PER SHARE $ (0.15) $ 0.02 $ (0.19) $ 0.07
============ =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES 9,159,000 7,181,000 9,159,000 7,181,000
============ =========== ============ ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 6
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stocks
-------------------------------------------------------------
Series A Series B Series D
--------------- ---------------------- ------------------
Shares Amount Shares Amount Shares Amount
------ ------ --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 7,550 $755 2,800,000 $2,800,000 -- --
Net loss - - - -
Preferred stock dividend - - - -
Issuance of Series D preferred stock in exchange for
shareholder loans 200,000 200,000
Translation of foreign currency - - - -
Issuance of warrants in connection with debt - - - -
----- ---- --------- ---------- ------- --------
BALANCE - MARCH 31, 1995 7,550 $755 2,800,000 $2,800,000 200,000 $200,000
===== ==== ========= ========== ======= ========
<CAPTION>
Common Stock
------------------- Paid-in Treasury
Shares Amount Capital Stock
--------- ------- ----------- -------
<S> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1994 9,158,676 $91,587 $12,748,815 $ --
Net loss
Preferred stock dividend
Issuance of Series D preferred stock in exchange for
shareholder loans 102,000
Translation of foreign currency
Issuance of warrants in connection with debt 150,000
--------- ------- ----------- ------
BALANCE - MARCH 31, 1995 9,158,676 $91,587 $13,000,815 $ --
========= ======= =========== ======
<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 (1,579,219) (1,579,219)
-
Preferred stock dividend (140,000) (140,000)
Issuance of Series D preferred stock in exchange for
shareholder loans 302,000
Translation of foreign currency 6,909 6,909
Issuance of warrants in connection with debt 150,000
------------ -------- -----------
BALANCE - MARCH 31, 1995 $(15,664,739) $(74,784) $ 353,634
============ ======== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 7
CONQUEST INDUSTRIES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended March 31.
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,579,219) $ 692,523
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 717,657 369,622
Provision for bad debts 56,802 62,953
Issuance of Series D preferred stock 102,000 --
Loss from discontinued operations 611,008
Changes in assets and liabilities:
Decrease (increase) in trade and other accounts receivable 446,727 (418,567)
Decrease (increase) in inventories 854,022 920,604
Decrease (increase) in prepaid expenses and other
current assets (568,987) 31,911
Increase in intangibles and other assets (325,864) (300,739)
Increase (decrease) in accounts payable 851,157 (350,447)
Increase (decrease) in income taxes payable 225,406 42,538
Increase (decrease) in accrued expenses (1,143,213) 29,330
----------- -----------
TOTAL ADJUSTMENTS 1,826,715 387,205
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 247,496 1,079,728
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (96,632) (121,380)
Cash used in discontinued operations (577,892) 6,427
----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (674,524) (114,953)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term financing (750,000) (620,871)
Preferred stock dividends (140,000) (200,000)
Proceeds from revolving credit line -- 100,000
Proceeds from issuance of promissory notes, net 973,369 --
Proceeds from issuance of preferred stock 200,000 --
Effect of foreign currency exchange rate changes 6,909 (295)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES 290,278 (721,166)
----------- -----------
NET INCREASE (DECREASE) IN CASH (136,750) 243,609
CASH AT BEGINNING OF PERIOD 1,007,880 791,038
----------- -----------
CASH AT END OF PERIOD $ 871,130 $ 1,034,647
=========== ===========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 8
CONQUEST INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Six months ended March 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,048,014 $ 860,311
========== ==========
Income taxes $ -- $ --
========== ==========
Noncash investing and financing activities:
Issuance of Series D preferred stock $ 102,000 $ --
========== ==========
</TABLE>
See notes to financial statements.
-6-
<PAGE> 9
CONQUEST INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. All
such adjustments are of a normal and recurring nature. The results of operations
for any interim period are not necessarily indicative of a full year.
Certain financial information which is normally included in the financial
statements prepared in accordance with generally accepted accounting principles,
which is not required for interim reporting purposes has been condensed or
omitted. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and notes thereto (the "Consolidated
Financial Statements") as filed by the Company with the Securities and Exchange
Commission in the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1994.
2. EARNINGS (LOSS) PER SHARE
The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the period
plus (in periods in which they have a dilutive effect) the effect of common
shares contingently issuable, primarily from stock options, exercise of warrants
and the conversion of preferred stock. Such dilutive securities included in the
number of common shares outstanding are based on the treasury stock method.
3. ACQUISITION OF LANGWORTHY CASINO SUPPLY
The following table sets forth pro-forma results of operations for the
Company and Langworthy Casino Supply as if the Langworthy acquisition took
place on October 1, 1993.
<TABLE>
<CAPTION>
Six months ended
March 31, 1994
----------------
<S> <C>
Revenues, net $23,535,000
-----------
Operating income $ 2,211,000
-----------
Pro-forma net income $ 1,382,000
===========
Pro-forma income per share $ .13
===========
</TABLE>
-7-
<PAGE> 10
4. INVENTORIES
Inventories are summarized as follows at March 31, 1995:
<TABLE>
<S> <C>
Manufacturing inventories:
Material and work-in-process $1,653,553
Finished products 1,076,819
----------
2,730,372
Purchased merchandise for resale 4,911,085
----------
$7,641,457
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
(a) In February 1995, the Company borrowed $200,000 from the
Blum Asset Trust ("BAT") an affiliate of Bentley J. Blum. The loan was
non-interest bearing and was repayable on demand. In May 1995, pursuant to a
prior agreement, the loan was converted into 600,000 shares of new Series D
preferred Stock of the Company, and the Company simultaneously issued to BAT
warrants entitling BAT to purchase, at any time on or before February 15, 2000,
up to 600,000 shares of Common Stock at a price of $.3333 per share (subject to
adjustment under certain circumstances); and one-third of such warrants are
subject to cancellation if all of the shares of Series D Preferred Stock are
redeemed on or before August 15, 1995. BAT has the right_to pay the exercise
price under such warrants by delivering to the Company for cancellation a
number of shares of Series D Preferred Stock having an aggregate liquidation
preference equal to the amount of the subject exercise price.
-8-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital for operations has been the
combined Term Loan and Revolving Credit Loan pursuant to the Lending Agreement
between the Company's wholly-owned subsidiary Wico Corporation ("Wico") and its
institutional lender, as well as cash flow from operations. However, as
described in greater detail below, the Company has experienced negative cash
flow, and a shortage of working capital in the first two quarters of the year
ending September 30, 1995. Additionally, in November 1994, the Company
completed a Private Placement of its securities in the amount of $2,737,500,
which yielded net proceeds to the Company of approximately $2.3 million after
the costs of the financing.
Under the terms of the Lending Agreement, Wico must be in compliance with
certain financial ratios. Certain of the covenant requirements include
attaining operating income before amortization of intangibles and other assets
(as defined in the Lending Agreement), current ratio of 1.75:1 and minimum
working capital of $6,300,000. As of March 31, 1995, Wico was not in
compliance with two of such financial covenants and has received a waiver from
its lending institution with respect thereto. The Term Loan, maturing in
October 1998, provides for monthly installments of principal, and had a
principal balance of approximately $6,211,000 at March 31, 1995. The Revolving
Credit Loan provides for a maximum credit of $13,000,000 (inclusive of letters
of credit that may be established at the request of Wico), and as of the date
of this report, the line of credit is fully drawn upon. At March 31, 1995,
the aggregate amount of borrowings under the Lending Agreement was
approximately $19,161,000. Repayment of the loan is secured by a first lien on
a substantial portion of Wico's assets, limited personal guarantees, each in
the amount of $1,000,000, from Stephen R. Feldman, Chairman of the Board of
the Company, and Bentley J. Blum, a principal stockholder and director of the
Company, and stock pledges in favor of the institutional lender covering all of
the common stock of the Company owned by certain of Wico's prior stockholders.
The maximum interest rates on the institutional loans are payable at the
option of WICO at either the prime rate plus 1-1/2%, or LIBOR plus 3-1/4%.
Under certain circumstances related to earnings, the rate of interest may be
reduced to the prime rate, or LIBOR plus 1-3/4%. Under the terms of the
Lending Agreement, the lender was granted a warrant to purchase 4.9% of Wico's
common stock which was exchanged for a warrant to purchase 400,000 shares of
common stock of the Company at the time of the business combination between the
Company and Wico (the "Wico Merger"). In consideration of Wico's agreement to
make a prepayment, the lender consented to the Wico Merger and the Langworthy
acquisition. Wico used $4,000,000 in funds obtained from the Wico Merger to
make such payment and agreed to pay the lender an additional $1,000,000 by
December 31, 1994 and to purchase the lender's warrant for $1,000,000 by
December 31, 1994, or in the alternative incur a 1-1/2 % per annum increase in
the interest rate paid on the loans and pay a fee of $375,000. The Company
selected the second option and paid $200,000 on December 15, 1994, and has
accrued the balance as of March 31, 1995.
The Lending Agreement provides for mandatory prepayment of the term loan
in amounts equal
-9-
<PAGE> 12
to 75% of Wico's excess cash flow, as defined in the Lending Agreement. The
Lending Agreement contains other restrictions requiring the consent of the
lender in connection with making of any acquisition, payment of dividends,
issuance of additional securities or making of annual capital expenditures in
excess of $500,000.
The Company sold $2,737,500 of its securities in an private placement of
units in November 1994. Each unit ("Unit") consisted of a $25,000 principal
amount 10% convertible Promissory Note (the "Notes") due 24 months from
September 1994 (or earlier upon the occurrence of certain events). The Notes
are convertible into shares of the Company's Common Stock at a price per share
equal to eighty percent of the closing bid price of the Common Stock on the
date of conversion. Upon conversion, holders of the Notes will also have the
right to receive warrants to purchase 500 shares of common stock of the Company
per Unit at an exercise price of $11.875 per share for a four-year period
commencing on the effective date of a registration statement which includes
such shares.
Since the Wico Merger, the Company's airline operation has used
approximately $2,000,000 in cash through March 31, 1995. The airline operation
has continued to operate unprofitably and generate negative cash flow from its
operations. On January 1, 1995, the Company implemented across the board fare
increases, and in February 1995, the Company was successful in negotiating with
its lessors to terminate the leases of three of its aircraft which reduced the
fleet to six, as compared to 16 aircraft at the time of the Wico Merger. These
measures, together with other cost reductions, have reduced the losses in the
airline operation. However, the Company expects to continue to incur losses in
the airline operation while the Company continues to seek a buyer for the
airline. Due to the negative cash flow in the airline operation, the airline
is also in default of its lease payments under the leases for its six aircraft,
and has received default notices from the lessors in respect of four of the six
aircraft.
During the year ended September 30, 1994, Wico operated with positive cash
flow. However, as a result of continuing demands of the Company's airline
operation, as well as costs associated with the consolidation of the Company's
recently acquired gaming subsidiary, and a general softening of demand for
certain of Wico's products, Wico generated lower than expected sales volume in
the fourth quarter of fiscal 1994 and the first two quarters of fiscal 1995,
resulting in a negative cash flow for the first two quarters of fiscal 1995 to
date and a shortage of working capital. The Company is attempting to obtain
additional working capital by refinancing its senior secured indebtedness under
its line of credit. Although it has received a financing proposal from an
institutional lender, such proposal does not constitute a financing commitment
In addition, consummation of such refinancing will require the agreement of the
Company's existing institutional lender to subordinate a portion of its debt to
the rights of such new lender. Accordingly, there is no assurance that the
Company will be able to effect such refinancing, or on terms that will relieve
its liquidity and cash flow shortages.
Seasonality
Wico's consumer products segment experiences its peak sales during the
Christmas holiday selling season. Due to the importance of the Christmas
selling season, net sales relating thereto constitute a disproportionate amount
of net sales for the entire year and all of Wico's income from operations of
this segment. Unfavorable economic conditions affecting retailers generally
during the Christmas selling season in any year could materially adversely
affect Wico's results of operations for this segment. Wico must also make
decisions regarding how much inventory to buy in advance of
-10-
<PAGE> 13
the season in which it will be sold. Significant deviations from projected
demand for products can have an adverse effect on Wico's sales and
profitability for this segment.
Inflation
To date, inflation has not had a material effect on Wico's operations.
-11-
<PAGE> 14
RESULTS OF OPERATIONS
The Company's results of continuing operations continue to be impacted by
trends in Wico's coin - operated machine and consumer video game markets. The
soft market for coin operated amusement machine parts has resulted in
essentially flat distribution sales. Consumer sales were impacted negatively
in this period by a soft post - Christmas selling season, and delayed orders
from retailers in anticipation of the Company's new product line unveiled at
the January 1995 Consumer Electronics show. The three and six - month 1994
periods also benefited from increased sales to an original equipment
manufacturer ("OEM"), which was not repeated in the 1995 periods. Additionally,
both distribution and consumer sales were negatively impacted by poor inventory
positions as a result of a shortage of working capital.
Three Months Ended March 31, 1995 compared to Three Months Ended March 31,
1994:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------------
1995 1994
------ ------
(In Thousands)
<S> <C> <C>
Sales:
Distribution $ 8,598 $ 8,797
Consumer 1,025 1,556
Gaming 434 -
----------------------
10,057 10,353
Gross Profit:
Distribution 3,151 3,398
Consumer 424 564
Gaming (76) -
----------------------
3,499 3,962
Selling, Distribution and Administrative 3,482 3,047
Amortization of intangibles 116 92
----------------------
Interest and other amortization 878 434
----------------------
Other Expense 105 12
----------------------
Income (Loss) Before Income Taxes (1,693) 375
----------------------
Net Income (Loss) (1,334) 233
======================
</TABLE>
Sales for the three months ended March 31, 1995 were $10,057,000 as
compared to $10,353,000 for the comparable prior year period. The 2.9% or
$296,000 decrease was the result of consumer sales decreasing $531,000, or
34.1% and distribution sales decreasing $199,000 (approximately
-12-
<PAGE> 15
2.3%). These sales declines were partially offset by the inclusion of Wico
Gaming Supply Corp. ("Wico Gaming") of $434,000 as a result of the acquisition
of this division in June 1994.
Distribution sales declined primarily due to depressed demand for products
relating to coin-operated video games. Consumer sales declined due in
part to discontinued products for Nintendo and Sega video game machines, which
effected sales by 2%-3%. Management believes that it will be able to replace
these manufacturers with other customers. Additionally, production problems in
the Far East manufacturing facility restricted supply of product, resulting in
lost sales. As a result of the problems encountered with these vendors,
management is seeking alternative foreign sources of supply, and expects to be
able to replace these vendors in the next six months.
Additionally, sales of both coin-operated parts and consumer joysticks
were negatively affected in the quarter due to decreased availability of
inventory, in part a result of working capital constraints. Such lost sales
will not be recouped. Wico Gaming's sales were also negatively impacted by
licensing requirements of individual states and the length of time required in
obtaining such licenses. While applications have been submitted in all major
gaming states, the approval process is continuing..
Gross profit for the three months ended March 31, 1995 was $3,499,000
versus $3,962,000 for the comparable prior year period. Distribution gross
margin percentage was 36.7% versus 36.4% for the comparable prior year period.
Suncom (the consumer division) gross margin percentage increased from 36.3% to
41.3%. Wico Gaming's negative gross margin of $76,000 represented a negative
gross margin percentage of approximately 17.5% of its net sales for the period.
Selling, distribution and administration expenses in the three months
ended March 31, 1995 were $3,482,000 (approximately 34.9% of sales) as compared
to $3,047,000 (approximately 29.4% of sales) for the comparable prior year
period. The increase is partially due to the inclusion of Wico Gaming
expenses of $266,000 which were higher than normal due to a reorganization and
relocation of the physical plant in Las Vegas.
Amortization of intangibles was $116,000 during the current period and
$92,000 in the comparable prior year period, respectively.
Interest expense (including the amortization of deferred debt discounts
and fees of $290,000 in the current year period, as opposed to none in the
comparable prior year period) increased from $434,000 to $878,000. The balance
of the increase is a combination of higher borrowings as well as higher
interest rates.
The Company recorded a loss before taxes of $1,693,000 and a net loss of
$1,334,000 for the three-month period ended March 31, 1995. The result was
due to reduced parts and supplies sales, a change in the consumer product
division's product mix, as well as the reorganization of Wico Gaming,
amortization charges of $382,000 as discussed above, and a loss from airline
operations of $611,000.
-13-
<PAGE> 16
Six months ended March 31, 1995 compared to Six months ended March 31, 1994:
<TABLE>
<CAPTION>
Six Months
Ended
March 31,
----------------------
1995 1994
------- -------
(In Thousands)
<S> <C> <C>
Sales:
Distribution $16,003 $17,015
Consumer products 3,527 4,399
Gaming 1,001 -
----------------------
20,531 21,414
Gross Profit:
Distribution 5,812 6,599
Consumer products 1,536 1,813
Gaming 34 -
----------------------
7,382 8,412
Selling, Distribution and Administrative 6,976 6,239
Amortization 233 185
Interest Expense 1,546 860
Other Expense 105 11
Income (Loss) Before Income Taxes (2,088) 1,117
Net Income (Loss) (1,579) 693
</TABLE>
Sales for the six months ended March 31, 1995 were $20,531,000 as compared
to $21,414,000 for the comparable prior year period. The 4% or $883,000
decrease was the result of distribution sales decreasing $1,012,000 and
consumer product sales decreasing $872,000, partially offset by sales of Wico
Gaming, acquired in June 1994, of $1,001,000.
Distribution sales decreased 6% to $16,003,000. Distribution sales
continued to be hampered by soft conditions in the coin machine market.
Consumer sales declined 19.8% from the comaparable prior year period. This
decline is attributable to the soft Christmas market and the decline in
consumer OEM sales.
Additionally, sales of both coin-operated parts and consumer joysticks
were negatively affected in the quarter due to decreased availability of
inventory, in part a result of working capital constraints. Such lost sales
will not be recouped. Wico Gaming's sales were also 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.
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<PAGE> 17
Gross profit for the six months ended March 31, 1995 was $7,384,000 as
compared to $8,412,000 for the comparable prior year period. Distribution
gross margin percentage was 36.3% as compared to 38.8% for the comparable prior
year period. The decline was the result of increased price competition in an
overall soft market. The consumer products division's gross margin percentage
increased from 41.2% to 43.6%. Wico Gaming's gross margin of $34,000
represented a gross margin percentage of approximately 3.4% of its net sales
for the period.
Selling, distribution and administration expenses for the six months ended
March 31, 1995 were $6,976,000 (approximately 33.3% of sales) as compared to
$6,239,000 (29.4% of sales) for the comparable prior year period. The 9.7%
increase was largely the result of the inclusion of Wico Gaming, which
accounted for $544,000 of expenses.
Amortization of intangibles was approximately $233,000 and $185,000,
respectively. The increase in 1995 is due to amortization related to deferred
debt financing costs.
Interest expense increased from $860,000 to $1,061,000. The increase is a
combination of higher borrowings as well as higher interest rates. Amortization
of debt discounts and deferred loan costs was $485,000 in the current year
period (none in the comparable prior year period).
The Company recorded a loss before tax benefit of $2,088,000 and a net
loss of $1,579,000 for the six months ended March 31, 1995. The result was due
to reduced parts and supplies sales and gross margins, as well as the
reorganization of Wico Gaming, a charge of $485,000 relating to the
amortization of debt discounts recorded in the fourth quarter of fiscal 1994,
and a loss on airline operations of $611,000. A deferred income tax benefit of
approximately $509,000 was recorded during the six months ended March 31, 1995
as a result of the tax benefits of the operating losses incurred during this
period.. Management believes that the total deferred tax benefits, aggregating
approximately $1,260,000 as of March 31, 1995 will be recovered by the
generation of financial reporting and taxable income prior to the expiration of
such net operating losses.
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<PAGE> 18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - NONE
Item 2. CHANGES IN SECURITIES - NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
Item 5. OTHER INFORMATION - NONE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K -
(b) No reports on Form 8-K were filed by this registrant during the
quarter for which this report is filed
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONQUEST INDUSTRIES INC.
/s/ Stephen R. Feldman
-----------------------------------
Stephen R. Feldman,
Chairman
/s/ Jerry Karlik
-----------------------------------
Jerry Karlik
Chief Financial Officer and Chief
Accounting Officer
Dated: November 2, 1995
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