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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 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 NO. 0-11630
CHALLENGER INTERNATIONAL, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
REID HOUSE, 31 CHURCH STREET
HAMILTON, BERMUDA
HM 12
(Address of principal executive offices, zip code)
(441) 295-8639
(Registrant's telephone number, including area code)
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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
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There were 11,009,808 shares of the registrant's Common Stock, par value
.01 per share, outstanding on July 31, 1995.
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CHALLENGER INTERNATIONAL, LTD.
INDEX
PAGE
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PART 1 FINANCIAL INFORMATION
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ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
(unaudited) at July 31, 1995 and October 31, 1994 2
Consolidated Statements of Operations of the Company
(unaudited) for the three months and nine months ended July 31, 1995 3
Consolidated Statements of Cash Flows of the Company
(unaudited) for the three months and nine months ended July 31, 1995 4
Notes to the Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 6
PART 2 OTHER INFORMATION
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 9
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
(Unaudited)
July 31 October 31
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1995 1994
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,574 $ 2,997
Accounts receivable 7,176 5,539
Inventories 12,760 6,449
Other current assets 457 99
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21,967 15,084
EXCESS OF COST OVER NET ASSETS OF COMPANY ACQUIRED - LAKEFIELD 1,689 -
EXCESS OF COST OVER NET ASSETS OF COMPANY ACQUIRED - INTELECT 7,642 -
PROPERTY, PLANT AND EQUIPMENT - NET 9,617 7,527
OTHER ASSETS 387 370
DEPOSIT FOR ACQUISITION - 923
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$ 41,302 $ 23,904
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 776 $ 522
Notes payable 4,222 3,146
Accounts payable and accrued liabilities 6,420 4,146
Current maturities of long-term debt 5,466 873
Current installments of obligations under capital leases 46 -
Liability reserve 173 97
Income taxes payable 165 46
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17,268 8,830
LONG-TERM DEBT, net of current maturities 8,509 2,241
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25,777 11,071
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MINORITY INTEREST 969 930
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SHAREHOLDERS' EQUITY:
Common shares, $0.01 par value,
80,000,000 shares authorized,
11,009,808 issued and outstanding
(October 31, 1994 - 10,583,142) 110 106
Share premium 9,821 7,854
Retained earnings - since November 1, 1992 4,625 3,943
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14,556 11,903
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$ 41,302 $ 23,904
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2
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
July 31 July 31
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1995 1994 1995 1994
----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS
SALES AND OTHER REVENUES:
Net sales $ 10,542 $ 8,156 $ 24,626 $ 17,548
Interest and other income 40 36 119 43
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10,582 8,192 24,745 17,591
COSTS AND EXPENSES:
Cost of goods sold 6,555 5,402 16,124 11,608
Research and development 784 - 784 -
Interest expense 332 175 661 413
Selling, general and administrative 2,428 1,208 4,821 2,856
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 483 1,407 2,355 2,714
INCOME TAXES 913 310 1,674 655
----------- ----------- ----------- -----------
NET INCOME (LOSS) FOR PERIOD $ (430) $ 1,097 $ 681 $ 2,059
=========== =========== =========== ===========
EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER SHARE $ (0.04) $ 0.10 $ 0.06 $ 0.19
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES AND
COMMON STOCK EQUIVALENTS OUTSTANDING
(IN THOUSANDS) 11,682 10,994 11,483 11,075
=========== =========== =========== ===========
3
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
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July 31 July 31
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1995 1994 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) for period $ (430) $ 1,097 $ 681 $ 2,059
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Discontinued operations - (90) - (114)
Provision for losses on accounts receivable (29) - 36 -
Changes in the provision for cash discount (19) - 86 -
Reserve for inventory obsolescence - - 6 -
Depreciation and amortization 298 159 725 458
Utilization of net loss carryforwards 549 97 1,022 407
Non cash interest 19 - 39 -
Changes in operating assets and liabilities:
Accounts receivable (630) (1,118) (1,328) (2,167)
Inventories (4,173) (314) (5,928) (2,251)
Other current assets 210 - (345) (136)
Liability reserves 72 26 40 (31)
Accounts payable and accrued liabilities 3,050 10 2,056 610
Income taxes payable (67) - 89 -
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Net cash used in operating activities (1,150) (133) (2,821) (1,165)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on acquisition - - 923 -
Investment in other assets (1) (32) (28) (32)
Purchase of fixed assets (1,398) (207) (2,085) (779)
Investment in Lakefield - - (1,960) -
Investment in Intelect (5,418) (32) (7,642) (32)
Proceeds on sale of fixed assets (110) - (102) -
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Net cash used in investing activities (6,927) (239) (10,894) (811)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under notes payable (383) 125 610 1,678
Payments on capital lease obligations (7) (6) (7) (72)
Payment of long-term debt (720) (105) (1,000) (424)
Proceeds from issuances of notes payable 10,745 - 11,533 -
Proceeds from share issuances 15 - 944 75
Adjustments to minority interest (20) - (39) -
Bank overdraft (104) 249 251 350
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NET CASH PROVIDED BY FINANCING ACTIVITIES 9,526 263 12,292 1,607
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,449 (109) (1,423) (369)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOd 125 804 2,997 1,064
============= ============= ============= =============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,574 $ 695 $ 1,574 $ 695
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4
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1995
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's Report on Form 20-F as at
October 31, 1994.
ACQUISITIONS
The Company concluded the acquisition of Intelect, Inc. ("Intelect") on
April 24, 1995, however due to pending legal agreements to retire Intelect's
secured debt, the Company did not fund the acquisition until June 27, 1995. The
excess of purchase price over the estimated fair values of the net assets
acquired has been recorded as excess of cost over net assets of company
acquired, which will be amortized over fifteen years.
Current installments of long-term debt and long-term debt net of current
maturities both include $4,500,000 of debt assumed in connection with the
acquisition of Intelect. In connection with the intended sale of Savage
Corporation ("Savage") to Mossberg Corporation ("Mossberg"), Mossberg provided
the Company with a loan of $9,000,000 (the "Mossberg Note") to fund the
Company's acquisition of Intelect.
LONG-TERM DEBT
Current installments of long-term debt and long-term debt net of current
maturities both include $4,500,000 of debt assumed in connection with the
acquisition of Intelect. In connection with the intended sale of Savage
Corporation ("Savage") to Mossberg Corporation ("Mossberg"), Mossberg provided
the Company with a loan of $9,000,000 (the "Mossberg Note") to fund the
Company's acquisition of Intelect.
The acquisition of Intelect required the issuance by Intelect of debentures
(the "Debentures") of $2,500,000 plus the amount by which certain of Intelect's
debts to two major customers (the "Debts") were settled for less than
$6,000,000. The Debts were settled for $5,180,000 and accordingly the face value
of the Debentures were issued in the amount of $3,320,000 ($2,500,000 plus
$6,000,000 minus $5,180,000). In accordance with the purchase agreement the face
value of the Debentures can be reduced by the amount that defined net assets at
the acquisition date (April 24, 1995) are less than $1,268,000. As at July 31,
1995 this reduction is estimated to be $1,797,000 and accordingly the value of
the Debentures, which bear interest at 6%, are $1,523,000 payable over the four
year period post-acquisition.
RESEARCH AND DEVELOPMENT (R&D)
Capitalization of development costs commences upon the establishment of
technological feasibility. Both the establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized development costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future revenues, estimated
economic life and changes in software and hardware technologies. Whilst
technological feasibility has been established, future revenue potential has not
been established and accordingly R&D expenses, which relate solely to the
business of Intelect, has been expensed in the accompanying financial
statements.
5
INVENTORIES
The components of inventories are as follows (thousands of U.S. dollars):
JULY 31 OCTOBER 31
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1995 1994
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Raw materials $ 2,867 $ 720
Work in progress 7,174 5,002
Finished goods 3,187 853
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13,228 6,575
Less: allowance for obsolescence 468 126
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$ 12,760 $ 6,449
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JULY 31, 1995
OVERVIEW
The Company's third quarter financial statements primarily reflect the
transition of the Company's business from sporting firearms through its
subsidiary Savage Corporation ("Savage") to telecommunications through its
subsidiary Intelect Systems Corp. ("Intelect"). Third quarter results combine
the relatively robust performance by Savage over the full nine months and
start-up of Intelect following the acquisition of Intelect, Inc. on April 24,
1995. Prior year accounts include only the results of Savage.
Results for the quarter ended July 31, 1995 include the consolidation of
Savage for the full nine months and Intelect Systems Corp. for three months.
Comparative results for the prior year include only Savage.
Consolidated sales totaled $24,626,000 for the nine months and $10,542,000
for the three months ended July 31, 1995 - up from $17,548,000 and $8,156,000
the prior year. This increase is primarily attributable to Savage ($23,578,000
versus $17,548,000 for nine months and $9,494,000 versus $8,156,000 for three
months) with Intelect contributing $1,048,000 for the three months ended July
31, 1995.
Pretax income fell to $483,000 for the quarter from $1,407,000 and to
$2,355,000 for the nine months from $2,714,000 reflecting a net loss by Intelect
of $1,614,000 and net income by Savage of $2,326,000. Savage reported an
increase in operating income for the three months ended July 31, 1995 to
$2,489,000 up from $1,782,000 for the same period in 1994, and for the nine
months ended July 31, 1995 to $4,661,000 up from $3,541,000 for the
corresponding 1994 period.
Net income was $681,000 or $0.06 per share for the nine months, down from
$2,059,000 or $0.10 per share in 1994. For the three months to July 31, 1995 the
net loss was $430,000 or $0.04 per share compared with net income of $1,097,000
or $0.10 per share in 1994.
On a per share basis, since there has not been a tax consolidation with
Intelect, after-tax results reflect estimated taxes on the Savage profits, but
do not benefit from an estimated tax reduction for the Intelect loss. In this
format, earnings (loss) per share for the third quarter and nine months were
$(0.04) and $0.06, compared to $0.10 and $0.19 in 1994. This tax reporting
anomaly will be resolved upon the sale of Savage.
The Company executed definitive acquisition documents on April 25, 1995 and
funded the acquisition of Intelect, Inc. on June 27, 1995. The delay was due to
final agreements to retire Intelect, Inc.'s secured debts.
The Company had previously entered into a Letter of Intent to sell Savage
to Mossberg for $35,000,000 plus additional consideration to be determined at
closing. The Company and Mossberg were subsequently not able to complete a
definitive agreement on mutually acceptable terms. The Company has therefore
agreed to sell Savage to Savage Sports Corporation (the "Buyer"), a newly-formed
company owned by Ronald Coburn, the President of Savage and Fleet Equity
Partners of Providence, Rhode Island. The Agreement reflects a base price of
$33,000,000 and the assumption by the Buyer of up to $6,000,000 of defined debt.
The Company will be required to repay the Mossberg Note (amounting to $9,000,000
plus interest) and to retire certain preferred shares of Savage which will
require a cash payment of $500,000 and the issuance of 160,991 shares of the
Company. In
6
connection with the sale of Savage, the Company will retain certain
environmental and product liability contingent liabilities relating to Savage's
operations prior to the sale which is planned on or about October 31, 1995.
RESULTS OF OPERATIONS
Until the sale of Savage is concluded, the Company continues to consolidate
Savage's operations. Accordingly, the results of operations of Savage and
Intelect are discussed separately below:
SAVAGE CORPORATION
The following is a summary of results of Savage (thousands of U.S.
Dollars):
THREE MONTHS ENDED Nine Months Ended
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JULY 31 July 31
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1995 1994 1995 1994
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Net sales $ 9,494 $ 8,156 $ 23,578 $ 17,548
Cost of sales 5,472 5,402 15,041 11,608
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Gross Margin 4,022 2,754 8,537 5,940
Interest 332 175 661 413
Selling, general and administrative 1,534 972 3,876 2,399
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Operating income - before taxes 2,156 1,607 4,000 3,128
Income taxes 913 310 1,674 655
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Net income $ 1,243 $ 1,297 $ 2,326 $ 2,473
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The following is a description of the economic performance of Savage
Corporation:
SALES
Sales increased by 16% to $9,494,000 from $8,156,000 for the quarter and by
34% to $23,578,000 from $17,548,000 for the nine months compared with 1994. The
increase was due to the incremental sales of Lakefield Arms, acquired on
November 1, 1994, amounting to $2,364,000 and to an increase in unit sales of
Savage Arms' products to 79,311 from 69,139 for the nine months and to 32,381
from 32,337 for the three months.
GROSS MARGIN
Margins for the three months were 43% (1994: 34%) and 37% (1994: 34%) for
the nine months. The increase is due primarily to operating efficiencies,
overhead absorption and a generally higher level of production than in prior
years.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses rose to $1,534,000 (1994: $972,000) for the three months and
$3,876,000 (1994: $2,399,000) for the nine months due to higher selling expenses
which are directly proportionate to sales levels. In addition, expenses of
approximately $233,000 are included in SG&A representing costs incurred in
connection with a loan of $9,000,000 advanced by Mossberg Corporation, the
proceeds of which were used to acquire Intelect.
INTEREST
Interest expense is slightly higher than in 1994 ($194,000 versus $175,000
for the three months and $523,000 versus $413,000 for the nine months) exclusive
of $138,000 incurred in 1995 relating to the Mossberg loan.
7
INTELECT SYSTEMS CORP.
The following is a summary of the results of Intelect from April 24, 1995
(the date of acquisition) to July 31, 1995 (thousands of U.S. Dollars):
THREE MONTHS ENDED Nine Months Ended
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JULY 31 July 31
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1995 1994 1995 1994
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Net sales $ 1,048 $ - $ 1,048 $ -
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Gross Margin (35) - (35) -
Research and development 784 - 784 -
Selling, general and administrative 795 795
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Pretax loss (1,614) - (1,614) -
Taxes - - - -
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Net loss $ (1,614) $ - $ (1,614) $ -
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SALES
Sales for the three months ended July 31, 1995 totalled $1,048,000 and
comprised the completion of back orders for DAV equipment for the F.A.A.,
completion of Intelect's first teleconferencing installation and the Iceland
project.
GROSS MARGIN
Gross margins were a negative .04% due to the low level of sales activity
(creating low overhead absorption) and the fact that the back order status was
long overdue thereby making the traditional margins unachievable.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses amounted to $795,000 and reflect the ramp up of marketing
efforts following the acquisition of Intelect. In this initial period, expected
to extend through December 31, 1995, the sales costs will preceed orders and
related gross margin contributions.
RESEARCH AND DEVELOPMENT (R&D)
R&D costs amounted to $784,000 and principally comprised of the costs of
preparing both the S4(TM) and PANTHER(TM) products for roll out at trade shows
in September and in commercializing these products. R&D is expected to continue
at this level for at least one year.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its funding of Intelect on June 27, 1995. Proceeds
from the Mossberg Note (of $9,000,000) were received on May 31, 1995. The
acquisition of Intelect required the issuance by Intelect of debentures (the
"Debentures") of $2,500,000 plus the amount by which certain of Intelect's debts
to two major customers (the "Debts") were settled for less than $6,000,000. The
Debts were settled for $5,180,000 and accordingly the face value of the
Debentures were issued in the amount of $3,320,000 ($2,500,000 plus $6,000,000
minus $5,180,000). In accordance with the purchase agreement the face value of
the Debentures can be reduced by the amount that defined net assets at the
acquisition date (April 24, 1995) are less than $1,268,000. As at July 31, 1995
this reduction is estimated to be $1,797,000 and accordingly the value of the
Debentures, which bear interest at 6%, are $1,523,000 payable over the four year
period post-acquisition. The Company is also contingently liable for additional
payments of up to $4,000,000 based on the future profitability of Intelect over
the four year period from January 1, 1995. This liability, if realized, can be
settled in cash or common shares of the Company, at the Company's option.
The Company expects to receive approximately $31,000,000 in cash on the
closing of the sale of Savage representing the base price of $33,000,000 less
the retirement of Savage's preferred shares ($500,000) and legal and other costs
of approximately $1,500,000. These funds will be used to retire the Mossberg
Note of $9,000,000 plus interest of approximately $450,000. In the event that
the sale of Savage is not concluded, the Company will be required to fund
Intelect's working capital needs and to retire the Mossberg Note over two years
from the cash flow of Savage. The Mossberg Note will bear interest at 17% if not
repaid by October 31, 1995 and is secured by the shares of Savage. No assurances
can be given that Savage's cash flow will be sufficient to fund these cash
requirements or that the Company will be able to obtain other sources of
capital. In the event that the Company defaults on the Mossberg Note, the
Company would forfeit its primary business and principal source of revenue, net
income and cashflow.
8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11 Calculation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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.
CHALLENGER INTERNATIONAL, LTD.
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(Registrant)
Date: May 29, 1996 /s/ PETER G. LEIGHTON
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Peter G. Leighton
President and Chief Financial Officer
9