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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 APRIL 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE 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 10,999,908 shares of the registrant's Common Stock, par value $.01
per share, outstanding on April 30, 1995.
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CHALLENGER INTERNATIONAL, LTD.
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
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ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
(unaudited) at April 30, 1995 and October 31, 1994 2
Consolidated Statements of Operations of the Company
(unaudited) for the three months and the six months
ended April 30, 1995 3
Consolidated Statements of Cash Flows of the Company
(unaudited) for the three months and six months
ended April 30, 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 7
SIGNATURES 7
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars,
except share data)
(Unaudited)
APRIL 30 October 31
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1995 1994
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 125 $ 2,997
Accounts receivable 6,497 5,539
Inventories 8,587 6,449
Other current assets 667 99
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15,876 15,084
EXCESS OF COST OVER NET ASSETS OF COMPANY ACQUIRED 1,706 -
PROPERTY, PLANT AND EQUIPMENT - NET 8,386 7,527
INVESTMENT IN AND ADVANCES TO INTELECT, INC. 2,224 -
OTHER ASSETS 390 370
DEPOSIT FOR ACQUISITION - 923
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$ 28,582 $ 23,904
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 880 $ 522
Notes payable 4,605 3,146
Accounts payable and accrued liabilities 3,370 4,146
Current maturities of long-term debt 574 873
Current installments of obligations under capital leases - -
Liability reserve 102 97
Income taxes payable 232 46
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9,763 8,830
LONG-TERM DEBT, net of current maturities 3,428 2,241
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13,191 11,071
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MINORITY INTEREST 950 930
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SHAREHOLDERS' EQUITY:
Common shares, $0.01 par value,
80,000,000 shares authorized,
10,999,908 issued and outstanding (1994 - 9,948,142) 110 106
Share premium 9,277 7,854
Retained earnings - since November 1, 1992 5,054 3,943
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14,441 11,903
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$ 28,582 $ 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 Six Months Ended
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April 30 April 30
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1995 1994 1995 1994
----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS
SALES AND OTHER REVENUES:
Net sales $ 8,141 $ 5,910 $ 14,084 $ 9,392
Interest and other income 12 4 79 7
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8,153 5,914 14,163 9,399
COSTS AND EXPENSES:
Cost of goods sold 5,177 3,788 9,569 6,206
Interest expense 162 134 329 238
Selling, general and administrative 1,431 876 2,393 1,648
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INCOME BEFORE TAXES 1,383 1,116 1,872 1,307
INCOME TAXES 578 345 762 345
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NET INCOME FOR PERIOD $ 805 $ 771 $ 1,110 $ 962
=========== =========== =========== ===========
EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE $ 0.07 $ 0.07 $ 0.10 $ 0.09
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES AND
COMMON STOCK EQUIVALENTS OUTSTANDING
(IN THOUSANDS) 11,361 11,032 11,358 11,104
=========== =========== =========== ===========
3
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars)
(Unaudited)
Three Months Ended Six Months Ended
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April 30 April 30
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1995 1994 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Income for period $ 805 $ 771 $ 1,110 $ 962
Adjustments to reconcile net income to
net cash provided by operating activities:
Discontinued operations - (24) - (24)
Provision for losses on accounts receivable 45 - 65 -
Changes in the provision for cash discount 26 - 105 -
Reserve for inventory obsolescence 32 - 6 -
Depreciation and amortization 219 149 427 299
Utilization of net loss carryforwards 359 310 473 310
Non cash interest 19 - 19 -
Changes in operating assets and liabilities:
Accounts receivable (1,461) (519) (698) (1,049)
Inventories (988) (922) (1,755) (1,937)
Other current assets (300) (2) (555) (136)
Liability reserves (17) (27) (31) (57)
Accounts payable and accrued liabilities (171) 631 (994) 600
Income taxes payable 165 - 157 -
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Net cash provided by (used in) operating activities (1,267) 367 (1,671) (1,032)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on acquisition - - 923 -
Investment in other assets (27) - (28) -
Purchase of fixed assets (506) (429) (686) (572)
Investment in Lakefield - - (1,960) -
Investment in and advances to Intelect, Inc. (1,763) - (2,224) -
Proceeds on sale of fixed assets - - 8 -
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Net cash used in investing activities (2,296) (429) (3,967) (572)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under notes payable 936 (135) 993
Payments on capital lease obligations - (33) - (66)
Payment of long-term debt 494 (123) 788 (319)
Proceeds from issuances of notes payable (120) - (280) -
Proceeds from share issuances 178 6 929 75
Adjustments to minority interest (19) - (19) -
Bank overdraft 270 64 355 101
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Net cash provided by (used in) financing activities 1,739 (221) 2,766 1,344
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,824) (283) (2,872) (260)
CASH AND CASH EQUIVALENTS, beginning of period 1,949 1,087 2,997 1,064
============= ============= ============= =============
CASH AND CASH EQUIVALENTS, end of period $ 125 $ 804 $ 125 $ 804
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4
CHALLENGER INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 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
On January 13, 1995 the Company invested $400,000 to acquire 16% of the
outstanding capital stock of Intelect, Inc. ("Intelect") and on March 31, 1995
the Company entered into an agreement to purchase the remaining 84% of the
capital stock of Intelect (the "Option Agreement"). The Company had advanced a
further $1,824,000 at April 30, 1995 in the form of unsecured advances. Intelect
has secured debt of approximately $6,300,000 to two customers - the Company's
advances are subordinate to the secured debt.
INVENTORIES
The components of inventories are as follows (thousands of U.S. dollars):
APRIL 30 October 31
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1995 1994
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Raw materials $ 523 $ 720
Work in progress 5,769 5,002
Finished goods 2,395 853
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8,687 6,575
Less: allowance for obsolescence 100 126
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$ 8,587 $ 6,449
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5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED APRIL 30, 1995
OVERVIEW
The Company signed a Letter of Intent on May 23, 1995 to sell its firearms
and related businesses, Savage Arms, Lakefield Arms and Savage Range Systems
(collectively, "Savage"), to Mossberg Corporation ("Mossberg") of North Haven,
Connecticut for $35,000,000 in cash plus additional consideration to be
determined at closing (the "Sale"). (REFERENCE IS MADE TO EXHIBIT 10(i) UNDER
ITEM 6 HEREOF). The Closing of the Sale is anticipated to be on or about July
31, 1995, subject to the execution of a definitive sale agreement, completion of
financing, due diligence and customary filings and approvals.
In connection with the Letter of Intent, Mossberg advanced the Company
$9,000,000 at an initial interest rate of 9% which the Company anticipates
applying to complete its acquisition of Intelect, which was initiated on January
13, 1995 when the Company acquired 16% for $400,000. (REFERENCE IS MADE TO
EXHIBIT 10(ii) UNDER ITEM 6).
RESULTS OF OPERATIONS
SALES
Sales increased to $10,141,000, up from $5,910,000 for the quarter, and to
$14,084,000, up from $9,392,000, in the six months ended April 30, 1995,
compared with the previous year. These increases were due to strong demand for
Savage Arms core product (the Model 110 Rifle) and incremental sales of
Lakefield Arms products (.22 caliber rim fire rifles).
GROSS MARGINS
Gross margins amounted to 36% for the quarter consistent with the previous
year but decreased to 32% (down from 34%) for the six months due to the lower
margins on the Lakefield product line (Lakefield sales were minimal in the first
quarter).
INTEREST EXPENSE
Interest expense increased for both the quarter and six month periods over
the prior year due to higher inventory levels necessitated by higher sales
expectations (and Lakefield's new product line) and higher interest rates.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
Selling expenses increased 63% and 45% in the quarter and six month periods
respectively in line with higher sales (up 38% and 50% for the quarter and six
month periods) and with the increased fixed overhead of Lakefield.
LIQUIDITY AND CAPITAL RESOURCES
As described above, in connection with the intended sale of Savage to
Mossberg, Mossberg provided the Company with a loan of $9,000,000 (the "Mossberg
Note") to fund the Company's acquisition of Intelect. The Mossberg Note will be
repaid out of the proceeds of the sale of Savage at closing or over a two year
period in the event the sale does not close. Interest on the Mossberg Note
increases from an initial rate of 9% to 17% if not repaid by October 31, 1995
and is secured by the shares of Savage. This financing arrangement was made to
avoid the fees, warrants and other costs and contingencies customarily
associated with placement of external, long-term subordinated debt. In the event
that the sale to Mossberg does not close, the Company believes that the Mossberg
Note can be repaid from the cash flow of Savage over the next two years although
no assurances can be given in this regard.
The Company intends to retire the secured debt of Intelect and to provide
working capital to Intelect from the proceeds of the Mossberg Note. No
assurances can be given that these funds will be sufficient to finance
Intelect's ongoing working capital requirements. The Company expects to receive
approximately $33,000,000 in cash on the closing of the sale of Savage
representing the base price of $35,000,000 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.
6
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 (i) Letter of Intent between the Company and Mossberg
Corporation dated May 23, 1995;
10 (ii) Promissory Note between the Company and Mossberg
Corporation dated May 31, 1995;
10 (iii) Letter Agreement between the Company and Mossberg
Corporation dated May 31, 1995;
10 (iv) Pledge Agreement between the Company and Mossberg
Corporation dated May 31, 1995;
10 (v) Pledge Agreement between Challenger Industries Inc.
and Mossberg Corporation dated May 31, 1995.
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
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/s/ PETER G. LEIGHTON
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Peter G. Leighton
President and Chief Financial Officer
7