UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368 - 2700
(Registrant's 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 [ ]
As of October 30, 1998, 45,936,907 shares of Common Stock, $.01 par value per
share; and 5,500,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $4,000,000);
were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of October 30, 1998 was approximately
$17,341,016. Aggregate market value of the total voting stock of the issuer as
of October 30, 1998 was approximately $35,491,466.
CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as
of September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 14
1
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
September 30, 1998 December 31, 1997
(unaudited) (audited)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 591 $ 97
Cash and cash equivalents, restricted . . . . . . . . . . . . 283 2,419
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . 498 667
Leased equipment held for underwriting. . . . . . . . . . . . 502 502
Net investment in direct finance leases . . . . . . . . . . . 3,921 521
Equipment on operating lease, net of accumulated depreciation
of $2,915 and $4,106. . . . . . . . . . . . . . . . . . . . 515 232
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 333 -
Residual values, net. . . . . . . . . . . . . . . . . . . . . 298 465
Furniture and equipment, net of accumulated depreciation
of $1,507 and $1,291 . . . . . . . . . . . . . . . . . . . . 880 937
Other investments . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000
Intangibles, net. . . . . . . . . . . . . . . . . . . . . . . 122 122
Prepaid rent. . . . . . . . . . . . . . . . . . . . . . . . . 1,692 -
Deferred finance and acquisition costs. . . . . . . . . . . . 4,093 -
Other assets, net . . . . . . . . . . . . . . . . . . . . . . 1,617 129
-------------------- -------------------
$ 16,345 $ 7,091
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses . . . . . . . . . . . . $ 4,233 $ 5,921
Indebtedness:
Non-recourse. . . . . . . . . . . . . . . . . . . . . . . . 3,504 528
Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . 3,369 415
-------------------- -------------------
Total liabilities. . . . . . . . . . . . . . . . . . . 11,106 6,864
-------------------- -------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 20,000,000 shares authorized
Convertible Series A, none and 710,526 shares . . . . . . . . - 7
issued and outstanding
Convertible Series AA, 5,500,000 and 8,000,000 shares . . . . 55 80
issued and outstanding
Common stock, $.01 par value; 75,000,000 shares authorized,
45,936,907 and 25,401,391 issued and outstanding . . . 459 254
Additional paid-in capital. . . . . . . . . . . . . . . . . . 33,183 28,426
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (28,458) (28,540)
-------------------- -------------------
Total stockholders' equity . . . . . . . . . . . . . . 5,239 227
-------------------- -------------------
Total liabilities and stockholders' equity . . . . . . $ 16,345 $ 7,091
==================== ===================
The accompanying notes are an integral part of these condensed
consolidated financial statements
2
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES:
Rental income. . . . . . . . . . . . . $ 286 $ 250 $ 698 $ 746
Lease underwriting income. . . . . . . 18 - 52 38
Direct finance lease income. . . . . . 22 88 89 228
Interest income. . . . . . . . . . . . 5 16 27 32
Gains from portfolio remarketing . . . 47 85 355 468
Transportation equipment revenues. . . 5,090 - 6,062 -
Fees from remarketing activities . . . 303 313 857 547
Other income . . . . . . . . . . . . . 2 307 46 325
------------ ------------ ------------ ------------
5,773 1,059 8,186 2,384
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of transportation equipment sold. 4,915 - 5,583 -
Selling, general and administrative. . 571 883 1,990 4,809
Interest expense . . . . . . . . . . . 43 170 74 391
Depreciation and amortization. . . . . 103 64 338 225
------------ ------------ ------------ ------------
5,632 1,117 7,985 5,425
------------ ------------ ------------ ------------
Net income (loss) before extraordinary
item . . . . . . . . . . . . . . . . . 141 (58) 201 (3,041)
Extraordinary item - gain on early
extinguishment of debt . . . . . . . . - - - 930
------------ ------------ ------------ ------------
Net income (loss). . . . . . . . . . . . $ 141 $ (58) $ 201 $ (2,111)
============ ============ ============ ============
Basic net income (loss) per share
Before extraordinary item. . . . . . . $ 0.00 $ (0.00) $ 0.00 $ (0.14)
Extraordinary item . . . . . . . . . . - - - 0.04
------------ ------------ ------------ ------------
$ 0.00 $ (0.00) $ 0.00 $ (0.10)
============ ============ ============ ============
Shares used in computing basic
net income (loss) per share. . . . . . 62,412,303 32,247,739 57,561,612 21,747,787
============ ============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended September 30,
1998 1997
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 201 $ (2,111)
------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 338 225
Gain on debt forgiveness. . . . . . . . . . . . . . . . . . . . . . - (930)
Residual value estimate realizations and
reductions, net of additions . . . . . . . . . . . . . . . . . . . 168 226
Changes in assets and liabilities, net of effects of acquisitions:
Decrease in receivables. . . . . . . . . . . . . . . . . . . . . 169 976
Increase in inventory. . . . . . . . . . . . . . . . . . . . . . (365) -
Decrease in accounts payable and accrued expenses. . . . . . . . $ (2,438) (1,147)
------------ ------------
(2,128) (650)
------------ ------------
Net cash used by operating activities. . . . . . . . . (1,927) (2,761)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting . . . . . . . . . . . . . . - 105
Net investments in direct finance leases . . . . . . . . . . . . . 67 145
Equipment on operating lease . . . . . . . . . . . . . . . . . . . (367) 91
Payment for acquisitions, net of cash acquired . . . . . . . . . . 465 (86)
Net change in cash restricted and escrowed . . . . . . . . . . . . 2,136 194
Additions to furniture and equipment, net. . . . . . . . . . . . . (159) (829)
Increase in deferred finance and acquisition costs . . . . . . . . (4,093)
Net change in other assets . . . . . . . . . . . . . . . . . . . . (1,488) 353
------------ ------------
Net cash used by investing activities. . . . . . . . . (3,439) (27)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in indebtedness - non-recourse. . . . . . . . . . . . . . 174 40
Increase in indebtedness - recourse. . . . . . . . . . . . . . . . 2,978 4,463
Repayments of indebtedness - non-recourse. . . . . . . . . . . . . (199) (609)
Repayments of indebtedness - recourse. . . . . . . . . . . . . . . (24) (4,243)
Issuance of preferred stock, net . . . . . . . . . . . . . . . . . - 900
Issuance of common stock, net. . . . . . . . . . . . . . . . . . . 2,931 2,326
------------ ------------
Net cash provided by financing activities. . . . . . . 5,860 2,877
------------ ------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . 494 89
Cash and cash equivalents at beginning of period. . . . . . . . . . . 97 21
Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 591 $ 110
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements
4
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosure required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Intercompany accounts and
transactions have been eliminated. These financial statements and related notes
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997. The results for the interim period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the entire year.
2. ACQUISITION
On July 28, 1998, Chancellor Corporation ("Chancellor" or the "Company") formed
Chancellor Leasing Services, Inc. ("CLS") (which was originally formed as
Riviera Financial Services, Inc.) as a wholly owned subsidiary engaged in the
origination of equipment leases. CLS agreed to purchase the rights to certain
receivables on equipment leases and the use of several offices to expand its
lease origination business from Riviera Finance-East Bay and United Capital and
Finance LLC (collectively "Riviera"). The transaction results in consideration
of approximately $5,625,000. The consideration, net of cash acquired of
approximately $466,000, has been ascribed to the rights to lease receivables and
office space. In connection with this transaction, the Company will issue
1,500,000 shares of its common stock valued at $1,875,000. The Company will
also assist in the repatriation of $3,000,000 for the right to service the lease
receivables to Riviera and recorded acquisition costs of approximately $750,000.
The Company also provided an additional 9,000,000 shares to be issued to the
stockholders of Riviera over a three year period subject to CLS achieving
certain agreed upon performance criteria.
3. SUBSEQUENT EVENTS
On August 3, 1998, the Company formed Chancellor Asset Management Inc. ("CAM")
as a wholly owned subsidiary engaged in the remarketing and sales of
transportation and material handling equipment. On August 1, 1998, CAM entered
into a letter of intent, as amended on October 30, 1998, to purchase all of the
common stock of MRB, Inc. d/b/a Tomahawk Truck Sales ("Tomahawk"). The
transaction, as contemplated, will result in total consideration of
approximately $12,411,000 of which approximately $5,184,000 has been assigned to
excess of purchase price over net assets acquired and other intangible assets.
In connection with the acquisition, as contemplated, Chancellor will issue
4,500,000 shares of its common stock valued at approximately $6,030,000.
Additionally, the Company assumed liabilities of approximately $6,381,000,
including approximately $500,000 of acquisition costs. Tomahawk is a retailer
and wholesaler of used transportation equipment. The execution of definitive
agreements is expected in the fourth quarter of fiscal 1998. The operations of
Tomahawk will be consolidated as of August 1, 1998 for accounting purposes.
5
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table reflects, on a proforma basis, the condensed balance sheet
of Chancellor Corporation as of September 30, 1998, including the contemplated
combination of the Company with Tomahawk:
Proforma
Chancellor Tomahawk Combined
(In Thousands)
Total Assets . . . . . . . $ 16,345 $ 17,238 $ 33,583
Total Liabilities. . . . . 11,106 10,187 21,293
Total Stockholders' Equity 5,239 7,051 12,290
Upon the final execution of the definitive agreements, the Company anticipates
amending this quarterly report on form 10QSB to reflect the final treatment of
the aforementioned proforma information.
6
CHANCELLOR CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three-Month Period Ended September 30, 1998 vs. September 30, 1997
Revenues. Total revenues for the three-month period ended September 30,
1998 was $5,773,000 as compared to $1,059,000 for the corresponding prior year
period, an increase of $4,714,000 or 445.1%. For the three-month period ended
September 30, 1998, rental income increased by $36,000 or 14.4% as compared to
the corresponding prior year period. The increase in rental income is comprised
of the net of an increase attributable to equipment added to the Company's
portfolio through the purchase of certain leases from trust investors and a
decrease attributable to the expiration of several leases, including the
subsequent disposition of $228,000 of equipment (based on the original equipment
cost). For the three-month period ended September 30, 1998, lease underwriting
income increased by $18,000 or 100.0% as compared to the corresponding prior
year period. Lease underwriting income increased due to the origination of
$356,000 of equipment leases, at cost, as compared to no origination of
equipment leases during the same period last year. For the three-month period
ended September 30, 1998, direct finance lease income decreased by $66,000 or
75.0%, as compared to the corresponding prior year period. The decrease in
direct finance lease income is attributable primarily to the expiration of
several leases, including the subsequent disposition of $71,000 of equipment
(based on the original equipment cost). For the three-month period ended
September 30, 1998, gains from portfolio remarketing decreased by $38,000 or
44.7% as compared to the corresponding prior year period. For the three-month
period ended September 30, 1998, transportation equipment revenues was
$5,090,000, as compared to no revenues for the corresponding prior year period.
This increase is attributable to management successfully implementing its
strategy to enter into Buy/Sell arbitrage transactions of used transportation
equipment. It is management's intent to continue its vigorous implementation
and expansion of this growth strategy. For the three-month period ended
September 30, 1998, fees from remarketing activities was $303,000 as compared to
$313,000 for the corresponding prior year period. The remarketing expertise
which the Company provides to trust investors and third parties, continues to
make a significant contribution toward profitability. For the three-month
period ended September 30, 1998, other income decreased by $305,000 as compared
to the corresponding prior year period primarily due to $300,000 of financial
consulting services provided in 1997.
Costs and Expenses. Cost of transportation equipment sold for the
three-month period ended September 30, 1998 was $4,915,000 as compared to no
cost of transportation equipment sold for the corresponding prior year period.
This increase is attributable to management successfully implementing its
strategy to enter into Buy/Sell arbitrage transactions. Selling, general and
administrative expense for the three-month period ended September 30, 1998 was
$571,000 as compared to $883,000 for the corresponding prior year period, a
decrease of $312,000 or 35.3%. This decrease is primarily attributable to the
Company's efforts to recover certain costs incurred by and due to the Company
from trust investors for lease and vehicle administration.
Interest expense for the three-month period ended September 30, 1998 was
$43,000 as compared to $170,000 for the corresponding prior year period, a
decrease of $127,000 or 74.7%. Although total non-recourse and recourse debt
increased for the period ended September 30, 1998 as compared to the period
ended September 30, 1997, the majority of this increase in indebtedness occurred
in the later half of September, 1998. Therefore the associated interest expense
did not also increase.
Depreciation expense for the three-month period ended September 30, 1998
was $103,000 as compared to $64,000 for the corresponding prior year period, an
increase of $39,000 or 60.9%. The increase is primarily a result of additional
depreciation and amortization on furniture, fixtures, computer equipment and
leasehold improvements added in connection with the Company's move to its new
facilities in the latter half of 1997.
7
CHANCELLOR CORPORATION
Net Income (Loss). Net income for the three-month period ended September
30, 1998 was $141,000 as compared to a net loss of $58,000 for the corresponding
prior year period, an increase of $199,000 or 343.1%. The increase in net
income is attributable to the increase in revenue components and the net
decreases in total costs, specifically described above. Net income per common
share assuming full dilution for the three month period ended September 30, 1998
was $.002 per share as compared to a net loss of $.002 per share for the
corresponding prior year period, resulting in an increase of approximately
$200,000.
Nine-Month Period Ended September 30, 1998 vs. September 30, 1997
Revenues. Total revenues for the nine-month period ended September 30,
1998 was $8,186,000 as compared to $2,384,000 for the corresponding prior year
period, an increase of $5,802,000 or 243.4%. For the nine-month period ended
September 30, 1998, rental income decreased by $48,000 or 6.4% as compared to
the corresponding prior year period. The decrease in rental income is
attributable primarily to the expiration of several leases, including the
subsequent disposition of $1.5 million of equipment (based on its original
cost). Although rental income will continue to decrease until the company
purchases additional equipment for its lease portfolio, the Company has
successfully begun this process through the acquisition of certain leases from
trust investors. These recently acquired leases account for $283,000 of rental
income for the nine-month period ended September 30, 1998. For the nine-month
period ended September 30, 1998, lease underwriting income increased by $14,000
or 36.8% as compared to the corresponding prior year period. Lease underwriting
income increased due to the origination of $2.0 million of equipment leases, at
cost, as compared to origination of $1.4 million of equipment leases, at cost,
during the same period last year. Management has implemented a strategy of
brokering new lease transactions to generate additional revenues from lease
activities. For the nine month period ended September 30, 1998, direct finance
lease income decreased by $139,000 or 61.0%, as compared to the corresponding
prior year period. The decrease in direct finance lease income is attributable
primarily to the expiration of several leases, including the subsequent
disposition of $252,000 of equipment (based on the original equipment cost).
For the nine-month period ended September 30, 1998, gains from portfolio
remarketing decreased by $113,000 or 24.1%, as compared to the corresponding
prior year period. The decrease is primarily attributable to the decrease in
sales of portfolio assets during the three-month period ended March 31, 1998.
For the nine-month period ended September 30, 1998, transportation equipment
revenues were $6,062,000, as compared to no revenues for the corresponding prior
year period. This increase is attributable to
management successfully implementing its strategy to enter into Buy/Sell
arbitrage transactions of used transportation equipment. It is management's
intent to continue its vigorous implementation and expansion of this growth
strategy. For the nine-month period ended September 30, 1998, fees from
remarketing activities increased by $310,000 or 56.7% as compared to the
corresponding prior year period. This increase is attributable to a renewed
effort by management to focus its efforts on the Company's superior remarketing
expertise including the remarketing of assets for third parties other than
trusts. For the nine-month period ended September 30, 1998, other income
decreased by $279,000 as compared to the corresponding prior year period.
Costs and Expenses. Cost of transportation equipment sold for the
nine-month period ended September 30, 1998 was $5,583,000 as compared to no cost
of transportation equipment sold for the corresponding prior year period. This
increase is attributable to management successfully implementing its strategy to
enter into Buy/Sell arbitrage transactions. Selling, general and administrative
expense for the nine-month period ended September 30, 1998 was $1,990,000 as
compared to $4,809,000 for the corresponding prior year period, a decrease of
$2,819,000 or 58.6%. The first six months of 1997 was burdened with significant
legal, accounting and consulting fees incurred in connection with the new
management's corporate restructuring and transition plans. As a result of the
implementation of these focused and fundamentally sound strategies, the Company
has brought its cost structure in line in order to operate in the most effective
and efficient manner. Selling, general, and administrative expense also
decreased due to the Company's efforts to recover certain costs incurred by and
due to the Company from trust investors for lease and vehicle administration.
8
CHANCELLOR CORPORATION
Interest expense for the nine-month period ended September 30, 1998 was
$74,000 as compared to $391,000 for the corresponding prior year period, a
decrease of $317,000 or 81.1%. Although total non-recourse and recourse debt
increased for the period ended September 30, 1998 as compared to the period
ended September 30, 1997, the majority of this increase in indebtedness occurred
in the later half of September, 1998. Therefore the associated interest expense
did not also increase.
Depreciation expense for the nine-month period ended September 30, 1998 was
$338,000 as compared to $225,000 for the corresponding prior year period, an
increase of $113,000 or 50.2%. The increase is primarily a result of additional
depreciation and amortization on furniture, fixtures, computer equipment and
leasehold improvements added in connection with the Company's move to its new
facilities in the latter half of 1997.
Extraordinary Item - Gain on Early Extinguishment of Debt. The Company
recorded a gain on early extinguishment of debt for the nine-month period ended
September 30, 1997 of $930,000. In April 1997, the Company repaid in advance of
their respective terms an intercreditor loan and secured inventory loan. The
aggregate amount of this debt on the repayment date was $1,906,000, of which
approximately $976,000 was paid in cash and the balance of $930,000 was
forgiven. In addition, the Company paid approximately $22,000 in legal and bank
fees to complete this transaction.
Net Income (Loss). Net income for the nine-month period ended September
30, 1998 was $201,000 as compared to a net loss of $2,111,000 (inclusive of the
$930,000 gain on extraordinary item) for the corresponding prior year period, an
increase of $2,312,000 or 109.5%. The increase in net income is attributable to
the increase in revenue components and the net decrease in costs, specifically
described above. Net income per common share assuming full dilution for the
nine-month period ended September 30, 1998 was $.003 per share as compared to a
net loss of $.10 per share for the corresponding prior year period, an increase
of $.10 per share or 100.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash flow from operations of $1,927,000 during the nine
month period ended September 30, 1998, in part, due to payment of accounts
payable and accrued expenses, the collection of receivables, and the build-up of
used transportation equipment inventory held for resale. Investing activities
used $3,439,000 during the nine-month period, in part, due to the collections in
connection with the Company's recovery of trust
administration costs, the disposition of equipment on operating leases, and
deferred costs incurred in conjunction with intended acquisitions as discussed
below. Financing activities in the nine-month period provided $5,860,000 due to
the aggregate of increases and repayments of non-recourse and recourse debt, and
the issuance of common stock. The net result of the above activity for the
nine-month period was an increase in cash and cash equivalents of $494,000.
Cash and cash equivalents amounted to $591,000 at September 30, 1998 as compared
to $110,000 at September 30, 1997.
In August 1997, the Company committed to make a $1,000,000 equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a
$120,000,000 investment fund composed of $40,000,000 from equity participants
including the Company, and $80,000,000 in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), and independent U.S.
government agency. The purpose of the fund is to make direct investments in
emerging companies throughout Africa. As of September 30, 1998, the Company had
funded approximately $325,000 and is obliged to provide additional funding in
the approximate amount of $675,000.
9
CHANCELLOR CORPORATION
During the first quarter of 1998, the Company formed the wholly-owned
subsidiaries of (i) Chancellor International Corporation ("CIL"), a Delaware
Corporation, formed as the parent holding company for diversified financial
services companies specializing in international commercial and consumer
financing, (ii) Chancellor Africa Corporation ("CAC"), a Mauritius corporation,
formed as the parent holding company for a diversified financial services
company specializing in commercial and consumer financing in Africa, and (iii)
Africa Financial Corporation ("AFC"), a Mauritius corporation, formed as the
operating company providing lease and commercial financing services in Africa.
In connection with the Company establishing its presence in South Africa, it has
formed a relationship with Afinta Motor Corporation ("AMC"), a Republic of South
Africa transportation equipment manufacturer. The Company has provided AMC with
approximately $450,000 of debt financing as of September 30, 1998 and an
additional $750,000 subsequent to September 30, 1998. The investment bears
interest at the Republic of South Africa prime rate (24.5% at September 30,
1998). The funds are primarily used to support the expansion of AMC's
transportation equipment leasing subsidiary. The company continues to provide
AMC with equipment leasing expertise as part of this relationship.
On July 28, 1998, Chancellor Corporation ("Chancellor" or the "Company")
formed Chancellor Leasing Services, Inc. ("CLS") (which was originally formed as
Riviera Financial Services, Inc.) as a wholly owned subsidiary engaged in the
origination of equipment leases. CLS agreed to purchase the rights to certain
receivables on equipment leases and the use of several offices to expand its
lease origination business from Riviera Finance-East Bay and United Capital and
Finance LLC (collectively "Riviera"). The transaction results in consideration
of approximately $5,625,000. The consideration, net of cash acquired of
approximately $466,000, has been ascribed to the rights to lease receivables and
office space. In connection with this transaction, the Company will issue
1,500,000 shares of its common stock valued at $1,875,000. The Company will
also assist in the repatriation of $3,000,000 for the right to service the lease
receivables to Riviera and recorded acquisition costs of approximately $750,000.
The Company also provided an additional 9,000,000 shares to be issued to the
stockholders of Riviera over a three year period subject to CLS achieving
certain agreed upon performance criteria.
On August 3, 1998, the Company formed Chancellor Asset Management Inc.
("CAM") as a wholly owned subsidiary engaged in the remarketing and sales of
transportation and material handling equipment. On August 1, 1998, CAM entered
into a letter of intent, as amended on October 30, 1998, to purchase all of the
common stock of MRB, Inc. d/b/a Tomahawk Truck Sales ("Tomahawk"). The
transaction, as contemplated, will result in total consideration of
approximately $12,411,000 of which approximately $5,184,000 has been assigned to
excess of purchase price over net assets acquired and other intangible assets.
In connection with the acquisition, as contemplated, Chancellor will issue
4,500,000 shares of its common stock valued at approximately $6,030,000.
Additionally, the Company assumed liabilities of approximately $6,381,000,
including approximately $500,000 of acquisition costs. Tomahawk is a leading
retailer and wholesaler of used transportation equipment. The execution of
definitive agreements is expected in the fourth quarter of fiscal 1998. The
operations of Tomahawk will be consolidated as of August 1, 1998 for accounting
purposes.
The Company's ability to underwrite equipment lease transactions is
dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in continuing dialogue with several inventory lenders,
that can provide the Company with warehouse financing. If the Company
experiences delays in putting warehouse facilities in place, the Company
transacts deals by coterminous negotiation of lease transactions with customers
and financing with institutions upon which it obtains a fee as the intermediary
of up to 3% of the amount of financing.
The remarketing of equipment has played and will continue to play a vital
role in the Company's operating activities. In connection with the sale of
lease transactions to investors, the Company typically is entitled to share in a
portion of the residual value realized upon remarketing. Successful remarketing
of the equipment is essential to the realization of the Company's
interest in the residual value of its managed portfolio. It is also
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CHANCELLOR CORPORATION
essential to the Company's ability to recover its original investment in the
equipment in its own portfolios and to recognize a return on that investment.
The Company has found that its ability to remarket equipment is affected by a
number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of the remarketing.
The Company anticipates it will continue to dedicate substantial resources
toward the further development and improvement of its remarketing capabilities
and believes that remarketing will continue to be a profit center for the
Company. The Company's strategy is to further exploit its remarketing expertise
by continuing to develop its ability to sell remarketing services to other
lessors, fleet owners, and lessees and also to create a dealer capability under
which the Company would buy and resell fleet equipment. The Company is also
implementing a plan to expand its brokerage activities through the Internet and
the use of other information technologies.
The Company's renewal or replacement of recently expired lines, its
expected access to the public and private securities markets (both debt and
equity), anticipated new lines of credit (both short-term and long-term and
recourse and non-recourse), anticipated long-term financing of individual
significant lease transactions, and its estimated cash flows from operations are
anticipated to provide adequate capital to fund the Company's operations for the
next twelve months. Although no assurances can be given, the Company expects to
be able to renew or timely replace its recently expired lines of credit, to
continue to have access to the public and private securities markets (both debt
and equity), and to be able to enter into new lines of credit and individual
financing transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts or the
market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the same time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
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CHANCELLOR CORPORATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-QSB contains certain "Forward-Looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or the Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introduction and acceptance, technology changes and changes in industry
conditions. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
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CHANCELLOR CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in the following legal proceedings:
The Company was named as a defendant along with the Chairman of the Board
and an affiliate of the Chairman in a suit brought by Ernest Rolls, the former
Vice-Chairman, on February 5, 1998. The suit alleges that the Company is in
default on the payment of $2.7 million, which Mr. Rolls claims he loaned to the
Company. It is the Company's position that $1.5 million of the loan has been
repaid to Mr. Rolls and that the balance is subject to offsets and counterclaims
by the Company. The Company has removed the cases to federal court and has
filed an answer. On July 13, 1998 the Company, along with the affiliate of the
Chairman of the Board, filed a complaint against Mr. Rolls which alleged
misrepresentation of material facts, breach of contract, breach of fiduciary
duty, fraud, and negligent misrepresentation.
The Company is also involved in routine legal proceedings incidental
to the conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Under 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
(a) Exhibits - None
(b) Reports on Form 8-K - None
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CHANCELLOR CORPORATION
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.
CHANCELLOR CORPORATION
/s/ Brian M. Adley
---------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
/s/ Jonathan C. Ezrin
------------------------
Jonathan C. Ezrin
Corporate Controller
(Principle Accounting Officer)
DATE: November 13, 1998
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