UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(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, 1999
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 [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of November 15, 1999, 58,524,065 shares of Common Stock, $.01 par value per
share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value
per share (with a liquidation preference of $20.00 per share, or $7,000,000, and
are convertible into the Common Stock of the Company on a ten for one (10:1)
basis) were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of November 15, 1999 was approximately
$7,734,022. Aggregate market value of the total voting stock of the issuer as of
November 15, 1999 was approximately $31,092,503.
CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II Other Information 15
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
Item 7 Exhibit 11 - Computation of Earnings per Share
Signatures 16
1
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1999 1998
-------------- -------------
(unaudited)
(restated) (restated)
ASSETS
Cash and cash equivalents $ 1,657 $ 612
Receivables, net 4,375 2,880
Inventory 10,630 36
Net investment in direct finance leases 426 359
Equipment on operating lease, net of accumulated depreciation
of $2,034 and $2,351 5,280 702
Residual values, net 180 219
Furniture and equipment, net of accumulated depreciation
of $1,463 and $1,290 1,011 807
Long term investments 1,009 1,000
Intangibles, net 2,651 111
Other assets, net 3,934 1,460
--------- ---------
Total Assets $ 31,153 $ 8,186
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 5,261 $ 3,572
Deferred reimbursable expenses 4,711 1,068
Indebtedness:
Revolving credit line 8,648 - - -
Notes payable 761 - - -
Nonrecourse 219 889
Recourse 5,104 295
--------- ---------
Total Liabilities 24,704 5,824
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, none and 5,000,000 shares issued and
outstanding - - - 50
Convertible Series B, 2,000,000 shares authorized, none
issued and outstanding - - - - - -
Common stock, $.01 par value; 75,000,000 shares authorized,
58,316,877 and 38,541,895 shares issued and outstanding 583 385
Additional paid-in capital 33,324 29,943
Accumulated deficit (27,458) (28,016)
--------- ---------
Total Stockholders' Equity 6,449 2,362
--------- ---------
Total Liabilities and Stockholders' Equity $ 31,153 $ 8,186
========= =========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated) (restated) (restated)
Revenues:
Transportation Equipment Sales $ 16,152 $ 5,090 $ 39,342 $ 6,062
Rental income 465 286 1,239 698
Lease underwriting income - - - 18 27 52
Direct finance lease income 17 22 60 89
Interest income 36 5 200 27
Gains from portfolio remarketing 286 47 860 355
Fees from remarketing activities 767 303 1,627 857
Other income 1 2 82 46
------------ ---------- ---------- ----------
$ 17,724 $ 5,773 $ 43,437 $ 8,186
----------- ----------- ---------- ----------
Costs and expenses:
Cost of transportation equipment sales 12,837 4,915 31,426 5,583
Selling, general and administrative 3,920 571 9,716 1,990
Interest expense 234 43 476 74
Depreciation and amortization 390 103 1,098 338
----------- ---------- ---------- ---------
17,381 5,632 42,716 7,985
----------- ---------- ---------- ----------
Earnings before taxes 343 141 721 201
Provision for income taxes 77 - - - 163 - - -
-- ------- --- ------
Net Income $ 266 $ 141 $ 558 $ 201
=========== =========== ========== ==========
Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
=========== =========== ========== ===========
Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00
=========== =========== =========== ===========
Shares used in computing basic net income
per share 53,530,730 38,472,679 48,381,553 35,883,172
Shares used in computing diluted net income
per share 59,943,551 53,232,679 57,180,393 47,963,172
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,
1999 1998
---------- -------
(unaudited) (unaudited)
(restated) (restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558 $ 201
---------- ----------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 1,098 338
Residual value estimate realizations and reductions,
net of additions 39 167
Changes in assets and liabilities:
(Increase) in receivables (2,517) (79)
(Increase) in inventory (711) (333)
Increase (decrease) in accounts payable and accrued
expenses 564 (2,035)
Increase in deferred reimbursable expenses 3,643 - - -
---------- ---------
2,116 (1,942)
---------- ---------
Net cash provided by (used for) operating activities 2,674 (1,741)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases (67) 67
Equipment on operating lease (4,777) (405)
Net change in cash restricted - - - 2,419
Additions to furniture and equipment, net (294) (159)
Increase in intangibles (275) (1,185)
Net change in other assets (817) (1,488)
--------- ---------
Net cash (used for) by investing activities (6,230) (751)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 114 - - -
Increase in notes payable - net 48 - - -
Borrowings - nonrecourse debt - - - 175
Borrowings - recourse debt 7,422 917
Repayments of indebtedness - nonrecourse (670) (199)
Repayment of indebtedness - recourse (2,613) (24)
Issuance of common stock, net 300 1,934
---------- ----------
Net cash provided by financing activities 4,601 2,803
---------- ----------
Net increase in cash and cash equivalents 1,045 311
Cash and cash equivalents at beginning of period 612 97
---------- ----------
Cash and cash equivalents at end of period $ 1,657 $ 408
========== ==========
Cash paid for interest $ 760 $ 265
========== ==========
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 interim 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. The unaudited interim
condensed consolidated financial statements include the accounts of
Chancellor Corporation and each of its subsidiaries ("company's").
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. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates, based upon the best information available, in
recording transactions resulting from business operations. 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-A for the year ended December 31,
1998. The balance sheet at December 31, 1998 has been derived from the
audited consolidated financial statements included in the Annual Report on
Form 10-KSB-A. The results for the interim period ended September 30, 1999
are not necessarily indicative of the results to be expected for the entire
year.
RESTATEMENT OF FINANCIAL STATEMENTS:
In accordance with guidelines of the Securities and Exchange
Commission, the Company has restated its 1998 and 1999 financial statements
to reflect the acquisition of MRB, Inc. and related companies "Tomahawk" on
January 29, 1999 and related revisions to the purchase price and
amortization periods of intangibles and to properly record expenses and
accrued liabilities related to the issuance of stock purchase warrants by
the Company's majority shareholder and certain other deferred costs or
expenses paid by VCC or VMI on behalf of the Company during 1998 and 1999.
The effects on the 10-QSB/A's for September 30, 1999 are as follows (in
thousands):
Related
As to
originally Tomahawk Related to Related to
reported deconsol Related to VCC/VMI VCC Related to As
-idation goodwill fees warrants Intangibles Restated
Total assets $44,287 $(1,681) $309 $(6,921) $ - - - $(4,841) $31,153
Total liabilities 29,670 (183) 210 (6,328) - - - 1,335 24,704
Total shareholders equity 14,617 (1,488) 155 (1,243) 33 (5,625) 6,449
Total revenues 17,856 - - - - - - (14) - - - (118) 17,724
Total expenses 17,338 - - - 47 (191) 11 253 17,458
2. LOAN AGREEMENTS
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender"). The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount
of $104,000 and interest at 3.75% plus the average of the one (1) and two
(2) month London Interbank Offered Rates. In addition, proceeds from the
sale of the Equipment will be paid to the Lender as additional principal
reduction up to $1,034,000. In connection with the Loan, the Lender
retained $300,000 as a security deposit to secure repayment of the Loan.
The Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction. The balance outstanding as
of September 30, 1999 on this loan is approximately $1,657,000.
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,876,000 loan agreement (the "Loan") with a financial institution (the
"Lender") in September 1999. The Loan provides for principal and interest
payments (at 10%) of $583,400 on September 30, 1999, $72,300 per month from
October 1999 through December 1999, $64,400 per month from January 2000
through April 2000, $55,500 per month from May 2000 through July 2000, and
$1,842,000 August 2000. The loan is secured by all of the Equipment and the
lease contracts specifically associated with this transaction. The balance
outstanding as of September 30, 1999 on this loan is approximately
$2,819,000.
5
3. BUSINESS ACQUISITION
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement dated August 1, 1998, as
amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a
Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida
corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia
corporation; and Tomahawk Truck & Trailer Sales of Missouri, Inc., a
Missouri corporation (collectively "Tomahawk"). The Management Agreement
provided CAM with effective control of Tomahawk's operations as of August
1, 1998. Subsequently, CAM acquired all of the outstanding capital stock of
Tomahawk from the two (2) sole shareholders (the "Selling Shareholders")
pursuant to a Stock Purchase Agreement (the "Agreement") dated January 29,
1999.
The acquisition of MRB, Inc. was accounted for under the purchase method of
accounting. As previously reported in the 1998 10-K, the purchase price
paid by CAM consisted of 4,500,000 shares of Common Stock of Chancellor
valued at $.96 cents per share. The excess purchase price of $2,600,000 as
of January, 1999 consisted of said shares valued at $.65 cents per share,
less change in net worth, which has been allocated between a covenant not
to compete, customer database files, and goodwill which will be amortized
beginning in February, 1999 over a period of five to twenty years.
Results of operations of Tomahawk after the acquisition date, is included
in the September 30, 1999 condensed consolidated statements of operations.
The following proforma information has been prepared assuming that this
acquisition had taken place at the beginning of the respective periods.
The proforma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been
effected on the assumed dates.
Nine Months September 30, 1999
----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Net revenue $ 46,737
Net income before taxes 725
Net income after taxes 578
Net income (loss) per common share $ .01
4. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective
for years beginning after June 15, 2000. The standard requires that all
derivatives be recorded as an asset or liability, at estimated fair value,
regardless of the purpose or intent for holding the derivative. If a
derivative is not utilized as a hedge, all gains or losses from the change
in the derivative's estimated fair value are recognized in earnings. The
gains or losses from the change in estimated fair value of certain
derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship. Due to
the Company's limited use of derivatives, the Company expects that
adoption of SFAS No. 133 will have an immaterial impact on the Company's
consolidated financial position and results of operations.
5. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) Sales of
transportation equipment and 2) Leasing activity, as follows (in
thousands).
The Company's Sales of Transportation Equipment division retails and
wholesales used transportation equipment, primarily, tractors and
trailers, through retail centers located in strategic locations primarily
in the southern and midwestern sections of the United States.
Leasing activities include revenues generated under operating or
direct financing leases. The Company also manages most of the leases it
sells to investors and, when the original lease expires or terminates,
remarkets the equipment for the benefit of the investors and the Company.
Leases primarily involve transportation equipment, but also other
equipment including material handling and construction equipment.
6
Three Months Ended Nine Months Ended September
September 30, 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
(restated) (restated) (restated) (restated)
SALES OF TRANSPORTATION EQUIPMENT:
Revenues $ 16,502 $ 5,090 $ 39,692 $ 6,062
Costs and expenses:
Cost of transportation equipment 12,837 4,915 31,426 5,583
Selling, general and administrative 2,638 116 6,400 292
Interest expense 197 2 333 7
Depreciation and amortization 162 10 352 39
------------- ------------- ------------- -------------
Total costs and expenses 15,834 5,043 38,511 5,921
------------- ------------- ------------- -------------
Income from sales of transportation equipment $ 668 $ 47 $ 1,181 131
============= ============= ============= ==============
Identifiable Assets $ 13,960 $ 535 $ 13,960 $ 535
============= ============= ============= ==============
LEASING ACTIVITY
Revenues:
Leasing activity $ 1,185 $ 676 $ 3,462 $ 2,051
Interest income 36 5 200 37
Other income 1 2 83 46
------------- ------------- ------------- -------------
Total Leasing Revenues 1,222 683 3,745 2,134
------------- ------------- ------------- -------------
Costs and expenses:
Selling, general and administrative 1,282 455 3,316 1,698
Interest expense 37 41 143 67
Depreciation and amortization 228 93 746 299
------------- ------------- ------------- -------------
Total Costs and Expenses 1,547 589 4,205 2,064
------------- ------------- ------------- -------------
Income (loss) from leasing activity $ (325) $ 94 $ (460) $ 70
============= ============= ============= ==============
Identifiable assets $ 14,450 $ 7,540 $ 14,450 $ 7,540
============= ============= ============= ==============
6. COMMON STOCK ISSUED
During the quarter ended September 30, 1999, the Company's major
shareholder was issued five (5) million shares of additional common stock
as a result of conversion of Series AA preferred stock.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned
subsidiary, CAM, purchased a company known as Tomahawk. (see note 3)
In thousands
Fair Value of assets acquired $ 10,679
Fair Value of liabilities assumed ( 10,372)
-----------
307
Fair Value of common stock issued 2,925
-----------
Excess purchase price over fair value
of assets acquired
$ 2,618
===========
7
8. SUBSEQUENT ACQUISITION OF STOCK AND DISTRIBUTION RIGHTS
In October 1999, the Company, through an affiliate, closed on the
acquisition of a 15.1% equity interest in Afinta Motor Corporation (Pty)
Ltd. ("AMC"). AMC is a South African manufacturer/assembler of trucks,
buses, automobiles, sport utility vehicles, and other products. This
transaction and the related transaction surrounding certain distribution
rights were acquired via a combination of the conversion of a note
receivable (including accrued interest) from cash previously advanced, and
the issuance of 250,000 shares of a newly created class of Series B
Convertible Preferred Stock (the "Series B Preferred Stock").
In October 1999,the Company, through affiliates, finalized several
agreements that were made effective retroactive to June 30, 1999, with
Afinta Motor Corporation (Pty) ltd. ("AMC"). One such affiliate acquired
the exclusive worldwide distribution rights for product
manufactured/assembled by AMC, excluding Africa, and Great Britain. AMC is
a manufacturer/assembler of trucks, buses and other products. These
distribution rights to the AMC product range include, but are not limited
to trucks, tractor-trailers, buses, automobiles, sport utility vehicles,
motorcycles and other products supplied by AMC. The Company issued 100,000
shares of Series B Preferred Stock in the transaction.
The Company has these distribution rights for the next 99 years. The
Company will amortize these rights over a 15-year period beginning October
1999. It is the Company's desire to utilize these rights to earn
additional revenue via commissions and the potential sale and/or lease of
AMC products within the defined territory.
The Series B Preferred Stock has a $20.00 per share liquidation
preference and converts into common stock at a 1 for 10 basis, which will
increase the shares used in computing diluted net income per share in
future periods. Also, in conjunction with these investments, NAOF, a $120
million OPIC backed investment fund, of which the Company has a 2.5%
investment also, extended its investment/commitment in AMC to $10,000,000.
In addition to the Company, several of the other investors are Sun
America, Inc., Citicorp, Northwestern Mutual Life and others.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations in the previously reported 10-QSB, filed in
November 1999, included the effects of Tomahawk for the full nine months
ended September 30, 1999 and the restated statements of operations and
cash flows for the three months ended September 30, 1998 which included
the Tomahawk acquisition as of August 1998. Because of the change in the
acquisition date from August, 1998 to January 1999, this amended 10-QSB-A
includes consolidated results of operations of Tomahawk for the eight
months ended September 30, 1999 and the results of operations for the nine
months ended September 30, 1998 as originally reported in November, 1998.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998
REVENUES. Total revenues for the three-month period ended September
30, 1999 were $17,724,000 as compared to $5,773,000 for the corresponding
prior period, an increase of $11,951,000 or 207.0%. For the three-month
period ended September 30, 1999, transportation equipment sales were
$16,152,000 as compared to $5,090,000 for the corresponding prior period,
an increase of $11,062,000 or 217.3%. This significant revenue stream from
transportation equipment sales is primarily attributable to sales of used
transportation equipment through the operating activities of the Company's
wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The
increase in revenues provided by CAM is primarily a result of the Tomahawk
purchase, which has retail outlets located in key southeastern and
mid-western cities and has inventory for both retail and wholesale sales.
Through CAM, the Company seeks to continue to expand its retail centers
geographically. The Company also seeks to utilize the competitive
advantage provided by its access to retail pricing for residual values of
its leased equipment to increase competitiveness within the company lease
origination business unit. For the three-month period ended September 30,
1999, rental income increased by $179,000 or 62.6% to $465,000 as compared
to $286,000 for the corresponding prior period. The increase in rental
income is attributable primarily to the addition to the Company's
portfolio of certain equipment acquired in connection with the purchase of
several leases from portfolios administered by the Company for trusts. For
the three month period ended September 30, 1999, lease underwriting income
decreased by $18,000 or 100% to $0 as compared to $18,000 for the
corresponding prior period and direct finance lease income decreased by
$5,000 or 22.7% to $17,000 as compared to $22,000 for the corresponding
prior period. For the three-month period ended September 30, 1999,
interest income increased by $31,000 or 620.0% to $36,000 as compared to
$5,000 for the corresponding prior period. The increase is primarily
attributable to interest earned in connection with the Company's
investment of approximately $1,475,000 in a South African based
manufacturer and lessor of transportation equipment. This note was
exchanged for stock in the manufacturing company in October 1999. For the
three-month period ended September 30, 1999, gains from portfolio
remarketing increased by $239,000 or 508.5% to $286,000 as compared to
$47,000 for the corresponding prior period. The increase in gains from
portfolio remarketing is attributable to the increase in portfolio assets
acquired in connection with the purchase of several leases from portfolios
administered on behalf of trusts by the Company, which were made available
for sale upon termination of certain leases. For the three-month period
ended September 30, 1999, fees from remarketing activities increased by
$464,000 or 153.1% to $767,000 as compared to $303,000 for the
corresponding prior period. This increase is attributable, in part, to the
Company's efforts to promote its remarketing services on a third party
basis. For the three-month period ended September 30, 1999, other income
decreased by $1,000 or 50% to $1,000.
COSTS AND EXPENSES. Total costs and expenses for the three-month
period ended September 30, 1999 was $17,381,000 as compared to $5,632,000
for the corresponding prior period, an increase of 11,749,000 or 208.6%.
The significant increase is primarily a result of the costs associated
with sales of transportation equipment. The cost of transportation
equipment sales for the three-month period ended September 30, 1999 was
$12,837,000 as compared to $4,915,000 for the corresponding prior period,
an increase of $7,922,000 or 161.2%, and resulted in an overall gross
margin of 20.5%. Selling, general and administrative expenses for the
three-month period ended September 30, 1999 was $3,920,000 as compared to
$571,000 for the corresponding prior period, an increase of $3,349,000 or
586.5%. For the three month period ended September 30, 1999 selling,
general and administrative expenses included recovered reimbursable trust
administration costs of approximately $211,000. Approximately $2,387,000
of selling, general and administrative expenses for the three-month period
ended September 30, 1999 is a result of normal operating expenses incurred
by CAM and CAM's newly acquired retail and wholesale business unit,
Tomahawk, whose
9
operations were consolidated with the Company's beginning February 1999.
Before netting out the reimbursable trust administration costs and the
effect of the CAM expenses, selling, general and administrative expenses
increased to $2,134,000 for the three-month period ended September 30, 1999
as compared to $785,000 or the corresponding prior period, an increase of
$1,349,000 or 172.0%. The increase in selling, general and administrative
expenses reflects the effect of the Company's growth strategy
implementation that included, in part, costs associated with the addition
of senior management, sales and staff personnel.
Interest expense for the three-month period ended September 30, 1999
was $234,000 as compared to $43,000 for the corresponding prior period, an
increase of $191,000 or 444.2%. This increase is primarily a result of
increased interest expense associated with CAM's revolving credit line
with a financial institution utilized for inventory floor planning and
interest accrued on the Company's recourse debt.
Depreciation and amortization expense for the three-month period ended
September 30, 1999 was $390,000 as compared to $103,000 for the
corresponding prior period, an increase of $287,000 or 278.6%. The
increase is primarily due to the amortization of intangible assets
associated with the acquisition of Tomahawk by CAM, as well as the
depreciation of additions to the Company's portfolio of leased
transportation equipment.
Provision for income taxes for the three-month period ended September
30, 1999 was $77,000 as compared to zero for the corresponding prior
period. The increase is primarily due to the taxes incurred by income
generated from Tomahawk during the quarter.
NET INCOME. Net income for the three-month period ended September 30,
1999 was $343,000 as compared to $141,000 for the corresponding prior
period, an increase of $202,000 or 143.3%. The increase in net income is
attributable to the significant increase in revenues, primarily from the
retail and wholesale of used transportation equipment, the sale of
equipment under lease, and continued improvements in the containment of
costs. Net income per share was $0.00 per share (both basic and diluted)
for the three-month periods ended September 30, 1999 and 1998.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998
REVENUES. Total revenues for the nine-month period ended September 30,
1999 were $43,437,000 as compared to $8,186,000 for the corresponding
prior period, an increase of $35,251,000 or 430.6%. For the nine-month
period ended September 30, 1999, transportation equipment sales were
$39,342,000 as compared to $6,062,000 for the corresponding prior period,
an increase of $33,280,000 or 549.0%. This significant revenue stream from
transportation equipment sales is primarily attributable to sales of used
transportation equipment through the operating activities of the Company's
wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The
increase in revenues provided by CAM is primarily a result of the Tomahawk
purchase, which has retail outlets located in key southeastern and
midwestern cities and has inventory for both retail and wholesale sales.
Through CAM, the Company seeks to continue to expand its retail centers
geographically. The Company also seeks to utilize the competitive
advantage provided by its access to retail pricing for residual values of
its leased equipment to increase competitiveness within the Company's
lease origination business unit. For the nine-month period ended September
30, 1999, rental income increased by $541,000 or 77.5% to $1,239,000 as
compared to $698,000 for the corresponding prior period. The increase in
rental income is attributable primarily to the addition to the Company's
portfolio of certain equipment acquired in connection with the purchase of
several leases from portfolios administered for trusts by the Company. For
the nine-month period ended September 30, 1999, lease underwriting income
decreased by $25,000 or 48.1% to $27,000 as compared to $52,000 for the
corresponding prior period and direct finance lease income decreased by
$29,000 or 32.6% to $60,000 as compared to $89,000 for the corresponding
prior period. The Company is in the final phase of its lease origination
rebuilding process, having completed plans for the addition of key senior
management and sales personnel in 2000, and development of strategic
alliances to provide future growth in this area. For the nine-month period
ended September 30, 1999, interest income increased by $173,000 or 640.7%
to $200,000 as compared to $27,000 for the corresponding prior period. The
increase is primarily attributable to interest earned in connection with
the Company's investment of approximately $1,475,000 in a South Africa
based manufacturer and lessor of transportation equipment. This note was
exchanged for stock in the manufacturing company in October 1999. For the
nine-month period ended September 30, 1999, gains from portfolio
remarketing increased by $505,000 or 142.3% to $860,000 as compared to
$355,000 for
10
the corresponding prior period. The increase in gains from portfolio
remarketing is attributable to the increase in portfolio assets acquired
in connection with the purchase of several leases from portfolios
administered for trusts by the Company which were made available for sales
upon termination of certain leases. For the nine-month period ended
September 30, 1999, fees from remarketing activities increased by $770,000
or 89.8% to $1,627,000 as compared to $857,000 for the corresponding prior
period. This increase is attributable, in part, to the Company's efforts
to promote its remarketing services on a third party basis. For the
nine-month period ended September 30, 1999, other income increased by
$36,000 or 78.3% to $82,000.
COSTS AND EXPENSES. Total costs and expenses for the nine-month period
ended September 30, 1999 was $42,716,000 as compared to $7,985,000 for the
corresponding prior period, an increase of $34,731,000 or 435.0%. The
significant increase is primarily a result of the costs associated with
sales of transportation equipment. The cost of transportation equipment
sales for the nine-month period ended September 30, 1999 was $31,426,000
as compared to $5,583,000 for the corresponding prior period, an increase
of $25,843,000 or 462.9%, and resulted in an overall gross margin of
20.1%. Selling, general and administrative expenses for the nine-month
period ended September 30, 1999 was $9,716,000 as compared to $1,990,000
for the corresponding prior period, an increase of $7,726,000 or 388.2%.
Approximately $6,537,000 of selling, general and administrative expenses
for the nine-month period ended September 30, 1999 is a result of normal
operating expenses incurred by CAM and CAM's newly acquired retail and
wholesale business unit, Tomahawk, whose operations were consolidated with
the Company's beginning February 1999.
In a prior year, the Company undertook a review of the portfolios it
administers on behalf of trusts, including consultation with legal counsel
and industry consultants, and determined that it had not been recovering
costs associated with administering the trusts. Management's review
determined that approximately $22,000,000 of the costs for periods prior
to 1997 had not been recovered from the trusts. The Company has recorded
approximately $789,000 and $952,000 of cost recoveries in the nine-month
periods ended September 30, 1999 and 1998, respectively. Before netting
out the reimbursable trust administration costs and the effect of the CAM
expenses, selling, general and administrative expenses increased to
$5,122,000 for the nine-month period ended September 30, 1999 as compared
to $1,217,000 for the corresponding prior period, an increase of
$3,905,000 or 320.9%. This increase in selling, general and administrative
expenses reflects the effect of the Company's growth strategy
implementation that included, in part, significant costs associated with
the addition of senior management and staff personnel and costs incurred
in obtaining additional financing sources and investment assets, while
continuing to improve the containment of other operating costs.
Interest expense for the nine-month period ended September 30, 1999
was $476,000 as compared to $74,000 for the corresponding prior period, an
increase of $402,000 or 543.2%. This increase is primarily a result of
increased interest expense associated with CAM's revolving credit line
with a financial institution utilized for inventory floor planning and
interest accrued on the Company's recourse debt.
Depreciation and amortization expense for the nine-month period ended
September 30, 1999 was $1,098,000 as compared to $338,000 for the
corresponding prior period, an increase of $760,000 or 224.9%. The
increase is primarily due to the amortization of intangible assets
associated with the acquisition of Tomahawk by CAM.
Provision for income taxes for the nine-month period ended September
30, 1999 was $163,000 as compared to zero for the corresponding prior
period. The increase is primarily due to the taxes incurred from income
generated by Tomahawk during the eight months ending September 1999.
NET INCOME. Net income for the nine-month period ended September 30,
1999 was $558,000 as compared to $201,000 for the corresponding prior
period, an increase of $357,000 or 177.6%. The increase in net income is
attributable to the significant increase in revenues, primarily from the
retail and wholesale of used transportation equipment, the purchase of
certain lease portfolios from the trusts, and continued improvements in
the containment of costs. Net income per share was $0.01 per share (both
basic and diluted) for the nine-month periods ended September 30, 1999
compared to $.00 per share in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net increase in cash and cash equivalents for
the nine-month period ended September 30, 1999 of $1,045,000 totaling
$1,657,000. Operating activities provided cash of $2,674,000 during the
nine-month period ended September 30, 1999 and is primarily a result of
increased sales of used transportation equipment inventory, normal
increases in accounts payable
11
associated with inventory and operating purchases, an increase in deferred
revenue associated with the addition to the Company's portfolio of certain
equipment acquired in connection with the purchase of several equipment
lease portfolios, and offset by increases in accounts receivable and
inventory. Investing activities used cash of $6,230,000 during the
nine-month period ended September 30, 1999 and is primarily a result of
the acquisitions of portfolios of operating leases valued at approximately
$4,773,000. Financing activities provided cash of $4,601,000 during the
nine-month period ended September 30, 1999 and is primarily the result of
recourse debt loans from financing institutions in the amount of
$5,376,000 and loans from Vestex Capital Corporation. The Company's
majority shareholder exercised a Stock Purchase Warrant for an aggregate
of Ten Million (10,000,000) shares of the Common Stock, $.01 par value, of
the Company at the exercise price of $.20 per share in exchange for
payment of recourse debt during the quarter ended June 30, 1999. During
the quarter ended September 30, 1999, the Company's major shareholder was
issued five (5) million shares of additional common stock as a result of
conversion of Series AA preferred stock. Cash and cash equivalents were
$1,657,000 at September 30, 1999 as compared to $612,000 at December 31,
1998, an increase of $1,045,000 or 170.8%.
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender") in March 1999. The Loan provides for the payment of twenty-four
equal monthly installments, beginning May 1, 1999, of principal in the
approximate amount of $104,000 and interest at 3.75% plus the average of
the one (1) and two (2) month London Interbank Offered Rates. In addition,
proceeds from the sale of the Equipment will be paid to the Lender as
additional principal reduction up to $1,034,000. In connection with the
Loan, the Lender retained $300,000 to secure repayment of the Loan. The
Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction. Balance for this loan as of
11/15/99 is $1,340,000.
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,876,000 loan agreement (the "Loan") with a financial institution (the
"Lender") in September 1999. The Loan provides for principal and interest
payments (at 10%) of $583,400 on September 30, 1999, $72,300 per month
from October 1999 through December 1999, $64,400 per month from January
2000 through April 2000, $55,500 per month from May 2000 through July
2000, and $1,842,000 August 2000. The Loan is secured by all of the
Equipment and the lease contracts specifically associated with this
transaction. The balance outstanding as of 11/15/99 is $2,230,000.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor
plan used transportation equipment inventory. The balance outstanding
under this revolving line of credit agreement is approximately $6,385,000
as of September 30, 1999. Prior to the acquisition, during 1998, CAM,
through Tomahawk, entered into a special purpose financing agreement with
the same institution to floor plan additional used transportation
equipment inventory in the approximate amount of $4,500,000. The balance
outstanding under this special purpose financing agreement is
approximately $1,254,000 as of September 30, 1999. In addition, during
1999, CAM entered into an additional special purpose financing agreement
with the same institution to finance used transportation equipment
inventory in the approximate amount of $626,000. The balance outstanding
under this agreement is approximately $626,000 as of September 30, 1999.
The interest rate charges on the above three lines of credit is Prime plus
1.75%. The Company, in 1999, has also entered into a special line of
credit to finance used transportation equipment for approximately $500,000
at the rate of Prime plus 1%. The balance on this line of credit as of
September 30, 1999 is approximately $383,000.
The Company's ability to underwrite equipment lease transactions is
largely dependent upon the availability of short-term warehouse lines of
credit. Management is engaged in continuing dialogue with several
inventory lenders to providing 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, retailing and wholesaling 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 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,
12
technological changes, and condition of the equipment upon its return all
influence the price for which the equipment can be sold or released,
resulting in a potential loss to the Company.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further capitalize upon its
remarketing expertise by continuing to develop its ability to sell
remarketing services to other lessors, fleet owners, and lessees. The
company plans also to create a dealer capability under which the Company
would buy and resell fleet equipment. The Company anticipates expanding
its used transportation equipment retail and wholesale capabilities
through the addition of strategically located retail centers through
internal growth and/or acquisitions. The Company's retail and wholesale
capabilities have been greatly improved through CAM's strategic
acquisition of Tomahawk. This improved capability will be used as a
competitive advantage that will enable the Company to provide a "total
holding cost" concept when competing for new lease origination deals. The
Company's retail and wholesale business unit will provide improved outlets
for other lessors, financial institutions, and fleet owners to dispose of
used transportation equipment and sources of quality used transportation
equipment for fleet owners and owner-operators. The Company also plans to
aggressively promote its Internet capabilities to further promote its
business activities and as an e-commerce tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S.
government agency. The purpose of the fund is to make direct investments
in emerging companies throughout Africa. In addition to the Company,
several of the other investors are Sun America, Inc., Citicorp,
Northwestern Mutual Life and others. As of September 30, 1999, the Company
had funded approximately $469,000 and is obligated to provide additional
funding in the approximate amount of $531,000. The Company has
additionally invested approximately $1,475,000 into one of NAOF's
portfolio investee companies. Subsequent to September 30, 1999, the
Company formally closed on a strategic investment/alliance with a South
African manufacturer and New Africa Opportunity Fund "NAOF" whereby a
series of convertible preferred stock of Chancellor Corporation was issued
and the note receivable including accrued interest was canceled in
exchange for a minority interest and certain distribution rights in the
South African company.
The Company's renewal or replacement of 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
expired lines of credit, to expand currently existing lines for inventory
floor planning, 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.
The Company is in the final stages of negotiation with several
financial institutions, whereby the Company could potentially gain access
to substantial funding which would enable the Company to accelerate the
redevelopment of its lease origination business.
IMPACT OF THE YEAR 2000 ISSUE
The Company has completed efforts to assess and, where required,
remediate issues associated with Year 2000 ("Y2K") issues. Generally
defined, Y2K issues arise from computer programs which use only two digits
to refer to the year and which may experience problems when the two digits
become "00" in the year 2000. In addition, imbedded hardware
microprocessors may contain time and two-digit year fields in executing
their functions. Much literature has been devoted to the possible effects
such programs may experience in the Year 2000, although significant
uncertainty exists as to the scope and effect the Y2K issues will have on
industry and the Company.
The Company has recognized the need to address the Y2K issue in a
comprehensive and systematic manner and has taken steps to assess the
possible Y2K impact on the Company. Although the Company has not completed
a 100% assessment of all its information technology ("IT") and non-IT
systems for Y2K issues the Company has completed its assessment of all
mission-critical systems. All mission-critical systems and most of the
major applications and hardware have been assessed to determine the Y2K
impact and a plan is in place for timely resolution of potential issues.
13
In 1998, the Company developed a strategic plan to identify the IT
systems needed to accomplish the Company's overall growth plans. As part
of this process, Y2K issues were considered and addressed by the Company's
senior management and MIS personnel. Although this plan was intended to
modernize the IT systems, compliance with Y2K requirements were
incorporated.
The cost of bringing the Company in full compliance should not result
in a material increase in the recent levels of capital spending or any
material one-time expenses. Prior to 1999, the Company spent approximately
$200,000 in modernizing its IT system, including compliance with Y2K
requirements. The Company anticipates spending approximately $350,000
during fiscal 1999 and 2000 to complete the modernization of its IT
system.
The failure of either the Company, its vendors or clients to correct
the systems affected by Y2K issues could result in a disruption or
interruption of business operations. The Company uses computer programs
and systems in a vast array of its operations to collect, assimilate and
analyze data. Failure of such programs and systems could affect the
Company's ability to track assets under lease and properly bill. Although
the Company does not believe that any of the foregoing worst-case
scenarios will occur, there can be no assurance that unexpected Y2K
problems of the Company's and its vendors' and customer's operations will
not have a material adverse effect on the Company.
While it is difficult to classify our state of readiness, we believe
that our internal plans should have the Company ready by the end of 1999
to avoid any material Y2K issues. We have completed the assessing, testing
of systems, and the development of contingency plans. Management is in
constant communication with its IT personnel and has made and will
continue to make reports to the Company's Board of Directors.
The preceding discussion contains forward-looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also
subject to protection under the Year 2000 Information and Readiness
Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and
"Year 2000 Readiness Disclosure" as defined therein. Actual results may
differ materially from such projected information due to changes in the
underlying assumptions.
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 and others, 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 material
or meaningful and that such results for one quarter should not be relied
upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
This Quarterly Report on Form 10-QSB/A 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
14
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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 of 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
Form 10-KSB for 1998 was amended June, 2000, primarily for the effects caused by
the change in acquisition date of the Tomahawk subsidiary which was originally
reported as of August, 1998. This transaction has been recorded as of January
1999, the date of final closing in the revised 10-KSB-A and this 10-QSB-A. See
10-KSB-A for more information. Additionally, the original 10-QSB included the
acquisition of a minority interest in a South African company as of September
30, 1999 in exchange for forgiveness of debt and issuance of preferred stock.
This transaction has been revised and recorded as of the closing date in October
1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
11 Computation of Earnings per Share
27 Financial Data Schedule for period ended September 30, 1999.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated February 10, 1999
2. Current Report on Form 8-K, dated March 4, 1999
3. Current Report on Form 8-K/A, dated March 22, 1999
4. Current Report on Form 8-K/A, dated April 13, 1999
5. Current Report on Form 8-K/A, dated July 9, 1999
15
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/ Franklyn E. Churchill
----------------------------------------
Franklyn E. Churchill
President, Chief Operating Officer and
Director
/s/ Barry W. Simpson
----------------------------------------
Barry W. Simpson
Chief Financial Officer
(Principal Accounting Officer)
Date: July 26, 2000
16