<PAGE>
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 June 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 July 31, 1998, 25,460,656 shares of Common Stock, $.01 par value per
share; 8,000,000 shares of Series AA Convertible Preferred Stock, $.01 par value
per share (with a liquidation preference of $.50 per share or $4,000,000); and
710,526 shares of Series A Convertible Preferred Stock, $.01 par value per share
(with a liquidation preference of $1.90 per share or $1,350,000), were
outstanding. As of July 31, 1998, 2,000,000 shares of Series B Convertible
Preferred Stock were authorized. Aggregate market value of the voting stock held
by non-affiliates of the issuer as of July 31, 1998 was approximately
$3,190,000. Aggregate market value of the total voting stock of the issuer as of
July 31, 1998 was approximately $12,476,000.
<PAGE>
Chancellor Corporation and Subsidiaries
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as
of June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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 6
Part II. Other Information 12
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
<PAGE>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Balance Sheet
(In Thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents ................................... $ 95 $ 97
Cash and cash equivalents, restricted ....................... 137 2,419
Receivables, net ............................................ 177 667
Leased equipment held for underwriting ...................... 502 502
Net investment in direct finance leases ..................... 578 521
Equipment on operating lease, net of accumulated depreciation -- --
of $3,161 and $4,106 ...................................... 471 232
Transportation equipment inventory .......................... 217 --
Residual values, net ........................................ 441 465
Furniture and equipment, net of accumulated depreciation
of $1,435 and $1,291 ....................................... 878 937
Other investments ........................................... 1,000 1,000
Intangibles, net ............................................ 122 122
Other assets, net ........................................... 1,554 129
-------- --------
$ 6,172 $ 7,091
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses ....................... 4,884 5,921
Indebtedness:
Nonrecourse ............................................... 366 528
Recourse .................................................. 632 415
-------- --------
Total liabilities .................................... $ 5,882 $ 6,864
-------- --------
-------- --------
Stockholders' equity
Preferred Stock, $.01 par value, 20,000,000 shares authorized
Convertible Series A, 710,526 shares issued and outstanding . 7 7
Convertible Series A, 8,000,000 shares issued and outstanding 80 80
Convertible Series B, 2,000,000 shares authorized,
none issued and outstanding .............................. -- --
Common stock, $.01 par value; 75,000,000 shares authorized,
25,454,156 issued and outstanding ........................ 254 254
Additional paid-in capital .................................. 28,375 28,426
Accumulated deficit ......................................... (28,426) (28,540)
-------- --------
Total stockholders' equity ........................... 290 227
-------- --------
Total liabilities and stockholders' equity ........... $ 6,172 $ 7,091
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statement of Operations
(In Thousands, Except Per Share Date)
Three Months Ended June 30, Six Months Ended June 30,
<TABLE>
<CAPTION>
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Rental income ....................... $ 290 $ 218 $ 411 $ 496
Lease underwriting income ........... 34 23 34 38
Direct finance lease income ......... 31 101 67 141
Interest income ..................... 14 3 32 16
Gains from portfolio remarketing .... 227 211 308 384
Transportation equipment revenues ... 481 -- 972 --
Fees from remarketing activities .... 314 94 554 234
Other income ........................ 27 18 45 18
------------ ------------ ------------ ------------
1,418 668 2,423 1,327
------------ ------------ ------------ ------------
Costs and expenses:
Cost of transportation equipment sold 362 -- 669 --
Selling, general and administrative . 883 1,989 1,419 3,930
Interest expense .................... 19 117 40 219
Depreciation and amortization ....... 120 71 235 161
1,384 2,177 2,363 4,310
------------ ------------ ------------ ------------
Net income (loss) before extraordinary
item ................................ 34 (1,509) 60 (2,983)
Extraordinary item - gain on early
extinguishment of debt .............. -- 930 -- 930
------------ ------------ ------------ ------------
Net income (loss) ..................... $ 34 $ (579) $ 60 $ (2,053)
Basic net income (loss) per share
Before extraordinary item ........... $ 0.00 $ (0.16) $ 0.00 $ (0.40)
Extraordinary item .................. -- 0.10 -- 0.12
------------ ------------ ------------ ------------
$ 0.00 $ (0.06) $ 0.00 $ (0.28)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing basic
net income (loss) per share ......... 25,416,244 9,664,114 25,409,476 7,412,760
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------- -------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income loss ........................................................... $ 60 $(1,788)
------- -------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization ............................................ 120 161
Gain on debt forgiveness ................................................. -- (930)
Residual value estimate realizations and
reductions, net of additions ............................................ 24 150
Changes in assets and liabilities:
Decrease in receivables ................................................. 490 2,261
Increase in transportation equipment inventory .......................... (222) --
Decrease in accounts payable and accrued expenses ....................... 1,038) (5,228)
------- -------
(626) (3,586)
------- -------
Net cash used by operating activities ....................... (566) (5,374)
------- -------
Cash flows from investing activities:
Leased equipment held for underwriting .................................. -- 1,231
Net investments in direct finance leases ................................ 57 181
Equipment on operating lease ............................................ (325) 113
Net change in cash restricted and escrowed .............................. 2,282 1,065
Additions to furniture and equipment, net ............................... (85) 32
Increase in other assets ................................................ 1,425) (672)
------- -------
Net cash provided by investing activities .................. 504 1,950
------- -------
Cash flows from financing activities:
Increase in indebtedness - nonrecourse .................................. -- 20
Increase in indebtedness - recourse ..................................... 225 4,074
Repayments of indebtedness - nonrecourse ................................ (162) (494)
Repayments of indebtedness - recourse ................................... (8) (2,677)
Issuance of preferred stock, net ........................................ -- 900
Issuance of common stock, net ........................................... 5 1,806
------- -------
Net cash provided by financing activities ................... 60 3,629
------- -------
Net increase in cash and cash equivalents .................................. (2) 205
Cash and cash equivalents at beginning of period ........................... 97 21
------- -------
Cash and cash equivalents at end of period ................................. $ 95 $ 226
------- -------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
4
<PAGE>
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 June 30, 1998 are not
necessarily indicative of the results to be expected for the entire year.
2. SUBSEQUENT EVENTS
On July 28, 1998, Chancellor Corporation ("Chancellor" or the "Company")
formed Riviera Financial Services Inc. ("Riviera") as a wholly owned
subsidiary of the Company. Riviera agreed to acquire certain assets,
primarily lease receivables, and assume certain liabilities from Riviera
Finance - East Bay ("East Bay"), a company unrelated to Riviera. In
consideration, the stockholders of East Bay will receive a total of
1,500,000 shares of the Company's Common Stock and 400,000 shares of the
Company's newly created Series C Convertible Preferred Stock. Additionally,
the stockholders will receive an option to purchase a total of 5,000,000
shares of the Company's Common Stock over a four-year period, subject to
Riviera achieving certain performance-based milestones. The transaction is
expected to be finalized by the end of August 1998.
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 to purchase all of the common stock of MRB,
Inc. d/b/a Tomahawk Truck Sales ("Tomahawk"). Tomahawk is a leading
retailer and wholesaler of used transportation equipment. The execution of
definitive agreements is expected no later than September 30, 1998. The
operations of Tomahawk will be consolidated as of August 1, 1998 for
accounting purposes.
5
<PAGE>
CHANCELLOR CORPORATION
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Month Period Ended June 30, 1998 vs. June 30, 1997
Revenues. Total revenues for the three-month period ended June 30, 1998
was $1,418,000 as compared to $668,000 for the corresponding prior year period,
an increase of $750,000 or 112.3%. For the three-month period ended June 30,
1998, rental income increased by $72,000 or 33.0% as compared to the
corresponding prior year period. The increase in rental income is attributable
to equipment added to the Company's portfolio through the purchase of certain
leases from trust investors. For the three-month period ended June 30, 1998,
lease underwriting income increased by $11,000 or 47.8% as compared to the
corresponding prior year period. Lease underwriting income increased due to the
origination of $1.5 million of equipment leases, at cost, as compared to
origination of only $848,000 of equipment leases, at cost, during the same
period last year. For the three month period ended June 30, 1998, direct finance
lease income decreased by $70,000 or 69.3%, 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 $181,000 of equipment (based on the original equipment cost). For
the three-month period ended June 30, 1998, gains from portfolio remarketing
increased by $16,000 or 7.6% as compared to the corresponding prior year period.
For the three-month period ended June 30, 1998, transportation equipment
revenues was $481,000, 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 June 30, 1998, fees from remarketing activities increased by $220,000 or
234.0% 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 three-month period ended June 30, 1998,
other income increased by $9,000 as compared to the corresponding prior year
period.
Costs and Expenses. Cost of transportation equipment sold for the
three-month period ended June 30, 1998 was $362,000 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 June 30, 1998 was $883,000 as compared
to $1,989,000 for the corresponding prior year period, a decrease of $1,106,000
or 55.6%. The second quarter of 1997 was burdened with significant legal,
accounting and consulting fees incurred in connection with the 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.
Interest expense for the three-month period ended June 30, 1998 was
$19,000 as compared to $117,000 for the corresponding prior year period, a
decrease of $98,000 or 83.8%. The decrease in interest expense is primarily a
result of the decrease in recourse debt and the expiration of several leases
with associated non-recourse debt.
Depreciation expense for the three-month period ended June 30, 1998 was
$120,000 as compared to $71,000 for the corresponding prior year period, an
increase of $49,000 or 69.0%. 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.
6
<PAGE>
Extraordinary Item - Gain on Early Extinguishment of Debt. The Company
recorded a gain on early extinguishment of debt for the three-month period ended
June 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 three-month period ended June 30,
1998 was $34,000 as compared to a net loss of $579,000 (inclusive of the
$930,000 gain on extraordinary item) for the corresponding prior year period, an
increase of $613,000 or 105.9%. 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 share for the three month period
ended June 30, 1998 was $.00 per share as compared to a net loss of $.06 per
share for the corresponding prior year period, an increase of $.06 per share or
100.0%.
Six Month Period Ended June 30, 1998 vs. June 30, 1997
Revenues. Total revenues for the six-month period ended June 30, 1998
was $2,423,000 as compared to $1,327,000 for the corresponding prior year
period, an increase of $1,096,000 or 82.6%. For the six-month period ended June
30, 1998, rental income decreased by $85,000 or 17.1% 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 $1.2 million of equipment (based on its original cost). Although
rental income will continue to decrease until the Company is able to add
substantial amounts of equipment to its portfolio, the Company has successfully
added equipment to its portfolio in the second quarter of fiscal, 1998 through
the purchase of certain leases from trust investors which will contribute
towards increasing future rental income revenues. For the six-month period ended
June 30, 1998, lease underwriting income decreased by $4,000 or 10.5% as
compared to the corresponding prior year period. Lease underwriting income
decreased despite the increase in origination of $1.6 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 six month period ended June 30, 1998, direct finance lease
income decreased by $74,000 or 52.5%, 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 $329,000 of equipment (based on the original equipment cost). For
the six-month period ended June 30, 1998, gains from portfolio remarketing
decreased by $76,000 or 19.8%, 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
six-month period ended June 30, 1998, transportation equipment revenues were
$972,000, 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 six-month period ended June 30, 1998,
fees from remarketing activities increased by $320,000 or 136.8% 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 six-month period ended June 30, 1998, other income increased by
$27,000 as compared to the corresponding prior year period.
Costs and Expenses. Cost of transportation equipment sold for the
six-month period ended June 30, 1998 was $669,000 as compared to no cost of
transportation equipment 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 six-month period ended June 30, 1998 was
7
<PAGE>
$1,419,000 as compared to $3,930,000 for the corresponding prior year period, a
decrease of $2,511,000 or 63.9%. The first six months of 1997 was burdened with
significant legal, accounting and consulting fees incurred in connection with
the 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.
Interest expense for the six-month period ended June 30, 1998 was
$40,000 as compared to $219,000 for the corresponding prior year period, a
decrease of $179,000 or 81.7%. The decrease in interest expense is primarily a
result of the decrease in recourse debt and the expiration of several leases
with associated non-recourse debt.
Depreciation expense for the six-month period ended June 30, 1998 was
$235,000 as compared to $161,000 for the corresponding prior year period, an
increase of $74,000 or 46.0%. 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 six-month period ended
June 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 six-month period ended June 30,
1998 was $60,000 as compared to a net loss of $2,053,000 (inclusive of the
$930,000 gain on extraordinary item) for the corresponding prior year period, an
increase of $2,113,000 or 102.9%. The increase in the net income is attributable
to the increase in revenue components and the net decrease in total costs,
specifically described above. Net income per share for the six month period
ended June 30, 1998 was $.00 per share as compared to a net loss of $.28 per
share for the corresponding prior year period, an increase of $.28 per share or
100.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash flow from operations of $566,000 during the six
month period ended June 30, 1998, in part, due to payment of accounts payable
and accrued expenses, the collection of account receivable, and the build-up of
used transportation equipment inventory held for resale. Investing activities
provided $504,000 during the six-month period, in part, due to the collections
in connection with the Company's recovery of trust administration costs.
Financing activities in the six-month period provided $60,000 due to an
aggregate increase in recourse debt net of repayments of non-recourse debt. The
net result of the above activity for the six month period was a decrease in cash
and cash equivalents of $2,000. Cash and cash equivalents amounted to $95,000 at
June 30, 1998 as compared to $226,000 at June 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 June 30, 1998, the Company had
funded approximately $273,000 and is obliged to provide additional funding in
the approximate amount of $727,000.
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
8
<PAGE>
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.
On December 12, 1997, the Company, Afinta Motor Corporation (Pty) Ltd
("AMC"), its wholly owned subsidiary Afinta Financial Services (Pty) Ltd
("AFS"), and New Africa Opportunity Fund, LP ("NAOF"), entered into a letter of
intent, under which a diversified financial services company, specializing in
commercial and consumer financing in Africa will be formed. On March 27, 1998,
the parties entered into a second agreement that described the responsibilities
of the parties upon the closing of the transaction and execution of the
definitive closing. The Company will provide, through CAC, $5,000,000 of capital
to AFC and 1,000,000 shares of the Company's Series B Preferred Stock. NAOF and
AMC will receive up to a 50% ownership interest in AFC. In consideration of this
ownership interest, NAOF will infuse $10,000,000 of cash in two $5,000,000
tranches. AMC will grant exclusive distribution rights for AMC products in North
America, Eastern Europe, the Russian Federation and Commonwealth of Independent
States, and Asia-Pacific; nonexclusive distribution rights for AMC products in
South America; and discounted pricing for the purchase of AMC products to be
sold and/or leases through AFC or its assignee. Additionally, AFC will issue to
NAOF and AMC up to 1,000,000 shares of the Company's Series B Preferred at $20
per share. The Series B Preferred converts into 10 shares of the Company's
Common Stock for each one share of Preferred stock at the holder's option
reflecting a price per share of Common Stock of $2.00 per share. Additionally,
the Series B Preferred has a liquidation preference of $2.00 per share. The
proforma effect on stockholder's equity, net of estimated transaction related
costs, if all the transactions described above are executed, would result in an
increase from $290,000 to $19,290,000 as of June 30, 1998.
In anticipation of the successful completion of the above transaction,
the Company commenced its investment in the operation of AFC. Accordingly, the
Company infused approximately $450,000 in cash during the first quarter of
fiscal 1998 to successfully complete certain leasing transactions. The funds
were used to purchase vehicles from AMC, which were then leased to end user
customers.
On July 28, 1998, the Company formed Riviera Financial Services Inc.
("Riviera") as a wholly owned subsidiary of the Company. Riviera agreed to
acquire certain assets, primarily lease receivables, and assume certain
liabilities from Riviera Finance - East Bay ("East Bay"), a company unrelated to
Riviera. In consideration, the stockholders of East Bay will receive a total of
1,500,000 shares of the Company's common stock and 400,000 shares of the
Company's newly created Series C Convertible Preferred Stock. Additionally, the
stockholders will receive an option to purchase a total of 5,000,000 shares of
the Company's common stock over a four-year period, subject to Riviera achieving
certain performance-based milestones. The transaction is expected to be
finalized by the end of August 1998.
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 to purchase all of the common stocks of MRB, Inc. d/b/a
Tomahawk Truck Sales ("Tomahawk"). Tomahawk is a leading retailer and wholesaler
of used transportation equipment. The execution of definitive agreements is
expected no later than September 30, 1998. The operations of Tomahawk will be
consolidated as of August 1, 1998 for accounting purposes.
9
<PAGE>
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 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.
10
<PAGE>
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.
"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.
11
<PAGE>
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
On April 20, 1998, the Board of Directors caused to be
distributed to stockholders of record as of March 20, 1998, a Notice of Annual
Meeting of Stockholders, Proxy and Proxy Statement for the Annual Meeting held
on May 15, 1998. As of the record date, 25,404,156 shares of Common Stock,
710,526 shares of Series A Preferred Stock and 8,000,000 shares of Series AA
Preferred Stock were entitled to vote. For all matters presented, the Common
Stock, Series AA Preferred Stock, and Series A Preferred Stock voted as a single
class.
At the meeting, the stockholders acted upon the following
proposals: (i) to approve an amendment to the Company's 1997 Stock Option Plan;
(ii) to ratify the selection by the Board of Directors of Reznick, Fedder and
Silverman as the Company's independent public accountants for fiscal 1998; and
(iii) to confirm the vote of the Board on the removal of Mr. Ernest L. Rolls as
a Director and Vice Chairman of the Company. All of the above matters were
approved by the stockholders.
12
<PAGE>
CHANCELLOR CORPORATION
Votes "For" represent affirmative votes and do not represent
abstentions or broker non-votes. In cases where a signed proxy was submitted
without direction, the shares represented by the proxy were voted "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy. The voting
results were as follows:
I. Amendment to the 1997 Stock Option Plan
FOR AGAINST ABSTAIN
--- ------- -------
34,470,648 218,360 24,799
II. Ratification of Auditors
FOR AGAINST ABSTAIN
--- ------- -------
36,654,934 54,184 708
III. Confirmation on Removal of Earnest L. Rolls
FOR AGAINST ABSTAIN
--- ------- -------
34,460,385 244,125 9,297
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
13
<PAGE>
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: August 14, 1998
14
<PAGE>
Chancellor Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
Brian M. Adley
---------------------------------------
Chairman of the Board and Director
(Principle Executive Officer)
---------------------------------------
Jonathan C. Ezrin
Corporate Controller
(Principle Accounting Officer)
DATE: August 14, 1998
14
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 232
<SECURITIES> 0
<RECEIVABLES> 177
<ALLOWANCES> 0
<INVENTORY> 217
<CURRENT-ASSETS> 0
<PP&E> 2,313
<DEPRECIATION> (1,435)
<TOTAL-ASSETS> 6,172
<CURRENT-LIABILITIES> 4,884
<BONDS> 998
07
87
<COMMON> 140
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,172
<SALES> 2,423
<TOTAL-REVENUES> 2,423
<CGS> 669
<TOTAL-COSTS> 2,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 60
<INCOME-TAX> 0
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
