UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 Small Business Issuer in its Charter)
Massachusetts 042626079
(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
Issuer's telephone number, including area code (617) 368-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1997 were approximately
$4,433,000.
As of March 15, 1998, 25,404,156 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 March 15, 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 registrant as of March 15, 1998 was approximately
$1,201,000. Aggregate market value of the total voting stock of the registrant
as of March 15, 1998 was approximately $8,129,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders to be held at 2:00 p.m.
on May 15, 1998 at the offices of Sullivan & Worcester LLP, One Post Office
Square, 23rd Floor, Boston, MA 02109 is incorporated into Part III hereof.
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This Annual Report on Form 10-KSB 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Chancellor Corporation ("Chancellor" or the "Company") was incorporated
in Massachusetts in January 1977. It is principally engaged in (1) buying,
selling, leasing and remarketing new and used equipment, (2) managing equipment
on and off-lease, and (3) arranging equipment-related financing through its
principal subsidiary, Chancellor Fleet Corporation ("Fleet"), which was
incorporated in Massachusetts in January 1980.
HISTORICAL BUSINESS AND FISCAL YEAR 1997 SIGNIFICANT DEVELOPMENTS
The Company originates lease transactions directly with equipment users
and in most cases sells those leases to investors. The Company also manages most
of the leases it sells to investors and, when the original leases expire or
terminate, remarket the equipment for the benefit of the investors and the
Company. The Company originates leases involving primarily transportation
equipment, but also other equipment including material handling equipment and
construction equipment. Investors who purchase equipment subject to a lease
receive the tax and most of the economic benefits associated with the lease
transaction. In certain cases, the Company has retained leases for its own
account. The Company also arranges non-recourse financing for some of the leases
which it sells and for most leases which it has retained for its own account.
Typically, when the Company originates leases, the investors or buyers of those
leases are not known. Therefore, the Company at the time of entering into the
lease transaction is "underwriting" the lease. At the expiration or early
termination of the original lease, the Company typically sells or releases the
equipment on behalf of the investor.
During the period 1989 through 1996, the Company incurred cumulative
losses in excess of $50 million. The Company recorded losses of $1,802,000 and
$6,373,000 during fiscal 1997 and 1996, respectively. This decline led
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to the restructuring and transition plan developed and implemented under the
direction of Vestex, the Company's majority shareholder. The continued loss in
1997 is due primarily to the lack of sufficient cash flow to add new leases to
the Company's own lease portfolio and continued costs that were anticipated to
occur in the first half of 1997 in connection with the Company's restructuring
efforts. However, the marked decrease in loss from 1996 to 1997 reflects the
positive effect of management's restructuring and cost containment strategies,
which began in late fiscal 1996 and continued throughout fiscal 1997.
In December 1996, a restructuring of the Company (the "Restructuring")
occurred pursuant to which certain members of the Company's Board of Directors
and senior management were replaced. In connection with the Restructuring, the
Company's Board of Directors unanimously adopted resolutions accepting the
resignations submitted by Messrs. Dayton, Killilea and Morison as directors; Mr.
Morison's resignation as an officer; and approving the termination of a Voting
Agreement dated April 11, 1996, other than section 1.5 of such Agreement which
relates to indemnification of directors, among the Company, Brian M. Adley and
the Company's majority shareholder, Vestex Capital Corporation ("VCC" or
"Vestex").
During 1994, and prior to becoming an affiliate, the board of directors
recommended and the shareholders approved at the 1995 Annual Meeting of
Stockholders, a consulting agreement with Vestex, Inc., an affiliate of the
majority stockholder, whereby the affiliate provides specified services related
to the Company's equity raising efforts and financing activities. Under the
agreement, the affiliate earns a fee for consummating equity or debt
transactions. The fee related to debt transactions is 1.5% of the transaction
amount through December 1996 at which time the Board of Directors increased the
fee to 3.0% of the transaction amount. The fee related to equity transactions
equals 7.5% of the transaction amount if a broker or underwriting fee is not
paid to a third party and 2.5% of the transaction amount if a broker or
underwriting fee is paid to a third party. The agreement was extended effective
July 1, 1997 on the same terms and conditions through June 2000. Vestex also
provides services to the Company on operational and other matters for which it
is compensated at levels negotiated with the Company, as described below.
During 1996 and through March 1997, the affiliate charged the Company
fees for certain transactions it determined were consummated during the period
and were covered by the agreement. The Company disputed a certain portion of
these charges. The parties settled this dispute by agreeing that $3,000,000 was
incurred relating to these services, of which $800,000 and $2,200,000 were
performed in 1997 and 1996, respectively. In connection with this settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed. These amounts
are included in selling, general, and administrative expenses on the
consolidated statement of operations. Per the agreement, the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during the coming year if payment can be made from refinancing or equity
proceeds in a manner that does not impact the Company's ability to meet its
other obligations.
As of December 31, 1996, the Company had received from Vestex a total
of $4,121,000, net of repayments and cost of $312,500, which consisted of
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equity of $1,421,000 and debt and payables of $ 2,700,000. During 1997, the
Company entered into several transactions with Vestex that resulted in an
increase of $ 1,856,000 resulting in a net equity infusion of $ 5,977,000 and
debt and payables of $59,000 as of December 31, 1997.
In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000. The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through December 1997, and iii) a $45,000
fee relating to the $1,500,000 loan provided by the then Vice-Chairman of the
Board of Directors. This loan was guaranteed by Brian M. Adley and Vestex.
The Company also entered into several transactions whereby Vestex
received fees of approximately $1,288,000 in 1997. The Company recorded
approximately $519,000 of these expenses in connection with Vestex's
negotiations on behalf of the Company resulting in significant financial
benefits and savings to the Company. This includes, but is not limited to,
savings of approximately $930,000, whereby the intercreditor loan of
approximately $1,906,000 was paid in advance of term; savings in excess of
$2,000,000 on the termination of the Company's office lease and renegotiations
of more favorable terms on the Company's new office lease; and development and
implementation of strategies enabling the Company to properly recover certain
administrative costs incurred in connection with the administration of the
Company's trust portfolio assets. The Company also recorded an additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's successful restructuring and transition plan. This amount
reduced the restructuring charges accrued at December 31, 1996. In connection
with a $1,500,000 loan provided to the Company by the Vice-Chairman of the Board
of Directors, Vestex provided certain guarantees and was compensated in the
amount of $375,000 for providing such guarantee.
The Company purchased furniture and computer equipment from Vestex in
the amount of $300,000. The acquisition prices were based on estimated fair
value as of the date of the transaction. At December 31, 1997, approximately
$60,000 of the furniture acquired was not in service by the Company.
The Company received loans from Vestex during 1997 totaling $1,735,000,
including $1,500,000 in connection with the repayment of the Company's debt to
the Vice-Chairman. Interest on loans payable to Vestex accrues at the prime rate
plus 2% (10.5% as of December 31, 1997). During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.
During 1997, Vestex agreed to take stock, at the then fair market value
on the date of conversion, in lieu of cash in consideration of certain
obligations due Vestex by the Company. In February 1997, the Board of Directors
approved the issuance of 3,000,000 shares of the Company's Series AA Preferred
Stock at $.30 per share to Vestex in consideration of $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex in consideration of $1,000,000 of fees and debt including Vestex's
guarantee of the $1,500,000 loan provided to the Company by the Vice Chairman,
stated above. Also in June 1997, the Company issued 6,716,667 shares of Common
Stock to Vestex in consideration of approximately
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$806,000 of fees and debt due. In September 1997, the Company issued 5,000,000
shares of Common Stock to Vestex in consideration of approximately $500,000 of
Vestex fees and debt due. In December 1997, the Company issued 710,526 shares of
the Company's Series A Preferred Stock to Vestex in consideration of $1,350,000
of Vestex fees and debt due. In addition to the conversion of accrued Vestex
fees and debt into the Company's preferred and common stock totaling
approximately $4,556,000, the Company also repaid debt and fees through cash
payments in the amount of approximately $2,848,000. For the years ended December
31, 1997 and 1996, the Company incurred expenses to Vestex of $1,850,000 and
$2,594,000, respectively. As of December 31, 1997, the Company owed Vestex
$50,000 of unpaid loans and approximately $9,000 of unpaid fees. In addition,
Vestex is due $50,000 of unpaid fees assumed by the Company at the time of
acquisition of Long River Capital.
An affiliate of the Chairman of the Board of Directors provided
supervisory and other construction services in connection with the build-out and
improvements to the Company's new office space. The total fees earned by the
affiliate were $275,000, all of which was paid in 1997. The Company recorded
these amounts as capitalized leasehold improvements.
In April 1997, the Company's loans due to an intercreditor group were
paid in advance of their terms. The balance due on the intercreditor group loans
as of the repayment date was approximately $1,906,000. The intercreditor group
accepted a payment of $976,000 in cash, plus closing fees of $22,000, and
forgave the remaining balance of $930,000. In connection with this transaction
the Company provided a security interest in all assets of the Company to Vestex.
During 1996, the Company acquired a fifty percent interest in TruckScan
LLC ("TruckScan") for a $350,000 contribution to equity. Due to the level of
control the Company exercised over the operation of TruckScan, TruckScan's
financial statements are consolidated with the financial statements of the
Company and its other subsidiaries. On May 1, 1997 the Company sold its 50%
investment in TruckScan to Telescan, the joint venture partner and a party
unrelated to the Company. In consideration for the sale, the Company received
certain assets from Telescan with an estimated value of $11,000 and a one year
promissory note in the amount of $50,000 secured by certain assets of Telescan
and forgiveness of a promissory commitment to contribute capital of
approximately $300,000 which was authorized by the former management and board.
The Company realized a gain of $41,000 on the sale of this investment. TruckScan
had a loss of $29,000 and $422,000 from January 1, 1997 through April 30,1997
(date of sale) and from June 21, 1996 (date of inception) through December 31,
1996, respectively. The minority owner's share of this loss exceeded its equity
by $225,000. As a result, the entire loss of $29,000 and $422,000, respectively
is recognized by the Company.
On July 31, 1997, the Company acquired certain assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application processing and origination of automobile loans for high credit
risk consumers. The acquisition was accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on their fair market value at the date of
acquisition. (See Note O of the Notes to Consolidated Financial Statements).
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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. As of December 31, 1997, the Company had funded
approximately $185,000 and is obligated to provide additional funding in the
approximate amount of $815,000.
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, Africa Finance
Corporation ("AFC"), specializing in commercial and consumer financing in Africa
will be formed. The parties commenced operations on January 1,1998 pursuant to
an agreement reached in principle, as outlined in the Letter of Intent. On March
27, 1998, the parties finalized the terms of the agreement and responsibilities
of the parties by the closing of the transaction and executing the documents.
The parent holding company will be Chancellor Africa Corporation ("CAC"). The
Company will provide, through CAC, $5,000,000 of start-up capital to AFC, and
1,000,000 shares of the Company's Series B Convertible Preferred Stock. In
consideration of a 40% ownership interest in AFC, NAOF will infuse $10,000,000
of cash in two $5,000,000 tranches. Upon the event of a material adverse change
in the financial condition of AFC prior to the second funding, and with the
unanimous consent of the board of directors of AFC, the second funding may be
extended to a mutually agreeable date or terminated. In connection with this
capital infusion, AFC will also issue 500,000 shares of the Company's Series B
Convertible Preferred Stock to NAOF. In consideration of a 9% ownership interest
in AFC, and the issuance of 500,000 shares of the Company's Series B Convertible
Preferred Stock, AMC will contribute the net assets of AFS; 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 leased
through AFC or its assignee. AMC will also transfer a 2-1/2 percent ownership
interest in AMC to CAC in connection with this transaction. The Series B
Convertible Preferred stock has a liquidation preference of $2.00 per share and
is convertible into 10 shares of the Company's Common Stock for each one share
of preferred stock at the holders option.
During 1997, as part of the Company's restructuring, management
undertook a review of its operations. As part of this review, management,
outside counsel and industry consultants reviewed the trust agreements and
determined that the Company historically had not charged the trust for the costs
of their administration. As a result of this review management determined that
the Company had not been reimbursed approximately $22 million of costs incurred
for trust administration for periods prior to 1997. Management, with the advice
of counsel, subsequently began to charge the trusts for these services and
implemented plans to recover past costs. The consolidated statements of
stockholders' equity (deficit) reflects an increase in stockholders' equity of
$1,437,000 from $1,365,000 to $2,802,000
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as of December 31, 1995 for trust administration costs recovered for periods
prior to 1996. Management makes no representations concerning the Company's
ability to recover any further costs for periods prior to 1997. The 1996
consolidated statements of operations have been restated to reflect an
adjustment to include a reduction in the general and administrative expenses of
approximately $431,000 for trust administration costs recovered and a
corresponding decrease in the net loss from $6,804,000 to $6,373,000 for the
year ended December 31, 1996. The net loss per share amounts in the consolidated
statements of operations have been restated from $1.32 to $1.24 as a result of
this change.
The ability of the Company to operate profitably in the future will
depend largely on the amount of new capital available to the Company and the
cost of that capital. The Company continues to explore possible sources of new
capital including, for example, obtaining new or additional recourse debt,
obtaining new equity capital, securitizing lease transactions, obtaining equity
capital from private investors, purchases of equipment leases originated by the
Company and/or entering into strategic alliances/joint ventures with other
leasing or financial services companies and the sale of ancillary business units
and/or assets as considered appropriate. The Company intends to invest any new
capital that it obtains in leases for its own portfolios (if practical) as well
as to invest in certain remarketing and other business operations.
Description of Business
The majority of the Company's leases are noncancelable "net" leases
which contain provisions under which the customer must make all lease payments
regardless of any defects in the equipment and which require the customer to
insure the equipment against casualty loss, and pay all related property, sales
and other taxes. Some of the leases written by the Company provide for early
termination options. Generally, these options may be exercised at specified
times upon receipt by the Company of an amount at least equal to the discounted
present value of remaining rent payments. The Company intends to collect all
termination payments. Other leases allow the lessee at certain times to require
the Company to attempt to sell or sublease the equipment for the lessee, with
the Company sharing in any losses or gains should a decrease or increase in
revenue streams occur as a result.
Leases are generally originated for private third party purchasers of
equipment. The Company's lease origination marketing strategy is transaction
driven. With each lease origination opportunity, the Company evaluates both the
prospective lessee and the equipment to be leased. With respect to each
potential lessee, the Company evaluates the lessee's credit worthiness. With
respect to the equipment, the Company evaluates the remarketing potential.
The Company currently concentrates on leasing transportation equipment,
such as tractors, trailers and trucks. The Company also leases construction
equipment, aircraft, material handling equipment and other equipment. The
Company's business plan calls for diversification of the equipment available to
be financed. This diversification will provide for the financing of
low-obsolescence, hard-asset equipment with predictable and dependable residual
values, including but not limited to, plastics, printing, construction and
general manufacturing equipment. Further, the Company will seek to syndicate
transactions not meeting these criteria or the Company's credit risk profile.
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The Company leases equipment to lessees in diverse industries
throughout the United States. Additionally, the Company's international presence
includes transactions in the Russian Federation and the Commonwealth of
Independent States ("CIS"). Although the Company's direct solicitation efforts
involving leases of new equipment have shifted from Fortune 100 companies to
include smaller business entities, most of the Company's lessees of new
equipment are still of substantial creditworthiness, with minimum net worth in
excess of $25 million.
The Company's level of lease origination declined significantly in the
years 1989 through 1997. Between 1989 and 1997, the Company sold substantially
all new lease origination to private investors and retained very few lease
originations for its own account. During 1997, the Company entered into
approximately 10 new lease transactions involving equipment having an original
equipment cost of approximately $3 million, versus 42 transactions involving
equipment having an original cost of $21 million in 1996. Additionally, the
Company realized cash from origination activities of $93,000 and $224,000 in
1997 and 1996, respectively.
During 1997, 92% (based on original equipment cost) of the new lease
transactions originated by the Company were with the one largest lessee. In
addition, approximately 55% and 37% (based on original equipment cost) of
equipment sold to investors in 1997 were purchased by the two largest investors.
During 1996, 42%, 11% and 10% (based on original equipment cost) of the new
lease transactions originated by the Company were with the three largest
lessees. In addition, approximately 26%, 16% and 13% (based on original
equipment cost) of equipment sold to investors in 1996 were purchased by the
three largest investors.
Equipment Acquisition. The Company acquired $214,000 of new equipment
under 4 leases during 1997. Additionally, the Company acquired 10 existing
leases in connection with the prepayment of the intercreditor loan. The Company
acquired no equipment in 1996.
Equipment Disposition. In 1997, the Company disposed of $4.0 million of
the Company's portfolio equipment (measured by its original cost) on operating
leases and disposed of $590,000 on direct finance leases, reducing the total
equipment (net of depreciation, pay-down and write-downs) on operating leases
and direct finance leases to $232,000 and $521,000, respectively. In 1997, the
Company, as a result of a commitment from the previous management and board,
sold $1,300,000 (based on original cost) of equipment under one lease from the
portfolio prior to lease expiration. In 1996, the Company disposed of $11.4
million of the Company's portfolio equipment (measured by its original cost) on
operating leases and disposed of no equipment on direct finance leases, reducing
the total equipment (net of depreciation, pay-down and write-downs) on operating
leases and direct finance leases to $497,000 and $748,000, respectively. In
1996, the Company voluntarily sold $1.1 million of equipment under one lease
from the portfolio prior to lease expiration.
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Remarketing Activities
The remarketing of equipment plays a vital role in the operations of
the Company. 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
not only to the realization of the Company's interest in the residual value but
also for the Company to recover its original investment in the equipment in its
portfolios and to recognize a return on that investment.
The Company continues to dedicate substantial resources towards the
development and improvement of its remarketing capabilities, which is a
significant profit center for the Company. The Company's strategy is to exploit
its remarketing expertise by providing fee-based remarketing services to fleet
equipment owners and lessees and also to create a dealer capability under which
the Company would buy and re-sell fleet equipment. The Company continually
explores the potential for financing relationships enabling the remarketing
group to enter into transactions to purchase used transportation equipment which
can be quickly and profitably remarketed.
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 remarketing.
Remarketing efforts are pursued on a direct retail sale or lease basis.
The Company's fleet equipment remarketing experience has shown that generally
the greatest residual value is realized by initially re-leasing equipment,
rather than immediately selling it. Therefore, the Company has concentrated its
remarketing efforts on re-leasing, although re-leasing involves more risks than
selling because lessees of used equipment are generally smaller, less
creditworthy enterprises than the Company's initial lessees. The Company sells
fleet equipment through its retail sales center located in Elizabeth, New Jersey
and through its indirect retail sales centers in California, Florida, Georgia,
Illinois and Texas.
Equity Syndications
The Company sells its lease transactions to private investors through
the sale of interests in grantor trusts. In the grantor trust structure, the
equipment is acquired directly by the trust and the related lease is transferred
to the trust. The Company or one of its subsidiaries usually acts as trustee and
in that capacity holds title to the equipment and performs specified
administrative functions for which it is entitled to receive reimbursement for
costs incurred. The Company typically sells equipment directly to an investor.
The Company sold approximately $3 million and $21 million of equipment to
private investors during 1997 and 1996, respectively. The Company receives fees
upon these sales. In addition, the Company often shares with the investor in the
residual value derived from the remarketing of equipment at lease expiration or
early termination.
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Competition
The principal methods by which the Company competes are its ability to
underwrite the lease transactions which it originates; its knowledge of the
equipment used by its lessees; the training and experience of its personnel; the
relationships and reputation it has established with lessees, equipment
suppliers and financial institutions; its ability to adapt to changing
regulations and tax laws; and its experience in successfully remarketing the
equipment at lease termination.
The equipment leasing business, on a global basis, is a highly
competitive, fragmented marketplace with thousands of competitors. However, the
Company has identified emerging markets such as the Russian Federation, the
Commonwealth of Independent States, and the Republic of South Africa, the
Kingdom of Swaziland and other sub-Saharan countries. These emerging markets
hold significant opportunity to provide financial services such as leasing. The
Company is aggressively pursuing the transacting of lease deals and negotiation
of strategic alliances in these markets. Chancellor's competitors include (1)
large diversified financial services companies, (2) other leasing companies and
(3) vendor financing programs. Many of these organizations have greater
financial resources than the Company and, therefore, may be able to obtain funds
or equipment on more favorable terms than those available to the Company.
Additionally, the Company competes against other financing alternatives
available to lessees for the purchase of equipment.
BUSINESS PLAN
The Company's strategy is to return to profitability, increase market
share, and create growth opportunities by expanding its core business through
servicing middle market clients, expanding into new transportation and equipment
markets and seeking strategic financial partnerships and joint ventures
domestically and internationally.
Strengthening of Core Business. Historically, the Company has focused
its efforts on Fortune 100 companies. The Company has implemented a plan to
re-focus its transportation equipment and remarketing expertise by expanding the
number of customers within its target market. The Company will be a transaction
intermediary to Fortune 100 companies and focus origination activities on middle
market clients with a variety of transportation equipment requirements. The
strategic decision to de-emphasize origination activities within the highly
competitive Fortune 100 marketplace is expected to result in higher gross
margins while utilizing the Company's twenty years of historical equipment
residual performance. The Company will leverage off of its expertise allowing
entry into emerging international markets seeking these basic financial services
in their economic development.
Aggressive Entry into Select Markets. Through acquisitions and
strategic financial partnerships, the Company will compliment its core business
by entering into general equipment leasing. The Company believes that these
businesses will strengthen its origination base and provide valuable new market
opportunities.
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Independent outside advisers believes that tremendous opportunities
also exist in the origination and remarketing of aircraft, barges and other
equipment utilized for infrastructure projects. These "big ticket" leases play
to Chancellor's strength and are natural avenues for expansion. The Company
opened a new Florida office in 1997 and has committed resources and expertise to
target these structured finance projects.
Structured finance represents a logical extension of both Chancellor's
middle market financing and its commitment to new business development.
Structured finance offerings are significantly larger in scope (typically $5-150
million) than the Company's typical middle market transaction and may require
significant tax and legal human resource support. Transactions in this area will
fall into four general categories: project finance, facility finance, equipment
finance and sale-leaseback. The keys to success include employing extremely
knowledgeable and experienced personnel and working efficiently to identify
"real" transactions where the Company can make an impact and be recognized for
the value-added it brings to a project.
International Expansion. The Company perceives significant
opportunities for its services in international markets. Additionally, the
Company can benefit from higher margins in less competitive international
markets. In 1997, the Company completed certain lease transactions in the
Russian Federation and the Commonwealth of Independent States ("Russia and the
CIS"). In addition, the Company has entered into a letter of intent with certain
parties investing in and operating companies in the Republic of South Africa
("RSA"), the Kingdom of Swaziland and other sub-Saharan countries. The Company
contemplates providing financial services in the RSA as a result of the
strategic alliance which was recently executed.
Business Expansion
Since the change in management and Board control on December 3, 1996
the Company closely scrutinizes transactions to maximize profitability. As a
result of the restructuring, which was near completion in 1997, and a move
towards concentrating on profit centers, the Company has established a strong
foundation upon which future profitable business expansion can be achieved.
As an outgrowth of the Company's core transportation leasing business,
several acquisitions are being evaluated that provide for vertical and
horizontal integration into businesses that utilize similar back office
operations.
In March 1997, the Company originated its first equipment transaction
in Russia and the CIS. The opportunity to deliver equipment leasing in an
emerging market with minimal competition is an important first step in
Chancellor's origination growth. To date, Chancellor has forged a strategic
alliance with InterLeasing, a local Russian licensed and authorized leasing
company, to aid the Company in its expansion into the Russian market. The
Company has originated 2 equipment lease transactions in Russia with Kent
International, a company owned 50 percent by a director of the Company, in the
approximate amount of $144,000 (based on original equipment cost). Additionally,
the Company is in negotiations with the Moscow government, several of the
largest financial institutions and Digital Equipment Corporation regarding
multiple lease transactions, management can give no assurance that these
transactions will be completed.
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In 1997, the Company instituted an aggressive mergers and acquisition
strategy, seeking candidates providing vertical and horizontal opportunities
within the areas of commercial, consumer and real estate finance. The expansion
of the Company's core business through the acquisition of and merger with
complementary businesses within financial services will be an ongoing strategic
focus. The implementation of this strategy involves members of senior management
and outside professionals reporting to a Mergers and Acquisitions subcommittee
of the Board of Directors. This group is constantly evaluating a variety of
domestic and international leasing companies and related opportunities, for
potential alliances and/or business combinations.
Communications and Information
The Company is in the process of reviewing and enhancing its Management
Information System (MIS) capabilities and identifying those strategies and
technologies that will enhance the Company's back office systems. This
integrated system will provide back office operations with the detailed
information necessary to track transactions and will facilitate management's
ability to evaluate operations to ensure proactive decision-making.
In its efforts to enhance the current MIS system, attention will be
given to upgrading to client-server technology, which will increase
productivity, reduce costs, provide easy access to centralized data and improve
communications. A broader scope of benefits includes company re-engineering and
cultural change, sophisticated customer services, elimination of outside
delivery and soft cost reductions. The Year 2000 Issue will also be considered
in connection with the system upgrade project. The Year 2000 Issue is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could potentially result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in other similar normal activities. In updating its computer software to
increase operational efficiencies and information analysis, the Company will
ensure that the new system properly utilizes dates beyond December 31, 1999. The
cost of this upgrade project, as it relates to the Year 2000 Issue, is not
expected to have a material effect on the operations of the Company and will be
funded through operating cash flow.
The Company has re-designed and implemented a new Internet presence
(http://www.chancellorfleet.com) allowing the Company to electronically
disseminate information on its financial services and remarketing expertise, as
well as improve financial and corporate information delivery to its
shareholders, the financial community and interested parties.
Market Opportunities
Through implementation of a strategy allowing for penetration of
non-Fortune 100 customers, the Company will broaden its target market to a less
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competitive and price sensitive arena. The Company will focus its energies
domestically and internationally on the multi-billion dollar leasing
marketplace. The ability of the Company to originate and remarket equipment in
underdeveloped and inefficient markets translates into higher potential rates of
return. Additionally, the willingness of the Company's strategic financial
partners to augment the Company's deal underwriting capabilities provides
financial strength to execute transactions.
Domestic Market
The diversification outside the highly competitive Fortune 100
tractor/trailer market as an origination portfolio player enables the Company to
focus its leasing activities on selective transportation deals as well as
non-transportation equipment such as computers, general office equipment,
telecommunications, and other high technology equipment. The decision to
originate assets in the growing equipment leasing marketplace will focus on
assets with three to five year life cycles and capitalize on the Company's
strong remarketing efforts. Adding additional lines of origination in less
competitive markets will allow Chancellor to execute profitable transactions.
The Company will establish an in-house Buy/Sell division as a part of
its Remarketing group to execute asset arbitrage transactions of used equipment.
Through effective utilization of the Company's management information system,
and using historical pricing values as a basis, an asset will be priced and
marketed immediately to customers who have a relationship with the Company. This
strategic tool allows Chancellor to identify the most likely candidates and
pre-sell equipment, resulting in minimal capital risk and higher margins.
Additionally, the Company plans to expand beyond traditional lease
origination by engaging in venture leasing activity, which will secure equipment
for high growth companies. This operation will seek relationships with rapidly
growing venture capital backed enterprises that may not qualify for bank or
other conventional financing at the time. As these relationships grow, the
Company envisions maintaining exclusive equipment leasing contracts for these
customers' future equipment requirements.
The Company is actively engaged in negotiations with strategic domestic
financial partners to leverage the Company's remarketing expertise.
International Markets
A key element of the corporate growth strategy is to make the Company a
global originator/remarketer of transportation and non-transportation equipment.
These additional international revenue streams, where margins are significantly
higher than the domestic market, should help facilitate the Company's goal of
returning to profitability. Exposure on these transactions will be mitigated
through the use of credit enhancement, letters of credit and other similar
instruments.
The Company's management is committed to a strategy providing for
international diversification within emerging global markets. Management has
identified Russia and the CIS, the Republic of South Africa, the Kingdom of
Swaziland and other sub-Saharan countries, as emerging markets having
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significant demand for the financial services and expertise that the Company can
provide to further their economic development. As a result of this strategy, the
Company in 1997 entered into several transactions in Russia and the CIS
providing lease financing for agricultural equipment with a total original
equipment cost of $144,000.
Additionally, the Company has made significant progress in establishing
a major presence in the RSA as the premier financial services company in this
region. The Company's efforts as a key contributor in the economic development
of the RSA are demonstrated indirectly through an investment in the New Africa
Opportunity Fund, LP ("NAOF"), and directly through the creation of a majority
owned subsidiary incorporated under the laws of Mauritius that will provide
financial services and specialize in equipment leasing in the RSA.
NAOF is a $120 million investment fund created to make direct
investments in emerging companies throughout Africa. The fund consists of a $40
million equity commitment from various limited partners. In connection with the
equity commitment, the Overseas Private Investment Corporation ("OPIC"), an
independent U.S. government agency, has provided $80 million of debt financing
as part of the capitalization of NAOF. As a result of the OPIC participation in
NAOF, the fund's investment activities have become of interest to President
Clinton's Economic Initiative for Africa, which is intended to assist investors
and American small businesses that are investing and operating in Africa.
Capital contributions are payable within 10 business days of a capital call
pursuant to the terms of the partnership agreement. The Company, as an equity
participant in NAOF, has committed $1 million of which $185,000 was funded
through December 31, 1997.
NAOF is advised by New Africa Advisers ("NAA"), the first U.S.
investment firm to open offices in post-apartheid South Africa. The Company,
together with NAA and Afinta Motor Corporation (Pty) Ltd. ("AMC"), a local
manufacturer of transportation and material handling equipment, expect to
develop this subsidiary, Africa Finance Corporation ("AFC"), into a premier
provider of financial services to RSA businesses, specializing in equipment
lease financing. As part of this development plan, AFC will acquire the lease
financing arm of AMC and provide captive financing for the equipment that AMC
manufactures.
Businesses throughout the RSA are in need of short-term and long-term
financing facilities to increase and improve production. The Company, through
AFC, will make available purchase order financing, working capital lines, and
real estate financing, including sale-leaseback, to businesses in the RSA.
Further, the RSA also demonstrates the need for consumer financial services and
credit data collection and processing systems.
The Company and NAA believe that to be successful in the RSA, it will
be important to develop business initiatives that support the black economic
empowerment program. These initiatives will allow the companies to promote
advancement of the majority of the population, as well as, capitalize on the
black economic empowerment opportunities that will be available.
In conjunction with Kent International, an international business
developer having a primary focus of operating companies in Russia and the
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CIS, the Company completed several lease transactions in Russia and the CIS in
1997 with a total original equipment cost of approximately $344,000. Kent
International has guaranteed all payment streams on these transactions.
Negotiations are ongoing with first tier Russian financial institutions, as well
as companies with equipment needs in technology, consumer goods and automotive
industries. Chancellor is also currently negotiating several lease transactions
between Digital Equipment Corporation (DEC) and the Siberian Ministry of
Transportation.
Chancellor has formed a strategic alliance with InterLeasing, a Russian
licensed leasing company. InterLeasing is a 50/50 joint venture of two U.S.
business development companies that focus their energies on Russia and the CIS.
As a strategic partner of Chancellor's, InterLeasing will help to promote
Chancellor's financial services in Russia and the CIS. InterLeasing has an
established business network that has generated several potential large-scale
lease transactions.
Under Russian regulations, a Russian entity can only engage in leasing
activity with a Russian licensed leasing company. InterLeasing will function as
the leasing arm for Chancellor in Russia and the CIS. InterLeasing is currently
working with local financial institutions and legal staff to create solid back
office operations and transaction processes. InterLeasing will locally market
and promote leasing opportunities in Russia and the CIS and participate in trade
shows that will market leasing services.
As a result of its strength in the management of assets, the Company
has a unique opportunity to originate and/or remarket long-lived assets in the
international marketplace. As continued emphasis is placed on projects to
rebuild and improve infrastructure, the need for capital equipment in these
international markets is expected to grow.
Operating Facility
The Company's fully integrated sales and marketing departments are
headquartered in Boston, Massachusetts. Three additional satellite operations
are located in Palm Beach, Florida; New York City, New York; and Elizabeth, New
Jersey. A direct sales staff and telemarketing program support a national
network of sales representatives.
Seasonality
Because of tax and investment considerations, investors frequently
defer their decisions to purchase lease transactions until after the first half
of the calendar year.
Employees
As of March 15, 1998, the Company employed approximately 40 persons on
a full time basis.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an office facility in Boston, Massachusetts. This
facility houses the Company's administrative, financing and marketing
operations. The Boston, Massachusetts lease is for a non-cancelable period of
five years, with four and a half years remaining in the term, and with a base
rent, as of December 31, 1997, of approximately $11,000 per month. This amount
was approximately $35,000 per month in 1996. The Boston, Massachusetts facility
adequately provides for present and future needs, as currently planned. In
addition, the Company leases regional marketing offices at an aggregate rental
of approximately $7,000 per month.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
On January 15, 1997, Chancellor filed a complaint in Superior Court,
Suffolk County, Massachusetts, alleging that certain of its former officers and
directors are liable to the corporation for losses incurred as a result of their
negligence, breach of fiduciary duties, unjust enrichment, conversion, and
unfair and deceptive trade practices. In addition, Chancellor's complaint sought
the imposition of a constructive trust for the corporation's benefit on various
assets that Chancellor claims were wrongfully taken from the corporation by its
former officers and directors, as well as recovery of damages arising from legal
malpractice allegedly committed by the corporation's former general counsel, and
defamatory statements made by one former officer and director to certain of the
corporation's customers.
Four of the defendants, Stephen G. Morison, David W. Parr, Gregory S.
Harper and Thomas W. Killilea, answered the complaint (denying its allegations),
and filed a counterclaim against Chancellor, and commenced a third-party action
against Brian M. Adley, Vestex Corporation and Vestex Capital Corporation. The
counterclaim alleged that Chancellor is liable for breach of certain employment
and severance agreements allegedly entered into with the defendants Morison and
Harper, and for the abuse of process in connection with the corporation's
initiation of this lawsuit. The third-party complaint sought indemnification and
contribution from Adley, Vestex Corporation and Vestex Capital Corporation in
connection with the claims raised by Chancellor in the primary action. In
addition, the third party complaint sought recovery of damages from Adley,
Vestex Corporation and Vestex Capital Corporation for alleged abuse of process,
interference with the contractual relations and deceit. In their answer to the
counterclaim and third-party complaint, Chancellor and third party defendant
denied the defendants allegations. In January 1998, the litigation was dismissed
with prejudice as to all parties, except for Kevin Kristick, pursuant to the
terms of a settlement agreement.
On September 9, 1997, Cheyenne Leasing commenced litigation against the
Company to recover funds that the Company withheld from Cheyenne pursuant to the
terms of the Trust Agreement between the parties. The funds withheld totaled
approximately $107,000 and were placed in escrow by the Company. In December
1997, the parties settled the matter for an undisclosed amount and
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the Company was allowed to charge for reimbursement of administrative costs. The
funds held in escrow were released as provided for in the settlement.
In December 1997, Complex Design and Construction, Inc. ("Complex")
filed a complaint against Chancellor Corporation and others in Superior Court,
Suffolk County, Massachusetts alleging that the Company breached its contract
with Complex relating to the build-out of the Company's leasehold. The complaint
also alleges that Chancellor committed unfair and deceptive acts and practices
in connection with the construction contract. The complaint seeks approximately
$44,000 in damages for the alleged breach of contract, as well as double or
treble damages for purported unfair and deceptive acts and practices. Legal
counsel has advised the Company that it is reasonably possible that the Company
may be liable for up to approximately $155,000 plus legal costs and expenses.
Chancellor filed an answer and counterclaim against Complex alleging breach of
contract, breach of expenses and implied warranty, liquidated damages pursuant
to a penalty clause in the contract, and unfair and deceptive acts and
practices. In addition, Chancellor filed a motion to dismiss the count in the
complaint against it, which alleges unfair and deceptive acts and practices. The
motion was heard on March 26, 1998, but has not yet been decided.
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 brought by Mr. Rolls 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 case to
federal court and has filed an answer. The Company intends to file a
counterclaim against Mr. Rolls.
The Board of Directors of Chancellor Corporation voted to remove Mr.
Ernest L. Rolls as a Director and Vice Chairman of the Board effective March
10,1998. The reasons cited by the Board for removing Mr. Rolls included breach
of his fiduciary duties of care and loyalty, Mr. Rolls' suspected self-dealing
and his failure to provide a total of $7.5 million in financing that he
represented to the Board he would provide. The Board also believed that a suit
filed by Mr. Rolls was an attempt by Mr. Rolls to jeopardize the Company's
strategic alliances and other activities that are currently being negotiated.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the NASDAQ OTC Electronic
Bulletin Board under the symbol "CHLR" since August 21, 1996 and under the
symbol "CHCR" between January 28, 1994 and August 21, 1996 on the basis of
actual trading prices. The Company's Common Stock had traded from June 30, 1992
to January 28, 1994 on the Small Cap Market of the Automated Quotation System of
NASDAQ on the basis of actual trading prices.
The following table sets forth the high and low sales prices of the
Company's Common Stock for the periods indicated, according to published
sources.
1998 High Low
First quarter (through March 15, 1998) .44 .27
1997 High Low
Fourth quarter .44 .15
Third quarter .18 .10
Second quarter .15 .09
First quarter .10 .04
1996 High Low
Fourth quarter .28 .06
Third quarter .31 .19
Second quarter .31 .19
First quarter .31 .19
On March 15, 1998, there were approximately 415 beneficial owners of
the Company's common stock.
The Company has not paid or declared cash dividends on its common stock
during the periods indicated and does not currently intend to pay cash dividends
on its common stock for the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Year Ended December 31, 1997 vs. December 31, 1996
Revenues. Total revenues for the year ended December 31, 1997 was
$4,433,000 as compared to $5,513,000 for the prior year, a decrease of
$1,080,000 or 19.6%. For the year ended December 31, 1997, rental income
decreased by $1,063,000 or 55.0% as compared to the prior year. The decrease in
rental income is attributable primarily to the expiration of several leases,
including the subsequent disposition of $4.0 million of equipment (based on its
original cost). With the completion of its restructuring efforts, the Company
has started to originate new equipment leases ($214,000 at cost during the year
ended December 31, 1997), however, rental income will continue to decrease until
new equipment additions are sufficient to compensate for an aging lease
portfolio. For the year ended December 31, 1997, lease underwriting income
decreased by $211,000 or 41.9% as compared to the prior year. Lease underwriting
income decreased due to the origination of only $3.0 million of equipment
leases, at cost, as compared to origination of $21.0 million of equipment
leases, at cost, during the prior year. Additionally, as a consequence of the
restructuring which commenced at the end of 1996, the Company is rebuilding its
lease origination sales force and broker network and developing strategic
alliances to provide future growth in this area. Management believes growth in
its lease origination business will grow through modest addition to its existing
lease portfolio and increased emphasis on services as a financial intermediary.
For the year ended December 31, 1997, direct finance lease income increased by
$81,000 or 42.4%, as compared to the prior year. The increase in direct finance
lease income is attributable to the transfer of 10 leases acquired as a result
of the buyout in April 1997 of the inter-creditor agreement and the addition of
3 international leases. For the year ended December 31, 1997, gains from
portfolio remarketing decreased by $590,000 or 42.4% as compared to the prior
year. The decrease in gains from portfolio remarketing is attributable to the
decrease in sales of portfolio assets during the year ended December 31, 1997 as
compared to the prior year. For the year ended December 31, 1997, fees from
remarketing activities increased by $668,000 or 81.5% as compared to the prior
year. This increase is attributable to a continued focus by management on the
remarketing of trust assets, as they become available for sale. This increase is
also attributable to remarketing fees earned from third parties other than trust
investors. Management plans to increase the utilization of the Company's
remarketing expertise to provide such services to third parties. For the year
ended December 31, 1997, other income increased by $51,000 or 8.3% as compared
to the corresponding prior year period.
Costs and Expenses. Total costs and expenses for the year ended
December 31, 1997 was $7,152,000 as compared to $12,125,000 for the prior year,
a decrease of $4,973,000 or 41.0%. The 1996 costs and expenses were reduced by
$431,000 as a result of the restatement discussed in Note T to the consolidated
financial statements. In general, the significant decrease is primarily a result
of management's successful implementation of a
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restructuring plan that stabilized the Company's cost structure thereby
providing a stable foundation upon which to grow. During 1997, the Company
incurred additional legal, accounting and consulting charges of approximately
$1,791,000 in connection with the continued implementation of the transition
plan and litigation against certain members of the Company's former management
and directors during the first two quarters of fiscal 1997. The Company also
recorded $375,000 of costs in connection with the guarantee by Vestex of a
$1,500,000 line of credit. As expected, the Company reduced selling, general and
administrative costs by approximately $1,807,000 or 22.0% as compared to the
prior year. These cost reductions represent the direct benefit derived by the
Company from the restructuring and stabilization efforts effected by the
management, including the reduction of headcount and general operating costs.
The Company also realized significant cost savings, net of abatements, through
the termination of its former facility lease arrangement and negotiation of its
current facility arrangement. Finally, in connection with its review of
operations, resulting in the recovery of trust administration costs, the Company
recorded cost recoveries for 1997 and 1996 of approximately $405,000 and
$431,000, respectively. Management believes it has successfully implemented the
cost stabilization phase of its restructuring strategy. These cost improvements
have resulted in a stabilization of the corporate infrastructure and provide a
firm foundation for the new management team to implement the growth phase of its
business plan.
Interest expense for the year ended December 31, 1997 was $281,000 as
compared to $480,000 for the prior year, a decrease of $199,000 or 41.5%. This
decrease is primarily a result of the reduction in both recourse and
non-recourse debt.
Depreciation and amortization expense for the year ended December 31,
1997 was $459,000 as compared to $1,042,000 for the prior year, a decrease of
$583,000 or 56.0%. The decrease is primarily due to the decrease in the
operating lease base, resulting from decreases in operating leases originated by
the Company over the past year and sale of equipment coming off lease. This
decrease is partly offset by $51,000 of amortization on assets acquired in 1997.
Prior to 1996, the Company utilized a combination of benchmark/matrices
for establishing performance of the residual portfolio. During 1996, due to
changes in market conditions, the Company evaluated residual values based upon
independent assessments by industry professionals, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
As a result of such procedures, the Company recorded a residual value estimate
reduction of $2,384,000 for the year ended December 31, 1996. Although the
Company had initially recorded an additional estimated residual value reduction
of $709,000 in the first quarter of fiscal 1997, upon audit it was determined
that such a residual value reduction was not warranted. Accordingly, the Company
did not record a residual value reduction in 1997 as compared to the prior year.
Extraordinary Item - Gain on Debt Forgiveness. The Company recorded a
gain on debt forgiveness for the year ended December 31, 1997 of $930,000. In
April 1997, the Company repaid in advance of their respective terms an
inter-creditor loan and secured inventory loan. The aggregate amount of this
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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 Loss. Net loss for the year ended December 31, 1997 was $1,802,000 as
compared to $6,373,000 for the prior year, a decrease of $4,571,000 or 71.7%.
The decrease in the net loss is primarily attributable to the significant
reduction in cost components as specifically described above. The decrease in
the net loss is further affected by the positive impact of the gain on debt
forgiveness. Net loss per share (basic) for the year ended December 31, 1997 was
$.12 per share as compared to $1.24 per share for the prior year, a decrease of
$1.12 per share or 90.3%. The decrease is due primarily to the marked decrease
in the overall net loss and an increase of 196.4% in the number of shares issued
and outstanding.
Liquidity and Capital Resources
The Company recognized a net increase in cash and cash equivalents for
the year ended December 31, 1997 of $76,000. Operating activities provided cash
of $1,875,000 during the year ended December 31, 1997 and is primarily a result
of collections in connection with the Company's recovery of trust administration
costs of approximately $2,100,000. Investing activities provided cash of
$946,000 during the year ended December 31, 1997 and is primarily a result of
cash received in connection with the completion of transactions awaiting
syndication as of December 31, 1997 and normal sale of portfolio assets coming
off lease during the year. Cash paid primarily for the purchase of furniture,
fixtures and computer equipment and build-out of the new office facility offsets
this. Financing activities used cash of $2,745,000 during the year ended
December 31, 1997 and is primarily a result of payments made to reduce
obligations on an intercreditor loan. Cash and cash equivalents amounted to
$97,000 at December 31, 1997 as compared to $21,000 at December 31, 1996. Cash
and cash equivalents restricted amounted to $2,419,000 at December 31, 1997.
Withdrawals of restricted cash balances are limited to the distribution of
rents, sales proceeds and reimbursable expenses of trust-owned leases to
investors. As of December 31, 1997, the amount due to investors for cash
collected on their behalf exceeded the balance in restricted cash by $446,000.
In April 1997, the Company executed and delivered (1) the Loan
Reduction and Purchase and Assignment Agreement dated as of April 1997 among the
Company, its corporate affiliates and/or subsidiaries, Fleet National Bank-
Corporate Trust Division, as agent (the "Agent") for the Company's principal
recourse lenders, and Vestex, the Company's majority stockholder; (2) release in
favor of the principal recourse lenders to be given by Vestex and Brian Adley,
Chairman of the Board of Directors of the Company and president of Vestex,
individually; (3) release in favor of the principal recourse lenders to be given
by the Company, its corporate affiliates and/or subsidiaries; and (4) $1,500,000
Secured Promissory Note given by the Company, its corporate affiliates and/or
subsidiaries in favor of Vestex. The intercreditor loan and secured inventory
loan were then repaid in advance of their respective terms. The aggregate amount
of this debt on the repayment date was approximately $1,906,000 of which
approximately $976,000 was paid in cash and the balance of $930,000 was
forgiven. In addition, the
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Company paid approximately $22,000 in legal and bank fees to complete this
transaction.
As approved by the stockholders at the 1997 Annual Meeting of
Stockholders, the Company increased its authorization of Preferred Stock and
Common Stock to 20,000,000 shares and 75,000,000 shares, respectively.
During 1996 and through March 1997, the affiliate charged the Company
fees for certain transactions it determined were consummated during the period
and were covered by the agreement. The Company disputed a certain portion of
these charges. The parties settled this dispute by agreeing that $3,000,000 was
incurred relating to these services, of which $800,000 and $2,200,000 were
performed in 1997 and 1996, respectively. In connection with this settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed. These amounts
are included in selling, general, and administrative expenses in the
consolidated statement of operations. Per the agreement, the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during the coming year if payment can be made from refinancing or equity
proceeds in a manner that does not impact the Company's ability to meet its
other obligations.
As of December 31, 1996, the Company had received from Vestex a total
of $4,121,000, net of repayments and cost of $312,500, which consisted of equity
of $1,421,000 and debt and payables of $ 2,700,000. During 1997, the Company
entered into several transactions with Vestex that resulted in an increase of
$1,856,000 resulting in a net equity infusion of $5,977,000 and debt and
payables of $59,000 as of December 31, 1997.
In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000. The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through December 1997, and iii) a $45,000
fee relating to the $1,500,000 loan provided by the then Vice Chairman of the
Board of Directors.
The Company also entered into several transactions whereby Vestex
received fees of approximately $1,288,000 in 1997. The Company recorded
approximately $519,000 of these expenses in connection with Vestex's
negotiations on behalf of the Company resulting in significant financial
benefits and savings to the Company. This includes, but is not limited to,
savings of approximately $930,000, whereby the intercreditor loan of
approximately $1,906,000 was paid in advance of term; savings in excess of
$2,000,000 on the termination of the Company's office lease and renegotiations
of more favorable terms on the Company's new office lease; and development and
implementation of strategies enabling the Company to properly recover certain
administrative costs incurred in connection with the administration of the
Company's trust portfolio assets. The Company also recorded an additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's successful restructuring and transition plan. This amount
reduced the restructuring charges accrued at December 31, 1996. In connection
with a $1.5 million loan provided to the Company by the Vice-Chairman of the
Board of Directors, Vestex provided certain guarantees and was compensated in
the amount of $375,000 for providing such guarantee.
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The Company purchased furniture and computer equipment from Vestex in
the amount of $300,000. The acquisition prices were based on estimated fair
value as of the date of the transaction. At December 31, 1997, approximately
$60,000 of the furniture acquired was not in service by the Company.
The Company received loans from Vestex during 1997 totaling $1,735,000,
including $1,500,000 in connection with the repayment of the Company's debt to
the Vice-Chairman. Interest on loans payable to Vestex accrues at the prime rate
plus 2% (10.5% as of December 31, 1997). During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.
During 1997, Vestex agreed to take stock, at the then fair market value
on the date of conversion, in lieu of cash in consideration of certain
obligations due Vestex by the Company. In February 1997, the Board of Directors
approved the issuance of 3,000,000 shares of the Company's Series AA Preferred
Stock at $.30 per share to Vestex in consideration of $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex in consideration of $1,000,000 of fees and debt including Vestex's
guarantee of the $1,500,000 loan provided to the Company by the Vice Chairman,
stated above. Also in June 1997, the Company issued 6,716,667 shares of Common
Stock to Vestex in consideration of approximately $806,000 of fees and debt due.
In September 1997, the Company issued 5,000,000 shares of Common Stock to Vestex
in consideration of approximately $500,000 of Vestex fees and debt due. In
December 1997, the Company issued 710,526 shares of the Company's Series A
Preferred Stock to Vestex in consideration of $1,350,000 of Vestex fees an debt
due. In addition to the conversion of accrued Vestex fees and debt to the
Company's preferred and common stock totaling approximately $4,556,000, the
Company also repaid debt and fees through cash payments in the amount of
approximately $2,848,000. For the years ended December 31, 1997 and 1996, the
Company incurred expenses to Vestex of $1,850,000 and $2,594,000, respectively.
As of December 31, 1997, the Company owed Vestex $50,000 of unpaid loans and
approximately $9,000 of unpaid fees. In addition, Vestex is due $50,000 of
unpaid fees assumed by the Company at the time of acquisition of Long River
Capital.
An affiliate of the Chairman of the Board of Directors provided
supervisory and other construction services in connection with the build-out and
improvements to the Company's new office space. The total fees earned by the
affiliate were $275,000, all of which was paid in 1997. The Company recorded
these amounts as capitalized leasehold improvements.
The Company entered into several transactions with the then
Vice-Chairman of the Board of Directors. On May 19, 1997, the Company issued a
$1,500,000 promissory note to the then Vice-Chairman of the Board which was
guaranteed by Vestex and the Chairman of the Board. Interest on the promissory
note accrued at the prime rate plus 2 1/8%. On September 3, 1997, Vestex on
behalf of the Company repaid the promissory note. The resultant obligation
recorded as owing to Vestex was subsequently converted into equity as described
above. Interest accrued to the Vice-Chairman during 1997 of approximately
$59,000. The Vice-Chairman also made a non-interest-bearing advance of
$1,200,000 to the Company in October 1997.
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<PAGE>
During 1997, the Company directly and through Valmont Ventures Inc.
("Valmont"), a wholly-owned subsidiary, providing consulting services, incurred
costs on behalf of and made advances to Global Weather Services ("GWS"), a
company represented by the then Vice-Chairman as an affiliate of the
Vice-Chairman. The Company provided these services at the request of the then
Vice-Chairman with the approval of management. The total due from GWS amounted
to approximately $756,000, including consulting fees of $600,000 that are
included in other revenue in the consolidated statements of operations. Company
funds were used to pay amounts on behalf of the Vice-Chairman totaling
approximately $58,000 during 1997. Based on discussions with legal counsel, the
Company believes it has the right to offset the amounts due to and from the then
Vice-Chairman and GWS. As a result, the accompanying consolidated financial
statements reduced the amounts due totaling approximately $814,000 and the
amounts owed of $1,200,000. The difference of approximately $386,000 has offset
the amount due by the Vice-Chairman or GWS to Vestex and has been reflected as
an increase in the amount due by the Company to Vestex.
On July 31, 1997, the Company acquired certain assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application processing and origination of automobile loans for high credit
risk consumers. The acquisition was accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on their fair market value at the date of
acquisition. (See Note O of the Notes to Consolidated Financial Statements).
As a result of a review of trust agreements by management, outside
counsel and industry consultants, it was determined that the Company had not
been reimbursed for approximately $22 million of costs incurred for trust
administration for periods prior to 1997. Management subsequently began to
charge the trusts for these services and implemented plans to recover past
costs. The consolidated statement of stockholders' equity (deficit) reflects an
increase in stockholders' equity of $1,437,000 from $1,365,000 to $2,802,000 as
of December 31, 1995 for trust administration costs recovered for periods prior
to 1996. Management makes no representations concerning the Company's ability to
recover any further costs for periods prior to 1997. The 1996 consolidated
statements of operations have been restated to reflect an adjustment to include
a reduction in the general and administrative expenses of approximately $431,000
for trust administration costs recovered and a corresponding decrease in the net
loss from $6,804,000 to $6,373,000 for the year ended December 31, 1996.
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
which appear be interested in 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 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
25
<PAGE>
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 using the Internet for additional promotion of its business activities.
The Company has now successfully begun a growth strategy of applying
its knowledge of the highly competitive tractor/trailer/forklift industry into
markets outside of the Unites States where margins are significantly higher.
Through December 31, 1997, the Company entered into several lease transactions
in the former Soviet Union with a total equipment cost of $144,000, and is in
the process of completing additional equipment financing transactions. The
Company has been presented with numerous opportunities for additional lease
placements outside of the United States.
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. As of December 31, 1997, the Company had funded
approximately $185,000 and is obligated to provide additional funding in the
approximate amount of $815,000.
On March 27, 1998, the Company, AMC, AFS, and NAOF finalized the terms
of the agreement, initially set forth in the December 12, 1997 Letter of Intent,
and responsibilities of the parties by the closing of the transaction and
executing the documents. The parties commenced operations on January 1, 1998
pursuant to an agreement reached in principle, as outlined in the Letter of
Intent. The parent holding company will be CAC. The Company will provide,
through CAC, $5,000,000 of start-up capital to AFC, and 1,000,000 shares of the
Company's Series B Convertible Preferred Stock. In consideration of a 40%
ownership interest in AFC, NAOF will infuse $10,000,000 of cash in two
$5,000,000 tranches. Upon the event of a material adverse change in the
financial condition of AFC prior to the second funding, and with the unanimous
consent of the board of directors of AFC, the second funding may be extended to
a mutually agreeable date or terminated. In connection with this
26
<PAGE>
capital infusion, AFC will also issue 500,000 shares of the Company's Series B
Convertible Preferred Stock to NAOF. In consideration of a 9% ownership interest
in AFC, and the issuance of 500,000 shares of the Company's Series B Convertible
Preferred Stock, AMC will contribute the net assets of AFS; 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 leased
through AFC or its assignee. AMC will also transfer a 2-1/2 percent ownership
interest in AMC to CAC in connection with this transaction. The Series B
Convertible Preferred stock has a liquidation preference of $2.00 per share and
is convertible into 10 shares of the Company's Common Stock for each one share
of preferred stock at the holders option.
The Company's renewal or replacement of recently expired lines, its
expected access to the public and private securities markets, both debt and
equity, anticipated new lines of credit (both short-term and long-term and
recourse and non-recourse), anticipated long-term financing of individual
significant lease transactions, and its estimated cash flows from operations are
anticipated to provide adequate capital to fund the Company's operations for the
next twelve months. Although no assurances can be given, the Company expects to
be able to renew or timely replace its recently expired lines of credit, to
continue to have access to the public and private securities markets, both debt
and equity, and to be able to enter into new lines of credit and individual
financing transactions.
Potential Fluctuations In Quarterly Operating Results
The Company's future quarterly operating results and the market price
of its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts or the
market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the same time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
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<PAGE>
Recent Accounting Pronouncements
The Company has adopted SFAS No. 128 "Earnings Per Share", which has
changed the method of calculating earnings per share and related disclosure.
SFAS No. 128 requires the presentation of "basic" and "diluted" earnings per
share on the face of the income statement. Basic loss per common share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 prescribes standards for
reporting comprehensive income and its components. SFAS No. 130 is effective for
years beginning after December 15, 1997. The implementation of SFAS No. 130 is
not expected to materially effect the Company's consolidated financial
statements.
In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information" was issued. SFAS No. 131 is effective for years
beginning after December 15,1997 and early adoption is encouraged. The Company
intends to adopt SFAS No. 131 for the year ending December 31, 1998. At that
time, the Company will be required to disclose certain geographic information
including revenue from external customers and certain assets and liabilities
based on country of domicile.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
potentially result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in other similar normal activities. The
Company had already planned on updating its computer software to increase
operational efficiencies and information analysis and will ensure that the new
systems properly utilizes dates beyond December 31, 1999. The cost of this
upgrade project, as it relates to the Year 2000 Issue, is not expected to have a
material effect on the operations of the Company and will be funded through
operating cash flow.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following documents are filed as a part of this report on Form
10-KSB:
Page No.
Independent Auditors' Report F-1
Consolidated Balance Sheet as of
December 31, 1997 F-2
Consolidated Statements of Operations for the
years ended December 31, 1997 and 1996 F-3
Consolidated Statements of Stockholders
Equity (Deficit) for the years ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
All schedules have been omitted because they are inapplicable or the
required information is included in the notes to the consolidated financial
statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
29
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 401 and 405 of Regulation S-B with
respect to directors and executive officers of the registrant will be set forth
in the Proxy Statement for the Annual Meeting of Stockholders to be held on May
15, 1998 and to be filed with the Securities and Exchange Commission in April
1998, and is incorporated herein by this reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-B with respect to
executive compensation will be set forth in he Proxy Statement for the Annual
Meeting of Stockholders to be held on May 15, 1998 and to be filed with the
Securities and Exchange Commission in April 1998, and is incorporated herein by
this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-B with respect to
security ownership of certain beneficial owners and management will be set forth
in the Proxy Statement for the Annual Meeting of Stockholders to be held on May
15, 1998 and to be filed with the Securities and Exchange Commission in April
1998, and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-B with respect to
certain relationships and related transactions will be set forth in the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 1998 and
to be filed with the Securities and Exchange Commission in April 1998, and is
incorporated herein by this reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
3(a) Restated Articles of Organization of the Company
(incorporated by reference from Exhibit 3A to the
Company's Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on July
22, 1983 (Registration Statement)), as amended by
Articles of Amendment filed with the Massachusetts
Secretary of State on May 18, 1990 (incorporated by
references from Exhibit 3(a) to the Company's Annual
Report, Form 10-K, for the year ended December 31,
1991) and by Articles of Amendment filed with the
Massachusetts Secretary of State on January 26, 1995
(incorporated by reference from Exhibit 3(a) to the
Company's Annual Report, Form 10-K, for the year
ended December 31, 1994)
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<PAGE>
3(b) By-laws of the Company, as amended to date
(incorporated by reference from Exhibit 3(b) to the
Company's Annual Report, Form 10-K, for the year
ended December 31, 1994)
10(a) Lease dated June 8, 1988 between Arthur DiMartino,
Trustee of 745 Atlantic Realty Trust and the Company
(incorporated by reference from Exhibit 10(m) to the
Company's Annual Report, Form 10-K, for the fiscal
year ended March 31, 1988), as was provisionally
amended by a proposal letter dated June 11, 1990,
from Richard A. Galvin to Stephen G. Morison
(incorporated by reference from Exhibit 10(g) to the
Company's Annual Report, Form 10-K, for the year
ended December 31, 1990); First Amendment to Lease,
dated as of June 5, 1992, between the Company and The
Aetna Casualty and Surety Company (incorporated by
reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
July 6, 1992 and dated June 23, 1992); and Second
Amendment to Lease, dated as of December 8, 1993,
between the Company and The Aetna Casualty and Surety
Company (incorporated by reference from Exhibit 1 to
the Company's Form 8-K filed with the Securities and
Exchange Commission on January 24, 1994 and dated
December 8, 1993).
10(b) Loan Agreement dated as of April 6, 1990 between
Shawmut Bank, N.A.-Corporate Trust Division, as agent
("Agent"), and the Company, Chancellor Fleet
Corporation, Chancellor Acquisition Corporation,
Chancellor Asset Management Corporation, Chancellor
Financial lease, Inc., Chancellor Credit, Ltd.,
Valmont Financial Corporation and Valmont Credit
Corp. ("Borrowers") (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form
10K, for the year ended December 31, 1989), as
amended by Amendment No. 1 to Loan Agreement dated as
of May 16, 1990 between Agent and Borrowers,
Amendment No. 2 to Loan Agreement dated as of June
12, 1990 between Agent and Borrowers, Amendment No. 3
to Loan Agreement dated as of July 9, 1990 between
Agent and Borrowers(incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form
10-K, for the year ended December 31, 1990),
Amendment and Extension Agreement dated as of July
30, 1990 between Agent and Borrowers (incorporated by
reference from Exhibit 28A to the Company's Quarterly
Report, Form 10-Q, for the quarter ended June 30,
1990) Amendment No. 5 to Loan Agreement dated as of
October 15, 1990 between Agent and
Borrowers(incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1990), Second Amendment
and Extension Agreement dated as October 31, 1990
between Agent and Borrowers (incorporated by
reference from Exhibit 3 to the Company's Form 8K
filed with the Securities and Exchange Commission on
November 1, 1990 and dated October 25, 1990), Third
Amendment and Extension Agreement dated as of January
31, 1991 between Agent and Borrowers by reference
from Exhibit 2 to the Company's Form 8-K filed with
the Securities and Exchange
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<PAGE>
Commission on February 8, 1991 and dated January 31,
1991),Fourth Amendment and Extension Agreement dated
as of April 30, 1991 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on May 2, 1991 and dated May 1,
1991), Fifth Amendment and Extension Agreement dated
as of July 31, 1991 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on August 12, 1991 and dated July
19, 1991), Sixth Amendment and Extension Agreement
dated as of September 18, 1991 between Agent and
Borrowers (incorporated by reference from Exhibit 2
to the Company's Form 8-K filed with the Securities
and Exchange Commission on September 25, 1991
anddated September 18, 1991), Seventh Amendment and
Extension Agreement dated as of November 19, 1991
between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
November 25, 1991 and dated November 19, 1991),
Eighth Amendment and Extension Agreement dated as of
March 19, 1992 between Agent and
Borrowers(incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1991), Ninth Amendment
and Extension Agreement dated as of May 5, 1992
between Agent and Borrowers(incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with
the Securities and Exchange Commission on May 14,
1992 and dated May 5, 1992), Tenth Amendment and
Extension Agreement dated as of August 4, 1992
between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
August 14, 1992 and dated August 4, 1992),Eleventh
Amendment and Extension Agreement dated as of
November 5, 1992 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with theSecurities and
Exchange Commission on November 16, 1992 and dated
November 5, 1992), Twelfth Amendment and Extension
Agreement dated as of February 5, 1993 between Agent
and Borrowers (incorporated by reference from Exhibit
2 to the Company's Form 8-K filed with the Securities
and Exchange Commission on February 16, 1993 and
dated February 5, 1993), Modification of Loan
Agreement and Forbearance Agreement dated as of June
30, 1993 between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
July 19, 1993 and dated June 9, 1993), Moratorium
Agreement dated as of October 29, 1993 between Agent
and Borrowers incorporated by reference from Exhibit
2 to the Company's Form 8-K filed with the Securities
and Exchange Commission on November 10, 1993 and
dated October 29, 1993), Moratorium Amendment dated
as of December 24, 1993 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on January 2,1994 and dated
December 8, 1993), Second Moratorium Amendment dated
as of March 25, 1994 between Agent and Borrowers
(incorporated by
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<PAGE>
reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
April 1, 1994 and dated March 25, 1994), Third
Moratorium Amendment dated as of May 27, 1994 between
Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form
10-K, for the year ended December 31, 1994), Fourth
Moratorium Agreement dated as of August 26, 1994
between Agent and Borrowers (incorporated by
reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
September 27, 1994 and dated August 26, 1994), Fifth
Moratorium Agreement dated as of September 30, 1994
between Agent and Borrowers (incorporated by
reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
October 6, 1994 and dated September 30, 1994), letter
agreement dated as of January 31, between Agent and
Borrowers (incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1994), letter agreement
dated as of February 28, 1995 between Agent and
Borrowers (incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1994), letter agreement
dated as of March 31, 1995 between Agent and
Borrowers (incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1994), letter agreement
dated as of April 30, 1995 between Agent and
Borrowers (incorporated by reference from Exhibit 2
to the Company's Form 8-K filed with the Securities
and Exchange Commission on June 1, 1995 and dated
April 30, 1995), letter agreement dated as of July
25, 1995 between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
August 4, 1995 and dated July 25, 1995), letter
agreement dated as of December 29, 1995 between Agent
and Borrowers (incorporated by reference from Exhibit
1 to the Company's Form 8-K filed with the Securities
and Exchange Commission on March 5, 1996 and dated
December 29, 1995),Loan TermOut Agreement dated as of
January 31,1996 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on March 5,1996 and dated
December 29, 1995), and Extension Agreement dated as
of January 7, 1997 between Agent and Borrowers.
10(c) Forbearance Agreement dated as of April 6, 1990
between Northwestern National Life Insurance Company,
Farm Bureau Life Insurance Company of Michigan, F.B.
Annuity Company, Farm Bureau Mutual Insurance Company
of Michigan, Atlantic Bank of New York, The Daiwa
Bank, Ltd., Shawmut Bank,N.A., The CIT
Group/Equipment Financing, Inc., First Mutual of
Boston, and First NH Bank, N.A., and the Company,
Chancellor Fleet Corporation,Chancellor Acquisition
Corporation, Chancellor Asset Management Corporation,
Chancellor Financial lease, Inc., Chancellor Credit,
Ltd.,Valmont Financial Corporation and Valmont Credit
Corp. (incorporated by reference from Exhibit 10(k)
to the Company's Annual Report, Form 10-K,for the
year ended December 31, 1989).
33
<PAGE>
10(d) *First Refusal Agreement dated as of June 1, 1992
between Bruncor Inc. and Stephen G. Morison
(incorporated by reference from Exhibit 1 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on July 6, 1992 and dated June
23, 1992).
10(e) Specimen of Final Form of Warrant to Purchase Common
Stock of Chancellor Corporation issued by the Company
on February 5, 1993 to each of Northwestern National
Life Insurance Company, Farm Bureau Life Insurance
Company of Michigan, F.B. Annuity Company, Farm
Bureau Mutual Insurance Company of Michigan, Atlantic
Bank of New York, The Daiwa Bank, Ltd., Shawmut Bank,
N.A., The CIT Group/Equipment Financing, Inc.,
Federal Deposit Insurance Corporation and First NH
Bank, N.A. (the "Lenders") in denominations set forth
on Schedule A to Twelfth Amendment and Extension
Agreement dated as of February 5, 1993 between Agent
and Borrowers (incorporated by reference from Exhibit
2 to the Company's Form 8-K filed with the Securities
and Exchange Commission on February 16, 1993 and of
dated February 5, 1993); and Modification of Warrant
Agreement dated as of March 31, 1993 among the
Borrowers and the Lenders (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with
the Securities and Exchange Commission on May 27,
1993 and dated May 25,1993).
10(f) Letter agreement dated as of March 1, 1993 between
the Company and Bruncor Inc. relating to the proposed
conversion of certain indebtedness into Common Stock
of the Company under a formula based on the book
value of the Common Stock (incorporated by reference
from Exhibit 10(r) to the Company's Annual Report,
Form 10-K, for the year ended December 31, 1992); and
Consent Agreement dated as of March 31, 1993 among
the Borrowers, the Lenders, Bruncor Inc. and The Bank
of Nova Scotia (incorporated by reference from
Exhibit 3 to the Company's Form 8-K filed with the
Securities and Exchange Commission on May 27, 1993
and dated May 25, 1993).
10(g) Secured Warehouse Loan Agreement dated as of June 9,
1993 between Chancellor Fleet Corporation and IBJ
Schroder Leasing Corporation (incorporated by
reference from Exhibit 3 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
July 19, 1993 and dated June 9, 1993).
10(h) Recapitalization and Stock Purchase Agreement dated
as of September 20, 1994 among the Company, Bruncor
Inc. and Vestex Corporation (incorporated by
reference from Exhibit 3 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
September 27, 1994 and dated August 26, 1994), as
amended by Amendment No. 1 (incorporated by reference
from Appendix I to the Company's Proxy Statement
dated December 9, 1994), by a letter agreement dated
as of February 28, 1995
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<PAGE>
among the Company, Bruncor Inc. and Vestex
Corporation (incorporated by reference from Exhibit
10(t) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1994), by Amendment No. 3
to Recapitalization and Stock Purchase Agreement
dated as of July 14, 1995 by and among the Company,
Bruncor Inc., and Vestex Corporation (incorporated by
reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on
August 4, 1995 and dated July 25, 1995), and by
Amendment No. 4 to Recapitalization and Stock
Purchase Agreement dated as of July 14, 1995 by and
among the Company, Bruncor Inc., and Vestex
Corporation (incorporated by reference from Exhibit 1
to the Company's Form 8-K filed with the Securities
and Exchange Commission on April 22, 1996 and dated
April 12, 1996).
10(i) *1994 Stock Option Plan, adopted by the Board of
Directors of the Company on August 12, 1994 and
approved by the Stockholders of the Company on
January 20, 1995 (incorporated by reference from
Appendix III to the Company's Proxy Statement dated
December 9, 1994).
10(j) *1994 Directors' Stock Option Plan, adopted by the
Board of Directors of the Company on August 12, 1994
and approved by the Stockholders of the Company on
January 20, 1995 (incorporated by reference from
Appendix III to the Company's Proxy Statement dated
December 9, 1994).
10(k) *1994 Employee Stock Purchase Plan, adopted by the
Board of Directors of the Company on August 12, 1994
and approved by the Stockholders of the Company on
January 20, 1995 (incorporated by reference from
Appendix IV to the Company's Proxy Statement dated
December 9, 1994).
10(l) Interim Voting Agreement dated as of July 25, 1995
among the Company, Vestex Corporation, Stephen G.
Morison and the Company's other employees and form of
Voting Agreement among the Company, Vestex
Corporation, Stephen G. Morison, Bruce M. Dayton and
Thomas W. Killilea (incorporated by reference from
Exhibits 4 and 5, respectively, to the Company's Form
8-K filed with the Securities and Exchange Commission
on August 4, 1995 and dated July 25, 1995).
10(m) $200,000 Subordinated Promissory Note dated as of
July 25, 1995 by the Company in favor of Bruncor Inc.
(incorporated by reference from Exhibit 3 to the
Company's Form 8-K filed with the Securities and
Exchange Commission on August 4, 1995 and dated July
25, 1995).
10(n) Note dated November 22, 1996 in the original
principal amount of $500,000 from Chancellor
Corporation to Vestex Capital Corporation.
16(a) Letter dated January 9, 1997, from Deloitte & Touche
LLP (incorporated by reference from Exhibit to the
Company's
35
<PAGE>
Amendment No. 1 to Form 8-K filed with the Securities
and Exchange Commission on January 13, 1997 and dated
December 26, 1996). 21 Subsidiaries of the Company
(incorporated by reference from Exhibit 21 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
23(a) Independent Auditors' Consent - Reznick Fedder &
Silverman
27.1 Financial Data Schedule for year ended December 31,
1997
27.2 Restated Financial Data Schedules for quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996
and year ended December 31, 1996.
27.3 Restated Financial Data Schedules for quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
- -------------------
*Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
Copies of these exhibits are available to stockholders of record at a charge of
$.09 per page, plus postage upon written request. Direct requests to: Peter J.
Mullen, Clerk, or Debra E. Rich, Assistant Clerk, Chancellor Corporation, 210
South Street, Boston, MA 02111.
(b)Reports on Form 8-K: None
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Chancellor Corporation
We have audited the accompanying consolidated balance sheet of Chancellor
Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Boston, Massachusetts
March 18, 1998, except for Note V
which is as of March 27, 1998
F-1
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
(In Thousands, Except Share Amounts)
ASSETS
Cash and cash equivalents $ 97
Cash and cash equivalents, restricted 2,419
Receivables, net 667
Leased equipment held for underwriting 502
Net investment in direct finance leases 521
Equipment on operating lease, net of
accumulated depreciation of $4,106 232
Residual values, net 465
Furniture, equipment and leaseholds, net of
accumulated depreciation of $1,291 937
Security deposits 12
Other investment 1,000
Intangibles, net 122
Other assets 117
-------
Total Assets $ 7,091
=======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued expenses $ 5,921
Indebtedness:
Nonrecourse 528
Recourse 415
-------
Total liabilities 6,864
-------
Commitments and contingencies --
Stockholders' equity (deficit)
Preferred Stock, $.01 par value, 20,000,000
shares authorized
Convertible Series A, 710,526 shares
issued and outstanding 7
Convertible Series AA, 8,000,000 shares
issued and outstanding 80
Convertible Series B, 2,000,000
shares authorized, none issued and outstanding --
Common stock, $.01 par value, 75,000,000 shares
authorized, 25,401,391 issued and outstanding 254
Additional paid-in capital 28,426
Accumulated deficit (28,540)
-------
Total stockholders' equity 227
-------
Total liabilities and stockholders' equity $ 7,091
=======
See notes to consolidated financial statements.
F-2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 and 1996
(In Thousands, Except Per Share and Share Amounts)
1997 1996
---- ----
Revenues:
Rental income $ 870 $ 1,933
Lease underwriting income 293 504
Direct finance lease income 272 191
Interest income 44 60
Gains from portfolio remarketing 801 1,391
Fees from remarketing activities 1,488 820
Other income 665 614
---------- ---------
4,433 5,513
---------- ---------
Costs and expenses:
Selling, general and administrative 6,412 8,219
Interest expense 281 480
Depreciation and amortization 459 1,042
Residual value estimate reduction -- 2,384
---------- ---------
7,152 12,125
---------- ---------
Loss before extraordinary
item and income tax (benefit)
provision (2,719) (6,612)
Income tax (benefit) provision 13 (239)
---------- ---------
Loss before extraordinary item ($ 2,732) ($ 6,373)
Extraordinary item - gain on
debt forgiveness 930 --
---------- ---------
Net Loss $ (1,802) $ (6,373)
========== =========
Basic net loss per share:
Loss before extraordinary item ($0.18) ($1.24)
Extraordinary item .06 --
---------- ---------
Net Loss ($0.12) ($1.24)
========== =========
Shares used in computing Basic
Net Loss per share 15,224,432 5,136,391
========== =========
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 and 1996
(In Thousands)
Additional Stockholders
Preferred Stock Common Stock paid-in Accumulated Treasury Stock Equity
Shares Amount Shares Amount capital Deficit Shares Amount (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, 12/31/95, as - $ - 6,567 $65 $23,638 ($21,802) 1,431 ($536) $1,365
previously reported
Prior Period 1,437 1,437
adjustment
------- -------- -------- ------ ---------- ---------- -------- -------- --------
BALANCE, 12/31/95,
as restated 6,567 65 23,638 (20,365) 1,431 (536) 2,802
Preferred Stock
Series AA issued,
net of expenses of
approximately $329 5,000 50 971 1,021
Net loss ( 6,373) (6,373)
------- -------- -------- ------ ---------- ---------- -------- -------- --------
BALANCE, 12/31/96 5,000 50 6,567 65 24,609 (26,738) 1,431 (536) (2,550)
Preferred Stock
Series A issued 711 7 1,343 1,350
Preferred Stock
Series AA issued 3,000 30 870 900
Common Stock
issued 20,250 203 2,123 2,326
Exercise of
stock options 15 3 3
Retirement of
Treasury Stock (1,431) (14) (522) (1,431) 536 -
Net Loss (1,802) (1,802)
------- -------- -------- ------ ---------- ---------- -------- -------- --------
BALANCE, 12/31/97 8,711 $ 87 25,401 $254 $28,426 ($28,540) $ - $ - $ 227
======= ======== ======== ====== ========== ========== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 and 1996
(In Thousands)
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,802) ($6,373)
------ ------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 459 1,042
Deferred income taxes (benefit) - (400)
Gain on debt forgiveness (930) -
Changes in assets and liabilities:
Receivables 1,896 (674)
Residual values, net 283 2,592
Other assets 141 39
Accounts payable and accrued expenses 1,828 2,987
----- -----
Total Adjustments 3,677 5,586
----- -----
Net cash provided by (used in)
operating activities 1,875 (787)
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting 729 628
Net investment in direct finance leases 227 673
Equipment on operating lease 59 302
Net change in cash restricted 1,134 960
Additions to furniture and equipment, net (1,018) (100)
Other investments (185) -
------ -----
Net cash provided by investing activities 946 2,463
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - recourse 1,879 570
Additions to indebtedness - nonrecourse 40 -
Repayments on indebtedness - nonrecourse (701) (1,979)
Repayments on indebtedness - recourse (3,966) (1,452)
Sale of common stock 3 -
Sale of preferred stock, net of expenses - 1,021
----- -----
Net cash used in financing activities (2,745) (1,840)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 76 (164)
CASH AND CASH EQUIVALENTS, BEGINNING 21 185
------ ------
CASH AND CASH EQUIVALENTS, ENDING $ 97 $ 21
====== ======
Non-Cash Activity
Issuance of common and preferred stock
in exchange for fees and debt due
to related party $4,556 $ -
====== =====
Issuance of common stock for acquisition of
subsidiary company $ 20 $ -
===== =====
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. Business Organization and Significant Accounting Policies
Business
Chancellor Corporation and Subsidiaries (the "Company") are engaged in
(1) buying, selling, leasing and remarketing new and used equipment, primarily
transportation, material handling and construction equipment, (2) managing
equipment on and off-lease, and (3) arranging equipment-related financing. The
Company's primary market has historically been the United States, and during
1997 has expanded its market presence into international markets, primarily
Russia and the Commonwealth of Independent States.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts, transactions and profits and losses have been eliminated in
consolidation.
Accounting for Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make assumptions regarding
estimates reported in these consolidated financial statements. These estimates
primarily include residual values, the useful lives of fixed assets and deferred
income taxes, among others. These assumptions could change based on future
experience and, accordingly, actual results may differ from these estimates.
Revenue Recognition
Lease underwriting income - Lease underwriting fees arise from the sale
of equipment leasing transactions and include cash underwriting margins and
residual value fees. The excess of the sales price of equipment to an investor
(including the assumption of any nonrecourse indebtedness) over its cost to the
Company represents lease underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases, for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a nonrecourse basis. If the Company elects to sell the transaction (as
opposed to retaining the transaction for its own portfolio), the equipment,
subject to the lease and the borrowing (if any), is then sold to investors using
the structure of a grantor trust which is then managed by the Company.
Consideration for the sale of the leased equipment to investors is normally in
the form of a cash investment.
Residual value fees arise from the sale of lease transactions to
investors. These fees represent the Company's present value share of the future
residual value of the leased equipment that the Company expects to realize upon
successful remarketing of the equipment.
Direct finance lease income - Lease contracts which qualify as direct
finance leases are accounted for by recording on the balance sheet minimum lease
payments receivable and estimated residual values on leased equipment less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease, on the basis that produces
a constant rate of return.
Operating leases (Rental Income) - Lease contracts, which qualify as
operating leases, are accounted for by recording the leased equipment as an
asset, at cost. The equipment is then depreciated on a straight-line basis over
two to fifteen years to its estimated residual value. Equipment is further
depreciated below its initial residual value upon release to its estimated
revised residual value at release expiration. Any changes in depreciable lives
affect the associated expense on a prospective basis. Rental income from
operating leases is recognized using a straight-line method over the initial
term of the lease.
F-6
<PAGE>
Reimbursable Expenses
The Company is entitled to reimbursement of expenses incurred in the
remarketing of certain equipment as outlined in various remarketing agreements.
Pursuant to the terms of the trust agreements, the Company is permitted to
charge the trusts for its costs associated with administrating the trust. The
reimbursement of these costs is recorded as a reduction of general and
administrative expenses.
Residual Values
The Company reviews recorded residual values on an annual basis. Write
downs in estimated residual values, due to declines in equipment value or the
financial creditworthiness of individual customers and major industries into
which the Company leases equipment, are recorded when considered other than
temporary. Through 1995, the residual values were estimated based on a Company
developed database by comparing future estimated values with historical
experience. In 1996, as a result of changes in market conditions, the Company
reassessed the valuation model and database, and the residual valuation was
based on independent valuation of the equipment held under trust lease and
valuation model.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Cash Restricted
Restricted cash balances are available only for specific purposes
related to payments to investors, escrow agreements and payment of taxes related
to equipment owned by investors.
Leased Equipment Held for Underwriting
Equipment inventories are valued at the lower of cost (specific
identification) or market. Revenues and expenses associated with this equipment
are deferred until the equipment is sold or added to the Company's owned
portfolio.
Furniture, Equipment and Leaseholds
Furniture and equipment are recorded at cost. Depreciation is computed
using a the straight-line method over 5 years based on the estimated useful
lives of the related assets. No depreciation is recorded on idle furniture and
equipment. Leasehold improvements are amortized over the lease term.
Intangibles
Intangibles consist of goodwill which is amortized over an estimated
life of fifteen years using the straight-line method and license agreements and
a customer list which are being amortized over an estimated life of four years
using the straight-line method.
Income Taxes
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," requires an asset and liability approach for
financial accounting and reporting for income taxes. In addition, future tax
benefits, such as net operating tax carry forwards, are recognized to the extent
realization of such benefits is more likely than not.
Stock-based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows the Company to account for stock-based awards
(including stock options) to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No, 25, "Accounting for
Stock Issued to Employees".
F-7
<PAGE>
Net Loss per Share
Basic net loss per share amounts are computed based on the weighted
average number of common shares and diluted net loss per share amounts are based
on common and common equivalent shares, when dilutive. Diluted net loss per
share is not presented for 1997 and 1996 since common stock equivalent shares
from convertible preferred stock and from stock options and warrants are
antidilutive.
Supplemental Cash Flow Information
Cash paid for income taxes during 1997 and 1996 was $13,000 and
$29,000, respectively. Interest paid during 1997 and 1996 was $340,000 and
$903,000, respectively.
Other Investments
The Company accounts for its equity investment of less than 20%
ownership in an investee on a cost basis.
Recent Accounting Pronouncements
The Company has adopted SFAS No. 128 "Earnings Per Share", which has
changed the method of calculating earnings per share and related disclosure.
SFAS No. 128 requires the presentation of "basic" and "diluted" earnings per
share on the face of the income statement. Basic loss per common share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. The implementation of this SFAS has no material
effect on the financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 prescribes standards for
reporting comprehensive income and its components. SFAS No. 130 is effective for
years beginning after December 15, 1997. The implementation of SFAS No. 130 is
not expected to materially effect the Company's consolidated financial
statements.
In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information" was issued. SFAS No. 131 is effective for years
beginning after December 15,1997 and early adoption is encouraged. The Company
intends to adopt SFAS No. 131 for the year ended December 31, 1998. At that
time, the Company will be required to disclose certain geographic information
including revenue from external customers and certain assets and liabilities
based on country of domicile.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
potentially result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in other similar normal activities. The
Company had already planned on updating its computer software to increase
operational efficiencies and information analysis and will ensure that the new
systems properly utilizes dates beyond December 31, 1999. The cost of this
upgrade project, as it relates to the Year 2000 Issue, is not expected to have a
material effect on the operations of the Company and will be funded through
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities that constitute
financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments", approximate their recorded amounts.
F-8
<PAGE>
B. Receivables
December 31, 1997
(In Thousands)
Loans receivable, net $ 6
Auto loans receivable, net 87
Receivables from trusts, net 507
Accrued rents, net 38
Other 29
----
$667
====
Receivables from trusts include amounts due the Company for cash
outlays associated with the remarketing of equipment of $150,000, net of an
allowance of $59,000. These amounts will be collected upon successful
remarketing of such equipment. Additionally, receivables from trusts includes
amounts due for costs incurred by the Company for administration of the trusts
in accordance with the trust agreements of $357,000, net of an allowance of
$588,000. Collection of costs of administration is not certain due to numerous
factors and is, therefore, included net of the estimated reserve.
Loans receivable includes $6,000 relating to the Company's lease and
loan origination, underwriting and syndication business and a loan from the
divestiture from a former subsidiary (see note P) of $50,000. A reserve of
$50,000 has been recorded against the loans at December 31, 1997.
Auto loans receivable consists of 15 loans, which are payable monthly
with interest of 19%. The underlying automobiles secure the loans.
Accrued rents represent amounts due from portfolio leases, net of an
allowance of $129,000.
C. Residual Values, Net
The Company's lease underwriting income includes consideration in the
residual value sharing arrangements received from originating and selling lease
transactions to investors. The Company upon remarketing of the equipment at
termination or expiration of the related leases will realize this type of
consideration (residual values). The Company's share of expected future residual
values is recorded as income at their discounted present value at the time the
underlying leases are sold to investors. Any increases in the Company's expected
residual sharing are recorded as gains upon realization. Write-down in estimated
residual value due to declines in equipment value or the financial
creditworthiness of individual customers and major industries into which the
Company leases equipment, are recorded when considered other than temporary. The
Company evaluates residual values based upon independent assessments by industry
professionals, in addition to already established criteria used in the
benchmark/matrices methodology.
The activity in the residual value accounts for the years ended December 31,
1997 and 1996 is as follows:
December 31,
1997 1996
(In Thousands)
Residual values, beginning of year, net $ 748 $3,340
Residual fees recorded - 268
Realization (283) (476)
Residual value estimate reduction - (2,384)
------- -------
Residual values, end of year, net $ 465 $ 748
======= =======
Residual value estimate reductions represent reductions in expected
future residual values on certain equipment, the residuals that were
substantially all recorded prior to 1996. Such reductions resulted from an
extensive review and valuation of all assets owned, leased and managed by the
Company. See Note G for additional information on the review and valuation. For
the years ended December 31, 1997 and 1996, the Company realized income of
approximately $1,488,000 and $820,000, respectively, relating to the remarketing
of equipment for which no residuals were recorded or realized amounts exceeded
the booked residual.
F-9
<PAGE>
Aggregate residual value fees expected to be realized as of December
31, 1997 are as follows (in thousands):
Year ending December 31:
1998 $ 118
1999 223
2000 76
2001 5
2002 4
Thereafter 39
----
$465
====
D. Net Investment in Direct Finance Leases and Equipment on Operating
Lease:
Net investment in direct finance leases consisted of the following at
December 31, 1997:
Minimum lease payments receivable $496
Estimated unguaranteed residual values of
leased equipment, net 160
Less unearned income (135)
----
$521
====
The cost of equipment on operating lease by category of equipment as of
December 31, 1997 is as follows:
Transportation equipment $1,370
Other equipment 2,838
-----
4,208
Less accumulated depreciation 3,976
-----
$ 232
=====
The aggregate amounts of minimum lease payments to be received from
noncancelable direct finance and operating leases are as follows:
Direct Finance Operating
-------------- ---------
Year ending December 31: (In Thousands)
1998 $235 $223
1999 101 45
2000 76 31
2001 72 30
2002 12 10
---- ----
$496 $339
==== ====
Included in the operating lease and direct finance lease portfolios are
equipment held for remarketing with an original cost of approximately $650,000
and a net book value of $0.
E. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expense consists of the following as of
December 31, 1997:
Trade accounts payable $ 598
Payables to trusts 2,842
Accrued interest payable 46
Contribution payable to NAOF 815
Accrued income taxes payable 230
Other accrued expenses 1,390
-------
$ 5,921
=======
F-10
<PAGE>
F. Restricted Cash
The balance in restricted cash represents cash proceeds collected from
the sale of equipment owned by the investors and rental income collected on
behalf of the investors, net of expenses. As of December 31, 1997, the amount
due to investors for cash collected on their behalf exceeded the balance in
restricted cash by $446,000.
G. Residual Value Estimate Reductions and Lessee Credit-Related Portfolio
Losses
The Company performs a review and revaluation of all assets owned,
leased and managed by the Company every year.
The Company evaluates residual values based upon independent
assessments by industry professionals, in addition to already established
criteria used in the benchmark/matrices methodology. The Company did not
recognize a reduction in trust residual values in 1997. Substantially all of the
residual write-down for the year 1996 was associated with equipment leased and
sold to investors by the Company prior to 1996.
H. Indebtedness
In April 1997, the Company executed and delivered (1) the Loan
Reduction and Purchase and Assignment Agreement dated April 1997 among the
Company, its corporate affiliates, Fleet National Bank - Corporate Trust
Division, as agent (the "Agent") for the Company's principal recourse lenders,
and Vestex, the Company's majority shareholder; (2) release in favor of the
principal recourse lenders to be given by Vestex and Brian M. Adley, Chairman of
the Board of Directors of the Company and President and sole shareholder of
Vestex, individually; (3) release in favor of the principal recourse lenders to
be given by the Company, its corporate affiliates and/or subsidiaries, in favor
of Vestex. Coterminous with this transaction, both the intercreditor loan and
secured inventory loan were repaid in advance on their respective terms. The
aggregate amount of this debt on the repayment date was approximately
$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.
A $50,000 subordinated loan from Vestex, Inc., $73,000 in equipment
loans, a $68,000 bank loan and a $24,000 shareholder and director loan owed by
the Company's subsidiary Long River Capital, and a $200,000 subordinated loan
from a former shareholder together make up the $415,000 of recourse debt
outstanding at December 31, 1997. The loan payable to Vestex bears interest at
2% above the prime rate (10.5% at December 31, 1997) and is due on demand. The
loan payable to a former shareholder bears interest at 1% over the base rate as
defined in the agreement X% at December 31, 1997. Pursuant to the terms of the
loan, principal payments of $40,000 per month were scheduled to commence upon
repayment of the intercreditor debt. No payments were made in 1997. The
equipment loan provides for monthly principal and interest at 8% and 15% of
approximately $2,000 payable in advance and expires in November 2000. The bank
loan is due on demand with interest at 2% over prime rate (10.5% at December 31,
1997) payable monthly and is secured by auto loans receivable (see Note B). The
shareholder and director loan is payable monthly with interest at X% and is due
on demand.
Aggregate annual maturities under recourse debt discussed above as of
December 31, 1997 are as follows (in thousands):
Year ending December 31:
1998 $374
1999 22
2000 19
-----
$415
Maximum recourse indebtedness outstanding during the year ended
December 31, 1997 was approximately $3.4 million.
F-11
<PAGE>
Nonrecourse indebtedness consists of notes payable to banks and
financial institutions arising from assignments of the Company's rights, (most
notably the right to receive rental payments) as lessor, at interest rates
ranging from 7.5% to 14%. Amounts due under nonrecourse notes are obligations of
the Company which are secured only by the leased equipment and assignments of
lease receivables, with no recourse to any other assets of the Company. The
Company is at risk, however, for the amount of residual value booked on
equipment for its own portfolio in the event of a lessee default.
Aggregate future maturities of nonrecourse indebtedness as of December
31, 1997 are as follows (in thousands):
Year ending December 31:
1998 $226
1999 102
2000 91
2001 87
2002 22
----
$528
====
I. Income Taxes
The provision (benefit) for income taxes consists of the following:
1997 1996
----- -----
Current:
Federal $ - $ 90
State 13 71
Deferred:
Federal - (400)
State - -
----- -----
Total $13 ($239)
===== =====
A reconciliation of the rate used for the provision (benefit) for
income taxes is as follows:
1997 1996
----- -----
Tax benefit at statutory rate 34.0% 34.0%
Net operating loss carry forward
benefit for which utilization
is not assured and other items (34.0) (37.4)
----- -----
Total 0.0% ( 3.4%)
====== =======
The Company files consolidated federal income tax returns with all of
its subsidiaries. As of December 31, 1997, the Company has net operating loss
carryforwards of approximately $23,385,000 available for federal tax purposes,
which expire in the years 2001 through 2012. In addition, at December 31, 1997,
the Company has investment tax credit carryforwards for federal income tax
purposes available to offset future taxes of approximately $2,276,000 expiring
in the years 1998 through 2001 and minimum tax credit carryforwards for federal
income tax purposes available to offset future taxes of approximately $105,000
which do not expire. For federal tax purposes, utilization of net operating
losses and tax credit carryforwards will be limited in future years as a result
of a greater than 50% change in ownership which occurred in July 1995.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
F-12
<PAGE>
The tax effects of significant items comprising the Company's net
deferred tax liability as of December 31, 1997 are as follows:
December 31,
------------
1997
----
(In Thousands)
Deferred tax liabilities:
Differences between book and tax
basis of property $ 292
Deferred tax assets:
Reserves not currently deductible 500
Net operating loss carryforwards 9,354
Tax credit carryforwards 2,381
Other 10
------
Total deferred tax assets 12,245
------
11,953
Valuation allowance (11,953)
------
Net deferred tax liability $ -
======
All deferred tax liabilities and deferred tax assets (except tax credit
carryforwards) are tax effected at the enacted rates for state and federal
taxes. The valuation allowance relates primarily to net operating loss
carryforwards and tax credit carryforwards that may not be realized. The
valuation allowance decreased by $1,050,000 in 1997. For the year ended December
31, 1996 the valuation allowance increased by $3,046,000.
The deferred tax asset is available to offset taxable income in excess
of book income generated from the lease portfolio and residual values which are
the principal components of the total deferred tax liabilities of $292,000 as of
December 31, 1997. The deferred tax asset, net of the deferred tax liability,
has been fully reserved as of December 31, 1997.
J. Stockholders Equity (Deficit)
The Preferred Stock issued by the Company carries certain preferences
and rights as discussed below. Each share of Preferred Stock is entitled to the
number of votes equal to the number of whole shares of Common Stock into which
the share of the Preferred Stock held are then convertible. The holders of the
Preferred Stock shall be entitled to receive cash dividends only to the extent
and in the same amounts as dividends are declared and paid with respect to
Common Stock as if the Preferred Stock has been converted to Common Stock in
accordance with the provisions related to conversion. Preferences specific to
each series are as follows:
Series A - convertible into ten shares of Common Stock for each share
of Preferred Stock and has a liquidation preference of $1.90 per share;
Series AA - convertible into one share of Common Stock for each share
of Preferred Stock and has a liquidation preference of $.50 per share.
Series B - convertible into ten shares of Common Stock for each share
of Preferred Stock and has a liquidation preference of $2.00 per share.
K. Stock Option Plans and Stock Purchase Plan
The Company has four stock option plans: a 1994 Stock Option Plan, a
1994 Directors' Stock Option Plan, a 1997 Stock Option Plan, and a 1983 Stock
Option Plan. The 1983 Stock Option Plan has expired and remaining outstanding
options under this Plan were canceled in 1997 and reissued under the 1994
Stock Option Plan.
The Company's stock option plans provide for incentive and nonqualified
stock options to purchase up to an aggregate of 5,707,000 shares of the
Company's Common Stock which may be granted to key contributors of the Company,
including officers, directors, employees and consultants. The aggregate number
of shares pursuant to the plans do not include 1,100,500 options related to the
1983 stock option plan which have expired. The options are generally granted at
the fair market value of the Company's Common Stock at the date of the grant,
F-13
<PAGE>
vest over a five-year period, are exercisable upon vesting and expire five years
from the date of grant.
Information with respect to the stock option plans was as follows:
1994 1994 1997 1983 Weighted
Stock Directors Stock Stock Average
Option Option Option Option Exercise
Plan Plan Plan Plan Price
-----------------------------------------------------------
Outstanding,
December 31, 1995 1,207,000 95,000 3,981 $.16
Options granted - 234,500 - .25
Options canceled (72,715) - (737) .007
--------- ------- ------ ----
Outstanding,
December 31, 1996 1,134,285 329,500 - 3,244 .18
Options granted 1,005,000 337,500 2,240,000 - .51
Options exercised (15,000) - - - .15
Options canceled
and expired (1,119,285) - - .18
Options canceled
and reissued 3,244 - - (3,244) .01
-------- ------- --------- ------ ----
Outstanding,
December 31, 1997 1,008,244 667,000 2,240,000 - $.49
========= ======= ========= ====== ====
Additional information regarding options outstanding as of December 31,
1997 is as follows:
Options Outstanding
Exercise Number Weighted Average Exercisable Date of
Price Of Shares Contractual Life Options Expiration
- ----- --------- ---------------- ------- ----------
$0.01 3,244 5.00 3,244 2002
$0.06 112,500 4.00 112,500 2001-2003
$0.10 681,000 4.98 115,000 2002-2003
$0.20 225,000 4.00 75,000 2003
$0.25 920,500 4.50 329,500 2002-2003
$0.30 40,000 5.25 2002-2003
$0.50 591,000 5.69 2002-2005
$0.60 40,000 5.75 2002-2004
$0.75 541,000 5.75 2002-2006
$1.00 681,000 6.56 2003-2007
$1.50 40,000 6.75 2002-2006
$2.00 40,000 7.25 2003-2007
--------- --------
Total 3,915,244 635,244
========= ========
The weighted average exercise price of the options outstanding at
December 31, 1997 was $.49.
Pro forma information. The Company has elected to follow APB Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options which equal or
exceeds the market price of the underlying stock on the date of the grant, no
compensation expense is recognized in the Company's financial statements. SFAS
No. 123 requires the disclosure of pro forma net income (loss) and earnings per
share as if the Company had adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock options to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly differs from the calculated values. The Company's calculations were made
using the Black-Scholes option
F-14
<PAGE>
pricing model with the following weighted average assumptions: expected life, 48
months following vesting-stock volatility 200% in 1997 and 1996, risk free
interest rate, 8%, in 1997 and in 1996 and no dividends during the expected
term. The forfeitures of the options are recognized as they occur. If the
computed fair values of the 1996 and 1997 awards had been expensed over the
vesting period of the awards, the pro forma net loss would have been $6,411,000
($1.25 per share) in 1996 and $1,850,000 ($0.12 per share) in 1997.
Employee Stock Purchase Plan
The Company's 1994 Employee Stock Purchase Plan authorizes the offering
to employees of up to 250,000 shares of Common Stock in six semiannual offerings
at a price of 85% of the Common Stock's bid price and in an amount determined by
a formula based on each employee's estimated annual compensation. The Company's
stockholders authorized this plan in January 1995. No shares of Common Stock
have been offered pursuant to the plan to date.
The Company has reserved 250,000 shares of Common Stock for all amounts
that may be offered to employees under this plan.
L. Commitments and Contingencies
The Company rents its corporate offices under a five-year
non-cancelable lease. In addition, the Company leases regional marketing offices
at the three locations along the east coast. The future minimum rental
commitments are as follows:
Year ending December 31:
1998 $191,000
1999 155,000
2000 143,000
2001 131,000
2002 99,000
Rental expense, net of abatements, for the years ended December 31,
1997 and 1996 amounted to $194,000, and $182,000, respectively.
The Company undertook a review of its trust portfolio, 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 costs for
periods prior to 1997 had not been recovered from the trusts. As discussed in
Note T, the Company has recorded $1,868,000 of cost recoveries through December
31, 1997 for periods prior to 1997. Management makes no representations
concerning the Company's ability to recover any further costs for periods prior
to 1997. Further recoveries for periods prior to 1997 are contingent upon the
current status of the specific trusts and the Company's level of recovery
efforts. Consequently, the Company will record any further recoveries as income
in the period in which collection is assured. Management cannot reasonably
predict if any trust investors will claim that the recovery of these
administrative costs was not accordance with the trust agreement.
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 brought by Mr. Rolls 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 moved the case to
federal court and has filed an answer. The Company intends to file a
counterclaim against Mr. Rolls.
The Board of Directors of Chancellor Corporation voted to remove Mr.
Ernest L. Rolls as a Director and Vice Chairman of the Board effective March
10,1998. The reasons cited by the Board for removing Mr. Rolls included breach
of his fiduciary duties of care and loyalty, Mr. Rolls' suspected self-dealing
and his failure to provide a total of $7.5 million in financing that he
represented to the Board he would provide. The Board also believed that a suit
filed by Mr. Rolls was an attempt by Mr. Rolls to jeopardize the Company's
strategic alliances and other activities that are currently being negotiated.
F-15
<PAGE>
In December 1997, Complex Design and Construction, Inc. ("Complex")
filed a complaint against Chancellor Corporation and others in Superior Court,
Suffolk County, Massachusetts alleging that the Company breached its contract
with Complex relating to the build-out of the Company's leasehold. The complaint
also alleges that Chancellor committed unfair and deceptive acts and practices
in connection with the construction contract. The complaint seeks approximately
$44,000 in damages for the alleged breach of contract, as well as double or
treble damages for purported unfair and deceptive acts and practices. Legal
counsel has advised the Company that it is reasonably possible that the Company
may be liable for up to approximately $155,000 plus legal costs and expenses.
Chancellor filed an answer and counterclaim against Complex alleging breach of
contract, breach of expenses and implied warranty, liquidated damages pursuant
to a penalty clause in the contract, and unfair and deceptive acts and
practices. In addition, Chancellor filed a motion to dismiss the count in the
complaint against it, which alleges unfair and deceptive acts and practices. The
motion is scheduled to be heard on March 26, 1998.
In the normal course of its business, the Company is from time to time
subject to litigation. Management does not expect that the outcome of any of
these actions, or the actions as noted above, will have a material adverse
impact on the Company, its business or its consolidated financial position or
results of operations.
M. Major Customers
The Company is engaged principally in originating and selling equipment
leasing transactions. During 1997, 92% (based on original equipment cost) of the
new lease transactions originated by the Company were with the one largest
lessee. In addition, approximately 55% and 37% (based on original equipment
cost) of equipment sold to investors in 1997 were purchased by the two largest
investors. During 1996, 42%, 11% and 10% (based on original equipment cost) of
the new lease transactions originated by the Company were with the three largest
lessees. In addition, approximately 26%, 16% and 13% (based on original
equipment cost) of equipment sold to investors in 1996 were purchased by the
three largest investors.
N. Employee Benefit Plan
The Company sponsors a 401(k)retirement plan (the "Plan") for the
benefit of its employees. The Plan enables employees to contribute up to 15% of
their annual compensation. The Company's contributions to the Plan amounted to
approximately $18,000 and $19,000 in 1997 and 1996, respectively.
O. Acquisition
On July 31, 1997, the Company acquired certain assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application processing and origination of automobile loans for high credit
risk consumers. Long River Capital was previously owned 50% by a director of the
Company. Total consideration for the purchase of $104,000 of assets at their
fair market value and the assumption of $257,000 of liabilities consisted
primarily of the issuance of 200,000 shares of the Company's common stock having
a fair market value of $20,000. The acquisition was accounted for by the
purchase method of accounting, and accordingly, the purchase price has been
allocated to assets acquired and liabilities assumed based on their fair market
value at the date of acquisition. The excess of purchase price over the fair
market values of net assets acquired of $122,000 (net of amortization of $6,000
and a write-down of $45,000 to net realizable value) has been included in
intangible assets and represents goodwill, license agreements, and a customer
list.
P. Minority Interest in a Subsidiary
During 1996, the Company acquired a fifty percent interest in TruckScan
LLC ("TruckScan") for a $350,000 contribution to equity. Due to the level of
control the Company exercised over the operation of TruckScan, TruckScan's
financial statements are consolidated with the financial statements of the
Company and its other subsidiaries.
F-16
<PAGE>
On May 1, 1997 the Company sold its 50% investment in TruckScan to
Telescan, the joint venture partner and a party unrelated to the Company. In
consideration for the sale, the Company received certain assets from Telescan
with an estimated value of $11,000 and a one year promissory note in the amount
of $50,000 secured by certain assets of Telescan and forgiveness of a promissory
commitment to contribute capital of approximately $300,000 which was authorized
by the former management and board. The Company realized a gain of $41,000 on
the sale of this investment.
TruckScan had a loss of $29,000 and $422,000 from January 1, 1997
through April 30,1997 (date of sale) and from June 21, 1996 (date of inception)
through December 31, 1996, respectively. The minority owner's share of this loss
exceeded its equity by $225,000. As a result, the entire loss of $29,000 and
$422,000, respectively is recognized by the Company.
Q. Other Investment
Other investment includes $1 million equity investment in the New
Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund
with the backing of the Overseas Private Investment Corporation ("OPIC") created
to make direct investments in emerging companies throughout sub-Saharan Africa.
Capital contributions are payable within 10 business days of a capital call
pursuant to the terms of the partnership agreement. As of December 31, 1997, the
Company funded $185,000 of a $1 million commitment for its 2.5% interest in NAOF
and the remaining obligation of $815,000 is included in accounts payable and
accrued expenses.
R. Concentration of Credit Risk
The Company maintains its cash balances in several banks. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000 by each
bank. The Company also has arrangements whereby the funds in excess of specified
cash balances are invested in overnight repurchase agreements and such overnight
investments are collateralized by high grade corporate debt securities. As of
December 31, 1997, the uninsured portion of the cash balances held at two of the
banks were approximately $2,592,000 of which $2,404,000 was invested in
overnight repurchase agreements.
S. Restructuring
In order to improve the Company's liquidity, return to profitability
and create growth opportunities, management initiated a plan during the year
ended December 31, 1996 which provides for, among other things, expanding its
core business by servicing middle market clients, expanding into new
transportation and equipment markets and seeking strategic financial
partnerships and joint ventures domestically and internationally. As part of the
restructuring, the Company repaid the intercreditor loan and the secured
inventory loan in 1997, as described in Note H and relocated its corporate
headquarters. The Company believes that these initiatives will allow the Company
to improve financial performance and liquidity. Included in 1996 selling,
general and administrative expenses is a charge of $524,000 for costs associated
with the restructuring plan.
T. Prior Period Adjustment
During 1997, as part of the Company's restructuring, management
undertook a review of its operations. As part of this review, management
reviewed the trust agreements, including consultation with legal counsel and
industry consultants and determined that the Company historically had not
charged the trust for the costs of their administration. As a result of this
review management determined that the Company had not been reimbursed
approximately $22 million of costs incurred for trust administration for periods
prior to 1997. Management subsequently began to charge the trusts for these
services and implemented plans to recover past costs. Management makes no
representations concerning the Company's ability to recover any further costs
for periods prior to 1997. The consolidated statement of stockholders' equity
(deficit) reflects an increase in stockholders' equity of $1,437,000 from
$1,365,000 to $2,802,000 as of December 31, 1995 for trust administration costs
recovered for periods prior to 1996. The 1996 consolidated statements of
operations have been restated to reflect an adjustment to include a reduction in
the general and administrative expenses of approximately $431,000 for trust
F-17
<PAGE>
administration costs recovered relating to 1996 and a corresponding decrease in
the net loss from $6,804,000 to $6,373,000 for the year ended December 31, 1996.
The net loss per share amounts in the consolidated statements of operations has
been restated from $1.32 to $1.24 as a result of this change.
U. Related Party Activity
During 1994, and prior to becoming an affiliate, the board of directors
recommended and the shareholders approved at the 1995 Annual Meeting of
Stockholders, a consulting agreement with Vestex, Inc., an affiliate of the
majority stockholder, whereby the affiliate provides specified services related
to the Company's equity raising efforts and financing activities. Under the
agreement, the affiliate earns a fee for consummating equity or debt
transactions. The fee related to debt transactions is 1.5% of the transaction
amount through December 1996 at which time the Board of Directors increased the
fee to 3.0% of the transaction amount. The fee related to equity transactions
equals 7.5% of the transaction amount if a broker or underwriting fee is not
paid to a third party and 2.5% of the transaction amount if a broker or
underwriting fee is paid to a third party. The agreement was extended effective
July 1, 1997 on the same terms and conditions through June 2000. Vestex also
provides services to the Company on operational and other matters for which it
is compensated at levels negotiated with the Company, as described below.
During 1996 and through March 1997, the affiliate charged the Company
fees for certain transactions it determined were consummated during the period
and were covered by the agreement. The Company disputed a certain portion of
these charges. The parties settled this dispute by agreeing that $3,000,000 was
incurred relating to these services, of which $800,000 and $2,200,000 were
performed in 1997 and 1996, respectively. In connection with this settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed. These amounts
are included in selling, general, and administrative expenses on the
consolidated statement of operations. Per the agreement, the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during the coming year if payment can be made from refinancing or equity
proceeds in a manner that does not impact the Company's ability to meet its
other obligations.
As of December 31, 1996, the Company had received from Vestex a total
of $4,121,000, net of repayments and cost of $312,500 which consisted of equity
of $1,421,000 and debt and payable of $ 2,700,000. During 1997, the Company
entered into several transactions with Vestex which resulted in an increase of $
1,856,000 resulting in a net equity infusion of $ 5,977,000 and debt and
payables of $59,000 as of December 31, 1997.
In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000. The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through December 1997, and iii) a $45,000
fee relating to the $1,500,000 loan provided by the then Vice Chairman of the
Board of Directors (as described below).
The Company also entered into several transactions whereby Vestex
received fees of approximately $1,288,000 in 1997. The Company recorded
approximately $519,000 of these expenses in connection with Vestex's
negotiations on behalf of the Company resulting in significant financial
benefits and savings to the Company. This includes, but is not limited to,
savings of approximately $930,000, whereby the intercreditor loan of
approximately $1,906,000 was paid in advance of term; savings in excess of
$2,000,000 on the termination of the Company's office lease and renegotiations
of more favorable terms on the Company's new office lease; and development and
implementation of strategies enabling the Company to properly recover certain
administrative costs incurred in connection with the administration of the
Company's trust portfolio assets. The Company also recorded an additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's successful restructuring and transition plan. This amount
reduced the restructuring charges accrued at December 31, 1996. In connection
with a $1.5 million loan provided to the Company by the Vice Chairman of the
Board of Directors, Vestex provided certain guarantees and was compensated in
the amount of $375,000 for providing such guarantee.
F-18
<PAGE>
The Company purchased furniture and computer equipment from Vestex in
the amount of $300,000. The acquisition prices were based on estimated fair
value as of the date of the transaction. At December 31, 1997, approximately
$60,000 of the furniture acquired was not in service by the Company.
The Company received loans from Vestex during 1997 totaling $1,735,000,
including $1,500,000 in connection with the repayment of the Company's debt to
the Vice-Chairman. Interest on loans payable to Vestex accrue at the prime rate
plus 2% (10.5% as of December 31, 1997). During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.
During 1997, Vestex agreed to take stock, at the then fair market value
on the date of conversion, in lieu of cash in consideration of certain
obligations due Vestex by the Company. In February 1997, the Board of Directors
approved the issuance of 3,000,000 shares of the Company's Series AA Preferred
Stock at $.30 per share to Vestex in consideration of $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex in consideration of $1,000,000 of fees and debt including Vestex's
guarantee of the $1,500,000 loan provided to the Company by the Vice Chairman,
stated above. Also in June 1997, the Company issued 6,716,667 shares of Common
Stock to Vestex in consideration of approximately $806,000 of fees and debt due.
In September 1997, the Company issued 5,000,000 shares of Common Stock to Vestex
in consideration of approximately $500,000 of Vestex fees and debt due. In
December 1997, the Company issued 710,526 shares of the Company's Series A
Preferred Stock to Vestex in consideration of $1,350,000 of Vestex fees an debt
due. In addition to the conversion of accrued Vestex fees and debt to the
Company's preferred and common stock totaling approximately $4,556,000, the
Company also repaid debt and fees through cash payments in the amount of
approximately $2,848,000. For the years ended December 31, 1997 and 1996, the
Company incurred expenses to Vestex of $1,850,000 and $2,594,000, respectively.
As of December 31, 1997, the Company owed Vestex $50,000 of unpaid loans and
approximately $9,000 of unpaid fees. In addition, Vestex is due $50,000 of
unpaid fees assumed by the Company at the time of acquisition of Long River
Capital.
An affiliate of the Chairman of the Board of Directors provided
supervisory and other construction services in connection with the build-out and
improvements to the Company's new office space. The total fees earned by the
affiliate were $275,000, all of which was paid in 1997. The Company recorded
these amounts as capitalized leasehold improvements.
The Company entered into several transactions with the then
Vice-Chairman of the Board of Directors. On May 19, 1997, the Company issued a
$1,500,000 promissory note to the then Vice-Chairman of the Board which was
guaranteed by Vestex and the Chairman of the Board. Interest on the promissory
note accrued at the prime rate plus 2 1/8%. On September 3, 1997, Vestex on
behalf of the Company repaid the promissory note. The resultant obligation
recorded as owing to Vestex was subsequently converted into equity as described
above. Interest accrued to the Vice-Chairman during 1997 of approximately
$59,000. The Vice-Chairman also made a non-interest-bearing advance of
$1,200,000 to the Company in October 1997.
During 1997, the Company directly and through Valmont Ventures Inc.
("Valmont"), a wholly-owned subsidiary, providing consulting services, incurred
costs on behalf of and made advances to Global Weather Services ("GWS"), a
company represented by the then Vice-Chairman as an affiliate of the
Vice-Chairman. The Company provided these services at the request of the then
Vice-Chairman with the approval of management. The total due from GWS amounted
to approximately $756,000, including consulting fees of $600,000 which are
included in other revenue in the consolidated statements of operations.
Company funds were used to pay amounts on behalf of the Vice-Chairman
totaling approximately $58,000 during 1997.
Based on discussions with legal counsel, the Company believes it has
the right to offset the amounts due to and from the then Vice-Chairman and GWS.
As a result, the accompanying consolidated financial statements reduced the
amounts due totaling approximately $814,000 and the amounts owed of $1,200,000.
The difference of approximately $386,000 has offset the amount due by the
Vice-Chairman or GWS to Vestex and has been reflected as an increase in the
amount due by the Company to Vestex.
F-19
<PAGE>
Chancellor has entered into two lease transactions with Kent International, a
company owned 50 percent by a director of the Company. Total original equipment
cost for these transactions amount to approximately $144,000.
V. Subsequent Events
Subsequent to December 31, 1997, the Company, formed the following
wholly-owned subsidiaries and issued the following shares:
Chancellor International Corporation ("CIL"), a Delaware Corporation,
formed as the parent holding company for diversified financial services
companies specializing in international commercial and consumer
financing. The Company issued 2,000,000 shares of Series B Convertible
Preferred Stock for 100% ownership of CIL.
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.
CIL transferred 1,500,000 shares of its Series B Convertible Preferred
Stock of the Company to CAC in exchange for 100% ownership of CAC.
Africa Financial Corporation ("AFC"), a Mauritius Corporation, formed
as the operating company providing lease and commercial financing
services in Africa. CAC transferred 1,000,000 shares of its Series B
Convertible Preferred Stock of the Company to AFC in exchange for 100%
ownership of AFC.
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. The parties
commenced operations on January 1, 1998 pursuant to an agreement reached in
principle, as outlined in the Letter of Intent. On March 27, 1998, the parties
finalized the terms of the agreement and responsibilities of the parties by the
closing of the transaction and executing the documents. The parent holding
company will be CAC. The Company will provide, through CAC, $5,000,000 of
start-up capital to AFC, and 1,000,000 shares of the Company's Series B
Convertible Preferred Stock. In consideration of a 40% ownership interest in
AFC, NAOF will infuse $10,000,000 of cash in two $5,000,000 tranches. Upon the
event of a material adverse change in the financial condition of AFC prior to
the second funding, and with the unanimous consent of the board of directors of
AFC, the second funding may be extended to a mutually agreeable date or
terminated. In connection with this capital infusion, AFC will also issue
500,000 shares of the Company's Series B Convertible Preferred Stock to NAOF. In
consideration of a 9% ownership interest in AFC, and the issuance of 500,000
shares of the Company's Series B Convertible Preferred Stock, AMC will
contribute the net assets of AFS; 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 leased through AFC or its assignee. AMC will also
transfer a 2 1/2 percent ownership interest in AMC to CAC in connection with
this transaction. The Series B Convertible Preferred stock has a liquidation
preference of $2.00 per share and is convertible into 10 shares of the Company's
Common Stock for each one share of preferred stock at the holders option.
F-20
<PAGE>
The following is the proforma effect on stockholder's equity if all the
transactions described above are executed and includes estimated transaction
related cost of $1 million:
<TABLE>
<CAPTION>
Per Shares
Financial To Be
Statements Issued Proforma
---------- ------ --------
(In Thousands)
<S> <C> <C> <C>
Preferred Stock, Series AA Convertible,
$.01 par value, authorized 8,000,000
shares, issued and outstanding 8,000,000
shares $ 80 $ - $ 80
Preferred Stock, Series A, Convertible,
$.01 par value, authorized 710,562
shares, issued and outstanding 710,562
shares 7 - 7
Preferred Stock, Series B Convertible,
$.01 par value, authorized 2,000,000
shares, issued and outstanding 1,000,000
shares - 20 20
Common Stock, $.01 par value, authorized
75,000,000 shares, issued and outstanding
25,401,156 shares 254 - 254
Additional Paid in Capital 28,426 18,980 47,406
Accumulated Deficit (28,540) - (28,540)
-------- ------ --------
$ 227 $19,000 $19,227
======= ======= =======
</TABLE>
F-21
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 31, 1998
By: /s/ Brian M. Adley
Brian M. Adley
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: March 31, 1998 By: /s/ Brian M. Adley
-------------------
Brian M. Adley
Chairman of the Board and Director
(Principal Executive Officer)
Dated: March 31, 1998 By: /s/ Rudolph Peselman
---------------------
Rudolph Peselman
Director
Dated: March 31, 1998 By: /s/ Michael Marchese
---------------------
Michael Marchese
Director
Dated: March 31, 1998 By: /s/ Jonathan Ezrin
-------------------
Jonathan Ezrin
Corporate Controller and Principal
Accounting Officer
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Chancellor Corporation
We consent to the incorporation by reference in Registration Statements Nos.
2-97816 and 33-8656 of Chancellor Corporation on Form S-8, as amended, of our
report on the consolidated financial statements of Chancellor Corporation and
Subsidiaries as of December 31, 1997 and for the years ended December 31, 1997
and 1996, appearing in this Annual Report on Form 10-KSB of Chancellor
Corporation for the year ended December 31, 1997.
/s/ REZNICK FEDDER & SILVERMAN
Boston, Massachusetts
April 7, 1998
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