UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368 - 2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of August 13, 1999, 53,362,786 shares of Common Stock, $.01 par value per
share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $2,500,000)
were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of August 13, 1999 was approximately
$11,020,410. Aggregate market value of the total voting stock of the issuer as
of August 13, 1999 was approximately $40,172,090.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as
of June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 14
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1999 1998
---------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,169 $ 644
Receivables, net 6,027 3,255
Inventory 10,389 10,758
Net investment in direct finance leases 434 359
Equipment on operating lease, net of accumulated depreciation
of $2,292 and $2,351 2,560 702
Residual values, net 214 219
Furniture and equipment, net of accumulated depreciation
of $1,463 and $1,290 955 999
Long term investments 5,407 3,681
Intangibles, net 7,357 7,541
Other assets, net 1,540 1,411
---------- --------------
$ 36,052 $ 29,569
========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 6,152 $ 6,366
Deferred reimburseable expenses 4,122 1,068
Indebtedness:
Revolving credit line 8,270 9,063
Notes -payable 466 942
Nonrecourse 572 889
Recourse 6,747 4,234
---------- --------------
Total liabilities 26,329 22,562
---------- --------------
Stockholders' equity:
Prefered Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, 5,000,000 shares issued and outstanding 50 50
Convertible Series B, 2,000,000 shares authorized,
none issued and outstanding --- ---
Common stock, $.01 par value; 75,000,000 shares authorized,
53,358,786 and 43,041,895 shares issued and outstanding 533 430
Additional paid-in capital 36,155 34,217
Accumulated deficit (27,015) (27,690)
---------- --------------
9,723 7,007
---------- --------------
$ 36,052 $ 29,569
========== ==============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Transportation equipment sales $ 14,223 $ 481 $ 26,490 $ 972
Rental income 316 290 774 411
Lease underwriting income 17 34 27 34
Direct finance lease income 28 31 42 67
Interest income 470 14 551 32
Gains from portfolio remarketing 323 227 574 308
Fees from remarketing activities 446 314 683 554
Other income 11 27 82 45
------------ ------------ ------------ -----------
$ 15,834 $ 1,418 $ 29,223 $ 2,423
------------ ------------ ------------ -----------
Costs and expenses:
Cost of transportation equipment sales 11,500 362 21,372 669
Selling, general and administrative 3,135 883 5,941 1,419
Interest expense 262 19 445 40
Depreciation and amortization 374 120 734 235
------------ ------------ ------------ -----------
15,271 1,384 28,492 2,363
------------ ------------ ------------ -----------
Earnings before taxes 563 34 731 60
------------ ------------ ------------ -----------
Provision for income taxes 14 - 56 -
Net Income $ 549 $ 34 $ 675 $ 60
============ ============ ============ ===========
Basic net income per share $ 0.01 $ 0.00 $ 0.01 $ 0.00
============ ============ ============ ===========
Diluted net income per share $ 0.01 $ 0.00 $ 0.01 $ 0.00
============ ============ ============ ===========
Shares used in computing basic net income per share 48,300,550 35,032,242 46,039,725 33,168,387
Shares used in computing diluted net income per share 54,363,952 51,032,242 52,203,127 49,168,387
The accompanying notes are an integral part
of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended June 30,
1999 1998
------------ --------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 675 $ 60
------------ --------
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 734 120
Residual value estimate realizations and
reductions, net of additions 5 24
Changes in assets and liabilities:
(Increase) decrease in receivables (2,772) 490
Decrease (increase) in inventory 369 (222)
Decrease in accounts payable and accrued
expenses (213) (1,038)
Increase in deferred reimburseable expenses 3,054 ----
------------ --------
1,177 (626)
------------ --------
Net cash provided (used) by operating activities 1,852 (566)
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases (75) 57
Equipment on operating lease (1,977) (325)
Net change in cash restricted ---- 2,282
Additions to furniture and equipment, net (138) (85)
Increase in intangibles, net (249) ----
Net change in other assets (1,855) (1,425)
------------ --------
Net cash provided (used) by investing activities (4,294) 504
------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit (792) ----
Increase in notes payable 200 ----
Increase in indebtedness - recourse 4,700 225
Repayments of notes payable (676) ----
Repayments of indebtedness - nonrecourse (317) (162)
Repayments of indebtedness - recourse (2,189) (8)
Issuance of common stock, net 2,041 5
------------ --------
Net cash provided (used) by financing activities 2,967 60
------------ --------
Net increase (decrease) in cash and cash equivalents 525 (2)
Cash and cash equivalents at beginning of period 644 97
------------ --------
Cash and cash equivalents at end of period $ 1,169 $ 95
============ ========
Cash paid for interest $ 846 $ 13
============ ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosure required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Intercompany accounts and
transactions have been eliminated. These financial statements and related notes
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998. The results for the interim period ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
2. LOAN AGREEMENT
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 as a
deposit to secure repayment of the Loan. The Loan is secured by all of the
Equipment and the lease contracts specifically associated with this transaction.
3. DISTRIBUTION RIGHTS
During the quarter ended June 30, 1999, an affiliate of the Company
obtained exclusive worldwide distribution rights for certain products,
including, but not limited to, trucks, tractor trailers, buses and other
products, manufactured by a closely held South African company for approximately
$4.0 million inclusive of all costs.
4. COMMON STOCK ISSUED
During the quarter ended June 30, 1999, the Company's major shareholder was
issued ten (10) million shares of additional common stock as a result of the
exercise of a stock purchase warrant in exchange of payment of $2,000,000 of
recourse debt.
5. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company formalized a strategic
investment/alliance with a South African manufacturer and New Africa
Opportunity Fund "NAOF" whereby a series of preferred stock of Chancellor
Corporation may be issued in exchange for a minority interest in the South
African company.
5
<PAGE>
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Month Period Ended June 30, 1999 vs. June 30, 1998
Revenues. Total revenues for the three-month period ended June 30, 1999
was $15,834,000 as compared to $1,418,000 for the corresponding prior period, an
increase of $14,416,000 or 1,016.6%. For the three-month period ended June 30,
1999, transportation equipment sales were $14,223,000 as compared to $481,000
for the corresponding prior period, an increase of $13,742,000 or 2,857%. This
significant revenue stream from transportation equipment sales is primarily
attributable to sales of used transportation equipment through the operating
activities of the Company's wholly owned subsidiary, Chancellor Asset Management
Inc. ("CAM"). CAM's used transportation equipment retail and wholesale business
units accounted for approximately $13,310,000 of used transportation equipment
sales. CAM's revenues from the sales of used transportation equipment for the
three month period ended June 30, 1999 increased by $2,873,000 or 27.5% as
compared to the corresponding period for 1998. The increase in revenues
provided by CAM is primarily a result of its six different retail sales centers
located in Atlanta, Georgia; Elizabeth, New Jersey; Kansas City, Missouri;
Orlando, Florida; Pompano Beach, Florida; and Richmond, Virginia. For the
three-month period ended June 30, 1999, rental income increased by $26,000 or 9%
to $316,000 as compared to $290,000 for the corresponding prior period. The
increase in rental income is attributable primarily to the addition to the
Company's portfolio of transportation equipment. For the three month period
ended June 30, 1999, lease underwriting income decreased by $17,000 or 50% to
$17,000 as compared to $34,000 for the corresponding prior period and direct
finance lease income decreased by $3,000 or 9.7% to $28,000 as compared to
$31,000 for the corresponding prior period. The Company is continuing the
process of rebuilding its lease origination business to stimulate future growth
in this area. For the three-month period ended June 30, 1999, interest income
increased by $456,000 or 3,257.1% to $470,000 as compared to $14,000 for the
corresponding prior period. The increase is primarily attributable to interest
earned in connection with the Company's investments. For the three-month period
ended June 30, 1999, gains from portfolio remarketing increased by $96,000 or
42.3% to $323,000 as compared to $227,000 for the corresponding prior period.
The increase in gains from portfolio remarketing is attributable to the increase
in portfolio assets acquired in connection with the purchase of several leases
from trust portfolios administered by the Company, which were made available for
sale upon termination of certain leases. For the three-month period ended June
30, 1999, fees from remarketing activities increased by $132,000 or 42.0% to
$446,000 as compared to $314,000 for the corresponding prior period. This
increase is attributable, in part, to the Company's efforts to promote its
remarketing services on a third party basis. For the three-month period ended
June 30, 1999, other income decreased by $16,000 or 59.3% to $11,000 as compared
to $27,000 for the corresponding prior period.
Costs and Expenses. Total costs and expenses for the three-month
period ended June 30, 1999 was $15,271,000 as compared to $1,384,000 for the
corresponding prior period, an increase of $13,888,000 or 1,003.5%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
three-month period ended June 30, 1999 was $11,500,000 as compared to $362,000
for the corresponding prior period, an increase of $11,138,000 or 3,076.8%, and
resulted in an overall gross margin of 19.1%. Selling, general and
administrative expenses for the three-month period ended June 30, 1999 was
$3,135,000 as compared to $883,000 for the corresponding prior period, an
increase of $2,253,000 or 255.2%. Approximately $1,900,000 of the increase in
selling, general and administrative expenses for the three-month period ended
June 30, 1999 is a result of normal operating expenses incurred by CAM and CAM's
newly acquired retail and wholesale business unit, Tomahawk, whose operations
were consolidated with the Company's as of the August 1, 1998 acquisition date.
Net of the effect of the CAM expenses, selling, general and administrative
expenses increased to $1,236,000 for the three-month period ended June 30, 1999
as compared to $883,000 for the corresponding prior period, an increase of
$353,000 or 40.0%. The increase in selling, general and administrative expenses
reflects the effect of the Company's growth strategy implementation that
included, in part, significant costs associated with the addition of senior
management, sales and staff personnel.
6
<PAGE>
Interest expense for the three-month period ended June 30, 1999 was
$262,000 as compared to $19,000 for the corresponding prior period, an increase
of $243,000 or 1,278.9%. This increase is primarily a result of increased
interest expense associated with CAM's revolving credit line with a financial
institution utilized for inventory floor planning and interest accrued on the
Company's recourse debt.
Depreciation and amortization expense for the three-month period ended
June 30, 1999 was $374,000 as compared to $120,000 for the corresponding prior
period, an increase of $254,000 or 211.7%. The increase is primarily due to the
amortization of intangible assets associated with the acquisition of Tomahawk by
CAM, as well as the depreciation of additions to the Company's portfolio of
leased transportation equipment.
Net Income. Net income for the three-month period ended June 30, 1999
was $549,000 as compared to $34,000 for the corresponding prior period, an
increase of $515,000 or 1,514.7%. The increase in net income is attributable to
the significant increase in revenues, primarily from the retail and wholesale of
used transportation equipment, the buy-out of leases from trust portfolios, and
continued improvements in the containment of costs. Net income per share was
$0.01 per share (both basic and diluted) for the three-month period ended June
30, 1999 as compared to $0.00 per share (both basic and diluted) for the
corresponding prior period.
Six Month Period Ended June 30, 1999 vs. June 30, 1998
Revenues. Total revenues for the six-month period ended June 30, 1999 was
$29,223,000 as compared to $2,423,000 for the corresponding prior period, an
increase of $26,800,000 or 1,105.1%. For the six-month period ended June 30,
1999, transportation equipment sales were $26,490,000 as compared to $972,000
for the corresponding prior period, an increase of $25,518,000 or 2,625.3%.
This significant revenue stream from transportation equipment sales is primarily
attributable to sales of used transportation equipment through the operating
activities of the Company's wholly owned subsidiary, Chancellor Asset Management
Inc. ("CAM"). CAM's used transportation equipment retail and wholesale business
unit accounted for approximately $24,107,000 of used transportation equipment
sales. CAM's revenues from the sales of used transportation equipment for the
six-month period ended June 30, 1999 increased by $5,307,000 or 28.2% as
compared to the corresponding period for 1998. The increase in revenues
provided by CAM is primarily a result of its six different retail sales centers
located in Atlanta, Georgia; Elizabeth, New Jersey; Kansas City, Missouri;
Orlando, Florida; Pompano Beach, Florida; and Richmond, Virginia. For the
six-month period ended June 30, 1999, rental income increased by $363,000 or
88.3% to $774,000 as compared to $411,000 for the corresponding prior period.
The increase in rental income is attributable primarily to the addition to the
Company's portfolio of transportation equipment. For the six-month period ended
June 30, 1999, lease underwriting income decreased by $7,000 or 20.6% to $27,000
as compared to $34,000 for the corresponding prior period and direct finance
lease income decreased by $25,000 or 37.3% to $42,000 as compared to $67,000 for
the corresponding prior period. The Company is continuing the process of
rebuilding its lease origination business to stimulate future growth in this
area. For the six-month period ended June 30, 1999, interest income increased
by $519,000 or 1,621.9% to $551,000 as compared to $32,000 for the corresponding
prior period. The increase is primarily attributable to interest earned in
connection with the Company's investments. For the six-month period ended June
30, 1999, gains from portfolio remarketing increased by $266,000 or 86.4% to
$574,000 as compared to $308,000 for the corresponding prior period. The
increase in gains from portfolio remarketing is attributable to the increase in
portfolio assets acquired in connection with the purchase of several leases from
trust portfolios administered by the Company, which were made available for sale
upon termination of certain leases. For the six-month period ended June 30,
1999, fees from remarketing activities increased by $129,000 or 23.3% to
$683,000 as compared to $554,000 for the corresponding prior period. This
increase is attributable, in part, to the Company's efforts to promote its
remarketing services on a third party basis. For the six-month period ended
June 30, 1999, other income increased by $37,000 or 82.2% to $82,000 as compared
to $45,000 for the corresponding prior period. The increase is primarily
attributable to the recovery of approximately $67,000 of fees from a former
lessee of the Company.
7
<PAGE>
Costs and Expenses. Total costs and expenses for the six-month period
ended June 30, 1999 was $28,493,000 as compared to $2,363,000 for the
corresponding prior period, an increase of $26,130,000 or 1,105.8%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
six-month period ended June 30, 1999 was $21,372,000 as compared to $669,000 for
the corresponding prior period, an increase of $20,703,000 or 3,094.6%, and
resulted in an overall gross margin of 19.3%. Selling, general and
administrative expenses for the six-month period ended June 30, 1999 was
$5,941,000 as compared to $1,419,000 for the corresponding prior period, an
increase of $4,523,000 or 318.7%. For the six-month period ended June 30, 1999,
selling, general and administrative expenses included recovered reimbursable
trust administration costs of approximately $578,000 as compared to $558,000 for
the corresponding prior period. Approximately $3,535,000 of the increase in
selling, general and administrative expenses for the three-month period ended
June 30, 1999 is a result of normal operating expenses incurred by CAM and CAM's
newly acquired retail and wholesale business unit, Tomahawk, whose operations
were consolidated with the Company's as of the August 1, 1998 acquisition date.
Net of the reimbursable trust administration costs and the effect of the CAM
expenses, selling, general and administrative expenses increased to $2,985,000
for the six-month period ended June 30, 1999 as compared to $2,917,000 for the
corresponding prior period, an increase of $68,000 or 2.3%. This nominal
increase in selling, general and administrative expenses reflects the effect of
the Company's growth strategy implementation that included, in part, significant
costs associated with the addition of senior management and staff personnel
while continuing to improve the containment of other costs.
Interest expense for the six-month period ended June 30, 1999 was $445,000
as compared to $40,000 for the corresponding prior period, an increase of
$405,000 or 1,012.5%. This increase is primarily a result of increased interest
expense associated with CAM's revolving credit line with a financial institution
utilized for inventory floor planning and interest accrued on the Company's
recourse debt.
Depreciation and amortization expense for the six-month period ended
June 30, 1999 was $734,000 as compared to $235,000 for the corresponding prior
period, an increase of $499,000 or 212.3%. The increase is primarily due to the
amortization of intangible assets associated with the acquisition of Tomahawk by
CAM.
Net Income. Net income for the six-month period ended June 30,
1999 was $675,000 as compared to $60,000 for the corresponding prior period, an
increase of $615,000 or 1,025%. The increase in net income is attributable to
the significant increase in revenues, primarily from the retail and wholesale of
used transportation equipment, the buy-out of leases from trust portfolios, and
continued improvements in the containment of costs. Net income per share was
$0.01 per share (both basic and diluted) for the six-month period ended June 30,
1999 as compared to $0.00 per share (both basic and diluted) for corresponding
prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net increase in cash and cash equivalents for
the six-month period ended June 30, 1999 of $525,000. Operating activities
provided cash of $1,852,000 during the six-month period ended June 30, 1999 and
is primarily a result of increased sales of used transportation equipment
inventory, an increase in deferred revenue associated with the addition to the
Company's portfolio of certain equipment acquired in connection with the
purchase of several equipment lease portfolios, and offset by increases in
accounts receivables. Investing activities used cash of $4,294,000 during the
six-month period ended June 30, 1999 and is primarily a result of the
acquisition of a portfolio of operating leases valued at approximately
$1,977,000 and $4,328,000 related to the acquisition of distribution rights of
vehicles manufactured by Afinta Motor Corporation (Pty) Ltd. ("AMC"). As of the
six-month period ended June 30, 1999, the acquisition of the distribution rights
was partially offset by a $2,645,000 decrease in deferred finance and
acquisition costs. Financing activities provided cash of $2,967,000 during the
six-month period ended June 30, 1999 and is primarily the result of the exercise
of a Stock Purchase Warrant for an aggregate of Ten Million (10,000,000) shares
of the Common Stock, $.01 par value, of the Company at the exercise price of
$.20 per share by Vestex Capital Corporation, the Company's majority
shareholder. Additionally, the Company incurred a net increase in recourse debt
of approximately $2,511,000 primarily as a result of a loan from a financing
institution. Cash and cash equivalents were $1,169,000 at June 30, 1999 as
compared to $644,000 at December 31, 1998, an increase of $525,000 or 81.5%.
8
<PAGE>
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 to secure
repayment of the Loan. The Loan is secured by all of the Equipment and the
lease contracts specifically associated with this transaction.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor plan used
transportation equipment inventory. The balance outstanding under this
revolving line of credit agreement is approximately $6,393,000 as of June 30,
1999. In addition, during 1998, CAM entered into a special purpose financing
agreement with the same institution to floor plan additional used transportation
equipment inventory in the approximate amount of $4,500,000. The balance
outstanding under this special purpose financing agreement is approximately
$1,877,000 as of June 30, 1999.
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 to 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, retailing and wholesaling of equipment has played and
will continue to play a vital role in the Company's operating activities. In
connection with the sale of lease transactions to investors, the Company
typically is entitled to share in a portion of the residual value realized upon
remarketing. Successful remarketing of the equipment is essential to the
realization of the Company's interest in the residual value of its managed
portfolio. It is also essential to the Company's ability to recover its
original investment in the equipment in its own portfolios and to recognize a
return on that investment. The Company has found that its ability to remarket
equipment is affected by a number of factors. The original equipment
specifications, current market conditions, technological changes, and condition
of the equipment upon its return all influence the price for which the equipment
can be sold or re-leased.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further capitalize upon its
remarketing expertise by continuing to develop its ability to sell remarketing
services to other lessors, fleet owners, and lessees. The Company plans also to
create a dealer capability under which the Company would buy and resell fleet
equipment. The Company anticipates expanding its used transportation equipment
retail and wholesale capabilities through the addition of retail centers
geographically through internal growth and acquisitions. The Company's retail
and wholesale capabilities have been greatly improved through CAM's strategic
acquisition of Tomahawk. This improved capability will be used as a competitive
advantage that will enable the Company to provide a "total holding cost" concept
when competing for new lease origination deals. The Company's retail and
wholesale business unit will provide improved outlets for other lessors,
financial institutions, and fleet owners to dispose of used transportation
equipment and sources of quality used transportation equipment for fleet owners
and owner-operators. The Company will also aggressively promote its Internet
capabilities to further promote its business activities and as an e-commerce
tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. As of June 30, 1999, the Company had funded
approximately $400,000 and is obligated to provide additional funding in the
approximate amount of $600,000. The Company has additionally invested
approximately $1,475,000 into one of NAOF's portfolio investee companies.
Subsequent to June 30, 1999, the Company formalized a strategic
investment/alliance with a South African manufacturer and New Africa Opportunity
Fund "NAOF" whereby a series of preferred stock of Chancellor Corporation may be
issued in exchange for a minority interest in the South African company.
9
<PAGE>
The Company's renewal or replacement of expired lines, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse and
non-recourse), anticipated long-term financing of individual significant lease
transactions, and its estimated cash flows from operations are anticipated to
provide adequate capital to fund the Company's operations for the next twelve
months. Although no assurances can be given, the Company expects to be able to
renew or timely replace expired lines of credit, to expand currently existing
lines for inventory floor planning, to continue to have access to the public and
private securities markets, both debt and equity, and to be able to enter into
new lines of credit and individual financing transactions.
The Company is in the final stages of negotiation with several significant
financial institutions, whereby the Company could potentially gain access to
substantial funding which would enable the Company to accelerate the
redevelopment of its lease origination business.
IMPACT OF THE YEAR 2000 ISSUE
The Company has commenced efforts to assess and where required, remediate,
issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues
arise from computer programs which use only two digits to refer to the year and
which may experience problems when the two digits become "00" in the year 2000.
In addition, imbedded hardware microprocessors may contain time and two-digit
year fields in executing their functions. Much literature has been devoted to
the possible effects such programs may experience in the Year 2000, although
significant uncertainty exists as to the scope and effect the Y2K issues will
have on industry and the Company.
The Company has recognized the need to address the Y2K issue in a
comprehensive and systematic manner and has taken steps to assess the possible
Y2K impact on the Company. Although the Company has not completed a 100%
assessment of all its information technology ("IT") and non-IT systems for Y2K
issues, the Company has completed its assessment of all mission-critical
systems. All mission-critical systems and most of the major applications and
hardware have been assessed to determine the Y2K impact and a plan is in place
for timely resolution of potential issues.
In 1998, the Company developed a strategic plan to identify the IT systems
needed to accomplish the Company's overall growth plans. As part of this
process, Y2K issues were considered and addressed by the Company's senior
management and MIS personnel. Although this plan was intended to modernize the
IT systems, compliance with Y2K requirements were incorporated.
The cost of bringing the Company in full compliance should not result in a
material increase in the recent levels of capital spending or any material
one-time expenses. The Company has spent approximately $160,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending approximately $200,000 during fiscal 1999 to complete the
modernization of its IT system.
The failure of either the Company, its vendors or clients to correct the
systems affected by Y2K issues could result in a disruption or interruption of
business operations. The Company uses computer programs and systems in a vast
array of its operations to collect, assimilate and analyze data. Failure of
such programs and systems could affect the Company's ability to track assets
under lease and properly bill. Although the Company does not believe that any
of the foregoing worst-case scenarios will occur, there can be no assurance that
unexpected Y2K problems of the Company's and its vendors' and customer's
operations will not have a material adverse effect on the Company.
10
<PAGE>
While it is difficult to classify our state of readiness, we believe that
our internal plans should have the Company ready by the end of 1999 to avoid any
material Y2K issues. We are in the process of completing the assessment,
testing systems and developing contingency plans. Management is in constant
communication with its IT personnel and has made and will continue to make
reports to the Company's Board of Directors.
The preceding discussion contains forward looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also subject
to protection under the Year 2000 Information and Readiness Disclosure Act of
1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein. Actual results may differ materially from such
projected information due to changes in the underlying assumptions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-QSB contains certain "Forward-Looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or the Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introduction and acceptance, technology changes and changes in industry
conditions. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 1999, the Board of Directors caused to be distributed to
stockholders of record as of April 23, 1999, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for the Annual Meeting held on June 25,
1999. As of the record date, 43,365,536 shares of Common Stock and 5,000,000
shares of Series AA Preferred Stock were entitled to vote. For all matters
presented, the Common Stock and Series AA Preferred Stock voted as a single
class.
At the meeting, the stockholders acted upon the following proposals: (i) to
elect three (3) directors to hold office until their successors shall be elected
and shall have qualified; (ii) to approve an amendment to the Company's By-laws
to make certain changes to improve the efficiency of the operation of the
Company by the Board of Directors and to afford the Board greater latitude and
flexibility in the management of the Company; (iii) to approve an amendment to
the Company's 1997 Stock Option Plan increasing the number of shares reserved
under the plan from 4,000,000 to 7,500,000; and (iv) to ratify the selection by
the Board of Directors of Metcalf, Rice, Fricke and Davis as the Company's
independent public accountants for fiscal 1999. All of the above matters were
approved by the stockholders.
Votes "For" represent affirmative votes and do not represent abstentions or
broker non-votes. In cases where a signed proxy was submitted without
direction, the shares represented by the proxy were voted "For" each proposal in
the manner disclosed in the Proxy Statement and Proxy. The voting results were
as follows:
<TABLE>
<CAPTION>
Proposal No. 1: Election of Directors:
Director Nominee For % Withheld %
---------- ------ --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
M. Rea Brookings 41,400,922 99.99% 4,383 0.01%
Rudolph Peselman 39,565,922 95.56% 1,839,383 4.44%
Franklyn E. Churchill 41,400,922 99.99% 4,383 0.01%
Proposal No. 2: Approval of an Amendment to the Company's By-Laws
For % Against % Abstain %
---------- ------ --------- ----- --------- -----
39,486,969 95.37% 83,873 0.20% 1,834,463 4.43%
---------- ------ --------- ----- --------- -----
12
<PAGE>
Proposal No. 3: Approval of an Amendment to the 1997 Stock Option Plan
For % Against % Abstain %
---------- ------ --------- ----- --------- -----
41,279,163 99.70% 124,616 0.30% 1,526 0.00%
---------- ------ --------- ----- --------- -----
Proposal No. 4: Ratification of Auditors
For % Against % Abstain %
---------- ------ --------- ----- --------- -----
41,304,100 99.76% 45,862 0.11% 55,343 0.13%
---------- ------ --------- ----- --------- -----
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(ii) By-laws of the Company, as amended by the Board of Directors
of the Company in April 1999, and approved by the
Stockholders of the Company on June 25, 1999 (incorporated
by reference to Exhibit A to the Company's Proxy Statement
dated May 7, 1999 on Form DEF 14A).
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR
CORPORATION FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
27 Financial Data Schedule for period ended June 30, 1999.
(b) Reports on Form 8-K:
1.) Current Report on Form 8-K, dated February 10, 1999.
2.) Current Report on Form 8-K, dated March 4, 1999.
3.) Current Report on Form 8-K/A, dated March 22, 1999.
4.) Current Report on Form 8-K/A, dated April 13, 1999.
5.) Current Report on Form 8-K/A, dated July 9, 1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
/s/ Brian M. Adley
---------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
/s/ Franklyn E. Churchill
----------------------------
Franklyn E. Churchill
President, Chief Operating Officer
and Director
/s/ Jonathan C. Ezrin
------------------------
Jonathan C. Ezrin
Corporate Controller
(Principle Accounting Officer)
Date: August 13, 1999
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1169
<SECURITIES> 0
<RECEIVABLES> 6027
<ALLOWANCES> 0
<INVENTORY> 10389
<CURRENT-ASSETS> 0
<PP&E> 2418
<DEPRECIATION> (1463)
<TOTAL-ASSETS> 36052
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 533
0
50
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36052
<SALES> 15834
<TOTAL-REVENUES> 15834
<CGS> 11500
<TOTAL-COSTS> 15271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262
<INCOME-PRETAX> 563
<INCOME-TAX> 14
<INCOME-CONTINUING> 549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
