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, 1998
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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
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Chancellor Corporation
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(Exact name of Small Business Issuer in its Charter)
Massachusetts 04-2626079
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 South Street, Boston, Massachusetts 02111
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(Address of principal executive offices) Zip Code
Issuer's telephone number, including area code (617) 368-2700
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of Class)
Check mark 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 [ ]
Check if there is no disclosure of delinquent filers pursuant in response to
Item 405 of Regulation S-B is not 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, 1998 were approximately
$29,639,000.
As of April 13, 1999, 43,226,395 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 registrant as of April 13, 1999 was approximately
$9,332,000. Aggregate market value of the total voting stock of the registrant
as of April 13, 1999 was approximately $28,367,000.
DOCUMENTS INCORPORATED BY REFERENCE
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Proxy Statement for the Annual Meeting of Stockholders to be held at 2:00 p.m.
on June 25, 1999 at the offices of Bingham Dana, LLP, 150 Federal Street,
Boston, MA 02109 - Part III
<PAGE>
21.
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
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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 transportation 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 1998 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 1997, the Company incurred cumulative losses in
excess of $56 million. The Company recorded a loss of $1,802,000 during fiscal
1997. The decline through 1996 led the Company to the development and
implementation of a restructuring and transition plan. This plan was developed
and implemented under the direction of Vestex, the Company's majority
shareholder. The continued, but decreasing, loss in 1997 was due primarily to
the lack of sufficient cash flow to add new leases to the Company's own lease
portfolio and continued costs that occurred in the first half of 1997 in
connection with the Company's restructuring efforts. For the year ended
December 31, 1998, the Company recorded a profit of $850,000, the first year of
profitability since 1988. The Company's return to profitability in 1998
reflects the culmination of new management's efforts and strategies to maximize
remarketing of off lease equipment and fully implement its strategy to expand
its operations to retail and wholesale used transportation equipment. The
Company continues to develop and implement innovative financing and fleet
management programs in the transportation equipment finance industry to further
the Company's continued growth.
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement, dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk
Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively
"Tomahawk"). The Management Agreement provided CAM with effective control of
Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of
the outstanding capital stock of Tomahawk from the two (2) sole shareholders
(the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the
"Agreement") dated January 29, 1999.
Tomahawk is engaged in a similar line of business as CAM. Tomahawk retails and
wholesales used transportation equipment, primarily tractors and trailers.
Tomahawk operates five (5) retail centers in Conley, Georgia; Richmond,
Virginia; Pompano Beach, Florida; Orlando, Florida; and Kansas City, Missouri.
Tomahawk also operates its wholesale division from the Conley, Georgia facility.
Tomahawk will operate as a wholly owned subsidiary of the Company, coordinating
many operations with the Company to achieve operating efficiencies and
synergies.
The purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of
Chancellor (valued at $.96 per share) and future cash consideration pursuant to
an earn-out (the "Earn-Out") as provided for in the Agreement. The Earn-Out
provides that each of the Selling Shareholders will be paid an amount equal to
seven and one-half percent (7.5%) of the Adjusted Pre-Tax Earnings of Tomahawk.
The Earn-Out, which is paid on a quarterly basis, begins in the fiscal year
ended December 31, 1999 and ends in the fiscal year ended December 31, 2004. In
connection with this Agreement, CAM loaned the Selling Shareholders a total of
$500,000 pursuant to certain promissory notes payable that are payable in full
on January 29, 2004.
The Agreement also: i) nominates one of the Selling Shareholders as a director
of Chancellor's Board of Directors; ii) elects both of the Selling Shareholders
as directors of CAM's Board of Directors; iii) provides for Employment
Agreements for the Selling Shareholders over a period of five years with base
salaries of $200,000 per annum; iv) prohibits the Selling Shareholders from
competing against CAM or Tomahawk, or soliciting former employees and customers
of Tomahawk; v) provides for Tomahawk to lease from the Selling Shareholders the
Conley, Georgia facility at fair market value rents of approximately $8,500 per
month; and vi) provides CAM an option to purchase from the Selling Shareholders
the Conley, Georgia facility for an amount not to exceed $950,000.
This transaction has been recorded in accordance with the purchase method of
accounting. As a result of the effect on the transaction of the Management
Agreement, the designated date of this transaction for accounting purposes is
August 1, 1998. In connection with this transaction, CAM assumed liabilities of
approximately $6,414,000 and incurred acquisition costs of approximately
$3,405,000. The excess of the purchase price over net assets of approximately
$7,695,000 has been recorded in intangibles. Approximately $154,000 of
intangibles has been amortized as of December 31, 1998.
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, 1998, the Company had funded
approximately $350,000 and is obligated to provide additional funding in the
approximate amount of $650,000. The Company has additionally invested
approximately $1,340,000 into one of NAOF's investee companies. The Company
continues to negotiate further strategic opportunities with this investee
company.
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. The Company has recorded approximately
$1,498,000 and $994,000 of cost recoveries in the years ended December 31, 1998
and 1997, respectively. For periods prior to 1997, $1,868,000 was recovered.
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.
The ability of the Company to profitably operate its lease origination business
unit in the future will depend largely on the amount of new capital available to
the Company and the cost of that capital. In addition, the success of the
Company's remarketing, retailing and wholesaling of used transportation
equipment will result, in part, from its ability to locate sources of quality
used transportation equipment and expansion of its distribution channel through
siting of new retail facilities. 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
also utilizes an expansive database of over 75,000 sources and customers of used
transportation equipment and the Company's database of over 2,000 Fortune 1000
and middle market customers to provide both sources of quality used
transportation equipment and end user customers. This effort is on-going and
includes a fully staffed telemarketing group to continually upgrade and add new
sources and users of transportation equipment. Additionally, the Company's
management has established a retail facility expansion program through the
investigates of potential new sites that can be developed internally as well as
acquisition candidates. The Company intends on investing any new capital that
it obtains in leases for its own portfolios (if practical), expansion of its
remarketing and retail/wholesale operations, and other business operations.
Description of Business
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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.
The Company leases equipment to lessees in diverse industries throughout the
United States. 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.
During 1998, the Company continued its lease originating activities, including
brokering of several new lease transactions. The Company also transacted
several significant buyouts of portfolios held by certain trust investors.
During 1998, 31% (based on original equipment cost) of the new lease
transactions originated by the Company were with the one largest lessee. In
addition, approximately 40% and 31% (based on original equipment cost) of
equipment sold to investors in 1998 were purchased by the two largest investors.
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.
Equipment Acquisition. The Company acquired $5.5 million of equipment under 40
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leases during 1998. The Company acquired $214,000 of equipment under 4 leases
during 1997. Additionally, the Company acquired 10 existing leases in
connection with the prepayment of the intercreditor loan in 1997.
Equipment Disposition. In 1998, the Company disposed of $6.8 million of
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portfolio equipment (measured by its original cost) on operating leases and
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disposed of $139,000 on direct finance leases, reducing the total equipment (net
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of depreciation, pay-down and write-downs) on operating leases and direct
finance leases to $702,000 and $359,000, respectively. 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.
Remarketing Activities
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The remarketing of equipment plays a vital role in the operations of the
Company. The Company's remarketing efforts are directed through Chancellor
Asset Management, Inc. ("CAM"), the Company's wholly owned subsidiary. The
remarketing effort has been further strengthened through the increased retail
and wholesale capabilities provided as a result of CAM's acquisition of
Tomahawk.
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. This strategy has been enhanced as a result of
the CAM's acquisition of Tomahawk. 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, wholesale, 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 centers located in Elizabeth, New
Jersey; Conley, Georgia; Pompano Beach and Orlando, Florida; Richmond, Virginia;
and Kansas City, Missouri. Additionally, the Company uses indirect retail sales
centers in California, Florida, Georgia, Illinois and Texas.
Retail and Wholesale Activities
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As previously mentioned, CAM acquired Tomahawk for purposes of enhancing its
remarketing of used transportation equipment. The acquisition of Tomahawk
provides the Company with five additional retail centers in Conley, Georgia;
Pompano Beach and Orlando, Florida; Richmond, Virginia; and Kansas City,
Missouri, in addition to its previously existing location in Elizabeth, New
Jersey. Tomahawk also provides additional wholesale opportunities from its
Conley, Georgia headquarters. The Company derives significant revenues from the
retail and wholesale of used transportation equipment through CAM's Tomahawk
business unit. In addition, the Company's ability to utilize retail pricing to
establish residual values on lease transactions will provide the Company with a
competitive advantage in its ability to originate lease transactions. The
Company's business plan provides for further expansion of its retail centers
throughout the domestic marketplace. CAM maintains an extensive database of
used equipment sources and customers and continually updates this information
through a fully staffed telemarketing group.
Equity Syndications
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The Company sold certain 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 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. The Company sold
approximately $3 million of equipment to private investors during 1997. There
were no sales of equipment using grantor trusts in 1998. Although the Company
will continue its efforts to syndicate lease transactions, it does not envision
the use of grantor trusts in future transactions.
Competition
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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. Additionally, the Company's ability to provide
in-house retail and wholesale distribution channels provides advantages in
establishing pricing for lease origination transactions and inmproving overal
fleet management and total holding costs for the customer.
The equipment leasing business, on a global basis, is a highly competitive,
fragmented marketplace with thousands of competitors. The Company has
identified emerging markets such as Russia, the Commonwealth of Independent
States, 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, that the Company will continue to
explore as resources and opportunities permit. 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 increase profitability, increase market share, and
create growth opportunities by expanding its core business through servicing
middle market clients, expanding its used transportation equipment retail and
wholesale distribution channel, expanding into new transportation and equipment
markets and seeking strategic financial partnerships and joint ventures
domestically and internationally.
Historically, the Company focused its efforts on Fortune 100 companies. The
Company implemented a plan to broaden the focus of its transportation equipment
and remarketing expertise by expanding the number of customers within its target
market. The Company will broaden its scope of lease origination activities to
include middle market clients with a variety of transportation equipment
requirements. The strategic decision to target middle market origination
activities 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.
The Company enjoys a reputation as one of the premier transportation
equipment remarketers in the industry. To expand upon this position and
capitalize on the opportunity to offer used transportation equipment in this
highly fragmented, yet lucrative industry, the Company, through CAM, acquired
Tomahawk. In connection with this acquisition, the Company has available six
(6) retail centers to directly remarket used transportation equipment in the
northeast and southeast US. This also provides a stable foundation upon which
to implement further expansion to the west and midwest US. The Company believes
there is a significant opportunity to offer lease and rental companies, finance
companies, utilities, municipalities, and transportation companies an outlet for
their used equipment other than the traditional low-end auction channels.
The Company also 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 made investments with certain parties that both invest in and
operate companies in the Republic of South Africa ("RSA"), the Kingdom of
Swaziland and other sub-Saharan countries. The Company continues to evaluate
the potential for providing additional financial services in the RSA as a result
of the strategic alliances established.
Business Expansion
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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 completed 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 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. As a
result of this merger and acquisition strategy, the Company identified Tomahawk
in 1998 as a candidate meeting the Company's strategic directives. The
acquisition of Tomahawk provided the Company an opportunity to enhance its lease
origination and remarketing capabilities. The Company continues to seek
opportunities such as Tomahawk, that will be accretive to the Company's business
strategy. 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 Year 2000 Disclosure
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The Company is in the process of implementing a new Management Information
System (MIS) 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 enhancement of the current MIS system, attention is being 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.
Year 2000 Disclosure
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 $152,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending of approximately $300,000 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.
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.
In 1998 the Company made several improvements to its Internet presence
(http://www.chancellorcorp.com) as part of the Company's strategy to further
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incorporate technology into its marketing and customer service initiatives. The
Company's goal for 1999 is to create a simple, well-designed and useful Internet
destination by redesigning the site and expanding content to improve its
usefulness as a business resource for customers and an informational tool for
investors.
In February 1999, Chancellor added on-line small ticket lease applications
to its Internet presence to increase availability of applications for the
Company's Small Business Solutions program offered by its Long River Capital
subsidiary. By the end of the second quarter of 1999, the Company plans to
launch a comprehensive upgrade to its Internet site designed to be more user
friendly. In addition to online lease application forms for small businesses,
the new Chancellor site will showcase the Company's truck and trailer inventory
available through its Tomahawk subsidiary, provide online and downloadable lease
applications for fleet managers, and improve the quality and quantity of
corporate and financial information tailored for the investment community.
Market Opportunities
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Through implementation of a strategy allowing for penetration of middle market,
as well as Fortune 100 customers, the Company will broaden its target market to
a less 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.
The used transportation equipment market also presents one of the most
fragmented and lucrative markets available. Dominated by local dealers and
manufacturer remarketers, the used transportation equipment market presents
Chancellor an opportunity for consolidation in this industry. The Company's
management believes that a significant opportunity exists to offer lease and
rental companies, finance companies, utilities, municipalities, and
transportation companies a retail outlet for their used equipment as opposed to
the current wholesale and auction outlets currently used.
The Company also views its efforts to be a global originator/remarketer of
transportation and non-transportation equipment as an important element to its
corporate growth strategy. The additional international revenue streams, where
margins are significantly higher than the domestic market, will help facilitate
the Company's goal of increasing 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.
Additionally, the Company has made significant progress in establishing a
presence in the Republic of South Africa ("RSA") as a 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.
<PAGE>
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, with a satellite office located in New York City, New
York. In addition, the Company maintains retail used transportation equipment
centers in Conley, Georgia; Pompano Beach, Florida; Orlando, Florida; Richmond,
Virginia; Kansas City, Missouri; and Elizabeth, New Jersey. A direct sales
staff and telemarketing program supports 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 April 13, 1999, the Company employed approximately 90 persons on a
full time basis.
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 three and a half years remaining in the term, and with a base
rent, as of December 31, 1998, of approximately $11,000 per month. The Boston,
Massachusetts facility adequately provides for present and future needs, as
currently planned.
The Company also leases six retail centers located in Conley, Georgia; Pompano
Beach, Florida; Orlando, Florida; Richmond, Virginia; Kansas City, Missouri; and
Elizabeth, New Jersey. These locations are utilized for the storage, display,
and selling of used transportation equipment. In addition, the Conley, Georgia
facility is utilized for the administrative and marketing operations of the
Company's retail and wholesale operations. These facilities are leased under
non-cancelable arrangements with remaining terms ranging from one to five years.
The aggregate monthly rent of these facilities as of December 31, 1998 is
approximately $34,000. Furthermore, the Conley, Georgia facility is owned by
the former stockholders of M.R.B., Inc. d/b/a Tomahawk Truck and Trailer Sales.
The monthly rent is $8,500 pursuant to a five year non-cancelable lease
agreement. This lease agreement also provides an option to purchase the
property from the former stockholders.
ITEM 3. LEGAL PROCEEDINGS
- - ------- ------------------
The Company is involved in the following legal proceedings:
The Company was named as a defendant along with the Chairman of the Board
and an affiliate, of the Chairman in a suit brought by Ernest Rolls, the former
Vice-Chairman, on February 5, 1998. The suit 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 filed a counterclaim against Mr. Rolls in
May, 1998.
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 were 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.
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.
<TABLE>
<CAPTION>
1999 High Low
- - ---- -------------------------------------- -----
<C> <S> <C> <C>
First quarter (through March 30, 1999) $ .93 $.43
1998
- - ----
Fourth quarter .88 .50
Third quarter 1.34 .24
Second quarter .37 .16
First quarter .44 .27
1997
- - ----
Fourth quarter .44 .15
Third quarter .18 .10
Second quarter .15 .09
First quarter .10 .04
</TABLE>
On April 13, 1999, there were approximately 510 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.
<PAGE>
- - ------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------- -------------------------------------------------------------------
RESULTS OF OPERATIONS
- - -----------------------
Results of Operations
- - -----------------------
Year Ended December 31, 1998 vs. December 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 was
$29,639,000 as compared to $4,433,000 for the prior year, an increase of
$25,206,000 or 568.6%. For the year ended December 31, 1998, transportation
equipment sales were $25,096,000 as compared to no sales for the corresponding
prior year. This significant revenue stream is attributable in part to a major
purchase and sale of equipment from the buy-out of a trust portfolio resulting
in approximately $5,647,000 of revenues recorded. More importantly, the
acquisition of the Company's Tomahawk subsidiary provided approximately
$18,930,000 of revenues from the sale of used transportation equipment through
both its retail and wholesale distribution channels. Through Tomahawk, the
Company will continue to expand its retail centers geographically. The Company
will also utilize the competitive advantage provided by its access to retail
pricing for residual values to aid in the ability to improve competitiveness
within the Company's lease origination business unit. For the year ended
December 31, 1998, rental income increased by $72,000 or 8.3% as compared to the
prior year. The increase in rental income is attributable primarily to the
addition of certain equipment acquired in connection with the purchase of
several leases from the trust portfolio. For the year ended December 31, 1998,
lease underwriting income decreased by $219,000 or 74.7% as compared to the
prior year. Lease underwriting income decreased due to a higher concentration
of broker related activity that results in a lower overall revenue stream. The
Company does, however, continue its lease origination rebuilding process through
the addition of key senior management and sales personnel, and development of
strategic alliances to provide future growth in this area. For the year ended
December 31, 1998, direct finance lease income decreased by $162,000 or 59.6%,
as compared to the prior year. The decrease in direct finance lease income is
attributable primarily to the lack of additions to its portfolio of direct
finance leases in 1998 as compared to the addition of 10 leases in 1997. For
the year ended December 31, 1998, gains from portfolio remarketing increased by
$573,000 or 71.5% as compared to the prior year. The increase in gains from
portfolio remarketing is attributable to the increase in sales of portfolio
assets during the year ended December 31, 1998 as compared to the prior year.
For the year ended December 31, 1998, fees from remarketing activities decreased
slightly by $81,000 or 5.4% as compared to the prior year. This decrease is
attributable, in part, to management's efforts to increase the level of activity
in the sales of used transportation equipment through its newly acquired
Tomahawk retail and wholesale distribution channel. For the year ended December
31, 1998, other income decreased by $224,000 or 33.7% as compared to the
corresponding prior year period. The decrease is attributable in part to the
inclusion of certain consulting fees earned in 1997 that were not recurring in
1998.
Costs and Expenses. Total costs and expenses for the year ended December
31, 1998 was $28,789,000 as compared to $7,152,000 for the prior year, an
increase of $21,637,000 or 302.5%. The significant increase is primarily a
result of the costs associated with sales of transportation equipment. The cost
of transportation equipment sales was $21,731,000 for the year ended December
31, 1998 and resulted in an overall gross margin of 13.4%. Selling, general and
administrative expenses for the year ended December 31, 1998 was $6,054,000 as
compared to $6,412,000 for the corresponding prior year, a decrease of $358,000
or 5.6%. For the year ended December 31, 1998, selling, general and
administrative expenses included recovered reimbursable trust administration
costs of $1,498,000 as compared to $405,000 for the corresponding prior year.
Approximately $2,441,000 of selling, general and administrative expenses for the
year ended December 31, 1998 is a result of expenses incurred by normal
operations of the Company's Tomahawk subsidiary 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 Tomahawk
expenses, selling, general and administrative expenses decreased to $5,145,000
for the year ended December 31, 1998 as compared to $6,007,000 for the
corresponding prior year, a decrease of $862,000 or 14.3%. The decrease in
selling, general and administrative expenses reflects the success of
management's cost containment and stabilization efforts that were finalized in
1997. Management believes it has successfully implemented its cost containment
and stabilization 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.
<PAGE>
Interest expense for the year ended December 31, 1998 was $343,000 as compared
to $281,000 for the prior year, an increase of $62,000 or 22.1%. This increase
is primarily a result of increased interest expense associated with Tomahawk's
revolving credit line with a financial institution utilized for inventory floor
planning.
Depreciation and amortization expense for the year ended December 31, 1998
was $661,000 as compared to $459,000 for the prior year, an increase of $202,000
or 44.0%. The increase is primarily due to the amortization of intangible
assets associated with the acquisition of Tomahawk.
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
debt on the repayment date was $1,906,000, of which approximately $976,000 was
paid in cash and the balance of $930,000 was forgiven. In addition, the Company
paid approximately $22,000 in legal and bank fees to complete this transaction.
Net Income. Net income for the year ended December 31, 1998 was $850,000
as compared to a net loss of $1,802,000 for the prior year, an increase of
$2,652,000 or 147.2%. The increase in net income is primarily 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 (basic
and diluted) for the year ended December 31, 1998 was $0.02 per share as
compared to a $0.12 net loss per share for the prior year, an increase of $0.14
cents per share. The increase is due primarily to the marked increase in
overall net income resulting from significant revenue growth and recovery of
reimbursable trust administration expenses.
Liquidity and Capital Resources
- - ----------------------------------
The Company recognized a net increase in cash and cash equivalents for the
year ended December 31, 1998 of $547,00. Operating activities used cash of
$5,264,000 during the year ended December 31, 1998 and is primarily a result of
the build-up of used transportation equipment inventory at the Company's newly
acquired Tomahawk subsidiary. Investing activities used cash of $4,523,000
during the year ended December 31, 1998 and is primarily a result of investments
in South Africa, costs associated with acquisition activities, and costs
associated with recovery of reimbursable trust administration expenses.
Financing activities provided cash of $10,334,000 during the year ended December
31, 1998 and is primarily a result of borrowings on a revolving line of credit
used for inventory floor planning purposes and increases in recourse debt
provided by the VCC, the Company's majority stockholder. Cash and cash
equivalents amounted to $644,000 at December 31, 1998 as compared to $97,000 at
December 31, 1997, an increase of $547,000 or 563.9%.
The Company is provided investment banking and consulting services by an
affiliate of the Company's majority stockholder, Vestex Capital Corporation
("VCC"), pursuant to a consulting agreement approved by the shareholders at the
1995 Annual Meeting of the Stockholders, as amended in July 1998. VCC provides
specified services including, but not limited to, general business consulting,
the development and implementation of the Company's 1997 transition and
turnaround strategies, development of domestic and international business
opportunities and growth strategies, identification and development of strategic
alliances, support of merger and acquisition activity, debt and equity raising
efforts, and other financing activity. Fees related to debt and equity
transactions are up to 3.0% and 7.5%, respectively, of the amount of financing
raised in addition to related expenses. VCC also provides services to the
Company on operational and other matters for which it is compensated at levels
negotiated with the Company.
During 1998, VCC investigated numerous strategic alliances and merger and
acquisition opportunities on behalf of the Company. In connection with this
activity, VCC was instrumental in the negotiation and consummation of the Lease
Servicing Agreement entered into on November 1, 1998 among Chancellor Leasing
Services, Riviera Finance - East Bay and United Capital and Finance LLC.
Additionally, VCC identified, negotiated and closed the acquisition of MRB, Inc.
d/b/a Tomahawk Truck and Trailer Sales ("Tomahawk"), a used transportation
equipment retailer and wholesaler that recorded approximately $39,000,000 in
revenue for the 12 month period ended December 31, 1998. VCC facilitated
approximately $3,500,000 in equity and cash financing in connection with the
Tomahawk acquisition. VCC continues to negotiate and manage the Company's
financing, acquisition and investment efforts in the Republic of South Africa
and other international opportunities. VCC was instrumental in the development
and implementation of the strategy to buy-out and acquire investment grade
transportation equipment portfolios. As a result of this strategy, the Company
acquired portfolios valued at an original equipment cost of approximately
$22,000,000. The acquisition of these portfolios was further facilitated by VCC
assisting in arranging approximately $8,000,000 of financing to effect the
portfolio buy-out. VCC was also instrumental in recruiting and attracting key
employees to the Company. Additionally, VCC provided these key employees
warrants to purchase Chancellor common stock, beneficially owned by VCC and
valued at approximately $4,500,000. Certain of these key employees were also
issued an additional 500,000 shares of the Company's stock from VCC's beneficial
holdings. VCC's activities provided sources of funding to the Company of
approximately $6,500,000, and $300,000 for fees for services and reimbursable
expenses, respectively, converted into debt and equity instruments of the
Company. This included the purchase of 1,946,146 shares of the Company's common
stock at a price of $.69 per share. Additionally, VCC infused approximately
$1,200,000 of cash into or on behalf of the Company during 1998. As a result,
in part, of VCC's activities and services provided, the Company's net worth
increased to $7,007,000 at December 31, 1998 from $227,000 as of December 31,
1997 and from an approximate $2,550,000 negative net worth as of December 31,
1996.
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement, dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk
Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively
"Tomahawk"). The Management Agreement provided CAM with effective control of
Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of
the outstanding capital stock of Tomahawk from the two (2) sole shareholders
(the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the
"Agreement") dated January 29, 1999.
Tomahawk is engaged in a similar line of business as the CAM. Tomahawk retails
and wholesales used transportation equipment, primarily tractors and trailers.
Tomahawk operates five (5) retail centers in Conley, Georgia; Richmond,
Virginia; Pompano Beach, Florida; Orlando, Florida; and Kansas City, Missouri.
Tomahawk also operates its wholesale division from the Conley, Georgia facility.
Tomahawk will operate as a wholly owned subsidiary of the Company, coordinating
many operations with the Company to achieve operating efficiencies and
synergies.
The purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of
Chancellor (valued at $.96 per share) and future cash consideration pursuant to
an earn-out (the "Earn-Out") as provided for in the Agreement. The Earn-Out
provides that each of the Selling Shareholders will be paid an amount equal to
seven and one-half percent (7.5%) of the Adjusted Pre-Tax Earnings of Tomahawk.
The Earn-Out, which is paid on a quarterly basis, begins in the fiscal year
ended December 31, 1999 and ends in the fiscal year ended December 31, 2004. In
connection with this Agreement, CAM loaned the Selling Shareholders a total of
$500,000 pursuant to certain promissory notes payable that are payable in full
on January 29, 2004.
The Agreement also: i) nominates one of the Selling Shareholders as a director
of Chancellor's Board of Directors; ii) elects both of the Selling Shareholders
as directors of CAM's Board of Directors; iii) provides for Employment
Agreements for the Selling Shareholders over a period of five years with base
salaries of $200,000 per annum; iv) prohibits the Selling Shareholders from
competing against CAM or Tomahawk, or soliciting former employees and customers
of Tomahawk; v) provides for Tomahawk to lease from the Selling Shareholders the
Conley, Georgia facility at fair market value rents of approximately $8,500 per
month; and vi) provides CAM an option to purchase from the Selling Shareholders
the Conley, Georgia facility for an amount not to exceed $950,000.
This transaction has been recorded in accordance with the purchase method of
accounting. As a result of the effect on the transaction of the Management
Agreement, the designated date of this transaction for accounting purposes is
August 1, 1998. In connection with this transaction, CAM assumed liabilities of
approximately $6,414,000 and incurred acquisition costs of approximately
$3,405,000. The excess of the purchase price over net assets of approximately
$7,695,000 has been recorded in intangibles. Approximately $154,000 of
intangibles has been amortized as of December 31, 1998. Results of operations
of Tomahawk after the acquisition date are included in the 1998 Consolidated
Statement of Operations.
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. The Company has
recorded approximately $1,498,000 and $994,000 of cost recoveries in the years
ended December 31, 1998 and 1997, respectively. For periods prior to 1997,
$1,868,000 was recovered. 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.
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, 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. 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, retailing and
wholesaling capabilities and believes that this business unit 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 will also expand its used transportation equipment
retail and wholesale capabilities through addition of retail centers through
internal growth and acquisitions. The Company's retail and wholesale
capabilities have been greatly improved through its 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 both provide an improved outlet for other lessors, financial institutions,
and fleet owners to dispose of used transportation equipment and a source of
quality used transportation equipment for fleet owners and owner-operator. 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 December 31, 1998, the Company had funded
approximately $350,000 and is obligated to provide additional funding in the
approximate amount of $650,000. The Company has additionally invested
approximately $1,340,000 into one of NAOF's investee companies. The Company
continues to negotiate further strategic opportunities with this investee
company.
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 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.
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.
Recent Accounting Pronouncements
- - ----------------------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes
standards for reporting comprehensive income and its components. The
implementation of this SFAS has no material effect on the Company's consolidated
financial statements.
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information", requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or the financial position of the Company
but did affect the disclosure of segment information.
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 $152,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending of approximately $300,000 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.
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.
<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
Independendent Auditors' Report F-2
Consolidated Balance Sheet as of
December 31, 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders
Equity for the years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
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
- - ----------------------
On February 25, 1999, our Audit Committee and Board of Directors
approved the dismissal of our independent accountants, Reznick Fedder &
Silverman, P.C. ("Reznick Fedder"). We provided Reznick Fedder with the reasons
for the dismissal in a letter on March 4, 1999. The reasons include, but are
not limited to: (i) disagreements on fees billed by Reznick Fedder for
services, including, but not limited to, due diligence and business advisory
services in connection with merger and acquisition activity, in the prior year
and estimated fees in connection with the proposed 1998 audit engagement, (ii) a
lack of commitment by Reznick Fedder to ensure timely completion of the 1998
audit and timely filing of the 1998 Annual Report on Form 10-KSB, (iii)
dissatisfaction as to the timeliness of Reznick Fedder's provision of business
advisory reports and recommendations in general and Management Reports pursuant
to the requirements of Statements on Auditing Standards No. 61 in particular,
and (iv) personality conflicts between Reznick Fedder's audit team and
management, including disagreements concerning the quality of staffing provided
previously.
During the years ended December 31, 1997 and 1996: (i) there were no
disagreements with Reznick Fedder on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Reznick Fedder, would have
caused Reznick Fedder to make a reference to the subject matter of the
disagreements in connection with its reports in the financial statements for
such years and (ii) there were no "reportable events" as described in Items 304
of Regulation S-K. Reznick Fedder's report of independent accountants on the
Company's consolidated financial statements for the years ended December 31,
1997 and 1996 each contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the interim period from December 31, 1997 through February 25,
1999 (the date of Reznick Fedder's dismissal as the Company's independent
accountants), Reznick Fedder alleged, solely in their opinion, (i) one potential
disagreement as to a matter relating to accounting principles, and (ii) one
suggested "reportable event".
By letter dated March 15, 1999, Reznick Fedder has indicated that,
based on the limited information provided to them as of February 6, 1999, it did
not appear that the purchase of Atlanta based MRB, Inc. and affiliates d/b/a
Tomahawk Truck & Trailer Sales, Inc. ("MRB") should be reflected as of August 1,
1998, as stated in our Current Report on Form 8-K filed on February 12, 1999.
Reznick Fedder based its preliminary determination on the August 1, 1998
Management Agreement, the January 29, 1999 Stock Purchase Agreement, and the
January 29, 1999 Loan Agreement, each with MRB, as indicated in Reznick Fedder's
letter to us dated March 8 (incorporated by reference from Exhibit 99 t the
Company's Form 8-K/A filed with the Securities and Exchange Commission on March
22, 1999).
Reznick Fedder also incorrectly stated in that letter that their
preliminary determination was based in part on the First Amendment to the
Management Agreement dated August 17, 1998, when in fact, Reznick Fedder did
not review that First Amendment until after we filed our Current Report on Form
8-K on February 12, 1999 reporting the completion of our acquisition of MRB.
Despite their dismissal as our independent accountants, Reznick Fedder also
requested in that letter that the Company provide any additional information
that they should consider in connection with their opinion regarding the
appropriateness of the accounting disclosures made in the Company's Form 8-K
filed on February 12, 1999. Reznick Fedder did not request further information
as to this issue prior to their dismissal.
We engaged the Atlanta based firm of Metcalf Rice Fricke & Davis
("Metcalf Rice") on January 25, 1999 to perform the 1998, 1997, and 1996 audits
of MRB, a significant subsidiary. We further engaged the firm of Metcalf Rice,
based on the merits of their performance of services in connection with the MRB
audits, to serve as our independent accountants in February, 1999. We then
asked Metcalf Rice to review this potential issue, alleged by Reznick Fedder as
referenced in their letter dated March 15, 1999, using all available
information, including materials not previously requested by Reznick Fedder, and
provide us with their determination as to the proper accounting treatment of our
acquisition of MRB under generally accepted accounting principles. On March 29,
1999, Metcalf Rice issued a letter pursuant to Statements of Auditing Standards
No. 50 "Independent Accountants Report on Appropriate Application of Generally
Accepted Accounting Principles," which addressed the reporting period under
generally accepted accounting principles that the Company complied with in
preparing its December 31, 1998 financial statements.
As to the second paragraph of Reznick Fedder's letter, they were only
provided with a preliminary unaudited, unconsolidated, and unadjusted trial
balance for fiscal 1998. In addition, Reznick Fedder was not engaged as our
independent accountants for the purpose of certifying the consolidated financial
statements of Chancellor Corporation as of December 31, 1998 and for the year
then ended, and were therefore not engaged to perform planning for this audit.
Reznick Fedder was not asked by us to determine whether adjustments
were required to recorded assets and liabilities which could materially impact
the fairness or reliability of financial statements for the year ended December
31, 1998. Adjustments, as necessary, were made based on recommendations of
Metcalf Rice during the course of their audit fieldwork.
<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 June 25,
1999 and to be filed with the Securities and Exchange Commission in April 1999,
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 June 25, 1999 and to be filed with the
Securities and Exchange Commission in April 1999, 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 June
25, 1999 and to be filed with the Securities and Exchange Commission in April
1999, 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 June 25, 1999 and
to be filed with the Securities and Exchange Commission in April 1999, and is
incorporated herein by this reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
- - -------- -------------------------------------
(a) Exhibits:
2 Stock Purchase Agreement, dated January 29, 1999, by and among Chancellor
Asset Management, inc., M. Rea Brookings and David F. Herring (incorporated by
reference from Exhibit 2 to the Company's current report on Form 8-K filed with
the Securities and Exchange Commission on February 12, 1999).
3.1 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 the Commonwealth 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), as amended by Articles of Amendment filed with the
Massachusetts Secretary of the Commonwealth 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) and as amended by Articles of Amendment files with
the Massachusetts Secretary of the Commonwealth on October 27, 1997
(incorporated by reference from Exhibit 3(a) to the Company's annual report,
Form 10-KSB, for the year ended December 31, 1997).
3.2 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)
10.1 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 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).
10.2 Loan Reduction and Purchase and Assignment Agreement dated as of April
4, 1997 among the Company, Chancellor Fleet Corporation, Chancellor Financial
Sales Service, Inc., Chancellor Fleet Remarketing, Inc., Chancellor Asset
Corporation, Chancellor Financialease, Inc., Valmont Financial Corporation,
Chancellor DataComm, Inc., Alco 474N Trust, Cains 931D Trust, Cains 931E Trust,
Chrysler Bo4E Trust, Conagra 25405 Trust, Conagra 25409 Trust, Dallas 38329
Trust, H.E. Butt 796C Trust, Kraft 79328 Trust, Savrn B063 Trust, Saturn B067
Trust, Shamrock 25748 Trust, Tyler 3Mo Trust, Whirlpool 49434 Trust, Fleet
National Bank and VESTEX Capital Corporation.
10.3 *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).
10.4 *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) and as amended by the Board of
Directors of the Company on December 30, 1996 and approved by the Stockholders
of the Company on August 29, 1997 (incorporated by reference from Appendix III
to the Company's Proxy Statement dated July 30, 1997.
10.5 *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).
10.6 *1997 Stock Option Plan, adopted by the Board of Directors of the
Company on March 20, 1997 and approved by the stockholders of the Company on
August 29, 1997 (incorporated by reference from Appendix III to the Company's
proxy statement dated July 30, 1997), and as amended by the Board of Directors
of the Company on April 1, 1998 and approved by the stockholders of the Company
on May 15, 1998 (incorporated by reference from Appendix III to the Company's
proxy statement dated April 9, 1998).
10.7 $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).
10.8 Specimen of Final Form of Warrant to Purchase Common Stock of
Chancellor Corporation issued by the Company on April 1, 1998 to VESTEX Capital
Corporation.
10.9 Consulting Agreement, dated July 1, 1998, by and among the Company and
VMI Corporation.
10.10 Management Agreement, dated August 1, 1998, by and among Chancellor
Asset Management, Inc. and M.R.B., Inc. d/b/a (Tomahawk Truck and Trailer
Sales).
10.11 Stock Redemption Agreement, dated August 7, 1998, by and among the
Company and VESTEX Capital Corporation.
10.12 First Amendment to the Management Agreement, dated August 17, 1998, by
and among Chancellor Asset Management, Inc. and M.R.B., Inc. d/b/a (Tomahawk
Truck and Trailer Sales).
10.13 Lease Agreement, dated January 29, 1999, by and among M. Rea
Brookings, David F. Herring, and Chancellor Asset Management, Inc. (incorporated
by reference from Exhibit 10.1 to the Company's current report on Form 8-K,
filed with the Securities and Exchange Commission.
10.14 Memorandum of lease, dated January 29, 1999, by and among M. Rea
Brookings, David F. Herring, and Chancellor Asset Management, Inc. (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 12, 1999).
10.15 Employment Agreement, dated January 29, 1999, by and among M.R.B.,
Inc. and M. Rea Brookings (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K as filed with the Securities and Exchange
Commission on February 12, 1999).
10.16 Promissory Note, dated January 29, 1999, by and among M. Rea Brookings
and Chancellor Asset Management, Inc. (incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K as filed with the Securities and
Exchange Commission on February 12, 1999).
10.17 Stock Pledge Agreement, dated January 29, 1999, by and among
Chancellor Asset Management, Inc. and M. Rea Brookings (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February 12, 1999).
10.18 Employment Agreement, dated January 29, 1999, by and among M.R.B.,
Inc. and David F. Herring (incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K as filed with the Securities and Exchange
Commission on February 12, 1999).
10.19 Promissory Note, dated January 29, 1999, by and among David F. Herring
and Chancellor Asset Management, Inc. (incorporated by reference to Exhibit 10.7
to the Company's Current Report on Form 8-K as filed with the Securities and
Exchange Commission on February 12, 1999).
10.20 Stock Pledge Agreement, dated January 29, 1999, by and among
Chancellor Asset Management, Inc. and David F. Herring (incorporated by
reference to Exhibit 10.8 to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February 12, 1999).
10.21 Promissory Note, dated December 22, 1998, in the original principal
amount of $3,475,000 from Chancellor Corporation to Vestex Capital Corporation.
10.22 Security Agreement, dated as of December 22, 1998, by and among
Chancellor Corporation and Vestex Capital Corporation.
10.23 Employment Agreement, dated October 1, 1998, by and among Chancellor
Corporation and Franklyn E. Churchill.
16(a) Letter dated January 9, 1997, from Deloitte & Touche LLP (incorporated by
reference from Exhibit to the Company's 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).
23.1 Independent Auditor's Consent - Metcalf, Rice, Fricke and Davis
23.2 Independent Auditors' Consent - Reznick Fedder & Silverman
27.1 Financial Data Schedule for year ended December 31, 1998.
* 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, Chancellor Corporation, 210 South Street, Boston, MA
02111.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated February 10, 1999
Current Report on Form 8-K, dated March 4, 1999
Current Report on Form 8-K/A, dated March 22, 1999
Current Report on Form 8-K/A, dated April 13, 1999
<PAGE>
F-1
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, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. 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 audit. The financial
statements of Chancellor Corporation and subsidiaries for the year ended
December 31, 1997 were audited by other auditors whose report dated March 27,
1998 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 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, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ METCALF RICE FRICKE & DAVIS
Atlanta, Georgia
April 13, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Chancellor Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1997. 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 audit.
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 1997 consolidated financial statements referred to above
present fairly, in all material respects, and the results of operations and cash
flows of Chancellor Corporation and its subsidiaries for the year ended December
31, 1997, 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
<PAGE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
In Thousands, Except Share Data)
DECEMBER 31,
1998
--------------
<S> <C>
ASSETS
Cash and cash equivalents $ 644
Receivables, net 3,255
Inventory 10,758
Net investment in direct finance leases 359
Equipment on operating lease, net of accumulated depreciation
of $2,351 702
Residual values, net 219
Furniture and equipment, net of accumulated depreciation
of $1,290 999
Other investments 3,681
Intangibles, net 7,541
Other assets, net 1,411
--------------
$ 29,569
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 6,366
Deferred reimburseable expenses 1,068
Indebtedness:
Revolving credit line 9,063
Notes payable 942
Nonrecourse 889
Recourse 4,234
Total liabilities 22,562
--------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, 5,000,000 shares issued and outstanding 50
Convertible Series B, 2,000,000 shares authorized,
none issued and outstanding ---
Common stock, $.01 par value; 75,000,000 shares authorized,
43,041,895 shares issued and outstanding 430
Additional paid-in capital 34,217
Accumulated deficit (27,690)
7,007
--------------
$ 29,569
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
DECEMBER 31,
1998 1997
------------- --- ----
<S> <C> <C> <C>
Revenues:
Transportation equipment sales $ 25,096 $ ----
Rental income 942 870
Lease underwriting income 74 293
Direct finance lease income 110 272
Interest income 195 44
Gains from portfolio remarketing 1,374 801
Fees from remarketing activities 1,407 1,488
Other income 441 665
29,639 4,433
------------- ------------
Costs and expenses:
Cost of transportation equipment sales 21,731 ----
Selling, general and administrative 6,054 6,412
Interest expense 343 281
Depreciation and amortization 661 459
28,789 7,152
------------- ------------
Income (loss) before extraordinary item and
provision (benefit) for income tax 850 (2,719)
Provision (benefit) for income tax ---- 13
------------- ------------
Income (loss) before extraordinary item 850 (2,732)
Extraordinary item - gain on debt forgiveness ---- 930
------------- ---
Net income (loss) $ 850 ( $1,802)
============= =======
Basic net income (loss) per share:
Income (loss) before extraordinary item $ .02 $ .18
Extraordinary item ---- (.06)
Net income (loss) $ .02 ( $ .12)
============= =======
Diluted net income (loss) per share:
Income (loss) before extraordinary item $ .02 $ .18
Extraordinary item ---- (.06)
Net income (loss) $ .02 ( $ .12)
============= =======
Shares used in computing basic net income (loss)
per share 36,695,162 15,224,432
============= ============
Shares used in computing diluted net income (loss)
per share 52,941,579 15,224,432
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
Stockholders
Preferred Stock Common Stock Additional Paid - In Accumulated Treasury Stock Equity
---------------- -------------- ----------------
Shares Amount Shares Amount Capital Deficit
---------------- -------------- --------------------- ------------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 1/1/97 5,000 $ 50 6,567 $ 65 $ 24,609 (
Preferred stock,
Series A issued 711 7 1,343 1,350
Preferred stock,
Series AA issued 3,000 30 20,250 870 900
Common stock issued 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)
Preferred stock,
Series A converted
To common stock (711) (7) 7,105 71 (64) ----
Preferred stock,
Series AA converted
To common stock (3,000) (30) 3,000 30 ----
Common stock issued 6,646 66 5,571 5,637
Exercise of stock
Options 892 9 284 293
Net income 850 850
---------------- --------------
BALANCE, 12/31/98 5,000 $ 50 43,044 $ 430 $ 34,217 (
================ ============== ===================== ============= ================
Shares Amount (Deficit)
-------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 1/1/97 $26,738) 1,431 ( $ 536) ( $2,550)
Preferred stock,
Series A issued
Preferred stock,
Series AA issued
Common stock issued
Exercise of stock
Options
Retirement of treasury
Stock
Net loss
BALANCE, 12/31/97 ---- ---- 227
Preferred stock,
Series A converted
To common stock
Preferred stock,
Series AA converted
To common stock ----
Common stock issued
Exercise of stock
Options
Net income
BALANCE, 12/31/98 $27,690) $ ---- $ ---- $7,007
======== ======= ========== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEARS ENDED DECEMBER 31,
---------------------
1998 1997
-------- ------------ --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 850 ( $1,802)
----------------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 661 459
Residual value estimate realizations and
reductions, net of additions 246 283
Gain on debt forgiveness ---- (930)
Changes in assets and liabilities, net of effects of acquisitions:
Receivables (2,366) 1,896
Inventory (5,184) ----
Deferred reimbursable expenses 1,068 ----
Accounts payable and accrued expenses (539) 1,828
----------------- --------
(6,114) 3,536
----------------- --------
Net cash provided (used) by operating activities (5,264) 1,734
----------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Leased equipment held for underwriting 502 729
Net investments in direct finance leases 162 227
Equipment on operating lease (588) 59
Other investments (2,680) (185)
Net change in cash restricted and escrowed 2,419 1,134
Additions to furniture and equipment, net (244) (1,018)
Increase in intangibles, net (3,322) ----
Net change in other assets (1,170) 141
Purchase of Tomahawk, net of cash acquired 398 ----
Net cash provided (used) by investing activities (4,523) 1,087
----------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 4,611 ----
Increase in indebtedness - nonrecourse 689 40
Increase in indebtedness - recourse 4,236 1,879
Repayments of indebtedness - nonrecourse (328) (701)
Repayments of indebtedness - recourse (417) (3,966)
Repayments of notes payable (36) ----
Issuance of common stock, net 1,579 3
Net cash provided (used) by financing activities 10,334 (2,745)
----------------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 547 76
CASH AND CASH EQUIVALENTS, BEGINNING 97 21
CASH AND CASH EQUIVALENTS, ENDING $ 644 $ 97
========================== ========
Non-Cash Activity:
Issuance of common stock in exchange for fees due
To related party $ 1,343 $ 4,556
========================== ========
Issuance of common stock for acquisition of
subsidiary company $ 4,320 $ 20
========================== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
F-7
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1998
-----------------
1. 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. During 1998
the Company expanded its market presence to include minor activities in
international markets such as Russia and the Republic of South Africa.
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.
On August 1, 1998, pursuant to a Management Agreement dated August 1, 1998, as
amended on August 17, 1998, and a Stock Purchase Agreement dated January 29,
1999, Chancellor Asset Management Inc. ("CAM"), the Company's wholly owned
subsidiary, acquired all of the outstanding shares of MRB, Inc. d/b/a Tomahawk
Truck and Trailer Sales and affiliates ("Tomahawk"). The acquisition was
accounted for under the purchase method of accounting.
Accounting for Estimates
- - --------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. These assumptions could change based on future experience
and, accordingly, actual results may differ from these estimates.
Revenue Recognition
--------------------
Transportation equipment sales - Revenues on transportation equipment sales
is recognized in the period in which the sale is completed and title is
transferred. Deposits on transportation equipment, that may be required under
certain financing contracts, are shown as deposits on sales and included in
accrued expenses.
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.
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.
<PAGE>
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 lease 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.
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. The residual valuation is based on independent valuation of the
equipment held under trust lease and its internal valuation assessments.
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.
Concentration of Credit Risk
-------------------------------
The Company maintains its cash balances in several banks. The Federal
Deposit Insurance Corporation insures up to $100,000 the balances held 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, 1998, the uninsured portion of the cash balances
held at one bank was approximately $573,000 of which $532,000 was invested in
overnight repurchase agreements.
Inventory
---------
All inventories are valued at the lower of cost or market. The cost of
transportation equipment, including reconditioning parts and other direct costs,
is determined using the specific identification method.
Furniture, Equipment and Leaseholds
--------------------------------------
Furniture and equipment are recorded at cost. Depreciation is computed
using a the straight-line method over the estimated useful lives of the related
assets, typically 3 to 7 years. Leasehold improvements are amortized over the
lease term.
Intangibles
- - -----------
Intangibles consist of goodwill, data files and customer lists which are
amortized over an estimated life of fifteen to twenty-five years using the
straight-line method. License agreements, included in intangibles, are being
amortized over an estimated life of four years using the straight-line method.
<PAGE>
- - ------
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 loss tax carryforwards, 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".
Net Income (Loss) per Share
-------------------------------
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net income per share reflects the potential dilution
that could occur from potential common stock such as stock issuable pursuant to
the exercise of stock options outstanding and conversion of debt.
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 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 1998 and 1997 was $13,000 and $13,000,
respectively. Interest paid during 1998 and 1997 was $630,000 and $340,000,
respectively. The Company issued stock valued at $4,320,000 in exchange of all
of the net assets of its Tomahawk subsidiary in a non-cash investing and
financing transaction.
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 Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes
standards for reporting comprehensive income and its components. The
implementation of this SFAS has no material effect on the Company's consolidated
financial statements.
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information", requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or the financial position of the Company
but did affect the disclosure of segment information.
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 $152,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending of approximately $300,000 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.
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
substantial 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.
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.
Risk Management
----------------
The Company is exposed to risks of loss related to torts; theft of, damage to,
and destruction of assets; errors and omissions; injuries to employees; material
disasters; and product liability. The Company carries commercial insurance for
risks of loss.
Foreign Currency Translation
------------------------------
The Company uses the US dollar as its functional currency. Foreign currency
assets are recoverable in US dollars, including equipment lease payments.
However, the Company has recorded an allowance equal to the net book value for
leases receivable from a party in Russia. The effect of any foreign currency
fluctuations is not considered material in these financial statements.
<PAGE>
2. Receivables
Receivables consists of the following as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Note receivable on international investment $ 1,242
Receivables from trust, net 855
Trade accounts receivable 375
Loans receivable 373
Other notes receivable 137
Accrued rents receivable, net 40
Interest receivable 104
Other receivables 129
-------------
$ 3,255
=============
</TABLE>
Receivables from trusts include amounts due the Company for cash outlays
associated with the remarketing of equipment of $72,000. 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
$1,764,000. Collection of costs of administration is not certain due to
numerous factors and is, therefore, included net of the estimated reserve.
Accrued rents represent amounts due from portfolio leases, net of an allowance
of $88,000.
3. 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
internal criteria.
The activity in the residual value accounts for the years ended December
31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
<S> <C> <C>
Residual values, beginning of year, net $ 465 $ 748
Residual realization (204) (283)
Residual value estimate reduction (42) ----
-------------- ------
Residual values, end of year, net $ 219 $ 465
============== ======
</TABLE>
Residual value estimate reductions represent reductions in expected future
residual values on certain equipment, the residuals that were substantially all
recorded prior to 1997. Such reductions resulted from an extensive review and
valuation of all assets owned, leased and managed by the Company. For the years
ended December 31, 1998 and 1997, the Company realized income of approximately
$1,395,000 and $1,488,000, respectively, relating to the remarketing of
equipment for which no residuals were recorded or realized amounts exceeded the
booked residual.
Aggregate residual value fees expected to be realized as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
<S> <C> <C>
Residual values, beginning of year, net $ 465 $ 748
Residual realization (204) (283)
Residual value estimate reduction (42) ----
-------------- ------
Residual values, end of year, net $ 219 $ 465
============== ======
</TABLE>
Net investment in direct finance leases consisted of the following as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Minimum lease payments receivable $ 389
Estimated unguaranteed residual values of
leased equipment, net 53
Less: Unearned income (83)
--------------
$ 359
==============
</TABLE>
The cost of equipment on operating lease by category of equipment consists
of the following as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Transportation equipment $ 819
Other equipment 2,234
-------------
3,053
Less - accumulated depreciation 2,351
-------------
$ 702
=============
</TABLE>
The aggregate amounts of minimum lease payments to be received from
noncancelable direct finance and operating leases are as follow
<TABLE>
<CAPTION>
Direct
Year ending December 31: Finance Operating
-------- ----------
<S> <C> <C>
1999 $ 195 $ 219
2000 110 34
2001 72 31
2002 8 30
2003 4 30
389 $ 344
========================= ========
</TABLE>
<PAGE>
5. Accounts Payable and Accrued Expenses:
-----------------------------------------
Accounts payable and accrued expenses consists of the following as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Trade accounts payable $ 1,326
Payables to investors 1,361
Fees payable to related party 895
Contribution payable to New Africa Opportunity Fund 650
Accrued commissions payable 453
Accrued legal and accounting fees 272
Accrued interest payable 185
Other accrued expenses 1,224
-------------
$ 6,366
=============
</TABLE>
6. Early Extinguishment of Intercreditor Loan
----------------------------------------------
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, a bank, as agent (the "Agent") for the Company's principal
recourse lenders, and VCC, the Company's majority shareholder; (2) release in
favor of the principal recourse lenders to be given by VCC and Brian M. Adley,
Chairman of the Board of Directors of the Company and President of VCC,
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 VCC.
Coterminous with this transaction, both the intercreditor loan and secured
inventory loan were 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 Company paid approximately $22,000 in legal and bank
fees to complete this transaction.
7. Revolving Lines of Credit
----------------------------
During 1994, and prior to its acquisition by the Company, Tomahawk entered into
a revolving line of credit agreement with a financial institution whereby
Tomahawk can borrow up to $7,500,000 to floor plan used transportation equipment
inventory. The maximum amount outstanding during 1998 was $7,500,000. In
addition, during 1998, Tomahawk entered into a financing agreement with the same
institution to floor plan additional used transportation equipment inventory in
the approximate amount of $4,500,000. Interest is accrued monthly at the
financial institution's prime plus .75 to 1.5 percent, depending upon the floor
planned inventory amounts. The effective rate of interest at December 31, 1998
was 9.7 percent. The aggregate principal balance outstanding on the revolving
line of credit and the financing agreement as of December 31, 1998 is
approximately $9,063,000. The Company, in connection with the Tomahawk
acquisition, assumed the obligation pursuant to this revolving line of credit
and financing agreement. The revolving line of credit and financing agreement
are both personally guaranteed by the selling stockholders of Tomahawk.
<PAGE>
8. Notes Payable
--------------
Notes payable consists of the following as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Unsecured notes payable to individuals due on demand
Including interest at 10 percent per annum. $ 256
Unsecured notes payable to selling stockholders of Tomahawk,
Including interest payable at 10 percent. 300
Notes payable to a bank, payable in various monthly
Installments including interest at the prime rate (7.75% at
December 31, 1998) plus 2%, secured by automobiles
Financed by the Company. 115
Note payable to a financial institution, payable in monthly
Installments of $4,135 including interest at a rate of 10
Percent per annum, due February 15, 1999, secured by
Automobiles and equipment. 8
Bridge loan payable to a financial institution providing for
Maximum borrowings up to $400,000 for working capital
Purposes, interest payable monthly at the rate of 10.5
Percent per annum, principal balance due on March 27, 1999. 163
Various notes payable to a financial institution, payable in
Monthly installments of $2,753 including interest at rates
Of 9 and 10 percent per annum, due from September 2001
To May 2003, secured by automobiles and equipment. 100
-------------
942
Less - current portion 821
-------------
$ 121
=============
</TABLE>
Aggregate annual maturities of notes payable as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $821
2000 64
2001 34
2002 17
2003 6
----
942
==========================
</TABLE>
9. Non-Recourse and Recourse Debt
---------------------------------
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 7.8%
to 13.6%. 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 non-recourse debt as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $698
2000 87
2001 91
2002 13
----
889
==========================
</TABLE>
Recourse debt consists of the following as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Promissory note payable to the Company's majority
Stockholder, bearing interest at the prime rate (7.75% at
December 31, 1998) plus 2%, principal and accrued interest
Payable December 31, 2001, secured by substantially
All of the assets of the Company $ 3,978
Subordinated promissory note payable to a former
Stockholder of the Company, bearing interest at the prime
Rate (7.75% at December 31, 1998) plus 1%, principal and
Accrued interest payable on demand. 200
Equipment line of credit with two leasing companies, aggregate
Monthly payments of $2,183 and leases expiring from
November 2000 to January 2001 56
-------------
4,234
Less - current portion 4,198
-------------
$ 36
=============
</TABLE>
Aggregate future maturities of recourse debt as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $ 220
2000 23
2001 3,985
2002 6
------
4,234
==========================
</TABLE>
10. Income Taxes
-------------
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $---- $----
State ---- 13
Deferred:
Federal ---- ----
State ---- ----
----- -----
$---- $ 13
=============== =====
</TABLE>
A reconciliation of the rate used for the provision (benefit) for income taxes
is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
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) (34.0)
------ ------
0.0% 0.0%
====== ======
</TABLE>
The Company files consolidated federal income tax returns with all of its
subsidiaries, with the exception of Tomahawk. As of December 31, 1998, the
Company has net operating loss carryforwards of approximately $21,771,000
available for federal tax purposes, which expire in the years 2001 through 2012.
In addition, at December 31, 1998, the Company has investment tax credit
carryforwards for federal income tax purposes available to offset future taxes
of approximately $1,855,000 expiring in the years 1999 through 2002 and minimum
tax credit carryforwards for federal income tax purposes available to offset
future taxes of approximately $135,000 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.
The tax effects of significant items comprising the Company's net deferred
tax liability as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
--------------
<S> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ 189
--------------
Deferred tax assets:
Reserves not currently deductible 552
Net operating loss carryforwards 8,708
Tax credit carryforwards 1,990
Other 1,000
--------------
Total deferred tax assets 11,248
--------------
11,059
Valuation allowance (11,059)
--------------
Net deferred tax liability $ ----
==============
</TABLE>
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 $940,000 in 1998. For the year ended December
31, 1997 the valuation allowance decreased by $1,050,000.
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 $189,000 as of
December 31, 1998. The deferred tax asset, net of the deferred tax liability,
has been fully reserved as of December 31, 1998.
11. Stockholders Equity
--------------------
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 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.
12. Stock Option Plans and Stock Purchase Plan
------------------------------------------------
The Company has three stock option plans: a 1994 Stock Option Plan, a 1994
Directors' Stock Option Plan and a 1997 Stock Option Plan.
The Company's stock option plans provide for incentive and nonqualified
stock options to purchase up to an aggregate of 7,207,000 shares of the
Company's Common Stock which may be granted to key contributors of the Company,
including officers, directors, employees and consultants. The options are
generally granted at the fair market value of the Company's Common Stock at the
date of the grant, 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:
<TABLE>
<CAPTION>
Weighted
1994 1994 1997 1983 Average
Stock Directors Stock Stock Exercise
Option Plan Option Plan Option Plan Option Plan Price
------------------------------ ------------ ------------ ------------ ---------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1996 1,081,466 329,500 ---- 3,244 $.18
Options granted 775,000 337,500 2,245,000 ---- .51
Options exercised (15,000) ---- ---- ---- .15
Options canceled and expired (973,716) ---- ---- ---- .18
Options canceled and reissued 3,244 ---- ---- (3,244) .01
------------ ------------ ------------ --------- ----
Outstanding, December 31, 1997 870,994 667,000 2,245,000 ---- .49
Options granted 355,991 ---- 1,911,500 ---- .52
Options exercised (384,583) (40,000) (467,000) ---- .33
Options canceled and expired (59,985) ---- (952,500) ---- .52
------------ ------------ ------------ --------- ----
Outstanding, December 31, 1998 782,417 627,000 2,737,000 ---- $.54
============ ============ ============ ========= ====
</TABLE>
<PAGE>
Additional information regarding options outstanding as of December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Exercise Number
Price of Shares Weighted Average Contractual Life Exercisable Options Date of Expiration
- - ---------- --------- --------------------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
0.01 1,917 5.00 1,917 2002
0.05 112,500 8.00 112,500 2006
0.06 112,500 8.00 112,500 2006
0.10 364,000 4.75 267,000 2003 - 2004
0.13 27,911 2.59 27,911 2001
0.16 5,000 2.59 5,000 2001
0.19 27,589 2.59 27,589 2001
0.20 675,000 6.15 475,000 2004 - 2007
0.25 602,000 6.13 177,000 2004 - 2005
0.30 40,000 4.75 40,000 2003
0.50 591,333 6.64 ---- 2005 - 2006
0.60 40,000 5.75 ---- 2004
0.70 120,000 7.34 ---- 2004 - 2008
0.71 10,000 5.75 ---- 2004
0.75 588,333 7.64 ---- 2006 - 2007
0.80 30,000 7.75 ---- 2004 - 2008
0.81 10,000 6.75 ---- 2005
0.91 10,000 7.75 ---- 2006
1.00 678,334 9.09 ---- 2007 - 2008
1.01 10,000 8.75 ---- 2007
1.11 10,000 9.75 ---- 2008
1.50 40,000 8.75 ---- 2007 - 2008
2.00 40,000 8.75 ---- 2007 - 2008
4,146,417 1,246,417
========== =========
</TABLE>
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 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 pricing model with the following weighted average assumptions: expected
life, 48 months following vesting; stock volatility 200% in 1998 and 1997; risk
free interest rate, 8%, in 1998 and in 1997 and no dividends during the expected
term. The forfeitures of the options are recognized as they occur. If the
computed fair values of the 1997 and 1998 awards had been expensed over the
vesting period of the awards, the pro forma net income in 1998 would have been
$547,000 or $0.01 per share and the pro forma net loss in 1997 would have been
$1,850,000 or $0.12 per share.
<PAGE>
- - ------
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.
13. Major Customers
----------------
The Company is engaged principally in originating and selling equipment
leasing transactions. During 1998, 31% (based on original equipment cost) of
the new lease transactions originated by the Company were with the one largest
lessee. In addition, approximately 40% and 31% (based on original equipment
cost) of equipment sold to investors in 1998 were purchased by the two largest
investors. 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.
14. 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, up to a maximum of
$500 per participating employee, amounted to approximately $11,000 and $18,000
in 1998 and 1997, respectively.
15. Acquisition
-----------
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement, dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk
Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively
"Tomahawk"). The Management Agreement provided CAM with effective control of
Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of
the outstanding capital stock of Tomahawk from the two (2) sole shareholders
(the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the
"Agreement") dated January 29, 1999.
Tomahawk is engaged in a similar line of business as CAM. Tomahawk retails and
wholesales used transportation equipment, primarily tractors and trailers.
Tomahawk operates five (5) retail centers in Conley, Georgia; Richmond,
Virginia; Pompano Beach, Florida; Orlando, Florida; and Kansas City, Missouri.
Tomahawk also operates its wholesale division from the Conley, Georgia facility.
Tomahawk will operate as a wholly owned subsidiary of the Company, coordinating
many operations with the Company to achieve operating efficiencies and
synergies.
The purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of
Chancellor (valued at $.96 per share) and future cash consideration pursuant to
an earn-out (the "Earn-Out") as provided for in the Agreement. The Earn-Out
provides that each of the Selling Shareholders will be paid an amount equal to
seven and one-half percent (7.5%) of the Adjusted Pre-Tax Earnings of Tomahawk.
The Earn-Out, which is paid on a quarterly basis, begins in the fiscal year
ended December 31, 1999 and ends in the fiscal year ended December 31, 2004. In
connection with this Agreement, CAM loaned the Selling Shareholders a total of
$500,000 pursuant to certain promissory notes payable that are payable in full
on January 29, 2004.
The Agreement also: i) nominates one of the Selling Shareholders as a director
of Chancellor's Board of Directors; ii) elects both of the Selling Shareholders
as directors of CAM's Board of Directors; iii) provides for Employment
Agreements for the Selling Shareholders over a period of five years with base
salaries of $200,000 per annum; iv) prohibits the Selling Shareholders from
competing against CAM or Tomahawk, or soliciting former employees and customers
of Tomahawk; v) provides for Tomahawk to lease from the Selling Shareholders the
Conley, Georgia facility at fair market value rents of approximately $8,500 per
month; and vi) provides CAM an option to purchase from the Selling Shareholders
the Conley, Georgia facility for an amount not to exceed $950,000.
This transaction has been recorded in accordance with the purchase method of
accounting. As a result of the effect on the transaction of the Management
Agreement, the designated date of this transaction for accounting purposes is
August 1, 1998. In connection with this transaction, CAM assumed liabilities of
approximately $6,414,000 and incurred acquisition costs of approximately
$3,405,000. The excess of the purchase price over net assets of approximately
$7,695,000 has been recorded in intangibles. Approximately $154,000 of
intangibles has been amortized as of December 31, 1998.
Results of operations of Tomahawk after the acquisition date are included in the
1998 Consolidated Statement of Operations. The following pro forma information
has been prepared assuming that this acquisition had taken place at the
beginning of the respective periods. The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed dates.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- - -------------------------------------------------- ------- --------
In thousands, except per share amounts (unaudited)
<S> <C> <C>
Net revenues $49,782 $31,765
Net income (loss) 951 (1,734)
Net income (loss) per common share .03 (.11)
</TABLE>
16. Other Investment
-----------------
Other investment includes a $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, 1998, the Company
funded $350,000 of a $1 million commitment for its 2.5% interest in NAOF and the
remaining obligation of $650,000 is included in accounts payable and accrued
expenses.
17. Related Party Activities
--------------------------
The Company is provided investment banking and consulting services by an
affiliate of the Company's majority stockholder, Vestex Capital Corporation
("VCC"), pursuant to a consulting agreement approved by the shareholders at the
1995 Annual Meeting of the Stockholders, as amended in July 1998. VCC provides
specified services including, but not limited to, general business consulting,
the development and implementation of the Company's 1997 transition and
turnaround strategies, development of domestic and international business
opportunities and growth strategies, identification and development of strategic
alliances, support of merger and acquisition activity, debt and equity raising
efforts, and other financing activities. Fees related to debt and equity
transactions are up to 3.0% and 7.5%, respectively, of the amount of financing
raised in addition to related expenses. VCC also provides services to the
Company on operational and other matters for which it is compensated at levels
negotiated with the Company.
During 1998, VCC investigated numerous strategic alliances and merger and
acquisition opportunities on behalf of the Company. In connection with this
activity, VCC was instrumental in the negotiation and consummation of the Lease
Servicing Agreement entered into on November 1, 1998 among Chancellor Leasing
Services, Riviera Finance - East Bay and United Capital and Finance LLC.
Additionally, VCC identified, negotiated and closed the acquisition of MRB, Inc.
d/b/a Tomahawk Truck and Trailer Sales ("Tomahawk"), a used transportation
equipment retailer and wholesaler that recorded approximately $39,000,000 in
revenue for the 12 month period ended December 31, 1998. VCC facilitated
approximately $3,500,000 in equity and cash financing in connection with the
Tomahawk acquisition. VCC continues to negotiate and manage the Company's
financing, acquisition and investment efforts in the Republic of South Africa
and other international opportunities. VCC was instrumental in the development
and implementation of the strategy to buy-out and acquire investment grade
transportation equipment portfolios. As a result of this strategy, the Company
acquired portfolios valued at an original equipment cost of approximately
$22,000,000. The acquisition of these portfolios was further facilitated by VCC
assisting in arranging approximately $8,000,000 of financing to effect the
portfolio buy-out. VCC was also instrumental in recruiting and attracting key
employees to the Company. Additionally, VCC provided these key employees
warrants to purchase Chancellor common stock, beneficially owned by VCC and
valued at approximately $4,500,000. Certain of these key employees were also
issued an additional 500,000 shares of the Company's stock from VCC's beneficial
holdings. VCC's activities provided sources of funding to the Company of
approximately $6,500,000, and $300,000 for fees for services and reimbursable
expenses, respectively, converted into debt and equity instruments of the
Company. This included the purchase of 1,946,146 shares of the Company's common
stock at a price of $.69 per share. Additionally, VCC infused approximately
$1,200,000 of cash into or on behalf of the Company during 1998. As a result,
in part, of VCC's activities and services provided, the Company's net worth
increased to $7,007,000 at December 31, 1998 from $227,000 as of December 31,
1997 and from an approximate $12,000,000 negative net worth as of December 31,
1996.
During 1998, in connection with VCC's consulting agreement for the various
activities as previously discussed, VCC received cash payments of approximately
$1,390,000. The Company recorded consulting expenses of approximately $255,000.
In connection with various financing, investment and acquisition transactions
the Company capitalized costs charged by VCC of approximately $6,803,000.
Approximately $3,439,000 of VCC's cash advances, loans and costs accrued were
converted into a three-year note payable, bearing interest at the prime rate
plus 2 percent (9.75% as of December 31, 1998).
Chancellor has entered into two lease transactions with Kent International
("Kent"), a company owned 50 percent by a director of the Company. Total
original equipment cost for these transactions amount to approximately $144,000.
During 1997, the Company loaned Kent $128,500. The loan is repaid in equal
monthly installments of $5,296 and matures December 1999. The loan bears
interest at 15 percent per annum. As of December 31, 1998, Kent was in default
of the loan. As of December 31, 1998, the outstanding balance on the loan is
approximately $62,000.
18. 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 three
locations along the east coast. The future minimum rental commitments are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $359
2000 300
2001 233
2002 201
2003 102
----
1,195
======
</TABLE>
Rental expense, net of abatements, for the years ended December 31, 1998
and 1997 amounted to approximately $421,000, and $194,000, respectively. Rental
expense paid to related parties was approximately $80,000 for the year ended
December 31, 1998.
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. The Company has
recorded approximately $1,498,000 and $994,000 of cost recoveries in the years
ended December 31, 1998 and 1997, respectively. For periods prior to 1997,
$1,868,000 was recovered. 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.
19. Legal Proceedings
The Company was named as a defendant along with the Chairman of the Board and an
affiliate of the Chairman in a suit brought by Ernest Rolls, the former
Vice-Chairman, on February 5, 1998. The suit 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.
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.
20. Operating Segments
-------------------
The Company operates in two primary business segments: 1) sales of
transportation equipment and 2) leasing activity, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Sales of Transportation Equipment:
- - ---------------------------------------------------
Revenues $25,096 $----
Cost and expenses:
Cost of transportation equipment 21,731 ----
Selling, general and administrative 2,441 ----
Interest expense 142 ----
Depreciation and amortization 19 ----
$24,333 $----
======= =====
Income from sales of transportation equipment $ 763 $----
======= =====
Total transportation equipment assets
As of December 31, 1998 $11,468
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C> <C>
Leasing Activity
- - -------------------------------------------------
Revenues:
Leasing activity $ 3,907 $3,724
Interest income 195 44
Other income 441 665
4,543 4,433
------- ------
Costs and expenses:
Selling, general and administrative 3,613 6,412
Interest expense 201 281
Depreciation and amortization 642 459
4,456 7,152
------- ------
Income (loss) from leasing activity $ 87 ( $2,719)
======= =======
Total leasing assets as of December 31, 1998 $13,648
=======
Income (loss) before extraordinary item and
provision (benefit) for income taxes $ 850 ( $2,719)
======= =======
</TABLE>
Domestic and Foreign Operations
The Company has foreign operating segments in Russia and the Republic of South
Africa. Operating income from these operations for the year ended December 31,
1998 was approximately $13,000 in Russia and $96,000 in the Republic of South
Africa. Foreign assets and U.S. assets collateralized by equipment in Russia
and the Republic of South Africa are approximately $3,902,000 as of December 31,
1998. The assets, which include intangibles and a note receivable, are
recoverable or collectable in U.S. dollars.
<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: April 15, 1999
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: April 15, 1999 By: /s/ Brian M. Adley
-----------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
Dated April 15, 1999
By: /s/ Franklyn E. Churchill
------------------------------
Franklyn E. Churchill
President
Dated: April 15, 1999 By: /s/ Rudolph Peselman
------------------------
Rudolph Peselman
Director
Dated: April 15, 1999 By: /s/ Michael J. Marchese
----------------------------
Michael J. Marchese
Director
Dated: April 15, 1999 By: /s/ Jonathan C. Ezrin
--------------------------
Jonathan C. Ezrin
Corporate Controller
(Principal Accounting Officer)
LOAN REDUCTION AND
PURCHASE AND ASSIGNMENT AGREEMENT
This Loan Reduction and Purchase and Assignment Agreement is made as of
April 4, 1997 (this "Agreement")by and among FLEET NATIONAL BANK, a national
banking association with offices at one Federal Street, Boston, Massachusetts
02110 (the "Agent")" the lenders named on the signature pages hereto (the
"Lenders"),--. VESTEX CAPITAL CORPORATION, a Massachusetts corporation with
offices at 12 Waltham Street, Lexington, Massachusetts 02173 ("Vestex") and
CHANCELLOR CORPORATION, CHANCELLOR FLEET CORPORATION, CHANCELLOR FINANCIAL SALES
AND SERVICES, INC., CHANCELLLOR FLEET REMARKETING, INC., CHANCELLOR ASSET
CORPORATION, CHANCELLOR FINANCIALEASE, INC., VALMONT FINANCIAL CORPORATION,
CHANCELLOR DATACOMM, INC. ALCO 474N TRUST, CAINS 931D TRUST, CAINS 931E TRUST,
CHRYSLER B04E TRUST, CONAGRA 25405 TRUST, CONAGRA 25409 TRUST, DALLAS 38329
TRUST, H.E. BUTT 796C TRUST, KRAFT 79328 TRUST, KRAFT 993C TRUST, PIC B03H
TRUST, SATURN B062 TRUST, SATURN B063 TRUST, SATURN B067 TRUST, SHAMROCK 25748
TRUST, TYLER 3110 TRUST, AND WHIRLPOOL 49434 TRUST (the "Borrowers").
WITNESSETH:
WHEREAS, the Borrowers, each having a principal place of business at 745
Atlantic Avenue, Boston, Massachusetts 02111, and certain affiliates
(collectively, the "Borrowers") of the foregoing from time to time parties, as
borrowers and/or guarantors, to certain extensions of credit referenced in that
certain Forbearance Agreement, dated as of April 6, 1990, and that certain Loan
Agreement, dated as of April 6, 1990 (the "Loan Agreement") executed by certain
of the Borrowers, the Agent and the Lenders (the Loan Agreement together with
all security documents and all other documents described on Exhibit A attached
hereto and made a part hereof, are sometimes referred to hereinafter
collectively as the "Loan Documents");
WHEREAS, at the request of the Borrowers, the Lenders have agreed to (i)
reduce the aggregate principal amount of the obligations to the Lenders pursuant
to the Loan Documents from $2,429,412.89 to $1,500,000, (ii) agree to transfer
and assign all of their right, title and interest in and to the Loan Documents
(reflecting the reduced amount of the obligations thereunder) to Vestex, and
(iii) provide full and complete releases in favor of the Borrowers, in exchange
for (x) $523,234.43 from the Borrowers representing the aggregate amount of the
principal and interest payments made by the Borrowers from the Collateral
Account in two installments, one on or about February 25, 1997 and one on or
about March 25, 1997) and (y) full and complete releases in favor of the Agent
and each of the Lenders from each of the Borrowers;
WHEREAS, at the request of the Borrowers, the Lenders have agreed to assign
to Vestex all of their respective right, title and interest in and to the Loan
Documents (reflecting the reduced amount of the obligations thereunder) in-
exchange -for (x) $976,765.77 from Vestex and (y) a full and complete release in
favor of the Agent and each of the Lenders from Vestex and Brian Adley;
WHEREAS, the Borrowers have arranged to obtain financing from Vestex in
replacement for the financing currently provided by the Lenders at a reduced per
annum rate of interest and on longer amortization terms, and Vestex has agreed
to purchase and accept and subsequently reduce the interest rate and lengthen
the amortization under, and the Lenders have agreed to sell and assign, all of
the Lenders, rights under the Loan Documents, all in accordance with the terms
and conditions hereinafter described;
WHEREAS, to induce Vestex to purchase the rights under the Loan Documents,
the Borrowers have agreed to substitute a promissory note payable jointly and
severally by the Borrowers to Vestex reflecting the amended terms and to
terminate the Loan Agreement;
<PAGE>
NOW THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
Section 1. Loan Reduction. In consideration of the payment of $523,234.43
from the Borrowers of which amount the Lenders acknowledge that $523,234.43 has
been paid to the Lenders in two installments, one on or about February 25, 1997,
the other on or about March 25, 1997) and the delivery of full and complete
releases by the Borrowers in favor of the Lenders and the Agent, the Lenders
agree (i) to reduce the aggregate amount of the total indebtedness of the
Borrowers to the Lenders pursuant to the Loan Documents to $1,500,000, and (ii)
to transfer the Loan Documents to Vestex in accordance with the terms hereof.
Section 2. Assignment to Vestex. In consideration of the payment of
$976,765.77 from Vestex and the delivery of full and complete releases by Vestex
and Brian Adley in favor of the Lenders and the Agent, the Lenders agree to
sell, grant, assign and convey to Vestex, without recourse, representation or
warranty of any kind, except as otherwise provided herein, and Vestex hereby
accepts, all of the Lenders' right, title and interest in, to and under the Loan
Documents (as amended hereunder), including, without limitation, all liens and
security interests in all collateral and security for the Borrowers, obligations
under the Loan Documents.
Section 3. Conditions Precedent. The Lenders' agreements herein are
subject to the delivery of the following items by the Borrowers to the Lenders
in form and substance satisfactory to the Lenders and its counsel and the Agent:
(a) resolutions of the Boards of Directors of the Borrowers authorizing the
execution and delivery by the Borrowers of this Agreement and of the other
documents and instruments referred to herein;
(b) payment of the fees and expenses of Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. through the date of closing of this Agreement;
(c) payment of the fees and expenses of Fleet National Bank, as Agent to the
Lenders, through the date of closing of this Agreement;
(d) payment of the fees and expenses of Argus Management Corporation and
Equipment Leasing Services, Inc., each as Consultant to the Lenders, through
the date of closing of this Agreement;
(e) such other documents, instruments, opinions of counsel and other
materials that the Lenders, any participant, or their respective counsel may
reasonably require; and,
(f) Releases in the form attached hereto as Exhibits C and Dduly executed by
each of the Borrowers, Vestex and Brian Adley.
Section 4. Representations and Warranties of Agent and Lenders. The Agent
and the Lenders each represents and warrants to Vestex that (i) Exhibit A hereto
sets forth all of the material documents, instruments and agreements entered
into in connection with the Loan Agreement, together with all amendments to the
Loan Agreement or any such documents, (ii) there are no written agreements to
which the Agent or any of the Lenders is a party which vary the terms of or the
priorities of the security interests granted under the Loan Documents which
would adversely affect Vestex thereunder, and (iii) the Lenders own the loans
evidenced by the Loan Documents for their own accounts, respectively, and none
of the Lenders has sold any participations therein or encumbered any or all of
its interest in such loans or its security interests and liens evidenced by the
Loan Documents.
Section 5. Representations and Warranties of Vestex. Vestex represents and
warrants to the Agent and the Lenders that (a) Vestex has been and will continue
to be solely responsible for the making of its own independent investigation as
to: (i) the authorization, execution, legality, validity, effectiveness,
genuineness, enforceability and sufficiency of the Loan Documents, (ii) the
adequacy or perfection of any security interests held by the Agent or the
Lenders in the collateral securing the Borrowers, obligations under the Loan
Documents and any liens held by the Agent or the Lenders in any other security
therefor, (iii) Vestex has entered into this Agreement on the basis of its own
independent investigation and has not relied upon, and will not rely upon, any
explicit or implicit written or oral representation, warranty or other statement
of the Lenders other than those expressly contained herein, and (b) that Vestex
shall cancel all notes or instruments delivered pursuant to Section 6 below and
accept from the Borrowers, in replacement of all evidence of the obligations of
the Borrowers under the Loan Documents, a promissory note providing for a
reduced rate of interest and a longer amortization period.
Section 6. Delivery of Loan Documents. Upon satisfaction of each of the
conditions precedent set forth in Section 3 above, and upon receipt by the Agent
of the payment of $976,765.77 from Vestex, (a) the Lenders shall reduce the
amount of the obligations of the Borrowers to the Lenders to $1,500,000 in
accordance with Section 1 above, and (b) the Agent shall deliver to Vestex the
original of the Secured Promissory Note dated April 6, 1990 in the original
principal amount of $8,000,000 payable by certain of the Borrowers to Shawmut
Bank, N.A., predecessor in interest to the Agent, endorsed as follows:
Pay to the order of Vestex Capital Corporation, without recourse.
Fleet National Bank, formerly known as Fleet National Bank
of Connecticut, successor by merger to Fleet National Bank of
Massachusetts,
formerly known as Shawmut Bank, N.A.
By: _____________________________
Name: ___________________________
Title: ____________________________
The Agent agrees to use its best efforts to deliver to Vestex within ten (10)
business days from the date hereof the originals of all other Loan Documents
described on Exhibit A hereto and all original file-stamped secured party copies
of the executed UCC financing statements for the locations described on Exhibit
B hereto together with executed assignments of same to Vestex in recordable
form. Each of the Agent and the Lenders agrees to execute such other
documents as Vestex may reasonably request -in connection with effecting
the transactions contemplated by this Agreement, including, without
limitation, releases or assignments of any blocked accounts, cash
collateral accounts and the like maintained in connection with the Loan
Documents.
Section 7. Indemnification. The Agent, the Lenders and Vestex all agree
that from and after the date hereof Vestex shall be responsible for all acts and
omissions which may hereafter occur with respect to the Loan Documents. Vestex
hereby indemnities and holds the Agent and the Lenders harmless from any
liability, damage, cost or expense (including reasonable attorney fees) claimed
or asserted against the Agent or the Lenders by Vestex, any Borrower, Brian
Adley (collectively, the "Indemnitors") or any Affiliate of any Indemnitor with
respect to the Loan Documents or this Agreement. For the purposes hereof,
"Affiliate" shall mean, with respect to any Indemnitor, (i) any entity directly
or indirectly controlling (including but not limited to all directors and
officers, if any, of such entity), controlled by or under direct or indirect
common control with any Indemnitor, or (ii) any family member of any Indemnitor
who is a natural person. An entity shall be deemed to control a corporation,
partnership, trust, joint venture or other enterprise or person if such entity
possesses, directly or indirectly, the power (a) to vote 5% or more of the
interests having ordinary voting power for such entity, or (b) to direct or
cause direction of the management and policies of such corporation, partnership,
trust, joint venture, enterprise or person whether through the ownership of
voting securities or interest, by contract or otherwise.
Section 8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when so executed shall be deemed an original but all
such counterparts shall constitute one and the same instrument.
Section 9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of Massachusetts.
<PAGE>
Section 10. Other Agreements. Nothing contained herein shall be construed
so as to limit or impair the Borrowers, obligations, liabilities and
indebtedness to any Lender on account of indebtedness not listed on Exhibit A
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as an
instrument under seal as of the day and year first written above.
WITNESSED: VESTEX CAPITAL CORPORATION
/s/ Derek R. Coulter By: /s/ Brian M. Adley
Derek R. Coulter Brian M. Adley
Chief Executive Officer
BORROWERS:
WITNESSED AS TO ALL SIGNATURES
ON BEHALF OF BORROWERS: CHANCELLOR CORPORATION
/s/ Derek R. Coulter By: /s/ John J. Powell
Derek R. Coulter John J. Powell
President
CHANCELLOR FLEET CORPORATION
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR FINANCIAL SALES AND
SERVICES, INC.
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR FLEET
REMARKETING, INC.
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR ASSET
CORPORATION
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
CHANCELLOR FINANCIALEASE, INC.
By: /s/ John J. Powell
John J. Powell
President
VALMONT FINANCIAL CORPORATION
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR DATACOMM, INC.
By: /s/ John J. Powell
John J. Powell
President
ALCO 474N TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CAINS 931D TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CAINS 931E TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
CHRYSLER B04E TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CONAGRA 25405 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CONAGRA 25409 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
DALLAS 38329 TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
H.E. BUTT 796C TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
KRAFT 79328 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
KRAFT 993C TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
PIC B03H TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B062 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B063 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B067 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SHAMROCK 25748 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
TYLER 3110 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
WHIRLPOOL 49434 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
EXHIBIT A
1. Loan Agreement dated as of April 6, 1990, by and between Shawmut Bank,
N.A., as agent and the Borrowers;
2. $8,000,000 Secured Promissory Note, dated as of April 6, 1990, made by
the Borrowers in favor of Shawmut Bank, N.A. as agent.
3. Forbearance Agreement dated as of April 6, 1990 ' by and among the
Lenders and the Borrowers and the promissory notes, loan agreements and related
documents referred to in the schedules and exhibits thereto, including Schedule
I attached hereto [not available on disk].
4. Security Agreement, dated as of April 6, 1990.
5. Pledge Agreement, dated as of April 6, 1990.
6. Promissory Notes with respect to "Deferred Payments" in accordance with
Letter
Agreement dated as of July 25, 1995.
Deferred Payment Promissory Note in the principal amount of $80,950.58
payable to the order of Northwestern National Life Insurance Company,
predecessor-in-interest to Reliastar Life Insurance;
Deferred Payment Promissory Note in the principal amount of $23,128.74
payable to the order of Shawmut Bank, N.A., predecessor-in-interest to Fleet
National Bank;
Deferred Payment Promissory Note in the principal amount of $3,854.79
payable to the order of Farm Bureau Life Insurance Company of Michigan;
Deferred Payment Promissory Note in the principal amount of $3,854.79
payable to the order of F.B. Annuity Company;
Deferred Payment Promissory Note in the principal amount of $3,854.79
payable to the order of Farm Bureau Mutual Insurance Company of Michigan;
Deferred Payment Promissory Note in the principal amount of $14,918.04
payable to the order of The CIT Group/Equipment Financing, Inc.; and
7. Warrants to purchase common stock dated February 5, 1993:
No. I - 181,912 shares in favor of Northwestern National Life Insurance,
predecessor-in-interest to Reliastar Life Insurance
No. 2 - 81,615 shares in favor of The Daiwa Bank Limited
No. 3 - 51,975 shares in favor of Shawmut Bank, N.A.,
predecessor-in-interest to Fleet National Bank
No. 4 - 34,651 shares in favor of Atlantic Bank of New York
No. 5 - 33,524 shares in favor of The CIT Group/Equipment Financing, Inc.
No. 6 - 25,847 shares in favor of First NH Bank, N.A.
predecessor-in-interest to AMRESCO New Hampshire, Inc.
No. 7 - 13,929 shares in favor of First Mutual of Boston
predecessor-in-interest to the FDIC
No. 8 - 8,662 shares in favor of FB Annuity Company
No. 9 - 8,662 shares in favor of Farm Bureau Life Insurance Company of
Michigan
No. 10 - 8,662 shares in favor of Farm Bureau Mutual Life Insurance Company
of Michigan
<PAGE>
8. Amendments, modifications and supplements to the foregoing to which one
or more of the Borrowers are parties.
The Lenders and/or their predecessors in interest are parties to an Agency,
Funding and Collateral Sharing Agreement dated as of April 6, 1990, as amended
through the date hereof, with respect to the Lenders' and Agent's agreements
regarding taking actions against the collateral and sharing of proceeds of the
obligations of the Borrowers and of the collateral. None of the Agent's or
Lenders' rights or obligations pursuant to such agreement are being transferred.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
to Loan Reduction and Purchase and Assignment Agreement
UCC Financing Statements
------------------------
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - --------------------------------------------------------------------------------------
Chancellor Acquisition Corp. Illinois Secretary of State April 10, 1990 2101859
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Asset Management Illinois Secretary of State April 10, 1990 2701860
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. Illinois Secretary of State April 10, 1990 2701863
745 Atlantic Avenue
Boston, NM 02111
Chancellor Credit, Ltd. Illinois Secretary of State April 10, 1990 2701862
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Illinois Secretary of State April 10, 1990 2701861
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. DuPage County Recorder. April 10, 1990 9OU-2088
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management DuPage County Recorder April 10, 1990 9OU-2087
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. DuPage County Recorder April 10, 1990 9OU-2084
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. DuPage County Recorder April 10, 1990 9OU-2085
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. DuPage County Recorder April 10, 1990 9OU-2086
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. NC Secretary of State April 10, 1990 0668412
745 Atlantic Avenue
Boston, MA 02111
- - --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - ---------------------------------------------------------------------------------------
Chancellor Asset Management NC Secretary of State April 10, 1990 0668411
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. NC Secretary of State April 10, 1990 0668408
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. NC Secretary of State April 10,1990 0668408
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. NC Secretary of State April 10,1990 0668410
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. Registry-Mecklenberg April 10, 1990 005563
745 Atlantic Avenue County
Boston, MA 021 11
Chancellor Asset Management Registry-Mecklenberg April 10, 1990 005562
Corp. County
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Corp. Registry-Mecklenberg April 10, 1990 005559
745 Atlantic Avenue County
Boston, MA 021 11
Chancellor Credit, Ltd. Registry-Mecklenberg April 10, 1990 005560
745 Atlantic Avenue County
Boston, MA 02111
Chancellor Fleet Corp. Registry-Mecklenberg April 10, 1990 005561
745 Atlantic Avenue County
Boston, MA 02111
Chancellor Acquisition Corp. Tennessee Secretary of State April 16, 1990 761497
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management Tennessee Secretary of State April 16, 1990 761498
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. Tennessee Secretary of State April 16, 1990 761501
745 Atlantic Avenue
Boston, MA 02111
- - ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - -------------------------------------------------------------------------------------
Chancellor Credit, Ltd. Tennessee Secretary of State April 16, 1990 761500
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Tennessee Secretary of State April 16, 1990 761499
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. Davidson County, Tennessee April 16, 1990 072485
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management Davidson County, Tennessee April 16, 1990 072484
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. Davidson County, Tennessee April 16, 1990 072481
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Davidson County, Tennessee April 16, 1990 072482
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Davidson County, Tennessee April 16, 1990 072483
745 Atlantic Avenue
Boston, NM 02111
Chancellor Asset Management Texas Secretary of State April 10, 1990 076266
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. Texas Secretary of State April 101 1990 076267
745 Atlantic Avenue
Boston, NM 02111
Chancellor Fleet Corp. Texas Secretary of State April 10, 1990 076265
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Texas Secretary of State April 10, 1990 076264
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Corp. Texas Secretary of State April 10, 1990 076263
745 Atlantic Avenue
Boston, MA 02111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - ---------------------------------------------------------------------------------
Chancellor Asset Management Clerk of Dallas County, April 10, 1990 002820
Corp. Texas
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Clerk of Dallas County, April 10, 1990 002818
745 Atlantic Avenue Texas
Boston, MA 02111
Chancellor Acquisition Corp. Clerk of Dallas County, April 10, 1990 002821
745 Atlantic Avenue Texas
Boston, NM 02111
Chancellor Fleet Corp. Clerk of Dallas County, April 10, 1990 002819
745 Atlantic Avenue Texas
Boston, MA 02111
Chancellor Corp. Clerk of Dallas County, April 10, 1990 002817
745 Atlantic Avenue Texas
Boston, MA 02111
Chancellor Acquisition Corp. Fulton County, GA April 10, 1990 735390
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management Fulton County, GA April 10, 1990 735389
Corp.
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Corp. Fulton County, GA April 10, 1990 735386
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Fulton County, GA April 10, 1990 735387
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Fulton County, GA April 10, 1990 735388
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. Wayne County, MI April 10, 1990 0464453
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management Wayne County, MI April 10, 1990 0464452
Corp.
745 Atlantic Avenue
Boston, MA 021 11
- - ----------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - --------------------------------------------------------------------------
Chancellor Corp. Wayne County, MI April 10, 1990 0464455
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Wayne County, MI April 10, 1990 0464456
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Wayne County, MI April 10, 1990 0464454
745 Atlantic Avenue
Boston, MA 02111
Chancellor Acquisition Corp. April 10, 1990 02541B
745 Atlantic Avenue
Boston, MA 02111
Chancellor Asset Management April 10 1990 02540B
Corp.
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Fleet Corp. April 10, 1990 02542B
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Corp. April 10, 1990 02543B
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Corp. April 10, 1990 02544B
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Acquisition Corp. New Jersey Secretary of April 10, 1990 1331116
745 Atlantic Avenue State
Boston, MA 021 11
Chancellor Asset Management New Jersey Secretary of April 10, 1990 1331108
Corp. State
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. New Jersey Secretary of April 10, 1990 1331110
745 Atlantic Avenue State
Boston, MA 02111
Chancellor Credit, Ltd. New Jersey Secretary of April 10, 1990 1331114
745 Atlantic Avenue State
Boston, MA 021 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DEBTOR JURISDICTION DATE OF FILING FILE NO.
- - ------------------------------------------------------------------------------
Chancellor Corp. New Jersey Secretary of April 10, 1990 1331112
745 Atlantic Avenue State
Boston, MA 021 11
Chancellor Acquisition Corp. Middlesex County, NJ April 10, 1990 001005
745 Atlantic Avenue
Boston, MA 021 11
Chancellor Asset Management Middlesex County, NJ April 10, 1990 001004
Corp.
745 Atlantic Avenue
Boston, MA 02111
Chancellor Fleet Corp. Middlesex County, NJ April 10, 1990 001003
745 Atlantic Avenue
Boston, MA 02111
Chancellor Credit, Ltd. Middlesex County, NJ April 10, 1990 001002
745 Atlantic Avenue
Boston, MA 02111
Chancellor Corp. Middlesex County, NJ April 10, 1990 001001
745 Atlantic Avenue
Boston, NM 02111
- - ------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C
RELEASE
Release executed as of April 4, 1997, by each of the undersigned (the
"Releasors") in favor of Fleet National Bank, as agent (the "Agent"), and
Reliastar Life Insurance Company, the CIT Group/Equipment Financing, Inc.,
Atlantic Bank of New York, Inc., Farm Bureau Life Insurance Company of Michigan,
Inc., F.B. Annuity Company, Farm Bureau Mutual Insurance Company of Michigan,
Fleet National Bank, The Federal Deposit Insurance Corporation, and AMRESCO New
Hampshire, L.P. (collectively, the "Lenders" and, together with the Agent, the
"Releasees").
WITNESSETH:
-----------
WHEREAS, Releasees, Releasors and others have entered into a Loan Reduction
and Purchase and Assignment Agreement, dated as of the date hereof (the
"Settlement Agreement") and this Release is being executed pursuant to Section
3(f) of the Settlement Agreement.
NOW THEREFORE, in consideration of one dollar ($1.00), the consideration
set forth in the Settlement Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Releasors, with the intention of binding their respective heirs, executors,
administrators, legal representatives, successors and assigns, do hereby
expressly remise, release and forever discharge Releasees, their respective
officers, directors, shareholders, agents, servants, employees, attorneys,
predecessors in interest, successors and assigns from all debts, liabilities,
obligations, claims, demands, actions, accounts, covenants, contracts,
agreements, promises, omissions, damages and causes of action whatsoever, of
every name, nature, and description, both in law and in equity, or which may
result from the existing state of things, that Releasors ever had or may now
have, known or unknown, direct or indirect, absolute or contingent, or might
subsequently accrue to Releasors or any of them or that anyone claiming through
or under any of them may have, or claim to have, which arise under or in any way
relate to any of the Loan Documents (as defined in the Settlement Agreement) or
the subject matter of the Settlement Agreement, against any one or more of the
Releasees or their respective officers, directors, shareholders, agents,
servants, employees, attorneys, predecessors in interest, successors or assigns.
This Release shall forever settle, adjust, and discharge all claims of
Releasors against Releasees designated above. Releasors voluntarily and
knowingly execute this release with the intent of effecting the extinguishment
of obligations as hereinabove designated. The Releasors have read this Release
and understand all of its terms. The undersigned have executed the same
voluntarily and with full knowledge of its significance.
EXECUTED as an instrument under seal the day and year first above written.
BORROWERS:
WITNESSED AS TO ALL SIGNATURES
ON BEHALF OF BORROWERS: CHANCELLOR CORPORATION
/s/ Derek R. Coulter By: /s/ John J. Powell
Derek R. Coulter John J. Powell
President
CHANCELLOR FLEET CORPORATION
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR FINANCIAL SALES AND
SERVICES, INC.
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR FLEET
REMARKETING, INC.
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR ASSET
CORPORATION
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
CHANCELLOR FINANCIALEASE, INC.
By: /s/ John J. Powell
John J. Powell
President
VALMONT FINANCIAL CORPORATION
By: /s/ John J. Powell
John J. Powell
President
CHANCELLOR DATACOMM, INC.
By: /s/ John J. Powell
John J. Powell
President
ALCO 474N TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CAINS 931D TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CAINS 931E TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
CHRYSLER B04E TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CONAGRA 25405 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
CONAGRA 25409 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
DALLAS 38329 TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
H.E. BUTT 796C TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
KRAFT 79328 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
KRAFT 993C TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
PIC B03H TRUST
By: CHANCELLOR FLEET CORPORATION,
AS TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B062 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B063 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SATURN B067 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
SHAMROCK 25748 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
TYLER 3110 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
WHIRLPOOL 49434 TRUST
By: CHANCELLOR FLEET CORPORATION, AS
TRUSTEE
By: /s/ John J. Powell
John J. Powell
President
<PAGE>
EXHIBIT D
RELEASE
Release executed as of April 4, 1997, by each of the undersigned (the
"Releasors") in favor of Fleet National Bank, as agent (the "Agent"), and
Reliastar Life Insurance Company, the CIT Group/Equipment Financing, Inc.,
Atlantic Bank of New York, Inc., Farm Bureau Life Insurance Company of Michigan,
Inc., F.B. Annuity Company, Farm Bureau Mutual Insurance Company of Michigan,
Fleet National Bank, The Federal Deposit Insurance Corporation, and AMRESCO New
Hampshire, L.P. (collectively, the "Lenders" and, together with the Agent, the
"Releasees").
WITNESSETH:
WHEREAS, Releasees, Releasors and others have entered into a Loan Reduction
and Purchase and Assignment Agreement, dated as of the date hereof (the
"Settlement Agreement") and this Release is being executed pursuant to Section
3(f) of the Settlement Agreement.
NOW THEREFORE, in consideration of one dollar ($1.00), the consideration
set forth in the Settlement Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Releasors, with the intention of binding their respective heirs, executors,
administrators, legal representatives, successors and assigns, do hereby
expressly remise, release and forever discharge Releasees, their respective
officers, directors, shareholders, agents, servants, employees, attorneys,
predecessors in interest successors and assigns from all debts, liabilities,
obligations, claims, demands, actions, accounts, covenants, contracts,
agreements, promises, omissions, damages and causes of action whatsoever, of
every name, nature, and description, both in law and in equity, or which may
result from the existing state of things, that Releasors ever had or may now
have, known or unknown, direct or indirect, absolute or contingent, or might
subsequently accrue to Releasors or any of them or that anyone claiming through
or under any of them may have, or claim to have, which arise under or in any way
relate to any of the Loan Documents (as defined in the Settlement Agreement) or
the subject matter of the Settlement Agreement, against any one or more of the
Releasees or their respective officers, directors, shareholders, agents,
servants, employees, attorneys, predecessors in interest, successors or assigns.
This Release shall forever settle, adjust, and discharge all claims of
Releasors against Releasees designated above. Releasors voluntarily and
knowingly execute this release with the intent of effecting the extinguishment
of obligations as hereinabove designated. The Releasors have read this Release
and understand all of its terms. The undersigned have executed the same
voluntarily and with full knowledge of its significance.
EXECUTED as an instrument under seal the day and year first above written.
WITNESSED: VESTEX CAPITAL CORPORATION
/s/ Derek R. Coulter By: /s/ Brian M. Adley
Derek R. Coulter Brian M. Adley
Chief Executive Officer
WITNESSED:
/s/ Derek R. Coulter By: /s/ Brian M. Adley
Derek R. Coulter Brian M. Adley
WARRANT TO PURCHASE COMMON STOCKOF CHANCELLOR CORPORATION
-------------------------
Warrant No.: 98-001 Number of Shares:
10,000,000Date of Issuance: April 1, 1998
(subject to adjustment)
Chancellor Corporation, a Massachusetts corporation (the "Company"), for value
received, hereby certifies that Vestex Capital Corporation, or its registered
assigns (the "Holder") is entitled, subject to the provisions contained herein,
to purchase from the Company Ten Million (10,000,000) shares of Common Stock,
par value $.01 per share, of the Company ("Common Stock"), at the exercise price
of Twenty Cents ($.20) per share, subject to adjustment upon the occurrence of
certain events. The number of shares of Common Stock purchasable upon exercise
of this Warrant, and the purchase price per share, each as adjusted from to time
pursuant to the provisions contained herein, are hereinafter referred to as the
"Warrant Stock" and the "Purchase Price", respectively.
1. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
Common Stock: the Common Stock, par value $.01 per share, of the Company
and any other capital stock of the Company into which such common stock may be
converted or reclassified or that may be issued in respect of, in exchange for,
or in substitution of, such common stock by reason of any stock splits, stock
dividends, distributions, mergers, consolidations or other like events.
Company: Chancellor Corporation, a Massachusetts corporation,
and its successors and assigns.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Holder: from time to time, the holder of this Warrant and, unless
otherwise provided or indicated herein, the holder of the Warrant Stock (or
other securities issuable upon exercise of this Warrant).
Holders: from time to time, the holders of the Warrants and, unless
otherwise provided or indicated herein, the holders of the shares of Common
Stock issuable upon exercise of the Warrants (or other securities issuable upon
exercise of the Warrants).
Person: any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Prospectus: the prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any of the Registrable Common Stock covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
Purchase Price: the meaning set forth in the preamble to this Warrant.
- - ----------------
Registrable Common Stock: all shares of Common Stock issuable upon exercise
of the Warrants; provided that particular shares of Common Stock shall cease to
be Registrable Common Stock when (i) a registration statement covering the sale
of such shares shall have been declared effective under the Securities Act and
such shares shall have been disposed of in accordance with such registration
statement; (ii) such shares have been distributed to the public pursuant to Rule
144 (or any successor provision) under the Securities Act or (iii) such shares
shall have otherwise been transferred and new shares not subject to transfer
restrictions under the Securities Act and not bearing any legend restricting
further transfer shall have been delivered by the Company, and no other
applicable and legally binding restriction on transfer shall exist. As used in
Section 5, the number of shares of "Registrable Common Stock deemed outstanding"
on a particular date shall be equal to the sum of (1) the number of shares of
Registrable Common Stock issuable upon exercise of Warrants outstanding on such
date, plus (ii) the number of shares of Registrable Common Stock outstanding on
such date.
Registration Rights: the rights of Holders set forth in Section 5 of the
Warrants to have shares of Registrable Common Stock registered under the
Securities Act for sale under one or more effective Registration Statements.
Registration Statement: any registration statement filed by the Company
under the Securities Act that covers any of the Registrable Common Stock,
including the Prospectus, any amendments and supplements to such Registration
Statement, including post-effective amendments, and all exhibits and all
material incorporated by reference in such registration statement.
SEC: the Securities and Exchange Commission.
- - ----
Securities Act: the Securities Act of 1933, as amended.
Termination Date: December 31, 2002.
- - ------------------
Warrant Stock: the meaning set forth in the preamble to this Warrant.
---------------
Warrants: the meaning set forth in the preamble to this Warrant.
- - ---------
2. EXERCISE.
--------
2.1 Exercise of Warrant. Subject to the terms and conditions set
forth herein, this Warrant shall be exercisable on or prior to the
Termination Date as follows:
(a) this Warrant shall be exercisable for the total number of shares
of Common Stock purchasable pursuant to this Warrant at any time or from
time to time on or after the date hereof;
(b) this Warrant shall be exercisable in full until December 31, 2002.
2.2 Method of Exercise; Payment of Purchase Price.
(a) In order to exercise this Warrant, the Holder must surrender this
Warrant to the Company, with the exercise subscription form attached hereto duly
executed by such Holder or by such Holder's duly authorized attorney, at the
principal office of the Company (or at such other office or agency as the
Company may designate), together with any required payment in full of the
Purchase Price then in effect for the portion of Warrant Stock as to which this
Warrant is submitted for exercise. Except as provided in Section 2.3 below, any
such payment of the Purchase Price shall be in cash or by certified or official
bank check payable to the order of the Company.
(b) Each exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which this Warrant
shall have been surrendered to the Company as provided in subsection (a) above
and the purchase price paid as provided herein. At such time, the Person or
Persons in whose name or names any certificates for Warrant Stock shall be
issuable upon such exercise as provided in subsection (c) below shall be deemed
to become the Holder or Holders of record of the Warrant Stock represented by
such certificate.
(c) As soon as practicable after the exercise of this warrant in full
or in part, and in any event within ten (10) business days thereafter, the
Company at its expense will cause to be issued in the name of, and delivered to,
the Holder, or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may direct:
(i) a certificate or certificates for the number of whole shares of
Warrant Stock to which such Holder is entitled upon such exercise, together with
an amount in cash in lieu of any fraction of a share of Warrant Stock to which
such Holder is entitled as provided in Section 3, and
(ii) in the event such exercise is in part only, a new Warrant or
Warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of shares of Warrant Stock equal (without
giving effect to any adjustment therein and rounded if necessary to the nearest
whole number of shares) to the number of such shares called for on the face of
this Warrant minus the number of such shares purchased by the Holder upon such
exercise as provided in subsection (a) above.
2.3 Payment by Surrender of Warrants.
(a) Notwithstanding the payment provisions of Section 2.2, all or
part of payment due upon exercise of any portion of this Warrant may be made by
the surrender and the Warrant for the full number of shares of Common Stock
which the holder of the Warrant i purchase hereunder, less that number of shares
of Common Stock having a fair market value ( below) equal to the Exercise Price
of the shares of Common Stock being purchased. As used in this Warrant, "fair
market value" shall mean (i) if the Common Stock is traded on a national
securities exchange, the average last sale price reported for the twenty
preceding trading days by the consolidated transaction reporting system, or, if
the price IS not so reported, the average last sale price on the principal
exchange for the twenty preceding trading days, or, if no such price is reported
by such system or by such exchange, the average of the mean of the reported bid
and asked prices for each of the twenty preceding trading days; or (ii) if
traded on the over-the-counter market, the average last sale price reported for
the twenty preceding trading days by the system for last-sale reporting
maintained by the National Association of Securities Dealers Automated Quotation
("NASDAQ") for last sale reporting for securities designated National Market
Security or if such last price is not otherwise so reported, the average of the
mean of the bid and asked prices reported for each of the twenty preceding
trading days by NASDAQ, or, if not otherwise quoted, the average of the mean of
the bid and asked prices provided the twenty preceding days by the principal
market maker. Notice of exercise of the Warrant and payment of the Exercise
Price as aforesaid shall be made in the office of the Company, or at such other
address as the Company may designate by notice in writing to the holder hereof,
and the holder of this Warrant shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased.
2.4 Compliance with the Securities Act.
(a) This Warrant may be not exercised, and this Warrant or any share of
Registrable Common Stock may not be sold, transferred or otherwise disposed of
(any such sale, transfer or other disposition, a "sale"), except in compliance
with this Section 2.4.
(b) A Holder may exercise this Warrant if it is an "accredited
investor", as defined in Regulation D under the Securities Act, and a Holder may
sell this Warrant or shares of Registrable Common Stock to a transferee that is
an "accredited investor"; provided that:
(i) such Holder or transferee, as the case may be, establishes to the
reasonable satisfaction of the Company that it is an "accredited investor"; and
(ii) such Holder or transferee represents that it is acquiring the Warrant
Stock (in the
case of an exercise) or this Warrant or shares of Registrable Common Stock (in
the case of a sale) for its own account and that it is not acquiring such
Warrant Stock or this Warrant or shares of Registrable Common Stock with a view
to, or for offer or sale in connection with, any distribution thereof (within
the meaning of the Securities Act) that would be in violation of the securities
laws of the United States or any state thereof, but subject, nevertheless, to
the disposition of its property being at all times within its control; and
(iii) such Holder or transferee agrees to be bound by the provisions of this
Section 2.4 with respect to any exercise of this Warrant and any sale of
This Warrant or shares of Registrable Common Stock.
(c) In the event of a proposed exercise or sale that does not qualify
under Section 2.4(b), a Holder may exercise this warrant or sell this warrant or
shares of Registrable Common Stock only if:
(i) such Holder gives written notice to the Company of its intention to
exercise or effect such sale, which notice (A) shall describe the manner and
circumstances of the proposed transaction in reasonable detail, (B) shall
contain an undertaking by the Holder to furnish such other information as may be
required to enable counsel for the Company to render the opinion referred to in
Section 2.4(c)(ii) and (C) shall designate the counsel for such Holder, which
counsel shall be reasonably satisfactory to the Company; and (ii) both
counsel for the Holder and counsel for the Company shall render opinions to the
effect that such proposed exercise or sale may be effected without registration
under the Securities Act or under applicable blue sky laws.
The Company will cause its counsel to render its opinion promptly and, if
the Company's counsel is unable to deliver such an opinion, the Company shall,
as promptly as practicable, so notify the Holder, specifying the reasons
therefor.
(d) The provisions of Section 2.4(a) shall not apply to:
(i) any exercise of this warrant in connection with a sale of the
Registrable Common Stock in a transaction that is registered under the
Securities Act pursuant to this Warrant; or
(ii) any sale of this Warrant or shares of Registrable Common Stock in
a transaction
that is registered under the Securities Act pursuant to this Warrant.
3. FRACTIONAL INTEREST.
The Company shall not be required to issue fractional shares of Common
Stock on the
exercise of Warrants. If more than one Warrant shall be presented for exercise
in full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise thereof shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented. If any fraction of a share of Common
Stock would, except for the provisions of this Section 3 be issuable on the
exercise of any Warrant (or specified portion thereof), the Company shall pay an
amount in cash calculated by it to be equal to the then fair market value per
share of Common Stock multiplied by such fraction computed to the nearest whole
cent.
4. ADJUSTMENTS.
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4.1 Stock Dividends; Stock Splits; Reverse Stock Splits;
Reclassifications. In case the Company shall (i) pay a dividend or make any
other distribution with respect to its Common Stock in shares of its capital
stock, (ii) subdivide its outstanding Common Stock, (iii) combine its
outstanding Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of the Common Stock (including
any such reclassification in connection with a merger, consolidation or other
business combination in which the Company is the continuing corporation), the
number of shares of Warrant Stock issuable upon exercise of this Warrant
immediately prior to the record date for such dividend or distribution or the
effective date of such subdivision or combination shall be adjusted so that the
Holder of this Warrant shall thereafter be entitled to receive the kind and
number of shares of Warrant Stock or other securities of the Company that such
Holder would have owned or have been entitled to receive after the happening of
any of the events described above, had this Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto.
An adjustment made pursuant to this Section 4.1 shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event. Whenever the number of shares of Warrant Stock
purchasable upon the exercise of this Warrant is adjusted as provided in this
Section 4. 1, the Purchase Price for each share of Warrant Stock payable upon
exercise of this warrant shall be adjusted (calculated to the nearest $.0001) so
that it shall equal the price determined by multiplying such Purchase Price
immediately prior to such adjustment by a fraction, the numerator of which shall
be the number of shares issuable upon the exercise of this Warrant immediately
prior to such adjustment, and the denominator of which shall be the number of
shares so issuable immediately thereafter.
4.2 Mergers, Etc.
(a) In case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each case the Holder on the exercise hereof at any time after
the consummation of such reorganization, consolidation or merger or the
effective date of such dissolution, as the case may be, shall receive, in lieu
of the Common Stock issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided herein.
(b) In the event of any dissolution of the Company following the
transfer of all or substantially all of its properties or assets, the Company,
prior to such dissolution, shall at its expense deliver or cause to be delivered
the stock and other securities and property (including cash, where applicable)
receivable by the Holders after the effective date of such dissolution to an
"eligible institution," as trustee for the Holder or Holders.
(c) upon any reorganization, consolidation, merger or transfer (and any
dissolution following any transfer) referred to in this Section 4.2, this
Warrant shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the
person acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the terms of
this Warrant.
4.3 Issuance of Common Stock at Lower Values.
(a) In case the Company shall, in a transaction in which Section 4.1 is
inapplicable, issue or sell shares of Common Stock, or rights, options, warrants
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock, at a price per share of Common Stock
(determined in the case of such rights, options, warrants or convertible or
exchangeable securities, by dividing (A) the total amount receivable by the
Company in consideration of the issuance and sale of such rights, options,
warrants or convertible or exchangeable securities, plus the total
consideration, if any, payable to the Company upon exercise, conversion or
exchange thereof, by (B) the total number of shares of Common Stock covered by
such rights, options, warrants or convertible or exchangeable securities) that
is lower than the Purchase Price then in effect immediately prior to such sale
or issuance, then the Purchase Price shall thereafter be lowered to an amount
equal to such lower purchase price, effectively immediately upon such issue or
sale. Such adjustment shall be made successively whenever any such sale or
issuance is made.
(b) In case the Company shall issue and sell shares of Common Stock or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then in determining the "price per share of Common Stock" and
the "consideration" receivable by or payable to the Company for purposes of this
Section 4.3, the Board of Directors of the Company shall determine, in good
faith, the fair value of such property. In case the Company shall issue and
sell rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock,
together with one or more other securities as part of a unit at a price per
unit, then in determining the "price per share of Common Stock" and the
"consideration" receivable by or payable to the Company for purposes of this
Section 4.3, the Board of Directors of the Company shall determine, in good
faith, the fair value of the rights, options, warrants or convertible or
exchangeable securities then being sold as part of such unit.
(c) The provisions of this Section 4.3 shall not apply to the issuance
of any shares of Common Stock pursuant to employee stock options outstanding on
the date hereof or to shares issued pursuant to an employee stock option plan or
similar plan providing for options or other similar rights to purchase (or
issuances pursuant to incentive bonus plans) covering in the aggregate not in
excess of an
additional 10.0% of the fully-diluted shares of Common Stock outstanding on the
date hereof.
4.4 Distributions of Debt, Assets, Subscription Rights or Convertible
Securities. In case the Company shall fix a record date for the making of a
distribution to all holders of shares of its Common Stock of evidences of
indebtedness of the Company, assets (other than cash dividends payable out of
earnings and profits arising after the date hereof) or securities (excluding
those referred to in Sections 4.1 and 4.3 (any such evidences of indebtedness,
assets or securities, the "assets or securities"), then in each case the Holder,
upon the exercise of this Warrant, shall be entitled to receive in addition to
the shares of Warrant Stock, (i) the assets or securities to which such Holder
would have been entitled as a holder of Common Stock if such Holder had
exercised this Warrant immediately prior to the record date for such
distribution and (ii) any income earned on the assets or securities distributed
from the distribution date to the date of exercise or repurchase, as the case
may be. At the time of any such distribution, the Company shall either (A)
deposit the assets or securities payable to Holders pursuant hereto in trust for
the Holder with an "eligible institution" with instructions as to the investment
of such property and any proceeds therefrom so as to protect the value of such
property for the Holder or (B) distribute to the Holder the assets or securities
to which such Holder would be entitled upon exercise, and, upon any such
distribution pursuant to this clause (B), the provisions of this Section 4.4
shall no longer apply to such event. Such election shall be made by the Company
giving written notice thereof to the Holder. For purposes of this Section 4,
the term "eligible institution" shall mean a corporation organized and doing
business under the laws of the United States of America or of any state thereof,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least $25,000,000, and subject to supervision or
examination by Federal or state authority.
4.5 Notice of Adjustment. Whenever the number of shares of Warrant
Stock or other securities or property issuable upon the exercise of this Warrant
or the Purchase Price is adjusted, as herein provided, the Company shall
promptly mail by first class mail, postage prepaid, to the Holder notice of such
adjustment or adjustments, together with a certificate of a firm of independent
public accountants of recognized standing selected by the Board of Directors of
the Company (who may be the regular accountants employed by the Company) setting
forth (i) the number of shares of Warrant Stock or other securities or property
issuable upon the exercise of this Warrant and the Purchase Price after such
adjustment, (ii) a brief statement of the facts requiring such adjustment and
(iii) the computation by which such adjustment was made.
5. REGISTRATION RIGHTS AND PROCEDURES.
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5.1 Registration. (a) At any time and from time to time, the Holders of
at least
40,000 shares (as adjusted for changes in Common Stock after the date hereof) of
the Registrable Common Stock then deemed outstanding shall have the right to
request in writing that the Company effect a registration of such Holders'
Registrable Common Stock pursuant to the provisions of this Section 5.1 (each
such request, a "Registration Demand"). Further, if a from time to time the
Company proposes to file a Registration Statement with the SEC respecting an
offering, whether primary or secondary, of any equity securities of the Company,
the holders of at least ten percent (10%) of the Registrable Common stock then
deemed outstanding shall have the right to make a Registration Demand. Each
Registration Demand shall specify the number of Registrable Common Stock that
each such Holder proposes to sell in the offering. Notwithstanding the
foregoing, the Holders shall not in the aggregate have the right to require the
Company to file a total of more than five Registration Statements, nor more than
one Registration Statement on Form S-1 or more than one Registration Statement
on Form S-2.
(b) Upon receipt of a Registration Demand, the Company shall give written
notice
thereof to all the other Holders of Warrants or Registrable Common Stock within
10 days of the date of such Registration Demand. Each of the other Holders
shall have the right, within 20 days after the delivery of such notice, to
request that the Company include all or a portion of such Holder's Registrable
Common Stock in such Registration Statement,
(c) As promptly as practicable and in no event later than 45 days after
the Company receives a Registration Demand, the Company shall file with the SEC
a Registration Statement, on any form that shall be available and appropriate
for the sale of the Registrable Common Stock in accordance with the intended
method of distribution thereof, provided that the Company shall have the right
to delay the filing of the Registration Statement for a reasonable period of
time up to an additional 45 days in the event the filing of such Registration
Statement prior to such time would have a material adverse affect on the
Company, as determined by the Company and reasonably agreed to by a majority of
the Holders. The Company shall include in such Registration Statement all of
the Registrable Common Stock of such requesting Holders that such Holders have
requested to be included therein pursuant to Sections 5.1(a) and 5.1(b);
provided that, if the requested registration involves an underwritten offering,
-
the Registrable Common Stock to be registered may be reduced by the underwriter
for the public offering or the underwriter managing the public offering (in
either case, the "managing underwriter") if the managing underwriter delivers a
notice (a "Cutback Notice") pursuant to Section 5.1(g) or 5.1(h).
---------------
(d) The Company shall use its reasonable best efforts to cause each such
Registration Statement to be declared effective and to keep such Registration
Statement continuously effective and usable for resale of such Registrable
Common Stock from the date on which the SEC declares such Registration Statement
effective until the distribution of the securities registered thereunder has
been completed provided, however, that with respect to Registration Statements
on Form S-1 or S-2, the Company shall not be required to maintain the
effectiveness of such Registration Statements for a period in excess of 90 days.
(e) The Holders of a majority of the shares of Registrable Common Stock
to be included in any registration requested pursuant to a Registration Demand
shall determine the method of distribution of such shares.
(f) If a Registration Demand involves an underwritten offering,
the Holders of a
majority of the shares of Registrable Common Stock to be included in such
underwritten offering shall
have the right to select the managing underwriter for such offering with the
consent of the Company
which shall not be unreasonably withheld or delayed.
(g) If the proposed offering only includes shares of Registrable Common
Stock to be offered for the account of requesting Holders pursuant to a
Registration Demand, the provisions of this Section 5.1(g) shall be applicable
if the managing underwriter delivers a Cutback Notice stating that, in its
opinion, the number of shares of Registrable Common Stock that the Holders have
requested to be sold exceeds the maximum number of shares specified by the
managing underwriter in such Cutback Notice that may be distributed without
adversely affecting the price, timing or distribution of the Registrable Common
Stock being distributed. If the managing underwriter delivers such Cutback
Notice, the number of shares of Registrable Common Stock entitled to be included
in such Registration Statement shall be allocated among requesting Holders in
proportion to the respective number of shares of Registrable Common Stock that
each Holder owns or has the right to acquire.
(h) In the event that the proposed offering is an underwritten
offering and includes shares of Common Stock to be offered for the account of
selling stockholders, whether or not such selling stockholders have the right to
include shares in such offering (the "Other Demand Shares"), or securities to be
offered for the account of the Company (the "Company Demand Shares"), the
provisions of this Section 5.1(h) shall be applicable if the managing
underwriter delivers a Cutback Notice stating that, in its opinion, the
aggregate number of shares of Registrable Common Stock, plus the Other Demand
Shares and the Company Demand Shares proposed to be sold therein, exceeds the
maximum number of shares (the "Includible Demand Shares") specified by the
managing underwriter in such Cutback Notice that may be distributed without
adversely affecting the price, timing or distribution of the Common Stock being
distributed. If the managing underwriter delivers such Cutback Notice, the
requesting Holders shall first be entitled to include in such offering all of
the Registrable Common Stock such requesting Holders desire to sell therein,
allocated among the requesting Holders in proportion to the respective numbers
of shares of Registrable Common Stock that each Holder owns or has the right to
acquire, and the Company and the selling stockholders shall then be entitled to
participate in such offering in the proportions that they shall have agreed to,
provided, however, that if such Registration Statement was initially being filed
- - --------
by the Company and the Holders have elected to include their shares in such
Registration Statement, the number of shares to be included therein shall be
allocated among the requesting Holders in proportion to the respective numbers
of Registerable Shares that each Holder owns or has the right to acquire and the
number of shares which the Company intended to include therein, provided further
that in no event shall the Holders in the aggregate be prohibited from
registering less than one quarter of the shares to be included in such
Registration Statement.
(i) The underwriting agreement relating to any Registration Demand
shall provide
that each requesting Holder shall have the right to sell either its Warrants or
its Registrable Common Stock to the underwriters.
(j) No Registration Demand may be made until the expiration of six
(6) monthsfollowing the completion of the distribution of the securities
registered under any Registration Statementthat has been filed and has become
effective pursuant to a prior Registration Demand.
(k) The Company shall not be obligated to file a Registration Statement
relating to any Registration Demand unless the requests by the Holders for such
registration cover an aggregate of ten percent (10%) or more of the Registrable
Common Stock then deemed outstanding.
5.2. Underwriters' Green Shoe Option. If any registration pursuant to
this Section 5 involves an underwritten offering and the managing underwriter
requests that the participants in such offering grant the underwriters an
overallotment or "green shoe" option for the purpose of covering overallotments
that may be made by the underwriters in connection with such offering, then a
portion of the shares proposed to be sold by each Holder, which portion shall
not exceed the maximum amount then permitted by the rules of the National
Association of Securities Dealers, Inc. (currently 15%) and shall IN no event be
greater than the portion of the shares proposed to be sold by other sellers in
the offering that is applied to the same purpose, may, to the extent not
included in the firm commitment underwriting, be made subject to such
overallotment option, unless otherwise agreed in the underwriting agreement
relating thereto.
5.3. Holder Withdrawal Rights. The Company shall withdraw from
registration any Registrable Common Stock on request of a Holder, at the
Company's expense. The Company shall not be obligated to maintain the
effectiveness of any Registration Statement if, after any withdrawal of
Registrable Common Stock by a Holder, the number of shares of Registrable Common
Stock remaining subject to such Registration Statement is less than ten percent
(10%) of the Registrable Common Stock deemed outstanding, unless (i) the Company
is also registering securities on such Registration Statement for its own
account or (ii) if such Registration Statement relates to securities other than
for the account of the Company, the Company shall be reimbursed by the
non-withdrawing selling Holders for their pro rata share of all the expenses
thereafter incurred for maintaining the registration of the Registrable Common
Stock remaining subject to such registration.
6. REGISTRATION PROCEDURES.
------------------------
6.1. Covenants of the Company Applicable to All Registration
Statements. This Section 6.1 applies to all Registration Statements filed by
the Company and referred to in Section 5. 1. The securities covered by each such
Registration Statement are referred to as the "Registered Securities"Each
underwriter, agent, selling broker, dealer manager or similar securities
industry professional participating in any offering of the Registered Securities
is referred to as an "underwriter or agent" and any agreement entered into with
an underwriter or agent is referred to as an "underwriting or agency agreement".
In connection with each such registration, the Company covenants with each
Holder participating in such offering (each, a "selling holder") and each
underwriter or agent participating therein as follows:
(a) The Company will notify the selling holders and the managing
underwriter or agent, immediately, and confirm the notice in writing, (i) when
the Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the SEC, (iii) of any request by the SEC to amend the Registration
Statement or amend or supplement the Prospectus or for additional information,
(iv) of the issuance by the SEC of any stop order suspending the effectiveness
of the Registration Statement or of any order preventing or suspending the use
of any preliminary prospectus, or of the suspension of the qualification of the
Registered Securities for offering or sale in any jurisdiction, or of the
institution or threatening of any proceedings for any of such purposes, (v) if
at any time when a prospectus is required by the Securities Act to be delivered
in connection with sales of the Registered Securities the representations and
warranties of the Company contemplated by Section 6. 1 0) cease to be true and
correct and (vi) of the existence of any fact that results in the Registration
Statement. the Prospectus or any document incorporated therein by
referencecontaining an untrue statement of material fact or omitting to state a
material fact required to be statedtherein or necessary to make any statement
therein not misleading.
(b) The Company will use every reasonable effort to prevent the
issuance of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus and, if any such order is issued, to obtain the lifting thereof at
the earliest possible moment.
(c) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment of or supplement to the Prospectus
(including amendments of the documents incorporated by reference into the
Prospectus), of which the selling holders or the managing underwriter or agent
shall not have previously been advised and furnished a copy, or to which the
selling holders, the managing underwriter or agent or counsel for the selling
holders or counsel for the underwriters or agents shall reasonably object.
(d) The Company will furnish to each selling holder and to the managing
underwriter or agent, without charge, as many signed copies of the Registration
Statement (as originally filed) and of all amendments thereto, whether filed
before or after the Registration Statement becomes effective, copies of all
exhibits and documents filed therewith, including documents incorporated by
reference into the Prospectus, and signed copies of all consents and
certificates of experts, as such selling holder or the managing underwriter or
agent may reasonably request, and will furnish to the managing underwriter, for
each other underwriter participating in an underwritten offering, one conformed
copy of the Registration Statement as originally filed and of each amendment
thereto (including documents incorporated by reference into the Prospectus but
without exhibits).
(e) The Company will deliver to each selling holder and each
underwriter or agent participating in such offering, without charge, as many
copies of each preliminary prospectus as such selling holder or such underwriter
or agent may reasonably request, and the Company hereby consents to the use of
such copies for purposes permitted by the Securities Act. The Company will
deliver to each selling holder and each underwriter or agent participating in
such offering, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Securities Act, such number of
copies of the Prospectus (as supplemented or amended) as such selling holder or
such underwriter or agent may reasonably request.
(f) The Company will comply to the best of its ability with the
Securities Act and the rules and regulations of the SEC thereunder, and the
Exchange Act and the rules and regulations of the SEC thereunder so as to permit
the completion of the distribution of the Registered Securities in accordance
with the intended method or methods of distribution contemplated in the
Prospectus. If at any time when a prospectus is required by the Securities Act
to be delivered in connection with sales of the Registered Securities any event
shall occur or condition exist as a result of which it is necessary, in the
opinion of counsel for the selling holders, counsel for the underwriters or
agents or counsel for the Company, to amend the Registration Statement or amend
or supplement the Prospectus in order that the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of any of such counsel, at any such time to
amend the Registration Statement or amend or supplement the Prospectus in order
to comply with the requirements of the Securities Act or the rules and
regulations of the SEC thereunder, the Company will promptly prepare and file
with the SEC, subject to Section 6. 1 (c), such amendment or
supplement as may be necessary to correct such untrue statement or omission or
to make the Registration
Statement or the Prospectus comply with such requirements.
(g) The Company will use its best efforts, in cooperation with the
selling holders or the underwriters or agents, as the case may be, to qualify
the Registered Securities for offering and sale under the applicable securities
laws of such states and other jurisdictions as the selling holders or the
managing underwriter or agents, as the case may be, may designate; provided that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. The Company will file such statements and reports as may
be required by the laws of each jurisdiction in which the Registered Securities
have been qualified as above provided.
(h) The Company will use its best efforts to effect the listing of the
Registered Securities covered by a Registration Statement on each securities
exchange on which similar securities issued by the Company are then listed if
requested by the holders of at least a majority of the Registered Securities, or
if requested by the managing underwriter.
(i) If any of the Registered Securities are debt securities, the
Company will use its best efforts to cause such Registered Securities to be
rated with Moody's Investors Services, Inc. and Standard & Poor's Corporation or
other appropriate rating agencies, if so requested by the holders of at least a
majority of such Registered Securities, or if requested by the managing
underwriter.
(i) The Company shall make such reasonable representations and
warranties to the selling holders and the underwriters or agents, if any, in
form, substance and scope as are customarily made by issuers to underwriters in
primary underwritten public offerings.
(k) On the effective day of the Registration Statement or, in the case
of an underwritten offering, on the date of delivery of the Registered
Securities sold pursuant thereto, the Company shall cause to be delivered to the
selling holders and the underwriters or agents, if any, opinions of counsel for
the Company, which counsel, and opinions (in form, scope and substance), shall
be reasonably satisfactory to counsel for the underwriters or agents, if any,
and counsel for the selling holders, covering the matters customarily covered in
opinions given to underwriters in primary underwritten public offerings,
(1) Immediately prior to the effectiveness of the Registration
Statement or, in the case of an underwritten offering, at the time of delivery
of any Registered Securities sold pursuant thereto, the Company shall cause to
be delivered to the selling holders and the underwriters or agents, if any,
letters from the Company's independent public accountants stating that such
accountants are independent public accountants with respect to the Company
within the meaning of the Securities Act and the applicable published rules and
regulations of the SEC thereunder, and otherwise in customary form and covering
such financial and accounting matters as are customarily covered by letters of
the independent public accountants delivered in connection with primary
underwritten public offerings.
(m) If the managing underwriter or agent so requests, the
underwriting or agency agreement shall set forth in full the provisions hereof
relating to covenants, registration expenses, lock-up agreements,
indemnification and contribution contained in Sections 6.1, 6.2, 6.3, 6.4, 6.5
and 6.9, with such changes therein as may be agreed to by the managing
underwriter or agent, the Company and a majority of the selling holders.
(n) The Company shall deliver such documents and certificates as may be
reasonably requested by any selling holder or the underwriters or agents, if
any, to evidence compliance
with Section 6.1(j) and with any customary conditions contained in the
underwriting or agency agreement, if any.
(o) The Company will make available for inspection by representatives
of the selling
holders and the underwriters or agents participating in such offering and any
attorney or accountant retained by such selling holders or underwriters or
agents, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
representative, underwriter or agent, attorney or accountant in connection with
the preparation of the Registration Statement; provided that any
records, information or documents that are designated by the Company
in writing as confidential shall be kept confidential by each such person unless
such records, information or documents become part of the public domain
through no fault of such person or unless disclosure thereof is required by
court or administrative order.
(p) The Company will make generally available to its security holders
as soon as practicable, but not later than 45 days after the close of the period
covered thereby (or 90 days if such period is a fiscal year), an earnings
statement of the Company (in form complying with the provisions of Rule 158
under the rules and regulations of the SEC under the Securities Act), covering a
period of 12 months beginning after the effective date of the Registration
Statement but not later than the first day of the Company's fiscal quarter next
following such effective date.
(q) The Company will enter into such customary agreements, including a
customary underwriting or agency agreement with the underwriters or agents, if
any, and take all such other actions in connection with the offering in order to
expedite or facilitate the disposition of the Registered Securities.
6.2 Covenants of the Selling Holders. (a) Each selling holder
shall use its best efforts to furnish to the Company such information regarding
the distribution of such Registered Securities as the Company may from time to
time reasonably request in writing.
(b) Each selling holder agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section
6.1(a)(vi), such selling holder will forthwith discontinue the disposition of
its Registered Securities pursuant to the Registration Statement until such
selling holder's receipt of the copies of a supplemented or amended Prospectus
contemplated by Section 6. 1 (f), or until it is advised in writing by the
Company that the use of such Prospectus may be resumed. If the Company shall
give any such notice, the Company shall extend the period of time during which
the Company is required to keep the Registration Statement effective and usable
by the number of days during the period from the date of receipt of such notice
to the date when each selling holder of Registered Securities covered by such
Registration Statement either receives the copies of a supplemented or amended
Prospectus contemplated by Section 6. 1 (f) or is advised in writing Company
that the use of such Prospectus may be resumed.
6.3. Registration Expenses. (a) The Company will pay and bear all costs and
expenses, including but not limited to legal, consulting, accounting, printing
and other expenses,
incident to the performance of its obligations under this Agreement with respect
to each registration pursuant to Section 5.1 other than underwriter's
commissions or discounts (except that if the Company is required by the Holders
to file a Registration Statement on Form S-1 or S-2 on behalf of the Holders and
Form S-3 could have been used for such registration but the Holders refuse to
permit the Company to do so, such expenses shall be borne one-half by the
Company and one-half by the Holders in proportion to the shares registered
therein), including: (i) the preparation, printing and filing of
the Registration Statement (including
financial statements and exhibits), as originally filed and as amended, any
preliminary prospectuses and the Prospectus and any amendments or supplements
thereto, and the cost of furnishing copies thereof to the selling holders or the
underwriters or agents, as the case may be; (ii) the preparation,
printing and distribution of any underwriting or agency agreement, certificates
representing the Registered Securities, any Blue Sky Survey and other documents
relating to the performance of and compliance with this Agreement; (iii)
the fees and disbursements of the Company's counsel and accountants and the
reasonable fees and disbursements of one counsel retained by the selling holders
pursuant to Section 6.3(b);
(iv) the fees and disbursements of the underwriters or agents
customarily paid by issuers or sellers of securities and the reasonable fees and
expenses of any special experts retained in connection with the Registration
Statement, but excluding underwriting discounts and commissions and transfer
taxes, if any;
(v) the qualification of the Registered Securities Stock under
applicable securities laws in accordance with Section 6.1(g) and any filing for
review of the offering with the National Association of Securities Dealers,
Inc., including filing fees and fees and disbursements of counsel for the
selling holders and the underwriters or agents, as the case may be, in
connection therewith, in connection with any Blue Sky Survey and in connection
with any reserve share program;
(vi) all fees and expenses incurred in connection with the
listing, if any, of any of
the Registered Securities on any securities exchange pursuant to Section
6.1(h); and
(vii) the fees charged by any rating agency in connection with the
rating, if any, of
the Registered Securities pursuant to Section 6.1(i). (b) In connection
with the filing of each Registration Statement, the Company will
reimburse the selling holders for the reasonable fees and disbursements of one
firm of legal counsel, which shall be chosen by the holders of at least a
majority of the Registered Securities to be included in such offering.
(c) Each selling holder will pay and bear all costs and expenses
incident to the delivery of the Registered Securities to be sold by it,
including any stock transfer taxes payable upon the sale of such Registered
Securities to the purchaser thereof and any underwriting discounts or
commissions payable to underwriters or agents in connection therewith.
6.4. Indemnification. (a) In connection with each registration
pursuant to this Warrant, the Company agrees to indemnify and hold harmless each
selling holder, each underwriter or agent participating in such offering, and
each person, if any, who controls any selling holder or any such underwriter or
agent within the meaning of Section 15 of the Securities Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading or arising out of an untrue statement of a material fact included
in any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue statement or
omission, if such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
fees and disbursements of counsel chosen by the selling holders and by the
underwriters or agents) reasonably incurred in investigating, preparing or
defending against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid under
subsection (i) or (ii) above;
provided that this indemnity does not apply to any loss, liability, claim,
damage or expense to the extent arising out of an untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by any selling holder or any
underwriter or agent expressly for use in the Registration Statement (or any
amendment thereto) or any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(b) Each selling holder agrees severally, and not jointly, to indemnify
and hold harmless the Company, its directors, each of its officers who signed a
Registration Statement, each underwriter or agent participating in such offering
and the other selling holders, and each person, if any, who controls the
Company, any such underwriter or agent and any other selling holder within the
meaning of Section 15 of the Securities Act, against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
Section 6.4(a), as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such selling
holder expressly for use in the Registration Statement (or any amendment
thereto), or any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) The obligations of the Company under Section 6.4(a) and of the selling
holders
under Section 6.4(b) to indemnify any underwriter or agent who participates in
an offering (or any person, if any, controlling such underwriter or agent within
the meaning of Section 15 of the Securities Act) shall be conditioned upon the
underwriting or agency agreement with such underwriter or agent containing an
agreement by such underwriter or agent to indemnify and hold harmless the
Company, its directors, each of its officers who signed a Registration
Statement, and each selling holder, and each person, if any, who controls the
Company or any such selling holder within the meaning of Section 15 of the
Securities Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 6.5(a), as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto), or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such underwriter or agent expressly for use in the
Registration Statement (or any amendment thereto), or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(d) Each indemnified party shall give prompt notice to each indemnifying
party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of such action. In no event shall the indemnifying party or parties be
liable for the fees and expenses of more than one counsel for the Company, its
officers, directors and controlling persons as a group, for the selling holders
and their controlling persons as a group, and for the underwriters or agents and
their controlling persons as a group, in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
6.5. Contribution. (a) In order to provide for just and equitable
contribution in circumstances under which the indemnity provided for in this
Section 6 is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company, the selling
holders and the underwriters or agents shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company, the selling holders and one or more of the
underwriters or agents, as incurred, in proportion to their relative fault in
the matter, but in no event, whether pursuant to this Section 6.5, under other
provisions of this Section 6 or otherwise shall any selling holder be
responsible for an amount in excess of the net proceeds realized by such selling
holder from the sale of its Registrable Securities in such transaction.
(b) No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 6.5, each person, if any, who
controls an underwriter or agent within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such underwriter or
agent, and each director of the Company, each officer of the Company who signed
a Registration Statement, and each person, if any, who controls the Company or a
selling holder within the meaning of Section 15 of the Securities Act shall have
the same rights to contribution as the Company or such selling holder, as the
case may be.
6.6 Representations, Warranties and Indemnities to Survive. The
indemnity and
contribution agreements contained in this Section 6 and the representations and
warranties of the Company referred to in Section 6. 1 0) shall remain operative
and in full force and effect regardless of (i) any termination of any
underwriting or agency agreement, (ii) any investigation made by or on behalf of
the selling holders, the Company or any underwriter or agent or controlling
person or (iii) theconsummation of the sale or successive resales of the
Registered Securities.
6.7. Rule 144. From and after the date hereof, the Company covenants that it
will file
the reports required to be filed by it under the Securities Act and the rules
and regulations of the SEC thereunder and the Exchange Act and the rules and
regulations of the SEC thereunder and it will take such further action as any
Holder of Registrable Common Stock may reasonably request, all to the extent
required from time to time to enable such Holder to sell Registrable Common
Stock without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 under the Securities Act, as such Rule may be
amended from time to time. Upon the request of any Holder of Registrable Common
Stock, the Company will deliver to such Holder a written statement as to whether
it has complied with such information and requirements.
6.8. Participation in Underwritten Offerings. No Holder may
participate in any
underwritten offering hereunder unless:
(a) Such Holder executes a power of attorney appointing one or more
attorneys
designated by the selling holders proposing to sell a majority of the shares of
Registrable Common Stock proposed to be sold by all selling holders. Each such
attorney shall be authorized, on customary terms, to execute the underwriting
agreement on behalf of each selling holder and to otherwise act for the selling
holders in connection with the offering.
(b) Such Holder, through one of its powers of attorney, enters into an
underwriting
agreement with the Company, the other selling holders, any selling stockholders
and the underwriters, which underwriting agreement shall comply with the
provisions of this Section 6. (c) Such Holder executes all
questionnaires and other documents required by such
power of attorney or the underwriting agreement to be executed by such
Holder.
6.9. Lock-Up Agreements. (a) The Company agrees that for a period of 150
days
from the effective date of any Registration Statement for an underwritten public
offering pursuant to Section 5.1., it will not, directly or indirectly, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of, any
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock, other than any such sale or distribution of Common Stock (i) upon
exercise of the Company's outstanding Warrants or (ii) in connection with the
exercise of options granted to employees in the ordinary course of business
prior to the date of the Registration Statement.
(b) Each Holder of Registrable Common Stock agrees that except pursuant to
the
Registration Statement it will not, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, any shares of Common
Stock or any Warrants or other securities convertible into or exchangeable or
exercisable for Common Stock, for a period of 90 days from the effective date of
the Registration Statement pertaining thereto.
(c) The lock-up agreements set forth in Sections 6.9(a) and 6.9(b)
shall be subject to customary exceptions that may be contained in an
underwriting agreement if any such registration involves an underwritten
offering.
7. COVENANTS-OF THE COMPANY.
7.1. Reservation of Common Stock for Issuance on Exercise of Warrants.
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The Company covenants that it will at all times reserve and keep available, free
from pre-emptive rights, out of its authorized but unissued Common Stock, solely
for the purpose of issue upon exercise of this Warrant as herein provided, such
number of shares of Warrant Stock, and such other stock,-securities and
property, as shall then be issuable upon the exercise of this Warrant. The
Company covenants that all shares of Warrant Stock which shall be so issuable
shall, upon such issue, be duly and validly issued and fully paid and
nonassessable.
7.2. Certain Agreements Respecting Registration Rights. (a) Without the
consent of the Holders of two thirds of the Registrable Shares the Company will
not while any Registrable Shares remain outstanding permit or enter into any
agreement permitting any person or entity other than the Holders to include any
securities of the Company in any registration statement filed by the Company,
other than the exercise of options and the resale of Common Stock acquired upon
such exercise pursuant to one or more Registration Statements on Form S-8 or its
successor.
(b) The Company agrees that it will not grant to any Holder any rights
to register Warrants, or the related Warrant Stock, that are not granted to all
Holders of the then outstanding Warrants.
7.3. Notices of Record Date, etc. In the event of:
(a) any taking by the Company of a record of the holders of any class or
securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up of
the
Company, or
(d) any proposed issue or grant by the Company of any shares of stock
of any class
or any other securities, or any right or option to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities
(other than the issue of Warrant Stock on the exercise of the Warrants), then
and in each such event the Company will mail or cause to be mailed to each
Holder of a warrant a notice specifying (i) the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and stating
the amount and character of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock (or other securities underlying this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other securities underlying this
Warrant) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall be mailed at least 20 days prior to the date
specified in such notice on which any such action is to be taken.
7.4. Exchange of Warrants. On surrender for exchange of any Warrant,
properly
endorsed, to the Company, the Company at its expense will issue and deliver to
or on the order of the Holder thereof a new Warrant or Warrants of like tenor,
in the name of such Holder or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct, calling in the aggregate on the face or
faces thereof for the number of shares of Warrant Stock called for on the face
or faces of the Warrant or Warrants so surrendered.
7.5. Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the
Company of the loss, theft, destruction or mutilation of any Warrant and, in the
case of any such loss, theft or destruction of any Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
7.6. Payment of Taxes. The Company shall pay all taxes and other
governmental charges that may be imposed on the Company or on the Warrants or on
any securities deliverable upon exercise of Warrants with respect thereto. The
Company shall not be required, however, to pay any tax or other charge imposed
in connection with any transfer involved in the issue of any certificate for
shares of Warrant Stock or other securities underlying the Warrants or payment
of cash to any Person other than the Holder of the Warrant surrendered upon
exercise, and in case of such transfer or payment, the Company shall not be
required to issue any stock certificate or pay any cash until such tax or charge
has been paid or it has been established to the Company's satisfaction that no
such tax or other charge is due.
7.7 No Impairment. The Company will not, by amendment of its charter
or through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the Holder of
this Warrant against impairment.
7.8 Warrant Register. The Company will maintain a register containing
the names and addresses of the Holders of the Warrants. Any Holder may change
its address as shown on the warrant register by written notice to the Company
requesting such change.
8. RIGHT OF FIRST REFUSAL.
8.01. Voluntary Transfers of Warrant Stock. If at any time after
exercise of the Warrant and prior to December 31, 2002, the Holder intends to
sell, assign, transfer or otherwise voluntary dispose in a single or series of
related transactions of all or part of the Warrant Stock, the Holder shall give
written notice of such intention to the Company, which notice shall include
either (a) the name of the proposed transferee, the proposed aggregate purchase
price for the Warrant Stock, the terms of payment of such purchase price and all
other matters relating to such sale and shall be accompanied by a copy of the
binding written agreement of the proposed transferee to purchase the Warrant
Stock or (b) a statement that such shares will be sold by the Holder in market
transactions or otherwise. Such notice shall constitute a binding offer by the
Holder to sell to the Company such number of shares of the Warrant Stock then
held by the Holder as are proposed to be sold in the notice at either (i) the
aggregate purchase price designated in a notice pursuant to clause (a) or (ii)
with respect to Warrant Stock to be sold other than pursuant to clause (a) the
Fair Market Value, in either case, payable as provided in Section 8.02 hereof.
Within three (3) business days after receipt of written notice, the Company
shall give written notice to the Holder as to whether such offer has been
accepted by the Company. The Company may only accept such offer in whole and
may not accept such offer in part. Such acceptance notice shall fix a time,
location and date for the closing of such purchase which shall not be less than
one (1) nor more than five (5) business days after the giving of the acceptance
notice. The place for such closing shall be at the principal office of the
Company or such other location agreed to by the parties. At such closing, the
Holder shall accept payment as set forth in Section 8.02 and shall deliver to
the Company in exchange therefor certificates for the Warrant Stock stated in
the notice accompanied by duly executed instruments of transfer.If the Company
shall fail to accept any such offer, then the Holder shall be free to sell the
Warrant Stock set forth in its notice to the designated transferee at a price
and on terms no less favorable to the Holder than described in the Holder's
notice or in market transactions, provided that such sale is consummated within
ninety (90) days after the giving of notice by the Holder to the Company as
aforesaid. After the expiration of such ninety-day period, the provisions of
this Article 8 shall again apply with respect to any proposed transfer of the
Holder's Warrant Stock.
The purchase price of any Warrant Stock to be acquired pursuant to this
Article 8 shall be payable on the terms offered to the Holder by the proposed
transferee, if any (provided, however, that the Company shall not be required to
meet any non-monetary terms of the proposed transfer, including, without
limitation, delivery of other securities in exchange for the Warrant Stock
proposed to be sold) or by payment in full in immediately available funds at the
time of delivery of the Warrant Stock.
8.02. Tenders. In the event of the purchase pursuant to Section
8.01, the Holder shall tender the Warrant Stock being purchased hereunder to the
Company, or to an assignee designated by the Company, at the principal office of
the Company at a reasonable date and time specified by it (in any event within
five (5) business days of the Company's election), by delivery of certificates
representing such shares endorsed in blank and in proper form for transfer
against payment of the purchase price.
8.03. Waiver. From time to time the Company may waive its rights hereunder
either
generally or with respect to one or more specified transfers. All action to be
taken by the Company hereunder shall be taken by vote of a majority of its
Directors then in office.
8.04. Legends. The Company will cause all certificates or other instruments
representing the Warrant Stock to be endorsed conspicuously on the face thereof
with the following legend:
"The shares represented by this certificate are subject to a Warrant to
Purchase Common Stock dated April 1, 1998, a copy of which is available for
inspection at the offices of the Corporation or may be available upon request."
9. RIGHTS OF MATCHING.
Pursuant to this Section 9, the Holder of this Warrant shall have the
right to match any and all investments by any Person into the Company,
including, but not limited to, investments through the exercise of warrants,
options, rights or such other negotiated transaction (the "Investment"). For
the purposes of this right of matching each Investment (i.e., warrant, option,
common stock, preferred stock, debt with equity features, warrants or conversion
rights) shall be treated as separate and distinct Investments into the Company.
The Holder shall have the right to match said Investment under the following
terms:
9.01. Up to a total of six (6) months after the original date of
issuance of this Warrant, but no later than twelve (12) months after the date of
Investment, the Holder may exercise their rights under this Section 9.01 to
match the Investment. If the Holder elects to exercise this right, then the
Holder must match the Investment by a total of one hundred and ten (110%)
percent of the principal amount of the Investment (e.g., $1.00 invested equals
$1.10 required investment under the rights pursuant to Section 9.01) with all
other terms and conditions of the Investment to remain constant.
9.02. Up to a total of eighteen (18) months after the original
date of issuance of this Warrant, but no later than twelve (12) months after the
date of Investment, the Holder may exercise their rights under this Section 9.02
to match the Investment. If the Holder elects to exercise this right, then the
Holder must match the Investment by a total of one hundred and fifteen (115%)
percent of the principal amount of the Investment (e.g., $1.00 invested equals
$1.15 required investment under the rights pursuant to Section 9.01) with all
other terms and conditions of the Investment to remain constant.
9.03. Up to a total of thirty (30) months after the original date
of issuance of this Warrant, but no later than twelve (12) months after the date
of Investment, the Holder may exercise their rights under this Section 9.03 to
match the Investment. If the Holder elects to exercise this right, then the
Holder must match the Investment by a total of one hundred and twenty (120%)
percent of the principal amount of the Investment (e.g., $1.00 invested equals
$1.20 required investment under the rights pursuant to Section 9.01) with all
other terms and conditions of the Investment to remain constant.
9.04. The Holder's right to match any Investment shall terminate
coincident with the Termination Date as described in the above Section 2(b)
hereto.
9.05. For the purposes of the right of matching, this Warrant need
not be exercised pursuant to Section 2 for the Holder to be able to exercise its
rights under this Section 9 or for the right of matching as described in this
Section 9 to be enforceable.
10. WARRANT AGENT.
The Company may, by written notice to each Holder of a Warrant, appoint an
agent having an office in Boston, Massachusetts for the purpose of issuing
Warrant Stock (or such other securities at the time deliverable upon the
exercise of Warrants) on the exercise of the Warrants pursuant to Section 1,
exchanging Warrants pursuant to Section 7.4, replacing Warrants pursuant to
Section 7.5, maintaining the warrant register pursuant to Section 7.8, or any of
the foregoing, and thereafter any such issuance, exchange or replacement, as the
case may be, shall be made at such office by such agent.
11. REMEDIES.
The Company stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
12. NEGOTIABILITY, ETC.
This Warrant is issued upon the following terms, to all of which the
Holder hereof by the
taking hereof consents and agrees:
(a) title to this warrant may be transferred by endorsement by the
Holder hereof executing an assignment and delivery in the same manner as in the
case of a negotiable instrument transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is empowered to
transfer above title hereto by endorsement and delivery hereof to a bona fide
purchaser hereof for value; each prior taker or owner waives and renounces all
of his equities or rights in this Warrant in favor of each such bona fide
purchaser, and each such bona fide purchaser, and each such bona fide purchaser
shall acquire absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the Company, the
Company may
treat the registered holder hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
13. NO RIGHTS AS STOCKHOLDER. Until the exercise of this Warrant,
the Holder of this Warrant shall not have or exercise any rights by virtue
hereof as a stockholder of the Company.
14. NOTICES. All notices and
other communications from the Company to the Holder of this Warrant shall be
mailed by first class registered or certified mail, postage prepaid, at such
address as may have been furnished to the Company in writing by such Holder or,
until any such Holder furnishes to the Company an address, then to, and at the
address of, the last Holder of this Warrant who has so furnished an address to
the Company. All notices and other communications from the Holder of this
Warrant or in connection herewith to the Company shall be mailed by first class
registered or certified mail, postage prepaid, to the Company at its principal
office set forth below. If the Company should at any time change the location
of its principal office to a place other than as set forth below, it shall give
prompt written notice to the Holders and, thereafter, all references in this
Warrant to the location of its principal office at the particular time shall be
as so specified in such notice.
15. MISCELLANEOUS.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought or by the
affirmative vote of the holders of 67% of the Warrants outstanding on the date
when such amendment is agreed to by such Holders. This Warrant shall be
construed and enforced in accordance with and governed by the laws of the
Commonwealth of Massachusetts. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
This Warrant is being executed as an instrument under seal. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this warrant to be duly
executed, as
of the day and year first above written.Dated: April 1, 1998
CHANCELLOR CORPORATION
By: /s/ Rudolph Peselman
Title: Director
(Corporate Seal)
Attest:By: /s/ Peter J.Mullen
Title: Clerk
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into
effective as of July 1, 1998, by and between Chancellor Corporation, a
Massachusetts corporation, having a principal business address at 210 South
Street, Boston, MA 02111 (the "Company"), and VMI Corporation, a Massachusetts
corporation, having a principal business address at 405 Waltham Street, Suite
304, Lexington, MA 02173 (the "Consultant").
WHEREAS, the Company desires that the Consultant provide certain general
business consulting services to the Company, including, but certainly not
limited to, identification, review and analysis of potential acquisition and
merger candidates and capital formation, on the terms and conditions contained
in this Agreement, and the Consultant wishes to provide such consulting services
on the terms and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company and the Consultant, each intending to be legally
bound hereby, agree as follows:
1. RETENTION OF CONSULTANT. Subject to the terms and conditions of this
Agreement, the Company hereby retains the Consultant to perform consulting
services in accordance with Section 3 hereof, and the Consultant hereby agrees
to render such services.
2. TERM.
(a) Unless otherwise terminated in accordance with Section 10 hereof, the
Consultant shall perform the duties and services specified herein for a period
commencing on the date hereof (the "Effective Date") and ending on July 1, 2001.
The period during which the Consultant is obligated to perform such duties and
services, as the same may be reduced by termination pursuant to Section 11
hereof, is referred to herein as the "Consulting Term."
(b) The Consulting Term of this Agreement may automatically extend for a period
of two (2) years if the Company achieves profitability from operations for two
(2) out of the three (3) fiscal years ending (1998, 1999 and 2000) during the
Consulting Term. The Consulting Term of this Agreement may also automatically
extend for a period of two (2) years if an event whereby any new person (within
the meaning of Section 13(b) of the 1934 Securities Exchange Act) becomes the
beneficial owner (directly or indirectly) of securities of the Company
representing Twenty Five (25%) percent or more of the combined voting power of
the Company's then outstanding securities entitled to vote generally in the
election of directors.
(c) The payment of fees due to the Consultant under this Agreement will
accelerate if an event whereby any new person (within the meaning of Section
13(b) of the 1934 Securities Exchange Act) becomes the beneficial owner
(directly or indirectly) of securities of the Company representing Forty (40%)
percent or more of the combined voting power of the Company's then outstanding
securities entitled to vote generally in the election of directors. If such an
event should occur, the Consultant will be entitled to receive a lump sum
payment of the aggregate of all fees entitled to it during the Consulting Term,
as may be amended pursuant to Section 2(b) of this Agreement.
3. CONSULTING SERVICES. During the Consulting Term, the Consultant shall
perform such general business consulting services including, but certainly not
limited to, identification, review and analysis of potential acquisition and
merger candidates and capital formation, and such other services as may be
requested of him from time to time by the Chief Executive Officer or Board of
Directors of the Company. All of the consulting services rendered by the
Consultant to the Company in accordance with the terms of this Agreement are
referred to herein as "Services."
<PAGE>
4. COMPENSATION.
(a) As consideration for the Consultant's provision of Services hereunder and in
settlement for all previous amounts that may be outstanding, the Company shall
pay the Consultant an initial fee of Seven Hundred and Fifty Thousand
($750,000.00) dollars. Additionally, the Company shall pay the Consultant a fee
(the "Fee") of Fifty Thousand ($50,000.00) dollars per month. The Fee shall be
paid in installments consistent with the Company's normal payroll schedule,
commencing on either the first or fifteenth day of the month, as the case may
be, following the date of commencement of the Consulting Term.
(b) As additional consideration for the Consultant's provision of Services
hereunder, the Company shall pay the Consultant a bonus (the "Bonus") based on
the performance of the Company to be measured by the Company's consolidated
pre-tax operating income for the fiscal years ending during the Consulting Term.
The minimum Bonus to be paid to the Consultant will be calculated and paid based
upon the Company achieving a minimum pre-tax income target according to the
following schedule:
Fiscal Year Ending Pre-Tax Income Target Minimum Bonus
December 31, 1999 $ 1,250,000.00 $ 350,000.00
December 31, 2000 $ 1,500,000.00 $ 500,000.00
December 31, 2001 $ 2,000,000.00 $ 650,000.00
The Consultant shall also be entitled to additional bonus dollars based
upon the Company exceeding the aforementioned pre-tax income targets. The
Company shall pay the Consultant the sum of Fifty Thousand ($50,000.00) dollars
for each Five Hundred Thousand ($500,000.00) dollars that the Company exceeds
the aforementioned pre-tax income targets, or a portion thereof of approximately
Ten (10%) percent. As an illustration, if the Company achieves a pre-tax income
of $1,750,000.00 in fiscal 1999, then the Consultant shall be entitled to a
Bonus totaling Four Hundred Thousand ($400,000.00) dollars.
(c) Any fees not paid to the Consultant when due shall accrue interest at
the then prime lending rate LESS One Hundred (100) basis points, compounded
monthly. Additionally, any fees accrued under this Agreement shall become due
and payable in full upon the receipt of any proceeds of any debt, equity or
other such offering that causes a significant increase in the Company's
liquidity.
(d) The Company agrees to reimburse the Consultant for all reasonable
business expenses (including, without limitation, reasonable travel and
entertainment expenses) incurred by the Consultant in rendering Services
hereunder, subject to the Company's reimbursement policies in effect from time
to time. The Consultant agrees to maintain reasonable records of his business
expenses in such form and detail as the Company may request and to make such
records available to the Company as and when requested.
(e) If an event occurs as described in Section 2(b) to this Agreement,
whereby this Agreement is automatically renewed for a period of two (2) years,
then the Compensation contemplated under Section 4(a) and the Bonus under
Section 4(b) will be replaced by a Fee totaling Ninety Thousand ($90,000.00)
dollars per month for the twenty four (24) month period.
<PAGE>
5. AGREEMENT NOT TO SOLICIT OR SELL TO CUSTOMERS. The Consultant agrees
that, during the Consulting Term and for two years thereafter, it will not
without the prior written consent of the Company, either directly or indirectly,
call on, solicit, take away, accept as a client, customer or prospective client,
customer or attempt to call on, solicit, take away or accept as a client,
customer, prospective client or customer, any person that was a client, customer
or prospective client or customer of the Company or any of its subsidiaries or
affiliates in so far as such solicitation is for a purpose within the scope of
the Company's business (e.g., transportation equipment leasing).
6. OWNERSHIP AND NON-DISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION
6.1 As used in this Agreement, "Confidential Information"
shall mean all customer sales and marketing information, customer account
records, proprietary receipts and/or processing techniques, information
regarding vendors and products, training and operations memoranda and similar
information, personnel records, pricing information, financial information and
trade secrets concerning or relating to the business, accounts, customers,
employees and affairs of the Company, or any subsidiary or affiliate thereof,
obtained by or furnished, disclosed or disseminated to the Consultant, or
obtained, assembled or compiled by the Consultant or under his supervision
during the course of his rendering Services to the Company, and all physical
embodiments of the foregoing, all of which are hereby agreed to be the property
of and confidential to the Company, but Confidential Information shall not
include any of the foregoing to the extent the same is or becomes publicly known
through no fault or breach of this Agreement by the Consultant.
6.2 The Consultant agrees that he will not, either during the
Consulting Term or at any time thereafter, without the prior written consent of
the Company, use, disclose or make available any Confidential Information to any
person or entity, nor shall he use, disclose, make available or cause to be
used, disclosed or made available, or permit or allow, either on his own behalf
or on behalf of others, any use or disclosure of such Confidential Information
other than in the proper performance of the Consultant's duties hereunder.
6.3 The Company acknowledges and agrees that all financing documents,
work papers and other work products of the Consultant prepared in the course of
its engagement by the Company shall remain the property of the Consultant.
7. REASONABLENESS OF RESTRICTIONS. In the event that any provision
relating to time period or geographic area of any restriction set forth in
Sections 5 or 6 shall be declared by a court of competent jurisdiction to exceed
the maximum time period or area of restriction that the court deems reasonable
and enforceable, the time period or area of restriction which the court finds to
be reasonable and enforceable shall be deemed to become, and thereafter shall
be, the maximum time period or geographic area of such restriction.
8. ENFORCEABILITY. Any provision of Sections 5 or 6 which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, but shall be enforced to the
maximum extent permitted by law, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
9. TERMINATION; COMPENSATION. Notwithstanding any provision in this
Agreement to the contrary, this Agreement may be terminated by the Company only
for "Cause" at any time during the Term hereof, and such termination shall be
effective immediately upon written notice to the Consultant. For purposes of
this Agreement, "Cause" for the termination of the Consultant's engagement
hereunder shall be deemed to exist only if: (a) the Consultant commits fraud,
theft or embezzlement against any the Company; (b) the Consultant discloses
trade secrets or other proprietary information of the Company or any of its
subsidiaries or affiliates thereof to any unauthorized person or entity; (c) the
Consultant engages in gross negligence or willful misconduct that causes
substantial and irreparable harm to the business and operations of the Company
or any of its subsidiaries or affiliates thereof. Upon any termination pursuant
to this Section 10, the Consultant shall be entitled to be paid solely the
Consultant's Fee then in effect through the effective date of termination, and
the Company shall have no further liability or other obligation of any kind
whatsoever to the Consultant hereunder.
<PAGE>
10. INDEMNIFICATION. The Company agrees to indemnify and hold harmless
the Consultant and any of its affiliates and each of their respective officers,
directors, employees and agents (each such person and Consultant being
hereinafter called an Indemnified Party) against any losses, claims, damages,
liabilities, or actions, including shareholder actions, in respect thereof,
joint or several, to which and Indemnified Party may become subject under any
statute or at common law or otherwise, and to reimburse promptly such
Indemnified Party for any reasonable legal or other expenses (including
appropriate compensation for preparation time, if any) incurred by such
Indemnified Party in connection with investigating any written claim or
preparing for or defending or assisting in the defense of any action (whether or
not such Indemnified Party is named as a party thereto) commenced or threatened
in writing, whether or not resulting in liability (including any loss to the
extent of the aggregate amount paid in settlement of any litigation commenced or
threatened, or of any claim whatsoever set forth therein, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities, actions, settlements or expenses arise out of, are
based upon or are in any way connected with services provided to the Company
whether performed prior to or after the date hereof.
The Company shall prepay the reasonable and estimable costs of defense of
Consultant, as set forth above, upon notice by Consultant that a claim has
arisen.
11. ARBITRATION. Consultant and Chancellor agree that any legal
disputes that may occur between Consultant and Chancellor, and that arise out
of, or are related in any way to, this Agreement and/or Consultant's performance
of services under this Agreement or the termination of this Agreement, and which
disputes cannot be resolved informally, shall be resolved exclusively through
final and binding private arbitration before an arbitrator mutually selected by
Consultant and Chancellor, with each party to bear its own costs and attorney
fees. If the Consultant and Chancellor are unable to agree upon an arbitrator
within twenty-one (21) days after either party has made a demand for
arbitration, the matter will be submitted for arbitration to the Boston office
of the American Arbitration Association pursuant to the rules governing dispute
resolution in effect as of January 1, 1999. Notwithstanding the foregoing, in
no event shall a demand for arbitration be made after the date when institution
of legal or equitable proceedings based on such claim, dispute, or other matter
in question would be barred by the applicable statutes of limitation.
12. GENERAL PROVISIONS.
12.1 Indulgences, Etc. Any failure or delay on the part of any
party to exercise any right, remedy, power or privilege under this Agreement
will not operate as a waiver thereof, nor will any single or partial exercise of
any right, remedy, power or privilege preclude any other or further exercise of
the same or of any other right, remedy, power or privilege, nor will any waiver
of any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of that right, remedy, power or privilege with respect to
any other occurrence.
<PAGE>
12.2 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement must be in writing and
will be deemed to have been duly given, made and received only when delivered
(personally, by facsimile transmission or by courier service such as Federal
Express, or by other messenger) or when deposited in the United States mails,
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(i) If to the Consultant:
VMI Corporation
405 Waltham Street
Suite 304
Lexington, MA 02173
Attention: Brian M. Adley
(ii) If to the Company:
Chancellor Corporation
210 South Street
Boston, MA 02111
Attention: Peter J. Mullen
Any party may alter the address to which communications or copies are to be sent
by giving notice of any change of address to the other party in conformity with
the provisions of this paragraph for the giving of notice.
12.3 Binding Nature of Agreement; Assignment. This Agreement
shall be binding upon and inure to the benefit of the Company and its successors
and assigns and shall be binding upon the Consultant, his heirs and legal
representatives. The Company may assign this Agreement at any time to any
affiliate, provided that such assignee assumes all of the obligations of the
Company hereunder; the Consultant may not assign this Agreement.
12.4 Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which will be deemed to be an original
and all of which will together constitute one and the same instrument.
12.5 Provisions Separable. The provisions of this Agreement
are independent of and separable from each other, and no provision will be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be invalid or unenforceable in whole or
in part.
12.6 Entire Agreement. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter of
this Agreement, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
with respect to the subject matter of this Agreement. The express terms of this
Agreement control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
12.7 Remedies. The rights conferred upon the Company pursuant
to Section 10 hereof shall not be exclusive of, but shall be in addition to, any
other rights or remedies which the Company may have at law, in equity or
otherwise.
<PAGE>
12.8 Section Headings. The section headings in this Agreement
are for convenience only; they form no part of this Agreement and will not
affect its interpretation.
12.9 Governing Law. This Agreement, the rights and obligations
of the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts, excluding the choice of law rules thereof.
12.10 Survival. The provisions of Sections 5, 6, 8, 9, 10, 11
and 12 hereof shall survive the termination of this Agreement to the extent
necessary to effectuate the respective purposes of such provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
CHANCELLOR CORPORATION
By: /s/ Rudolph Peselman___________
----------------------
Name: Rudolph Peselman
Title: Director, Chancellor Corporation
Attest:
By: /s/ Peter J. Mullen______________
----------------------
Name: Peter J. Mullen
Title: Clerk, Chancellor Corporation
VMI CORPORATION
By: /s/ Derek R. Coulter____________
-----------------------
Name: Derek R. Coulter
Title: Managing Director, VMI Corporation
/s/ Jonathan C. Ezrin___________________
------------------------
Notary Public
My Commission Expires: _______________ [ SEAL ]
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is dated as of the 1st day of
August, 1998, by and among CHANCELLOR ASSET MANAGEMENT, INC., a Delaware
corporation ("CAM") and M.R.B. Inc., a Georgia corporation d/b/a "Tomahawk Truck
and Trailer Sales", Tomahawk Truck & Trailer Sale, Inc., a Florida corporation,
Tomahawk Truck & Trailer Sales of Virginia, Inc. a Virginia corporation, and
Tomahawk Truck & Trailer Sales of Missouri, Inc. a Missouri corporation
(collectively "MRB" or the "Companies").
WITNESSETH:
WHEREAS, MRB desires to obtain the benefits of the knowledge and expertise
of the executive, managerial, financial and operational personnel of CAM to
assist MRB in its business, and
WHEREAS, CAM is willing to so provide the assistance desired by MRB on the
terms and conditions herein provided.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
covenant and agree as follows:
1. Services. During the term of this Agreement, CAM shall (a) provide and
make available to MRB general advice and assistance with respect to MRB's used
transportation equipment retail and wholesale business ("Used Equipment
Business"), upon reasonable advance notice from MRB, (b) refer to MRB all
opportunities and leads relating to the Used Equipment Business (collectively,
the "Services"), c) to assist in negotiating and arranging financing, upon which
MRB is dependent, that will extend current inventory financing lines of
credit with current financing institutions and identify and negotiate with
prospective financing sources to provide additional much needed increases in
inventory and floor planning lines of credit, and d) provide CAM's expertise in
general financial, accounting, business development, and information systems
that has been identified by MRB as currently lacking in the MRB organization.
Nothing herein contained shall be deemed in any way to obligate CAM to add to or
maintain beyond its general needs any personnel, facilities or equipment.
2. Consideration. In consideration of CAM's provision of the Services, MRB
assigns to CAM all rights to MRB's Gross Revenues and Net Profits for the period
from August 1, 1998 through the termination date of this agreement as set forth
below. For purposes of this Agreement, Net Profits are defined as all Gross
Revenues earned less the cost of revenues and the operating expenses as
determined in accordance with generally accepted accounting principles. The
assignment of such Gross Revenues Net Profits is not deemed in any way to
obligate CAM in regards to any and all liabilities incurred by MRB and in no way
indemnifies MRB, its management or shareholders from liabilities incurred as a
result of CAM performing the Services.
3. Term. This Agreement shall continue in full force and effect until such
time that either party mutually agrees to terminate this Agreement upon
reasonable notification.
4. Miscellaneous.
- - -- -------------
a) Nothing contained herein shall negate or lessen or in any way effect or
reduce the representations and warranties and indemnifications of the respective
parties in any future agreements.
b) Neither this Agreement nor any term, covenant, condition or other
provision hereof may be changed, waived, discharged or terminated except by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
c) This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the Commonwealth of Massachusetts.
d) This Agreement may be executed in several identical counterparts, each of
which when executed by the parties hereto and delivered shall be an original,
but all of which together shall constitute a single instrument. In making proof
of this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as an instrument under seal as of the date first written.
M.R.B, INC.
By: /s/ M. Rea Brookings_
------------------------
Name: M. Rea Brookings
Title: President
CHANCELLOR ASSET MANAGEMENT, INC.
By: /s/ Franklyn E. Churchill
----------------------------
Name: Franklyn E. Churchill
Title: President
STOCK REDEMPTION AGREEMENT
AGREEMENT made as of this 7th day of August, 1998, by and between VESTEX
CAPITAL CORPORATION, a closely held corporation having its principal place of
business at 210 South Street, Boston, MA 02111 ("Vestex" or the "Shareholder")
and CHANCELLOR CORPORATION (the "Corporation"), a publicly traded corporation
with its principal place of business at 210 South Street, Boston, MA 02111.
Shareholder and Corporation may be referred to collectively as the "Parties".
1. Statement of Intent. Shareholder is the present owner of
eighty-seven percent (87%) of the issued and outstanding shares of the common
stock of the Corporation. Shareholder also owns both Series A and Series AA
preferred stock of the Corporation. (See Exhibit A for the specific holdings of
Shareholder in the Corporation.)
Shareholder is a closely held corporation wholly owned by Brian M. Adley
("Shareholder's Owner").
The Corporation desires to provide for the orderly continuation of the
business and affairs of the Corporation if Shareholder's Owner dies.
Shareholder's Owner desires to assure liquidity for his family if and when
he dies owning stock in the Corporation.
THEREFORE, in consideration of the mutual covenants herein contained, the
Parties enter into this Agreement on the terms set forth below.
2. Disposition of Shares Upon Death. At the death of Shareholder's
Owner, the Corporation shall purchase, and the personal representative of the
estate of the deceased Shareholder's Owner shall join with Shareholder and sell,
all the shares of stock of the Corporation owned by Shareholder at the price and
upon the terms and limitations set forth in paragraph 3 of this Agreement. Such
transaction shall take place as soon as practicable after Shareholder's Owner's
death, but no later than three (3) months after such date.
3. Price and Terms for Purchase and Sale of Shares.
3.1 Price. The price per share to be paid upon the purchase and
sale of shares of the common stock of the Corporation (including any converted
preferred) shall be its market value at the closing of the market on the date of
death of Shareholder's Owner, and if such date falls on a weekend day or
holiday, the market value on the next business day closest to such date. Any
unconverted preferred stock in the Corporation then owned by Shareholder shall
be valued as follows, unless the then market value on conversion is greater, in
which case the greater value shall prevail: (a) Preferred Series A at $1.90 per
share; (b) Preferred Series AA at 50 per share. The Corporation agrees to
purchase all of the stock of Shareholder's Owner, provided, however, that such
obligation to purchase shall not exceed Ten Million Dollars ($10,000,000).
3.2 Terms. The purchase price to be paid for any purchase of
shares pursuant to this Agreement shall, except as expressly provided otherwise
by mutual agreement of the Parties, be paid by the Corporation to the
Shareholder in cash or certified check at the closing of the sale.
4. Insurance Policies. The Corporation agrees to purchase and maintain
a policy or policies of life insurance on the life of Shareholder's Owner to
fund its obligations under this Agreement. Neither Shareholder nor Shareholder's
Owner shall possess any incidents of ownership in any such policy insuring his
life. Such policy or policies will be the sole property of the Corporation. No
Shareholder nor any successor, transferee, assignee, or personal repre-sentative
of Shareholder or Shareholder's Owner shall have any collateral interest in any
such policy insuring his own life.
5. Termination of Agreement. This Agreement shall terminate upon the
first to occur of the following events:
5.1 The execution of an agreement to revoke this Agreement, signed
by the duly authorized representatives of the Parties and Shareholder's Owner;
or
5.2 The adoption of a plan of sale or liquidation by the
Corporation, or the bankruptcy, receivership, or dissolution of the Corporation
(but such termination shall not extinguish the rights or obligations of the
Parties arising out of any event occurring before such termination); or
5.3 The complete termination of all ownership of shares in the
Corporation by the Shareholder, and the satisfaction of all obligations
respecting such termination, if any, as provided in this Agreement; or
5.4 The death of Shareholder's Owner and the satisfaction of all
obligations here-under by the Parties.
6. Amendment. This Agreement is the entire understanding among the
---------
Parties and may be altered, amended or revoked only by subsequent written
instrument executed by all the living parties.
7. Persons Bound. This Agreement is binding upon the Corporation and
--------------
the Share-holder and their heirs, legal representatives, transferees, successors
and assigns. The Corporation and Shareholder agree to execute any and all
additional documents necessary to effectuate the purposes of this Agreement.
8. Benefit. This Agreement is for the benefit of the Parties, their
heirs, executors, administrators, successors, assigns and transferees.
9. Notices. Shareholder and the Corporation, through their Presidents
or other authorized officers, shall give prompt notice to each other of all
offers, acceptances, refusals, and exercise of options made pursuant to this
Agreement. All notices, writings, offers, acceptances, refusals, payments, or
agreements given or required to be given under this Agreement shall be made in
writing and sent by registered or certified mail, return receipt requested, to
the principal business office of the Corporation and to the last known address
of Shareholder appearing on the books of the Corporation, with like notice to:
Attorney Sheila B. Giglio, 239 Common Street, Belmont, MA 02178 if intended for
Shareholder; and to: Attorney John D. Colucci, 100 Cummings Center, Suite 332J,
Beverly, MA 01915 if intended for the Corporation. Any such notice or other
writing shall be deemed given and received upon the expiration of three days
following such mailing with proper postage affixed.
10. Execution of Other Documents. The parties agree to execute and
deliver all proxies, stock transfer agent agreements, authorizations, documents
and instruments which are necessary to carry out the terms and conditions of
this Agreement.
11. Massachusetts Law. This Agreement shall be construed and enforced
in accordance with the laws of the Commonwealth of Massachusetts.
12. Heading and Gender Neutral. Any headings are inserted solely for
the convenience of reference and are not a part of this Agreement, nor shall
they affect its meaning, construction or effect. Any pronoun reference to "he"
or "she" shall be read as to accommodate the gender of the Parties.
13. Prior Agreement. This Agreement revokes all previous agreements
among the parties to the extent they are inconsistent herewith.
IN WITNESS WHEREOF, the Parties have hereunto set their hands and seals,
the Corporation by its duly authorized officers, the day and year first above
written.
CHANCELLOR CORPORATION VESTEX CAPITAL CORPORATION
By: /s/ Jonathan C. Ezrin By: /s/ Brian M. Adley____________
------------------------ ---------------------------------
Jonathan C. Ezrin, Treasurer Brian Adley, President
FIRST AMENDMENT TO MANAGEMENT AGREEMENT
THIS FIRST AMENDMENT TO MANAGEMENT AGREEMENT (this "Amendment") is entered
into as of August 17, 1998, by and between CHANCELLOR ASSET MANAGEMENT, INC., a
Delaware corporation ("CAM") and M.R.B. Inc., a Georgia corporation d/b/a
"Tomahawk Truck and Trailer Sales", Tomahawk Truck & Trailer Sale, Inc., a
Florida corporation, Tomahawk Truck & Trailer Sales of Virginia, Inc., a
Virginia corporation, and Tomahawk Truck & Trailer Sales of Missouri, Inc., a
Missouri corporation (collectively "MRB" or the "Companies").
RECITALS
WHEREAS, MRB desires to obtain the benefits of the knowledge and expertise of
the executive, managerial, financial and operational personnel of CAM to assist
and operate MRB in its business, and
WHEREAS, CAM is providing the assistance, financial needs, and operational
guidance and performance desired by MRB;
WHEREAS, CAM and MRB have agreed to certain changes in the terms and conditions
set forth in the Management Agreement and have agreed to amend the Management
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree that the Management Agreement
shall be amended as follows:
1. Section 1 is hereby amended by deleting the last sentence "Nothing herein
contained shall be deemed in any way to obligate CAM to add to or maintain
beyond its general needs any personnel, facilities or equipment." and by
substituting "CAM will also be obligated to MRB to provide approvals on, but not
limited to, all personnel hiring decisions and human resources policies, capital
expenditures, other operating expenditures not in the ordinary course of
business, execution of contractual arrangements, disposition of inventory,
disposition of any and all MRB physical assets; and to provide funding of such
expenditures in the event such funding cannot first be made available through
MRB's normal internal cash flows. CAM will also make available to MRB, subject
to approval by the Board of Directors, all funds necessary to provide for
working capital and support operating deficits in the event such operating
deficits are incurred by MRB.", with such change to be effective immediately
upon execution of this Amendment.
2. Section 2 is hereby amended by deleting the first sentence "In
consideration of CAM's provision of the Services, MRB assigns to CAM all rights
to MRB's Gross Revenues and Net Profits for the period from August 1, 1998
through the termination date of this agreement as set forth below." and by
substituting "In consideration of CAM's provision of the Services, MRB assigns
all rights to MRB's Gross Revenues and Net Profits commencing August 1, 1998.",
with such change to be effective immediately upon execution of this Amendment.
3. Section 2 is hereby amended by deleting the last sentence "The assignment
of such Gross Revenues and Net Profits is not deemed in any way to obligate CAM
in regards to any and all liabilities incurred by MRB and in no way indemnifies
MRB, its management or shareholders from liabilities incurred as a result of CAM
performing the Services." and by substituting "The benefits inured to CAM as a
result of such assignment of such Gross Revenues and Net Profits does not in any
way relieve CAM of any liabilities incurred by MRB, as directed and controlled
through the operational assistance of CAM, but also in no way indemnifies MRB,
its management or shareholders from liabilities incurred as a result of CAM
performing the Services.", with such change to be effective immediately upon
execution of this Amendment.
4. Section 3 is hereby amended by deleting "This Agreement shall continue in
full force and effect until such time that either party mutually agrees to
terminate this Agreement upon reasonable notification." and by substituting
"This Agreement shall continue in full force and effect for as long as MRB
remains as a business entity except that CAM may for reasonable cause terminate
this Agreement.", with such change to be effective immediately upon execution of
this Amendment.
5. Upon the execution of this Amendment, CAM shall cause to be reserved up
to 5,000,000 shares of Chancellor's Common Stock, subject to adjustment. In
addition to the reservation of Chancellor Common Stock, CAM shall assume
oversight and operational control of the daily operations of MRB with the full
support and cooperation of the MRB shareholders and management. Additionally,
MRB shall cause to be reserved all of MRB's Common Stock for issuance to CAM or
its assigns. During this period, CAM has the right of first refusal to purchase
the reserved shares of MRB. While final due diligence is being evaluated by
external and internal personnel, CAM shall have the right of first refusal prior
to any sale of the MRB Common Stock.
6. Except as specifically provided herein, all terms and conditions of the
Management Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Management Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Management
Agreement shall be read together, as one document.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
CHANCELLOR ASSET MANAGEMENT, INC.
By: /s/ Franklyn E. Churchill
----------------------------
Name: Franklyn E. Churchill
Title: President and CEO
M.R.B., INC.
By: /s/ M. Rea Brookings
-----------------------
Name: M. Rea Brookings
Title: President
PROMISSORY NOTE
---------- ----
$3,475,000 December 22, 1998
I. Indebtedness.
------------
FOR VALUE RECEIVED, the undersigned, Chancellor Corporation, A
Massachusetts Company ("Maker"), promises to pay to the order of Vestex Capital
Corporation a Massachusetts corporation (the "Payee"), the principal amount of
THREE MILLION FOUR HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($3,475,000), with
interest @ two percent above the federal reserved published prime rate, payable
in one installment on December 31, 2001 (the "Maturity Date"), at the Payee's
principal address at 405 Waltham Street Suite 304, Lexington, MA 02173 or at
such other place as the Payee shall have designated to the Maker in writing, (i)
in lawful money of the United States of America and in immediately available
funds, or, in accordance with the terms set forth in Section V of this Note.
II. Loan Obligations.
---- -----------
This is a "Promissory Note" superceding all prior notes between the two
parities prior to the execution date of this note and is deemed as payment in
full for all services provided, capital infused, equity secured, and any and all
expenses incurred by the payee up to the date of this note. This note is
secured through the execution of the (Loan Reduction and Purchase and
Assignment Agreement, dated April 4, 1997 between the two parties) and again
through the additional security agreement executed between the parties dated the
same as this note. Both agreements are attached as exhibits to this agreement
and shall be deemed in full force and no waiver to their enforceability is
granted by signature of this document.
III. Default.
If an Event of Default (as hereinafter defined) shall occur and be
continuing under the provisions of this Note, the Payee may accelerate the
entire unpaid principal balance outstanding under this Note, by written notice
to the Maker, and the entire unpaid principal balance outstanding under this
Note shall become immediately due and payable within ten (10) days after receipt
by the Maker of said notice. At such time the Payee shall be entitled to
exercise any remedies that it may have at law, or in equity, in order to collect
its debt hereunder including, without limitation, the commencement of legal
proceedings against the Maker.
As used herein, an "Event of Default" means the occurrence of any of the
following:
(i) the failure of the Maker to make any payment of principal or other
sums due under this Note within twenty (20) days after the due date thereof;
(ii) if the Maker shall make an assignment for the benefit of creditors, or
if a receiver of the property of the Maker shall be appointed, or if a petition
in any bankruptcy or other similar proceeding under any law for relief of
debtors shall be filed by or against the Maker, and, if against the Maker, is
not dismissed or discharged within sixty (60) days;
(iii) any breach or default by the Maker of the terms and conditions of that
certain Stock Pledge Agreement, of even date herewith, between the Maker and the
Payee, securing the obligation of the Maker under this Note, which continues
unremedied after notice and a cure period as specifically provided therein; or
IV. Prepayment
----------
All or any portion of this Note may be prepaid (herein, a "Prepayment") at
any time without premium or penalty by the Maker furnishing a written notice to
the Payee of the Maker's election to effect such a prepayment (a "Prepayment
Notice"), which Prepayment Notice shall include the date on which the Maker
desires to make the Prepayment (the "Prepayment Date"); provided, however, that
if the Maker desires to pay all (or any portion) of the Prepayment in the manner
described in Section V hereof, then the Prepayment Date shall be the fifteenth
(15th) day following the Prepayment Notice (or the first (1st) business day
thereafter if such fifteenth (15th) day is not a business day). The payee at
his sole discretion may accelerate the payment of this note in part or in full,
in the event that the maker receives additional capital in the form of debt or
equity infused into the Company.
V. Payment in the Form of Common Stock
-------- -- --- ---- -- -------------
A. Exchange. On the Maturity Date or earlier upon the a Prepayment
Date, as the case may be, the Payee may, but shall not be obligated to, accept
all (or any portion) of the outstanding principal balance owed under this Note
by the number of shares of Capital Stock (common or preferred) by dividing (a)
the outstanding principal amount of this Note to be so paid, by (b) the Exchange
Price (as hereinafter defined). In order to pay all (or any portion) of the
outstanding principal balance owed under this Note by delivering shares of Stock
as herein above provided, the Maker shall be required to:
(i) in the case of any such payment on the Maturity Date, furnish an
Exchange Notice (as hereinafter defined) to the Maker not less than fifteen (15)
days prior to the Maturity Date, notifying Maker of the Payee's desire to
exercise the Payee's rights to receive payment in such manner; and
(ii) in the case of any such payment constituting a Prepayment, furnish
an Exchange Notice to the Maker contemporaneously with the applicable Prepayment
Notice (which Exchange Notice may be incorporated into the applicable Prepayment
Notice), notifying the Maker of the Payee's desire to exercise the Maker's
rights to pay in such manner.
B. Exchange Mechanism. Payment of all (or any portion) of the
outstanding principal balance owed under this Note in the manner herein above
described shall be made by the Maker's surrender of the stock certificate(s)
representing the number of shares of Capital Stock (common or preferred) to be
exchanged by the Maker determined as herein above provided, duly endorsed or
accompanied by a written instrument of transfer duly executed by the Maker, to
the Payee at its principal place of business (or at such other office as the
Payee shall designate by notice in writing to the Maker from time to time),
accompanied by a copy of the applicable Exchange Notice previously furnished.
C. Certain Definitions. For all purposes of this Section V, the
following terms shall have the respective meanings set forth below:
(a) "Exchange Notice" shall mean written notice by the Maker to the
Payee of the Maker's election to effect a payment with shares of Common Stock
held by the Maker of all (or any portion) of the outstanding principal balance
owed under the Note on the Maturity Date or on a Prepayment Date, as the case
may be; and
(b) "Exchange Price" shall mean (i) the last reported sales price per
share of the Common Stock on any national securities exchange or the NASDAQ
National Market System or the over-the-counter market which is then the
principal market for the Common Stock on the trading day immediately before the
Maturity Date or a Prepayment Date, as the case may be, or (ii) if the Common
Stock is not quoted or listed in any national securities exchange or the NASDAQ
National Market System or the over-the-counter market, the fair market value of
a share of Common Stock, as promptly determined in good faith by the Board of
Directors of Chancellor or preferred stock as mutually agreed.
VI. Miscellaneous.
-------------
A. Waiver. The Payee hereby waives, to the extent not prohibited by
provisions of applicable law, presentment, demand, protest and notice thereof or
dishonor, and waives any right to be released by reason of any extension of time
or change in the terms of payment or any change, alteration or release of any
security given for the payment hereof. No course of dealing between Payee on
the one hand, and the Payee hereof on the other hand, shall operate as a waiver
of any of its rights under this Note. No delay or omission in exercising any
right under this Note shall operate as a waiver of such right or any other
right. A waiver on any one occasion shall not be construed as a waiver of or
bar to any right or remedy on any other occasion.
B. Expenses. The Maker hereby agrees to pay on demand all costs of
collection, including reasonable attorneys fees and disbursements, paid or
incurred by the Payee in connection with enforcing the Maker's obligations
hereunder.
C. Notices. All notices hereunder shall be given in the manner
provided in the Stock Purchase Agreement.
D. Severability. In the event that any one more of the provisions
contained in this Note shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Note shall not in any way be impaired.
E. Assignment. The Maker may not assign or pledge this Note or
delegate its obligation to make payment hereunder without the prior written
consent of the Payee.
THIS NOTE AND THE OBLIGATIONS OF THE MAKER HEREUNDER SHALL FOR ALL PURPOSES
BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).
THE MAKER CONSENTS TO SERVICE OF PROCESS IN ANY SUIT WITH RESPECT TO THE
ENFORCEMENT OF THIS NOTE BEING MADE UPON THE MAKER BY MAIL AT THE ADDRESS OF THE
MAKER AT 210 SOUTH STREET, BOSTON, MA 02110 AND A COPY FORWARDED TO JOHN
COLLUCCI, ESQUIRE, 100 CUMMINGS CENTER, SUITE 339C, BEVERLY, MA 01915. THE
MAKER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed as an
instrument under seal as of the day and year first above written.
By: /s/ Jonathan C. Ezrin
------------------------
Jon Ezrin, Chancellor Corporation
Chief Accounting Officer & Treasurer
By: /s/ Peter J. Mullen____________
---------------------- -----------
Peter Mullen, Chancellor Corporation
Clerk
By: /s/ Derek R. Coulter___________
-----------------------
Witness
VESTEXCAPITAL CORPORATION SECURITY AGREEMENT
1 . GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned Chancellor Corporation ("Debtor"), hereby grants and transfers to
Vestex Capital Corporation ("VCC") a security interest in all goods, tools,
machinery, furnishings, furniture and other equipment, now or at any time
hereafter, and prior to the termination hereof, owned or acquired by Debtor,
wherever located, whether in the possession of Debtor or any other person and
whether located on Debtor's property or elsewhere, and all improvements,
replacements, accessions and additions thereto (collectively called
"Collateral"), together with whatever is receivable or received when any of the
Collateral or proceeds thereof are sold, leased, collected, exchanged or
otherwise disposed of, whether such disposition is voluntary or involuntary,
including without limitation, (a) all accounts, contract rights, chattel paper,
instruments, documents, general intangibles and rights to payment of every kind
now or at any time hereafter arising from any such sale, lease, collection,
exchange or other disposition of any of the foregoing, (b) all rights to
payment, including returned premiums, with respect to any insurance relating to
any of the foregoing, and (c) all rights to payment with respect to any cause of
action affecting or relating to any of the foregoing (hereinafter called
"Proceeds").
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a)' all present and future Indebtedness of Debtor to VCC;
(b) all obligations of Debtor and rights of VCC under this Agreement; and (c)
all present and future obligations of Debtor to VCC of other kinds. The word
"Indebtedness" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of Debtor, or any of them,
heretofore, now - or Hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Debtor may
be liable individually or jointly, or whether recovery upon such indebtedness
may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Debtor to VCC, including without limitation, the payment of
all Indebtedness of Debtor to VCC, and the termination of all commitments of VCC
to extend credit to Debtor, existing at the time VCC receives written notice
front Debtor of the termination of this Agreement.
4. OBLIGATIONS OF VCC. VCC has no obligation to make any loans hereunder.
Any money received by VCC in respect of the Collateral may be deposited, at
VCC's option, into a non-interest bearing account over which Debtor
shall leave no control and the same shall, for all purposes, be deemed
Collateral hereunder.
5. REPRESENTATIONS AND WAFIRANTIES. Debtor represents and warrants to
VCC that: (a) Debtor is the owner and has possession or control of the
Collateral and Proceeds; b) Debtor has the right to grant a security interest
in the Collateral and Proceeds; (c) all Collateral and Proceeds are genuine,
free from liens, adverse claims, setoffs, default, prepayment, defenses and
conditions precedent of any kind or character, except the lien created hereby or
as otherwise agreed to by VCC, or Heretofore disclosed by Debtor to VCC, in
writing; (d) all statements contained herein are true and complete in all
material respects; (e) no financing statement covering any of the Collateral or
Proceeds, and naming any secured party other than VCC, is on file in any public
office; and (f) Debtor is not in the business of selling goods of the kind
included within the Collateral subject to this Agreement, and Debtor
acknowledges that no sale of any Collateral, including without limitation, any
Collateral which Debtor may deem to be surplus, has been or shall be consented
to or acquiesced in by VCC, except as specifically set forth in writing by VCC.
6. COVENANTS OF DEBTOR.
(a) Debtor Agrees in general: (I) to pay Indebtedness secured hereby
when due; (ii) to indemnify VCC against all losses, claims, demands, liabilities
and expenses of every kind caused by property subject Hereto; (iii) to pay all
costs and expenses, including reasonable attorneys' fees, incurred by VCC in the
perfection and preservation of the Collateral or VCC's interest therein and/or
the. realization, enforcement and exercise of VCC's rights, powers and remedies
hereunder; (iv) to permit VCC to exercise its powers; (v) to execute and deliver
such documents as VCC deems necessary to, create, perfect and continue the
security interests contemplated hereby; and (vi) not to change its chief place
of business (or personal residence, if applicable) or the places where Debtor
keeps any of the Collateral or Debtor's records concerning the Collateral and
Proceeds without first giving VCC written notice of the address to which Debtor
is moving same.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless VCC
agrees otherwise in writing:
to insure the Collateral with VCC as loss payee, it form, substance and
amounts, under agreements, against risks and liabilities, and with insurance
companies satisfactory to VCC; (ii) to operate the Collateral in accordance with
all applicable statutes, rules and regulations relating to the use and control
thereof, and not to use the Collateral for any unlawful purpose or in any way
that would void any insurance required to be carried in connection therewith;
(iii) not to permit any security interest in or lien on the Collateral or
Proceeds, including without limitation, liens arising from repairs to or storage
of the Collateral, except in favor of VCC; (iv) to pay when due all license
fees, registration fees and other charges in connection with any Collateral; (v)
not to remove the Collateral from Debtor's premises unless the Collateral
consists of mobile goods as defined in the-Massachusetts Uniform Commercial
Code, in which case Debtor agrees not to remove or permit the removal of the
Collateral from its state of domicile for a period in excess of 30 calendar
days; (vi) not to sell, or otherwise dispose of, nor permit the transfer by
operation of law of, any of the Collateral or Proceeds or any interest herein;
(vii) not to rent, lease or charter the Collateral; (viii) to permit VCC to
inspect the Collateral at any time; (ix) to keep, in accordance with generally
accepted accounting principles, complete and accurate records regarding all
Collateral and Proceeds, and to permit VCC to inspect the same and make copies
thereof at any reasonable time; (x) if requested by VCC, to receive and use
reasonable diligence to collect Proceeds, in trust and as the property of VCC,
and to immediately endorse as appropriate and deliver such Proceeds to VCC daily
in the exact form in which they are received together with a collection report
in form satisfactory to VCC; (xi) not to commingle Proceeds or collections
thereunder with other property; (xii) to give only normal allowances and credits
and to advise VCC thereof immediately in writing if they affect any Collateral
or Proceeds in any material respect; (xiii) in the event VCC elects to receive
payments of Proceeds Hereunder, to pay all expenses incurred by VCC in
connection therewith, including expenses of accounting, correspondence,
collection efforts, reporting to account or contract debtors, filing, recording,
record keeping and expenses incidental thereto; and (xiv) to provide any service
and do any other acts which may be necessary to maintain, preserve and protect
all Collateral and, as appropriate and applicable, to keep the Collateral in
good and saleable condition and repair, to deal with the Collateral in
accordance with the standards and practices adhered to generally by owners of
like property, and to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims.
7. POWERS OF VCC. Debtor appoints VCC its true attorney-in-fact to
perform any of the following powers, which are coupled with an interest, are
irrevocable until termination of this Agreement and may be exercised from time
to time by VCC's officers and employees, or any of them, whether or riot Debtor
is in default: (a) to perform any obligation of Debtor Hereunder in Debtor's
name or otherwise; (b) to give notice to account debtors or others of VCC's
rights in the Collateral and Proceeds, to enforce the sale and make extension
agreements with respect thereto; (c) to release persons liable on Proceeds and
to give receipts and acquittances and compromise disputes in connection
therewith; (d) to release security; (e) to resort to security in any order; (f)
to prepare, execute, file, record or deliver notes, assignments, schedules,
designation statements, financing statements, continuation statements,
termination statements, statements of assignment, applications for registration
or like papers to perfect, preserve or release VCC's interest in the Collateral
and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to
take cash, instruments for the payment of money and other property to which VCC
is entitled; (i) to verify facts concerning the Collateral and Proceeds by
inquiry of obligors thereon, or otherwise, in its own name or a fictitious name;
(i) to endorse, collect, deliver and receive payment under instruments for the
payment of money constituting or relating to Proceeds; (k) to prepare, adjust,
execute, deliver and receive payment under insurance claims, and to collect and
receive payment of and endorse any instrument in payment of loss or returned
premiums or any otter insurance refund or return, and to apply such amounts
received by Batik, at VCC's sole option, toward repayment of the Indebtedness or
replacement of the Collateral; (1) to exercise all rights, powers and remedies
which Debtor would have, but for this Agreement, with respect to all Collateral
and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting
the Collateral; and (n) to do all acts and things and execute all documents in
the name of Debtor or otherwise, deemed by VCC as necessary, proper and
convenient in connection with the preservation, perfection or enforcement of its
rights hereunder.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AUID ASSESSMENTS. Debtor
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and Lien on the
failure of Debtor to do so, VCC at its option may pay any of the lien and shall
be the sole judge of the legality or validity thereof and the amount necessary
to discharge the said. Any such payments made by Chancellor shall be
obligations of Debtor to VCC, due and payable immediately upon demand, together
with interest at a rate determined in accordance with the provisions of Section
15 Herein, and shall be secured by tile Collateral and Proceeds, subject to all
terms and conditions of this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default, under
(i) any contract or instrument evidencing any Indebtedness, or (ii) any other
agreement between any Debtor and VCC, including without limitation any loan
agreement, relating to or executed in connection with any Indebtedness; (b) any
representation or warranty made by any Debtor Herein shall prove to be incorrect
in any material respect when made; (c) any Debtor shall fail to observe or
perform any obligation or agreement contained herein; (d) any attachment or like
levy on any property of any Debtor; and (e) VCC, in good faith, believes any or
all of the Collateral and/or Proceeds to be in danger of (misuse, dissipation,
loss, theft, damage or destruction, or otherwise iii jeopardy or unsatisfactory
in character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, VCC shall
have the right to declare immediately due and payable all or any Indebtedness
secured Hereby and to terminate any commitments to make loans or otherwise
extend credit to Debtor. VCC shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the Massachusetts
Uniform Commercial Code or otherwise provided by law, including without
limitation, the right to contact all persons obligated to Debtor on any
Collateral or Proceeds and to instruct such persons to deliver all Collateral
and/or Proceeds directly to VCC. All rights, powers, privileges and remedies of
VCC shall be cumulative. No delay, failure or discontinuance of VCC in
exercising any right, power, privilege or remedy hereunder shall affect or
operate as a waiver of such right, power, privilege or remedy; nor shall any
single or partial exercise of any such right, power, privilege or remedy
preclude, waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power, privilege or remedy. Any waiver, permit,
consent or approval of any kind by VCC of any default hereunder, or any such
waiver of any provisions or conditions Hereof, must be in writing and shall be
effective only to the extent set forth in writing. It is agreed that public or
private sales, for cash or on credit, to a wholesaler or retailer or investor,
or user of property of the types subject to this Agreement, or public auction,
are all commercially reasonable since differences in the sales prices generally
realized in the different kinds of sales are ordinarily offset by the
differences in the costs and credit risks of such sales.
While an Event of Default exists: (a) Debtor will deliver to VCC from time to
time, as requested by VCC, current lists of all Collateral and Proceeds; (b)
Debtor will not dispose of any of the Collateral or Proceeds except on terms
approved by VCC; (c) at VCC's request, Debtor will assemble and deliver all
Collateral and Proceeds, and books and records pertaining thereto, to VCC at a
reasonably convenient place designated by VCC; and (d) VCC may, without notice
to Debtor, enter onto Debtor's premises and take possession of the Collateral.
ii. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all
or any part of the Indebtedness, VCC may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and responsibility with respect to any of the foregoing so
transferred, and the transferee shall be vested with all rights and powers of
VCC Hereunder with respect to any of the foregoing so transferred; but with
respect to any Collateral or Proceeds not so transferred VCC shall retain all
rights, powers, privileges and remedies herein given. Any proceeds of any
disposition of any of the Collateral or Proceeds, or any part thereof, may be
applied by VCC to tile payment of expenses incurred by VCC iii connection with
the foregoing, including reasonable attorneys' fees, and the balance of such
proceeds may be applied by VCC toward the payment of the Indebtedness in such
order of application as VCC may from time to time elect. In the event that
additional capital is infused into the Debtor by a third party, VCC in it's sole
discretion may elect to place and all of those funds towards repayment of
principal and /or interest of it's outstanding obligation from the debtor.
1 2. STATUTE OF LIMITATIONS. Until all indebtedness shall have been paid
in full and all commitments by VCC to extend credit to Debtor leave been
terminated, the power of sale and all other rights, powers, privileges and
remedies granted to VCC hereunder shall continue to exist and may be exercised
by VCC at any time and from time to time irrespective of the fact that the
Indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all Indebtedness
secured hereunder.
<PAGE>
1 3. MISCELLANEOUS. (a) The obligations of Debtor are joint and several;
(b) Debtor hereby waives any right (i) to require VCC to make any presentment or
demand, or give any notice of nonpayment or nonperformance, protest, notice of
protest or notice of dishonor Hereunder, (ii) to direct the application of
payments or security for Indebtedness of Debtor or indebtedness of customers of
Debtor, or (iii) to require proceedings against others or to require exhaustion
of security; and (c) Debtor Hereby consents to extensions, forbearances or
alterations of the terms of Indebtedness, the release or substitution of
security, and the release of any guarantors; provided however, that in each
instance, VCC believes in good faith that the action in question is commercially
reasonable in that it does not unreasonably increase the risk of nonpayment of
the Indebtedness to which the action applies. Until all Indebtedness shall
leave been paid in full, no Debtor shall have any right or contribution, and
each Debtor Hereby waives any benefit of or right to participate in any of the
Collateral or Proceeds or any other security now or hereafter held by VCC.
14. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to VCC at the address specified in any
other loan documents entered into between Debtor and VCC and to Debtor at the
address party may designate by written notice to each other party, and shall be
deemed to have been given or made as follows: (a) if personally delivered, upon
delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days
after deposit in the U. S. mail, first class and postage prepaid; and (c) if
sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to VCC
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of VCC's in-house counsel), expended or
incurred by VCC iii exercising any right, power, privilege or remedy conferred
by this Agreement or in the enforcement thereof, whether incurred at the trial
or appellate level, it) an arbitration proceeding or otherwise, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by VCC or any other person) relating to Debtor or in any way
affecting any of the Collateral or VCC's ability to exercise any of its rights
or remedies with respect thereto. All of the foregoing shall be paid by Debtor
with interest from the date of demand until paid in full at a rate per annum
equal to the greater of ten percent (10%) or the Prime Rate in effect from time
to time. The "Prime Rate" is a base rate that VCC from time to time establishes
and which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, and legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by VCC and Debtor.
17. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be
held to be prohibited by-or invalid under applicable law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
<PAGE>
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, this Agreement has been duly executed as of December
22,1998.
Chancellor Corporation
By: /s/ Jonathan C. Ezrin
------------------------
Jonathan C. Ezrin
Title: Treasurer
1
BUSDOCS:705358.3
Employment Agreement
---------- ---------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the
1st day of October 1998 and effective the 31st day of December 1998, by and
between CHANCELLOR CORPORATION, a Massachusetts corporation (the "Company"), and
FRANKLYN E. CHURCHILL (the "Employee").
R E C I T A L S
The Company desires to obtain the services of the Employee in the
employment of the Company on the terms and subject to the conditions set forth
in this Agreement, and the Employee desires to make his services available to
the Company on the terms and subject to the conditions set forth in this
Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises, agreements and mutual
covenants set forth herein, the parties hereto, intending to be bound legally,
hereby agree as follows:
1. DEFINITIONS. The following terms when used herein, unless the context
otherwise requires, shall be defined as follows:
1.1. "Cause" shall have the meaning set forth in Section 5.1 hereof.
1.2. "Confidential Information" shall have the meaning set forth in Section
7.1 hereof.
1.3. "Term" shall have the meaning set forth in Section 3 hereof.
2. EMPLOYMENT.
2.1. General. The Company hereby agrees to employ the Employee as President
and Chief Operating Officer of the Company during the Term on the terms and
subject to the conditions contained in this Agreement, and the Employee hereby
agrees to accept such employment on the terms and subject to the conditions
contained in this Agreement.
2.2. Duties of Employee. During the Term, the Employee shall diligently
perform all duties and responsibilities as may be assigned to him by the
Chairman of the Board and Chief Executive Officer, and shall exercise such power
and authority as may from time to time be delegated to him thereby. The
Employee shall devote his full business time and attention to the business and
affairs of the Companies as necessary to perform his duties and responsibilities
hereunder, render such services to the best of his ability, and use his best
efforts to promote at all times the interests of the Companies.
3. TERM.
3.1. Subject to the provisions of Section 5 of this Agreement, the Company
shall employ the Employee for a term of three (3) years (the "Term") commencing
as of the date first written above (the "Effective Date").
3.2. The Term of this Agreement may automatically renew for a period of two
(2) years (the "Renewal Term") upon the Employee satisfactorily fulfilling the
duties as described in the above Section 2.2 hereof.
3.3. The Term of this Agreement shall accelerate and any and all
compensation due to the Employee under Section 4.1 and Section 4.5 hereof,
including the Renewal Term as described in the above Section 3.2 hereof and all
stock options granted to the Employee pursuant to the Incentive Stock Option
Agreement, dated June 30, 1998, by and between the Company and the Employee
("ISO Agreement"), shall become immediately due and payable to the Employee if
an event whereby any new person (within the meaning of Section 13(b) of the 1934
Securities Exchange Act) becomes the beneficial owner (directly or indirectly)
of securities of the Company representing Fifty (50%) percent or more of the
combined voting of the Company's then outstanding securities entitled to vote
generally in the election of directors.
3.4. The Employee's continued employment with the Company after the Term and
Renewal Term will have no specific duration and that either the Employee or the
Company may terminate the Employee at any time, with or without cause.
4. COMPENSATION.
4.1. Salary. The Employee shall receive an annual salary of Three Hundred
Fifty Thousand Dollars ($350,000.00) during the Term, and such salary shall be
payable in equal installments consistent with the Company's normal payroll
schedule commencing on either the first or fifteenth day of the month, as the
case may be, following the Effective Date. The Employee's annual salary shall
be subject to such increases as shall be approved by the Company's Board of
Directors in its sole discretion.
4.2. Benefits. During the Term, the Employee shall be entitled to
participate in all plans adopted for the general benefit of the Company's
employees, such as stock option plans, 401(k) plans, pension plans, profit
sharing plans, medical plans, group or other insurance plans and benefits, to
the extent that the Employee is and remains eligible to participate therein and
subject to the eligibility provisions of such plans in effect from time to time.
For each calendar year during the Term, the Employee shall be entitled to four
(4) weeks of paid vacation at such times as shall be mutually acceptable to the
Employee and the Company, and to sick and holiday time as prescribed by the
established Chancellor policies in effect from time to time.
4.3. Withholding. Notwithstanding any provision in this Agreement to the
contrary, all payments required to be made by the Company hereunder to the
Employee in connection with the Employee's employment hereunder shall be subject
to withholding of such amounts relating to taxes as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation. In
lieu of withholding such amounts, in whole or in part, the Company may, in its
sole discretion, accept other provisions for the payment of taxes, provided that
the Company is satisfied that all requirements of law affecting its
responsibilities to withhold have been satisfied.
4.4. Reimbursement of Expenses. The Company agrees to reimburse the
Employee for all reasonable business expenses (including, without limitation,
reasonable travel and entertainment expenses) incurred by the Employee in the
discharge of his duties hereunder, subject to the Company's reimbursement
policies in effect from time to time. The Employee agrees to maintain reasonable
records of his business expenses in such form and detail as the Company may
request and to make such records available to the Company as and when requested.
4.5. Bonus. The Company agrees to pay the Employee a minimum annual bonus
("Bonus") in the amount of Three Hundred and Fifty Thousand Dollars
($350,000.00) based on performance of the Employee pursuant to his duties as
described in Section 2.2 hereof. The Employee's Bonus shall be based on the
profits of the Company, its stock price and/or at the discretion of the
Company's Chairman and Chief Executive Officer.
5. TERMINATION.
5.1. Termination by the Company for Cause. Notwithstanding any provision in
this Agreement to the contrary, this Agreement may be terminated by the Company
for "Cause" at any time during the Term hereof, and such termination shall be
effective immediately upon written notice to the Employee. For purposes of this
Agreement, "Cause" for the termination of the Employee's employment hereunder
shall be deemed to exist only if, in the reasonable judgment of the Company's
Board of Directors: (a) the Employee commits fraud, theft or embezzlement
against any of the Companies; (b) the Employee commits a felony or a crime
involving moral turpitude; (c) the Employee discloses trade secrets or other
proprietary information of Chancellor or any subsidiary or affiliate thereof to
any unauthorized person or entity; (d) the Employee breaches any non-competition
or non-solicitation agreement with Chancellor or any subsidiary or affiliate
thereof; (e) the Employee breaches any of the terms of this Agreement (other
than those referenced in clauses (c) and (d) of this Section 5.1) and fails to
cure such breach within twenty (20) days after the receipt of written notice of
such breach from the Company; or (f) the Employee engages in gross negligence or
willful misconduct that causes harm (or could reasonably be expected to cause
harm) to the business and operations of Chancellor or a subsidiary or affiliate
thereof. Upon any termination pursuant to this Section 5.1, the Employee shall
be entitled to be paid solely the Employee's salary then in effect through the
effective date of termination, and the Company shall have no further liability
or other obligation of any kind whatsoever to the Employee hereunder.
5.2. Termination by the Company Without Cause. The Company may, in its sole
and absolute discretion, terminate the employment of the Employee hereunder at
any time without "Cause" (as such term is defined in Section 5.1 above), or
otherwise without any cause, reason or justification, provided that the Company
provides to the Employee at least ninety (90) days' prior written notice (the
"Termination Notice") of such termination. In the event of any such termination
by the Company, (a) the Employee's employment with the Company shall cease and
terminate on the date specified in the Termination Notice (or, if no date is so
specified, on the date which is ninety (90) days following the date of such
notice), and (b) the Employee shall be entitled to receive and be paid (i) in
the case of a termination under this Section 5.2 at any time prior to or on the
third anniversary of the Effective Date, the Employee's entire salary, at the
rate in effect as of the effective date of such termination and in equal monthly
installments, through such third anniversary, and thereafter fifty percent (50%)
of the Employee's salary, at the rate in effect as of the effective date of such
termination and in equal monthly installments, during the then remaining Term,
and (ii) in the case of termination under this Section 5.2 at any time after the
third anniversary of the Effective Date, fifty percent (50%) of the Employee's
salary, at the rate in effect as of the effective date of such termination and
in equal monthly installments, during the then remaining Term, payable in either
of the cases set forth in clauses (i) and (ii) over the applicable period at the
Company's regular and customary intervals for the payment of salaries as then in
effect and in equal monthly installments, and the Company shall have no further
liability or other obligation of any kind whatsoever to the Employee hereunder.
5.3. Death of the Employee. In the event that the Employee shall die during
the Term, the Employee's employment with the Company shall immediately cease and
terminate and the Employee's estate, heirs (at law), devisees, legatees or other
proper and legally entitled descendants, or the personal representative,
executor, administrator or other proper legal representative on behalf of such
descendants, shall be entitled to receive and be paid solely the Employee's
salary through the date of death, and the Company shall have no further
liability or other obligation of any kind whatsoever to the Employee hereunder.
Additionally, they shall also be entitled to elect to exercise all vested stock
options pursuant to the ISO Agreement. In the event that this Section 5.3 shall
conflict with any provision of the ISO Agreement then this Agreement and the
provisions as described in this Section 5.3 shall prevail.
5.4. Disability of the Employee. In the event that the Employee becomes
incapacitated during the Term by reason of sickness, accident or other mental or
physical disability such that he is substantially unable to perform his duties
and responsibilities hereunder for a period of ninety (90) consecutive days, or
for shorter or intermittent periods aggregating one hundred twenty (120) days
during any 12-month period (a "Disability"), the Company thereafter shall have
the right, in its sole and absolute discretion, to terminate the Employee's
employment under this Agreement by sending written notice of such termination to
the Employee or his legal guardian or other proper legal representative and
thereupon his employment hereunder shall immediately cease and terminate;
provided, however, that notwithstanding the foregoing, the Employee's employment
--
shall not be terminated as aforesaid if the Company's Board of Directors
determines, in its reasonable judgment, that after the termination of such
Disability, the Employee is able to resume his duties and responsibilities to
the Company in accordance with the terms hereof in the manner theretofore
provided. In the event of any such termination, the Employee shall be entitled
to receive and be paid the Employee's salary then in effect through the
effective date of termination, as well as the amount of Fifty (50%) percent of
the remaining amount due under this Agreement, including the Renewal Term as
described in the above Section 3.2 hereof in monthly installments.
5.5. Termination by the Employee. Provided that the Company does not have
"Cause" to terminate the Employee pursuant to Section 5.1 above, the Employee
may terminate the Employee's employment with the Company hereunder at any time
and for any reason. Employee must provide to the Company written notice of such
termination not less than ninety (90) days prior to the date such termination is
to be effective. Upon any termination pursuant to this Section 5.5, the Employee
shall be entitled to be paid solely the Employee's salary then in effect through
the effective date of termination, and the Company shall have no further
liability or other obligation of any kind whatsoever to the Employee hereunder.
6. AGREEMENT NOT TO COMPETE. The Employee agrees that in the event that the
Employee's employment with the Company is terminated either (a) at the
expiration of the full five (5) year Term, or (b) at any time during the fifth
year of the Term (the actual effective date of such employment termination being
referred to herein as the "Termination Date"), the Employee shall not, for an
additional one (1) year period commencing as of the Termination Date, without
the prior written consent of the Company, (a) engage anywhere in the United
States, directly or indirectly, alone or as a shareholder (other than as a
holder of less than 3% of the capital stock of any publicly traded corporation),
member, partner, manager, officer, director, employee or consultant, in any
business that is engaged or becomes engaged in the business of Chancellor as
existing on the Effective Date, (b) divert or attempt to divert to any
competitor of Chancellor or any Affiliate of any such competitor, any customer
or client, or prospective customer or client, of Chancellor, or (c) solicit or
encourage, or attempt to solicit or encourage, any employee of Chancellor to
leave its employ for employment by or with either Employee or Employee's
Affiliates, or any competitor of Chancellor or any of any such competitor's
Affiliates. If at any time the provisions of this Section 6 shall be determined
to be invalid or unenforceable, by reason of being vague or unreasonable as to
area, duration or scope of activity, this Section 6 shall be considered
divisible and shall become and be immediately amended to only such area,
duration and scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter; and
the Employee agrees that this Section 6 as so amended shall be valid and binding
as though any invalid or unenforceable provisions had not been included therein.
7. OWNERSHIP AND NON-DISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION.
7.1. As used in this Agreement, "Confidential Information" shall mean all
customer sales and marketing information, customer account records, proprietary
receipts and/or processing techniques, information regarding vendors and
products, training and operations memoranda and similar information, personnel
records, pricing information, financial information and trade secrets concerning
or relating to the business, accounts, customers, employees and affairs of
Chancellor, or any subsidiary or affiliate thereof, obtained by or furnished,
disclosed or disseminated to the Employee, or obtained, assembled or compiled by
the Employee or under his supervision during the course of his employment by the
Company, and all physical embodiments of the foregoing, all of which are hereby
agreed to be the property of and confidential to Chancellor, but Confidential
Information shall not include any of the foregoing to the extent the same is or
becomes publicly known through no fault or breach of this Agreement by the
Employee.
7.2. The Employee acknowledges and agrees that all Confidential Information,
and all physical embodiments thereof, are confidential to and shall be and
remain the sole and exclusive property of Chancellor. Upon request by any of the
Company, and in any event upon termination of the Employee's employment with the
Company for any reason whatsoever, as a prior condition to the Employee's
receipt of any final salary or benefit payments hereunder, the Employee shall
deliver to the Company all property belonging to Chancellor or any of its
subsidiaries or affiliates, including, without limitation, all Confidential
Information (and all embodiments thereof), then in his custody, control or
possession, but any forfeiture of such salary or benefit shall not be considered
a satisfaction or a release of or liquidated damages for any claim(s) for
damages against the Employee which may accrue to the Company, as a result of any
breach of this Section 7 by the Employee.
7.3. The Employee agrees that he will not, either during the Term or at any
time thereafter, without the prior written consent of the Company, use, disclose
or make available any Confidential Information to any person or entity, nor
shall he use, disclose, make available or cause to be used, disclosed or made
available, or permit or allow, either on his own behalf or on behalf of others,
any use or disclosure of such Confidential Information other than in the proper
performance of the Employee's duties hereunder. Notwithstanding anything to the
contrary set forth herein, after the expiration of the non-competition period
set forth herein, the Employee shall be permitted to utilize the customer lists
of the Company for any purpose whatsoever.
8. INVENTIONS. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, business methods and
systems, and valuable discoveries, whether patentable or not, that are conceived
or made by the Employee, solely or jointly with another, during the Term and
that are directly related to the business or activities of the Company and that
the Employee conceives as a result of his employment by the Company, regardless
of whether or not such ideas, inventions, or improvements qualify as "works for
hire." The Employee hereby assigns and agrees to assign all his interests
therein to the Company or their nominees. Whenever requested to do so by
Chancellor, the Employee shall execute any and all applications, assignments or
other instruments that such Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect Chancellor's interest therein.
9. AGREEMENT NOT TO SOLICIT OR HIRE EMPLOYEES. The Employee agrees that,
during the Term, or Renewal Term as the case may be, and for two (2) years
thereafter, he will not, either directly or indirectly, on his own behalf or in
the service or on behalf of others, solicit, divert or hire, attempt to
solicit, divert or hire or induce or attempt to induce to discontinue employment
with the Company or any subsidiary or affiliate thereof, any person employed by
the Company or any subsidiary or affiliate thereof, whether or not such employee
is a full time employee or a temporary employee of the Company or any subsidiary
or affiliate thereof and whether or not such employment is for a determined
period or is at will.
10. REASONABLENESS OF RESTRICTIONS. In the event that any provision
relating to time period or geographic area of any restriction set forth in
Sections 6, 7, 8 or 9 shall be declared by a court of competent
jurisdiction to exceed the maximum time period or area of restriction that
the court deems reasonable and enforceable, the time period or area of
restriction which the court finds to be reasonable and enforceable shall be
deemed to become, and thereafter shall be, the maximum time period or geographic
area of such restriction.
11. ENFORCEABILITY. Any provision of Sections 6, 7, 8 or 9 which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, but shall be enforced to the
maximum extent permitted by law, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
12. INJUNCTION. It is recognized and hereby acknowledged by the parties hereto
that a breach or threat of breach by the Employee of any of the covenants
contained in Sections 6, 7, 8 or 9of this Agreement will cause irreparable harm
and damage to the Company, the monetary amount of which may be virtually
impossible to ascertain. As a result, the Employee recognizes and hereby
acknowledges that the Company shall be entitled to an injunction fromany court
of competent jurisdiction enjoining and restraining any violation or threatened
violation of any or all of the covenants contained in Sections 6, 7, 8 or 9 of
this Agreement by the Employee or any of his affiliates, associates, partners or
agents, either directly or indirectly, and that such right to injunction shall
be cumulative and in addition to whatever other remedies the Company may
possess.
13. ASSIGNMENT; BINDING EFFECT. The Employee shall not assign any of his rights
or obligations pursuant to this Agreement to any other person without the prior
written consent of the Company, which consent may be unreasonably withheld or
delayed. Subject to the foregoing, this Agreement shall be for the benefit of
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns.
14. EMPLOYER'S AUTHORITY. The relationship between the parties hereto is
that of employer and employee. The Employee agrees to observe and comply with
the rules and regulations of the Company, as adopted by the Company from time to
time with respect to the performance of the duties of the Employee. The Employee
acknowledges that he has no authority to enter into any contracts or other
obligations that are binding upon the Company unless such contracts or
obligations are authorized by the Board of Directors of Chancellor. The Company
shall have the power to direct, control and supervise the duties to be performed
by the Employee, the manner of performing said duties, and the time of
performing said duties.
15. GOVERNING LAW. This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts,
excluding the choice of law rules thereof.
16. ARBITRATION OF DISPUTES. The Employee agrees that any legal disputes that
may occur between him and the Company, and that arise out of, or are related in
any way to his employment with the Company and his performance of services under
this Agreement or the termination of this Agreement, and which disputes cannot
be resolved informally, shall be resolved exclusively through final and binding
private arbitration before an arbitrator mutually selected by the Employee and
the Company, with each party to bear its own costs and attorney's fees. If the
Employee and the Company are not able to agree upon an arbitrator within
twenty-one (21) days after either the Employee or the Company has made a demand
for arbitration, the matter will be submitted for arbitration to the Boston
office of the American Arbitration Association pursuant to the rules governing
employee dispute resolution in effect as of October 1, 1998. Notwithstanding
the foregoing, in no event shall a demand for arbitration be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be barred by the applicable statues of
limitation.
17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements, understandings and arrangements, both oral and
written, between the parties hereto with respect to such subject matter. This
Agreement may not be modified or amended in any way, unless by a written
instrument signed by both the Company and the Employee.
18. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given upon
receipt or actual delivery by hand or after sent by certified United States
mail, return receipt requested, postage prepaid, or by a reputable overnight
courier service, addressed as follows:
i) If to the Employee:
Franklyn E. Churchill
c/o Chancellor Corporation
210 South Street
10th Floor
Boston, MA 02111
Fax: 617-422-5851
ii) If to the Company:
c/o Peter J. Mullen, Clerk
Chancellor Corporation
210 South Street
10th Floor
Boston, MA 02111
Fax: 617-422-5851
or to such other addresses as either party hereto may from time to time
give notice of to the other party hereto in the aforesaid manner.
19. DAMAGES. Nothing contained herein shall be construed to prevent
Chancellor or the Employee from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement. In the event that either party hereto brings
suit for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
Agreement, then the non-prevailing party shall pay all reasonable court costs
and attorneys' fees of the other party.
20. SECTION HEADINGS. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
21. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
or entity other than the parties hereto and their respective heirs, personal
representative, legal representative, successors and assigns any rights or
remedies under or by reason of this Agreement.
22. WAIVER. No delay or failure at any time on the part of Chancellor in
exercising any right, power or privilege under this Agreement, or in enforcing
any provision of this Agreement, shall impair any such right, power or
privilege, or be construed as a waiver of any default or as any acquiescence
therein, or shall affect the right of Chancellor thereafter to enforce each and
every provision of this Agreement in accordance with its terms. The waiver by
either party hereto of a breach or violation of any term or provision of this
Agreement shall neither operate nor be construed as a waiver of any subsequent
breach or violation.
IN WITNESS WHEREOF, the undersigned have executed this Agreement under seal
as of the date first above written.
CHANCELLOR CORPORATION
By: /s/ Brian M. Adley
- - ---------------------------------------------
Name: Brian M. Adley
Title: Chairman of the Board, Chancellor Corporation
EMPLOYEE
By: /s/ Franklyn E. Churchill
- - ---------------------------------------------
Name: Franklyn E. Churchill
Exhibit 23.1
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, 1998 and for the years ended December 31, 1998
and 1997, dated April 13, 1999 appearing in this Annual Report on Form 10-KSB of
Chancellor Corporation for the year ended December 31, 1998.
/S/ METCALF FRICKE RICE & DAVIS
Atlanta, Georgia
April 13, 1999
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<NAME> Chancellor Corporation
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-01-1998
<CASH> 644
<SECURITIES> 0
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<ALLOWANCES> (1052)
<INVENTORY> 10758
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<DEPRECIATION> (1290)
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0
50
<OTHER-SE> 0
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<SALES> 29639
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<CGS> 21731
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