UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer I.D. No.)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368 - 2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of November 15, 1999, 58,524,065 shares of Common Stock, $.01 par value per
share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value
per share (with a liquidation preference of $20.00 per share, or $7,000,000, and
are convertible into the Common Stock of the Company on a ten for one (10:1)
basis) were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of November 15, 1999 was approximately
$7,734,022. Aggregate market value of the total voting stock of the issuer as
of November 15, 1999 was approximately $31,092,503.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as
of September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements
5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 14
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1999 1998
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,657 $ 644
Receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . 4,375 3,255
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,630 10,758
Net investment in direct finance leases . . . . . . . . . . . . . 426 359
Equipment on operating lease, net of accumulated depreciation
of $2,034 and $2,351, respectively. . . . . . . . . . . . . 5,280 702
Residual values, net. . . . . . . . . . . . . . . . . . . . . . . 180 219
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,036 3,681
Furniture and equipment, net of accumulated depreciation
of $1,457 and $1,290, respectively. . . . . . . . . . . . . 1,011 999
Intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . 7,267 7,541
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 1,425 1,411
--------------- --------------
$ 44,287 $ 29,569
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses . . . . . . . . . . . . . . $ 6,262 $ 6,366
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . 4,711 1,068
Indebtedness:
Revolving credit line . . . . . . . . . . . . . . . . . . . . . 8,648 9,063
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 761 942
Nonrecourse . . . . . . . . . . . . . . . . . . . . . . . . . . 219 889
Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,069 4,234
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . 29,670 22,562
--------------- --------------
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized:
Convertible Series AA, none and 5,000,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . - 50
Convertible Series B, 1,000,000 shares authorized,
600,000 issued and 350,000 outstanding, and none . . . . . 4 -
Common stock, $.01 par value; 75,000,000 shares authorized,
58,282,686 and 43,041,895 shares issued and outstanding . 583 430
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 40,527 34,217
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (26,497) (27,690)
--------------- --------------
14,617 7,007
--------------- --------------
$ 44,287 $ 29,569
=============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998
---------------------------------- ---------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C>
REVENUES:
Transportation equipment sales. . . . . . . . . . . $ 16,152 11,886
Rental income . . . . . . . . . . . . . . . . . . . 465 286
Lease underwriting income . . . . . . . . . . . . . - 18
Direct finance lease income . . . . . . . . . . . . 17 22
Interest income . . . . . . . . . . . . . . . . . . 169 5
Gains from portfolio remarketing. . . . . . . . . . 286 47
Fees from remarketing activities. . . . . . . . . . 767 303
Other income. . . . . . . . . . . . . . . . . . . . - 2
---------------------------------- ---------------------------------
$ 17,856 $ 12,569
---------------------------------- ---------------------------------
COSTS AND EXPENSES:
Cost of transportation equipment sales. . . . . . . 12,837 10,337
Selling, general and administrative . . . . . . . . 3,657 1,707
Interest expense. . . . . . . . . . . . . . . . . . 322 152
Depreciation and amortization . . . . . . . . . . . 391 108
---------------------------------- ---------------------------------
17,207 12,304
---------------------------------- ---------------------------------
Earnings before taxes. . . . . . . . . . . . . . . . . 649 265
---------------------------------- ---------------------------------
Provision for income taxes . . . . . . . . . . . . . . 131 -
Net income . . . . . . . . . . . . . . . . . . . . . . $ 518 $ 265
---------------------------------- ---------------------------------
Basic net income per share . . . . . . . . . . . . . . $ 0.01 $ 0.01
================================== =================================
Diluted net income per share . . . . . . . . . . . . . $ 0.01 $ 0.00
================================== =================================
Shares used in computing basic net income per share. . 53,530,730 38,472,679
Shares used in computing diluted net income per share. 58,566,877 54,472,679
1999 1998
------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES:
Transportation equipment sales. . . . . . . . . . . $ 42,642 $ 12,858
Rental income . . . . . . . . . . . . . . . . . . . 1,240 697
Lease underwriting income . . . . . . . . . . . . . 27 52
Direct finance lease income . . . . . . . . . . . . 60 89
Interest income . . . . . . . . . . . . . . . . . . 720 27
Gains from portfolio remarketing. . . . . . . . . . 860 355
Fees from remarketing activities. . . . . . . . . . 1,450 857
Other income. . . . . . . . . . . . . . . . . . . . 82 46
------------ -----------
$ 47,081 # $14,981
------------ -------
COSTS AND EXPENSES:
Cost of transportation equipment sales. . . . . . . 34,232 11,009
Selling, general and administrative . . . . . . . . 9,575 3,122
Interest expense. . . . . . . . . . . . . . . . . . 767 182
Depreciation and amortization . . . . . . . . . . . 1,126 343
------------ -----------
45,700 14,656
------------ -------
Earnings before taxes. . . . . . . . . . . . . . . . . 1,381 325
------------ -----------
Provision for income taxes . . . . . . . . . . . . . . 187 -
Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,194 $ 325
------------ -----------
Basic net income per share . . . . . . . . . . . . . . $ 0.02 $ 0.01
============ ===========
Diluted net income per share . . . . . . . . . . . . . $ 0.02 $ 0.01
============ ===========
Shares used in computing basic net income per share. . 48,381,553 35,883,172
Shares used in computing diluted net income per share. 58,417,700 51,883,172
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended September 30,
1999 1998
--------------------------------- --------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,194 $ 325
--------------------------------- --------
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,126 343
Residual value estimate realizations and
reductions, net of additions. . . . . . . . . . . . . . . 39 167
Changes in assets & liabilities:
(Increase) in receivables . . . . . . . . . . . . . . . . (1,120) (346)
Decrease (increase) in inventory. . . . . . . . . . . . . 128 (4,538)
(Decrease) in accounts payable & accrued expenses. . . . . (104) (1,715)
Increase in deferred revenue. . . . . . . . . . . . . . . 3,642 -
--------------------------------- --------
3,711 (6,089)
--------------------------------- --------
Net cash provided (used) by operating activities. 4,905 (5,764)
--------------------------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases. . . . . . . . . . . (67) 67
Equipment on operating lease. . . . . . . . . . . . . . . . . (4,773) (405)
Payment for acquisitions, net of cash acquired. . . . . . . . - 398
Net change in cash restricted . . . . . . . . . . . . . . . . - 2,419
Additions to furniture and equipment, net . . . . . . . . . . (292) (159)
(Increase) in intangibles, net . . . . . . . . . . . . . . . . (376) (8,765)
(Increase) in investments. . . . . . . . . . . . . . . . . . . (7,000) -
Net change in other assets. . . . . . . . . . . . . . . . . . (1,369) (1,468)
--------------------------------- --------
Net cash used by investing activities. . . . . . . . . (13,877) (7,913)
--------------------------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit . . . . . . . . (415) 4,750
Increase notes payable. . . . . . . . . . . . . . . . . . . . 200 282
Increase in indebtedness - nonrecourse. . . . . . . . . . . . - 175
Increase in indebtedness - recourse . . . . . . . . . . . . . 8,815 3,667
Repayments of notes payable . . . . . . . . . . . . . . . . . (381) -
Repayments of indebtedness - nonrecourse. . . . . . . . . . . (670) (199)
Repayments of indebtedness - recourse . . . . . . . . . . . . (3,980) (24)
Issuance of preferred stock, net. . . . . . . . . . . . . . . 3,361 -
Issuance of common stock, net . . . . . . . . . . . . . . . . 3,055 6,224
--------------------------------- --------
Net cash provided by financing activities . . . . . . 9,985 14,875
--------------------------------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . 1,013 1,198
Cash and cash equivalents at beginning of period. . . . . . . . 644 97
--------------------------------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . $ 1,657 $ 1,295
================================= ========
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 1,585 $ 265
================================= ========
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosure required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Intercompany accounts and
transactions have been eliminated. The Statement of Operations for the
three-month and nine-month periods ending September 30, 1998 and the Statement
of Cash Flows for the nine-month period ending September 30, 1998 as presented
here have been revised from those as originally filed to reflect the Company's
acquisition of MRB, Inc. d/b/a Tomahawk Truck Sales as of August 1, 1998. These
financial statements and related notes should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
The results for the interim period ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
2. LOAN AGREEMENTS
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 as a
deposit to secure repayment of the Loan. The Loan is secured by all of the
Equipment and the lease contracts specifically associated with this transaction.
The balance outstanding as of November 15, 1999, on this loan is approximately
$1,340,000.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,876,000
loan agreement (the "Loan") with a financial institution (the "Lender") in
September 1999. The Loan provides for principal and interest payments (at 10%)
of $583,400 September 30, 1999, $72,300 per month from October 1999 through
December 1999, $64,400 per month from January 2000 through April 2000, $55,500
per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan
is secured by all of the Equipment and the lease contracts specifically
associated with this transaction. The balance outstanding as of November 15,
1999, on this loan is approximately $2,230,000.
3. DISTRIBUTION RIGHTS
During the quarters ending June 30 and September 30, 1999, the Company,
through an affiliate, entered into several agreements with Afinta Motor
Corporation (Pty) Ltd. ("AMC"). One such affiliate acquired the exclusive
worldwide distribution rights for products manufactured/assembled by AMC,
excluding Africa, England, Scotland and Wales. AMC is a manufacturer/assembler
of trucks, buses, and other products. Said distribution rights to the AMC
product range include, but are not limited to trucks, tractor trailers, buses,
automobiles, sport utility vehicles, motorcycles, and other products supplied by
AMC.
The Company has these distribution rights for the next 99 years, whereby
they expire during 2098. The Company has elected to amortize these rights over
a 15 year period. It is the Company's desire to utilize these rights to earn
additional revenue via commissions and the potential sale of AMC products within
the defined territory.
4. ACQUISITION
During the quarter ended September 30, 1999, the Company through an affiliate
acquired a 15.1% interest in Afinta Motor Corporation (Pty) Ltd. ("AMC"). AMC
is a South African manufacturer/assembler of trucks, buses, automobiles, sport
utility vehicles, and other products. This transaction and the related
transaction surrounding the worldwide distribution rights, excluding Africa,
England, Scotland and Wales, were acquired via a combination of cash and the
issuance of a newly created class of Series B Convertible Preferred Stock (the
"Series B Preferred Stock"). The Series B Preferred Stock has a $20.00 per
share liquidation preference and converts into common stock at a 10 for 1 basis.
In conjunction with this investment, NAOF, a $120 million OPIC backed investment
fund, also extended its investment/commitment into AMC to $10,300,000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three-Month Period Ended September 30, 1999 vs. September 30, 1998
Revenues. Total revenues for the three-month period ended September 30,
1999 was $17,856,000 as compared to $12,569,000 for the corresponding prior
period, an increase of $5,287,000 or 42.1%. For the three-month period ended
September 30, 1999, transportation equipment sales were $16,152,000 as compared
to $11,886,000 for the corresponding prior period, an increase of $4,266,000 or
35.9%. This revenue stream from transportation equipment sales is primarily
attributable to sales of used transportation equipment through the operating
activities of the Company's wholly owned subsidiary, Chancellor Asset Management
Inc. ("CAM"). CAM's revenues from the sales of used transportation equipment for
the three-month period ended September 30, 1999 increased by $6,492,000 or 72.0%
as compared to the corresponding period for 1998. The increase in revenues
provided by CAM is primarily a result of its seven retail sales centers located
in Atlanta, Georgia; Dallas, Texas; Elizabeth, New Jersey; Kansas City,
Missouri; Orlando, Florida; Pompano Beach, Florida; and Richmond, Virginia. For
the three-month period ended September 30, 1999, rental income increased by
$179,000 or 62.6% to $465,000 as compared to $286,000 for the corresponding
prior period. The increase in rental income is attributable primarily to the
addition to the Company's portfolio of transportation equipment and recent
acquisition of investment grade portfolios. For the three month period ended
September 30, 1999, lease underwriting income decreased by $18,000 or 100% to $0
as compared to $18,000 for the corresponding prior period and direct finance
lease income decreased by $5,000 or 22.7% to $17,000 as compared to $22,000 for
the corresponding prior period. The Company is in the beginning of its
rebuilding process of the lease origination business in order to stimulate
future growth in this area. For the three-month period ended September 30,
1999, interest income increased by $164,000 or 3,280.0% to $169,000 as compared
to $5,000 for the corresponding prior period. The increase is primarily
attributable to interest earned in connection with the Company's investments.
For the three-month period ended September 30, 1999, gains from portfolio
remarketing increased by $239,000 or 508.5% to $286,000 as compared to $47,000
for the corresponding prior period. The increase in gains from portfolio
remarketing is attributable to the increase in portfolio assets acquired in
connection with the purchase of portfolios by the Company. For the three-month
period ended September 30, 1999, fees from remarketing activities increased by
$464,000 or 153.1% to $767,000 as compared to $303,000 for the corresponding
prior period. This increase is attributable, in part, to the Company's efforts
to promote its remarketing services to financial institutions and other third
parties.
Costs and Expenses. Total costs and expenses for the three-month
period ended September 30, 1999 was $17,207,000 as compared to $12,304,000 for
the corresponding prior period, an increase of 4,903,000 or 39.8%. The
significant increase is primarily a result of the costs associated with sales
and remarketing expenses of transportation equipment. The cost of
transportation equipment sales for the three-month period ended September 30,
1999 was $12,837,000 as compared to $10,337,000 for the corresponding prior
period, an increase of $2,500,000 or 24.2%, and resulted in an overall gross
margin of 20.5%. Selling, general and administrative expenses for the
three-month period ended September 30, 1999 was $3,657,000 as compared to
$1,707,000 for the corresponding prior period, an increase of $1,950,000 or
114.2%. Approximately $2,157,000 of selling, general and administrative
expenses for the three-month period ended September 30, 1999 is a result of
normal operating expenses incurred by CAM and CAM's newly acquired retail and
wholesale business unit, Tomahawk, whose operations were consolidated with the
Company's as of the August 1, 1998 acquisition date. Net of the effect of the
CAM expenses, selling, general and administrative expenses increased to
$1,500,000 for the three-month period ended September 30, 1999 as compared to
$571,000 for the corresponding prior period, an increase of $929,000 or 162.7%.
The increase in selling, general and administrative expenses reflects the effect
of the Company's growth strategy implementation that included, in part,
including costs associated with the addition of senior management, sales and
staff personnel.
Interest expense for the three-month period ended September 30, 1999 was
$322,000 as compared to $152,000 for the corresponding prior period, an increase
of $170,000 or 111.8%. This increase is primarily a result of increased
interest expense associated with CAM's revolving credit line with a financial
institution utilized for inventory floor planning and interest accrued on the
Company's recourse debt.
Depreciation and amortization expense for the three-month period ended
September 30, 1999 was $391,000 as compared to $108,000 for the corresponding
prior period, an increase of $283,000 or 262.0%. The increase is primarily due
to the amortization of intangible assets associated with the acquisition of
Tomahawk by CAM, as well as the depreciation of additions to the Company's
portfolio of leased transportation equipment.
Net Income. Net income for the three-month period ended September 30,
1999 was $518,000 as compared to $265,000 for the corresponding prior period, an
increase of $253,000 or 95.5%. The increase in net income is attributable to
increase in revenues, primarily from the retail and wholesale of used
transportation equipment, the sale of equipment under lease, and continued
improvements in the containment of costs. Net income per share was $0.01 per
share (both basic and diluted) for the three-month period ended September 30,
1999 as compared to $0.01 per share basic and $0.00 diluted for the
corresponding prior period.
Nine-Month Period Ended September 30, 1999 vs. September 30, 1998
Revenues. Total revenues for the nine-month period ended September 30,
1999 was $47,081,000 as compared to $14,981,000 for the corresponding prior
period, an increase of $32,100,000 or 214.3%. For the nine-month period ended
September 30, 1999, transportation equipment sales were $42,642,000 as compared
to $12,858,000 for the corresponding prior period, an increase of $29,784,000 or
231.6%. This significant revenue stream from transportation equipment sales is
primarily attributable to sales of used transportation equipment through the
operating activities of the Company's wholly owned subsidiary, CAM. CAM's used
transportation equipment retail and wholesale business unit accounted for
approximately $39,615,000 of used transportation equipment sales. CAM's
revenues from the sales of used transportation equipment for the nine-month
period ended September 30, 1999 increased by $11,799,000 or 42.4% as compared to
the corresponding period for 1998. The increase in revenues provided by CAM is
primarily a result of its seven different retail sales centers located in
Atlanta, Georgia; Dallas, Texas; Elizabeth, New Jersey; Kansas City, Missouri;
Orlando, Florida; Pompano Beach, Florida; and Richmond, Virginia. For the
nine-month period ended September 30, 1999, rental income increased by $543,000
or 77.9% to $1,240,000 as compared to $697,000 for the corresponding prior
period. The increase in rental income is attributable primarily to the addition
to the Company's portfolio of transportation equipment. For the nine-month
period ended September 30, 1999, lease underwriting income decreased by $25,000
or 48.1% to $27,000 as compared to $52,000 for the corresponding prior period
and direct finance lease income decreased by $29,000 or 32.6% to $60,000 as
compared to $89,000 for the corresponding prior period. The Company is in the
development stage of rebuilding its lease origination business to stimulate
future growth in this area. For the nine-month period ended September 30, 1999,
interest income increased by $693,000 or 2,566.7% to $720,000 as compared to
$27,000 for the corresponding prior period. The increase is primarily
attributable to interest earned in connection with the Company's investments.
For the nine-month period ended September 30, 1999, gains from portfolio
remarketing increased by $505,000 or 142.3% to $860,000 as compared to $355,000
for the corresponding prior period. The increase in gains from portfolio
remarketing is attributable to the increase in portfolio assets acquired in
connection with the purchase of several lease portfolios. For the nine-month
period ended September 30, 1999, fees from remarketing activities increased by
$593,000 or 69.2% to $1,450,000 as compared to $857,000 for the corresponding
prior period. This increase is attributable, in part, to the Company's efforts
to promote its remarketing services to financial institutions and others on a
third party basis.
Costs and Expenses. Total costs and expenses for the nine-month
period ended September 30, 1999 was $45,701,000 as compared to $14,656,000 for
the corresponding prior period, an increase of $31,045,000 or 211.8%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
nine-month period ended September 30, 1999 was $34,232,000 as compared to
$11,009,000 for the corresponding prior period, an increase of $23,223,000 or
210.9%, and resulted in an overall gross margin of 19.7%. Selling, general and
administrative expenses for the nine-month period ended September 30, 1999 was
$9,575,000 as compared to $3,122,000 for the corresponding prior period, an
increase of $6,453,000 or 206.7%. Approximately $5,711,000 of selling, general
and administrative expenses for the nine-month period ended September 30, 1999
is a result of normal operating expenses incurred by CAM and CAM's newly
acquired retail and wholesale business unit, Tomahawk, whose operations were
consolidated with the Company's as of the August 1, 1998 acquisition date. Net
of the effect of the CAM expenses, selling, general and administrative expenses
increased to $3,864,000 for the nine-month period ended September 30, 1999 as
compared to $1,986,000 for the corresponding prior period, an increase of
$1,878,000 or 94.6%. This increase in selling, general and administrative
expenses reflects the effect of the Company's growth strategy implementation
that included, in part, significant costs associated with the addition of senior
management and staff personnel while continuing to improve the containment of
other costs.
Interest expense for the nine-month period ended September 30, 1999 was
$767,000 as compared to $182,000 for the corresponding prior period, an increase
of $585,000 or 321.4%. This increase is primarily a result of increased
interest expense associated with CAM's revolving credit line with a financial
institution utilized for inventory floor planning and interest accrued on the
Company's recourse debt.
Depreciation and amortization expense for the nine-month period ended
September 30, 1999 was $1,126,000 as compared to $343,000 for the corresponding
prior period, an increase of $783,000 or 228.3%. The increase is primarily due
to the amortization of intangible assets associated with the acquisition of
Tomahawk by CAM.
Net Income. Net income for the nine-month period ended September
30, 1999 was $1,194,000 as compared to $325,000 for the corresponding prior
period, an increase of $869,000 or 267.4%. The increase in net income is
attributable to the significant increase in revenues, primarily from the retail
and wholesale of used transportation equipment, the purchase portfolios, and
continued improvements in the containment of costs. Net income per share was
$0.02 per share (both basic and diluted) for the nine-month period ended
September 30, 1999 as compared to $0.01 per share (both basic and diluted) for
corresponding prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net increase in cash and cash equivalents for
the nine-month period ended September 30, 1999 of $1,013,000 totaling
$1,657,000. Operating activities provided cash of $4,905,000 during the
nine-month period ended September 30, 1999 and is primarily a result of
increased sales of used transportation equipment inventory, an increase in
deferred revenue associated with the addition to the Company's portfolio of
certain equipment acquired in connection with the purchase of several equipment
lease portfolios, and offset by increases in accounts receivables. Investing
activities used cash of $13,877,000 during the nine-month period ended September
30, 1999 and is primarily a result of the acquisitions of portfolios of
operating leases valued at approximately $4,773,000. The Company also increased
its investments and acquired distribution rights of approximately $7,000,000 via
the acquisition of said activities with Afinta Motor Corporation (Pty) Ltd.
("AMC"). Financing activities provided cash of $9,985,000 during the nine-month
period ended September 30, 1999 and is primarily the result of the exercise of a
Stock Purchase Warrant for an aggregate of Ten Million (10,000,000) shares of
the Common Stock, $.01 par value, of the Company at the exercise price of $.20
per share by Vestex Capital Corporation, the Company's majority shareholder. In
addition the Company issued Preferred Stock in conjunction with the acquisition
of a 15.1% interest in AMC and the world wide distribution rights (within the
defined territory) to the current and future product lines of AMC.
Additionally, the Company incurred a net increase in recourse debt of
approximately $5,148,000 primarily as a result of loans from financing
institutions and other creditors, including, but not limited to, additional
infusions by Vestex Capital Corporation. Cash and cash equivalents were
$1,657,000 at September 30, 1999 as compared to $644,000 at December 31, 1998,
an increase of $1,013,000 or 157.3%.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 to secure
repayment of the Loan. The Loan is secured by all of the Equipment and the
lease contracts specifically associated with this transaction. Balance for this
loan as of 11/15/99 is $1,340,000.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,876,000
loan agreement (the "Loan") with a financial institution (the "Lender") in
September 1999. The Loan provides for principal and interest payments (at 10%)
of $583,400 September 30, 1999, $72,300 per month from October 1999 through
December 1999, $64,400 per month from January 2000 through April 2000, $55,500
per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan
is secured by all of the Equipment and the lease contracts specifically
associated with this transaction. The balance outstanding as of 11/15/99 is
$2,230,000.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor plan used
transportation equipment inventory. The balance outstanding under this
revolving line of credit agreement is approximately $6,385,000 as of September
30, 1999. During 1998, CAM entered into a special purpose financing agreement
with the same institution to floor plan additional used transportation equipment
inventory in the approximate amount of $4,500,000. The balance outstanding under
this special purpose financing agreement is approximately $1,254,000 as of
September 30, 1999. In addition, during 1999, CAM entered into an additional
special purpose financing agreement with the same institution to finance used
transportation equipment inventory in the approximate amount of $626,000. The
balance outstanding under this agreement is approximately $626,000 as of
September 30, 1999. The interest rate charges on the above three lines of
credit is Prime plus 1.75%. The Company, in 1999, has also entered into a
special line of credit to finance used transportation equipment for
approximately $500,000 at the rate of Prime plus 1%. The balance on this line
of credit as of September 30, 1999 is approximately $383,000.
The Company's ability to underwrite equipment lease transactions is largely
dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in continuing dialogue with several inventory lenders to
providing the Company with warehouse financing. If the Company experiences
delays in putting warehouse facilities in place, the Company transacts deals by
coterminous negotiation of lease transactions with customers and financing with
institutions upon which it obtains a fee as the intermediary of up to 3% of the
amount of financing.
The remarketing, retailing and wholesaling of equipment has played and
will continue to play a vital role in the Company's operating activities. In
connection with the sale of lease transactions to investors, the Company
typically is entitled to share in a portion of the residual value realized upon
remarketing. Successful remarketing of the equipment is essential to the
realization of the Company's interest in the residual value of its managed
portfolio. It is also essential to the Company's ability to recover its
original investment in the equipment in its own portfolios and to recognize a
return on that investment. The Company has found that its ability to remarket
equipment is affected by a number of factors. The original equipment
specifications, current market conditions, technological changes, and condition
of the equipment upon its return all influence the price for which the equipment
can be sold or re-leased, resulting in a potential loss to the company.
The Company plans to dedicate resources toward the further development
and improvement of its remarketing, retailing and wholesaling capabilities. The
Company's strategy is to further capitalize upon its remarketing expertise by
continuing to develop its ability to sell remarketing services to other lessors,
fleet owners, and lessees. The Company anticipates, if resources are available,
to expand its used transportation equipment retail and wholesale capabilities
through the addition of retail centers geographically through internal growth
and/or acquisitions. The Company's retail and wholesale capabilities have been
greatly improved through CAM's strategic acquisition of Tomahawk. This improved
capability will be used as a competitive advantage that will enable the Company
to provide a "total holding cost" concept when competing for new lease
origination deals. The Company's retail and wholesale business unit will
provide improved outlets for other lessors, financial institutions, and fleet
owners to dispose of used transportation equipment and sources of quality used
transportation equipment for fleet owners and owner-operators. The Company also
plans to aggressively promote its Internet capabilities to further promote its
business activities and as an e-commerce tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. In addition to the Company, several of the other
parties are SunAmerica, Inc., Citicorp, Northwestern Mutual Life and others. As
of September 30, 1999, the Company had funded approximately $469,000 and is
obligated to provide additional funding in the approximate amount of $531,000.
The Company's renewal or replacement of expired lines, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse and
non-recourse), anticipated long-term financing of individual significant lease
transactions, and its estimated cash flows from operations are anticipated to
provide adequate capital to fund the Company's operations for the next twelve
months. Although no assurances can be given, the Company expects to be able to
renew or timely replace expired lines of credit, to expand currently existing
lines for inventory floor planning, to continue to have access to the public and
private securities markets, both debt and equity, and to be able to enter into
new lines of credit and individual financing transactions.
IMPACT OF THE YEAR 2000 ISSUE
The Company has completed efforts to assess and, where required, are in the
final remediate stages addressing 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. The Company has completed a 100% assessment of all
its information technology ("IT") and non-IT systems for Y2K issues and has
completed its assessment of all mission-critical systems. All mission-critical
systems and major applications and hardware have been assessed to determine the
Y2K impact and a plan is in place for timely resolution of potential issues.
Since 1998, the Company has used 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 $200,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending approximately $250,000 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.
The Company has purchased a Y2K compliant system from CFS Americas which is
---------------------------------------------------------------------------
being final tested and will be operational for 1/1/2000. We are in the process
- --------------------------------------------------------------------------------
of completing implementation and final testing of systems. Management is in
- --------------------------------------------------------------------------------
constant communication with its IT personnel and has made and will continue to
- --------------------------------------------------------------------------------
make reports to the Company's Board of Directors.
- --------------------------------------------------------
The preceding discussion contains forward looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also subject
to protection under the Year 2000 Information and Readiness Disclosure Act of
1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein. Actual results may differ materially from such
projected information due to changes in the underlying assumptions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts and others,
or the market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the same time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily material or meaningful and that such results for one quarter
should not be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-QSB 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR
CORPORATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
27 Financial Data Schedule for period ended September 30,
1999.
(b) Reports on Form 8-K:
1.) Current Report on Form 8-K, dated February 10, 1999.
2.) Current Report on Form 8-K, dated March 4, 1999.
3.) Current Report on Form 8-K/A, dated March 22, 1999.
4.) Current Report on Form 8-K/A, dated April 13, 1999.
5.) Current Report on Form 8-K/A, dated July 9, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
/s/ Brian M. Adley
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
/s/ Franklyn E. Churchill
Franklyn E. Churchill
President, Chief Operating Officer
and Director
/s/ Jonathan C. Ezrin
Jonathan C. Ezrin
Corporate Controller
(Principle Accounting Officer)
Date: November 15, 1999
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