SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 1
TO CURRENT REPORT ON FORM 8-K
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: Date of Earliest Event Reported:
April 13, 1999 February 10, 1999
COMMISSION FILE NUMBER 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 368-2700
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The registrant filed on February 12, 1999 a current report on Form 8-K relating
to its acquisition of MRB, Inc., a Georgia corporation d/b/a Tomahawk Truck and
Trailer Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation;
Tomahawk Truck and Trailer Sales of Virginia, Inc., a Virginia corporation; and
Tomahawk Truck and Trailer Sales of Missouri, Inc., a Missouri corporation
(collectively "Tomahawk"). The purpose of this amendment is to provide the
financial statement and information required by Item 7 of the Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Exhibit 99.1 filed herewith contains the following financial statements of
Tomahawk as required by and for the periods specified in Rule 3-05(b) of
regulation S-X:
(a) Financial Statements of Business Acquired:
Independent Certified Public Accountants' Report
Combined Balance Sheets as of July 31, 1998 (unaudited), December 31, 1998, 1997
and 1996
Combined Statement of Earnings and Retained Earnings for the seven months ended
July 31, 1998 (unaudited)
Combined Statements of Earnings for years ended December 31, 1998, 1997 and 1996
Combined Statements of Shareholders' Equity as of December 31, 1998, 1997 and
1996
Combined Statements of Cash Flows for the seven months ended July 31, 1998
(unaudited), and the years ended December 31, 1998, 1997 and 1996
Notes to Combined Financial Statements
(b) Pro Forma Financial Information (unaudited):
Exhibit 99.2 filed herewith contains the following pro forma condensed financial
statements as required by Article 11 of Regulation S-X:
Pro Forma Balance Sheet as of December 31, 1998
Pro Forma Statements of Operations for the years ended December 31, 1998 and
1997
<PAGE>
(c) Exhibits:
Exhibit 23 Consent of Metcalf, Rice, Fricke and Davis
Exhibit 99.1 The audited financial statements of MRB, Inc. and
affiliates as of and for the year ended December 31,
1998, 1997 and 1996, with interim financial statements
as of and for the seven months ended July 31,
1998 (unaudited).
Exhibit 99.2 The unaudited pro forma condensed balance sheet as of
December 31, 1998, and statements of operations
for the years ended December 31,1998 and 1997.
<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
By: /s/ Franklyn E. Churchill______
----------------------------------------
Franklyn E. Churchill, President
Date: April 13, 1999
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
23 Consent of Metcalf ,Rice, Fricke and Davis
99.1 The audited financial statements of MRB, Inc. and affiliates
as of and for the year ended December 31, 1998, 1997 and 1996,
with auditor's interim financial statements as of and for
the seven months ended July 31, 1998 (unaudited).
99.2 The unaudited pro forma condensed balance sheet as of
December 31, 1998, and statements of operations for the
years ended December 31, 1998 and 1997.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated March 12, 1999, on the financial statements of MRB, Inc. and affiliates,
as of and for the seven months ended July 31, 1998 (unaudited), and the combined
financial statements of MRB, Inc., as of and for the years ended December 31,
1998, 1997 and 1996, included in this Form 8-K.
/s/ METCALF, RICE, FRICKE AND DAVIS
Atlanta, Georgia
April 13, 1999
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MRB, INC. & AFFILIATES
DECEMBER 31, 1998, 1997 AND 1996
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Shareholders
MRB, Inc. & Affiliates
d/b/a Tomahawk Truck and Trailer Sales
We were engaged to audit the accompanying combined balance sheets of MRB,
INC. & AFFILIATES as of December 31, 1998, 1997 and 1996, and the related
combined statements of earnings, shareholders' equity and cash flows for the
years 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 audits.
Except as discussed in the following paragraph, 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.
The physical inventories were counted on December 31, 1998, 1997 and 1996,
and inventory quantities are stated in the accompanying financial statements at
$10,721,462, $3,977,167 and $2,059,530, respectively. However, since we were
not initially engaged as auditors until substantially after the physical
inventories were counted in 1997 and 1996 and we were not able to apply
alternative auditing procedures to satisfy ourselves as to inventory quantities
as of December 31, 1996, the scope of our work was not sufficient to enable us
to express, and we do not express an opinion on the financial statements
referred to above for 1996 and on the combined statements of earnings and cash
flows for the year ended December 31, 1997.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to observe inventory
in 1997 and 1996 as referred to in the previous paragraph, the combined
financial statements referred to above present fairly, in all material respects,
the financial position of MRB, INC. & AFFILIATES as of December 31, 1998, 1997
and 1996, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Atlanta, Georgia
March 12, 1999
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED BALANCE SHEETS
December 31,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash (note A6) $ 31,809 $ 639,795 $ 289,458
Accounts receivable
Trade (note A3) 207,654 473,510 365,624
Due from related parties (note B) 167,300 - -
----------- ---------- ----------
374,954 473,510 365,624
Inventory (notes A7 and C) 10,721,462 3,977,167 2,059,530
Deposits 2,700 18,004 42,573
Prepaid expenses 57,752 25,780 19,349
----------- ---------- ----------
Total current assets 11,188,677 5,134,256 2,776,534
FURNITURE, FIXTURES AND EQUIPMENT (note A2) 259,971 199,804 212,201
Less accumulated depreciation 68,908 68,707 75,915
----------- ---------- ----------
191,063 131,097 136,286
OTHER ASSETS
Organization costs, less accumulated amortization
of $14,547, $8,005 and $2,734 in 1998, 1997
and 1996, respectively (note A9) 88,090 18,420 9,039
----------- ---------- ----------
$11,467,830 $5,283,773 $2,921,859
=========== ========== ==========
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term obligations $ 24,936 $ 100,750 $ 19,271
Notes payable - other (notes B and C) 426,852 730,756 353,859
Notes payable - floor plan (note C) 9,062,635 3,602,232 1,901,055
Accounts payable
Trade 685,780 221,290 151,527
Payroll and sales taxes 58,818 55,869 29,661
----------- ---------- ----------
744,598 277,159 181,188
Accrued expenses 537,847 106,397 31,711
Customer deposits 21,208 4,000 -
----------- ---------- ----------
Total current liabilities 10,818,076 4,821,294 2,487,084
LONG-TERM OBLIGATIONS, less current
maturities (note C) 75,877 57,791 38,541
DUE TO SHAREHOLDERS (note B) 300,000 35,755 -
COMMITMENTS AND CONTINGENT LIABILITIES
(notes E, H, and I)
SHAREHOLDERS' EQUITY
Common stock and additional contributed capital (note G) 80,100 80,000 80,000
Retained earnings 193,777 288,933 316,234
----------- ---------- ----------
273,877 368,933 396,234
----------- ---------- ----------
$11,467,830 $5,283,773 $2,921,859
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED STATEMENTS OF EARNINGS
Year ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (note A4) $39,073,588 $27,331,970 $19,192,724
Cost of goods sold 32,752,949 22,603,639 16,052,856
------------ ------------ ------------
Gross profit 6,320,639 4,728,331 3,139,868
Operating expenses
Administrative expenses 3,720,485 2,394,372 1,633,416
Selling and marketing expenses 1,770,326 1,812,462 1,147,432
Depreciation and amortization (notes A2 and A9) 39,521 47,280 36,427
------------ ------------ ------------
5,530,332 4,254,114 2,817,275
Operating earnings 790,307 474,217 322,593
Other income (expenses)
Other income (expense) 4,454 (13,783) 1,170
Interest expense (449,917) (392,561) (255,229)
(445,463) (406,344) (254,059)
------------ ------------ ------------
Earnings before income taxes 344,844 67,873 68,534
Income taxes (note F) - - -
------------ ------------ ------------
NET EARNINGS $ 344,844 $ 67,873 $ 68,534
============ ============ ============
</TABLE>
The accompanying notes are in integral part of these combined financial
statements.
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
Retained
Common stock and additional contributed capital earnings Total
------------------------------------------------ ---------- ----------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 30,000 $ 333,930 $ 363,930
Issuance of common stock 50,000 - 50,000
Distribution to shareholders - (86,230) (86,230)
Net earnings for the year - 68,534 68,534
------------------------------------------------ ---------- ----------
Balance at December 31, 1996 80,000 316,234 396,234
Distribution to shareholders - (95,174) (95,174)
Net earnings for the year - 67,873 67,873
------------------------------------------------ ---------- ----------
Balance at December 31, 1997 80,000 288,933 368,933
Issuance of common stock 100 - -
Distribution to shareholders - (440,000) (440,000)
Net earnings for the year - 344,844 344,844
------------------------------------------------ ---------- ----------
Balance at December 31, 1998 $ 80,100 $ 193,777 $ 273,877
================================================ ========== ==========
</TABLE>
The accompanying notes are an integral part of this combined statement.
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings for the year $ 344,844 $ 67,873 $ 68,534
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 39,521 47,280 36,427
Loss on sale of equipment - 13,783 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 98,556 (107,886) (332,792)
Increase in inventory (6,744,295) (1,917,637) (91,667)
Decrease (increase) in deposits 15,304 24,569 (42,573)
(Increase) decrease in other assets (108,183) (18,728) 10,814
Increase (decrease) in accounts payable and
accrued expenses 916,097 174,657 (50,590)
------------ ------------ ----------
(5,783,000) (1,783,962) (470,381)
Net cash used in operating activities (5,438,156) (1,716,089) (401,847)
Cash flows from investing activity
Purchase of furniture, fixtures and equipment (92,946) (52,958) (72,878)
Cash flows from financing activities
Proceeds from notes payable - net 5,098,771 2,178,803 714,658
Distribution to shareholders (440,000) (95,174) (86,230)
Proceeds from shareholders 264,245 35,755 -
Proceeds from stock issuance 100 - 50,000
------------ ------------ ----------
Net cash provided by financing activities 4,923,116 2,119,384 678,428
------------ ------------ ----------
Net (decrease) increase in cash (607,986) 350,337 203,703
Cash at beginning of year 639,795 289,458 85,755
------------ ------------ ----------
Cash at end of year $ 31,809 $ 639,795 $ 289,458
============ ============ ==========
Cash paid during the year for:
- - ---------------------------------------------------
Interest $ 426,062 $ 376,118 $ 240,457
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows.
1. Principles of Combination and Nature of Business
MRB, Inc. & Affiliates, (the "Company") consists of four Corporations owned by
the same shareholders and under common management, which collectively do
business under the name of Tomahawk Truck & Trailer Sales (Tomahawk). MRB, Inc.
was incorporated in July 1991. Tomahawk Truck & Trailer Sales, Inc. was
incorporated in November 1995. Tomahawk Truck & Trailer Sales of Virginia, Inc.
was incorporated in November 1996. Tomahawk Truck & Trailer Sales of Missouri,
Inc. was incorporated in October 1998. Because of these relationships, the
combined financial statements have been prepared as if they were a single
entity. All inter-company transactions have been eliminated from the combined
financial statements.
The Company is engaged in the sale of used trucks and trailers primarily in
the Southeastern and Midwestern United States. The Company's telemarketing
department finds and secures equipment for major carriers throughout the United
States, which is unique to the industry.
2. Furniture, Fixtures and Equipment
Property and equipment consists of office furniture and fixtures, vehicles and
leasehold improvements, which are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of five to seven years for office furniture
and fixtures, five years for vehicles, and 10 to 15 years for leasehold
improvements. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, while statutory
methods are used for income tax purposes. Depreciation expense was $32,980,
$44,364 and $36,427 for the years ended December 31, 1998, 1997 and 1996,
respectively.
3. Accounts Receivable
Accounts receivable consist of amounts due on open customer contracts financed
by the Company on an interim basis and completed sales contracts to be funded by
outside finance companies. The Company considers all accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
If amounts become uncollectible, they will be charged to operations when that
determination is made.
4. Revenue Recognition
Revenue and related costs of trucks are recognized on the accrual basis of
accounting and income is then recognized in the period in which the related
truck or trailer sale is completed and title passes to the customer.
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
5. Advertising
The Company expenses advertising costs as they are incurred.
6. Cash - Concentration of Credit Risk
Each company maintains their cash balances in demand deposits at financial
institutions, which at times may exceed Federally insured limits. The Company
has not experienced any losses in such accounts and believes there is no
significant credit risk exposure on cash.
7. Inventory
All inventories are valued at the lower of cost or market. The cost of vehicles
including reconditioning parts and other direct costs is determined using the
specific identification method.
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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.
Actual results could differ from those estimates.
9. Organization Costs
Costs of organizing the Company have been capitalized and are being amortized to
operations over a 60-month period. Additionally, pre-acquisition costs incurred
during 1998 in connection with the stock sale are included and amortized over 25
years beginning August 1, 1998.
10. 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.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE B - RELATED PARTY TRANSACTIONS
The Company leases its facilities in Conley, Georgia from related parties under
an operating lease. The lease requires the Company to pay all maintenance,
insurance, and taxes on the leased property. The following schedule shows the
future minimum lease payments including the option period required by year under
the operating lease, which was revised in January 1999 in connection with the
stock purchase agreement of the Company.
Years ended December 31,
1999 $ 102,000
2000 102,000
2001 102,000
2002 102,000
2003 102,000
2004 and thereafter 600,000
------------
$ 1,110,000
===========
The lease contains an option to purchase the property by the parent company
which expires July 31, 1999 (unless renewed by both parties).
Rental expense for the lease was $193,274, $180,000 and $158,053 for the years
ended December 31, 1998, 1997 and 1996, respectively.
During the normal course of operations, the Company's shareholders advanced
money to and received payments from the Company. The amount outstanding at
December 31, 1998 and 1997 was $300,000 and $35,755, respectively.
During the normal course of operations, individuals or companies controlled by
employees and relatives of employees made bridge loans to the Company to finance
vehicle purchases on an interim basis. The amounts outstanding to these
individuals are shown in note C.
During the normal course of operations, the Company placed inventory on
consignment with a subsidiary company of the parent company, which purchased
Tomahawk (see note I). The balance of these consigned items was $167,300 at
December 31, 1998.
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE C - NOTE PAYABLE AND LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Long-term obligations consist of the following:
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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. $ 100,813 $ - $ -
Various notes payable to financial institutions at rates of 9 and 10 percent per
annum, secured by automobiles and equipment. - 158,541 57,812
Less current maturities (24,936) (100,750) (19,271)
Total long-term obligations $ 75,877 $ 57,791 $ 38,541
=========== =========== ===========
CURRENT NOTES PAYABLE
Current portion of long-term obligations $ 24,936 $ 100,750 $ 19,271
Unsecured notes payable to individuals due on demand including interest
payable at 10 percent. 255,950 403,696 160,000
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. 8,164 - -
Revolving bridge loan payable to a financial institution whereby the Company
can borrow up to $400,000 for operating purposes. The remaining principle
balance on the current note is due on March 27, 1999. 162,738 327,060 193,859
During 1994, the Company entered into a revolving line of credit agreement
with a financial institution whereby the Company can borrow up to $7,500,000
to floor plan inventory. The maximum amount outstanding during 1998 was
$7,500,000. Interest is accrued monthly at the financial institution's prime rate
plus between .75 percent and 1.5 percent depending upon floor planned
inventory amounts. The effective rate of interest at December 31, 1998 was 9.7
percent. This note is personally guaranteed by the shareholders of the
Company. 5,573,235 3,602,232 1,901,055
During 1998, the Company entered into a financing agreement with the
aforementioned financial institution to floor plan inventory from a specific
buyer. Interest is accrued monthly at the financial institution's prime rate plus
between .75 percent and 1.5 percent. The effective rate of interest at December
31, 1998 was 9.7 percent. This note is personally guaranteed by the
shareholders of the Company. 3,489,400 - -
Total current notes payable $9,514,423 $4,433,738 $2,274,185
=========== =========== ===========
</TABLE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE C - NOTE PAYABLE AND LONG-TERM OBLIGATIONS - Continued
Aggregate maturities of notes payable and long-term obligations are as follows
<TABLE>
<CAPTION>
<S> <C>
1999 $9,514,423
2000 27,405
2001 26,891
2002 15,585
2003 5,996
----------
9,590,300
==========
</TABLE>
NOTE D - CONCENTRATION OF CREDIT RISK
Sales and credit receivables have significant concentrations of risk due to
fluctuations affecting the trucking industry. However, concentrations of credit
risk with respect to trade receivables is limited because the Company's client
base is made up of a large number of geographically diverse clients and
financing is provided primarily from outside parties with limited or no
recourse.
NOTE E - COMMITMENTS
The Company conducts a substantial portion of its operations utilizing leased
facilities, consisting of offices, equipment and vehicles over periods of 12 to
60 months. Most of the operating leases provide that the Company pay taxes,
maintenance, insurance and other expenses applicable to the leased property.
Lease payments and related expenses amounted to $449,966, $328,042 and $245,636
for the years ended December 31, 1998, 1997 and 1996, respectively.
The minimum rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31,
1999 $179,300
2000 168,100
2001 102,000
2002 102,000
2003 102,000
653,400
</TABLE>
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE F - INCOME TAXES
The income taxes on the net earnings of the Company are payable personally by
the shareholders pursuant to an election as an S corporation under the Internal
Revenue Code not to have the Company taxed as a corporation. The income taxes
assumed payable had this election not been made amount to $131,385, $15,022 and
$15,218 in 1998, 1997 and 1996, respectively.
NOTE G - COMMON STOCK AND ADDITIONAL CONTRIBUTED CAPITAL
Ownership of the four entities under common ownership and control are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
MRB, Inc. (of Georgia)
Authorized, 10,000 shares of $1.00 par value;
issued 5,000 shares $10,000 $10,000 $10,000
Tomahawk Truck & Trailer Sales, Inc. (of Florida)
Authorized, 7,500 shares of $1.00 par value;
issued 100 shares 20,000 20,000 20,000
Tomahawk Truck & Trailer Sales of Virginia, Inc.
Authorized, 1,000 shares of no par value;
Issued 100 shares 50,000 50,000 50,000
Tomahawk Truck & Trailer Sales of Missouri, Inc.
Authorized, 30,000 shares of $1.00 par value;
Issued 100 shares 100 - -
------- ------- -------
$80,100 $80,000 $80,000
======= ======= =======
</TABLE>
NOTE H - CONTINGENT LIABILITIES
The Company is engaged in two lawsuits as a defendant involving alleged breach
of contract from the sale of used trucks sold during 1996 through 1998. In the
opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits is unknown as of the date of this report. The Company has
insurance against certain liability claims; however, a reserve for estimated
expenses to defend these claims and possible losses in the amount of
approximately $47,000 was accrued as of the date of this report. Additionally,
the Company's new parent has accrued approximately $37,500 to defend these
claims.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE I - CHANGE IN MANAGEMENT AND OWNERSHIP
During August 1998, the Company's board of directors and shareholders entered
into a management agreement effective August 1, 1998, with a subsidiary of a
publicly traded company. A related stock purchase agreement closed in January
1999 which included an exchange of MRB, Inc. & Affiliates' common stock for
stock in the parent; earn out payments in the form of cash and/or shares of
common stock based on quarterly operating performance; cash consideration; and
contingent shares of the parent in the form of loans. Employment agreements,
lease agreements on business real estate and certain indemnity agreements were
signed with certain key employees of MRB, Inc.
<PAGE>
FINANCIAL STATEMENTS AND ACCOUNTANTS' REVIEW REPORT
MRB, INC. & AFFILIATES
JULY 31, 1998
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Shareholders
MRB, Inc. & Affiliates
We have reviewed the accompanying combined balance sheet of MRB, INC. &
AFFILIATES as of July 31, 1998, and the related combined statements of earnings
and retained earnings, and cash flows for the seven months then ended. All
information included in these financial statements is the representation of the
management of MRB, INC. & AFFILIATES.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of making inquires of Company
personnel and applying analytical procedures to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying combined financial statements in order for
them to be in conformity with generally accepted accounting principles.
Atlanta, Georgia
March 12, 1999
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED BALANCE SHEET
July 31, 1998
(See Accountants' Review Report)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (note A7) $ 397,653
Accounts receivable trade (note A4) 222,100
Inventory (notes A8 and C) 5,574,462
Deposits 25,000
Prepaid expenses 21,000
-----------
Total current assets 6,240,215
FURNITURE, FIXTURES AND EQUIPMENT (note A2) 190,744
Less accumulated depreciation and amortization 52,559
-----------
138,185
OTHER ASSETS
Organization costs, less accumulated amortization
of $11,080 (note A10) 65,941
-----------
$6,444,341
===========
LIABILITIES
CURENT LIABILITIES
Current maturities of long-term obligations (note C) $ 4,600
Notes payable - others (note C) 517,033
Note payable - floor plan (note C) 4,452,114
Accounts payable - trade 589,481
Payroll and sales taxes 81,220
Accrued expenses 313,123
-----------
Total current liabilities 5,957,571
LONG-TERM OBLIGATIONS, less current maturities (note C) 21,434
DUE TO SHAREHOLDERS (note B) 435,403
COMMITMENTS AND CONTINGENT LIABILITIES (notes E and G)
SHAREHOLDERS' EQUITY
Common stock and additional contributed capital (note F) $ 80,000
Retained earnings (50,067) 29,933
----------- ------
$6,444,341
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE>
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED STATEMENT OF EARNINGS AND RETAINED EARNINGS
Seven months ended July 31, 1998
(See Accountant's Review Report)
<S> <C> <C>
Revenues (note A5) $20,143,295
Cost of goods sold 16,668,331
------------
Gross profit 3,474,964
Operating expenses
Administrative expenses $ 2,193,574
Selling and marketing expenses 856,344
Depreciation and amortization (notes A2 and A10) 20,436 3,070,354
------------ ---------
Operating earnings 404,610
Other expense - interest 303,610
------------
Earnings before income taxes 101,000
Income taxes (note A3) -
------------
NET EARNINGS 101,000
Retained earnings at beginning of period 288,933
Distribution to shareholders (440,000)
------------
Retained earnings at end of period $ (50,067)
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
MRB, Inc. & Affiliates
COMBINED STATEMENT OF CASH FLOWS
Seven months ended July 31,1998
(See Accountants' Review Report)
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings for the period $ 101,000
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization $ 20,436
Changes in assets and liabilities:
Decrease in accounts receivable 251,410
Increase in inventory (1,597,295)
Increase in deposits (6,996)
Increase in other assets (47,029)
Increase in accounts payable and accrued expenses 596,268 (783,206)
------------ ---------
Net cash used in operating activities (682,206)
Cash flows from investing activity
Purchase of furniture, fixtures, and equipment (23,236)
Cash flows from financing activities
Proceeds from notes payable - net 503,652
Distributions to shareholders (440,000)
Proceeds from shareholders - loans 399,648
------------
Net cash provided by financing activities 463,300
------------
Net decrease in cash (242,142)
Cash at beginning of period 639,795
------------
Cash at end of period $ 397,653
============
Cash paid during the period for:
- - ---------------------------------------------------------
Interest $ 295,374
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows.
1. Principles of Combination and Nature of Business
MRB, Inc. & Affiliates (the "Company") consists of three corporations owned by
the same shareholders and under common management, which collectively do
business under the name of Tomahawk Truck & Trailer Sales (Tomahawk). MRB, Inc.
was incorporated in July 1991. Tomahawk Truck & Trailer Sales, Inc. was
incorporated in November 1995. Tomahawk Truck & Trailer Sales of Virginia, Inc.
was incorporated in November 1996. Because of these relationships, the combined
financial statements have been prepared as if they were a single entity. All
inter-company transactions have been eliminated from the combined financial
statements.
The Company is engaged in the sale of used trucks and trailers primarily in the
Southeastern and Midwestern United States. The Company's telemarketing
department finds and secures equipment for major carriers throughout the United
States, which is unique to the industry.
2. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consists of office furniture and fixtures,
vehicles and leasehold improvements which are stated at cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives of five to seven years for office
furniture and fixtures, five years for vehicles and 10 to 15 years for leasehold
improvements. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, while statutory
methods are used for income tax purposes.
3. Income Taxes
The income taxes on the net earnings of the Company are payable personally by
the shareholders pursuant to an election as an S corporation under the Internal
Revenue Code not to have the Company taxed as a corporation. The income taxes
assumed payable had this election not been made amount to $22,640 for the seven
month period ended July 31, 1998.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. Accounts Receivable
Accounts receivable consists of amounts due on open customer contracts financed
by the Company on an interim basis and completed sales contracts to be funded by
outside finance companies. The Company considers all accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
If amounts become uncollectible, they will be charged to operations when that
determination is made.
5. Revenue Recognition
Revenue and related costs of trucks are recognized on the accrual basis of
accounting, and income is then recognized in the period in which the related
truck or trailer sale is completed and title passes to the customer.
6. Advertising
The Company expenses advertising costs as they are incurred.
7. Cash - Concentration of Credit Risk
Each company maintains their cash balances in demand deposits at one financial
institution, which at times may exceed Federally insured limits. The Company
has not experienced any losses in such accounts and believes there is no
significant credit risk exposure on cash.
8. Inventory
All inventories are valued at the lower of cost or market. The cost of vehicles
and parts is determined using the specific identification method.
9. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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.
Actual results could differ from those estimates.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
10. Organization Costs
Costs of organizing the Company have been capitalized and are being amortized to
operations over a 60-month period.
11. 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.
NOTE B - RELATED PARTY TRANSACTIONS
The Company leases its facilities in Conley, Georgia from a related party under
an operating lease. The lease requires the Company to pay all maintenance,
insurance, and taxes on the leased property. The following schedule shows the
future minimum lease payments required by year under the operating lease, which
was revised in January 1999 in connection with the sale of the Company. See
note H.
<TABLE>
<CAPTION>
<S> <C>
Periods ended July 31,
1999 $ 93,000
2000 102,000
2001 102,000
2002 102,000
2003 102,000
--------
501,000
=======================
</TABLE>
Rental expense for the lease was $108,500 for the seven months ended July 31,
1998.
During the normal course of operations, the Company's shareholders advanced
money to and received repayments from the Company. At July 31, 1998, $435,403
is owed to shareholders, of which $135,403 was repaid by December 31, 1998.
NOTE C - NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable-other includes a bridge loan payable to a financial institution
whereby the Company can borrow up to $400,000 for operating purposes. Interest
is payable monthly at a rate of 10.5 percent. Remaining principle balance is
due on March 27, 1999. The outstanding balance on this loan is $291,083 at July
31, 1998. Also included in notes payable-other is $225,950 in amounts due to
various individuals. These notes are unsecured, bear interest at a rate of 10
percent and are due on demand.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE C - NOTES PAYABLE AND LONG-TERM OBLIGATIONS - Continued
During 1994, the Company entered into a revolving line of credit agreement with
a financial institution, whereby the Company can borrow up to $7,500,000 to
floor plan inventory. Borrowing outstanding on this line of credit was
$4,452,114 at July 31, 1998. Interest is accrued monthly at the institution's
prime rate plus 1.75 percent. The effective rate of interest at July 31, 1998
was 10.25 percent. This note is personally guaranteed by the shareholders of the
Company.
<TABLE>
<CAPTION>
<S> <C>
Long-term obligations consist of the following at July 31, 1998:
Notes payable to a financial institution, payable in
monthly installments of $563 including interest at
9.5% per annum over 60 months, due June 1998 to
May 2003 secured by an automobile. $26,034
Less: current portion due (4,600)
--------
Long-term notes payable $21,434
========
</TABLE>
Aggregate maturities of notes payable and long-term obligations for the five
years following July 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Periods ended July 31,
1999 $4,600
2000 5,031
2001 5,503
2002 6,019
2003 4,881
------
26,034
=======================
</TABLE>
NOTE D - CONCENTRATION OF CREDIT RISK
Sales and credit receivables have significant concentrations of risk due to
fluctuations affecting the trucking industry. However, concentrations of credit
risk with respect to trade receivables is limited because the Company's client
base is made up of a large number of geographically diverse clients and
financing is provided primarily from outside parties with limited or no
recourse.
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE E - COMMITMENTS
The Company conducts a substantial portion of its operations utilizing leased
facilities, consisting of offices, equipment and vehicles leased over periods of
12 to 60 months. Most of the operating leases provide that the Company pay
taxes, maintenance, insurance and other expenses applicable to the leased
property. Lease payments and related expenses amounted to $272,295 for the
period ended July 31, 1998.
The minimum rental commitments under operating leases excluding the related
party lease disclosed in note B are as follows:
<TABLE>
<CAPTION>
<S> <C>
Periods ended July 31,
1999 $179,300
2000 168,000
2001 102,000
2002 102,000
2003 102,000
--------
653,300
=======================
</TABLE>
NOTE F - COMMON STOCK AND ADDITIONAL CONTRIBUTED CAPITAL
Ownership of the three entities under common ownership and control are as
follows at July 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
MRB, Inc. (Georgia)
Authorized, 10,000 shares of $1.00 par value;
issued 5,000 shares $10,000
Tomahawk Truck & Trailer Sales, Inc. (Florida)
Authorized, 7,500 shares of $1.00 par value;
issued 100 shares 20,000
Tomahawk Truck & Trailer Sales of Virginia, Inc.
Authorized, 1,000 shares of no par value;
issued 100 shares 50,000
-------
$80,000
=======
</TABLE>
<PAGE>
MRB, Inc. & Affiliates
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1998
(See Accountants' Review Report)
NOTE G - CONTINGENT LIABILITIES
The Company is engaged in two alleged breach of contract lawsuits as a defendant
from the sale of used trucks during 1996 through 1998. In the opinion of
management, based upon advice of counsel, the ultimate outcome of these lawsuits
is unknown as of the date of this report. The Company has insurance against
certain liability claims; however, a reserve for estimated expenses to defend
these claims and possible losses in the amount of approximately $47,000 was
accrued as of the date of this report. Additionally, the Company's new parent
has accrued approximately $37,500 to defend these claims.
NOTE H - SUBSEQUENT EVENTS
Subsequent to July 31, 1998, the Company's board of directors and shareholders
entered into a stock purchase agreement with a subsidiary of a publicly traded
company. A management agreement was entered into whereby significant management
control of the Company was passed to the acquiring company in August 1998. The
stock purchase agreement included an exchange of MRB, Inc. & Affiliates common
stock for stock in the parent, earn out payments in the form of cash and/or
shares of common stock based on quarterly operating performance; cash
consideration; and contingent shares of the parent in the form of loans. The
sale was closed in January 1999. Employment agreements, lease agreements on
business real estate and certain indemnity agreements were signed by certain key
employees of Tomahawk.
Subsequent to July 31, 1998 the Company opened a retail operation in Kansas
City, Missouri under the name of Tomahawk Truck & Trailer Sales of Missouri,
Inc.
Exhibit 99.2
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEETS
(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 reimbursable 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:
Prefered 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,
43,044,380 shares issued and outstanding 430
Additional paid-in capital 34,217
Accumulated deficit (27,690)
7,007
--------------
$ 29,569
==============
</TABLE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C> <C>
Revenues:
Transportation equipment sales $ 45,239 $ 27,332
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
49,782 31,765
------------- ------------
Costs and expenses:
Cost of transportation equipment sales 38,399 22,604
Selling, general and administrative 9,104 10,619
Interest expense 647 687
Depreciation and amortization 681 506
48,831 34,416
------------- ------------
Income (loss) before extraordinary item and
Provision (benefit) for income tax 951 (2,651)
Provision (benefit) for income tax ---- 13
------------- ------------
Income (loss) before extraordinary item 951 (2,664)
Extraordinary item - gain on debt forgiveness ---- 930
------------- ------------
Net income (loss) $ 951 ( $1,734)
============= =======
Basic net income (loss) per share:
Income (loss) before extraordinary item $ .03 $ .17
Extraordinary item ---- (.06)
Net income (loss) $ .03 ( $ .11)
============= =======
Diluted net income (loss) per share:
Income (loss) before extraordinary item $ .02 $ .17
Extraordinary item ---- (.06)
Net income (loss) $ .02 ( $ .11)
============= =======
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>
