UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368 - 2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of August 13, 1999, 53,362,786 shares of Common Stock, $.01 par value per
share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $2,500,000)
were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of August 13, 1999 was approximately
$11,020,410. Aggregate market value of the total voting stock of the issuer as
of August 13, 1999 was approximately $40,172,090.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 2
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information
Item 1 Legal Proceedings 14
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
Item 7 Exhibit 11 - Computation of Earnings per Share
Signatures 16
1
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<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
(restated) (restated)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 444 $ 612
Receivables, net 5,708 2,880
Inventory 10,589 36
Net investment in direct finance leases 434 359
Equipment on operating lease, net of accumulated depreciation
of $2,292 and $2,351 2,560 702
Residual values, net 214 219
Furniture and equipment, net of accumulated depreciation
of $1,463 and $1,290 1,096 807
Long term investments 1,000 1,000
Intangibles, net 2,693 111
Other assets, net 1,942 1,460
--------- ---------
Total Assets $ 26,680 $ 8,186
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 4,994 $ 3,572
Deferred reimbursable expenses 4,122 1,068
Indebtedness:
Revolving credit line 8,270 - - -
Notes payable 492 - - -
Nonrecourse 547 889
Recourse 2,082 295
--------- ---------
Total Liabilities 20,507 5,824
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, 5,000,000 shares issued and outstanding 50 50
Convertible Series B, 2,000,000 shares authorized, none
issued and outstanding - - - - - -
Common stock, $.01 par value; 75,000,000 shares authorized,
53,358,786 and 38,541,895 shares issued and outstanding 533 385
Additional paid-in capital 33,313 29,943
Accumulated deficit (27,723) (28,016)
--------- ---------
Total Stockholders' Equity 6,173 2,362
--------- ---------
Total Liabilities and Stockholders' Equity $ 26,680 $ 8,186
========= =========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
------- --------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
Revenues
<S> <C> <C> <C> <C>
Transportation Equipment Sales $ 14,223 $ 481 $ 23,190 $ 972
Rental income 316 290 774 411
Lease underwriting income 17 34 27 34
Direct finance lease income 28 31 42 67
Interest income 84 14 164 32
Gains from portfolio remarketing 323 227 574 308
Fees from remarketing activities 622 314 860 554
Other income 11 27 82 45
------------ ---------- ---------- ----------
$ 15,624 $ 1,418 $ 25,713 $ 2,423
----------- ----------- ---------- ----------
Costs and expenses:
Cost of transportation equipment sales 11,500 362 18,589 669
Selling, general and administrative 3,288 883 5,795 1,419
Interest expense 176 19 242 40
Depreciation and amortization 395 120 708 235
----------- ---------- ---------- ---------
15,359 1,384 25,334 2,363
----------- ---------- ---------- ----------
Earnings before taxes 265 34 379 60
----------- ---------- ---------- ----------
Provision for income taxes 64 - - - 86 - - -
-- ------- -- ------
Net Income $ 201 $ 34 $ 293 $ 60
----------- ----------- ---------- ----------
Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00
----------- ----------- ---------- -----------
Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00
----------- ----------- ----------- -----------
Shares used in computing basic net income 48,300,550 35,032,242 46,039,725 33,168,387
per share
Shares used in computing diluted net income 56,941,127 43,624,835 56,046,197 42,025,530
per share
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
1999 1998
---------- -------
(unaudited) (unaudited)
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 293 $ 60
--------- ----------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 708 120
Residual value estimate realizations and reductions,
net of additions 5 24
Changes in assets and liabilities:
(Increase) decrease in receivables (2,256) 490
(Increase) in inventory (670) (222)
Increase (decrease) in accounts payable and accrued
expenses 297 (1,038)
Increase in deferred reimbursable expenses 3,054 - - -
--------- --------
1,138 (626)
--------- ---------
Net cash (used) provided by operating activities 1,431 (566)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases (75) 57
Equipment on operating lease (1,980) (325)
Net change in cash restricted - - - 2,282
Additions to furniture and equipment, net (318) (85)
Increase in intangibles (66) - - -
Net change in other assets (410) (1,425)
--------- ---------
Net cash provided (used) by investing activities (2,849) 504
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit (264) - - -
Increase in indebtedness - recourse 3,300 225
Repayments of indebtedness-non recourse (342) (162)
Repayments of indebtedness-recourse (1,513) (8)
Repayment of note payable (221) - - -
Issuance of common stock, net 290 5
--------- ----------
Net cash provided by financing activities 1,250 60
--------- ----------
Net (decrease) in cash and cash equivalents (168) (2)
Cash and cash equivalents at beginning of period 612 97
--------- ----------
Cash and cash equivalents at end of period $ 444 $ 95
========= ==========
Cash paid for interest $ 332 $ 13
========= ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim 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. The unaudited interim
condensed consolidated financial statements include the accounts of
Chancellor Corporation and each of its subsidiaries ("company's").
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. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates, based upon the best information available, in
recording transactions resulting from business operations. Intercompany
accounts and transactions have been eliminated. These financial statements
and related notes should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB-A for the year ended December 31,
1998. The balance sheet at December 31, 1998 has been derived from the
audited consolidated financial statements included in the Annual Report on
Form 10-KSB-A. The results for the interim period ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire
year.
RESTATEMENT OF FINANCIAL STATEMENTS:
-----------------------------------
In accordance with guidelines of the Securities and Exchange
Commission, the Company has restated its 1999 financial statements to
reflect the acquisition of MRB, Inc. and related companies "Tomahawk" on
January 29, 1999 and related revisions to the purchase price and
amortization periods of intangibles and to properly record expenses and
accrued liabilities related to the issuance of stock purchase by the
Company's majority shareholder and certain other deferred costs or expenses
paid by VCC or VMI on behalf of the Company during 1998.
The effects on the 10-QSB/A's for June 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
As Related to
originally Tomahawk Related to Related to Related to As
reported deconsol- Related to VCC/VMI VCC Intangibles Restated
idatiton goodwill fees warrants
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $36,052 $(1,781) $262 $(6,226) $ - - - $(1,627) $26,680
Total liabilities 26,329 (183) 119 (5,758) - - - - - - 20,507
Total shareholders equity 9,723 (1,488) 155 (990) 23 (1,250) 6,173
Total revenues 15,834 - - - - - - 167 - - - (377) 15,624
Total expenses 15,285 - - - 41 86 11 - - - 15,423
</TABLE>
2. LOAN AGREEMENT
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender"). 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 security deposit to secure repayment of the Loan.
The Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction.
3. BUSINESS ACQUISITION
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement dated August 1, 1998, as
amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a
Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida
corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia
corporation; and Tomahawk Truck & Trailer Sales of Missouri, Inc., a
Missouri corporation (collectively "Tomahawk"). The Management Agreement
provided CAM with effective control of Tomahawk's operations as of 1998.
Subsequently, CAM acquired all of the outstanding capital stock of
5
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Tomahawk from the two (2) sole shareholders (the "Selling Shareholders")
pursuant to a Stock Purchase Agreement (the "Agreement") dated January 29,
1999.
The acquisition of MRB, Inc. was accounted for under the purchase method of
accounting. As previously reported in the 1998 10-K, the purchase price
paid by CAM consisted of 4,500,000 shares of Common Stock of Chancellor
valued at $.96 cents per share. The excess purchase price of $2,600,000 as
of January, 1999 consisted of said shares valued at $.65 cents per share,
less change in net worth, which has been allocated between a covenant not
to compete, customer database files, and goodwill which will be amortized
beginning in February, 1999 over a period of five to twenty years.
Results of operations of Tomahawk after the acquisition date are included
in the June 30, 1999 condensed consolidated statements of operations. The
following proforma information has been prepared assuming that this
acquisition had taken place at the beginning of the respective periods.
The proforma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been
effected on the assumed dates.
Six Months Ended June 30, 1999
----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Net revenue $ 29,013
Net income before taxes 383
Net income after taxes 313
Net income (loss) per common share $ .01
4. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective
for years beginning after June 15, 2000. The standard requires that all
derivatives be recorded as an asset or liability, at estimated fair value,
regardless of the purpose or intent for holding the derivative. If a
derivative is not utilized as a hedge, all gains or losses from the change
in the derivative's estimated fair value are recognized in earnings. The
gains or losses from the change in estimated fair value of certain
derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship. Due to
the Company's limited use of derivatives, the Company expects that
adoption of SFAS No. 133 will have an immaterial impact on the Company's
consolidated financial position and results of operations.
5. COMMON STOCK
During the quarter ended June 30, 1999, the Company's major shareholder
was issued ten (10) million shares of additional common stock as a result
of the exercise of a stock purchase warrant in exchange of payment of
$2,000,000 of recourse debt.
6. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) Sales of
transportation equipment and 2) Leasing activity, as follows (in
thousands).
The Company's Sales of Transportation Equipment division retails and
wholesales used transportation equipment, primarily, tractors and
trailers, through retail centers located throughout the country.
Leasing activities include revenues generated under operating or direct
financing leases. The Company also manages most of the leases it sells to
investors and, when the original lease expires or terminates, remarkets
the equipment for the benefit of the investors and the Company. Leases
primarily involve transportation equipment, but also other equipment
including material handling and construction equipment.
6
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<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
SALES OF TRANSPORTATION EQUIPMENT:
<S> <C> <C> <C> <C>
Revenues $ 14,222 $ 481 $ 23,190 $ 972
Costs and expenses:
Cost of transportation equipment 11,500 362 18,589 669
Selling, general and administrative 2,287 74 3,761 176
Interest expense 103 2 136 5
Depreciation and amortization 108 10 190 29
---------- --------- ---------- --------
Total Costs and expenses 13,998 448 22,676 879
---------- --------- ---------- --------
Income from sales of transportation equipment $ 224 $ 33 $ 514 $ 93
--- -- --- --
Identifiable Assets 13,972 $ 535 $ 13,972 $ 535
--------- --------- ---------- ---------
LEASING ACTIVITY
Revenues:
Leasing activity $ 1,307 $ 896 $ 2,277 $ 1374
Interest income 84 14 164 32
Other income 11 27 82 45
--------- --------- ---------- ---------
Total Leasing Revenues 1,402 937 2,523 1,451
--------- --------- ---------- ---------
Costs and expenses:
Selling, general and administrative 1,001 809 2,034 1,243
Interest expense 73 17 106 35
Depreciation and amortization 287 110 518 206
--------- --------- ---------- ---------
Total Costs and Expenses 1,361 936 2,658 1,484
--------- --------- ---------- ---------
Income (loss) from leasing activity $ 41 $ 1 $ (135) $ (33)
-- - ---------- ---------
Identifiable assets $ 10,015 $ 5,637 $ 10,015 $ 5,637
========= ========= ========== =========
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned
subsidiary, CAM, purchased a company known as Tomahawk. (see note 3)
In thousands
Fair Value of assets acquired $ 10,679
Fair Value of liabilities assumed (10,372)
--------
307
Fair Value of common stock issued 2,925
--------
Excess purchase price over fair value of assets
acquired
$ 2,618
========
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company formalized a strategic
investment/alliance with a South African manufacturer and New Africa
Opportunity Fund "NAOF" whereby a series of convertible preferred stock of
Chancellor Corporation will be issued in exchange for a minority interest
in the South African company. Additionally, a subsidiary of the Company
will obtain exclusive worldwide distribution rights for certain products,
including, but not limited to, trucks, tractor trailers, buses and other
products, manufactured by a closely held south African company for
approximately $4.0 million inclusive of all costs.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations in the previously reported 10-QSB, filed in
August 1999, included the effects of Tomahawk for the full six months
ended June 30, 1999. Because of the change in the acquisition date from
August, 1998 to January, 1999, this amended 10-QSB-A includes consolidated
results of operations of Tomahawk for the five months ended June 30, 1999.
THREE MONTH PERIOD ENDED JUNE 30, 1999 VS. JUNE 30, 1998
REVENUES. Total revenues for the three-month period ended June 30, 1999
were $15,624,000 as compared to $1,418,000 for the corresponding prior
period, an increase of $14,206,000 or 1,001.8%. For the three-month period
ended June 30, 1999, transportation equipment sales were $14,223,000 as
compared to $481,000 for the corresponding prior period, an increase of
$13,742,000 or 2,857.0%. This significant revenue stream from
transportation equipment sales is primarily attributable to sales of used
transportation equipment through the operating activities of the Company's
wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). CAM's
used transportation equipment retail and wholesale business units
accounted for approximately $13,310,000 of used transportation equipment
sales. CAM's revenues from the sales of used transportation equipment for
the three month period ended June 30, 1999 increased by $13,310,000 as
compared to the $.0 for the corresponding period for 1998. The increase in
revenues provided by CAM is primarily a result of the Tomahawk purchase,
which has retail outlets located throughout the country and has inventory
for both retail and wholesale sales. Through CAM, the Company seeks to
continue to expand its retail centers geographically. The Company also
seeks to utilize the competitive advantage provided by its access to
retail pricing for residual values of its leased equipment to increase
competitiveness within the Company's lease origination business unit. For
the three-month period ended June 30, 1999, rental income increased by
$26,000 or 9% to $316,000 as compared to $290,000 for the corresponding
prior period. The increase in rental income is attributable primarily to
the addition to the Company's portfolio of certain equipment acquired in
connection with the purchase of several leases from portfolios
administered by the Company for trusts. For the three month period ended
June 30, 1999, lease underwriting income decreased by $17,000 or 50% to
$17,000 as compared to $34,000 for the corresponding prior period and
direct finance lease income decreased by $3,000 or 9.7% to $28,000 as
compared to $31,000 for the corresponding prior period. The Company is in
the final phase of its lease origination rebuilding process, having
completed the addition of key senior management and sales personnel, and
development of strategic alliances to provide future growth in this area.
For the three-month period ended June 30, 1999, interest income increased
by $70,000 or 500.0% to $84,000 as compared to $14,000 for the
corresponding prior period. The increase is primarily attributable to
interest earned in connection with the Company's investment of
approximately $1,475,000 in a South Africa based manufacturer and lessor
of transportation equipment. For the three-month period ended June 30,
1999, gains from portfolio remarketing increased by $96,000 or 42.3% to
$323,000 as compared to $227,000 for the corresponding prior period. The
increase in gains from portfolio remarketing is attributable to the
increase in portfolio assets acquired in connection with the purchase of
several leases from portfolios administered on behalf of trusts by the
Company, which were made available for sale upon termination of certain
leases. For the three-month period ended June 30, 1999, fees from
remarketing activities increased by $308,000 or 98.1% to $622,000 as
compared to $314,000 for the corresponding prior period. This increase is
attributable, in part, to the Company's efforts to promote its remarketing
services on a third party basis. For the three-month period ended June 30,
1999, other income decreased by $16,000 or 59.3% to $11,000 as compared to
$27,000 for the corresponding prior period.
COSTS AND EXPENSES. Total costs and expenses for the three-month period
ended June 30, 1999 was $15,359,000 as compared to $1,384,000 for the
corresponding prior period, an increase of $13,975,000 or 1,009.8%. The
significant increase is primarily a result of the costs associated with
sales of transportation equipment. The cost of transportation equipment
sales for the three-month period ended June 30, 1999 was $11,500,000 as
compared to $362,000 for the corresponding prior period, an increase of
$11,138,000 or 3,076.8%, and resulted in an overall gross margin of 19.2%.
Selling, general and administrative expenses for the three-month period
ended June 30, 1999 was $3,288,000 as compared to $883,000 for the
corresponding prior period, an increase of $2,405,000 or 272.4%. For the
three-month period ended June 30, 1999, selling, general and
administrative expenses included recovered reimbursable trust
administration costs of approximately $30,000. Approximately $1,948,000 of
the increase in selling, general and administrative expenses for the
three-month period ended June 30, 1999 is a result of normal operating
expenses incurred by CAM and CAM's newly acquired retail and wholesale
business unit, Tomahawk, whose operations were consolidated with the
Company's beginning February, 1999. Before netting out the reimbursable
trust administration costs and the effect of the CAM expenses, selling,
general and administrative expenses increased to $1,370,000 for the
three-month period ended June 30, 1999 as compared to
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$1,298,000 for the corresponding prior period, an increase of $72,000
or 5.5%. The increase in selling, general and administrative expenses
reflects the effect of the Company's growth strategy implementation that
included, in part, significant costs associated with the addition of
senior management, sales and staff personnel.
Interest expense for the three-month period ended June 30, 1999 was
$176,000 as compared to $19,000 for the corresponding prior period, an
increase of $157,000 or 826.3%. This increase is primarily a result of
increased interest expense associated with CAM's revolving credit line
with a financial institution utilized for inventory floor planning and
interest accrued on the Company's recourse debt.
Depreciation and amortization expense for the three-month period ended
June 30, 1999 was $395,000 as compared to $120,000 for the corresponding
prior period, an increase of $275,000 or 229.2%. The increase is primarily
due to the amortization of intangible assets associated with the Tomahawk
purchase.
Provision for income taxes for the three-month period ended June 30,
1999 was $64,000 as compared to zero for the corresponding prior period,
an increase of $64,000. The increase is primarily due to the taxes
incurred by Tomahawk during the quarter.
NET INCOME. Net income for the three-month period ended June 30, 1999
was $201,000 as compared to $34,000 for the corresponding prior period, an
increase of $167,000 or 491.2%. The increase in net income is attributable
to the significant increase in revenues, primarily from the retail and
wholesale of used transportation equipment, the buy-out of leases from
portfolios owned by trusts, and continued improvements in the containment
of costs. Net income per share was $0.00 per share (both basic and
diluted) for the three-month period ended June 30, 1999 as compared to
$0.00 per share (both basic and diluted) for the corresponding prior
period.
SIX MONTH PERIOD ENDED JUNE 30, 1999 VS. JUNE 30, 1998
REVENUES. Total revenues for the six-month period ended June 30, 1999
was $25,713,000 as compared to $2,423,000 for the corresponding prior
period, an increase of $23,290,000 or 961.2%. For the six-month period
ended June 30, 1999, transportation equipment sales were $23,190,000 as
compared to $972,000 for the corresponding prior period, an increase of
$22,218,000 or 2,285.8%. This significant revenue stream from
transportation equipment sales is primarily attributable to sales of used
transportation equipment through the operating activities of the Company's
wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). CAM's
used transportation equipment retail and wholesale business unit accounted
for approximately $20,807,000 of used transportation equipment sales.
CAM's revenues from the sales of used transportation equipment for the
six-month period ended June 30, 1999 increased by $20,807,000 as compared
to the corresponding period for 1998. The increase in revenues provided by
CAM is primarily a result of the Tomahawk purchase, which has retail
outlets located throughout the country and has inventory for both retail
and wholesale sales. Through CAM, the Company seeks to continue to expand
its retail centers geographically. The Company also seeks to utilize the
competitive advantage provided by its access to retail pricing for
residual values of its leased equipment to increase competitiveness within
the Company's lease origination business unit. For the six-month period
ended June 30, 1999, rental income increased by $363,000 or 88.3% to
$774,000 as compared to $411,000 for the corresponding prior period. The
increase in rental income is attributable primarily to the addition to the
Company's portfolio of certain equipment acquired in connection with the
purchase of several leases from portfolios administered for trusts by the
Company. For the six-month period ended June 30, 1999, lease underwriting
income decreased by $7,000 or 20.6% to $27,000 as compared to $34,000 for
the corresponding prior period and direct finance lease income decreased
by $25,000 or 37.3% to $42,000 as compared to $67,000 for the
corresponding prior period. The Company is in the final phase of its lease
origination rebuilding process, having completed the addition of key
senior management and sales personnel, and development of strategic
alliances to provide future growth in this area. For the six-month period
ended June 30, 1999, interest income increased by $132,000 or 412.5% to
$164,000 as compared to $32,000 for the corresponding prior period. The
increase is primarily attributable to interest earned in connection with
the Company's investment of approximately $1,475,000 in a South Africa
based manufacturer and lessor of transportation equipment. For the
six-month period ended June 30, 1999, gains from portfolio remarketing
increased by $266,000 or 86.4% to $574,000 as compared to $308,000 for the
corresponding prior period. The increase in gains from portfolio
remarketing is attributable to the increase in portfolio assets acquired
in connection with the purchase of several leases from portfolios
administered for trusts by the Company, which were made available for sale
upon termination of certain leases. For the six-month period ended June
30, 1999, fees from remarketing activities increased by $306,000 or 55.2%
to $860,000 as compared to $554,000 for the corresponding prior period.
This increase is attributable, in part, to the Company's efforts to
promote its remarketing services on a third party
9
<PAGE>
basis. For the six-month period ended June 30, 1999, other income
increased by $37,000 or 82.2% to $82,000 as compared to $45,000 for the
corresponding prior period. The increase is primarily attributable to
the recovery of approximately $67,000 of fees from a former lessee of the
Company.
COSTS AND EXPENSES. Total costs and expenses for the six-month period
ended June 30, 1999 was $25,334,000 as compared to $2,363,000 for the
corresponding prior period, an increase of $22,971,000 or 972.1%. The
significant increase is primarily a result of the costs associated with
sales of transportation equipment. The cost of transportation equipment
sales for the six-month period ended June 30, 1999 was $18,589,000 as
compared to $669,000 for the corresponding prior period, an increase of
$17,920,000 or 2,678.6%, and resulted in an overall gross margin of 19.8%.
Selling, general and administrative expenses for the six-month period
ended June 30, 1999 was $5,795,000 as compared to $1,419,000 for the
corresponding prior period, an increase of $4,376,000 or 308.4%. For the
six-month period ended June 30, 1999, selling, general and administrative
expenses included recovered reimbursable trust administration costs of
approximately $578,000 as compared to $558,000 for the corresponding prior
period. Approximately $2,997,000 of the increase in selling, general and
administrative expenses for the six-month period ended June 30, 1999 is a
result of normal operating expenses incurred by CAM and CAM's newly
acquired retail and wholesale business unit, Tomahawk, whose operations
were consolidated with the Company's beginning February, 1999. Before
netting out the reimbursable trust administration costs and the effect of
the CAM expenses, selling, general and administrative expenses increased
to $3,376,000 for the six-month period ended June 30, 1999 as compared to
$1,977,000 for the corresponding prior period, an increase of $1,399,000
or 70.8%. 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 six-month period ended June 30, 1999 was
$242,000 as compared to $40,000 for the corresponding prior period, an
increase of $202,000 or 505.5%. This increase is primarily a result of
increased interest expense associated with CAM's revolving credit line
with a financial institution utilized for inventory floor planning and
interest accrued on the Company's recourse debt.
Depreciation and amortization expense for the six-month period ended
June 30, 1999 was $708,000 as compared to $235,000 for the corresponding
prior period, an increase of $473,000 or 201.3%. The increase is primarily
due to the amortization of intangible assets associated with the purchase
of Tomahawk.
Provision for income taxes for the six-month period ended June 30, 1999
was $86,000 as compared to zero for the corresponding prior period, an
increase of $86,000. The increase is primarily due to the taxes incurred
by Tomahawk during the five months ending June 1999.
NET INCOME. Net income for the six-month period ended June 30, 1999 was
$293,000 as compared to $60,000 for the corresponding prior period, an
increase of $233,000 or 388.3%. The increase in net income is attributable
to the significant increase in revenues, primarily from the retail and
wholesale of used transportation equipment, the buy-out of leases from
trust portfolios, and continued improvements in the containment of costs.
Net income per share was $0.01 per share (both basic and diluted) for the
six-month period ended June 30, 1999 as compared to $0.00 per share (both
basic and diluted) for corresponding prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net decrease in cash and cash equivalents for
the six-month period ended June 30, 1999 of $168,000. Operating activities
provided cash of $1,431,000 during the six-month period ended June 30,
1999 and is primarily a result of increased sales of used transportation
equipment inventory, normal increases in accounts payable associated with
inventory and operating purchases, 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 receivable and
inventory. Investing activities used cash of $2,849,000 during the
six-month period ended June 30, 1999 and is primarily a result of the
acquisition of portfolios of operating leases valued at approximately
$1,977,000. Financing activities provided cash of $1,250,000 during the
six-month period ended June 30, 1999 and is primarily the result of a loan
from a financing institution in the amount of $2,500,000 offset by normal
repayments of recourse and non-recourse debt. Cash and cash equivalents
were $444,000 at June 30, 1999 as compared to $612,000 at December 31,
1998, a decrease of $168,000 or 27.5%.
The Company undertook a review of the portfolios it administers on
behalf of trusts, including consultation with legal counsel and industry
consultants, and determined that it had not been
10
<PAGE>
recovering costs associated with administering the trusts. Management's
review determined that approximately $22,000,000 of the costs for periods
prior to 1997 had not been recovered from the trusts. The Company has
recorded approximately $578,000 and $558,000 of cost recoveries in the
six-month periods ended June 30, 1999 and 1998, respectively.
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender") in March 1999. The Loan provides for the payment of twenty-four
equal monthly installments, beginning May 1, 1999, of principal in the
approximate amount of $104,000 and interest at 3.75% plus the average of
the one (1) and two (2) month London Interbank Offered Rates. In addition,
proceeds from the sale of the Equipment will be paid to the Lender as
additional principal reduction up to $1,034,000. In connection with the
Loan, the lender retained $300,000 to secure repayment of the Loan. The
Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor
plan used transportation equipment inventory. The balance outstanding
under this revolving line of credit agreement is approximately $6,393,000
as of June 30, 1999. Prior to the acquisition, during 1998, CAM, through
Tomahawk entered into a special purpose financing agreement with the same
institution to floor plan additional used transportation equipment
inventory in the approximate amount of $4,500,000. The balance outstanding
under this special purpose financing agreement is approximately $1,877,000
as of June 30, 1999.
The Company's ability to underwrite equipment lease transactions is
largely dependent upon the availability of short-term warehouse lines of
credit. Management is engaged in continuing dialogue with several
inventory lenders, which appear to be interested in providing the Company
with warehouse financing. If the Company experiences delays in putting
warehouse facilities in place, the Company transacts deals by coterminous
negotiation of lease transactions with customers and financing with
institutions upon which it obtains a fee as the intermediary of up to 3%
of the amount of financing.
The remarketing, retailing and wholesaling of equipment has played and
will continue to play a vital role in the Company's operating activities.
In connection with the sale of lease transactions to investors, the
Company typically is entitled to share in a portion of the residual value
realized upon remarketing. Successful remarketing of the equipment is
essential to the realization of the Company's interest in the residual
value of its managed portfolio. It is also essential to the Company's
ability to recover its original investment in the equipment in its own
portfolios and to recognize a return on that investment. The Company has
found that its ability to remarket equipment is affected by a number of
factors. The original equipment specifications, current market conditions,
technological changes, and condition of the equipment upon its return all
influence the price for which the equipment can be sold or re-leased.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further capitalize upon its
remarketing expertise by continuing to develop its ability to sell
remarketing services to other lessors, fleet owners, and lessees. The
Company plans also to create a dealer capability under which the Company
would buy and resell fleet equipment. The Company anticipates expanding
its used transportation equipment retail and wholesale capabilities
through the addition of retail centers geographically through internal
growth and acquisitions. The Company's retail and wholesale capabilities
have been greatly improved through CAM's strategic acquisition of
Tomahawk. This improved capability will be used as a competitive advantage
that will enable the Company to provide a "total holding cost" concept
when competing for new lease origination deals. The Company's retail and
wholesale business unit will provide improved outlets for other lessors,
financial institutions, and fleet owners to dispose of used transportation
equipment and sources of quality used transportation equipment for fleet
owners and owner-operators. The Company will also aggressively promote its
Internet capabilities to further promote its business activities and as an
e-commerce tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S.
government agency. The purpose of the fund is to make direct investments
in emerging companies throughout Africa. As of June 30, 1999, the Company
had funded approximately $400,000 and is obligated to provide additional
funding in the approximate amount of $600,000. The Company has
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<PAGE>
additionally invested approximately $1,475,000 into one of NAOF's
portfolio investee companies. Subsequent to June 30, 1999, the Company
formalized a strategic investment/alliance with a South African
manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of
preferred stock of Chancellor Corporation may be issued in exchange for a
minority interest in the South African company.
The Company's renewal or replacement of expired lines, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and
recourse and non-recourse), anticipated long-term financing of individual
significant lease transactions, and its estimated cash flows from
operations are anticipated to provide adequate capital to fund the
Company's operations for the next twelve months. Although no assurances
can be given, the Company expects to be able to renew or timely replace
expired lines of credit, to expand currently existing lines for inventory
floor planning, to continue to have access to the public and private
securities markets, both debt and equity, and to be able to enter into new
lines of credit and individual financing transactions.
The Company is in the final stages of negotiation with several
significant financial institutions, whereby the Company could potentially
gain access to substantial funding which would enable the Company to
accelerate the redevelopment of its lease origination business.
IMPACT OF THE YEAR 2000 ISSUE
The Company has commenced efforts to assess and where required,
remediate, issues associated with Year 2000 ("Y2K") issues. Generally
defined, Y2K issues arise from computer programs which use only two digits
to refer to the year and which may experience problems when the two digits
become "00" in the year 2000. In addition, imbedded hardware
microprocessors may contain time and two-digit year fields in executing
their functions. Much literature has been devoted to the possible effects
such programs may experience in the Year 2000, although significant
uncertainty exists as to the scope and effect the Y2K issues will have on
industry and the Company.
The Company has recognized the need to address the Y2K issue in a
comprehensive and systematic manner and has taken steps to assess the
possible Y2K impact on the Company. Although the Company has not completed
a 100% assessment of all its information technology ("IT") and non-IT
systems for Y2K issues, the Company has completed its assessment of all
mission-critical systems. All mission-critical systems and most of the
major applications and hardware have been assessed to determine the Y2K
impact and a plan is in place for timely resolution of potential issues.
In 1998, the Company developed a strategic plan to identify the IT
systems needed to accomplish the Company's overall growth plans. As part
of this process, Y2K issues were considered and addressed by the Company's
senior management and MIS personnel. Although this plan was intended to
modernize the IT systems, compliance with Y2K requirements were
incorporated.
The cost of bringing the Company in full compliance should not result
in a material increase in the recent levels of capital spending or any
material one-time expenses. The Company has spent approximately $160,000
in modernizing its IT system, including compliance with Y2K requirements.
The Company anticipates spending approximately $200,000 during fiscal 1999
to complete the modernization of its IT system.
The failure of either the Company, its vendors or clients to correct
the systems affected by Y2K issues could result in a disruption or
interruption of business operations. The Company uses computer programs
and systems in a vast array of its operations to collect, assimilate and
analyze data. Failure of such programs and systems could affect the
Company's ability to track assets under lease and properly bill. Although
the Company does not believe that any of the foregoing worst-case
scenarios will occur, there can be no assurance that unexpected Y2K
problems of the Company's and its vendors' and customer's operations will
not have a material adverse effect on the Company.
While it is difficult to classify our state of readiness, we believe
that our internal plans should have the Company ready by the end of 1999
to avoid any material Y2K issues. We have completed the assessing, testing
of systems, and the development of contingency plans. Management is in
constant communication with its IT personnel and has made and will
continue to make reports to the Company's Board of Directors.
The preceding discussion contains forward-looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also
subject to protection under the Year 2000 Information and Readiness
Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and
"Year 2000 Readiness Disclosure" as defined therein. Actual results may
differ
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<PAGE>
materially from such projected information due to changes in the
underlying assumptions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price
of its stock may fluctuate. In the event the Company's revenues or
earnings for any quarter are less than the level expected by securities
analysts or the market in general, such shortfall could have an immediate
and significant adverse impact on the market price of the Company's stock.
Any such adverse impact could be greater if any such shortfall occurs near
the same time of any material decrease in any widely followed stock index
or in the market price of the stock of one or more public equipment
leasing companies or major customers or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a
result of sales by the Company of equipment it leases to its customers.
Such sales of equipment, which are an ordinary but not predictable part of
the Company's business, will have the effect of increasing revenues, and,
to the extent sales proceeds exceeds net book value, net income, during
the quarter in which the sale occurs. Furthermore, any such sale may
result in the reduction of revenue, and net income, otherwise expected in
subsequent quarters, as the Company will not receive lease revenue from
the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding
quarters are not necessarily meaningful and that such results for one
quarter should not be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB-A 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.
13
<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 of operations of the
Company.
Item 2. Changes in Securities
None
Item 3 Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 1999, the Board of Directors caused to be distributed to stockholders
of record as of April 23, 1999, a Notice of Annual Meeting of Stockholders,
Proxy and Proxy Statement for the Annual Meeting held on June 25, 1999. As of
the record date, 43,365,536 shares of Common Stock and 5,000,000 shares of
Series AA Preferred Stock were entitled to vote. For all matters presented, the
Common Stock and Series AA Preferred Stock voted as a single class.
At the meeting, the stockholders acted upon the following proposals: (I) to
elect three (3) directors to hold office until their successors shall be elected
and shall have qualified; (ii) to approve an amendment to the Company's By-laws
to make certain changes to improve the efficiency of the operation of the
Company by the Board of Directors and to afford the Board greater latitude and
flexibility in the management of the Company, (iii) to approve an amendment to
the Company's 1997 Stock Option Plan increasing the number of shares reserved
under the plan from 4,000,000 to 7,500,000; and (iv) to ratify the selection by
the Board of Directors of Metcalf, Rice, Fricke and Davis as the Company's
independent public accountants for fiscal 1999. All of the above matters were
approved by the stockholders.
Votes "For" represent affirmative votes and do not represent abstentions or
broker non-votes. In cases where a signed proxy was submitted without direction,
the shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy. The voting results were as follows:
<TABLE>
<CAPTION>
Proposal No. 1: Election of Directors:
DIRECTOR NOMINEE FOR % WITHHELD %
---------------- --- - -------- -
<S> <C> <C> <C> <C>
M. Rea Brookings 41,400,922 99.99% 4,383 0.01%
Rudolph Peselman 39,565,922 95.56% 1,839,383 4.44%
Franklyn E. Churchill 41,400,922 99.99% 4,383 0.01%
</TABLE>
<TABLE>
<CAPTION>
Proposal No. 2: Approval of an Amendment to the Company's by-laws
<S> <C> <C> <C> <C> <C> <C>
FOR % AGAINST % ABSTAIN %
---- - ------- - ------- -
39,486,969 95.37% 83,873 0.20% 1,834,463 4.43%
Proposal No. 3: Approval of an Amendment to the 1997 Stock Option Plan
For % Against % Abstain %
---------------------------------------------------------------------------------------
41,279,163 99.70% 124,616 0.30% 1,526 0.00%
Proposal No. 4: Ratification of Auditors
For % Against % Abstain %
---------------------------------------------------------------------------------------
41,304,100 99.76% 45,862 0.11% 55,343 0.13%
</TABLE>
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<PAGE>
Item 5 Other Information
Form 10-KSB for 1998 was amended June, 2000, primarily for the effects caused by
the change in acquisition date of the Tomahawk subsidiary which was originally
reported as of August, 1998. This transaction has been recorded as of January
1999, the date of final closing in the revised 10-KSB-A and this 10-QSB-A. See
10-KSB-A for more information.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(ii) By-laws of the Company, as amended by the Board of Directors
of the Company in April 1999, and approved by the
Stockholders of the Company on June 25, 1999.
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
11 Computation of Earnings per Share
27 Financial Data Schedule for period ended June 30, 1999.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated February 10, 1999 Current
Report on Form 8-K, dated March 4, 1999 Current Report on
Form 8-K/A, dated March 22, 1999 Current Report on Form
8-K/A, dated April 13, 1999 Current Report on Form 8-K/A,
dated July 9, 1999
15
<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/ Barry W. Simpson
--------------------------------------
Barry Simpson
Chief Financial Officer
(Principal Accounting Officer)
Date: July 26, 2000
16
