UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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 November 7, 2000, 58,807,565 shares of Common Stock, $.01 par value per
share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value
per share were outstanding. The Series B shares convert into common on a 1 to 10
basis (3,500,000 in total) and have a liquidation preference of $20.00 per
preferred share or $7,000,000 in the aggregate. Aggregate market value of the
voting stock held by non-affiliates of the issuer as of November 7, 2000 was
approximately $7,827,000. Aggregate market value of the total voting stock of
the issuer as of November 7, 2000 was approximately $23,365,000.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Part II Other Information 16
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Item 7 Exhibit 11 - Computation of Earnings per Share
Signatures 18
</TABLE>
2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 351 $ 1,104
Receivables, net 5,159 4,154
Inventory 9,441 10,359
Net investment in direct finance leases 9,809 376
Equipment on operating lease, net of accumulated depreciation of
$1,759 and $1,887 5,017 4,152
Residual values, net 99 143
Property and equipment, net of accumulated depreciation
of $2,031 and $1,539 4,353 1,072
Investments 4,758 4,758
Intangibles, net 6,303 4,010
Other assets, net 1,643 1,420
---------- -----------
Total Assets $ 46,933 $ 31,548
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 5,189 $ 5,444
Deferred revenue 671 1,812
Indebtedness:
Revolving credit line 5,818 8,543
Notes payable 395 699
Nonrecourse 17,389 192
Recourse 7,466 5,320
---------- -----------
Total Liabilities 36,928 22,010
---------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series B, 2,000,000 shares authorized, 350,000 shares 4 4
issued and outstanding
Common stock, $.01 par value; 75,000,000 shares authorized, 590 590
58,807,565 and 58,795,065 shares issued and outstanding
Additional paid-in capital 35,871 35,837
Accumulated deficit (26,509) (26,942)
Accumulated other comprehensive income 49 49
---------- -----------
Total Stockholders' Equity 10,005 9,538
---------- -----------
Total Liabilities and Stockholders' Equity $ 46,933 $ 31,548
========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
<S> <C> <C> <C> <C>
REVENUES:
Transportation Equipment Sales $ 9,238 $ 16,152 $ 33,238 $ 39,342
Rental income 778 465 2,083 1,239
Lease underwriting income -- -- 13 27
Direct finance lease income 401 17 456 60
Interest income 3 36 13 200
Fees from remarketing activities 602 1,053 1,823 2,487
Other income 100 1 204 82
----------- ----------- ----------- -----------
11,122 17,724 37,830 43,437
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of transportation equipment sales 7,727 12,837 26,884 31,426
Selling, general and administrative 2,472 3,920 8,316 9,716
Interest expense 156 234 456 476
Depreciation and amortization 640 390 1,637 1,098
----------- ----------- ----------- -----------
10,995 17,381 37,293 42,716
----------- ----------- ----------- -----------
Earnings before taxes 127 343 537 721
Provision for income taxes 25 77 104 163
----------- ----------- ----------- -----------
Net Income $ 102 $ 266 $ 433 $ 558
----------- ----------- ----------- -----------
Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
----------- ----------- ----------- -----------
Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
----------- ----------- ----------- -----------
Shares used in computing basic net income 58,806,206 53,530,730 58,798,926 48,381,553
per share
Shares used in computing diluted net income 63,086,254 59,943,551 63,145,476 57,180,393
per share
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---------- ----------
(unaudited) (unaudited)
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 433 $ 558
-------- --------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 1,637 1,098
Residual value estimate realizations and reductions, net of additions 44 39
Amortization of unamortized stock warrants 34 --
Changes in assets and liabilities:
(Increase) decrease in receivables 2,187 (2,517)
(Increase) decrease in inventory 1,720 (711)
Increase (decrease) in accounts payable and accrued
expenses (724) 564
Increase (decrease) in deferred revenue (1,493) 3,643
-------- --------
Total Adjustments 3,405 2,116
-------- --------
Net cash provided by operating activities 3,838 2,674
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases (768) (67)
Equipment on operating lease 60 (4,777)
Additions to property and equipment, net (247) (294)
Increase in intangibles (--) (275)
Net change in other assets (542) (817)
-------- --------
Net cash used by investing activities (1,497) (6,230)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of credit (2,725) (114)
Increase in receivables-collateral for line of credit (1,500) --
Increase in indebtedness-recourse 5,343 7,746
Repayments of indebtedness-non recourse (711) (670)
Repayments of indebtedness-recourse (3,197) (2,613)
Repayment of notes payable, net (304) (48)
Issuance of common stock, net -- 300
-------- --------
Net cash provided (used) by financing activities (3,094) 4,601
-------- --------
Net increase (decrease) in cash and cash equivalents (753) 1,045
Cash and cash equivalents at beginning of period 1,104 612
-------- --------
Cash and cash equivalents at end of period $ 351 $ 1,657
======== ========
Cash paid for interest $ 1,221 $ 760
======== ========
Cash paid for income taxes $ 59 $ --
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
<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. Certain
items in the 1999 financial statements have been reclassified to conform to the
2000 presentation. There is no effect on previously reported net income and
accumulated deficit. 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, 1999. The balance sheet at December 31, 1999 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 September 30, 2000
are not necessarily indicative of the results to be expected for the entire
year.
2. LOAN AGREEMENTS
In connection with the purchase of the common stock of Sapp Bros. Leasing
Inc., ("Sapp," see Note 3) the Company added obligations aggregating
approximately $16.5 million under various loan agreements which are nonrecourse
to the parent Company. These loan agreements consist of lines of credit secured
by inventory, notes payable secured by direct finance leases and capital lease
obligations secured by equipment. Certain loans are guaranteed by the former
stockholders of Sapp Bros. Leasing Inc. These guarantees remain in place, and
said shareholders agree to indemnify the Company, until such time as the loans
are discharged. These loans bear interest at rates ranging from 8% to 15.5%,
with approximately $12.3 million due under revolving lines of credit and the
remainder requiring periodic payments through dates ranging from August 2000 to
April 2005.
In July 2000, the Company increased its working capital line of credit with
an international financial institution from $3,000,000 to $3,750,000. The line
is due on demand with interest at a per annum rate equal to the sum of 2.65%
plus the 30-day Dealer Commercial Paper Rate. The line is secured by marketable
securities placed in a brokerage account at the institution by the Company's
majority stockholder.
3. BUSINESS ACQUISITIONS
The Company acquired its Tomahawk subsidiary (M.R.B., Inc.) on January 29,
1999. The Company took operational control of Tomahawk effective August 1, 1998
pursuant to a Management Agreement and, pursuant to a formal closing on January
29, 1999. The acquisition was accounted for under the purchase method of
accounting and therefore, the results of operations of Tomahawk after the
acquisition date are included in the Company's statement of operations for the
nine month period ended September 30, 1999.
The following pro forma information has been prepared assuming that this
acquisition had taken place at the beginning of the period. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transactions been effected on the assumed date.
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------ ---------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C>
Net revenue $ 46,737
Net income before taxes $ 725
Net income after taxes $ 578
Net income per common share $ .01
</TABLE>
On July 31, 2000, the Company acquired the common stock of Sapp Bros.
Leasing Inc. in exchange for 1,000,000 shares of common stock of the Company.
Sapp is a lessor of transportation equipment with two retail locations in the
mid-western section of the United States. In addition, the Company is
contingently liable for cash payment up to $500,000 based upon the future
profitability of Sapp as well as contingent earnout payments, which are a
percentage of Sapp's projected annual profitability commencing January 1, 2001.
The Company assumed approximately $6.7 million of liabilities in excess of the
estimated fair value of assets acquired and issued common stock of the Company
with a market value of $468,000. Included in this acquisition, the Company also
acquired a $750,000 note receivable secured by real estate owned by the former
shareholders of Sapp, as well as the assets of Sapp's wholly owned subsidiary,
Rigfinder.com Inc., valued at $3,300,000. Rigfinder.com adds to the Companies
e-business development process. The Company, through a subsidiary along with
Rigfinder.com, has developed its used truck web-site as a complimentary effort
to its national retail truck centers. The e-commerce web-site provides photos
and details of vehicles available at its truck centers. The site also provides
financing, prepaid legal services, insurance and extended warranty quotes
on-line. In the future, the Company anticipates the sites to; list vehicles
coming up for sale, to be offered in Spanish; provide inspection and other
remarketing services to customers. The excess of purchase price over assets
acquired (goodwill) approximated $3.1 million and is being amortized over ten
years. The Company does not believe that the final purchase price allocation
will differ significantly from the preliminary purchase price allocation
recorded at September 30, 2000. The acquisition was accounted for under the
purchase method of accounting and, therefore, the results of operations of Sapp
after the acquisition date are included in the Company's statement of operations
for the nine month period ended September 30, 2000.
The pro forma unaudited consolidated results of operations as though Sapp
had been acquired as of the beginning of the period are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
------------------------------------------------- -------- --------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue $ 43,858 61,632
Net income (loss) $ ( 401) (1,200)
Net income (loss) per share $ ( 0.01) ( 0.02)
</TABLE>
The unaudited pro forma combined results of operations are not indicative of the
actual results that would have occurred had the acquisition been consummated at
the beginning of these periods or of the future operations of the consolidated
companies under the ownership and management of the Company.
4. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial
7
<PAGE>
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.
In December 1999, the Securities and Exchange Commission issued staff
accounting bulletin No. 101 ("SAB101"), "Revenue Recognition in Financial
Statements". SAB101 provided guidance on applying generally accepted accounting
principals to revenue recognition issues in financial statements. The Company
has adopted SAB101 as required during the year 2000 and believes that this SAB
does not have a material effect on the results of operations.
5. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) sales of
transportation equipment and 2) leasing activity.
The Company's Sales of Transportation Equipment division retails and
wholesales used transportation equipment primarily, tractors and trailers,
through retail centers located in strategic locations primarily in the southern
and mid-western sections of the United States. This business segment also
includes sales of equipment by the Company's equipment re-marketing group.
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.
8
<PAGE>
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September Nine Months Ended
30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) restated)
<S> <C> <C> <C> <C>
SALES OF TRANSPORTATION EQUIPMENT:
Revenues $ 9,338 $ 16,502 $ 33,338 $ 39,692
--------- --------- --------- ---------
Costs and expenses:
Cost of transportation equipment 7,727 12,837 26,884 31,426
Selling, general and administrative 2,021 2,638 6,577 6,400
Interest expense 11 197 23 333
Depreciation and amortization 110 162 330 352
--------- --------- --------- ---------
Total Costs and expenses 9,869 15,834 33,814 38,511
--------- --------- --------- ---------
Income from sales of transportation equipment $ (531) $ 668 $ (476) $ 1,181
--------- --------- --------- ---------
Identifiable Assets $ 16,426 $ 13,960 $ 16,426 $ 13,960
--------- --------- --------- ---------
LEASING ACTIVITY
Revenues:
Leasing activity $ 1,781 $ 1,185 $ 4,375 $ 3,462
Interest income 3 36 13 200
Other income -- 1 104 83
--------- --------- --------- ---------
Total Leasing Revenues 1,784 1,222 4,492 3,745
--------- --------- --------- ---------
Costs and expenses:
Selling, general and administrative 451 1,282 1,739 3,316
Interest expense 145 37 433 143
Depreciation and amortization 530 228 1,307 746
--------- --------- --------- ---------
Total Costs and expenses 1,126 1,547 3,479 4,205
--------- --------- --------- ---------
Income (loss) from leasing activity $ 658 $ (325) $ 1,013 $ (460)
--------- --------- --------- ---------
Identifiable assets $ 23,598 $ 14,450 $ 23,598 $ 14,450
========= ========= ========= =========
Total Assets for reportable segments $ 40,024 $ 28,410
Corporate investments, intangibles and other assets 6,909 2,743
--------- ---------
$ 46,933 $ 31,153
========= =========
</TABLE>
Included in cost of transportation equipment for the three and nine months
ended September 30, 2000 are $391,000 and $768,000 respectively of interest
expense.
6. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The financial statements for the nine month period ended September 30, 1999
were restated to reflect the acquisition of Tomahawk on January 29, 1999 rather
than August 1998, as originally reported, due to management and operational
control given to the Company on the earlier date. In accordance with APB Opinion
20, the Company has treated this change as a change in reporting entity. In
addition, the Company restated the 1999 financial statements to record $33,000
of compensation expense related to stock purchase warrants. The total effect of
this restatement on the September 30, 1999 financial statements was to reduce
net income for the nine-month period by $634,000. The effect on earnings per
share for the three-month period ended September 30, 1999 was to decrease both
basic and diluted net income per share from $ .01 to $ .00. There was no effect
on earnings per share for the nine months ended September 30,1999.
9
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned
subsidiary, CAM, purchased a company known as Tomahawk (M.R.B., Inc.), with the
following non-cash investing and financing activities:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
(In thousands)
<S> <C>
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
==========
</TABLE>
During June 2000, the Company acquired approximately $1,386,000 of
equipment under operating leases in exchange for non-recourse debt from the
seller.
On July 31, 2000, the Company acquired Sapp Bros. Leasing, Inc. in exchange
for 1,000,000 shares of the Company's common stock and assumption of liabilit
ies (see Note 3). As part of this acquisition, the Company obtained a $750,000
mortgage note receivable from the former stockholders of Sapp. Concurrently, the
Company obtained 1,000,000 shares of its common stock previously issued as part
of its acquisition of M.R.B., Inc. as an adjustment to the purchase price of
that acquisition. The following non-cash investing and financing activities
resulted from these transactions:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000
(In thousands)
<S> <C>
Fair value of assets acquired $ 13,828
Fair value of liabilities assumed (17,212)
Mortgage note receivable 750
----------
(2,634)
Reclamation of common stock issued for MRB Inc. (468)
Fair value of common stock issued 468
----------
Excess purchase price over fair value of assets acquired $ 2,634
==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to its majority shareholder for fees
associated with the acquisition of certain subsidiaries and investments. The
final fees to be paid are based principally on the financial impact and
profitability that these acquisitions add to the Company's operating results.
The Company is also contingently liable to the former owners and current
employees of MRB via an earnout arrangement. No such fees were paid during the
nine-month period ended September 30, 2000.
In the normal course of business, the Company is from time to time, subject
to litigation. Management does not expect that the outcome of any of these
actions will have a material adverse impact on the Company's financial position.
The Company records sales of leased equipment with limited and full
recourse in accordance with the provisions of FASB Statement No. 125. The
Company has considered its history of repossession losses and determined that no
liability for recourse obligations is currently necessary.
In conjunction with the acquisition of Sapp, the Company entered into
facilities lease agreements commencing August 1, 2000 for a six year period with
minimum monthly lease payments of approximately $11,000 ($5,500 to a related
party owned by former Sapp stockholders). In addition, the Company has entered
into employment agreements with certain Sapp employees.
10
<PAGE>
9. DIRECT FINANCE LEASES
<TABLE>
<CAPTION>
Net investment in direct finance leases consisted of the following at
September 30, 2000 (in thousands)
<S> <C>
Minimum lease payments receivable $13,719
Estimated unguaranteed residual values
of lease equipment, net 490
Less: unearned income (4,400)
-------
$ 9,809
=======
</TABLE>
Leases consist primarily of direct finance leases of transportation
equipment to owner/operators throughout the United States. The leases generally
have terms of two to five years.
ITEM 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 VS SEPTEMBER 30, 1999
REVENUES. Total revenues for the three-month period ended September 30,
2000 were $11,122,000 as compared to $17,724,000 for the corresponding prior
period, a decrease of $6,602,000 or 37%. For the three-month period ended
September 30, 2000, transportation equipment sales were $ 9,238,000 as compared
to $16,152,000 for the corresponding prior period, a decrease of $6,914,000 or
43%. This significant decrease 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"). The decrease
in revenues by CAM is primarily a result of financial downturn in the used
transportation equipment market attributable, in part, to increased fuel prices
and interest rates. CAM, through it's Tomahawk subsidiary has retail outlets
located in key southeastern and mid-western cities and has inventory for both
retail and wholesale sales. Through CAM, the Company seeks to continue to expand
its retail centers geographically. In July 2000, the Company acquired a company
with two additional strategic retail locations as well as financing alternatives
for the owner/operator market. 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 September 30, 2000,
rental income increased by $313,000 or 67 % to $778,000 as compared to $465,000
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 lease portfolios
in 1999 and 2000 from financial institutions. For the three month period ended
September 30, 2000, direct finance lease income increased by $384,000 or 225 %
to $401,000 as compared to $17,000 for the corresponding prior period. This
increase is due to the acquisition of the Sapp Bros. Leasing Inc. portfolio at
July 31, 2000. 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 September 30, 2000, interest
income decreased by $ 33,000 or 92 % to $3,000 as compared to $36,000 for the
corresponding prior period. The decrease 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. In
October 1999, the Company converted the note receivable into an equity interest
in the South African company. For the three-month period ended September 30,
2000, fees from remarketing activities decreased by $451,000 or 43 % to $602,000
as compared to $1,053,000 for the corresponding prior period. This decrease is
attributable, in part, to the slowdown in the used equipment market in the
quarter ended September 30, 2000. For the three-month period ended September 30,
2000, other income increased by $99,000 or 99 % compared to the corresponding
prior period.
COSTS AND EXPENSES. Total costs and expenses for the three-month period
ended September 30, 2000 were $ 10,995,000 as compared to $17,381,000 for the
corresponding prior period, a decrease of $6,386,000 or 37%. The significant
decrease 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 September 30, 2000 was $7,727,000 as compared to
$12,837,000 for the
<PAGE>
corresponding prior period, a decrease of $5,110,000 or 40%, and resulted in an
overall gross margin of 16.4%. Selling, general and administrative expenses for
the three-month period ended September 30, 2000 were $2,472,000 as compared to
$3,920,000 for the corresponding prior period, a decrease of $1,448,000 or 37%.
For the three-month period ended September 30, 2000, selling, general and
administrative expenses included recovered reimbursable trust administration
costs of approximately $134,000. Approximately $600,000 of the decrease in
selling, general and administrative expenses for the three-month period ended
September 30, 2000 is a result of cost containment measures implemented by CAM
and CAM's 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 decreased to $594,000 for the
three-month period ended September 30, 2000 as compared to $1,493,000 for the
corresponding prior period, a decrease of $899,000 or 60%. The decrease in
selling, general and administrative expenses reflects the effect of the
Company's growth strategy implementation that included, in part, costs
associated with the addition of senior management, sales and staff personnel,
offset by significant cost containment and consolidation in other areas as well
as reduction of costs associated with decreased used transportation equipment
sales.
Interest expense for the three-month period ended September 30, 2000 was
$156,000 as compared to $234,000 for the corresponding prior period, a decrease
of $78,000 or 33%. Interest expense included in cost of transportation equipment
sales for the three-month period ended September 30, 2000 was $391,000.
Depreciation and amortization expense for the three-month period ended
September 30, 2000 was $640,000 as compared to $390,000 for the corresponding
prior period, an increase of $248,000 or 64%. The increase is primarily due to
the amortization of intangible assets associated with the acquisition of Sapp
Bros. Leasing Inc., the distribution rights acquired from AMC, the Company's
South African investee and increase in equipment under operating leases as
previously indicated.
Provision for income taxes for the three-month period ended September 30,
2000 was $25,000 as compared to $77,000 for the corresponding prior period, a
decrease of $52,000, reflecting a decrease in pre-tax income..
NET INCOME. Net income for the three-month period ended September 30, 2000
was $102,000 as compared to $266,000 for the corresponding prior period, a
decrease of $164,000 or 62%. The decrease in net income is attributable to the
significant decrease in transportation equipment sales offset by 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 September 30,
2000 as compared to $0.00 per share (both basic and diluted) for the
corresponding prior period.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 VS. SEPTEMBER 30, 1999
REVENUES. Total revenues for the nine-month period ended September 30, 2000
were $37,830,000 as compared to $43,437,000 for the corresponding prior period,
a decrease of $5,607,000 or 13%. For the nine-month period ended September 30,
2000, transportation equipment sales were $33,238,000 as compared to $39,342,000
for the corresponding prior period, a decrease of $6,104,000 or 16%. This
revenue stream from transportation equipment sales is primarily attributable to
sales of used transportation equipment through the operating activities of the
Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM")
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 decrease in revenues provided by
CAM is primarily a result of the financial downturn in the used transportation
equipment market which is attributable, in part, to increased fuel prices and
tightening of credit in the owner/operator end user market. 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 nine-month period
ended September 30, 2000, rental income increased by $844,000 or 68 % to
$2,083,000 as compared to $1,239,000 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 lease portfolios in 1999 and 2000 from financial
institutions. For the nine-month period ended September 30, 2000, lease
underwriting income decreased by $14,000 or 52 % to $13,000 as compared to
$27,000 for the corresponding prior period and direct finance lease income
increased by $396,000 or 660% to $456,000 as compared to $60,000 for the
corresponding prior period. The increase in direct finance lease income results
from the acquisition of Sapp Bros. Leasing Inc. on July 31, 2000. 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 nine-
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<PAGE>
month period ended September 30, 2000, interest income decreased by $187,000 or
94 % to $13,000 as compared to $200,000 for the corresponding prior period. The
decrease 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. The note receivable was
converted into an equity interest in the South African company in October 1999.
For the nine-month period ended September 30, 2000, fees from remarketing
activities decreased by $664,000 or 27 % to $1,823,000 as compared to $2,487,000
for the corresponding prior period. This decrease is attributable, in part, to
the aforementioned downturn in the used transportation equipment market. For the
nine-month period ended September 30, 2000, other income increased by $122,000
or 148 % to $204,000 as compared to $82,000 for the corresponding prior period.
COSTS AND EXPENSES. Total costs and expenses for the nine-month period
ended September 30, 2000 were $37,293,000 as compared to $42,716,000 for the
corresponding prior period, a decrease of $5,423,000 or 13%. The decrease is
primarily a result of the costs associated with sales of transportation
equipment. The cost of transportation equipment sales for the nine-month period
ended September 30, 2000 was $26,884,000 as compared to $31,426,000 for the
corresponding prior period, a decrease of $4,542,000 or 13%, and resulted in an
overall gross margin of 19.1%. Selling, general and administrative expenses for
the nine-month period ended September 30, 2000 was $8,316,000 as compared to
$9,716,000 for the corresponding prior period, a decrease of $1,400,000 or 14%.
This decrease in selling, general and administrative expenses reflects the
effect of the implementation of cost containment measures.
Interest expense for the nine-month period ended September 30, 2000 was
$456,000 as compared to $476,000 for the corresponding prior period, a decrease
of $20,000 or 4%.
Depreciation and amortization expense for the nine-month period ended
September 30, 2000 was $1,637,000 as compared to $1,098,000 for the
corresponding prior period, an increase of $539,000 or 49%. The increase is
primarily due to the amortization of intangible assets associated with the
purchase of Sapp Bros. Leasing Inc. and distribution rights as well as an
increase in equipment under operating leases.
Provision for income taxes for the nine-month period ended September 30,
2000 was $104,000 as compared to $163,000 for the corresponding prior period, a
decrease of $59,000.
NET INCOME. Net income for the nine-month period ended September 30, 2000
was $433,000 as compared to $558,000 for the corresponding prior period, a
decrease of $125,000 or 22%. The decrease in net income is attributable to the
decrease in transportation equipment sales offset by continued improvements in
the containment of costs and increase in direct finance lease income from the
acquisition of Sapp Bros. Leasing Inc. Net income per share was $0.01 per share
(both basic and diluted) for the nine-month period ended September 30, 2000 as
compared to $0.01 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
nine-month period ended September 30, 2000 of $753,000. Operating activities
provided cash of $3,738,000 during the nine-month period ended September 30,
2000 and is primarily a result of planned reductions of inventory levels and
collections of receivables offset by a decrease in deferred revenue associated
with the re-marketing of the Company's lease portfolio and decreases in accounts
payable. Investing activities used cash of $1,497,000 during the nine-month
period ended September 30, 2000 and is primarily a result of the acquisition of
portfolios of leases and investments in other assets. Financing activities used
cash of $2,994,000 during the nine-month period ended September 30, 2000 and is
primarily the result of normal repayments of recourse and non-recourse debt as
well as repayments of lines of credit associated with the reduction of
inventory. Cash and cash equivalents were $351,000 at September 30, 2000 as
compared to $1,104,000 at December 31, 1999, a decrease of $753,000 or 68%.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $1,386,000
loan agreement (the "Loan") with a financial institution (the "Lender") in June
2000. The Loan provides for the payment of nine equal monthly installments,
beginning July 15, 2000, of principal and interest at 7.45% in the approximate
amount of $105,000. Proceeds from the sale of the Equipment will be paid to the
Lender as additional principal reduction. The Loan is secured by all of the
Equipment and the lease contracts specifically associated with this transaction.
In January 2000, the Company obtained a $3,000,000 working capital line of
credit (increased in July 2000 to $3,750,000) from an international financial
institution. The line is due on demand with
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interest at a per annum rate equal to the sum of 2.65% plus the 30-day Dealer
Commercial Paper Rate. The line is secured by marketable securities placed in a
brokerage account at the institution by the Company's majority shareholder.
The Company 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 $5,575,000 as of September 30, 2000.
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 $194,000 as of September 30, 2000. The interest rate
on the above lines is prime plus 3%.
In connection with the purchase of Sapp Bros. Leasing Inc., the Company
added obligations aggregating approximately $16.5 million under various loan
agreements, which are nonrecourse to the parent Company. These loan agreements
consist of lines of credit secured by inventory, notes payable secured by direct
finance leases and capital lease obligations secured by equipment. Certain loans
are guaranteed by the former stockholders of Sapp Bros. Leasing Inc. These loans
bear interest at rates ranging from 8% to 15.5%, with approximately $12.3
million due under revolving lines of credit and the remainder requiring periodic
payments through dates ranging from August 2000 to April 2005. Maximum credit
availability under the lines of credit totals $15.7 million.
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, resulting in a potential loss to the Company.
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. In addition to the Company, several of the other
investors are Sun America, Inc., Citicorp, Northwestern Mutual Life and others.
As of September 30, 2000, the Company had funded approximately $736,000 and is
obligated to provide additional funding in the approximate amount of $264,000.
The Company has additionally invested approximately $4,875,000 into one of
NAOF's portfolio investee companies. In October 1999, the Company formalized a
strategic
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investment/alliance with a South African manufacturer and New Africa Opportunity
Fund "NAOF" whereby a series of preferred stock of Chancellor Corporation was
issued in exchange for a minority interest and certain distribution rights 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the same time of any material decrease
in any widely followed stock index or in the market price of the stock of one or
more public equipment leasing companies or major customers or vendors of the
Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-QSB contains certain "Forward-Looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or the Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introduction and acceptance, technology changes and changes in industry
conditions. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
15
<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
Pursuant to a Notice of Special Meeting of Shareholders, the Board of Directors
caused to be held on September 22, 2000 a meeting of shareholders. At the
meeting, the shareholders acted upon a proposal to amend the articles of
organization to increase the number of shares of authorized common stock, $.01
par value, from 75,000,000 to 90,000,000. The above matter was overwhelmingly
approved by the shareholders with only 112,915 shares voting against the
proposal.
Item 5 Other Information
Form 10-KSB, for 1999 was amended July, 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:
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2000 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 September 30, 2000.
(b) Reports on Form 8-K:
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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 W. Simpson
Chief Financial Officer
(Principal Accounting Officer)
Date: November 13, 2000
17
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EXHIBIT 11
CHANCELLOR CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
The following table reflects the calculation of the earnings per share:
<TABLE>
<CAPTION>
Weighted Average
Common Shares
Income Outstanding
(numerator) (denominator)
Quarter ended September 30, 2000: In thousands, except share and per share data
<S> <C> <C>
Earnings from Operations $ 102 58,806,206
======= ==========
Basic earnings per common share $0.00
Effect of dilutive securities-
Convertible preferred shares -- 3,500,000
Stock Options -- 780,048
------- -----------
63,086,254
===========
Diluted earnings per common share $ 102 $0.00
-------
Quarter ended September 30, 1999
Earnings from Operations (restated) $ 266 53,530,730
======= ===========
Basic earnings per common share $0.00
Effect of dilutive securities
Convertible preferred shares -- 5,000,000
Stock Options -- 1,412,821
------- -----------
$ 266 59,943,551
======= ===========
Diluted earnings per common share $0.00
Year to date ended September 30, 2000:
Earnings from operations $ 433 58,798,926
======= ===========
Basic earnings per common share $0.01
Convertible preferred shares -- 3,500,000
Stock Options -- 846,550
------- -----------
$ 433 63,145,476
======= ===========
Diluted earnings per common share $0.01
Year to date ended September 30, 1999:
Earnings from operations (restated) $ 558 48,381,553
======= ===========
Basic earnings per common share $0.01
Effect of dilutive securities -
Convertible preferred shares -- 5,000,000
Warrant - VCC -- 2,323,232
Stock Options -- 1,475,608
------- -----------
$ 558 57,180,393
------- ===========
Diluted earnings per common share $0.01
</TABLE>
18
