UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB-A
-------------
(Mark One)
- -----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------
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 Small Business Issuer 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
Issuer's telephone number, including area code (617) 368-2700
-------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
-----------------------------------------------------------
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
Common Stock, par value $.01
----------------------------
(Title of Class)
----------------
Check mark whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1998 were approximately
$10,708,000.
As of April 13, 1999, 43,226,395 shares of Common Stock, $.01 par value per
share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $2,500,000)
were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the registrant as of April 13, 1999 was approximately
$9,332,000. Aggregate market value of the total voting stock of the registrant
as of April 13, 1999 was approximately $28,367,000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Proxy Statement for the Annual Meeting of Stockholders to be held at 2:00 p.m.
on June 25, 1999 at the offices of Bingham Dana, LLP, 150 Federal Street,
Boston, MA 02109 - Part III
<PAGE>
This Annual Report on Form 10-KSB-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.
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
- ------- -------------------------
Chancellor Corporation ("Chancellor" or the "Company") was incorporated in
Massachusetts in January 1977. It is principally engaged in (1) buying,
selling, leasing and remarketing new and used transportation equipment, (2)
managing equipment on and off-lease, and (3) arranging equipment-related
financing through its principal subsidiary, Chancellor Fleet Corporation
("Fleet"), which was incorporated in Massachusetts in January 1980.
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 The
Management Agreement provided CAM with effective control of Tomahawk's
operations as of August 1, 1998. Subsequently, CAM acquired all of the
outstanding capital stock of Tomahawk from the two (2) sole shareholders (the
"Selling Shareholders") pursuant to a Stock Purchase Agreement (the "Agreement")
dated January 29, 1999.
In addition to having effective control of Tomahawk as of August 1998, the
Company had also contractually committed to significant liabilities in excess of
$11,194,000. The Company completed additional due diligence through the
remainder of the year and effected a formal closing in January 1999. The
Company had initially filed its 1998 10-KSB on April 14, 1999, whereby the
Company included Tomahawk in its consolidated financial statements. Upon
additional review and discussions with the Securities and Exchange Commission,
the Company has filed this amended 10-KSB-A to reflect the financial statements
without Tomahawk as of August 1998, and recorded the transaction as of January,
1999. In an effort to reflect the transaction on a pro forma basis as initially
recorded, please see footnote 18 to the financial statements.
HISTORICAL BUSINESS AND FISCAL YEAR 1998 SIGNIFICANT DEVELOPMENTS
- ------------------------------------------------------------------------
The Company originates lease transactions directly with equipment users and in
most cases sells those leases to investors. The Company also manages most of
the leases it sells to investors and, when the original leases expire or
terminate, remarket the equipment for the benefit of the investors and the
Company. The Company originates leases involving primarily transportation
equipment, but also other equipment including material handling equipment and
construction equipment. Investors who purchase equipment subject to a lease may
receive the tax and most of the economic benefits associated with the lease
transaction. In certain cases, the Company has retained leases for its own
<PAGE>
account. The Company also arranges non-recourse financing for some of the
leases which it sells and for most leases which it has retained for its own
account. Typically, when the Company originates leases, the investors or buyers
of those leases are not known. Therefore, the Company at the time of entering
into the lease transaction is "underwriting" the lease. At the expiration or
early termination of the original lease, the Company typically sells or releases
the equipment on behalf of the investor.
During the period 1989 through 1997, the Company incurred cumulative losses in
excess of $56 million. The Company recorded a loss of $1,802,000 during fiscal
1997. The continued decline from 1989 through 1996 led the Company to the
development and implementation of a restructuring and transition plan. This
plan was developed and implemented under the direction of Vestex Capital
Corporation, the Company's majority shareholder. The continued, but decreasing,
loss in 1997 was due primarily to the lack of sufficient cash flow to add new
leases to the Company's own lease portfolio and continued costs that occurred in
the first half of 1997 in connection with the Company's restructuring efforts.
For the year ended December 31, 1998, the Company recorded a profit of $524,000,
the first year of profitability since 1988. The Company's return to
profitability in 1998 reflects the culmination of new management's efforts and
strategies to maximize remarketing of off lease equipment and fully implement
its strategy to expand its operations to retail used transportation equipment.
The Company continues to develop and attempts to implement innovative financing
and fleet management programs in the transportation equipment finance industry
to further the Company's continued growth.
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement, dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and The
Management Agreement provided CAM with effective control of Tomahawk's
operations as of August 1, 1998. Subsequently, CAM acquired all of the
outstanding capital stock of Tomahawk from the two (2) sole shareholders (the
"Selling Shareholders") pursuant to a Stock Purchase Agreement (the "Agreement")
dated January 29, 1999.
Tomahawk is engaged in a similar line of business as CAM. Tomahawk retails and
wholesales used transportation equipment, primarily tractors and trailers.
Tomahawk operates five (5) retail centers in Conley, Georgia; Richmond,
Virginia; Pompano Beach, Florida; Orlando, Florida; and Kansas City, Missouri.
Tomahawk also operates its wholesale division from the Conley, Georgia facility.
Tomahawk will operate as a wholly owned subsidiary of the Company, coordinating
many operations with the Company to achieve operating efficiencies and
synergies.
The purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of
Chancellor (valued at $.65 per share) and future cash consideration pursuant to
an earn-out (the "Earn-Out") as provided for in the Agreement. The Earn-Out
provides that each of the Selling Shareholders will be paid an amount equal to
seven and one-half percent (7.5%) of the Adjusted Pre-Tax Earnings of Tomahawk.
Investment funding the Earn-Out, which is paid on a quarterly basis, begins in
the fiscal year ended December 31, 1999 and ends in the fiscal year ended
December 31, 2004. In connection with this Agreement, CAM loaned the Selling
Shareholders a total of $500,000 pursuant to certain promissory notes payable
that are payable in full on January 29, 2004. Additionally, Vestex Capital
Corporation, the largest shareholder of the Company, is to receive up to
$3,250,000 plus expenses, not to exceed $50,000, payable over the next six years
for services rendered in finding, negotiating and arranging financing on the
transaction. The final fee is based principally upon the financial impact and
profitability that Tomahawk adds to the Company's operating results.
The Agreement also: i) nominates one of the Selling Shareholders as a director
of Chancellor's Board of Directors; ii) elects both of the Selling Shareholders
as directors of CAM's Board of Directors; iii) provides for Employment
Agreements for the Selling Shareholders over a period of five years with base
<PAGE>
salaries of $200,000 per annum; iv) prohibits the Selling Shareholders from
competing against CAM or Tomahawk, or soliciting former employees and customers
of Tomahawk; v) provides for Tomahawk to lease from the Selling Shareholders the
Conley, Georgia facility at fair market value rents of approximately $8,500 per
month; and vi) provides CAM an option to purchase from the Selling Shareholders
the Conley, Georgia facility for an amount not to exceed $950,000.
This transaction was recorded in accordance with the purchase method of
accounting as of January , 1999. As a result of the effect on the transaction
of the Management Agreement, the designated date of this transaction for
accounting purposes was initially August 1, 1998 but has been revised effective
January 1999. In connection with this transaction, CAM assumed liabilities of
approximately $11,200,000 and incurred acquisition costs of approximately
$155,000. The excess of the purchase price over net assets of approximately
$2,600,000 has been recorded in intangibles and allocated between a covenant not
to compete, customer database files and goodwill in 1999 and will be amortized
in the beginning of February, 1999 over periods of five to twenty years.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. As of December 31, 1998, the Company had funded
approximately $350,000 and is obligated to provide additional funding in the
approximate amount of $650,000. The Company has additionally invested
approximately $1,340,000 into one of NAOF's investee companies. The Company
continues to negotiate further strategic opportunities with this investee
company.
The Company undertook a review of its trust portfolio, including consultation
with legal counsel and industry consultants, and determined that it had not been
recovering costs associated with administering the trusts. Management's initial
review determined that approximately $22,000,000 of costs for periods prior to
1997 had not been recovered from the trusts. The Company has recorded
approximately $1,498,000 and $994,000 of cost recoveries in the years ended
December 31, 1998 and 1997, respectively. For periods prior to 1997, $1,868,000
was recovered. Management makes no representations concerning the Company's
ability to recover any further costs for periods prior to 1997. Further
recoveries for periods prior to 1997 and thereafter are contingent upon the
current status of the specific trusts and the Company's level of recovery
efforts. Consequently, the Company will record any further recoveries as income
in the period in which collection is assured.
The ability of the Company to profitably operate its lease origination business
unit in the future will depend largely on the amount of new capital available to
the Company and the cost of that capital. In addition, the success of the
Company's remarketing and retailing of used transportation equipment will
result, in part, from its ability to locate sources of quality used
transportation equipment and expansion of its distribution channel through
siting of potentialR new retail facilities. The Company continues to explore
possible sources of new capital including, for example, obtaining new or
additional recourse debt, obtaining new equity capital, securitizing lease
transactions, obtaining equity capital from private investors, purchases of
equipment leases originated by the Company and/or entering into strategic
alliances/joint ventures with other leasing or financial services companies and
the sale of ancillary business units and/or assets as considered appropriate.
The Company also utilizes an expansive database of over 75,000 sources and
customers of used transportation equipment. This effort is on going and includes
a fully staffed telemarketing group to continually upgrade and add new sources
and users of transportation equipment. Additionally, the Company's management
has established a retail facility expansion program through the investigation of
potential new sites that can be developed internally as well as acquisition
candidates. The Company intends on investing any new capital that it obtains in
leases for its own portfolios (if practical), expansion of its remarketing and
retail/wholesale operations, and other business operations.
<PAGE>
Description of Business
- -------------------------
The majority of the Company's leases are noncancelable "net" leases which
contain provisions under which the customer must make all lease payments
regardless of any defects in the equipment and which require the customer to
insure the equipment against casualty loss, and pay all related property, sales
and other taxes. Some of the leases written by the Company provide for early
termination options. Generally, these options may be exercised at specified
times upon receipt by the Company of an amount at least equal to the discounted
present value of remaining rent payments. The Company intends to collect all
termination payments. Other leases allow the lessee at certain times to require
the Company to attempt to sell or sublease the equipment for the lessee, with
the Company sharing in any losses or gains should a decrease or increase in
revenue streams occur as a result.
Leases are generally originated for private third party purchasers of equipment.
The Company's lease origination marketing strategy is transaction driven. With
each lease origination opportunity, the Company evaluates both the prospective
lessee and the equipment to be leased. With respect to each potential lessee,
the Company evaluates the lessee's credit worthiness. With respect to the
equipment, the Company evaluates the remarketing potential.
The Company currently concentrates on leasing transportation equipment, such as
tractors, trailers and trucks. The Company also leases construction equipment,
aircraft, material handling equipment and other equipment. The Company's
business plan calls for diversification of the equipment available to be
financed. This diversification will provide for the financing of
low-obsolescence, hard-asset equipment with predictable and dependable residual
values, including but not limited to, plastics, printing, construction and
general manufacturing equipment. Further, the Company will seek to syndicate
transactions not meeting these criteria or the Company's credit risk profile.
The Company leases equipment to lessees in diverse industries throughout the
United States. Although the Company's direct solicitation efforts involving
leases of new equipment have shifted from Fortune 100 companies to include
smaller business entities, most of the Company's lessees of new equipment are
still of substantial creditworthiness, with minimum net worth in excess of $25
million.
During 1998, the Company continued its lease originating activities, including
brokering of several new lease transactions. The Company also transacted
several significant buyouts of portfolios held by certain trust investors.
During 1998, 31% (based on original equipment cost) of the new lease
transactions originated by the Company were with the one largest lessee (Wal
- -Mart). In addition, approximately 40% and 31% (based on original equipm
ent cost) of equipment sold to investors in 1998 were purchased by the two large
st investors. During 1997, 92% (based on original equipment cost) of
the new lease transactions originated by the Company were with the one
largest lessee. In addition, approximately 55% and 37% (based on original
equipment cost) of equipment sold to investors in 1997 were purchased by the two
largest investors.
Equipment Acquisition
- ---------------------
The Company acquired $5.5 million of equipment under 40 leases during 1998.
The Company acquired $214,000 of equipment under 4 leases during 1997.
Additionally, the Company acquired 10 existing leases in connection with the
prepayment of the intercreditor loan in 1997.
Equipment Disposition
- ----------------------
In 1998, the Company disposed of $6.8 million of portfolio equipment (measured
<PAGE>
by its original cost) on operating leases and disposed of $139,000 on direct
finance leases, reducing the total equipment (net of depreciation, pay-down and
write-downs) on operating leases and direct finance leases to $702,000 and
$359,000, respectively. In 1997, the Company disposed of $4.0 million of the
Company's portfolio equipment (measured by its original cost) on operating
leases and disposed of $590,000 on direct finance leases, reducing the total
equipment (net of depreciation, pay-down and write-downs) on operating leases
and direct finance leases to $232,000 and $521,000, respectively. In 1997, the
Company, as a result of a commitment from the previous management and board,
sold $1,300,000 (based on original cost) of equipment under one lease from the
portfolio prior to lease expiration.
Remarketing Activities
- -----------------------
The remarketing of equipment plays a vital role in the operations of the
Company. The Company's remarketing efforts are directed through Chancellor
Asset Management, Inc. ("CAM"), the Company's wholly owned subsidiary.
In connection with the sale of lease transactions to investors, the Company
typically is entitled to share in a portion of the residual value realized upon
remarketing. Successful remarketing of the equipment is essential not only to
the realization of the Company's interest in the residual value but also for the
Company to recover its original investment in the equipment in its portfolios
and to recognize a return on that investment.
The Company continues to dedicate substantial resources towards the development
and improvement of its remarketing capabilities, which is a significant profit
center for the Company. The Company's strategy is to exploit its remarketing
expertise by providing fee-based remarketing services to fleet equipment owners
and lessees and also to create a dealer capability under which the Company would
buy and re-sell fleet equipment. The Company continually explores the potential
for financing relationships enabling the remarketing group to enter into
transactions to purchase used transportation equipment which can be quickly and
profitably remarketed.
The Company has found that its ability to remarket equipment is affected by a
number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of remarketing.
Remarketing efforts are pursued on a direct retail sale, wholesale or lease
basis. The Company's fleet equipment remarketing experience has shown that
generally the greatest residual value is realized by initially re-leasing
equipment, rather than immediately selling it. Therefore, the Company has
concentrated its remarketing efforts on re-leasing, although re-leasing involves
more risks than selling because lessees of used equipment are generally smaller,
less creditworthy enterprises than the Company's initial lessees. The Company
sells fleet equipment through its retail sales center located in Elizabeth, New
Jersey. Additionally, the Company uses indirect retail sales centers in
California, Georgia, Illinois and Texas.
Retail and Wholesale Activities
- ----------------------------------
As previously mentioned, CAM acquired Tomahawk for purposes of enhancing
its remarketing of used transportation equipment. The acquisition of Tomahawk
provides the Company with five additional retail centers in Conley, Georgia;
Pompano Beach and Orlando, Florida; Richmond, Virginia; and Kansas City,
Missouri, in addition to its previously existing location in Elizabeth, New
Jersey. Tomahawk also provides additional wholesale opportunities from its
Conley, Georgia headquarters. The Company will derive significant revenues from
The retail and wholesale of used transportation equipment through CAM's
Tomahawk business unit. In addition, the Company's ability to utilize retail
pricing to establish residual values on lease transactions will provide the
Company with a competitive advantage in its retail centers throughout the
domestic marketplace. CAM maintains an extensive database of used equipment
sources and customers and continually updates this information through a
fully staffed telemarketing group.
<PAGE>
Equity Syndications
- --------------------
The Company sold certain lease transactions to private investors through the
sale of interests in grantor trusts. In the grantor trust structure, the
equipment is acquired directly by the trust and the related lease is transferred
to the trust. The Company or one of its subsidiaries usually acts as trustee
and in that capacity holds title to the equipment and performs specified
administrative functions for which it is entitled to receive reimbursement for
costs incurred. The Company typically sells equipment directly to an investor.
The Company receives fees upon these sales. In addition, the Company often
shares with the investor in the residual value derived from the remarketing of
equipment at lease expiration or early termination. The Company sold
approximately $3 million of equipment to private investors during 1997. There
were no sales of equipment using grantor trusts in 1998. Although the Company
will continue its efforts to syndicate lease transactions, it does not envision
the use of grantor trusts in future transactions.
Competition
- -----------
The principal methods by which the Company competes are its ability to
underwrite the lease transactions which it originates; its knowledge of the
equipment used by its lessees; the training and experience of its personnel; the
relationships and reputation it has established with lessees, equipment
suppliers and financial institutions; its ability to adapt to changing
regulations and tax laws; and its experience in successfully remarketing the
equipment at lease termination. Additionally, the Company's ability to provide
in-house retail distribution channels provides advantages in establishing
pricing for lease origination transactions and improving overall fleet
management and total holding costs for the customer.
The equipment leasing business, on a global basis, is a highly competitive,
fragmented marketplace with thousands of competitors. The Company has
identified emerging markets such as Russia, the Commonwealth of Independent
States, the Republic of South Africa, the Kingdom of Swaziland, and other
sub-Saharan countries. These emerging markets hold significant opportunity to
provide financial services, such as leasing, that the Company will continue to
explore as resources and opportunities permit. The Company is aggressively
pursuing the transacting of lease deals and negotiation of strategic alliances
in these markets. Chancellor's competitors include (1) large diversified
financial services companies, (2) other leasing companies and (3) vendor
financing programs. Many of these organizations have greater financial
resources than the Company and, therefore, may be able to obtain funds or
equipment on more favorable terms than those available to the Company.
Additionally, the Company competes against other financing alternatives
available to lessees for the purchase of equipment.
BUSINESS PLAN
- --------------
The Company's strategy is to increase profitability, increase market share, and
create growth opportunities by expanding its core business through servicing
middle market clients, expanding its used transportation equipment retail and
wholesale distribution channel, expanding into new transportation and equipment
markets and seeking strategic financial partnerships and joint ventures
domestically and internationally.
Historically, the Company focused its efforts on Fortune 100 companies. The
Company implemented a plan to broaden the focus of its transportation equipment
and remarketing expertise by expanding the number of customers within its target
market. The Company will broaden its scope of lease origination activities to
include middle market clients with a variety of transportation equipment
requirements. The strategic decision to target middle market origination
activities is expected to result in higher gross margins while utilizing the
Company's twenty years of historical equipment residual performance. The
Company will leverage off of its expertise allowing entry into emerging
international markets seeking these basic financial services in their economic
development.
<PAGE>
The Company enjoys a reputation as one of the premier transportation equipment
remarketers in the industry. The Company believes there is a significant
opportunity to offer lease and rental companies, finance companies, utilities,
municipalities, and transportation companies an outlet for their used equipment
other than the traditional low-end auction channels. The Company further
believes the acquisition of Tomahawk will enhance the distribution of this
equipment at lease expiration.
The Company also perceives significant opportunities for its services in
international markets. Additionally, the Company can benefit from higher
margins in less competitive international markets. In 1997, the Company
completed certain lease transactions in the Russian Federation and the
Commonwealth of Independent States ("Russia and the CIS"). In addition, the
Company has made investments with certain parties that both invest in and
operate companies in the Republic of South Africa ("RSA"), the Kingdom of
Swaziland and other sub-Saharan countries. The Company continues to evaluate
the potential for providing additional financial services in the RSA as a result
of the strategic alliances established.
Business Expansion
- -------------------
Since the change in management and Board control on December 3, 1996 the Company
closely scrutinizes transactions to maximize profitability. As a result of the
restructuring, which was completed in 1997, and a move towards concentrating on
profit centers, the Company has established a strong foundation upon which
future profitable business expansion can be achieved. As an outgrowth of the
Company's core transportation leasing business, several acquisitions are being
evaluated that provide for vertical and horizontal integration into businesses
that utilize similar back office operations.
In 1997, the Company instituted an aggressive mergers and acquisition strategy,
seeking candidates providing vertical and horizontal opportunities within the
areas of commercial, consumer and real estate finance. The expansion of the
Company's core business through the acquisition of and merger with complementary
businesses within financial services will be an ongoing strategic focus. The
implementation of this strategy involves members of senior management and
outside professionals reporting to a Mergers and Acquisitions subcommittee of
the Board of Directors. This group is constantly evaluating a variety of
domestic and international leasing companies and related opportunities, for
potential alliances and/or business combinations.
Year 2000 Disclosure
- ----------------------
The Company has commenced efforts to assess and where required, remediate,
issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues
arise from computer programs which use only two digits to refer to the year and
which may experience problems when the two digits become "00" in the year 2000.
In addition, imbedded hardware microprocessors may contain time and two-digit
year fields in executing their functions. Much literature has been devoted to
the possible effects such programs may experience in the Year 2000, although
significant uncertainty exists as to the scope and effect the Y2K issues will
have on industry and the Company.
The Company has recognized the need to address the Y2K issue in a comprehensive
and systematic manner and has taken steps to assess the possible Y2K impact on
the Company. Although the Company has not completed a 100% assessment of all
its information technology ("IT") and non-IT systems for Y2K issues, the Company
has completed its assessment of all mission-critical systems. All
mission-critical systems and most of the major applications and hardware have
been assessed to determine the Y2K impact and a plan is in place for timely
resolution of potential issues.
In 1998, the Company developed a strategic plan to identify the IT systems
needed to accomplish the Company's overall growth plans. As part of this
<PAGE>
process, Y2K issues were considered and addressed by the Company's senior
management and MIS personnel. Although this plan was intended to modernize the
IT systems, compliance with Y2K requirements were incorporated.
The cost of bringing the Company in full compliance should not result in a
material increase in the recent levels of capital spending or any material
one-time expenses. The Company has spent approximately $152,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending of approximately $300,000 during fiscal 1999 to complete
the modernization of its IT system.
The failure of either the Company, its vendors or clients to correct the systems
affected by Y2K issues could result in a disruption or interruption of business
operations. The Company uses computer programs and systems in a vast array of
its operations to collect, assimilate and analyze data. Failure of such
programs and systems could affect the Company's ability to track assets under
lease and properly bill. Although the Company does not believe that any of the
foregoing worst-case scenarios will occur, there can be no assurance that
unexpected Y2K problems of the Company's and its vendors' and customer's
operations will not have a material adverse effect on the Company.
While it is difficult to classify our state of readiness, we believe that our
internal plans should have the Company ready for the year 2000 to avoid any
material Y2K issues. We have completed the assessment, testing systems and
developing contingency plans. Management is in constant communication with its
IT personnel and has made and will continue to make reports to the Company's
Board of Directors.
<PAGE>
In 1998 the Company made several improvements to its Internet presence
(http://www.chancellorcorp.com) as part of the Company's strategy to further
---------------------
incorporate technology into its marketing and customer service initiatives. The
Company's goal for 1999 is to create a simple, well-designed and useful Internet
destination by redesigning the site and expanding content to improve its
usefulness as a business resource for customers and an informational tool for
investors.
During second quarter of 1999, the Company plans to launch a comprehensive
upgrade to its Internet site designed to be more user friendly. The new
Chancellor site will showcase the Company's truck and trailer inventory
available through its New Jersey retail location, provide online and
downloadable lease applications for fleet managers, and improve the quality and
quantity of corporate and financial information tailored for the investment
community.
Market Opportunities
- ---------------------
Through implementation of a strategy allowing for penetration of middle market,
as well as Fortune 100 customers, the Company will broaden its target market to
a less competitive and price sensitive arena. The Company will focus its
energies domestically and internationally on the multi-billion dollar leasing
marketplace. The ability of the Company to originate and remarket equipment in
underdeveloped and inefficient markets translates into higher potential rates of
return. Additionally, the willingness of the Company's strategic financial
partners to augment the Company's deal underwriting capabilities provides
financial strength to execute transactions.
The used transportation equipment market also presents one of the most
fragmented markets available. Dominated by local dealers and manufacturer
remarketers, the used transportation equipment market presents Chancellor an
opportunity for consolidation in this industry. The Company's management
believes that a significant opportunity exists to offer lease and rental
companies, finance companies, utilities, municipalities, and transportation
companies a retail outlet for their used equipment as opposed to the current
wholesale and auction outlets currently used.
<PAGE>
The Company also views its efforts to be a global originator/remarketer of
transportation and non-transportation equipment as an element to its corporate
growth strategy over the next 5 to 7 years. The additional international
revenue streams, where margins are significantly higher than the domestic
market, will help facilitate the Company's goal of increasing profitability.
Exposure on these transactions will be mitigated through the use of credit
enhancement, letters of credit and other similar instruments. The Company's
management is committed to a strategy providing for international
diversification within emerging global markets.
Additionally, the Company has made significant progress in establishing a
presence in the Republic of South Africa ("RSA") as a premier financial services
company in this region. The Company's efforts as a key contributor in the
economic development of the RSA are demonstrated indirectly through an
investment in the New Africa Opportunity Fund, LP ("NAOF.)
As a result of its strength in the management of assets, the Company has a
unique opportunity to originate and/or remarket long-lived assets in the
international marketplace. As continued emphasis is placed on projects to
rebuild and improve infrastructure, the need for capital equipment in these
international markets is expected to grow.
Operating Facility
- -------------------
The Company's fully integrated sales and marketing departments are headquartered
in Boston, Massachusetts, with a satellite office located in New York City, New
York. The Company maintains retail used transportation equipment centers in
Conley, Georgia; Pompano Beach, Florida; Orlando, Florida; Richmond, Virginia;
Kansas City, Missouri; and Elizabeth, New Jersey. A direct sales staff and
Telemarketing program supports a national network of sales representatives.
Seasonality
- -----------
Because of tax and investment considerations, investors frequently defer
their decisions to purchase lease transactions until after the first half of the
calendar year.
Employees
- ---------
As of April 13, 1999, the Company employed approximately 90 persons on a
full time basis.
ITEM 2. DESCRIPTION OF PROPERTY
- ------- -------------------------
The Company leases an office facility in Boston, Massachusetts. This
facility houses the Company's administrative, financing and marketing
operations. The Boston, Massachusetts lease is for a non-cancelable period of
five years, with three and a half years remaining in the term, and with a base
rent, as of December 31, 1998, of approximately $11,000 per month. The Boston,
Massachusetts facility adequately provides for present and future needs, as
currently planned.
The Company also leases a retail center in Elizabeth, New Jersey. This location
is utilized for the storage, display, and selling of used transportation
equipment. This facility is leased under a non-cancelable arrangement with the
remaining term of one year. The monthly rent of this facility as of December
31, 1998 is approximately $4,500.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- ------------------
As of 12/1/99, all material litigation involving the Company has been settled
and grievances have been resolved. The Company is involved in routine legal
proceedings incidental to the conduct of its business. Management believes that
none of these legal proceedings will have a material adverse effect on the
financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- -----------------------------------------------------------
None.
-----
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ------------------------------------------------------ -------
The Company's Common Stock has traded on the NASDAQ OTC Electronic Bulletin
Board under the symbol "CHLR" since August 21, 1996 and under the symbol "CHCR"
between January 28, 1994 and August 21, 1996 on the basis of actual trading
prices. The Company's Common Stock had traded from June 30, 1992 to January 28,
1994 on the Small Cap Market of the Automated Quotation System of NASDAQ on the
basis of actual trading prices.
The following table sets forth the high and low sales prices of the Company's
Common Stock for the periods indicated, according to published sources.
<TABLE>
<CAPTION>
1999 High Low
<S> <C> <C>
First quarter (through March 30, 1999) $ .93 $.43
1998
- ----
Fourth quarter .88 .50
Third quarter 1.34 .24
Second quarter .37 .16
First quarter .44 .27
1997
- ----
Fourth quarter .44 .15
Third quarter .18 .10
Second quarter .15 .09
First quarter .10 .04
</TABLE>
On April 13, 1999, there were approximately 510 beneficial owners of the
Company's common stock. The Company has not paid or declared cash dividends on
its common stock during the periods indicated and does not currently intend to
pay cash dividends on its common stock for the foreseeable future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- -------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
The analysis below is reflected of the Company, and does not give rise to
further analysis of the Management Agreement with Tomahawk.
Results of Operations
- -----------------------
Year Ended December 31, 1998 vs. December 31, 1997
----------------------------------------------------------
Revenues. Total revenues for the year ended December 31, 1998 was
$10,708,000 as compared to $4,433,000 for the prior year, an increase of
$6,275,000 or 141.6%. For the year ended December 31, 1998, transportation
equipment sales were $6,165,000 as compared to no sales for the corresponding
prior year. This significant revenue stream is attributable in part to a major
purchase and sale of equipment from the buy-out of a portfolio resulting in
approximately $5,647,000 of revenues recorded. The Company will also utilize
the competitive advantage provided by its access to retail pricing for residual
values to aid in the ability to improve competitiveness within the Company's
lease origination business unit. For the year ended December 31, 1998, rental
income increased by $72,000 or 8.3% as compared to the prior year. The increase
in rental income is attributable primarily to the addition of certain equipment
acquired in connection with the purchase of several portfolios. For the year
ended December 31, 1998, lease underwriting income decreased by $219,000 or
74.7% as compared to the prior year. Lease underwriting income decreased due to
a higher concentration of broker related activity that results in a lower
overall revenue stream. The Company does, however, continue its lease
origination rebuilding process through the addition of key senior management and
sales personnel, and development of strategic alliances to provide future growth
in this area. For the year ended December 31, 1998, direct finance lease income
decreased by $162,000 or 59.6%, as compared to the prior year. The decrease in
direct finance lease income is attributable primarily to the lack of additions
to its portfolio of direct finance leases in 1998 as compared to the addition of
10 leases in 1997. For the year ended December 31, 1998, gains from portfolio
remarketing increased by $573,000 or 71.5% as compared to the prior year. The
increase in gains from portfolio remarketing is attributable to the increase in
sales of portfolio assets during the year ended December 31, 1998 as compared to
the prior year. For the year ended December 31, 1998, fees from remarketing
activities decreased slightly by $81,000 or 5.4% as compared to the prior year.
This decrease is attributable, in part, to management's efforts to increase the
level of activity in the sales of used transportation equipment. For the year
ended December 31, 1998, other income decreased by $224,000 or 33.7% as compared
to the corresponding prior year period. The decrease is attributable in part to
the inclusion of certain consulting fees earned in 1997 that were not recurring
in 1998.
Costs and Expenses. Total costs and expenses for the year ended December
31, 1998 was $10,184,000 as compared to $7,152,000 for the prior year, an
increase of 3,032,000 or 42.4%. The increase is primarily a result of the
costs associated with sales of transportation equipment. The cost of
transportation equipment sales was $5,647,000 for the year ended December 31,
1998 and resulted in an overall gross margin of 8.4%. Selling, general and
administrative expenses for the year ended December 31, 1998 was $3,949,000 as
compared to $6,412,000 for the corresponding prior year, a decrease of
$2,463,000 or 38.4%. For the year ended December 31, 1998, selling, general and
administrative expenses included recovered reimbursable administration costs of
$1,498,000 as compared to $405,000 for the corresponding prior year. Net of the
reimbursable administration costs selling, general and administrative costs
decreased to $5,447,000 for the year ended December 31, 1998 as compared to
$6,817,000 for the corresponding prior year, a decrease of $1,370,000 or 20.1%.
The decrease in selling, general and administrative expenses reflects the
success of management's cost containment and stabilization efforts that were
finalized in 1997. Management believes it has successfully implemented its cost
containment and stabilization strategy. These cost improvements have resulted
<PAGE>
in a stabilization of the corporate infrastructure and provide a firm foundation
for the new management team to implement the growth phase of its business plan.
Interest expense for the year ended December 31, 1998 was $111,000 as
compared to $281,000 for the prior year, a decrease of $170,000 or 60.5%.
Depreciation and amortization expense for the year ended December 31, 1998
was $477,000 as compared to $459,000 for the prior year, an increase of $18,000
or 3.9%.
Extraordinary Item - Gain on Debt Forgiveness. The Company recorded a
gain on debt forgiveness for the year ended December 31, 1997 of $930,000. In
April 1997, the Company repaid in advance of their respective terms an
inter-creditor loan and secured inventory loan. The aggregate amount of this
debt on the repayment date was $1,906,000, of which approximately $976,000 was
paid in cash and the balance of $930,000 was forgiven. In addition, the Company
paid approximately $22,000 in legal and bank fees to complete this transaction.
Net Income. Net income for the year ended December 31, 1998 was $524,000
as compared to a net loss of $1,802,000 for the prior year, an increase of
$2,326,000 or 129.1%. The increase in net income is primarily attributable to
the significant increase in revenues, primarily from the retail and wholesale of
used transportation equipment, the buy-out of leases from portfolios, and
continued improvements in the containment of costs. Basic net income per share
for the year ended December 31, 1998 was $0.02 per share as compared to a
($0.12) net loss per share for the prior year, an increase of $0.14 per share.
The increase is due primarily to the marked increase in overall net income
resulting from significant revenue growth .
Liquidity and Capital Resources
- ----------------------------------
The Company recognized a net increase in cash and cash equivalents for the
year ended December 31, 1998 of $515,000. Operating activities used cash of
$2,283,000 during the year ended December 31, 1998. Investing activities
provided cash of $946,000 during the year ended December 31, 1998 and is
primarily a result of investments in South Africa. Financing activities
provided cash of $1,852,000 during the year ended December 31, 1998 and is
primarily a result of increases in stock issuance. Cash and cash equivalents
amounted to $612,000 at December 31, 1998 as compared to $97,000 at December
31, 1997, an increase of $515,000 or 530.9%.
The Company is provided management and consulting services by VMI,
Corporation ("VMI") an affiliate of the Company's majority stockholder,
pursuant to a consulting agreement approved by the shareholders at the 1995
Annual Meeting of the Stockholders, as amended in July 1998. VMI provides
specified services including, but not limited to, general business consulting,
the development and implementation of the Company's 1997 transition and
turnaround strategies, development of domestic and international business
opportunities and growth strategies, identification and development of strategic
alliances, and support of merger and acquisition activity. Vestex Capital
Corporation ("VCC"), an additional affiliate of the Company, provided specified
services including debt and equity raising efforts, and other financing
activity. VCC is paid fees related to debt and equity transactions up to 3.0%
and 7.5%, respectively, of the amount of financing raised in addition to related
expenses. VMI provides services to the Company on operational and other matters
for which it is compensated at levels negotiated with the Company.
During 1998, VCC investigated numerous strategic alliances and merger and
acquisition opportunities on behalf of the Company. In connection with this
<PAGE>
activity, VCC was instrumental in the negotiation and consummation of the Lease
Servicing Agreement entered into on November 1, 1998 among Chancellor Leasing
Services, Riviera Finance - East Bay and United Capital and Finance LLC. VCC
continues to negotiate and manage the Company's financing, acquisition and
investment efforts in the Republic of South Africa and other international
opportunities. VCC was instrumental in the development and implementation of
the strategy to buy-out and acquire investment grade transportation equipment
portfolios. As a result of this strategy, the Company acquired portfolios
valued at an original equipment cost of approximately $22,000,000. The
acquisition of these portfolios was further facilitated by VCC assisting in
arranging approximately $8,000,000 of financing to effect the portfolio buy-out.
VCC was also instrumental in recruiting and attracting key employees to the
Company. Additionally, VCC provided these key employees warrants to purchase
Chancellor common stock, beneficially owned by VCC and valued at approximately
$1,752,300. VCC's activities provided sources of funding to the Company of
approximately $6,500,000, and $300,000 for fees for services and reimbursable
expenses, respectively, converted into debt and equity instruments of the
Company. This included the purchase of 1,946,146 shares of the Company's common
stock at a price of $.69 per share. Additionally, VCC infused approximately
$755,000 of cash and paid expenses of approximately $670,000 on behalf of the
Company during 1998. As a result, in part, of VCC's activities and services
provided, the Company's net worth increased to $2,362,000 at December 31, 1998
from $227,000 as of December 31, 1997 and from an approximate $2,550,000
negative net worth as of December 31, 1996.
The Company undertook a review of its trust portfolio, including
consultation with legal counsel and industry consultants, and determined that it
had not been recovering costs associated with administering the trusts.
Management's review determined that approximately $22,000,000 of costs for
periods prior to 1997 had not been recovered from the trusts. The Company has
recorded approximately $1,498,000 and $994,000 of cost recoveries in the years
ended December 31, 1998 and 1997, respectively. For periods prior to 1997,
$1,868,000 was recovered. Management makes no representations concerning the
Company's ability to recover any further costs for periods prior to 1997 or
thereafter. Further recoveries for periods prior to 1997 are contingent upon
the current status of the specific trusts and the Company's level of recovery
efforts. Consequently, the Company will record any further recoveries as income
in the period in which collection is assured.
The Company's ability to underwrite equipment lease transactions is
largely dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in continuing dialogue with several inventory lenders
which appear 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. Delays in remarketing caused by various market
conditions reduce the profitability of the remarketing.
The Company anticipates it will continue to dedicate substantial resources
toward the further development and improvement of its remarketing and retailing
capabilities and believes that this business unit will continue to be a profit
center for the Company. The Company's strategy is to further exploit its
remarketing expertise by continuing to develop its ability to sell remarketing
<PAGE>
services to other lessors, fleet owners, and lessees and also to create a
dealer capability under which the Company would buy and resell fleet equipment.
The Company will also expand its used transportation equipment retail and
wholesale capabilities through addition of retail centers through internal
growth and acquisitions. This improved capability will be used as a competitive
advantage that will enable the Company to provide a "total holding cost" concept
when competing for new lease origination deals. The Company's retail and
wholesale business unit will both provide an improved outlet for other lessors,
financial institutions, and fleet owners to dispose of used transportation
equipment and a source of quality used transportation equipment for fleet owners
and owner-operator. The Company will also aggressively promote its Internet
capabilities to further promote its business activities and as an e-commerce
tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. As of December 31, 1998, the Company had funded
approximately $350,000 and is obligated to provide additional funding in the
approximate amount of $650,000. The Company has additionally invested
approximately $1,340,000 into one of NAOF's investee companies. The Company
continues to negotiate further strategic opportunities with this investee
company.
The Company's renewal or replacement of recently expired lines, its
expected access to the public and private securities markets, both debt and
equity, anticipated new lines of credit (both short-term and long-term and
recourse and non-recourse), anticipated long-term financing of individual
significant lease transactions, and its estimated cash flows from operations are
anticipated to provide adequate capital to fund the Company's operations for the
next twelve months. Although no assurances can be given, the Company expects to
be able to renew or timely replace expired lines of credit, to 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.
Contractual - Tomahawk Liability
- -----------------------------------
As previously discussed, although the Company did not have a formal closing
with Tomahawk until January 1999, the Company was contractually liable at
December 31, 1998 for approximately $11,200,000 of liabilities. The purchase
was effected January, 1999 (see footnote 18 for details).
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
<PAGE>
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
Recent Accounting Pronouncements
- ----------------------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes
standards for reporting comprehensive income and its components. The
implementation of this SFAS has no material effect on the Company's consolidated
financial statements.
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information", requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or the financial position of the Company
but did affect the disclosure of segment information.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ------- ---------------------
The following documents are filed as a part of this report on Form
---------------------------------------------------------------------------
10-KSB-A:
- --------
Page No.
Independent Auditors' Report F-1
Independendent Auditors' Report F-2
Consolidated Balance Sheet as of
December 31, 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders
Equity for the years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
All schedules have been omitted because they are inapplicable or the
required information is included in the notes to the consolidated financial
statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- -------------------------------------------------------------------
FINANCIAL DISCLOSURES
- ----------------------
On February 25, 1999, our Audit Committee and Board of Directors
approved the dismissal of our independent accountants, Reznick Fedder &
Silverman, P.C. ("Reznick Fedder"). We provided Reznick Fedder with the reasons
for the dismissal in a letter on March 4, 1999. The reasons include, but are
not limited to: (i) disagreements on fees billed by Reznick Fedder for
services, including, but not limited to, due diligence and business advisory
services in connection with merger and acquisition activity, in the prior year
and estimated fees in connection with the proposed 1998 audit engagement, (ii) a
lack of commitment by Reznick Fedder to ensure timely completion of the 1998
audit and timely filing of the 1998 Annual Report on Form 10-KSB-A, (iii)
dissatisfaction as to the timeliness of Reznick Fedder's provision of business
advisory reports and recommendations in general and Management Reports pursuant
to the requirements of Statements on Auditing Standards No. 61 in particular,
and (iv) personality conflicts between Reznick Fedder's audit team and
management, including disagreements concerning the quality of staffing provided
previously.
During the years ended December 31, 1997 and 1996: (i) there were no
disagreements with Reznick Fedder on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Reznick Fedder, would have
caused Reznick Fedder to make a reference to the subject matter of the
disagreements in connection with its reports in the financial statements for
such years and (ii) there were no "reportable events" as described in Items 304
of Regulation S-K. Reznick Fedder's report of independent accountants on the
Company's consolidated financial statements for the years ended December 31,
1997 and 1996 each contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
<PAGE>
During the interim period from December 31, 1997 through February 25, 1999
(the date of Reznick Fedder's dismissal as the Company's independent
accountants), Reznick Fedder alleged, solely in their opinion, (i) one potential
disagreement as to a matter relating to accounting principles, and (ii) one
suggested "reportable event".
By letter dated March 15, 1999, Reznick Fedder has indicated that,
based on the limited information provided to them as of February 6, 1999, it did
not appear that the purchase of Atlanta based MRB, Inc. and affiliates d/b/a
Tomahawk Truck & Trailer Sales, Inc. ("MRB") should be reflected as of August 1,
1998, as stated in our Current Report on Form 8-K filed on February 12, 1999.
Reznick Fedder based its preliminary determination on the August 1, 1998
Management Agreement, the January 29, 1999 Stock Purchase Agreement, and the
January 29, 1999 Loan Agreement, each with MRB, as indicated in Reznick Fedder's
letter to us dated March 8 (incorporated by reference from Exhibit 99 to the
Company's Form 8-K/A filed with the Securities and Exchange Commission on March
22, 1999).
Reznick Fedder also incorrectly stated in that letter that their
preliminary determination was based in part on the First Amendment to the
Management Agreement dated August 17, 1998, when in fact, Reznick Fedder did
not review that First Amendment until after we filed our Current Report on Form
8-K on February 12, 1999 reporting the completion of our acquisition of MRB.
Despite their dismissal as our independent accountants, Reznick Fedder also
requested in that letter that the Company provide any additional information
that they should consider in connection with their opinion regarding the
appropriateness of the accounting disclosures made in the Company's Form 8-K
filed on February 12, 1999. Reznick Fedder did not request further information
as to this issue prior to their dismissal.
We engaged the Atlanta based firm of Metcalf Rice Fricke & Davis
("Metcalf Rice") on January 25, 1999 to perform the 1998, 1997, and 1996 audits
of MRB, a significant subsidiary. We further engaged the firm of Metcalf Rice,
based on the merits of their performance of services in connection with the MRB
audits, to serve as our independent accountants in February, 1999. We then
asked Metcalf Rice to review this potential issue, alleged by Reznick Fedder as
referenced in their letter dated March 15, 1999, using all available
information, including materials not previously requested by Reznick Fedder, and
provide us with their determination as to the proper accounting treatment of our
acquisition of MRB under generally accepted accounting principles. On March 29,
1999, Metcalf Rice issued a letter pursuant to Statements of Auditing Standards
No. 50 "Independent Accountants Report on Appropriate Application of Generally
Accepted Accounting Principles," which addressed the reporting period under
generally accepted accounting principles that the Company complied with in
preparing its December 31, 1998 financial statements.
As to the second paragraph of Reznick Fedder's letter, they were only
provided with a preliminary unaudited, unconsolidated, and unadjusted trial
balance for fiscal 1998. In addition, Reznick Fedder was not engaged as our
independent accountants for the purpose of certifying the consolidated financial
statements of Chancellor Corporation as of December 31, 1998 and for the year
then ended, and were therefore not engaged to perform planning for this audit.
Reznick Fedder was not asked by us to determine whether adjustments
were required to recorded assets and liabilities which could materially impact
the fairness or reliability of financial statements for the year ended December
31, 1998. Adjustments, as necessary, were made based on recommendations of
Metcalf Rice during the course of their audit fieldwork.
The Company had initially filed its 1998 10-KSB on April 14, 1999, whereby
the Company included Tomahawk in its consolidated financial statements. Upon
additional review and discussions with the Securities and Exchange Commission,
the Company has filed this amended 10-KSB-A to reflect the financial statements
without Tomahawk as of August 1998, and recorded the transaction as of January,
1999.
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------- -------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------
The information required by Item 401 and 405 of Regulation S-B with respect
to directors and executive officers of the registrant will be set forth in the
Proxy Statement for the Annual Meeting of Stockholders to be held on June 25,
1999 and to be filed with the Securities and Exchange Commission in April 1999,
and is incorporated herein by this reference.
ITEM 10. EXECUTIVE COMPENSATION
- -------- -----------------------
The information required by Item 402 of Regulation S-B with respect to
executive compensation will be set forth in he Proxy Statement for the Annual
Meeting of Stockholders to be held on June 25, 1999 and to be filed with the
Securities and Exchange Commission in April 1999, and is incorporated herein by
this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- ------------------------------------------------------------------
The information required by Item 403 of Regulation S-B with respect to
security ownership of certain beneficial owners and management will be set forth
in the Proxy Statement for the Annual Meeting of Stockholders to be held on June
25, 1999 and to be filed with the Securities and Exchange Commission in April
1999, and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- --------------------------------------------------
The information required by Item 404 of Regulation S-B with respect to
certain relationships and related transactions will be set forth in the Proxy
Statement for the Annual Meeting of Stockholders to be held on June 25, 1999 and
to be filed with the Securities and Exchange Commission in April 1999, and is
incorporated herein by this reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
- -------- -------------------------------------
Exhibits:
- ---------
(a) 2 Stock Purchase Agreement, dated January 29, 1999, by and
among Chancellor Asset Management, Inc, M. Rea Brookings and David F. Herring
(incorporated by reference from Exhibit 2 to the Company's current report on
Form 8-K filed with the Securities and Exchange Commission on February 12,
1999).
3.1 Restated Articles of Organization of the Company (Incorporated by
reference from Exhibit 3A to the Company's Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on July 22, 1983 (Registration
Statement)), as amended by Articles of Amendment filed with the Massachusetts
Secretary of the Commonwealth on May 18, 1990 (incorporated by references from
Exhibit 3(a) to the Company's Annual Report, Form 10-K, for the year ended
December 31, 1991), as amended by Articles of Amendment filed with the
Massachusetts Secretary of the Commonwealth on January 26, 1995 (incorporated by
reference from Exhibit 3(a) to the Company's Annual Report, Form 10-K, for the
year ended December 31, 1994) and as amended by Articles of Amendment files with
the Massachusetts Secretary of the Commonwealth on October 27, 1997
(incorporated by reference from Exhibit 3(a) to the Company's annual report,
Form 10-KSB-A, for the year ended December 31, 1997).
<PAGE>
3.2 By-laws of the Company, as amended to date (incorporated by reference
from Exhibit 3(b) to the Company's Annual Report, Form 10-K, for the year ended
December 31, 1994)
10.1 Recapitalization and Stock Purchase Agreement dated as of September 20,
1994 among the Company, Bruncor Inc. and Vestex Corporation (incorporated by
reference from Exhibit 3 to the Company's Form 8-K filed with the Securities and
Exchange Commission on September 27, 1994 and dated August 26, 1994), as amended
by Amendment No. 1 (incorporated by reference from Appendix I to the Company's
Proxy Statement dated December 9, 1994), by a letter agreement dated as of
February 28, 1995 among the Company, Bruncor Inc. and Vestex Corporation
(incorporated by reference from Exhibit 10(t) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1994), by Amendment No. 3
to Recapitalization and Stock Purchase Agreement dated as of July 14, 1995
by and among the Company, Bruncor Inc., and Vestex Corporation (incorporated by
reference from Exhibit 1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on August 4, 1995 and dated July 25, 1995), and by Amendment
No. 4 to Recapitalization and Stock Purchase Agreement dated as of July 14, 1995
by and among the Company, Bruncor Inc., and Vestex Corporation (incorporated by
reference from Exhibit 1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on April 22, 1996 and dated April 12, 1996).
10.2 Loan Reduction and Purchase and Assignment Agreement dated as of April
4, 1997 among the Company, Chancellor Fleet Corporation, Chancellor Financial
Sales Service, Inc., Chancellor Fleet Remarketing, Inc., Chancellor Asset
Corporation, Chancellor Financialease, Inc., Valmont Financial Corporation,
Chancellor DataComm, Inc., Alco 474N Trust, Cains 931D Trust, Cains 931E Trust,
Chrysler Bo4E Trust, Conagra 25405 Trust, Conagra 25409 Trust, Dallas 38329
Trust, H.E. Butt 796C Trust, Kraft 79328 Trust, Savrn B063 Trust, Saturn B067
Trust, Shamrock 25748 Trust, Tyler 3Mo Trust, Whirlpool 49434 Trust, Fleet
National Bank and VESTEX Capital Corporation.
10.3 *1994 Stock Option Plan, adopted by the Board of Directors of the
Company on August 12, 1994 and approved by the Stockholders of the Company on
January 20, 1995 (incorporated by reference from Appendix III to the Company's
Proxy Statement dated December 9, 1994).
10.4 *1994 Directors' Stock Option Plan, adopted by the Board of Directors
of the Company on August 12, 1994 and approved by the Stockholders of the
Company on January 20, 1995 (incorporated by reference from Appendix III to the
Company's Proxy Statement dated December 9, 1994) and as amended by the Board of
Directors of the Company on December 30, 1996 and approved by the Stockholders
of the Company on August 29, 1997 (incorporated by reference from Appendix III
to the Company's Proxy Statement dated July 30, 1997.
10.5 *1994 Employee Stock Purchase Plan, adopted by the Board of Directors
of the Company on August 12, 1994 and approved by the Stockholders of the
Company on January 20, 1995 (incorporated by reference from Appendix IV to the
Company's Proxy Statement dated December 9, 1994).
<PAGE>
10.6 *1997 Stock Option Plan, adopted by the Board of Directors of the
Company on March 20, 1997 and approved by the stockholders of the Company on
August 29, 1997 (incorporated by reference from Appendix III to the Company's
proxy statement dated July 30, 1997), and as amended by the Board of Directors
of the Company on April 1, 1998 and approved by the stockholders of the Company
on May 15, 1998 (incorporated by reference from Appendix III to the Company's
proxy statement dated April 9, 1998).
10.7 $200,000 Subordinated Promissory Note dated as of July 25, 1995 by the
Company in favor of Bruncor, Inc. (incorporated by reference from Exhibit 3 to
the Company's Form 8-K filed with the Securities and Exchange Commission on
August 4, 1995 and dated July 25, 1995).
10.8 Specimen of Final Form of Warrant to Purchase Common Stock of
Chancellor Corporation issued by the Company on April 1, 1998 to VESTEX Capital
Corporation.
10.9 Consulting Agreement, dated July 1, 1998, by and among the Company and
VMI Corporation.
10.11 Stock Redemption Agreement, dated August 7, 1998, by and among the
Company and VESTEX Capital Corporation.
10.21 Promissory Note, dated December 22, 1998, in the original principal
amount of $3,475,000 from Chancellor Corporation to Vestex Capital Corporation.
10.22 Security Agreement, dated as of December 22, 1998, by and among
Chancellor Corporation and Vestex Capital Corporation.
10.23 Employment Agreement, dated October 1, 1998, by and among Chancellor
Corporation and Franklyn E. Churchill.
16(a) Letter dated January 9, 1997, from Deloitte & Touche LLP (incorporated
by reference from Exhibit to the Company's Amendment No. 1 to Form 8-K filed
with the Securities and Exchange Commission on January 13, 1997 and dated
December 6, 1996).
21 Subsidiaries of the Company (incorporated by reference from Exhibit 21 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
23.1 Independent Auditor's Consent - Metcalf, Rice, Fricke and Davis
23.2 Independent Auditors' Consent - Reznick Fedder & Silverman
27.1 Financial Data Schedule for year ended December 31, 1998.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
<PAGE>
Copies of these exhibits are available to stockholders of record at a
charge of $.09 per page, plus postage upon written request. Direct requests to:
Jon Ezrin, Treasurer, Chancellor Corporation, 210 South Street, Boston, MA
02111.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated February 10, 1999
Current Report on Form 8-K, dated March 4, 1999
Current Report on Form 8-K/A, dated March 22, 1999
Current Report on Form 8-K/A, dated April 13, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Chancellor Corporation
We have audited the accompanying consolidated balance sheet of Chancellor
Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Chancellor Corporation and subsidiaries for the year ended
December 31, 1997 were audited by other auditors whose report dated March 27,
1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ METCALF RICE FRICKE & DAVIS
Atlanta, Georgia
April 13, 1999, except for Notes 7, 10,
14 and 18 which are as of December 30, 1999.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Chancellor Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, and the results of operations and cash
flows of Chancellor Corporation and its subsidiaries for the year ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Boston, Massachusetts
March 18, 1998, except for Note V
which is as of March 27, 1998
. F2
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
1998
--------------
<S> <C>
ASSETS
Cash and cash equivalents $ 612
Receivable, net 2,880
Inventory 36
Net investment in direct finance leases 359
Equipment on operating lease, net of accumulated depreciation
of $2,351 702
Residual values, net 219
Furniture and equipment, net of accumulated depreciation
of $1,221 807
Other investments 1,000
Intangibles, net 111
Other assets, net 1,460
--------------
Total Assets $ 8,186
==============
Liabilities and Stockholder's Equity
Accounts payable and accrued expenses $ 3,572
Deferred revenue 1,068
Indebtedness:
Nonrecourse 889
Recourse 295
--------------
Total Liabilities 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
Convertible Series B, 2,000,000 shares authorized,
none issued and outstanding -
Common stock, $.01 par value; 75,000,000 shares authorized,
38,541,895 shares issued and outstanding 385
Additional paid-in capital 29,943
Accumulated deficit (28,016)
--------------
Total Stockholder's Equity 2,362
--------------
Total Liabilities and Stockholder's Equity $ 8,186
==============
</TABLE>
The accompanying notes are and integral part
of these condensed consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
December 31,
1998 1997
----------- ------------
<S> <C> <C>
REVENUES:
Transportation equipment sales $ 6,165 $ -
Rental income 942 870
Lease underwriting income 74 293
Direct finance lease income 110 272
Interest income 195 44
Gains from portfolio remarketing 1,374 801
Fees from remarketing activities 1,407 1,488
Other income 441 665
----------- ------------
$ 10,708 $ 4,433
----------- ------------
COSTS AND EXPENSES:
Cost of transportation equipment sales 5,647 -
Selling, general and administrative 3,949 6,412
Interest expense 111 281
Depreciation and amortization 477 459
----------- ------------
10,184 7,152
----------- ------------
Earnings before taxes 524 (2,719)
----------- ------------
Provision for income taxes - 13
Income (loss) before extraordinary item 524 (2,732)
----------- ------------
Extraordinary item - gain on debt forgiveness - 930
Net income $ 524 $ (1,802)
----------- ------------
Basic net income per share:
Income (loss) before extraordinary item $ 0.02 $ (0.18)
Extraordinary item - 0.06
----------- ------------
Net income (loss) $ 0.02 $ (0.12)
=========== ============
Shares used in computing basic net income (loss) per share 32,195,162 15,224,432
</TABLE>
The accompanying notes are and integral part
of these condensed consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
Preferred Stock Common Stock Additional Treasury Stock Stockholders
----------------- ------------------- Paid - In Accumulated -------------------- Equity
Shares Amount Shares Amount Capital Deficit Shares Amount (Deficit)
------- -------- -------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, 1/1/97 5,000 $ 50 6,567 $ 65 $ 24,609 $(26,738) 1,431 $ (536) $ (2,550)
Preferred stock
Series A issued 711 7 1,343 1,350
Preferred stock
Series AA issued 3,000 30 20,250 870 900
Common stock issued 203 2,123 2,326
Exercise of stock
options 15 3 3
Retirement of treasury
stock (1,431) (14) (522) (1,431) 536 ----
Net loss (1,802) (1,802)
------- -------- -------- --------- --------- --------- --------- --------- ----------
BALANCE, 12/31/97 8,711 87 25,401 254 28,426 (28,540) ----- ---- 227
Preferred stock,
Series A converted
to common stock (711) (7) 7,105 71 (64) ----
Preferred stock,
Series AA converted
to common stock (3,000) (30) 3,000 30 ---- ----
Common stock issued 2,146 21 1,296 1,317
Exercise of stock
options 892 9 284 293
Additional paid in
capital 1 1
Net income 524 524
------- -------- -------- --------- --------- --------- --------- --------- ----------
BALANCE, 12/31/98 5,000 $ 50 38,544 $ 385 $ 29,943 $(28,016) $ ---- $ ---- $ 2,362
======= ======== ======== ========= ========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are and integral part
of these condensed consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 524 $(1,802)
-------- --------
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 477 459
Residual value estimate realizations and
reductions, net of additions 246 283
Gain on debt forgiveness - (930)
Changes in assets & liabilities:
Receivables (2,213) 1,896
Inventory (36) -
Accounts payable & accrued expenses (2,334) 1,813
Increase in deferred revenue 1,053 15
-------- --------
(2,807) 3,536
-------- --------
Net cash (used in) provided by operating activities (2,283) 1,734
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting 502 729
Net investments in direct finance leases 162 227
Equipment on operating lease (588) 59
Other investments - (185)
Net change in cash restricted and escrowed 2,419 1,134
Additions to furniture and equipment, net (172) (1,018)
Net change in other assets (1,377) 141
-------- --------
Net cash provided by investing activities 946 1,087
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in indebtedness - nonrecourse 688 40
Increase in indebtedness - recourse 755 1,879
Repayments of indebtedness - nonrecourse (327) (701)
Repayments of indebtedness - recourse (875) (3,966)
Issuance of common stock, net 1,611 3
-------- --------
Net cash provided by financing activities 1,852 (2,745)
-------- --------
- -------------------------------------------------------------------
Net increase in cash and cash equivalents 515 76
Cash and cash equivalents at beginning of period 97 21
-------- --------
Cash and cash equivalents at end of period $ 612 $ 97
======== ========
</TABLE>
The accompanying notes are and integral part
of these condensed consolidated financial statements
F-6
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Business Organization and Significant Accounting Policies
--------------------------------------------------------------
Business
--------
Chancellor Corporation and Subsidiaries (the "Company") are engaged in
(1) buying, selling, leasing and remarketing new and used equipment, primarily
transportation, material handling and construction equipment, (2) managing
equipment on and off-lease, and (3) arranging equipment-related financing. The
Company's primary market has historically been the United States. During 1998,
the Company expanded its market presence to include minor activities in
international markets such as Russia and the Republic of South Africa.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts,
transactions and profits and losses have been eliminated in consolidation.
Accounting for Estimates
- --------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These assumptions could change based on future experience
and, accordingly, actual results may differ from these estimates.
Revenue Recognition
--------------------
Transportation equipment sales - Revenues on transportation equipment sales
is recognized in the period in which the sale is completed and title is
transferred. Deposits on transportation equipment, that may be required under
certain financing contracts, are shown as deposits on sales and included in
accrued expenses.
Lease underwriting income - Lease underwriting fees arise from the sale of
equipment leasing transactions and include cash underwriting margins and
residual value fees. The excess of the sales price of equipment to an investor
(including the assumption of any nonrecourse indebtedness) over its cost to the
Company represents lease-underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a nonrecourse basis. If the Company elects to sell the transaction (as
opposed to retaining the transaction for its own portfolio), the equipment,
subject to the lease and the borrowing (if any), is then sold to investors.
Consideration for the sale of the leased equipment to investors is normally in
the form of a cash investment.
<PAGE>
Residual value fees arise from the sale of lease transactions to investors.
These fees represent the Company's present value share of the future residual
value of the leased equipment that the Company expects to realize upon
successful remarketing of the equipment. The Company accounts for these
transactions by booking the income during the period in which it is recognized.
Direct finance lease income - Lease contracts which qualify as direct
finance leases are accounted for by recording on the balance sheet minimum lease
payments receivable and estimated residual values on leased equipment less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease, on the basis that produces
a constant rate of return.
Operating leases (Rental Income) - Lease contracts, which qualify as
operating leases, are accounted for by recording the leased equipment as an
asset, at cost. The equipment is then depreciated on a straight-line basis over
two to fifteen years to its estimated residual value. Equipment is further
depreciated below its initial residual value upon release to its estimated
revised residual value at lease expiration. Any changes in depreciable lives
affect the associated expense on a prospective basis. Rental income from
operating leases is recognized using a straight-line method over the initial
term of the lease.
Reimbursable Expenses
----------------------
The Company is entitled to reimbursement of expenses incurred in the remarketing
of certain equipment as outlined in various remarketing agreements. Pursuant to
the terms of the trust agreements, the Company is permitted to charge the trusts
for costs associated with administrating the trust. The reimbursement of these
costs is recorded as a reduction of general and administrative expenses.
Residual Values
----------------
The Company reviews recorded residual values on an annual basis. Write
downs in estimated residual values, due to declines in equipment value or the
financial creditworthiness of individual customers and major industries into
which the Company leases equipment, are recorded when considered other than
temporary. The residual valuation is based on independent valuation of the
equipment held under trust lease and its internal valuation assessments. The
Company also reviews current market analyses and trends of the industry for
comparative valuations.
Cash and Cash Equivalents
----------------------------
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
-------------------------------
The Company maintains its cash balances in several banks. The Federal
Deposit Insurance Corporation insures up to $100,000 of the balances held by
each bank. The Company also has arrangements whereby the funds in excess of
specified cash balances are invested in overnight repurchase agreements and such
overnight investments are collateralized by high-grade corporate debt
securities. As of December 31, 1998, the uninsured portion of the cash balances
held at one bank was approximately $573,000, of which $532,000 was invested in
overnight repurchase agreements.
<PAGE>
Inventory
- ---------
All inventories are valued at the lower of cost or market. The cost of
transportation equipment, including reconditioning parts and other direct costs,
is determined using the specific identification method.
Furniture, Equipment and Leaseholds
- --------------------------------------
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets, typically 3 to 7 years. Leasehold improvements are amortized over the
lease term.
Intangibles
- -----------
Intangibles primarily consist of goodwill, which is amortized over an
estimated life of ten years using the straight-line method.
Income Taxes
-------------
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," requires an asset and liability approach for financial
accounting and reporting for income taxes. In addition, future tax benefits,
such as net operating loss tax carry forwards, are recognized to the extent
realization of such benefits is more likely than not.
Stock-based Compensation
-------------------------
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows the Company to account for stock-based awards
(including stock options) to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No, 25, "Accounting for
Stock Issued to Employees".
Net Income (Loss) per Share
-------------------------------
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net income per share reflects the potential dilution
that could occur from potential common stock such as stock issuable pursuant to
the exercise of stock options outstanding and conversion of debt.
Basic net loss per share amounts are computed based on the weighted average
number of common shares and diluted net loss per share amounts are based on
common and common equivalent shares, when dilutive. Diluted net loss per share
is not presented for 1998 and 1997 since common stock equivalent shares from
convertible preferred stock and from stock options and warrants are
antidilutive.
Supplemental Cash Flow Information
- -------------------------------------
Cash paid for income taxes during 1998 and 1997 was $13,000 and $13,000,
respectively. Interest paid during 1998 and 1997 was $63,000 and $340,000,
respectively.
<PAGE>
Other Investments
- ------------------
The Company accounts for its equity investment of less than 20% ownership in an
investee on a cost basis.
Recent Accounting Pronouncements
----------------------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes
standards for reporting comprehensive income and its components. The
implementation of this SFAS has no material effect on the Company's consolidated
financial statements.
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information", requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or the financial position of the Company
but did affect the disclosure of segment information.
Impact of the Year 2000 Issue
- ----------------------------------
The Company has commenced efforts to assess and, where required, remediate
issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues
arise from computer programs which use only two digits to refer to the year and
which may experience problems when the two digits become "00" in the year 2000.
In addition, imbedded hardware microprocessors may contain time and two-digit
year fields in executing their functions. Much literature has been devoted to
the possible effects such programs may experience in the Year 2000, although
significant uncertainty exists as to the scope and effect the Y2K issues will
have on industry and the Company.
The Company has recognized the need to address the Y2K issue in a comprehensive
and systematic manner and has taken steps to assess the possible Y2K impact on
the Company. Although the Company has not completed a 100% assessment of all
its information technology ("IT") and non-IT systems for Y2K issues, the Company
has completed its assessment of all mission-critical systems. All
mission-critical systems and most of the major applications and hardware have
been assessed to determine the Y2K impact and a plan is in place for timely
resolution of potential issues.
In 1998, the Company developed a strategic plan to identify the IT systems
needed to accomplish the Company's overall growth plans. As part of this
process, Y2K issues were considered and addressed by the Company's senior
management and MIS personnel. Although this plan was intended to modernize the
IT systems, compliance with Y2K requirements were incorporated.
The cost of bringing the Company in full compliance should not result in a
material increase in the recent levels of capital spending or any material
one-time expenses. The Company has spent approximately $152,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending of approximately $300,000 during fiscal 1999 to complete
the modernization of its IT system.
<PAGE>
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 and its vendors' and customer's
operations will not have a material adverse effect on the Company.
Fair Value of Financial Instruments
---------------------------------------
The fair value of the Company's assets and liabilities that constitute
financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments", approximate their recorded amounts.
Risk Management
----------------
The Company is exposed to risks of loss related to torts; theft of, damage to,
and destruction of assets; errors and omissions; injuries to employees; material
disasters; and product liability. The Company carries commercial insurance for
risks of loss.
Foreign Currency Translation
------------------------------
The Company uses the US dollar as its functional currency. Foreign currency
assets are recoverable in US dollars, including equipment lease payments.
However, the Company has recorded an allowance equal to the net book value for
lease receivables from a party in Russia. The effect of any foreign currency
fluctuations is not considered material in these financial statements.
2. Receivables
Receivables consists of the following as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Note receivable $ 1,242
Receivables from trust, net 855
Loans receivable 373
Other notes receivable 137
Accrued rents receivable, net 40
Interest receivable 104
Other receivables 129
-------------
$ 2,880
</TABLE>
<PAGE>
Receivables from trusts include amounts due the Company for cash outlays
associated with the remarketing of equipment of $72,000. These amounts will be
collected upon successful remarketing of such equipment. Additionally,
receivables from trusts include amounts due for costs incurred by the Company
for administration of the trusts in accordance with the trust agreements of
$1,764,000. Collection of costs of administration is not certain due to
numerous factors and is, therefore, included net of the estimated reserve.
Accrued rents represent amounts due from portfolio leases, net of an allowance
of $88,000.
3. Residual Values, Net
----------------------
The Company's lease underwriting income includes consideration in the
residual value sharing arrangements received from originating and selling lease
transactions to investors. The Company, upon remarketing of the equipment at
termination or expiration of the related leases, will realize this type of
consideration (residual values). The Company's share of expected future
residual values is recorded as income at their discounted present value at the
time the underlying leases are sold to investors. Any increases in the
Company's expected residual sharing are recorded as gains upon realization.
Write-down in estimated residual value due to declines in equipment value or the
financial creditworthiness of individual customers and major industries into
which the Company leases equipment, are recorded when considered other than
temporary. The Company evaluates residual values based upon independent
assessments by industry professionals, in addition to already established
internal criteria.
The activity in the residual value accounts for the years ended December
31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
-------------- ------
<S> <C> <C>
Residual values, beginning of year, net $ 465 $ 748
Residual realization (204) (283)
Residual value estimate reduction (42) ----
Residual values, end of year, net $ 219 $ 465
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
-------------- ------
<S> <C> <C>
Residual values, beginning of year, net $ 465 $ 748
Residual realization (204) (283)
Residual value estimate reduction (42) ----
Residual values, end of year, net $ 219 $ 465
</TABLE>
Residual value estimate reductions represent reductions in expected future
residual values on certain equipment, the residuals that were substantially all
recorded prior to 1997. Such reductions resulted from an extensive review and
valuation of all assets owned, leased and managed by the Company. For the years
ended December 31, 1998 and 1997, the Company realized income of approximately
$1,407,000 and $1,488,000, respectively, relating to the remarketing of
equipment for which no residuals were recorded or realized amounts exceeded the
booked residual.
<PAGE>
Aggregate residual value fees expected to be realized as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $ 102
2000 74
2001 8
2002 2
2003 ----
Thereafter 33
------
$ 219
</TABLE>
4. Net Investment in Direct Finance Leases and Equipment on Operating Lease:
------------------------------------------------------------------------
Net investment in direct finance leases consisted of the following as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Minimum lease payments receivable $ 389
Estimated unguaranteed residual values of
leased equipment, net 53
Less: Unearned income (83)
$ 359
</TABLE>
The cost of equipment on operating lease by category of equipment consists
of the following as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Transportation equipment $ 819
Other equipment 2,234
3,053
-------------
Less - accumulated depreciation 2,351
$ 702
</TABLE>
<PAGE>
The aggregate amounts of minimum lease payments to be received from
noncancelable direct finance and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Direct
Year ending December 31: Finance Operating
----------
<S> <C> <C>
1999 $ 195 $ 219
2000 110 34
2001 72 31
2002 8 30
2003 4 30
$ 389 $ 344
</TABLE>
5. Accounts Payable and Accrued Expenses:
-----------------------------------------
Accounts payable and accrued expenses consists of the following as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Trade accounts payable $ 358
Payables to investors 1,361
Contribution payable to New Africa Opportunity Fund 650
Accrued commissions payable 53
Accrued legal and accounting fees 272
Accrued interest payable 95
Other accrued expenses 783
$ 3,572
</TABLE>
6. Early Extinguishment of Intercreditor Loan
----------------------------------------------
In April 1997, the Company executed and delivered (1) the Loan Reduction
and Purchase and Assignment Agreement dated April 1997 among the Company, its
corporate affiliates, a bank, as agent (the "Agent") for the Company's principal
recourse lenders, and VCC, the Company's majority shareholder; (2) release in
favor of the principal recourse lenders to be given by VCC and Brian M. Adley,
Chairman of the Board of Directors of the Company and President of VCC,
individually; (3) release in favor of the principal recourse lenders to be given
by the Company, its corporate affiliates and/or subsidiaries, in favor of VCC.
Coterminous with this transaction, both the intercreditor loan and secured
inventory loan were repaid in advance of their respective terms. The aggregate
amount of this debt on the repayment date was approximately $1,906,000, of which
approximately $976,000 was paid in cash and the balance of $930,000 was
forgiven. In addition, the Company paid approximately $22,000 in legal and bank
fees to complete this transaction.
<PAGE>
7. Non-Recourse and Recourse Debt
---------------------------------
Non-recourse indebtedness consists of notes payable to banks and financial
institutions arising from assignments of the Company's rights, (most notably the
right to receive rental payments) as lessor, at interest rates ranging from 7.8%
to 13.6%. Amounts due under nonrecourse notes are obligations of the Company,
which are secured only by the leased equipment, and assignments of lease
receivables, with no recourse to any other assets of the Company. The Company
is at risk, however, for the amount of residual value booked on equipment for
its own portfolio in the event of a lessee default.
Aggregate future maturities of non-recourse debt as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $698
2000 87
2001 91
2002 13
---
$889
====
</TABLE>
Recourse debt consists of the following as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Promissory note payable to the Company's majority
stockholder, bearing interest at the prime rate (7.75% at
December 31, 1998) plus 2%, principal and accrued interest
payable December 31, 2001, secured by substantially
all of the assets of the Company. $ 39
Subordinated promissory note payable to a former
stockholder of the Company, bearing interest at the prime
rate (7.75% at December 31, 1998) plus 1%, principal and
accrued interest payable on demand. 200
Equipment line of credit with two leasing companies, aggregate
monthly payments of $2,183 and leases expiring from
November 2000 to January 2001 56
295
Less - current portion 220
--------
$ 75
============
</TABLE>
<PAGE>
Aggregate future maturities of recourse debt as of December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $220
2000 23
2001 46
2002 6
---
$295
====
</TABLE>
8. Income Taxes
-------------
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ------
<S> <C> <C>
Current:
Federal $---- $----
State ---- 13
Deferred:
Federal ---- ----
State ---- ----
$---- $ 13
</TABLE>
A reconciliation of the rate used for the provision (benefit) for income taxes
is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Tax benefit at statutory rate 34.0% 34.0%
Net operating loss carry forward benefit for which
utilization is not assured and other items (34.0) (34.0)
0.0% 0.0%
</TABLE>
The Company files consolidated federal income tax returns with all of its
subsidiaries. As of December 31, 1998, the Company has net operating loss carry
forwards of approximately $21,771,000 available for federal tax purposes, which
expire in the years 2001 through 2012. In addition, at December 31, 1998, the
Company has investment tax credit carry forwards for federal income tax purposes
available to offset future taxes of approximately $1,855,000 expiring in the
years 1999 through 2002 and minimum tax credit carry forwards for federal income
tax purposes available to offset future taxes of approximately $135,000 which do
not expire. For federal tax purposes, utilization of net operating losses and
tax credit carry forwards will be limited in future years as a result of a
greater than 50% change in ownership which occurred in July 1995.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carry forwards.
<PAGE>
The tax effects of significant items comprising the Company's net deferred tax
liability as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ 189
Deferred tax assets:
Reserves not currently deductible 552
Net operating loss carry forwards 8,708
Tax credit carry forwards 1,990
Other 1,000
Total deferred tax assets 11,248
--------------
11,059
--------------
Valuation allowance (11,059)
Net deferred tax liability $ ----
=============
</TABLE>
All deferred tax liabilities and deferred tax assets (except tax credit
carry forwards) are tax effected at the enacted rates for state and federal
taxes. The valuation allowance relates primarily to net operating loss carry
forwards and tax credit carry forwards that may not be realized. The valuation
allowance decreased by $940,000 in 1998. For the year ended December 31, 1997
the valuation allowance decreased by $1,050,000.
The deferred tax asset is available to offset taxable income in excess of
book income generated from the lease portfolio and residual values, which are
the principal components of the total deferred tax liabilities of $189,000 as of
December 31, 1998. The deferred tax asset, net of the deferred tax liability,
has been fully reserved as of December 31, 1998.
9. Stockholders Equity
--------------------
The Preferred Stock issued by the Company carries certain preferences and
rights as discussed below. Each share of Preferred Stock is entitled to the
number of votes equal to the number of whole shares of Common Stock into which
the share of the Preferred Stock held are then convertible. The holders of the
Preferred Stock shall be entitled to receive cash dividends only to the extent
and in the same amounts as dividends are declared and paid with respect to
Common Stock as if the Preferred Stock has been converted to Common Stock in
accordance with the provisions related to conversion. Preferences specific to
each series are as follows:
Series AA - convertible into one share of Common Stock for each share of
Preferred Stock and has a liquidation preference of $.50 per share.
Series B - convertible into ten shares of Common Stock for each share of
Preferred Stock and has a liquidation preference of $2.00 per share.
<PAGE>
10. Stock Option Plans and Stock Purchase Plan
------------------------------------------------
The Company has three stock option plans: a 1994 Stock Option Plan, a 1994
Directors' Stock Option Plan and a 1997 Stock Option Plan.
The Company's stock option plans provide for incentive and nonqualified
stock options to purchase up to an aggregate of 7,207,000 shares of the
Company's Common Stock which may be granted to key contributors of the Company,
including officers, directors, employees and consultants. The options are
generally granted at the fair market value of the Company's Common Stock at the
date of the grant, vest over a five-year period, are exercisable upon vesting
and expire five years from the date of grant.
Information with respect to the stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
1994 1994 1997 1983 Average
Stock Directors Stock Stock Exercise
Option Plan Option Plan Option Plan Option Plan Price
------- -------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1996 1,081,466 329,500 --- 3,244 $. 18
------------ ------------ ------------ --------- ----
Options granted 775,000 337,500 2,245,000 .51
Options exercised (15,000) ---- ---- ---- .15
Options canceled and expired (973,716) --- ---- ---- .18
Options canceled and reissued 3,244 ---- ---- (3,244) .01
Outstanding, December 31, 1997 870,994 667,000 2,245,000 ---- .49
Options granted 355,991 ---- 1,911,500 ---- .52
Options exercised (384,583) (40,000) (467,000) ---- .33
Options canceled and expired (59,985) ---- (952,500) ---- .52
Outstanding, December 31, 1998 782,417 627,000 2,737,000 ---- $.54
</TABLE>
<PAGE>
Additional information regarding options outstanding as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Average Contractual Life
Exercise Number Exercisable Options Date of Expiration
Price of Shares
- ---------- ---------------------------------
<S> <C> <C> <C> <C>
0.01 1,917 5.00 1,917 2002
- ---------- --------------------------------- ------------------- ------------------ -----------
0.05 112,500 8.00 112,500 2006
0.06 112,500 8.00 112,500 2006
0.10 364,000 4.75 267,000 2003 - 2004
0.13 27,911 2.59 27,911 2001
0.16 5,000 2.59 5,000 2001
0.19 27,589 2.59 27,589 2001
0.20 675,000 6.15 475,000 2004 - 2007
0.25 602,000 6.13 177,000 2004 - 2005
0.30 40,000 4.75 40,000 2003
0.50 591,333 6.64 ---- 2005 - 2006
0.60 40,000 5.75 ---- 2004
0.70 120,000 7.34 ---- 2004 - 2008
0.71 10,000 5.75 ---- 2004
0.75 588,333 7.64 ---- 2006 - 2007
0.80 30,000 7.75 ---- 2004 - 2008
0.81 10,000 6.75 ---- 2005
0.91 10,000 7.75 ---- 2006
1.00 678,334 9.09 ---- 2007 - 2008
1.01 10,000 8.75 ---- 2007
1.11 10,000 9.75 ---- 2008
1.50 40,000 8.75 ---- 2007 - 2008
2.00 40,000 8.75 ---- 2007 - 2008
4,146,417 1,246,417
</TABLE>
Pro forma information. The Company has elected to follow APB Opinion No.
------------------------
25; "Accounting for Stock Issued to Employees," in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, because the exercise price of
the Company's employee stock options equal or exceeds the market price of the
underlying stock on the date of the grant, no compensation expense is recognized
in the Company's financial statements. SFAS No. 123 requires the disclosure of
pro forma net income (loss) and earnings per share as if the Company had adopted
the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the
fair value of stock options to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly differs from the
calculated values.
<PAGE>
The Company's calculations were made using the Black-Scholes option pricing
model with the weighted average assumptions: expected life, 48 months following
vesting; stock volatility 200% in 1998 and 1997; risk free interest rate, 8%, in
1998 and in 1997 and no dividends during the expected term. The forfeitures of
the options are recognized as they occur. If the computed fair values of the
1997 and 1998 awards had been expensed over the vesting period of the awards,
the pro forma net income in 1998 would have been $547,000 or $0.01 per share and
the pro forma net loss in 1997 would have been $1,850,000 or $0.12 per share.
Employee Stock Purchase Plan
- -------------------------------
The Company's 1994 Employee Stock Purchase Plan authorizes the offering to
employees of up to 250,000 shares of Common Stock in six semiannual offerings at
a price of 85% of the Common Stock's bid price and in an amount determined by a
formula based on each employee's estimated annual compensation. The Company's
stockholders authorized this plan in January 1995. No shares of Common Stock
have been offered pursuant to the plan to date.
The Company has reserved 250,000 shares of Common Stock for all amounts
that may be offered to employees under this plan.
Stock Warrants
---------------
During 1998, the Company's majority shareholder has allocated 3,300,000
shares to employees of the Company under various stock purchase warrant
agreements.
Information with respect to these stock warrants is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------- ---------------
<S> <C> <C>
Outstanding, December 31, 1997 ----- $ ----
Warrants granted 3,300,000 .682
Warrants exercised ----- -----
Warrants forfeited ----- -----
Outstanding, December 31, 1998 3,300,000 $ .682
---------------- ---------------
</TABLE>
<PAGE>
Additional information regarding options outstanding as of December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Warrants Outstanding
--------------------
OPTIONS EXERCISABLE
-------------------
NUMBER WEIGHT-AVG NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHT-AVG EXERCISABLE WEIGHT-AVG
EXERCISE PRICES AT 12/31/98 LIFE EXERC-PRICE AT 12/31/98 EXERC PRICE
----------- -----------
<S> <C> <C> <C> <C> <C>
0.10 550,000 6.36 0.10 550,000 0.10
0.25 650,000 7.46 0.25 650,000 0.25
0.50 800,000 8.50 0.50 800,000 0.50
0.75 200,000 9.00 0.75 200,000 0.75
1.00 180,000 6.00 1.00 180,000 1.00
1.10 180,000 7.00 1.10 180,000 1.10
1.25 380,000 9.05 1.25 380,000 1.25
1.50 180,000 9.00 1.50 180,000 1.50
2.00 180,000 10.00 2.00 180,000 2.00
------------------- ---------- ----------- ----------- -----------
3,300,000 7.92 0.682 3,300,000 0.68
</TABLE>
Pro forma information As noted above The Company has elected to follow APB
----------------------
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for
the Warrants because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation",
requires the use of option valuation models that were not developed for use in
valuing these warrants. These warrants have been properly recorded within APB
25 and have resulted in a $939.00 compensation expense to the Company during
1998. SFAS No. 123 requires the disclosure of pro forma net income (loss) and
earnings per share as if the Company had adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock options to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the stock warrants. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly differs from the calculated values.
The Company's calculations were made using the Black-Scholes option pricing
model using the same assumptions utilized for the stock option plans discussed
above. The forfeitures of the warrants are recognized as they occur. If the
computed fair values of the warrants had been expensed over the vesting period
of the awards, the pro forma net loss in 1998 would have been $128,000
11. Major Customers
----------------
The Company is engaged principally in originating and selling equipment
leasing transactions. During 1998, 31% (based on original equipment cost) of
the new lease transactions originated by the Company were with the one largest
lessee (Wal-Mart). In addition, approximately 40% and 31% (based on original
equipment cost) of equipment sold to investors in 1998 were purchased by the two
largest investors. During 1997, 92% (based on original equipment cost) of the
new lease transactions originated by the Company were with the one largest
lessee. In addition, approximately 55% and 37% (based on original equipment
cost) of equipment sold to investors in 1997 were purchased by the two largest
investors.
<PAGE>
12. Employee Benefit Plan
-----------------------
The Company sponsors a 401(k) retirement plan (the "Plan") for the benefit
of its employees. The Plan enables employees to contribute up to 15% of their
annual compensation. The Company's contributions to the Plan, up to a maximum of
$500 per participating employee, amounted to approximately $11,000 and $18,000
in 1998 and 1997, respectively.
13. Other Investment
-----------------
Other investment includes a $1 million equity investment in the New Africa
Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund with the
backing of the Overseas Private Investment Corporation ("OPIC") created to make
direct investments in emerging companies throughout sub-Saharan Africa. Capital
contributions are payable within 10 business days of a capital call pursuant to
the terms of the partnership agreement. As of December 31, 1998, the Company
funded $350,000 of a $1 million commitment for its 2.5% interest in NAOF and the
remaining obligation of $650,000 is included in accounts payable and accrued
expenses.
14. Related Party Activities
--------------------------
During 1998, VCC investigated numerous strategic alliances and merger and
acquisition opportunities on behalf of the Company. In connection with this
activity, VCC was instrumental in the negotiation and consummation of the Lease
Servicing Agreement entered into on November 1, 1998 among Chancellor Leasing
Services, Riviera Finance - East Bay and United Capital and Finance LLC. VCC
continues to negotiate and manage the Company's financing, acquisition and
investment efforts in the Republic of South Africa and other international
opportunities. VCC was instrumental in the development and implementation of
the strategy to buy-out and acquire investment grade transportation equipment
portfolios. As a result of this strategy, the Company acquired portfolios
valued at an original equipment cost of approximately $22,000,000. The
acquisition of these portfolios was further facilitated by VCC assisting in
arranging approximately $8,000,000 of financing to effect the portfolio buy-out.
In connection with the lease recovery project the Company capitalized costs
charged by VCC of approximately $1,000,000, which currently represents approx-
imately 10% of the expected recovery costs. These costs are being
amortized over the expected recovery period of the leases, which averages
approximately 24 to 36 months and amounted to approximately $48,000 for
1998.
<PAGE>
VCC was also instrumental in recruiting and attracting key employees to the
Company. Additionally, VCC provided these key employees warrants to purchase
Chancellor common stock, beneficially owned by VCC and valued at approximately
$1,752,300 as of December 31, 1998. VCC's activities provided sources of
funding to the Company of approximately $6,500,000, and $300,000 for fees for
services and reimbursable expenses, respectively, converted into debt and equity
instruments of the Company. This included the purchase of 1,946,146 shares of
the Company's common stock at a price of $.69 per share. Additionally, VCC
infused approximately $755,000 cash into and $670,000 paid on behalf of the
Company during 1998. As a result, in part, of VCC's activities and services
provided, the Company's net worth increased to $2,362,000 at December 31, 1998
from $227,000 as of December 31, 1997 and from an approximate $12,000,000
negative net worth as of December 31, 1996. During 1998, in connection with
VMI's consulting agreement for the various activities as previously discussed,
VMI received cash payments of approximately $470,000. The Company recorded
consulting expenses of approximately $461,000.
Chancellor has entered into two lease transactions with Kent International
("Kent"); a company owned 50 percent by a director of the Company. Total
original equipment cost for these transactions amount to approximately $144,000.
During 1997, the Company loaned Kent $128,500. The loan is repaid in equal
monthly installments of $5,296 and matures December 1999. The loan bears
interest at 15 percent per annum. As of December 31, 1998, Kent was in default
of the loan. As of December 31, 1998, the outstanding balance on the loan is
approximately $62,000.
15. Commitments and Contingencies
-------------------------------
The Company rents its corporate offices under a five-year non-cancelable
lease. In addition, the Company leases regional marketing offices at three
locations along the east coast. The future minimum rental commitments are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $359
2000 300
2001 233
2002 201
2003 102
1,195
</TABLE>
Rental expense, net of abatements, for the years ended December 31, 1998
and 1997 amounted to approximately $421,000, and $194,000, respectively.
The Company undertook a review of its trust portfolio, including
consultation with legal counsel and industry consultants, and determined that it
had not been recovering costs associated with administering the trusts.
Management's review determined that approximately $22,000,000 of costs for
periods prior to 1997 had not been recovered from the trusts. The Company has
recorded approximately $1,498,000 and $994,000 of cost recoveries in the years
ended December 31, 1998 and 1997, respectively. For periods prior to 1997,
$1,868,000 was recovered. Management makes no representations concerning the
Company's ability to recover any further costs for periods prior to 1997 or
thereafter. Further recoveries for periods prior to 1997 are contingent upon
the current status of the specific trusts and the Company's level of recovery
efforts. Consequently, the Company will record any further recoveries as income
in the period in which collection is assured.
<PAGE>
16. Legal Proceedings
------------------
As of 12/1/99, all material litigation involving the Company has been
settled and grievances have been resolved. The Company is involved in routine
legal proceedings incidental to the conduct of its business. Management
believes that none of these legal proceedings will have a material adverse
effect on the financial condition or operations of the Company.
17. Operating Segments
-------------------
The Company operates in two primary business segments: 1) sales of
transportation equipment and 2) leasing activity, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997
- --------------------------------------------------- -------------------------
<S> <C> <C>
Sales of Transportation Equipment:
- ---------------------------------
Revenues $ 6,165 $----
Cost and expenses:
Cost of transportation equipment 5,647 ----
Selling, general and administrative $ 278 ----
$ ----- ----
$ 5,925
===== ====
Income from sales of transportation equipment $ 240 $----
===== ====
Total transportation equipment assets
As of December 31, 1998 $ 36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997
------------------------- ------
<S> <C> <C>
Leasing Activity
- ----------------
Revenues:
Leasing activity $ 3,907 $3,724
Interest income 195 44
Other income 441 665
4,543 4,433
Costs and expenses:
Selling, general and administrative 3,671 6,412
Interest expense 111 281
Depreciation and amortization 477 459
4,259 7,152
Income (loss) from leasing activity $ 284 ($2,719)
===== =======
Total leasing assets as of December 31, 1998 $ 3,648
Income (loss) before extraordinary item and
provision (benefit) for income taxes $ 524 ($2,719)
</TABLE>
Domestic and Foreign Operations
The Company has foreign operating segments in Russia and the Republic of South
Africa. Operating income from these operations for the year ended December 31,
1998 was approximately $13,000 in Russia and $96,000 in the Republic of South
Africa. Foreign assets and U.S. assets collateralized by equipment in Russia
and the Republic of South Africa are approximately $3,902,000 as of December 31,
1998. The assets, which include intangibles and a note receivable, are
recoverable or collectable in U.S. dollars.
18. Subsequent Event
-----------------
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement, dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk
Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively
"Tomahawk"). The Management Agreement provided CAM with effective control of
Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of
the outstanding capital stock of Tomahawk from the two (2) sole shareholders
(the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the
"Agreement") dated January 29, 1999.
F-26
<PAGE>
Principles of proforma information The proforma consolidating balance
-------------------------------------
sheet and statement of operations include the accounts of Chancellor Corporation
and its wholly owned subsidiaries and MRB, Inc. All significant intercompany
accounts, transactions, and profits and losses have been eliminated in the
proforma financial statements.
Said transaction has been accounted for at its formal closing in January
1999, the evaluation being based on $.65 per share as opposed to the previous
$.96 per share. As previously noted the Company had been contractually liable
for liabilities of approximately $11,194,000. The Company had initially filed
its 10K in April 1999. Said 10K included Tomahawk consolidated with the Company
(as of August 1998), however, this 10K has been revised to reflect Tomahawk as
of January 1999. The following financial statements are Pro-Forma only, and the
consolidated statement of operations reflect Tomahawk for five months beginning
August 1998, and 12 months for Chancellor Corporation.
Revenue RecognitionTransportation Equipment Sales- Revenues on MRB, Inc.
--------------------
transportation equipment sales is recognized in the period in which the sale is
complete and title is transferred. Deposits on transportation equipment, that
may be required under certain financing contracts, are shown as deposits on
sales and included in accrued expenses.
Inventory MRB, Inc. inventory is valued at the lower of cost or market.
---------
The cost of transportation equipment, including reconditioning parts and other
direct costs, is determined using the specific identification method.
Tomahawk excess purchase price The acquisition of MRB, Inc. was accounted
-------------------------------
for under the purchase method of accounting. As previously reported in the
April, 1999 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 in 1999
and will be amortized in the beginning of February, 1999 over a period of five
to twenty years.
Net Income per share Basic net income per share is computed by dividing
-----------------------
net income available to common stockholders by the weighted average number of
common shares outstanding for the period, including the MRB, Inc. shares issued.
Diluted net income per share is not presented for the 1998 proforma financial
statements since common stock equivalent shares from convertible preferred stock
and from stock options and warrants are antidilutive.
Revolving Lines of Credit During 1994, and prior to its acquisition by the
-------------------------
Company, Tomahawk entered into a revolving line of credit agreement with a
financial institution whereby Tomahawk can borrow up to $7,500,000 to floor plan
used transportation equipment inventory. The maximum amount outstanding during
1998 was $7,500,000. In addition, during 1998, Tomahawk entered into a
financing agreement with the same institution to floor plan additional used
transportation equipment inventory in the approximate amount of $4,500,000.
Interest is accrued monthly at the financial institution's prime plus .75 to 1.5
percent, depending on the floor planned inventory amounts. The effective rate
of interest at December 31, 1998 was 9.7 percent. The aggregate principal
balance outstanding on the revolving line of credit and the financing agreement
as of December 31, 1998 was approximately $9,063,000. The Company, in
connection with the Tomahawk acquisition, assumed the obligation pursuant to
this revolving line of credit and financing agreement. The evolving line of
credit and financing agreement are both personally guaranteed by the selling
stockholders of Tomahawk.
Notes Payable
--------------
Notes payable consists of the following as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
-------------
<S> <C>
Unsecured notes payable to individuals due on demand
including interest at 10 percent per annum. . . . . . . . . $ 256
Unsecured notes payable to selling stockholders of Tomahawk,
including interest payable at 10 percent. . . . . . . . . . 200
Notes payable to a bank, payable in various monthly
installments including interest at the prime rate (7.75% at
December 31, 1998) plus 2%, secured by automobiles
financed by the Company.. . . . . . . . . . . . . . . . . . 113
Note payable to a financial institution, payable in monthly
installments of $4,135 including interest at a rate of 10
percent per annum, due February 15, 1999, secured by
automobiles and equipment.. . . . . . . . . . . . . . . . . 4
Bridge loan payable to a financial institution providing for
maximum borrowings up to $400,000 for working capital
purposes, interest payable monthly at the rate of 10.5
percent per annum, principal balance due on March 27, 1999. 157
Various notes payable to a financial institution, payable in
monthly installments of $2,753 including interest at rates
of 9 and 10 percent per annum, due from September 2001
to May 2003, secured by automobiles and equipment.. . . . . 97
-------------
827
Less - current portion . . . . . . . . . . . . . . . . . . . . 706
-------------
827
$ 121
=============
</TABLE>
Aggregate annual maturities of notes payable as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999. . . . . . . . $706
2000. . . . . . . . 64
2001. . . . . . . . 34
2002. . . . . . . . 17
2003. . . . . . . . 6
----
827
====
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION
PROFORMA CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
(In Thousands)
MRB MRB
CONSOL CONSOL CHANCELLOR
CHANCELLOR MRB COMBINED ENTRY #1 ENTRY #2 CONSOLIDATED
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents 612 32 644 644
Accounts receivable 2,880 375 3,255 3,255
Inventory 36 10,721 10,757 10,757
Net investment in direct finance lease 359 359 359
Equipment on operating lease, net 702 702 702
Residual values, net 219 219 219
Property, plant & equipment, net 807 191 998 998
Intangibles 111 111 111
Other investments 1,000 1,000 1,000
Other assets 1,460 149 1,609 1,609
Tomahawk excess purchase price - (274) 2,925 2,651
-
----------- ------ --------- --------- -------- -------------
8,186 11,468 19,654 (274) 2,925 22,305
=========== ====== ========= ========= ======== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses 3,572 1,304 4,876 4,876
Deferred revenue 1,068 1,068 1,068
Revolving credit line 9,063 9,063 9,063
Notes payable 827 827 827
Non recourse debt 889 889 889
Recourse debt 295 295 295
- -
----------- ------ --------- --------- -------- -------------
5,824 11,194 17,018 - - 17,018
----------- ------ --------- --------- -------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, Series AA 50 50 50
Common Stock 385 80 465 (80) 45 430
APIC 29,943 29,943 2,880 32,823
(28,016) 194 (27,822) (194) (28,016)
----------- ------ --------- --------- -------------
2,362 274 2,636 (274) 2,925 5,287
----------- ------ --------- --------- -------- -------------
----------- ------ --------- --------- -------- -------------
8,186 11,468 19,654 (274) 2,925 22,305
=========== ====== ========= ========= ======== =============
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION
PROFORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(In Thousands)
CHANCELLOR
CHANCELLOR MRB CONSOLIDATED
REVENUE
<S> <C> <C> <C>
Transportation equipment sales 6,165 18,930 25,095
Rental income 942 942
Lease underwriting income 74 74
Direct finance lease income 110 110
Interest income 195 195
Gains from portfolio remarketing 1,374 1,374
Fees from remarketing income 1,407 1,407
Other 441 441
---------- ------ ------------
10,708 18,930 29,638
========== ====== ============
COST OF SALES:
Cost of transportation equipment sales 5,647 16,084 21,731
Selling, general & administrative 3,949 2,441 6,390
Interest 111 142 253
Depreciation & amortization 477 19 496
---------- ------ ------------
10,184 18,686 28,870
---------- ------ ------------
INCOME BEFORE TAXES 524 244 768
========== ====== ============
Basic Net Income Per Share 0.02
============
</TABLE>
F-29
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
Dated: January 4, 2000
By: /s/ Brian M. Adley
------------------------------
Brian M. Adley
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: January 4, 2000 By: /s/ Brian M. Adley
------------------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
Dated January 4, 2000
By: /s/ Franklyn E. Churchill
------------------------------
Franklyn E. Churchill
President
Dated: January 4, 2000 By: /s/ Rudolph Peselman
------------------------------
Rudolph Peselman
Director
Dated: January 4, 2000 By: /s/ Jonathan C. Ezrin
------------------------------
Jonathan C. Ezrin
Corporate Treasurer
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 612
<SECURITIES> 0
<RECEIVABLES> 2880
<ALLOWANCES> 0
<INVENTORY> 36
<CURRENT-ASSETS> 0
<PP&E> 2028
<DEPRECIATION> 1221
<TOTAL-ASSETS> 8186
<CURRENT-LIABILITIES> 5824
<BONDS> 0
<COMMON> 385
0
50
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8186
<SALES> 10708
<TOTAL-REVENUES> 10708
<CGS> 5647
<TOTAL-COSTS> 10184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> 524
<INCOME-TAX> 0
<INCOME-CONTINUING> 524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
