UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368 - 2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of April 30, 1999, 43,365,536 shares of Common Stock, $.01 par value per
share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $2,500,000)
were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of April 30, 1999 was approximately $9,060,000.
Aggregate market value of the total voting stock of the issuer as of April 30,
1999 was approximately $27,103,000.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
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Page
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Part I. Financial Information
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Item 1 Financial Statements
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Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 2
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Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1999
and 1998 3
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Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1999 and 1998 4
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Notes to Condensed Consolidated Financial Statements 5
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Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
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Part II Other Information 13
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Item 1 Legal Proceedings
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Item 2 Changes in Securities
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Item 3 Defaults Upon Senior Securities
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Item 4 Submission of Matters to a Vote of Security Holders
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Item 5 Other Information
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Item 6 Exhibits and Reports on Form 8-K
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Item 7 Exhibit 11 - Computation of Earnings per Share
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Signatures 14
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2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
(restated) (restated)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,014 $ 612
Receivables, net 4,053 2,880
Inventory 10,201 36
Net investment in direct finance leases 306 359
Equipment on operating lease, net of accumulated depreciation
of $2,344 and $2,351 2,154 702
Residual values, net 205 219
Furniture and equipment, net of accumulated depreciation
of $1,380 and $1,221 917 807
Other investments 1,000 1,000
Intangibles, net 2,710 111
Other assets, net 2,078 1,460
--------- --------
Total Assets $ 24,638 $ 8,186
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 5,402 $ 3,572
Deferred reimbursable expenses 848 1,068
Indebtedness:
Revolving credit line 8,720 - - -
Notes payable 740 - - -
Nonrecourse 765 889
Recourse 2,926 295
--------- --------
Total Liabilities 19,401 5,824
--------- --------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, 5,000,000 shares issued and outstanding 50 50
Convertible Series B, 2,000,000 shares authorized, none
issued and outstanding - - - - - -
Common stock, $.01 par value; 75,000,000 shares authorized,
43,344,493 and 38,541,895 shares issued and outstanding 433 385
Additional paid-in capital 32,677 29,943
Accumulated deficit (27,923) (28,016)
--------- --------
Total Stockholders' Equity 5,237 2,362
--------- --------
Total Liabilities and Stockholders' Equity $ 24,638 $ 8,186
========= ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ----------
(unaudited) (unaudited)
(restated)
Revenues:
<S> <C> <C>
Transportation equipment sales $ 8,968 $ - - -
Rental income 458 96
Lease underwriting income 10 9
Direct finance lease income 15 36
Interest income 80 18
Gains from portfolio remarketing 251 82
Fees from remarketing activities 237 423
Other income 71 18
------------ ------------
Total Revenue 10,090 682
------------ ------------
Costs and expenses:
Cost of transportation equipment sales 7,089 - - -
Selling, general and administrative 2,507 530
Interest expense 66 21
Depreciation and amortization 313 104
------------ ------------
Total Costs and Expenses 9,975 655
------------ ------------
Earnings before taxes on income 115 27
Provision for income taxes 22 - - -
------------ ------------
Net income $ 93 $ 27
============ ============
Basic net income per share $ 0.00 $ 0.00
============ ============
Diluted net income per share $ 0.00 $ 0.00
============ ============
Shares used in computing basic net income per share 43,240,194 25,403,127
============ ============
Shares used in computing diluted net income per share 55,546,453 25,403,127
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
(unaudited) (unaudited)
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 93 $ 27
---------- ----------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 313 104
Residual value estimate realizations and reductions,
net of additions 14 17
Changes in assets and liabilities:
(Increase) decrease in receivables (601) 370
(Increase) in inventory (282) - - -
Increase (decrease) in accounts payable and accrued
expenses 784 (265)
Decrease in deferred reimbursable expenses (220) - - -
---------- ----------
Total adjustments 8 226
---------- ----------
Net cash provided by operating activities 101 253
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases 53 (97)
Equipment on operating lease (1,472) (442)
Net change in cash restricted - - - 2,207
Additions to furniture and equipment, net (162) (40)
Increase in intangibles (4) - - -
Net change in other assets (618) (1,614)
---------- ----------
Net cash (used) provided by investing activities (2,203) 14
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 186 - - -
Increase in notes payable 27 - - -
Borrowings-recourse 3,000 - - -
Repayments of indebtedness-non recourse (117) (88)
Repayments of indebtedness-recourse (369) (32)
Cost of issuance of common stock, related to acquisition (223) - - -
---------- ----------
Net cash provided (used) by financing activities 2,504 (120)
---------- ----------
Net increase in cash and cash equivalents 402 147
Cash and cash equivalents at beginning of period 612 97
---------- ----------
Cash and cash equivalents at end of period $ 1,014 $ 244
========== ==========
Cash paid for interest $ 64 $ 21
========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. The unaudited interim
condensed consolidated financial statements include the accounts of
Chancellor Corporation and each of its subsidiaries ("company's").
Accordingly, the interim statements do not include all of the information
and disclosure required for annual financial statements. In the opinion of
the Company's management, all adjustments (consisting solely of adjustments
of a normal recurring nature) necessary for a fair presentation of these
interim results have been included. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates, based upon the best information available, in
recording transactions resulting from business operations. Intercompany
accounts and transactions have been eliminated. These financial statements
and related notes should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB-A for the year ended December 31,
1998. The balance sheet at December 31, 1998 has been derived from the
audited consolidated financial statements included in the Annual Report on
Form 10-KSB-A. The results for the interim period ended March 31, 1999 are
not necessarily indicative of the results to be expected for the entire
year.
Restatement of Financial Statements:
-----------------------------------
In accordance with guidelines of the Securities and Exchange
Commission, the Company has restated its 1999 financial statements to
reflect the acquisition of MRB, Inc. and related companies "Tomahawk" on
January 29, 1999 and related revisions to the purchase price and
amortization periods of intangibles and to properly record expenses and
accrued liabilities related to the issuance of stock purchase warrants by
the Company's majority shareholder and certain other deferred costs or
expenses paid by VCC or VMI on behalf of the Company during 1998.
The effects on the 10-QSB/A's for March 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
As Related to Related to Related to
originally Tomahawk Related to VCC/VMI VCC
reported deconsolidation goodwill fees warrants As Restated
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $32,634 $(1,781) $184 $(6,399) $ - - - $24,638
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 25,434 (183) - - - (5,850) - - - 19,401
---------------------------------------------------------------------------------------------------------------------------
Total shareholders equity 7,200 (1,488) 155 (642) 12 5,237
---------------------------------------------------------------------------------------------------------------------------
Total revenues 13,390 (3,300) - - - - - - - - - 10,090
---------------------------------------------------------------------------------------------------------------------------
Total expenses 13,263 (3,212) (29) (36) 11 9,997
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. LOAN AGREEMENT
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender"). The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount
of $104,000 and interest at 3.75% plus the average of the one (1) and two
(2) month London Interbank Offered Rates. In addition, proceeds from the
sale of the Equipment will be paid to the Lender as additional principal
reduction up to $1,034,000. In connection with the Loan, the lender
retained $300,000 as a security deposit to secure repayment of the Loan.
The Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction.
3. BUSINESS ACQUISITION
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of
the Company, entered into a Management Agreement dated August 1, 1998, as
amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a
Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida
corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia
corporation; and Tomahawk Truck & Trailer Sales of Missouri, Inc., a
Missouri corporation (collectively "Tomahawk"). The Management Agreement
provided CAM with effective control of Tomahawk's operations as of 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.
6
<PAGE>
The acquisition of MRB, Inc. was accounted for under the purchase
method of accounting. As originally reported in the 10-K for 1998, the
purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of
Chancellor valued at $.96 cents per share. The excess purchase price of
$2,600,000 as of January, 1999 consisted of said shares valued at $.65
cents per share, less change in net worth, which has been allocated between
a covenant not to compete, customer database files, and goodwill which will
be amortized beginning in February, 1999 over a period of five to twenty
years.
Results of operations of Tomahawk after the acquisition date are
included in the March 31, 1999 condensed consolidated statements of
operations. The following proforma information has been prepared assuming
that this acquisition had taken place at the beginning of the respective
periods. The proforma financial information is not necessarily indicative
of the results of operations as they would have been had the transactions
been effected on the assumed dates.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999 1998
---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue $ 13,390 $ 9,047
Net income before taxes 119 103
Net income after taxes 113 73
Net income (loss) per common share .00 .00
</TABLE>
4. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective
for years beginning after June 15, 2000. The standard requires that all
derivatives be recorded as an asset or liability, at estimated fair value,
regardless of the purpose or intent for holding the derivative. If a
derivative is not utilized as a hedge, all gains or losses from the change
in the derivative's estimated fair value are recognized in earnings. The
gains or losses from the change in estimated fair value of certain
derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship. Due to
the Company's limited use of derivatives, the Company expects that
adoption of SFAS No. 133 will have an immaterial impact on the Company's
consolidated financial position and results of operations.
5. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) Sales of
transportation equipment and 2) Leasing activity.
The Company's Sales of Transportation Equipment division retails and
wholesales used transportation equipment, primarily, tractors and
trailers, through retail centers located throughout the country.
Leasing activities include revenues generated under operating or
direct financing leases. The Company also manages most of the leases it
sells to investors and, when the original lease expires or terminates,
remarkets the equipment for the benefit of the investors and the Company.
Leases primarily involve transportation equipment, but also other
equipment including material handling and construction equipment.
Segment information is as follows:
7
<PAGE>
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31,
1999 1998
(restated)
---------------- ----------------
(in thousands)
SALES OF TRANSPORTATION EQUIPMENT:
<S> <C> <C>
Revenues $ 8,968 $ - - -
Cost and expenses:
Cost of transportation equipment 7,089 - - -
Selling, general and administrative 1,474 - - -
Interest expense 33 - - -
Depreciation and amortization 11 - - -
----------- ----------
8,607 - - -
----------- ----------
Income from sales of transportation equipment $ 361 $ - - -
=========== ==========
Identifiable assets $ 14,688 $ - - -
=========== ==========
LEASING ACTIVITY
Revenues:
Leasing activity $ 971 $ 646
Interest income 80 18
Other income 71 18
----------- ----------
1,122 682
----------- ----------
Costs and expenses:
Selling, general and administrative 1,033 530
Interest expense 33 21
Depreciation and amortization 302 104
----------- ----------
1,368 655
----------- ----------
Income (loss) from leasing activity $ (246) $ 27
----------- ----------
Identifiable assets $ 8,467 $ 5,736
=========== ==========
Total assets for reportable segments: $ 23,155 $ 5,736
Corporate investments, intangibles and other assets 1,483 1,000
----------- ----------
$ 24,638 $ 6,736
=========== ==========
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned
subsidiary, CAM, purchased Tomahawk in exchange for common stock (see note
3).
<TABLE>
<CAPTION>
In thousands
<S> <C>
Fair Value of assets acquired $ 10,679
Fair Value of liabilities assumed (10,372)
-----------
307
Fair Value of common stock issued 2,925
-----------
Excess purchase price over fair value of assets acquired
$ 2,618
===========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations in the previously reported 10-QSB, filed in
May, 1999, included the effects of Tomahawk for the full three months ended
March 31, 1999. Because of the change in the acquisition date from August, 1998
until January, 1999, this amended 10-QSB-A includes consolidated results of
operations of Tomahawk for the two months ended March 31, 1999.
REVENUES. Total revenues for the three-month period ended March 31,
1999 were $10,090,000 as compared to $682,000 for the corresponding prior
period, an increase of $9,408,000 or 1,379.5%. For the three-month period ended
March 31, 1999, transportation equipment sales were $8,968,000 as compared to no
sales for the corresponding prior period. This significant revenue stream from
transportation equipment sales is primarily attributable to significant sales of
used transportation equipment through the operating activities of the Company's
wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The increase
in revenues provided by CAM is primarily a result of the Tomahawk purchase,
which has retail outlets located throughout the country and has inventory for
both retail and wholesale sales. Through CAM, the Company seeks to continue to
expand its retail centers geographically. The Company also seeks to utilize the
competitive advantage provided by its access to retail pricing for residual
values of its leased equipment to increase competitiveness within the Company's
lease origination business unit. For the three-month period ended March 31,
1999, rental income increased by $362,000 or 377.1% as compared to the
corresponding prior period. The increase in rental income is attributable
primarily to the addition to the Company's portfolio of certain equipment
acquired in connection with the purchase of several leases from portfolios
administered for trusts by the Company. For the three month period ended March
31, 1999, lease underwriting income increased by $1,000 or 11.1% and direct
finance lease income decreased by $21,000 or 58.3%, both as compared to the
corresponding prior period. This resulted in a net decrease in lease origination
activity of $20,000 or 44.4%. The Company is in the final phase of its lease
origination rebuilding process, having completed the addition of key senior
management and sales personnel, and development of strategic alliances to
provide future growth in this area. For the three-month period ended March 31,
1999, interest income increased by $62,000 or 344.4% as compared to the
corresponding prior period. The increase is primarily attributable to interest
earned in connection with the Company's investment of approximately $1,475,000
in a South Africa based manufacturer and lessor of transportation equipment. For
the three-month period ended March 31, 1999, gains from portfolio remarketing
increased by $169,000 or 206.1% as compared to the corresponding prior period.
The increase in gains from portfolio remarketing is attributable to the increase
in portfolio assets acquired in connection with the purchase of several leases
from portfolios administered for trusts by the Company, which were made
available for sale upon termination of certain leases. For the three-month
period ended March 31, 1999, fees from remarketing activities decreased by
$186,000 or 44.0% as compared to the corresponding prior period. This decrease
is attributable, in part, to a diminishing level of portfolio assets owned by
trusts available for remarketing from which the Company derives a significant
portion of its remarketing fees. For the three-month period ended March 31,
1999, other income increased by $53,000 or 294.4% as compared to the
corresponding prior period. The increase is primarily attributable to the
recovery of approximately $67,000 of fees from a former lessee of the Company.
COSTS AND EXPENSES. Total costs and expenses for the three-month period
ended March 31, 1999 were $9,975,000 as compared to $655,000 for the
corresponding prior period, an increase of $9,320,000 or 1,422.9%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales was
$7,089,000 for the three-month period ended March 31, 1999 and resulted in an
overall gross margin of 21.0%. Selling, general and administrative expenses for
the three-month period ended March 31, 1999 was $2,507,000 as compared to
$530,000 for the corresponding prior period, an increase of $1,977,000 or
372.0%. For the three-month period ended March 31, 1999, selling, general and
administrative expenses included recovered reimbursable trust administration
costs of approximately $547,000 as compared to $415,000 for the corresponding
prior period. Approximately $1,038,000 of the increase in selling, general and
administrative expenses for the three-month period ended March 31, 1999 is a
result of normal operating expenses incurred by CAM and CAM's newly acquired
retail
9
<PAGE>
and wholesale business unit, Tomahawk, whose operations were consolidated
with the Company's beginning February, 1999. Before netting out the reimbursable
trust administration costs and the effect of the CAM expenses, selling, general
and administrative expenses increased to $2,016,000 for the three-month period
ended March 31, 1999 as compared to $944,000 for the corresponding prior period,
an increase of $1,072,000 or 113.1%. The increase in selling, general and
administrative expenses reflects the effect of the Company's growth strategy
implementation that included, in part, significant costs associated with the
addition of senior management, sales and staff personnel.
Interest expense for the three-month period ended March 31, 1999 was
$66,000 as compared to $21,000 for the corresponding prior period, an increase
of $45,000 or 214.3%. This increase is primarily a result of increased interest
expense associated with CAM's revolving credit line with a financial institution
utilized for inventory floor planning and interest accrued on the Company's
recourse debt.
Depreciation and amortization expense for the three-month period ended
March 31, 1999 was $313,000 as compared to $104,000 for the corresponding prior
period, an increase of $209,000 or 201.0%. The increase is primarily due to the
amortization of intangible assets associated with the Tomahawk purchase.
Provision for income taxes for the three-month period ended March 31,
1999 was $22,000 as compared to zero for the corresponding prior period, an
increase of $22,000 or 100%. The increase is primarily due to the taxes incurred
by Tomahawk during the quarter.
NET INCOME. Net income for the three-month period ended March 31, 1999
was $93,000 as compared to $27,000 for the corresponding prior period, an
increase of $66,000 or 244.4%. The increase in net income is attributable to the
significant increase in revenues, primarily from the retail and wholesale of
used transportation equipment, the buy-out of leases from portfolios owned by
trusts, and continued improvements in the containment of costs. Net income per
share (basic and diluted) was $0.00 per share for the three-month periods ended
March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net increase in cash and cash equivalents for
the three-month period ended March 31, 1999 of $402,000. Operating activities
provided cash of $101,000 during the three-month period ended March 31, 1999 and
is primarily a result of increased sales of used transportation equipment
inventory, normal increases in accounts payable associated with inventory and
operating purchases, and offset by increases in accounts receivable. Investing
activities used cash of $2,203,000 during the three-month period ended March 31,
1999 and is primarily a result of the acquisition of approximately $1,472,000 of
net operating leases that were bought out from a trust and a $300,000 security
deposit with a bank in connection with a loan agreement for $2,500,000 entered
into between the Company and a financing institution. Financing activities
provided cash of $2,504,000 during the three-month period ended March 31, 1999
and is primarily a result of a loan from a financing institution in the amount
of $2,500,000. Cash and cash equivalents were $1,014,000 at March 31, 1999 as
compared to $612,000 at December 31, 1998, an increase of $402,000 or 65.7%.
The Company undertook a review of the portfolios it administers on
behalf of trusts, including consultation with legal counsel and industry
consultants, and determined that it had not been 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 $547,000 and $415,000 of cost
recoveries in the three-month periods ended March 31, 1999 and 1998,
respectively.
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$2,500,000 loan agreement (the "Loan") with a financial institution (the
"Lender"). The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the
10
<PAGE>
average of the one (1) and two (2) month London Interbank Offered Rates. In
addition, proceeds from the sale of the Equipment will be paid to the Lender as
additional principal reduction up to $1,034,000. In connection with the Loan,
the Lender retained $300,000 as a security deposit to secure repayment of the
Loan. The Loan is secured by all of the Equipment and the lease contracts
specifically associated with this transaction.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor plan used
transportation equipment inventory. The balance outstanding under this revolving
line of credit agreement is approximately $5,375,000 as of March 31, 1999. Prior
to the acquisition, during 1998, CAM, through Tomahawk, entered into a special
purpose financing agreement with the same institution to floor plan additional
used transportation equipment inventory in the approximate amount of $4,500,000.
The balance outstanding under this special purpose financing agreement is
approximately $2,780,000 as of March 31, 1999.
The Company's ability to underwrite equipment lease transactions is
largely dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in continuing dialogue with several inventory lenders,
which appear to be interested in providing the Company with warehouse financing.
If the Company experiences delays in putting warehouse facilities in place, the
Company transacts deals by coterminous negotiation of lease transactions with
customers and financing with institutions upon which it obtains a fee as the
intermediary of up to 3% of the amount of financing.
The remarketing, retailing and wholesaling of equipment has played and
will continue to play a vital role in the Company's operating activities. In
connection with the sale of lease transactions to investors, the Company
typically is entitled to share in a portion of the residual value realized upon
remarketing. Successful remarketing of the equipment is essential to the
realization of the Company's interest in the residual value of its managed
portfolio. It is also essential to the Company's ability to recover its original
investment in the equipment in its own portfolios and to recognize a return on
that investment. The Company has found that its ability to remarket equipment is
affected by a number of factors. The original equipment specifications, current
market conditions, technological changes, and condition of the equipment upon
its return all influence the price for which the equipment can be sold or
re-leased.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further exploit its remarketing
expertise by continuing to develop its ability to sell remarketing services to
other lessors, fleet owners, and lessees. The Company plans also to create a
dealer capability under which the Company would buy and resell fleet equipment.
The Company anticipates expanding its used transportation equipment retail and
wholesale capabilities through the addition of retail centers geographically
through internal growth and acquisitions. The Company's retail and wholesale
capabilities have been greatly improved through CAM's strategic acquisition of
Tomahawk. This improved capability will be used as a competitive advantage that
will enable the Company to provide a "total holding cost" concept when competing
for new lease origination deals. The Company's retail and wholesale business
unit will provide improved outlets for other lessors, financial institutions,
and fleet owners to dispose of used transportation equipment and sources of
quality used transportation equipment for fleet owners and owner-operators. The
Company will also aggressively promote its Internet capabilities to further
promote its business activities and as an e-commerce tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. As of March 31, 1999, 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 $1,475,000 into
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one of NAOF's portfolio investee companies. The Company continues to negotiate
further strategic opportunities with this investee company.
The Company's renewal or replacement of expired lines, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse and
non-recourse), anticipated long-term financing of individual significant lease
transactions, and its estimated cash flows from operations are anticipated to
provide adequate capital to fund the Company's operations for the next twelve
months. Although no assurances can be given, the Company expects to be able to
renew or timely replace expired lines of credit, to expand currently existing
lines for inventory floor planning, to continue to have access to the public and
private securities markets, both debt and equity, and to be able to enter into
new lines of credit and individual financing transactions.
IMPACT OF THE YEAR 2000 ISSUE
The Company has commenced efforts to assess and, where required,
remediate issues associated with Year 2000 ("Y2K") issues. Generally defined,
Y2K issues arise from computer programs which use only two digits to refer to
the year and which may experience problems when the two digits become "00" in
the year 2000. In addition, imbedded hardware microprocessors may contain time
and two-digit year fields in executing their functions. Much literature has been
devoted to the possible effects such programs may experience in the Year 2000,
although significant uncertainty exists as to the scope and effect the Y2K
issues will have on industry and the Company.
The Company has recognized the need to address the Y2K issue in a
comprehensive and systematic manner and has taken steps to assess the possible
Y2K impact on the Company. Although the Company has not completed a 100%
assessment of all its information technology ("IT") and non-IT systems for Y2K
issues, the Company has completed its assessment of all mission-critical
systems. All mission-critical systems and most of the major applications and
hardware have been assessed to determine the Y2K impact and a plan is in place
for timely resolution of potential issues.
In 1998, the Company developed a strategic plan to identify the IT
systems needed to accomplish the Company's overall growth plans. As part of this
process, Y2K issues were considered and addressed by the Company's senior
management and MIS personnel. Although this plan was intended to modernize the
IT systems, compliance with Y2K requirements were incorporated.
The cost of bringing the Company in full compliance should not result
in a material increase in the recent levels of capital spending or any material
one-time expenses. The Company has spent approximately $160,000 in modernizing
its IT system, including compliance with Y2K requirements. The Company
anticipates spending approximately $200,000 during fiscal 1999 to complete the
modernization of its IT system.
The failure of either the Company, its vendors or clients to correct
the systems affected by Y2K issues could result in a disruption or interruption
of business operations. The Company uses computer programs and systems in a vast
array of its operations to collect, assimilate and analyze data. Failure of such
programs and systems could affect the Company's ability to track assets under
lease and properly bill. Although the Company does not believe that any of the
foregoing worst-case scenarios will occur, there can be no assurance that
unexpected Y2K problems of the Company's and its vendors' and customer's
operations will not have a material adverse effect on the Company.
While it is difficult to classify our state of readiness, we believe
that our internal plans have the Company ready for the year 2000 to avoid any
material Y2K issues. We have completed the assessing, testing of systems, and
the development of contingency plans. Management is in constant communication
with its IT personnel and has made and will continue to make reports to the
Company's Board of Directors.
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POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price
of its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts or the
market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the same time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB-A contains certain
"Forward-Looking" statements as such term is defined in the Private Securities
Litigation Reform Act of 1995 and information relating to the Company and its
subsidiaries that are based on the beliefs of the Company's management as well
as assumptions used in this report, the words "anticipate," "believe,"
"estimate," "expect," and "intend" and words or phrases of similar import, as
they relate to the Company or its subsidiaries or the Company management, are
intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, competitive factors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introduction and acceptance, technology changes and changes in industry
conditions. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the conduct
of its business. Management believes that none of these legal proceedings will
have a material adverse effect on the financial condition of operations of the
Company.
Item 2. Changes in Securities
None
Item 3 Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
Form 10-KSB for 1998 was amended June, 2000, primarily for the effects caused by
the change in acquisition date of the Tomahawk subsidiary which was originally
reported as of August, 1998. This transaction has been recorded as of January,
1999, the date of final closing in the revised 10-KSB-A and this 10-QSB-A. See
10-KSB-A for more information.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Loan and Security Agreement No.7622, dated March 31, 1999,
by and between Pheonixcor, Inc., Chancellor Corporation and
Chancellor Fleet Corporation. Filed with original
10-QSB, May 1999
10.2 Pledge and Security Agreement, dated March 31, 1999, by and
between Phoenixcor, Inc, Chancellor Corporation and
Chancellor Fleet Corporation. Filed with original 10-QSB,
May 1999.
10.3 Promissory Note to Loan and Security Agreement No7622, dated
March 31, 1999, in the original principal amount of
$2,500,000 from Chancellor Corporation to Phoenixcor, Inc.
Filed with original 10-QSB, May 1999.
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
11 Computation of Earnings per Share
27 Financial Data Schedule for period ended March 31, 1999.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated February 10, 1999
Current Report on Form 8-K, dated March 4, 1999
Current Report on Form 8-K/A, dated March 22, 1999
Current Report on Form 8-K/A, dated April 13, 1999
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
/s/ Brian M. Adley
----------------------------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
/s/ Franklyn E. Churchill
----------------------------------------
Franklyn E. Churchill
President, Chief Operating Officer and
Director
/s/ Barry W. Simpson
----------------------------------------
Barry W. Simpson
Chief Financial Officer
(Principal Accounting Officer
Date: July 24, 2000
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