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 Small Business Issuer)
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
(Issuer's telephone number, including area code)
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
preceding 12 months (or for such shorter period that the Issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ X ] No [ ]
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
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Item 7. Exhibit 11 - Computation of earnings per share.
Signatures 14
1
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<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except per Share Data)
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
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
Accounts payable and accrued expenses $ 5,402 $ 3,572
Deferred reimburseable 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.
2
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED MARCH 31,
1999 1998
---------------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
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 $ .00 $ .00
=============== ==========
Diluted net income per share $ .00 $ .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 62,703,596 25,403,127
=============== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED MARCH 31,
1999 1998
----------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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) ----
----------------- ------------
$ 8 $ 226
----------------- ------------
Net cash (used) 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 with recourse 3,000 ----
Repayments of indebtedness - nonrecourse (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.
4
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission for
interim financial statements. The unaudited interim condensed consolidated
financial statements include the accounts of Chancellor Corporation and each of
its subsidiaries ("company's"). Accordingly, the interim statements do not
include all of the information and disclosure required for annual financial
statements. In the opinion of the Company's management, all adjustments
(consisting solely of adjustments of a normal recurring nature) necessary for a
fair presentation of these interim results have been included. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates, based upon the best
information available, in recording transactions resulting from business
operations. Intercompany accounts and transactions have been eliminated. These
financial statements and related notes should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB-A for the year ended December 31, 1998.
The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements included in the Annual Report on Form
10-KSB-A. The results for the interim period ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire year.
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.
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 which will be amortized in the beginning of
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.
5
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<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, as follows (in thousands).
The Company's Sales of Transportation Equipment division retails and wholesales
used transportation equipment, primarily, tractors and trailers, through retail
centers located throughout the country.
Leasing activities include revenues generated under operating or direct
financing leases. The Company also manages most of the leases it sells to
investors and, when the original lease expires or terminates, remarkets the
equipment for the benefit of the investors and the Company. Leases primarily
involve transportation equipment, but also other equipment including material
handling and construction equipment.
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31,
1999 1998
------------- ---------
(in thousands)
<S> <C> <C>
SALES OF TRANSPORTATION EQUIPMENT:
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
before income taxes $ 361 $ ---
Income taxes 22 ---
------------- ---------
Income from sales of transportation equipment $ 339 $ ---
Identifiable Assets $ 12,128 $ ---
============== =========
6
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $ 9,800 $ 8,075
=============== =========
TOTAL COMPANY
- -------------
Revenues: $ 10,090 $ 682
Cost and expenses:
Cost of transportation equipment 7,089 ---
Selling, general and administrative 2,507 530
Interest expense 66 21
Depreciation and amortization 313 104
--------------- ---------
$ 9,975 $ 655
--------------- ---------
Income before income taxes $ 115 $ 27
Income taxes 22 ---
--------------- ---------
Net Income $ 93 $ 27
============== =========
</TABLE>
7
<PAGE>
CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned subsidiary,
CAM, purchased a company known as Tomahawk. (see note 3)
<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"). CAM's used
transportation equipment retail and wholesale business unit accounted for
approximately $7,497,000 of used transportation equipment sales. CAM's revenues
from the sales of used transportation equipment for the three month period ended
March 31, 1999 increased to $8,968,000 as compared to no sales for the
corresponding period for 1998. The increase in revenues provided by CAM is
primarily a result of the Tomahawk purchase, which has retail outlets located
throughout the country and has inventory for both retail and wholesale sales.
Through CAM, the Company seeks to continue to expand its retail centers
geographically. The Company also seeks to utilize the competitive advantage
provided by its access to retail pricing for residual values of its leased
equipment to increase competitiveness within the Company's lease origination
business unit. For the three-month period ended 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 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.
9
<PAGE>
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 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
10
<PAGE>
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 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.
11
<PAGE>
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.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
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 January, 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 Phoenixcor, Inc., Chancellor Corporation and
Chancellor Fleet Corporation. Filed with original 10-Q,
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-Q,
May, 1999.
10.3 Promissory Note to Loan and Security Agreement No. 7622, dated
March 31, 1999, in the original principal amount of
$2,500,000 from Chancellor Corporation to Phoenixcor, Inc.
Filed with original 10-Q, 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
13
<PAGE>
CHANCELLOR CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, issuer
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
/s/ Jonathan C. Ezrin
------------------------
Jonathan C. Ezrin
Corporate Treasurer
(Principle Accounting Officer)
DATE: January 14, 2000
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
CHANCELLOR CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
The following table reflects the calculation of the earninngs per share:
Income Weighted Average
Common Shares Outstanding
(numerator) (denominator)
in thousands, except share and per share data
<S> <C> <C> <C>
Quarter ended March 31, 1999:
Earnings from operations $ 93 43,240,194
================ ================
Basic earnings per common share $ 0.00
Effect of dilutive securities-
Convertible preferred shares 0 5,000,000
Warrant - VCC 0 7,142,857
Vested Employee Options 0 163,402
--------------- ----------------
$ 93 55,546,453
================ ================
Diluted earnings per common share $ 0.00
Quarter ended March 31,1998:
Earnings from operations $ 27 25,403,127
================ ================
Basic and diluted earnings per common share $ 0.00
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1014
<SECURITIES> 4255
<RECEIVABLES> 4053
<ALLOWANCES> 0
<INVENTORY> 10201
<CURRENT-ASSETS> 1556
<PP&E> 7306
<DEPRECIATION> 3724
<TOTAL-ASSETS> 24638
<CURRENT-LIABILITIES> 19401
<BONDS> 0
<COMMON> 433
0
50
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24930
<SALES> 10090
<TOTAL-REVENUES> 10090
<CGS> 7089
<TOTAL-COSTS> 9975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 115
<INCOME-TAX> 22
<INCOME-CONTINUING> 93
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
