UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 [ ]
As of November 15, 1999, 58,524,065 shares of Common Stock, $.01 par value per
share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value
per share (with a liquidation preference of $20.00 per share, or $7,000,000, and
are convertible into the Common Stock of the Company on a ten for one (10:1)
basis) were outstanding. Aggregate market value of the voting stock held by
non-affiliates of the issuer as of November 15, 1999 was approximately
$7,734,022. Aggregate market value of the total voting stock of the issuer as
of November 15, 1999 was approximately $31,092,503.
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CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as
of September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 16
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 17
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1
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CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1999 1998
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,657 $ 612
Receivables, net 4,375 2,880
Inventory 10,630 36
Net investment in direct finance leases 426 359
Equipment on operating lease, net of accumulated depreciation
of $2,034 and $2,351 5,280 702
Residual values, net 180 219
Furniture and equipment, net of accumulated depreciation
of $1,457 and $1,224 1,011 807
Long term investments 1,009 1,000
Intangibles, net 2,651 111
Other assets, net 3,934 1,460
--------------- --------------
Total assets $ 31,153 $ 8,186
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,261 $ 3,572
Deferred reimburseable expenses 4,711 1,068
Indebtedness:
Revolving credit line 8,648 ---
Notes -payable 761 ---
Nonrecourse 219 889
Recourse 5,104 295
--------------- --------------
Total liabilities 24,704 5,824
--------------- --------------
Stockholders' equity:
Prefered Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series AA, none and 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,
58,316,877 and 38,541,895 shares issued and outstanding 583 385
Additional paid-in capital 33,324 29,943
Accumulated deficit (27,458) (28,016)
--------------- --------------
Total stockholder's equity $ 6,449 $ 2,362
--------------- --------------
Total liabilities and stockholder's equity $ 31,153 $ 8,186
=============== ==============
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The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
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CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Transportation equipment sales $ 16,152 $ 5,090 $ 39,342 $ 6,062
Rental income 465 286 1,239 698
Lease underwriting income - 18 27 52
Direct finance lease income 17 22 60 89
Interest income 36 5 200 27
Gains from portfolio remarketing 286 47 860 355
Fees from remarketing activities 767 303 1,627 857
Other income 1 2 82 46
------------ ------------ ------------ -----------
Total Revenue $ 17,724 $ 5,773 $ 43,437 $ 8,186
------------ ------------ ------------ -----------
Costs and expenses:
Cost of transportation equipment sales $ 12,837 $ 4,915 $ 31,426 $ 5,583
Selling, general and administrative 3,920 571 9,716 1,990
Interest expense 234 43 476 74
Depreciation and amortization 390 103 1,098 338
------------ ------------ ------------ -----------
$ 17,381 $ 5,632 $ 42,716 $ 7,985
------------ ------------ ------------ -----------
Earnings before taxes $ 343 $ 141 $ 721 $ 201
------------ ------------ ------------ -----------
Provision for income taxes $ 77 $ - $ 163 $ -
Net Income $ 266 $ 141 $ 558 $ 201
============ ============ ============ ===========
Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
============ ============ ============ ===========
Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00
============ ============ ============ ===========
Shares used in computing basic net income per share 53,530,730 38,472,679 48,381,553 35,883,172
Shares used in computing diluted net income per share 59,943,551 53,232,679 57,180,393 47,963,172
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
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<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
1999 1998
------------ --------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558 $ 201
------------ --------
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization $ 1,098 $ 338
Residual value estimate realizations and
reductions, net of additions 39 167
Changes in assets and liabilities:
(Increase) in receivables (2,517) (79)
(Increase) in inventory (711) (333)
Increase (decrease) in accounts payable and accrued expenses 564 (2,035)
Increase in deferred reimburseable expenses and revenues 3,643 -
------------ --------
2,116 (1,942)
------------ --------
Net cash provided by (used for) operating activities 2,674 (1,741)
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases $ (67) $ 67
Equipment on operating lease $ (4,777) (405)
Net change in cash restricted - 2,419
Additions to furniture and equipment, net (294) (159)
Increase in intangibles, net (275) (1,185)
Net change in other assets (817) (1,488)
------------ --------
Net cash (used for) investing activities $ (6,230) $ (751)
------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit $ 114 $ -
Increase in notes payable-net 48 -
Borrowings-nonrecourse debt - 175
Borrowings-recourse debt 7,422 917
Repayments of indebtedness-non recourse (670) (199)
Repayments of indebtedness-recourse (2,613) (24)
Issuance of common stock, net 300 1,934
------------ --------
Net cash provided by financing activities $ 4,601 $ 2,803
------------ --------
Net increase in cash and cash equivalents $ 1,045 $ 311
Cash and cash equivalents at beginning of period 612 97
------------ --------
Cash and cash equivalents at end of period $ 1,657 $ 408
============ ========
Cash paid for interest $ 760 $ 265
============ ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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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 of operations for the nine months ended September 30,
1998 were derived from the 10-QSB filed in November 1998. The results for the
interim period ended September 30, 1999 are not necessarily indicative of the
results to be expected for the entire year.
2. LOAN AGREEMENTS
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 as a
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 balance outstanding as of September 30, 1999 on this loan is approximately
$1,657,000.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,876,000
loan agreement (the "Loan") with a financial institution (the "Lender") in
September 1999. The Loan provides for principal and interest payments (at 10%)
of $583,400 on September 30, 1999, $72,300 per month from October 1999 through
December 1999, $64,400 per month from January 2000 through April 2000, $55,500
per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan
is secured by all of the Equipment and the lease contracts specifically
associated with this transaction. The balance outstanding as of September 30,
1999 on this loan is approximately $2,819,000.
3. 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
5
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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 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.
4. 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 in strategic locations primarily in the southern and midwestern
sections of the United States.
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 involve other equipment including
material handling and construction equipment.
<TABLE>
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Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
-------- ------ -------- ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES OF TRANSPORTATION EQUIPMENT:
- ------------------------------------------------------
Revenues $16,502 $5,090 $39,692 $6,052
Costs and expenses:
Cost of transportation equipment 12,837 4,915 31,426 5,583
Selling, general and administrative 2,638 116 6,400 292
Interest expense 197 2 333 7
Depreciation and amortization 162 10 352 39
-------- ------ -------- ------
Total Costs and expenses $15,834 $5,043 $38,511 $5,921
-------- ------ -------- ------
Income from sales of transportation equipment $ 668 $ 47 $ 1,181 $ 131
before income taxes
Income taxes 77 --- 163 ---
-------- ------ -------- ------
Income from sales of transportation equipment $ 591 $ 47 $ 1,018 $ 131
-------- ------ -------- ------
Identifiable Assets $13,960 $ 535 $13,960 $ 535
======== ====== ======== ======
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LEASING ACTIVITY
- ------------------------------------------------------
Revenues:
Leasing activity $ 1,185 $ 676 $ 3,462 $2,051
Interest income 36 5 200 37
Other income 1 2 83 46
-------- ------ -------- ------
Total Leasing Revenues $ 1,222 $ 683 $ 3,745 $2,134
-------- ------ -------- ------
Costs and expenses:
Selling, general and administrative $ 1,282 $ 455 $ 3,316 1,698
Interest expense 37 41 143 67
Depreciation and amortization 228 93 746 299
-------- ------ -------- ------
Total Costs and Expenses $ 1,547 $ 589 $ 4,205 $2,064
-------- ------ -------- ------
Income (loss) from leasing activity before income $ (325) $ 94 $ (460) $ 70
taxes
Income taxes --- --- --- ---
-------- ------ -------- ------
Income (Loss) from leasing activity $ (325) $ 94 $ (460) $ 70
-------- ------ -------- ------
Identifiable assets $14,450 $7,540 $14,450 $7,540
======== ====== ======== ======
TOTAL COMPANY
- ------------------------------------------------------
Revenues: $17,724 $5,773 $43,437 $8,186
Cost and expenses:
Cost of transportation equipment 12,837 4,915 31,426 5,583
Selling, general and administrative 3,920 571 9,716 1,990
Interest expense 234 43 476 74
Depreciation and amortization 390 103 1,098 338
-------- ------ -------- ------
$17,381 $5,632 $42,716 $7,985
-------- ------ -------- ------
Income before income taxes $ 343 $ 141 $ 721 $ 201
-------- ------ -------- ------
Income taxes 77 --- 163 ---
-------- ------ -------- ------
Net Income $ 266 $ 141 558 $ 201
-------- ------ -------- ------
</TABLE>
5. COMMON STOCK ISSUED
During the quarter ended September 30, 1999, the Company's major shareholder was
issued five (5) million shares of additional common stock as a result of
conversion of series AA preferred stock.
6. SUBSEQUENT ACQUISITION OF STOCK AND DISTRIBUTION RIGHTS
In October 1999, the Company, through an affiliate, closed on the acquisition of
a 15.1% equity interest in Afinita Motor Corporation (Pty) Ltd. ("AMC"). AMC is
a South African manufacturer/assembler of trucks, buses, automobiles, sport
utility vehicles, and other products. This transaction and the related
transaction surrounding certain distribution rights were acquired via a
combination of the conversion of a note receivable including accrued interest
from cash previously advanced, and the issuance of 250,000 shares of a newly
created class of Series B Convertible Preferred Stock (the "Series B Preferred
Stock").
7
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In October 1999, the Company, through an affiliate, finalized several agreements
that were made effective retroactive to June 30, 1999, with Afinta Motor
Corporation (Pty) Ltd. ("AMC"). One such affiliate acquired the exclusive
worldwide distribution rights for products manufactured/assembled by AMC,
excluding Africa, England, Scotland and Wales. AMC is a manufacturer/assembler
of trucks, buses, and other products. These distribution rights to the AMC
product range include, but are not limited to trucks, tractor-trailers, buses,
automobiles, sport utility vehicles, motorcycles, and other products supplied by
AMC. The Company issued 100,000 shares of Series B Preferred Stock in the
transaction.
The Company has these distribution rights for the next 99 years, whereby
they expire during 2098. The Company will amortize these rights over a 15-year
period beginning October 1999. It is the Company's desire to utilize these
rights to earn additional revenue via commissions and the potential sale and/or
lease of AMC products within the defined territory.
The Series B Preferred Stock has a $20.00 per share liquidation preference and
converts into common stock at a 1 for 10 basis, which will increase the shares
used in computing diluted net income per share in future periods. Also, in
conjunction with these investments, NAOF, a $120 million OPIC backed investment
fund of which the Company has a 2.5% investment in, also extended its
investment/commitment in AMC to $10,000,000. In addition to the Company,
several of the other investors are Sun America, Inc., Citicorp, Northwestern
Mutual Life and others.
8
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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 November 1999, included the effects
of Tomahawk for the full nine months ended September 30, 1999 and the restated
statements of income and cash flows for the three months ended September 30,
1998 which included the Tomahawk acquisition as of August 1998. Because of the
change in the acquisition date from August, 1998 to January 1999, this amended
10-QSB-A includes consolidated results of operations of Tomahawk for the eight
months ended September 30, 1999 and the results of operations for the nine
months ended September 30, 1998 as originally reported in November, 1998.
Three-Month Period Ended September 30, 1999 vs. September 30, 1998
Revenues. Total revenues for the three-month period ended September 30,
1999 were $17,724,000 as compared to $5,773,000 for the corresponding prior
period, an increase of $11,951,000 or 207.0%. For the three-month period ended
September 30, 1999, transportation equipment sales were $16,152,000 as compared
to $5,090,000 for the corresponding prior period, an increase of $11,062,000 or
217.3%. This significant revenue stream from transportation equipment sales is
primarily attributable to sales of used transportation equipment through the
operating activities of the Company's wholly owned subsidiary, Chancellor Asset
Management Inc. ("CAM"). The increase in revenues provided by CAM is primarily
a result of the Tomahawk purchase, which has retail outlets located in key
Southeastern and Midwestern cities 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
lease origination business unit. For the three-month period ended September 30,
1999, rental income increased by $179,000 or 62.6% to $465,000 as compared to
$286,000 for the corresponding prior period. The increase in rental income is
attributable primarily to the addition to the Company's portfolio of certain
equipment acquired in connection with the purchase of several leases from
portfolios administered by the company for trusts. For the three month period
ended September 30, 1999, lease underwriting income decreased by $18,000 or 100%
to $0 as compared to $18,000 for the corresponding prior period and direct
finance lease income decreased by $5,000 or 22.7% to $17,000 as compared to
$22,000 for the corresponding prior period. For the three-month period ended
September 30, 1999, interest income increased by $31,000 or 620.0% to $36,000 as
compared to $5,000 for the corresponding prior period. This note was exchanged
for stock in the manufacturing company in October 1999. For the three-month
period ended September 30, 1999, gains from portfolio remarketing increased by
$239,000 or 508.5% to $286,000 as compared to $47,000 for the corresponding
prior period. The increase in gains from portfolio remarketing is attributable
to the increase in portfolio assets acquired in connection with the purchase of
several leases from portfolios administered on behalf of trusts by the Company,
which were made available for sale upon termination of certain leases. For the
three-month period ended September 30, 1999, fees from remarketing activities
increased by $464,000 or 153.1% to $767,000 as compared to $303,000 for the
corresponding prior period. This increase is attributable, in part, to the
Company's efforts to promote its remarketing services on a third party basis.
For the three-month period ended September 30, 1999, other income decreased by
$1,000 or 50% to $1,000.
Costs and Expenses. Total costs and expenses for the three-month period
ended September 30, 1999 was $17,381,000 as compared to $5,632,000 for the
corresponding prior period, an increase of 11,749,000 or 208.6%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
three-month period ended September 30, 1999 was $12,837,000 as compared to
$4,915,000 for the corresponding prior period, an increase of $7,922,000 or
161.2%, and resulted in an overall gross margin of 20.5%. Selling, general and
administrative expenses for the three-month period ended September 30, 1999 was
$3,920,000 as compared to $571,000 for the corresponding prior period, an
increase of $3,349,000 or 586.5%. For the three month period ended September
30, 1999 selling, general and administrative expenses included recovered
reimbursable trust administration costs of approximately $211,000.
Approximately $2,387,000 of selling, general and
administrative expenses for the three-month period ended September 30, 1999 is a
result of normal operating expenses incurred by CAM and CAM's newly acquired
retail and wholesale business unit, Tomahawk, whose operations were consolidated
with the Company's beginning February 1999. Before netting out the reimbursable
trust administration costs and the effect of the CAM expenses, selling, general
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and administrative expenses increased to $2,134,000 for the three-month period
ended September 30, 1999 as compared to $785,000 or the corresponding prior
period, an increase of $1,349,000 or 172.0%. The increase in selling, general
and administrative expenses reflects the effect of the Company's growth strategy
implementation that included, in part, costs associated with the addition of
senior management, sales and staff personnel.
Interest expense for the three-month period ended September 30, 1999 was
$234,000 as compared to $43,000 for the corresponding prior period, an increase
of $191,000 or 444.2%. 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
September 30, 1999 was $390,000 as compared to $103,000 for the corresponding
prior period, an increase of $287,000 or 278.6%. The increase is primarily due
to the amortization of intangible assets associated with the acquisition of
Tomahawk by CAM, as well as the depreciation of additions to the Company's
portfolio of leased transportation equipment.
Provision for income taxes for the three-month period ended September 30,
1999 was $77,000 as compared to zero for the corresponding prior period. The
increase is primarily due to the taxes incurred by income generated from
Tomahawk during the quarter.
Net Income. Net income for the three-month period ended September 30,
1999 was $343,000 as compared to $141,000 for the corresponding prior period, an
increase of $202,000 or 143.3%. The increase in net income is attributable to
the significant increase in revenues, primarily from the retail and wholesale of
used transportation equipment, the sale of equipment under lease, and continued
improvements in the containment of costs. Net income per share was $0.00 per
share (both basic and diluted) for the three-month periods ended September 30,
1999 and 1998.
Nine-Month Period Ended September 30, 1999 vs. September 30, 1998
Revenues. Total revenues for the nine-month period ended September 30,
1999 were $43,437,000 as compared to $8,186,000 for the corresponding prior
period, an increase of $35,251,000 or 430.6%. For the nine-month period ended
September 30, 1999, transportation equipment sales were $39,342,000 as compared
to $6,062,000 for the corresponding prior period, an increase of $33,280,000 or
549.0%. This significant revenue stream from transportation equipment sales is
primarily attributable to sales of used transportation equipment through the
operating activities of the Company's wholly owned subsidiary, Chancellor Asset
Management Inc. ("CAM"). The increase in revenues provided by CAM is primarily
a result of the Tomahawk purchase, which has retail outlets located in key
Southeastern and Midwestern cities 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 nine-month period ended September 30,
1999, rental income increased by $541,000 or 77.5% to $1,239,000 as compared to
$698,000 for the corresponding prior period. The increase in rental income is
attributable primarily to the addition to the Company's portfolio of certain
equipment acquired in connection with the purchase of several leases from
portfolios administered for trusts by the Company. For the nine-month period
ended September 30, 1999, lease underwriting income decreased by $25,000 or
48.1% to $27,000 as compared to $52,000 for the corresponding prior period and
direct finance lease income decreased by $29,000 or 32.6% to $60,000 as compared
to $89,000 for the corresponding prior period. The Company is in the final
phase of its lease origination rebuilding process, having completed plans for
the addition of key senior management and sales personnel in 2000, and
development of strategic alliances to provide future growth in this area. For
the nine-month period ended September 30, 1999, interest income increased by
$173,000 or 640.7% to $200,000 as compared to $27,000 for the corresponding
prior period. The increase is primarily attributable to interest earned in
connection with the Company's investment of approximately $1,475,000 in a South
Africa based manufacturer and lessor of
10
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transportation equipment. This note was exchanged for stock in the
manufacturing company in October 1999. For the nine-month period ended
September 30, 1999, gains from portfolio remarketing increased by $505,000 or
142.3% to $860,000 as compared to $355,000 for the corresponding prior period.
The increase in gains from portfolio remarketing is attributable to the increase
in portfolio assets acquired in connection with the purchase of several leases
from portfolios administered for trusts by the Company which were made available
for sales upon termination of certain leases. For the nine-month period ended
September 30, 1999, fees from remarketing activities increased by $770,000 or
89.8% to $1,627,000 as compared to $857,000 for the corresponding prior period.
This increase is attributable, in part, to the Company's efforts to promote its
remarketing services on a third party basis. For the nine-month period ended
September 30, 1999, other income increased by $36,000 or 78.3% to $82,000.
Costs and Expenses. Total costs and expenses for the nine-month
period ended September 30, 1999 was $42,716,000 as compared to $7,985,000 for
the corresponding prior period, an increase of $34,731,000 or 435.0%. The
significant increase is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
nine-month period ended September 30, 1999 was $31,426,000 as compared to
$5,583,000 for the corresponding prior period, an increase of $25,843,000 or
462.9%, and resulted in an overall gross margin of 20.1%. Selling, general and
administrative expenses for the nine-month period ended September 30, 1999 was
$9,716,000 as compared to $1,990,000 for the corresponding prior period, an
increase of $7,726,000 or 388.2%. Approximately $6,537,000 of selling, general
and administrative expenses for the nine-month period ended September 30, 1999
is a result of normal operating expenses incurred by CAM and CAM's newly
acquired retail and wholesale business unit, Tomahawk, whose operations were
consolidated with the Company's beginning February 1999.
In a prior year, 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 the costs for periods prior to 1997 had not been
recovered from the trusts. The Company has recorded approximately $789,000 and
$952,000 of cost recoveries in the nine-month periods ended September 30, 1999
and 1998, respectively. Before netting out the reimbursable trust
administration costs and the effect of the CAM expenses, selling, general and
administrative expenses increased to $5,122,000 for the nine-month period ended
September 30, 1999 as compared to $1,217,000 for the corresponding prior period,
an increase of $3,905,000 or 320.9%. This increase in selling, general and
administrative expenses reflects the effect of the Company's growth strategy
implementation that included, in part, significant costs associated with the
addition of senior management and staff personnel and costs incurred in
obtaining additional financing sources and investment assets, while continuing
to improve the containment of other operating costs.
Interest expense for the nine-month period ended September 30, 1999 was
$476,000 as compared to $74,000 for the corresponding prior period, an increase
of $402,000 or 543.2%. 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 nine-month period ended
September 30, 1999 was $1,098,000 as compared to $338,000 for the corresponding
prior period, an increase of $760,000 or 224.9%. The increase is primarily due
to the amortization of intangible assets associated with the acquisition of
Tomahawk by CAM.
Provision for income taxes for the nine-month period ended September
30, 1999 was $163,000 as compared to zero for the corresponding prior period.
The increase is primarily due to the taxes incurred from income generated by
Tomahawk during the eight months ending September 1999.
Net Income. Net income for the nine-month period ended September
30, 1999 was $558,000 as compared to $201,000 for the corresponding prior
period, an increase of $357,000 or 177.6%. The increase in net income is
attributable to the significant increase in revenues, primarily from the retail
and wholesale of used transportation equipment, the purchase of certain lease
portfolios from the trusts, and continued improvements in the containment of
costs. Net income per share was $0.01 per share (both basic and diluted) for
the nine-month periods ended September 30, 1999 compared to $.00 per share in
1998.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net increase in cash and cash equivalents for
the nine-month period ended September 30, 1999 of $1,045,000 totaling
$1,657,000. Operating activities provided cash of $2,674,000 during the
nine-month period ended September 30, 1999 and is primarily a result of
increased sales of used transportation equipment inventory, normal increases in
accounts payable associated with inventory and operating purchases, an increase
in deferred revenue associated with the addition to the Company's portfolio of
certain equipment acquired in connection with the purchase of several equipment
lease portfolios, and offset by increases in accounts receivable and inventory.
Investing activities used cash of $6,230,000 during the nine-month period ended
September 30, 1999 and is primarily a result of the acquisitions of portfolios
of operating leases valued at approximately $4,773,000. Financing activities
provided cash of $4,601,000 during the nine-month period ended September 30,
1999 and is primarily the result of recourse debt loans from financing
institutions in the amount of $5,376,000 and loans from Vestex Capital
Corporation. The Company's majority shareholder, exercised of a Stock Purchase
Warrant for an aggregate of Ten Million (10,000,000) shares of the Common Stock,
$.01 par value, of the Company at the exercise price of $.20 per share in
exchange for payment of recourse debt during the quarter ended June 30, 1999.
During the quarter ended September 30, 1999, the Company's major shareholder was
issued five (5) million shares of additional common stock as a result of
conversion of Series AA preferred stock. Cash and cash equivalents were
$1,657,000 at September 30, 1999 as compared to $612,000 at December 31, 1998,
an increase of $1,045,000 or 170.8%.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,500,000
loan agreement (the "Loan") with a financial institution (the "Lender") in March
1999. The Loan provides for the payment of twenty-four equal monthly
installments, beginning May 1, 1999, of principal in the approximate amount of
$104,000 and interest at 3.75% plus the average of the one (1) and two (2) month
London Interbank Offered Rates. In addition, proceeds from the sale of the
Equipment will be paid to the Lender as additional principal reduction up to
$1,034,000. In connection with the Loan, the lender retained $300,000 to secure
repayment of the Loan. The Loan is secured by all of the Equipment and the
lease contracts specifically associated with this transaction. Balance for this
loan as of 11/15/99 is $1,340,000.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $2,876,000
loan agreement (the "Loan") with a financial institution (the "Lender") in
September 1999. The Loan provides for principal and interest payments (at 10%)
of $583,400 on September 30, 1999, $72,300 per month from October 1999 through
December 1999, $64,400 per month from January 2000 through April 2000, $55,500
per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan
is secured by all of the Equipment and the lease contracts specifically
associated with this transaction. The balance outstanding as of 11/15/99 is
$2,230,000.
The Company also maintains a revolving line of credit agreement with a
financial institution whereby CAM can borrow up to $7,500,000 to floor plan used
transportation equipment inventory. The balance outstanding under this
revolving line of credit agreement is approximately $6,385,000 as of September
30, 1999. Prior to the acquisition, during 1998, CAM, through Tomahawk, entered
into a special purpose financing agreement with the same institution to floor
plan additional used transportation equipment inventory in the approximate
amount of $4,500,000. The balance outstanding under this special purpose
financing agreement is approximately $1,254,000 as of September 30, 1999. In
addition, during 1999, CAM entered into an additional special purpose financing
agreement with the same institution to finance used transportation equipment
inventory in the approximate amount of $626,000. The balance outstanding under
this agreement is approximately $626,000 as of September 30, 1999. The interest
rate charges on the above three lines of credit is Prime plus 1.75%. The
Company, in 1999, has also entered into a special line of credit to finance used
transportation equipment for approximately $500,000 at the rate of Prime plus
1%. The balance on this line of credit as of September 30, 1999 is
approximately $383,000.
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 to
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.
12
<PAGE>
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 released, resulting in a potential loss to the company.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further capitalize upon its
remarketing expertise by continuing to develop its ability to sell remarketing
services to other lessors, fleet owners, and lessees. The company plans also to
create a dealer capability under which the Company would buy and resell fleet
equipment. The Company anticipates expanding its used transportation equipment
retail and wholesale capabilities through the addition of strategically located
retail centers through internal growth and/or 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 also plans to aggressively
promote its Internet capabilities to further promote its business activities and
as an e-commerce tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. In addition to the Company, several of the other
investors are Sun America, Inc., Citicorp, Northwestern Mutual Life and others.
As of September 30, 1999, the Company had funded approximately $469,000 and is
obligated to provide additional funding in the approximate amount of $531,000.
The Company has additionally invested approximately $1,475,000 into one of
NAOF's portfolio investee companies. Subsequent to September 30, 1999, the
Company formally closed on a strategic investment/alliance with a South African
manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of
convertible preferred stock of Chancellor Corporation was issued and the note
receivable including accrued interest was canceled in exchange for a minority
interest and certain distribution rights in the South African company.
The Company's renewal or replacement of expired lines, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse and
non-recourse), anticipated long-term financing of individual significant lease
transactions, and its estimated cash flows from operations are anticipated to
provide adequate capital to fund the Company's operations for the next twelve
months. Although no assurances can be given, the Company expects to be able to
renew or timely replace expired lines of credit, to expand currently existing
lines for inventory floor planning, to continue to have access to the public and
private securities markets, both debt and equity, and to be able to enter into
new lines of credit and individual financing transactions.
The Company is in the final stages of negotiation with several
financial institutions, whereby the Company could potentially gain access to
substantial funding which would enable the Company to accelerate the
redevelopment of its lease origination business.
IMPACT OF THE YEAR 2000 ISSUE
The Company has completed 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
13
<PAGE>
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. Prior to 1999, the Company spent approximately $200,000 in
modernizing its IT system, including compliance with Y2K requirements. The
Company anticipates spending approximately $350,000 during fiscal 1999 and 2000
to complete the modernization of its IT system.
The failure of either the Company, its vendors or clients to correct the
systems affected by Y2K issues could result in a disruption or interruption of
business operations. The Company uses computer programs and systems in a vast
array of its operations to collect, assimilate and analyze data. Failure of
such programs and systems could affect the Company's ability to track assets
under lease and properly bill. Although the Company does not believe that any
of the foregoing worst-case scenarios will occur, there can be no assurance that
unexpected Y2K problems of the Company's and its vendors' and customer's
operations will not have a material adverse effect on the Company.
While it is difficult to classify our state of readiness, we believe that
our internal plans should have the Company ready by the end of 1999 to avoid any
material Y2K issues. We have completed the assessing, testing of systems, and
the development of contingency plans. Management is in constant communication
with its IT personnel and has made and will continue to make reports to the
Company's Board of Directors.
The preceding discussion contains forward-looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also subject
to protection under the Year 2000 Information and Readiness Disclosure Act of
1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein. Actual results may differ materially from such
projected information due to changes in the underlying assumptions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for
any quarter are less than the level expected by securities analysts and others,
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,
14
<PAGE>
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
material or 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition 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. Additionally,
the original 10-QSB included the acquisition of a minority interest in a South
African company as of September 30, 1999 in exchange for forgiveness of debt and
issuance of preferred stock. This transaction has been revised and recorded as
of the closing date in October, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR
CORPORATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 September 30, 1999.
(b) Reports on Form 8-K:
1.) Current Report on Form 8-K, dated February 10, 1999.
2.) Current Report on Form 8-K, dated March 4, 1999.
3.) Current Report on Form 8-K/A, dated March 22, 1999.
4.) Current Report on Form 8-K/A, dated April 13, 1999.
5.) Current Report on Form 8-K/A, dated July 9, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
/s/ Brian M. Adley
---------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
/s/ Franklyn E. Churchill
----------------------------
Franklyn E. Churchill
President, Chief Operating Officer
and Director
/s/ Jonathan C. Ezrin
------------------------
Jonathan C. Ezrin
Corporate Treasurer
(Principle Accounting Officer)
Date: January 29, 2000
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
CHANCELLOR CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
The following table reflects the calculation of the earnings per share:
Income Weighted Average
Common Shares Outstanding
(numerator) (denominator)
in thousands, except share and per share data
<S> <C> <C> <C>
Quarter ended September 30, 1999:
Earnings from operations $ 266 53,530,730
============ ==========================
Basic earnings per common share $0.00
Effect of dilutive securities-
Convertible preferred shares - - - 5,000,000
Vested Employee Options - - - 1,412,821
------------ --------------------------
$ 266 59,943,551
============ ==========================
Diluted earnings per common share $0.00
Quarter ended September 30,1998:
Earnings from operations $ 141 38,472,679
============ ==========================
Basic earnings per common share $0.00
Effect of dilutive securities-
Convertible preferred shares - - - 5,000,000
Warrant - VCC - - - 8,760,000
Vested Employee Options - - - 1,000,000
------------ --------------------------
$ 141 53,232,679
============ ==========================
Diluted earnings per common share $0.00
Year to date ended September 30, 1999:
Earnings from operations $ 558 48,381,553
============ ==========================
Basic earnings per common share $0.01
Effect of dilutive securities-
Convertible preferred shares - - - 5,000,000
Warrant - VCC - - - 2,323,232
Vested Employee Options - - - 1,475,608
------------ --------------------------
$ 558 57,180,393
============ ==========================
Diluted earnings per common share $0.01
Year to date ended September 30, 1998:
Earnings from operations $ 201 35,883,172
============ ==========================
Basic and diluted earnings per common share $0.01
Convertible preferred shares - - - 5,000,000
Warrant - VCC - - - 6,080,000
Vested Employee Options - - - 1,000,000
------------ --------------------------
$ 201 47,963,172
============ ==========================
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> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1657
<SECURITIES> 2651
<RECEIVABLES> 4375
<ALLOWANCES> 0
<INVENTORY> 10630
<CURRENT-ASSETS> 3934
<PP&E> 10388
<DEPRECIATION> 3491
<TOTAL-ASSETS> 31153
<CURRENT-LIABILITIES> 24704
<BONDS> 0
<COMMON> 583
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31153
<SALES> 14233
<TOTAL-REVENUES> 17724
<CGS> 12837
<TOTAL-COSTS> 17381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> 343
<INCOME-TAX> 77
<INCOME-CONTINUING> 266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
