UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to________
Commission file number 0-11663
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
(617) 368-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of August 2, 2000, 58,807,565 shares of Common Stock, $.01 par value per
share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value
per share were outstanding. The Series B shares convert into common on a 1 to 10
basis (3,500,000 in total) and have a liquidation preference of $20.00 per
preferred share or $7,000,000 in the aggregate. Aggregate market value of the
voting stock held by non-affiliates of the issuer as of August 2, 2000 was
approximately $ 9,768,000. Aggregate market value of the total voting stock of
the issuer as of August 2, 2000 was approximately $27,522,000.
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 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 14
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 16
1
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 264 $ 1,104
Receivables, net 3,959 4,154
Inventory 10,487 10,359
Net investment in direct finance leases 341 376
Equipment on operating lease, net of accumulated depreciation of
$1,706 and $1,887 5,444 4,152
Residual values, net 125 143
Furniture and equipment, net of accumulated depreciation
of $ 1,785 and $1,539 997 1,072
Investments 4,758 4,758
Intangibles, net 3,869 4,010
Other assets, net 1,435 1,420
------- -------
Total Assets $31,679 $31,548
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 3,938 $ 5,444
Deferred revenue 593 1,812
Indebtedness:
Revolving credit line 8,144 8,543
Notes payable 556 699
Nonrecourse 1,395 192
Recourse 7,161 5,320
------- -------
Total Liabilities 21,787 22,010
------- -------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
Convertible Series B, 2,000,000 shares authorized, 350,000 shares 4 4
issued and outstanding
Common stock, $.01 par value; 75,000,000 shares authorized, 590 590
58,802,565 and 58,795,065 shares issued and outstanding
Additional paid-in capital 35,860 35,837
Accumulated deficit (26,611) (26,942)
Accumulated other comprehensive income 49 49
------- -------
Total Stockholders' Equity 9,892 9,538
------- -------
Total Liabilities and Stockholders' Equity $31,679 $31,548
======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
------- --------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
Transportation Equipment Sales $ 10,735 $ 14,546 $ 24,001 $ 23,764
Rental income 566 316 1,305 774
Lease underwriting income -- 17 13 27
Direct finance lease income 21 28 55 42
Interest income 4 84 10 164
Fees from remarketing activities 950 622 1,221 860
Other income -- 11 104 82
----------- ----------- ----------- -----------
12,276 15,624 26,709 25,713
----------- ----------- ----------- -----------
Costs and expenses:
Cost of transportation equipment sales 8,554 11,500 19,158 18,589
Selling, general and administrative 2,799 3,288 5,844 5,795
Interest expense 161 176 300 242
Depreciation and amortization 487 395 997 708
----------- ----------- ----------- -----------
12,001 15,359 26,299 25,334
----------- ----------- ----------- -----------
Earnings before taxes 275 265 410 379
Provision for income taxes 54 64 79 86
----------- ----------- ----------- -----------
Net Income $ 221 $ 201 $ 331 $ 293
----------- ----------- ----------- -----------
Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
----------- ----------- ----------- -----------
Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01
Shares used in computing basic net income 58,800,340 48,300,550 58,797,703 46,039,725
per share
Shares used in computing diluted net income 63,308,322 56,941,127 63,210,534 56,046,197
per share
----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
June 30,
2000 1999
---------- -----------
(unaudited) (unaudited)
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 331 $ 293
------- -------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 819 708
Residual value estimate realizations and reductions, net of additions 18 5
Amortization of unamortized stock warrants 23 --
Changes in assets and liabilities:
(Increase) decrease in receivables 1,695 (2,256)
(Increase) in inventory (128) (670)
Increase (decrease) in accounts payable and accrued
expenses (1,506) 297
Increase (decrease) in deferred revenue (1,219) 3,054
------- -------
Total Adjustments (298) 1,138
------- -------
Net cash provided by operating activities 33 1,431
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investments in direct finance leases 35 (75)
Equipment on operating lease (204) (1,980)
Additions to furniture and equipment, net (171) (318)
Increase in intangibles (9) (66)
Net change in other assets (140) (410)
------- -------
Net cash used by investing activities (489) (2,849)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit (399) (264)
Increase in receivables-collateral for line of credit (1,500) --
Increase in indebtedness - recourse 4,480 3,300
Repayments of indebtedness-non recourse (183) (342)
Repayments of indebtedness-recourse (2,639) (1,513)
Repayment of notes payable (143) (221)
Issuance of common stock, net -- 290
------- -------
Net cash provided (used) by financing activities (384) 1,250
------- -------
Net increase (decrease) in cash and cash equivalents (840) 168
Cash and cash equivalents at beginning of period 1,104 612
------- -------
Cash and cash equivalents at end of period $ 264 $ 444
======= =======
Cash paid for interest $ 291 $ 332
======= =======
</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. Certain items in the 1999
financial statements have been reclassified to conform to the 2000
presentation. There is no effect on previously reported net income and
accumulated deficit. These financial statements and related notes should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB-A for
the year ended December 31, 1999. The balance sheet at December 31, 1999
has been derived from the audited consolidated financial statements
included in the Annual Report on Form 10-KSB-A. The results for the interim
period ended June 30, 2000 are not necessarily indicative of the results to
be expected for the entire year.
2. LOAN AGREEMENTS
In connection with the purchase of certain transportation equipment
(the "Equipment") on lease to certain lessees, the Company entered into a
$1,386,000 loan agreement (the "Loan") with a financial institution (the
"Lender"). The Loan provides for the payment of nine equal monthly
installments, beginning June 15, 2000, of principal and interest at 7.45%
in the amount of $105,000 with a final payment of $355,000 due on April 15,
2001. In addition, proceeds from the sale of the Equipment will be paid to
the Lender as additional principal reduction. The Loan is secured by all of
the Equipment and the lease contracts specifically associated with this
transaction. The balance outstanding on this Loan at June 30, 2000 was
$1,250,000.
In January 2000, the Company obtained a $3,000,000 working capital line
of credit (subsequently increased to $3,750,000) from an international
financial institution. The line is due on demand with interest at a per
annum rate equal to the sum of 2.65% plus the 30-day Dealer Commercial
Paper Rate. The line is secured by marketable securities placed in a
brokerage account at the institution by the Company's majority shareholder.
The balance outstanding in this line of credit at June 30, 2000 was
approximately $3,126,000.
3. BUSINESS ACQUISITION
The Company acquired its Tomahawk subsidiary (M.R.B.), Inc. on January 29,
1999. The Company took operational control of Tomahawk effective August 1,
1998 pursuant to a Management Agreement and, pursuant to a formal closing
on January 29, 1999. The acquisition was accounted for under the purchase
method of accounting and therefore, the results of operations of Tomahawk
after the acquisition date included in the Company's statement of
operations for the six month period ended June 30, 1999.
The following pro forma information has been prepared assuming that
this acquisition had taken place at the beginning of the period. The pro
forma financial information is not necessarily indicative of the results of
operations as they would have been had the transactions been effected on
the assumed date.
5
<PAGE>
Six Months Ended June 30, 1999
----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE
AMOUNTS)
Net revenue $ 29,013
Net income before taxes $ 383
Net income after taxes $ 313
Net income (loss) per common share $ .01
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.
In December 1999, the Securities and Exchange Commission issued staff
accounting bulletin No. 101 ("SAB101"), Revenue Recognition in Financial
Statements. SAB101 provided guidance on applying generally accepted
accounting principals to revenue recognition issues in financial
statements. The Company has adopted SAB101 as required during the year 2000
and believes that this SAB does not have a material effect on the results
of operations.
5. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) sales of
transportation equipment and 2) leasing activity.
The Company's Sales of Transportation Equipment division retails and
wholesales used transportation equipment primarily, tractors and trailers,
through retail centers located in strategic locations primarily in the
southern and mid-western sections of the United States. This business
segment also includes sales of equipment by the Company's equipment
re-marketing group.
Leasing activities include revenues generated under operating or
direct financing leases. The Company also manages most of the leases it
sells to investors and, when the original lease expires or terminates,
remarkets the equipment for the benefit of the investors and the Company.
Leases primarily involve transportation equipment, but also other equipment
including material handling and construction equipment.
6
<PAGE>
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
<S> <C> <C> <C> <C>
SALES OF TRANSPORTATION EQUIPMENT:
Revenues $ 10,735 $ 14,546 $ 24,001 $ 23,764
-------- -------- -------- --------
Costs and expenses:
Cost of transportation equipment 8,554 11,500 19,158 18,589
Selling, general and administrative 2,047 2,287 4,556 3,761
Interest expense 11 103 12 136
Depreciation and amortization 106 108 220 190
-------- -------- -------- --------
Total Costs and expenses 10,718 13,998 23,946 22,676
-------- -------- -------- --------
Income from sales of transportation equipment $ 17 $ 548 $ 55 $ 1,088
-------- -------- -------- --------
Identifiable Assets $ 18,354 $ 13,972 $ 18,354 $ 13,972
-------- -------- -------- --------
LEASING ACTIVITY
Revenues:
Leasing activity $ 1,537 $ 983 $ 2,594 $ 2,277
Interest income 4 84 10 164
Other income -- 11 104 82
-------- -------- -------- --------
Total Leasing Revenues 1,541 1,078 2,708 2,523
-------- -------- -------- --------
Costs and expenses:
Selling, general and administrative 752 1,001 1,288 2,034
Interest expense 150 73 288 106
Depreciation and amortization 381 287 777 518
-------- -------- -------- --------
Total Costs and expenses 1,283 1,361 2,353 2,658
-------- -------- -------- --------
Income (loss) from leasing activity $ 258 $ (283) $ 355 $ (135)
-------- -------- -------- --------
Identifiable assets $ 6,694 $ 10,015 $ 6,694 $ 10,015
======== ======== ======== ========
Total Assets for reportable segments $ 25,048 $ 23,987
Corporate investments, intangibles and other assets 6,631 2,693
-------- --------
$ 31,679 $ 26,680
======== ========
</TABLE>
Included in cost of transportation equipment for the three and six months
ended June 30, 2000 is $202,000 and $377,000 respectively of interest
expense.
6. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The financial statements for the six month period ended June 30, 1999
were restated to reflect the acquisition of Tomahawk on January 29, 1999
rather than August 1998, as originally reported, due to management and
operational control given to the Company on the earlier date. In accordance
with APB Opinion 20, the Company has treated this change as a change in
reporting entity. In addition, the Company restated the 1999 financial
statements to record $10,500 of compensation expense related to stock
purchase warrants. The total effect of this restatement on the June 30,
1999 financial statements was to reduce net income for the six-month period
by $382,000. The effect on earnings per share for the three-month period
ended June 30, 1999 was to decrease both basic and diluted net income per
share from $ .01 to $ .00. There was no effect on earnings per share for
the six months ended June 30,1999.
7
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Effective January 29, 1999, the Company, through its wholly owned
subsidiary, CAM, purchased a company known as Tomahawk, with the following
non-cash investing and financing activities:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
------------------------------
(In thousands)
<S> <C>
Fair Value of assets acquired $ 10,679
Fair Value of liabilities assumed (10,372)
------
307
Fair Value of common stock issued 2,925
-----
Excess purchase price over fair value of assets acquired $ 2,618
=======
</TABLE>
During June 2000, the Company acquired approximately $1,386,000 of
equipment under operating leases in exchange for non-recourse debt from the
seller.
8. CONTINGENCIES
The Company is contingently liable to its majority shareholder for
fees associated with the acquisition of certain subsidiaries and
investments. The final fees to be paid are based principally on the
financial impact and profitability that these acquisitions add to the
Company's operating results. The Company is also contingently liable to the
former owners and current employees of MRB via and earnout arrangement. No
such fees were paid during the six-month period ended June 30, 2000.
In the normal course of business, the Company is from time to time,
subject to litigation. Management does not expect that the outcome of any
of these actions will have a material adverse impact on the Company's
financial position.
The Company records sales of leased equipment with limited and full
recourse in accordance with the provisions of FASB Statement No. 125. The
Company has considered its history of repossession losses and determined
that no liability for recourse obligations is currently necessary.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2000 VS. JUNE 30, 1999
REVENUES. Total revenues for the three-month period ended June 30, 2000
were $12,276,000 as compared to $15,624,000 for the corresponding prior period,
a decrease of $ 3,348,000 or 21%. For the three-month period ended June 30,
2000, transportation equipment sales were $ 10,735,000 as compared to
$14,546,000 for the corresponding prior period, a decrease of $ 3,811,000 or
26%. 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"). CAM's revenues from the sales of used transportation
equipment for the three month period ended June 30, 2000 decreased by $2,663,000
as compared to $13,310,000 for the corresponding period for 1999. The decrease
in revenues by CAM is primarily a result of financial downturn in the used
transportation equipment market attributable, in part, to increased fuel prices
and interest rates. CAM, through it's Tomahawk subsidiary has retail outlets
located in key southeastern and mid-western cities and has inventory for both
retail and wholesale sales. Through CAM, the Company seeks to continue to expand
its retail centers geographically. In July 2000, the Company acquired a company
with two additional strategic retail locations. 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 June
30, 2000, rental income increased by $250,000 or 79% to $566,000 as compared to
$316,000 for the corresponding prior period. The increase in rental income is
attributable primarily to the addition to the Company's portfolio of certain
equipment acquired in connection with the purchase of several lease portfolios
in 1999 and 2000 from financial institutions. For the three month period ended
June 30, 2000, lease underwriting income decreased by $17,000 or 100% as
compared to for the corresponding prior period and direct finance lease income
decreased by $7,000 or 25% to $21,000 as compared to $28,000 for the
corresponding prior period. 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 June 30,
2000, interest income decreased by $ 80,000 or 95% to $4,000 as compared to
$84,000 for the corresponding prior period. The decrease is primarily
attributable to interest earned in connection with the Company's investment of
approximately $1,475,000 in a South Africa based manufacturer and lessor of
transportation equipment. In October 1999, the Company converted the note
receivable into an equity interest in the South African company. For the
three-month period ended June 30, 2000, fees from remarketing activities
increased by $328,000 or 53% to $950,000 as compared to $622,000 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 June 30, 2000, other income decreased by
$11,000 or 100% compared to the corresponding prior period.
COSTS AND EXPENSES. Total costs and expenses for the three-month period
ended June 30, 2000 were $ 12,001,000 as compared to $15,359,000 for the
corresponding prior period, a decrease of $3,358,000 or 22%. The significant
decrease is primarily a result of the costs associated with sales of
transportation equipment. The cost of transportation equipment sales for the
three-month period ended June 30, 2000 was $8,554,000 as compared to $11,500,000
for the corresponding prior period, a decrease of $2,946,000 or 26%, and
resulted in an overall gross margin of 20%. Selling, general and administrative
expenses for the three-month period ended June 30, 2000 were $2,799,000 as
compared to $3,288,000 for the corresponding prior period, a decrease of
$489,000 or 15%. For the three-month period ended June 30, 2000, selling,
general and administrative expenses included recovered reimbursable trust
administration costs of approximately $144,000. Approximately $184,000 of the
decrease in selling, general and administrative expenses for the three-month
period ended June 30, 2000 is a result of cost containment measures implemented
by CAM and CAM's retail and wholesale business unit, Tomahawk, whose operations
were consolidated with the Company's beginning February, 1999. Before netting
out the reimbursable trust administration costs and the effect of the CAM
expenses, selling, general and administrative expenses decreased to $1,047,000
for the three-month period ended June 30, 2000 as compared to $1,370,000 for the
corresponding prior period, a decrease of $323,000 or 24%. The decrease in
selling, general and administrative expenses reflects the effect of the
Company's growth strategy implementation that included, in part, costs
associated with the addition of senior management, sales and staff personnel,
offset by significant cost containment and consolidation in other areas.
9
<PAGE>
Interest expense for the three-month period ended June 30, 2000 was
$161,000 as compared to $176,000 for the corresponding prior period, a decrease
of $15,000 or 9%.
Depreciation and amortization expense for the three-month period ended June
30, 2000 was $487,000 as compared to $395,000 for the corresponding prior
period, an increase of $92,000 or 23%. The increase is primarily due to the
amortization of intangible assets associated with distribution rights acquired
from AMC, the Company's South African investee and increase in equipment under
operating leases as previously indicated.
Provision for income taxes for the three-month period ended June 30, 2000
was $54,000 as compared to $64,000 for the corresponding prior period, a
decrease of $10,000.
NET INCOME. Net income for the three-month period ended June 30, 2000 was
$221,000 as compared to $201,000 for the corresponding prior period, an increase
of $20,000 or 10%. The increase in net income is attributable to the significant
increase in re-marketing activity 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 period ended June 30, 2000 as compared to $0.00 per share (both
basic and diluted) for the corresponding prior period.
SIX MONTH PERIOD ENDED JUNE 30, 2000 VS. JUNE 30, 1999
REVENUES. Total revenues for the six-month period ended June 30, 2000 were
$26,709,000 as compared to $25,713,000 for the corresponding prior period, an
increase of $996,000 or 4%. For the six-month period ended June 30, 2000,
transportation equipment sales were $24,001,000 as compared to $23,764,000 for
the corresponding prior period, an increase of $237,000 or 1%. 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 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 six-month period ended June
30, 2000, rental income increased by $531,000 or 69% to $ 1,305,000 as compared
to $774,000 for the corresponding prior period. The increase in rental income is
attributable primarily to the addition to the Company's portfolio of certain
equipment acquired in connection with the purchase of several lease portfolios
in 1999 and 2000 from financial institutions. For the six-month period ended
June 30, 1999, lease underwriting income decreased by $ 14,000 or 52% to
$13,000 as compared to $27,000 for the corresponding prior period and direct
finance lease income increased by $13,000 or 31% to $55,000 as compared to
$42,000 for the corresponding prior period. 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 six-month period ended June 30,
2000, interest income decreased by $154,000 or 94% to $ 10,000 as compared to
$164,000 for the corresponding prior period. The decrease is primarily
attributable to interest earned in connection with the Company's investment of
approximately $1,475,000 in a South Africa based manufacturer and lessor of
transportation equipment. The note receivable was converted into an equity
interest in the South African company in October 1999. For the six-month period
ended June 30, 2000, fees from remarketing activities increased by $361,000 or
42% to $1,221,000 as compared to $860,000 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 six-month period ended June
30, 2000, other income increased by $22,000 or 27% to $104,000 as compared to
$82,000 for the corresponding prior period.
COSTS AND EXPENSES. Total costs and expenses for the six-month period ended
June 30, 2000 were $26,299,000 as compared to $25,334,000 for the corresponding
prior period, an increase of $965,000 or 4%. The increase is primarily a result
of the costs associated with sales of transportation equipment. The cost of
transportation equipment sales for the six-month period ended June 30, 2000 was
$19,158,000 as compared to $18,589,000 for the corresponding prior period, an
increase of $569,000 or 3%, and resulted in an overall gross margin of 20.2%.
Selling, general and administrative expenses for the six-month period ended June
30, 2000 was $5,844,000 as compared to $5,795,000 for the corresponding prior
period, an increase of $49,000 or 1%. This increase in selling, general and
administrative expenses reflects the effect of the Company's growth strategy
implementation while continuing to improve the containment of other costs.
10
<PAGE>
Interest expense for the six-month period ended June 30, 2000 was $300,000
as compared to $242,000 for the corresponding prior period, an increase of
$58,000 or 24%. 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 six-month period ended June
30, 2000 was $997,000 as compared to $708,000 for the corresponding prior
period, an increase of $289,000 or 41%. The increase is primarily due to the
amortization of intangible assets associated with the purchase of Tomahawk and
distribution rights as well as an increase in equipment under operating leases.
Provision for income taxes for the six-month period ended June 30, 2000 was
$79,000 as compared to $86,000 for the corresponding prior period, a decrease of
$7,000.
NET INCOME. Net income for the six-month period ended June 30, 2000 was
$331,000 as compared to $293,000 for the corresponding prior period, an increase
of $38,000 or 13%. The increase in net income is attributable to the significant
increase in revenues, primarily from re-marketing activities and benefit from
settlement of litigation and continued improvements in the containment of costs.
Net income per share was $0.01 per share (both basic and diluted) for the
six-month period ended June 30, 2000 as compared to $0.01 per share (both basic
and diluted) for corresponding prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net decrease in cash and cash equivalents for the
six-month period ended June 30, 2000 of $840,000. Operating activities provided
cash of $33,000 during the six-month period ended June 30, 2000 and is primarily
a result of increased re-marketing activities and collections of receivables
offset by a decrease in deferred revenue associated with the re-marketing of the
Company's lease portfolio and decreases in accounts payable. Investing
activities used cash of $489,000 during the six-month period ended June 30, 2000
and is primarily a result of the acquisition of portfolios of operating leases
valued at approximately $204,000. Financing activities used cash of $384,000
during the six-month period ended June 30, 2000 and is primarily the result of
normal repayments of recourse and non-recourse debt. Cash and cash equivalents
were $264,000 at June 30, 2000 as compared to $1,104,000 at December 31, 1999, a
decrease of $840,000 or 73%.
In connection with the purchase of certain transportation equipment (the
"Equipment") on lease to certain lessees, the Company entered into a $1,386,000
loan agreement (the "Loan") with a financial institution (the "Lender") in June
2000. The Loan provides for the payment of nine equal monthly installments,
beginning July 15, 2000, of principal and interest at 7.45% in the approximate
amount of $105,000. Proceeds from the sale of the Equipment will be paid to the
Lender as additional principal reduction. The Loan is secured by all of the
Equipment and the lease contracts specifically associated with this transaction.
In January 2000, the Company obtained a $3,000,000 working capital line of
credit (subsequently increased to $3,750,000) from an international financial
institution. The line is due on demand with interest at a per annum rate equal
to the sum of 2.65% plus the 30-day Dealer Commercial Paper Rate. The line is
secured by marketable securities placed in a brokerage account at the
institution by the Company's majority shareholder. The balance outstanding in
this line of credit at June 30, 2000 was approximately $3,126,000.
The Company maintains a revolving line of credit agreement with a financial
institution whereby CAM can borrow up to $7,500,000 to floor plan used
transportation equipment inventory. The balance outstanding under this revolving
line of credit agreement is approximately $7,244,000 as of June 30, 2000. Prior
to the acquisition, during 1998, CAM, through Tomahawk entered into a special
purpose financing agreement with the same institution to floor plan additional
used transportation equipment inventory in the approximate amount of $4,500,000.
The balance outstanding under this special purpose financing agreement is
approximately $427,000 as of June 30, 2000. The interest rate on the above lines
is prime plus 1.75%.
The Company's ability to underwrite equipment lease transactions is largely
dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in continuing dialogue with several inventory lenders,
which appear to be interested in providing the Company with warehouse financing.
If the Company experiences delays in putting warehouse facilities in place, the
Company transacts deals by coterminous negotiation of lease transactions with
customers and financing with institutions upon which it obtains a fee as the
intermediary of up to 3% of the amount of financing.
11
<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
re-leased, resulting in a potential loss to the Company.
The Company plans to dedicate substantial resources toward the further
development and improvement of its remarketing, retailing and wholesaling
capabilities. The Company's strategy is to further capitalize upon its
remarketing expertise by continuing to develop its ability to sell remarketing
services to other lessors, fleet owners, and lessees. The Company plans also to
create a dealer capability under which the Company would buy and resell fleet
equipment. The Company anticipates expanding its used transportation equipment
retail and wholesale capabilities through the addition of retail centers
geographically through internal growth and acquisitions. The Company's retail
and wholesale capabilities have been greatly improved through CAM's strategic
acquisition of Tomahawk. This improved capability will be used as a competitive
advantage that will enable the Company to provide a "total holding cost" concept
when competing for new lease origination deals. The Company's retail and
wholesale business unit will provide improved outlets for other lessors,
financial institutions, and fleet owners to dispose of used transportation
equipment and sources of quality used transportation equipment for fleet owners
and owner-operators. The Company will also aggressively promote its Internet
capabilities to further promote its business activities and as an e-commerce
tool.
In August 1997, the Company committed to make a $1 million equity
investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120
million investment fund composed of $40 million from equity participants
including the Company, and $80 million in debt financing provided by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency. The purpose of the fund is to make direct investments in emerging
companies throughout Africa. As of June 30, 2000, the Company had funded
approximately $736,000 and is obligated to provide additional funding in the
approximate amount of $264,000. The Company has additionally invested
approximately $4,875,000 into one of NAOF's portfolio investee companies. In
October 1999, the Company formalized a strategic investment/alliance with a
South African manufacturer and New Africa Opportunity Fund "NAOF" whereby a
series of preferred stock of Chancellor Corporation was issued in exchange for a
minority interest and certain distribution rights in the South African company.
The Company has signed a letter of intent and is in the final stages of
negotiation to acquire all of the common stock of Sapp Bros. Leasing Inc., a
lessor of transportation equipment with two retail locations in the mid-western
section of the United States. As part of the acquisition, the Company will also
acquire Rigfinder.com Inc., an e-commerce company associated with the sale and
leasing of transportation equipment and a wholly owned subsidiary of Sapp Bros.
The transaction cost are expected to include the issuance of 1,000,000 shares of
the Company's common stock as well as cash payments contingent upon the future
profitability of Sapp Bros.
The Company's renewal or replacement of expired lines, its expected access
to the public and private securities markets, both debt and equity, anticipated
new lines of credit (both short-term and long-term and recourse and
non-recourse), anticipated long-term financing of individual significant lease
transactions, and its estimated cash flows from operations are anticipated to
provide adequate capital to fund the Company's operations for the next twelve
months. Although no assurances can be given, the Company expects to be able to
renew or timely replace expired lines of credit, to expand currently existing
lines for inventory floor planning, to continue to have access to the public and
private securities markets, both debt and equity, and to be able to enter into
new lines of credit and individual financing transactions.
The Company is in the final stages of negotiation with several significant
financial institutions, whereby the Company could potentially gain access to
substantial funding which would enable the Company to accelerate the
redevelopment of its lease origination business.
12
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of
its stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the same time of any material decrease
in any widely followed stock index or in the market price of the stock of one or
more public equipment leasing companies or major customers or vendors of the
Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its customers. Such sales of
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceeds net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-QSB contains certain "Forward-Looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or the Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introduction and acceptance, technology changes and changes in industry
conditions. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings incidental to the conduct
of its business. Management believes that none of these legal proceedings will
have a material adverse effect on the financial condition of operations of the
Company.
Item 2. Changes in Securities
None
Item 3 Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 25, 2000, the Board of Directors caused to be distributed to stockholders
of record as of May 23, 2000, a Notice of Annual Meeting of Stockholders, Proxy
and Proxy Statement for the Annual Meeting held on June 30, 2000. As of the
record date, 58,802,565 shares of Common Stock and 350,000 shares of Series B
Preferred Stock were entitled to vote. Each share of Series B Preferred Stock
was entitled to 10 votes. For all matters presented the Common Stock and Series
Preferred Stock voted as a single class.
At the meeting, the stockholders acted upon the following proposals: (i) to
elect one (1) director to hold office until his successor shall be elected and
shall have qualified; (ii) to ratify the selection by the Board of Directors of
BKR Metcalf, Davis as the Company's independent public accountants for fiscal
2000. All of the above matters were approved by the stockholders.
Votes "For" represent affirmative votes and do not represent abstentions or
broker non-votes. In cases where a signed proxy was submitted without direction,
the shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy. The voting results were as follows:
Proposal No. 1: Election of Director:
<TABLE>
<CAPTION>
Director Nominee For % Withheld %
---------------- --------------------------------------------------
<S> <C> <C> <C> <C>
Brian M. Adley 41,192,807 99.8% 90,082 .2%
</TABLE>
Proposal No. 2: Ratification of Auditors
<TABLE>
<CAPTION>
For % Against % Abstain %
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
39,381,174 95.39% 19,319 0.05% 1,882,396 4.56%
</TABLE>
Item 5. Other Information
Form 10-KSB, for 1999 was amended July, 2000, primarily for the effects caused
by the change in acquisition date of the Tomahawk subsidiary which was
originally reported as of August, 1998. This transaction has been recorded as of
January 1999, the date of final closing in the revised 10-KSB-A and this
10-QSB-A. See 10-KSB-A for more information.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Note and Security Agreement, dated June 14, 2000 in the
original principal amount of $1,386,598 from Chancellor
Fleet Corporation to Banc of America Leasing and Capital,
LLC
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE
MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
11 Computation of Earnings per Share
27 Financial Data Schedule for period ended June 30, 2000.
(b) Reports on Form 8-K:
15
<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/ Barry W. Simpson
----------------------------------------------------
Barry W. Simpson
Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 2000
16
<PAGE>
EXHIBIT 11
CHANCELLOR CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
The following table reflects the calculation of the earnings per share:
<TABLE>
<CAPTION>
Weighted Average
Common Shares
Outstanding
INCOME ----------------
------ (denominator)
(numerator)
In thousands, except share and per share data
<S> <C> <C> <C>
Quarter ended June 30, 2000:
Earnings from Operations $ 221 58,800,340
=========== ===========
Basic earnings per common share $ 0.00
Effect of dilutive securities -
Convertible preferred shares -- 5,000,000
Stock Options -- 1,007,982
-----------
-- 63,308,322
===========
Diluted earnings per common share $ 221 $ 0.00
Quarter ended June 30, 1999
Earnings from Operations (restated) $ 201 48,300,550
=========== ===========
Basic earnings per common share $ 0.00
Effect of dilutive securities
Convertible preferred shares -- 5,000,000
Warrant - VCC -- 2,222,222
Stock Options -- 1,418,355
----------- -----------
$ 201 56,941,127
=========== ===========
Diluted earnings per common share $ 0.00
Year to date ended June 30, 2000:
Earnings from operations $ 331 58,797,703
=========== ===========
Basic earnings per common share $ 0.01
Convertible preferred shares -- 3,500,000
Stock Options -- 912,813
----------- -----------
$ 331 63,210,534
=========== ===========
Diluted earnings per common share $ 0.01
Year to date ended June 30, 1999:
Earnings from operations (restated) $ 293 46,039,725
=========== ===========
Basic earnings per common share $ 0.01
Effect of dilutive securities -
Convertible preferred shares -- 5,000,000
Warrant - VCC -- 3,484,848
Stock Options -- 1,521,624
----------- -----------
$ 293 56,046,197
=========== ===========
Diluted earnings per common share $ 0.01
</TABLE>
17
