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
Income Common Shares
Outstanding
(numerator) (denominator)
In thousands, except per share data
<S> <C> <C> <C>
Year ended December 31, 1999
Earnings from Operations $ 1,074 50,804,176
Basic earnings per common share $ 0.02
Effective of dilutive securities
Convertible preferred shares - 3,083,333
Warrant-VCC - 1,622,807
Stock option plans - 1,680,144
----------- -----------
$ 1,074 57,190,460
=========== ===========
Diluted earnings per common share $ 0.02
Year ended December 31, 1998
Earnings from operations $ 524 32,195,162
Basic earnings per common share $ 0.02
Effect of dilutive securities
Convertible preferred shares -- 5,000,000
Warrant-VCC -- 2,959,184
Stock option plans -- 1,246,417
----------- -----------
$ 524 41,400,763
============ =============
Diluted earnings per common share $ 0.01
======================================================================================================
</TABLE>
End
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Chancellor Corporation
We have audited the accompanying consolidated balance sheet of Chancellor
Corporation and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the two-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed further in note 1, the Company has restated the 1998
consolidated financial statements to reflect the results of a change in the date
of acquisition of the Company's MRB, Inc. subsidiary to January 29, 1999.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1999 (as restated for 1998) in conformity with
generally accepted accounting principles.
/s/ Metcalf Rice Fricke & Davis
Atlanta, Georgia
March 24, 2000, except for Note 1, 14 and 15 which are as of August 17, 2000.
F-1
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
1999
----------------
<S> <C>
ASSETS
Cash and cash equivalents $ 1,104
Receivables, net 4,154
Deferred taxes 336
Net investment in direct finance leases 376
Equipment on operating lease, net 4,152
Inventory 10,359
Residual values, net 143
Furniture and equipment, net of accumulated depreciation of $1,539 1,072
Investments 4,758
Intangibles, net 4,010
Other assets, net 1,084
-------
Total Assets $31,548
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 5,444
Deferred revenue 1,812
Indebtedness:
Revolving credit line 8,543
Notes payable 699
Nonrecourse 192
Recourse 5,320
-------
Total liabilities 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
issued and outstanding 4
Common stock, $.01 par value; 75,000,000 shares authorized,
58,795,065 shares issued and outstanding 590
Additional paid-in capital 35,837
Accumulated deficit (26,893)
-------
Total Stockholders' Equity 9,538
-------
Total Liabilities and Stockholders' Equity $31,548
=======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(restated)
Revenues
<S> <C> <C>
Transportation equipment sales $ 54,528 $ 6,165
Rental income 1,755 942
Lease underwriting income 27 74
Direct finance lease income 109 110
Interest income 267 195
Gains from portfolio remarketing 873 1,374
Fees from remarketing activities 4,575 1,728
Other income 138 120
------------ ------------
62,272 10,708
------------ ------------
Costs and expenses:
Cost of transportation equipment sales 43,802 5,647
Selling, general and administrative 15,217 3,949
Interest expense 802 111
Depreciation and amortization 1,621 477
------------ ------------
61,442 10,184
------------ ------------
Earnings before taxes 830 524
Provision for (benefit from) income taxes (244) --
------------ ------------
NET INCOME $ 1,074 $ 524
============ ============
Basic net income per share $ .02 $ .02
============ ============
Diluted net income per share $ .02 $ .01
------------ ------------
Shares used in computing basic net income per share 50,804,176 32,195,162
Shares used in computing diluted net income per share 57,190,460 41,400,763
Net Income $ 1,074 $ 524
Other Comprehensive Income 49 0
------------ ------------
Net Income and Comprehensive Income $ 1,123 $ 524
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(In Thousands)
<TABLE>
<CAPTION>
ACCUM
ADD'L OTHER STOCKHOLDERS
PREFERRED STOCK COMMON STOCK PAID IN ACCUM COMP. EQUITY
--------------- ------------ ------- ----- ----- ------
SHARES AMT SHARES AMT CAPITAL DEFICIT INCOME (DEFICIT)
------ --- -- ------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 12/31/97 8,711 $ 87 25,401 $ 254 $ 28,426 $ (28,540) $ 227
Preferred Stock,
Series A converted to (711) (7) 7,105 71 (64)
common stock
Preferred stock,
Series AA converted to
common stock (3,000) (30) 3,000 30
Common Stock Issued 2,146 21 1,296 1,317
Exercise of Stock 892 9 284 293
Options
Additional Paid in 1 1
Capital
Net Income (restated) 524 524
----- ----- ------ ----- --------- ---------- -------- ----------
Balance 12/31/98
(restated) 5,000 $ 50 38,544 $385 $29,943 $(28,016) ------ $ 2,362
Exercise of stock 10,000 $100 1,900 2,000
warrants
Preferred stock,
Series AA converted to
common stock (5,000) (50) 5,000 50
Preferred stock,
Series B issued 4 4 1,815 1,819
Common stock issued 4,700 48 2,153 2,201
Exercise of stock
options 718 8 81 89
Common Shares Returned
(167) (1) (97) (98)
Additional paid in
capital 42 42
Unrealized gain on
available-for-sale
securities 49 49
Net Income 1,074 1,074
----- ----- ------ ----- --------- ---------- -------- ----------
Balance 12/31/99 4 $ 4 58,795 $ 590 $ 35,837 $ (26,942) $ 49 $ 9,538
====== ====== ======= ===== ========= ========== ======= ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,074 $ 524
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,621 477
Residual value estimate realizations and reductions, net of additions 76 246
Changes in assets and liabilities:
(Increase) in receivables (702) (2,213)
(Increase) in deferred taxes (336) --
(Increase) in inventory (440) (36)
Increase in deferred revenue 744 1,053
Increase (decrease) in accounts payable and accrued expenses 748 (2,334)
------- -------
1,711 (2,807)
------- -------
Net cash provided by (used in) operating activities 2,785 (2,283)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting -- 502
Net investments in direct finance leases (17) 162
Equipment on operating lease (3,800) (588)
Net change in cash restricted -- 2,419
Additions to furniture and equipment, net (496) (172)
(Increase) in intangibles, net (1,866) --
Net change in other assets (3,262) (1,377)
------- -------
Net cash (used for) provided by investing activities (9,441) 946
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving line of credit 9 --
Borrowings - nonrecourse debt -- 688
Borrowings - recourse debt 9,542 755
Repayments of indebtedness - nonrecourse (697) (327)
Repayments of indebtedness - recourse (4,517) (875)
Repayments of notes payable - net (14) --
Issuance of stock, net 2,825 1,611
------- -------
Net cash provided by financing activities 7,148 1,852
------- -------
Net increase in cash and cash equivalents 492 515
Cash and cash equivalents at beginning of year 612 97
------- -------
Cash and cash equivalents at end of year $ 1,104 $ 612
======= =======
Cash paid for interest $ 728 $ 265
======= =======
Cash paid for income taxes $ 57 $ 13
======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Business Organization and Significant Accounting Policies
BUSINESS
Chancellor Corporation and Subsidiaries (the "Company") are engaged in (1)
buying, selling, leasing and remarketing new and used equipment, primarily
transportation, material handling and construction equipment, (2) managing
equipment on and off-lease, and (3) arranging equipment-related financing. The
Company's primary market has historically been the United States. During 1999
and 1998, the Company expanded its market presence to include activities in
international markets such as the Republic of South Africa and Russia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts,
transactions and profits and losses have been eliminated in consolidation.
ACCOUNTING FOR ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These assumptions could change based on future experience and,
accordingly, actual results may differ from these estimates.
REVENUE RECOGNITION
TRANSPORTATION EQUIPMENT SALES - Revenues on transportation equipment sales
is recognized in the period in which the sale is completed and title is
transferred. Deposits on transportation equipment, that may be required under
certain financing contracts, are shown as deposits on sales and included in
accrued expenses.
Although transportation equipment is primarily sold with recourse, the
Company may undertake certain limited obligations with respect to specific
customers in case of default, referred to as limited recourse. Upon transfer of
the asset sold with limited or full recourse, the Company accounts for the
transaction as a sale, in accordance with the provisions of FASB Statement No.
125, "Accounting for transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The Company's management has considered its
history of repossession losses and has determined that no liability for recourse
obligations is currently necessary.
LEASE UNDERWRITING INCOME - Lease underwriting fees arise from the sale of
equipment leasing transactions and include cash underwriting margins and
residual value fees. The excess of the sales price of equipment to an investor
(including the assumption of any nonrecourse indebtedness) over its cost to the
Company represents lease-underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a nonrecourse basis. If the Company elects to sell the transaction (as
opposed to retaining the transaction for its own portfolio), the equipment,
subject to the lease and the borrowing (if any), is then sold to investors.
Consideration for the sale of the leased equipment to investors is normally in
the form of a cash investment.
F-6
<PAGE>
Residual value fees arise from the sale of lease transactions to investors.
These fees represent the Company's present value share of the future residual
value of the leased equipment that the Company expects to realize upon
successful remarketing of the equipment. The Company accounts for these
transactions by booking the income during the period in which it is recognized.
DIRECT FINANCE LEASE INCOME - Lease contracts which qualify as direct
finance leases are accounted for by recording on the balance sheet minimum lease
payments receivable and estimated residual values on leased equipment less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease, on the basis that produces
a constant rate of return.
OPERATING LEASES (RENTAL INCOME) - Lease contracts, which qualify as
operating leases, are accounted for by recording the leased equipment as an
asset, at cost. The equipment is then depreciated on a straight-line basis over
two to fifteen years to its estimated residual value. Equipment is further
depreciated below its initial residual value upon release to its estimated
revised residual value at lease expiration. Any changes in depreciable lives
affect the associated expense on a prospective basis. Rental income from
operating leases is recognized using a straight-line method over the initial
term of the lease.
REIMBURSABLE EXPENSES
The Company is entitled to reimbursement of expenses incurred in the
remarketing of certain equipment as outlined in various remarketing agreements.
Pursuant to the terms of the trust agreements, the Company is permitted to
charge the trusts for costs associated with administrating the trust and to
recover expenses incurred in administering the trust. The reimbursement of these
costs is recorded as a reduction of general and administrative expenses.
RESIDUAL VALUES
The Company reviews recorded residual values on an annual basis. Write
downs in estimated residual values, due to declines in equipment value or the
financial creditworthiness of individual customers and major industries into
which the Company leases equipment, are recorded when considered other than
temporary. The residual valuation is based on independent valuation of the
equipment held under trust lease and its internal valuation assessments. The
Company also reviews current market analyses and trends of the industry for
comparative valuations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
A primary credit risk includes financing for high-credit-risk customers.
The Company, as is common in this industry, obtains financing for the customers
from outside financial institutions that specialize in this type of high-credit
risk customers primarily with no recourse. The Company may undertake certain
limited obligations with respect to specific customers with these financial
institutions in case of customer default, referred to as limited recourse.
However, should a sale without recourse be obtained by a credit application
which contains misrepresentation to the financing company, via the Company or
customer, then that sale can be reclassified as a sale with recourse and become
an obligation of the Company. As discussed in the summary of accounting policies
of this report, the Company records limited and full recourse sales in
accordance with the provisions of FASB Statement No. 125. As of December 31,
1999, the Company's has sold approximately $1,849,000 with limited or full
recourse. The Company's management has considered its history of repossession
losses and has determined that no liability for recourse obligations is
currently necessary. Concentrations with respect to trade receivables are
limited because the Company's client base is made up of a large number of
geographically diverse clients.
F-7
<PAGE>
The Company maintains its cash balances in several banks. The Federal
Deposit Insurance Corporation insures up to $100,000 of the balances held by
each bank. The Company also has arrangements whereby the funds in excess of
specified cash balances are invested in overnight repurchase agreements and such
overnight investments are collateralized by high-grade corporate debt
securities. As of December 31, 1999, the uninsured portion of the cash balances
held at banks was approximately $825,000, of which $520,000 was invested in
overnight repurchase agreements.
INVENTORY
All inventories are valued at the lower of cost or market. The cost of
transportation equipment, including reconditioning parts and other direct costs,
is determined using the specific identification method.
FURNITURE, EQUIPMENT AND LEASEHOLDS
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets, typically 3 to 7 years. Leasehold improvements are amortized over the
lease term.
INTANGIBLES
Intangibles consist of goodwill, distribution rights and deferred trust
recovery costs, which are being amortized over estimated lives of three (3) to
fifteen (15) years using the straight-line method. Amortization expense of
distribution rights amounted to approximately $46,000 during 1999. Amortization
expense of the deferred trust recovery costs for 1999 and 1998 was $500,000 and
$47,000 respectively and accumulated amortization of these costs was $547,000.
TOMAHAWK EXCESS PURCHASE PRICE - The acquisition of MRB, Inc. was accounted
for under the purchase method of accounting. The purchase price paid by CAM
consisted of 4,500,000 shares of Common Stock of Chancellor. The excess purchase
price of $3,142,000 as of December, 1999 consists of said shares valued at $.65
cents per share, less net worth plus earn-out payments accrued during 1999, and
has been allocated between a covenant not to compete, customer database files
and goodwill in 1999 and will be amortized over periods of five to fifteen
years. Amortization expense amounted to approximately $336,000 for 1999.
INCOME TAXES
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," requires an asset and liability approach for financial
accounting and reporting for income taxes. In addition, future tax benefits,
such as net operating loss tax carry forwards, are recognized to the extent
realization of such benefits is more likely than not.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows the Company to account for stock-based awards
(including stock options) to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No, 25, "Accounting for
Stock Issued to Employees".
F-8
<PAGE>
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net income per share reflects the potential dilution
that could occur from potential common stock such as stock issuable pursuant to
the exercise of stock options outstanding and conversion of debt.
SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, the Company exchanged stock with a value of approximately
$2,925,000 in exchange for the assets and liabilities of Tomahawk consisting of
inventory, property, equipment, intangibles, trade accounts payable and certain
notes payable.
During 1999, the Company exchanged preferred stock for an investment in
equity securities and distribution rights totaling $1,819,000.
During 1999, the Company exchanged a note receivable including accrued
interest for equity securities in the amount of $1,594,000 and recognized a loss
of $219,000 on the transaction.
OTHER INVESTMENTS
The Company accounts for its equity investments of less than twenty-percent
ownership as an investee in a South African Company as available-for-sale
securities, which are adjusted to their fair market value with unrealized gains
and losses recorded as a component of accumulated other comprehensive income.
Upon disposition of the investments, the specific identification method is used
to determine the cost basis in computing realized gains or losses.
The Company accounts for its investment in New Africa Opportunity Fund at
cost for 1999 and 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 prescribes standards for reporting comprehensive income and its
components. Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but are excluded from income as these amounts are recorded
as an adjustment to stockholders equity, net of tax. The Company's other
comprehensive income is composed of unrealized gains on available/for sale
securities.
F-9
<PAGE>
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information", requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131 did
not affect results of operations or the financial position of the Company but
did affect the disclosure of segment information.
START-UP COSTS - In April 1998, AcSEC issued Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for fiscal years beginning after December 15, 1998. There was
no cumulative adjustment required for adoption of SOP 98-5.
REVENUE RECOGNITION - In December, 1999, the Securities and Exchange
Commission issued staff accounting bulletin No. 101("SAB101"), "Revenue
Recognition in Financial Statements." SAB101 provides guidance on applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The Company will adopt SAB101 as required during the year
2000, and is evaluating the effect such adoption may have on its consolidated
results of operations and financial position.
IMPACT OF THE YEAR 2000 ISSUE
The Company has completed efforts to assess and, where required, remediate
issues associated with Year 2000 ("Y2K") 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 has spent approximately $400,000
in modernizing its IT system, including compliance with Y2K requirements. The
Company anticipates spending approximately $350,000 during fiscal 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. However, the
Company has experienced no material operational problems related to Y2K.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's assets and liabilities that constitute
financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments", approximate their recorded amounts.
F-10
<PAGE>
RISK MANAGEMENT
The Company is exposed to risks of loss related to torts; theft of, damage
to, and destruction of assets; errors and omissions; injuries to employees;
material disasters; and product liability. The Company carries commercial
insurance for risks of loss.
FOREIGN CURRENCY TRANSLATION
The Company uses the US dollar as its functional currency. Foreign currency
assets are recoverable in US dollars, including equipment lease payments.
However, the Company has recorded an allowance equal to the net book value for
lease receivables from a party in Russia. The effect of any foreign currency
fluctuations is not considered material in these financial statements.
RECLASSIFICATION TO 1998 FINANCIAL STATEMENTS
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
RESTATEMENT OF FINANCIAL STATEMENTS
In accordance with guidelines of the Securities and Exchange Commission, the
Company has restated its 1998 financial statements to reflect the acquisition of
MRB, Inc. and related companies "Tomahawk" on January 29, 1999 and related
revisions to the purchase price and amortization periods of intangibles and to
properly record expenses and accrued liabilities related to the issuance of
stock purchase warrants by the Company's majority shareholder and certain other
deferred costs or expenses paid by VCC or VMI on behalf of the Company during
1998. The effects of the above are as follow (in thousands):
<TABLE>
<CAPTION>
1998
As Related to Related to Related to
originally Tomahawk Related to VCC/VMI VCC 1998
Reported Deconsolidation goodwill Fees Warrants As Restated
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 29,569 $ (15,760) $ 155 $ 5,778 $ -- $ 8,186
Total liabilities 22,562 (11,591) -- (5,147) -- 5,824
Total shareholders'
equity 7,007 (4,169) 155 (631) (1) 2,362
Total revenues 29,639 (18,931) -- -- -- 10,708
Total expenses 28,789 (19,082) (155) 631 1 10,184
</TABLE>
2. RECEIVABLES
Receivables consists of the following as of December 31, 1999 (in thousands):
December 31,
1999
Notes receivable $ 202
Receivables from trust, net 1,036
Loans receivable 84
Trade receivable 1,683
Accrued rents receivable, net 47
Interest receivable 4
Contracts receivable 1,098
-----------
$ 4,154
F-11
<PAGE>
Receivables from trusts include amounts due the Company for cash outlays
associated with the remarketing of equipment of $103,000. These amounts will be
collected upon successful remarketing of such equipment. Additionally,
receivables from trusts include amounts due for costs incurred by the Company
for administration of the trusts in accordance with the trust agreements of
$1,729,000. Collection of costs of administration is not certain due to numerous
factors and is, therefore, included net of the estimated allowance for bad debts
in the amount of $509,000.
Notes receivable consist of non-interest bearing notes related to the
Tomahawk acquisition. Imputed interest on these loans amounted approximately
$18,000 during 1999.
Accrued rents represent amounts due from portfolio leases, net of an
allowance of $18,000.
Bad debt expense recognized and charged to general and administrative
expense amounted to $1,381,000 and $1,113,000 in 1999 and 1998 respectively.
3. RESIDUAL VALUES, NET
The Company's lease underwriting income includes consideration in the
residual value sharing arrangements received from originating and selling lease
transactions to investors. The Company, upon remarketing of the equipment at
termination or expiration of the related leases, will realize this type of
consideration (residual values). The Company's share of expected future residual
values is recorded as income at their discounted present value at the time the
underlying leases are sold to investors. Any increases in the Company's expected
residual sharing are recorded as gains upon realization. Write-down in estimated
residual value due to declines in equipment value or the financial
creditworthiness of individual customers and major industries into which the
Company leases equipment, are recorded when considered other than temporary. The
Company evaluates residual values based upon independent assessments by industry
professionals, in addition to already established internal criteria.
The activity in the residual value accounts for the years ended December
31, 1999 and 1998 is as follows (in thousands):
December 31,
1999 1998
----- -----
Residual values, beginning of year, net $ 219 $ 465
Residual realization (76) (204)
Residual value estimate reduction (--) (42)
----- -----
Residual values, end of year, net $ 143 $ 219
===== =====
Residual value estimate reductions represent reductions in expected future
residual values on certain equipment, the residuals that were substantially all
recorded prior to 1997. Such reductions resulted from an extensive review and
valuation of all assets owned, leased and managed by the Company. For the years
ended December 31, 1999 and 1998, the Company realized income of approximately
$1,192,000 and $1,407,000, respectively, relating to the remarketing of
equipment for which no residuals were recorded or realized amounts exceeded the
booked residual.
Aggregate residual value fees expected to be realized as of December 31,
1999 are as follows (in thousands):
Years ending December 31:
2000 $ 116
2001 5
2002 --
2003 --
2004 22
----
$ 143
F-12
<PAGE>
4. NET INVESTMENT IN DIRECT FINANCE LEASES AND EQUIPMENT ON OPERATING LEASE:
Net investment in direct finance leases consisted of the following as of
December 31, 1999 (in thousands):
December 31,
1999
Minimum lease payments receivable $ 458
Estimated unguaranteed residual values of
leased equipment, net 39
Less: Unearned income (121)
-------
$ 376
=======
The cost of equipment on operating lease by category of equipment consists
of the following as of December 31, 1999 (in thousands):
December 31,
1999
Transportation equipment $ 5,404
Other equipment 635
--------
6,039
Less - accumulated depreciation 1,887
-------
$ 4,152
The aggregate amounts of minimum lease payments to be received from
noncancelable direct finance and operating leases are as follows (in thousands):
DIRECT
YEAR ENDING DECEMBER 31: FINANCE OPERATING
------- ---------
2000 $ 166 $ 1,059
2001 161 633
2002 97 202
2003 34 111
Thereafter -- 175
--------- --------
$ 458 $ 2,180
======== ========
F-14
<PAGE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following as of
December 31, 1999 (in thousands):
December 31,
1999
Trade accounts payable $ 2,227
Payables to investors 883
Contribution payable to New Africa Opportunity Fund 531
Accrued commissions payable 725
Accrued legal and accounting fees 189
Accrued interest payable 123
Commitment Fees 183
Accrued Income Taxes 70
Accrued Other Taxes 40
Accrued Earn out Fees - Tomahawk Acquisition 217
Accrued Other Expenses 256
-------------
$ 5,444
=============
6. NON-RECOURSE AND RECOURSE DEBT
Non-recourse indebtedness consists of notes payable to banks and financial
institutions arising from assignments of the Company's rights, (most notably the
right to receive rental payments) as lessor, at interest rates ranging from
8.25% to 11.58%. Amounts due under nonrecourse notes are obligations of the
Company, which are secured only by the leased equipment, and assignments of
lease receivables, with no recourse to any other assets of the Company. The
Company is at risk, however, for the amount of residual value booked on
equipment for its own portfolio in the event of a lessee default.
Aggregate future maturities of non-recourse debt as of December 31, 1999
are as follows (in thousands):
Years ending December 31:
2000 $ 88
2001 91
2002 13
------
$ 192
======
Recourse debt consists of the following as of December 31, 1999 (in
thousands):
Promissory note payable to the Company's majority
stockholder, bearing interest at the prime rate (8.50%
at December 31, 1999) plus 2%, principal and accrued
interest payable December 31, 2002, secured by
substantially all of the assets of the Company. $ 586
F-14
<PAGE>
Subordinated promissory note payable to a former
stockholder of the Company, bearing interest at the
prime rate (8.5% at December 31, 1999) plus 1%,
principal and accrued interest payable on demand. 200
Promissory note payable to a financial institution,
bearing interest at 10%, monthly payments of $64,400
January 2000 through April 2000, $55,500 May 2000
through July 2000, and a balloon payment of $1,842,000
due August 2000, secured by the equipment and lease
contracts associated with the note payable. 2,123
Promissory note payable to a financial institution,
bearing interest at the average of the one (1) and two
(2) month London Interbank Offered Rates (5.99% at
December 31,1999) plus interest through July 2000,
secured by the equipment and lease contracts with the
note payable. 1,206
Promissory note payable to an insurance institution,
bearing interest at 8%, principal and accrued interest
payable if the note amount exceeds the cash value of
the associated life insurance policy, secured by an
adjustable whole life policy insuring certain officers
of the Company. 291
Promissory note payable to a financial institution,
bearing interest at the prime rate (8.50 % at December
31, 1999) plus 2%, principal and accrued interest
payable January 31, 2000, secured by guarantee of
Vestex Capital Corporation and Brian M. Adley. 900
Equipment line of credit with one leasing company,
monthly payments of $502 expiring November 2002 14
--------------
5,320
Less - current portion 4,725
--------------
$ 595
==============
Aggregate future maturities of recourse debt as of December 31, 1999 are as
follows (in thousands):
Years ending December 31:
2000 $ 4,725
2001 6
2002 589
------
$ 5,320
REVOLVING LINES OF CREDIT. During 1994, and prior to its acquisition by the
Company, Tomahawk entered into a revolving line of credit agreement with a
financial institution whereby Tomahawk can borrow up to $7,500,000 to floor plan
used transportation equipment inventory. The maximum amount outstanding during
1999 was $7,500,000. In addition, during 1998, Tomahawk entered into a financing
agreement with the same institution to floor plan additional used transportation
equipment inventory in the approximate amount of $4,500,000. Interest is accrued
monthly at the financial institution's prime plus 1.75 percent, depending on the
floor planned inventory amounts. The effective rate of interest at December 31,
1999 was 10.25 percent. The aggregate principal balance outstanding on the
revolving line of credit and the financing agreement as of December 31, 1999 was
approximately $8,543,000. The Company, in connection with the Tomahawk
acquisition, assumed the obligation pursuant to this revolving line of credit
and financing agreement. The revolving line of credit and financing agreement
are both personally guaranteed by the selling stockholders of Tomahawk.
F-16
<PAGE>
7. NOTES PAYABLE
Notes payable consists of the following as of December 31, 1999 (in
thousands):
December 31,
1999
--------------
Revolving Bridge loan payable to a financial
institution providing for maximum borrowings up to
$400,000 for working capital purposes, interest payable
monthly at the rate of 10.5% per annum, principal
balance due on March 27, 2000. $ 380
Various notes payable to a financial institution,
payable in monthly installments of $2,753 including
interest at rates of 9 and 10 percent per annum, due
from September 2001 to May 2003, secured by automobiles
and equipment. 69
Notes Payable to Shareholders 250
--------------
699
Less - current portion 650
--------------
$ 49
==============
Aggregate annual maturities of notes payable as of December 31, 1999 are as
follows (in thousands):
Years ending December 31:
2000 $ 650
2001 27
2002 16
2003 6
----------
$ 699
==========
8. INCOME TAXES
The provision (benefit) for income taxes consists of
the following (in thousands):
1999 1998
----- -----
Current:
Federal $ 355 $ 493
State 73 31
----- -----
428 524
Deferred:
Federal (566) (493)
State (106) (31)
----- -----
(672) (524)
----- -----
$(244) $ --
===== =====
F-16
<PAGE>
A reconciliation of the rate used for the provision (benefit) for income taxes
is as follows:
<TABLE>
<CAPTION>
1999 1998
------ ----
<S> <C> <C>
Tax benefit at statutory rate 34.0 % 34.0 %
Net operating loss carry forward benefit for which
utilization is reasonably assured (62.0)% (34.0)%
-------- --------
(28.0)% --
======== ========
</TABLE>
The Company files consolidated federal income tax returns with all of its
subsidiaries. As of December 31, 1999, the Company has net operating loss carry
forwards of approximately $21,000,000 of which only $6,741,000 is available for
federal tax purposes, which expire in the years 2001 through 2012. In addition,
at December 31, 1999, the Company has investment tax credit carry forwards for
federal income tax purposes available to offset future taxes of approximately
$1,725,000 expiring in the years 2000 through 2002. For federal tax purposes,
utilization of net operating losses and tax credit carry forwards will be
limited in future years as a result of a greater than 50% change in ownership
which occurred in July 1995.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carry forwards.
The tax effects of significant items comprising the Company's net deferred
tax assets and liability as of December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ 165 $ 189
-------- --------
Deferred tax assets:
Reserves not currently deductible 438 550
Net operating loss carry forwards 3,109 8,708
Tax credit carry forwards 1,860 1,990
Other 280 0
-------- --------
Total deferred tax assets 5,687 11,248
-------- --------
5,522 11,059
Valuation allowance (5,186) (11,059)
-------- --------
Net deferred tax asset $ 336 $ --
======== ========
</TABLE>
All deferred tax liabilities and deferred tax assets (except tax credit
carry forwards) are tax effected at the enacted rates for state and federal
taxes. The valuation allowance relates primarily to net operating loss carry
forwards and tax credit carry forwards that may not be realized. The valuation
allowance decreased by $5,873,000 in 1999. For the year ended December 31, 1998
the valuation allowance decreased by $940,000.
The deferred tax asset is available to offset taxable income in excess of
book income generated from the lease portfolio and residual values, which are
the principal components of the total deferred tax liabilities of $165,000 as of
December 31, 1999. The net deferred tax asset in the amount of $336,000 is
reported as a current asset by the Company. The deferred tax asset, net of the
deferred tax liability, has been fully reserved as of December 31, 1998.
F-17
<PAGE>
9. STOCKHOLDERS' EQUITY
The Preferred Stock issued by the Company carries certain preferences and
rights as discussed below. Each share of Preferred Stock is entitled to the
number of votes equal to the number of whole shares of Common Stock into which
the share of the Preferred Stock held are then convertible. The holders of the
Preferred Stock shall be entitled to receive cash dividends only to the extent
and in the same amounts as dividends are declared and paid with respect to
Common Stock as if the Preferred Stock has been converted to Common Stock in
accordance with the provisions related to conversion. Preferences specific to
each series are as follows:
Series AA - convertible into one share of Common Stock for each share of
Preferred Stock and has a liquidation preference of $.50 per share. The
Series AA preferred shares were converted into the Common Stock Equivalent
during 1999.
Series B - convertible into ten shares of Common Stock for each share of
Preferred Stock and has a liquidation preference of $2.00 per converted
preferred share or $20.00 per non-converted share.
In exchange for cash, amounts due VCC from the Company, reimbursement of
certain expenses, and forgiveness of debt, VCC exercised $2,000,000 for
warrants to purchase common stock.
10. STOCK OPTION PLANS AND STOCK PURCHASE PLAN.
The Company has three stock option plans: a 1994 Stock Option Plan, a 1994
Directors' Stock Option Plan and a 1997 Stock Option Plan.
The Company's stock option plans provide for incentive and nonqualified
stock options to purchase up to an aggregate of 7,207,000 shares of the
Company's Common Stock which may be granted to key contributors of the Company,
including officers, directors, employees and consultants. The options are
generally granted at the fair market value of the Company's Common Stock at the
date of the grant, vest over a five-year period, are exercisable upon vesting
and expire five years from the date vested.
Information with respect to the stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
1994 1994 1997 Average
Stock Directors Stock Exercise
Option Plan Option Plan Option Plan Price
------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Stock Option Plans and Stock 870,994 717,000 2,245,000 $ .49
Purchase Plan Outstanding, December
31, 1997
Options granted 355,991 -- 3,465,176 .52
Options exercised (384,583) (40,000) (467,000) .33
Options canceled and expired (139,770) -- (952,500) .52
---------- ---------- ---------- -------
Outstanding, December 31, 1998 702,632 677,000 4,290,676 $ .54
Options granted -- -- 983,500 .91
Options exercised (54,985) -- (494,676) .16
Options canceled and expired (240,000) -- (940,000) .54
---------- ---------- ---------- -------
Outstanding, December 31, 1999 407,647 677,000 3,839,500 $ .64
========== ========== ========== =======
</TABLE>
Additional information regarding options outstanding as of December 31, 1999 is
as follows: Options Outstanding
F-18
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise Number Contractual Exercisable Date of
Price of Shares Life Options Expiration
----------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.01 147 3.00 147 2002
$0.05 137,500 2.08 137,500 2002
$0.06 137,500 1.92 137,500 2001
$0.10 206,000 4.45 206,000 2003--2005
$0.13 16,345 1.50 16,345 2001
$0.19 16,155 2.50 16,155 2002
$0.20 625,000 4.28 625,000 2002--2005
$0.25 452,000 2.96 452,000 2000--2006
$0.35 60,000 5.83 60,000 2005
$0.40 110,000 5.50 110,000 2005--2006
$0.50 783,333 5.42 783,333 2004--2007
$0.55 70,700 5.00 70,700 2005
$0.75 790,333 6.35 - - - 2005--2008
$0.80 70,700 6.00 - - - 2006
$0.82 2,000 5.25 - - - 2005
$0.92 2,000 6.25 - - - 2006
$1.00 740,334 7.40 - - - 2006--2009
$1.02 2,000 7.25 - - - 2007
$1.05 70,700 7.00 - - - 2007
$1.12 2,000 8.25 - - - 2008
$1.22 2,000 9.25 - - - 2009
$1.25 117,000 8.38 - - - 2007--2008
$1.30 70,700 8.00 - - - 2008
$1.50 197,000 7.83 - - - 2007--2009
$1.55 70,700 9.00 - - - 2009
$1.75 22,000 9.00 - - - 2009
$2.00 150,000 8.50 - - - 2008
--------- ---------
4,924,147 2,614,680
========= =========
</TABLE>
PRO FORMA INFORMATION. The Company has elected to follow APB Opinion No.
25; "Accounting for Stock Issued to Employees," in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, because the exercise price of
the Company's employee stock options equal or exceeds the market price of the
underlying stock on the date of the grant, no compensation expense is recognized
in the Company's financial statements. SFAS No. 123 requires the disclosure of
pro forma net income (loss) and earnings per share as if the Company had adopted
the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the
fair value of stock options to employees is calculated through tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly differs from the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48-60 months following
vesting; stock volatility 200% in 1999 and 1998; risk free interest rates,
ranging from 4.45% to 8% and no dividends during the expected term. The
forfeitures of the options are recognized as they occur. If the computed fair
values of the 1997 and 1998 awards had been expensed over the vesting period of
the awards, the pro forma net income in 1999 would have been $974,000 or $.02
per share and the pro forma net income in 1998 would have been $414,000 or $0.01
per share.
F-19
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan authorizes the offering to
employees of up to 250,000 shares of Common Stock in six semiannual offerings at
a price of 85% of the Common Stock's bid price and in an amount determined by a
formula based on each employee's estimated annual compensation. The Company's
stockholders authorized this plan in January 1995. No shares of Common Stock
have been offered pursuant to the plan to date.
The Company has reserved 250,000 shares of Common Stock for all amounts
that may be offered to employees under this plan.
STOCK WARRANTS
During 1998, the Company's majority shareholder (Vestex Capital
Corporation) allocated 3,300,000 shares of the Company's common stock that VCC
owns to employees of the Company under various stock purchase warrant
agreements. The majority shareholder allocated these warrants as an incentive to
hire and to retain management. No warrants were exercised during 1999.
Additional information regarding options outstanding as of December 31,
1999 is as follows:
WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
Warrants Exercisable
Weight Avg Number Weight-Avg
Range of Exercise Number Outstanding Weight-Avg Exercisable Exercisable At Exercisable
Prices at 12/13/99 Remaining Life Price 12/31/99 Price
<S> <C> <C> <C> <C> <C> <C>
0.10 550,000 6.36 0.10 550,000 0.10
0.25 650,000 7.46 0.25 650,000 0.25
0.50 800,000 8.50 0.50 800,000 0.50
0.75 200,000 9.00 0.75 - - - - - -
1.00 180,000 6.00 1.00 - - - - - -
1.10 180,000 7.00 1.10 - - - - - -
1.25 380,000 9.05 1.25 - - - - - -
1.50 180,000 9.00 1.50 - - - - - -
2.00 180,000 10.00 2.00 - - - - - -
------- ----- ---- ----- -----
3,300,000 7.92 0.682 2,000,000 0.31
</TABLE>
PRO FORMA INFORMATION As noted above The Company has elected to follow APB
Opinion No. 25, Accounting Interpretation 1, "Stock Plans Established by a
Principal Stock Holder", in accounting for the Warrants because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation", requires the use of option valuation
models that were not developed for use in valuing these warrants. These warrants
have been properly recorded within APB 25 and have resulted in approximately
$42,000 and $939 compensation expense to the Company during 1999 and 1998,
respectively. SFAS No. 123 requires the disclosure of pro forma net income
(loss) and earnings per share as if the Company had adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of
stock options to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradeable, fully transferable options without vesting restrictions, which
significantly differ from the stock warrants. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly differs from the calculated values.
F-20
<PAGE>
The Company's calculations were made using the Black-Scholes option pricing
model using the same assumptions utilized for the stock option plans discussed
above. The forfeitures of the warrants are recognized as they occur. If the
computed fair values of the warrants had been expensed over the vesting period
of the awards, the pro forma net income in 1999 would have been $708,000 or .01
per share and the pro forma net loss in 1998 would have been $128,000.
11. MAJOR CUSTOMERS
The Company leases equipment to lessees in diverse industries throughout
the United States. Although the Company's direct solicitation efforts involving
leases of new equipment have shifted from Fortune 100 companies to include
smaller business entities, most of the Company's lessees of new equipment are
still of substantial creditworthiness, with minimum net worth in excess of $25
million. Some of the Company's customers include, but are not limited to,
Raytheon, Pepsico, Dow Chemical, Whirlpool, Alliant Food Service, Walmart,
Texaco, Coca-Cola, Johnson & Johnson, and others.
During 1999, the Company continued its lease originating activities,
including brokering of new lease transactions. The Company also transacted
several significant buyouts of portfolios held by certain trust investors.
During 1999, 67% (based on original equipment cost) of the new lease
transactions originated by the Company were with one large lessee. During 1998,
31% (based on original equipment cost) of the new lease transactions originated
by the Company were with the one largest lessee (Wal-Mart). In addition,
approximately 40% and 31% (based on original equipment cost) of equipment sold
to investors in 1998 were purchased by the two largest investors.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) retirement plan (the "Plan") for the benefit
of its employees. The Plan enables employees to contribute up to 15% of their
annual compensation. The Company's contributions to the Plan, up to a maximum of
$500 per participating employee, amounted to $0 and $11,000 in 1999 and 1998,
respectively. The decrease in contributions is due to forfeitures earned by the
Company from non-vested employees.
13. OTHER INVESTMENTS
Other investment includes a $1 million equity investment in the New Africa
Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund with the
backing of the Overseas Private Investment Corporation ("OPIC") created to make
direct investments in emerging companies throughout sub-Saharan Africa. Capital
contributions are payable within 10 business days of a capital call pursuant to
the terms of the partnership agreement. As of December 31, 1999, the Company
funded $469,000 of a $1 million commitment for its 2.5% interest in NAOF and the
remaining obligation of $531,000 is included in accounts payable and accrued
expenses.
INVESTMENT IN AFINTA MOTOR CORPORATION AND DISTRIBUTION RIGHTS: - In
October 1999, the Company, through an affiliate, closed on the acquisition of a
15.1% equity interest in Afinta 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 cash, 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") at $5.20 per share less expenses.
F-21
<PAGE>
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 at $5.20 per share less expenses.
The Company has these distribution rights for the next 99 years, whereby
they expire during 2098. The Company will amortize these rights over a five (5)
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.
Additionally, Vestex Capital Corporation, the largest shareholder of the
Company, is to receive up to $4,000,000 plus expenses, not to exceed $250,000,
payable over the next six years for services rendered in finding, negotiating
and arranging financing on the transaction as well as ongoing consulting and
development of long-term growth strategies including development of a worldwide
marketing plan and introduction to capital funding resources. The final fee is
based principally upon the financial impact that these long term investments add
to the Company's operating results. Approximately $1,048,000 was paid in fees
and expenses during 1999.
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.
A summary of other investments at December 31, 1999 consists of the
following (in thousands):
<TABLE>
<CAPTION>
AGGREGATE GROSS UNREALIZED HOLDING AMORTIZED
FAIR VALUE GAINS/(LOSSES) COST
<S> <C> <C> <C>
Securities available for sale $3,734 $49 $3,685
New Africa Opportunity
Fund 1,000 - - - 1,000
Trading Securities 24 24
--------- ---------
$ 4,758 $ 49 $ 4,709
========= ========= =========
</TABLE>
F-22
<PAGE>
14. MAJOR ACQUISITION
Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the
Company, entered into a Management Agreement dated August 1, 1998, as amended
August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck
Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk
Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk
Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively
"Tomahawk"). The Management Agreement provided CAM with effective control of
Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of
the outstanding capital stock of Tomahawk from the two (2) sole shareholders
(the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the
"Agreement") dated January 29, 1999.
The acquisition of MRB, Inc. was accounted for under the purchase method of
accounting. The purchase price paid by CAM consisted of 4,500,000 shares of
Common Stock. The excess purchase price of $3,142,000 as of December 31, 1999
consisted of said shares valued at $.65 cents per share, less net worth, plus
earn out payments paid or accrued during 1999 which has been allocated between a
covenant not to compete, customer database files, and goodwill which is being
amortized over a period of five to fifteen years. Results of operations of
Tomahawk after the acquisition date are included in the consolidated statement
of operations for 1999.
Additionally, Vestex Capital Corporation, the largest shareholder of the
Company, is to receive up to $3,250,000 plus expenses, not to exceed $50,000,
payable over the next six years for services rendered in finding, negotiating
and arranging financing on the transaction as well as ongoing management and
development of long-term growth strategies including initiation of possible
acquisition and/or merger candidates. The final fee is based principally upon
the financial impact and profitability that Tomahawk adds to the Company's
operating results. Approximately $1,019,000 and $300,000 was paid in fees and
expenses and charged to operations during 1999 and 1998 respectively.
The following pro forma information has been prepared assuming that this
acquisition had taken place at the beginning of the respective periods. 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 dates.
<TABLE>
<CAPTION>
BALANCE SHEET DECEMBER 31, 1998
-----------------
<S> <C> <C>
ASSETS $ 22,305
============
LIABILITIES 17,018
STOCKHOLDERS' EQUITY:
Preferred stock, Series AA 50
Common stock 430
APIC 32,823
Retained earnings (deficit) (28,016)
------------
5,287
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,305
============
YEAR ENDED DECEMBER 31, 1999 1998
----------------------- ---- ----
in thousands, except per share amounts
Net revenues $ 65,572 $ 49,782
Net income $ 1,133 $ 519
Net income per common share $ 0.02 $ 0.02
</TABLE>
F-23
<PAGE>
15. RELATED PARTY ACTIVITIES
The Company is provided management and consulting services by VMI,
Corporation ("VMI") an affiliate of the Company's majority stockholder, pursuant
to a consulting agreement approved by the shareholders at the 1995 Annual
Meeting of the Stockholders, as amended in July 1998. VMI provides specified
services including, but not limited to, general business consulting, the
development and implementation of the Company's 1997 transition and turnaround
strategies, development of domestic and international business opportunities and
growth strategies, identification and development of strategic alliances, and
support of merger and acquisition activity. VMI was paid approximately $1.1
million in 1999 for consulting fees charged to Company operations including
reimbursement for expenses paid on behalf of the Company in the approximate
amount of $170,000. During 1998, the Company's majority shareholder and its
affiliates provided various services for which the Company incurred total fees
and related expenses of $1,996,000; fees to affiliates charged to operations
totaled $996,000 and fees of $1,000,000 associated with obtaining the future
recovery of trust administration expenses were capitalized to be amortized over
a two-year period.
VCC provided key employees warrants to purchase Chancellor common stock,
beneficially owned by VCC and valued at approximately $1,752,300 as of December
31, 1999. During 1998, VCC's activities provided sources of funding to the
Company of approximately $6,500,000, and $300,000 for fees for services and
reimbursable expenses, respectively, and converted into debt and equity
instruments of the Company. In 1998, this included the purchase of 1,946,146
shares of the Company's common stock at a price of $.69 per share. Additionally,
VCC infused directly over $2,385,000 into the Company, and paid over $670,000 of
expenses on behalf of the Company during 1998. During 1999, VCC also guaranteed
debt on behalf of the Company, in which the Company was able to utilize for the
benefit of over $3,000,000 during the year. As of December 31, 1999 and December
31, 1998, VCC guaranteed this debt line of up to $1,000,000 and $500,000
respectively. In addition to the above, subsequent to year end, VCC placed
$1,000,000 in cash and/or marketable securities with another financial
institution, whereby that financial institution loaned the Company $1,500,000
secured against the cash and/or cash equivalents and the guarantee by VCC. In
addition to the above, VCC infused approximately $3,250,000 directly into the
Company, consisting of cash and conversion of debt into equity during 1999.
Also, subsequent to year end, VCC loaned the Company an additional $350,000 in
cash. As a result, in part, of VMI and VCC's activities and services provided,
the Company's net worth increased to approximately $9,500,000 at December 31,
1999, from $2,362,000 at December 31, 1998 from $227,000 as of December 31, 1997
and from a negative net worth of approximately $9,446,000 as of December 31,
1996, as adjusted for stock issuance, direct equity infusions, contributions of
related parties, and the results of discussion regarding the initial Vestex
recapitalization of the Company during 1995. During 1999, VCC received from the
Company in the form of fees, repayment of loans, and for expenses paid on behalf
of the Company approximately $2,765,000. During 1998, the Company issued various
equity securities in exchange for cash, debt and fees payable to the majority
shareholder. In 1998, the Company issued 1,946,196 shares of common stock at a
price of $0.69 per share in payment of $1,343,000 of debt and fees payable.
Loans and Fees payable to affiliates at December 31, 1999 and 1998 totaled
$588,000 and $42,000 respectively. Interest expense to the majority shareholder
for 1999 and 1998 was $16,400 and $16,000, respectively.
In prior years, the Company had entered into two lease transactions with
Kent International ("Kent"); a company owned 50 percent by a director of the
Company. Total original equipment cost for these transactions amount to
approximately $144,000. During 1997, the Company loaned Kent $128,500. The loan,
bearing interest at 15 percent per annum, was to be repaid in equal monthly
installments of $5,296 and matured December 1999. As of December 31, 1998, Kent
was in default of the loan. The aforementioned leases and loan were re-written
in May 1999. The terms of the new lease provide for monthly lease payments of
$7,443 through May 2003. As of December 31, 1999, the outstanding payments due
on the lease are approximately $20,000.
F-24
<PAGE>
During 1999, a former director of the Company, and officer of the Company's
subsidiary Long River Capital purchased back from the Company 100% of the stock
of Long River Capital. The repurchase included a note payable to the Company of
$40,000 and other consideration valued at less than $100,000.
During 1999, lease payments in the amount of $102,000 were paid to the
former shareholders of Tomahawk. The lease requires the Company to pay all
maintenance, insurance and taxes on the property.
In connection with the purchase of Tomahawk, the Company loaned the two
selling shareholders $150,000 each. The loans are repayable January 29, 2004 and
bear no interest. Interest is imputed at 9.75% in these financial statements.
16. COMMITMENTS AND CONTINGENCIES
The Company rents its corporate offices under a five-year non-cancelable
lease. The Company leases an additional regional marketing office on the East
Coast. The future minimum rental commitments are as follows (in thousands):
Years ending December 31:
2000 $ 240
2001 240
2002 171
2003 102
2004 and thereafter 600
------
$ 1,353
Rental expense, net of abatements, for the years ended December 31, 1999
and 1998, amounted to approximately $614,000 and $222,000 respectively.
During a prior year, the Company undertook a review of its trust portfolio,
including consultation with legal counsel, an International "Big 5" Independent
public accounting firm, and industry consultants and determined that it had not
been recovering costs associated with administering the trusts. Management's
initial review determined that approximately $22,000,000 of costs for periods
prior to 1997 had not been recovered from the trusts. The Company has recorded
approximately $972,000 and $1,498,000 of cost recoveries in the years ended
December 31, 1999 and 1998, respectively. For periods prior to 1998, $2,862,000
was recovered. Thus, to date, the Company has recovered in excess of $5,300,000.
Management makes no representations concerning the Company's ability to recover
any further costs for periods prior to 1997. Further recoveries for periods
prior to 1997 and thereafter are contingent upon the current status of the
specific trusts and the Company's level of recovery efforts.
During 1999, the Company paid a deposit to the former Tomahawk shareholders
and have entered into an agreement to purchase the Conley, Georgia, retail
location. Final details are being confirmed and/or reviewed by legal counsel,
however, the purchase price is believed to be less than the $950,000 previously
agreed to in the stock purchase agreement.
17. LEGAL PROCEEDINGS
In the normal course of its business, the Company is from time to time
subject to litigation. Management does not expect that the outcome of any of
these actions, or the actions as noted above, will have a material adverse
impact on the Company, its business or its consolidated financial position or
results of operations.
F-25
<PAGE>
During 1999, the Company entered into a settlement agreement regarding
trust recovery fees. The estimated liability of this agreement totals $300,000,
of which approximately $250,000 is deposited in escrow with the attorney. The
balance is included in accounts payable in these financial statements.
18. SUBSEQUENT EVENTS
Subsequent to year-end, the Company closed on an operating line of credit
with a financial institution in the amount of $1,500,000. The loan is secured by
marketable securities placed in a brokerage account at the institution by the
Company's major shareholder.
19. OPERATING SEGMENTS
The Company operates in two primary business segments: sales of transportation
equipment and leasing activity, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
------- -------
(restated)
<S> <C> <C>
SALES OF TRANSPORTATION EQUIPMENT:
Revenues $51,787 $ 6,165
------- -------
Cost and expenses:
Cost of transportation equipment 43,802 5,647
Selling, general and administrative 6,529 278
Depreciation and Amortization 396 --
Interest Expense 512 --
------- -------
51,239 5,925
------- -------
Income from sales of transportation equipment $ 548 $ 240
======= =======
Identifiable Assets $14,563 $ 36
======= =======
LEASING ACTIVITY
Revenues:
Leasing activity $10,080 $ 4,228
Interest income 267 195
Other income 138 120
------- -------
10,485 4,543
------- -------
Costs and expenses:
Selling, general and administrative 8,688 3,671
Interest expense 290 111
Depreciation and amortization 1,225 477
------- -------
10,203 4,259
------- -------
Income from leasing activity $ 282 $ 284
======= =======
Identifiable assets $16,985 $ 3,648
======= =======
</TABLE>
Additionally, the Company recognized interest income from international sources,
primarily from South Africa and Russia in the amount of $216,000 in 1999 and
$108,000 in 1998.
F-26
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities ExchangeAct of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHANCELLOR CORPORATION
Dated: August 17, 2000
By: /s/ Brian M. Adley
-------------------------------------
Brian M. Adley
Chairman of the Board and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Dated: August 17, 2000 By: /s/ Brian M. Adley
-------------------------------------
Brian M. Adley
Chairman of the Board and Director
(Principle Executive Officer)
Dated: August 17, 2000 By: /s/ Franklyn E. Churchill
-------------------------------------
Franklyn E. Churchill
President, Chief Operating Officer
Dated: August 17, 2000 By: /s/ Barry W. Simpson
-------------------------------------
Barry W. Simpson
Chief Financial Officer
(Principal Accounting Officer)
F-27
