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UNITED STATES (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 MASSACHUSETTS 04-2626079 (State or other jurisdiction of (I.R.S. Employer I.D. No.) 210 South Street, Boston, Massachusetts 02111 (Address of principal executive offices) (Zip Code) (617) 368 - 2700 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of April 30, 2000, 58,802,500 shares of Common Stock, $.01 par value per share and 350,000 shares of Series B Convertible Preferred Stock ("Series B"), $.01 par value per share were outstanding. The Series B shares convert into
common on a 1 for 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. Market value of the voting stock held by non-affiliates of the registrant as of April 30, 2000 was
approximately $7,531,000. Aggregate market value of the registrant (inclusive of Series B shares) was approximately $33,083,000 as of April 30, 2000. DOCUMENTS INCORPORATED BY REFERENCE Chancellor Corporation and Subsidiaries Page Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2000 and 2 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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 Signatures 15
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
CHANCELLOR CORPORATION
(Exact name of registrant as specified in its charter)
incorporation or organization)
(Registrant's telephone number, including area code)
APPLICABLE ONLY TO CORPORATE REGISTRANTS
December 31, 1999
Chancellor Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands)
March 31, |
December 31, |
|||||||||||
2000 |
1999 |
|||||||||||
(unaudited) |
||||||||||||
Assets |
||||||||||||
Cash and cash equivalents |
$ |
1,087 |
$ |
1,104 |
||||||||
Receivables, net of allowances of $716 and $731 |
4,430 |
4,154 |
||||||||||
Net investment in direct finance leases |
352 |
376 |
||||||||||
Equipment on operating lease, net of accumulated depreciation of $2,007 and $1,887 |
4,163 |
4,152 |
||||||||||
Inventory |
9,332 |
10,359 |
||||||||||
Residual values, net |
133 |
143 |
||||||||||
Furniture and equipment, net of accumulated depreciation of $1,744 and $1,662 |
990 |
1,072 |
||||||||||
Investments |
4,758 |
4,758 |
||||||||||
Intangibles, net |
3,948 |
4,094 |
||||||||||
Other assets, net |
1,540 |
1,336 |
||||||||||
Total Assets |
$ |
30,733 |
$ |
31,548 |
||||||||
Liabilities and Stockholders' Equity |
||||||||||||
Liabilities: |
||||||||||||
Accounts payable and accrued expenses |
$ |
4,759 |
$ |
5,444 |
||||||||
Deferred revenue |
1,094 |
1,812 |
||||||||||
Indebtedness: |
||||||||||||
Revolving credit line |
7,845 |
8,543 |
||||||||||
Notes payable |
446 |
699 |
||||||||||
Nonrecourse |
169 |
192 |
||||||||||
Recourse |
6,763 |
5,320 |
||||||||||
Total Liabilities |
21,076 |
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, |
590 |
590 |
||||||||||
Additional paid-in capital |
35,846 |
35,837 |
||||||||||
Accumulated deficit |
( |
26,832 |
) |
( |
26,942 |
) |
||||||
Accumulated other comprehensive income |
49 |
49 |
||||||||||
Total Stockholders' Equity |
9,657 |
9,538 |
||||||||||
Total Liabilities and Stockholders' Equity |
$ |
30,733 |
$ |
31,548 |
||||||||
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
Three Months Ended March 31, |
||||||||
2000 |
1999 |
|||||||
(unaudited) |
(unaudited) |
|||||||
(restated) |
||||||||
Revenues: |
||||||||
Transportation equipment sales |
$ |
13,265 |
$ |
9,432 |
||||
Rental income |
739 |
458 |
||||||
Lease underwriting income |
13 |
10 |
||||||
Direct finance lease income |
34 |
15 |
||||||
Interest income |
6 |
80 |
||||||
Fees from remarketing activities |
271 |
237 |
||||||
Other income |
104 |
71 |
||||||
Total Revenue |
14,432 |
10,303 |
||||||
Costs and expenses: |
||||||||
Cost of transportation equipment sales |
10,603 |
7,302 |
||||||
Selling, general and administrative |
3,045 |
2,507 |
||||||
Interest expense |
139 |
66 |
||||||
Depreciation and amortization |
510 |
313 |
||||||
Total Costs and Expenses |
14,297 |
10,188 |
||||||
Earnings before taxes |
135 |
115 |
||||||
Provision for income taxes |
25 |
22 |
||||||
Net income |
$ |
110 |
$ |
93 |
||||
Basic net income per share |
$ |
0.00 |
$ |
0.00 |
||||
Diluted net income per share |
$ |
0.00 |
$ |
0.00 |
||||
Shares used in computing basic net income per share |
58,795,065 |
43,240,194 |
||||||
Shares used in computing diluted net income per share |
63,308,838 |
55,546,453 |
||||||
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Three Months Ended |
|||||
March 31, |
|||||
2000 |
1999 |
||||
(unaudited) |
(unaudited) |
||||
(restated) |
Cash flows from operating activities: |
|||||||||||
Net income |
$ |
110 |
$ |
93 |
|||||||
Adjustments to reconcile net income to net cash used by operating activities: |
|||||||||||
Depreciation and amortization |
510 |
313 |
|||||||||
Residual value estimate realizations and reductions, |
10 |
14 |
|||||||||
Amortization of unamortized stock warrants |
11 |
11 |
|||||||||
Changes in assets and liabilities: |
|||||||||||
Decrease (Increase) in receivables |
|
1,224 |
(601) |
||||||||
Decrease (Increase) in inventory |
1,027 |
|
(282) |
||||||||
(Decrease ) in deferred revenues |
(718) |
(220) |
|||||||||
(Decrease) Increase in accounts payable and accrued expenses |
(685) |
|
784 |
|
|||||||
1,379 |
19 |
||||||||||
Net cash provided by operating activities |
1,489 |
112 |
Cash flows from investing activities: |
|||||||||||
Net investments in direct finance leases |
24 |
53 |
|||||||||
Equipment on operating lease, net |
(161) |
(1,472) |
|||||||||
Additions to furniture and equipment, net |
- - - |
(162) |
|||||||||
Increase in intangibles |
(9) |
(4) |
|||||||||
Increase in other assets |
(329) |
(618) |
|||||||||
Net cash (used for) investing activities |
(475) |
(2,203) |
Cash flows from financing activities: |
|||||||||||
Net borrowings under revolving line of credit |
2,302 |
186 |
|||||||||
Increase in receivables-collateral for line of credit |
(1,500) |
- - - |
|||||||||
Net change in notes payable |
(253) |
27 |
|||||||||
Borrowings-recourse debt |
914 |
3,000 |
|||||||||
Repayments of indebtedness-non recourse |
(23) |
(117) |
|||||||||
Repayments of indebtedness-recourse |
(2,471) |
(369) |
|||||||||
Cost of issuance of common stock, net |
- - - |
(234) |
|||||||||
Net cash provided by (used for) financing activities |
(1,031) |
|
2,493 |
Net (decrease) increase in cash and cash equivalents |
(17) |
402 |
|
||||||||
Cash and cash equivalents at beginning of period |
1,104 |
612 |
|||||||||
Cash and cash equivalents at end of period |
$ |
1,087 |
$ |
1,014 |
|||||||
Cash paid for interest |
$ |
157 |
$ |
64 |
|||||||
Cash paid for income taxes |
$ |
26 |
$ |
15 |
|||||||
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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"). 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 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. The results of operations for the three months ended March 31, 1999 were derived from the 10-QSB-A filed in January 2000 and which restated the purchase price of Tomahawk to reflect the acquisition on January 29, 1999 and revised the amortization periods of related intangibles as well as record compensation expense for certain stock purchase warrants. The results for the interim period ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year.
2. LOAN AGREEMENTS
During the period ended March 31, 2000, the Company obtained a $3,000,000 working capital line of credit 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. During the period ended March 31, 2000, the Company advanced $1,500,000 to the majority shareholder as collateral for its guarantee of the $3,000,000 line of credit. This amount is included in receivables at March 31, 2000. The balance outstanding on this line of credit at March 31, 2000 was approximately $2,948,000.
In addition, the Company obtained recourse loans from its majority shareholder of $414,000 and from a financial institution for $500,000. The loan from the shareholder bears interest at prime rate plus 2%, is payable on demand and is secured by all of the assets of the Company. The loan from the financial institution bears interest at the rate of prime plus 2%, is due in 60 days, and is secured by guarantee of the majority shareholder and a director. At March 31, 2000, the balance outstanding on the shareholder loan was $210,000 and the balance outstanding on the loan from the financial institution was $365,000.
3. ACCOUNTING STANDARDS
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 principles 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.
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 are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivatives, the Company expects that adoption of SFAS No. 133 will have an immaterial impact on the Company's consolidated financial position and results of operations.
4. OPERATING SEGMENTS
The Company operates in two primary business segments: 1) sales of transportation equipment and 2) leasing activity, as follows (in thousands).
The Company's Sales of Transportation Equipment division retails and wholesales used transportation equipment, primarily, tractors and trailers, through retail centers located in strategic locations primarily in the southern and midwestern sections of the United States. This business segment also includes sales of equipment for the Company's equipment remarketing group. Approximately $2,670,000 or 20.13% of sales of transportation revenue were derived from one significant customer.
Leasing activities include revenues generated under operating or direct financing leases to lessees primarily throughout the United States. The Company also manages most of the leases it sells to investors and, when the original lease expires or terminates, remarkets the equipment for the benefit of the investors and the Company. Leases primarily involve transportation equipment, but also involve other equipment including material handling and construction equipment.
Three Months Ended |
|||||||||||||
2000 |
1999 |
||||||||||||
(unaudited) |
(unaudited) |
||||||||||||
(restated) |
|||||||||||||
Sales of Transportation Equipment: |
|||||||||||||
Revenues |
$ |
13,265 |
$ |
9,432 |
|||||||||
Costs and expenses: |
|||||||||||||
Cost of transportation equipment |
10,603 |
7,302 |
|||||||||||
Selling, general and administrative |
2,509 |
1,474 |
|||||||||||
Interest expense |
1 |
33 |
|||||||||||
Depreciation and amortization |
114 |
73 |
|||||||||||
Total Costs and Expenses |
13,227 |
8,882 |
|||||||||||
Income from sales of transportation equipment |
$ |
38 |
$ |
550 |
|||||||||
|
|||||||||||||
Identifiable Assets |
$ |
17,422 |
$ |
14,688 |
Leasing Activity |
|||||
Revenues: |
|||||
Leasing activity |
$ |
1,057 |
$ |
720 |
|
Interest income |
6 |
80 |
|||
Other income |
104 |
71 |
|||
Total Leasing Revenues |
$ |
1,167 |
$ |
871 |
|
Costs and expenses: |
|||||
Selling, general and administrative |
536 |
1,033 |
|||
Interest expense |
138 |
33 |
|||
Depreciation and amortization |
396 |
240 |
|||
Total Costs and Expenses |
1,070 |
1,306 |
|||
Income (loss) from leasing activity |
$ |
97 |
$ |
(435) |
|
Identifiable assets |
$ |
6,672 |
$ |
8,467 |
|
Total assets for reportable segments: |
$ |
24,094 |
$ |
$ 23,155 |
|
Corporate investments, intangibles and other assets |
|
|
|||
$ |
30,733 |
$ |
24,638 |
5. 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 are included in the Company's statement of operations for the three-month period ended March 31, 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 had the transaction been effected on the assumed date.
Quarter Ended |
|
March 31, 1999 |
|
(in thousands) |
|
Net Revenue |
$ 13,603 |
Net income before taxes |
$ 119 |
Net income after taxes |
$ 113 |
Net income per common share |
$ 0.00 |
6. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The financial statements for the three-month period ended March 31, 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 March 31, 1999 financial statements was to reduce net income by $34,000. There was no effect on earnings per share.
7. SUPPLEMENTAL CASH FLOWS INFORMATION
Effective January 29, 1999, the Company purchased its Tomahawk subsidiary with the following non-cash investing and financing activities:
Quarter Ended March 31, 1999 |
||
(in thousands) |
||
Fair value of assets acquired |
$ 10,679 |
|
Fair value of liabilities assumed |
(10,372) |
|
Net assets acquired |
307 |
|
Fair value of common stock |
2,925 |
|
Excess purchase price |
$ 2,618 |
|
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 an earnout arrangement. No such fees were paid during the three-month period ended March 31, 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. As of March 31, 2000, the Company has sold approximately $785,000 with limited or full recourse. The Company has considered its history of repossession losses and determined that no liability for recourse obligations is currently necessary.
ITEM 2. |
Management's Discussion and Analysis of Financial Condition |
And Results of Operations |
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 2000 vs. March 31, 1999
Revenues. Total revenues for the three-month period ended March 31, 2000 were $14,432,000 as compared to $10,303,000 for the corresponding prior period, an increase of $4,129,000 or 40.1 %. For the three-month period ended March 31, 2000, transportation equipment sales were $13,265,000 as compared to $9,432,000 for the corresponding prior period, an increase of $3,833,000 or 40.6 %. This significant revenue stream from transportation equipment sales is attributable to sales of used transportation equipment through the remarketing activities of the Company as well as the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"), which operated for three months in 2000 versus two months in 1999. The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located in key Southeastern and Midwestern cities and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the three-month period ended March 31, 2000, rental income increased by $281,000 or 61.4 % to $739,000 as compared to $458,000 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 from financial institutions. For the three-month period ended March 31, 2000, lease underwriting income increased by $3,000 or 30.0 % to $13,000 as compared to $10,000 for the corresponding prior period and direct finance lease income increased by $19,000 or 126.7 % to $34,000 as compared to $15,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed plans for the addition of key senior management and sales personnel in 2000, and development of strategic alliances to provide future growth in this area. For the three-month period ended March 31, 2000, interest income decreased by $74,000 or 92.5 % to $6,000 as compared to $80,000 for the corresponding prior period. The decrease is primarily attributable to interest earned in connection with the Company's investment in a South Africa based manufacturer and lessor of transportation equipment. For the three-month period ended March 31, 2000, fees from remarketing activities increased by $34,000 or 14.3 % to $271,000 as compared to $237,000 for the corresponding prior period. For the three-month period ended March 31, 2000, other income increased by $33,000 or 46.5 % to $104,000 as compared to $71,000 for the corresponding prior period.
Costs and Expenses. Total costs and expenses for the three-month period ended March 31, 2000 were $14,297,000 as compared to $10,188,000 for the corresponding prior period, an increase of $4,109,000 or 40.3 %. The increase is primarily a result of the costs associated with sales of transportation equipment, which, for the three-month period ended March 31, 2000, were $10,603,000 as compared to $7,302,000 for the corresponding prior period, an increase of $3,301,000 or 45.2 %, and resulted in an overall gross margin from sales of transportation equipment of 20.1% as compared to 22.6% in the corresponding prior period. Selling, general and administrative expenses for the three-month period ended March 31, 2000 were $3,045,000 as compared to $2,507,000 for the corresponding prior period, an increase of $538,000 or 21.5 %. This increase is due in part to Tomahawk's operations being consolidated with the Company beginning February 1999 and an increase in operating costs associated with the addition of a new Tomahawk facility opened in late 1999.
Interest expense for the three-month period ended March 31, 2000 was $139,000 as compared to $66,000 for the corresponding prior period, an increase of $73,000 or 110.6 %. This increase is primarily a result of increased interest expense associated with CAM's revolving credit line with a financial institution utilized for inventory floor planning and interest accrued on the Company's recourse debt.
Depreciation and amortization expense for the three-month period ended March 31, 2000 was $510,000 as compared to $313,000 for the corresponding prior period, an increase of $197,000 or 62.9%. The increase is due to the amortization of intangible assets associated with the acquisition of Tomahawk by CAM as well as the amortization of distribution rights acquired from AMC, a South African truck manufacturer and assembler, in October 1999.
Provision for income taxes for the three-month period ended March 31, 2000 was $25,000 as compared to $22,000 for the corresponding prior period. The increase is primarily due to the increase in pre-tax income.
Net Income after Taxes. Net income for the three-month period ended March 31, 2000 was $110,000 as compared to $93,000 for the corresponding prior period, an increase of $17,000 or 18.3%. The increase in net income is attributable to the increase in revenues, primarily from the retail and wholesale of used transportation equipment, and the purchase of certain lease portfolios from financial institutions. Net income per share was $0.00 (both basic and diluted) for the three-month periods ended March 31, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company recognized a net decrease in cash and cash equivalents for the three-month period ended March 31, 2000 of $17,000. Operating activities provided cash of $1,489,000 during the three-month period ended March 31, 2000 primarily as a result of increased sales of used transportation equipment inventory, decreases in accounts payable associated with inventory reduction and operating purchases, a decrease in deferred revenue associated with the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several equipment lease portfolios, and offset by a decrease in operating accounts receivable. Investing activities used cash of $475,000 during the three-month period ended March 31, 2000 and is primarily a result of the net acquisitions of portfolios of operating leases valued at approximately $161,000 and an increase in other assets of approximately $329,000. Financing activities used cash of $1,031,000 during the three-month period ended March 31, 2000 and is primarily the result of an increase of recourse debt from financing institutions in the amount of $3,000,000 and loans from Vestex Capital Corporation and Citibank offset by $1,500,000 of cash payments advanced as loan collateral and repayments of recourse debt. Cash and cash equivalents were $1,087,000 at March 31, 2000 as compared to $1,104,000 at December 31, 1999, a decrease of $17,000 or 1.5%.
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 $6,998,000 as of March 31, 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 $677,000 as of March 31, 2000. The interest rate charge on the above lines of credit is Prime plus 1.75%.
During the period ended March 31, 2000, the Company obtained a $3,000,000 working capital loan 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. During the period ended March 31, 2000, the Company advanced $1,500,000 to the majority shareholder as collateral for its guarantee of the $3,000,000 loan. This amount is included in receivables at March 31, 2000. The balance outstanding on this line of credit at March 31, 2000 was approximately $2,948,000.
The Company's ability to underwrite equipment lease transactions is largely dependent upon the availability of short-term warehouse lines of credit. Management is engaged in continuing dialogue with several inventory lenders to provide the Company with warehouse financing. If the Company experiences delays in putting warehouse facilities in place, the Company transacts deals by coterminous negotiation of lease transactions with customers and financing with institutions upon which it obtains a fee as the intermediary of up to 3% of the amount of financing.
The remarketing, retailing and wholesaling of equipment has played and will continue to play a vital role in the Company's operating activities. In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential to the realization of the Company's interest in the residual value of its managed portfolio. It is also essential to the Company's ability to recover its original investment in the equipment in its own portfolios and to recognize a return on that investment. The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or released, resulting in a potential loss to the Company.
The Company plans to dedicate substantial resources toward the further development and improvement of its remarketing, retailing and wholesaling capabilities. The Company's strategy is to further capitalize upon its remarketing expertise by continuing to develop its ability to sell remarketing services to other lessors, fleet owners, and lessees. The company plans also to create a dealer capability under which the Company would buy and resell fleet equipment. The Company anticipates expanding its used transportation equipment retail and wholesale capabilities through the addition of strategically located retail centers through internal growth and/or acquisitions. The Company's retail and wholesale capabilities have been greatly improved through CAM's strategic acquisition of Tomahawk. This improved capability will be used as a competitive advantage that will enable the Company to provide a "total holding cost" concept when competing for new lease origination deals. The Company's retail and wholesale business unit will provide improved outlets for other lessors, financial institutions, and fleet owners to dispose of used transportation equipment and sources of quality used transportation equipment for fleet owners and owner-operators. The Company also plans to promote its Internet capabilities to further promote its business activities and as an e-commerce tool.
In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. In addition to the Company, several of the other investors are Sun America, Inc., Citicorp, Northwestern Mutual Life and others. As of March 31, 2000, the Company had funded approximately $611,000 and is obligated to provide additional funding in the approximate amount of $389,000. The Company has additionally invested approximately $4,875,000 into one of NAOF's portfolio investee companies. In October, 1999 the Company formally closed on a strategic investment/alliance with a South African manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of convertible preferred stock of Chancellor Corporation was issued and the note receivable including accrued interest was canceled in exchange for a minority interest and certain distribution rights in the South African company.
The Company's renewal or replacement of expired lines, its expected access to the public and private securities markets, both debt and equity, anticipated new lines of credit (both short-term and long-term and recourse and non-recourse), anticipated long-term financing of individual significant lease transactions, and its estimated cash flows from operations are anticipated to provide adequate capital to fund the Company's operations for the next twelve months. Although no assurances can be given, the Company expects to be able to renew or timely replace expired lines of credit, to expand currently existing lines for inventory floor planning, to continue to have access to the public and private securities markets, both debt and equity, and to be able to enter into new lines of credit and individual financing transactions.
The Company is in the final stages of negotiation with several financial institutions, whereby the Company could potentially gain access to substantial funding that would enable the Company to accelerate the redevelopment of its lease origination business.
COMMUNICATIONS AND INFORMATION
The Company has completed efforts to assess and, where required, remediate issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues arise from computer programs which use only two digits to refer to the year and which may experience problems when the two digits become "00" for the year 2000. In addition, imbedded hardware microprocessors may contain time and two-digit year fields in executing their functions. Much literature has been devoted to the possible effects such programs may experience in the Year 2000, although significant uncertainty exists as to the scope and effect the Y2K issues will have on industry and the Company.
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. To date, the Company has spent approximately $400,000 in modernizing its IT system, including compliance with Y2K requirements. The Company anticipates spending approximately $750,000 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. No significant operational deficiencies have arisen from the Y2K issue.
In 1998, the Company made several improvements to its Internet presence (
http://www.chancellorcorp.com) as part of the Company's strategy to further incorporate technology into its marketing and customer service initiatives. The Company's goal is to create a simple, well-designed and useful Internet destination by redesigning the site and expanding content to improve its usefulness as a business resource for customers and an informational tool for investors when fully developed. The Chancellor site will showcase the Company's truck and trailer inventory available through its six (6) retail locations, provide online and downloadable lease applications for fleet managers and improve the quality and quantity of corporate and financial information tailored for the investment community.POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its stock may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts and others, or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be greater if any such shortfall occurs near the same time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing companies or major customers or vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, as a result of sales by the Company of equipment it leases to its customers. Such sales of equipment, which are an ordinary but not predictable part of the Company's business, will have the effect of increasing revenues, and, to the extent sales proceeds exceeds net book value, net income, during the quarter in which the sale occurs. Furthermore, any such sale may result in the reduction of revenue, and net income, otherwise expected in subsequent quarters, as the Company will not receive lease revenue from the sold equipment in those quarters. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations to immediately succeeding quarters are not necessarily material or meaningful and that such results for one quarter should not be relied upon as an indication of future performance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB 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
EXHIBIT 11
Chancellor Corporation and Subsidiaries
The following table reflects the calculation of the earnings per share:
|
Weighted Average |
|||
Quarter ended March 31, 2000 |
In thousands, except share and per share data |
|||
Earnings from Operations |
$ 110 |
58,795,065 |
||
Basic earnings per common share |
$ 0.00 |
|||
Effective of dilutive securities |
||||
Convertible preferred shares |
- - - |
3,500,000 |
||
Stock option plans |
- - - |
1,013,773 |
||
$ 110 |
63,308,838 |
|||
Diluted earnings per common share |
$ 0.00 |
|||
Quarter ended March 31, 1999 |
||||
Earnings from operations |
$ 93 |
43,240,194 |
||
Basic earnings per common share |
$ 0.00 |
|||
Effect of dilutive securities |
||||
Convertible preferred shares |
- - - |
5,000,000 |
||
Warrant-VCC |
- - - |
7,142,857 |
||
Stock option plans |
- - - |
163,402 |
||
$ 93 |
55,546,453 |
|||
$ 0.00 |
Part II. Other Information
Item 1. |
Legal Proceedings |
The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company. |
|
Item 2. |
Changes in Securities |
None |
|
Item 3. |
Defaults Under Senior Securities |
None |
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None |
|
Item 5. |
Other Information |
Form 10-QSB for March 31, 1999 was amended January, 2000, primarily for the effects caused by the change in acquisition date of the Tomahawk subsidiary which was originally reported as of August, 1998. This transaction has been recorded as of January, 1999, the date of final closing in the revised 10-QSB-A for Quarter 1 of 1999 and this 10-QSB. |
|
Item 6. |
Exhibits and Reports on Form 8-K |
(a) |
Exhibits: |
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 2000. |
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 |
|
Date: May 15, 2000