-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KT4q8Rc1AVJeAcMpSqLM7RzmpKNnctx0qI+s2bvto9sscHFtXtmUMfRNWchcrIdp PxJl5u96e1p3S2xpQAMq8A== 0001015402-00-000246.txt : 20000203 0001015402-00-000246.hdr.sgml : 20000203 ACCESSION NUMBER: 0001015402-00-000246 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANCELLOR CORP CENTRAL INDEX KEY: 0000724051 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 042626079 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-11663 FILM NUMBER: 518212 BUSINESS ADDRESS: STREET 1: 210 SOUTH STREET CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6177288500 MAIL ADDRESS: STREET 1: 210 SOUTH STREET CITY: BOSTON STATE: MA ZIP: 02111 10QSB/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-11663 CHANCELLOR CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2626079 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111 (Address of principal executive offices) (Zip Code) (617) 368 - 2700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of November 15, 1999, 58,524,065 shares of Common Stock, $.01 par value per share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value per share (with a liquidation preference of $20.00 per share, or $7,000,000, and are convertible into the Common Stock of the Company on a ten for one (10:1) basis) were outstanding. Aggregate market value of the voting stock held by non-affiliates of the issuer as of November 15, 1999 was approximately $7,734,022. Aggregate market value of the total voting stock of the issuer as of November 15, 1999 was approximately $31,092,503.
CHANCELLOR CORPORATION AND SUBSIDIARIES Page Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheet as of September 30, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information 16 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 17
1
CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, December 31, 1999 1998 --------------- -------------- (unaudited) ASSETS Cash and cash equivalents $ X $ 612 Receivables, net X 2,880 Inventory X 36 Net investment in direct finance leases X 359 Equipment on operating lease, net of accumulated depreciation of $2,292 and $2,351 X 702 Residual values, net X 219 Furniture and equipment, net of accumulated depreciation of $1,463 and $1,290 X 807 Long term investments X 1,000 Intangibles, net X 111 Other assets, net X 1,460 --------------- -------------- $ X $ 8,186 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ X $ 3,572 Deferred reimburseable expenses X 1,068 Indebtedness: Revolving credit line X --- Notes -payable X --- Nonrecourse X 889 Recourse X 295 --------------- -------------- Total liabilities X 5,824 --------------- -------------- Stockholders' equity: Prefered Stock, $.01 par value, 20,000,000 shares authorized: Convertible Series AA, 5,000,000 shares issued and outstanding X 50 Convertible Series B, 2,000,000 shares authorized, 350,000 and none issued and outstanding --- --- Common stock, $.01 par value; 75,000,000 shares authorized, 53,XXX,XXX and 43,041,895 shares issued and outstanding X 385 Additional paid-in capital X 29,943 Accumulated deficit (X) (28,016) --------------- -------------- X 2,362 --------------- -------------- $ X $ 8,186 =============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements. 2
CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------------ ------------ ------------ ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Transportation equipment sales $ 16,152 $ 5,090 $ 39,342 $ 6,062 Rental income 465 286 1,239 698 Lease underwriting income - 18 27 52 Direct finance lease income 17 22 60 89 Interest income 36 5 200 27 Gains from portfolio remarketing 286 47 860 355 Fees from remarketing activities 767 303 1,627 857 Other income 1 2 82 46 ------------ ------------ ------------ ----------- Total Revenue $ 17,724 $ 5,773 $ 43,437 $ 8,186 ------------ ------------ ------------ ----------- Costs and expenses: Cost of transportation equipment sales $ 12,837 $ 4,915 $ 31,426 $ 5,583 Selling, general and administrative 3,920 571 9,716 1,990 Interest expense 234 43 476 74 Depreciation and amortization 390 103 1,098 338 ------------ ------------ ------------ ----------- $ 17,381 $ 5,632 $ 42,716 $ 7,985 ------------ ------------ ------------ ----------- Earnings before taxes $ 343 $ 141 $ 721 $ 201 ------------ ------------ ------------ ----------- Provision for income taxes $ 77 $ - $ 163 $ - Net Income $ 266 $ 141 $ 558 $ 201 ============ ============ ============ =========== Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01 ============ ============ ============ =========== Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00 ============ ============ ============ =========== Shares used in computing basic net income per share 53,530,730 38,472,679 48,381,553 35,883,172 Shares used in computing diluted net income per share 59,943,551 53,232,679 57,180,393 47,963,172
The accompanying notes are an integral part of these condensed consolidated financial statements. 3
CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended September 30, 1999 1998 ------------ -------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 558 $ 201 ------------ -------- Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization $ 1,098 $ 338 Residual value estimate realizations and reductions, net of additions 39 167 Changes in assets and liabilities: (Increase) in receivables (2,517) (79) (Increase) in inventory (711) (333) Increase (decrease) in accounts payable and accrued expenses 564 (2,035) Increase in deferred reimburseable expenses and revenues 3,643 - ------------ -------- 2,116 (1,942) ------------ -------- Net cash provided by (used for) operating activities 2,674 (1,741) ------------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net investments in direct finance leases $ (67) $ 67 Equipment on operating lease $ (4,777) (405) Net change in cash restricted - 2,419 Additions to furniture and equipment, net (294) (159) Increase in intangibles, net (275) (1,185) Net change in other assets (817) (1,488) ------------ -------- Net cash (used for) investing activities $ (6,230) $ (751) ------------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit $ 114 $ - Increase in notes payable-net 48 - Borrowings-nonrecourse debt - 175 Borrowings-recourse debt 7,422 917 Repayments of indebtedness-non recourse (670) (199) Repayments of indebtedness-recourse (2,613) (24) Issuance of common stock, net 300 1,934 ------------ -------- Net cash provided by financing activities $ 4,601 $ 2,803 ------------ -------- Net increase in cash and cash equivalents $ 1,045 $ 311 Cash and cash equivalents at beginning of period 612 97 ------------ -------- Cash and cash equivalents at end of period $ 1,657 $ 408 ============ ======== Cash paid for interest $ 760 $ 265 ============ ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission for interim financial statements. The unaudited interim condensed consolidated financial statements include the accounts of Chancellor Corporation and each of its subsidiaries ("company's"). Accordingly, the interim statements do not include all of the information and disclosure required for annual financial statements. In the opinion of the Company's management, all adjustments (consisting solely of adjustments of a normal recurring nature) necessary for a fair presentation of these interim results have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based upon the best information available, in recording transactions resulting from business operations. Intercompany accounts and transactions have been eliminated. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB-A for the year ended December 31, 1998. The balance sheet at December 31, 1998 has been derived from the audited consolidated financial statements included in the Annual Report on Form 10-KSB-A. The results of operations for the nine months ended September 30, 1998 were derived from the 10-QSB filed in November 1998. The results for the interim period ended September 30, 1999 are not necessarily indicative of the results to be expected for the entire year. 2. LOAN AGREEMENTS In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $2,500,000 loan agreement (the "Loan") with a financial institution (the "Lender") in March 1999. The Loan provides for the payment of twenty-four equal monthly installments, beginning May 1, 1999, of principal in the approximate amount of $104,000 and interest at 3.75% plus the average of the one (1) and two (2) month London Interbank Offered Rates. In addition, proceeds from the sale of the Equipment will be paid to the Lender as additional principal reduction up to $1,034,000. In connection with the Loan, the lender retained $300,000 as a deposit to secure repayment of the Loan. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. The balance outstanding as of September 30, 1999 on this loan is approximately $1,657,000. In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $2,876,000 loan agreement (the "Loan") with a financial institution (the "Lender") in September 1999. The Loan provides for principal and interest payments (at 10%) of $583,400 on September 30, 1999, $72,300 per month from October 1999 through December 1999, $64,400 per month from January 2000 through April 2000, $55,500 per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. The balance outstanding as of September 30, 1999 on this loan is approximately $2,819,000. 3. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for years beginning after June 15, 2000. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized 5 as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivatives, the Company expects that adoption of SFAS No. 133 will have an immaterial impact on the Company's consolidated financial position and results of operations. 4. OPERATING SEGMENTS The Company operates in two primary business segments: 1) sales of transportation equipment and 2) leasing activity, as follows (in thousands). The Company's Sales of Transportation Equipment division retails and wholesales used transportation equipment, primarily, tractors and trailers, through retail centers located in strategic locations primarily in the southern and midwestern sections of the United States. Leasing activities include revenues generated under operating or direct financing leases. The Company also manages most of the leases it sells to investors and, when the original lease expires or terminates, remarkets the equipment for the benefit of the investors and the Company. Leases primarily involve transportation equipment, but also involve other equipment including material handling and construction equipment.
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 -------- ------ -------- ------ (unaudited) (unaudited) SALES OF TRANSPORTATION EQUIPMENT: - ------------------------------------------------------ Revenues $16,502 $5,090 $39,692 $6,052 Costs and expenses: Cost of transportation equipment 12,837 4,915 31,426 5,583 Selling, general and administrative 2,638 116 6,400 292 Interest expense 197 2 333 7 Depreciation and amortization 162 10 352 39 -------- ------ -------- ------ Total Costs and expenses $15,834 $5,043 $38,511 $5,921 -------- ------ -------- ------ Income from sales of transportation equipment $ 668 $ 47 $ 1,181 $ 131 before income taxes Income taxes 77 --- 163 --- -------- ------ -------- ------ Income from sales of transportation equipment $ 591 $ 47 $ 1,018 $ 131 -------- ------ -------- ------ Identifiable Assets $13,960 $ 535 $13,960 $ 535 ======== ====== ======== ====== 6 LEASING ACTIVITY - ------------------------------------------------------ Revenues: Leasing activity $ 1,185 $ 676 $ 3,462 $2,051 Interest income 36 5 200 37 Other income 1 2 83 46 -------- ------ -------- ------ Total Leasing Revenues $ 1,222 $ 683 $ 3,745 $2,134 -------- ------ -------- ------ Costs and expenses: Selling, general and administrative $ 1,282 $ 455 $ 3,316 1,698 Interest expense 37 41 143 67 Depreciation and amortization 228 93 746 299 -------- ------ -------- ------ Total Costs and Expenses $ 1,547 $ 589 $ 4,205 $2,064 -------- ------ -------- ------ Income (loss) from leasing activity before income $ (325) $ 94 $ (460) $ 70 taxes Income taxes --- --- --- --- -------- ------ -------- ------ Income (Loss) from leasing activity $ (325) $ 94 $ (460) $ 70 -------- ------ -------- ------ Identifiable assets $14,450 $7,540 $14,450 $7,540 ======== ====== ======== ====== TOTAL COMPANY - ------------------------------------------------------ Revenues: $17,724 $5,773 $43,437 $8,186 Cost and expenses: Cost of transportation equipment 12,837 4,915 31,426 5,583 Selling, general and administrative 3,920 571 9,716 1,990 Interest expense 234 43 476 74 Depreciation and amortization 390 103 1,098 338 -------- ------ -------- ------ $17,381 $5,632 $42,716 $7,985 -------- ------ -------- ------ Income before income taxes $ 343 $ 141 $ 721 $ 201 -------- ------ -------- ------ Income taxes 77 --- 163 --- -------- ------ -------- ------ Net Income $ 266 $ 141 558 $ 201 -------- ------ -------- ------
5. COMMON STOCK ISSUED During the quarter ended September 30, 1999, the Company's major shareholder was issued five (5) million shares of additional common stock as a result of conversion of series AA preferred stock. 6. SUBSEQUENT ACQUISITION OF STOCK AND DISTRIBUTION RIGHTS In October 1999, the Company, through an affiliate, closed on the acquisition of a 15.1% equity interest in Afinita Motor Corporation (Pty) Ltd. ("AMC"). AMC is a South African manufacturer/assembler of trucks, buses, automobiles, sport utility vehicles, and other products. This transaction and the related transaction surrounding certain distribution rights were acquired via a combination of the conversion of a note receivable including accrued interest from cash previously advanced, and the issuance of 250,000 shares of a newly created class of Series B Convertible Preferred Stock (the "Series B Preferred Stock"). 7 In October 1999, the Company, through an affiliate, finalized several agreements that were made effective retroactive to June 30, 1999, with Afinta Motor Corporation (Pty) Ltd. ("AMC"). One such affiliate acquired the exclusive worldwide distribution rights for products manufactured/assembled by AMC, excluding Africa, England, Scotland and Wales. AMC is a manufacturer/assembler of trucks, buses, and other products. These distribution rights to the AMC product range include, but are not limited to trucks, tractor-trailers, buses, automobiles, sport utility vehicles, motorcycles, and other products supplied by AMC. The Company issued 100,000 shares of Series B Preferred Stock in the transaction. The Company has these distribution rights for the next 99 years, whereby they expire during 2098. The Company will amortize these rights over a 15-year period beginning October 1999. It is the Company's desire to utilize these rights to earn additional revenue via commissions and the potential sale and/or lease of AMC products within the defined territory. The Series B Preferred Stock has a $20.00 per share liquidation preference and converts into common stock at a 1 for 10 basis, which will increase the shares used in computing diluted net income per share in future periods. Also, in conjunction with these investments, NAOF, a $120 million OPIC backed investment fund of which the Company has a 2.5% investment in, also extended its investment/commitment in AMC to $10,000,000. In addition to the Company, several of the other investors are Sun America, Inc., Citicorp, Northwestern Mutual Life and others. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The results of operations in the previously reported 10-QSB, filed in November 1999, included the effects of Tomahawk for the full nine months ended September 30, 1999 and the restated statements of income and cash flows for the three months ended September 30, 1998 which included the Tomahawk acquisition as of August 1998. Because of the change in the acquisition date from August, 1998 to January 1999, this amended 10-QSB-A includes consolidated results of operations of Tomahawk for the eight months ended September 30, 1999 and the results of operations for the nine months ended September 30, 1998 as originally reported in November, 1998. Three-Month Period Ended September 30, 1999 vs. September 30, 1998 Revenues. Total revenues for the three-month period ended September 30, 1999 were $17,724,000 as compared to $5,773,000 for the corresponding prior period, an increase of $11,951,000 or 207.0%. For the three-month period ended September 30, 1999, transportation equipment sales were $16,152,000 as compared to $5,090,000 for the corresponding prior period, an increase of $11,062,000 or 217.3%. This significant revenue stream from transportation equipment sales is primarily attributable to sales of used transportation equipment through the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located in key Southeastern and Midwestern cities and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the company lease origination business unit. For the three-month period ended September 30, 1999, rental income increased by $179,000 or 62.6% to $465,000 as compared to $286,000 for the corresponding prior period. The increase in rental income is attributable primarily to the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several leases from portfolios administered by the company for trusts. For the three month period ended September 30, 1999, lease underwriting income decreased by $18,000 or 100% to $0 as compared to $18,000 for the corresponding prior period and direct finance lease income decreased by $5,000 or 22.7% to $17,000 as compared to $22,000 for the corresponding prior period. For the three-month period ended September 30, 1999, interest income increased by $31,000 or 620.0% to $36,000 as compared to $5,000 for the corresponding prior period. This note was exchanged for stock in the manufacturing company in October 1999. For the three-month period ended September 30, 1999, gains from portfolio remarketing increased by $239,000 or 508.5% to $286,000 as compared to $47,000 for the corresponding prior period. The increase in gains from portfolio remarketing is attributable to the increase in portfolio assets acquired in connection with the purchase of several leases from portfolios administered on behalf of trusts by the Company, which were made available for sale upon termination of certain leases. For the three-month period ended September 30, 1999, fees from remarketing activities increased by $464,000 or 153.1% to $767,000 as compared to $303,000 for the corresponding prior period. This increase is attributable, in part, to the Company's efforts to promote its remarketing services on a third party basis. For the three-month period ended September 30, 1999, other income decreased by $1,000 or 50% to $1,000. Costs and Expenses. Total costs and expenses for the three-month period ended September 30, 1999 was $17,381,000 as compared to $5,632,000 for the corresponding prior period, an increase of 11,749,000 or 208.6%. The significant increase is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales for the three-month period ended September 30, 1999 was $12,837,000 as compared to $4,915,000 for the corresponding prior period, an increase of $7,922,000 or 161.2%, and resulted in an overall gross margin of 20.5%. Selling, general and administrative expenses for the three-month period ended September 30, 1999 was $3,920,000 as compared to $571,000 for the corresponding prior period, an increase of $3,349,000 or 586.5%. For the three month period ended September 30, 1999 selling, general and administrative expenses included recovered reimbursable trust administration costs of approximately $211,000. Approximately $2,387,000 of selling, general and administrative expenses for the three-month period ended September 30, 1999 is a result of normal operating expenses incurred by CAM and CAM's newly acquired retail and wholesale business unit, Tomahawk, whose operations were consolidated with the Company's beginning February 1999. Before netting out the reimbursable trust administration costs and the effect of the CAM expenses, selling, general 9 and administrative expenses increased to $2,134,000 for the three-month period ended September 30, 1999 as compared to $785,000 or the corresponding prior period, an increase of $1,349,000 or 172.0%. The increase in selling, general and administrative expenses reflects the effect of the Company's growth strategy implementation that included, in part, costs associated with the addition of senior management, sales and staff personnel. Interest expense for the three-month period ended September 30, 1999 was $234,000 as compared to $43,000 for the corresponding prior period, an increase of $191,000 or 444.2%. This increase is primarily a result of increased interest expense associated with CAM's revolving credit line with a financial institution utilized for inventory floor planning and interest accrued on the Company's recourse debt. Depreciation and amortization expense for the three-month period ended September 30, 1999 was $390,000 as compared to $103,000 for the corresponding prior period, an increase of $287,000 or 278.6%. The increase is primarily due to the amortization of intangible assets associated with the acquisition of Tomahawk by CAM, as well as the depreciation of additions to the Company's portfolio of leased transportation equipment. Provision for income taxes for the three-month period ended September 30, 1999 was $77,000 as compared to zero for the corresponding prior period. The increase is primarily due to the taxes incurred by income generated from Tomahawk during the quarter. Net Income. Net income for the three-month period ended September 30, 1999 was $343,000 as compared to $141,000 for the corresponding prior period, an increase of $202,000 or 143.3%. The increase in net income is attributable to the significant increase in revenues, primarily from the retail and wholesale of used transportation equipment, the sale of equipment under lease, and continued improvements in the containment of costs. Net income per share was $0.00 per share (both basic and diluted) for the three-month periods ended September 30, 1999 and 1998. Nine-Month Period Ended September 30, 1999 vs. September 30, 1998 Revenues. Total revenues for the nine-month period ended September 30, 1999 were $43,437,000 as compared to $8,186,000 for the corresponding prior period, an increase of $35,251,000 or 430.6%. For the nine-month period ended September 30, 1999, transportation equipment sales were $39,342,000 as compared to $6,062,000 for the corresponding prior period, an increase of $33,280,000 or 549.0%. This significant revenue stream from transportation equipment sales is primarily attributable to sales of used transportation equipment through the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located in key Southeastern and Midwestern cities and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the nine-month period ended September 30, 1999, rental income increased by $541,000 or 77.5% to $1,239,000 as compared to $698,000 for the corresponding prior period. The increase in rental income is attributable primarily to the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several leases from portfolios administered for trusts by the Company. For the nine-month period ended September 30, 1999, lease underwriting income decreased by $25,000 or 48.1% to $27,000 as compared to $52,000 for the corresponding prior period and direct finance lease income decreased by $29,000 or 32.6% to $60,000 as compared to $89,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed plans for the addition of key senior management and sales personnel in 2000, and development of strategic alliances to provide future growth in this area. For the nine-month period ended September 30, 1999, interest income increased by $173,000 or 640.7% to $200,000 as compared to $27,000 for the corresponding prior period. The increase is primarily attributable to interest earned in connection with the Company's investment of approximately $1,475,000 in a South Africa based manufacturer and lessor of 10 transportation equipment. This note was exchanged for stock in the manufacturing company in October 1999. For the nine-month period ended September 30, 1999, gains from portfolio remarketing increased by $505,000 or 142.3% to $860,000 as compared to $355,000 for the corresponding prior period. The increase in gains from portfolio remarketing is attributable to the increase in portfolio assets acquired in connection with the purchase of several leases from portfolios administered for trusts by the Company which were made available for sales upon termination of certain leases. For the nine-month period ended September 30, 1999, fees from remarketing activities increased by $770,000 or 89.8% to $1,627,000 as compared to $857,000 for the corresponding prior period. This increase is attributable, in part, to the Company's efforts to promote its remarketing services on a third party basis. For the nine-month period ended September 30, 1999, other income increased by $36,000 or 78.3% to $82,000. Costs and Expenses. Total costs and expenses for the nine-month period ended September 30, 1999 was $42,716,000 as compared to $7,985,000 for the corresponding prior period, an increase of $34,731,000 or 435.0%. The significant increase is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales for the nine-month period ended September 30, 1999 was $31,426,000 as compared to $5,583,000 for the corresponding prior period, an increase of $25,843,000 or 462.9%, and resulted in an overall gross margin of 20.1%. Selling, general and administrative expenses for the nine-month period ended September 30, 1999 was $9,716,000 as compared to $1,990,000 for the corresponding prior period, an increase of $7,726,000 or 388.2%. Approximately $6,537,000 of selling, general and administrative expenses for the nine-month period ended September 30, 1999 is a result of normal operating expenses incurred by CAM and CAM's newly acquired retail and wholesale business unit, Tomahawk, whose operations were consolidated with the Company's beginning February 1999. In a prior year, the Company undertook a review of the portfolios it administers on behalf of trusts, including consultation with legal counsel and industry consultants, and determined that it had not been recovering costs associated with administering the trusts. Management's review determined that approximately $22,000,000 of the costs for periods prior to 1997 had not been recovered from the trusts. The Company has recorded approximately $789,000 and $952,000 of cost recoveries in the nine-month periods ended September 30, 1999 and 1998, respectively. Before netting out the reimbursable trust administration costs and the effect of the CAM expenses, selling, general and administrative expenses increased to $5,122,000 for the nine-month period ended September 30, 1999 as compared to $1,217,000 for the corresponding prior period, an increase of $3,905,000 or 320.9%. This increase in selling, general and administrative expenses reflects the effect of the Company's growth strategy implementation that included, in part, significant costs associated with the addition of senior management and staff personnel and costs incurred in obtaining additional financing sources and investment assets, while continuing to improve the containment of other operating costs. Interest expense for the nine-month period ended September 30, 1999 was $476,000 as compared to $74,000 for the corresponding prior period, an increase of $402,000 or 543.2%. This increase is primarily a result of increased interest expense associated with CAM's revolving credit line with a financial institution utilized for inventory floor planning and interest accrued on the Company's recourse debt. Depreciation and amortization expense for the nine-month period ended September 30, 1999 was $1,098,000 as compared to $338,000 for the corresponding prior period, an increase of $760,000 or 224.9%. The increase is primarily due to the amortization of intangible assets associated with the acquisition of Tomahawk by CAM. Provision for income taxes for the nine-month period ended September 30, 1999 was $163,000 as compared to zero for the corresponding prior period. The increase is primarily due to the taxes incurred from income generated by Tomahawk during the eight months ending September 1999. Net Income. Net income for the nine-month period ended September 30, 1999 was $558,000 as compared to $201,000 for the corresponding prior period, an increase of $357,000 or 177.6%. The increase in net income is attributable to the significant increase in revenues, primarily from the retail and wholesale of used transportation equipment, the purchase of certain lease portfolios from the trusts, and continued improvements in the containment of costs. Net income per share was $0.01 per share (both basic and diluted) for the nine-month periods ended September 30, 1999 compared to $.00 per share in 1998. 11 LIQUIDITY AND CAPITAL RESOURCES The Company recognized a net increase in cash and cash equivalents for the nine-month period ended September 30, 1999 of $1,045,000 totaling $1,657,000. Operating activities provided cash of $2,674,000 during the nine-month period ended September 30, 1999 and is primarily a result of increased sales of used transportation equipment inventory, normal increases in accounts payable associated with inventory and operating purchases, an increase in deferred revenue associated with the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several equipment lease portfolios, and offset by increases in accounts receivable and inventory. Investing activities used cash of $6,230,000 during the nine-month period ended September 30, 1999 and is primarily a result of the acquisitions of portfolios of operating leases valued at approximately $4,773,000. Financing activities provided cash of $4,601,000 during the nine-month period ended September 30, 1999 and is primarily the result of recourse debt loans from financing institutions in the amount of $5,376,000 and loans from Vestex Capital Corporation. The Company's majority shareholder, exercised of a Stock Purchase Warrant for an aggregate of Ten Million (10,000,000) shares of the Common Stock, $.01 par value, of the Company at the exercise price of $.20 per share in exchange for payment of recourse debt during the quarter ended June 30, 1999. During the quarter ended September 30, 1999, the Company's major shareholder was issued five (5) million shares of additional common stock as a result of conversion of Series AA preferred stock. Cash and cash equivalents were $1,657,000 at September 30, 1999 as compared to $612,000 at December 31, 1998, an increase of $1,045,000 or 170.8%. In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $2,500,000 loan agreement (the "Loan") with a financial institution (the "Lender") in March 1999. The Loan provides for the payment of twenty-four equal monthly installments, beginning May 1, 1999, of principal in the approximate amount of $104,000 and interest at 3.75% plus the average of the one (1) and two (2) month London Interbank Offered Rates. In addition, proceeds from the sale of the Equipment will be paid to the Lender as additional principal reduction up to $1,034,000. In connection with the Loan, the lender retained $300,000 to secure repayment of the Loan. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. Balance for this loan as of 11/15/99 is $1,340,000. In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $2,876,000 loan agreement (the "Loan") with a financial institution (the "Lender") in September 1999. The Loan provides for principal and interest payments (at 10%) of $583,400 on September 30, 1999, $72,300 per month from October 1999 through December 1999, $64,400 per month from January 2000 through April 2000, $55,500 per month from May 2000 through July 2000, and $1,842,000 August 2000. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. The balance outstanding as of 11/15/99 is $2,230,000. The Company also maintains a revolving line of credit agreement with a financial institution whereby CAM can borrow up to $7,500,000 to floor plan used transportation equipment inventory. The balance outstanding under this revolving line of credit agreement is approximately $6,385,000 as of September 30, 1999. Prior to the acquisition, during 1998, CAM, through Tomahawk, entered into a special purpose financing agreement with the same institution to floor plan additional used transportation equipment inventory in the approximate amount of $4,500,000. The balance outstanding under this special purpose financing agreement is approximately $1,254,000 as of September 30, 1999. In addition, during 1999, CAM entered into an additional special purpose financing agreement with the same institution to finance used transportation equipment inventory in the approximate amount of $626,000. The balance outstanding under this agreement is approximately $626,000 as of September 30, 1999. The interest rate charges on the above three lines of credit is Prime plus 1.75%. The Company, in 1999, has also entered into a special line of credit to finance used transportation equipment for approximately $500,000 at the rate of Prime plus 1%. The balance on this line of credit as of September 30, 1999 is approximately $383,000. The Company's ability to underwrite equipment lease transactions is largely dependent upon the availability of short-term warehouse lines of credit. Management is engaged in continuing dialogue with several inventory lenders to providing the Company with warehouse financing. If the Company experiences delays in putting warehouse facilities in place, the Company transacts deals by coterminous negotiation of lease transactions with customers and financing with institutions upon which it obtains a fee as the intermediary of up to 3% of the amount of financing. 12 The remarketing, retailing and wholesaling of equipment has played and will continue to play a vital role in the Company's operating activities. In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential to the realization of the Company's interest in the residual value of its managed portfolio. It is also essential to the Company's ability to recover its original investment in the equipment in its own portfolios and to recognize a return on that investment. The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or released, resulting in a potential loss to the company. The Company plans to dedicate substantial resources toward the further development and improvement of its remarketing, retailing and wholesaling capabilities. The Company's strategy is to further capitalize upon its remarketing expertise by continuing to develop its ability to sell remarketing services to other lessors, fleet owners, and lessees. The company plans also to create a dealer capability under which the Company would buy and resell fleet equipment. The Company anticipates expanding its used transportation equipment retail and wholesale capabilities through the addition of strategically located retail centers through internal growth and/or acquisitions. The Company's retail and wholesale capabilities have been greatly improved through CAM's strategic acquisition of Tomahawk. This improved capability will be used as a competitive advantage that will enable the Company to provide a "total holding cost" concept when competing for new lease origination deals. The Company's retail and wholesale business unit will provide improved outlets for other lessors, financial institutions, and fleet owners to dispose of used transportation equipment and sources of quality used transportation equipment for fleet owners and owner-operators. The Company also plans to aggressively promote its Internet capabilities to further promote its business activities and as an e-commerce tool. In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. In addition to the Company, several of the other investors are Sun America, Inc., Citicorp, Northwestern Mutual Life and others. As of September 30, 1999, the Company had funded approximately $469,000 and is obligated to provide additional funding in the approximate amount of $531,000. The Company has additionally invested approximately $1,475,000 into one of NAOF's portfolio investee companies. Subsequent to September 30, 1999, the Company formally closed on a strategic investment/alliance with a South African manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of convertible preferred stock of Chancellor Corporation was issued and the note receivable including accrued interest was canceled in exchange for a minority interest and certain distribution rights in the South African company. The Company's renewal or replacement of expired lines, its expected access to the public and private securities markets, both debt and equity, anticipated new lines of credit (both short-term and long-term and recourse and non-recourse), anticipated long-term financing of individual significant lease transactions, and its estimated cash flows from operations are anticipated to provide adequate capital to fund the Company's operations for the next twelve months. Although no assurances can be given, the Company expects to be able to renew or timely replace expired lines of credit, to expand currently existing lines for inventory floor planning, to continue to have access to the public and private securities markets, both debt and equity, and to be able to enter into new lines of credit and individual financing transactions. The Company is in the final stages of negotiation with several financial institutions, whereby the Company could potentially gain access to substantial funding which would enable the Company to accelerate the redevelopment of its lease origination business. IMPACT OF THE YEAR 2000 ISSUE The Company has completed efforts to assess and, where required, remediate issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues arise from computer programs which use only two digits to refer to the year and 13 which may experience problems when the two digits become "00" in the year 2000. In addition, imbedded hardware microprocessors may contain time and two-digit year fields in executing their functions. Much literature has been devoted to the possible effects such programs may experience in the Year 2000, although significant uncertainty exists as to the scope and effect the Y2K issues will have on industry and the Company. The Company has recognized the need to address the Y2K issue in a comprehensive and systematic manner and has taken steps to assess the possible Y2K impact on the Company. Although the Company has not completed a 100% assessment of all its information technology ("IT") and non-IT systems for Y2K issues the Company has completed its assessment of all mission-critical systems. All mission-critical systems and most of the major applications and hardware have been assessed to determine the Y2K impact and a plan is in place for timely resolution of potential issues. In 1998, the Company developed a strategic plan to identify the IT systems needed to accomplish the Company's overall growth plans. As part of this process, Y2K issues were considered and addressed by the Company's senior management and MIS personnel. Although this plan was intended to modernize the IT systems, compliance with Y2K requirements were incorporated. The cost of bringing the Company in full compliance should not result in a material increase in the recent levels of capital spending or any material one-time expenses. Prior to 1999, the Company spent approximately $200,000 in modernizing its IT system, including compliance with Y2K requirements. The Company anticipates spending approximately $350,000 during fiscal 1999 and 2000 to complete the modernization of its IT system. The failure of either the Company, its vendors or clients to correct the systems affected by Y2K issues could result in a disruption or interruption of business operations. The Company uses computer programs and systems in a vast array of its operations to collect, assimilate and analyze data. Failure of such programs and systems could affect the Company's ability to track assets under lease and properly bill. Although the Company does not believe that any of the foregoing worst-case scenarios will occur, there can be no assurance that unexpected Y2K problems of the Company's and its vendors' and customer's operations will not have a material adverse effect on the Company. While it is difficult to classify our state of readiness, we believe that our internal plans should have the Company ready by the end of 1999 to avoid any material Y2K issues. We have completed the assessing, testing of systems, and the development of contingency plans. Management is in constant communication with its IT personnel and has made and will continue to make reports to the Company's Board of Directors. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. Actual results may differ materially from such projected information due to changes in the underlying assumptions. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's future quarterly operating results and the market price of its stock may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts and others, or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be greater if any such shortfall occurs near the same time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing companies or major customers or vendors of the Company. The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, as a result of sales by the Company of equipment it leases to its customers. Such sales of equipment, which are an ordinary but not predictable part of the Company's business, will have the effect of increasing revenues, and, to the extent sales proceeds exceeds net book value, net income, during the quarter in which the sale occurs. Furthermore, any such sale may result in the reduction of revenue, 14 and net income, otherwise expected in subsequent quarters, as the Company will not receive lease revenue from the sold equipment in those quarters. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations to immediately succeeding quarters are not necessarily material or meaningful and that such results for one quarter should not be relied upon as an indication of future performance. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB/A contains certain "Forward-Looking" statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management as well as assumptions used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or the Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introduction and acceptance, technology changes and changes in industry conditions. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company. Item 2. Changes in Securities None Item 3. Defaults Under Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Form 10-KSB for 1998 was amended January, 2000, primarily for the effects caused by the change in acquisition date of the Tomahawk subsidiary which was originally reported as of August, 1998. This transaction has been recorded as of January, 1999, the date of final closing in the revised 10-KSB-A and this 10-QSB-A. See 10-KSB-A for more information. Additionally, the original 10-QSB included the acquisition of a minority interest in a South African company as of September 30, 1999 in exchange for forgiveness of debt and issuance of preferred stock. This transaction has been revised and recorded as of the closing date in October, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 11 Computation of Earnings per Share 27 Financial Data Schedule for period ended September 30, 1999. (b) Reports on Form 8-K: 1.) Current Report on Form 8-K, dated February 10, 1999. 2.) Current Report on Form 8-K, dated March 4, 1999. 3.) Current Report on Form 8-K/A, dated March 22, 1999. 4.) Current Report on Form 8-K/A, dated April 13, 1999. 5.) Current Report on Form 8-K/A, dated July 9, 1999. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHANCELLOR CORPORATION /s/ Brian M. Adley --------------------- Brian M. Adley Chairman of the Board and Director (Principle Executive Officer) /s/ Franklyn E. Churchill ---------------------------- Franklyn E. Churchill President, Chief Operating Officer and Director /s/ Jonathan C. Ezrin ------------------------ Jonathan C. Ezrin Corporate Treasurer (Principle Accounting Officer) Date: January 29, 2000 17 EX-11 2
EXHIBIT 11 CHANCELLOR CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE The following table reflects the calculation of the earnings per share: Income Weighted Average Common Shares Outstanding (numerator) (denominator) in thousands, except share and per share data Quarter ended September 30, 1999: Earnings from operations $ 266 53,530,730 ============ ========================== Basic earnings per common share $0.00 Effect of dilutive securities- Convertible preferred shares - - - 5,000,000 Vested Employee Options - - - 1,412,821 ------------ -------------------------- $ 266 59,943,551 ============ ========================== Diluted earnings per common share $0.00 Quarter ended September 30,1998: Earnings from operations $ 141 38,472,679 ============ ========================== Basic earnings per common share $0.00 Effect of dilutive securities- Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 8,760,000 Vested Employee Options - - - 1,000,000 ------------ -------------------------- $ 141 53,232,679 ============ ========================== Diluted earnings per common share $0.00 Year to date ended September 30, 1999: Earnings from operations $ 558 48,381,553 ============ ========================== Basic earnings per common share $0.01 Effect of dilutive securities- Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 2,323,232 Vested Employee Options - - - 1,475,608 ------------ -------------------------- $ 558 57,180,393 ============ ========================== Diluted earnings per common share $0.01 Year to date ended September 30, 1998: Earnings from operations $ 201 35,883,172 ============ ========================== Basic and diluted earnings per common share $0.01 Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 6,080,000 Vested Employee Options - - - 1,000,000 ------------ -------------------------- $ 201 47,963,172 ============ ========================== Diluted earnings per common share $0.00
EX-27 3
5 1000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 1657 2651 4375 0 10630 3934 10388 3491 31153 24704 0 583 0 0 0 31153 14233 17724 12837 17381 0 0 234 343 77 266 0 0 0 266 0 0
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