-----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, TKnFZG7X8dT0NXc6rBWaAJQRnkMLz3oxwUM5eb7wEjw50boFx9ILW4FTmlm33UtD +8Pn0Nq2YjlJr+rLkzLGQQ== /in/edgar/work/20000809/0001104659-00-000390/0001104659-00-000390.txt : 20000921 0001104659-00-000390.hdr.sgml : 20000921 ACCESSION NUMBER: 0001104659-00-000390 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANCELLOR CORP CENTRAL INDEX KEY: 0000724051 STANDARD INDUSTRIAL CLASSIFICATION: [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: 689926 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 0001.txt QUARTERLY REPORT 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 June 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 [ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS As of August 13, 1999, 53,362,786 shares of Common Stock, $.01 par value per share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par value per share (with a liquidation preference of $.50 per share or $2,500,000) were outstanding. Aggregate market value of the voting stock held by non-affiliates of the issuer as of August 13, 1999 was approximately $11,020,410. Aggregate market value of the total voting stock of the issuer as of August 13, 1999 was approximately $40,172,090. CHANCELLOR CORPORATION AND SUBSIDIARIES Page Part I Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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 8 Part II Other Information Item 1 Legal Proceedings 14 Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Item 7 Exhibit 11 - Computation of Earnings per Share Signatures 16 1
CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) June 30, December 31, 1999 1998 ------------ ------------ (unaudited) (restated) (restated) ASSETS Cash and cash equivalents $ 444 $ 612 Receivables, net 5,708 2,880 Inventory 10,589 36 Net investment in direct finance leases 434 359 Equipment on operating lease, net of accumulated depreciation of $2,292 and $2,351 2,560 702 Residual values, net 214 219 Furniture and equipment, net of accumulated depreciation of $1,463 and $1,290 1,096 807 Long term investments 1,000 1,000 Intangibles, net 2,693 111 Other assets, net 1,942 1,460 --------- --------- Total Assets $ 26,680 $ 8,186 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 4,994 $ 3,572 Deferred reimbursable expenses 4,122 1,068 Indebtedness: Revolving credit line 8,270 - - - Notes payable 492 - - - Nonrecourse 547 889 Recourse 2,082 295 --------- --------- Total Liabilities 20,507 5,824 --------- --------- Stockholders' equity: Preferred Stock, $.01 par value, 20,000,000 shares authorized: Convertible Series AA, 5,000,000 shares issued and outstanding 50 50 Convertible Series B, 2,000,000 shares authorized, none issued and outstanding - - - - - - Common stock, $.01 par value; 75,000,000 shares authorized, 53,358,786 and 38,541,895 shares issued and outstanding 533 385 Additional paid-in capital 33,313 29,943 Accumulated deficit (27,723) (28,016) --------- --------- Total Stockholders' Equity 6,173 2,362 --------- --------- Total Liabilities and Stockholders' Equity $ 26,680 $ 8,186 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements.
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CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, Except Per Share Data) THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, ------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) (restated) (restated) Revenues Transportation Equipment Sales $ 14,223 $ 481 $ 23,190 $ 972 Rental income 316 290 774 411 Lease underwriting income 17 34 27 34 Direct finance lease income 28 31 42 67 Interest income 84 14 164 32 Gains from portfolio remarketing 323 227 574 308 Fees from remarketing activities 622 314 860 554 Other income 11 27 82 45 ------------ ---------- ---------- ---------- $ 15,624 $ 1,418 $ 25,713 $ 2,423 ----------- ----------- ---------- ---------- Costs and expenses: Cost of transportation equipment sales 11,500 362 18,589 669 Selling, general and administrative 3,288 883 5,795 1,419 Interest expense 176 19 242 40 Depreciation and amortization 395 120 708 235 ----------- ---------- ---------- --------- 15,359 1,384 25,334 2,363 ----------- ---------- ---------- ---------- Earnings before taxes 265 34 379 60 ----------- ---------- ---------- ---------- Provision for income taxes 64 - - - 86 - - - -- ------- -- ------ Net Income $ 201 $ 34 $ 293 $ 60 ----------- ----------- ---------- ---------- Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00 ----------- ----------- ---------- ----------- Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.00 ----------- ----------- ----------- ----------- Shares used in computing basic net income 48,300,550 35,032,242 46,039,725 33,168,387 per share Shares used in computing diluted net income 56,941,127 43,624,835 56,046,197 42,025,530 per share - ------------------------------------------------------------------------------------------------------------------------------------
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) Six Months Ended June 30, 1999 1998 ---------- ------- (unaudited) (unaudited) (restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 293 $ 60 --------- ---------- Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 708 120 Residual value estimate realizations and reductions, net of additions 5 24 Changes in assets and liabilities: (Increase) decrease in receivables (2,256) 490 (Increase) in inventory (670) (222) Increase (decrease) in accounts payable and accrued expenses 297 (1,038) Increase in deferred reimbursable expenses 3,054 - - - --------- -------- 1,138 (626) --------- --------- Net cash (used) provided by operating activities 1,431 (566) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net investments in direct finance leases (75) 57 Equipment on operating lease (1,980) (325) Net change in cash restricted - - - 2,282 Additions to furniture and equipment, net (318) (85) Increase in intangibles (66) - - - Net change in other assets (410) (1,425) --------- --------- Net cash provided (used) by investing activities (2,849) 504 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit (264) - - - Increase in indebtedness - recourse 3,300 225 Repayments of indebtedness-non recourse (342) (162) Repayments of indebtedness-recourse (1,513) (8) Repayment of note payable (221) - - - Issuance of common stock, net 290 5 --------- ---------- Net cash provided by financing activities 1,250 60 --------- ---------- Net (decrease) in cash and cash equivalents (168) (2) Cash and cash equivalents at beginning of period 612 97 --------- ---------- Cash and cash equivalents at end of period $ 444 $ 95 ========= ========== Cash paid for interest $ 332 $ 13 ========= ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CHANCELLOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission for interim financial statements. The unaudited interim condensed consolidated financial statements include the accounts of Chancellor Corporation and each of its subsidiaries ("company's"). Accordingly, the interim statements do not include all of the information and disclosure required for annual financial statements. In the opinion of the Company's management, all adjustments (consisting solely of adjustments of a normal recurring nature) necessary for a fair presentation of these interim results have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based upon the best information available, in recording transactions resulting from business operations. Intercompany accounts and transactions have been eliminated. 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 for the interim period ended June 30, 1999 are not necessarily indicative of the results to be expected for the entire year. RESTATEMENT OF FINANCIAL STATEMENTS: ----------------------------------- In accordance with guidelines of the Securities and Exchange Commission, the Company has restated its 1999 financial statements to reflect the acquisition of MRB, Inc. and related companies "Tomahawk" on January 29, 1999 and related revisions to the purchase price and amortization periods of intangibles and to properly record expenses and accrued liabilities related to the issuance of stock purchase by the Company's majority shareholder and certain other deferred costs or expenses paid by VCC or VMI on behalf of the Company during 1998. The effects on the 10-QSB/A's for June 30, 1999 are as follows (in thousands):
As Related to originally Tomahawk Related to Related to Related to As reported deconsol- Related to VCC/VMI VCC Intangibles Restated idatiton goodwill fees warrants Total assets $36,052 $(1,781) $262 $(6,226) $ - - - $(1,627) $26,680 Total liabilities 26,329 (183) 119 (5,758) - - - - - - 20,507 Total shareholders equity 9,723 (1,488) 155 (990) 23 (1,250) 6,173 Total revenues 15,834 - - - - - - 167 - - - (377) 15,624 Total expenses 15,285 - - - 41 86 11 - - - 15,423
2. LOAN AGREEMENT 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"). 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 security 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. 3. BUSINESS ACQUISITION Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the Company, entered into a Management Agreement dated August 1, 1998, as amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and Tomahawk Truck & Trailer Sales of Missouri, Inc., a Missouri corporation (collectively "Tomahawk"). The Management Agreement provided CAM with effective control of Tomahawk's operations as of 1998. Subsequently, CAM acquired all of the outstanding capital stock of 5 Tomahawk from the two (2) sole shareholders (the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the "Agreement") dated January 29, 1999. The acquisition of MRB, Inc. was accounted for under the purchase method of accounting. As previously reported in the 1998 10-K, the purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of Chancellor valued at $.96 cents per share. The excess purchase price of $2,600,000 as of January, 1999 consisted of said shares valued at $.65 cents per share, less change in net worth, which has been allocated between a covenant not to compete, customer database files, and goodwill which will be amortized beginning in February, 1999 over a period of five to twenty years. Results of operations of Tomahawk after the acquisition date are included in the June 30, 1999 condensed consolidated statements of operations. The following proforma information has been prepared assuming that this acquisition had taken place at the beginning of the respective periods. The proforma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. Six Months Ended June 30, 1999 ---- (IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) Net revenue $ 29,013 Net income before taxes 383 Net income after taxes 313 Net income (loss) per common share $ .01 4. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for years beginning after June 15, 2000. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivatives, the Company expects that adoption of SFAS No. 133 will have an immaterial impact on the Company's consolidated financial position and results of operations. 5. COMMON STOCK During the quarter ended June 30, 1999, the Company's major shareholder was issued ten (10) million shares of additional common stock as a result of the exercise of a stock purchase warrant in exchange of payment of $2,000,000 of recourse debt. 6. 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 throughout the country. Leasing activities include revenues generated under operating or direct financing leases. The Company also manages most of the leases it sells to investors and, when the original lease expires or terminates, remarkets the equipment for the benefit of the investors and the Company. Leases primarily involve transportation equipment, but also other equipment including material handling and construction equipment. 6
Three Months Ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) (restated) (restated) SALES OF TRANSPORTATION EQUIPMENT: Revenues $ 14,222 $ 481 $ 23,190 $ 972 Costs and expenses: Cost of transportation equipment 11,500 362 18,589 669 Selling, general and administrative 2,287 74 3,761 176 Interest expense 103 2 136 5 Depreciation and amortization 108 10 190 29 ---------- --------- ---------- -------- Total Costs and expenses 13,998 448 22,676 879 ---------- --------- ---------- -------- Income from sales of transportation equipment $ 224 $ 33 $ 514 $ 93 --- -- --- -- Identifiable Assets 13,972 $ 535 $ 13,972 $ 535 --------- --------- ---------- --------- LEASING ACTIVITY Revenues: Leasing activity $ 1,307 $ 896 $ 2,277 $ 1374 Interest income 84 14 164 32 Other income 11 27 82 45 --------- --------- ---------- --------- Total Leasing Revenues 1,402 937 2,523 1,451 --------- --------- ---------- --------- Costs and expenses: Selling, general and administrative 1,001 809 2,034 1,243 Interest expense 73 17 106 35 Depreciation and amortization 287 110 518 206 --------- --------- ---------- --------- Total Costs and Expenses 1,361 936 2,658 1,484 --------- --------- ---------- --------- Income (loss) from leasing activity $ 41 $ 1 $ (135) $ (33) -- - ---------- --------- Identifiable assets $ 10,015 $ 5,637 $ 10,015 $ 5,637 ========= ========= ========== =========
7. SUPPLEMENTAL CASH FLOW INFORMATION Effective January 29, 1999, the Company, through its wholly owned subsidiary, CAM, purchased a company known as Tomahawk. (see note 3) In thousands Fair Value of assets acquired $ 10,679 Fair Value of liabilities assumed (10,372) -------- 307 Fair Value of common stock issued 2,925 -------- Excess purchase price over fair value of assets acquired $ 2,618 ======== 8. SUBSEQUENT EVENTS Subsequent to June 30, 1999, the Company formalized 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 will be issued in exchange for a minority interest in the South African company. Additionally, a subsidiary of the Company will obtain exclusive worldwide distribution rights for certain products, including, but not limited to, trucks, tractor trailers, buses and other products, manufactured by a closely held south African company for approximately $4.0 million inclusive of all costs. 7 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 August 1999, included the effects of Tomahawk for the full six months ended June 30, 1999. 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 five months ended June 30, 1999. THREE MONTH PERIOD ENDED JUNE 30, 1999 VS. JUNE 30, 1998 REVENUES. Total revenues for the three-month period ended June 30, 1999 were $15,624,000 as compared to $1,418,000 for the corresponding prior period, an increase of $14,206,000 or 1,001.8%. For the three-month period ended June 30, 1999, transportation equipment sales were $14,223,000 as compared to $481,000 for the corresponding prior period, an increase of $13,742,000 or 2,857.0%. 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"). CAM's used transportation equipment retail and wholesale business units accounted for approximately $13,310,000 of used transportation equipment sales. CAM's revenues from the sales of used transportation equipment for the three month period ended June 30, 1999 increased by $13,310,000 as compared to the $.0 for the corresponding period for 1998. The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located throughout the country and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the three-month period ended June 30, 1999, rental income increased by $26,000 or 9% to $316,000 as compared to $290,000 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 June 30, 1999, lease underwriting income decreased by $17,000 or 50% to $17,000 as compared to $34,000 for the corresponding prior period and direct finance lease income decreased by $3,000 or 9.7% to $28,000 as compared to $31,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed the addition of key senior management and sales personnel, and development of strategic alliances to provide future growth in this area. For the three-month period ended June 30, 1999, interest income increased by $70,000 or 500.0% to $84,000 as compared to $14,000 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 transportation equipment. For the three-month period ended June 30, 1999, gains from portfolio remarketing increased by $96,000 or 42.3% to $323,000 as compared to $227,000 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 June 30, 1999, fees from remarketing activities increased by $308,000 or 98.1% to $622,000 as compared to $314,000 for the corresponding prior period. This increase is attributable, in part, to the Company's efforts to promote its remarketing services on a third party basis. For the three-month period ended June 30, 1999, other income decreased by $16,000 or 59.3% to $11,000 as compared to $27,000 for the corresponding prior period. COSTS AND EXPENSES. Total costs and expenses for the three-month period ended June 30, 1999 was $15,359,000 as compared to $1,384,000 for the corresponding prior period, an increase of $13,975,000 or 1,009.8%. 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 June 30, 1999 was $11,500,000 as compared to $362,000 for the corresponding prior period, an increase of $11,138,000 or 3,076.8%, and resulted in an overall gross margin of 19.2%. Selling, general and administrative expenses for the three-month period ended June 30, 1999 was $3,288,000 as compared to $883,000 for the corresponding prior period, an increase of $2,405,000 or 272.4%. For the three-month period ended June 30, 1999, selling, general and administrative expenses included recovered reimbursable trust administration costs of approximately $30,000. Approximately $1,948,000 of the increase in selling, general and administrative expenses for the three-month period ended June 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 and administrative expenses increased to $1,370,000 for the three-month period ended June 30, 1999 as compared to 8 $1,298,000 for the corresponding prior period, an increase of $72,000 or 5.5%. The 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, sales and staff personnel. Interest expense for the three-month period ended June 30, 1999 was $176,000 as compared to $19,000 for the corresponding prior period, an increase of $157,000 or 826.3%. 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 June 30, 1999 was $395,000 as compared to $120,000 for the corresponding prior period, an increase of $275,000 or 229.2%. The increase is primarily due to the amortization of intangible assets associated with the Tomahawk purchase. Provision for income taxes for the three-month period ended June 30, 1999 was $64,000 as compared to zero for the corresponding prior period, an increase of $64,000. The increase is primarily due to the taxes incurred by Tomahawk during the quarter. NET INCOME. Net income for the three-month period ended June 30, 1999 was $201,000 as compared to $34,000 for the corresponding prior period, an increase of $167,000 or 491.2%. The increase in net income is attributable to the significant increase in revenues, primarily from the retail and wholesale of used transportation equipment, the buy-out of leases from portfolios owned by trusts, and continued improvements in the containment of costs. Net income per share was $0.00 per share (both basic and diluted) for the three-month period ended June 30, 1999 as compared to $0.00 per share (both basic and diluted) for the corresponding prior period. SIX MONTH PERIOD ENDED JUNE 30, 1999 VS. JUNE 30, 1998 REVENUES. Total revenues for the six-month period ended June 30, 1999 was $25,713,000 as compared to $2,423,000 for the corresponding prior period, an increase of $23,290,000 or 961.2%. For the six-month period ended June 30, 1999, transportation equipment sales were $23,190,000 as compared to $972,000 for the corresponding prior period, an increase of $22,218,000 or 2,285.8%. This significant revenue stream from transportation equipment sales is primarily attributable to sales of used transportation equipment through the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). CAM's used transportation equipment retail and wholesale business unit accounted for approximately $20,807,000 of used transportation equipment sales. CAM's revenues from the sales of used transportation equipment for the six-month period ended June 30, 1999 increased by $20,807,000 as compared to the corresponding period for 1998. The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located throughout the country and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the six-month period ended June 30, 1999, rental income increased by $363,000 or 88.3% to $774,000 as compared to $411,000 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 six-month period ended June 30, 1999, lease underwriting income decreased by $7,000 or 20.6% to $27,000 as compared to $34,000 for the corresponding prior period and direct finance lease income decreased by $25,000 or 37.3% to $42,000 as compared to $67,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed the addition of key senior management and sales personnel, and development of strategic alliances to provide future growth in this area. For the six-month period ended June 30, 1999, interest income increased by $132,000 or 412.5% to $164,000 as compared to $32,000 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 transportation equipment. For the six-month period ended June 30, 1999, gains from portfolio remarketing increased by $266,000 or 86.4% to $574,000 as compared to $308,000 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 sale upon termination of certain leases. For the six-month period ended June 30, 1999, fees from remarketing activities increased by $306,000 or 55.2% to $860,000 as compared to $554,000 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 9 basis. For the six-month period ended June 30, 1999, other income increased by $37,000 or 82.2% to $82,000 as compared to $45,000 for the corresponding prior period. The increase is primarily attributable to the recovery of approximately $67,000 of fees from a former lessee of the Company. COSTS AND EXPENSES. Total costs and expenses for the six-month period ended June 30, 1999 was $25,334,000 as compared to $2,363,000 for the corresponding prior period, an increase of $22,971,000 or 972.1%. The significant increase is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales for the six-month period ended June 30, 1999 was $18,589,000 as compared to $669,000 for the corresponding prior period, an increase of $17,920,000 or 2,678.6%, and resulted in an overall gross margin of 19.8%. Selling, general and administrative expenses for the six-month period ended June 30, 1999 was $5,795,000 as compared to $1,419,000 for the corresponding prior period, an increase of $4,376,000 or 308.4%. For the six-month period ended June 30, 1999, selling, general and administrative expenses included recovered reimbursable trust administration costs of approximately $578,000 as compared to $558,000 for the corresponding prior period. Approximately $2,997,000 of the increase in selling, general and administrative expenses for the six-month period ended June 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 and administrative expenses increased to $3,376,000 for the six-month period ended June 30, 1999 as compared to $1,977,000 for the corresponding prior period, an increase of $1,399,000 or 70.8%. 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 while continuing to improve the containment of other costs. Interest expense for the six-month period ended June 30, 1999 was $242,000 as compared to $40,000 for the corresponding prior period, an increase of $202,000 or 505.5%. This increase is primarily a result of increased interest expense associated with CAM's revolving credit line with a financial institution utilized for inventory floor planning and interest accrued on the Company's recourse debt. Depreciation and amortization expense for the six-month period ended June 30, 1999 was $708,000 as compared to $235,000 for the corresponding prior period, an increase of $473,000 or 201.3%. The increase is primarily due to the amortization of intangible assets associated with the purchase of Tomahawk. Provision for income taxes for the six-month period ended June 30, 1999 was $86,000 as compared to zero for the corresponding prior period, an increase of $86,000. The increase is primarily due to the taxes incurred by Tomahawk during the five months ending June 1999. NET INCOME. Net income for the six-month period ended June 30, 1999 was $293,000 as compared to $60,000 for the corresponding prior period, an increase of $233,000 or 388.3%. The increase in net income is attributable to the significant increase in revenues, primarily from the retail and wholesale of used transportation equipment, the buy-out of leases from trust portfolios, and continued improvements in the containment of costs. Net income per share was $0.01 per share (both basic and diluted) for the six-month period ended June 30, 1999 as compared to $0.00 per share (both basic and diluted) for corresponding prior period. LIQUIDITY AND CAPITAL RESOURCES The Company recognized a net decrease in cash and cash equivalents for the six-month period ended June 30, 1999 of $168,000. Operating activities provided cash of $1,431,000 during the six-month period ended June 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 $2,849,000 during the six-month period ended June 30, 1999 and is primarily a result of the acquisition of portfolios of operating leases valued at approximately $1,977,000. Financing activities provided cash of $1,250,000 during the six-month period ended June 30, 1999 and is primarily the result of a loan from a financing institution in the amount of $2,500,000 offset by normal repayments of recourse and non-recourse debt. Cash and cash equivalents were $444,000 at June 30, 1999 as compared to $612,000 at December 31, 1998, a decrease of $168,000 or 27.5%. 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 10 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 $578,000 and $558,000 of cost recoveries in the six-month periods ended June 30, 1999 and 1998, respectively. 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. 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 $6,393,000 as of June 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 $1,877,000 as of June 30, 1999. The Company's ability to underwrite equipment lease transactions is largely dependent upon the availability of short-term warehouse lines of credit. Management is engaged in continuing dialogue with several inventory lenders, which appear to be interested in providing the Company with warehouse financing. If the Company experiences delays in putting warehouse facilities in place, the Company transacts deals by coterminous negotiation of lease transactions with customers and financing with institutions upon which it obtains a fee as the intermediary of up to 3% of the amount of financing. The remarketing, retailing and wholesaling of equipment has played and will continue to play a vital role in the Company's operating activities. In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential to the realization of the Company's interest in the residual value of its managed portfolio. It is also essential to the Company's ability to recover its original investment in the equipment in its own portfolios and to recognize a return on that investment. The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or re-leased. The Company plans to dedicate substantial resources toward the further development and improvement of its remarketing, retailing and wholesaling capabilities. The Company's strategy is to further capitalize upon its remarketing expertise by continuing to develop its ability to sell remarketing services to other lessors, fleet owners, and lessees. The Company plans also to create a dealer capability under which the Company would buy and resell fleet equipment. The Company anticipates expanding its used transportation equipment retail and wholesale capabilities through the addition of retail centers geographically through internal growth and acquisitions. The Company's retail and wholesale capabilities have been greatly improved through CAM's strategic acquisition of Tomahawk. This improved capability will be used as a competitive advantage that will enable the Company to provide a "total holding cost" concept when competing for new lease origination deals. The Company's retail and wholesale business unit will provide improved outlets for other lessors, financial institutions, and fleet owners to dispose of used transportation equipment and sources of quality used transportation equipment for fleet owners and owner-operators. The Company will also aggressively promote its Internet capabilities to further promote its business activities and as an e-commerce tool. In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. As of June 30, 1999, the Company had funded approximately $400,000 and is obligated to provide additional funding in the approximate amount of $600,000. The Company has 11 additionally invested approximately $1,475,000 into one of NAOF's portfolio investee companies. Subsequent to June 30, 1999, the Company formalized a strategic investment/alliance with a South African manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of preferred stock of Chancellor Corporation may be issued in exchange for a minority interest 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 significant financial institutions, whereby the Company could potentially gain access to substantial funding which would enable the Company to accelerate the redevelopment of its lease origination business. IMPACT OF THE YEAR 2000 ISSUE The Company has commenced 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" 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. The Company has spent approximately $160,000 in modernizing its IT system, including compliance with Y2K requirements. The Company anticipates spending approximately $200,000 during fiscal 1999 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 12 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 or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be greater if any such shortfall occurs near the same time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing companies or major customers or vendors of the Company. The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, as a result of sales by the Company of equipment it leases to its customers. Such sales of equipment, which are an ordinary but not predictable part of the Company's business, will have the effect of increasing revenues, and, to the extent sales proceeds exceeds net book value, net income, during the quarter in which the sale occurs. Furthermore, any such sale may result in the reduction of revenue, and net income, otherwise expected in subsequent quarters, as the Company will not receive lease revenue from the sold equipment in those quarters. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations to immediately succeeding quarters are not necessarily meaningful and that such results for one quarter should not be relied upon as an indication of future performance. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB-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. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition of operations of the Company. Item 2. Changes in Securities None Item 3 Defaults Under Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 7, 1999, the Board of Directors caused to be distributed to stockholders of record as of April 23, 1999, a Notice of Annual Meeting of Stockholders, Proxy and Proxy Statement for the Annual Meeting held on June 25, 1999. As of the record date, 43,365,536 shares of Common Stock and 5,000,000 shares of Series AA Preferred Stock were entitled to vote. For all matters presented, the Common Stock and Series AA Preferred Stock voted as a single class. At the meeting, the stockholders acted upon the following proposals: (I) to elect three (3) directors to hold office until their successors shall be elected and shall have qualified; (ii) to approve an amendment to the Company's By-laws to make certain changes to improve the efficiency of the operation of the Company by the Board of Directors and to afford the Board greater latitude and flexibility in the management of the Company, (iii) to approve an amendment to the Company's 1997 Stock Option Plan increasing the number of shares reserved under the plan from 4,000,000 to 7,500,000; and (iv) to ratify the selection by the Board of Directors of Metcalf, Rice, Fricke and Davis as the Company's independent public accountants for fiscal 1999. All of the above matters were approved by the stockholders. Votes "For" represent affirmative votes and do not represent abstentions or broker non-votes. In cases where a signed proxy was submitted without direction, the shares represented by the proxy were voted "For" each proposal in the manner disclosed in the Proxy Statement and Proxy. The voting results were as follows:
Proposal No. 1: Election of Directors: DIRECTOR NOMINEE FOR % WITHHELD % - ---------------- --- - -------- - M. Rea Brookings 41,400,922 99.99% 4,383 0.01% Rudolph Peselman 39,565,922 95.56% 1,839,383 4.44% Franklyn E. Churchill 41,400,922 99.99% 4,383 0.01%
Proposal No. 2: Approval of an Amendment to the Company's by-laws FOR % AGAINST % ABSTAIN % ---- - ------- - ------- - 39,486,969 95.37% 83,873 0.20% 1,834,463 4.43% Proposal No. 3: Approval of an Amendment to the 1997 Stock Option Plan For % Against % Abstain % --------------------------------------------------------------------------------------- 41,279,163 99.70% 124,616 0.30% 1,526 0.00% Proposal No. 4: Ratification of Auditors For % Against % Abstain % --------------------------------------------------------------------------------------- 41,304,100 99.76% 45,862 0.11% 55,343 0.13%
14 Item 5 Other Information Form 10-KSB for 1998 was amended June, 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3(ii) By-laws of the Company, as amended by the Board of Directors of the Company in April 1999, and approved by the Stockholders of the Company on June 25, 1999. THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE MONTHS ENDED JUNE 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 June 30, 1999. (b) Reports on Form 8-K: Current Report on Form 8-K, dated February 10, 1999 Current Report on Form 8-K, dated March 4, 1999 Current Report on Form 8-K/A, dated March 22, 1999 Current Report on Form 8-K/A, dated April 13, 1999 Current Report on Form 8-K/A, dated July 9, 1999 15 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 Simpson Chief Financial Officer (Principal Accounting Officer) Date: July 26, 2000 16 EX-11 2 0002.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 CHANCELLOR CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE The following table reflects the calculation of the earnings per share:
Weighted Average Common Shares Income Outstanding ----------- ---------------- (numerator) (denominator) Quarter ended June 30, 1999 In thousands, except share and per share data Earnings from Operations (restated) $ 201 48,300,550 =========== ========== Basic earnings per common share $ 0.00 Effect of dilutive securities Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 2,222,222 Vested Employee Options - - - 1,418,355 ----------- ---------- $ 201 56,941,127 =========== ========== Diluted earnings per common share $ 0.00 Quarter ended June 30, 1998 Earnings from Operations $ 34 35,032,242 =========== ========== Basic earnings per common share $ 0.00 Effect of dilutive securities - Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 2,592,593 Vested Employee Options - - - 1,000,000 ----------- ---------- $ 34 43,624,835 =========== ========== Diluted earnings per common share $ 0.00 Year to date ended June 30, 1999: Earnings from operations (restated) $ 293 46,039,725 =========== ========== Basic earnings per common share $ 0.01 Effect of dilutive securities - Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 3,484,848 Vested Employee Options - - - 1,521,624 ----------- --------- $ 293 56,046,197 =========== ========== Diluted earnings per common share $ 0.01 Year to date ended June 30, 1998: Earnings from operations $ 60 33,168,387 =========== ========== Basic earnings per common share $ 0.00 Convertible preferred shares - - - 5,000,000 Warrant - VCC - - - 2,857,143 Vested Employee Options - - - 1,000,000 ----------- ---------- $ 60 42,025,530 =========== ========== Diluted earnings per common share $ 0.00
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