-----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, TPACLGq4hqMFKDUz3mCn/YB5OvMgorzndg1PSePVMZkK96MjtZpu6mft8ZFM8FxR LTJYXIFBlQ/5UOZEdwAjPQ== /in/edgar/work/20000815/0001104659-00-000486/0001104659-00-000486.txt : 20000922 0001104659-00-000486.hdr.sgml : 20000921 ACCESSION NUMBER: 0001104659-00-000486 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000815 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 SEC ACT: SEC FILE NUMBER: 000-11663 FILM NUMBER: 703045 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 1 0001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to________ Commission file number 0-11663 CHANCELLOR CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2626079 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 210 SOUTH STREET, BOSTON, MASSACHUSETTS 02111 (Address of principal executive offices) (Zip Code) (617) 368-2700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS As of August 2, 2000, 58,807,565 shares of Common Stock, $.01 par value per share and 350,000 shares of Series B Convertible Preferred Stock, $.01 par value per share were outstanding. The Series B shares convert into common on a 1 to 10 basis (3,500,000 in total) and have a liquidation preference of $20.00 per preferred share or $7,000,000 in the aggregate. Aggregate market value of the voting stock held by non-affiliates of the issuer as of August 2, 2000 was approximately $ 9,768,000. Aggregate market value of the total voting stock of the issuer as of August 2, 2000 was approximately $27,522,000. CHANCELLOR CORPORATION AND SUBSIDIARIES Page Part I. Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II Other Information 14 Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Item 7 Exhibit 11 - Computation of Earnings per Share Signatures 16 1 CHANCELLOR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
June 30, December 31, 2000 1999 ------------ ------------ (unaudited) ASSETS Cash and cash equivalents $ 264 $ 1,104 Receivables, net 3,959 4,154 Inventory 10,487 10,359 Net investment in direct finance leases 341 376 Equipment on operating lease, net of accumulated depreciation of $1,706 and $1,887 5,444 4,152 Residual values, net 125 143 Furniture and equipment, net of accumulated depreciation of $ 1,785 and $1,539 997 1,072 Investments 4,758 4,758 Intangibles, net 3,869 4,010 Other assets, net 1,435 1,420 ------- ------- Total Assets $31,679 $31,548 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 3,938 $ 5,444 Deferred revenue 593 1,812 Indebtedness: Revolving credit line 8,144 8,543 Notes payable 556 699 Nonrecourse 1,395 192 Recourse 7,161 5,320 ------- ------- Total Liabilities 21,787 22,010 ------- ------- Stockholders' equity: Preferred Stock, $.01 par value, 20,000,000 shares authorized: Convertible Series B, 2,000,000 shares authorized, 350,000 shares 4 4 issued and outstanding Common stock, $.01 par value; 75,000,000 shares authorized, 590 590 58,802,565 and 58,795,065 shares issued and outstanding Additional paid-in capital 35,860 35,837 Accumulated deficit (26,611) (26,942) Accumulated other comprehensive income 49 49 ------- ------- Total Stockholders' Equity 9,892 9,538 ------- ------- Total Liabilities and Stockholders' Equity $31,679 $31,548 ======= =======
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 SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, ------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) (restated) (restated) Revenues: Transportation Equipment Sales $ 10,735 $ 14,546 $ 24,001 $ 23,764 Rental income 566 316 1,305 774 Lease underwriting income -- 17 13 27 Direct finance lease income 21 28 55 42 Interest income 4 84 10 164 Fees from remarketing activities 950 622 1,221 860 Other income -- 11 104 82 ----------- ----------- ----------- ----------- 12,276 15,624 26,709 25,713 ----------- ----------- ----------- ----------- Costs and expenses: Cost of transportation equipment sales 8,554 11,500 19,158 18,589 Selling, general and administrative 2,799 3,288 5,844 5,795 Interest expense 161 176 300 242 Depreciation and amortization 487 395 997 708 ----------- ----------- ----------- ----------- 12,001 15,359 26,299 25,334 ----------- ----------- ----------- ----------- Earnings before taxes 275 265 410 379 Provision for income taxes 54 64 79 86 ----------- ----------- ----------- ----------- Net Income $ 221 $ 201 $ 331 $ 293 ----------- ----------- ----------- ----------- Basic net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01 ----------- ----------- ----------- ----------- Diluted net income per share $ 0.00 $ 0.00 $ 0.01 $ 0.01 Shares used in computing basic net income 58,800,340 48,300,550 58,797,703 46,039,725 per share Shares used in computing diluted net income 63,308,322 56,941,127 63,210,534 56,046,197 per share - ----------------------------------------------------------------------------------------------------
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, 2000 1999 ---------- ----------- (unaudited) (unaudited) (restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 331 $ 293 ------- ------- Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 819 708 Residual value estimate realizations and reductions, net of additions 18 5 Amortization of unamortized stock warrants 23 -- Changes in assets and liabilities: (Increase) decrease in receivables 1,695 (2,256) (Increase) in inventory (128) (670) Increase (decrease) in accounts payable and accrued expenses (1,506) 297 Increase (decrease) in deferred revenue (1,219) 3,054 ------- ------- Total Adjustments (298) 1,138 ------- ------- Net cash provided by operating activities 33 1,431 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net investments in direct finance leases 35 (75) Equipment on operating lease (204) (1,980) Additions to furniture and equipment, net (171) (318) Increase in intangibles (9) (66) Net change in other assets (140) (410) ------- ------- Net cash used by investing activities (489) (2,849) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit (399) (264) Increase in receivables-collateral for line of credit (1,500) -- Increase in indebtedness - recourse 4,480 3,300 Repayments of indebtedness-non recourse (183) (342) Repayments of indebtedness-recourse (2,639) (1,513) Repayment of notes payable (143) (221) Issuance of common stock, net -- 290 ------- ------- Net cash provided (used) by financing activities (384) 1,250 ------- ------- Net increase (decrease) in cash and cash equivalents (840) 168 Cash and cash equivalents at beginning of period 1,104 612 ------- ------- Cash and cash equivalents at end of period $ 264 $ 444 ======= ======= Cash paid for interest $ 291 $ 332 ======= =======
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. Certain items in the 1999 financial statements have been reclassified to conform to the 2000 presentation. There is no effect on previously reported net income and accumulated deficit. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB-A for the year ended December 31, 1999. The balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements included in the Annual Report on Form 10-KSB-A. The results for the interim period ended June 30, 2000 are not necessarily indicative of the results to be expected for the entire year. 2. LOAN AGREEMENTS In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $1,386,000 loan agreement (the "Loan") with a financial institution (the "Lender"). The Loan provides for the payment of nine equal monthly installments, beginning June 15, 2000, of principal and interest at 7.45% in the amount of $105,000 with a final payment of $355,000 due on April 15, 2001. In addition, proceeds from the sale of the Equipment will be paid to the Lender as additional principal reduction. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. The balance outstanding on this Loan at June 30, 2000 was $1,250,000. In January 2000, the Company obtained a $3,000,000 working capital line of credit (subsequently increased to $3,750,000) from an international financial institution. The line is due on demand with interest at a per annum rate equal to the sum of 2.65% plus the 30-day Dealer Commercial Paper Rate. The line is secured by marketable securities placed in a brokerage account at the institution by the Company's majority shareholder. The balance outstanding in this line of credit at June 30, 2000 was approximately $3,126,000. 3. BUSINESS ACQUISITION The Company acquired its Tomahawk subsidiary (M.R.B.), Inc. on January 29, 1999. The Company took operational control of Tomahawk effective August 1, 1998 pursuant to a Management Agreement and, pursuant to a formal closing on January 29, 1999. The acquisition was accounted for under the purchase method of accounting and therefore, the results of operations of Tomahawk after the acquisition date included in the Company's statement of operations for the six month period ended June 30, 1999. The following pro forma information has been prepared assuming that this acquisition had taken place at the beginning of the period. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed date. 5 Six Months Ended June 30, 1999 ---- (IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) Net revenue $ 29,013 Net income before taxes $ 383 Net income after taxes $ 313 Net income (loss) per common share $ .01 4. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for years beginning after June 15, 2000. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivatives, the Company expects that adoption of SFAS No. 133 will have an immaterial impact on the Company's consolidated financial position and results of operations. In December 1999, the Securities and Exchange Commission issued staff accounting bulletin No. 101 ("SAB101"), Revenue Recognition in Financial Statements. SAB101 provided guidance on applying generally accepted accounting principals to revenue recognition issues in financial statements. The Company has adopted SAB101 as required during the year 2000 and believes that this SAB does not have a material effect on the results of operations. 5. OPERATING SEGMENTS The Company operates in two primary business segments: 1) sales of transportation equipment and 2) leasing activity. The Company's Sales of Transportation Equipment division retails and wholesales used transportation equipment primarily, tractors and trailers, through retail centers located in strategic locations primarily in the southern and mid-western sections of the United States. This business segment also includes sales of equipment by the Company's equipment re-marketing group. Leasing activities include revenues generated under operating or direct financing leases. The Company also manages most of the leases it sells to investors and, when the original lease expires or terminates, remarkets the equipment for the benefit of the investors and the Company. Leases primarily involve transportation equipment, but also other equipment including material handling and construction equipment. 6 Segment information is as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) (restated) (restated) SALES OF TRANSPORTATION EQUIPMENT: Revenues $ 10,735 $ 14,546 $ 24,001 $ 23,764 -------- -------- -------- -------- Costs and expenses: Cost of transportation equipment 8,554 11,500 19,158 18,589 Selling, general and administrative 2,047 2,287 4,556 3,761 Interest expense 11 103 12 136 Depreciation and amortization 106 108 220 190 -------- -------- -------- -------- Total Costs and expenses 10,718 13,998 23,946 22,676 -------- -------- -------- -------- Income from sales of transportation equipment $ 17 $ 548 $ 55 $ 1,088 -------- -------- -------- -------- Identifiable Assets $ 18,354 $ 13,972 $ 18,354 $ 13,972 -------- -------- -------- -------- LEASING ACTIVITY Revenues: Leasing activity $ 1,537 $ 983 $ 2,594 $ 2,277 Interest income 4 84 10 164 Other income -- 11 104 82 -------- -------- -------- -------- Total Leasing Revenues 1,541 1,078 2,708 2,523 -------- -------- -------- -------- Costs and expenses: Selling, general and administrative 752 1,001 1,288 2,034 Interest expense 150 73 288 106 Depreciation and amortization 381 287 777 518 -------- -------- -------- -------- Total Costs and expenses 1,283 1,361 2,353 2,658 -------- -------- -------- -------- Income (loss) from leasing activity $ 258 $ (283) $ 355 $ (135) -------- -------- -------- -------- Identifiable assets $ 6,694 $ 10,015 $ 6,694 $ 10,015 ======== ======== ======== ======== Total Assets for reportable segments $ 25,048 $ 23,987 Corporate investments, intangibles and other assets 6,631 2,693 -------- -------- $ 31,679 $ 26,680 ======== ========
Included in cost of transportation equipment for the three and six months ended June 30, 2000 is $202,000 and $377,000 respectively of interest expense. 6. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS The financial statements for the six month period ended June 30, 1999 were restated to reflect the acquisition of Tomahawk on January 29, 1999 rather than August 1998, as originally reported, due to management and operational control given to the Company on the earlier date. In accordance with APB Opinion 20, the Company has treated this change as a change in reporting entity. In addition, the Company restated the 1999 financial statements to record $10,500 of compensation expense related to stock purchase warrants. The total effect of this restatement on the June 30, 1999 financial statements was to reduce net income for the six-month period by $382,000. The effect on earnings per share for the three-month period ended June 30, 1999 was to decrease both basic and diluted net income per share from $ .01 to $ .00. There was no effect on earnings per share for the six months ended June 30,1999. 7 7. SUPPLEMENTAL CASH FLOW INFORMATION Effective January 29, 1999, the Company, through its wholly owned subsidiary, CAM, purchased a company known as Tomahawk, with the following non-cash investing and financing activities:
Six Months Ended June 30, 1999 ------------------------------ (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 =======
During June 2000, the Company acquired approximately $1,386,000 of equipment under operating leases in exchange for non-recourse debt from the seller. 8. CONTINGENCIES The Company is contingently liable to its majority shareholder for fees associated with the acquisition of certain subsidiaries and investments. The final fees to be paid are based principally on the financial impact and profitability that these acquisitions add to the Company's operating results. The Company is also contingently liable to the former owners and current employees of MRB via and earnout arrangement. No such fees were paid during the six-month period ended June 30, 2000. In the normal course of business, the Company is from time to time, subject to litigation. Management does not expect that the outcome of any of these actions will have a material adverse impact on the Company's financial position. The Company records sales of leased equipment with limited and full recourse in accordance with the provisions of FASB Statement No. 125. The Company has considered its history of repossession losses and determined that no liability for recourse obligations is currently necessary. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JUNE 30, 2000 VS. JUNE 30, 1999 REVENUES. Total revenues for the three-month period ended June 30, 2000 were $12,276,000 as compared to $15,624,000 for the corresponding prior period, a decrease of $ 3,348,000 or 21%. For the three-month period ended June 30, 2000, transportation equipment sales were $ 10,735,000 as compared to $14,546,000 for the corresponding prior period, a decrease of $ 3,811,000 or 26%. This significant revenue stream from transportation equipment sales is primarily attributable to sales of used transportation equipment through the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). CAM's revenues from the sales of used transportation equipment for the three month period ended June 30, 2000 decreased by $2,663,000 as compared to $13,310,000 for the corresponding period for 1999. The decrease in revenues by CAM is primarily a result of financial downturn in the used transportation equipment market attributable, in part, to increased fuel prices and interest rates. CAM, through it's Tomahawk subsidiary has retail outlets located in key southeastern and mid-western cities and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. In July 2000, the Company acquired a company with two additional strategic retail locations. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the three-month period ended June 30, 2000, rental income increased by $250,000 or 79% to $566,000 as compared to $316,000 for the corresponding prior period. The increase in rental income is attributable primarily to the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several lease portfolios in 1999 and 2000 from financial institutions. For the three month period ended June 30, 2000, lease underwriting income decreased by $17,000 or 100% as compared to for the corresponding prior period and direct finance lease income decreased by $7,000 or 25% to $21,000 as compared to $28,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed the addition of key senior management and sales personnel, and development of strategic alliances to provide future growth in this area. For the three-month period ended June 30, 2000, interest income decreased by $ 80,000 or 95% to $4,000 as compared to $84,000 for the corresponding prior period. The decrease is primarily attributable to interest earned in connection with the Company's investment of approximately $1,475,000 in a South Africa based manufacturer and lessor of transportation equipment. In October 1999, the Company converted the note receivable into an equity interest in the South African company. For the three-month period ended June 30, 2000, fees from remarketing activities increased by $328,000 or 53% to $950,000 as compared to $622,000 for the corresponding prior period. This increase is attributable, in part, to the Company's efforts to promote its remarketing services on a third party basis. For the three-month period ended June 30, 2000, other income decreased by $11,000 or 100% compared to the corresponding prior period. COSTS AND EXPENSES. Total costs and expenses for the three-month period ended June 30, 2000 were $ 12,001,000 as compared to $15,359,000 for the corresponding prior period, a decrease of $3,358,000 or 22%. The significant decrease is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales for the three-month period ended June 30, 2000 was $8,554,000 as compared to $11,500,000 for the corresponding prior period, a decrease of $2,946,000 or 26%, and resulted in an overall gross margin of 20%. Selling, general and administrative expenses for the three-month period ended June 30, 2000 were $2,799,000 as compared to $3,288,000 for the corresponding prior period, a decrease of $489,000 or 15%. For the three-month period ended June 30, 2000, selling, general and administrative expenses included recovered reimbursable trust administration costs of approximately $144,000. Approximately $184,000 of the decrease in selling, general and administrative expenses for the three-month period ended June 30, 2000 is a result of cost containment measures implemented by CAM and CAM's retail and wholesale business unit, Tomahawk, whose operations were consolidated with the Company's beginning February, 1999. Before netting out the reimbursable trust administration costs and the effect of the CAM expenses, selling, general and administrative expenses decreased to $1,047,000 for the three-month period ended June 30, 2000 as compared to $1,370,000 for the corresponding prior period, a decrease of $323,000 or 24%. The decrease in selling, general and administrative expenses reflects the effect of the Company's growth strategy implementation that included, in part, costs associated with the addition of senior management, sales and staff personnel, offset by significant cost containment and consolidation in other areas. 9 Interest expense for the three-month period ended June 30, 2000 was $161,000 as compared to $176,000 for the corresponding prior period, a decrease of $15,000 or 9%. Depreciation and amortization expense for the three-month period ended June 30, 2000 was $487,000 as compared to $395,000 for the corresponding prior period, an increase of $92,000 or 23%. The increase is primarily due to the amortization of intangible assets associated with distribution rights acquired from AMC, the Company's South African investee and increase in equipment under operating leases as previously indicated. Provision for income taxes for the three-month period ended June 30, 2000 was $54,000 as compared to $64,000 for the corresponding prior period, a decrease of $10,000. NET INCOME. Net income for the three-month period ended June 30, 2000 was $221,000 as compared to $201,000 for the corresponding prior period, an increase of $20,000 or 10%. The increase in net income is attributable to the significant increase in re-marketing activity and continued improvements in the containment of costs. Net income per share was $0.00 per share (both basic and diluted) for the three-month period ended June 30, 2000 as compared to $0.00 per share (both basic and diluted) for the corresponding prior period. SIX MONTH PERIOD ENDED JUNE 30, 2000 VS. JUNE 30, 1999 REVENUES. Total revenues for the six-month period ended June 30, 2000 were $26,709,000 as compared to $25,713,000 for the corresponding prior period, an increase of $996,000 or 4%. For the six-month period ended June 30, 2000, transportation equipment sales were $24,001,000 as compared to $23,764,000 for the corresponding prior period, an increase of $237,000 or 1%. This significant revenue stream from transportation equipment sales is primarily attributable to sales of used transportation equipment through the operating activities of the Company's wholly owned subsidiary, Chancellor Asset Management Inc. ("CAM"). The increase in revenues provided by CAM is primarily a result of the Tomahawk purchase, which has retail outlets located throughout the country and has inventory for both retail and wholesale sales. Through CAM, the Company seeks to continue to expand its retail centers geographically. The Company also seeks to utilize the competitive advantage provided by its access to retail pricing for residual values of its leased equipment to increase competitiveness within the Company's lease origination business unit. For the six-month period ended June 30, 2000, rental income increased by $531,000 or 69% to $ 1,305,000 as compared to $774,000 for the corresponding prior period. The increase in rental income is attributable primarily to the addition to the Company's portfolio of certain equipment acquired in connection with the purchase of several lease portfolios in 1999 and 2000 from financial institutions. For the six-month period ended June 30, 1999, lease underwriting income decreased by $ 14,000 or 52% to $13,000 as compared to $27,000 for the corresponding prior period and direct finance lease income increased by $13,000 or 31% to $55,000 as compared to $42,000 for the corresponding prior period. The Company is in the final phase of its lease origination rebuilding process, having completed the addition of key senior management and sales personnel, and development of strategic alliances to provide future growth in this area. For the six-month period ended June 30, 2000, interest income decreased by $154,000 or 94% to $ 10,000 as compared to $164,000 for the corresponding prior period. The decrease is primarily attributable to interest earned in connection with the Company's investment of approximately $1,475,000 in a South Africa based manufacturer and lessor of transportation equipment. The note receivable was converted into an equity interest in the South African company in October 1999. For the six-month period ended June 30, 2000, fees from remarketing activities increased by $361,000 or 42% to $1,221,000 as compared to $860,000 for the corresponding prior period. This increase is attributable, in part, to the Company's efforts to promote its remarketing services on a third party basis. For the six-month period ended June 30, 2000, other income increased by $22,000 or 27% to $104,000 as compared to $82,000 for the corresponding prior period. COSTS AND EXPENSES. Total costs and expenses for the six-month period ended June 30, 2000 were $26,299,000 as compared to $25,334,000 for the corresponding prior period, an increase of $965,000 or 4%. The increase is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales for the six-month period ended June 30, 2000 was $19,158,000 as compared to $18,589,000 for the corresponding prior period, an increase of $569,000 or 3%, and resulted in an overall gross margin of 20.2%. Selling, general and administrative expenses for the six-month period ended June 30, 2000 was $5,844,000 as compared to $5,795,000 for the corresponding prior period, an increase of $49,000 or 1%. This increase in selling, general and administrative expenses reflects the effect of the Company's growth strategy implementation while continuing to improve the containment of other costs. 10 Interest expense for the six-month period ended June 30, 2000 was $300,000 as compared to $242,000 for the corresponding prior period, an increase of $58,000 or 24%. This increase is primarily a result of increased interest expense associated with CAM's revolving credit line with a financial institution utilized for inventory floor planning and interest accrued on the Company's recourse debt. Depreciation and amortization expense for the six-month period ended June 30, 2000 was $997,000 as compared to $708,000 for the corresponding prior period, an increase of $289,000 or 41%. The increase is primarily due to the amortization of intangible assets associated with the purchase of Tomahawk and distribution rights as well as an increase in equipment under operating leases. Provision for income taxes for the six-month period ended June 30, 2000 was $79,000 as compared to $86,000 for the corresponding prior period, a decrease of $7,000. NET INCOME. Net income for the six-month period ended June 30, 2000 was $331,000 as compared to $293,000 for the corresponding prior period, an increase of $38,000 or 13%. The increase in net income is attributable to the significant increase in revenues, primarily from re-marketing activities and benefit from settlement of litigation and continued improvements in the containment of costs. Net income per share was $0.01 per share (both basic and diluted) for the six-month period ended June 30, 2000 as compared to $0.01 per share (both basic and diluted) for corresponding prior period. LIQUIDITY AND CAPITAL RESOURCES The Company recognized a net decrease in cash and cash equivalents for the six-month period ended June 30, 2000 of $840,000. Operating activities provided cash of $33,000 during the six-month period ended June 30, 2000 and is primarily a result of increased re-marketing activities and collections of receivables offset by a decrease in deferred revenue associated with the re-marketing of the Company's lease portfolio and decreases in accounts payable. Investing activities used cash of $489,000 during the six-month period ended June 30, 2000 and is primarily a result of the acquisition of portfolios of operating leases valued at approximately $204,000. Financing activities used cash of $384,000 during the six-month period ended June 30, 2000 and is primarily the result of normal repayments of recourse and non-recourse debt. Cash and cash equivalents were $264,000 at June 30, 2000 as compared to $1,104,000 at December 31, 1999, a decrease of $840,000 or 73%. In connection with the purchase of certain transportation equipment (the "Equipment") on lease to certain lessees, the Company entered into a $1,386,000 loan agreement (the "Loan") with a financial institution (the "Lender") in June 2000. The Loan provides for the payment of nine equal monthly installments, beginning July 15, 2000, of principal and interest at 7.45% in the approximate amount of $105,000. Proceeds from the sale of the Equipment will be paid to the Lender as additional principal reduction. The Loan is secured by all of the Equipment and the lease contracts specifically associated with this transaction. In January 2000, the Company obtained a $3,000,000 working capital line of credit (subsequently increased to $3,750,000) from an international financial institution. The line is due on demand with interest at a per annum rate equal to the sum of 2.65% plus the 30-day Dealer Commercial Paper Rate. The line is secured by marketable securities placed in a brokerage account at the institution by the Company's majority shareholder. The balance outstanding in this line of credit at June 30, 2000 was approximately $3,126,000. The Company maintains a revolving line of credit agreement with a financial institution whereby CAM can borrow up to $7,500,000 to floor plan used transportation equipment inventory. The balance outstanding under this revolving line of credit agreement is approximately $7,244,000 as of June 30, 2000. Prior to the acquisition, during 1998, CAM, through Tomahawk entered into a special purpose financing agreement with the same institution to floor plan additional used transportation equipment inventory in the approximate amount of $4,500,000. The balance outstanding under this special purpose financing agreement is approximately $427,000 as of June 30, 2000. The interest rate on the above lines is prime plus 1.75%. The Company's ability to underwrite equipment lease transactions is largely dependent upon the availability of short-term warehouse lines of credit. Management is engaged in continuing dialogue with several inventory lenders, which appear to be interested in providing the Company with warehouse financing. If the Company experiences delays in putting warehouse facilities in place, the Company transacts deals by coterminous negotiation of lease transactions with customers and financing with institutions upon which it obtains a fee as the intermediary of up to 3% of the amount of financing. 11 The remarketing, retailing and wholesaling of equipment has played and will continue to play a vital role in the Company's operating activities. In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential to the realization of the Company's interest in the residual value of its managed portfolio. It is also essential to the Company's ability to recover its original investment in the equipment in its own portfolios and to recognize a return on that investment. The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or re-leased, resulting in a potential loss to the Company. The Company plans to dedicate substantial resources toward the further development and improvement of its remarketing, retailing and wholesaling capabilities. The Company's strategy is to further capitalize upon its remarketing expertise by continuing to develop its ability to sell remarketing services to other lessors, fleet owners, and lessees. The Company plans also to create a dealer capability under which the Company would buy and resell fleet equipment. The Company anticipates expanding its used transportation equipment retail and wholesale capabilities through the addition of retail centers geographically through internal growth and acquisitions. The Company's retail and wholesale capabilities have been greatly improved through CAM's strategic acquisition of Tomahawk. This improved capability will be used as a competitive advantage that will enable the Company to provide a "total holding cost" concept when competing for new lease origination deals. The Company's retail and wholesale business unit will provide improved outlets for other lessors, financial institutions, and fleet owners to dispose of used transportation equipment and sources of quality used transportation equipment for fleet owners and owner-operators. The Company will also aggressively promote its Internet capabilities to further promote its business activities and as an e-commerce tool. In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. As of June 30, 2000, the Company had funded approximately $736,000 and is obligated to provide additional funding in the approximate amount of $264,000. The Company has additionally invested approximately $4,875,000 into one of NAOF's portfolio investee companies. In October 1999, the Company formalized a strategic investment/alliance with a South African manufacturer and New Africa Opportunity Fund "NAOF" whereby a series of preferred stock of Chancellor Corporation was issued in exchange for a minority interest and certain distribution rights in the South African company. The Company has signed a letter of intent and is in the final stages of negotiation to acquire all of the common stock of Sapp Bros. Leasing Inc., a lessor of transportation equipment with two retail locations in the mid-western section of the United States. As part of the acquisition, the Company will also acquire Rigfinder.com Inc., an e-commerce company associated with the sale and leasing of transportation equipment and a wholly owned subsidiary of Sapp Bros. The transaction cost are expected to include the issuance of 1,000,000 shares of the Company's common stock as well as cash payments contingent upon the future profitability of Sapp Bros. The Company's renewal or replacement of expired lines, its expected access to the public and private securities markets, both debt and equity, anticipated new lines of credit (both short-term and long-term and recourse and non-recourse), anticipated long-term financing of individual significant lease transactions, and its estimated cash flows from operations are anticipated to provide adequate capital to fund the Company's operations for the next twelve months. Although no assurances can be given, the Company expects to be able to renew or timely replace expired lines of credit, to expand currently existing lines for inventory floor planning, to continue to have access to the public and private securities markets, both debt and equity, and to be able to enter into new lines of credit and individual financing transactions. The Company is in the final stages of negotiation with several significant financial institutions, whereby the Company could potentially gain access to substantial funding which would enable the Company to accelerate the redevelopment of its lease origination business. 12 POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's future quarterly operating results and the market price of its stock may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be greater if any such shortfall occurs near the same time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing companies or major customers or vendors of the Company. The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, as a result of sales by the Company of equipment it leases to its customers. Such sales of equipment, which are an ordinary but not predictable part of the Company's business, will have the effect of increasing revenues, and, to the extent sales proceeds exceeds net book value, net income, during the quarter in which the sale occurs. Furthermore, any such sale may result in the reduction of revenue, and net income, otherwise expected in subsequent quarters, as the Company will not receive lease revenue from the sold equipment in those quarters. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations to immediately succeeding quarters are not necessarily meaningful and that such results for one quarter should not be relied upon as an indication of future performance. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB contains certain "Forward-Looking" statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management as well as assumptions used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or the Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introduction and acceptance, technology changes and changes in industry conditions. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition of operations of the Company. Item 2. Changes in Securities None Item 3 Defaults Under Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 25, 2000, the Board of Directors caused to be distributed to stockholders of record as of May 23, 2000, a Notice of Annual Meeting of Stockholders, Proxy and Proxy Statement for the Annual Meeting held on June 30, 2000. As of the record date, 58,802,565 shares of Common Stock and 350,000 shares of Series B Preferred Stock were entitled to vote. Each share of Series B Preferred Stock was entitled to 10 votes. For all matters presented the Common Stock and Series Preferred Stock voted as a single class. At the meeting, the stockholders acted upon the following proposals: (i) to elect one (1) director to hold office until his successor shall be elected and shall have qualified; (ii) to ratify the selection by the Board of Directors of BKR Metcalf, Davis as the Company's independent public accountants for fiscal 2000. All of the above matters were approved by the stockholders. Votes "For" represent affirmative votes and do not represent abstentions or broker non-votes. In cases where a signed proxy was submitted without direction, the shares represented by the proxy were voted "For" each proposal in the manner disclosed in the Proxy Statement and Proxy. The voting results were as follows: Proposal No. 1: Election of Director:
Director Nominee For % Withheld % - ---------------- -------------------------------------------------- Brian M. Adley 41,192,807 99.8% 90,082 .2%
Proposal No. 2: Ratification of Auditors
For % Against % Abstain % --------------------------------------------------------------------------------- 39,381,174 95.39% 19,319 0.05% 1,882,396 4.56%
Item 5. Other Information Form 10-KSB, for 1999 was amended July, 2000, primarily for the effects caused by the change in acquisition date of the Tomahawk subsidiary which was originally reported as of August, 1998. This transaction has been recorded as of January 1999, the date of final closing in the revised 10-KSB-A and this 10-QSB-A. See 10-KSB-A for more information. 14 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Note and Security Agreement, dated June 14, 2000 in the original principal amount of $1,386,598 from Chancellor Fleet Corporation to Banc of America Leasing and Capital, LLC THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHANCELLOR CORPORATION FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 11 Computation of Earnings per Share 27 Financial Data Schedule for period ended June 30, 2000. (b) Reports on Form 8-K: 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHANCELLOR CORPORATION /s/ Brian M. Adley ---------------------------------------------------- Brian M. Adley Chairman of the Board and Director (Principle Executive Officer) /s/ Franklyn E. Churchill ---------------------------------------------------- Franklyn E. Churchill President, Chief Operating Officer and Director /s/ Barry W. Simpson ---------------------------------------------------- Barry W. Simpson Chief Financial Officer (Principal Accounting Officer) Date: August 14, 2000 16 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 Outstanding INCOME ---------------- ------ (denominator) (numerator) In thousands, except share and per share data Quarter ended June 30, 2000: Earnings from Operations $ 221 58,800,340 =========== =========== Basic earnings per common share $ 0.00 Effect of dilutive securities - Convertible preferred shares -- 5,000,000 Stock Options -- 1,007,982 ----------- -- 63,308,322 =========== Diluted earnings per common share $ 221 $ 0.00 Quarter ended June 30, 1999 Earnings from Operations (restated) $ 201 48,300,550 =========== =========== Basic earnings per common share $ 0.00 Effect of dilutive securities Convertible preferred shares -- 5,000,000 Warrant - VCC -- 2,222,222 Stock Options -- 1,418,355 ----------- ----------- $ 201 56,941,127 =========== =========== Diluted earnings per common share $ 0.00 Year to date ended June 30, 2000: Earnings from operations $ 331 58,797,703 =========== =========== Basic earnings per common share $ 0.01 Convertible preferred shares -- 3,500,000 Stock Options -- 912,813 ----------- ----------- $ 331 63,210,534 =========== =========== Diluted earnings per common share $ 0.01 Year to date ended June 30, 1999: Earnings from operations (restated) $ 293 46,039,725 =========== =========== Basic earnings per common share $ 0.01 Effect of dilutive securities - Convertible preferred shares -- 5,000,000 Warrant - VCC -- 3,484,848 Stock Options -- 1,521,624 ----------- ----------- $ 293 56,046,197 =========== =========== Diluted earnings per common share $ 0.01
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