UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1996
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)
745 Atlantic Avenue, Boston, Massachusetts 02111
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (617) 728-8500
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at July 22, 1996
<S> <C>
Common Stock, $.01 par value per share 5,136,391
Series AA Convertible Preferred Stock, $.01 5,000,000
par value per share
</TABLE>
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
June 30, 1996 December 31, 1995
(Unaudited) (Audited)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 235 $ 185
Cash - restricted and escrowed 3,019 4,513
Receivables, net 175 1,889
Leased equipment held for underwriting 7,344 1,859
Net investment in direct finance lease 1,155 1,421
Equipment on operating lease (net of
accumulated depreciation of $11,170
and $17,020) 440 1,683
Residual values, net 3,266 3,340
Furniture and equipment (net of accumu-
lated depreciation of $2,477 and $2,453) 184 179
Investment in TruckScan 350
Other assets, net 1,040 1,019
_____ _____
$ 17,208 $16,088
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,045 $ 6,842
Indebtedness:
Nonrecourse 6,361 3,167
Recourse 3,660 4,314
Deferred income taxes 400 400
______ ______
Total liabilities 15,466 14,723
Commitments and contingencies
Stockholders' equity (deficit):
Convertible Preferred stock - $.01
par value,
Authorized: 10,000,000 shares;
Issued: 5,000,000 shares: 1,021 0
Common stock - $.01 par value,
Authorized 30,000,000 shares;
Issued 6,567,302 shares: 65 65
Additional paid-in capital 23,638 23,638
Deficit (22,446) (21,802)
Less treasury stock - 1,430,911
shares at cost ( 536) ( 536)
_______ ________
Total stockholders' equity 1,742 1,365
________ ________
$ 17,208 $16,088
</TABLE>
See notes to condensed consolidated financial statements
-1-
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30 1996 1995 1996 1995
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 631 $ 1,258 $ 1,211 $2,657
Lease underwriting income 191 258 324 326
Direct finance lease income 41 40 79 108
Interest income 17 21 31 36
Gains from portfolio remarketing 400 195 649 663
Fees from remarketing activities 217 163 424 374
Other 24 22 143 128
_____ _____ _____ _____
1,521 1,957 2,861 4,292
_____ _____ _____ _____
Costs and expenses:
Selling, general and
administrative 1,314 1,325 2,589 2,748
Interest expense 149 311 278 769
Depreciation and amortization 298 998 637 2,161
Lease rental - - - -
_____ _____ _____ _____
1,761 2,634 3,504 5,678
_____ _____ _____ _____
Loss before income tax
expense and cumulative effect
of change in accounting
principle ( 240) ( 677) ( 643) (1,386)
Income tax expense - - - -
Net loss ($ 240) ($ 677) ($ 643) ($1,386)
Net loss per share ($ .05) ($ .11) ($ .13) ($ .22)
Weighted average number of common
shares 5,136,391 6,382,077 5,136,391 6,382,077
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In Thousands Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Treasury Stock
Shares Amount Shares Amount capital Deficit Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 0 $ 0 6,566,712 $ 65 $19,475 ($20,581) 184,635 ($380)
Net Loss - - - - - ( 1,386) - -
_____ _____ _________ ___ ______ _________ _______ ______
BALANCE, JUNE 30, 1995 0 $ 0 6,566,712 $ 65 $19,475 ($21,967) 184,635 ($380)
BALANCE, JANUARY 1, 1996 0 $ 0 6,567,302 $ 65 $23,638 ($21,803) 1,430,911 ($536)
Net Loss - - - - - ( 643) - -
Stock Purchase by Vestex 5,000,000 1,021 - - - - - -
_________ _____ ________ ____ ______ _________ _________ ______
BALANCE, JUNE 30, 1996 5,000,000 $1,021 6,567,302 $ 65 $23,638 ($22,446) 1,430,911 ($536)
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ( 643) ($1,386)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 637 2,161
Residual value estimate realizations and
reductions, net of additions 74 ( 70)
Changes in assets and liabilities:
Receivables 1,714 1,488
Other assets ( 21) ( 17)
Accounts payable and accrued expenses ( 1,797) ( 1,979)
________ ________
Total adjustments 607 1,583
________ ________
Net cash provided by (used for) operating
activities ( 36) 197
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting ( 5,485) (2,247)
Net investments in direct finance leases 266 227
Equipment on operating lease 630 1,437
Investment in Truckscan ( 350)
Net change in cash restricted and escrowed 1,494 2,330
Additions to furniture and equipment, net ( 29) 4
_________ ______
Net cash provided by (used in) investing
activities ( 3,474) 1,751
_________ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - non-recourse 3,873 1,670
Repayments of indebtedness - nonrecourse ( 680) ( 1,818)
Repayments of indebtedness - recourse ( 654) ( 1,669)
Preferred stock issued, net 1,021 -
_______ ______
Net cash used for financing activities 3,560 ( 1,817)
_______ ________
NET INCREASE IN CASH AND CASH EQUIVALENTS 50 131
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 185 79
_______ ______
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 235 $ 210
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Financial Presentation
In the opinion of Management, the accompanying interim
unaudited condensed consolidated financial statements contain all
adjustments considered necessary to present fairly the Company's
financial position, results of operations and cash flows for the
periods presented. All accounting adjustments are of a normal
recurring nature.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
1995 Annual Report to shareholders on Form 10-K for the year
ended December 31, 1995 and subsequent quarterly filing on Form
10-Q . The results of operations for the periods presented are
not necessarily indicative of the operating results expected for
the full year. Certain amounts in prior periods have been
reclassified to conform with the presentation at June 30, 1996.
B. Acquisition Activity
On June 21, 1996, the Company acquired a 50% interest in
TruckScan, L.L.C. ("TruckScan"), a newly-formed company organized
by the Company and TeleScan Technologies, L.L.C. of Bloomfield
Hills, Michigan ("Telescan") to market and sell an electronic
truck and trailer inventory management and networking program.
The Company paid $350,000 for its interest in TruckScan.
The purchase price may be adjusted upwards based on certain
subsequent events. TruckScan has contractual rights to market
and license software and had negligible tangible assets at
acquisition. The Company accounts for its investment in
accordance with the equity method.
Reference is made to the Company's report on Form 8-K dated
June 21, 1996 concerning the above-described transaction.
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<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Results of Operations
Revenues for the three months and six months ended June 30,
1996 decreased to $1.5 million and $2.9 million from $2.0 million
and $4.3 million for the comparable periods of 1995. The Company
reported net losses of $240,000 and $643,000 ($.05 and $.13 per
share) for the three months and six months ended June 30, 1996 as
compared with net losses of $677,000 and $1.4 million ($.11 and
$.22 per share) for the same periods last year.
Rental Income
Rental income, primarily from the Company's portfolio of
leased equipment, was $631,000 and $1.2 million for the three
months and six months ended June 30, 1996 versus $1.3 million and
$2.7 million for the comparable periods last year. The majority
of the decrease is the result of the expiration of several leases
and subsequent disposition of $22.1 million of equipment (based
on its original cost) from the Company's portfolio during the
twelve months ended June 30, 1996. Most rental income is used to
service non-recourse debt secured by lease transactions.
Lease Underwriting Income
Lease underwriting resulted in income of $191,000 and
$324,000 for the three months and six months ended June 30, 1996
versus $258,000 and $326,000 for the same periods in 1995. This
income was derived from sales of $9.5 million of equipment
leases, at cost, to third party investors of leased equipment in
the six months ended June 30, 1996 as compared with $7.7 million
in such sales during the same period last year.
At June 30, 1996, the Company held in its inventory $7.3
million (original cost) of lease transactions for sale to third
parties as compared to $1.9 million at December 31, 1995. The
Company's strongest quarter for sales of inventory is the fourth
quarter. Consequently the inventory balance at December 31, 1995
is usually the lowest of the year. The Company's ability to
generate new profitable transactions is constrained by
competitive pressures from other leasing companies and the
difficulty the Company has in persuading investors to translate
-6-
<PAGE>
the Company's remarketing success into more aggressive residual
pricing when soliciting bids for transactions.
Under the terms of its intercreditor agreement, discussed
below under "Liquidity and Capital Resources", the Company's
available warehouse financing with its senior lender group is
approximately $1.8 million as of June 30, 1996. The Company's
warehouse facility with a bank provides an additional $10.0
million in warehouse financing capacity, subject to the lender's
credit approval of the lessee. The bank lends the Company the
discounted rental stream of certain lease transactions as well as
a portion of the residual value of the equipment subject to those
leases. The balance of the equipment cost is furnished by the
senior lenders.
Residuals. Lease underwriting income includes the present
value of the Company's share of the estimated future residual
values expected to be realized from lease transactions sold to
investors. For the three months and six months ended June 30,
1996, $53,000 and $98,000 of residual fee income was recognized,
representing 30% of lease underwriting income year to date.
During the same periods in 1995, $224,000 and $277,000 of
residual fee income was recognized, representing 85% of lease
underwriting income.
Gains from Portfolio Remarketing. The Company recognized
$400,000 and $649,000 of gains from the sale of portfolio assets
with an original cost of $5.8 million and $7.5 million,
respectively, in the three months and six months ended June 30,
1996 versus $195,000 and $663,000 of gains from the sale of
portfolio assets with an original cost of $2.3 million and $8.3
million in the same periods last year.
Gains decreased 2% on decreased portfolio equipment sales of
10% in the six months of 1996 as compared with the same period in
1995. The reduced sales and gains in sales for the six-month
periods are the result of a decreasing number of assets
and leases in the Company's portfolio.
Fees from Remarketing Activities. Fees from remarketing
activities were $217,000 and $424,000 for the three months and
six months ended June 30, 1996 versus $163,000 and $374,000 in
the same periods last year. During the second quarter of 1996,
$27,000 was attributable to remarketing performed for third
parties other than trust investors with which the Company entered
into remarketing agreements at the time of the related leases
were sold to trust investors. During the same period in 1995,
$124,000 in fees were attributable to remarketing performed for
-7-
<PAGE>
third parties other than trust investors with which the Company
entered into remarketing agreements at the time the related
leases were sold to trust investors.
Other Income. Other income was $24,000 and $143,000 for the
three and six months ended June 30, 1996 versus $22,000 and
$128,000 for the three months and six months ended June 30, 1995.
Expenses. Selling, general and administrative expenses for
the three months and six months ended June 30, 1996 amounted to
$1.3 million and $2.6 million versus $1.3 million and $2.7
million for the three months and six months ended June 30, 1995.
Interest expense for the three months and six months ended
June 30, 1996 was $149,000 and $278,000 versus $311,000 and
$769,000 million for the same periods in 1995. The decrease from
1995 to 1996 resulted largely from a reduction of subordinated
debt guaranteed by the Company's former majority shareholder.
Other causes were due to reductions in the amount of leased
equipment in the Company's portfolio, and lower interest rates on
the Company's recourse debt.
The provision for income taxes for the three months and six
months ended June 30, 1996 is nominal. During the same periods
in 1995, the provision for income taxes was also nominal.
Liquidity and Capital Resources
Since 1990, the Company's ability to sustain its operations
and meet its ongoing working capital requirements has been
exclusively dependent upon the continued availability of
internally generated cash arising primarily from lease
underwriting and brokerage fees and residual value realization.
External funds such as short-term warehouse financing and
non-recourse debt to finance leases have been consistently
available in amounts adequate to support both the Company's
origination and syndication activities.
During the first six months of the year the Company used
$36,000 cash for operations which includes a seasonal reduction
of receivables of $1.7 million.
Effective April 12, 1996, the Company issued and sold to
Vestex Capital Corporation 5,000,000 shares of its Series AA
Convertible Preferred Stock for $1,350,000 in cash, less
reimbursement of $312,000 of due diligence and other transactions
costs to Vestex Capital Corporation (the "Preferred Stock
Placement"). On April 12, 1996, the Company also announced that
it had commenced a private offering of up to 4,000,000 shares of
-8-
<PAGE>
its Common Stock (the "Common Stock Offering") to a select group
of investors. The Company's management and Board of Directors
are exploring alternative ways to raise new capital, which is
considered essential in order for the Company to achieve and
sustain future profitability.
A significant portion of the Company's assets is pledged as
collateral for the Company's non-recourse indebtedness. As of
June 30, 1996, approximately $3.7 million (or 37%) of
indebtedness represented a direct liability of the Company; the
remainder, approximately $6.4 million (or 63%), was non-recourse.
Amounts due under non-recourse notes are obligations of the
Company which are secured only by the leased equipment and
assignments of lease receivables, with no recourse to any other
assets of the Company. The significant near-term maturities of
this non-recourse debt are not expected to affect the Company's
liquidity because the debt is expected to be fully amortized by
the assignment of the collateral leases and payment by the
related lessees of lease rentals directly to the non-recourse
lenders.
Restricted balances represent mainly the equipment cash
collateral account under the intercreditor agreement and funds
collected by the Company on behalf of trust investors consisting
of rental income and sales proceeds related to leases in which
they have an equity interest. A related liability exists on the
balance sheet until the funds have been distributed to the
appropriate investors. The same amount is included in "Accounts
Payable and Accrued Expenses."
-9-
<PAGE>
Part II. - Other Information
Item 5. Exhibits and Reports on Form 8-K:
(a) Exhibits - None
(b) Reports on Form 8-K:
On May 17, 1996, the Company filed a Form 8-K dated May 16,
1996 reporting that it had issued a press release on May 16,
1996 in which it announced the Company's financial results
for the three months ended March 31, 1996.
On July 17, 1996, the Company filed a Form 8-K dated June 21,
1996 reporting that it had issued a press release on June
28, 1996 in which it announced that the Company acquired a
50% interest in TruckScan, L.L.C. ("TruckScan"), a newly-
formed company organized by the Company and TeleScan
Technologies, L.L.C. of Bloomfield Hills, Michigan
("Telescan") to market and sell an electronic truck and
trailer inventory management and networking program.
-10-
<PAGE>
SIGNATURE
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
Dated August 13, 1996
/s/ Stephen G. Morison
______________________________
Stephen G. Morison
Vice Chairman, President and
Chief Executive Officer
/s/ William J. Guthlein
_______________________________
William J. Guthlein
Vice President and
Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from 10-Q
and is qualified in its entirety by reference to such financial statement.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 235
<SECURITIES> 0
<RECEIVABLES> 175
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 410
<PP&E> 2,661
<DEPRECIATION> 2,477
<TOTAL-ASSETS> 17,208
<CURRENT-LIABILITIES> 15,466
<BONDS> 0
0
1021
<COMMON> 721
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,208
<SALES> 0
<TOTAL-REVENUES> 2,861
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278
<INCOME-PRETAX> (643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (643)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
