<PAGE>
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 March 31, 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 May 1, 1996
----- --------------------------
<S> <C>
Common Stock, $.01 5,136,391
par value per share
</TABLE>
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In Thousands Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 25 $ 185
Cash - restricted and escrowed 2,400 4,513
Receivables, net 430 1,889
Leased equipment held for underwriting 5,938 1,859
Net investment in direct finance leases 1,246 1,421
Equipment on operating lease (net of
accumulated depreciation of $15,766
and $17,020) 1,308 1,683
Residual values, net 3,321 3,340
Furniture and equipment (net of accum-
ulated depreciation of $2,462 and
$2,453) 185 179
Other assets, net 1,034 1,019
------ -----
$15,887 $16,088
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 4,885 $ 6,842
Indebtedness:
Nonrecourse 5,653 3,167
Recourse 3,987 4,314
Deferred income taxes 400 400
------ ------
Total liabilities 14,925 14,723
------ ------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock - $.01 par value,
Authorized: 10,000,000 shares;
None issued
Common stock - $.01 par value,
Authorized 30,000,000 shares:
Issued 6,567,302 and
6,567,302 shares: 65 65
Additional paid-in capital 23,638 23,638
Deficit (22,205) (21,802)
-------- --------
Less treasury stock - 1,430,911
and 1,430,911 shares at cost ( 536) ( 536)
-------- --------
Total stockholders' equity 962 1,365
-------- --------
$15,887 $16,088
======= =======
</TABLE>
See notes to condensed consolidated financial statements
-1-
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In Thousands Except Per Share and Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Rental income $ 581 $ 1,399
Lease underwriting income 133 68
Direct finance lease income 38 68
Interest income 14 14
Gains from portfolio remarketing 248 467
Fees from remarketing activities 207 211
Other income 119 107
----- ------
1,340 2,334
----- ------
Costs and expenses:
Selling, general and administrative 1,275 1,422
Interest expense 129 458
Depreciation and amortization 339 1,163
1,743 3,043
----- ------
Net loss ($ 403) ($ 709)
======== ==========
Net loss per share ($ .08) ($ .11)
======== ==========
Weighted average number of common
and common equivalent shares 5,136,391 6,382,077
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
------------------------------------------
(In Thousands Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common stock Treasury stock
------------ paid-in --------------
Shares Amount capital Deficit Shares Amount
------ ------ ---------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 6,566,712 $ 65 $19,475 ($20,581) 184,635 ($380)
Exercise of stock options 590 - - - - -
Net loss - - - ( 1,221) - -
--------- ---- ------- --------- ------- ------
BALANCE, MARCH 31, 1995 6,566,712 $ 65 $19,475 ($21,290) 184,635 ($380)
========= ==== ======= ========= ======== ======
BALANCE, JANUARY 1, 1996 6,567,302 $ 65 $23,638 ($21,802) 1,430,911 ($536)
Net loss - - - ( 403) - -
--------- ---- ------- --------- --------- ------
BALANCE, MARCH 31, 1996 6,567,302 $ 65 $23,638 ($22,205) 1,430,911 ($536)
========= ==== ======= ========= ========= ======
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 403) ($ 709)
-------- --------
Adjustments to reconcile net loss to net cash
flows provided by operating activities:
Depreciation and amortization 339 1,163
Residual value estimate realizations and
reductions, net of additions 19 52
Changes in assets and liabilities:
Receivables 1,459 1,332
Other assets ( 14) 5
Accounts payable and accrued expenses (1,957) 190
-------
Total adjustments ( 154) 2,742
------- ------
Net cash provided by operating activities ( 557) 2,033
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting (4,079) ( 931)
Net investments in direct finance leases 175 57
Equipment on operating lease 44 1,193
Net change in cash restricted and escrowed (2,113) ( 1,069)
Additions to furniture and equipment, net ( 15) ( 5)
------- --------
Net cash used for investing activities (1,762) ( 755)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - non-recourse 3,163 568
Repayments of indebtedness - nonrecourse ( 677) ( 1,174)
Repayments of indebtedness - recourse ( 327) ( 589)
------- --------
Net cash used for financing activities 2,159 ( 1,195)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 160) 83
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 185 79
----- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25 $ 162
====== =======
CASH PAID FOR INTEREST $ 124 $ 357
====== =======
</TABLE>
See notes to condensed consolidated financial statements.
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<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 financial position of the Company as of March 31, 1996 and
the results of operations and statements of 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. The
results of operations for the periods presented are not necessarily indicative
of the operating results expected for the full
B. New Accounting Pronouncements
-----------------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived assets
and for Long-lived Assets to Be Disposed Of", effective January 1, 1996. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Adopting SFAS No. 121 has no material effect on the Company's
consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which was adopted by the Company
effective January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-
based compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share in the 1996
annual financial statements.
C. Acquisition Activity
--------------------
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<PAGE>
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 its Common Stock (the "Common
Stock Offering") to a select group of investors.
Reference is made to the Company's report on Form 8-K dated April 12, 1996
concerning the above-described transaction. A discussion of certain aspects of
the transaction and the Company's plans to address its need for capital is
included below in "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
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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 ended March 31, 1996 decreased to $1,340,000
from $2,334,000 for the comparable period of 1995. The Company reported a net
loss of $403,000 ($.08 per share) for the three months ended March 31, 1996 as
compared with a net loss of $709,000 million ($.11 per share) for the same
period last year.
Rental Income
- -------------
Rental income, primarily from the Company's portfolio of leased equipment,
was $581,000 for the three months ended March 31, 1996 versus $1.4 million for
the three months ended March 31, 1995. The majority of the decrease is the
result of the expiration of several leases and subsequent disposition of $18.6
million of equipment (based on its original cost) from the Company's portfolio
during the twelve months ended March 31, 1996. Most rental income is used to
service non-recourse debt secured by lease transactions.
Lease Underwriting Income
- -------------------------
Lease underwriting resulted in income of $133,000 for the three months ended
March 31, 1996 versus income of $68,000 for the three months ended March 31,
1995. The increase in revenue is the result of sales of $4.2 million of
equipment leases, at cost, to third party investors of leased equipment in the
first quarter of 1996 as compared to $2.6 million of sales during the same
period last year.
At March 31, 1996, the Company held in its inventory $5.9 million (original
cost) of lease transactions for sale to third parties as compared to $1.9
million at December 31, 1995. 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 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 $1.83 million as of May 1, 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
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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 ended March 31,
1996, $45,000 of residual fee income was recognized, representing 34% of lease
underwriting income. For the three months in 1995, $53,000 of residual fee
income was recognized, representing 78% of lease underwriting income.
Gains from Portfolio Remarketing. The Company recognized $248,000 of gains
--------------------------------
from the sale of portfolio assets with an original cost of $1.7 million in the
three months ended March 31, 1996 versus $467,000 of gains from the sale of
portfolio assets with an original cost of $6.0 million in the same period last
year. The reduced sales and gains in sales are the result of a decreasing
number of assets and leases in the Company's portfolio.
Gains decreased 47% on decreased portfolio equipment sales of 72% in the
first three months of 1996 as compared with the same period in 1995.
Fees from Remarketing Activities. Fees from remarketing activities were
--------------------------------
$207,000 for the three months ended March 31, 1996 versus $211,000 in the same
period last year. During the first quarter of 1996, no fees were attribiutable
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 quarter in 1995, $90,000
in fees were attributable to remarketing performed for 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 $119,000 for the three months ended March
------------
31, 1996 versus $107,000 for the three months ended March 31, 1995. The March
31, 1996 period included a $101,000 final settlement of a bankruptcy claim.
Expenses. Selling, general and administrative expenses for the three months
--------
ended March 31, 1996 amounted to $1.3 million versus $1.4 million for the three
months ended March 31, 1995.
Interest expense for the three months ended March 31, 1996 was $129,000
versus $458,000 for the same period in 1995. The decrease from 1996 to 1995
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 ended March
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<PAGE>
31, 1996 and 1995 is 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.
The Company is currently satisfying its working capital needs through normal
operations. While no assurances can be given, management believes that the
terms of the extension and term-out negotiated with its senior lenders in
December 1995 and January 1996 will continue to permit the Company to meet its
current obligations and underwrite a sufficient volume of new lease transactions
to enable the Company to continue to meet its future obligations.
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 its Common Stock (the
"Common Stock Offering") to a select group of investors.
A significant portion of the Company's assets is pledged as collateral for
the Company's non-recourse indebtedness. As of March 31, 1996, approximately
$4.0 million (or 41%) of indebtedness represented a direct liability of the
Company; the remainder, approximately $5.7 million (or 59%), 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."
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<PAGE>
Part II. - Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - None
(b) Reports on Form 8-K:
On April 22, 1996, the Company filed a Form 8-K dated April 12, 1996
reporting that it had issued and sold 5,000,000 shares of its Series AA
Convertible Preferred Stock to Vestex Capital Corporation for net
proceeds of over $1 million. The Company also announced that it had
commenced a private offering of up to 4 million shares of its Common
Stock to a select group of investors.
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<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 May 10, 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>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 25 162
<SECURITIES> 0 0
<RECEIVABLES> 430 352
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 185 188
<DEPRECIATION> 18,228 32,658
<TOTAL-ASSETS> 15,887 21,451
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 962 (2,130)
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 15,887 21,451
<SALES> 0 0
<TOTAL-REVENUES> 1,340 2,334
<CGS> 0 0
<TOTAL-COSTS> 1,743 3,043
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 129 458
<INCOME-PRETAX> (403) (709)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (403) (709)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (403) (709)
<EPS-PRIMARY> (.08) (.11)
<EPS-DILUTED> (.08) (.11)
</TABLE>
