<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 September 30, 1996
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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
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Chancellor Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2626079
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
745 Atlantic Avenue, Boston, Massachusetts 02111
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (617) 728-8500
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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.
Class Outstanding at October 17, 1996
Common Stock, $.01 par value per share 5,136,391
Series AA Convertible Preferred Stock, $.01 5,000,000
par value per share
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CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
September 30, 1996 December 31, 1995
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ASSETS (Unaudited) (Audited)
Cash and cash equivalents $ 11 $ 185
Cash - restricted and escrowed 3,705 4,513
Receivables, net 452 1,889
Leased equipment held for underwriting 3,868 1,859
Net investment in direct finance leases 946 1,421
Equipment on operating lease (net of accum-
ulated depreciation of $8,554 and $17,020) 280 1,683
Residual values, net 3,164 3,340
Furniture and equipment (net of accumu-
lated depreciation of $2,506 and $2,453) 229 179
Investment in TruckScan (net of accumulated
amortization of $35 and $0) 346 0
Other assets, net 1,053 1,019
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$ 14,054 $ 16,088
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,654 $ 6,842
Indebtedness:
Nonrecourse 3,488 3,167
Recourse 3,396 4,314
Deferred income taxes 400 400
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Total liabilities 12,938 14,723
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Commitments and contingencies
Stockholders' equity:
Convertible Preferred stock - $.01 par value,
Authorized:10,000,000 shares;
Issued: 5,000,000 shares: 1,021 0
Common stock - $.01 par value,
Authorized 30,000,000 shares;
Issued 6,567,302 shares: 65 65
Additional paid-in capital 23,638 23,638
Deficit (23,072) (21,802)
Less treasury stock - 1,430,911 shares at cost (536) (536)
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Total stockholders' equity 1,116 1,365
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$ 14,054 $ 16,088
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See notes to condensed consolidated financial statements.
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<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1996 1995 1996 1995
------ ------ ------- -------
Revenues:
Rental income $ 442 $1,010 $1,654 $3,667
Lease underwriting income 73 187 396 513
Direct finance lease income 54 40 133 148
Interest income 10 14 41 50
Gains from portfolio remarketing 336 626 985 1,289
Fees from remarketing activities 216 182 640 556
Other - 39 142 167
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1,131 2,098 3,991 6,390
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Costs and expenses:
Selling, general and administrative 1,417 1,200 4,005 3,948
Interest expense 102 103 380 872
Depreciation and amortization 238 784 875 2,945
Lease rental - - - -
------ ------ ------- -------
1,757 2,087 5,260 7,765
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Income (loss) before income tax
expense and cumulative effect of
change in accounting principle (626) 11 (1,269) (1,375)
Income tax expense - - - -
Net loss ($ 626) $ 11 ($1,269) ($1,375)
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------ ------ ------- -------
Net income (loss) per share ($ .11) $ - ($ .22) ($ .23)
------ ------ ------- -------
------ ------ ------- -------
Weighted average number of common
shares 5,851,847 5,759,234 5,851,847 6,070,655
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to condensed consolidated financial statements.
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CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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)
Capital Contribution by
related party 4,146 3,870,015 ($484)
Stock purchase by Vestex 24 (1,600,000) $200
Stock grant (1,023,739) $128
Exercise of stock options 590
Net loss - - - - - (1,375) - -
--------- ------ --------- --- ------- --------- --------- ------
BALANCE, SEPTEMBER 30, 1995 0 $ 0 6,567,302 $65 $23,645 ($21,956) 1,430,911 ($536)
--------- ------ --------- --- ------- --------- --------- ------
--------- ------ --------- --- ------- --------- --------- ------
BALANCE, JANUARY 1, 1996 0 $ 0 6,567,302 $65 $23,638 ($21,803) 1,430,911 ($536)
Net Loss - - - - - (1,269) - -
Stock Purchase by Vestex 5,000,000 1,021 - - - - - -
--------- ------ --------- --- ------- --------- --------- ------
BALANCE, SEPTEMBER 30, 1996 5,000,000 $1,021 6,567,302 $65 $23,638 ($23,072) 1,430,911 ($536)
--------- ------ --------- --- ------- --------- --------- ------
--------- ------ --------- --- ------- --------- --------- ------
</TABLE>
See notes to condensed consolidated financial statements.
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CHANCELLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
September 30,
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1996 1995
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ($0,000) ($0,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,269) ($1,375)
Adjustments to reconcile net loss to net cash
flows provided by operating activities:
Depreciation and amortization 875 2,945
Residual value estimate realizations and
reductions, net of additions 176 (83)
Compensation expense recognized on stock grants - 128
Changes in assets and liabilities:
Receivables 1,437 (737)
Other assets (34) (1)
Accounts payable and accrued expenses (1,188) (842)
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Total adjustments 1,266 1,410
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Net cash provided by (used in) operating activities (3) 35
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CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting (2,009) 513
Net investments in direct finance leases 475 374
Equipment on operating lease 615 2,050
Investment in TruckScan (381) -
Net change in cash restricted and escrowed 808 786
Additions to furniture and equipment, net (103) (4)
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Net cash provided by (used in) investing activities (595) 3,719
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - non-recourse 433 2,064
Repayments of indebtedness - nonrecourse (112) (3,092)
Repayments of indebtedness - recourse (918) (3,023)
Preferred stock issued, net 1,021 -
Common stock issued, net - 224
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Net cash provided by (used in) financing activities 424 (3,827)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (174) (73)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 185 79
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11 $ 6
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See notes to condensed consolidated financial statements.
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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
quarters have been reclassified to conform with the presentation at September
30, 1996.
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CHANCELLOR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months and nine months ended September 30, 1996
decreased to $1.1 million and $4.0 million from $2.1 million and $6.4 million
for the comparable periods of 1995. The Company reported net losses of
$626,000 and $1.3 million ($.11 and $.22 per share) for the three months and
nine months ended September 30, 1995 as compared with net profit of $11,000
and a net loss of $1.4 million ($.- and ($.23) per share) for the same
periods last year.
RENTAL INCOME
Rental income, primarily from the Company's portfolio of leased equipment,
was $442,000 and $1.7 million for the three months and nine months ended
September 30, 1996 versus $1.0 million and $3.7 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 $15.6 million of
equipment (based on its original cost) from the Company's portfolio during
the nine months ended September 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 $73,000 and $396,000 for the three
months and nine months ended September 30, 1996 versus $187,000 and $513,000
for the same periods in 1995. This income was derived from sales of $14.7
million of equipment leases, at cost, to third party investors of leased
equipment in the nine months ended September 30, 1996 as compared with $15.3
million in such sales during the same period last year.
At September 30, 1996, the Company held in its inventory $3.9 million
(original cost) of lease transactions for sale to third parties as compared
to $1.9 million at December 31, 1995. The Company's 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 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 was approximately $1.8 million as of
September 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
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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. The continued availability of the
$1.8 million warehouse loan is discussed in the "Liquidity and Capital
Resources" section.
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
nine months ended September 30, 1996, $75,000 and $172,000 of residual fee
income was recognized, representing 43% of lease underwriting income year to
date. For the same periods in 1995 $72,000 and $350,000 of residual fee
income was recognized, representing 68% of total lease underwriting income.
GAINS FROM PORTFOLIO REMARKETING. The Company recognized $336,000 and
$1.0 million of gains from the sale of portfolio assets with an original cost
of $2.9 million and $10.4 million, respectively, in the three months and nine
months ended September 30, 1996 versus $626,000 and $1.3 million of gains
from the sale of portfolio assets with an original cost of $5.7 million and
$14.1 million in the same periods last year.
Gains decreased 23% on decreased portfolio equipment sales of 26% in the
first nine months of 1996 as compared with the same period in 1995. The
reduced sales and gains in sales for the nine-month period are the result of
a decreasing number of asset and leases in the Company's portfolio.
FEES FROM REMARKETING ACTIVITIES. Fees from remarketing activities were
$216,000 and $640,000 for the three months and nine months ended September
30, 1996 versus $183,000 and $556,000 in the same periods last year. During
the third quarter of 1996 $32,000 was attributed to remarketing performed for
third parties other than trust investors with which the Company entered into
remarketing agreements at the time the related leased were sold to trust
investors. During the same period in 1995, $143,000 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 $0 and $142,000 for the three and nine
months ended September 30, 1996 versus $39,000 and $167,000 for the three
months and nine months ended September 30, 1995. Other income for the third
quarter includes an $18,000 loss recognized in the Company's investment in
TruckScan LLC.
EXPENSES. Selling, general and administrative expenses for the three
months and nine months ended September 30, 1996 amounted to $1.4 million and
$4.0 million versus $1.2 million and $4.0 million for the three months and
nine months ended September 30, 1995. The increase in the third quarter is
primarily related to additional travel and entertainment expenses and
compensation expense.
Interest expense for the three months and nine months ended September
30, 1996 was $102,000 and $380,000 versus $103,000 and $872,000 for the same
periods in 1995. The year-to-date decrease from 1995 to 1996 resulted
largely from a reduction of subordinated debt guaranteed
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by the Company's former majority shareholder. Other causes were due to
reductions in the amount of non-recourse debt associated with 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 nine months
ended September 30, 1996 is nominal; during the same periods in 1995, the
provision for income tax 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 nine months of the year the Company used $3,000 cash
for operations which includes a reduction of receivables of $1.4 million,
which increased cash from operations. Cash flow used in investing activities
included $381,000 related to the purchase of a 50% interest in TruckScan LLC
and $2.0 million from the build up of leases held for underwriting. The
issue of preferred stock in April 1996 provided $1.0 million of cash from
financing activities partially offset by payment of indebtedness.
Under terms of the Company's agreement with its lender group, the
Company must repay its warehouse loan of $1.8 million by December 31, 1996.
The Company intends to negotiate an extension of the loan from its lenders.
If unsuccessful, the Company would be unable to underwrite leases after
December 31, 1996 unless and until a new lender or equity capital was
available for this purpose.
A significant portion of the Company's assets is pledged as collateral
for the Company's non-recourse indebtedness. As of September 30, 1996,
approximately $3.4 million (or 49%) of indebtedness represented a direct
liability of the Company; the remainder, approximately $3.5 million (or 51%),
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
to the trust investors exists on the balance sheet until the funds have been
distributed to the
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appropriate investors. The same amount is included in "Accounts Payable and
Accrued Expenses."
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. The Company is
actively marketing a group of leases in its portfolio of operating leases and
direct finance leases as well as the Company's residual interest in a lease
owned by a third party. The Company may raise approximately $1 million if
all transactions are concluded at values estimated by the Company. The
Company estimates that approximately $600,000 of cash flow must be
accelerated to sustain operations into 1997. The sale of assets involve
leases which would have completed their original lease terms in the years
1997-2000. As a result of a sale, rental revenue would decrease approximately
$150,000 per quarter. The revenue reduction is offset in substantial part by
a reduction in depreciation expense and interest expense. Because of the
nonrecourse debt financings, the impact of a sale of leases to future
cash flows is limited to the proceeds the Company would have received on sale
of the assets at the completion of the lease term if the sale had not taken
place, less any residual interest the Company retains in the assets as part
of the sale agreement.
FORWARD LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may
make forward-looking statements, orally or in writing, in reports filed under
the Securities Act of 1934, as amended, in press releases or in statements
made with the approval of an authorized executive officer. The words or
phrases "is expected," "will continue," "anticipates," "estimates," "intends
to," "are exploring," "may raise," or similar expressions in any of these
communications are intended to identify "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933, as enacted by the Private
Securities Litigation Reform Act of 1995.
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Part II. - OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K:
(a) Exhibits - None
(b) Reports on Form 8-K:
On August 22, 1996, the Company filed a Form 8-K dated August 16, 1996
reporting that it had issued a press release that day in which it announced
the Company's financial results for the three months and six months ended
June 30, 1996.
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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 November __, 1996
/s/ Stephen G. Morison
-----------------------------
Stephen G. Morison
Vice Chairman, President and
Chief Executive Officer
/s/ William J. Guthlein
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William J. Guthlein
Vice President and
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 11 6
<SECURITIES> 0 0
<RECEIVABLES> 452 2,421
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 2,735 2,628
<DEPRECIATION> (2,506) (2,442)
<TOTAL-ASSETS> 14,054 17,249
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
1,021 0
<COMMON> 95 1,218
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 14,054 17,249
<SALES> 3,991 6,390
<TOTAL-REVENUES> 3,991 6,390
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,880 6,893
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 380 872
<INCOME-PRETAX> (1,269) (1,375)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,269) (1,375)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,269) (1,375)
<EPS-PRIMARY> (.22) (.23)
<EPS-DILUTED> 0 0
</TABLE>
