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, 1997
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)
745 Atlantic Avenue, Boston, Massachusetts 02111
(Former Address, if changed since last report)
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 [ ]
As of September 30, 1997, 25,386,391 shares of Common Stock, $.01 par value per
share, and 8,000,000 shares of Series AA Convertible Preferred Stock, $.01 par
value per share (with a liquidation preference of $.50 per share or $4,000,000)
were outstanding.
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Chancellor Corporation and Subsidiaries
Page
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 13
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
Signatures 15
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1
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<CAPTION>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands)
September 30, December 31,
1997 1996
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 110 $ 21
Cash - restricted and escrowed 3,359 3,553
Receivables, net 1,587 2,563
Leased equipment held for underwriting 1,126 1,231
Net investment in direct finance leases 603 748
Equipment on operating lease, net of accumulated depreciation
of $5,843 and $7,191 235 497
Residual values, net 608 748
Furniture and equipment, net of accumulated depreciation
of $2,695 and $2,655 896 121
Other assets, net 627 980
-------- --------
$ 9,150 $ 10,462
======== ========
Liabilities and Stockholders' Deficit
Accounts payable and accrued expenses $ 9,867 $ 10,260
Indebtedness:
Nonrecourse 619 1,188
Recourse 3,652 3,432
-------- --------
Total liabilities 14,138 14,880
-------- --------
Stockholders' deficit:
Convertible preferred stock, Series AA, $.01 par value, 20,000,000 shares
authorized, 8,000,000 and 5,000,000 shares issued and outstanding 80 50
Common stock, $.01 par value; 75,000,000 shares authorized,
25,386,391 and 6,567,302 shares issued and outstanding 268 65
Additional paid-in capital 27,066 24,609
Accumulated deficit (32,402) (28,606)
-------- --------
(4,988) (3,882)
Less: Treasury stock, none and 1,430,911 shares at cost -- (536)
-------- --------
Total stockholders' deficit (4,988) (4,418)
-------- --------
$ 9,150 $ 10,462
======== ========
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The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
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<CAPTION>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 250 $ 442 $ 746 $ 1,654
Lease underwriting income -- 73 38 396
Direct finance lease income 88 54 228 133
Interest income 16 10 32 41
Gains from portfolio remarketing 85 336 468 985
Fees from remarketing activities 388 216 906 640
Other income 307 -- 325 142
---------- --------- ---------- ---------
1,134 1,131 2,743 3,991
---------- --------- ---------- ---------
Costs and expenses:
Selling, general and administrative 1,483 1,417 6,143 4,005
Interest expense 170 102 391 380
Depreciation and amortization 64 238 225 875
Residual value estimate reduction -- -- 709 --
---------- --------- ---------- ---------
1,717 1,757 7,468 5,260
---------- --------- ---------- ---------
Net income (loss) before extraordinary ( 583) ( 626) ( 4,725) ( 1,269)
item
Extraordinary item - gain on early -- -- 930 --
---------- --------- ---------- ---------
Net income (loss) ($ 583) ($ 626) ($ 3,795) ($ 1,269)
========== ========= ========== =========
Net income (loss) per share:
Before extraordinary item ($ .03) ($ .11) ($ .37) ($ .22)
Extraordinary item -- -- .07 --
---------- --------- ---------- ---------
( .03) ($ .11) ($ .30) ($ .22)
========== ========= ========== =========
Weighted average common and common
equivalent shares 22,819,000 5,851,847 12,473,570 5,851,847
========== ========= ========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
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<CAPTION>
Chancellor Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Nine Months Ended September 30,
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,795) ($1,269)
------- -------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 225 875
Residual value estimate realizations and
reductions, net of additions 140 176
Changes in assets and liabilities, net of effects from
purchase of Long River Capital:
Decrease in receivables 1,068 1,437
Decrease (increase) in other assets 567 (34)
Decrease in accounts payable and accrued expenses (563) (1,188)
------- -------
1,437 1,266
------- -------
Net cash used by operating activities (2,358) (3)
------- -------
Cash flows from investing activities:
Leased equipment held for underwriting 105 (2,009)
Net investments in direct finance leases 145 475
Equipment on operating lease 91 615
Investment in Truckscan -- (381)
Payment for purchase of Long River Capital,
net of cash acquired (86) --
Net change in cash restricted and escrowed 194 808
Additions to furniture and equipment, net (829) (103)
------- -------
Net cash provided (used) by investing activities (380) (595)
------- -------
Cash flows from financing activities:
Increase in indebtedness - nonrecourse 40 433
Increase in indebtedness - recourse 4,463 --
Repayments of indebtedness - nonrecourse (609) (112)
Repayments of indebtedness - recourse (4,293) (918)
Issuance of preferred stock, net 900 1,021
Issuance of common stock, net 2,326 --
------- -------
Net cash provided by financing activities 2,827 424
------- -------
Net increase (decrease) in cash and cash equivalents 89 (174)
Cash and cash equivalents at beginning of period 21 185
------- -------
Cash and cash equivalents at end of period $ 110 $ 11
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited 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. 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.
Intercompany accounts and transactions have been eliminated. These
financial statements and related notes should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1996. The balance sheet at December 31, 1996 has been derived from the
audited consolidated financial statements included in the Annual Report on
Form 10-K. The results for the interim period ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire
year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
SFAS 128 specifies required disclosures relating to earnings per share
data. SFAS 128 is effective for fiscal years ending after December 15, 1997
and earlier application is not permitted. The implementation of these
standards is not expected to materially affect the Company's consolidated
financial statements.
3. COMMON STOCK
On June 6, 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex in consideration of the guarantee by Vestex of certain bank lines of
credit in the aggregate of $4,000,000. The Company ascribed a value of
$1,000,000 to the guarantee and recorded the value as debt issuance costs.
On June 6, 1997, the Company issued 6,716,667 shares of Common Stock to
Vestex in consideration of approximately $806,000 of fees due Vestex which
were previously accrued. Of the total 15,050,000 shares issued, 1,430,911
shares were issued from treasury stock. On September 24, 1997, the Company
issued 5,000,000 shares of Common Stock to Vestex in consideration of
approximately $500,000 of fees due Vestex which were previously accrued.
As of September 30, 1997, 25,386,391 shares of Common Stock were
outstanding. In combination with the 8,000,000 shares of Series AA
Convertible Preferred Stock outstanding, the Company would have 33,386,391
shares of Common Stock outstanding on an "as converted" basis.
5
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CHANCELLOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ACQUISITION
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Long River Capital, Inc., a company engaged in automobile
loan application processing and origination of automobile loans for high
credit risk consumers. Mr. Michael Marchese, a principal stockholder of
Long River Capital, Inc., is also a director of the Company. Total
consideration for the purchase of $104,000 of assets at their fair market
value consisted primarily of $68,000 in cash, the issuance of 200,000
shares of the Company's common stock having a fair market value of $20,000
and the assumption of $229,000 of liabilities and accrued acquisition
costs. The acquisition was accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to
assets acquired and liabilities assumed based on their fair market value at
the date of acquisition. The excess of purchase price over the fair market
value of net assets acquired of $213,000 has been included in other assets.
6
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CHANCELLOR CORPORATION
ITEM 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Month Period Ended September 30, 1997 vs. September 30, 1996
Revenues. Total revenues for the three month period ended September 30,
1997 were $1,134,000 as compared to $1,131,000 for the corresponding prior year
period, an increase of $3,000 or 0.3%. For the three month period ended
September 30, 1997, rental income decreased by $192,000 or 43.4% as compared to
the corresponding prior year period. The decrease in rental income is
attributable primarily to the expiration of several leases, including the
subsequent disposition of $653,000 of equipment (based on its original cost).
With the completion of its restructuring efforts, the Company has started to
originate new equipment leases ($26,000 at cost during the three month period
ended September 30, 1997), however rental income will continue to decrease until
new equipment additions are sufficient to compensate for an aging lease
portfolio. For the three month period ended September 30, 1997, lease
underwriting income decreased by $73,000 or 100.0% as compared to the
corresponding prior year period. Lease underwriting income decreased due to the
lack of syndication of new equipment leases, as compared to syndication of $5.2
million of equipment leases, at cost, during the same period last year.
Additionally, as a consequence of the restructuring commenced in January 1997,
the Company is rebuilding its lease origination sales force. For the three month
period ended September 30, 1997, direct finance lease income increased by
$34,000 or 63.0%, as compared to the corresponding prior year period. The
increase in direct finance lease income is attributable to the transfer of 10
leases acquired as a result of the buyout in April 1997 of the intercreditor
agreement and the addition of 2 international leases in the current quarter.
Management believes there are numerous opportunities in the international
markets due to increased infrastructure spending and higher rates of return and
will devote certain resources to expanding these market opportunities. For the
three month period ended September 30, 1997, gains from portfolio remarketing
decreased by $251,000 or 74.7% as compared to the corresponding prior year
period. The decrease in gains from portfolio remarketing is attributable to the
decrease in sales of portfolio assets during the three month period ended
September 30, 1997 as compared to the corresponding prior year period. For the
three month period ended September 30, 1997, fees from remarketing activities
increased by $172,000 or 79.6% as compared to the corresponding prior year
period. This increase is attributable in part to an increase of remarketing to
third parties other than trusts of $79,000 in the current period as compared to
$32,000 the prior year period, an increase of 146.9%. Management plans to
continue to increase the utilization of the Company's remarketing expertise to
provide such services to third parties. For the three month period ended
September 30, 1997, other income increased by $307,000 as compared to the
corresponding prior year period. The increase is due primarily to approximately
$300,000 of strategic and financial consulting service revenues provided in
connection with the Company's long-term strategic objective of diversifying its
financial product offerings.
Costs and Expenses. Selling, general and administrative expense for the
three month period ended September 30, 1997 was $1,483,000 as compared to
$1,417,000 for the corresponding prior year period, an increase of $66,000 or
4.7%. The Company successfully implemented its restructuring strategy through
the first two quarters of 1997 resulting in an improvement in its overall
operational cost structure. The improved cost structure includes decreases
during the period in human resource costs of approximately $306,000 and
occupancy costs of approximately $56,000. These cost improvements have resulted
in a stabilization of the corporate infrastructure and provide a firm foundation
for the new management team to implement the growth phase of its restructuring
strategy. These cost improvements were offset by approximately $100,000 in
additional reserves against receivables and leased assets believed to be
uncollectable, $165,000 in legal and professional fees accrued for potential
litigation in connection with the Company's efforts to recover certain
administrative costs incurred by and due to the Company from trusts, and
$140,000 in advertising and consulting costs expended to support the Company in
its growth strategy.
Interest expense for the three month period ended September 30, 1997
was $170,000 as compared to $102,000 for the corresponding prior year period, an
increase of $68,000 or 66.7%. If the comparison is
7
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CHANCELLOR CORPORATION
considered without the standard allocation of interest expense as a reduction to
lease underwriting income, interest expense actually decreased $102,000 or
37.5%. This decrease is primarily a result of the reduction in both recourse and
non-recourse debt.
Depreciation expense for the three month period ended September 30,
1997 was $64,000 as compared to $238,000 for the corresponding prior year
period, a decrease of $174,000 or 73.1%. The decrease is primarily due to the
decrease in the operating lease base, resulting from decreases in operating
leases originated by the Company over the past year and sale of equipment coming
off lease.
Net Loss. Net loss for the three month period ended September 30, 1997
was $583,000 as compared to $626,000 for the corresponding prior year period, a
decrease of $43,000 or 6.9%. The decrease in net loss is primarily attributable
to the decrease in operating costs and expenses resulting from the continued
restructuring and stabilization efforts by the new management team. Net loss per
share for the three month period ended September 30, 1997 was $.03 per share as
compared to $.11 per share for the corresponding prior year period, a decrease
of $.08 per share or 72.7%. The decrease is due primarily to an increase of
289.9% in the number of shares issued and outstanding.
Nine Month Period Ended September 30, 1997 vs. September 30, 1996
Revenues. Total revenues for the nine month period ended September 30,
1997 was $2,743,000 as compared to $3,991,000 for the corresponding prior year
period, a decrease of $1,248,000 or 31.3%. For the nine month period ended
September 30, 1997, rental income decreased by $908,000 or 54.9% as compared to
the corresponding prior year period. The decrease in rental income is
attributable primarily to the expiration of several leases, including the
subsequent disposition of $2.3 million of equipment (based on its original
cost). With the completion of its restructuring efforts, the Company has started
to originate new equipment leases ($51,000 at cost during the nine month period
ended September 30, 1997), however, rental income will continue to decrease
until new equipment additions are sufficient to compensate for an aging lease
portfolio. For the nine month period ended September 30, 1997, lease
underwriting income decreased by $358,000 or 90.4% as compared to the
corresponding prior year period. Lease underwriting income decreased due to the
origination of only $1.4 million of equipment leases, at cost, as compared to
origination of $14.7 million of equipment leases, at cost, during the same
period last year. Additionally, as a consequence of the restructuring commenced
in January 1997, the Company is rebuilding its lease origination sales force.
For the nine month period ended September 30, 1997, direct finance lease income
increased by $95,000 or 71.4%, as compared to the corresponding prior year
period. The increase in direct finance lease income is attributable to the
transfer of 10 leases acquired as a result of the buyout in April 1997 of the
intercreditor agreement and the addition of 2 international leases. For the nine
month period ended September 30, 1997, gains from portfolio remarketing
decreased by $517,000 or 52.5% as compared to the corresponding prior year
period. The decrease in gains from portfolio remarketing is attributable to the
decrease in sales of portfolio assets during the nine month period ended
September 30, 1997 as compared to the corresponding prior year period. For the
nine month period ended September 30, 1997, fees from remarketing activities
increased by $266,000 or 41.6% as compared to the corresponding prior year
period. This increase is attributable to a continued focus by management on the
remarketing of trust assets as they become available for sale. This increase is
also attributable to $79,000 of fees earned remarketing for third parties other
than trust investors. Management plans to increase the utilization of the
Company's remarketing expertise to provide such services to third parties. For
the nine month period ended September 30, 1997, other income increased by
$183,000 or 128.9% as compared to the corresponding prior year period. The
increase is due primarily to $300,000 of strategic and financial consulting
service revenues provided in connection with the Company's long-term strategic
objective of diversifying its financial product offerings.
Costs and Expenses. Selling, general and administrative expense for the
nine month period ended September 30, 1997 was $6,143,000 as compared to
$4,005,000 for the corresponding prior year period, an increase of $2,138,000 or
53.4%.
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CHANCELLOR CORPORATION
The Company incurred additional legal, accounting and consulting fees of
approximately $2,166,000 in connection with the continuing restructuring
activities and litigation against certain members of the Company's former
management team and directors during the first two quarters of fiscal 1997.
Additionally, the Company recorded $1,000,000 of debt issuance costs in
connection with the guarantee by Vestex of the $4,000,000 bank lines of credit.
The Company reduced operating costs by approximately $1,484,000 or 38.9% as
compared to the corresponding prior year period. These cost reductions result
from the continued restructuring and stabilization efforts by the new management
team, including the reduction of headcount and general operating costs.
Management believes it has successfully implemented the cost stabilization phase
of its restructuring strategy. These cost improvements have resulted in a
stabilization of the corporate infrastructure and provides a firm foundation for
the new management team to implement the growth phase of its restructuring
strategy.
Interest expense for the nine month period ended September 30, 1997 was
$391,000 as compared to $380,000 for the corresponding prior year period, an
increase of $11,000 or 2.9%. If the comparison is considered without the
standard allocation of interest expense as a reduction to lease underwriting
income, interest expense actually decreased $202,000 or 32.7%. This decrease is
primarily a result of the reduction in both recourse and non-recourse debt.
Depreciation expense for the nine month period ended September 30, 1997
was $225,000 as compared to $875,000 for the corresponding prior year period, a
decrease of $650,000 or 74.3%. The decrease is primarily due to the decrease in
the operating lease base, resulting from decreases in operating leases
originated by the Company over the past year and sale of equipment coming off
lease.
Prior to 1996, the Company utilized a combination of benchmark/matrices
for establishing performance of the residual portfolio. During 1996, due to
changes in market conditions, the Company evaluated residual values based upon
independent assessments by industry professionals, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
As a result of such procedures, the Company has recorded an additional residual
value estimate reduction of $709,000 for the nine month period ended September
30, 1997.
Extraordinary Item - Gain on Early Extinguishment of Debt. The Company
recorded a gain on early extinguishment of debt for the nine month period ended
September 30, 1997 of $930,000. In April 1997, the Company repaid in advance of
their respective terms an intercreditor loan and secured inventory loan. The
aggregate amount of this debt on the repayment date was $1,906,000, of which
approximately $976,000 was paid in cash and the balance of $930,000 was
forgiven. In addition, the Company paid approximately $22,000 in legal and bank
fees to complete this transaction.
Net Loss. Net loss for the nine month period ended September 30, 1997
was $3,795,000 as compared to $1,269,000 for the corresponding prior year
period, an increase of $2,526,000 or 199.1%. The increase in the net loss is
attributable to the decrease in revenue components and the net increases in
total costs, specifically described above. The increase in the net loss is
offset in part by the impact of the gain on early extinguishment of debt. Net
loss per share for the nine month period ended September 30, 1997 was $.30 per
share as compared to $.22 per share for the corresponding prior year period, an
increase of $.08 per share or 36.4%. The decrease is due primarily to an
increase of 113.2% in the number of shares issued and outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash flow from operations of $2,358,000 during the
nine month period ended September 30, 1997, in part, due to the net loss of
$3,795,000, for the same period, and conversion of approximately $4.5 million of
fees due Vestex into recourse debt, preferred stock and common stock. Investing
activities used $380,000 during the nine month period, primarily as a result of
expenditures in connection with the relocation and build-out of the Company's
new office facility, offset in part by the sale of equipment coming off lease
and the effect of the early termination of the intercreditor loans. Investing
activities were also affected by the acquisition of Long River Capital.
Financing activities in the nine month period provided $2,827,000, in part due
to the issuance of 3,000,000 shares of the Company's Series AA Convertible
Preferred Stock at $.30 per share to Vestex in consideration of $900,000 of
consulting fees due Vestex, the conversion of approximately $2.3 million of
9
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CHANCELLOR CORPORATION
accrued fees due Vestex into recourse debt and the issuance of 11,716,667 shares
of common stock in consideration of approximately $1,306,000 of accrued fees due
Vestex. The net result of the above activity for the nine month period was an
increase in cash and cash equivalents of $89,000. Cash and cash equivalents
amounted to $110,000 at September 30, 1997 as compared to $11,000 at September
30, 1996. Cash restricted and escrowed amounted to $3.4 million at September 30,
1997 as compared to $3.6 million at September 30, 1996. Withdrawals of
restricted cash balances were previously limited to the distribution of rents
and sales proceeds of trust-owned leases to investors, recourse debt service,
and working capital allotments prior to the early termination of the
intercreditor loans, whereas the use of escrowed balances are limited to
non-recourse debt service payments. As a result of the early termination of the
intercreditor loans, withdrawals of restricted cash balances are currently
limited to the distribution of rents and sales proceeds of trust-owned leases to
investors.
In February 1997, the Board of Directors approved the issuance of
3,000,000 shares of the Company's Series AA Convertible Preferred Stock at $.30
per share to Vestex in consideration of $900,000 of consulting fees due Vestex.
In addition during the first quarter of 1997, the Company received loans from
Vestex of approximately $250,000 which are due on demand.
In April 1997, the Company executed and delivered (1) the Loan
Reduction and Purchase and Assignment Agreement dated as of April 1997 among the
Company, its corporate affiliates and/or subsidiaries, Fleet National Bank-
Corporate Trust Division, as agent (the "Agent") for the Company's principal
recourse lenders, and Vestex, the Company's majority stockholder; (2) release in
favor of the principal recourse lenders to be given by Vestex and Brian Adley,
Chairman of the Board of Directors of the Company and president of Vestex,
individually; (3) release in favor of the principal recourse lenders to be given
by the Company, its corporate affiliates and/or subsidiaries; and (4) $1,500,000
Secured Promissory Note given by the Company, its corporate affiliates and/or
subsidiaries in favor of Vestex.
In April 1997, both an intercreditor loan and secured inventory loan
were repaid in advance of their respective terms. The aggregate amount of this
debt on the repayment date was approximately $1,906,000 of which approximately
$976,000 was paid in cash and the balance of $930,000 was forgiven. In addition,
the Company paid approximately $22,000 in legal and bank fees to complete this
transaction.
On May 19, 1997, the Company borrowed $1.5 million from the Vice
Chairman of the Board of the Company. The loan is evidenced by a promissory note
that bears interest at the prime rate plus 2-1/8% (10-3/8% at May 19, 1997) and
is guaranteed by the Chairman of the Board of the Company. The Company is also
negotiating an additional $2.5 million loan with a bank and a $2.5 million
warehouse line of credit facility with a financing institution owned by the Vice
Chairman of the Board of the Company. Although there can be no assurance that
such financing will occur, management is confident that these additional
financing transactions can be closed during the fourth quarter of fiscal 1997.
On June 6, 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex in consideration of the guarantee by Vestex of certain bank lines of
credit in the aggregate of $4,000,000. The Company ascribed a value of
$1,000,000 to the guarantee and recorded the value as debt issuance costs. On
June 6, 1997, the Company also issued 6,716,667 shares of Common Stock to Vestex
in consideration of approximately $806,000 of fees due Vestex which were
previously accrued. Of the total 15,050,000 shares issued, 1,430,911 shares were
issued from treasury stock. On September 24, 1997, the Company issued 5,000,000
shares of Common Stock to Vestex in consideration of approximately $500,000 of
fees due Vestex which were also previously accrued.
On July 31, 1997, the Company acquired certain assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application processing and origination of automobile loans for high credit
risk consumers. Total consideration for the purchase of $104,000 of assets at
their fair market value consisted primarily of $68,000 in cash, the issuance of
200,000 shares of the Company's common stock having a fair market value of
$20,000 and the assumption of $229,000 of liabilities and accrued acquisition
costs. The acquisition was accounted for by the purchase method of accounting,
and accordingly, the purchase price has been allocated to assets acquired and
liabilities assumed based on their fair market value at the date of acquisition.
The excess of purchase price over the fair market values of net assets acquired
of $213,000 has been included in other assets.
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CHANCELLOR CORPORATION
The Company's ability to underwrite equipment lease transactions is
largely dependent upon the continuing availability of short-term warehouse lines
of credit. Management is engaged in a continuing dialogue with several possible
alternative inventory lenders which appear to be interested in providing the
Company with warehouse financing. If the Company were to lose either of its
existing credit lines, or if their availability were reduced, the Company would
take immediate steps to replace either or both of them with one or more
alternative warehouse facilities. If the Company experienced unexpected delays
in putting a new warehouse facility in place, it would temporarily disrupt the
Company's ability to underwrite new equipment leases until the new warehouse
financing was secured.
The remarketing 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. Delays in remarketing caused
by various market conditions reduce the profitability of the remarketing.
The Company anticipates it will continue to dedicate substantial
resources toward the further development and improvement of its remarketing
capabilities and believes that remarketing will continue to be a profit center
for the Company. The Company's strategy is to further exploit its remarketing
expertise by continuing to develop its ability to sell remarketing services to
other lessors, fleet owners, and lessees and also to create a dealer capability
under which the Company would buy and resell fleet equipment. The Company is
also implementing a plan to expand its brokerage activities through the Internet
and the use of other information technologies.
The Company has now successfully begun a growth strategy of applying
its knowledge of the highly competitive tractor/trailer/forklift industry into
markets outside of the Unites States where margins are significantly higher. To
date, the Company has entered into 2 lease transactions in the former Soviet
Union with a total equipment cost of $144,000. The Company has been presented
with numerous opportunities for additional lease placements outside of the
United States.
The Company's current lines of credit, if renewed or replaced, the
renewal of recently 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 its existing
and recently expired lines of credit, 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.
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.
11
<PAGE>
CHANCELLOR CORPORATION
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-Q 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.
12
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is involved in the following legal proceedings:
On January 15, 1997, Chancellor filed a complaint in Superior Court,
Suffolk County, Massachusetts, alleging that certain of its former officers and
directors are liable to the corporation for losses incurred as a result of their
negligence, breach of fiduciary duties, unjust enrichment, conversion, and
unfair and deceptive trade practices. In addition, Chancellor's complaint sought
the imposition of a constructive trust for the corporation's benefit on various
assets that Chancellor claims were wrongfully taken from the corporation by its
former officers and directors, as well as recovery of damages arising from legal
malpractice allegedly committed by the corporation's former general counsel, and
defamatory statements made by one former officer and director to certain of the
corporation's customers.
Four of the defendants, Stephen G. Morison, David W. Parr, Gregory S.
Harper and Thomas W. Killilea, answered the complaint (denying its allegations),
filed a counterclaim against Chancellor, and commenced a third-party action
against Brian M. Adley, Vestex Corporation and Vestex Capital Corporation. The
counterclaim alleged that Chancellor is liable for breach of certain employment
and severance agreements allegedly entered into with the defendants Morison and
Harper, and for the abuse of process in connection with the corporation's
initiation of this lawsuit. The third-party complaint sought indemnification and
contribution from Adley, Vestex Corporation and Vestex Capital Corporation in
connection with the claims raised by Chancellor in the primary action. In
addition, the third party complaint sought recovery of damages from Adley,
Vestex Corporation and Vestex Capital Corporation for alleged abuse of process,
interference with the contractual relations and deceit. In their answer to the
counterclaim and third-party complaint, Chancellor and the third-party defendant
denied the defendants' allegations. On August 11, 1997, the litigation was
dismissed with prejudice as to all parties, except for Kevin Kristick, pursuant
to the terms of a settlement agreement.
On September 9, 1997, Cheyenne Leasing commenced litigation against the
Company to recover funds that the Company withheld from Cheyenne pursuant to the
terms of the Trust Agreement between the parties. The matter is currently
pending and the parties are engaged in negotiations to settle each party's
claims. The funds withheld total approximately $107,000 and have been placed in
escrow by the Company.
The Company is also 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 or
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 July 30, 1997, the Board of Directors caused to be distributed to
stockholders of record as of July 18, 1997, a Notice of Special Meeting in Lieu
of Annual Meeting of Stockholders, Proxy and Proxy Statement for the Special
Meeting in Lieu of Annual Meeting held on August 29,1997. As of the record date,
20,186,391 shares of Common Stock and 8,000,000 shares of Series AA Convertible
Preferred Stock were entitled to vote. For all matters presented, the Common
Stock and Series AA Convertible Preferred Stock voted as a single class.
13
<PAGE>
At the meeting, the stockholders acted upon the following proposals:
(i) to fix the number of directors at seven and to elect two Class I and two
Class II directors; (ii) to approve the adoption of the Company's 1997 Stock
Option Plan; (iii) to approve an amendment to the Company's 1994 Directors'
Stock Option Plan to increase the number of shares reserved under the Plan from
565,000 to 2,000,000 shares; and (iv) approval of an amendment to the Company's
Articles of Organization to increase the number of authorized shares of Common
Stock from 30,000,000 to 75,000,000 shares and to increase the number of shares
of Preferred Stock from 10,000,000 to 20,000,000 shares. 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:
I. Election Of Directors
FOR AGAINST WITHHOLD
------ -------- --------
Fix Board at Seven 25,424,132 0 16,531
Elect Class I Directors
Brian M. Adley 25,424,132 0 16,531
Ernest L. Rolls 25,424,132 0 16,531
Elect Class II Directors
Michael Marchese 25,424,132 0 16,531
Rudolph Peselman 25,424,132 0 16,531
II. Adoption of Company's 1997 Stock Option Plan
FOR AGAINST ABSTAIN
----- ------- --------
25,039,859 47,307 353,497
III. Amendment to 1994 Directors' Stock Option Plan
FOR AGAINST ABSTAIN
----- ------- --------
25,039,859 47,307 353,497
IV. Amendment to Articles of Organization
FOR AGAINST ABSTAIN
----- ------- --------
25,068,164 19,002 353,497
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8K - None
14
<PAGE>
Chancellor Corporation
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/ John J. Powell
John J. Powell
President and Chief Executive Officer
DATE: November 13, 1997
15
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