UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
Commission File Number 0-21912
First Chesapeake Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9100 Arboretum Parkway, Suite 160
Richmond, Virginia 23236
(Address of principal executive offices)
(Zip code)
(804)320-0160
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock of registrant outstanding as of August 9,
1996 was 4,621,550 shares.
<PAGE>
First Chesapeake Financial Corporation
and Subsidiaries
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets 3
at March 31, 1996 (Unaudited)
and December 31, 1995
Consolidated Statements of Operations 4
Three Months Ended March 31, 1996
and 1995 (Unaudited)
Consolidated Statements of Cash Flows 5
Three Months Ended March 31, 1996
and 1995 (Unaudited)
Notes to Consolidated Financial Statements 6
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1996 1995
___________ ____________
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,395,988 $ 1,833,216
Receivable from sale of servicing rights 17,132 196,934
Mortgage loans held for sale 455,575 590,529
Receivable from sale of loans - 798,285
Note receivable 44,000 109,000
Real estate owned - 298,000
Furniture and equipment 440,546 512,572
Organization costs 20,678 31,018
Loans to related parties 100,000 -
Other assets 178,227 184,917
___________ ___________
TOTAL ASSETS $ 2,652,146 $ 4,554,471
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 113,213 $ 1,157,348
Accounts payable
Trade 21,126 61,145
Purchased mortgage servicing rights 2,500 2,500
Accrued restructuring charges 61,228 165,149
___________ ___________
Total liabilities 198,067 1,386,142
Stockholders' equity
Convertible preferred stock; no par value;
$1 stated value per share; 5,000,000 shares
authorized; no shares issued - -
Common stock; no par value; 10,000,000 shares
authorized; 4,621,550 shares issued and
outstanding 10,542,458 10,542,458
Common stock warrant 50,000 50,000
Deficit ( 8,138,379) ( 7,424,129)
___________ ___________
Total stockholders' equity 2,454,079 3,168,329
___________ ___________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,652,146 $ 4,554,471
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
____________ ____________ ___________ ___________
<S> <C> <C> <C> <C>
REVENUES
Mortgage origination $ 22,730 $ 110,362 $ 30,269 $ 239,693
Servicing fees 3,303 24,609 5,407 129,645
Gain on sales of loans ( 339) 518,383 53,459 741,890
Loan administration - 2,998 - 18,610
Interest income 64,539 164,712 109,455 380,064
Interest expense ( 29,562) ( 107,330) ( 54,012) ( 317,477)
Other 4,212 49,446 15,988 103,430
____________ ____________ ___________ ___________
Total revenues 64,883 763,180 160,566 1,295,855
OPERATING EXPENSES
Compensation and employee
benefits 185,617 883,985 383,895 1,667,917
Professional fees 32,814 86,866 87,116 124,295
Commitment fees 4,051 40,041 21,609 40,041
Occupancy 17,946 84,279 56,588 163,495
Depreciation and other
amortization 37,942 43,929 76,025 86,602
Other operating expenses 169,802 254,134 249,582 544,095
Restructuring charges - 400,000 - 400,000
____________ ____________ ___________ ___________
Total operating expenses 448,172 1,793,234 874,815 3,026,445
____________ ____________ ___________ ___________
NET LOSS $ 383,289 $ 1,030,054 $ 714,249 $ 1,730,590
============ ============ =========== ===========
LOSS PER SHARE $ 0.08 $ 0.22 $ 0.15 $ 0.37
============ ============ =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
____________ ____________
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $( 714,249) $( 1,730,590)
Adjustments
Depreciation and other amortization 76,025 86,602
Net decrease in loans held for sale 134,954 15,083,121
Decrease in receivable from loan sales 798,285 -
Loss on sale of fixed assets 4,994 -
Loss on sale of real estate owned 4,625 -
Decrease in other assets 6,690 220,265
Decrease in trade accounts payable
and other liabilities ( 40,021) ( 229,812)
Accrued restructuring charges, net ( 103,921) 395,916
____________ ____________
Net cash provided by operating activities 167,382 13,825,502
____________ ____________
INVESTING ACTIVITIES
Purchase of furniture and equipment 1,071 ( 138,392)
Proceeds from sale of fixed assets 276 -
Proceeds from sale of servicing, net of
selling expenses 179,802 6,265,787
Decrease in accounts payable related to
purchased mortgage servicing rights - 397,500
Extensions of credit to related parties ( 100,000) -
Repayments of notes receivable 65,000 -
Proceeds from sale of real estate 293,375 -
Other - ( 67,599)
____________ ____________
Net cash provided by investing activities 439,524 5,662,296
____________ ____________
FINANCING ACTIVITIES
Repayment of bank loans ( 1,742) ( 4,150,000)
Net decrease in warehouse line of credit ( 1,042,392) (15,048,937)
____________ ____________
Net cash absorbed by financing activities ( 1,044,134) (19,198,937)
____________ ____________
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ( 437,228) 288,861
Cash and cash equivalents at beginning
of period 1,833,216 2,472,907
____________ ____________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,395,988 $ 2,761,768
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 54,012 $ 186,996
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
2. Loan Servicing
The Company services both conforming and nonconforming single family
first mortgage loans. Conforming conventional loans serviced by the Company are
securitized through Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Association ("FHLMC") programs on a nonrecourse basis whereby
foreclosure losses are generally the responsibility of FNMA or FHLMC and not the
Company. Nonconforming loans serviced by the Company are loans originated by a
subsidiary of the Company and are being temporarily serviced pending sale of the
loans and related servicing to other investors. Loans being serviced are
summarized as follows:
June 30, 1996 December 31, 1995
----------------- -----------------
No. Amount No. Amount
--- ---------- --- ----------
Conforming 53 $6,788,461 58 $7,458,380
Nonconforming 7 455,840 13 1,235,065
--- ---------- --- ----------
60 $7,244,301 71 $8,693,445
=== ========== === ==========
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. Loan Servicing (Continued)
Of the loans being serviced at June 30, 1996 and December 31, 1995, the
nonconforming loans are held for sale servicing released and the servicing will
transfer to the investor within 60 days. Additionally, the conforming loans are
being subserviced for the Company by another servicer. Loans serviced for
others are not included in the accompanying consolidated balance sheets.
In connection with its loan servicing activities, the Company makes
certain payments of property taxes and insurance premiums and advances certain
principal and interest payments to investors prior to collecting them from
specific mortgagors. These amounts represent receivables to the Company and are
included in other assets in the accompanying consolidated balance sheets.
At June 30, 1996, the Company carried Fidelity coverage of $1,000,000
and errors and omissions coverage of $1,000,000 related to its mortgage banking
activities.
3. Notes Payable
Notes payable consists of the following:
June 30, December 31,
1996 1995
---------- -----------
Warehouse line of credit $ 80,204 $1,122,597
Vehicle loan 33,009 34,751
---------- -----------
$ 113,213 $1,157,348
========== ==========
The Company's subsidiary, American Mortgage Express, Inc., has a
warehouse line of credit ("Warehouse Facility") for $10,000,000 with First Union
National Bank of North Carolina. This Warehouse Facility provides a credit line
to fund the origination of nonconforming 1 to 4 family residential first-lien
mortgage loans. It bears interest at the prime rate and expires on August 29,
1996. The Warehouse Facility is collateralized by the loans held for sale and
provides for certain covenants, including required financial ratios and minimum
net worth requirements. At June 30, 1996, the Company was not in compliance
with the minimum net worth requirement contained in the loan covenants.
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Note 3. Notes Payable (Continued)
However, subsequent to June 30, 1996, the Company paid off all outstanding loans
under the Warehouse Facility and is currently negotiating revised lending terms
with First Union. The Company believes it will be successful in negotiating a
new lending arrangement with First Union.
The following information relates to the Warehouse Facility:
June 30, December 31,
1996 1995
---------- -----------
Outstanding at end of period $ 80,204 $ 1,122,597
Weighted average interest rate
at end of period 8.25% 7.00%
Maximum amount outstanding
during the period $2,700,540 $16,102,475
Average amount outstanding
during the period $1,303,382 $ 3,230,360
Weighted average interest rate
during the period 8.15% 7.52%
4. Loss Per Share
Loss per share for the three and six months ended June 30, 1996 and 1995
was computed by dividing the net loss by 4,621,550 common shares representing
the aggregate of the weighted average number of common shares outstanding during
the periods. Outstanding stock options and warrants have been excluded from
loss per share calculations as their exercise prices exceed the average market
price for the three months ended June 30, 1996 and 1995 or their inclusion would
be anti-dilutive.
5. Commitments
The Company regularly enters into short term commitments with applicants
to fund mortgage loans subject to approval. Certain of these commitments
require the Company to offer mortgage loans at pre-established interest rates
and fees. As of June 30, 1996, commitments to fund mortgage loan applications
in process with pre-established interest rates and fees aggregated approximately
$1,516,000.
<PAGE>
Notes to Consolidated Financial Statements (Continued)
6. Proposed Acquisition
On December 11, 1995, the Company executed a Letter of Intent to acquire
all of the outstanding stock of a federal savings bank (the "Bank") located in
Florida for a purchase price of approximately $5,000,000. The purchase price is
payable $4,000,000 in cash at closing and a $1,000,000 note payable in five
equal annual installments of $200,000 each and bearing interest at a rate of 6%
on the unpaid balance. On March 25, 1996 a Definitive Acquisition Agreement was
executed between the parties. Consummation of this transaction is subject to
regulatory approval. The Company proposes to raise between $2,000,000 and
$3,000,000 in a private placement of its convertible preferred stock and obtain
bank financing of approximately $1,500,000 to provide the necessary funds to
acquire the Bank or another financial institution.
7. Litigation
The Company and its two principal officers ("Defendants") are defendants
in a legal action filed on June 6, 1996 by two former employees of Waterford
Mortgage Corporation ("Plaintiffs"), a wholly owned subsidiary of the Company
ceased operations in June, 1995. The suit was filed in the Circuit Court of
Fairfax County, Virginia and served on Defendants on June 12, 1996. Plaintiffs
allege, among other things, that (1) certain misrepresentations were made by
Defendants that fraudulently induced Plaintiffs to merge Waterford Mortgage
Corporation into the Company in exchange for stock in the Company, and (2) the
Company breached employment agreements with each Plaintiff. The Plaintiffs seek
unspecified compensatory and punitive damages and reimbursement of their costs,
expenses and legal fees in filing suit. The Company and its officers deny the
allegations and are vigorously contesting the action. Although the outcome of
the action cannot be determined, the Company expects to prevail and no provision
for any liability that may result from the action has been made in the financial
statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Financial Condition
Assets of the Company decreased from $4,554,471 at December 31, 1995
to $2,652,146 at June 30, 1996, a decrease of $1,902,325 or 42%. This decrease
was primarily due to the Company's loss of approximately $714,000 for the six
period, a decrease of $933,000 in mortgage loans held for sale (including a
$798,285 decline in receivable from sale of loans), and the paydown of
approximately $144,000 in trade and other liabilities. Liabilities decreased by
$1,188,000, from $1,386,000 at Decmeber 31, 1995 to $198,000 at June 30, 1996.
This decrease resulted due to a reduction in the warehouse notes payable of
$1,044,000 associated with the decline in the mortgage loans held for sale, and
the paydown of trade and other liabilities of $144,000. At June 30, 1996, the
Company was liquid with liquid assets of $2,013,000 and current liabilities of
$198,000.
The Company's current operations consist primarily of the operations of
its wholly owned subsidiary, American Mortgage Express, Inc. ("AME"). AME is a
mortgage banking company which originates nonconforming single family first and
second deed of trust loans. The Company's net loss and decrease in loans held
for sale are a direct result of AME's inability to generate sufficient loan
originations to be profitable. The mortgage market is still somewhat depressed,
and the Company has struggled to increase its loan originations. It has not
been able to attract loan officers who can build production nor has it been able
to increase production through its correspondents.
Results of Operations
Current Year Performance and Earnings Outlook
As discussed previously, the Company incurred a loss of $714,000 for the
six months ended June 30, 1996 as compared to a loss of $1,731,000 for the same
period in 1995. The substantial improvement in operations is a result of the
closure of the Company's wholly owned subsidiary, Waterford Mortgage Corporation
("Waterford"). Waterford originated conforming loans in northern Virginia. The
Company's current year loss is a result of the continued inability to generate
sufficient loan originations by its subsidiary, AME, to be profitable. The
mortgage loan environment has continued to be highly competitive and has put
tremendous pressure on the operating margins of the Company. Additionally, AME
has been unable to attract loan officers who can build loan production nor has
it been able to increase loan production through its correspondents. To the
extent that general demand for mortgage loans remains at or below its current
level and price competition within the industry continues, the Company's future
operating margins for its origination business will remain under pressure. Any
improvement in the Company's ability to originate mortgage loans cannot be
predicted.
<PAGE>
In recent years financial institutions have enjoyed strong returns.
Management of the Company has extensive experience in operating financial
institutions and believes that the acquisition of a financial institution would
greatly increase the Company's ability to attain profitable operations, both
from the operation of the financial institution and by improving the financial
outlook for AME. On March 25, 1996, the Company executed a definitive agreement
to acquire all of the outstanding stock of a federal savings bank (the "Bank")
located in Florida for a purchase price of approximately $5,000,000 (see Note 6
to "Notes to Consolidated Financial Statements"). Consummation of this
transaction is subject to regulatory approval. In addition to cash on hand, the
Company proposes to raise between $2,000,000 and $3,000,000 in a private
placement of its convertible preferred stock and obtain bank financing of
approximately $1,500,000 to provide the necessary funds to acquire the Bank or
another financial institution.
Comparison of Three Months Ended June 30, 1996 to Three Months Ended June 30,
1995
Revenues. Total revenues for the three months ended June 30, 1996
amounted to $64,883 representing a decrease of $698,297, or 92%, when compared
to the same period in 1995. The Company's principal sources of revenue are fees
from mortgage origination and servicing activities. The Company experienced the
decrease in revenues as a result of the closure of origination operations in
northern Virginia during the second and third quarters of 1995. As a result of
the closure of its conforming loan origination operations in northern Virginia,
mortgage origination fees declined by approximately $88,000, from $110,000 in
the second quarter of 1995 to $22,000 in the second quarter of 1996, and gain on
sale of loans declined by $518,000, from $518,000 in the second quarter of 1995
to $-0- in the second quarter of 1996. Also, the Company had anticipated that
AME would compensate for lower revenues resulting from the closure of the
northern Virginia operations; however this did not occur as discussed
previously.
Expenses. Total expenses for the three months ended June 30, 1996
amounted to $448,172 as compared to $1,793,234 for the same period in 1995.
This decrease is attributable to the reduction in overhead associated with the
closure of the Company's origination operations in northern Virginia.
<PAGE>
Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Revenues. Total revenues for the six months ended June 30, 1996 amounted
to $160,566 representing a decrease of $1,135,289, or 88%, when compared to the
same period in 1995. The Company's principal sources of revenue are fees from
mortgage origination and servicing activities. The Company experienced the
decrease in revenues as a result of the sale of its servicing portfolio on
November 30, 1004 and the closure of origination operations in northern Virginia
during the second and third quarters of 1995. As a result of the servicing
sale, servicing fees declined by approximately $124,000, from $130,000 in the
first half of 1995 to $6,000 during the same period in 1996. As a result of the
closure of its conforming loan origination operations in northern Virginia,
mortgage origination fees declined by approximately $209,000, from $239,000 in
1995 to $30,000 in 1996, and gain on sale of loans declined by $688,000, from
$742,000 in 1995 to $54,000 in 1996. Also, the Company had anticipated that AME
would compensate for lower revenues resulting from the closure of the northern
Virginia operations; however this did not occur as discussed previously.
Expenses. Total expenses for the six months ended June 30, 1996 amounted
to $874,815 as compared to $3,026,445 for the same period in 1995. This
decrease is attributable to the reduction in overhead associated with the sale
of servicing and the closure of the Company's origination operations in northern
Virginia.
Liquidity and Capital Resources
The Company's primary liquidity requirements have been the funding of
its mortgage banking operations, the net cost of mortgage loan originations and
the purchase of mortgage loan servicing rights. The Company currently does not
have any plans to purchase mortgage loan servicing rights, and, accordingly,
future funding requirements will relate to the cost of mortgage loan
originations and any additional business activities as may be approved by the
Board of Directors.
Cash and cash equivalents at June 30, 1996 amounted to $1,395,988 as
compared to $1,833,216 at December 31, 1995.
<PAGE>
During the six months ended June 30, 1996, the Company's operating
activities provided $167,382 as compared to providing $13,825,502 in the first
six months of 1995. These amounts reflect the decrease in loans held for sale
without regard to the associated decrease in the warehouse line of credit
reflected in financing activities. Netting the change in the warehouse line of
credit against loans held for sale provides a better picture of utilization of
funds from operating activities. If the change in the warehouse line of credit
is netted against the change in loans held for sale, the Company's operating
activities utilized $875,010 in 1996 as compared to the utilization of
$1,223,435 in 1995. The utilization of cash resources in 1996 and 1995
resulted primarily from the Company's losses in those periods.
The Company's investing activities provided $439,524 in cash resources
during the six months ended June 30, 1996 as compared to providing $5,662,296
for the same period in 1995. In 1995, the sale of the Company's servicing
portfolio provided $6,265,757 in cash resources in 1995, partially offset by
additions to fixed assets of $138,392 and payments for the purchase of servicing
rights of $397,500. In 1996, the major sources of cash from investing
activities came from proceeds from the sale of real estate owned of $293,375 and
sale of servicing of $179,802, partially offset by net purchases of notes
receivable of $35,000.
Without consideration to the change in the warehouse line of credit,
financing activities utilized $4,150,000 during 1995, and had very little impact
on cash in 1996. In 1995, the Company utilized a portion of the funds it
received from the sale of servicing to repay the associated debt.
In the past, the Company has relied on net proceeds from capital raising
activities, a servicing secured bank facility, and a warehouse credit facility
to meet its liquidity requirements. The servicing secured credit facility has
been terminated and will no longer be available to the Company.
The Company has a mortgage loan warehouse line of credit facility
("Warehouse Facility") of $10,000,000 with First Union National Bank of North
Carolina ("First Union") which expires on August 29, 1996 and provides a credit
line to fund the origination of nonconforming 1 to 4 family residential
first-lien mortgage loans. It is secured by the loans held for sale and
provides for certain covenants, including required financial ratios and minimum
net worth requirements (see Note 3 to "Notes to Consolidated Financial
Statements"). At June 30, 1996, the Company was not in compliance with the
minimum net worth requirement contained in the loan covenants. However,
subsequent to June 30, 1996, the Company paid off all outstanding loans under
the Warehouse Facility and is currently negotiating revised lending terms with
First Union. The Company believes it will be successful in negotiating a new
lending arrangement with First Union.
<PAGE>
As of June 30, 1996, the Company had cash and cash equivalents of
$1,395,988 and available borrowings of approximately $9,920,000 pursuant to the
Warehouse Facility. Management believes that the Company's current liquidity
and capital resources are adequate to meet its near-term goals.
Inflation
The Company is affected by inflation primarily through its impact on
interest rates. During periods of rising inflation, interest rates generally
increase, causing mortgage loan origination volumes, particularly refinancing
activity, to decline. However, during such periods, mortgage loan prepayments
slow, extending the average life of the servicing portfolio and enhancing its
market value. Conversely, during periods of declining inflation, interest rates
generally decline, resulting not only in increased mortgage loan origination
volume and mortgage loan refinancing activity, but also in accelerated loan
prepayment rates which decrease the average life of the Company's servicing
portfolio, adversely impacting its value.
Seasonality
The mortgage banking industry is generally subject to seasonal trends
which reflect the general pattern of sales and resales of homes. Such sales
typically peak during the spring and summer seasons and decline to lower levels
from November through February. The mortgage loan servicing business is
generally not subject to seasonal trends. Cyclical trends resulting from
increasing or decreasing interest rates and the general state of the economy
also affect the mortgage banking industry and may tend to accentuate or
counteract seasonal trends.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its two principal officers ("Defendants") are defendants
in a legal action filed on June 6, 1996 by two former employees of Waterford
Mortgage Corporation ("Plaintiffs"), a wholly owned subsidiary of the Company
ceased operations in June, 1995. The suit was filed in the Circuit Court of
Fairfax County, Virginia and served on Defendants on June 12, 1996. Plaintiffs
allege, among other things, that (1) certain misrepresentations were made by
Defendants that fraudulently induced Plaintiffs to merge Waterford Mortgage
Corporation into the Company in exchange for stock in the Company, and (2) the
Company breached employment agreements with each Plaintiff. The Plaintiffs seek
unspecified compensatory and punitive damages and reimbursement of their costs,
expenses and legal fees in filing suit. The Company and its officers deny the
allegations and are vigorously contesting the action. Although the outcome of
the action cannot be determined, the Company expects to prevail and no provision
for any liability that may result from the action has been made in the financial
statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
At June 30, 1996, the Company was not in compliance with the minimum net
worth requirement contained in the covenants related to its warehouse lin of
credit with First Union National Bank of North Carolina (see Note 3 of "Notes to
Consolidated Financial Statements"). However, subsequent to June 30, 1996, the
Company paid off all outstanding loans under the warehouse line of credit and is
currently negotiating revised lending terms with First Union. The Company
believes it will be successful in negotiating a new lending arrangement with
First Union.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
a) The annual meeting of stockholders was held on June 28, 1996.
b) The following directors were elected to the Board of Directors
(constituting the entire Board of Directors) for one year terms:
Max E. Gray
John D. Mazzuto
Robert L. Suthard
C. Harril Whitehurst, Jr.
c) The following items were voted on at the annual meeting either in
person or by proxy:
Withheld/
For Against Abstain
__________ __________ __________
Election of Directors:
Max E. Gray 3,210,182 121,550 11,200
John D. Mazzuto 3,210,182 121,500 11,200
Robert L. Suthard 3,210,182 121,500 11,200
C. Harril Whitehurst, Jr. 3,210,182 121,500 11,200
Classified Board of Directors 1,622,685 636,125 10,710
Increase available shares 1,599,460 658,180 11,880
under Company's Stock Option
Plan
Ratification of auditors 3,204,522 125,175 13,235
Passage of proposals for (1) implementing a classified Board of
Directors and (2) increasing the number of shares available under
the Company's 1992 Stock Option Plan required approval of
stockholders holding at least two-thirds of the outstanding shares
of the Company. Such proposals received approval of less than two-
thirds of the outstanding shares and, hence, failed.
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. None
b. Reports on Form 8-K. The Company filed a Form 8-K on May 13, 1996
reporting the resignation of Robert L. Nichols as a director. No
other reports on Form 8-K were filed during the period.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: August 14, 1996 By Max E. Gray
Max E. Gray
Chairman, President and
Chief Executive Officer
Date: August 14, 1996 By C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST CHESAPEAKE FINANCIAL CORPORATION FOR
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1395988
<SECURITIES> 0
<RECEIVABLES> 616707
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 720543
<DEPRECIATION> 279997
<TOTAL-ASSETS> 2652146
<CURRENT-LIABILITIES> 198067
<BONDS> 0
0
0
<COMMON> 10592458
<OTHER-SE> (8138379)
<TOTAL-LIABILITY-AND-EQUITY> 2652146
<SALES> 214578
<TOTAL-REVENUES> 214578
<CGS> 874815
<TOTAL-COSTS> 874815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54012
<INCOME-PRETAX> (714249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (714249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (714249)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>