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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 September 30, 1997
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 November
11, 1997 was 4,500,000 shares.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Sept. 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 181,138 $ 1,120,065
Mortgage loans held for sale 16,837 91,532
Notes receivable 323,392 25,000
Furniture and equipment 237,200 361,205
Organization costs - 10,338
Loans to related parties - 100,000
Other assets 183,306 234,895
------------ ------------
TOTAL ASSETS $ 941,873 $ 1,943,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 33,009 $ 33,009
Accounts payable 43,674 63,028
Accrued expenses - 25,000
Accrued litigation costs 43,259 -
------------ ------------
Total liabilities 119,942 121,037
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; 4,500,000 and 4,621,550 shares
issued and outstanding 10,542,458 10,542,458
Common stock warrant 50,000 50,000
Deficit ( 9,770,527) ( 8,770,460)
------------ ------------
Total stockholders' equity 821,931 1,821,998
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 941,873 $ 1,943,035
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
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<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Mortgage origination $ - $ 7,960 $ 19,184 $ 38,229
Servicing fees 20 1,894 1,989 7,301
Gain (loss) on sale
Loans and securities - 22,965 ( 6,326) 76,424
Servicing 7,298 - 30,627 -
Interest income 47,994 28,980 72,210 138,435
Interest expense - ( 2,840) ( 1,936) ( 56,852)
Other - 4 585 15,992
----------- ----------- ----------- -----------
Total revenues 55,312 58,963 116,333 219,529
OPERATING EXPENSES
Compensation and employee
benefits 60,686 140,610 285,167 524,505
Professional fees 95,961 14,018 310,818 101,134
Warehouse fees - 3,345 1,343 24,954
Occupancy 8,338 17,948 35,576 74,536
Depreciation and other
amortization 26,774 37,474 95,800 113,499
Litigation settlement - - 270,000 -
Other operating expenses 25,702 53,896 117,695 303,478
----------- ----------- ----------- -----------
Total operating expenses 217,461 267,291 1,116,399 1,142,106
----------- ----------- ----------- -----------
NET LOSS $ 162,149 $ 208,328 $1,000,066 $ 922,577
=========== =========== =========== ===========
LOSS PER SHARE $ 0.04 $ 0.05 $ 0.22 $ 0.20
=========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended Sept. 30,
-----------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $( 1,000,066) $( 922,577)
Adjustments
Depreciation and other amortization 95,800 113,499
Net decrease (increase) in loans held for sale 74,492 ( 16,956)
Decrease in receivable from loan sales - 798,285
(Gain)/Loss on sale of assets ( 685) 9,619
Increase in other assets ( 58,114) ( 36,725)
Decrease in trade accounts payable
and other liabilities ( 19,354) ( 34,631)
Accrued charges, net ( 25,000) ( 163,913)
Accrued litigation costs 43,259 -
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Net cash absorbed by operating activities ( 889,668) ( 253,399)
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INVESTING ACTIVITIES
Purchase of securities ( 103,424) -
Proceeds from sale of securities 87,288 -
Proceeds from sale of servicing 23,329 179,802
Purchase of fixed assets ( 1,055) -
Proceeds from sale of assets 32,792 924
Extensions of credit to related parties - ( 100,000)
Purchase of notes receivable ( 298,392) -
Repayments of notes receivable 210,203 84,000
Proceeds from sale of real estate - 293,375
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Net cash provided (absorbed) by
investing activities ( 49,259) 458,101
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FINANCING ACTIVITIES
Repayment of bank loans - ( 1,742)
Net decrease in warehouse line of credit - ( 799,834)
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Net cash absorbed by financing activities - ( 801,576)
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NET DECREASE IN CASH AND CASH EQUIVALENTS ( 938,927) ( 596,874)
Cash and cash equivalents at beginning of period 1,120,065 1,833,216
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181,138 $ 1,236,342
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 1,936 $ 56,852
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
2. Loss Per Share
Loss per share for the three and nine months ended September 30, 1997
and 1996 was computed by dividing the net loss by 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 and nine months ended
September 30, 1997 and 1996 or their inclusion would be anti-dilutive.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. Litigation
On June 6, 1996, Robert L. Nichols and John J. Morrissey ("Plaintiffs")
filed a lawsuit in the Circuit Court of Fairfax County, Virginia against the
Company and two of its principal officers, Max E. Gray and C. Harril Whitehurst,
Jr. ("Defendants"), in the matter captioned "Robert L. Nichols, et al. v. Max E.
Gray, et al", Law No. 152839 ("the Lawsuit"). Plaintiffs are former owners and
employees of Waterford Mortgage Corporation ("Waterford"), a former wholly owned
subsidiary of the Company which ceased operations during June of 1995. During
March of 1994, Waterford was merged into a subsidiary of First Chesapeake
Financial Corporation and became a wholly owned subsidiary of the Company.
Plaintiffs alleged in their Lawsuit, among other things, that: (1) Defendants
made fraudulent representations to Plaintiffs and fraudulently failed to
disclose certain matters to Plaintiffs which induced Plaintiffs to merge
Waterford into the Company in exchange for stock in the Company; and
(2) Defendants breached various contractual agreements allegedly made to
Plaintiffs in connection with the merger or arising out of Plaintiffs'
employment as officers of Waterford after the merger. Plaintiffs sought alleged
compensatory damages in the range of approximately $1.3 million to $1.9 million,
unspecified punitive damages, and reimbursement of their costs, expenses and
legal fees in filing suit. The Company and its officers denied Plaintiffs'
allegations and vigorously contested the Lawsuit.
On August 1, 1997, Defendants reached a settlement with Plaintiffs
with respect to this litigation. The Company agreed to a payment of $270,000
to Plaintiffs to settle their lawsuit. As part of the settlement, on August 5,
1997 Plaintiffs tendered to the Company 121,550 shares of the Company's common
stock owned by them.
As of June 30, 1997 the Company accrued the settlement and an estimated
$100,000 of additional professional fees. During the quarter ended September
30, 1997, the Company incurred an additional $128,000 of professional fees
related to the settlement of the litigation. Management believes that
substantially all costs related to the litigation have been recorded as of
September 30, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Financial Condition
Assets of the Company decreased from $1,943,035 at December 31, 1996
to $941,873 at September 30, 1997, a decrease of $1,001,162 or 52%. This
decrease was primarily due to the Company's loss for the nine month period which
resulted in a $938,927 decrease in cash. At September 30, 1997, liabilities
amounted to approximately $120,000, of which $73,327 represented accruals for
litigation costs, resulting in a net worth of approximately $822,000. Liquid
assets amounted to $181,138 and current liabilities amounted to $119,942.
During the three months ended September 30, 1997 the Company exchanged
its' loan to related party of $100,000, plus accrued interest of $35,000, for
the related party's 50% interest in a start-up corporation. The investee
corporation had limited operations as of September 30, 1997. The Company's
$135,000 investment is included in other assets. In addition, the Company lent
the investee corporation $250,000.00 in the form of a demand note during the
three months ended September 30, 1997.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of approximately $1,000,000 for the nine
months ended September 30, 1997 as compared to a loss of $922,000 for the same
period in 1996. The 1997 time period was negatively affected by the expense
of $498,000 associated with the settlement of litigation that had been
outstanding since June 1996 (see Note 3 to "Notes to Consolidated Financial
Statements"). Absent this expense, the Company's loss for the nine months ended
September 30, 1997 amounted to approximately $502,066 which represents a 46%
improvement over 1996. This improvement in operations is a result of the
closure of the Company's mortgage banking activities. As discussed more fully
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996, the Company has closed all its mortgage banking activities and is actively
seeking operational opportunities in the financial services industry or other
suitable investment opportunities. However, no assurance can be given that
management will be able to find a suitable investment opportunity, that it will
have the necessary capital to execute an effective business plan if an
opportunity is found, or that it can attain profitable operations.
Comparison of Three Months Ended September 30, 1997 to Three Months Ended
September 30, 1996.
Revenues. Total revenues for the three months ended September 30, 1997
amounted to $55,312 representing a decrease of $3,651, or 6%, when compared
to the same period in 1996. The Company's principal sources of revenue have
been fees from mortgage origination, gains on loan sales, and servicing
activities. The Company experienced the decrease in revenues as a result of the
closure of its mortgage banking activities. Until the Company is able to find
a suitable business opportunity following its cessation of all mortgage banking
activities, its only source of revenue going forward will be interest income
arising from investment of its cash balances.
<PAGE>
Expenses. Total expenses for the three months ended September 30, 1997
amounted to $217,461 as compared to $267,291 for the same period in 1996, a
decrease of $49,830 or 19%. The three month period ended September 30, 1997 was
negatively affected by $74,900 in litigation costs associated with the
settlement of litigation that had been outstanding since June 1996 (see Note 3
to "Notes to Consolidated Financial Statements"). Absent this expense, the
Company's expenses for the three months ended September 30, 1997 amounted to
$142,561 which represents a decrease of $124,730 over the same period in 1996.
This decrease is attributable to the reduction in overhead associated with the
closure of the Company's mortgage banking activities.
Comparison of Nine Months Ended September 30, 1997 to Nine Months Ended
September 30, 1996
Revenues. Total revenues for the nine months ended September 30, 1997
amounted to $116,333 representing a decrease of $103,196, or 47%, when compared
to the same period in 1996. The Company's principal sources of revenue have
been fees from mortgage origination, gains on loan sales, and servicing
activities. The Company experienced the decrease in revenues as a result of the
closure of its mortgage banking activities. Until the Company is able to find a
suitable business opportunity following its cessation of all mortgage banking
activities, its only source of revenue going forward will be interest income
arising from investment of its cash balances.
Expenses. Total expenses for the nine months ended September 30, 1997
amounted to $1,116,399 as compared to $1,142,106 for the same period in 1996, a
decrease of $25,707 or 2%. The 1997 nine month period was negatively affected
by the $498,000 in costs associated with the settlement of litigation discussed
previously. Absent this expense, the Company's expenses for the nine months
ended September 30, 1997 amounted to $618,399 which represents a decrease of
$523,707 over the same period in 1996. This decrease is attributable to the
reduction in overhead associated with the closure of the Company's mortgage
banking activities.
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. With the closure of its
mortgage banking operations, the Company's liquidity requirements will be the
funding of its remaining overhead expenses and any new business opportunities
that may be approved by the Board of Directors. The Company may have to seek
additional capital infusion to take advantage of new business opportunities.
While the Company believes it can attract the necessary capital to provide the
liquidity necessary to pursue new business opportunities, no assurance can be
given that it will in fact be able to do so.
Cash and cash equivalents at September 30, 1997 amounted to $181,138 as
compared to $1,120,065 at December 31, 1996.
<PAGE>
During the nine months ended September 30, 1997, the Company's operating
activities utilized $889,668 as compared to utilizing $253,399 in the first
nine months of 1996. For the nine months ended September 30, 1996, the
utilization of cash reflects the change in loans held for sale without regard
to the associated change in the warehouse line of credit reflected in
financing activities. Netting the decrease in the warehouse line of credit
against the decrease in receivable from loan sales provides a better picture of
utilization of funds from operating activities. If the decrease in the
warehouse line of credit is netted against the decrease in receivable from loan
sales for 1996, the Company's operating activities utilized $1,053,233 in 1996
as compared to the utilization of $889,668 in 1997. The utilization of cash
resources from operating activities in 1997 and 1996 resulted primarily from the
Company's losses in those periods.
The Company's investing activities utilized $42,259 in cash resources
during the nine months ended September 30, 1997 as compared to providing
$458,101 for the same period in 1996. In 1996, the sale of the Company's
servicing portfolio provided $179,802 in cash resources and the sale of real
estate provided $293,375 in cash resources. In 1997, the Company's utilization
of cash from investing activites arose primarily from the purchase of notes
receivable, net of repayments.
Financing activities had little impact on cash flows for the nine months
ended September 30, 1997 and 1996 after netting the change in the warehouse line
of credit against the change in loans held for sale.
As of September 30, 1997, the Company had cash and cash equivalents of
$181,138. Management believes that the Company's current liquidity and capital
resources are adequate to meet its near-term goals, however, the Company may
have to seek additional capital infusion to take advantage of new business
opportunities. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 6, 1996, Robert L. Nichols and John J. Morrissey ("Plaintiffs")
filed a lawsuit in the Circuit Court of Fairfax County, Virginia against the
Company and two of its principal officers, Max E. Gray and C. Harril Whitehurst,
Jr. ("Defendants"), in the matter captioned "Robert L. Nichols, et al. v. Max E.
Gray, et al", Law No. 152839 ("the Lawsuit"). Plaintiffs are former owners and
employees of Waterford Mortgage Corporation ("Waterford"), a former wholly owned
subsidiary of the Company which ceased operations during June of 1995. During
March of 1994, Waterford was merged into a subsidiary of First Chesapeake
Financial Corporation and became a wholly owned subsidiary of the Company.
Plaintiffs alleged in their Lawsuit, among other things, that: (1) Defendants
made fraudulent representations to Plaintiffs and fraudulently failed to
disclose certain matters to Plaintiffs which induced Plaintiffs to merge
Waterford into the Company in exchange for stock in the Company; and
(2) Defendants breached various contractual agreements allegedly made to
Plaintiffs in connection with the merger or arising out of Plaintiffs'
employment as officers of Waterford after the merger. Plaintiffs sought alleged
compensatory damages in the range of approximately $1.3 million to $1.9 million,
unspecified punitive damages, and reimbursement of their costs, expenses and
legal fees in filing suit. The Company and its officers denied Plaintiffs'
allegations and vigorously contested the Lawsuit.
On August 1, 1997, Defendants reached a settlement with Plaintiffs
with respect to this litigation. The Company has agreed to a payment of
$270,000 to Plaintiffs to settle their lawsuit. As part of the settlement, on
August 5, 1997 Plaintiffs tendered to the Company 121,550 shares of the
Company's common stock owned by them.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - None
b) Reports on Form 8-K
In a report on Form 8-K dated August 15, 1997, the Company announced
that C. Harril Whitehurst, Jr. resigned as an officer and director of First
Chesapeake Financial Corporation. His resignation was accepted by the Board of
Directors effective August 15, 1997.
In another report on Form 8-K dated August 15, 1997, the Board of
Directors appointed Richard N. Chakejian, Jr. to the Board of Directors on
August 15, 1997. Mr. Chakejian becomes the third member of First Chesapeake
Financial Corporation's Board of Directors filling the vacancy resulting from
the resignation of C. Harril Whitehurst, Jr. previously reported. Mr.
Chakejian has spent most of his career developing and opening full service
retail dry cleaning/laundering centers in the Philadelphia, Pennsylvania area.
He is the Chief Executive Office of Tri-State Linen Company, Chief Operating
Officer of Ascadin Cleaners, Inc., and Chief Executive Officer of Bala Corp.,
a company which markets and leases real estate. He has a BA Degree in
Economics and Political Science from Ohio Wesleyan University.
<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: November 12, 1997 By Max E. Gray
Max E. Gray
Chairman, President and
Chief Executive Officer
Date: November 12, 1997 By Max E. Gray
Max E. Gray
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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