<PAGE>
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, 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 August 5,
1997 was 4,500,000 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 569,684 $ 1,120,065
Mortgage loans held for sale 16,990 91,532
Notes receivable 399,000 25,000
Furniture and equipment 265,407 361,205
Organization costs - 10,338
Loans to related parties 100,000 100,000
Other assets 67,307 234,895
------------ ------------
TOTAL ASSETS $ 1,418,388 $ 1,943,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 33,009 $ 33,009
Accounts payable 31,299 63,028
Accrued expenses - 25,000
Accrued litigation costs 370,000 -
------------ ------------
Total liabilities 434,308 121,037
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; 4,621,550 shares issued and
outstanding 10,542,458 10,542,458
Common stock warrant 50,000 50,000
Deficit ( 9,608,378) ( 8,770,460)
------------ ------------
Total stockholders' equity 984,080 1,821,998
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,418,388 $ 1,943,035
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Mortgage origination $ - $ 22,730 $ 19,184 $ 30,269
Servicing fees - 3,303 1,969 5,407
Gain (loss) on sale
Loans and securities - ( 339) ( 6,326) 53,459
Servicing ( 5,714) - 23,329 -
Interest income 8,323 64,539 24,216 109,455
Interest expense ( 29,562) ( 1,936) ( 54,012)
Other - 4,212 585 15,988
----------- ----------- ----------- -----------
Total revenues 2,609 64,883 61,021 160,566
OPERATING EXPENSES
Compensation and employee
benefits 83,662 185,617 224,481 383,895
Professional fees 168,527 32,814 214,857 87,116
Warehouse fees - 4,051 1,343 21,609
Occupancy 8,233 17,946 27,238 56,588
Depreciation and other
amortization 33,443 37,942 69,026 76,025
Litigation settlement 270,000 - 270,000 -
Other operating expenses 55,790 169,802 91,993 249,582
----------- ----------- ----------- -----------
Total operating expenses 619,655 448,172 898,938 874,815
----------- ----------- ----------- -----------
NET LOSS $ 617,046 $ 383,289 $ 837,917 $ 714,249
=========== =========== =========== ===========
LOSS PER SHARE $ 0.13 $ 0.08 $ 0.18 $ 0.15
=========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended June 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $( 837,917) $( 714,249)
Adjustments
Depreciation and other amortization 69,026 76,025
Net decrease in loans held for sale 74,492 134,954
Decrease in receivable from loan sales - 798,285
Loss on sale of assets 6,070 9,619
Decrease in other assets 83,821 6,690
Decrease in trade accounts payable
and other liabilities ( 31,729) ( 40,021)
Accrued charges, net ( 25,000) ( 103,921)
Accrued litigation costs 370,000 -
------------- -------------
Net cash provided (absorbed) by
operating activities ( 291,237) 167,382
------------- -------------
INVESTING ACTIVITIES
Purchase of securities ( 103,424) -
Proceeds from sale of securities 72,054 -
Proceeds from sale of servicing 23,329 179,802
Purchase of fixed assets ( 1,055) 1,071
Proceeds from sale of fixed assets 13,902 276
Extensions of credit to related parties - ( 100,000)
Purchase of notes receivable ( 289,000) -
Repayments of notes receivable 25,050 65,000
Proceeds from sale of real estate - 293,375
------------- -------------
Net cash provided (absorbed) by
investing activities ( 259,144) 439,524
------------- -------------
FINANCING ACTIVITIES
Repayment of bank loans - ( 1,742)
Net decrease in warehouse line of credit - ( 1,042,392)
------------- -------------
Net cash absorbed by financing activities - ( 1,044,134)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 550,381) ( 437,228)
Cash and cash equivalents at beginning of period 1,120,065 1,833,216
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 569,684 $ 1,395,988
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 54,012 $ 186,996
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
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 six months
ended June 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 six months ended June 30, 1997 and 1996
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, 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 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.
In reaching a settlement of this lawsuit, the Company has incurred an
estimated $100,000 in expenses, primarily consisting of legal fees, which were
not paid as of June 30, 1997. Accordingly, the Company recorded a charge to
earnings of $370,000 in the quarter ended June 30, 1997 associated with the
settlement of this lawsuit.
<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 $1,418,388 at June 30, 1997, a decrease of $524,647 or 27%. This decrease
was primarily due to the Company's loss for the six month period which resulted
in a $468,000 decrease in assets after adding back a $370,000 accrual for
litigation costs, and the paydown of approximately $57,000 in payables and
accrued expenses. At June 30, 1997, liabilities amounted to approximately
$434,000, of which $370,000 represented an accrual for litigation costs,
resulting in a net worth of approximately $984,000. Liquid assets amounted to
$569,684 and current liabilities amounted to $434,308.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of approximately $838,000 for the six months
ended June 30, 1997 as compared to a loss of $714,000 for the same period in
1996. The 1997 time period was negatively affected by the accrual of $370,000
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 loss for the six months ended
June 30, 1997 amounted to approximately $468,000 which represents a 34%
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 June 30, 1997 to Three Months Ended June 30,
1996
Revenues. Total revenues for the three months ended June 30, 1997
amounted to $2,609 representing a decrease of $62,274, or 96%, 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 June 30, 1997
amounted to $619,655 as compared to $448,172 for the same period in 1996, an
increase of $171,483 or 38%. The 1997 three month period was negatively
affected by the accrual of $370,000 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 June 30, 1997 amounted to $249,655
which represents a decrease of $198,517 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 Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996
Revenues. Total revenues for the six months ended June 30, 1997 amounted
to $61,021 representing a decrease of $99,545, or 62%, 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 six months ended June 30, 1997 amounted
to $898,938 as compared to $874,815 for the same period in 1996, an increase of
$24,123 or 3%. The 1997 six month period was negatively affected by the accrual
of $370,000 in litigation costs associated with the settlement of litigation
discussed previously. Absent this expense, the Company's expenses for the six
months ended June 30, 1997 amounted to $528,938 which represents a decrease of
$345,877 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 June 30, 1997 amounted to $569,684 as
compared to $1,120,065 at December 31, 1996.
<PAGE>
During the six months ended June 30, 1997, the Company's operating
activities utilized $291,237 as compared to providing $167,382 in the first
six months of 1996. For the six months ended June 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 loans held for sale 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 loans held for sale
for 1996, the Company's operating activities utilized $875,010 in 1996 as
compared to the utilization of $291,237 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 $259,144 in cash resources
during the six months ended June 30, 1997 as compared to providing
$439,524 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.
Financing activities had little impact on cash flows for the six months
ended June 30, 1997 and 1996 after netting the change in the warehouse line of
credit against the change in loans held for sale.
As of June 30, 1997, the Company had cash and cash equivalents of
$569,684. 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 4. Submission of Matters to a Vote of Security Holders
a) The annual meeting of stockholders was held on June 30, 1997.
b) The following directors were elected to the Board of Directors
(constituting the entire Board of Directors) for one year terms:
Max E. Gray
Mark Mendelson
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 3,624,797 - 38,105
Mark Mendelson 3,621,122 - 41,780
C. Harril Whitehurst, Jr. 3,624,797 - 38,105
Amendment of the Bylaws to 3,600,428 13,725 48,749
reduce the minimum number of
directors from four to three
Ratification of BDO Seidman
as auditors 3,654,377 2,825 5,700
<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 8, 1997 By Max E. Gray
Max E. Gray
Chairman, President and
Chief Executive Officer
Date: August 8, 1997 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
THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 569,684
<SECURITIES> 0
<RECEIVABLES> 515990
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 628950
<DEPRECIATION> 363543
<TOTAL-ASSETS> 1418388
<CURRENT-LIABILITIES> 434308
<BONDS> 0
0
0
<COMMON> 10592458
<OTHER-SE> (9608378)
<TOTAL-LIABILITY-AND-EQUITY> 1418388
<SALES> 62957
<TOTAL-REVENUES> 62957
<CGS> 898938
<TOTAL-COSTS> 898938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1936
<INCOME-PRETAX> (837917)
<INCOME-TAX> 0
<INCOME-CONTINUING> (837917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (837917)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
