UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 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.)
12 East Oregon Avenue
Philadelphia, Pennsylvania 19148
(Address of principal executive offices)
(215) 755-5691
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common stock,
no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $103,771.00.
The aggregate market value of the issuer's voting stock held as of November
25, 1998, by nonaffiliates of the issuer was approximately $3,450,000.
As of November 25, 1998, issuer had 5,775,000 shares of its no par common
stock outstanding.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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SUPPLEMENTAL INFORMATION
Since the end of 1997, the Company substantially restructured its
business operations. The reader is advised that the Company is concurrently
filing 10-QSBs for the first three quarters of 1998. The reader is cautioned
that prior to making any investment decisions, the reader should carefully
review all publicly available information, including the Company's 10-QSBs for
the first three quarters of 1998.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
First Chesapeake Financial Corporation (the "Company") was incorporated
in Virginia in 1992. The Company has not been the subject of any bankruptcy,
receivership or similar proceeding. In the past years, the Company has
consolidated by closing of all its mortgage-related subsidiaries. Recently, the
Company has invested in three companies which are outside its core
mortgage-related business. Two of the business are wholly-owned subsidiaries,
and one is sixty percent (60%) owned by the Company.
INDUSTRY OVERVIEW
General
Until the 1st quarter of 1997, the Company engaged in the mortgage
banking business. In 1997, the Company closed all mortgage banking operations
after several years of substantial losses.
Effective December 15, 1997, the former President of the Company
resigned and Mr. Richard N. Chakejian, Jr. was appointed to serve as President
of the Company. With the change of management, the Company has broadened its
focus and is currently engaged in the investigation, development and operation
of several early stage businesses. At December 31, 1997, the Company was
actively engaged in the following businesses:
National Archives, Inc. In late 1995, the Company acquired a 60%
interest in a startup company, National Archives, Inc., formerly known as
National Business Archives, Inc. ("National Archives"), a Pennsylvania
corporation, for a purchase price of $150,000 in cash and certain furniture and
equipment valued at approximately $38,000. This acquisition was funded from the
Company's cash-on-hand and with fixed assets from the closure of its subsidiary
Waterford Mortgage Corporation ("Waterford"). National Archives is located in
Philadelphia, Pennsylvania and provides document archive services from a rented
warehouse. While management believes there is a good demand for document archive
services in the Philadelphia area from local government and businesses, National
Archives has been slow in attracting new customers and has not yet attained
profitable operations. National Archives is developing proprietary records
management technology. Management of the Company believes that National Archives
has the realistic prospect of profitable operations.
Premiere Quality Foods, Inc. ("Premiere Quality Foods") is a wholly
owned subsidiary of the Company. Premiere Quality Foods was organized by the
Company in 1997 to acquire, package, distribute and sell imported Spanish olive
oil and related specialty foods products to the growing North American market.
Premiere Quality Foods has secured exclusive rights to import olive oil from a
leading Spanish cooperative into the North American Free Trade Zone through the
Port of Philadelphia. Sales and marketing
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efforts commenced early in 1998 and the initial orders of olive oil products are
being introduced to several regional and national distributors and retailers.
While still in the early stage of its development at December 31, 1997,
management of the Company believes that Premiere Quality Foods has the realistic
prospect of successful operations.
Premiere Chemical Products, Inc. ("Premiere Chemical Products") is a
wholly-owned subsidiary of the Company. Premiere Chemical Products was organized
by the Company in 1997 to develop, manufacture, distribute and market its
proprietary formulation of laundry detergent and related products. Marketing and
initial sales efforts commenced early in 1998 and market response has been
favorable. Premiere Chemical Products is currently expanding its product line
from soap products to include various pre-treatments, stain removers, starches,
and related products. While still in the early stage of its development at
December 31, 1997, management of the Company believes that Premiere Chemical
Products has the realistic prospect of successful operations.
Fedeoliva International, Ltd. ("Fedeoliva") is a 50% owned subsidiary
of the Company which was closed in 1997. Fedeoliva was organized in 1997 to
acquire an ownership interest in a joint venture from Hampton Financial
Services, Inc., a company controlled by Mark Mendelson, who was at that time an
outside Director of the Company. All activities of Fedeoliva were transferred to
Premiere Quality Foods upon the formation of that subsidiary in 1997.
In addition to these early stage business activities, the Company
intends to aggressively seek out and pursue other synergistic business
opportunities (whether early stage or mature) and investments. However, no
assurance can be given that the Company will be successful in its efforts to
acquire profitable business opportunities and investments.
Forward-Looking Statements
This Quarterly Report on Form 10-KSB contains certain forward-looking
statements with respect to the financial condition, results of operations and
business of the Company. These forward-looking statements involve certain risks
and uncertainties. When used in this Quarterly Report on Form 10-KSB or future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Mortgage Banking Business
The Company was incorporated in the Commonwealth of Virginia in May
1992 to engage in the mortgage banking business. The Company acquired its
initial mortgage loan servicing portfolio in December 1992 and commenced
servicing operations in January 1993. As of December 31, 1997, the Company did
not have any operating activities in the mortgage business. Prior to acquiring
its initial servicing portfolio, the Company was in the development stage and
management of the Company focused on establishing the infrastructure of the
Company consisting primarily of obtaining agency approvals (FNMA, FHLMC and
HUD), hiring employees, establishing office facilities, and obtaining the
necessary hardware and software to perform mortgage loan servicing operations.
The Company's original business plan was to be a servicer of mortgage
loans only, purchasing mortgage loan servicing either through brokers or
directly from holders of such servicing. During 1992 and 1993, the Company
purchased the rights to service approximately 6,750 loans with unpaid principal
balances at the time of purchase of approximately $718,888,000.
In early 1993, management believed that to fully capitalize on mortgage
banking opportunities it would be necessary to also originate mortgage loans as
well as service them. Management believed that the ability to originate mortgage
loans would greatly enhance its ability to accumulate mortgage loan servicing at
the least possible cost and to replace mortgage loan servicing that may
dissipate through unanticipated prepayments. Additionally, profit margins on
mortgage loan originations were attractive. Accordingly, the Company began to
actively seek an origination opportunity and, in October 1993, executed an
Agreement and Plan of Merger, effective as of September 30, 1993, for a stock
for stock merger with Waterford Mortgage Corporation ("Waterford"), a
residential mortgage loan origination operation located in McLean, Virginia.
Waterford originated loans in Virginia, Washington, D.C., Maryland and North
Carolina.
Mortgage Loan Servicing
The Company's loan servicing activities included collecting and
remitting loan payments, accounting for principal and interest, reporting to
investors, collecting and holding escrow funds for payment of mortgage related
expenses such as taxes and insurance, making advances to investors to cover
delinquent payments, making inspections of mortgage properties as required,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, and generally administering
the loans. The Company received a fee for servicing mortgage loans, generally
ranging from 0.25% to 0.50% per annum on the declining unpaid principal balances
of the loans.
The Company obtained most of its mortgage loan servicing through bulk
purchases from the originators of the loans. In purchasing mortgage loan
servicing rights, the Company performed many different tasks. First, the Company
analyzed the servicing portfolio characteristics in relation to the Company's
financial expectations and submitted an offer to purchase. The Company performed
this analysis utilizing a computer model which values the servicing portfolio
given certain assumptions principally related to prepayment expectations and
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costs to service. If the offer was accepted, then a due diligence review of the
portfolio was conducted to verify the portfolio's characteristics and
parameters. Once this was successfully completed, a Purchase and Sale Agreement,
and if needed, an Interim Servicing Agreement was negotiated. After these
agreements were completed, other documents were secured such as the Agency
Approval of Transfer attorney's opinions, Certificates of Good Standing, etc.
The transaction cost varied with the size of the portfolio, however, the cost
for closing and related expenses were not generally material to the purchase
price.
The Company experienced numerous problems with its loan portfolio. The
Company addressed these uncertainties as follows. First, declining mortgage loan
interest rates generally result in prepayments of mortgage loans occurring
faster than expected as mortgagors take advantage of lower interest rates by
refinancing their mortgage. The Company entered into option contracts on thirty
year U.S. Treasury bonds that increase in value if interest rates decline in an
attempt to offset write-offs resulting from unanticipated prepayments.
The volume of servicing the Company had attained was not profitable and
the Company determined that building the servicing portfolio to a size that
would provide reasonable returns was becoming less feasible. First, with rising
interest rates and the resultant decline in prepayments, the price of servicing
was increasing substantially. The demand and therefore the price of servicing
was also being driven up due to the decline in available product. Second, due to
the lack of origination volume, the Company could not create an economically
viable amount of its own servicing.
Faced with these factors, management believed it was in the Company's
best interest to sell its existing servicing portfolio and payoff its credit
facility. Accordingly, on October 18, 1994, the Company executed a letter of
intent with MCA Mortgage Corporation ("MCA") whereby the Company sold
substantially all of its servicing rights to MCA. The date of sale was November
30, 1994 and transfer of the servicing rights was completed by May 1, 1995. The
sale resulted in a loss of approximately $540,000, but provided cash to the
Company of approximately $2,500,000 after payoff of its credit facility and
expenses associated with the sale.
Mortgage Loan Origination
The Company, through its wholly owned subsidiary Waterford, originated
both conventional and nonconforming mortgage loans. The Company's guidelines for
underwriting the conventional conforming loans it originated complied with the
criteria established by FNMA or FHLMC. The Company was also approved to
originate loans insured by the FHA or guaranteed by the VA. Waterford also
originated conventional nonconforming mortgage loans (loans for single family
homes that do not meet the criteria established by FNMA or FHLMC) and the
underwriting guidelines and property standards used for such loans were based on
the underwriting standards required by institutional investors to which such
loans were sold.
All of Waterford's mortgage loan origination was done from one office
in McLean, Virginia. During 1995, Waterford originated approximately $51,000,000
in mortgage loans primarily in Washington, D.C. and in the states of Virginia
and Maryland. This compares with $113,000,000 in 1994 and $125,000,000 in
originations in 1993.
Management's plan in the acquisition of Waterford was to expand the
Waterford operation to become a significant originator of mortgage loans.
Accordingly, during 1994 and into the first quarter of 1995, management
recruited personnel who had the necessary industry experience to significantly
expand mortgage loan production and invested heavily in additional office space
and fixed assets for Waterford.
In making a substantial investment in its capacity to originate
mortgage loans, management believed this investment would generate sufficient
mortgage loan origination volume to enable the Company to be profitable in 1994.
However, as discussed previously, the volume of mortgage loans nationally
declined significantly during 1994 and into 1995 due to rising interest rates
and the Company suffered significant operating losses during these years as did
many other independent mortgage banking companies. In response to these losses,
the Company took steps to reduce overhead expenses, including the reduction of
employees. However, the losses continued into 1995 because the volume of
origination business being generated by Waterford could not support even a
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minimum amount of overhead expenses. Given the continued losses and inability to
substantially increase origination volume, management made the decision in the
second quarter of 1995 to significantly reduce its overhead associated with
mortgage loan production and closed Waterford (the Company also closed an
inactive mortgage loan origination subsidiary, First Chesapeake Mortgage
Corporation). The Company recorded restructuring costs of $450,000 during 1995
to recognize expected costs associated with this restructuring. During 1996, the
Company paid approximately $178,000 in restructuring related expenses
(consisting primarily of payouts on employment contracts).
To the extent that general demand for conforming mortgage loans remains
at or below its current level and price competition within the industry
continues, future operating margins for the conforming mortgage loan origination
business will remain under pressure.
Given the highly competitive state of the conforming mortgage
origination market and management's belief that it could not compete profitably
in traditional mortgage banking activities, the Company has had to seek
alternative business strategies in an attempt to achieve profitable operations.
One strategy the Company pursued was the origination of nonconforming mortgage
loans where the borrower had some credit issue that did not allow them to obtain
traditional mortgage financing (commonly referred to as "B paper" loans). In
December 1994, the Company formed a subsidiary, American Mortgage Express, Inc.
("AME"), to originate B paper loans and hired an individual with over twenty
years experience with this type of lending to run the operations. During 1995
and 1996, AME struggled to attain profitable operations, and in fact was
profitable for six months in 1995. However, AME was never able to attain the
level of loan originations necessary to maintain profitability even though it
hired many qualified individuals and obtained the necessary warehouse financing.
Accordingly, the directors of the Company determined to cease AME's operations
effective as of January 30,1997.
Also, on December 11, 1995, the Company executed a Letter of Intent to
acquire all of the outstanding stock of a federal savings bank located in
Florida for a purchase price of approximately $5.5 million. Management has
extensive experience in operating financial institutions and believed the
acquisition of a savings bank would provide the operations necessary to attain
profitability. Consummation of this transaction was subject to the completion of
due diligence procedures, execution of a definitive acquisition agreement
between parties, approval by both boards of directors and regulatory approval. A
Stock Purchase Agreement (the "Agreement") was executed between the parties
which expired on September 30, 1996 before the Company could obtain regulatory
approval of the transaction from the Office of Thrift Supervision. The parties
negotiated an extension of the Agreement to December 31, 1996 to provide the
Company with additional time to obtain regulatory approval. The Company was
unable to obtain regulatory approval by December 31, 1996 and was unable to
negotiate an extension of the Agreement with the savings bank's stockholders
past December 31, 1996. As a result, on March 5, 1997, the Company withdrew its
Application for Change of Control with the Office of Thrift Supervision. At
December 31, 1996, the Company wrote off approximately $219,000 in capitalized
expenses related to this failed transaction.
Competition
All of the Company's current businesses are faced with a large group of
competitors. The mortgage banking business is highly competitive, and consists
of several well-capitalized national firms and thousands of smaller loan
brokers. The document archive services in the Philadelphia market is dominated
by a few large, well-capitalized national competitors and several regional
archival service companies, with moderate barriers of entry for potential new
competition. The specialty foods import and distribution market is dominated by
a small number of international companies, with several small and medium-sized
firms pursuing market share. The laundry detergent and related products market
is intensely competitive at the retail consumer level and moderately competitive
at the wholesale/institutional market. The Company believes, however, that there
is the opportunity for the Company's subsidiaries to grow and gain market share
in their respective industries. However, most of the Company's competitors have
financial resources that are substantially greater than those of the Company.
Sources and Availability of Raw Materials
The raw materials used in the Company's wholly-owned subsidiaries are
in ready supply. Premiere Quality Foods is dependent on maintaining a supply of
olive oil from a leading Spanish cooperative under its exclusive import
agreement. Failure to maintain this supply could materially and adversely affect
the operation of the subsidiary. Premiere Chemical Products' detergent and
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related products are contract manufactured by large, well-established contract
manufacturers using readily available compounds. The Company does not foresee
any difficulty in the continuing availability of the raw materials this
subsidiary needs to operate. Raw materials are not applicable to the Company's
mortgage banking or document archives businesses.
Regulation
Mortgage banking is a highly regulated industry. The industry is
subject to the rules and regulations of, and examinations by, HUD, FNMA, FHLMC,
FHA, GNMA and the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
residential mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such activities. These rules and regulations,
among other things, govern how mortgage servicers process a mortgagor's payment,
require an annual analysis of the Company's escrow balances and also regulate
the procedure for making investor payments. There are also numerous rules and
regulations imposed on mortgage loan originators. These rules and regulations
require originators to obtain or maintain licenses, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on prospective borrowers,
regulate payment features and, in some cases, fix maximum interest rates, fees
and loan amounts. Failure to comply with these requirements can lead to a loss
of approved status, termination of servicing contracts without compensation to
the servicer, demands for indemnification or loan repurchases, class action law
suits and administrative enforcement actions. There can be no assurance that
more restrictive laws, rules and regulations will not be adopted in the future,
which could make compliance more difficult or expensive, and to the extent that
the Company expands its loan origination activities in the future, restrict the
Company's ability to originate or sell mortgage loans, further limit or restrict
the amount of interest and other charges earned from loans originated or
purchased by the Company, or otherwise adversely affect the business or
prospects of the Company.
The Company's non-mortgage banking products and services are not
subject to intense governmental scrutiny. While the FDA has certain regulations
in place with regard to the food industry, and there are certain restrictions
involved with importing and exporting goods, they are not viewed as substantial
restrictions to the Company's business. The costs associated with complying with
environmental laws are not currently deemed to be substantial.
Employees
As of December 31, 1997, the Company had five employees, substantially
all of whom were full-time employees at the Company's headquarters in
Philadelphia, Pennsylvania. None of the Company's employees are represented by
unions. The Company considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate and administrative headquarters are located in
Philadelphia, Pennsylvania, which comprise approximately 5,000 square feet of
leased office and warehouse space. The leased property is owned by an entity
controlled by the Company's Chief Executive Officer, and is extended on a month
to month basis with no current rental payments.
Management believes that the Company's current facilities are suitable
and adequate for its business as well as to meet its near term expansion plans.
The Company has no plans to purchase any properties.
ITEM 3. 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. 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
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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
December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fourth fiscal quarter of the year ended December
31, 1997, no matter was submitted to a vote of the Company's security holders,
either by proxy solicitations or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not listed on any exchange. However,
market quotes for the Company's common stock (under the symbol "FCFN") may be
obtained from the National Association of Securities Dealers through the NASD
OTC Bulletin Board, its automated system for reporting non-NASDAQ quotes. The
following table sets forth, for the indicated calendar periods, the high and low
bid prices (as reported by the OTC Bulletin Board) for the Company's common
stock through December 31, 1997:
Bid Price
---------
High Low
---- ---
1996
First Quarter 11/16 1/8
Second Quarter 11/16 1/4
Third Quarter 1/2 5/16
Fourth Quarter 17/32 1/8
1997
First Quarter 1/2 3/32
Second Quarter 3/16 1/16
Third Quarter 3/32 1/16
Fourth Quarter 15/16 1/8
1998
First Quarter 3/16 1/8
Second Quarter 13/16 1/16
Third Quarter 13/16 1/4
The prices set forth in this table represent quotes between dealers and
do not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
As of November 23, 1998, there were 281 stockholders of record;
however, the Company believes there were over 900 beneficial stockholders of the
Company's common stock.
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The Company has never declared or paid a dividend on its common stock
and management expects that the substantial portion of the Company's earnings,
if any, for the foreseeable future will be retained for expansion or development
of the Company's business. The decision to pay dividends, if any, in the future
is within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements, financial condition and other
relevant factors such as loan covenants or other contractual obligations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the audited
financial statements and the notes thereto included elsewhere in this report.
GENERAL
Until the first quarter of 1997, the Company engaged in the mortgage
banking business. The Company closed all mortgage banking operations after
several years of substantial losses.
Effective December 15, 1997, the former President of the Company
resigned and Mr. Richard N. Chakejian, Jr. was appointed to serve as President
of the Company. With the change of management, the Company has changed its focus
and is currently engaged in the investigation, development and operation of
several early stage businesses. The Company is actively engaged in the following
businesses:
National Archives, Inc. In late 1995, the Company acquired 60% interest
in a startup company, National Archives, Inc., formerly known as National
Business Archives, Inc., a Pennsylvania corporation ("National Archives"), for a
purchase price of $150,000 in cash and certain furniture and equipment valued at
approximately $38,000. This acquisition was funded from the Company's
cash-on-hand and with fixed assets from the closure of its subsidiary Waterford.
National Archives is located in Philadelphia, Pennsylvania and provides document
archive services from a rented warehouse. While management believes there is a
good demand for document archive services in the Philadelphia area from local
government and businesses, National Archives has been slow in attracting new
customers and has not yet attained profitable operations. National Archives is
developing proprietary records management technology. As of December 31, 1997,
management of the Company believes that National Archives has the realistic
prospect of profitable operations.
Premiere Quality Foods, Inc. ("Premiere Quality Foods") is a wholly
owned subsidiary of the Company. Premiere Quality Foods was organized by the
Company in 1997 to acquire, package, distribute and sell imported Spanish olive
oil and related specialty foods products to the growing North American market.
Premiere Quality Foods has secured exclusive rights to import olive oil from a
leading Spanish cooperative into the North American Free Trade Zone through the
Port of Philadelphia. Sales and marketing efforts commenced early in 1998 and
the initial orders of olive oil products have been successfully introduced to
several regional and national distributors and retailers. As of December 31,
1997, Management of the Company believes that Premiere Quality Foods has the
realistic prospect of profitable operations.
Premiere Chemical Products, Inc. ("Premiere Chemical Products") is a
wholly-owned subsidiary of the Company. Premiere Chemical Products was organized
by the Company in 1997 to develop, manufacture, distribute and market its
proprietary formulation of laundry detergent and related products. Marketing and
initial sales efforts commenced early in 1998 and market response has been
favorable. Premiere Chemical Products is currently expanding its product line
from soap products to include various pre-treatments, stain removers, starches,
and related products. While still in the early stage of its development, as of
December 31, 1997, management of the Company believes that Premiere Chemical
Products has the realistic prospect of successful operations.
Fedeoliva International, Ltd. ("Fedeoliva") is a 50% owned subsidiary
of the Company which was closed in 1997. Fedeoliva was organized in 1997 to
acquire an ownership interest in a joint venture from Hampton Financial
Services, Inc., a company controlled by Mark Mendelson, who was at that time an
outside Director of the Company. All activities of Fedeoliva were transferred to
Premiere Quality Foods upon the formation of that subsidiary in 1997.
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In addition to these early stage business activities, the Company
intends to aggressively seek out and pursue other synergistic business
opportunities (whether early stage or mature) and investments. However, no
assurance can be given that the Company will be successful in its efforts to
acquire profitable business opportunities and investments.
Mortgage Banking Business
The Company was incorporated in the state of Virginia in May 1992 to
engage in the mortgage banking business. The Company acquired its initial
mortgage loan servicing portfolio in December 1992 and commenced servicing
operations in January 1993. Prior thereto, the Company was in the development
stage and management of the Company focused on establishing the infrastructure
of the Company consisting primarily of obtaining agency approvals (FNMA, FHLMC
and HUD), hiring employees, establishing office facilities, and obtaining the
necessary hardware and software to perform mortgage loan servicing operations.
The Company's original business plan was to be a servicer of mortgage
loans only, purchasing mortgage loan servicing either through brokers or
directly from holders of such servicing. During 1992 and 1993, the Company
purchased the rights to service approximately 6,750 loans with unpaid principal
balances at the time of purchase of approximately $718,888,000.
In early 1993, management believed that to fully capitalize on mortgage
banking opportunities it would be necessary to also originate mortgage loans as
well as service them. Management believed that the ability to originate mortgage
loans would greatly enhance its ability to accumulate mortgage loan servicing at
the least possible cost and to replace mortgage loan servicing that may
dissipate through unanticipated prepayments. Additionally, profit margins on
mortgage loan originations were attractive. Accordingly, the Company began to
actively seek an origination opportunity and, in October 1993, executed an
Agreement and plan of Merger, effective as of September 30, 1993, for a stock
for stock merger with Waterford. Waterford originated loans in Virginia,
Washington, D.C., Maryland and North Carolina.
The Company had received revenues from two sources, mortgage loan
origination activities and servicing activities. Revenues from mortgage loan
origination activities are generated from mortgage loan origination and related
fees, interest income earned on mortgage loans until they are sold and net
gains, if any, on the sale of mortgage loans. Revenues related to servicing
mortgage loans are derived principally from servicing fees earned in connection
with the collection and processing of mortgage loan payments and the
administration of mortgage loans on behalf of investors.
Mortgage Loan Servicing
The volume of servicing the Company had attained was not profitable and
the Company determined that building the servicing portfolio to a size that
would provide reasonable returns was becoming less feasible. First, with rising
interest rates and the resultant decline in prepayments, the price of servicing
was increasing substantially. The demand and therefore the price of servicing
was also being driven up due to the decline in available product. Second, due to
the lack of origination volume, the Company could not create an economically
viable amount of its own servicing.
Faced with these factors, management believed it was in the Company's
best interest to sell its existing servicing portfolio and to repay its credit
facility. Accordingly, on October 18, 1994, the Company executed a letter of
intent with MCA Mortgage Corporation ("MCA") whereby the Company sold
substantially all of its servicing rights to MCA The date of sale was November
30, 1994 and transfer of the servicing rights was completed by May 1, 1995. The
sale resulted in a loss of approximately $540,000, but provided cash to the
Company of approximately $2,500,000 after payoff of the NationsBank credit
facility and expenses associated with the sale. Given the significant reduction
in the amount of loan servicing during 1995, the Company significantly reduced
its overhead expenses associated with loan servicing, and therefore its capacity
to service loans. Since the sale to MCA, the Company has only been responsible
for loans it originated and sold to FNMA, FHLMC or other investors, which
amounted to approximately $7,500,000 at December 31, 1996. Subsequent to
December 31, 1996, this remaining servicing was sold at a small gain.
9
<PAGE>
Mortgage Loan Origination
The Company, through its wholly owned subsidiary Waterford, originated
both conventional and nonconforming mortgage loans. The Company's guidelines for
underwriting the conventional conforming loans it originated complied with the
criteria established by FNMA or FHLMC. The Company was also approved to
originate loans insured by the FHA or guaranteed by the VA. Waterford also
originated conventional nonconforming mortgage loans (loans for single family
homes that do not meet the criteria established by FNMA or FHLMC) and the
underwriting guidelines and property standards used for such loans were based on
the underwriting standards required by institutional investors to which such
loans were sold.
All of Waterford's mortgage loan origination was done from one office
in McLean, Virginia. During 1995, Waterford originated approximately $51,000,000
in mortgage loans primarily in Washington, D.C. and in the states of Virginia
and Maryland. This compares with $113,000,000 in 1994 and $125,000,000 in
originations in 1993. All such loans were sold servicing released to investors.
Management's plan in the acquisition of Waterford was to expand the
Waterford operation to become a significant originator of mortgage loans.
Accordingly, during 1994 and into the first quarter of 1995, management
recruited personnel who had the necessary industry experience to significantly
expand mortgage loan production and invested heavily in additional office space
and fixed assets for Waterford.
In making a substantial investment in its capacity to originate
mortgage loans, management believed this investment would generate sufficient
mortgage loan origination volume to enable the Company to be profitable in 1994.
However, as discussed previously, the volume of mortgage loans nationally
declined significantly during 1994 and into 1995 due to rising interest rates
and the Company suffered significant operating losses during these years as did
many other independent mortgage banking companies. In response to these losses,
the Company took steps to reduce overhead expenses, including the reduction of
employees. However, the losses continued into 1995 because the volume of
origination business being generated by Waterford could not support even a
minimum amount of overhead expenses. Given the continued losses and inability to
substantially increase origination volume, management made the decision in the
second quarter of 1995 to significantly reduce its overhead associated with
mortgage loan production and closed Waterford (the Company also closed an
inactive mortgage loan origination subsidiary, First Chesapeake Mortgage
Corporation). The Company recorded restructuring costs of $450,000 during 1995
to recognize expected costs associated with this restructuring. During 1996, the
Company paid approximately $178,000 in restructuring related expenses
(consisting primarily of payout on employment contracts), substantially all of
which was accrued at December 31, 1995.
To the extent that general demand for conforming mortgage loans remains
at or below its current level and price competition within the industry
continues, future operating margins for the conforming mortgage loan origination
business will remain under pressure.
Other Business Strategies
Given the highly competitive state of the conforming mortgage
origination market and management's belief that it could not compete profitably
in traditional mortgage banking activities, the Company has had to seek
alternative business strategies in an attempt to achieve profitable operations.
One strategy the Company pursued was the origination of nonconforming mortgage
loans where the borrower had some credit issue that did not allow them to obtain
traditional mortgage financing (commonly referred to as "B paper" loans). In
December 1994, the Company formed a subsidiary, American Mortgage Express, Inc.
("AME"), to originate B paper loans and hired an individual with over twenty
years experience with this type of lending to run the operations. During 1995
and 1996, AME struggled to attain profitable operations, and in fact was
profitable for six months in 1995. However, AME was never able to attain the
level of loan originations necessary to maintain profitability even though it
hired many qualified individuals and obtained the necessary warehouse financing.
Accordingly, the directors of the Company determined to cease AME's operations
effective as of January 30,1997. As part of AME's cessation of operations, the
warehouse line of credit was not extended beyond its expiration on February 28,
1997.
10
<PAGE>
Also, on December 11, 1995, the Company executed a Letter of Intent to
acquire all of the outstanding stock of a federal savings bank located in
Florida for a purchase price of approximately $5.5 million. Management has
extensive experience in operating financial institutions and believed the
acquisition of a savings bank would provide the operations necessary to attain
profitability. Consummation of this transaction was subject to the completion of
due diligence procedures, execution of a definitive acquisition agreement
between parties, approval by both boards of directors and regulatory approval. A
Stock Purchase Agreement (the "Agreement") was executed between the parties
which expired on September 30, 1996 before the Company could obtain regulatory
approval of the transaction from the Office of Thrift Supervision. The parties
negotiated an extension of the Agreement to December 31, 1996 to provide the
Company with additional time to obtain regulatory approval. The Company was
unable to obtain regulatory approval by December 31, 1996 and was unable to
negotiate an extension of the Agreement with the savings bank's stockholders
past December 31, 1996. As a result, on March 5, 1997 the Company withdrew its
Application for Change of Control with the Office of Thrift Supervision. At
December 31, 1996, the Company wrote off approximately $219,000 in capitalized
expenses related to this failed transaction.
FINANCIAL CONDITION
Assets of the Company decreased from $1,943,035 at December 31, 1996
to $253,553 at December 31, 1997, a decrease of $1,689,482. This decrease was
primarily due to the Company's operating loss of $1,967,530 and cessation of its
mortgage banking operations. At December 31, 1997, the Company's primary assets
consist of fixed assets of $121,627 and a note receivable from a related party
of $94,240. Liabilities of $158,809 were primarily composed of accounts payable
and accrued expenses.
The significant declines in the Company's assets during the last three
years have resulted due to the significant operating losses and the reduction in
mortgage banking activities with the closures of Waterford and AME. Given the
operating losses from mortgage banking activities the Company has experienced
over the last three years, the Company believed it was prudent to close down
these activities to safeguard the remaining assets.
RESULTS OF OPERATIONS
Current Year Performance and Earnings Outlook
The Company incurred a loss of $1,967,530 for the year ended December
31, 1997. This loss is a result of the Company's continued inability to attain
profitability from its activities, the cost of settling litigation and the
process and expenses of closing down many of the Company's operations.
As discussed previously, 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
business opportunity or attain profitable operations. The Company is continuing
to look at all possible acquisitions, including those outside of the financial
arena.
The Company's subsidiaries, Premiere Quality Foods, Premiere Chemical
Products, and National Archives are the only source of ongoing cash flow to the
Company at December 31, 1997. The Company is seeking to grow these businesses
and to acquire other businesses to assist the Company in becoming profitable.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
The Company incurred a loss of $1,967,530 for the year ended December
31, 1997 compared to a loss of $1,346,331 for the year ended December 31, 1996.
Total revenues for the year ended December 31, 1997 amounted to
$103,771 representing a decrease of $264,676, or 72%, when compared to 1996's
revenues of $368,447. The Company's principal sources of revenue had been fees
from mortgage origination, loan sales and servicing activities. The decline in
revenue is directly related to the closure of the Company's various
subsidiaries.
11
<PAGE>
Total expenses for 1997 amounted to $2,071,301 as compared to $1,714,778 in
1996, an increase of $356,523 or 21%. This increase is directly attributable to
the closure of the Company's activities, namely a loss on joint venture of
$112,983, payment of a legal settlement of $260,276, write off of investments
and advances to joint venture of $212,169 and an increase in professional fees
of $383,401.
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. If the Company requires additional capital
or liquidity, the Company may seek to raise funds in the capital markets. 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. Due to the operating losses
sustained and the limited working capital of the Company, the Company's
independent certified public accountants modified their opinion on the financial
statements for the year ended December 31, 1997 regarding the Company's ability
to continue as a going concern.
Cash and cash equivalents at December 31, 1997 amounted to $12,845 as
compared to $1,120,065 at December 31, 1996, a decrease of $1,107,220.
During 1997, the Company's operating activities utilized $1,090,920 as
compared to utilizing $75,767 in 1996. The utilization of cash resources from
operating activities in both years resulted from the Company's net loss for each
year.
The Company's investing activities used $1,086 in cash resources in
1997 as compared to providing $486,955 in 1996. In 1996 the principal sources of
cash from investing activities were provided from the final proceeds from sale
of the servicing portfolio of $196,934 and proceeds from the sale of real estate
of $293,375.
Financing activities used $15,214 in cash resources during 1997 compared
with $1,124,339 during 1996. 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 bank facility has been terminated and the warehouse credit facility
expired on February 28, 1997 and was not extended. Accordingly, neither of these
two sources of liquidity will be available to the Company in the future.
REGULATION
Mortgage banking is a highly regulated industry. The industry is
subject to the rules and regulations of, and examinations by, HUD, FNMA, FHLMC,
FHA, GNMA and the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
residential mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such activities. These rules and regulations,
12
<PAGE>
among other things, govern how mortgage servicers process a mortgagor's payment,
require an annual analysis of the Company's escrow balances and also regulate
the procedure for making investor payments.
There are also numerous rules and regulations imposed on mortgage loan
originators. These rules and regulations require originators to obtain or
maintain licenses, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on prospective borrowers, regulate payment features and, in some
cases, fix maximum interest rates, fees and loan amounts. Failure to comply with
these requirements can lead to a loss of approved status, termination of
servicing contracts without compensation to the servicer, demands for
indemnification or loan repurchases, class action law suits and administrative
enforcement actions. There can be no assurance that more restrictive laws, rules
and regulations will not be adopted in the future, which could make compliance
more difficult or expensive, and to the extent that the Company expands it loan
origination activities in the future, restrict the Company's ability to
originate or sell mortgage loans, further limit or restrict the amount of
interest and other charges earned from loans originated or purchased by the
Company, or otherwise adversely affect the business or prospects of the Company.
INFLATION
Prior to closure of its mortgage banking operations, the Company was
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 prepayment rates 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.
YEAR 2000
The Company is currently assessing the impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems and products purchased by the Company. In addition, the
Company plans to contact each significant vendor to request time tables for year
2000 compliance and expected costs, if any, to be passed along to the Company.
The Company also plans to identify alternative vendors if the current vendors do
not become year 2000 compliant. The Company believes that its internal
information systems are either year 2000 compliant or will be so prior to the
year 2000 without incurring material costs. There can be no assurance, however,
that the Company will not experience unexpected costs and delays in achieving
year 2000 compliance for its internal information systems and current products,
which could result in a material adverse effect on the Company's future results
of operations.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
First Chesapeake
Financial Corporation
Consolidated
Financial Statements
For the Years Ended December 31, 1997 and 1996
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Contents
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets 4
Statements of Operations 5
Statements of Stockholders' Equity 6
Statements of Cash Flows 7 - 8
Summary of Significant Accounting Policies 9 - 11
Notes to Financial Statements 12 - 17
2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
First Chesapeake Financial Corporation
Philadelphia, Pennsylvania
We have audited the consolidated balance sheets of First Chesapeake Financial
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Chesapeake
Financial Corporation and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raises doubt about its ability to continue as a going
concern. Management's plans in regard to this matter is also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Richmond, Virginia
October 26, 1998
3
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 12,845 $ 1,120,065
Mortgage loans held for sale (Note 3) - 91,532
Note receivable 16,746 25,000
Furniture and equipment, net (Note 4) 121,627 361,205
Organization costs - 10,338
Loans to related parties 94,240 100,000
Other assets 8,095 234,895
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 253,553 $ 1,943,035
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Note payable (Note 5) $ 17,795 $ 33,009
Accounts payable 26,355 63,028
Accrued expenses 114,659 25,000
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 158,809 121,037
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 8)
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; 5,500,000 and
4,621,550 shares issued and outstanding 10,832,734 10,542,458
Common stock warrant - 50,000
Deficit (10,737,990) (8,770,460)
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 94,744 1,821,998
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 253,553 $ 1,943,035
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Mortgage origination $ - $ 38,229
Servicing fees (Note 2) 29,036 10,025
Gain on sales of loans - 201,121
Interest income 74,632 159,700
Interest expense (1,936) (57,900)
Other 2,039 17,272
- -------------------------------------------------------------------------------------------------------------------
Total Revenues 103,771 368,447
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Compensation and employee benefits 552,318 691,087
Professional fees 495,854 112,453
Commitment fees - 26,613
Occupancy 60,455 93,385
Loss on joint venture (Note 11) 112,983 -
Legal settlement (Note 10) 260,276 -
Write off of investment and advances to
joint venture (Note 11) 212,169 -
Depreciation and amortization 129,888 149,763
Other operating expenses 247,358 641,477
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,071,301 1,714,778
- -------------------------------------------------------------------------------------------------------------------
Net Loss $(1,967,530) $(1,346,331)
- -------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per Share $ (.41) $ (.29)
- -------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 4,822,654 4,621,550
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
5
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
Common Total
Common Stock Stockholders'
Stock Warrant Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $10,542,458 $ 50,000 $ (7,424,129) $ 3,168,329
Net loss - - (1,346,331) (1,346,331)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 10,542,458 50,000 (8,770,460) 1,821,998
Issuance of common stock (Note 8) 250,000 - - 250,000
Repurchase of common stock (Note 10) (9,724) - - (9,724)
Warrant expiration 50,000 (50,000) - -
Net loss - - (1,967,530) (1,967,530)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $10,832,734 $ - $(10,737,990) $ 94,744
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net loss $(1,967,530) $(1,346,331)
Adjustments
Common stock issued as compensation 125,000 -
Write-off of investment and advances to
joint venture 212,169 -
Depreciation and amortization 129,888 149,763
Net decrease in loans held for sale 91,532 498,997
Decrease (increase) in receivable from
loan sales - 798,285
Loss on disposal of assets 38,235 14,263
Decrease (increase) in other assets 226,800 (49,978)
Decrease in trade accounts payable and
other liabilities (36,673) (617)
Net increase (decrease) in accrued expenses 89,659 (140,149)
- -------------------------------------------------------------------------------------------------------------------
Net cash absorbed by operating activities (1,090,920) (75,767)
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of furniture and equipment (1,086) (130)
Proceeds from sale of furniture and
equipment - 12,776
Proceeds from sale of servicing rights,
net of selling expenses - 196,934
Extensions of credit to related parties - (100,000)
Repayments of notes receivable - 84,000
Proceeds from sale of real estate owned - 293,375
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities $ (1,086) $ 486,955
- -------------------------------------------------------------------------------------------------------------------
continued...
7
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
<CAPTION>
Year Ended December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Repayment of bank loans $ (15,214) $ (1,742)
Net decrease in warehouse line of credit - (1,122,597)
- -------------------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (15,214) (1,124,339)
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,107,220) (713,151)
Cash and cash equivalents at beginning
of period 1,120,065 1,833,216
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,845 $ 1,120,065
- -------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures:
Cash payments of interest expense $ 1,936 $ 57,900
Supplemental Schedule of Non-Cash
Financing activities:
Common stock issued in exchange for
equity interest in joint venture $ 125,000 $ -
Transfer of related party loan to
investment in joint venture $ 135,000 $ -
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
8
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Summary of Significant Accounting Policies
Organization On May 18, 1992, First Chesapeake Financial Corporation (the
and Basis of "Company") was incorporated in the Commonwealth of Virginia
Presentation as a mortgage banking company to engage in the servicing of
mortgage loans.
The consolidated financial statements include the accounts
of the Company, its six wholly owned subsidiaries, Premiere
Quality Foods, Inc. ("Premiere Foods"), Premiere Chemical
Products, Inc., Waterford Mortgage Corporation ("WMC"),
American Mortgage Express, Inc. ("AME"), First Chesapeake
Mortgage Corporation ("FCMC"), and First Chesapeake Funding
Corporation ("FCFC"), and National Archives, Inc. ("NAI"),
of which the Company owns 60% of the outstanding stock. All
material intercompany transactions and accounts have been
eliminated in consolidation.
WMC and FCMC were engaged in the business of originating
first mortgage loans, however, due to a lack of loan volume,
were closed and ceased operations in 1995 (see Note 1 of the
Notes to Consolidated Financial Statements).
AME was incorporated on October 8, 1994 and commenced
operations in December of 1994. AME originated nonconforming
first mortgage loans where borrowers have some credit issue
that does not allow them to obtain traditional mortgage
financing (commonly referred to as "B paper" loans). Due to
an inability to attain profitable operations, AME was closed
during 1997.
FCFC acquires troubled loans through brokers at
significantly discounted prices and formulates a workout
with the borrower. Once a workout plan has been established,
FCFC will either retain the loan to maturity or sell the
loan to others. FCFC was closed during 1997.
NAI provides document archive services to government and
business primarily located in the Philadelphia area. The
operations of NAI were not significant to the consolidated
operations of the Company for the years ended December 31,
1997 and 1996.
Premiere Foods acquires, packages, distributes and sells
imported Spanish olive oil and related specialty foods
products within North America. Premiere Foods has exclusive
rights to import olive oil from a leading Spanish
Cooperative into the North American Free Trade Zone through
the Port of Philadelphia. The company was formed during 1997
and did not have significant operations during 1997.
Premiere Chemical Products, Inc. develops, manufactures,
distributes, and markets its proprietary formulation of
laundry detergent and related products. Premiere Chemical
Products was formed during 1997 and did not have any
operations during 1997.
9
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
Cash and Cash For the purposes of the statements of cash flows, the
Equivalents Company considers all highly liquid investments with an
initial maturity of three months or less to be cash
equivalents.
Loans Held Loans held for sale are carried at the lower of cost or
for Sale market on an aggregate basis. Discounts from origination of
loans held for sale are deferred and recognized as an
adjustment to carrying value.
Furniture and Furniture and equipment are stated at cost less accumulated
Equipment depreciation and amortization. Provision for depreciation
and amortization are computed by using the straight-line
method over the estimated useful lives of the individual
assets. Ordinary maintenance and repairs are charged to
operations as incurred.
Income Revenue from mortgage origination is recognized when the
Recognition loans are sold to an investor and the Company has no further
obligation to fulfill. To date, the majority of loans
originated have been sold (or will be sold in the case of
loans held for sale) and servicing released.
Servicing fees represent fees received for servicing loans
owned by investors and are recorded when the mortgage
payments are received by the Company. Revenues from loan
administration represent late fees and other service charges
and are recorded when received.
Gains or losses on loan sales are recognized at the time of
sale and are determined by the difference between net sales
proceeds and the carrying value of the loans sold.
Income Taxes From inception through December 31, 1997, the Company has
incurred net operating losses and, accordingly, has made no
provision for income taxes.
Basic and Diluted The Company adopted Financial Accounting Standards Board
Loss Per Share issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") in 1997. SFAS 128 provides
for the calculation of Basic and Diluted earnings per share.
Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in
earnings of an entity, similar to fully diluted earnings per
share.
Shares issuable for stock options and warrants have been
excluded from the computation of loss per share for the
years ended December 31, 1997 and 1996, as their inclusion
would be anti-dilutive.
10
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
11
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
1. Going Concern The Company's financial statements are presented on the
Matters going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business. During the year ended December 31, 1997,
the Company closed American Mortgage Express and First
Chesapeake Funding Corporation. As shown in the accompanying
financial statements, the Company has sustained significant
losses and has little working capital to fund future
operations which may indicate that the Company will be
unable to continue as a going concern for a reasonable
period of time.
The Company's continuation as a going concern is dependent
on its ability to identify new business opportunities and to
expand the operations of its wholly-owned subsidiaries,
Premiere Quality Foods, Inc. and Premiere Chemical Products,
Inc. both of which were formed, but were inactive, in 1997.
The Company also has issued letters of intent to acquire up
to six mortgage banking operations in the Eastern United
States. It is the Company's intent to fund these
acquisitions through issuance of additional shares and a
debt offering. There are no assurances that the Company will
be able to finalize any of these acquisitions.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability
and classification of assets or the amounts and
classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern.
2. Loan Servicing The Company was involved in servicing single family first
mortgage loans. Total loans being serviced at December 31,
1996 was approximately $7,505,000. During 1997, all loan
servicing was sold.
3. Mortgage Loans Loans held for sale at December 31, 1996 were committed for
Held for Sale delivery to various investors at prices that in the
aggregate exceeded carrying value.
12
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
4. Furniture and Furniture and equipment consists of the following:
Equipment
December 31, 1997 1996
------------------------------------------------------------
Leasehold improvements $ 22,138 $ 23,744
Furniture and fixtures 102,672 163,786
Machinery and equipment 186,571 452,935
Vehicles 36,521 55,100
-----------------------------------
347,902 695,565
Less accumulated depreciation
and amortization (226,275) (334,360)
-----------------------------------
$ 121,627 $ 361,205
-----------------------------------
Depreciation expense for the two years ended December 31,
1997 and 1996 were $119,550 and $129,243, respectively.
5. Notes Payable Note payable at December 31, 1997 and 1996 consisted of a
vehicle loan, which was paid in full during 1998. The
Company had a $3,000,000 warehouse line of credit at
December 31, 1996 to fund the origination of first
lien-mortgage loans. The warehouse line of credit was
terminated during February 1997 in conjunction with the
closing of AME and no amounts were outstanding during 1997
under the facility.
The following information relates to the warehouse line of
credit for the year ended December 31, 1996:
Outstanding at end of period $ -
Weighted average interest rate
at end of period -
Maximum amount outstanding
during the period 2,700,540
Average amount outstanding 701,019
Weighted average interest rate
during the period 8.15%
6. Income Taxes The Company files a consolidated income tax return. The
Company incurred net operating losses for federal income tax
purposes of approximately $1,680,000, and $1,272,000 for the
years ended December 31, 1997 and 1996, respectively,
resulting in total net operating loss carryforwards of
approximately $8,740,400 which expire beginning in 2007
through 2012, if not previously utilized. The difference
between the Company's net operating loss carryforward for
tax and financial reporting purposes results primarily from
temporary differences related to depreciation and
amortization.
At December 31, 1997 and 1996 the Company recorded a
valuation allowance for the total amount of the net deferred
tax asset which was composed primarily of the net operating
loss carryforwards.
13
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
7. Stock Options In May 1992, the Board of Directors adopted an Incentive
Stock Option Plan (the "Plan"). Pursuant to the Plan,
500,000 shares of the Company's common stock were made
available for awards. The Plan allows for Incentive Stock
Options intended to qualify as Incentive Stock Options
within the meaning of Section 322 of the Internal Revenue
Code of 1986, and for Non-qualified Stock Options not
intended to qualify as Incentive Stock Options. Incentive
Stock Options may be granted to employees as well as
non-employee directors and consultants to the Company.
Exercise prices under the Plan must be at fair market value
per share at date of grant or, in the case of Incentive
Stock Options granted to employees who own more than 10% of
the voting power of all classes of stock of the Company, at
110% of the fair market value per share at date of grant.
Option activity is summarized as follows:
<CAPTION>
Year Ended December 31, 1997 1996
------------------------------------------------------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
-----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding options
at beginning of
year 460,000 $1.17 460,000 $1.35
Options granted - 50,000 .50
Options cancelled (260,000) 1.28 (50,000) 2.20
-----------------------------------------------
Outstanding options
at end of year 200,000 $ .27 460,000 $1.17
-----------------------------------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
7. Stock Options The Company applies Accounting Principals Board Opinion 25
(continued) in accounting for stock options granted to employees. Had
compensation expense been determined based upon the fair
value of the awards at the grant date and consistent with
the methods under Statement of Financial Accounting
Standards 123, the Company's 1996 net loss and net loss per
share would have been increased to the pro forma amounts as
indicated in the following table:
Net loss 1996
-------------
As reported $1,346,331
Pro forma 1,371,331
Basic and
Net loss per share Diluted
-------------
As reported $.29
Pro forma .30
There were no options granted during 1997 and, therefore
there are no pro forma effects on net loss and net loss per
share. The fair value of each option granted during 1996 was
estimated on the date of grant using the Black-Sholes option
pricing model with the following assumptions: a risk free
interest rate of 6.397%, no dividend yield, expected
weighted average term of five years and a volatility of
140%.
At December 31, 1997 there were 200,000 options outstanding
and exercisable with an exercise price ranging from
$.25 to $.28 and a remaining maturity of 2.5 years.
8. Stockholders' On August 4, 1993, the Company completed an initial public
Equity offering of its securities through the sale of 1,250,000
Units at a purchase price of $8.00 per Unit. Each Unit
consisted of one share of the Company's common stock, no par
value, one Redeemable Class A Warrant and one Redeemable
Class B Warrant. Each Class A Warrant entitles its holder to
purchase one share of the Company's common stock at a
purchase price of $9.00 per share and each Class B Warrant
entitles its holder to purchase one share of common stock at
a price of $10.00 per share. The Class A and Class B
Warrants are exercisable by the holders until July 15, 1998.
In May 1992, the Company issued a warrant to purchase
500,000 shares of common stock at an exercise price of $2.00
per share. This warrant, together with 1,000,000 shares of
common stock, were issued to a founding stockholder of the
Company for proceeds of $425,000. The Company had assigned a
value to the warrant of $50,000. The warrant expired
unexercised during 1997 and the $50,000 was transferred to
common stock.
15
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
8. Stockholders' During, 1997, the Company issued 500,000 shares of common
Equity stock to acquire an interest in a joint venture (see Note
(continued) 11) and 500,000 shares as compensation to an officer of the
Company that joined the Company during 1997. The shares were
recorded at the fair value of the Company's common stock at
the respective issues dates.
9. Fair Value of FAS 107 requires disclosure of the fair value of financial
Financial instruments, both assets and liabilities recognized and not
Instruments recognized in the balance sheet, for which it is practicable
to estimate fair value. Fair value estimates are made as of
a specific point in time based on the characteristics of the
financial instruments and the relevant market information.
Fair value estimates are based on existing financial
instruments without attempting to estimate the value of
anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do
not necessarily represent the underlying market value of the
Company.
The following describes the methods and assumptions used by
the Company in estimating fair values.
Cash and Cash Equivalents - The carrying amount approximates
fair value as maturities are less than 90 days.
Mortgage Loans Held for Sale - The carrying amount
approximates fair value as these loans are backed by
commitments to purchase by an investor.
Notes Payable - The carrying amount approximates fair value
due to the short term repricing terms of the notes payable.
Commitment to Extend Credit - The fair value of mortgage
commitments to extend credit is estimated by comparing the
Company's cost to acquire mortgages to the current price for
similar mortgage loans, taking into account the terms of the
commitments and the creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers
the difference between the current level of interest rates
and the committed rates. There were no mortgage commitments
to extend credit at December 31, 1997.
10. 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
then principal officers ("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.
16
<PAGE>
- --------------------------------------------------------------------------------
First Chesapeake Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
10. Litigation On August 1, 1997, Defendants reached a settlement with
(continued) Plaintiffs with respect to this litigation. The Company
agreed to a payment of $270,000 to Plaintiffs to settle
their law suit. As part of the settlement, on August 5, 1997
the Plaintiffs tendered to the Company 121,550 shares of the
Company's common stock owned by them. The shares of common
stock were recorded at their fair value and the legal
settlement expense was adjusted by that amount $(9,724).
11. Investment in During 1997, the Company obtained a 50% interest in a joint
Joint Venture venture, Fedeoliva International LTD., from a company
wholly-owned by one of its board members in exchange for
extinguishment of a $135,000 (including accrued interest)
note receivable due from that board member and issuance of
500,000 (estimated fair value of $125,000 at issuance date)
shares of common stock. The remaining 50% is owned by
Fedeoliva, S.C.A., a Spanish olive oil production
cooperative. Fedeoliva International LTD is a company which
was created to acquire, package, distribute and sell
imported Spanish olive oil and related products in the
United States. During 1997, the Company loaned Fedeoliva
International, LTD $250,000 so that it could obtain the
rights to sell certain olive oil of Fedeoliva, S.C.A., held
in the United States. The joint venture experienced
significant losses during the year, and as a result, the
Company wrote-off its investment and a portion of the
unpaid note receivable balance ($55,760 plus accrued
interest) as of December 31, 1997. As of the end of January
1998, the joint venture ceased operations and remaining
obligations were transferred to Fedeoliva, S.C.A.
17
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, positions, ages and backgrounds of the directors and
executive officers of the Company at December 31, 1997 are set forth below.
Name Age Position
- ---- --- --------
Mark Mendelson 41 Chairman of the Board of Directors and
Chief Executive Officer. Mr. Mendelson has
been a Director of the Company since
August 1996. Since 1984, Mr. Mendelson has
served as Chairman and Chief Executive
Officer of Hampton Real Estate Group,
Inc., a diversified professional real
estate brokerage, development, and
management firm specializing in commercial
and residential properties throughout the
United States. Mr. Mendelson is a former
director and past chairman of the Audit
Committee of Equimark Bank Corporation
and sits on the boards of a variety of
civic and philanthropic institutions,
including the Board of Trustees of Lehigh
Valley Community College.
Richard N. Chajekian, Jr. 35 Director, President and Secretary and
Chief Operating Officer. Mr. Chakejian is
experienced in the food, laundry products
and chemical industries. Mr. Chakejian has
an extensive background in field
management, sales, marketing and research.
Matthew Coppolino 60 Director. Mr. Coppolino is the senior
Judge in the Municipal Court Of The City
Of Philadelphia.
Richard Chakejian, Sr., the father of the President, is manager and
sole employee of Premiere Chemical Products. Mr. Chakejian, Sr. formerly owned
and operated businesses engaged in several aspects of laundering, dry cleaning,
and institutional linen services, and is responsible for product introduction,
sales, marketing and general management of the wholly-owned subsidiary.
There are no other family relationships among any of the Directors or
executive officers of the Company or its subsidiaries.
Directors are elected at each annual meeting of stockholders and serve
until the next annual meeting. The bylaws of the Company require a minimum of
four Directors. With the resignations of Mr. Gray and Mr. Whitehurst, Jr. as of
December 15, 1997 and the election of Matthew Coppolino to the Board, there are
only three Directors on the Board. At December 31, 1997, the Company was seeking
candidates for the Board of Directors to reach or exceed the minimum required by
its bylaws. Executive officers are elected annually at a meeting of the Board of
Directors and, subject to individual contractual arrangements, serve at the
pleasure of the Board of Directors.
15
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file reports of
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
("SEC") and the National Association of Security Dealers. Officers, directors
and greater than ten percent (10%) beneficial owners are required by SEC
regulation to furnish the Company with copies of all forms 3, 4 and 5 they file.
To the Company's knowledge, the following transactions have not been filed with
the SEC:
1. In October 1997, Mark Mendelson received 500,000 shares of common
stock as partial payment for the transfer of a 50% interest in a Fedioliva
International, Ltd. to the Company.
2. In October 1997, Richard Chakejian, Jr. received 500,000 shares of
common stock in consideration of the transfer of his rights, title, and interest
in all propriertary formulas, processes, materials, know-how, and methods of
manufacture of a soap detergent and related product.
ITEM 10. EXECUTIVE COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company are entitled to
receive $300 per meeting of the Board of Directors or a Committee thereof
attended by the Director.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for the three years ended December 31,
1997, certain information as to the total remuneration paid to each of the
Company's executive officers whose total annual salary and bonus exceeded
$100,000 for services in all capacities:
<TABLE>
Summary Compensation Schedule
<CAPTION>
All
Annual Compensation Other
Name and Other Compensation
Principal Position (1) Year Salary Bonus (2) (3)
---------------------- ---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Mark Mendelson 1997 $ 0 $ 0 $ 0 $ 0
Chairman and CEO 1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
Richard N. Chakejian, Jr. 1997 $ 0 $ 0 $ 0 $ 125,000
President 1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
Max E. Gray 1997 $ 99,827 $ 0 $ 7,200 $ 110,167
President and CEO 1996 $100,000 $ 0 $ 7,200 $ 9,799
1995 $100,000 $ 25,000 $ 7,200 $ 9,144
C. Harril Whitehurst, Jr. 1997 $ 66,200 $ 0 $ 4,766 $ 0
Executive Vice 1996 $100,000 $ 0 $ 7,200 $ 9,500
President and CFO 1995 $100,000 $ 25,000 $ 7,200 $ 8,898
</TABLE>
(1) No other executive officer had compensation whose salary and bonus
exceeded $100,000.
(2) Includes perquisites, including automobile allowance.
(3) Includes premiums paid for health, disability and life (where the
spouse is the beneficiary) insurance.
(4) Mark Mendelson received 500,000 shares of common stock and $135,000
in exchange for a 50% interest in Fedeoliva International, Ltd.
Richard Chakejian, Jr. received 500,000 shares of common stock in
exchange for his transfer of all rights, title and interest in all
proprietary formulas, processes, materials, know-how, and methods of
manufacture of a soap detergent and related product. See item 12.
EMPLOYMENT AGREEMENTS
As of December 31, 1997, the Company had not entered into any
employment agreements with its employees.
16
<PAGE>
STOCK OPTION PLAN
In May 1992, the Board of Directors adopted an Incentive Stock Option
Plan (the "Plan"). Pursuant to the Plan, 500,000 shares of the Company's common
stock were made available for awards. The Plan allows for Incentive Stock
Options intended to qualify as Incentive Stock Options within the meaning of
Section 422 of the Internal Revenue Code of 1986, and for Nonqualified Stock
Options not intended to qualify as Incentive Stock Options. Incentive Stock
Options may be granted only to employees of the Company. Non-qualified Stock
Options may be granted to employees as well as non-employee directors and
consultants to the Company. Exercise prices under the Plan must be at fair
market value per share at date of grant or, in the case of Incentive Stock
Options granted to employees who own more than 10% of the voting power of all
classes of stock of the Company, at 110% of the fair market value per share at
date of grant. Option activity is summarized following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Outstanding options at
beginning of year 460,000 460,000 500,000
Options granted -0- 50,000 210,000
Options canceled (260,000) ( 50,000) (250,000)
--------- -------- -------
Outstanding options at
end of year 200,000 460,000 460,000
======= ======= =======
Exercise prices
Low $ .25 $ .25 $ .25
High .28 2.50 2.50
Latest expiration date May 1, 2001 May 1, 2001 July 24, 2000
</TABLE>
No options have been exercised as of December 31, 1997, nor were any
individual grants of stock options made to any executive officers during the
fiscal year ended December 31, 1997.
The following table presents information concerning each exercise of
stock options during the fiscal year ended December 31, 1997 by each of the
named executive officers and the value of unexercised options at December 31,
1997:
<TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
<CAPTION>
Number of
Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired at FY-End at FY-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Mark Mendelson 0 0 100,000 (1)
Richard N. Chakejian, Jr. 0 0 0 (1)
</TABLE>
(1) None of the options are in the money at December 31, 1997 as the
exercise price is equal to or higher than the closing price of the
Company's common stock at December 31, 1997 of $0.125 per share.
17
<PAGE>
STOCK APPRECIATION RIGHTS AND LONG-TERM INCENTIVE PLANS
The Company did not grant (nor has it ever granted) any stock
appreciation rights or long-term incentives to any of the executive officers
named in the preceding table during the fiscal year ended December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of December 31, 1997 by i)
each person known by the Company to own beneficially 5% of such stock, ii) each
Director of the Company, iii) each executive officer of the Company, and iv) all
Directors and executive officers of the Company as a group. Except as listed
below, the address for each of the listed individuals is:
12 E. Oregon St., Philadelphia, Pennsylvania 19148.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner (1) Beneficially Owned of Total (2)
- ---------------------------- ------------------ ------------
<S> <C> <C>
Mark Mendelson (3),(4)........................................ 2,651,000 47.3%
John E. Dell (4).............................................. 450,000 8.2%
c/o Gallagher, Briody, & Butler
Thomas P. Gallagher
212 Carnegie Center, Suite 402
Princeton, NJ 08540
Richard N. Chakejian, Jr...................................... 691,500 12.6%
Matthew Coppolino............................................. 0 0%
All Directors and officers
as a group (three persons)............................... 3,342,500 60.8%
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
powers with respect to the shares specified opposite his or her name.
(2) Does not include 2,500,000 shares of common stock which were issuable
upon exercise of the Class A and Class B Warrants included in the
Units sold in the initial public offering; these Class A and Class B
Warrants expired in mid-1997.
(3) Includes option to purchase 100,000 shares of common stock at $0.275
per share.
(4) Consists of 450,000 shares of common stock owned by Mr. Dell which is
subject to a voting trust which is voted by Mr. Mendelson.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, 500,000 shares of common stock were issued to Mr.
Chakejian, Jr. in consideration of the transfer of his rights, title, and
interests in all proprietary formulas, processes, materials, know-how, and
methods of manufacture of a soap detergent and related product.
In October 1997, 500,000 shares of common stock were issued to Mr.
Mendelson and a cash payment of $135,000 was made to Mr. Mendelson in
consideration for a 50% interest in Fedeoliva International, Ltd. which Mr.
Mendelson, through Hampton Financial Services, Inc., transferred to the Company.
Max E. Gray, C. Harril Whitehurst, Jr. and L. Anthony Bottoms, III each
purchased 500,000 shares of the Company's common stock at a purchase price of
$0.05 per share in May 1992. Messrs. Gray, Whitehurst and Bottoms were founding
stockholders of the Company and Messrs. Gray and Whitehurst were officers and
Directors of the Company until their resignations effective December 31, 1997.
Mr. Bottoms was an officer and Director of the Company until his resignation in
July 1995.
Pursuant to the terms of a May 1992 Stock Purchase Agreement between
the Company and John E. Dell a Director of the Company at that time, Mr. Dell
purchased 1,000,000 shares of the Company's common stock and was issued a Common
Stock Purchase Warrant (the "Private Warrant") entitling him to purchase up to
500,000 shares of the Company's common stock at $2.00 per share on or before May
18
<PAGE>
1997. The Private Warrant carries certain demand and piggyback registration
rights. Mr. Dell paid the Company $425,000 in consideration for the common stock
and Private Warrant and also agreed to subscribe for 1,000,000 shares of the
Company's Series A preferred stock if the Company was unable to sell a minimum
of 1,000,000 shares of its Series A preferred stock to third parties. On March
5, 1993, Mr. Dell sold the right to acquire 200,000 shares of the Company's
common stock pursuant to the Private Warrant to certain unrelated third parties.
All future transactions with officers, Directors or five percent (5%)
stockholders of the Company will be approved by the independent disinterested
members of the Company's Board of Directors and be on terms no less favorable to
the Company than could otherwise be obtained from unaffiliated third parties.
All of the transactions described above give retroactive effect to the
1-for-2 reverse stock split that occurred in July 1993.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) List of Exhibits Required by Item 601 Of Regulation S-B
Exhibit #
---------
1.1 Revised Form of Underwriting Agreement between the Company
and Hibbard Brown & Company, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 By-laws of the Company. (1)
3.3 Form of Stock Certificate. (1)
4.1 Revised Form of Underwriter's Unit Purchase Option to be
issued to Hibbard Brown & Company, Inc. (1)
4.2 Revised Form of Warrant Agreement among the Company, Hibbard
Brown & Company, Inc. and American Stock Transfer and Trust
Company, including specimen forms of Class A and Class B
Warrants. (1)
19
<PAGE>
4.3 Revised Form of "M/A" Agreement between the Company and
Hibbard Brown & Company, Inc. (2)
9.1 Irrevocable Voting Proxy, dated March 9, 1994 between John
E. Dell and Max E. Gray. (3)
10.1 Common Stock Purchase Agreement, dated May 16, 1992, by and
among the Company, John E. Dell, Max E. Gray, C. Harril
Whitehurst, Jr. and L. Anthony Bottoms, III. (1)
10.2 Escrow Agreement, dated May 16, 1992, by and among the
Company, Max E, Gray, C. Harril Whitehurst, Jr., L. Anthony
Bottoms, III, John E. Dell and Mason, Briody, Gallagher &
Taylor, Esqs. (1)
10.3 Escrow Agreement, dated May 16, 1992, by and among the
Company, John E. Dell and Mason, Briody, Gallagher & Taylor,
Esqs. (1)
10.4 Shareholders' Agreement, dated May 16, 1992 by and among the
Company, John E. Dell, Max E. Gray, C. Harril Whitehurst,
Jr. and L. Anthony Bottoms, III. (1)
10.5 Employment Agreement, dated May 18, 1992, between the
Company and Max E. Gray and Amendment No. 1 thereto dated
March 8, 1993. (1)
10.6 Employment Agreement, dated May 18, 1992, between the
Company and L. Anthony Bottoms, III and Amendment No. 1
thereto dated March 8, 1993. (1)
10.7 Employment Agreement, dated May 18, 1992, between the
Company and C. Harril Whitehurst, Jr. and Amendment No. 1
thereto dated March 8, 1993. (1)
10.8 1992 Stock Option Plan. (1)
10.9 Incentive Stock Option Agreement, dated June 1, 1992 between
the Company and Max E. Gray. (1)
10.10 Incentive Stock Option Agreement, dated June 1, 1992 between
the Company and L. Anthony Bottoms, III. (1)
10.11 Incentive Stock Option Agreement, dated June 1, 1992 between
the Company and C. Harril Whitehurst, Jr. (1)
10.12 Common Stock Purchase Warrant Agreement, dated March 8,
1993, by and among the Company, John E. Dell and Ronnie
Wohl. (1)
10.13 Common Stock Purchase Warrant Agreement, dated March 8,
1993, by and among the Company, John E. Dell and Donald
Wohl. (1)
10.14 Common Stock Purchase Warrant Agreement, dated March 8,
1993, by and among the Company, John E. Dell and Ladenberg,
Thalmann & Co. Inc. (1)
10.15 Common Stock Purchase Warrant, dated March 8, 1993, issued
by the Company to John E. Dell. (1)
10.16 Common Stock Purchase Warrant, dated March 8, 1993, issued
by the Company to Ronnie Wohl. (1)
10.17 Common Stock Purchase Warrant, dated March 8,1993, issued by
the Company to Donald Wohl. (1)
10.18 Common Stock Purchase Warrant, dated March 8, 1993, issued
by the Company to Ladenberg, Thalmann & Co. Inc. (1)
10.19 Non-Qualified Option Agreement, dated June 17, 1992, between
the Company and Thomas P. Gallagher. (1)
10.20 Non-Qualified Option Agreement, dated June 17, 1992, between
the Company and Michael F. Marino. (1)
10.21 Lease Agreement, dated July 27, 1992, between the Company
and Southgate Associates. (1)
10.22 Loan Agreement, dated July 20, 1992, by and between the
Company and NationsBank of Virginia, N.A. (1)
10.23 Commitment Letter, dated September 18, 1992, from
NationsBank of Virginia, N.A. approving credit facility in
the amount of $250,000. (1)
10.24 Commitment Letter, dated May 7, 1992, from NationsBank of
Virginia, N.A. approving credit facility in the amount of
$10,000,000. (1)
10.25 Mortgage Selling and Servicing Contract, dated July 31,
1992, between the Company and Fannie Mae. (1)
10.26 Mortgage Servicing Purchase and Sale Agreement, dated
December 30, 1992, by and between the Company and
Continental Savings of America. (1)
20
<PAGE>
10.27 Interim Servicing Agreement, dated December 9, 1992, by and
between the Company and Continental Savings of America. (1)
10.28 Mortgage Servicing Purchase and Sale Agreement, dated
December 30, 1992, by and between the Company and Beverly
Hills Securities Company. (1)
10.29 Interim Servicing Agreement, dated December 9, 1992, by and
between the Company and Beverly Hills Securities Company.
(1)
10.30 Mortgage Servicing Purchase and Sale Agreement, dated March
31, 1993, by and between the Company and Continental Savings
of America. (1)
10.31 Interim Servicing Agreement, dated March 31, 1993, by and
between the Company and Continental Savings of America. (1)
10.32 Mortgage Servicing Purchase and Sale Agreement, dated August
30, 1993, by and between the Company and Interfirst Federal
Savings Bank. (3)
10.33 Interim Servicing Agreement, dated August 30, 1993, by and
between the Company and Interfirst Federal Savings Bank. (3)
10.34 Mortgage Servicing Purchase and Sale Agreement, dated
September 30, 1993, by and between the Company and
Continental Savings of America. (3)
10.35 Interim Servicing Agreement, dated September 30, 1993, by
and between the Company and Continental Savings of America.
(3)
10.36 Agreement and Plan of Merger, dated September 29, 1993, by
and among the Company, First Chesapeake Acquisition
Corporation, Waterford Mortgage Corporation and Stockholders
of Waterford Mortgage Corporation. (3)
10.37 Lease Agreement, dated July 7, 1993, between Waterford
Mortgage Corporation and 1320 Old Chain Bridge Road
Associates. (3)
10.38 Lease Agreement, dated November 22, 1993, between Waterford
Mortgage Corporation and 1320 Old Chain Bridge Road
Associates. (3)
10.39 Mortgage Loan Warehouse Purchase Agreement, dated November
24, 1993, by and between Waterford Mortgage Corporation and
Mt. Vernon Federal Savings Bank. (3)
10.40 Commitment Letter, dated November 8, 1993, from NationsBank
of Virginia, N.A. approving increase in credit facility in
the amount of $10,000,000 to $15,000,000. (3)
10.41 Amendment, dated December 29, 1993, to Loan Agreement, dated
July 20, 1992, by and between the Company and NationsBank of
Virginia, N.A. (3)
10.42 Employment Agreement, dated March 16, 1994, between the
Company and John J. Morrissey. (3)
10.43 Employment Agreement, dated March 16, 1994, between the
Company and Robert L. Nichols. (3)
10.44 Stock Option Agreement, dated September 29, 1993, between
the Company and John J. Morrissey. (3)
10.45 Stock Option Agreement, dated September 29, 1993, between
the Company and Robert L. Nichols. (3)
10.46 Commitment Letter, dated October 8, 1993, from NationsBank
of Virginia, N.A. approving Credit Facility in the amount of
$250,000. (3)
10.47 Shareholders' Termination Agreement, dated January 7, 1994,
among the Company, John E. Dell, Max E. Gray, C. Harril
Whitehurst, Jr. and L. Anthony Bottoms, III. (3)
10.48 Liquidating Trust Agreement, dated March 9, 1994, by and
among John E. Dell, Wallace E. Timmeny, as Trustee, and the
Company. (3)
10.49 Commitment Letter and related loan documentation, dated
April 15, 1994, by and between Waterford Mortgage
Corporation and DLJ Mortgage Capital, Inc. (4)
10.50 Second Amendment, dated August 16, 1994, to Loan Agreement,
dated July 20, 1992, by and between the Company and
NationsBank of Virginia, N.A. (4)
10.51 Third Amendment, dated August 31, 1994, to Loan Agreement,
dated July 20, 1992, by and between the Company and
NationsBank of Virginia, N.A. (4)
10.52 Fourth Amendment, dated December 1, 1994, to Loan Agreement,
dated July 20, 1992, by and between the Company and
NationsBank of Virginia, N.A. (4)
10.53 Loan Servicing Purchase and Sale Agreement, dated November
30, 1994, by and between the Company and MCA Mortgage
Corporation. (4)
21
<PAGE>
10.54 Lease Agreement, dated January 12, 1995, by and between the
Company and Woodmere Investments Group, L.L.C. (4)
10.55 Lease Agreement, dated August 31, 1995, by and between the
Company and RF&P II, Inc. (5)
10.56 Letter of Intent, dated December 11, 1995, to acquire a
Federal Savings Bank in Florida by and between the Company
and Mr. Gene Moore, Chairman. (5)
10.57 Mortgage Loan Warehouse Agreement and related loan
documentation, dated February 29, 1996, by and between
American Mortgage Express, Inc. and First Union National
Bank of North Carolina. (5)
21 Subsidiaries of the Company
(a) National Archives, Inc., incorporated in the state
of Pennsylvania (60%)
(b) Premiere Quality Foods, Inc., incorporated in the
state of Virginia (100%)
(c) Premiere Chemicals, Inc., incorporated in the
state of Virginia (100%)
27 Financial Data Schedule (electronic filing only).
---------------------------
(1) Incorporated by reference to the correspondingly numbered
exhibit to the Registration Statement on Form S-1,
Registration No. 33-59726, filed by the Company with the
Securities and Exchange Commission (the "Commission") on March
18, 1993, and Amendments Nos. 1, 2, 3 and 4 thereto filed with
the Commission on May 19, June 25, July 8 and July 15, 1993,
respectively.
(2) Incorporated by reference to the exhibit numbered 4.4 to
Amendment No. 4 to the Registration Statement on Form S-1,
Registration No. 33-59726, filed by the Company with the
Commission on July 15, 1993.
(3) Incorporated by reference to the correspondingly numbered
exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1993 filed with the Commission on
March 31, 1994.
(4) Incorporated by reference to the correspondingly numbered
exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994 filed with the Commission on
March 31, 1995.
(5) Incorporated by reference to the correspondingly numbered
exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995 filed with the Commission on
April 1, 1996.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the last quarter of the period
covered by this report.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: December 7, 1998 First Chesapeake Financial Corporation,
a Virginia corporation
By: /s/ Mark Mendelson
---------------------------------
Mark Mendelson, Chairman,
Chief Executive Officer
By: /s/ Richard N. Chakejian, Jr.
---------------------------------
Richard N. Chakejian, Jr. Director,
President
By: /s/ Mark E. Glatz
---------------------------------
Mark E. Glatz, Director,
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
Date Name and Title Signature
- ---- -------------- ---------
<S> <C> <C>
December 7, 1998 Mark Mendelson, Chairman of the /s/ Mark Mendelson
------------------
Board, Chief Executive Officer Mark Mendelson
December 7, 1998 Richard N. Chakejian, Jr., /s/ Richard N. Chakejian. Jr.
-----------------------------
Director and President Richard N. Chakejian, Jr.
December 7, 1998 Mark E. Glatz /s/ Mark E. Glatz
-----------------
Director and Chief Financial Officer Mark E. Glatz
</TABLE>
23
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 17
<ALLOWANCES> 0
<INVENTORY> 8
<CURRENT-ASSETS> 37
<PP&E> 122
<DEPRECIATION> 306
<TOTAL-ASSETS> 253
<CURRENT-LIABILITIES> 159
<BONDS> 0
0
0
<COMMON> 10,833
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 253
<SALES> 29
<TOTAL-REVENUES> 104
<CGS> 0
<TOTAL-COSTS> 2,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,968)
<INCOME-TAX> 0
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<NET-INCOME> (1,968)
<EPS-PRIMARY> (0.41)
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</TABLE>
