Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on December 9, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
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 Oregon Avenue
Philadelphia, PA 19148
(Address of principal executive offices)
(Zip code)
(215) 755-5691
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ ] No [X]
The number of shares of common stock of registrant outstanding as of
November 24, 1998 was 5,775,000 shares.
<PAGE>
SUPPLEMENTAL INFORMATION
Since the end of 1997, the Company substantially restructured its
business operations. The reader is advised that the Company is concurrently
filing its 10-KSB for 1997 and 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-KSB for 1997 and 10-QSBs for the first three quarters of 1998.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,947 $ 12,845
Accounts receivable 10,942 -
Note receivable - 16,746
Furniture and equipment 65,431 121,627
Loan to related party - 94,240
Inventory 109,567 8,095
----------- ------------
TOTAL ASSETS $ 187,887 $ 253,553
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Notes payable $ 1,800 $ 17,795
Accounts payable 102,366 26,355
Accrued expenses 142,691 114,659
Due officers 245,624 -
----------- -----------
Total liabilities $ 492,481 $ 158,809
Stockholders' equity (deficit)
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 shares issued and
outstanding $10,832,734 $10,832,734
Deficit (11,137,328) (10,737,990)
----------- -----------
Total stockholders' equity (deficit) $ (304,594) $ 94,744
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 187,887 $ 253,553
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Sales $ 59,801 $ - $ 86,689 $ -
Mortgage origination - - 19,184
Servicing fees - - 1,969
Gain (loss) on sale:
Loans and securities - - (6,326)
Servicing (5,714) - 23,329
Interest income 166 8,323 722 24,216
Interest expense - - - (1,936)
Other 10,641 - 26,695 585
----------- ----------- ----------- -----------
Total revenues 70,608 2,609 114,106 61,021
OPERATING EXPENSES
Compensation and employee
benefits 157,315 83,662 297,834 224,481
Professional fees 29,002 168,527 62,157 214,857
Warehouse fees - - - 1,343
Occupancy 1,973 8,233 4,049 27,238
Depreciation and other
amortization 19,200 33,443 38,400 69,026
Litigation settlement - 270,000 - 270,000
Other operating expenses 76,631 55,790 111,004 91,993
----------- ---------- ----------- -----------
Total operating expenses 284,121 619,655 513,444 898,938
----------- ---------- ----------- -----------
NET LOSS $213,513 $617,046 $399,338 $ 837,917
========== ========== =========== ===========
LOSS PER SHARE $ 0.04 $ 0.13 $ 0.07 $ 0.18
========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (399,338) $ (837,917)
Adjustments
Depreciation and other amortization 38,400 69,026
Net decrease in loans held for sale -- 74,492
Increase in accounts receivable (10,942) --
Loss on sale of assets -- 6,070
Decrease (increase) in Inventory (101,472) 83,821
Increase (decrease) in trade accounts
payable accruals, and other liabilities 104,043 (56,729)
Accrued litigation costs -- 370,000
----------- -----------
Net cash provided (absorbed) by
operating activities (369,309) (291,237)
----------- -----------
INVESTING ACTIVITIES
Purchase of securities -- (103,424)
Proceeds from sale of securities -- 72,054
Proceeds from sale of servicing -- 23,329
Disposition of fixed assets 17,795 12,847
Purchase of notes receivable -- (289,000)
Repayments of notes receivable -- 25,050
----------- -----------
Net cash provided (absorbed) by
investing activities 17,795 (259,144)
----------- -----------
FINANCING ACTIVITIES
Repayment of notes payable (net) (15,995) --
Collection of note receivable 16,746 --
Decrease in loan to related party 94,240 --
Increase in amounts due officers 245,624 --
----------- -----------
Net cash provided by financing activities 340,615 --
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (10,898) (550,381)
Cash and cash equivalents
at beginning of period 12,845 1,120,065
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,947 $ 569,684
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ -- $ 54,012
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
2. Loss Per Share
Loss per share for the three and six months ended June 30, 1998 and 1997
was computed by dividing the net loss by 5,500,000 and 4,621,550 common shares
representing the aggregate of the weighted average number of common shares
outstanding during the periods. Outstanding stock options and warrants have been
excluded from loss per share calculations as their exercise prices exceed the
average market price for the three months ended June 30, 1998 and 1997 or their
inclusion would be anti-dilutive.
3. Litigation
On June 6, 1996, Robert L. Nichols and John J. Morrissey ("Plaintiffs")
filed a lawsuit in the Circuit Court of Fairfax County, Virginia against the
Company and two of its principal officers, Max E. Gray and C. Harril Whitehurst,
Jr. ("Defendants"), in the matter captioned "Robert L. Nichols, et al. v. Max E.
Gray, et al", Law No. 152839 (the "Lawsuit"). Plaintiffs are former owners and
employees of Waterford Mortgage Corporation ("Waterford"), a former wholly owned
subsidiary of the Company which ceased operations during June of 1995. During
March of 1994, Waterford was merged into a subsidiary of First Chesapeake
Financial Corporation and became a wholly owned subsidiary of the Company.
Plaintiffs alleged in their Lawsuit, among other things, that: (1) Defendants
made fraudulent representations to Plaintiffs and fraudulently failed to
disclose certain matters to Plaintiffs which induced Plaintiffs to merge
Waterford into the Company in exchange for stock in the Company; and (2)
Defendants breached various contractual agreements allegedly made to Plaintiffs
in connection with the merger or arising out of Plaintiffs' employment as
officers of Waterford after the merger. Plaintiffs sought alleged compensatory
damages in the range of approximately $1.3 million to $1.9 million, unspecified
punitive damages, and reimbursement of their costs, expenses and legal fees in
filing suit. The Company and its officers denied Plaintiffs' allegations and
vigorously contested the Lawsuit.
On August 1, 1997, Defendants reached a settlement with Plaintiffs with
respect to this litigation. The Company agreed to a payment of $270,000 to
Plaintiffs to settle their lawsuit. As part of the settlement, on August 5, 1997
Plaintiffs tendered to the Company 121,550 shares of the Company's common stock
owned by them.
As of June 30, 1997 the Company accrued the settlement and an estimated
$100,000 of additional professional fees. During the quarter ended September 30,
1997, the Company incurred an additional $128,000 of professional fees related
to the settlement of the litigation. Management believes that substantially all
costs related to the litigation have been recorded as of December 31, 1997.
Material Subsequent Events
Since the end of 1997, the Company substantially restructured its
business operations. The reader is advised that the Company is concurrently
filing its 10-KSB for 1997 and 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-KSB for 1997 and 10-QSBs for the first three quarters of 1998.
Item 2. Management's Discussion and Analysis or Plan of Operation
Financial Condition
Assets of the Company decreased from $253,000 at December 31, 1997 to
$188,000 at June 30, 1998, a decrease of $65,000 or 26%. This decrease was
primarily due to a reduction in loan to related party, partially offset by the
purchase of inventory by two early stage subsidiaries. At June 30, 1998,
liabilities amounted to approximately $492,000 versus $159,000 at the same date
in 1997, largely due to $246,000 of deferred salaries to the new management and
increased accounts payable and accruals. Following a loss of $399,000 for the
six month period, the Company had a net worth of $-305,000 (negative $305,000)
at June 30, 1998.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of approximately $399,000 for the six months
ended June 30, 1998 as compared to a loss of $838,000 for the same period in
1997. This decrease in the amount of loss in operations is a result of the
closure of the Company's mortgage banking activities, compounded by a $270,000
litigation settlement expense in the 1997 period. As discussed more fully in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, the
Company has closed all its mortgage banking activities and is actively seeking
operational opportunities in the financial services industry or other suitable
investment opportunities. However, no assurance can be given that management
will be able to find a suitable investment opportunity, that it will have the
necessary capital to execute an effective business plan if an opportunity is
found, or that it can attain profitable operations.
Comparison of Three Months Ended June 30, 1998 to Three Months Ended June 30,
1997
Revenues. Total revenues for the three months ended June 30, 1998
amounted to $71,000 representing an increase of $68,000 when compared to the
same period in 1997. Historically, the Company's principal sources of revenue
have been fees from mortgage origination, gains on loan sales, and servicing
activities. The 1997 closure of the mortgage banking related business resulted
in minimal revenues during the second quarter of 1997. Second quarter 1998
revenues consist primarily of sales by the subsidiaries.
Expenses. Total expenses for the three months ended June 30, 1998
amounted to $284,000 as compared to $620,000 for the same period in 1997. This
change is largely attributable to the $270,000 litigation settlement expense in
the 1997 period, as well as the reduction in overhead associated with the
closure of the Company's mortgage banking activities.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998
amounted to $114,000 representing an increase of $53,000 when compared to the
same period in 1997. The Company's principal sources of revenue had historically
been fees from mortgage origination, gains on loan sales, and servicing
activities. The Company experienced a decrease in revenues as a result of the
1997 closure of its mortgage banking activities. The increased revenues for the
first six months of 1998 are attributable to sales of the remaining
(non-mortgage banking) subsidiaries.
Expenses. Total expenses for the six months ended June 30, 1998 amounted
to $513,000 as compared to $899,000 for the same period in 1997, a decrease of
$386,000 or 43%. Operating costs were lower in the first six months of 1998
because of the reduction in overhead associated with the closure of the
Company's mortgage banking activities, and the 1997 six month period was also
adversely affected by the $270,000 litigation settlement expense.
Liquidity and Capital Resources
The Company's primary liquidity requirements have historically been the
funding of its mortgage banking operations, the net cost of mortgage loan
originations and the purchase of mortgage loan servicing rights. With the
closure of its mortgage banking operations, the Company's liquidity requirements
will be the funding of its remaining overhead expenses and any new business
opportunities that may be approved by the Board of Directors. The Company may
have to seek additional capital infusion to take advantage of new business
opportunities. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
Cash and cash equivalents at June 30, 1998 amounted to $1,947 as
compared to $12,845 at December 31, 1997.
During the six months ended June 30, 1998, the Company's operating
activities utilized $369,000 as compared to utilizing $291,000 in the first six
months of 1996. The utilization of cash resources from operating activities in
1998 and 1997 resulted primarily from the Company's losses in those periods.
The Company's investing activities provided $18,000 in cash resources
during the six months ended June 30, 1998 as compared to utilizing $259,000 for
the same period in 1997.
Financing activities provided $341,000 in cash resources for the six
months ended June 30, 1998 and had little impact on cash flows for the
comparable period in 1997. The 1998 financing activities consisted primarily of
the deferral of compensation by the new management as well as a reduction in
loan to related party.
As of June 30, 1998, the Company had cash and cash equivalents of
$1,947. Management believes that the Company may have to seek additional capital
infusion to take advantage of new business opportunities. While the Company
believes it can attract the necessary capital to provide the liquidity necessary
to pursue new business opportunities, no assurance can be given that it will in
fact be able to do so.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was involved in a lawsuit with Robert L. Nichols and John
J. Morrissey (the "Lawsuit"). The Lawsuit was concluded during 1997. The reader
is encouraged to review the Company's 10-KSB for the period ending December 31,
1997.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In December, 1997, the Company's former management resigned and the
Company's Richmond, VA offices were closed. At that time, the Company retained
interim management to oversee the move of the office and cessation of the
Company's former activities. Effective January 1, 1998, the Company's
headquarters was moved from Richmond, VA to 12 Oregon Avenue, Philadelphia, PA,
19148.
On April 1, 1998, the Company filed a Form 12b-25 Notification of Late
Filing regarding its Form 10-KSB for the period ended December 31, 1997. In that
filing, the Company stated that it had recently relocated its headquarters from
Virginia to Pennsylvania and installed new management, and that it was not
possible at that time for the new management to adequately review and file such
report without unreasonable effort or expense.
Item 6. Exhibits and Reports on Form 8-K
None
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: November 30, 1998 By: /s/ Mark Mendelson
---------------------------------------
Mark Mendelson, Chief Executive Officer
By: /s/ Richard N. Chakejian, Jr.
---------------------------------------
Richard N. Chakejian, Jr., President
By: /s/ Mark E. Glatz
---------------------------------------
Mark E. Glatz, Chief Financial Officer
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