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 September 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>
September 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and cash equivalents $ 59,822 $ 12,845
Accounts receivable 17,991 -
Note receivable - 16,746
Furniture and equipment 46,231 121,627
Loans To Related Party - 94,240
Inventory 104,084 8,095
--------- ----------
TOTAL ASSETS $ 228,128 $ 253,553
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Notes payable $ 1,800 $ 17,795
Accounts payable 151,572 26,355
Accrued expenses and other liabilities 69,712 114,659
Subordinated debenture notes payable 550,000 -
Due officers 101,486 -
--------- ----------
Total liabilities $ 874,570 $ 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; 5,775,000 and 5,500,000 shares issued
and outstanding $ 10,970,234 $ 10,832,734
Deficit (11,616,676) (10,737,990)
------------ ------------
Total stockholders' equity (deficit) $ (646,442) $ 94,744
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 228,128 $ 253,553
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Sales $ 47,642 $ - $ 134,331 $ -
Mortgage origination 11,450 - 11,450 19,184
Servicing fees - 20 - 1,989
Gain (loss) on sale:
Loans and securities - - - (6,326)
Servicing - 7,298 - 30,627
Interest income 173 47,994 895 72,210
Mortgage business interest expense - - - (1,936)
Other 585 26,695 -
----------- ----------- ----------- -----------
Total revenues $ 59,265 $ 55,312 $ 173,371 $ 116,333
OPERATING EXPENSES
Compensation and employee
benefits 387,168 60,686 685,002 285,167
Professional fees 23,980 95,961 86,137 310,818
Warehouse fees - - - 1,343
Occupancy 3,784 8,338 7,833 35,576
Depreciation and other
amortization 19,200 26,774 57,600 95,800
Litigation settlement - - - 270,000
Interest expense 16,567 - 16,567 -
Other operating expenses 87,914 25,702 198,918 117,695
----------- ----------- ----------- ------------
Total operating expenses 538,613 217,461 1,052,057 1,116,399
----------- ----------- ----------- ------------
NET LOSS $ 479,348 $ 162,149 $ 878,686 $1,000,066
======= ======= ======== ========
LOSS PER SHARE $ 0.08 $ 0.04 $ 0.15 $ 0.22
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (878,686) $(1,000,066)
Adjustments
Depreciation and other amortization 57,600 95,800
Net decrease in loans held for sale - 74,492
Increase in accounts receivable (17,991) -
Gain on sale of assets (685)
Increase in Inventory (95,989) (58,114)
Increase (decrease) in accounts payable,
accruals, and other liabilities 80,270 (44,354)
Accrued litigation costs 43,259
Common Stock Issued as Compensation 137,500 -
---------- -------------
Net cash absorbed by operating activities (717,295) (889,668)
---------- -------------
INVESTING ACTIVITIES
Purchase of securities - (103,424)
Proceeds from sale of securities - 87,288
Proceeds from sale of servicing - 23,329
Disposition of fixed assets (net) 17,795 31,737
Purchase of notes receivable - (298,392)
Repayments of notes receivable - 210,203
Net cash provided (absorbed) by ----------- -------------
investing activities 17,795 (49,259)
---------- -------------
FINANCING ACTIVITIES
Notes payable (net) (15,995) -
Collection of note recievable 16,746 -
Decrease in loan to related party 94,240 -
Subordinated debenture notes 550,000 -
Increase in amounts due officers 101,486 -
---------- -------------
Net cash provided by financing activities 746,477 -
---------- -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 46,977 (938,927)
Cash and cash equivalents
at beginning of period 12,845 1,120,065
---------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 59,822 $ 181,138
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ - $ 1,936
======== ========
</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 nine months
ended September 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 nine months ended September 30, 1998
and 1997 was computed by dividing the net loss by 5,775,000 and 4,621,550 common
shares representing the aggregate of the weighted average number of common
shares outstanding during the periods. As of July 1, 1998, the Company issued
275,000 shares of common stock as compensation to an officer of the Company that
joined the Company as of that date. The shares were recorded at the fair value
of the Company's common stock at the issue date. 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 September 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.
<PAGE>
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 $254,000 at December 31, 1997 to
$228,000 at September 30, 1998, a decrease of $26,000 or 10%. 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 September 30, 1998,
liabilities amounted to approximately $875,000 versus $159,000 at December 31,
1997, of which $550,000 represented subordinated debenture notes payable,
$101,000 represented deferred salaries to the new management and $221,000
represented accounts payable and accruals. The subordinated debenture notes are
unsecured, bear interest at 12% per annum, and are due and payable three years
from close of the offering. Up to 20% of the subordinated debenture notes are
convertible, at any time at option of the holder, into the Company's common
stock at a price of $2.00 per share. The $550,000 includes $350,000 of
subordinated debentures issued to certain officers of the Company in exchange
for a similar reduction in amounts due officers. Following a loss of $879,000
for the nine month period, the Company had a net worth of $-646,000 (negative
$646,000) at September 30, 1998.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of approximately $879,000 for the nine
months ended September 30, 1998 as compared to a loss of $1,000,000 for the same
period in 1997. This decrease in the amount of loss in operations is a result of
the 1997 closure of the Company's former 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 September 30, 1998 to Three Months Ended
September 30, 1997
Revenues. Total revenues for the three months ended September 30, 1998
amounted to $59,000 representing an increase of $4,000, or 7%, 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 third quarter of 1997. Third quarter
1998 revenues consist primarily of $48,000 of sales of the non-mortgage banking
subsidiaries and $11,000 of revenues from First Chesapeake Funding Corporation,
the newly formed mortgage banking subsidiary.
<PAGE>
Expenses. Total expenses for the three months ended September 30, 1998
amounted to $539,000 as compared to $217,000 for the same period in 1997, an
increase of $322,000, reflecting the increased activity of the subsidiaries and
including a substantial ($326,000) increase in compensation during the 1998
period.
Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Revenues. Total revenues for the nine months ended September 30, 1998
amounted to $173,000 representing an increase of $57,000 when compared to the
same period in 1997. Revenues for the nine month period of 1998 represent sales
by the non-mortgage banking subsidiaries of $134,000, and $11,000 of revenues
from First Chesapeake Funding Corporation, the newly formed mortgage banking
subsidiary. Until 1997, the Company's principal sources of revenue had been fees
from mortgage origination, gains on loan sales, and servicing activities. The
Company experienced the decrease in revenues as a result of the closure of its
former mortgage banking activities.
Expenses. Total expenses for the nine months ended September 30, 1998
amounted to $1,052,000 as compared to $1,116,000 for the same period in 1997, a
decrease of $64,000 or 6%. Operating costs were slighty lower in the first nine
months of 1998 as the 1997 nine month period was adversely affected by a
$270,000 litigation settlement expense, offset somewhat by increased
compensation expense in the 1998 period.
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 former
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 raised $550,000
under a subordinated debenture offering in the third quarter of 1998, and may
have to seek additional capital infusion to take advantage of new business
opportunities. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
Cash and cash equivalents at September 30, 1998 amounted to $59,822 as
compared to $12,845 at December 31, 1997.
During the nine months ended September 30, 1998, the Company's operating
activities utilized $717,000 as compared to $890,000 in the first nine months of
1997. 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 nine months ended September 30, 1998 as compared to utilizing $49,000
for the same period in 1997.
Financing activities provided $746,000 in cash resources for the nine
months ended September 30, 1998, including $550,000 represening the issuance of
subordinated debenture notes payable and $101,000 represented deferred salaries
to the new management. Financing activities had little impact on cash flows for
the nine months ended September 30, 1997.
As of September 30, 1998, the Company had cash and cash equivalents of
$59,822. Management believes that the Company's current liquidity and capital
resources are adequate to meet its near-term goals, however, the Company may
have to seek additional capital infusion to take advantage of new business
opportunities. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
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
<PAGE>
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
Richmond, Virginia to Philadelphia, 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.
In August 1998, the Company formed First Chesapeake Funding
Corporation, a wholly-owned subsidiary to operate a wholesale mortgage banking
business in the Ft. Lauderdale, Florida metropolitan area and to develop,
internally or by acquisition, complementary wholesale and retail operations in
targeted geographic markets. The subsidiary was formed with a cash infusion of
$150,000, a short term note payable from the Company of $100,000, and fixed
assets from the closure of the Company's Richmond, VA offices. In addition to
establishing a profitable wholesale mortgage banking operation, the subsidiary
will focus on the development of a comprehensive product line on both the
wholesale and retail levels. To date, the subsidiary has announced the signing
of letters of intent to purchase four mortgage companies, including an
established wholesale lending business that specializes in conventional
(conforming) loans. Subject to final due diligence, the current loan volumes of
the merged organization indicate annual closed loan production in excess of $400
million. Following closing of the acquisitions, the Company will have 14 offices
in seven states, and will be licensed to operate in over 40 states. Due
diligence is anticipated to be completed during the fourth quarter of 1998, with
completion of the transaction targeted before year's end. There can be no
assurance that the Company will successfully complete such transactions.
Furthermore, assuming that the Company does complete such transactions, there
can be no assurance that such transactions will be profitable.
Item 6. Exhibits and Reports on Form 8-K
In a report on Form 8-K dated August 6, 1998, the Company announced a
change in management, retention of interim management, and the move of its
corporate headquarters. 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.
In a report on Form 8-K dated August 11, 1998, the Company announced
today announced the results of a July 9, 1998, a special meeting of the Board of
Directors. The Board of Directors elected three new Directors, bringing the
total number of Directors to six:
Richard N. Chakejian, Jr., - President and a Director since 1997, Mr.
Chakejian is experienced in the food, laundry products and chemicals
industries, and has an extensive background in field management, sales,
marketing, and research.
Matthew Coppolino - a Director since 1997, Mr. Coppolino is the senior
Judge in the Municipal Court Of The City Of Philadelphia.
Mark Glatz - a newly-elected Director, Mr. Glatz brings fourteen years'
experience in finance, banking, and a wide array of industries, and
holds a degree in accounting and an MBA in financial management.
James Greenfield - a newly-elected Director, Mr. Greenfield is an
attorney with 16 years experience in private practice, emphasizing
municipal law, real estate matters, and complex commercial litigation
and arbitration.
Mark Mendelson - Chairman of the Board of Directors, Chief Executive
Officer, and a Director since 1997, Mr. Mendelson is an experienced
businessman, investor, and real estate developer with a financial
background, as well as former director of and past chairman of the
Audit Committee of a major financial institution and its subsidiaries.
John Papandon - a newly-elected Director, Mr. Papandon is an attorney
and Certified Public Accountant with a Masters degree in taxation with
15 years experience in the accounting industry.
<PAGE>
The Board of Directors appointed two new Officers to the company: Mark
Glatz, Chief Financial Officer and James Greenfield, Secretary. The Board of
Directors established three Committees to oversee activities of the Company:
Audit Committee; Executive Committee; and Executive Compensation Committee. The
Board of Directors elected to engage the accounting firm of BDO Seidman, LLP as
the Company's independent certified public accountant for the year ended
December 31, 1997. The Board of Directors has instructed the Officers to perform
all steps required to re-establish compliance with SEC and other regulatory
requirements. At the same meeting, the Company accepted the resignation of
Pasquale Nestico, M.D. from the Board of Directors, effective April 14, 1998,
and expresses its appreciation to Dr. Nestico for his services.
In a report on Form 8-K dated August 11, 1998, the Company announced
the formation of a new subsidiary and the acquisition of a Florida mortgage
banking operation and appointment of Lester W. Salzman as President of the newly
formed subsidiary. Salzman has more than 20 years of mortgage lending
experience, most recently served as executive vice president and sales manager
for another national publicly traded lender. The new company will be known as
First Chesapeake Funding Corporation with operational headquarters in the Ft.
Lauderdale, Florida metropolitan area and will focus on the development of a
comprehensive alternative documentation product line on both the wholesale and
retail levels.
In a report on Form 8-K dated August 11, 1998, the Company announced
the execution of letters of intent to purchase three mortgage companies. The
consolidated historical financials of the merged organization indicate gross
monthly closed loan production in excess of $30 million. Additionally, the
corporation will expand to thirteen branches in seven states, offering both
conventional and alternative documentation loans on a wholesale and retail
basis. Due diligence is anticipated to be completed in the fourth quarter of
1998, with completion of the transactions scheduled to occur before the year's
end. There can be no assurance that the Company will successfully complete such
transactions. Furthermore, assuming that the Company does complete such
transactions, there can be no assurance that such transactions will be
profitable.
In a report on Form 8-K dated September 23, 1998, the Company announced
the adoption of a private placement of convertible debt. At the July, 1998
special meeting of the Board of Directors, the Company ratified a "Confidential
Private Placement Memorandum" offering of up to $2,000,000 of Junior Debentures.
The Debentures bear interest at 12% per annum, and up to 20% of each unit is
convertible to the Company's Common Stock at a rate of $2.00 per share.
In a report on Form 8-K dated October 7, 1998, the Company announced
the signing of a letter of intent to purchase an established wholesale lending
business that specializes in conventional (conforming) loans. The agreement
represents the fourth in a series of planned acquisitions by the Company.
Subject to final due diligence, the current loan volumes of the merged
organization indicate annual closed loan production in excess of $400 million.
Due diligence is anticipated to be completed during the fourth quarter of 1998,
with completion of the transaction targeted before year's end. There can be no
assurance that the Company will successfully complete such transactions.
Furthermore, assuming that the Company does complete such transactions, there
can be no assurance that such transactions will be profitable.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: November 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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0
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