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 March 31, 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>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,538 $ 12,845
Note receivable - 16,746
Furniture and equipment 102,426 121,627
Loans to related parties - 94,240
Inventory 121,651 8,095
----------- -----------
TOTAL ASSETS $ 226,615 $ 253,553
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Notes payable $ 17,795 $ 17,795
Accounts payable 49,648 26,355
Accrued expenses 118,067 114,659
Due officers 132,186 -
----------- -----------
Total liabilities $ 317,696 $ 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 (10,923,815) (10,737,990)
----------- -----------
Total stockholders' equity (deficit) $ (91,081) $ 94,744
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 226,615 $ 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 Ended March 31,
------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Sales $ 26,888 $ -
Mortgage origination - 19,184
Servicing fees - 1,969
Gain (loss) on sales of loans - (6,326)
Gain on sale of servicing - 29,043
Interest income 556 15,893
Interest expense - (1,936)
Other 16,054 585
-------- --------
Total revenues $ 43,498 $ 58,412
OPERATING EXPENSES
Compensation and employee benefits $140,519 $140,819
Professional fees 33,155 46,330
Commitment fees - 1,343
Occupancy 2,076 19,005
Depreciation and other amortization 19,201 35,583
Other operating expenses 34,392 36,203
-------- --------
Total operating expenses $229,323 $279,283
-------- --------
NET LOSS $185,825 $220,871
======== ========
BASIC AND DILUTED
LOSS PER SHARE $ 0.03 $ 0.05
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1997
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(185,825) $(220,871)
Adjustments
Depreciation and other amortization 19,201 35,583
Net decrease (increase) in loans
held for sale - 74,442
Loss on sale of fixed assets - 21,008
Increase in Inventory (113,556) (38,126)
Increase (decrease) in trade
accounts payable 23,293 (38,213)
Accrued expenses, net 3,408 (21,897)
--------- ---------
Net cash absorbed by operating activities (253,479) (188,074)
--------- ---------
INVESTING ACTIVITIES
Purchase of furniture and equipment - (85)
Proceeds from sale of fixed assets - 6,952
Purchase of notes receivable - (39,000)
--------- ---------
Net cash absorbed by
investing activities - (32,133)
--------- ---------
FINANCING ACTIVITIES
Repayment of bank loans
Repayment of notes receivable 16,746 -
Repayment of Related Party Loans 94,240
Decrease in notes payable -
Increase in amounts due officers 132,186 -
--------- ---------
Net cash provided by financing activities 243,172 -
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (10,307) (220,207)
Cash and cash equivalents at beginning
of period $ 12,845 $1,120,065
--------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,538 $ 899,858
========= ==========
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 months ended
March 31, 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. Loan Servicing
During the three months ended March 31, 1997, the Company sold all of
its loan servicing. Prior to this sale, the Company serviced both conforming and
nonconforming single family first mortgage loans.
In connection with its loan servicing activities, the Company made
certain payments of property taxes and insurance premiums and advances certain
principal and interest payments to investors prior to collecting them from
specific mortgagors.
3. Basic and Diluted Loss Per Share
Loss per share for the three months ended March 31, 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 March 31, 1998 and 1997 or their
inclusion would be anti-dilutive.
4. 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.
<PAGE>
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-K for 1997 and 10-QSBs for the first three quarters of 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets of the Company decreased from $254,000 at December 31, 1997 to
$227,000 at March 31, 1998, a decrease of $27,000 or 11%. This decrease was
primarily due to a reduction in loan to related party, offset by the purchase of
inventory by two early stage subsidiaries. Liabilities increased from $159,000
at December 31, 1997 to $318,000 at March 31, 1998 primarily through the
$132,000 of deferred compensation due the new officers of the Company (no
salaries were drawn by new management in the first quarter of 1998). Net worth
after the loss of $186,000 is -$91,000 (negative $91,000). At March 31, 1998,
the Company had liquid assets of $2,538 and current liabilities of $186,000.
Results of Operations
Current Period Performance and Earnings Outlook
The Company incurred a loss of $186,000 for the three months ended March
31, 1998 as compared to a loss of $221,000 for the same period in 1997. This
decrease in the amount of loss is a result of the closure of the Company's
mortgage banking activities. As discussed more fully in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 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 or attain profitable operations.
Comparison of Three Months Ended March 31, 1998 to Three Months Ended March 31,
1997
Revenues. Total revenues for the three months ended March 31, 1998
amounted to $43,000 representing an decrease of $15,000 when compared to the
same period in 1997. In 1997, the Company's principal sources of revenue were
fees from mortgage origination, gains on loan sales, and servicing activities.
The Company experienced the decrease in mortgage-related business revenues as
a result of the closure of its mortgage banking activities.
<PAGE>
Expenses. Total expenses for the three months ended March 31, 1998
amounted to $229,000 as compared to $279,000 for the same period in 1997. This
decrease is attributable to the reduction in overhead associated with the
closure of the Company's mortgage banking activities.
Liquidity and Capital Resources
Until the 1997 closure of its mortgage banking activities, the Company's
primary liquidity requirements have been the funding of these 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 March 31, 1998 amounted to $2,538 as
compared to $12,845 at December 31, 1997.
During the three months ended March 31, 1998, the Company's operating
activities utilized $253,000 as compared to utilizing $188,000 in the first
three months of 1997. The utilization of cash resources from operating
activities resulted primarily from the Company's losses in those periods as well
as the first quarter 1998 purchase of inventory for two early stage
subsidiaries.
The Company's investing activities utilized no cash resources during the
three months ended March 31, 1998 as compared to providing $32,000 for the same
period in 1997.
The Company's financing activities provided $243,000 in the first three
months of 1998, primarily through deferral of salaries to new management and
reduction in loan to a related party, as compared with no impact on cash flows
for the first three months of 1997.
As of March 31, 1998, the Company had cash and cash equivalents of
$2,538. 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
<PAGE>
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.
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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