Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on August 24, 1999
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, 1999
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 June 30,
1999 was 6,345,000 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 1998 and 10-QSB for the first quarter of 1999. 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 1998 and 10-QSB for the first quarter of 1999.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
Assets (Unaudited)
<S> <C>
Cash and cash equivalents $ 414,414 $ 969
Note and accounts receivable 290,607 38,119
Furniture and equipment, net 118,164 53,943
Capitalized financing costs 187,000 -
Goodwill & related 3,904,933 -
Other assets 26,937 6,210
------------ ------------
Total Assets $ 4,942,055 $ 99,241
Liabilities and Stockholders' Equity (Deficiency)
Liabilities
Note payable - bank $ 1,500,000 $ -
Note payable - other 2,900,000 -
Accounts payable 563,928 359,429
Accrued expenses 243,256 51,470
Due to officers 297,360 259,860
Subordinated junior debentures 635,000 635,000
Liabilities of discontinued operations - 38,441
------------ ------------
Total Liabilities $ 6,139,544 $ 1,344,200
Commitments and Contingencies
Stockholders' Equity (Deficiency)
Convertible preferred stock; no par value;
$1 stated value per share; 5,000,000
shares authorized; no shares issued - -
Common stock; no par value; 20,000,000
shares authorized; 6,325,000 and
5,775,000 shares issued and outstanding 11,203,625 10,956,125
Deficit (12,401,113) (12,201,084)
------------ ------------
Total Stockholders' Equity (Deficiency) $ (1,197,489) $ (1,244,959)
Total Liabilities and Stockholders' Equity (Deficiency) $ 4,942,055 $ 99,241
</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,
----------------------------
1999 1998
---- ----
<S> <C>
REVENUES
Sales $ 776,479 $ 26,888
Interest income 1,483 556
Other - 16,054
---------- ----------
Total revenues $ 777,962 $ 43,498
OPERATING EXPENSES
Compensation and employee benefits $ 590,050 $ 140,519
Professional fees 12,076 33,155
Occupancy 43,111 2,076
Depreciation and other amortization 47,297 19,201
Other operating expenses 285,457 34,392
---------- ----------
Total operating expenses $ 977,991 $ 229,323
---------- ----------
NET INCOME/(LOSS) $ (200,029) $ (185,825)
========== ==========
BASIC AND DILUTED INCOME/
(LOSS) PER SHARE $ (0.03) $ (0.03)
========== ==========
</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,
----------------------------
1999 1998
---- ----
<S> <C>
OPERATING ACTIVITIES
Net loss $ (200,029) $(185,825)
Adjustments:
Depreciation 11,329 19,201
Amortization of goodwill and capitalized financing costs 68,968 -
(Increase) decrease in receivables (205,771) 16,746
Increase in inventory - (113,556)
Decrease in other assets 2,544 -
Increase in trade accounts payable 204,499 23,293
Accrued expenses, net 191,786 3,408
Decrease in liabilities of discontinued subsidiaries (38,441) -
Net cash provided (absorbed) by operating activities 34,885 (236,733)
----------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets (550) -
Cash used in acquisition, net (1,185,889) -
Net cash absorbed by investing activities (1,186,439) -
----------- ---------
FINANCING ACTIVITIES
Proceeds of note payable - bank 1,500,000
Repayment of related party loans - 94,240
Increase in amounts due officers 37,500 132,186
Increase in common stock 27,499 -
Net cash provided by financing activities 1,564,999 226,426
----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 413,445 (10,307)
Cash and cash equivalents at beginning of period $ 969 $ 12,845
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 414,414 $ 2,538
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 41,829 -
</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, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998.
2. Sale of Premiere Chemical
On January 1, 1999, the Company sold its investment in Premiere Chemical to a
family member of one of its officers in exchange for purchaser's assumption of
substantially all of Premiere Chemical's net liabilities; the transaction
resulted in a gain of $38,441 during the first quarter of 1999.
3. Acquisition
On February 9, 1999, the Company acquired substantially all of the assets of
Mortgage Concepts, Inc., an entity engaged in retail real estate financing
activities, for $4,100,000, subject to reduction if certain financial
benchmarks, as outlined in the Asset Purchase Agreement (the Agreement), are not
attained by Mortgage Concepts, Inc. The $4,100,000 purchase price consists of
$3,612,500 of cash and $487,500 of Company common stock, payable over a period
of time specified in the Agreement. The acquisition will be accounted for under
the purchase method of accounting.
4. Financing
On February 5, 1999, the Company borrowed $1,500,000 from a bank; $1,200,000 of
such borrowings was used in conjunction with the aforementioned acquisition. The
loan, guaranteed by certain officers of the Company and other individuals, bears
interest at 9.75% and matures February 5, 2000. Under the terms of the loan
agreement, the Company is required to sell to the bank at least $1,000,000 of
nonconforming mortgages, based on the bank's wholesale pricing structure,
originated by the Company monthly; in the event of failure to do so, the Company
is subject to an additional interest charge of 1% on the amount of loans sold
under $1,000,000.
In connection with this financing, the Company entered into loan guaranty
agreements with the individuals guaranteeing the loan, whereby such individuals
received shares and options of the Company's common stock as compensation for
their guarantees.
<PAGE>
5. Supplemental Information
The Company's business consists of two principal activities (a) mortgage banking
operations and (b) non-mortgage banking operations. The following table sets
forth certain unaudited information concerning these activities:
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Operations by Segment Mortgage Non-Mortgage
(Unaudited) Banking Banking Corporate Consolidated
Operations Operations Operations Operations
<S> <C>
Revenues: $ 736,000 $ 40,000 $ 2,000 $ 778,000
Operating Expenses:
Compensation and
Employee Benefits 474,000 24,000 92,000 590,000
Professional Fees 11,000 -0- 1,000 12,000
Occupancy 42,000 -0- 1,000 43,000
Other Operating Expenses 196,000 19,000 44,000 259,000
------------------------ --------- -------- ---------- ----------
723,000 43,000 138,000 904,000
Operating Profit/(Loss) 13,000 (3,000) (137,000) (126,000)
Other Expenses:
Depreciation/Amortization 2,000 5,000 40,000 47,000
Interest/Financing Expense -0- -0- 75,000 75,000
Other Expenses -0- -0- (48,000) (48,000)
-------------- --------- -------- ---------- ----------
2,000 5,000 68,000 74,000
Net Profit/Loss 11,000 (8,000) (203,000) (200,000)
</TABLE>
In managing its business, the Company does not allocate corporate expenses to
its various activities.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets of the Company increased from $99,000 at December 31, 1998 to $4,942,000
at March 31, 1999, an increase of $4,843,000. This increase was primarily due to
the acquisition of the assets of Mortgage Concepts, Inc. (as further detailed in
Note 3 of the financial statements).
Liabilities increased from $1,344,000 at December 31, 1998 to $6,140,000 at
March 31, 1999 primarily through the assumption of bank and other debt
associated with the Mortgage Concepts acquisition. Accounts payable and accruals
also increased by $396,000 during the first quarter of 1999. Net worth after the
loss of $200,000 during the period is -$1,197,000 (negative $1,197,000). At
March 31, 1999, the Company had liquid assets of $705,000 and current
liabilities of $3,257,000, including a bank loan of $1,500,000 maturing in
February 2000 and a payment due the sellers of Mortgage Concepts, Inc. of
$950,000 due in October 1999.
Results of Operations
Current Period Performance and Earnings Outlook
The Company incurred a loss of $200,000 for the three months ended March 31,
1999 as compared to a loss of $186,000 for the same period in 1998. This
increase in the amount of loss is a result of a modest profit in the mortgage
banking segment being more than offset by higher costs of corporate operations,
including approximately $75,000 of interest expense and financing costs and
$36,000 of amortization of goodwill associated with the aforementioned
acquisition. Results for the quarter benefited from a $38,000 gain upon the sale
of Premiere Chemicals in January 1999.
As discussed more fully in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998, the Company is implementing its strategic plan of
developing a retail and wholesale mortgage banking operation through acquisition
and internal growth as a step toward developing a vertically integrated
financial services company that can provide mortgage origination, homeowner's
insurance, title insurance and home warranties, among other financial services,
consumer direct, wholesale and through the Internet. The Company has acquired
substantially all of the assets of a retail real estate financing entity (Note 3
of the accompanying financial statements) and continues to expand its mortgage
banking operations, and is pursuing other potential business opportunities
consistent with its strategic plan. However, there are no assurances that the
Company will be able to successfully implement all aspects of its strategic
plan.
Comparison of Three Months Ended March 31, 1999 to Three Months Ended March 31,
1998
Revenues. Total revenues for the three months ended March 31, 1999 amounted to
$778,000 as compared with $43,000 for the same period in 1998, representing the
re-establishment of mortgage banking operations within the Company including
operations of the Mortgage Concepts, Inc. acquisition from February 10, 1999 to
March 31, 1999.
Expenses. Total expenses for the three months ended March 31, 1999 amounted to
$978,000 as compared to $229,000 for the same period in 1998. This increase is
attributable to the increased activity in the new mortgage banking operations
($725,000 of expenses, including compensation equal to 65% of the total)
including activity of the Mortgage Concepts, Inc. acquisition from February 10,
1999 to March 31, 1999.
Operating Results by Segment
For the three months ended March 31, 1999, the Company's mortgage banking
operations, which consist of First Chesapeake Funding Corporation and Collateral
One Mortgage Corporation (for the period from the February 9, 1999 acquisition
date until quarter end), reported revenues of $736,000 resulting in a profit of
$11,000. Expenses were comprised primarily of compensation ($474,000) which
includes commissions paid to loan officers during the period.
<PAGE>
The non-mortgage banking operations consist of the 60% subsidiary, National
Archives, Inc., which reported a loss of $8,000 on revenues of $40,000 for the
period. All other non-mortgage banking operations have been closed or sold as of
March 31, 1999.
Corporate operations consisted of expenses of $252,000 offset by a $38,000 gain
on the sale of the Premiere Chemicals subsidiary. Expenses included compensation
of $92,000, interest and financing expenses of $75,000, and
depreciation/amortization of $40,000 (including $36,000 of amortization of
goodwill associated with the Mortgage Concepts, Inc. acquisition). Overall, the
nominal profits from the mortgage banking operations were offset by corporate
operation costs, resulting in the $200,000 loss for the three month period ended
March 31, 1999.
Liquidity and Capital Resources
The Company's primary liquidity requirements have been the establishment,
funding and expansion of its mortgage banking operations, including the February
1999 acquisition of Mortgage Concepts, Inc.
The Company borrowed $1,500,000 from a bank in the first quarter of 1999 secured
by the personal guarantees of several officers and directors of the Company and
one outside investor to partially finance the Collateral One acquisition and for
working capital needs (as further discussed in Note 4 of the accompanying
financial statements). The Company is seeking additional capital infusion to
fund its mortgage banking acquisitions and expansion. 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.
The Company funds its mortgage banking activities in large part through
warehouse lines of credit, and its ability to continue to originate and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable terms. Borrowings under these lines are repaid with the proceeds
received by the Company from the sale of the loans to institutional investors.
The Company's committed warehouse lines at March 31, 1999 allowed the Company to
borrow up to $10 million; subsequently in 1999 borrowing availability has
increased to $26 million. The warehouse lines expire within the next twelve
months, but are generally renewable, however, no assurances are given that the
Company can renew its warehouse lines or that such renewals can be made on equal
or more favorable terms to the Company. The Company sells its originated and
purchased loans, including all servicing rights, for cash to institutional
investors, usually on a non-recourse basis, with proceeds applied to reduce
corresponding warehouse line outstandings.
Cash and cash equivalents at March 31, 1999 amounted to $414,000 as compared
to $1,000 at December 31, 1998, or an increase of $413,000.
During the first three months of 1999, the Company's operating activities
provided $184,000 as compared to utilizing $253,000 in the same period in 1998.
The cash provided from operating activities in the first quarter of 1999
resulted from the Company's net loss for the period more than offset by
increases in accounts payable and accruals. The cash utilized in the same period
in 1998 resulted from losses in that period and investment in inventory for
non-mortgage banking operations (since closed and/or sold).
Investing activities, namely the acquisition of Mortgage Concepts, Inc.,
utilized $4,016,000 in the first quarter of 1999. The Company's investing
activities were negligible in the comparable period of 1998.
Financing activities provided $4,245,000 of capital in the first three months of
1999 including the aforementioned $1,500,000 bank loan (Note 4 of the financial
statements) and $2,900,000 note payable to the sellers of the acquired company.
Other than the ongoing deferral of salaries by the executive officers of the
Company, financing activities were minimal in the same period of 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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
None
Item 6. Exhibits and Reports on Form 8-K
In a report on Form 8-K dated February 11, 1999 the Company announced
the acquisition of an undisclosed Eastern U.S. mortgage banking firm with retail
mortgage origination operations in five states, Kentucky, Indiana, Missouri,
North Carolina and Tennessee. The firm was subsequently identified as Mortgage
Concepts, Inc. in the Form 8-K dated May 11, 1999 (see below).
In a report on Form 8-K dated April 14, 1999 the Company announced a
definitive option agreement to purchase a substantial block of common stock held
by a former Director of the Company. Hampton Financial Services, Inc., an entity
controlled by Mark Mendelson, Chairman of the Board of Directors and Chief
Executive Officer, or its designee has entered into a definitive option
agreement to purchase 450,000 shares of common stock from John E. Dell. These
shares represent over 6% of the Company's fully diluted common stock. Mr. Dell
was a Director of First Chesapeake in 1992 at which time he purchased 1,000,000
shares of the Company's common stock with attached warrants (since expired). In
1994, Mr. Dell entered into a liquidating trust agreement whereby he sold
550,000 shares of common stock and granted an irrevocable proxy to vote his
remaining 450,000 shares to Max E. Gray, the former President of the Company.
This liquidating trust was established to, among other things, expedite the
approval of the Company's licensing application under the Virginia Mortgage
Lender and Broker Act. Effective January 1, 1998, following Mr. Gray's
resignation from the Company, the Board of Directors appointed Mark Mendelson to
replace Mr. Gray as holder of the proxy. This block of stock represents the last
remaining shares held by former management and/or Directors of the Company.
First Chesapeake was formed in 1992 and closed in 1997 following several years
of unprofitable operations. (This option was not exercised and expired in June
1999.)
In a report on Form 8-K dated May 11, 1999 the Company announced the
completion of the acquisition of Mortgage Concepts, Inc. of Louisville, KY.
Mortgage Concepts, Inc., which now conducts business under the name Collateral
One Mortgage, is a mortgage banking firm with retail mortgage origination
operations in five states including Kentucky, Indiana, Missouri, North Carolina
and Tennessee. Applications are also pending for approval to originate loans in
Ohio, Georgia, Kansas, Pennsylvania and New Jersey. Upon completion of these
approvals, First Chesapeake and its holdings will have mortgage origination
operations in a total of 11 states.
In a report on Form 8-K dated June 8, 1999 the Company announced a
change in accountant from BDO Seidman, LLP to Grant Thornton LLP as of that
date. The reports of BDO Seidman, LLP on the financial statements for the fiscal
years ended December 31, 1996 and 1997 contained no adverse opinion or
disclaimer of opinion and were not qualified or modifies as to uncertainty,
audit scope or accounting principle, except that their report for the fiscal
<PAGE>
year ended December 31, 1997 contained an explanatory paragraph regarding the
substantial doubt about the Company's ability to continue as a going concern.
The Company's Audit Committee recommended and approved the decision to change
independent accountants. In connection with its audits for the two most recent
fiscal years and through June 8, 1999, there have been no disagreements with BDO
Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of BDO Seidman, LLP, would have caused them to
make reference thereto in their report on the financial statements for such
years. BDO Seidman, LLP has furnished a letter addressed to the Securities and
Exchange Commission stating that it agrees with the above statements.
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: August 24, 1999 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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