<PAGE>
Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on December 3, 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 September 30, 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 East 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 September
30, 1999 was 6,341,000 shares.
Page 1
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SUPPLEMENTAL INFORMATION
Since the end of 1997, the Company substantially restructured its business
operations. 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
two quarters of 1999.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------- ------------------
Assets (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 69,557 $ 969
Note and accounts receivable 411,272 38,119
Mortgage loans held for resale 1,567,970 -
Furniture and equipment, net 119,294 53,943
Capitalized financing costs 179,275 -
Goodwill & related 3,773,569 -
Other assets 38,576 6,210
------------ ------------
Total Assets $ 6,159,513 $ 99,241
Liabilities and Stockholders' Equity (Deficiency)
Liabilities
Note payable - bank $ 1,500,000 $ -
Warehouse note payable - bank 1,549,805
Note payable - other 2,900,000 -
Accounts payable 598,802 359,429
Accrued expenses 212,667 51,470
Due to officers 431,496 259,860
Subordinated junior debentures 635,000 635,000
Liabilities of discontinued operations - 38,441
------------ ------------
Total Liabilities $ 7,827,770 $ 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; 6,341,000 and
5,775,000 shares issued and outstanding 11,365,125 10,956,125
Deficit (13,033,382) (12,201,084)
------------ ------------
Total Stockholders' Equity (Deficiency) $ (1,688,257) $ (1,244,959)
Total Liabilities and Stockholders' Equity (Deficiency) $ 6,159,513 $ 99,241
</TABLE>
See accompanying notes to consolidated financial statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------
1999 1998 1999 1998
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Sales $1,261,899 $ 59,092 $3,163,319 $ 145,781
Interest income 33,776 173 36,360 895
Other - - - 26,695
---------- -------- ---------- ----------
Total revenues 1,295,675 59,265 3,199,679 173,371
OPERATING EXPENSES
Compensation and employee benefits 948,841 387,168 2,244,957 685,002
Professional fees 30,796 23,980 62,851 86,137
Occupancy 70,468 3,784 190,252 7,833
Depreciation and amortization 81,038 19,200 205,541 57,600
Other operating expenses 393,849 87,914 1,018,586 198,918
Interest expense 94,708 16,567 182,804 16,567
Other expenses 63,608 - 126,984 -
Total expenses 1,683,308 538,613 4,031,975 1,052,057
---------- -------- ---------- ----------
NET LOSS $ 387,633 $479,348 $ 832,296 $ 878,686
========== ======== ========== ==========
NET LOSS PER SHARE $0.06 $0.08 $0.13 $0.15
========== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (832,296) $(878,686)
Adjustments Depreciation 38,209 57,600
Amortization of goodwill and capitalized financing costs 265,807 -
(Increase) decrease in accounts receivable (326,436) (17,991)
Increase in mortgage loans held for resale (1,567,970)
Increase in warehouse note payable - bank 1,549,805 -
Decrease (increase) in inventory - (95,989)
Decrease in other assets (9,095) -
Increase (decrease) in trade accounts payable and accruals 400,570 80,270
Decrease in liabilities of discontinued subsidiaries (38,441) -
Common stock issued as compensation 137,500
Net cash provided (absorbed) by operating activities (519,847) (674,036)
----------- ---------
INVESTING ACTIVITIES
Purchase (disposition) of fixed assets (28,560) 17,795
Cash used in acquisition, net (1,185,889) -
Net cash provided (absorbed) by investing activities (1,214,449) 17,795
----------- ---------
FINANCING ACTIVITIES
Proceeds of note payable - bank 1,500,000 -
Repayment of notes payable (net) - (15,995)
Collection of note receivable - 16,746
Decrease in loan to related party - 94,240
Subordinated debenture notes 550,000
Increase in amounts due officers 171,636 101,486
Increase in common stock 131,248 -
Net cash provided by financing activities 1,802,884 746,477
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS 68,588 46,977
Cash and cash equivalents at beginning of period 969 12,845
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,557 $ 59,822
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 66,135 $ -
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
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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 nine months ended
September 30, 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 and
Quarterly Reports on Form 10-QSB for the periods ended March 31, 1999 and June
30, 1999.
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, are not attained by
Mortgage Concepts, Inc. The $4,100,000 purchase price consists of a combination
of cash and Company common stock, payable over a period of time specified in the
Agreement (see Note 6 of the financial statements). The acquisition has been
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.
In November 1999, the Company borrowed an additional $600,000 from the bank -
see Note 6 of the financial statements.
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5. Supplemental Information
------------------------
The Company's business consists of two principal activities (a) mortgage
banking operations and (b) non-mortgage banking operations. The following
tables set forth certain unaudited information concerning these activities:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
- ------------------------------------
Mortgage Non-Mortgage
Operations by Segment Banking Banking Corporate Consolidated
(Unaudited) Operations Operations Operations Operations
--------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues: $3,070,000 $ 127,000 $ 3,000 $3,200,000
Operating Expenses:
Compensation and
Employee Benefits 1,935,000 75,000 235,000 2,245,000
Professional Fees 11,000 -0- 52,000 63,000
Occupancy 162,000 7,000 21,000 190,000
Other Operating Expenses 761,000 55,000 202,000 1,019,000
----------------- ---------- --------- ----------
2,869,000 137,000 510,000 3,517,000
Operating Profit/(Loss) 201,000 (10,000) (507,000) (317,000)
Other Expenses:
Depreciation/Amortization 11,000 12,000 183,000 206,000
Interest/Financing 41,000 -0- 240,000 281,000
Expense
Other Expenses -0- -0- 29,000 29,000
----------------- ---------- --------- ----------
52,000 12,000 452,000 516,000
Net Profit/Loss 149,000 (22,000) (959,000) (832,000)
<CAPTION>
Three Months Ended September 30, 1999
- -------------------------------------
Mortgage Non-Mortgage
Operations by Segment Banking Banking Corporate Consolidated
(Unaudited) Operations Operations Operations Operations
----------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues: $1,251,000 $ 44,000 $ - $1,296,000
Operating Expenses:
Compensation and
Employee Benefits 862,000 25,000 62,000 949,000
Professional Fees 6,000 -0- 24,000 31,000
Occupancy 54,000 3,000 13,000 70,000
Other Operating Expenses 305,000 16,000 72,000 392,000
----------------- ---------- --------- ---------
1,227,000 44,000 171,000 1,442,000
Operating Profit/(Loss) 24,000 -0- (171,000) (146,000)
Other Expenses:
Depreciation/Amortization 6,000 4,000 71,000 81,000
Interest/Financing 38,000 -0- 45,000 84,000
Expense
Other Expenses -0- -0- 77,000 77,000
----------------- ---------- --------- ---------
44,000 4,000 193,000 242,000
Net Profit/Loss (20,000) (4,000) (364,000) (388,000)
</TABLE>
In managing its business, the Company does not allocate corporate expenses to
its various activities.
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6. Subsequent Events
------------------
As of October 9, 1999, the Company restructured the remaining amounts due
the sellers of the assets of Mortgage Concepts, Inc., an originator of primarily
subprime and alternate documentation residential mortgage loans which was
acquired on February 9, 1999 and is now operating as the Company's Collateral
One subsidiary. The purchase price of $4,100,000 originally consisted of
$3,612,500 of cash and $487,500 of Company common stock, payable over multi-year
period of time as specified in the Agreement. The amended acquisition price is
unchanged, and was amended to consist of $2,862,500 of cash and $1,237,500 of
Company common stock, payable over a multi-year period of time. To date, the
Company has paid the sellers $2,194,000 of cash, with the remaining cash
payments due by June 2000. The stock is to be issued during 2000 and 2001.
In November 1999, The Company borrowed an additional $600,000 from Crusader
Bank, Philadelphia, PA, secured by the personal guaranty of the Chairman of the
Board of Directors of the Company to partially finance a payment due the sellers
of Mortgage Concepts, Inc. and for working capital needs.
In November 1999, the Company authorized and commenced a private placement
of common stock and, to date, has received subscriptions totaling $485,000.
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
$6,160,000 at September 30, 1999, an increase of $6,061,000. This increase was
primarily due to the acquisition of the assets of Mortgage Concepts, Inc. (see
Note 3 of the financial statements) and $1,567,000 of mortgage loans held for
resale by the Company's mortgage banking operation.
Liabilities increased from $1,344,000 at December 31, 1998 to $7,828,000 at
September 30, 1999 primarily through incurring of bank and other debt associated
with the Mortgage Concepts acquisition and warehouse line borrowings associated
with the Company's mortgage banking operation. Accounts payable and accruals
also increased by $401,000 during the first nine months of 1999. Net worth
after the loss of $832,000 during the period is -$1,688,000 (negative
$1,688,000). At September 30, 1999, the Company had liquid assets of $2,049,000
and current liabilities of $6,762,000, including a bank loan of $1,500,000
maturing in February 2000 and payments due the sellers of Mortgage Concepts,
Inc. of $950,000 due in October 1999 and of $963,000 due in May 2000 (both of
these obligations were restructured in the fourth quarter of 1999 - see Note 6
of the financial statements).
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $832,000 for the nine months ended September
30, 1999 as compared to a loss of $879,000 for the same period in 1998. This
slight decrease in the amount of loss is a result of profits in the mortgage
banking segment being more than offset by higher costs of corporate operations,
including approximately $183,000 of interest expense and financing costs,
$167,000 of amortization of goodwill associated with the aforementioned
acquisition, and depreciation of $38,209. Results for the period also benefited
from a $38,000 gain upon the sale of the Premiere Chemicals subsidiary 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 (see Note 3 of the 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.
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Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Revenues. Total revenues for the nine months ended September 30, 1999
amounted to $3,200,000 representing an increase of $3,027,000 when compared to
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 September 30, 1999. Revenues for the
first nine months of 1998 consisted of sales of the non-mortgage banking
subsidiaries.
Expenses. Total expenses for the nine months ended September 30, 1999
amounted to $4,032,000 as compared to $1,052,000 for the same period in 1998, an
increase of $2,980,000. This change is attributable to the increased activity
in the new mortgage banking operations ($2,921,000 of expenses) including
activity of the Mortgage Concepts, Inc. acquisition following the February 9,
1999 acquisition date well as approximately $183,000 of interest expense and
financing costs, $167,000 of amortization of goodwill associated with the
aforementioned acquisition, and depreciation of $38,209.
Comparison of Three Months Ended September 30, 1999 to Three Months Ended
September 30, 1998
Revenues. Total revenues for the three months ended September 30, 1999
amounted to $1,296,000 representing an increase of $1,237,000 when compared to
the same period in 1998. This increase is a result of the re-establishment of
mortgage banking operations within the Company including operations of the
Mortgage Concepts, Inc. acquisition (see Note 5 of the financial statements).
Third quarter 1998 revenues consisted primarily of sales by the non-mortgage
banking subsidiaries.
Expenses. Total expenses for the three months ended September 30, 1999
amounted to $1,524,000 as compared to $539,000 for the same period in 1998. This
change is attributable to the increased activity in the new mortgage banking
operations ($1,271,000 of expenses) including activity of the Mortgage Concepts,
Inc. acquisition as well as approximately $95,000 of interest expense and
financing costs and $66,000 of amortization of goodwill associated with the
aforementioned acquisition.
Operating Results by Segment
For the nine months ended September 30, 1999, the Company's mortgage
banking operations, which include activity of Collateral One Mortgage
Corporation for the period from the February 9, 1999 acquisition date, reported
revenues of $3,070,000 resulting in an operating profit of $149,000. Expenses
were comprised primarily of compensation ($1,935,000) which includes commissions
paid to loan officers during the period.
For the three months ended September 30, 1999, the Company's mortgage
banking operations, which consist of First Chesapeake Funding Corporation and
Collateral One Mortgage Corporation, reported revenues of $1,251,000 resulting
in an operating loss of $20,000. Expenses were comprised primarily of
compensation ($862,000) which includes commissions paid to loan officers during
the period.
The non-mortgage banking operations consist of the 60% subsidiary, National
Archives, Inc., which reported a loss of $22,000 on revenues of $127,000 for the
nine months ended September 30, 1999 and a loss of $4,000 on revenues of $44,000
for the three month period. All other non-mortgage banking operations have been
closed or sold as of September 30, 1999.
Corporate operations for the nine month period consisted of expenses of
$1,000,000 offset by a $38,000 gain on the sale of the Premiere Chemicals
subsidiary. Expenses included compensation of $235,000 (including $180,000 of
deferred officers' compensation), interest and financing expenses of $240,000,
and depreciation/amortization of $183,000 (including $167,000 of amortization of
goodwill associated with the Mortgage Concepts, Inc. acquisition).
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. and subsequent internal growth.
Page 8
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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 (see Note 4 of the financial
statements). The Company is seeking additional capital infusion to fund its
mortgage banking acquisitions and expansion and has obtained additional equity
capital of $485,000 and bank financing of $600,000 (see Note 5 of the financial
statements). 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 September 30, 1999 allowed the
Company to borrow up 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 September 30, 1999 amounted to $70,000 as
compared to $1,000 at December 31, 1998, or an increase of $69,000.
During the first nine months of 1999, the Company's operating activities
utilized $520,000 as compared to utilizing $717,000 in the same period in 1998.
The cash provided from operating activities in the first nine months of 1999
resulted from the Company's net loss for the period and increase in accounts
receivable partially offset by increases in accounts payable and accruals and
depreciation/amortization for the period. The cash utilized in the same period
in 1998 resulted from losses in that period and investment in inventory for non-
mortgage banking operations (all but one of which were since closed and/or
sold).
Investing activities, namely the acquisition of Mortgage Concepts, Inc.,
utilized $1,214,000 in the first nine months of 1999. The Company's investing
activities were negligible in the comparable period of 1998.
Financing activities provided $1,802,000 of capital in the first nine
months of 1999 including the aforementioned $1,500,000 bank loan (see Note 4 of
the financial statements). During the comparable period of 1998 financing
activities provided $746,000 of cash, primarily through the placement of
$550,000 of subordinated debentures, the deferral of $101,000 due the executive
officers of the Company and repayment of a $94,000 loan to related party.
As of September 30, 1999, the Company had cash and cash equivalents of
$70,000. The Company is seeking additional capital infusion to fund its
mortgage banking acquisitions and expansion and has obtained additional equity
capital of $485,000 and bank financing of $600,000 (see Note 5 of the financial
statements). 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.
Page 9
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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 September 17, 1999 the Company disclosed 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.
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: December 3, 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
Page 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 70
<SECURITIES> 0
<RECEIVABLES> 411
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,049
<PP&E> 119
<DEPRECIATION> 206
<TOTAL-ASSETS> 6,160
<CURRENT-LIABILITIES> 6,762
<BONDS> 635
0
0
<COMMON> 11,365
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,160
<SALES> 1,262
<TOTAL-REVENUES> 1,296
<CGS> 0
<TOTAL-COSTS> 1,683
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> (388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (388)
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<CHANGES> 0
<NET-INCOME> (388)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
