Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on September 7, 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 June 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 June 30,
1999 was 6,345,000 shares.
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SUPPLEMENTAL INFORMATION
Since the end of 1997, the Company substantially restructured its
business operations. The reader is advised that the Company concurrently filed
its 10-KSB for 1998 and 10-QSB for the first quarter of 1999 on August 24, 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>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C>
Assets (Unaudited)
Cash and cash equivalents $ 172,041 $ 969
Note and accounts receivable 364,353 38,119
Furniture and equipment, net 116,950 53,943
Capitalized financing costs 167,419 -
Goodwill & related 3,839,251 -
Other assets 34,933 6,210
---------- ----------
Total Assets $ 4,694,947 $ 99,241
Liabilities and Stockholders' Equity (Deficiency)
Liabilities
Note payable - bank $ 1,500,000 $ -
Note payable - other 2,900,000 -
Accounts payable 388,426 359,429
Accrued expenses 198,050 51,470
Due to officers 367,845 259,860
Subordinated junior debentures 635,000 635,000
Liabilities of discontinued operations - 38,441
----------- ----------
Total Liabilities $ 5,989,321 $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; 6,345,000 and
5,775,000 shares issued and outstanding 11,351,375 10,956,125
Deficit (12,645,749) (12,201,084)
------------ ----------
Total Stockholders' Equity (Deficiency) $ (1,294,374) $ (1,244,959)
Total Liabilities and Stockholders' Equity (Deficiency) $ 4,694,947 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
REVENUES
Sales $ 1,124,941 $ 59,801 $1,901,420 $ 86,689
Interest income 1,101 166 2,584 722
Other - 10,641 - 26,695
----------- -------- ----------- --------
Total revenues 1,126,042 70,608 1,904,004 114,106
OPERATING EXPENSES
Compensation and employee benefits 706,066 157,315 1,296,116 297,834
Professional fees 19,979 29,002 32,055 62,157
Occupancy 76,673 1,973 119,784 4,049
Depreciation and amortization 77,206 19,200 124,503 38,400
Other operating expenses 490,753 76,631 776,210 111,004
---------- --------- ---------- --------
Total operating expenses 1,370,677 284,121 2,348,668 513,444
---------- --------- ---------- --------
NET LOSS $ 244,635 $ 213,513 $ 444,664 $399,338
========== ========= ========== ========
NET LOSS PER SHARE $ 0.04 $ 0.04 $ 0.07 $ 0.07
========== ========= ========== ========
</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>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C>
OPERATING ACTIVITIES
Net loss $(444,664) $(399,338)
Adjustments
Depreciation 22,853 38,400
Amortization of goodwill and capitalized financing costs 211,981 --
(Increase) decrease in accounts receivable (279,517) (10,942)
Loss on sale of assets -- --
Decrease (increase) in inventory -- (101,472)
Decrease in other assets (5,452) --
Increase (decrease) in trade accounts payable 28,997 76,011
Accrued expenses, net 146,580 28,032
Decrease in liabilities of discontinued subsidiaries (38,441) --
Net cash provided (absorbed) by operating activities (357,663) (369,309)
---------- ---------
INVESTING ACTIVITIES
Purchase (disposition) of fixed assets (10,860) 17,795
Cash used in acquisition, net (1,185,889) --
Net cash provided (absorbed) by investing activities (1,196,749) 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
Increase in amounts due officers 107,985 245,624
Increase in common stock 117,499 --
Net cash provided by financing activities 1,725,484 340,615
----------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS 171,072 (10,898)
Cash and cash equivalents at beginning of period 969 12,845
----------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 172,041 $ 1,947
=========== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 66,135 $ --
=========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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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 six months ended June
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 Report on Form 10-QSB for the period ended March 31, 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 $3,612,500 of
cash and $487,500 of Company common stock, payable over a period of time
specified in the Agreement. 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.
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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>
Three Months Ended June 30, 1999
- --------------------------------
Mortgage Non-Mortgage
Operations by Segment Banking Banking Corporate Consolidated
(Unaudited) Operations Operations Operations Operations
<S> <C>
Revenues: $1,082,000 $ 43,000 $ 1,000 $ 1,126,000
Operating Expenses:
Compensation and
Employee Benefits 600,000 25,000 81,000 706,000
Professional Fees -7,000 -0- 27,000 20,000
Occupancy 66,000 4,000 7,000 77,000
Other Operating Expenses 260,000 20,000 87,000 367,000
------------------------ ---------- -------- --------- -----------
919,000 49,000 202,000 1,170,000
Operating Profit/(Loss) 163,000 (6,000) (201,000) (44,000)
Other Expenses:
Depreciation/Amortization 2,000 4,000 71,000 77,000
Interest/Financing Expense 3,000 -0- 121,000 124,000
Other Expenses -0- -0- -0- -0-
-------------- ---------- -------- --------- -----------
5,000 4,000 192,000 201,000
Net Profit/Loss 158,000 (10,000) (393,000) (245,000)
Six Months Ended June 30, 1999
Mortgage Non-Mortgage
Operations by Segment Banking Banking Corporate Consolidated
(Unaudited) Operations Operations Operations Operations
Revenues: $1,818,000 $ 83,000 $ 3,000 $ 1,904,000
Operating Expenses:
Compensation and
Employee Benefits 1,073,000 50,000 173,000 1,296,000
Professional Fees 4,000 -0- 28,000 32,000
Occupancy 108,000 4,000 8,000 120,000
Other Operating Expenses 456,000 39,000 131,000 626,000
------------------------ ---------- -------- --------- -----------
1,641,000 93,000 340,000 2,074,000
Operating Profit/(Loss) 177,000 (10,000) (337,000) (170,000)
Other Expenses:
Depreciation/Amortization 5,000 8,000 112,000 125,000
Interest/Financing Expense 3,000 -0- 195,000 198,000
Other Expenses -0- -0- (48,000) (48,000)
-------------- ---------- -------- --------- -----------
8,000 8,000 259,000 275,000
Net Profit/Loss 169,000 (18,000) (596,000) (445,000)
</TABLE>
In managing its business, the Company does not allocate corporate expenses to
its various activities.
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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
$4,695,000 at June 30, 1999, an increase of $4,596,000. 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
$5,989,000 at June 30, 1999 primarily through incurring of bank and other debt
associated with the Mortgage Concepts acquisition. Accounts payable and accruals
also increased by $176,000 during the first six months of 1999. Net worth after
the loss of $445,000 during the period is -$1,294,000 (negative $1,294,000). At
June 30, 1999, the Company had liquid assets of $536,000 and current liabilities
of $4,486,000, 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.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $445,000 for the six months ended June
30, 1999 as compared to a loss of $399,000 for the same period in 1998. This
increase 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 $199,000 of interest expense and financing costs and
$102,000 of amortization of goodwill associated with the aforementioned
acquisition. Results for the period 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 June 30, 1999 to Three Months Ended
June 30, 1998
Revenues. Total revenues for the three months ended June 30, 1999
amounted to $1,126,000 representing an increase of $1,055,000 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. Supplemental Information of the
financial statements). Second quarter 1998 revenues consisted primarily of sales
by the non-mortgage banking subsidiaries.
Expenses. Total expenses for the three months ended June 30, 1999
amounted to $1,371,000 as compared to $284,000 for the same period in 1998. This
change is attributable to the increased activity in the new mortgage banking
operations ($924,000 of expenses) including activity of the Mortgage Concepts,
Inc. acquisition as well as approximately $124,000 of interest expense and
financing costs and $65,000 of amortization of goodwill associated with the
aforementioned acquisition
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Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30, 1998
Revenues. Total revenues for the six months ended June 30, 1999
amounted to $1,904,000 representing an increase of $1,790,000 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 June 30, 1999. Revenues for the first
six months of 1998 consisted of sales of the non-mortgage banking subsidiaries.
Expenses. Total expenses for the six months ended June 30, 1999
amounted to $2,349,000 as compared to $513,000 for the same period in 1998, an
increase of $1,836,000. This change is attributable to the increased activity in
the new mortgage banking operations ($1,649,000 of expenses) including activity
of the Mortgage Concepts, Inc. acquisition following the February 9, 1999
acquisition date well as approximately $198,000 of interest expense and
financing costs and $102,000 of amortization of goodwill associated with the
aforementioned acquisition.
Operating Results by Segment
For the three months ended June 30, 1999, the Company's mortgage
banking operations, which consist of First Chesapeake Funding Corporation and
Collateral One Mortgage Corporation, reported revenues of $1,082,000 resulting
in an operating profit of $158,000. Expenses were comprised primarily of
compensation ($600,000) which includes commissions paid to loan officers during
the period.
For the six months ended June 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
$1,818,000 resulting in an operating profit of $169,000. Expenses were comprised
primarily of compensation ($1,073,000) 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 $10,000 on revenues of $43,000
for the three months ended June 30, 1999 and a loss of $18,000 on revenues of
$83,000 for the six month period. All other non-mortgage banking operations have
been closed or sold as of June 30, 1999.
Corporate operations for the six month period consisted of expenses of
$2,397,000 offset by a $38,000 gain on the sale of the Premiere Chemicals
subsidiary. Expenses included compensation of $173,000, interest and financing
expenses of $195,000, and depreciation/amortization of $112,000 (including
$102,000 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.
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.
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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 June 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 June 30, 1999 amounted to $172,000 as
compared to $1,000 at December 31, 1998, or an increase of $171,000.
During the first six months of 1999, the Company's operating activities
absorbed $358,000 as compared to utilizing $369,000 in the same period in 1998.
The cash provided from operating activities in the first six 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. 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 $1,197,000 in the first six months of 1999. The Company's
investing activities were negligible in the comparable period of 1998.
Financing activities provided $1,725,000 of capital in the first six
months of 1999 including the aforementioned $1,500,000 bank loan (Note 4 of the
financial statements). Other than the ongoing deferral of salaries by the
executive officers of the Company and repayment of a $94,000 loan to related
party, financing activities were minimal in the same period of 1998.
As of June 30, 1999, the Company had cash and cash equivalents of
$172,000. 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.
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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 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
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
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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: September 7, 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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