Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on November 13, 2000
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, 2000
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 [X] No [ ]
The number of shares of common stock of registrant outstanding as of September
30, 2000 was 7,353,536 shares.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
2000 1999
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 57,752 $ 70,617
Accounts receivable 221,712 82,874
Mortgage loans held for resale 394,586 911,050
Furniture and equipment, net 89,421 103,689
Capitalized financing costs 27,775 141,400
Goodwill 2,260,507 3,707,877
Other assets 121,057 43,897
------------- -------------
Total assets $ 3,172,810 $ 5,061,404
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Note payable - bank $ 2,107,321 $ 2,107,321
Warehouse note payable - bank 394,586 901,727
Note payable - other 197,938 668,680
Accounts payable 568,002 557,116
Accrued expenses 335,326 152,020
Due to officers 754,024 414,411
Subordinated junior debentures 75,000 75,000
Liabilities of discontinued operations 110,200 110,200
------------- -------------
Total liabilities 4,542,397 4,986,475
------------- -------------
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;
7,793,669 and 7,353,536 issued and outstanding in 2000 and 1999 12,865,584 13,647,625
Accumulated deficit (14,235,171) (13,572,696)
------------- -------------
Total stockholders' equity (deficiency) (1,369,587) 74,929
------------- -------------
Total liabilities and stockholders' equity $ 3,172,810 $ 5,061,404
============= =============
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The accompanying notes are an integral part of these statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Sales $ 1,085,157 $ 1,261,899 $ 3,091,905 $ 3,163,319
Interest income -0- 33,776 1,853 36,360
Other -0- -0- -0- -0-
----------- ----------- ----------- -----------
Total revenues 1,085,157 1,295,675 3,093,758 3,199,679
OPERATING EXPENSES
Compensation and employee benefits 718,045 948,841 1,928,127 2,244,957
Professional fees 33,106 30,796 153,997 62,851
Occupancy 79,709 70,468 214,504 190,252
Depreciation and amortization 62,387 81,038 279,013 205,541
Interest expense 110,348 94,708 264,763 182,804
Other expenses 250,740 457,457 915,828 1,145,570
----------- ----------- ----------- -----------
Total expenses 1,254,335 1,683,308 3,756,232 4,031,975
----------- ----------- ----------- -----------
NET LOSS $ 169,178 $ 387,633 $ 662,474 $ 832,296
=========== =========== =========== ===========
NET LOSS PER SHARE $0.02 $0.06 $ 0.09 $ 0.13
===== ===== ====== ======
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See accompanying notes to consolidated financial statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (662,474) $ (832,296)
Adjustments to reconcile net loss to net cash used in operating activities:
Unpaid officers' compensation 339,613 171,636
Common stock issued as (cancelled as) compensation (123,291) --
Depreciation/amortization 279,013 304,016
(Increase) decrease in accounts receivable (138,838) (326,436)
(Increase) decrease in mortgage loans held for resale 516,464 (1,567,970)
Increase (decrease) in warehouse note payable - bank (507,141) 1,549,805
(Increase) decrease in other assets (77,161) (9,095)
Increase (decrease) in trade accounts payable and accruals 194,192 400,570
Decrease in liabilities of discontinued subsidiaries -- (38,441)
Net cash provided (absorbed) by operating activities (179,623) (348,211)
----------- -----------
INVESTING ACTIVITIES
Purchase (disposition) of fixed assets -- (28,560)
Cash used in acquisition, net -- (1,185,889)
Net cash provided (absorbed) by investing activities -- (1,214,449)
----------- -----------
FINANCING ACTIVITIES
Proceeds of note payable - bank -- 1,500,000
Proceeds of notes payable (net) (8,242) --
Increase (decrease) in common stock 175,000 131,248
Net cash provided by financing activities 166,758 1,631,248
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,865) 68,588
Cash and cash equivalents at beginning of period 70,617 969
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,752 $ 69,557
=========== ===========
</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 three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. 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 years ended December 31, 1998
and December 31, 1999.
2. Acquisition
---------------
On February 9, 1999, the Company acquired substantially all of the
assets of Mortgage Concepts, Inc., an originator of primarily subprime and
alternate documentation residential mortgage loans which now operates as the
Company's Collateral One subsidiary. The purchase price was $4,100,000, subject
to reduction if certain financial benchmarks, as outlined in the Asset Purchase
Agreement, are not attained by the subsidiary. The $4,100,000 purchase price
consisted of a combination of $3,612,500 cash and $487,500 Company common stock,
payable over a multi-year period of time specified in the Agreement. The
acquisition has been accounted for under the purchase method of accounting.
As of August 31, 2000, the Company implemented a purchase price
adjustment and restructured the remaining amounts due the sellers of the assets
of Mortgage Concepts, Inc. The purchase price of $4,100,000 was reduced to
$2,804,000 in accordance with the Asset Purchase Agreement, and was amended to
consist of $2,400,000 of cash and $404,000 of Company common stock. At September
30, 2000, the Company had paid the sellers $2,278,000 of cash, with the
remaining $122,000 of cash payments due in ten equal installments through August
2001. All stock due the sellers had been issued as of August 31, 2000.
3. Debt and Equity Financing
-----------------------------
In February 1999, the Company borrowed $1,500,000 from a bank;
$1,200,000 of such borrowings was used in conjunction with the Mortgage
Concepts, Inc. acquisition. The loan, guaranteed by certain officers of the
Company and other individuals, bears interest at prime plus 2% and matures in
November 2000. In November 1999, the Company borrowed an additional $607,000
from the bank, secured by the personal guaranty and collateral 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. This loan also
bears interest at prime plus 2% and matures in November 2000. In connection with
both these financings, the Company entered into loan guaranty agreements with
the individuals guaranteeing the loans, whereby such individuals received shares
and/or options of the Company's common stock as compensation for their
guarantees.
In 1998, the Company issued $635,000 of convertible subordinated
debentures. 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 $635,000 includes $350,000 of subordinated debentures
issued to certain officers of the Company in exchange for a similar reduction in
amounts due to officers. In November 1999, the Company offered to convert the
convertible subordinated debentures into Company common stock at a conversion
price of $1.50 per share. Holders of $560,000 of debentures elected to convert
their holdings into 373,333 shares of common stock, including all debentures
held by officers of the Company. At September 30, 2000, the remaining $75,000 of
convertible subordinated debentures remain outstanding under the original terms
and conditions of the issuance.
The Company has warehouse lines of credit with maximum borrowings of
$29,000,000 at September 30, 2000 and December 31, 1999. At September 30, 2000
and December 31, 1999, $394,586 and $901,727 was outstanding under the lines,
respectively.
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In March 2000, the Company issued 66,667 shares under a private
placement of common stock which raised a total of $175,000 of equity capital.
In June 2000, the Company cancelled 275,000 shares of common stock
previously issued to the former President of its FC Funding subsidiary pursuant
to the terms of an employment agreement. The cancellation of these shares
resulted in a reduction of compensation expense of $123,291 during the period
ended September 30, 2000.
4. Cessation of Florida Operations
-----------------------------------
In January 2000, the Company ceased operations of its FC Funding
wholesale mortgage banking subsidiary and closed its two Florida locations,
effective January 31, 2000.
5. Divestiture of Subsidiaries
-------------------------------
In December 1999, the Company agreed to sell its interest in National
Archives to Mark Mendelson, the Chairman of the Board and Chief Executive
Officer, in exchange for assumption of certain liabilities of the subsidiary,
with the transaction to close in 2000 effective December 29, 1999.
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.
6. Terminated Acquisition
--------------------------
In March 2000, the Company entered into a preliminary agreement to
acquire Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet had
purported to be an Internet and telecommunications provider serving residential
and small business clients through its free Internet service. In May 2000, the
Company announced that it had terminated discussions to acquire Whoofnet.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
Financial Condition
Assets of the Company decreased from $5,061,000 at December 31, 1999 to
$3,173,000 at September 30, 2000, a decrease of $1,888,000. This decrease was
primarily due to a reduction in goodwill of $1,296,000 arising from
implementation of an acquisition purchase price adjustment as described in Note
2 above. In addition, a $139,000 increase in accounts receivable of the
Company's Collateral One subsidiary was more than offset by a $516,000 decrease
in mortgage loans held for resale and amortization of goodwill and capitalized
financing costs.
Liabilities decreased from $4,986,000 at December 31, 1999 to
$4,542,000 at September 30, 2000 as a result of a $507,000 decrease in warehouse
note payable borrowings partially offset by a $194,000 increase in accounts
payable and accrued expenses.
Net worth decreased from $74,000 at December 31, 1999 to -$1,370,000
(negative $1,370,000) at September 30, 2000. This change is primarily the result
of cancellation of $834,000 of common stock arising from implementation of an
acquisition purchase price adjustment as described in Note 2 above, as well as
from the loss of $388,000 for the nine month period and cancellation of $123,000
of common stock previously issued to a manager of a subsidiary, partially offset
by the sale of $175,000 of common stock (as more fully described in Note 3
above). At September 30, 2000, the Company had liquid assets of $675,000 and
current liabilities of $3,603,000, including a bank loan of $2,107,000 maturing
in November 2000 and payments due the sellers of Mortgage Concepts, Inc. of
$122,000 due within a 12 month period.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $662,000 for the nine months ended
September 30, 2000 as compared to a loss of $832,000 for the same period in
1999. This increase in the amount of loss is a result of profits of the ongoing
Collateral One operation of $418,000 being more than offset by losses at the
since closed FC Funding operation of $86,000 and higher costs of corporate
operations, including approximately $265,000 of interest expense and $279,000 of
depreciation and amortization of goodwill and capitalized financing costs
associated with the Collateral One acquisition.
As discussed more fully in the Company's Annual Reports on Form 10-KSB
for the year ended December 31, 1998 and December 31, 1999, 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. 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 September 30, 2000 to Three Months Ended
September 30, 1999
Revenues. Total revenues for the three months ended September 30, 2000
amounted to $1,085,000 representing an decrease of $211,000 when compared to the
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same period in 1999. This decrease is a result of the closure of the Company's
FC Funding subsidiary in early 2000.
Expenses. Total expenses for the three months ended September 30, 2000
amounted to $1,264,000 as compared to $1,683,000 for the same period in 1999.
This change is partially attributable to the decreased activity from the FC
Funding subsidiary and partially attributable to improved margins for the
Company's Collateral One subsidiary.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999
Revenues. Total revenues for the nine months ended September 30, 2000
amounted to $3,094,000 representing a decrease of $106,000 when compared to the
same period in 1999, representing inclusion of a full nine months of operations
of the Collateral One subsidiary in 2000 (as compared with a short period from
the February 10, 1999 acquisition date to September 30th of that year) more than
offsetting elimination of the FC Funding operation between periods.
Expenses. Total expenses for the nine months ended September 30, 2000
amounted to $3,756,000 as compared to $4,032,000 for the same period in 1999, an
improvement of $276,000 between periods.
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 $2,107,000 from a bank in 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 3 of the financial statements). The Company is
seeking additional capital infusion to fund its operations and expansion and has
obtained additional equity capital of $485,000 in 1999 and $175,000 in the first
nine months of 2000. 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, 2000 allowed the
Company to borrow up to $29 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, 2000 amounted to $58,000 as
compared to $71,000 at December 31, 1999, or a decrease of $13,000.
During the first nine months of 2000, the Company's operating
activities utilized $180,000 as compared to utilizing $348,000 in the same
period in 1999. The cash utilized by operating activities in the first nine
months of 2000 resulted from the Company's net loss for the period offset by a
$194,000 increase in accounts payable and accruals as well as by non-cash
operating activities (depreciation/amortization of $279,000, and an increase in
unpaid officers' compensation of $340,000, and cancellation of $123,000 of
common stock previously issued as compensation).
Investing activities were negligible in the first nine months of 2000
as compared with utilizing $1,214,000 in the same period of 1999 for the
Collateral One acquisition.
Financing activities provided $167,000 of capital in the first nine
months of 2000 primarily through the sale of $175,000 of common stock. During
the comparable period of 1999 financing activities provided $1,631,000 of cash,
primarily through the $1,500,000 bank borrowing to partially finance the
Collateral One acquisition.
As of September 30, 2000, the Company had cash and cash equivalents of
$58,000. The Company is seeking additional capital infusion to fund its
operations and obtained additional equity capital of $175,000 in the first nine
months of 2000. 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
Periodically, the Company and its subsidiaries become parties to legal
proceedings incidental to its business. In the opinion of management, such
matters are not expected to have a material impact on the financial position of
the Company.
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
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 13, 2000 By: /s/ Mark Mendelson
------------------------------
Mark Mendelson, Chief Executive Officer
By: /s/ Mark E. Glatz
------------------------------
Mark E. Glatz, Chief Financial Officer
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