UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to
Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal
year ended December 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 East Oregon Avenue
Philadelphia, Pennsylvania 19148
(Address of principal executive offices)
(215) 755-5691
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common stock, no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $4,390,000.00.
The aggregate market value of the issuer's voting stock held as of April 7,
2000, by nonaffiliates of the issuer was approximately $7,365,000.
As of December 31, 1999, issuer had 8,002,000 shares of its no par common stock
outstanding.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
- --------
First Chesapeake Financial Corporation (the "Company" or "First
Chesapeake") is a Virginia corporation which was formed in 1992 and discontinued
operations in 1997 following several years of unprofitable operations, and which
re-established operations in 1998.
A new Board of Directors and new management have re-established
operations of the Company and are currently building a fully integrated mortgage
origination organization through internal growth and acquisitions.
In 1998, the Company established a new mortgage banking subsidiary, and
subsequently in 1999 the Company has expanded its mortgage banking operations
through acquisitions and internal growth.
It has been First Chesapeake's goal to develop a vertically integrated
financial services company that can provide mortgage origination, homeowner's
insurance, title insurance, home warranties, among other financial services,
consumer direct, wholesale and through the Internet. However, no assurance can
be given that the Company will be successful in its efforts to implement its
strategic plan.
In March 2000, the Company entered into an agreement to acquire
Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet is an Internet and
telecommunications provider serving residential and small business clients
through its free Internet service. The Company intends to develop and expand the
Whoofnet operation, however, no assurance can be given that it will be
successful in its efforts to implement its strategic plan.
Company History
- ---------------
The Company was originally incorporated in Virginia in 1992 to engage
in the mortgage banking business. In 1997, the Company's management resigned and
the Company closed all mortgage banking operations after several years of
substantial losses. Following removal of management and ceasing of operations in
1997, the Company elected a new Board of Directors, installed new management and
commenced implementation of a new strategic plan to re-establish the Company as
a provider of financial services, initially within the mortgage banking segment.
In the period from 1995 through 1997, the Company also invested in four
companies which were outside its core financial services business. In 1998, the
newly-elected Board of Directors examined the Company's non-financial services
related businesses and their viability within the Company's overall strategic
plan and subsequently decided to exit these businesses. As a result, two of
these businesses ceased operations and two of these businesses were sold to
their respective managements.
In 1998, the Company's Board of Directors decided to refocus on the
financial services business, initially through the creation of a new
wholly-owned mortgage banking subsidiary and adoption of an acquisition and
expansion strategy to create a national retail and wholesale mortgage banking
business.
In the 3rd quarter of 1998, the Company formed First Chesapeake Funding
Corporation, ("First Chesapeake Funding"), a wholly-owned subsidiary to perform
wholesale and retail mortgage banking operations at its Sunrise, FL location and
to serve as the administrative and core platform for a to-be-developed national
retail and wholesale mortgage banking operation.
In the 1st quarter of 1999, the Company established First Chesapeake
Acquisition Corporation ("First Chesapeake Acquisition") and commenced its first
retail mortgage banking operation through formation of a wholly-owned
subsidiary, Collateral One Mortgage Corporation ("Collateral One"), to acquire
certain assets of Mortgage Concepts, Inc., an established originator of
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primarily subprime and alternate documentation residential mortgage loans
operating in five central and Midwestern states. In the 2nd quarter of 1999,
Collateral One concluded the Mortgage Concepts, Inc. acquisition and the Company
opened a retail mortgage banking operation in Southern Florida, recruiting two
established managers and several experienced loan officers and staff.
In the 1st quarter of 2000, the company discontinued operations at its
First Chesapeake Funding wholesale mortgage banking subsidiary, closed two
Florida locations and centralized its mortgage banking operations in Louisville,
KY.
In the 1st quarter of 2000, the company announced an agreement to
acquire Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet is an
Internet and telecommunications provider serving residential and small business
clients through its free Internet service.
In addition to these business activities, the Company intends to
aggressively seek out and pursue other synergistic business opportunities
(whether early stage or mature) and investments within the mortgage banking and
related financial services industries. However, no assurance can be given that
the Company will be successful in its efforts to acquire profitable business
opportunities and investments.
Forward Looking Statements
- --------------------------
This Form 10-KSB contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. When used in this Annual Report on Form 10-KSB or future filings
by the Company with the Securities and Exchange Commission, in the Company's
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Mortgage Banking Business
- -------------------------
First Chesapeake is a financial services company providing a broad
array of residential mortgage products and related products and services to its
customers through its wholly owned mortgage banking subsidiaries.
The Company offers a full menu of residential mortgage products to
customers ranging from prime credit borrowers seeking conventional or FHA/VA
loans to less credit-worthy customers who qualify for non-conventional,
alternate documentation and/or subprime loans through both its retail and
wholesale operations. Retail operations originate loans directly from the
consumer, while wholesale operations provide an efficient market for retail
mortgage loans originated by the Company's retail operations, as well as through
purchase of loans from third party loan originators.
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 December 31, 1999 allowed the Company
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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 the
corresponding warehouse lines outstanding.
At December 31, 1999, the Company's mortgage banking operations
consisted of thirteen offices in seven states, with applications pending to
expand into five additional states with the goal to expand nationwide through
both internal growth and acquisition. The Company originates loans in Florida,
Indiana, Kentucky, Missouri, North and South Carolina and Tennessee, with
applications for approval pending in Georgia, Kansas, New Jersey, Ohio, and
Pennsylvania. Subsequent to December 31, 1999, the Company closed two offices in
Florida, and currently originates loans in the states listed above other than
Florida.
The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and distribute these loans in a risk averse
manner through either bulk secondary market sales, loan sales to specific
institutional investors, or brokering of individual loans to "niche" investors.
Through this strategy, the Company anticipates profitability and continued
expansion with reduced exposure to interest rate and credit risks.
The Company derives revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company holds the mortgage loans for sale, and various
"junk" fees associated with retail and wholesale mortgage banking.
The Company also anticipates deriving an increased portion of its
revenues from its participation in various joint venture or strategic alliance
partnerships with groups offering title insurance, property/casualty insurance,
life and disability insurance, and home warranty products.
Another projected loan origination and revenue source is expected to
arise from the Company's Internet presence, currently under development. In 1999
the Company began offering mortgage and home equity loan originations through an
arrangement with an established Internet marketing group with compensation paid
on a closed loan basis to the referring Internet marketing group within state
and federal guidelines. In 2000 the Company began development of a proprietary
Internet site to replace the third party site. Direct marketing of the pending
Company Web site is expected to further increase the percentage of mortgage
loans originated via Internet, which is expected to account for a substantial
portion of the total mortgage origination marketplace within the next three to
five years.
Previous Non-Mortgage Banking Businesses
- ----------------------------------------
In the period from 1995 through 1997, the Company invested in four
companies which were outside its core financial services business:
National Archives, Inc. National Archives, Inc. ("National Archives")
is a 60% owned subsidiary of the Company which was sold as of December 29, 1999.
In late 1995, the Company acquired a 60% interest in the startup company, a
Pennsylvania corporation, for a purchase price of $150,000 in cash and certain
furniture and equipment valued at approximately $38,000. National Archives is
located in Philadelphia, Pennsylvania and provides document archive services
from a rented warehouse. National Archives has been slow in attracting new
customers and never attained profitable operations. In 1999, the Company reached
an agreement to divest of 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.
Premiere Quality Foods, Inc. Premiere Quality Foods, Inc. ("Premiere
Quality Foods") is a wholly owned subsidiary of the Company which was closed in
1998. Premiere Quality Foods was organized by the Company in 1997 to acquire,
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package, distribute and sell imported Spanish olive oil and related specialty
foods products to the growing North American market. Sales and marketing efforts
failed to meet projections, and in the 4th quarter of 1998, as part of its
overall refocus on the financial services businesses, the Company closed this
operation due to poor sales and uncertainties regarding the availability of an
ongoing supply of imported product.
Premiere Chemical Products, Inc. Premiere Chemical Products, Inc.
("Premiere Chemical Products") was a wholly-owned subsidiary of the Company that
was sold as of January 1, 1999. Premiere Chemical Products was organized by the
Company in 1997 to develop, manufacture, distribute and market its proprietary
formulation of laundry detergent and related products. Marketing and initial
sales efforts commenced early in 1998 yet failed to meet projections. In the 4th
quarter of 1998, as part of its overall refocus on the financial services
businesses, the Company agreed to sell the stock of Premiere Chemical Products
to its management in exchange for assumption of liabilities of the subsidiary.
This sale was completed in 1999.
Fedeoliva International, Ltd. Fedeoliva International, Ltd.
("Fedeoliva") is a 50% owned subsidiary of the Company which was closed in 1997.
Fedeoliva was organized in 1997 to acquire an ownership interest in a joint
venture from Hampton Financial Services, Inc. a company controlled by Mark
Mendelson, who was at that time an outside Director of the Company. All
activities of Fedeoliva were transferred to Premiere Quality Foods upon the
formation of that subsidiary in 1997.
As discussed previously, in 1998 the Board of Directors examined the
Company's non-financial services related businesses and their viability within
the Company's overall strategic plan and subsequently decided to exit certain of
these businesses. At December 31, 1999, the Company had divested of all four of
these businesses to focus on its core financial services business.
Competition
- -----------
The Company's financial services businesses are faced with a large
group of competitors. The mortgage banking business is highly competitive, and
consists of several well-capitalized national firms and thousands of smaller
loan brokers. The Company believes, however, that there is the opportunity for
the Company's mortgage banking subsidiaries to grow and gain market share.
However, many of the Company's competitors are considerably larger and have
financial resources that are substantially greater than those of the Company.
Year 2000 Compliance
- --------------------
As previously reported, the Company assessed its state of readiness for
Year 2000, became knowledgeable concerning the risks of non-compliance,
implemented and carried out an action plan to achieve Year 2000 compliance, and
developed contingency plans, all in an effort to successfully deal with Year
2000 issues. The Company did not suffer any Year 2000 related business
interruptions on January 1, 2000 and has not suffered any problems since that
date. The Company does not anticipate making any material expenditures for Year
2000 compliance purposes in 2000 or that Year 2000 issues will have any material
effect on the Company in 2000 or thereafter.
Regulation
- ----------
Mortgage banking is a highly regulated industry. The industry is
subject to the rules and regulations of, and examinations by HUD, FNMA, FHLMC,
FHA, GNMA and the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling and securitizing residential
mortgage loans. In addition, there are other federal and state statutes and
regulations affecting such activities. These rules and regulations require
originators to obtain or maintain licenses, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
Failure to comply with these requirements can lead to a loss of approved status,
demands for indemnification or loan repurchases, class action law suits and
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administrative enforcement actions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, which
could make compliance more difficult or expensive, and restrict the Company's
ability to originate or sell mortgage loans, further limit or restrict the
amount of interest and other charges earned from loans originated or purchased
by the Company, or otherwise adversely affect the business or prospects of the
Company.
Seasonality
- -----------
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes which typically
peak during the spring and summer. Mortgage refinancings tend to be less
seasonal and more closely tied to overall interest rates.
Environmental Matters
- ---------------------
In the course of its business, the Company takes title (for security
purposes) or may foreclose on residential properties securing its mortgage
loans. To date, the Company has not been required to perform any investigation
or remediation activities, nor has it been subject to any environmental claims
relating to these activities. There can be no assurance, however, that this will
remain the case in the future.
Employees
- ---------
As of December 31, 1999, the Company had approximately sixty employees,
including four employees at the various non-mortgage banking subsidiaries and
three full-time employees at the Company's headquarters in Philadelphia,
Pennsylvania. None of the Company's employees are represented by unions. The
Company considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate and administrative headquarters are located in
Philadelphia, PA, which comprise approximately 2,000 square feet of leased
office and warehouse space. The Company's subsidiary, NAI, also leases
approximately 25,000 square feet of office and warehouse space in the same
property. The leased property is owned by an entity controlled by the Company's
Chief Executive Officer, and is extended on a month to month basis to each
entity with no current rental payments.
The Company's subsidiary, Collateral One, leases approximately 20,000
square feet of office space at locations in Louisville, KY, Lexington, KY, St.
Louis, MO, Indianapolis, IN, Charlotte, NC, Raleigh, NC, Nashville, TN,
Greensboro, NC, Columbia, SC and Memphis, TN under leases which are all short
term in nature with aggregate annual lease payments of approximately $260,000.
The Company's subsidiary, First Chesapeake Funding, leases 2,400 square
feet of office space in Sunrise, Florida under a five year lease with annual
lease payments of $71,000. This office was closed in early 2000 and the Company
has agreed to sublease this office space to its pending Whoofnet acquisition
commencing in March 2000.
The Company's subsidiary, First Chesapeake Acquisition, leases
approximately 2,000 square feet of office space in Coral Gables, FL under a
three year lease which commenced in 1999 with annual lease payments of $48,000.
This office was closed in early 2000 and the Company expects to sublease this
office space in 2000.
Management believes that the Company's current facilities are suitable
and adequate for its business as well as to meet its near term expansion plans.
The Company has no plans to purchase any properties.
ITEM 3. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on December 29, 1999. At the annual
meeting, the shareholders elected Mark Mendelson, Richard Chakejian, Jr., Mark
Glatz, Matthew Coppolino, John Papandon, James Greenfield, Pasquale Nestico and
Jay Vederman to serve on the Board of Directors. The shareholders also approved
the Company's 1999 Incentive Stock Option Plan as further described in Part III,
Item 10 of this Form 10-KSB. No other matters were voted upon.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not listed on any exchange. However,
market quotes for the Company's common stock (under the symbol "FCFK") may be
obtained from the National Association of Securities Dealers through the NASD
OTC Bulletin Board, its automated system for reporting non-NASDAQ quotes. The
following table sets forth, for the indicated calendar periods, the high and low
bid prices (as reported by the OTC Bulletin Board) for the Company's common
stock through December 31, 1999:
Bid Price
---------
High Low
---- ---
1998
First Quarter 3/16 1/8
Second Quarter 13/16 1/16
Third Quarter 13/16 1/4
Fourth Quarter 2-3/4 5/8
1999
First Quarter 3-3/16 1-3/16
Second Quarter 2 1
Third Quarter 1-3/8 7/8
Fourth Quarter 2-1/4 7/8
The prices set forth in this table represent quotes between dealers and
do not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
As of December 31, 1999, there were 354 stockholders of record;
however, the Company believes there were over 1,350 beneficial stockholders of
the Company's common stock.
The Company has never declared or paid a dividend on its common stock
and management expects that the substantial portion of the Company's earnings,
if any, for the foreseeable future will be retained for expansion or development
of the Company's business. The decision to pay dividends, if any, in the future
is within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements, financial condition and other
relevant factors such as loan covenants or other contractual obligations.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
- -------
The following discussion should be read in conjunction with the audited
financial statements and the notes thereto included elsewhere in this report.
Overview
- --------
First Chesapeake Financial Corporation and subsidiaries (the "Company"
or "First Chesapeake") is a Virginia corporation which ceased operations in 1997
following several years of unprofitable operations.
A new Board of Directors and new management has re-established
operations of the Company and is currently building a fully integrated mortgage
origination organization through internal growth and acquisitions.
In 1998, the Company established a new mortgage banking subsidiary, and
subsequently in 1999 the Company has expanded its mortgage banking operations
through acquisitions and internal growth.
It has been First Chesapeake's goal to develop a vertically integrated
financial services company that can provide mortgage origination, homeowner's
insurance, title insurance, home warranties, among other financial services,
consumer direct, wholesale and through the Internet. However, no assurance can
be given that the Company will be successful in its efforts to implement its
strategic plan.
In March 2000, the Company entered into an agreement to acquire
Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet is an Internet and
telecommunications provider serving residential and small business clients
through its free Internet service. The Company intends to develop and expand the
Whoofnet operation, however, no assurance can be given that it will be
successful in its efforts to implement its strategic plan.
Plan of Operation - Mortgage Banking Business
- ---------------------------------------------
First Chesapeake is a financial services company providing a broad
array of residential mortgage products and related products and services to its
customers through its wholly owned mortgage banking subsidiaries.
The Company offers a full menu of residential mortgage products to
customers of ranging from prime credit borrowers seeking conventional or FHA/VA
loans to less credit-worthy customers who qualify for non-conventional,
alternate documentation and/or subprime loans through both its retail and
wholesale operations. Retail operations originate loans directly from the
consumer, while wholesale operations provide an efficient market for retail
mortgage loans originated by the Company's retail operations as well as through
purchase of loans from third party loan originators.
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 December 31, 1999 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.
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At December 31, 1999, the Company's mortgage banking operations
consisted of thirteen offices in seven states, with applications pending to
expand into five additional states and the stated goal to expand nationwide
through both internal growth and acquisition. The Company originates loans in
Florida, Indiana, Kentucky, Missouri, North and South Carolina and Tennessee,
with applications for approval pending in Georgia, Kansas, New Jersey, Ohio, and
Pennsylvania. Subsequent to December 31, 1999, the Company closed two offices in
Florida, and currently originates loans in the states listed above other than
Florida.
The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and distribute these loans in a risk averse
manner through either bulk secondary market sales, loan sales to specific
institutional investors, or brokering of individual loans to "niche" investors.
Through this strategy, the Company anticipates profitability and continued
expansion with reduced exposure to interest rate and credit risks.
The Company derives revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company holds the mortgage loans for sale, and various
fees associated with retail and wholesale mortgage banking.
The Company also anticipates deriving an increased portion of its
revenues from its participation in various joint venture or strategic alliance
partnerships with groups offering title insurance, property/casualty insurance,
life and disability insurance, and home warranty products.
Another projected loan origination and revenue source is expected to
arise from the Company's Internet presence, currently under development. In 1999
the Company began offering mortgage and home equity loan originations through an
arrangement with an established Internet marketing group with compensation paid
on a closed loan basis to the referring Internet marketing group within all
state and federal guidelines. In 2000 the Company began development of a
proprietary Internet site to replace the third party site. Direct marketing of
the pending Company Web site is expected to further increase the percentage of
mortgage loans originated via Internet, which is expected to account for a
substantial portion of the total mortgage origination marketplace within the
next three to five years.
Financial Condition
- -------------------
Assets of the Company increased from $64,000 at December 31, 1998 to
$5,061,000 at December 31, 1999. This increase was primarily due to expansion of
existing mortgage banking operations and acquisition of the Collateral One
operations.
At December 31, 1999, assets consisted of acquisition-related goodwill
of $3,708,000, mortgage loans held for resale of $911,000, cash and other
current assets of $153,000, capitalized financing costs of $141,000, as well as
fixed and other assets. At December 31, 1998, the Company's primary assets
consisted of receivables of $19,000 and fixed assets, net of accumulated
depreciation, of $38,000.
Liabilities were $4,986,000 at December 31, 1999 versus $1,308,000 at
December 31, 1998, including bank debt of $2,107,000 and other debt of $669,000
associated with the Collateral One acquisition, warehouse notes payable to banks
of $902,000, accounts payable and accruals totaling $709,000, $75,000 of
subordinated junior debentures, $414,000 of deferred salaries due officers of
the Company and $110,000 liabilities of discontinued operations.
Stockholders' equity improved from ($1,245,000) at December 31, 1998 to
$75,000 at December 31, 1999, an increase of $1,320,000. The net loss of
$1,372,000 was offset by issuances of common stock totaling $2,692,000,
including a $485,000 private placement of common stock, issuance of $1,237,500
of stock to the sellers of the Collateral One operation, conversion of $560,000
of subordinated junior debentures into common stock, issuance of $220,000 of
common stock as consideration for guarantees of bank debt, and repayment of
$90,000 of payables with common stock (see the Notes of the financial
statements), as well as the exercise of common stock options totaling $99,000.
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Results of Operations
- ---------------------
Current Year Performance and Earnings Outlook
The Company incurred a loss of $1,372,000 for the year ended December
31, 1999. This loss is a result of operating losses of $577,000 at the since
ceased First Chesapeake Funding operation and $41,000 at the since divested
National Archives subsidiaries offsetting the $567,000 operating profit of the
Collateral One subsidiary, in addition to interest and related costs ($423,000),
depreciation/amortization ($397,000) and other corporate expenses ($497,000).
As discussed previously, the Company ceased operations of its First
Chesapeake Funding subsidiary in January 2000 and agreed to sell its interest in
National Archives (effective in December 1999). In March 2000, the Company
announced an agreement to acquire Whoofnet, an Internet and telecommunications
provider serving residential and small business clients through its free
Internet service. The Company is actively seeking operational opportunities in
the Internet and financial services industries or other suitable investment
opportunities. However, no assurance can be given that management will be able
to find a suitable business opportunity or attain profitable operations.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
The Company incurred a loss from continuing operations of $1,331,000
for the year ended December 31, 1999 (including a $577,000 loss at the since
ceased First Chesapeake Funding operation) compared to a loss from continuing
operations of $1,164,000 for the year ended December 31, 1998. An incremental
loss from the discontinued operations of $41,000 resulted in the net loss of
$1,372,000 for 1999, compared with an incremental loss from discontinued
operations of $299,000 and a net loss of $1,463,000 for 1998.
Total revenues from continuing operations for the year ended December
31, 1999 amounted to $4,244,000 representing an increase of $4,140,000 when
compared to 1998's revenues of $104,000. The increase in revenue is primarily
attributable to the acquisition of the Collateral One operation and expansion of
the Company's other mortgage banking operations.
Total expenses from continuing operations for 1999 amounted to
$5,575,000 as compared to $1,268,000 in 1998, an increase of $4,307,000, and was
centered in increased compensation and employee benefits and other operating
expenses.
Liquidity and Capital Resources
- -------------------------------
The Company's primary liquidity requirements have been the
establishment, funding and expansion of its mortgage banking operations.
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 December 31, 1999 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.
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In 1998, the Company raised $635,000 under a subordinated debenture
offering. In February 1999, the Company borrowed $1,500,000 from a bank 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. In November 1999, the Company borrowed an additional
$607,000 from its bank and raised $485,000 under a private placement of common
stock to partially finance a payment due under the Collateral One acquisition.
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.
Cash and cash equivalents at December 31, 1999 amounted to $71,000 as
compared to a negligible balance at December 31, 1998, or an increase of
$71,000.
During 1999, the Company's operating activities utilized $1,324,000 as
compared to utilizing $624,000 in 1998. The utilization of cash resources from
operating activities resulted from the Company's net losses for each year,
offset in 1999 by non-cash expenses (depreciation and amortization of $397,000
primarily associated with the goodwill from the Collateral One acquisition) and
an increase in accounts payable and accruals of $403,000.
The Company's investing activities in 1999 utilized $1,204,000,
reflecting net cash of $1,186,000 applied toward the Collateral One acquisition.
The Company's investing activities were negligible in 1998.
Financing activities provided $2,599,000 of capital in 1999 through the
$2,107,000 of acquisition-related bank debt, $902,000 of warehouse line
borrowings and $485,000 private placement of common stock, as compared with
providing $617,000 of capital in 1998 comprised primarily of $635,000 proceeds
from the subordinated debenture offering.
ITEM 7. FINANCIAL STATEMENTS
See the Audited Financial Statements set forth at the end of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In a report on Form 8-K dated June 8, 1999 the Company announced a
change in Registrant's certifying accountant from BDO Seidman, LLP to Grant
Thornton LLP as of June 8, 1999. The Company's Form 8-K dated June 8, 1999 is
incorporated by reference.
Page 11
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, positions, ages and backgrounds of the directors and
executive officers of the Company at December 31, 1999 are set forth below.
<TABLE>
<CAPTION>
Name Age Position and Background
- ---- --- -----------------------
<S> <C> <C>
Mark Mendelson 44 Chairman of the Board of Directors and Chief Executive Officer. Mr.
Mendelson has been a Director of the Company since August 1996. Since
1984, Mr. Mendelson has served as Chairman and Chief Executive Officer of
Hampton Real Estate Group, Inc., a diversified real estate brokerage,
development, and management firm specializing in commercial and
residential properties throughout the United States. Mr. Mendelson is a
former director and past chairman of the Audit Committee of Equimark Bank
Corporation (currently known as Integra) and sits on the boards of a
variety of civic and philanthropic institutions.
Richard N. Chajekian, Jr. 38 Director and President. Mr. Chakejian is experienced in the food, laundry
products and chemical industries, and has served as President of the
Company since 1997. Mr. Chakejian has an extensive background in field
management, sales, marketing and research.
Matthew Coppolino 71 Director. Mr. Coppolino is the senior Judge in the Municipal Court of the
City of Philadelphia.
Mark Glatz 38 Director and Chief Financial Officer. Mr. Glatz is experienced in
finance, banking, and a wide array of industries, and holds a degree in
accounting and an MBA in financial management. Mr. Glatz has served as
Chief Financial Officer of the Company since July 1998.
James Greenfield 48 Director and Secretary. Mr. Greenfield is an attorney with experience
in private practice, emphasizing municipal law, real estate matters,
and complex commercial litigation and arbitration.
Pasquale Nestico, M.D. 54 Director. Dr. Nestico is a practicing physician certified in cardiology
and internal medicine as well as an extensively published clinical
professor of medicine at both Allegheny Hospital (formerly Hahnemann
University) and Jefferson Medical College.
John Papandon 38 Director. Mr. Papandon is an attorney and Certified Public Accountant
with a Masters degree in taxation with 15 years experience in the
accounting industry.
Jay Vederman 33 Director. Mr. Vederman has experience in real estate development and
management, retail and manufacturing. Mr. Vederman also brings valuable
experience and background in the management of growth-oriented
publicly-traded entities.
On May 10, 2000, Mr. Vederman resigned from the Board of Directors of the
Company.
</TABLE>
Page 12
<PAGE>
Richard Chakejian, Sr., the father of the President, was manager and
sole employee of Premiere Chemical Products, and was the purchaser of the stock
of this subsidiary upon its divestiture as of January 1, 1999.
The Company currently utilizes approximately 2,000 square feet of
office and warehouse space in a property owned by an entity controlled by Mark
Mendelson, Chairman of the Board and Chief Executive Officer. NAI also utilizes
approximately 25,000 square feet of office and warehouse space in the same
property. No current rental payments are made by either the Company or by NAI,
although both entities contribute pro rata toward the utilities and operating
costs of the property.
There are no other family relationships among any of the Directors or
executive officers of the Company or its subsidiaries.
Directors are elected at each annual meeting of stockholders and serve
until the next annual meeting. The bylaws of the Company require a minimum of
seven Directors. Executive officers are elected annually at a meeting of the
Board of Directors and, subject to individual contractual arrangements, serve at
the pleasure of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act
- ------------------------------------------------------------
Section 16 (a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file reports of
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
("SEC") and the National Association of Security Dealers. Officers, directors
and greater than ten percent (10%) beneficial owners are required by SEC
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors and greater than
ten percent (10%) beneficial owners are in compliance with all filing
requirements applicable to them with respect to transactions during the fiscal
year ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
- -------------------------
Directors who are not executive officers of the Company ("Outside
Directors") are entitled to receive compensation of $2,000 per calendar quarter
served.
In December 1999, the Executive Compensation Committee and Board of
Directors authorized the optional conversion of accrued Outside Director fees to
stock options under the 1999 ISO Plan. The options are immediately vested,
exercisable at $1.20 per share, and expire on December 29, 2004. The then
Outside Directors elected to convert their accrued directors fees into a total
of 39,000 shares under the 1999 ISO Plan.
Compensation of Executive Officers
- ----------------------------------
The following table sets forth, for the three years ended December 31,
1999, certain information as to the total remuneration paid to each of the
Company's executive officers whose total annual salary and bonus exceeded
$100,000 for services in all capacities:
Page 13
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
------------------- Other All Other
Name Salary Other Reimb. Compensation
Principal Position (1) Year (2) (3) (4) (5)
----------------------- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mark Mendelson (6) 1999 $ 60,000 $ 0 $ 6,000 $ 6,000
Chairman and CEO 1998 $ 75,000 $100,000 $ 9,000 $ 12,000
1997 $ 0 $ 0 $ 0 $ 0
Richard N. Chakejian, Jr. (6) 1999 $ 60,000 $ 9,515 $ 6,000 $ 6,000
President 1998 $ 50,000 $100,000 $ 9,000 $ 12,000
1997 $ 0 $ 0 $ 0 $125,000
Mark E. Glatz 1999 $120,000 $ 0 $ 12,000 $ 12,000
Chief Financial Officer 1998 $ 50,000 $ 50,000 $ 9,000 $ 12,000
1997 $ 0 $ 0 $ 0 $ 0
</TABLE>
(1) No other executive officer had compensation whose salary and bonus
exceeded $100,000.
(2) All 1999 and 1998 salaries to the three executive officers, Messrs.
Mendelson, Chakejian, Jr. and Glatz, have been deferred.
(3) Includes amounts converted to subordinated debentures in 1998.
(4) Includes perquisites, including automobile and incidental expense
allowance.
(5) Includes premiums paid or reimbursed for health, disability and life
(where the spouse is the beneficiary) insurance.
(6) For 1999, Mr. Mendelson has allocated 50% of his compensation award to
Mr. Chakejian, Jr.
Employment Agreements
- ---------------------
There are no employment agreements with the above-named executive
officers.
Stock Option Plans
- ------------------
In May 1992, the Board of Directors adopted an Incentive Stock Option
Plan (the "1992 Plan"). Pursuant to the 1992 Plan, 500,000 shares of the
Company's common stock were made available for awards. The 1992 Plan allows for
Incentive Stock Options intended to qualify as Incentive Stock Options within
the meaning of Section 422 of the Internal Revenue Code of 1986, and for
Nonqualified Stock Options not intended to qualify as Incentive Stock Options.
Incentive Stock Options may be granted only to employees of the Company.
Non-qualified Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair market value per share at date of grant or, in the case of Incentive
Stock Options granted to employees who own more than 10% of the voting power of
all classes of stock of the Company, at 110% of the fair market value per share
at date of grant.
In 1999, 1992 Plan options to purchase 150,000 shares were exercised by
holders; no 1992 Plan options were exercised in 1998. In 1999, the remaining
50,000 shares expired unexercised, and there are no outstanding shares under the
1992 plan at December 31, 1999.
In July 1998, the Board of Directors adopted a Non-Qualified Stock
Option Plan (the "1998 Plan"). Pursuant to the 1998 Plan, 1,000,000 shares of
the Company's common stock were made available for awards. The 1998 Plan allows
for Nonqualified Stock Options not intended to qualify as Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of 1986.
Non-qualified Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair market value per share at date of grant.
In July 1998, the Executive Compensation Committee awarded 500,000
option shares under 1998 Plan to three executive officers of the Company.
Page 14
<PAGE>
In July 1998, the Board of Directors awarded 30,000 option shares under
the 1998 Plan to three outside directors of the Company.
In February 1999, the Company issued 100,000 option shares under the
1998 Plan at an exercise price of $2.00 per share and 100,000 1998 Plan option
shares at an exercise price of $5.00 per share as partial compensation to seven
individuals, including three executive officers, one subsidiary officer, two
Outside Directors of the Company and one unaffiliated individual, for personally
guaranteeing a $1,500,000 bank loan to the Company.
In November 1999, the Company issued 200,000 option shares under the
1998 Plan at an exercise price of $0.875 per share as compensation to the
Chairman of the Company, for personally guaranteeing and providing additional
collateral to secure an incremental $600,000 bank loan to the Company.
No 1998 Plan options have been exercised as of December 31, 1999.
In December 1999 the shareholders of the Company approved an Incentive
Stock Option Plan (the "1999 ISO Plan"), which was adopted by the Board of
Directors on November 17, 1999. Pursuant to the 1999 ISO Plan, 1,500,000 shares
of the Company's common stock were made available for awards. The 1999 Plan
allows for Incentive Stock Options intended to qualify as Incentive Stock
Options ("ISOs") pursuant to Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code"), or they may be Non-Qualified Stock Options ("NSOs").
Exercise prices under the Plan must be at no less than fair market value per
share at date of grant, and shall expire no more than five years from date of
issuance.
In December 1999 the Company awarded 550,000 option shares under the
1999 ISO Plan to certain officers of the Company at exercise prices of $1.20 per
share and expiration dates of December 29, 2004.
In December 1999 the Company awarded a total of 29,500 option shares
under the 1999 ISO Plan to 18 employees of the Company in grants ranging from
500 option shares to 10,000 option shares at exercise prices ranging from $1.13
to $1.50 and expiration dates between July 9, 2004 and December 31, 2004.
In December 1999 the Company awarded 39,000 option shares under the
1999 ISO Plan to certain Outside Directors of the Company at an exercise price
of $1.20 per share and an expiration date of December 29, 2004.
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 officers.
In November 1999, the Company offered to convert up to 100% of 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 conversion of all
debentures held by officers of the Company. At December 31, 1999, the remaining
$75,000 of convertible subordinated debentures remain outstanding under the
original terms and conditions of the issuance.
Other than the November 1999 conversions, none of the remaining $75,000
of subordinated debenture options have been exercised as of December 31, 1999.
Option activity under the above plans is summarized following:
Page 15
<PAGE>
December 31,
-------------------------
1999 1998
---- ----
Outstanding options at beginning of year 730,000 200,000
1998 Plan options granted 400,000 530,000
1999 ISO Plan options granted 618,500 -0-
1992 Plan options exercised (150,000) -0-
1992 Plan options cancelled (50,000) -0-
--------- --------
Outstanding options at end of year 1,556,000 730,000
========= ========
Exercise prices
Low $ .60 $ .25
High 5.00 .60
Latest expiration date December 31, 2004 July 9, 2003
Option/SAR Grants in Last Fiscal Year
The following table sets forth, for the period ended December 31, 1999,
certain information as to the Option/SAR grants to the above-named executive
officers in the last fiscal year:
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options/SARs to Exercise or Latest
Options/SARs Employees in Base Price Expiration
Granted Fiscal Year ($/share) Date
------- ----------- --------- ----
<S> <C> <C> <C> <C>
Mark Mendelson 250,000 24.5% $1.20 December 29, 2004
200,000 19.6% $0.875 November 10, 2004
25,000 2.5% $2.00 February 5, 2004
25,000 2.5% $5.00 February 5, 2004
Richard Chakejian, Jr. 100,000 9.8% $1.20 December 29, 2004
10,000 1.0% $2.00 February 5, 2004
10,000 1.0% $5.00 February 5, 2004
Mark E. Glatz 200,000 19.6% $1.20 December 29, 2004
10,000 1.0% $2.00 February 5, 2004
10,000 1.0% $5.00 February 5, 2004
The following table presents information concerning each exercise of
stock options during the fiscal year ended December 31, 1999 by each of the
named executive officers and the value of unexercised options at December 31,
1999:
<CAPTION>
Number of Shares Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options at FY-End Options at FY-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
Mark Mendelson 100,000 $88,120** 800,000/-0- $223,120/-0-
Richard N. Chakejian, Jr. 0 0 220,000/-0- $55,620/-0-
Mark E. Glatz 0 0 320,000/-0- $55,620/-0-
</TABLE>
Page 16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of December 31, 1999 by (i) each
person known by the Company to own beneficially 5% of such stock, (ii) each
Director of the Company, (iii) each executive officer of the Company, and (iv)
all Directors and executive officers of the Company as a group. Except as listed
below, the address for each of the listed individuals is: 12 E. Oregon Avenue,
Philadelphia, Pennsylvania 19148.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner (1) Beneficially Owned of Total
---------------------------- ------------------ --------
<S> <C> <C>
Mark Mendelson (2),(3)............................... 3,604,333 37.7%
John E. Dell (2) .................................... 450,000 4.7%
c/o Gallagher Broidy & Butler, Attn: Thomas P. Gallagher
212 Carnegie Center, Suite 402, Princeton, NJ 08540
Richard N. Chakejian, Jr. (4)........................ 998,167 10.4%
Mark E. Glatz (5).................................... 873,333 9.1%
Matthew Coppolino (6)................................ 10,000 0.1%
James Greenfield (7)................................. 118,000 1.2%
John Papandon (7).................................... 118,000 1.2%
Jay Vederman (8)..................................... 69,667 0.7%
Pasquale Nestico..................................... 66,667 0.7%
------ ------
All Directors and officers as a group................ 5,858,167 61.3%
Total number of (fully diluted) shares............... 9,558,000 100.0%
</TABLE>
NOTES:
(1) Unless otherwise indicated, each person has sole voting and investment
powers with respect to the shares
(2) Consists of 450,000 shares of common stock owned by Mr. Dell subject
to an irrevocable voting trust which is voted by Mr. Mendelson.
(3) Includes options to purchase 550,000 shares under the Company's 1998
Plan and 250,000 shares under the Company's 1999 ISO Plan
(4) Includes options to purchase 120,000 shares under 1998 Plan and
100,000 shares under 1999 ISO Plan
(5) Includes options to purchase 120,000 shares under 1998 Plan and
200,000 shares under the 1999 ISO Plan
(6) Includes options to purchase 10,000 shares under 1998 Plan
(7) Includes options to purchase 30,000 shares under 1998 Plan and 18,000
shares under 1999 ISO Plan
(8) Includes options to purchase 3,000 shares under 1999 ISO Plan and
66,667 shares held by a trust for benefit of Mr. Vederman of which he
is not the trustee, and Mr. Vederman disclaims any beneficial
ownership of these shares. On May 10, 2000, Mr. Vederman resigned from
the Board of Directors of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1999, the Company issued 200,000 shares of common stock,
options to purchase 100,000 shares at $2.00 per share, and options to purchase
100,000 shares at $5.00 per share as compensation to certain individuals for
personally guaranteeing a $1,500,000 bank loan to the Company. The guarantors
included the three executive officers of the Company and two Outside Directors
of the Company, as well as Lester W. Salzman, at that time President of First
Chesapeake Funding, a wholly-owned subsidiary of the Company, as follows:
Page 17
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Option Shares Option Shares
Issued at $2.00 Issued at $5.00 Issued
------ --------------- ---------------
<S> <C> <C> <C>
Mark Mendelson 50,000 25,000 25,000
Richard N. Chakejian, Jr. 20,000 10,000 10,000
Mark E. Glatz 20,000 10,000 10,000
John Papandon 20,000 10,000 10,000
James Greenfield 20,000 10,000 10,000
Lester W. Salzman 20,000 10,000 10,000
(Unrelated party) 50,000 25,000 25,000
------ ------ ------
Totals 200,000 100,000 100,000
</TABLE>
In January 1999, the Company issued 50,000 shares of common stock to
James Greenfield and 50,000 shares of common stock to John Papandon, both
Directors of the Company, for prior services rendered in lieu of cash payments.
The Company currently utilizes approximately 2,000 square feet of
office and warehouse space in a property owned by an entity controlled by Mark
Mendelson, Chairman of the Board and Chief Executive Officer. NAI also utilizes
approximately 25,000 square feet of office and warehouse space in the same
property. No current rental payments are made by either the Company or by NAI,
although both entities contribute pro rata toward the utilities and operating
costs of the property.
In December 1999, the Company sold its 60% interest in National
Archives, Inc. to Mr. Mendelson in exchange for assumption of approximately
$362,000 in net liabilities and contingencies.
All future transactions with officers, Directors or five percent (5%)
stockholders of the Company will be approved by the independent disinterested
members of the Company's Board of Directors and be on terms no less favorable to
the Company than could otherwise be obtained from unaffiliated third parties.
Page 18
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) List of Exhibits Required by Item 601 Of Regulation S-B
Exhibit #
---------
1.1 Revised Form of Underwriting Agreement between the Company
and Hibbard Brown & Company, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 By-laws of the Company. (1)
3.3 Form of Stock Certificate. (1)
9.1 Irrevocable Voting Proxy dated March 9, 1994 between John E.
Dell and Max E. Gray (2)
9.2 Appointment of Mark Mendelson as of January 1, 1998 as
holder of Irrevocable Voting Proxy dated March 9, 1994
between John E. Dell and Max E. Gray.
10.1 1992 Stock Option Plan. (1)
10.2 Agreement between the Company and Lester W. Salzman dated
June 5, 1998 (3).
10.3 Share Purchase Agreement dated as of January 1, 1999 between
the Company and Richard N. Chakejian, Sr. (3).
10.4 Warehouse Loan Agreement dated March 1999 between the
Company and Priority Bancorp, Inc. (3).
10.5 Participation Agreement dated May 25, 1999 between the
Company and Sterling Bank and Trust. (3).
2.1 Asset Purchase Agreement dated February 9, 1999 with
Mortgage Concepts, Inc., William Everslage and Jeffrey Houk,
as amended (4).
2.2 Loan Agreement dated February 5, 1999 with Crusader Bank
(4).
2.3 Third Amendment to the Asset Purchase Agreement dated
February 9, 1999 with Mortgage Concepts, Inc.
2.4 Amendment to Loan Agreement dated November 10, 1999 with
Crusader Bank.
21
(a) National Archives, Inc., incorporated in the state of
Pennsylvania (60%)
(b) Premiere Quality Foods, Inc., incorporated in the state
of Virginia (100%)
(c) Premiere Chemicals, Inc., incorporated in the state of
Virginia (100%)
(d) First Chesapeake Funding Corporation, incorporated in
the state of Virginia (100%)
(e) First Chesapeake Acquisition Corporation, incorporated
in the state of Virginia (100%)
(f) Collateral One Mortgage Corporation, incorporated in
the state of Virginia (100%)
27 Financial Data Schedule (electronic filing only).
- ---------------------------
(1) Incorporated by reference to the correspondingly numbered exhibit to
the Registration Statement on Form S-1, Registration No. 33-59726,
filed by the Company with the Securities and Exchange Commission (the
"Commission") on March 18, 1993, and Amendments Nos. 1, 2, 3 and 4
thereto filed with the Commission on May 19, June 25, July 8 and July
15, 1993, respectively.
(2) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1993 filed with the Commission on March 31, 1994.
(3) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1998 filed with the Commission on August 24, 1999.
(4) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Current Report on Form 8-K filed with the Commission on
September 17, 1999.
Page 19
<PAGE>
(b) 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.
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.
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 principal, 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
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.
In a report on Form 8-K dated September 17, 1999 the Company filed
additional information pertaining to the previously-announced acquisition of
Mortgage Concepts, Inc. of Louisville, KY, including required statements of
Acquisition or Disposition of Assets, Financial Statements Pro Forma Financial
Information and Exhibits, Pro Forma Financial Information, and Exhibits
Page 20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 12, 2000 First Chesapeake Financial Corporation,
a Virginia corporation
By: /s/ Mark Mendelson
---------------------------------
Mark Mendelson, Chairman and Chief Executive
Officer
By: /s/ Richard N. Chakejian, Jr.
---------------------------------
Richard N. Chakejian, Jr., Director and
President
By: /s/ Mark E. Glatz
---------------------------------
Mark E. Glatz, Director and Chief Financial
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Date Name and Title Signature
- ---- -------------- ---------
<S> <C> <C>
May 12, 2000 Mark Mendelson, Chairman of /s/ Mark Mendelson
the Board and Chief Executive Officer ------------------
Mark Mendelson
May 12, 2000 Richard N. Chakejian, Jr., /s/ Richard N. Chakejian. Jr.
Director and President -----------------------------
Richard N. Chakejian, Jr.
May 12, 2000 Mark E. Glatz /s/ Mark E. Glatz
Director and Chief Financial Officer -----------------
Mark E. Glatz
May 12, 2000 Matthew Coppolino /s/ Matthew Coppolino
Director ---------------------
Matthew Coppolino
May 12, 2000 James Greenfield /s/ James Greenfield
Director and Secretary --------------------
James Greenfield
May 12, 2000 Pasquale Nestico /s/ Pasquale Nestico
Director --------------------
Pasquale Nestico
May 12, 2000 John Papandon /s/ John Papandon
Director -----------------
John Papandon
</TABLE>
Page 21
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1999 and 1998
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1999 and 1998
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
First Chesapeake Financial Corporation
We have audited the accompanying consolidated balance sheets of First
Chesapeake Financial Corporation (the Company) and Subsidiaries as of December
31, 1999 and December 31, 1998, and the related consolidated statements of
operations, stockholders' (deficiency) equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on those
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Chesapeake Financial Corporation and Subsidiaries as of December 31, 1999
and December 31, 1998, and their consolidated results of operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $1,371,612 for the year
ended December 31, 1999 and, as of that date, its total assets exceeded its
total liabilities by $74,929. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note A to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Grant Thornton LLP
May 12, 2000
Philadelphia, Pennsylvania
Page 3
<PAGE>
<TABLE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<CAPTION>
1999 1998
---------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 70,617 $ 32
Note and accounts receivable 82,874 19,087
Mortgage loans held for resale 911,050 -
Furniture and equipment, net 103,689 38,183
Capitalized financing costs 141,400 -
Goodwill 3,707,877 -
Other assets 43,897 6,210
----------- --------------
Total assets $5,061,404 $ 63,512
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Note payable - bank $ 2,107,321 $ -
Warehouse note payable - bank 901,727 -
Note payable - other 668,680 -
Accounts payable 557,116 255,747
Accrued expenses 152,020 50,000
Due to officers 414,411 259,860
Subordinated junior debentures 75,000 635,000
Liabilities of discontinued operations 110,200 107,864
------------- -----------
Total liabilities 4,986,475 1,308,471
------------- -----------
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;
8,002,000 and 5,775,000 shares issued and outstanding in
1999 and 1998, respectively 13,647,625 10,956,125
Accumulated deficit (13,572,696) (12,201,084)
------------ -----------
Total stockholders' equity (deficiency) 74,929 (1,244,959)
------------ -----------
Total liabilities and stockholders' equity $5,061,404 $ 63,512
========= ============
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
<TABLE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<CAPTION>
1999 1998
-------------- --------------
REVENUES
<S> <C> <C>
Sales $ 4,136,087 $ 83,599
Interest income 84,491 1,269
Other 23,129 19,437
------------ ----------
Total revenues $ 4,243,707 $ 104,305
EXPENSES
Compensation and employee benefits 3,170,216 755,426
Professional fees 143,139 258,670
Occupancy 280,020 43,767
Depreciation and amortization 397,223 30,620
Other operating expenses 1,160,925 145,456
Interest and related expense 423,019 34,240
------------ ----------
Total expenses 5,574,542 1,268,179
------------ ----------
Loss from continuing operations (1,330,835) (1,163,874)
Loss from discontinued operation (40,777) (299,220)
------------ ----------
NET LOSS $(1,371,612) $(1,463,094)
============ ===========
Basic and diluted loss per share
Continuing operations $ (.21) $ (.21)
Discontinued operations (.01) (.05)
$ (.22) $ (.26)
============ ===========
Weighted average shares outstanding 6,339,417 5,627,329
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
<PAGE>
<TABLE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
Years ended December 31, 1999 and 1998
<CAPTION>
Total
stockholders'
Common Accumulated (deficiency)
stock deficit equity
----------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, 1997 $10,832,734 $(10,737,990) $ 94,744
Issuance of common stock 123,391 - 123,391
Net loss - (1,463,094) (1,463,094)
----------- ------------ -----------
Balance at December 31, 1998 10,956,125 (12,201,084) (1,244,959)
Issuance of common stock 2,592,500 - 2,592,500
Exercise of common stock options 99,000 - 99,000
Net loss - $(1,371,612) $ (1,371,612)
----------- ------------ -----------
Balance at December 31, 1999 $13,647,625 $(13,572,696) $ 74,929
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
Page 6
<PAGE>
<TABLE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<CAPTION>
1999 1998
------------- --------------
Operating activities:
<S> <C> <C>
Net loss $(1,371,612) $(1,463,094)
Adjustments to reconcile net loss to net cash
used in operating activities:
Unpaid officers' compensation 154,551 259,860
Common stock issued as compensation 32,250 123,391
Depreciation 27,849 55,420
Amortization of goodwill and capitalized financing costs 369,374 -
Net increase in loans held for sale (911,050) -
(Gain) loss on disposal of assets (38,441) 17,796
Increase in note and accounts receivable (17,070) (2,286)
Decrease in loans to related parties 94,240
Decrease in other assets (14,416) 1,885
Increase in trade accounts payable 301,369 245,097
Increase (decrease) in accrued expenses 102,020 (64,659)
Increase in liabilities from discontinued operations 40,777 107,864
----------- ---------
Net cash used in operating activities (1,324,399) (624,486)
----------- ---------
Investing activities:
Purchase of furniture and equipment (18,355) (5,532)
Cash used in acquisition, net (1,185,889) -
----------- ---------
Net cash used in investing activities (1,204,244) (5,532)
----------- ---------
Financing activities:
Proceeds (repayment) of bank and warehouse loans 3,009,048 (17,795)
Proceeds from subordinated junior debentures - 635,000
Increase in common stock 584,000 -
Repayment of note payable - other (993,820) -
----------- ---------
Net cash provided by financing activities 2,599,228 617,205
----------- ---------
Net increase (decrease) in cash and cash equivalents 70,585 (12,813)
Cash and cash equivalents at beginning of year 32 12,845
----------- ---------
Cash and cash equivalents at end of year $ 70,617 $ 32
========== ===========
Supplemental cash flow disclosures:
Cash payments of interest expense $ 394,486 $ 14,407
</TABLE>
The accompanying notes are an integral part of these statements.
Page 7
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
On May 18, 1992, First Chesapeake Financial Corporation (the Company) was
incorporated in the Commonwealth of Virginia as a mortgage banking company
to engage in the servicing of mortgage loans.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, First Chesapeake Funding Corporation (FC
Funding), First Chesapeake Acquisition Corporation (FC Acquisition),
Collateral One Mortgage Corporation (Collateral One), Premiere Quality
Foods, Inc. (Premiere Foods), and Premiere Chemical Products, Inc. (Premiere
Chemical), and a 60% owned subsidiary, National Archives, Inc. (NAI). All
material intercompany transactions and accounts have been eliminated in
consolidation.
FC Funding was incorporated in July 1998 to operate as a wholesale mortgage
banking operation and to serve as the administrative and core platform for
developing national wholesale and retail mortgage banking operation.
FC Acquisition was incorporated in February 1999 to operate as a retail
mortgage banking operation.
Collateral One was incorporated in February 1999 to acquire the assets of
Mortgage Concepts, Inc. (Note L2) and operate as a retail mortgage banking
operation.
Premiere Foods acquires, packages, distributes and sells imported Spanish
olive oil and related specialty food products within North America. The
company was formed during 1997 and operations ceased during 1998.
Premiere Chemical develops, manufactures, distributes and markets its
proprietary formulation of laundry detergent and related products. Premiere
Chemical was formed during 1997. In January 1999, the Company sold its
holdings in Premiere Chemical to its management.
NAI provides document archive services to the government and businesses
primarily located in the Philadelphia area. In 1999, the Company agreed to
sell its interest in NAI effective December 29, 1999.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. During the year ended
December 31, 1999, the Company incurred a net loss of $1,371,612.
The Company's continuation as a going concern is dependent upon its ability
to implement 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 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.
The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a going concern.
Page 8
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an initial maturity of three
months or less to be cash equivalents.
2. Furniture and Equipment
Furniture and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by using
accelerated methods over the estimated useful lives of the individual
assets. Ordinary maintenance and repairs are charged to operations as
incurred.
3. Income Recognition
Revenue from mortgage origination is recognized when the loans are sold to
an investor and the Company has no further obligation to fulfill. To date,
the majority of loans originated has been sold (or will be sold in the case
of loans held for sale) and servicing has been released.
Gains or losses on loan sales are recognized at the time of sale and are
determined by the difference between net sales proceeds and the carrying
value of the loans sold.
4. Income Taxes
From inception through December 31, 1999, the Company has incurred net
operating losses and, accordingly, has made no provision for income taxes.
5. Basic and Diluted Loss Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" which provides for the
calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could occur if securities or other
contracts to issue common stock were exercised and converted into common
stock.
Shares issuable for stock options and warrants have been excluded from the
computation of loss per share for the years ended December 31, 1999 and
1998, as their inclusion would the anti-dilutive.
6. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
7. Stock-Based Compensation
The Company accounts for stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the date of grant based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under
Page 9
<PAGE>
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro-forma disclosures of net
income and earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. The Company's stock
options plans are accounted for under APB Opinion No. 25.
NOTE C - FIXED ASSETS
<TABLE>
Fixed assets consist of the following:
1999 1998
-------------- --------------
<S> <C> <C>
Leasehold improvements $ 22,138 $ 22,138
Furniture and fixtures 183,129 62,112
Machinery and equipment 205,001 192,103
-------- -------
410,268 276,353
Less accumulated depreciation and amortization (306,579) (238,170)
-------- -------
$ 103,689 $ 38,183
======== ========
</TABLE>
Depreciation and amortization expense associated with the fixed assets for
the years ended December 31, 1999 and 1998 was $27,849 and $55,420,
respectively.
NOTE D - ACQUISITION AND RELATED DEBT
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.
Had this transaction occurred on January 1, 1998, unaudited pro forma
operating results would have been as follows:
1999 1998
-------------- ---------------
Net loss $(1,258,303) $ (1,121,037)
========== ============
Loss per share $ (0.20) $ (0.19)
========== ============
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated at that time.
As of October 9, 1999, the Company restructured the remaining amounts due
the sellers of the assets of Mortgage Concepts, Inc. which now operates as
the Company's Collateral One subsidiary. The purchase price of $4,100,000
was unchanged, and was amended to consist of $2,862,500 of cash and
$1,237,500 of Company common stock, payable over the same multi-year period
of time. At December 31, 1999, the Company had paid the sellers $2,194,000
of cash, with the remaining cash payments due in 2000. The stock has been
issued into escrow for release in 2000 and 2001. As described above, the
remaining payments of cash and stock are subject to reduction if certain
financial benchmarks are not attained.
NOTE E - OTHER DEBT
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
Page 10
<PAGE>
elected to convert their holdings into 373,333 shares of common stock,
including all debentures held by officers of the Company. At December 31,
1999, the remaining $75,000 of convertible subordinated debentures remain
outstanding under the original terms and conditions of the issuance.
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 $600,000 from the
bank, 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. 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.
The Company has warehouse lines of credit with maximum borrowings of
$29,000,000 and $10,000,000 at December 31, 1999 and 1998, respectively. At
December 31, 1999, $921,727 was outstanding under the lines. At December 31,
1998, no amounts were outstanding under this line.
NOTE F - INCOME TAXES
The Company and its wholly owned subsidiaries file a consolidated income tax
return. The Company incurred net operating losses for federal income tax
purposes of approximately $1,400,000 and $1,400,000 for the years ended
December 31, 1999 and 1998, respectively, resulting in total net operating
loss carryforwards of approximately $4,500,000 which expire beginning in
2007 through 2013, if not utilized. The difference between the Company's net
operating loss carryforwards for tax and financial reporting purposes
results primarily from temporary differences related to depreciation and
amortization.
At December 31, 1999 and 1998, the Company recorded a valuation allowance
for the total amount of the net deferred tax asset which was composed
primarily of the net operating loss carryforwards.
NOTE G - STOCK OPTIONS
In May 1992, the Board of Directors adopted an Incentive Stock Option Plan
(the 1992 Plan). Pursuant to the 1992 Plan, 500,000 shares of the Company's
common stock were made available for awards. The 1992 Plan allows for
Incentive Stock Options intended to qualify as Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code of 1986, and
for Non-qualified Stock Options not intended to qualify as Incentive Stock
Options. Incentive Stock Options may be granted only to employees of the
Company. Non-qualified Stock Options may be granted to employees, as well as
non-employee directors and consultants to the Company. Exercise prices under
the 1992 Plan must be at fair market value per share at date of grant or, in
the case of Incentive Stock Options granted to employees who own more than
10% of the voting power of all classes of stock of the Company, at 110% of
the fair market value per share at date of grant.
No 1992 Plan options had been exercised as of December 31, 1998. In 1999,
options to purchase 150,000 shares were exercised by holders, and the
remaining 50,000 option shares were canceled by the Board of Directors of
the Company. There are no 1992 Plan options outstanding at December 31,
1999.
In July 1998, the Board of Directors adopted a Non-Qualified Stock Option
Plan (the 1998 Plan). Pursuant to the 1998 Plan, 1,000,000 shares of the
Company's common stock were made available for awards. The 1998 Plan allows
for Non-Qualified Stock Options not intended to qualify as Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of
1986. Non-Qualified Stock Options may be granted to employees, as well as
non-employee directors and consultants to the Company. Exercise prices under
the 1998 Plan must be at fair market value per share at date of grant. In
1999, 400,000 1998 Plan option shares at exercise prices of $0.875 to $5.00
were granted, of which 290,000 were granted to certain executive officers,
Page 11
<PAGE>
and 40,000 were granted to certain outside directors. In 1998, 530,000 1998
Plan option shares at an exercise price of $.60 were granted, of which
500,000 were granted to certain executive officers, and 30,000 were granted
to certain outside directors.
In December 1999 the shareholders of the Company approved an Incentive Stock
Option Plan (the "1999 ISO Plan"), which was adopted by the Board of
Directors on November 17, 1999. Pursuant to the 1999 ISO Plan, 1,500,000
shares of the Company's common stock were made available for awards. The
1999 Plan allows for Incentive Stock Options intended to qualify as
Incentive Stock Options pursuant to Section 422A of the Internal Revenue
Code of 1986, as amended, or they may be Non-Qualified Stock Options.
Exercise prices under the Plan must be at no less than fair market value per
share at date of grant, and shall expire no more than five years from date
of issuance. In 1999, 618,500 1999 ISO Plan option shares at exercise prices
of $1.13 to $1.50 were granted, of which 550,000 were granted to certain
executive officers, and 39,000 were granted to certain outside directors.
Option activity under the above plans is summarized following:
December 31,
-------------------------
1999 1998
---- ----
Outstanding options at beginning of year 730,000 200,000
1998 Plan options granted 400,000 530,000
1999 ISO Plan options granted 618,500 -0-
1992 Plan options exercised (150,000) -0-
1992 Plan options cancelled (50,000) -0-
-------- ---------
Outstanding options at end of year 1,548,500 730,000
========= =========
Exercise prices
Low $ .60 $ .25
High 5.00 .60
Latest expiration date December 31, 2004 July 9, 2003
Had compensation cost been determined based on the fair value of the options
at the grant date consistent with the provisions of SFAS No. 123, the
Company's 1999 and 1998 net loss and net loss per share would have been
reported as follows:
1999 1998
---- ----
Net loss: As reported $(1,371,612) $(1,463,094)
Pro forma $(2,113,230) $(1,696,294)
Loss per share: As reported $(0.22) $(.26)
Pro forma $(0.33) $(.30)
The fair value of options granted during 1999 and 1998 was estimated on the
date of grant using the Black-Sholes options pricing model with the
following assumptions; weighted average risk-free interest rate of 6.14% in
1999 and 5.33% in 1998; no dividend yield; expected weighted average term of
5 years; and volatility of 140% for 1999 and 1998.
At December 31, 1999, there were 1,548,500 options outstanding with a
weighted average exercise price of $1.26 and a remaining maturity of
approximately 4.3 years.At December 31, 1998, there were 730,000 options
outstanding with a weighted average exercise price of $.51 and a remaining
maturity of approximately 3.7 years.
NOTE H - STOCKHOLDERS' EQUITY
On August 4, 1993, the Company completed an initial public offering of its
securities through the sale of 1,250,000 units at a purchase price of $8.00
per unit. Each unit consisted of one share of the Company's common stock, no
par value, one Redeemable Class A Warrant and one Redeemable Class B
Page 12
<PAGE>
Warrant. Each Class A Warrant entitles its holder to purchase one share of
the Company's common stock at a purchase price of $9.00 per share and each
Class B Warrant entitles its holder to purchase one share of common stock at
a price of $10.00 per share. The Class A and Class B Warrants expired
unexercised in 1998.
In May 1992, the Company issued a warrant to purchase 500,000 shares of
common stock at an exercise price of $2.00 per share. This warrant, together
with 1,000,000 shares of common stock, were issued to a founding stockholder
of the Company for proceeds of $425,000. The Company had assigned a value of
$50,000 to the warrant. The warrant expired unexercised during 1997, and the
$50,000 was transferred to common stock.
During 1997, the Company issued 500,000 shares of common stock to acquire an
interest in a joint venture and 500,000 shares as compensation to an officer
of the Company that joined the Company during 1997. The shares were recorded
at the fair value of the Company's common stock at the respective issue
dates.
During 1998, the Company issued 275,000 shares as compensation to an officer
of the Company that joined the Company during 1998. The shares were recorded
at the fair value of the Company's common stock at the issue date, less a
discount due to the restricted nature of the stock.
During 1999, the Company issued 646,667 shares under a private placement of
common stock which raised a total of $485,000 of equity capital.
During 1999, holders of $560,000 of convertible subordinated debentures
elected to convert their debentures into 373,333 shares of Company common
stock at a conversion price of $1.50 per share.
During 1999, the Company issued 656,000 shares into escrow under an Escrow
Agreement with the sellers of the assets of Mortgage Concepts, Inc. which
now operates as the Company's Collateral One subsidiary. The shares shall be
released in 2000 and 2001 in accordance with the Escrow Agreement.
NOTE I - COMMITMENTS AND CONTINGENCIES
Litigation - 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.
Leases - The Company and its subsidiaries lease office facilities under
noncancellable leases. In addition to minimum rentals, several leases
provide for the Company to pay its pro-rata share of operating expenses.
Future minimum lease payments under noncancellable leases are as follows:
2000 $ 367,286
2001 300,263
2002 157,286
Thereafter 62,935
NOTE J - DISCONTINUED OPERATIONS
In December 1999, the Company agreed to sell its interest in NAI effective
December 29, 1999. Accordingly, the financial statements have been restated
to reflect NAI as a discontinued operation.
During 1998, management decided to cease operations at Premiere Foods and
sell Premiere Chemical to its management, effective January 1, 1999.
Accordingly, the results of operations of these discontinued entities are
presented separately in the accompanying consolidated statements of
operations.
Page 13
<PAGE>
NOTE K - LINES OF BUSINESS (Unaudited)
The Company's business consisted of three principal activities: (a)
continuing mortgage banking operations (namely, the ongoing Collateral One
operation and the FC Funding operation which was closed in January 2000);
(b) discontinued operations (consisting of the disposed National Archives
operations); and (c) corporate operations. The following tables set forth
certain 1999 and 1998 information concerning these activities:
<TABLE>
<CAPTION>
*Continuing Continuing
12 Months ended Operations - Operations - Discontinued Corporate Combined
December 31, 1999 Collateral One FC Funding Operations Operations Operations
----------------- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $3,653,000 $587,000 $179,000 $4,000 $4,423,000
Compensation and benefits 2,134,000 760,000 99,000 276,000 3,268,000
Professional fees 14,000 9,000 -0- 120,000 143,000
Occupancy 189,000 69,000 11,000 23,000 291,000
Other operating expenses 740,000 273,000 69,000 209,000 1,317,000
------------------------ ------- ------- ------ ------- ---------
Operating profit/(loss) 576,000 (524,000) (25,000) (624,000) (596,000)
Interest and related expenses -0- 78,000 -0- 345,000 423,000
Depreciation/amortization 6,000 2,000 16,000 389,000 413,000
Other expense/(income) 4,000 (27,000) -0- (38,000) (60,000)
---------------------- ----- -------- -------- -------- --------
Net income/(loss) $566,000 $(577,000) $(41,000) $(1,320,000) $(1,372,000)
*Note: Collateral One operations commenced on the February 10, 1999
acquisition date, and 1999 results reflect 10-1/2 months operations for
the period
<CAPTION>
*Continuing *Continuing
12 Months ended Operations - Operations - Discontinued Corporate Combined
December 31, 1998 Collateral One FC Funding Operations Operations Operations
----------------- -------------- ---------- ---------- ---------- ----------
Revenues $-0- $84,000 $180,000 $20,000 $284,000
Compensation and benefits -0- 140,000 139,000 614,000 893,000
Professional fees -0- 2,000 2,000 257,000 261,000
Occupancy -0- 21,000 7,000 23,000 51,000
Other operating expenses -0- 69,000 185,000 82,000 336,000
------------------------ --- ------ ------- ------ -------
Operating profit/(loss) -0- (148,000) (153,000) (956,000) (1,257,000)
Interest and related expenses -0- -0- -0- 34,000 34,000
Depreciation/amortization -0- 1,000 25,000 30,000 56,000
Other expense/(income) -0- 11,000 121,000 (16,000) 116,000
---------------------- --- ------ ------- -------- -------
Net income/(loss) $-0- $(160,000) $(229,000) $(1,004,000) $(1,463,000)
</TABLE>
*Note: FC Funding operations commenced in August 1998 start-up of that
subsidiary; Collateral One commenced operations in February 1999 and was
not included in the 1998 Company results.
In managing its business, the Company does not allocate corporate expenses to
its various activities.
Page 14
<PAGE>
NOTE L - DISPOSITION OF SUBSIDIARIES
On January 1, 1999, the Company sold its investment in Premiere Chemical to
a family member of one of its officers in exchange for substantially all of
Premiere Chemical's net liabilities; the transaction resulted in a gain of
approximately $38,000.
NOTE M - SUBSEQUENT EVENTS
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.
In March 2000, the Company entered into an agreement to acquire
Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet is an Internet
and telecommunications provider serving residential and small business
clients through its free Internet service. The Company intends to develop
and expand the Whoofnet operation, however, no assurance can be given that
it will be successful in its efforts to implement its strategic plan.
During the first quarter of 2000, the Company issued 66,667 shares under a
private placement of common stock which raised a total of $175,000 of equity
capital.
Page 15
THIRD AMENDMENT TO
ASSET PURCHASE AGREEMENT
THIS THIRD AMENDMENT TO ASSET PURCHASE AGREEMENT ("Amendment") is made
and entered into as of November __, 1999, by and among Mortgage Concepts, Inc.,
a Kentucky corporation ("Seller"), William P. Everslage, Jeffrey D. Houk
(collectively "Shareholders"), Collateral One Mortgage Corporation, a Virginia
corporation ("Purchaser") and First Chesapeake Financial Corporation, a Virginia
corporation ("Financial").
WHEREAS, Seller, Shareholders, Purchaser and Financial have previously
entered into that certain Asset Purchase Agreement, as amended (the
"Agreement"), wherein the Purchaser has agreed to purchase substantially all of
the assets of Seller and certain related entities;
WHEREAS, Seller, Shareholders, Purchaser and Financial desire to amend
the Agreement in certain respects, all as hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual
covenants and agreements contained in this Amendment, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller, Shareholders, Purchaser and Financial hereby amend the
Agreement as follows:
1. Section 2.1(b) of the Agreement is deleted in its entirety and in
its place is substituted the following:
2.1 (b) on or before November 11, 1999, Purchaser shall pay
Seller the sum of (i) Eight Hundred Thousand Dollars ($800,000.00); plus (ii)
simple interest on the amount of $756,180 beginning October 9, 1999; less (iii)
simple interest on the advances to Seller totaling $193,280 less authorized
advances thereunder in cash or cashier's check or by wire transfer of funds to
an account designated by Seller. Interest hereunder shall be calculated at a
rate of twelve percent (12%) per annum. Calculations of the advances to Seller
and accrued interest amounts are included as Attachments A-1 to A3 of this Third
Amendment.
2. Section 2.1(c) of the Agreement is deleted in its entirety and in
its place is substituted the following:
2.1 (c) (i) in January 2000, Purchaser shall issue that number
of unregistered shares of Financial common stock with a value of Two Hundred
Fifty Thousand Dollars ($250,000.00) as determined by the posted closing price
of Financial stock as listed on the NASDAQ Bulletin Board on the date of this
Third Amendment.
2.1 (c) (ii) on or before the tenth day of each month
beginning in February 2000 and concluding in May 2000 Purchaser shall pay Seller
in cash, certified or cashier's check or by wire transfer the sum equal to 40%
of the net operating profit for Collateral One Mortgage Corporation for the
preceding month to an aggregate amount of Two Hundred Six Thousand One Hundred
Eighty Dollars ($206,180.00). Any unpaid balance hereunder (the "Balloon Payment
Amount") shall be added to and paid in accordance with the amounts payable in
May 2000 under Section 2.1. (c) (iii) hereof.
2.1. (c) (iii) on or before June 1, 2000, Purchaser shall (1)
pay Seller in cash, certified or cashier's check or by wire transfer the sum of
Four Hundred Sixty Two Thousand Five Hundred Dollars ($462,500.00) plus any
Balloon Payment Amount, as adjusted pursuant to Section 2.2 below, and (2) shall
issue that number of unregistered shares of Financial common stock with a value
of Two Hundred Forty Three Thousand Seven Hundred Fifty Dollars ($243,750.00) as
determined by the posted closing price of Financial stock as listed on the
NASDAQ Bulletin Board on the Closing Date ("Shares"), adjusted pursuant to
section 2.2 below (collectively, the payments set forth in this section 2.1(c),
the "Final Payment"). Purchaser, in its sole and absolute discretion, may defer
payment of the Final Payment for a period of ninety (90) days following the
Anniversary Date so that the adjustment set forth in section 2.2(a), if any, may
be calculated by its outside accounting firm. In the event that Purchaser defers
payment of the Final Payment after June 1, 2000, interest shall accrue on the
unpaid balance of the Final Payment (minus any adjustment pursuant to section
2.2(a)) at the rate of six percent (6 %) per annum from the Anniversary Date
until paid. The remainder of the Purchase Price shall be payable in accordance
with section 2.3(c).
3. Section 2.2 (b) of the Agreement is deleted in its entirety and in
its place is substituted the following:
2.2 (b) In the event that there is a reduction in the Final
Payment pursuant to the above formula, Purchaser, in its sole discretion, shall
elect whether the reduction shall first be made against the payment set forth in
section 2.1(c)(1) or against the payment set forth in section 2.1(c)(2). In any
case, any reduction made against the payment set forth in section 2.1(c)(1)
shall not exceed a maximum of fifty percent (50%) of that total cash payment
amount set forth in Section 2.1 (c)(iii)(1) with the balance of any adjustment
against the payments of stock set forth in Sections 2.1(c)(iii)(2). 2.3(b)(i)
and/or 2.3(b)(ii) herein.
4. Section 2.3 (a) of the Agreement is deleted in its entirety and no
further advance payments shall be made.
5. Section 2.3 (b) of the Agreement is deleted in its entirety and in
its place is substituted the following:
2.3 (b) (i) For the period beginning June 1, 2000, at the end
of each subsequent calendar quarter, Purchaser shall issue that number of
unregistered shares of Financial common stock with a value equal to seventy
percent (70%) of the net operating profits of Purchaser for such quarter as
determined by the posted closing price of Financial stock listed on the NASDAQ
Bulletin Board on the date of this Third Amendment; provided that the maximum
number of shares of stock payable to Seller pursuant to this Section 2.3(b)(i)
shall equal that number of shares with a value equal of Five Hundred Thousand
Dollars ($500,000.00) as determined by the posted closing price of Financial
stock listed on the NASDAQ Bulletin Board on the date of this Third Amendment,
at which time the payments shall end.
2.3 (b) (ii) Upon the termination of such payments, at the end
of each subsequent calendar quarter, Purchaser shall issue that number of
unregistered shares of Financial common stock with a value equal to seventy
percent (70%) of the net operating profits of Purchaser for such quarter as
determined by the posted closing price of Financial stock listed on the NASDAQ
Bulletin Board on the Closing Date; provided that the maximum number of shares
of stock payable to Seller pursuant to this Section 2.3(b)(ii) shall equal that
number of shares with a value equal of Two Hundred Forty Three Thousand Seven
Hundred Fifty Dollars ($243,750.00) as determined by the posted closing price of
Financial stock listed on the NASDAQ Bulletin Board on the Closing Date.
6. Section 2.7 of the Agreement is deleted in its entirety and Seller
does hereby relinquish any and all rights to unwind under the Agreement and does
hereby release its first priority security interest in all issued and
outstanding shares of stock of Purchaser.
7. The Registration Rights Agreement with Seller and/or the
Shareholders included as Exhibit 2.4(b) is hereby amended to encompass all
additional shares of Financial common stock identified in this Third Amendment
to the Agreement.
8. This Third Amendment is conditional upon delivery of the payment
described in Section 2.1(b). In the event the payment is not made, the Agreement
shall be deemed to exist in its form on the day prior to execution of this Third
Amendment.
In all other respects, the Agreement is hereby ratified and approved by the
parties. In the event that there is a conflict between this Third Amendment and
the Agreement, this Third Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment as of the date first set forth above.
PURCHASER: COLLATERAL ONE MORTGAGE CORPORATION,
a Virginia corporation
By:______________________________
Its:_____________________________
SELLER: MORTGAGE CONCEPTS, INC.,
a Kentucky corporation
By:______________________________
Its:_____________________________
SHAREHOLDERS: WILLIAM P. EVERSLAGE
__________________________________________
JEFFREY D. HOUK
__________________________________________
FINANCIAL: FIRST CHESAPEAKE FINANCIAL CORPORATION,
a Virginia corporation
By:______________________________
Its:_____________________________
AMENDMENT 0F MORTGAGE AND OTHER LOAN DOCUMENTS
THIS AMENDMENT is made this 10th day of November, 1999 by and among
First Chesapeake Financial Corporation ("Borrower"), and CRUSADER BANK, a
federally-chartered savings bank (the "Bank"),
On February 5, 1999, Borrower and Bank consummated a loan transaction
pursuant to the terms of which Bank lent to Borrower the sum of $1,500,000 (the
"Loan") for the acquisition of Mortgage One Concepts Inc. The Loan is evidenced
by a promissory note dated February 5, 1999 (the "Note") executed by Borrower
and made to the order of the Bank in the stated principal sum of $1,500,000 and
is secured by, inter alia, (a) an open-end mortgage and security agreement dated
February 5, 1999 ("Mortgage") executed by Borrower in favor of Bank and covering
certain real property and improvements located at 1201 Meadow Bank Road,
Villanova, PA, as more particularly described on Exhibit A attached hereto (the
"Property"), which Mortgage was recorded with the Montgomery County Recorder of
Deeds in Mortgage Book _____ page ______ (b) Guaranty and Suretyship Agreements
executed by Mark Mendelson, Richard Chakejian, Mark Glatz, John Papandon, Les
Salzman and Thomas Leonard and Kathleen Leonard. ("Guaranties").
The Note, Guarantees, Business Loan Agreement, Mortgage and any other
document executed and delivered in connection with the Loan are sometimes
collectively referred to herein as the "Loan Documents'.
Borrower has requested that Bank further amend the Loan in order to,
inter alia, (a) increase the loan amount to $2,108,566 and Bank has agreed to do
so pursuant to the terms hereof.
Agreement
NOW THEREFORE, in consideration of the extension and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows
1. Note - The Note is amended, modified and supplemented as follows:
(a) The principal balance of the loan outstanding at November 5,1999 shall be
increased to $2,108,566 plus accrued interest or other loan charges. All
references in the Note to the principal amount thereof shall be deemed to refer
to $2,108,566 plus accrued interest or other loan charges. The maturity date
shall be extended to November 4, 2000. The $2,108,566 balance includes (1)
$78,566 of fail fees incurred by Borrower through October 31, 1999 pursuant to
the section of the Business Loan Agreement entitled Requirement to Sell
Mortgages to Bank and (ii) the $30,000 fee earned by the Bank pursuant to the
section of the Business Loan Agreement entitled Equity Option.
2. Guaranties.
(a) Mark Mendelson shall agree to guarantee and become surety for the loan
balance up to $1,800,000 plus accrued but unpaid interest or other loan charges.
The guarantee and surety of Thomas and Kathleen Leonard shall remain at $300,000
and the guarantee and Surety of the Guarantors other than Mark Mendelson and
Thomas and Kathleen Leonard shall remain at $1,200,000.
(b) In connection with the increase in the amount guaranteed by each Guarantor,
the Guarantor expressly reaffirms his or her Confession of Judgment and all
other provisions of the Commercial Guaranty Agreement. In the event of a default
by the Borrower, it is understood that the Bank may proceed against any
collateral posted in connection with this loan or any other extension of credit
between the Bank and the Guarantor.
(c) Each of the Guarantors agrees that he or she is acting in the capacity as
guarantor and surety with respect to the Loan.
3. Mortgage
(a) The Property shall remain subject to the liens, operation and effect of the
Mortgage, as amended hereby, and nothing contained herein or done pursuant
hereto shall impair or adversely affect the liens, operation or effect of the
same on the Property. Borrower hereby confirms, acknowledges and agrees that (i)
he has no defenses, charges, claims, demands, pleas or offsets whatsoever in law
or equity against the Mortgage, as amended hereby, or to his obligations
thereunder and (ii) the Mortgage, as amended hereby, constitutes a valid and
enforceable lien against the Property. The mortgage amount shall be increased to
$1,800,000.
4. Continuing Validity of Loan Documents; No Defense or Offsets; Acknowledgment
of Outstanding Amount.
(a) By execution of this Amendment, the parties hereby confirm and ratify all of
the Loan Documents in their entirety and agree that the Loan Documents shall
remain in full force and effect in accordance with their respective terms, as
the same may have been amended hereby. All of the Loan Documents are hereby
amended, where necessary, to reflect the provisions of this Amendment.
(b) Borrower confirms. acknowledges and agrees that he has no defenses, charges,
claims, demands, pleas or offsets whatsoever in law or equity to the
indebtedness evidenced and secured by the Loan Documents, as amended, or to his
obligations thereunder.
5. Conditions Precedent. The obligations of the Bank to amend the Loan (section
illegible)...
(a) This Amendment shall have been executed in recordable form by Borrower and
delivered to the Bank.
(b) Borrower shall have paid to Bark a legal and modification fee of $12,500 and
agrees to pay the Bank an extension fee of $15,000 by November 30, 1999.
(c) The Section in the Business Loan Agreement entitled Requirement to Sell
Mortgages to Bank is hereby amended effective November 1, 1999 to require the
Borrower or an affiliate thereof to sell to the Bank at least $1 million per
month of nonconforming credit mortgage loans based on the Bank's standard
wholesale rate sheet as published from time to time by the Bank or its
subsidiary, Crusader Mortgage Corporation ("Flow Priced Loans"). Additionally,
the Bank or its subsidiary shall have the right to match any bid received by the
Borrower on bulk sales of mortgage loans. The requirement to sell the Bank $1
million per month of Flow Priced loans and to provide the Bank with the right to
match bulk bids shall extend for a period (the "Requirement Period") until the
later of (a) November 30, 2000 or (b) until all balances outstanding under this
Loan are repaid. In event the Borrower shall fail to sell the Bank at least $1
million of Flow Priced Loans in any month during the Requirement Period, the
borrower shall be required to pay the Bank a fail fee (which at the discretion
of the Bank may be added to the principal balance of this Loan) equal to 1 % of
the excess, if any, of $1 million over the actual Flow Priced Loans sold to the
Bank during the month. If the Borrower sells more than $1 million of Flow Priced
Loans to the Bank in any month, the $1 million requirement in the following
month shall be reduced by such excess. Notwithstanding the requirements set
forth in this paragraph, the Bank shall purchase nonconforming loans from the
Borrower at its sole and absolute discretion, and the Bank's disapproval of a
loan or series of loans shall not reduce the $1 million per month sale
requirement.
(d) Borrower shall agree to pay to the Bank in addition to monthly accrued
interest, 50% of the Cash Flow generated by Collateral One Mortgage Corporation
("Collateral One"). Cash Flow shall mean pre-tax income plus depreciation,
amortization and any other non-cash expenses. In calculating Collateral One's
Cash Flow, Borrower shall not take into account any Corporate Overhead Charges,
including but not limited to salaries, interest and data processing.
(e) Borrower hereby agrees to pledge its shares in Collateral One as collateral
for this loan and to deliver such shares, properly endorsed to the Bank, prior
to the disbursement of any funds hereunder. Borrower also agrees to fully
cooperate with the Bank in executing any documents reasonably required by the
Bank to perfect its security interest in the collateral, In connection
therewith, Borrower hereby represents and warrants to the Bank that such shares
represent 100% of the outstanding shares of Collateral One, that such shares are
owned free and clear by Borrower and there are no agreements that prevent
Borrower from pledging such shares to the Bank. Borrower and Guarantors further
represent that during the term of this Loan Agreement, they will take all steps
necessary to ensure that (i) no additional shares of Collateral One stock are
issued and (ii) that the current and future contemplated operations of
Collateral One are conducted by Collateral One and that no such operations are
conducted by the Borrower or any affiliate thereof. In the event of a default
under any of the Loan Documents that is not cured in accordance with the terms
of such document, in addition to any other remedies available to the Bank, the
Bank shall have the right to assume the operations of Collateral One, in which
case the net income, if any, generated thereby shall be applied as a repayment
of the outstanding loan balance. Not withstanding anything herein to the
contrary, nothing in this section shall in any way restrict the Bank from
proceeding against the Borrower or any of the Guarantors for full payment of the
outstanding loan balance, even if the Bank does assume the operation of
Collateral One.
(f) Prior to disbursement of any funds hereunder, Borrower shall establish a two
month interest reserve to be held in a money market account at the Bank
throughout the term of the Loan. In the event of a default under any of the Loan
Documents, the Bank shall have the right to exercise any remedies available to
it without proceeding against the interest reserve. If the Bank does elect to
apply the interest reserve, or any portion thereof, in payment of any past due
balance hereunder, is shall be an Event of Default if Borrower does not fully
replenish the interest reserve within five days after the interest reserve is
applied.
(g) The disbursement of any funds pursuant to this Amendment shall be contingent
upon the Borrower (i) receiving additional cash equity pursuant to its private
offering of at least $350,000 and (ij) entering into the Third Amendment to the
Asset Purchase Agreement among Mortgage Concepts, Inc., William P. Everslage,
Jeffrey D. Houk, Collateral Mortgage Corporation, First Chesapeake Financial
Corporation and First Chesapeake Acquisition Corporation, a true copy of which
has been provided to the Bank. Simultaneous with the execution of this amendment
and disbursement of funds pursuant thereto, Borrower shall pay seller all funds
required at this time pursuant to the Third Amendment.
(h) Upon maturity of the Loan or payoff of the loan balance prior to maturity,
Borrower agrees to pay the Bank a payoff fee of $12,000.
(i) Mark Mendelson agrees that within seven days hereof he shall deliver the
Assignment of Partnership Income and Security Agreement duly executed by all
parties in the form previously provided by the Bank. The failure of Mark
Mendelson to comply with the provisions of this Paragraph shall, at the Bank's
option, constitute an Event of Default under the Loan.
6. Miscellaneous.
(a) The parties hereto acknowledge and agree that this Amendment shall not
constitute a novation of the Loan nor impair the validity or lien priority of
the Mortgage as amended hereby.
(b) The falsity of any representation made by any Borrower in this Amendment or
the breach by any Borrower of any of his or her covenants or agreements made
herein shall, at the option of the Bank, constitute an event of default under
the Loan Documents.
(c) This Amendment shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, successors and assigns. This
Amendment shall be governed by and construed in accordance with the provisions
of the laws of the Commonwealth of Pennsylvania.
(d) This Amendment may be executed in one or more counterparts with the same
effect as if all parties had signed the same document. All counterparts shall be
construed together and shall constitute one Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the day and year first above written.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 71
<SECURITIES> 0
<RECEIVABLES> 83
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,065
<PP&E> 104
<DEPRECIATION> 44
<TOTAL-ASSETS> 5,061
<CURRENT-LIABILITIES> 4,387
<BONDS> 75
0
0
<COMMON> 13,648
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,061
<SALES> 4,136
<TOTAL-REVENUES> 4,243
<CGS> 0
<TOTAL-COSTS> 5,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 423
<INCOME-PRETAX> (1,372)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,331)
<DISCONTINUED> (41)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,372)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
