Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on May 15, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission File Number 0-21912
First Chesapeake Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East Oregon Avenue
Philadelphia, PA 19148
(Address of principal executive offices)
(Zip code)
(215) 755-5691
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock of registrant outstanding as of March 31,
2000 was 8,002,000 shares.
Page 1
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
2000 1999
------------ ---------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 195,505 $ 70,617
Note and accounts receivable 111,497 82,874
Mortgage loans held for resale 1,805,400 911,050
Furniture and equipment, net 98,933 103,689
Capitalized financing costs 103,525 141,400
Goodwill 3,642,195 3,707,877
Other assets 17,911 43,897
----------- ------------
Total assets $5,974,966 $ 5,061,404
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Note payable - bank $2,107,321 $ 2,107,321
Warehouse note payable - bank 1,796,877 901,727
Note payable - other 620,280 668,680
Accounts payable 556,904 557,116
Accrued expenses 258,056 152,020
Due to officers 460,411 414,411
Subordinated junior debentures 75,000 75,000
Liabilities of discontinued operations 110,200 110,200
----------- ------------
Total liabilities 5,985,049 4,986,475
----------- ------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Convertible preferred stock; no par value; $1 stated value per
share; 5,000,000 shares authorized; no shares issued - -
Common stock; no par value; 20,000,000 shares authorized;
8,002,000 issued and outstanding in 2000 and 1999 13,822,625 13,647,625
Accumulated deficit (13,832,708) (13,572,696)
----------- ------------
Total stockholders' equity (deficiency) (10,083) 74,929
----------- ------------
Total liabilities and stockholders' equity $5.974,966 $ 5,061,404
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 2
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
REVENUES
<S> <C> <C>
Sales $ 975,703 $ 776,479
Interest income 1,853 1,483
Other -- --
---------- ----------
Total revenues 977,556 777,962
OPERATING EXPENSES
Compensation and employee benefits $ 612,998 $ 590,050
Professional fees 49,804 12,076
Occupancy 72,976 43,111
Depreciation and amortization 108,313 47,297
Other operating expenses 331,877 243,628
Interest expense 61,600 41,829
---------- ----------
Total expenses 1,237,568 997,991
---------- ----------
NET LOSS $ 260,012 $ 200,029
========== ==========
NET LOSS PER SHARE $ 0.03 $ 0.03
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
<CAPTION>
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (260,012) $ (200,029)
Adjustments
Depreciation 4,756 11,329
Amortization of goodwill and capitalized financing costs 103,557 68,968
(Increase) decrease in accounts receivable (28,623) (205,771)
Increase in mortgage loans held for resale (894,350)
Increase in warehouse note payable - bank 895,150 --
Decrease in other assets 25,986 2,544
Increase (decrease) in trade accounts payable (212) 204,499
Increase (decrease) in accruals 106,036 191,786
Decrease in liabilities of discontinued subsidiaries -- (38,441)
Net cash provided (absorbed) by operating activities (47,712) 34,885
----------- -----------
INVESTING ACTIVITIES
Purchase (disposition) of fixed assets -- (550)
Cash used in acquisition, net -- (1,185,889)
Net cash provided (absorbed) by investing activities -- (1,186,439)
----------- -----------
FINANCING ACTIVITIES
Proceeds of note payable - bank -- 1,500,000
Repayment of notes payable - other (48,400) --
Increase in amounts due officers 46,000 37,500
Increase in common stock 175,000 24,499
Net cash provided (absorbed) by financing activities 172,600 1,564,999
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 124,888 413,445
Cash and cash equivalents at beginning of period 70,617 $ 969
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195,505 $ 414,414
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 18,853 $ 41,829
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the years ended December 31, 1998 and
December 31, 1999.
2. Acquisition
On February 9, 1999, the Company acquired substantially all of the
assets of Mortgage Concepts, Inc., an originator of primarily subprime and
alternate documentation residential mortgage loans which now operates as the
Company's Collateral One subsidiary. The purchase price was $4,100,000, subject
to reduction if certain financial benchmarks, as outlined in the Asset Purchase
Agreement, are not attained by the subsidiary. The $4,100,000 purchase price
consisted of a combination of $3,612,500 cash and $487,500 Company common stock,
payable over a multi-year period of time specified in the Agreement. The
acquisition has been accounted for under the purchase method of accounting.
As of 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 March
31, 2000, the Company had paid the sellers $2,242,000 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 are subject
to reduction if certain financial benchmarks are not attained.
3. Debt and Equity Financing
In February 1999, the Company borrowed $1,500,000 from a bank;
$1,200,000 of such borrowings was used in conjunction with the Mortgage
Concepts, Inc. acquisition. The loan, guaranteed by certain officers of the
Company and other individuals, bears interest at prime plus 2% and matures in
November 2000. In November 1999, the Company borrowed an additional $607,000
from the bank, secured by the personal guaranty of the Chairman of the Board of
Directors of the Company to partially finance a payment due the sellers of
Mortgage Concepts, Inc. and for working capital needs. This loan also bears
interest at prime plus 2% and matures in November 2000. In connection with both
these financings, the Company entered into loan guaranty agreements with the
individuals guaranteeing the loans, whereby such individuals received shares
and/or options of the Company's common stock as compensation for their
guarantees.
In 1998, the Company issued $635,000 of convertible subordinated
debentures. Up to 20% of the subordinated debenture notes are convertible, at
any time at option of the holder, into the Company's common stock at a price of
$2.00 per share. The $635,000 includes $350,000 of subordinated debentures
issued to certain officers of the Company in exchange for a similar reduction in
amounts due to officers. In November 1999, the Company offered to convert the
convertible subordinated debentures into Company common stock at a conversion
price of $1.50 per share. Holders of $560,000 of debentures elected to convert
their holdings into 373,333 shares of common stock, including all debentures
held by officers of the Company. At March 31, 2000, the remaining $75,000 of
convertible subordinated debentures remain outstanding under the original terms
and conditions of the issuance.
The Company has warehouse lines of credit with maximum borrowings of
$29,000,000 at March 31, 2000 and December 31, 1999. At March 31, 2000 and
December 31, 1999, $1,796,877 and $901,727 was outstanding under the lines,
respectively.
Page 5
<PAGE>
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.
4. Cessation of Florida Operations
In January 2000, the Company ceased operations of its FC Funding
wholesale mortgage banking subsidiary and closed its two Florida locations,
effective January 31, 2000.
5. Divestiture of Subsidiaries
In December 1999, the Company agreed to sell its interest in National
Archives to Mark Mendelson, the Chairman of the Board and Chief Executive
Officer, in exchange for assumption of certain liabilities of the subsidiary,
with the transaction to close in 2000 effective December 29, 1999.
On January 1, 1999, the Company sold its investment in Premiere
Chemical to a family member of one of its officers in exchange for purchaser's
assumption of substantially all of Premiere Chemical's net liabilities; the
transaction resulted in a gain of $38,441 during the first quarter of 1999.
6. Pending Acquisition
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets of the Company increased from $5,061,000 at December 31, 1999 to
$5,975,000 at March 31, 2000, an increase of $914,000. This increase was
primarily due to an $894,000 increase in mortgage loans held for resale.
Liabilities increased from $4,986,000 at December 31, 1999 to
$5,985,000 at March 31, 2000 as a result of a $895,000 increase in warehouse
note payable borrowings and a $106,000 increase in accrued expenses.
Net worth at March 31, 2000 is -$10,000 (negative $10,000), resulting
from the loss of $260,000 for the period partially offset by the sale of
$175,000 of common stock (as more fully described in Note 3 above). At March 31,
2000, the Company had liquid assets of $2,112,000 and current liabilities of
$5,339,000, including a bank loan of $2,107,000 maturing in November 2000 and
payments due the sellers of Mortgage Concepts, Inc. of $620,000 due in 2000.
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $260,000 for the three months ended
March 31, 2000 as compared to a loss of $200,000 for the same period in 1999.
This increase in the amount of loss is a result of profits of the ongoing
Collateral One operation of $119,000 being more than offset by losses at the
since closed FC Funding oepration of $69,000 and higher costs of corporate
operations, including approximately $58,000 of interest expense and $104,000 of
amortization of goodwill and capitalized financing costs associated with the
Collateral One acquisition.
As discussed more fully in the Company's Annual Reports on Form 10-KSB
for the year ended December 31, 1998 and December 31, 1999, the Company is
implementing its strategic plan of developing a retail and wholesale mortgage
banking operation through acquisition and internal growth as a step toward
developing a vertically integrated financial services company that can provide
mortgage origination, homeowner's insurance, title insurance and home
warranties, among other financial services, consumer direct, wholesale and
through the Internet. However, there are no assurances that the Company will be
able to successfully implement all aspects of its strategic plan.
Page 6
<PAGE>
As also discussed more fully in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999, 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.
Liquidity and Capital Resources
The Company's primary liquidity requirements have been the
establishment, funding and expansion of its mortgage banking operations,
including the February 1999 acquisition of Mortgage Concepts, Inc. and
subsequent internal growth.
The Company borrowed $2,107,000 from a bank in 1999 secured by the
personal guarantees of several officers and directors of the Company and one
outside investor to partially finance the Collateral One acquisition and for
working capital needs (see Note 3 of the financial statements). The Company is
seeking additional capital infusion to fund its operations and expansion and has
obtained additional equity capital of $485,000 in 1999 and $175,000 in the first
quarter of 2000. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
The Company funds its mortgage banking activities in large part through
warehouse lines of credit, and its ability to continue to originate and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable terms. Borrowings under these lines are repaid with the proceeds
received by the Company from the sale of the loans to institutional investors.
The Company's committed warehouse lines at March 31, 2000 allowed the Company to
borrow up to $29 million. The warehouse lines expire within the next twelve
months, but are generally renewable, however, no assurances are given that the
Company can renew its warehouse lines or that such renewals can be made on equal
or more favorable terms to the Company. The Company sells its originated and
purchased loans, including all servicing rights, for cash to institutional
investors, usually on a non-recourse basis, with proceeds applied to reduce
corresponding warehouse line outstandings.
Cash and cash equivalents at March 31, 2000 amounted to $196,000 as
compared to $71,000 at December 31, 1999, or an increase of $125,000.
During the first three months of 2000, the Company's operating
activities utilized $48,000 as compared to providing $35,000,000 in the same
period in 1999. The cash utilized by operating activities in the first three
months of 2000 resulted from the Company's net loss for the period partially
offset by increases in accruals and $108,000 of depreciation/amortization for
the period. The cash provided in the same period in 1999 resulted from increases
in accounts payable and accruals of $396,000 and depreciation/amortization of
$80,000 more than offsetting the net loss for the period.
Investing activities were negligible in the first three months of 2000
as compared with utilizing $1,186,000 in the same period of 1999 for the
Collateral One acquisition.
Financing activities provided $173,000 of capital in the first three
months of 2000 primarily through the sale of $175,000 of common stock during the
period.
During the comparable period of 1999 financing activities provided
$1,565,000 of cash, primarily through the $1,500,000 bank borrowing to partially
finance the Collateral One acquisition.
As of March 31, 2000, the Company had cash and cash equivalents of
$196,000. The Company is seeking additional capital infusion to fund its
operations and obtained additional equity capital of $175,000 in the first
quarter of 2000. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
Page 7
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, the Company and its subsidiaries become parties to legal
proceedings incidental to its business. In the opinion of management, such
matters are not expected to have a material impact on the financial position of
the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None.
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: May 15, 2000 By: /s/ Mark Mendelson
----------------------
Mark Mendelson, Chief Executive Officer
By: /s/ Richard N. Chakejian, Jr.
----------------------------------
Richard N. Chakejian, Jr., President
By: /s/ Mark E. Glatz
----------------------
Mark E. Glatz, Chief Financial Officer
Page 8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-2000
<CASH> 196
<SECURITIES> 0
<RECEIVABLES> 111
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,112
<PP&E> 99
<DEPRECIATION> 5
<TOTAL-ASSETS> 5,975
<CURRENT-LIABILITIES> 5,339
<BONDS> 75
0
0
<COMMON> 13,823
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,975
<SALES> 976
<TOTAL-REVENUES> 978
<CGS> 0
<TOTAL-COSTS> 1,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> (260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (260)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (260)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
