Form 10-QSB for FIRST CHESAPEAKE FINANCIAL CORP filed on August 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 June 30, 2000
Commission File Number 0-21912
First Chesapeake Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East Oregon Avenue
Philadelphia, PA 19148
(Address of principal executive offices)
(Zip code)
(215) 755-5691
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock of registrant outstanding as of June 30,
2000 was 7,793,669 shares.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 57,802 $ 70,617
Note and accounts receivable 205,368 82,874
Mortgage loans held for resale 1,169,326 911,050
Furniture and equipment, net 94,177 103,689
Capitalized financing costs 65,650 141,400
Goodwill 3,576,513 3,707,877
Other assets 100,676 43,897
----------- -----------
Total assets $ 5,269,512 $ 5,061,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Note payable - bank $ 2,107,321 $ 2,107,321
Warehouse note payable - bank 1,169,326 901,727
Note payable - other 601,121 668,680
Accounts payable 584,701 557,116
Accrued expenses 310,056 152,020
Due to officers 678,446 414,411
Subordinated junior debentures 75,000 75,000
Liabilities of discontinued operations 110,200 110,200
----------- -----------
Total liabilities 5,636,171 4,986,475
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Convertible preferred stock; no par value; $1 stated value per
share; 5,000,000 shares authorized; no shares issued - -
Common stock; no par value; 20,000,000 shares authorized;
7,793,669 and 8,002,000 issued and outstanding in 2000 and 1999 13,699,334 13,647,625
Accumulated deficit (14,065,993) (13,572,696)
----------- -----------
Total stockholders' equity (deficiency) (366,659) 74,929
----------- -----------
Total liabilities and stockholders' equity $ 5,269,512 $ 5,061,404
=========== ===========
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The accompanying notes are an integral part of these statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Sales $1,031,045 $1,124,941 $2,006,748 $1,901,420
Interest income - 1,101 1,853 2,584
Other - - - -
---------- ---------- ---------- ----------
Total revenues 1,031,045 1,126,042 2,008,601 1,904,004
OPERATING EXPENSES
Compensation and employee benefits 597,084 706,066 1,210,082 1,296,116
Professional fees 71,087 19,979 120,891 32,055
Occupancy 61,819 76,673 134,795 119,784
Depreciation and amortization 108,313 77,206 216,626 234,834
Interest and related expense 92,815 46,267 154,415 88,096
Other operating expenses 333,211 444,486 665,088 577,783
---------- ---------- ---------- ----------
Total expenses 1,264,329 1,370,677 2,501,897 2,348,668
---------- ---------- ---------- ----------
NET LOSS $ 233,284 $ 244,635 $ 493,296 $ 444,664
========== ========== ========== ==========
NET LOSS PER SHARE $ 0.03 $ 0.04 $ 0.06 $ 0.07
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (493,296) $(444,664)
Adjustments
Depreciation/amortization 216,626 234,834
(Increase) decrease in accounts receivable (122,494) (279,517)
Net increase in loans held for resale (258,276) --
Decrease (increase) in other assets (56,779) (5,452)
Increase (decrease) in trade accounts payable 27,585 28,997
Accrued expenses, net 158,036 146,580
Decrease in liabilities of discontinued subsidiaries -- (38,441)
Net cash provided (absorbed) by operating activities (528,598) (357,663)
--------- -----------
INVESTING ACTIVITIES
Purchase (disposition) of fixed assets -- (10,860)
Cash used in acquisition, net -- (1,185,889)
Net cash provided (absorbed) by investing activities -- (1,196,749)
--------- -----------
FINANCING ACTIVITIES
Proceeds of note payable - bank -- 1,500,000
Proceeds of bank warehouse loans 267,599 --
Repayment of notes payable (67,559) --
Increase in amounts due officers 264,035 107,985
Increase in common stock 51,709 117,499
Net cash provided by financing activities 515,784 1,725,484
--------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,815) 171,072
Cash and cash equivalents at beginning of period 70,617 969
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,802 $ 172,041
========= ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 133,163 $ 66,135
========= ===========
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See accompanying notes to consolidated financial statements.
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FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
-------------------------
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the years ended December 31, 1998 and
December 31, 1999.
2. Acquisition
---------------
On February 9, 1999, the Company acquired substantially all of the
assets of Mortgage Concepts, Inc., an originator of primarily subprime and
alternate documentation residential mortgage loans which now operates as the
Company's Collateral One subsidiary. The purchase price was $4,100,000, subject
to reduction if certain financial benchmarks, as outlined in the Asset Purchase
Agreement, are not attained by the subsidiary. The $4,100,000 purchase price
consisted of a combination of $3,612,500 cash and $487,500 Company common stock,
payable over a multi-year period of time specified in the Agreement. The
acquisition has been accounted for under the purchase method of accounting.
As of 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 June
30, 2000, the Company had paid the sellers $2,261,379 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 and collateral of the Chairman
of the Board of Directors of the Company to partially finance a payment due the
sellers of Mortgage Concepts, Inc. and for working capital needs. This loan also
bears interest at prime plus 2% and matures in November 2000. In connection with
both these financings, the Company entered into loan guaranty agreements with
the individuals guaranteeing the loans, whereby such individuals received shares
and/or options of the Company's common stock as compensation for their
guarantees.
In 1998, the Company issued $635,000 of convertible subordinated
debentures. Up to 20% of the subordinated debenture notes are convertible, at
any time at option of the holder, into the Company's common stock at a price of
$2.00 per share. The $635,000 includes $350,000 of subordinated debentures
issued to certain officers of the Company in exchange for a similar reduction in
amounts due to officers. In November 1999, the Company offered to convert the
convertible subordinated debentures into Company common stock at a conversion
price of $1.50 per share. Holders of $560,000 of debentures elected to convert
their holdings into 373,333 shares of common stock, including all debentures
held by officers of the Company. At June 30, 2000, the remaining $75,000 of
convertible subordinated debentures remain outstanding under the original terms
and conditions of the issuance.
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The Company has warehouse lines of credit with maximum borrowings of
$29,000,000 at June 30, 2000 and December 31, 1999. At June 30, 2000 and
December 31, 1999, $1,169,326 and $901,727 was outstanding under the lines,
respectively.
During the first half 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.
In June 2000, the Company cancelled 275,000 shares of common stock
previously issued to the former President of its FC Funding subsidiary pursuant
to the terms of an employment agreement. The cancellation of these shares
resulted in a reduction of compensation expense of $123,291 during the period
ended June 30, 2000.
4. Cessation of Florida Operations
-----------------------------------
In January 2000, the Company ceased operations of its FC Funding
wholesale mortgage banking subsidiary and closed its two Florida locations,
effective January 31, 2000.
5. Divestiture of Subsidiaries
-------------------------------
In December 1999, the Company agreed to sell its interest in National
Archives to Mark Mendelson, the Chairman of the Board and Chief Executive
Officer, in exchange for assumption of certain liabilities of the subsidiary,
with the transaction to close in 2000 effective December 29, 1999.
On January 1, 1999, the Company sold its investment in Premiere
Chemical to a family member of one of its officers in exchange for purchaser's
assumption of substantially all of Premiere Chemical's net liabilities; the
transaction resulted in a gain of $38,441 during the first quarter of 1999.
6. Terminated Acquisition
--------------------------
In March 2000, the Company entered into a preliminary agreement to
acquire Whoofnet.com, Inc. and its affiliates ("Whoofnet"). Whoofnet had
purported to be an Internet and telecommunications provider serving residential
and small business clients through its free Internet service. In May 2000, the
Company announced that it had terminated discussions to acquire Whoofnet.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets of the Company increased from $5,061,000 at December 31, 1999 to
$5,270,000 at June 30, 2000, an increase of $209,000. This increase was
primarily due to a $122,000 increase in accounts receivable and a $258,000
increase in mortgage loans held for resale, partially offset by amortization of
goodwill and capitalized financing costs.
Liabilities increased from $4,986,000 at December 31, 1999 to
$5,636,000 at June 30, 2000 as a result of a $267,000 increase in warehouse note
payable borrowings and a $186,000 increase in accounts payable and accrued
expenses.
Net worth at June 30, 2000 is -$367,000 (negative $367,000), resulting
from the loss of $493,000 for the six month period and cancellation of $123,000
of common stock previously issued to a manager of a subsidiary, partially offset
by the sale of $175,000 of common stock (as more fully described in Note 3
above). At June 30, 2000, the Company had liquid assets of $1,432,000 and
current liabilities of $4,772,000, including a bank loan of $2,107,000 maturing
in November 2000 and payments due the sellers of Mortgage Concepts, Inc. of
$601,000 due in 2000 (before any contractual reduction to the payment if certain
financial benchmarks are not attained).
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $493,000 for the six months ended June
30, 2000 as compared to a loss of $445,000 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 $235,000 being more than offset by losses at the since closed
FC Funding operation of $83,000 and higher costs of corporate operations,
including approximately $154,000 of interest expense and $208,000 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.
Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30,
1999
Revenues. Total revenues for the three months ended June 30, 2000
amounted to $1,031,000 representing an decrease of $95,000 when compared to the
same period in 1999. This decrease is a result of the closure of the Company's
FC Funding subsidiary in early 2000.
Expenses. Total expenses for the three months ended June 30, 2000
amounted to $1,264,000 as compared to $1,371,000 for the same period in 1999.
This change is partially attributable to the decreased activity from the FC
Funding subsidiary and partially attributable to improved margins for the
Company's Collateral One subsidiary.
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Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999
Revenues. Total revenues for the six months ended June 30, 2000
amounted to $2,009,000 representing an increase of $105,000 when compared to the
same period in 1999, representing inclusion of a full six months of operations
of the Mortgage Concepts, Inc. subsidiary in 2000 (as compared with a short
period from the February 10, 1999 acquisition date to June 30th in that year)
more than offsetting elimination of the FC Funding operation between periods.
Expenses. Total expenses for the six months ended June 30, 2000
amounted to $2,502,000 as compared to $2,349,000 for the same period in 1999, an
increase of $153,000.
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
six months of 2000. While the Company believes it can attract the necessary
capital to provide the liquidity necessary to pursue new business opportunities,
no assurance can be given that it will in fact be able to do so.
The Company funds its mortgage banking activities in large part through
warehouse lines of credit, and its ability to continue to originate and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable terms. Borrowings under these lines are repaid with the proceeds
received by the Company from the sale of the loans to institutional investors.
The Company's committed warehouse lines at June 30, 2000 allowed the Company to
borrow up to $29 million. The warehouse lines expire within the next twelve
months, but are generally renewable, however, no assurances are given that the
Company can renew its warehouse lines or that such renewals can be made on equal
or more favorable terms to the Company. The Company sells its originated and
purchased loans, including all servicing rights, for cash to institutional
investors, usually on a non-recourse basis, with proceeds applied to reduce
corresponding warehouse line outstandings.
Cash and cash equivalents at June 30, 2000 amounted to $58,000 as
compared to $71,000 at December 31, 1999, or a decrease of $13,000.
During the first six months of 2000, the Company's operating activities
utilized $529,000 as compared to utilizing $358,000 in the same period in 1999.
The cash utilized by operating activities in the first six months of 2000
resulted from the Company's net loss for the period as well as substantial
increases in loans held for resale and account receivable.
Investing activities were negligible in the first six months of 2000 as
compared with utilizing $1,197,000 in the same period of 1999 for the Collateral
One acquisition.
Financing activities provided $516,000 of capital in the first six
months of 2000 primarily through increased warehouse line borrowings and
increases in amounts due officers during the period. During the comparable
period of 1999 financing activities provided $1,725,000 of cash, primarily
through the $1,500,000 bank borrowing to partially finance the Collateral One
acquisition.
As of June 30, 2000, the Company had cash and cash equivalents of
$58,000. The Company is seeking additional capital infusion to fund its
operations and obtained additional equity capital of $175,000 in the first six
months of 2000. While the Company believes it can attract the necessary capital
to provide the liquidity necessary to pursue new business opportunities, no
assurance can be given that it will in fact be able to do so.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, the Company and its subsidiaries become parties to legal
proceedings incidental to its business. In the opinion of management, such
matters are not expected to have a material impact on the financial position of
the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None.
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: August 15, 2000 By: /s/ Mark Mendelson
----------------------
Mark Mendelson, Chief Executive Officer
By: /s/ Mark E. Glatz
---------------------
Mark E. Glatz, Chief Financial Officer
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