On June 6, 1996, Robert L. Nichols and John J. Morrissey ("Plaintiffs")
filed a lawsuit in the Circuit Court of Fairfax County, Virginia against the
Company and two of its principal officers, Max E. Gray and C. Harril Whitehurst,
Jr. ("Defendants"), in the matter captioned "Robert L. Nichols, et al. v. Max E.
Gray, et al", Law No. 152839 (the "Lawsuit"). Plaintiffs are former owners and
employees of Waterford Mortgage Corporation ("Waterford"), a former wholly owned
subsidiary of the Company which ceased operations during June of 1995. During
March of 1994, Waterford was merged into a subsidiary of First Chesapeake
Financial Corporation and became a wholly owned subsidiary of the Company.
Plaintiffs alleged in their Lawsuit, among other things, that: (1) Defendants
made fraudulent representations to Plaintiffs and fraudulently failed to
disclose certain matters to Plaintiffs which induced Plaintiffs to merge
Waterford into the Company in exchange for stock in the Company; and (2)
Defendants breached various contractual agreements allegedly made to Plaintiffs
in connection with the merger or arising out of Plaintiffs' employment as
officers of Waterford after the merger. Plaintiffs sought alleged compensatory
damages in the range of approximately $1.3 million to $1.9 million, unspecified
punitive damages, and reimbursement of their costs, expenses and legal fees in
filing suit. The Company and its officers denied Plaintiffs' allegations and
vigorously contested the Lawsuit.
On August 1, 1997, Defendants reached a settlement with Plaintiffs with
respect to this litigation. The Company agreed to a payment of $270,000 to
Plaintiffs to settle their lawsuit. As part of the settlement, on August 5, 1997
Plaintiffs tendered to the Company 121,550 shares of the Company's common stock
owned by them.
As of June 30, 1997 the Company accrued the settlement and an estimated
$100,000 of additional professional fees. During the quarter ended September 30,
1997, the Company incurred an additional $128,000 of professional fees related
to the settlement of the litigation. Management believes that substantially all
costs related to the litigation have been recorded as of December 31, 1997. |
