<PAGE>
FILED PURSUANT TO RULE 424(B)(3) REGISTRATION NO. 333-48419
PROSPECTUS
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 6 AND "DILUTION."
The Common Stock is quoted on the Nasdaq SmallCap Market (the "SmallCap
Market") under the symbol "CMAN."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
This Prospectus has been prepared for and is to be used by The Chapman Co.
in connection with offers and sales of the shares of Common Stock related to
market-making transactions, at prevailing prices, related prices or negotiated
prices. The Company will not receive any of the proceeds of such sales. The
Chapman Co. may act as a principal or agent in such transactions.
--------------
THE CHAPMAN CO.
April 1, 1998
<PAGE>
------------------------
FURTHER INFORMATION
The Company will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent accounting
firm.
DOMESTIC EMERGING MARKETS-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK
AND DEM-TM- AND DEM INDEX-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.
2
<PAGE>
PROSPECTUS SUMMARY
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD
BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE DISCUSSION APPEARING UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," ARE
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
SEE "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." ON DECEMBER 29, 1997, CHAPMAN HOLDINGS,
INC., A NEWLY FORMED MARYLAND CORPORATION (THE "COMPANY"), EFFECTED A TAX-FREE
HOLDING COMPANY REORGANIZATION PURSUANT TO WHICH THE CHAPMAN CO. BECAME A
WHOLLY-OWNED DIRECT SUBSIDIARY OF THE COMPANY. ON FEBRUARY 26, 1998, IMMEDIATELY
PRIOR TO THE CLOSING OF THE SALE OF 964,387 SHARES (THE "SHARES") OF THE
COMPANY'S COMMON STOCK, PAR VALUE $0.001 PER SHARE (THE "COMMON STOCK") IN
CONNECTION WITH THE COMPANY'S INITIAL PUBLIC OFFERING (THE "OFFERING"), THE
COMPANY EFFECTED A TAX-FREE SPIN-OFF TRANSACTION PURSUANT TO WHICH TWO FORMER
WHOLLY-OWNED SUBSIDIARIES OF THE CHAPMAN CO., CHAPMAN CAPITAL MANAGEMENT, INC.
("CCM") AND THE CHAPMAN INSURANCE AGENCY INCORPORATED ("CIA"), BECAME
WHOLLY-OWNED SUBSIDIARIES OF SEPARATE HOLDING COMPANIES AND THE STOCK OF SUCH
HOLDING COMPANIES WAS DISTRIBUTED TO THE THEN EXISTING STOCKHOLDERS OF THE
COMPANY (THE "SPIN-OFF"). INVESTORS THAT PURCHASED SHARES IN THE OFFERING DID
NOT RECEIVE STOCK IN EITHER HOLDING COMPANY. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE COMPANY HEREIN AND THE INFORMATION SET FORTH IN THIS
PROSPECTUS GIVE EFFECT TO THE SPIN-OFF. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE COMPANY HEREIN REFER TO CHAPMAN HOLDINGS, INC. AND ITS
WHOLLY-OWNED DIRECT SUBSIDIARY, THE CHAPMAN CO.
THE COMPANY
The Company is an African-American owned and controlled full service
securities brokerage and investment banking firm. Through its wholly-owned
subsidiary, The Chapman Co., the Company is registered as a broker-dealer with
the Securities and Exchange Commission (the "Commission") and in 24 states and
the District of Columbia and is a member firm of the National Association of
Securities Dealers, Inc. (the "NASD"). The Company's primary sources of revenue
are derived from brokerage services, corporate finance and government finance
activities. These activities are supported by the Company's research
capabilities.
The Company provides sales and trading services to institutional and retail
clients. Commissions are charged for executing buy and sell orders of securities
on national and regional exchanges and in the over-the-counter market.
The Company has been a member of over 200 underwriting syndicates for
corporate issues, substantially all of which were equity offerings. The number
of transactions in which the Company participated during the last three years
declined primarily due to its limited capital position. The Company has been
involved in government finance for over nine years. The Company has managed,
primarily as co-manager, over 200 tax-exempt public finance transactions,
including approximately 35 transactions in the past two years. The Company has
also participated in the direct offering, as a selling group member, of debt of
the Tennessee Valley Authority and in competitive syndicates for other
government agencies.
The Company has recently launched a new corporate finance strategic
initiative called the Domestic Emerging Markets ("DEM") strategy which targets
domestic companies controlled by African-Americans, Asian-Americans,
Hispanic/Latino Americans and women as candidates for the Company's investment
banking services. The Company intends to market its investment banking services
to companies meeting the DEM profile and to make markets in the stocks of
selected DEM companies. The Company believes that its DEM strategy will permit
it to develop a market niche for its corporate finance business.
The Company is headquartered at The World Trade Center--Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, MD 21202 and its telephone number is (410)
625-9656. The Company has sales offices in Alabama, Tennessee, Illinois, Texas
and Pennsylvania.
3
<PAGE>
THE OFFERING
The Company closed the Offering on February 26, 1998.
<TABLE>
<S> <C>
Common Stock Sold in the
Offering: 964,387 Shares
Common Stock Outstanding
Prior to the
Offering: 1,989,235 Shares
After the Offering: 2,953,622 Shares
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds: The Company plans to use the net proceeds from the Offering to
increase its net capital to participate in corporate and
government finance transactions, expand market-making and
research efforts, implement its DEM strategy, expand sales and
marketing efforts (primarily for new products), hire sales
personnel to staff additional sales offices and corporate finance
staff to implement its DEM strategy and to provide general
corporate working capital. While the Company does not have any
current plans regarding mergers or acquisitions, the Company may
use a portion of the net proceeds from this Offering for such
purposes. See "Use of Proceeds."
Risk Factors: Prospective investors in the Common Stock should carefully
consider the information discussed under the heading "Risk
Factors."
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary of financial information set forth below is derived from the
Company's auditied financial statements for each of the years ended December 31,
1996 and 1997, which have been audited by Arthur Andersen LLP, independent
public accountants. This information should be read in conjunction with such
financial statements, including the notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
STATEMENT OF OPERATIONS DATA:
Total revenues................................................................... $2,887,049 $2,991,801
Income from continuing operations before income tax provision.................... 516,338 490,528
Net income from continuing operations............................................ $ 350,338 $ 285,528
------------ ------------
------------ ------------
Basic earnings per share: from continuing operations............................. $ 0.17 $ 0.14
------------ ------------
------------ ------------
Weighted average shares outstanding.............................................. 1,994,780 2,001,914
------------ ------------
------------ ------------
Diluted earnings per share: from continuing operations........................... $ 0.16 $ --
------------ ------------
------------ ------------
Weighted average shares outstanding.............................................. 2,191,374 --
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA (1) (2)
---------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities................. $ 420,764 $ 420,764 $ 7,295,803
Total assets..................................................... 2,863,586 1,818,716 8,693,755
Total long-term debt............................................. -- -- --
Total stockholders' equity....................................... 1,248,694 1,376,211 8,251,250
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to the Spin-off.
(2) Pro forma as adjusted gives effect to the sale of 964,387 shares of common
stock at an offering price of $8.00 per share less underwriting discounts,
commissions, and offering expenses.
5
<PAGE>
RISK FACTORS
THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF
SHARES OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors, including those set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Common Stock.
GENERAL SECURITIES BUSINESS RISKS
The securities business is, by its nature, subject to numerous and
substantial risks, particularly in volatile or illiquid markets and in markets
influenced by sustained periods of low or negative economic growth, including
the risk of losses resulting from the underwriting or ownership of securities,
trading, principal activities, counterparty failure to meet commitments,
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders), failures in connection with the processing of
securities transactions, litigation, the risks of reduced revenue in periods of
reduced demand for public offerings or reduced activity in the secondary markets
and the risk of reduced spreads on the trading of securities.
MANAGEMENT OF GROWTH
The Company has experienced and expects to continue to experience
significant growth in its business activities and the number of its employees.
This growth has required and will continue to require increased investment in
personnel, financial and management systems and controls and facilities. The
absence of continued revenue growth, or the Company's inability to manage such
growth, could have a material adverse effect on the Company's operations. In
addition, as is common in the securities industry, the Company is and will
continue to be highly dependent on the effective and reliable operation of its
communications and information systems. Any difficulty in the operation of
existing systems, the implementation of new systems or the training of personnel
could adversely affect the Company's ability to manage growth.
HIGHLY COMPETITIVE INDUSTRY
The investment banking and brokerage industry is extremely competitive. The
Company encounters intense competition in all aspects of the securities business
and competes directly with other securities firms, a significant number of which
have greater capital, experience and other resources than the Company.
Competition also exists for experienced personnel including technical personnel
and account executives. In addition to competition from firms currently in the
securities business, recently there has been increasing competition from other
sources, such as commercial banks and insurance companies offering financial
services. See "Business--Competition."
UNPROVEN NATURE OF DOMESTIC EMERGING MARKETS STRATEGY
The Company has recently launched the DEM strategic initiative which targets
U.S. companies controlled by African-Americans, Asian-Americans, Hispanic/Latino
Americans and women as candidates for investment banking services. The Company
will seek to expand its investment banking business through the implementation
of its DEM strategy, by earning fees from the distribution of DEM products, such
as investment companies with DEM-driven portfolios, from the provision of
financial advisory and investment banking services to DEM companies and by
making markets in the securities of DEM companies.
6
<PAGE>
Although the Company has identified approximately 150 publicly traded companies
with DEM characteristics, there can be no assurance that companies meeting the
DEM profile will select the Company for investment banking or other services.
The Company has had limited corporate finance experience in a management role;
therefore its ability to provide DEM companies with investment banking services,
such as management of underwriting syndicates, will require adding personnel
with investment banking expertise and development of a track record in the
management of underwriting syndicates. There can be no assurance that the
Company will be able to attract, hire and retain such personnel. Furthermore,
because a substantial number of companies meeting the DEM profile are expected
to trade in the over-the-counter markets, the formation of underwriting
syndicates for and the distribution of securities of such companies as well as
making markets in the stocks of such companies may be more difficult than for
companies having larger capitalizations and greater market liquidity. See
"Business--Strategy."
PROPOSED EXPANSION
The Company intends to apply a portion of the net proceeds of the Offering
to increase its net capital to participate in corporate and government finance
transactions. See "Use of Proceeds." There can be no assurance that the Company
will continue to be invited to participate in such transactions or that the
number of such transactions in which it is invited to participate will grow. The
Company also intends to deploy a portion of the net proceeds in efforts to
obtain government finance business in those states with the most tax-exempt bond
offerings in which the Company does not already have an office. The addition of
personnel to staff such offices (together with any corporate finance staff added
to implement the DEM strategy) can be expected to significantly increase the
Company's operating expenses. There can be no assurance that the Company will be
able to increase its revenue in an amount sufficient to offset such increased
expenses. See "Business Strategy."
DEPENDENCE ON KEY PERSONNEL; DUTIES TO OTHER COMPANIES
For the foreseeable future, the Company will place substantial reliance upon
the personal efforts and abilities of Nathan A. Chapman, Jr., President of the
Company. The loss of the services of Mr. Chapman may have a material adverse
effect on the business, operations, revenue and/or business prospects of the
Company. The Company maintains key man life insurance on Mr. Chapman in the
amount of $7 million. Mr. Chapman also serves as President and Chief Executive
Officer of CCM, CIA and certain investment companies sponsored by CCM.
Therefore, Mr. Chapman will not devote full time to the operation of the Company
and will devote significant time to his duties to these other entities. The
Company expects that Mr. Chapman will devote no less than 50% of his time to the
operation of the Company. See "Certain Transactions."
CERTAIN TRANSACTIONS; RELATIONSHIPS WITH OTHER CHAPMAN ENTITIES; CONFLICTS OF
INTEREST
The Company acts as an underwriter for the securities of three active
registered investment companies, DEM, Inc., a closed-end company, and DEM Equity
Fund and The Chapman U.S. Treasury Money Fund, each an open-end portfolio of The
Chapman Funds, Inc. These related party transactions accounted for 14% and 16%
of the Company's revenues in the years ended 1997 and 1996, respectively. Each
of these investment companies was sponsored and is managed by CCM. CCM's
majority owner, through a holding company, is Nathan A. Chapman, Jr., the
Company's President. In addition, several of the Company's key executives,
including Mr. Chapman, are also officers and/or directors of holding companies
owning all of the outstanding equity securities of CCM and CIA. The common
management and/or ownership among CCM, CIA, DEM, Inc., The Chapman Funds, Inc.
and the Company may involve potential conflicts of interest with respect to the
terms of business transactions, allocations of shared expenses for overhead
(including compensation of shared employees, lease payments and other expenses)
and the allocation of business opportunities between the Company and such other
companies. See "Certain Transactions." Further, because the key executives of
the Company are also senior executives of other companies, the
7
<PAGE>
Company's management will not be able to devote all of its time to the business
affairs of the Company. Management intends to have all business transactions and
allocations of overhead between the Company and such other companies approved by
a committee of the Board of Directors composed of independent, outside
directors. Furthermore, the compensation of the Company's President will be
approved by the Compensation Committee of the Board of Directors, all of the
members of which are independent, outside directors. The Company currently has
outstanding loans to certain affiliated parties. As of December 31, 1997, CCM
owed the Company $771,889 as evidenced by in a 10-year note executed as of
October 31, 1997 in the amount of $763,367 which accrues interest at 6.68% per
annum. As of December 31, 1997, CCM has not made any payments on this note. As
of December 31, 1997, CCM also owed the Company $28,782 pursuant to certain
allocation arrangements pertaining to shared overhead and other expenses of the
Company and CCM. As of December 31, 1997, the Company had outstanding advances
to Mr. Chapman of $164,601, of which $116,011 represents outstanding principal
and interest on a $106,923 demand note dated December 31, 1996 which bears
interest at the prime rate, and $48,590 of which represents additional advances
to Mr. Chapman since the date of such note. As of December 31, 1997, Mr. Chapman
has made no payments to the Company with respect to the note or the additional
advances. As of February 11, 1998, with the approval of the independent members
of the Board of Directors, Mr. Chapman executed a three-year note in the amount
of $176,250 which accrues interest at 5.54% per annum to replace the note
executed December 31, 1996. The Company's advances to Mr. Chapman were used by
Mr. Chapman for personal expenses. See "Certain Transactions."
EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
The Company has 2,953,622 shares of Common Stock outstanding, of which
1,828,115 are beneficially owned by Nathan A. Chapman, Jr. With the exception of
196,595 shares of Common Stock owned by Mr. Chapman, all of the shares
outstanding may be available for resale in the public market, under Rule 144
promulgated pursuant to the Securities Act. Mr. Chapman has agreed not to
publicly sell any of the shares of Common Stock that he owns as of February 26,
1998 until June 28, 1999. Sales of a significant number of shares of Common
Stock in the public market could have a material adverse effect on the market
price of the Common Stock. See "Shares Eligible for Future Sale."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including the
number of underwriting transactions in which the Company participates, access to
public markets for companies in which the Company has invested as a principal,
the valuations of the Company's principal investments, the level of
institutional and retail brokerage transactions, variations in expenditures for
personnel, litigation expenses and expenses of establishing new business units.
The Company's revenue from an underwriting transaction is recorded only when the
underwritten security commences trading; accordingly, the timing of the
Company's recognition of revenue from a significant transaction can materially
affect the Company's quarterly operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
REGULATORY RISKS
The Company's business, and the securities industry generally, are subject
to extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance with
their rules and regulations. Among other things, these regulatory authorities
impose restrictions on sales methods, trading practices, use and safekeeping of
customer funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to broker-dealers, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance requirements on the Company. Failure to
comply with any of the laws, rules or regulations of any independent, state or
federal regulatory authority could result in a fine,
8
<PAGE>
injunction, suspension or expulsion from the industry, which could have a
material adverse effect on the Company. Although the Company has implemented
procedures designed to achieve compliance with such laws, rules and regulations,
there can be no assurance that such compliance procedures will prevent
violations. Furthermore, amendments to existing statutes and regulations or the
adoption of new statutes and regulations could require the Company to alter its
methods of operation at costs which could be substantial. See
"Business--Government Regulation," "--Net Capital Requirements" and "--Legal
Proceedings."
NET CAPITAL REQUIREMENTS
The Commission and the NASD have adopted stringent provisions with respect
to net capital requirements applicable to the operation of securities firms. A
significant operating loss or any charge against the net capital of the
Company's brokerage subsidiary, The Chapman Co., could adversely affect its
ability to operate, expand or, depending upon the magnitude of the loss or
charge, maintain its present level of business. These rules could also restrict
the ability of the Company to withdraw capital from The Chapman Co., even in
circumstances where The Chapman Co. has more than the minimum amount of required
capital, which, in turn, could limit the ability of the Company to implement its
strategies. See "Business--Government Regulations."
CONTROL BY PRINCIPAL STOCKHOLDER
Nathan A. Chapman, Jr. beneficially owns in the aggregate approximately
61.9% of the outstanding shares of Common Stock. Accordingly, Mr. Chapman will
control the outcome of all matters submitted to the stockholders for approval,
including the election of directors of the Company. See "Management" and
"Principal Stockholders."
NO PRIOR PUBLIC MARKET FOR AND POSSIBLE PRICE VOLATILITY OF THE SHARES;
LIMITATIONS ON MARKET MAKING ACTIVITIES
Prior to the Offering, there was no public trading market for the Common
Stock and there is no assurance that an active public market for the Common
Stock will develop or, if developed, will continue. In the absence of an active
public trading market, an investor may be unable to liquidate his investment.
The trading prices of the Common Stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of material
business events by the Company or its competitors and other events or factors.
Moreover, pursuant to Commission and NASD regulations, a company engaging in
market-making transactions in its own or an affiliate's securities must deliver
a current market-making prospectus to purchasers. Therefore, the Company and its
wholly-owned brokerage subsidiary, The Chapman Co., will not be able, in the
absence of a current market-making prospectus, to engage in trading or
market-making activities relating to the Common Stock. A "market-making"
prospectus is a continuously updated prospectus that is part of an effective
registration statement filed with the Commission and must be delivered to
purchasers of securities from the issuer of such securities or a broker-dealer
affiliate of such issuer in market-making transactions. The costs of maintaining
a current prospectus and the prospectus delivery requirements can increase the
costs of making a market in securities to both the issuer and the broker-dealer.
The Company believes that there will be sufficient market makers to qualify for
and maintain a SmallCap Market quotation; however, no firms are under any
obligation to make a market in the Common Stock and any firm which commences
market-making activities may cease such activities at any time. Further, other
rules, including those relating to the use of "insider information," may prevent
the Company's registered representatives from recommending the Common Stock to
its customers. To the extent that the Company is unable to make a market in, or
recommendations regarding, the Common Stock, the ability of investors to sell
the Common Stock in the secondary market may be limited and the price of the
Common Stock may be adversely affected.
9
<PAGE>
RISKS OF LOW PRICED STOCKS
The Company's Common Stock is quoted on the SmallCap Market. A summary of
the current financial requirements for maintenance of such quotation on the
SmallCap Market as currently in effect are set forth below:
<TABLE>
<CAPTION>
ATTRIBUTE MAINTENANCE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Net Tangible Assets
or $2,000,000 or
Market Capitalization
or $35,000,000 or
Net Income (latest
year or two of last three
years) $500,000
Public Float (Shares) 500,000
Market Value of
Public Float $1,000,000
Stockholders 300
Minimum Bid Price $1.00
Number of Market
Makers 2
</TABLE>
The Company believes that it currently meets the current quotation
maintenance requirements. However, there can be no assurance that a market will
develop for the Common Stock, or that the Company will continue to meet the
other requirements for quotation.
CREDIT RISKS
The Company clears all transactions for its brokerage customers on a fully
disclosed basis with its clearing agent, which carries and clears all customer
securities accounts. The clearing agent also lends funds to the Company's
brokerage customers through the use of margin credit. These loans are made to
customers on a secured basis, with the clearing agent maintaining collateral in
the form of salable securities, cash or cash equivalents. Pursuant to the terms
of the agreement between the Company and the clearing agent, in the event that
customers fail to pay for their purchases, to supply the securities that they
have sold, or to repay funds they have borrowed, and the clearing agent
satisfies any customer obligations, the Company would be obligated to indemnify
the clearing agent for any resulting losses. See "Business-- Clearing Agent and
Customer Credit."
LEGAL PROCEEDINGS AND ARBITRATION RISKS
Many aspects of the Company's business involve substantial risks of
liability and regulatory enforcement by state and federal regulators.
Additionally, in recent years, there has been increased litigation involving
participants in the securities industry. Underwriters and agents are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. Claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty are regularly made against
broker-dealers. Customer claims may be made in arbitration proceedings, which
claims could result in awards of compensatory and/or punitive damages against
the Company. The Company has been, and is currently, a party to such
proceedings, none of which management believes will result in any material
liability. See "Business--Legal Proceedings."
10
<PAGE>
CURRENT AND POTENTIAL REFORMS IN THE NASDAQ STOCK MARKET
The Nasdaq Stock Market has come under intense scrutiny in the media and
Congress during the past few years and has been the subject of Commission
investigations into its operations. Concerns have been raised with respect to
the size of the spreads between the price paid by investors purchasing Nasdaq-
quoted securities and the dealers who process the transactions. Concerns also
have been raised with respect to whether Nasdaq's listing requirements are
sufficiently stringent and whether the NASD, the trade organization controlling
the Nasdaq market, carefully polices Nasdaq-quoted companies. In response, the
NASD has begun to boost its internal compliance and monitoring programs,
including establishing a separate regulatory unit, National Association of
Securities Dealers Regulation, Inc. ("NASDR"). More specifically, NASDR has
taken numerous steps to better monitor trading activities among dealers and to
scrutinize companies' compliance with applicable standards for quotation, and
has heightened its overall monitoring of small capitalization companies.
The effects of current and proposed Nasdaq reform on the operations of
brokerage firms, especially those specializing in the securities of small
capitalization companies, such as the Company, cannot be fully anticipated. The
cost of compliance with any new rules, regulations and procedures instituted by
the NASDR could be significant. Additionally, the implementation of stricter
standards for initial and continued inclusion of companies on Nasdaq could
adversely affect the prospects of small capitalization companies, the stock
performance of such companies, and the liquidity of investors' investments in
such companies. Increased compliance costs or the inability to attain or
maintain the quotation of underwriting clients on the Nasdaq system, or a
combination thereof, could adversely affect the financial performance of the
Company.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash dividends in the foreseeable future.
The Company intends to retain all earnings, if any, for the foreseeable future
for the Company's continued growth. Moreover, the Company's ability to pay
dividends in the future may be restricted by the obligations of its wholly-owned
broker-dealer subsidiary, The Chapman Co., to comply with the net capital rules
applicable to broker-dealers. See "Dividend Policy" and "Business--Government
Regulation, Net Capital Requirements."
DISCRETIONARY USE OF PROCEEDS
The Company has broad discretion as to the application of the Offering
proceeds. The Company plans to use approximately 14.6% of the net proceeds in
connection with such general corporate purposes as working capital. The Company
may also use a portion of the offering proceeds to effectuate suitable business
combinations, including mergers, consolidations and/or corporate acquisitions.
Such transactions may be consummated notwithstanding the stockholders' inability
to conduct a financial review of any potential target or the lack of a
stockholder vote approving the potential business combination. See "Use of
Proceeds."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares, after deducting
underwriting discounts, commissions and estimated offering expenses, are
approximately $6,875,039.
<TABLE>
<CAPTION>
PROCEEDS PERCENT
------------ -----------
<S> <C> <C>
Expand net capital to participate in corporate & government finance transactions........... $ 2,875,039 41.8%
Expand market-making and research capabilities............................................. 600,000 8.7
Implement DEM strategy..................................................................... 600,000 8.7
Expand sales and marketing efforts......................................................... 1,200,000 17.5
Hire sales personnel to staff additional sales office and corporate finance staff to
implement DEM strategy................................................................... 600,000 8.7
Working capital and general corporate purposes............................................. 1,000,000 14.6
------------ -----
Totals..................................................................................... $ 6,875,039 100.0%
------------ -----
------------ -----
</TABLE>
While the Company does not have any current plans regarding mergers and
acquisitions, the Company may use a portion of the net proceeds from the
Offering for such purposes.
The proposed allocation of net proceeds of the Offering represents the
Company's best estimates based upon current plans and certain assumptions
regarding industry and general economic conditions and the Company's future
revenue and expenditures. If any of these factors changes, the Company may find
it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes or may
be required to seek additional financing. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all. Any failure to obtain additional financing, if required, could have an
adverse effect on the Company, including possibly requiring the Company to
curtail its operations. Since a portion of the net proceeds will be applied to
general corporate purposes and working capital, the Company will have broad
discretion as to the application of such net proceeds.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments. None of the net proceeds of the Offering are specifically
designated for payments to officers, directors, or other affiliates of the
Company.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the sale of 964,387 shares
of Common Stock at an offering price of $8.00 per share and the receipt of the
estimated net proceeds therefrom:.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------------ ------------- ------------
<S> <C> <C> <C>
Long-term debt......................................................... $ -- $ -- $ --
------------ ------------- ------------
Common Stock--$.0001 par value; 20,000,000 shares authorized,
1,989,235, 1,989,235 and 2,953,622 shares issued and outstanding,
respectively......................................................... 1,989 1,989 2,953
Additional Paid-in Capital............................................. 1,091,461 1,091,461 7,965,536
Retained Earnings...................................................... 155,244 282,761 282,761
------------ ------------- ------------
Total Stockholders' Equity............................................. 1,248,694 1,376,211 8,251,250
------------ ------------- ------------
Total Capitalization................................................... $ 1,248,694 $ 1,376,211 $ 8,251,250
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to Spin-off.
DIVIDEND POLICY
The Company has never declared or paid cash or other dividends on its Common
Stock and does not anticipate doing so in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon the Company's earnings, if any, its financial
condition, and other relevant factors. The Company intends to retain any
earnings in the foreseeable future for the Company's continued growth. The
Company's ability to pay dividends in the future also may be restricted by
regulatory limitations on the ability of its wholly-owned subsidiary to pay
dividends due to its obligation to comply with the net capital requirements
imposed on broker-dealers under both Commission and NASD rules. See
"Business--Net Capital Requirements."
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the Summary Financial Data included
elsewhere in this Prospectus.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
The Company's primary sources of revenue are commissions earned from
brokerage services and fees earned from corporate finance and government finance
activities. The Company's principal business activities are, by their nature,
affected by many factors, including general economic and financial conditions,
movement of interest rates, security valuations in the marketplace, competitive
conditions, transaction volume and market liquidity. Consequently, brokerage
commission revenue and investment banking fees can be volatile. While the
Company seeks to maintain cost controls, a significant portion of the Company's
expenses are fixed and do not vary with market activity. As a result,
substantial fluctuations can occur in the Company's revenue and net income from
period to period. Unless otherwise indicated, in this section, references to
years are to fiscal years.
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997
----------------------------- ---------------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUE:
Commissions.............................................. $ 2,553,098 88.4% $ 2,612,251 87.3%
Underwriting and management fees......................... 296,757 10.3% 324,826 10.9%
Interest and dividends................................... 37,194 1.3% 54,724 1.8%
------------ ----- ------------ ------
Total revenue.......................................... 2,887,049 100.0% 2,991,801 100.0%
------------ ----- ------------ ------
EXPENSE:
Compensation and benefits................................ 1,050,193 36.4% 1,120,753 37.4%
Brokerage and clearing fees.............................. 238,027 8.2% 286,505 9.6%
Communications........................................... 164,303 5.7% 154,364 5.2%
Occupancy and equipment.................................. 422,598 14.6% 355,542 11.9%
Travel and business development.......................... 177,793 6.2% 210,881 7.0%
Professional fees........................................ 154,993 5.4% 103,431 3.5%
Other operating expense.................................. 162,804 5.6% 269,797 9.0%
------------ ----- ------------ ------
Total expense.......................................... 2,370,711 82.1% 2,501,273 83.6%
------------ ----- ------------ ------
Income from continuing operations........................ 516,338 17.9% 490,528 16.4%
Income tax provision..................................... 166,000 5.7% 205,000 6.9%
------------ ----- ------------ ------
Income from continuing operations........................ 350,338 12.1% 285,528 9.5%
Income from discontinued operations...................... 54,643 1.8% 51,459 1.7%
------------ ----- ------------ ------
Net income............................................... $ 404,981 14.0% $ 336,987 11.2%
------------ ----- ------------ ------
------------ ----- ------------ ------
</TABLE>
14
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996.
Total revenue for 1997 increased by $104,752, or 3.6%, to $2,991,801 for
1997 from $2,887,049 for 1996. Revenue increased in each of the Company's three
major business areas during 1997.
Commission revenue increased by $59,153, or 2.3%, to $2,612,251 for 1997
from $2,553,098 for 1996. The increase was primarily due to an increase in sales
volume from the Company's existing clients and an increase in the number of
clients resulting from the Company's business development activity. The
Company's institutional business increased by $128,902, or 12.3%, to $1,175,940
in 1997 from $1,047,038 in 1996.
Underwriting and management fees increased by $28,069, or 9.5%, to $324,826
for 1997 from $296,757 for 1996. The increase was primarily due to an increase
in financial advisory fees from municipalities. The number of municipal finance
underwriting syndicates in which the Company participated as a co-manager
increased during 1997; however, the Company's municipal finance revenue per
transaction was adversely affected by an industry-wide decrease in the amount of
management fees paid to co-managers in municipal finance underwriting
syndicates.
Total expense for 1997 increased by $130,562, or 5.5%, to $2,501,273 for
1997 from $2,370,711 for 1996. Total expenses increased to 83.6% of total
revenue for 1997 as compared to 82.1% of total revenue for 1996.
Compensation and benefits increased by $70,560, or 6.7%, to $1,120,753 for
1997 from $1,050,193 for 1996. As a percentage of total revenue, these expenses
increased to 37.5% in 1997 from 36.4% in 1996. Compensation expense includes
sales commissions paid to brokers on the sale of securities and varies in
relation to changes in commission revenue. The increase in compensation and
benefits is primarily attributable to the increase of commissions paid to
brokers.
Brokerage and clearing fees increased by $48,478, or 20.4%, to $286,505 for
1997 from $238,027 for 1996. This increase is attributable to the increase in
both sales volume to existing clients and in the number of clients.
Communication expense decreased by $9,939, or 6.1%, to $154,364 for 1997
from $164,303 for 1996. This decrease was primarily attributable to a change in
telephone service providers.
Occupancy and equipment expense decreased by $67,056, or 15.9%, to $355,542
for 1997 from $422,598 for 1996 due to a reduction of rental overhead allocated
to the Company.
Travel and business development expense increased by $33,088, or 18.6%, to
$210,881 for 1997 from $177,793 for 1996 due to increased travel and promotional
activities.
Professional fees decreased by $51,562, or 33.3%, to $103,431 for 1997 from
$154,993 for 1996. The Company incurred professional fees in connection with a
proposed financing in each period.
Other operating expense increased by $106,993, or 65.7%, to $269,797 for
1997 from $162,804 for 1996. This increase was attributable to increased
advertising, supplies and conference expenses to support the Company's sales
programs.
Income taxes from continuing operations increased by $39,000, or 23.5%, to
$205,000 in 1997 from $166,000 for 1996. This increase was due to a lower
effective tax rate during the prior comparable period because of the elimination
of the valuation reserve related to the full utilization of the net operating
loss carryforward.
Income from continuing operations decreased by $64,810, or 18.5%, to
$285,528 for 1997 from $350,338 for 1996.
Income from discontinued operations decreased by $3,184, or 5.8%, to $51,459
for 1997 from $54,643 for 1996.
Net income decreased by $67,994, or 16.8%, to $336,987 for 1997 from
$404,981 for 1996.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, investment securities, and receivables
from other broker-dealers and the Company's clearing agent, all of which
fluctuate depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and the Company's clearing agent turnover
rapidly. Both the Company's total assets as well as the individual components as
a percentage of total assets may vary significantly from period to period
because of changes relating to customer demand, economic and market conditions,
and proprietary trading strategies. The Company's total assets as of December
31, 1997 was $2,863,586.
As a broker-dealer, the Company is subject to the net capital rules of the
NASD. As such, the Company is subject to certain restrictions on the use of
capital and its related liquidity. The Company's net capital position as of
December 31, 1997 was $269,509, which was $169,509 in excess of the Company's
minimum net capital requirement.
The Company's cash and cash equivalents was $211,342 as of December 31,
1997. The decrease in cash and cash equivalents was primarily due to the use of
$217,500 to repurchase common stock of The Chapman Co. during 1997.
Historically, the Company has financed its operations through the private
placement of equity securities and cash flow from operations. The Company has
not employed any significant leverage or debt. The Company intends to use debt
prudently in the future and may seek to arrange for lines of credit.
On February 26, 1998, the Company consummated an initial public offering,
the Offering, of its Common Stock pursuant to which the Company received net
proceeds of approximately 6,875,000. The net proceeds from the Offering are
invested in U.S. government securities, short term certificates of deposit,
money market funds and other short-term interest-bearing investments.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business.
These reviews take into account business needs as well as the Company's
regulatory capital requirements. The Company believes that its capital structure
is adequate for current operations.
EFFECTS OF INFLATION
Market prices of securities are generally influenced by changes in
inflation. Moreover, the rate of inflation affects the Company's expenses, such
as employee compensation, occupancy expenses and communications costs, which may
not be readily recoverable in the prices of services offered to the Company's
customers. To the extent inflation results in rising interest rates or has
adverse effects upon the securities markets, it may adversely affect the
Company's financial condition and results of operations.
16
<PAGE>
BUSINESS
GENERAL
The Company is an African-American owned and controlled full service
securities brokerage and investment banking firm. Through its wholly-owned
subsidiary, The Chapman Co., the Company is registered as a broker-dealer with
the Commission and in 24 states and the District of Columbia, and is a member
firm of the NASD. The Company is headquartered in Baltimore, Maryland and has
sales offices in Birmingham, Alabama; Memphis, Tennessee; Chicago, Illinois;
Dallas, Texas; and Philadelphia, Pennsylvania. The Company's principal executive
offices are located at The World Trade Center-- Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, MD 21202 and its telephone number is (410)
625-9656. The Company was incorporated in the State of Maryland on December 12,
1997. Its wholly-owned subsidiary, The Chapman Co., was incorporated in Maryland
in 1986.
The Company's primary sources of revenue are derived from brokerage
services, corporate finance, and government finance activities. These activities
are supported by the Company's research capabilities.
The table below shows the types of revenue as a percentage of total revenue
and sources of revenue as a percentage of total revenue during 1995, 1996 and
the ten months ended October 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1996 1997
----- -----
<S> <C> <C>
TYPE OF REVENUE
Commissions...................................................................................... 89% 87%
Underwriting and management fees................................................................. 10 11
Interest and dividends........................................................................... 1 2
--- ---
Total revenue.................................................................................. 100% 100%
--- ---
--- ---
SOURCE OF REVENUE
Brokerage business............................................................................... 30% 40%
Secondary market trading......................................................................... 43 29
Corporate finance................................................................................ 19 16
Government finance............................................................................... 7 13
Interest and dividends........................................................................... 1 2
--- ---
Total revenue.................................................................................. 100% 100%
--- ---
--- ---
</TABLE>
BROKERAGE SERVICES
The Company provides brokerage services to institutional and retail clients.
Commissions are charged to these clients for executing buy and sell orders for
securities on national and regional exchanges and in the over-the-counter
market. The Company's primary source of revenue for its brokerage business has
historically been commissions generated from institutional brokerage. The
Company's institutional clients include investment managers, corporate
retirement plans and municipal retirement plan sponsors. The Company maintains
floor broker relationships on the New York, American and Chicago Stock Exchanges
and executes buy and sell orders in the over-the-counter markets. Approximately
40% and 30% of the Company's revenue during 1997 and 1996, respectively, has
been derived from its brokerage business.
The Company also participates in fixed income secondary market trading in
government securities primarily for fixed income investment managers, municipal
treasurers and other investment professionals. This business is done on a
competitive basis where the Company acts as a broker. Approximately 29% and 43%
of the Company's revenue during 1997 and 1996, respectively, was derived from
secondary market trading.
17
<PAGE>
As of December 31, 1997, the Company employed six brokers.
The Company is approved to make markets in the securities of five companies.
To date, the Company's ability to engage in any significant over-the-counter
market-making activities has been limited by its capital position.
CORPORATE FINANCE
To date, the Company's corporate finance activities have been limited
primarily to participation in syndicates. The Company has been a member of over
200 underwriting syndicates for corporate issues, substantially all of which
were equity offerings. In the last three years, the number of transactions in
which the Company participated declined primarily due to the limitations imposed
by applicable net capital rules. See "Government Regulation--Net Capital Rule."
During 1997 and 1996, approximately 16% and 19%, respectively, of the Company's
revenue was derived from corporate finance transactions. In each of these
periods, over half of the Company's revenue from corporate finance transactions
was derived from the sale of the stock of DEM, Inc. for which the Company was
the sole underwriter. DEM, Inc. is a publicly-traded closed-end company managed
by CCM, a former subsidiary of the Company.
GOVERNMENT FINANCE
The Company participates in the tax-exempt public finance market and has
managed, primarily as co-manager, over 200 transactions in 17 states and the
District of Columbia, including approximately 35 transactions in the past two
years. Over half of the total dollar amount of these transactions has been with
jurisdictions located in Maryland, Illinois, Texas and Pennsylvania.
During 1997 and 1996, approximately 13% and 7%, respectively, of the
Company's revenue was derived from management fees, financial advisory fees and
selling concessions in public finance transactions. The Company currently
employs two investment bankers whose primary responsibility is the development
of the Company's public finance business.
In 1996, the Company participated as a selling group member in one direct
offering of debt of the Tennessee Valley Authority. The Company has also
participated in syndicates of other government agencies.
STRATEGY
With the net proceeds of the Offering, the Company intends to both implement
its DEM strategy and to expand its existing business activities.
DOMESTIC EMERGING MARKETS
To compete effectively in the investment banking and brokerage market, the
Company intends to implement its Domestic Emerging Markets, or DEM, strategy
pursuant to which the Company will market financial services, primarily
investment banking services to domestic companies that are owned or controlled
by African-Americans, Asian-Americans, Hispanic/Latino Americans or women. As
part of the DEM strategy, the Company will seek to make markets in the stocks of
selected DEM companies. The Company believes that the DEM market is underserved
and its DEM strategy will permit the Company to develop a market niche for its
corporate finance business.
The Company has identified in excess of 150 DEM companies and intends to
establish relationships with such companies that are seeking to raise additional
equity or debt financing. Management currently anticipates that the typical
client will be a small capitalization company traded in the over-the-counter
market or a privately held company undertaking an initial public offering. While
the size of any particular offering may vary, the Company anticipates that most
such transactions would range from $2 million to $15
18
<PAGE>
million. The Company will seek to manage or co-manage a substantial portion of
these underwritings in which it participates.
The Company's ability to implement its DEM strategy in the context of
corporate underwritings will be dependent upon its ability to identify potential
clients fitting the DEM company profile and convincing such potential clients
that the Company is the right investment banking firm for their needs. There can
be no assurance that the Company will be successful in this regard. The Company
has not conducted any independent research to test the marketability of the DEM
strategy, nor has the Company engaged in any significant marketing of the
strategy. Therefore, while the Company believes the concept to be viable, the
level of market acceptance is largely unknown. The Company intends to devote a
substantial amount of its resources and the proceeds of the Offering to the
execution of the DEM strategy. See "Risk Factors" and "Use of Proceeds."
EXPANSION OF EXISTING BUSINESS
The Company believes its brokerage, corporate finance and government finance
business has been limited by its capital position. With the increased capital
from the net proceeds of the Offering, the Company intends to expand its
existing business as follows:
The Company intends to expand its research capabilities, focusing primarily
on DEM companies, hire additional brokers and market specialized products to
retail and institutional clients.
In addition to the DEM corporate finance strategy discussed above, the
Company intends to aggressively seek larger allocations in corporate
underwriting syndicates managed by other investment banking firms.
The Company intends to seek larger positions in state and local public
finance transactions. As a result of its ability to undertake larger
participations, the Company believes it will be better positioned to seek
manager roles in these transactions, entitling the Company to receive management
fees in addition to selling concessions. The Company intends to expand its
participation in the state and local public finance market by establishing a
presence in states with major issuers of negotiated tax-exempt bonds and by
seeking more assignments as manager of such transactions. The Company has
identified California, New York, Texas, Illinois, Pennsylvania, Michigan, Ohio
and Florida as representing over 45% of the dollar amount of aggregate
tax-exempt bonds issued in the U.S. in 1997. The Company currently has offices
in Texas, Illinois and Pennsylvania and may seek to establish offices in
California, Florida, New York, Michigan and Ohio.
The Company intends to use its increased capital to expand its participation
in federal agency debt transactions as a member of selling groups in direct
offerings and syndicates, as well as aggressively seeking management roles in
these offerings.
RESEARCH
The Company currently employs three research analysts and provides research
primarily on selected DEM companies. The Company intends to substantially
increase the number of DEM companies covered by its research.
The Company has created the DEM Index which tracks the results of certain of
those companies meeting the DEM profile. The Company believes that inclusion of
a DEM company in the DEM Index offers certain advantages such as facilitating
identification by fund managers and other institutions seeking to invest in
minority or women controlled businesses. The Company will seek to earn fees from
subscriptions to the DEM Index and the sale of limited information regarding the
companies included in the DEM Index.
19
<PAGE>
CLEARING AGENT AND CUSTOMER CREDIT
The Company currently utilizes the services of RPR Clearing Services, Inc.
as its clearing agent on a fully disclosed basis (the "Clearing Agent"). The
Clearing Agent processes all securities transactions and maintains the accounts
of customers. Customer accounts are protected through the Securities Investor
Protection Corporation for up to $500,000, of which coverage for cash balances
is limited to $100,000.
The services of the Clearing Agent include billing, credit control, receipt
and custody and delivery of securities. The Clearing Agent provides the
operational support necessary to process, record and maintain securities
transactions for the Company's brokerage and distribution activities. The total
cost of the Clearing Agent's services to the Company is less than the cost the
Company would incur to provide these services itself.
The Clearing Agent lends funds to the Company's customers through the use of
margin credit. These loans are made to customers on a secured basis, with the
Clearing Agent maintaining collateral in the form of salable securities, cash or
cash equivalents. Under the terms of the Company's clearing agreement, the
Company indemnifies the Clearing Agent for any loss on these credit
arrangements. As of December 31, 1997, the Company had approximately $1.66
million of margin credit outstanding to its customers through its Clearing
Agent. There have been no defaults on margin loans in the last two years. The
net interest income to the Company from margin activities for the years ending
December 31, 1996 and 1997 was not material.
GOVERNMENT REGULATION
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the
Commission and various state agencies and self-regulatory organizations, such as
the NASD. The Company is registered as a broker-dealer with the Commission and
is a member firm of the NASD. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally the NASD, which has been
designated by the Commission as the Company's primary regulator. The NASD adopts
rules (which are subject to approval by the Commission) that govern its members
and conducts periodic examinations of member firms' operations. Securities firms
are also subject to regulation by state securities administrators in those
states in which they conduct business. The Company is registered as a
broker-dealer in 24 states and the District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the Commission and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers.
The Commission, self-regulatory organizations and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
integrity of the securities markets.
The Company's mutual fund distribution business is subject to extensive
regulation as to its duties, affiliations, conduct and limitations on fees under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Investment Company Act of 1940, as amended (the "1940 Act"), and the regulations
of the NASD. As discussed above, the Company is an NASD member. The NASD has
prescribed rules (Rule 2830 of the NASD Conduct Rules) with respect to maximum
commissions, charges and fees related to investment in any open-end investment
company registered under the 1940 Act.
20
<PAGE>
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member firm of the NASD, the Company is
subject to the net capital rule of the Commission. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth (assets
minus liabilities), plus qualifying subordinated borrowings and less certain
mandatory deductions that result from excluding assets not readily convertible
into cash and from valuing certain other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition. The Company has elected to compute its net capital under the
standard aggregate indebtedness method permitted by the net capital rule, which
requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed a 15-to-1 ratio. At December 31, 1997, the Company had
net capital and a net capital requirement of $269,509 and $100,000,
respectively. The Company's net capital ratio was 0.88-to-1.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The Company entered into a consent
agreement with the NASD regarding alleged violations of the net capital rules in
late 1993 and early 1994. Pursuant to such agreement, the Company and Mr.
Chapman were jointly fined $30,000 and Mr. Chapman was suspended from
association with the Company for 10 days. The Company has exceeded all net
capital requirements since such alledged violations. The net capital rule also
prohibits payments of dividends, redemption of stock and the prepayment or
payment in respect of principal of subordinated indebtedness if net capital,
after giving effect to the payment, redemption or repayment, would be less than
a specified percentage (currently 120%) of the minimum net capital requirement.
Compliance with the net capital rule could limit those operations of the
Company's brokerage subsidiary that require the intensive use of capital, such
as underwriting and trading activities, and also could restrict the Company's
ability to withdraw capital from its operating subsidiary, which in turn, could
limit the Company's ability to pay dividends, repay debt and redeem or purchase
shares of its outstanding capital stock.
COMPETITION
The Company encounters intense competition in all aspects of its securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes that the principal factors affecting
competition in the securities industry are the quality and abilities of
professional personnel, including their ability to effectuate a firm's
commitments, and the quality, range and relative prices of services and products
offered.
Although the Company may expand the financial services it can offer to its
customers, it does not now offer as broad a range of financial services as
national stock exchange member firms, commercial banks, insurance companies and
others.
YEAR 2000 SOFTWARE ISSUE
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate information
that employs dates after December 31, 1999. Management is working with its
software vendors to prepare the Company for the year 2000. Based on information
currently available, management does not anticipate that the Company will incur
significant operating expenses or be required to incur material costs to be year
2000 compliant. The Company is,
21
<PAGE>
however, still analyzing and modifying its systems and requirements. In
addition, the Company has relationships with third parties that have computer
systems that may not be year 2000 compliant. To the extent such third parties'
systems are not fully year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software would
not have a material adverse effect on the Company's business, financial
condition, results of operations, or business prospects.
PERSONNEL
At December 31, 1997, the Company had 26 full-time employees, including 14
registered representatives. None of the Company's personnel is covered by a
collective bargaining agreement. The Company considers its relationships with
its employees to be good.
LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
liability, including exposure under federal and state securities laws in
connection with the underwriting and distribution of securities. The Company
does not presently maintain an errors and omissions insurance policy insuring it
against these risks. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages. Additionally, securities
brokerage firms become parties to arbitrations brought by dissatisfied customers
in the general course of business. The Company has been and is currently a party
to such proceedings, none of which has resulted or is expected to result in any
material liability.
PROPERTIES
The principal executive offices of the Company are located at The World
Trade Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland
21202 where the Company leases approximately 10,000 square feet of office space.
The lease for these premises expires in 2000. The Company leases furniture and
equipment from an affiliated entity. See "Certain Transactions."
22
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- --------------------------------------- --------------- ------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr.................. 40 President and Chairman of the Board of Directors
Earl U. Bravo, Sr...................... 50 Senior Vice President, Secretary, Assistant
Treasurer and Director
Lottie H. Shackelford.................. 56 Director
Donald V. Watkins...................... 49 Director
M. Lynn Ballard........................ 55 Treasurer, Assistant Secretary and Controller
</TABLE>
The Board of Directors has designated an Audit Committee of the Board of
Directors consisting of two Directors, that will review the scope of accounting
audits, review with the independent auditors the corporate accounting practices
and policies and recommend to whom reports should be submitted within the
Company, review with the independent auditors their final report, review with
internal and independent auditors overall accounting and financial controls, and
be available to the independent auditors during the year for consultation
purposes. The Board of Directors has also designated a Compensation Committee of
the Board of Directors consisting of two Directors, which will review the
performance of senior management, recommend appropriate compensation levels and
approve the issuance of stock options pursuant to the Company's stock option
plan. All Directors and officers of the Company serve until their successors are
duly elected and qualify.
NATHAN A. CHAPMAN, JR. has been President and Chairman of the Board of
Directors of the Company since its inception. Mr. Chapman founded the Company's
subsidiary, The Chapman Co., in 1986 and has served as its President and
Chairman of the Board of Directors since inception. Prior to founding The
Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons from 1982 to
1987. Mr. Chapman is a Certified Public Accountant, a General Securities
Principal, Financial and Operations Principal, Registered Options Principal, and
Registered Municipal Principal. Mr. Chapman is a Director of DEM, Inc. and The
Chapman Funds, Inc.
EARL U. BRAVO, SR. has been Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company since its inception. Mr. Bravo has been
Chief Operating Officer of The Chapman Co. since 1992 and Secretary and
Assistant Treasurer since 1997. Mr. Bravo is a General Securities Principal,
Financial and Operations Principal, and Registered Representative. Mr. Bravo
holds an MBA from the University of Maryland, College Park.
LOTTIE H. SHACKELFORD has been a Director of the Company since its
inception. Since 1994, Ms. Shackelford has been Executive Vice President of
Global USA, a management consulting firm. From 1992 to 1994, Ms. Shackelford
worked as an independent political consultant. In 1988 and 1989, Ms. Shackelford
was Vice-Chair and Co-Chair, respectively, of the Democratic National Committee.
From 1987 to 1989, Ms. Shackelford was Mayor of Little Rock, Arkansas. Ms.
Shackelford has graduated from the Harvard University Program for Senior
Executives in State and Local Government, the Hendrix College Institute of
Politics and the Broadway School of Real Estate and has attended the University
of Arkansas at Little Rock School of Law. Ms. Shackelford is a Director of DEM,
Inc. and The Chapman Funds, Inc.
DONALD V. WATKINS has been a director of the Company since its inception. He
has been President of Donald V. Watkins, PC, a law firm located in Birmingham,
Alabama since 1973. Mr. Watkins holds a J.D. from the University of Alabama Law
School.
M. LYNN BALLARD has been Treasurer, Assistant Secretary and Controller of
the Company since its inception. Ms. Ballard has been Controller of The Chapman
Co. and Treasurer of CCM since 1988. Ms. Ballard has been Treasurer and
Assistant Secretary of The Chapman Co. since 1997.
23
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by
the Company during the fiscal years ended December 31, 1997 and 1996, for all
services rendered in all capacities to the Company and its subsidiary, to the
Chief Executive Officer and each executive officer of the Company that received
salary and bonus of $100,000 or more during the fiscal years ended December 31,
1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ---------------------------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Nathan A. Chapman, Jr.(1)......................................................... 1997 $ 159,000 $ 100,000
Chief Executive Officer 1996 144,000 --
Earl U. Bravo, Sr.(1)............................................................. 1997 $ 100,000 $ 5,000
Senior Vice President 1996 (2) (2)
</TABLE>
- ------------------------
(1) Includes approximately 50% allocated to CCM and CIA pursuant to certain
expense sharing arrangements. See "Certain Transactions."
(2) Annual salary and bonus received by Mr. Bravo in fiscal year ended December
31, 1996 was less than $100,000.
The Board of Directors of the Company has established the 1998 Chapman
Holdings, Inc. Omnibus Stock Plan (the "Plan") to enable the Company to grant
equity compensation to the Company's Directors, officers, employees and
consultants. The Plan will be administered by the Compensation Committee of the
Board of Directors. No securities have been issued pursuant to the Plan as of
the date of this Prospectus.
24
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of February 26, 1998, by
(i) each person known by the Company to own beneficially 5% or more of its
outstanding shares of Common Stock prior to the Offering, (ii) each Director,
(iii) the Chief Executive Officer, and (iv) all Directors and executive officers
of the Company as a group. Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ----------------------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
Nathan A. Chapman, Jr.................................................. 1,828,115 shares 61.9%
401 E. Pratt Street
Baltimore, MD 21202
Earl U. Bravo, Sr...................................................... 1,900 shares *
401 E. Pratt Street
Baltimore, MD 21202
Donald V. Watkins...................................................... 7,000 shares *
401 E. Pratt Street
Baltimore, MD 21202
Lottie H. Shackelford.................................................. -0- shares *
401 E. Pratt Street
Baltimore, MD 21202
All Directors and Executive............................................ 1,837,015 shares 62.2%
Officers as a Group
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of Common Stock.
25
<PAGE>
CERTAIN TRANSACTIONS
On February 26, 1998, the Company effected the Spin-off pursuant to which
the two former wholly-owned subsidiaries of The Chapman Co., CCM and CIA, became
wholly-owned subsidiaries of separate holding companies and the stock of such
holding companies was distributed to the existing stockholders of the Company.
Investors that purchased Shares in the Offering did not receive stock in either
holding company.
CCM is registered with the Commission as an investment adviser and manages
funds for institutional investors and individuals on a separate account basis,
for a registered closed-end investment company, DEM, Inc., for two registered
open-end investment companies, DEM Equity Fund and The Chapman U.S. Treasury
Money Fund, each a portfolio of The Chapman Funds, Inc., and a private group
trust for qualified employee benefit plans. As of December 31, 1997, CCM had
approximately $430 million in total assets under management. CIA is a variable
annuity provider formed primarily to serve retail clients and its operations
have not been significant to date.
Nathan A. Chapman, Jr., the President and Chairman of the Board of Directors
of the Company, is the President and Chairman of the Board of Directors of each
of CCM, CIA, DEM, Inc. and The Chapman Funds, Inc. and controlling stockholder
of CCM and CIA. Earl U. Bravo, Sr., Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company is Secretary, Assistant Treasurer and a
Director of CCM and CIA, Secretary and Assistant Treasurer of The Chapman Funds,
Inc. and Vice President, Secretary and Assistant Treasurer of DEM, Inc. M. Lynn
Ballard, Treasurer, Assistant Secretary and Controller of the Company is
Treasurer, Assistant Secretary and Controller of CCM and CIA and Treasurer and
Assistant Secretary of DEM, Inc. and The Chapman Funds, Inc. Lottie H.
Shackelford, a Director of the Company is a Director of each of DEM, Inc. and
The Chapman Funds, Inc.
The Company is the underwriter, on a best efforts basis, for the sale of
DEM, Inc. common stock. The Company was paid $455,000 and $432,008 in management
fees and commissions in the years ended December 31, 1996 and December 31, 1997,
respectively.
The Company is the distributor for The Chapman U.S. Treasury Money Fund
pursuant to a distribution agreement between the Company and The Chapman Funds,
Inc. Such distribution agreement must be extended annually for one year periods
by the board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives no compensation for the
distribution of shares of The Chapman U.S. Treasury Money Fund.
The Company is the distributor for the DEM Equity Fund pursuant to a
distribution agreement between the Company and The Chapman Funds, Inc. Such
distribution agreement must be extended annually for one year periods by the
board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.50% of the average daily net assets per annum
of the Investor Shares of the DEM Equity Fund (the "Investor Shares") for
selling and administrative services pertaining to the Investor Shares. Further,
the Company receives a front-end load of up to 4.75% of the offering price on
the sale of the Investor Shares. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.25% of the average daily net assets per annum
of the Institutional Shares of the DEM Equity Fund (the "Institutional Shares")
for selling and administrative services pertaining to the Institutional Shares.
The Company recently began providing services pursuant to this agreement and no
fees have yet been earned by the Company.
As of December 31, 1997, CCM owed the Company $771,889 as reflected in a 10
year note executed as of October 31, 1997 in the amount of $763,367 which
accrues interest at 6.68% per annum. The note requires annual principal payments
equal to 10% of the original principal amount of the note.
26
<PAGE>
The proceeds of this loan, as reflected by the note, were used by CCM to pay
start-up costs in connection with its development of a proprietary investment
product. The largest amounts owed to the Company by CCM, including this loan and
CCM's allocation of shared overhead as set forth below, were $800,672 and
$849,662 during fiscal years ended December 31, 1997 and 1996, respectively.
As of December 31, 1996, Mr. Chapman executed a promissory note to the
Company in the amount of $106,923. The promissory note is payable on demand and
carries interest at the prime rate. As of December 31, 1997 and December 31,
1996, the Company had outstanding advances to Mr. Chapman of $164,601 and
$106,923, respectively. As of February 11, 1998, with the approval of the
independent members of the Board of Directors, Mr. Chapman executed a three-year
note in the amount of $176,250 which accrues interest at 5.54% per annum and no
payments of principal or interest are required until maturity, to replace the
note executed December 31, 1996. The Company's advances to Mr. Chapman were used
by Mr. Chapman for personal expenses.
Mr. Chapman is President and Treasurer and Mr. Bravo is Secretary of Chapman
General Partner One, Inc., the general partner of Chapman Limited Partnership I
(the "Partnership"). The Company leases furniture and equipment from the
Partnership. The lease requires monthly payments of $9,846 and contains one year
renewable terms, at the option of the Company, through September 2000, at which
time the Company can purchase the furniture and equipment at fair value. Rent
expense under this lease agreement was $118,152 in each of 1997 and 1996 of
which $9,846 and $39,384 were payable to the Partnership as of December 31, 1997
and 1996, respectively. Management believes that the terms of these transactions
were substantially as favorable to the Company as those available from
non-affiliates. The rent expense under the lease agreement has been shared
equally between the Company and CCM.
The Company shares office space, certain employees and other overhead with
certain other entities controlled by Mr. Chapman including CCM and CIA. The
Company allocates compensation and benefits expense to CCM and CIA based on
actual compensation and benefits expense and the estimated percentage of the
employee's time spent performing services for each entity. The Company allocates
other expenses based on estimated usage. Pursuant to such allocation
arrangements, as of December 31, 1997, CCM owed the Company $28,782. The Company
treats such outstanding allocation amounts as normal receivables to be paid in
the ordinary course of business. The common management and/or ownership among
the Company and other entities controlled by Mr. Chapman may involve potential
conflicts of interest. See "Risk Factors--Certain Transactions; Relationships
with Other Chapman Entities; Conflicts of Interest."
The Company and Mr. Chapman have entered into a non-exclusive, royalty-free
licensing agreement pertaining to the Company's use of the DEM and Domestic
Emerging Markets trademarks that are owned by Mr. Chapman.
All future transactions with affiliates of the Company will be approved by a
majority of the Board of Directors, including a majority of the disinterested
Directors and the Company intends that such transactions will be on terms no
less favorable to the Company than could be obtained from an unaffiliated third
party.
27
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20 million shares of
Common Stock, par value $0.001 per share.
COMMON STOCK
As of the date of this Prospectus, there are 2,953,622 shares of Common
Stock issued and outstanding, held of record by approximately 350 stockholders.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Stockholders do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a dissolution, liquidation or winding-up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities. Holders of Common Stock have no right to convert their Common
Stock into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
The Charter of the Company provides that the Company shall indemnify its
currently acting and its former Directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the Maryland General Corporation
Law, as from time to time amended (the "MGCL"). If approved by the Board of
Directors, the Company may indemnify its employees, agents and persons who serve
or have served, at its request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture or other
enterprise to the extent determined to be appropriate by the Board of Directors.
The Company shall advance expenses to its Directors and officers entitled to
mandatory indemnification to the maximum extent permitted by the Maryland
General Corporation Law and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Furthermore, the Charter of the Company provides that, to the fullest extent
permitted by the MGCL as it may be amended from time to time, no Director or
officer of the Company shall be liable to the Company or its stockholders for
monetary damages arising out of events occurring at the time such person is
serving as a Director or officer, regardless of whether such person is a
Director or officer at the time of a proceeding in which liability is asserted.
Under current Maryland law, the effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages from a
Director or officer except (i) to the extent that it is proved that the Director
or officer actually received an improper benefit, or profit in money, property,
or services for the amount of the benefit or profit in money, property or
services actually received, or (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
in the proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. In situations to which the Charter provision
applies, the remedies available to the Company or a stockholder are limited to
equitable remedies such as injunction or rescission.
28
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no trading market for the Common
Stock. Although the Common Stock is quoted on the SmallCap Market, there can be
no assurance that an active trading market for the Common Stock will develop
and, if developed, will continue. The continued quotation of the Common Stock on
the SmallCap Market is conditioned upon the Company meeting certain asset,
capital and surplus, stock price and public float tests. See "Risk
Factors--Risks of Low Priced Stocks."
The Company has 2,953,622 shares of Common Stock outstanding, of which
1,828,115 are owned by Nathan A. Chapman, Jr. All shares acquired in the
Offering, other than shares that were acquired by "affiliates" of the Company as
defined by Rule 144 under the Securities Act, if any, are freely transferable
without restriction or further registration under the Securities Act. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
the prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
As of February 26, 1998, Mr. Chapman beneficially owns 1,828,115 shares of
Common Stock or approximately 61.9% of the Company's outstanding Common Stock.
Mr. Chapman has agreed not to sell any shares of Common Stock that he owns as of
the date of this Prospectus until June 28, 1999. Accordingly, up to 1,125,507
shares of Common Stock or approximately 38.1% of the Company's outstanding
Common Stock may be eligible for sale pursuant to Rule 144.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least one year is entitled to sell within
any three-month period, shares equal in number to the greater of: (i) 1% of the
then-outstanding shares of Common Stock; or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of the required notice of sale with the Commission. In addition, any person (or
persons whose shares are aggregated) who is not, at the time of the sale, nor
during the preceding three months, an affiliate of the Company, and who has
beneficially owned restricted shares for at least two years, can sell such
shares under Rule 144 without regard to the notice, manner of sale, public
information or volume limitations described above.
PLAN OF DISTRIBUTION
This Prospectus may be used by The Chapman Co. in connection with offers and
sales related to market-making transactions in shares of Common Stock effected
from time to time. The Chapman Co. may act as principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or at negotiated prices.
For a description of certain relationships and transactions between The
Chapman Co. and its affiliates and the Company, see "Management," "Certain
Transactions" and "Principal Stockholders."
The Company has been advised by The Chapman Co. that, subject to applicable
laws and regulations, The Chapman Co. currently intends to make a market in the
Common Stock. However, The Chapman Co. is not obligated to do so and any
market-making activity will be subject to the limits imposed by the Securities
Act and the Securities Exchange Act of 1934, as amended. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors--Risks of Low Priced Stock."
The Chapman Co., has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority without
the prior specific written approval of such transactions by the customer.
29
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is UMB Bank, N.A.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Venable, Baetjer and Howard, LLP.
EXPERTS
The audited financial statements of the Company included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, DC, a registration
statement under the Securities Act with respect to the Shares offered by this
Prospectus (the "Registration Statement"). This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Offering, reference is made to the Registration Statement, including the
exhibits filed therewith, copies of which may be obtained at prescribed rates
from the Commission at the public reference facilities maintained by the
Commission at Judiciary Plaza Building, 450 Fifth Street, NW, Washington, DC
20549. Descriptions contained in this Prospectus as to the contents of any
contract or other documents filed as an exhibit to the Registration Statement
are not necessarily complete and each such description is qualified by reference
to such contract or document. The Commission maintains a website on the Internet
that will contain all future reports, proxy and information statements and other
information that the Company is required to file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov.
30
<PAGE>
CHAPMAN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index...................................................................................................... F-1
Report of Independent Public Accountants................................................................... F-2
Balance Sheet as of December 31, 1997...................................................................... F-3
Statements of Operations for the Years Ended December 31, 1996 and 1997.................................... F-4
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996 and 1997............... F-5
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997.................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Holdings, Inc:
We have audited the accompanying consolidated balance sheet of Chapman
Holdings, Inc. and Subsidiaries (a Maryland corporation) as of December 31,
1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the two years in the period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 financial position of Chapman
Holdings, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the two years in the period then ended
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 25, 1998
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents..................................................... $ 211,342
Cash deposits with clearing organization...................................... 40,116
Investments, available for sale............................................... 169,306
Receivables from brokers and dealers.......................................... 322,303
Receivables from discontinued operations...................................... 800,672
Receivables from affiliates................................................... 245
Advances to officer/employee.................................................. 176,051
Office equipment, net......................................................... 17,343
Prepaids and other assets..................................................... 81,338
Net assets from discontinued operations....................................... 1,044,870
---------
Total assets................................................................ $2,863,586
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses......................................... $ 68,864
Accrued compensation.......................................................... 68,910
Deferred rent................................................................. 89,048
Payable to affiliated partnership............................................. 9,846
Income taxes payable.......................................................... 205,837
Net liabilities from discontinued operations.................................. 1,172,387
---------
Total liabilities........................................................... 1,614,892
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 1,989,235 shares
issued and outstanding...................................................... 1,989
Additional paid-in capital.................................................... 1,091,461
Retained earnings............................................................. 155,244
---------
Total stockholders' equity.................................................. 1,248,694
---------
Total liabilities and stockholders' equity.................................. $2,863,586
---------
---------
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
REVENUE:
Commissions......................................................................... $ 2,553,098 $ 2,612,251
Underwriting and management fees.................................................... 296,757 324,826
Interest and dividends.............................................................. 37,194 54,724
------------ ------------
Total revenue..................................................................... 2,887,049 2,991,801
------------ ------------
EXPENSE:
Compensation and benefits........................................................... 1,050,193 1,120,753
Floor brokerage and clearing fees................................................... 238,027 286,505
Communications...................................................................... 164,303 154,364
Occupancy, equipment rental, and depreciation....................................... 422,598 355,542
Travel and business development..................................................... 177,793 210,881
Professional fees................................................................... 154,993 103,431
Other operating expense............................................................. 162,804 269,797
------------ ------------
Total expense..................................................................... 2,370,711 2,501,273
------------ ------------
Income from continuing operations before income tax provision..................... 516,338 490,528
INCOME TAX PROVISION.................................................................. 166,000 205,000
------------ ------------
Income from continuing operations................................................... 350,338 285,528
INCOME FROM DISCONTINUED OPERATIONS, net of
income taxes of $44,000 and $40,000, respectively................................... 54,643 51,459
------------ ------------
Net income........................................................................ $ 404,981 $ 336,987
------------ ------------
------------ ------------
BASIC EARNINGS PER SHARE DATA:
Income from continuing operations................................................... $ 0.17 $ 0.14
Income from discontinued operations................................................. 0.03 0.03
------------ ------------
Net income........................................................................ $ 0.20 $ 0.17
------------ ------------
------------ ------------
Weighted average shares outstanding................................................. 1,994,780 2,001,914
------------ ------------
------------ ------------
DILUTED EARNINGS PER SHARE DATA:
Income from continuing operations................................................... $ 0.16 $ --
Income from discontinued operations................................................. 0.02 --
------------ ------------
Net income........................................................................ $ 0.18 $ --
------------ ------------
------------ ------------
Weighted average shares outstanding................................................. 2,191,374 --
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT) EQUITY
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................................. $ 2,005 $ 1,540,445 $ (586,724) $ 955,726
Net income............................................... -- -- 404,981 404,981
Purchase of 59,750 shares of stock....................... (60) (231,440) -- (231,500)
----------- ------------ ------------- ------------
BALANCE, December 31, 1996................................. 1,945 1,309,005 (181,743) 1,129,207
Net income............................................... -- -- 336,987 336,987
Purchase of 152,250 shares of stock...................... (152) (217,348) -- (217,500)
Issuance of 196,594 shares of stock in exchange for a
stock warrant.......................................... 196 (196) -- --
----------- ------------ ------------- ------------
BALANCE, December 31, 1997................................. $ 1,989 $ 1,091,461 $ 155,244 $1,248,694
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 404,981 $ 336,987
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Effect from changes in assets and liabilities-
Receivables from brokers and dealers.............................................. 12,808 (228,743)
Deposits with clearing organization............................................... -- (5,116)
Receivables from affiliates....................................................... (165) (45)
Receivables from discontinued operations.......................................... (338,354) (118,029)
Advances to officer/employee...................................................... (19,656) (66,378)
Prepaids and other assets......................................................... 17,713 (24,330)
Net assets from discontinued operations........................................... (790,668) 112,586
Payable to clearing organization.................................................. (11,261) --
Accounts payable and accrued expenses............................................. (5,334) (24,104)
Accrued compensation.............................................................. 24,524 (7,461)
Payable to affiliated partnership................................................. 19,692 (49,230)
Income taxes payable.............................................................. 140,341 55,496
Net liabilities from discontinued operations...................................... 788,286 (28,958)
----------- -----------
Net cash provided by (used in) operating activities............................. 242,907 (47,325)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment.......................................................... (2,150) (9,785)
Investment in affiliate............................................................... 3,000 --
Purchase of investments............................................................... (147,500) (11,806)
----------- -----------
Net cash used in investing activities........................................... (146,650) (21,591)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock..................................................................... (231,500) (217,500)
----------- -----------
Net cash used in financing activities........................................... (231,500) (217,500)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (135,243) (286,416)
CASH AND CASH EQUIVALENTS, beginning of year............................................ 633,001 497,758
----------- -----------
CASH AND CASH EQUIVALENTS, end of year.................................................. $ 497,758 $ 211,342
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Chapman Holdings, Inc. (the "Company") provides securities brokerage and
investment banking services. The Company, during December 1997, became the
parent of a wholly-owned subsidiary, The Chapman Co. ("Chapman") and its two
subsidiaries, Chapman Capital Management, Inc. ("CCM") and Chapman Insurance
Agency, Incorporated ("CIA") pursuant to the merger of a newly formed wholly-
owned subsidiary of the Company into Chapman. CCM and CIA will be spun off from
Chapman as part of a planned initial public offering ("IPO"), with Chapman being
the remaining subsidiary. The IPO will be on a best efforts basis conditioned
upon the sale of a minimum of 850,000 shares of common stock and a maximum of
1,000,000 shares of common stock. The proceeds of the IPO will be used to expand
the Company's regulatory capacity to participate in corporate and public finance
transactions, for working capital to support the planned growth of its business
and other general corporate purposes.
The Company's operations are subject to certain risks, including the
Company's recently launched new strategic initiative it calls "Domestic Emerging
Markets," and the unproven nature of this strategy and its dependence on key
personnel.
The Company allocates compensation, benefits and other costs to CCM and CIA
on a proportional allocation cost method which management believes is
reasonable. Compensation and benefits are allocated based on management's
estimate of the percentage of time employees spend performing services for CCM
and CIA. Other costs, consisting of communications, occupancy and administrative
support, are allocated based on estimated usage by CCM and CIA.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are presented on the
accrual basis of accounting in accordance with generally accepted accounting
principles. All significant intercompany balances have been eliminated in
consolidation. 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 and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are primarily invested in money market funds.
INVESTMENTS
Investments as of December 31, 1997, consist primarily of certificates of
deposit in which cost approximates market. All investments are classified as
available for sale.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, receivables, accounts payable and accrued expenses
approximate fair value.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS PER SHARE
As of December 31, 1997, the Company adopted the Statement of Financial
Accounting Standards Statement No. 128, "Earnings Per Share" (SFAS No. 128).
Under SFAS No. 128, a company must disclose basic earnings per share (the
principal difference being that common stock equivalence would not be considered
in the compilation of basic earnings per share) and diluted earnings per share.
The Company adopted this pronouncement which required restatement of all prior
periods presented.
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method and the estimated IPO price
of $8.00 per share. During 1997, the warrant outstanding was exchanged for
shares of stock of Chapman Holdings, Inc. The weighted average shares
outstanding is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Weighted average common shares outstanding.......................... 1,994,780 2,001,914
Dilutive effect of warrants outstanding............................. 196,594 --
---------- ----------
2,191,374 2,001,914
---------- ----------
---------- ----------
</TABLE>
NEW ACCOUNTING STANDARD
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
becomes effective during the Company's 1998 fiscal year. Under SFAS No. 131, a
company must disclose certain information about the operating segments in the
consolidated financial statements of the company and information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company is still reviewing the effect of adopting this
pronouncement and does not expect the adoption of this pronouncement to have a
material effect on its financial statement presentation.
COMMISSION REVENUES
The Company records commission revenues and related expenses on a trade date
basis.
UNDERWRITING AND MANAGEMENT FEES
The Company records underwriting and management fee revenues and the related
expenses on a trade date basis.
VOLATILITY OF BUSINESS
The Company's revenues and operating results may fluctuate from month to
month, quarter to quarter and year to year due to a combination of factors,
including the number of underwriting transactions in which the Company
participates, access to public markets for companies in which the Company has
invested as a principal, the level of institutional and retail brokerage
transactions, variations in
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
expenditures for personnel, litigation expenses and expenses of establishing new
business units. The Company's revenues from an underwriting transaction are
recorded only when the underwritten security commences trading; accordingly, the
timing of the Company's recognition of revenue from a significant transaction
can materially affect the Company's operating results. As a result, the Company
could experience losses if demand for the above transactions declines faster
than the Company's ability to change its cost structure.
OFFICE EQUIPMENT
Office equipment is depreciated using the straight-line method over the
estimated useful life of 3 to 5 years. As of December 31, 1997, accumulated
depreciation was $14,502.
TRANSACTIONS WITH CLEARING ORGANIZATION
The Company is required to have cash on deposit with its clearing agent for
general trading purposes. In addition, receivables from and payables to the
clearing organization arise from cash settlements on ordinary trading activity
and clearing expenses.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The Company and its subsidiaries files
consolidated Federal tax returns on a cash basis.
CCM ACQUISITION
In December 1996, CCM started DEM-MET, a tax-exempt pooled interest trust
for qualified employee benefit plans. As part of the start-up of this trust, CCM
entered into a noncompete agreement for $300,000 and paid $640,000 in cost
related to starting the trust. These amounts, net of accumulated amortization,
are included in net assets from discontinued operations in the accompanying
consolidated balance sheets.
2. SPIN OFF OF OPERATIONS:
On December 29, 1997, the Company, a newly formed Maryland corporation,
effected a tax-free holding company reorganization pursuant to which Chapman
became a wholly-owned direct subsidiary of the Company. On or before the closing
of a sale of the minimum number of shares to be sold in the IPO, the Company
intends to effect a tax-free spin-off transaction in which Chapman's two
wholly-owned subsidiaries, CCM and CIA, will become separate stand-alone
corporations, and the stock of such companies will be distributed to the
existing stockholders of the Company. The financial position and results of
operations of CCM and CIA are reflected on the accompanying consolidated balance
sheets and consolidated statements of operations as net assets and net
liabilities from discontinued operations and income from discontinued
operations, respectively.
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
2. SPIN OFF OF OPERATIONS: (CONTINUED)
Assets and liabilities as of December 31, 1997, of the operations to be spun
off are listed below:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Cash and cash equivalents....................................................... $ 8,712
Management and underwriting receivables......................................... 253,002
Related party receivables....................................................... 67,089
Office equipment, net........................................................... 5,204
Prepaids and other assets, net.................................................. 710,863
------------
$ 1,044,870
------------
------------
Accounts payable and accrued expenses........................................... $ 130,189
Due to officer.................................................................. 60,000
Due to affiliate................................................................ 31,526
Due to parent company........................................................... 800,672
Non-compete agreement payable................................................... 150,000
------------
$ 1,172,387
------------
------------
</TABLE>
3. CAPITAL STOCK:
The common stock activity included in the accompanying consolidated
financial statements has been restated to reflect the one-for-five share
exchange of stock related to the merger of Chapman into the Company. As such,
all share data related to Chapman prior to the merger has been restated at the
Company's stock conversion amounts.
4. COMMITMENTS AND CONTINGENCIES:
The Company has entered into an operating lease agreement for office
facilities which expires on October 15, 2000. Rent expense under this agreement
was $209,052 in 1996 and 1997. The aggregate minimum future annual rental for
the following fiscal years ending December 31 is as follows:
<TABLE>
<S> <C>
1998.............................................. $ 219,954
1999.............................................. 252,660
2000.............................................. 200,022
</TABLE>
In addition, a proportionate share of real estate taxes and building
expenses in excess of base year amounts are charged to the Company. This lease
agreement includes scheduled rent increases which are recognized on a
straight-line basis. As of December 31, 1997, the Company recorded $89,048 in
deferred rent relating to this straight-line basis of rent expense recognition.
The Company leases furniture and equipment from the Chapman Limited
Partnership I (the Partnership), an entity in which certain officers and
stockholders of the Company are partners. The lease requires monthly payments of
$9,846 and contains one year renewable terms, at the option of the Company,
through September 2000, at which time the Company can purchase the furniture and
equipment at fair value. Rent expense under this lease agreement was $118,152 in
1996 and 1997, of which $9,846 is payable to the Partnership as of December 31,
1997.
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
4. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company clears all transactions for its brokerage customers through its
clearing agent, which carries and clears all customer securities accounts. The
clearing agent also lends funds to the Company's brokerage customers through the
use of margin credit. These loans are made to customers on a secured basis, with
the clearing agent maintaining collateral in the form of saleable securities,
cash or cash equivalents. Pursuant to the terms of the agreement between the
Company and the clearing agent, in the event that customers fail to pay for
their purchases, to supply the securities that they have sold, or to repay funds
they have borrowed, and the clearing agent satisfies any customer obligations,
the Company would be obligated to indemnify the clearing agent for any resulting
losses. As of December 31, 1997, the Company has approximately $1.7 million of
margin credit outstanding to its customers through its clearing agent.
Securities brokerage firms become parties to arbitrations brought by
dissatisfied customers in the general course of business. The Company has been
and is currently a party to such proceedings, none of which has resulted or
which management believes will result in any material liability.
5. INCOME TAXES:
As of December 31, 1997, there was a deferred tax liability of approximately
$140,000 related to the Company being on the cash basis of accounting for income
tax purposes. For the year ended December 31, 1996, the tax provision of
$259,000 is net of a reduction in the valuation reserve of $49,000 as a result
of utilization of a net operating loss which was applied against the provision
for continuing operations because the net operating loss was generated from
continuing operations.
A reconciliation of the statutory income taxes to the recorded income tax
provision for the years ended December 31, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Statutory tax (at 34% rate)........................................... $ 209,000 $ 197,900
Effect of state income taxes.......................................... 34,500 26,900
Effect of permanent book to tax differences........................... 15,500 20,200
Reduction in valuation reserve........................................ (49,000) --
---------- ----------
Income tax provision.................................................. $ 210,000 $ 245,000
---------- ----------
---------- ----------
</TABLE>
The components of the income tax provision for the years ended December 31,
1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current............................................................... $ 183,000 $ 97,000
Deferred.............................................................. 32,000 108,000
Discontinued operations............................................... 44,000 40,000
Reduction in valuation service........................................ (49,000) --
---------- ----------
Income tax provision.................................................. $ 210,000 $ 245,000
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
6. REGULATORY REQUIREMENTS:
Pursuant to the requirements of the Securities and Exchange Commission's
(SEC) Uniform Net Capital Rule (Rule 15c3-1), the Company is required to
maintain net capital, as defined, of not less than $100,000 as of December 31,
1997, and a ratio of aggregate indebtedness to net capital, as defined, not to
exceed 15 to 1. As of December 31, 1997, the Company had excess net capital of
$169,509 and a ratio of aggregate indebtedness to net capital of .9 to 1.
The Company is subject to compliance with various SEC and National
Association of Securities Dealers, Inc. (NASD) regulations. Also, the NASD
periodically reviews the Company's records and procedures for compliance with
its requirements. Any acts of noncompliance may subject the Company to fines and
other punitive remedies and may significantly effect the Company's ability to
operate.
7. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1996 and
1997, were as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Cash paid-Interest..................................................... $ 86,616 $ 9,341
Income taxes........................................................... 5,000 182,232
</TABLE>
8. EMPLOYEE SAVINGS PLAN:
The Company's Retirement Savings Plan, a 401(k) plan, provides participants
a mechanism for making contributions for retirement savings. Each participant
may make pre-tax and after-tax contributions based upon eligible compensation.
The Company may make discretionary contributions based on the participants'
compensation for the plan year. The Company elected not to contribute to the
plan for the years ended December 31, 1996 and 1997.
9. RELATED PARTY TRANSACTIONS:
The Company served as the underwriter for DEM, Inc. (DEM), a registered
non-diversified closed-ended management investment company. CCM provides
investment advisory and administrative services to DEM under an investment
advisory and administrative services agreement which sets forth the services to
be provided and the fees to be charged. In 1995, the Company and CCM owned a
total of 6,867 shares of DEM-TM-'s stock, with a cost basis of $103,005, which
approximated market. In 1996, CCM purchased 196,333 additional shares of DEM-TM-
stock and sold the shares recognizing a loss of $108,483. The Company accounted
for the DEM-TM- stock at market value.
Listed below are fees and commissions earned from DEM.
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Included in continuing operations..................................... $ 455,000 $ 432,008
Included in discontinued operations................................... 53,041 138,614
---------- ----------
$ 508,041 $ 570,622
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
CCM provides investment advisory and administrative services to The Chapman
Funds, Inc. (the Funds), an affiliated group of mutual funds, under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. The agreement also provides
that expense reimbursements be made to the Funds for specified expenses.
As of December 31, 1997, the Company had outstanding advances to its
majority stockholder and other employees of $207,578, of which $31,527 is
included in discontinued operations.
10. SUBSEQUENT EVENT:
On February 11, 1998, the Company declared a dividend to the stockholders of
the Company, the stock of CCM and CIA. The distribution of the dividend will be
to stockholders of record on February 15, 1998, and will be prior to the closing
of the minimum shares sold from the IPO. As of February 25, 1998, the Company
had sold the minimum number of shares of the IPO and plan to close on the
transaction in the near future.
F-13
<PAGE>
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES TO WHICH
IT RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 12
Capitalization.................................. 13
Dividend Policy................................. 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business........................................ 17
Management...................................... 23
Principal Stockholders.......................... 25
Certain Transactions............................ 26
Description of Capital Stock.................... 28
Shares Eligible for Future Sale................. 29
Plan of Distribution............................ 29
Transfer Agent and Registrar.................... 30
Legal Matters................................... 30
Experts......................................... 30
Additional Information.......................... 30
Index to Financial Statements................... F-1
</TABLE>
------------------------
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
APRIL 1, 1998
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