<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------------------------
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-23587
CHAPMAN HOLDINGS, INC.
(Name of small business issuer in its charter)
Maryland 52-206977
----------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202
- - --------------------------------------------------------------------------------
(Address of Principal Executive Office)
Issuer's telephone number, including area code: (410) 625-9656
- - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes X No
---- ----
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
----------------------------------------------
(Title of Class)
As of November 10, 1998, 2,953,622 shares of the registrant's common stock, par
value $0.001 per share, were outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part I.........................................................................
ITEM 1 FINANCIAL STATEMENTS........................................... 1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 9
Part II........................................................................
ITEM 2 CHANGES IN SECURITIES AND USE OF
PROCEEDS..................................................... 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................... 18
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
The consolidated financial statements for the three and nine months
ended September 30, 1998 have not been audited but, in the opinion of
management, contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company as of such date and for such periods. The unaudited
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto appearing
in the Company's Registration Statement on Form SB-2. The results of operations
for the three and nine months ended September 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1998 or any future periods.
3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ................................................ $ 211,342 $ 5,107,071
Cash deposits with clearing organization ................................. 40,116 1,639,000
Investments, available for sale .......................................... 169,306 238,250
Securities owned, at market value ....................................... -- 1,598,064
Receivables from brokers and dealers ..................................... 322,303 370,060
Notes receivable from affiliated company ................................. 800,672 --
Advances to officer/employee ............................................. 176,051 623,986
Office equipment, net .................................................... 17,343 21,071
Prepaids and other assets ................................................ 81,583 391,015
Net assets from discontinued operations .................................. 1,044,870 --
------------ ------------
Total assets ....................................................... $ 2,863,586 $ 9,988,517
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses .................................... $ 68,864 $ 189,273
Margin loan payable ...................................................... -- 1,927,199
Accrued compensation ..................................................... 68,910 115,866
Deferred rent ............................................................ 89,048 80,870
Payable to affiliates .................................................... 9,846 4,923
Income taxes payable ..................................................... 205,837 74,736
Net liabilities from discontinued operations ............................. 1,172,387 --
------------ ------------
Total liabilities .................................................. 1,614,892 2,392,867
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 1,989,235 and
2,922,752 shares issued and outstanding, respectively ................ 1,989 2,923
Additional paid-in capital ............................................... 1,091,461 7,609,327
Retained earnings (accumulated deficit)................................... 155,244 (16,600)
------------ ------------
Total stockholders' equity ........................................ 1,248,694 7,595,650
------------ ------------
Total liabilities and stockholders' equity ........................ $ 2,863,586 $ 9,988,517
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Commissions ....................... $ 660,460 $ 748,707 $ 1,793,448 $ 1,909,258
Underwriting and management fees .. 37,868 232,959 88,486 376,024
Interest and dividends ............ 11,675 81,148 33,410 246,858
Loss on trading ................... -- (173,879) -- (173,879)
--------- --------- --------- ---------
Total revenue ............... 710,003 888,935 1,915,344 2,358,261
--------- --------- --------- ---------
EXPENSE:
Compensation and benefits ......... 295,627 546,177 847,729 1,316,969
Floor brokerage and clearing fees . 71,981 102,360 210,683 302,399
Communications .................... 35,965 42,396 111,123 130,425
Occupancy, equipment rental, and
depreciation ................... 87,712 136,314 263,749 330,455
Travel and business development ... 70,286 69,479 174,955 167,175
Professional fees ................. 7,696 133,192 41,417 191,592
Other operating expense ........... 62,663 152,070 193,146 326,426
--------- --------- --------- ---------
Total expense ............... 631,930 1,181,988 1,842,802 2,765,441
--------- --------- --------- ---------
Income (loss) from continuing
operations before income
tax provision (benefit).. 78,073 (293,053) 72,542 (407,180)
INCOME TAX PROVISION(BENEFIT) ......... 32,628 (61,851) 30,317 (101,795)
--------- --------- --------- ---------
Income (loss) from continuing
operations .............. 45,445 (231,202) 42,225 (305,385)
--------- --------- --------- ---------
INCOME FROM DISCONTINUED
OPERATIONS ........................ 49,930 -- 30,535 --
--------- --------- --------- ---------
Net income (loss) ........... $ 95,375 $ (231,202) $ 72,760 $ (305,385)
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC AND DILUTIVE EARNINGS PER
SHARE DATA:
Income (loss) from continuing
operations ..................... $ .05 $ (.08) $ .04 $ (.11)
Income from discontinued operations.... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ........... $ .05 $ (.08) $ .04 $ (.11)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 1,989,234 2,927,897 2,006,151 2,730,739
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 72,760 $ (305,385)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Unrealized loss on securities owned ...................... -- 35,870
Effect from changes in assets and liabilities-
Cash deposits with clearing organization .............. -- (1,598,884)
Receivables from brokers and dealers .................. 34,761 (47,757)
Note receivable from affiliated company ............... (72,665) 800,672
Advances to officer/employee .......................... (36,693) (447,935)
Prepaids and other assets ............................. (15,020) (309,432)
Net assets from discontinued operations ............... 63,543 6,024
Accounts payable and accrued expenses ................. 36,579 120,409
Accrued compensation .................................. (8,828) 46,956
Deferred rent ......................................... -- (8,178)
Payable to affiliated partnership ..................... (59,076) (4,923)
Income taxes payable .................................. (84,527) (131,101)
----------- -----------
Net cash used in operating activities ............. (69,166) (1,843,664)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment ................................ (9,785) (3,728)
Purchase of investments ..................................... (22,706) (68,944)
----------- -----------
Net cash used in investing activities ............. (32,491) (72,672)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .................. -- 6,812,065
Purchase of stock ........................................... (217,500) --
----------- -----------
Net cash (used in) provided by financing activities (217,500) 6,812,065
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................................................. (319,157) 4,895,729
CASH AND CASH EQUIVALENTS, beginning of period .................. 497,758 211,342
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 178,601 $ 5,107,071
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest ............................................. $ 2,750 $ 2,850
----------- -----------
Taxes ................................................ $ 14,464 $ 22,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Chapman Holdings, Inc. provides securities brokerage and investment banking
services. The accompanying unaudited consolidated financial statements
include the accounts of Chapman Holdings, Inc. (CHI) and its wholly owned
subsidiary, The Chapman Co. (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements are presented on the
accrual basis of accounting in accordance with generally accepted accounting
principles. 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. Actual results could differ from those
estimates.
Interim Financial Statements
The consolidated financial statements for the three and the nine months ended
September 30, 1997 and 1998, are unaudited, but in the opinion of management,
such financial statements have been presented on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations, for the periods.
As permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financial statements do not include all disclosures
normally included with audited consolidated financial statements, and
accordingly, should be read in conjunction with the consolidated financial
statements and notes thereto as of December 31, 1997, included in the Company's
Form SB-2 filed. The results of operations presented in the accompanying
consolidated financial statements are not necessarily representative of
operations for an entire year and because of the nature of the Company's
operations can be materially different between periods.
Cash and Cash Equivalents
Included in cash and cash equivalents is $4,564,072 of cash invested in the U.S.
Treasury Money Fund, a fund managed by Chapman Capital Management, Inc., an
affiliate.
7
<PAGE>
Securities Owned and Not Yet Purchased
Securities owned consist of trading proprietary stock, which is carried at
market. The proprietary stock is primarily stock of Chapman Capital
Management Holdings, Inc. (CCMH), a company whose majority stockholder is
also the majority stockholder of the Company. The Chapman Co. is the market
maker for CHI and for CCMH and, thus, holds this stock in inventory. The
proprietary stock was purchased on margin. The margin loan payable represents
the value of the proprietary stock accepted for margin.
2. INITIAL PUBLIC OFFERING AND SPIN-OFF OF OPERATIONS:
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.
Effective February 26, 1998, concurrent with CHI's completed initial public
offering, CHI spun off two of its wholly owned subsidiaries, Chapman Capital
Management, Inc. and The Chapman Insurance Agency, Inc. See the audited
consolidated financial statements and notes thereto as of December 31, 1997,
included in the Company's Form 10-KSB filed, for a discussion of this
transaction.
3. RELATED PARTY TRANSACTIONS:
During 1998, the Company advanced the President of the Company approximately
$385,000. The note related to this advance bears interest at approximately
5.5% and is payable in three years. The loss on trading in the consolidated
statement of operations for the three and nine months ended September 30,
1998, includes $138,009 of loss related to trading stock of DEM, Inc., an
affiliate.
4. NEW AUTHORITATIVE STANDARDS:
During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its components.
The Company adopted SFAS No. 130 during the nine months ended September 30,
1998, and has determined that the adoption of this statement has an immaterial
impact on the financial statements as the Company has minimal comprehensive
income adjustments.
During 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which is effective for
fiscal years beginning after December 15, 1997. This statement establishes a
new approach for determining segments within a company and reporting
information on those segments. The Company is presently assessing this
statement.
5. OMNIBUS STOCK PLAN:
In March 1998, The Company started an Omnibus Stock Plan (the Plan) to enable
selected management, employees, consultants and directors to acquire interest
in the Company through ownership of common stock. The Plan has 150,000 shares
of common stock registered. On September 28, 1998, the Company granted
options for 43,900 shares of common stock at fair market value at the date of
grant. The options vested on the grant date and have a three-year term. None
of those options were exercised as of September 30, 1998.
8
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note Regarding Forward-Looking Information
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this Report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, general
economic and business conditions in the Company's market area, inflation,
fluctuations in interest rates, changes in government regulations,
competition, the ability of the Company to implement its business strategy
and other risks discussed in this and other reports filed by the Company.
Forward-looking statements are intended to apply only at the time they
are made. Moreover, whether or not stated in connection with a
forward-looking statement, the Company undertakes no obligation to correct or
update a forward-looking statement should the Company later become aware that
it is not likely to be achieved. If the Company were to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
The following discussion should be read in conjunction with the financial
statements contained in Item 1 of Part I of this Form 10-QSB.
9
<PAGE>
Results of Operations
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------
1997 1998
--------------------------- --------------------------------
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUE:
Commissions ........................ $ 660,460 93.0% $ 748,707 84.2%
Underwriting and management fees ... 37,868 5.3 232,959 26.2
Interest and dividends ............. 11,675 1.7 81,148 9.2
Loss on trading .................... -- 0.0 (173,879) -19.6
----------- ----- ----------- -----
Total revenue ................. 710,003 100.0 888,935 100.0
----------- ----- ----------- -----
EXPENSE:
Compensation and benefits .......... 295,627 41.6 546,177 61.4
Brokerage and clearing fees ........ 71,981 10.1 102,360 11.5
Communications ..................... 35,965 5.1 42,396 4.9
Occupancy, rental and depreciation . 87,712 12.4 136,314 15.3
Travel and business development .... 70,286 9.9 69,479 7.8
Professional fees .................. 7,696 1.1 133,192 15.0
Other operating expense ............ 62,663 8.8 152,070 17.1
----------- ----- ----------- -----
Total expense ................. 631,930 89.0 1,181,988 133.0
----------- ----- ----------- -----
Income (loss) from continuing
operations before income
tax provision .............. 78,073 11.0 (293,053) -33.0
Income tax provision (benefit) ..... 32,628 4.6 (61,851) -7.0
----------- ----- ----------- -----
Net income (loss) from continuing
operations ...................... 45,445 6.4 (231,202) -26.0
Income from discontinuing
operations ...................... 49,930 7.0 -- 0.0
Net income (loss) .................. $ 95,375 13.4% $ (231,202) -26.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------
1997 1998
------------------------------ -------------------------------
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Commissions ........................ $ 1,793,448 93.7% $ 1,909,258 81.0%
Underwriting and management fees ... 88,486 4.6 376,024 15.9
Interest and dividends ............. 33,410 1.7 246,858 10.5
Loss on trading .................... -- 0.0 (173,879) -7.4
----------- ----- ----------- -----
Total revenue ................. 1,915,344 100.0 2,358,261 100.0
----------- ----- ----------- -----
EXPENSE:
Compensation and benefits .......... 847,729 44.3 1,316,969 55.9
Brokerage and clearing fees ........ 210,683 11.0 302,399 12.8
Communications ..................... 111,123 5.8 130,425 5.5
Occupancy, rental and depreciation . 263,749 13.8 330,455 14.0
Travel and business development .... 174,955 9.1 167,175 7.1
Professional fees .................. 41,417 2.1 191,592 8.1
Other operating expense ............ 193,146 10.1 326,426 13.9
----------- ----- ----------- -----
Total expense ................. 1,842,802 96.2 2,765,441 117.3
----------- ----- ----------- -----
Income (loss) from continuing
operations before income
tax provision .............. 72,542 3.8 (407,180) -17.3
Income tax provision (benefit) ..... 30,317 1.6 (101,795) -4.3
----------- ----- ----------- -----
Net income (loss) from continuing
operations ...................... 42,225 2.2 (305,385) -13.0
Income from discontinuing
operations ...................... 30,535 1.6 -- 0.0
Net income (loss) .................. $ 72,760 3.8% $ (305,385) -13.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
10
<PAGE>
Total revenue increased by $178,932 or 25.2%, to $888,935 for the three
months ended September 30, 1998 from $710,003 for the prior comparable
period. Total revenue increased by $442,917 or 23.1% to $2,358,261 for the
nine months ended September 30, 1998 from $1,915,344 for the prior comparable
period. Revenue was higher due to an increase in underwriting and management
fees, interest income, and commissions, offset by a loss in trading.
Commission revenue increased by $88,247 or 13.4%, to $748,707 for the
three months ended September 30, 1998 from $660,460 for the prior comparable
period. Commission revenue increased by $115,810 or 6.5% to $1,909,258 for
the nine months ended September 30, 1998 from $1,793,448 in the prior
comparable period. The increase for the three month period was primarily due
to an 109.4% increase in the sale of equities offset by a corresponding
decrease of 90.7% in the sale of government securities. These commission
revenues were greatly affected by market conditions in the nine months ended
September 30, 1998. The increase for the nine month period ended September
30, 1998 was due to the increase in commission revenue during the first and
third quarters, offset by the decrease for the second quarter of the nine
month period.
Underwriting and management fees increased by $195,091, to $232,959 for the
three months ended September 30, 1998 from $37,868 for the prior comparable
period. Underwriting and management fees increased by $287,538 to $376,024
for the nine months ended September 30, 1998 from $88,486 in the prior
comparable period. These increases are due primarily to an increase in
management fees from municipal transactions and underwriting of deals.
11
<PAGE>
Loss on trading accounts increased by $173,879 for the three months and
nine months ended September 30, 1998 versus no such loss for either of the
prior comparable periods. The Company's loss on trading accounts is
attributable to a reduction in value of its security purchases due to
market conditions.
Interest and dividend revenue increased by $69,473 to $81,148 for the
three months ended September 30, 1998 from $11,675 in the prior comparable
period. Interest and dividend revenue increased by $213,448 to $246,858 for
the nine months ended September 30, 1998 from $33,410 in the prior comparable
period. This increase is due to higher earnings due to higher cash balances
associated with the net proceeds from the public offering.
Total expense increased by $550,058 or 87.0%, to $1,181,988 for the
three months ended September 30, 1998 from $631,930 for the prior comparable
period. Total expense increased to 133.0% of total revenue for the three
months ended September 30, 1998 as compared to 89.0% of total revenue for the
prior comparable period. Total expense increased by $922,639 or 50.1%, to
$2,765,441 for the nine months ended September 30, 1998 from $1,842,802 for
the prior comparable period. Total expense increased to 117.3% of total
revenue for the nine months ended September 30, 1998 as compared to 96.2% of
total revenue for the prior comparable period. Expenses increased in all
areas due to the opening of new offices and other expansions of operations.
Compensation and benefits increased by $250,550, or 84.8%, to $546,177
for the three months ended September 30, 1998 from $295,627 for the prior
comparable period. As a percentage of total revenue, these expenses increased
to 61.4% for the three months ended September 30, 1998 from 41.6% in the
prior comparable period. Compensation and benefits increased by $469,240 or
55.4% to $1,316,969 for the nine months ended September 30, 1998 from
$847,729 in the prior comparable period. 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 due
to an increased municipal sales volume, the addition of 14 employees, and
signing bonuses.
12
<PAGE>
Floor brokerage and clearing fees increased by $30,379 or 42.2%, to
$102,360 for the three months ended September 30, 1998 from $71,981 for the
prior comparable period. Floor brokerage and clearing fees increased by
$91,716 or 43.5%, to $302,399 for the nine months ended September 30, 1998
from $210,683 for the prior comparable period primarily due to an increase
in the number of sales transactions and a decrease in the average dollar
amount per transaction.
Communication expense increased by $6,431, or 17.9%, to $42,396 for the
three months ended September 30, 1998 from $35,965 for the prior comparable
period. Communication expense increased by $19,302, or 17.4% to $130,425 for
the nine months ended September 30, 1998 from $111,123 for the prior
comparable period primarily due to price and use increases in connection with
the Company's communications services.
Occupancy, rental and depreciation expense increased by $48,602 or 55.4%
to $136,314 for the three months ended September 30, 1998 from $87,712 for
the prior comparable period. Occupancy, rental and depreciation expense
increased by $66,706 or 25.3% to $330,455 for the nine months ended September
30, 1998 from $263,749 for the prior comparable period. The increase is due
to the opening of additional offices.
Travel and business development expense increased by $807 or 1.1% to
$69,479 for the three months ended September 30, 1998 from $70,286 for the
prior comparable period. Travel and business development expense decreased by
$7,780, or 4.4% to $167,175 for the nine months ended September 30, 1998 from
$174,955 for the prior comparable period.
13
<PAGE>
Professional fees increased by $125,496 or 1630.7% to $133,192 for the
three months ended September 30, 1998 from $7,696 for the prior comparable
period. Professional fees increased by $150,175 or 362.6% to $191,592 for the
nine months ended September 30, 1998 from $41,417 the prior comparable period
due primarily to the Company's increased use of legal services, professional
recruiters, and marketing consultants related to the growth and expansion of
the Company.
Other operating expense increased by $89,407 or 142.7% to $152,070 for
the three months ended September 30, 1998 from $62,663 for the prior
comparable period. Other operating expense increased by $133,280 or 69.0% to
$326,426 for the nine months ended September 30, 1998 from $193,146 for the
prior comparable period. The increase is due primarily to an increase in
advertising, supplies, postage and filing fees expenses due to the growth and
expansion of the Company.
Income taxes from continuing operations decreased by $94,479 to a
$61,851 tax benefit in the three months ended September 30, 1998 from a
$32,628 tax provision for the prior comparable period. Income taxes from
continuing operations decreased by $132,112 to a $101,795 tax benefit in the
nine months ended September 30, 1998 from a $30,317 tax provision for the
prior comparable period. This decrease was due to the net loss for the
periods.
Net income decreased by $326,577 to a $231,202 loss for the three months
ended September 30, 1998 from net income of $95,375 for the prior
comparable period. Net income decreased by $378,145 to a $305,385 loss for
the nine months ended September 30, 1998 from net income of $72,760 for the
prior comparable period.
14
<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 related to customer demand, economic and market
conditions, and proprietary trading strategies. The Company's total assets as
of September 30, 1998 were $9,988,517.
The Chapman Co., the Company's broker-dealer subsidiary, is subject to
the net capital rules of the NASD. As such, The Chapman Co. is subject to
certain restrictions on the use of capital and its related liquidity. The net
capital position of The Chapman Co. as of September 30, 1998 was $2,491,533
which was $2,391,533 in excess of its minimum net capital requirement.
The Company's cash and cash equivalents were $5,107,071 as of September
30, 1998. The increase in cash and cash equivalents was primarily due to the
Company's initial public offering during the period.
Historically, the Company has financed its operations through the sale
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.
15
<PAGE>
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.
16
<PAGE>
Year 2000 Software Issue
As the year 2000 approaches, existing software programs and operating
systems must be reviewed to determine if they can accommodate information that
employs dates after December 31, 1999.
The Company has allocated funds not to exceed $100,000 during fiscal
year 1998 to cover assessment of systems, internal testing, point-to-point
testing, training, SIA Industry testing and replacement and modification of
existing systems to ensure year 2000 compliance.
Management has prepared a written plan detailing the Company's software
and operating systems' compliance issues for the year 2000. The plan identifies
critical and non-critical operating systems of the Company and addresses
external interfaces with third party computer systems. The Company is currently
working with its hardware and software vendors and other third parties to
prepare for the year 2000.
The Company anticipates that most of the necessary hardware and
software renovations needed to render the Company year 2000 compliant have been
or will be completed by the first quarter of 1999. Management plans to test its
systems during the last quarter of 1998 and the first quarter of 1999 to
determine the effect of its compliance efforts. According to the Company's plan,
the testing phase of its plan is scheduled to be completed by March 31, 1999.
The Company has relationships with third parties that may have computer
systems that are not year 2000 compliant. The Company has identified the third
parties upon which it relies for mission-critical systems and has contacted or
is contacting such third parties to confirm that their systems are in compliance
with the year 2000 requirements.
While the Company believes that it is taking prudent and necessary
action to comply with year 2000 requirements, there can be no assurance that the
year 2000 issue will not result in information or communications systems
interruptions. Any such interruptions could be expected to have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects and may subject the Company to liability to
its clients.
The Company is currently building upon its existing contingency plan in
the event that the Company or third parties do not
17
<PAGE>
successfully complete their compliance efforts, or if vendors or third parties
controlling systems critical to the Company are unable to confirm that their
systems will be year 2000 compliant. These efforts may result in additional
costs in excess of current allocations and estimates.
PART II
OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement on Form SB-2 (File No.
333-43487) with respect to the Offering was declared effective by the
Commission on February 23, 1998. As of September 30, 1998, the Company has
applied approximately $5 million of the net proceeds to expand its net
capital and $1 million toward working capital and for general corporate
purposes. Further, the Company has applied approximately $200,000 to expand
research, approximately $400,000 to open two new offices and staff such
offices and approximately $300,000 to expand marketing and sales capability.
The remainder of the net proceeds have not yet been applied by the Company
and, pending such application, will be invested principally in United States
government securities, short-term certificates of deposit, money market funds
or other short-term interest-bearing investments.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits required by Item 601 of Regulation S-B:
Exhibit 27: Financial Data Schedule
B. Reports on Form 8-K:
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHAPMAN HOLDINGS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
----------------------------------
Nathan A. Chapman, Jr.
President, Chairman of the Board
and Director
/S/ M. LYNN BALLARD
----------------------------------
M. Lynn Ballard
Treasurer and Controller
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 13, 1998
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. Description of Exhibit
27 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997
<CASH> 6,746,071 0 0 0
<SECURITIES> 1,836,314 0 0 0
<RECEIVABLES> 370,060 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 9,967,446 0 0 0
<PP&E> 21,071 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 9,988,517 0 0 0
<CURRENT-LIABILITIES> 2,392,867 0 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,923 0 0 0
<OTHER-SE> 7,592,727 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 9,988,517 0 0 0
<SALES> 2,111,403 698,328 807,787 1,881,934
<TOTAL-REVENUES> 2,358,261 710,003 888,935 1,915,344
<CGS> 0 0 0 0
<TOTAL-COSTS> 2,765,441 631,930 1,181,988 1,842,802
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 3,271 0 1,853 0
<INCOME-PRETAX> (407,180) 78,073 (293,053) 72,542
<INCOME-TAX> (101,795) 32,628 (61,851) 30,317
<INCOME-CONTINUING> (305,385) 45,445 (231,202) 42,225
<DISCONTINUED> 0 49,930 0 30,535
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (305,385) 95,375 (231,202) 72,760
<EPS-PRIMARY> (0.11) 0.05 (0.08) 0.04
<EPS-DILUTED> (0.11) 0.05 (0.08) 0.04
</TABLE>
