<PAGE>
PROSPECTUS
MINIMUM OFFERING: 850,000 SHARES
MAXIMUM OFFERING: 1,000,000 SHARES
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
--------------------
Chapman Holdings, Inc., a Maryland corporation (the "Company"), is offering
for sale up to 1,000,000 shares (the "Maximum") of its common stock, $0.001 par
value per share (the "Common Stock") (the offering made is referred to herein as
the "Offering"). A minimum of 850,000 shares of Common Stock must be sold in
order for the Offering to close (the "Minimum"). Prior to the Offering, there
has been no public market for the Common Stock and there can be no assurance
that any such market will develop in the future. The Company has applied for
quotation on the Nasdaq SmallCap Market (the "SmallCap Market") under the symbol
"CMAN". The initial public offering price of the shares of Common Stock offered
by this Prospectus (the "Shares") is $8.00 per share. The initial public
offering price has been determined by negotiation between the Company and a
qualified independent underwriter as required by the Rules of the National
Association of Securities Dealers, Inc. (the "NASD"). See "Plan of
Distribution." Upon sale of the Minimum, the current President of the Company
will exercise voting control over approximately 64.4% of the Company's
outstanding Common Stock. See "Principal Stockholders."
------------------------
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."
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.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1)(2) COMPANY(3)
<S> <C> <C> <C>
Per Share....................................... $8.00 $0.56 $7.44
Total Minimum................................... $6,800,000 $476,000 $6,324,000
Total Maximum................................... $8,000,000 $560,000 $7,440,000
</TABLE>
(1) The Company has agreed to indemnify The Chapman Co. (the "Underwriter") and
the qualified independent underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) Includes fees payable to the qualified independent underwriter. See "Plan of
Distribution."
(3) Before deducting expenses payable by the Company that are estimated at
$300,000.
------------------------
The Shares are offered on a best efforts basis by the Underwriter, subject
to prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering without notice and to reject any order in whole or in part.
This Offering is conditioned upon the sale of the Minimum. Until the Minimum
is sold, all funds received from purchasers will be held by UMB Bank, N.A. as
escrow agent and returned promptly if the Minimum is not sold by the termination
date, without interest or deduction. The termination date of the Offering is on
the earlier to occur of: the date selected by the Company; the date of the sale
of the Maximum; or, if the Minimum is not sold, 180 days after the date of this
Prospectus, unless extended by the Company for one or more additional periods
not to exceed an additional 30 days in the aggregate (the "Termination Date").
THE CHAPMAN CO.
February 24, 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.
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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, THE COMPANY, A NEWLY
FORMED MARYLAND CORPORATION, EFFECTED A TAX-FREE HOLDING COMPANY REORGANIZATION
PURSUANT TO WHICH THE CHAPMAN CO. BECAME A WHOLLY-OWNED DIRECT SUBSIDIARY OF THE
COMPANY. IMMEDIATELY PRIOR TO THE CLOSING OF THE SALE OF THE MINIMUM, THE
COMPANY INTENDS TO EFFECT A TAX-FREE SPIN-OFF TRANSACTION PURSUANT TO WHICH THE
CHAPMAN CO.'S TWO WHOLLY-OWNED SUBSIDIARIES, CHAPMAN CAPITAL MANAGEMENT, INC.
("CCM") AND THE CHAPMAN INSURANCE AGENCY INCORPORATED ("CIA"), WILL BECOME
WHOLLY-OWNED SUBSIDIARIES OF SEPARATE HOLDING COMPANIES AND THE STOCK OF SUCH
HOLDING COMPANIES WILL BE DISTRIBUTED TO THE EXISTING STOCKHOLDERS OF THE
COMPANY (THE "SPIN-OFF"). INVESTORS THAT PURCHASE SHARES IN THE OFFERING WILL
NOT RECEIVE STOCK IN EITHER HOLDING COMPANY. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE COMPANY HEREIN ASSUME COMPLETION OF THE SPIN-OFF AND THE
INFORMATION SET FORTH IN THIS PROSPECTUS GIVES 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
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THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered
Minimum: 850,000 Shares
Maximum: 1,000,000 Shares
Common Stock Outstanding
Prior to the 1,989,235 Shares
Offering:
After the Offering
Minimum: 2,839,235 Shares
Maximum: 2,989,235 Shares
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds: The Company proposes to use the net proceeds from this 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. The extent to which the Company will seek to implement
the above objectives will be determined by the total amount of
proceeds raised from the Offering. If the Minimum is sold, the
Company intends to devote a substantial amount of the net
proceeds to increase net capital as needed to participate in
corporate and public finance transactions, expand market- making
and research, implement its DEM strategy and the remainder to
sales and marketing. To the extent net proceeds in excess of the
Minimum are received, the Company expects to devote increasing
amounts to increase its net capital and the amounts of net
proceeds allocated to the other specified uses of proceeds. 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
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SUMMARY FINANCIAL DATA
The summary of financial information set forth below is derived from the
Company's audited financial statements for each of the years ended December 31,
1995 and 1996, which have been audited by Arthur Andersen LLP, independent
public accountants. The financial data for the ten months ended October 31, 1996
and 1997 have been derived from unaudited financial statements of the Company.
The unaudited financial data, in the opinion of management, includes all
adjustments, consisting of normal recurring adjustments and adjustments for
discontinued operations, necessary for the fair presentation of the financial
condition and results of operations of the Company. This information should be
read in conjunction with such financial statements, including the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenues......................................... $ 2,795,992 $ 2,887,049 $ 1,981,860 $ 2,543,820
Income from continuing operations before income tax
provision............................................ 134,446 516,338 92,336 434,807
Net income from continuing operations.................. $ 206,446 $ 350,338 $ 63,336 $ 260,907
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share:
from continuing operations........................... $ 0.09 $ 0.16 $ 0.03 $ 0.13
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding.................... 2,201,414 2,191,374 2,200,514 2,001,914
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED AS ADJUSTED
ACTUAL (1) MINIMUM(2) MAXIMUM(2)
----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities......... $ 440,428 $ 440,428 $ 6,464,436 $7,580,436
Total assets............................................. 2,818,525 1,766,518 7,790,526 8,906,526
Total long-term debt..................................... -- -- -- --
Total stockholders' equity............................... 1,225,932 1,364,921 7,388,929 8,504,929
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to the Spin-off.
(2) Pro forma as adjusted minimum and pro forma as adjusted maximum give effect
to the sale of the Minimum and Maximum, respectively, at a public offering
price of $8.00 per share less underwriting discounts, commissions and
estimated offering expenses.
5
<PAGE>
RISK FACTORS
THE SHARES INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE
SHARES 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 Shares.
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. 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
6
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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%, 16% and
13% of the Company's revenues in the ten month ended October 31, 1997, and the
years ended 1996 and 1995, 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 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
7
<PAGE>
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."
POTENTIAL CONFLICTS CAUSED BY SELF-UNDERWRITING; NEED FOR QUALIFIED INDEPENDENT
UNDERWRITER
The Chapman Co. (which is a wholly-owned subsidiary of the Company) is the
Underwriter of the Offering on a best efforts basis. As a wholly-owned
subsidiary of the Company, The Chapman Co.'s role as Underwriter may involve
certain conflicts of interest. Pursuant to the Conduct Rules of the NASD, the
Shares are being offered at a price no higher than that recommended by Ferris
Baker Watts, Incorporated, which is acting as qualified independent underwriter
(the "QIU"). Although the QIU has participated in the preparation of the
Registration Statement of which this Prospectus forms a part and is required to
exercise the usual standards of "due diligence" with respect thereto, there can
be no assurance that certain conflicts will not arise with respect to this
Offering, or if conflicts do arise, that they will be resolved in a manner
favorable to investors. See "Plan of Distribution."
ARBITRARY NEGOTIATED OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined
through negotiation between the Company and the QIU and may not be indicative of
the market price of the Common Stock after the Offering. For a discussion of the
factors considered in determining the offering price, see "Plan of
Distribution." Certain factors, such as subsequent sales of Common Stock into
the market by existing stockholders and market conditions generally, could cause
the market price of the Common Stock to fluctuate substantially. Furthermore,
there can be no assurance that the offering price will correspond to the price
at which the Common Stock will trade in the public market at any time subsequent
to the Offering. See "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The sale of the Minimum would involve immediate and substantial dilution of
$5.40 per share, or 67.5%, to investors because the net tangible book value per
share of Common Stock upon the sale of the Minimum would be substantially less
than the per share public offering price of $8.00 per share. See "Dilution."
8
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EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
As of the Minimum closing, the Company will have 2,839,235 shares of Common
Stock outstanding, of which 1,828,115 will be 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 prior to the Offering will be available
for resale in the public market, under Rule 144 promulgated pursuant to the
Securities Act, 90 days after the date of this Prospectus. Mr. Chapman has
agreed not to publicly sell any of the shares of Common Stock that he owns as of
the date of this Prospectus 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."
BEST EFFORTS NATURE OF OFFERING; UNDERWRITER HAS NO COMMITTMENT TO PURCHASE
SHARES
The Underwriter shall use its best efforts to sell the Shares; however,
there is no commitment by the Underwriter or any other person to purchase the
Shares. Consequently, the Company can give no assurance that any of the Shares
will be sold. Although the Offering will not close unless the Minimum is
achieved, the Company's ability to implement the DEM strategy and expand its
operations will be diminished to the extent less than the Maximum is sold. See
"Use of Proceeds" and "Plan of Distribution."
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, 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 Securities and Exchange Commission (the "Commission") and the NASD have
adopted stringent provisions with respect to net capital requirements applicable
to the operation of securities firms. A
9
<PAGE>
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. will beneficially own in the aggregate approximately
64.4% and 61.2% of the outstanding shares of Common Stock assuming the Minimum
and Maximum, respectively, are sold in this Offering. 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 has been 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 after the Offering. 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 following consummation of this Offering. A "market making"
prospectus is a continuously updated prospectus that is part of an effective
registration statement filed with the Securities and Exchange Commission (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 following this Offering, 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.
RISKS OF LOW PRICED STOCKS
There is currently no public market for the Company's Common Stock. The
Company has applied for quotation on the SmallCap Market; however, there can be
no assurance that the Nasdaq Stock Market will
10
<PAGE>
approve the Company's application. A summary of the current financial
requirements for initial quotation and maintenance of such quotation on the
SmallCap Market as currently in effect are set forth below:
<TABLE>
<CAPTION>
INITIAL
ATTRIBUTE QUOTATION MAINTENANCE
- --------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Net Tangible Assets
or $4,000,000 or $2,000,000 or
Market Capitalization
or $50,000,000 or $35,000,000 or
Net Income (latest
year or two of last three
years) $750,000 $500,000
Public Float (Shares) 1,000,000 500,000
Market Value of
Public Float $5,000,000 $1,000,000
Stockholders 300 300
Minimum Bid Price $4.00 $1.00
Number of Market
Makers 3 2
</TABLE>
The Company expects that at the time of the Minimum closing it will meet the
current initial quotation and maintenance requirements. However, the Offering is
not conditioned on achieving listing on the SmallCap Market, and 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. Until such time as
the Company's application is approved and the Common Stock is quoted on the
SmallCap Market, trading in the Common Stock, should a market develop, could be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's Electronic Bulletin Board.
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."
11
<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 will have broad discretion as to the application of the offering
proceeds. At the public offering price of $8.00 per share, if the Minimum is
sold, 14.9% of the net proceeds to the Company from the sale of the Shares will
be applied to general corporate purposes, such as working capital. In the event
the Maximum is sold, 14.0% of the net proceeds will be used in connection with
such general corporate purposes. 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."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares, at the public
offering price of $8.00 per share and, after deducting underwriting discounts,
commissions and estimated offering expenses, are estimated to be approximately
$6,024,000 if the Minimum is sold. In the event the Maximum is sold, net
proceeds are estimated to be approximately $7,140,000.
USE OF PROCEEDS
<TABLE>
<CAPTION>
MINIMUM PERCENT MAXIMUM PERCENT
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Expand net capital to participate in corporate & government finance
transactions..................................................... $ 2,624,000 43.6% $ 3,140,000 43.9%
Expand market-making and research capabilities..................... 500,000 8.3 600,000 8.4
Implement DEM strategy............................................. 500,000 8.3 600,000 8.4
Expand sales and marketing efforts................................. 1,000,000 16.6 1,200,000 16.8
Hire sales personnel to staff additional sales office and corporate
finance staff to implement DEM strategy.......................... 500,000 8.3 600,000 8.4
Working capital and general corporate purposes..................... 900,000 14.9 1,000,000 14.0
------------ --- ------------ ---
Totals............................................................. $ 6,024,000 100% $ 7,140,000 100%
------------ --- ------------ ---
------------ --- ------------ ---
</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 this
Offering for such purposes.
The proposed allocation of net proceeds of this 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.
13
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the pro forma net tangible book value per share of Common Stock after this
Offering constitutes dilution to purchasers of the Shares. Pro forma net
tangible book value per share is determined by dividing the pro forma net
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of Common Stock.
The pro forma net tangible book value of the Company as of October 31, 1997,
after giving effect to the Spin-off would have been $1,364,929 or $0.69 per
share of Common Stock. After giving effect to the sale of the Minimum at the
public offering price of $8.00 per Share (after deducting underwriting
discounts, commissions and estimated offering expenses) the pro forma net
tangible book value at that date would have been $7,388,929 or $2.60 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.91 per share to existing stockholders and an immediate dilution of $5.40 per
share to the purchasers of the Shares.
The following table illustrates the per share dilution effect as of October
31, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................................... $ 8.00
Pro forma net tangible book value before this Offering........................ $ 0.69
Increase attributable to new investors........................................ 1.91
---------
Pro forma net tangible book value after this Offering......................... 2.60
---------
Dilution to new investors..................................................... $ 5.40
---------
---------
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid and the average price per share paid by existing stockholders and by the
purchasers of the Shares, at the public offering price of $8.00 per share and
the sale of the Minimum:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------ ----------- -----------------
Existing stockholders............................. 1,989,235 70.1% $ 1,093,450 13.9% $ 0.55
New investors..................................... 850,000 29.9 6,800,000 86.1 8.00
---------- ----- ------------ -----
Total............................................. 2,839,235 100.0% $ 7,893,450 100.0% $ 2.78
---------- ----- ------------ ----- -----
---------- ----- ------------ ----- -----
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997, and as adjusted to give effect to the sale of the Minimum at
the public offering price of $8.00 per share and the receipt of the net proceeds
therefrom:
<TABLE>
<CAPTION>
PRO FORMA
MINIMUM
ACTUAL PRO FORMA(1) AS ADJUSTED
------------ ------------- ------------
<S> <C> <C> <C>
Long term debt......................................................... $ -- $ -- $ --
------------ ------------- ------------
Common stock--$0.001 par value; 20,000,000 shares authorized,
1,792,640(2), 1,792,640(2) and 2,839,235 shares issued and
outstanding, respectively............................................ 1,793 1,793 2,839
Additional paid-in capital............................................. 1,091,657 1,091,657 7,114,619
Retained earnings...................................................... 132,482 271,471 271,471
------------ ------------- ------------
Total stockholders' equity............................................. $ 1,225,932 $ 1,364,921 $ 7,388,929
------------ ------------- ------------
------------ ------------- ------------
Total capitalization................................................... $ 1,225,932 $ 1,364,921 $ 7,388,929
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to the Spin-off.
(2) Excludes 196,594 shares of Common Stock issued to the Company's majority
stockholder on December 22, 1997 in exchange for a warrant to purchase
common stock of The Chapman Co. owned by such stockholder.
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."
15
<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, TEN MONTHS ENDED OCTOBER 31,
---------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1996 1997
---------------------------- ---------------------------- ---------------------------- -----------
<CAPTION>
(UNAUDITED)
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS
----------- --------------- ----------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Commissions................. $ 2,475,151 88.5% $ 2,553,098 88.4% $ 1,776,898 89.6% $ 2,246,180
Underwriting and management
fees...................... 286,780 10.3% 296,757 10.3% 171,850 8.7% 268,654
Interest and dividends...... 34,061 1.2% 37,194 1.3% 33,112 1.7% 28,986
----------- ----- ----------- ------ ----------- ------ -----------
Total revenue............. 2,795,992 100.0% 2,887,049 100.00% 1,981,860 100.00% 2,543,820
----------- ----- ----------- ------ ----------- ------ -----------
EXPENSE:
Compensation and benefits... 1,259,371 45.0% 1,050,193 36.4% 813,363 41.0% 942,867
Brokerage and clearing
fees...................... 323,245 11.6% 238,027 8.2% 195,249 9.9% 237,713
Communications.............. 154,506 5.5% 164,303 5.7% 133,036 6.7% 124,117
Occupancy and equipment..... 368,863 13.2% 422,598 14.6% 328,939 16.6% 296,718
Travel and business
development............... 193,302 6.9% 177,793 6.2% 169,126 8.5% 196,511
Professional fees........... 135,090 4.8% 154,993 5.4% 109,377 5.5% 76,775
Other operating expense..... 227,169 8.1% 162,804 5.6% 140,434 7.1% 234,312
----------- ----- ----------- ------ ----------- ------ -----------
Total expense............. 2,661,546 95.1% 2,370,711 82.1% 1,889,524 95.3% 2,109,013
----------- ----- ----------- ------ ----------- ------ -----------
Income from continuing
operations................ 134,446 4.8% 516,338 17.9% 92,336 4.7% 434,807
Income tax provision........ (72,000) (2.6)% 166,000 5.7% 29,000 1.5% 173,900
----------- ----- ----------- ------ ----------- ------ -----------
Net income from continuing
operations................ 206,446 7.4% 350,338 12.1% 63,336 3.2% 260,907
Net income from discontinued
operations................ 151,249 5.4% 54,643 1.8% 31,779 1.6% 53,318
Net income.................. $ 357,695 12.8% $ 404,981 14.0% $ 95,115 4.8% $ 314,225
----------- ----- ----------- ------ ----------- ------ -----------
----------- ----- ----------- ------ ----------- ------ -----------
<CAPTION>
<S> <C>
PERCENTAGE OF
TOTAL REVENUE
---------------
<S> <C>
REVENUE:
Commissions................. 88.3%
Underwriting and management
fees...................... 10.6%
Interest and dividends...... 1.1%
-----
Total revenue............. 100.0%
-----
EXPENSE:
Compensation and benefits... 37.1%
Brokerage and clearing
fees...................... 9.3%
Communications.............. 4.9%
Occupancy and equipment..... 11.7%
Travel and business
development............... 7.7%
Professional fees........... 3.0%
Other operating expense..... 9.2%
-----
Total expense............. 82.9%
-----
Income from continuing
operations................ 17.1%
Income tax provision........ 6.8%
-----
Net income from continuing
operations................ 10.3%
Net income from discontinued
operations................ 2.1%
Net income.................. 12.4%
-----
-----
</TABLE>
16
<PAGE>
TEN MONTHS ENDED OCTOBER 31, 1997 COMPARED TO TEN MONTHS ENDED OCTOBER 31, 1996.
Total revenue for the ten months ended October 31, 1997 increased by
$561,960, or 28.4%, to $2,543,820 from $1,981,860 for the prior comparable
period. Revenue increased in each of the Company's three major business areas
during the ten months ended October 31, 1997.
Commission revenue increased by $469,282, or 26.4%, to $2,246,180 for the
ten months ended October 31, 1997 from $1,776,898 for the prior comparable
period. The increase was due to an increase in sales volume from the Company's
existing clients, an increase in the number of clients resulting from the
Company's business development activity and the strong investment market. The
Company's institutional business increased by $374,800, or 57.6%, to $1,026,000
for the ten months ended October 31, 1997 from $651,200 for the prior comparable
period.
Underwriting and management fees increased by $96,804, or 56.3%, to $268,654
for the ten months ended October 31, 1997 from $171,850 for the prior comparable
period. The increase was primarily due to fees earned by the Company in a single
corporate finance underwriting managed by the Company. The number of municipal
finance underwriting syndicates in which the Company participated as a
co-manager increased during the ten months ended October 31, 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 the ten months ended October 31, 1997 increased by
$219,489, or 11.6%, to $2,109,013 from $1,889,524 for the prior comparable
period. Total expenses decreased to 82.9% of total revenue for the ten months
ended October 31, 1997 from 95.3% of total revenue for the prior comparable
period.
Compensation and benefits increased by $129,504, or 15.9%, to $942,867 for
the ten months ended October 31, 1997 from $813,363 for the prior comparable
period. As a percentage of total revenue, these expenses decreased to 37.1% for
the ten months ended October 31, 1997 from 41.0% for the prior comparable
period. The compensation expense portion of compensation and benefits increased
by 18% for the ten months ended October 31, 1997. Compensation expense consists
primarily of sales commissions paid to brokers on the sale of securities and
varies in relation to changes in commission revenue. Commissions paid to brokers
as a percentage of compensation expense increased to 30% for the ten months
ended October 31, 1997 from 24% for the prior comparable period. This percentage
increase accounted for the majority of the increase in compensation and benefits
in the ten months ended October 31, 1997.
Brokerage and clearing fees increased by $42,464, or 21.7%, to $237,713 for
the ten months ended October 31, 1997 from $195,249 for the prior comparable
period. This increase is attributable to the increase in both sales volume to
existing clients and in the number of clients.
Communications expense decreased by $8,919, or 6.7%, to $124,117 for the ten
months ended October 31, 1997 from $133,036 for the prior comparable period.
This decrease was primarily attributable to a change in telephone service
providers.
Occupancy and equipment expense decreased by $32,221, or 9.8%, to $296,718
for the ten months ended October 31, 1997 from $328,939 for the prior comparable
period, due to a reduction of rental overhead allocated to the Company.
Travel and business development expense increased by $27,385, or 16.2%, to
$196,511 for the ten months ended October 31, 1997 from $169,126 for the prior
comparable period, due to increased travel and promotional activities.
Professional fees decreased by $32,602, or 29.8%, to $76,775, for the ten
months ended October 31, 1997 from $109,377 for the prior comparable period. The
Company incurred professional fees in connection with a proposed financing in
each period.
17
<PAGE>
Other operating expense increased by $93,878, or 66.8%, to $234,312 for the
ten months ended October 31, 1997 from $140,434 for the prior comparable period.
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 $144,900, or 499.7%, to
$173,900 for the ten months ended October 31, 1997 from $29,000 for the prior
comparable period. This increase was due to increased income during the ten
months ended October 31, 1997 and 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.
Net income from continuing operations increased by $197,571, or 311.9%, to
$260,907 for the ten months ended October 31, 1997 from $63,336 for the prior
comparable period.
Net income from discontinued operations increased by $21,539, or 67.8%, to
$53,318 for the ten months ended October 31, 1997 from $31,779 for the prior
comparable period due primarily to increased assets under management for CCM,
the Company's former investment advisor subsidiary.
Net income increased by $219,110, or 230.4%, to $314,225 for the ten months
ended October 31, 1997 from $95,115 for the prior comparable period.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995.
Total revenue for 1996 increased by $91,057, or 3.3%, to $2,887,049 from
$2,795,992 for 1995. This increase is primarily due to an increase in commission
revenue of $77,947 for 1996 versus 1995.
Commissions increased by $77,947, or 3.1%, to $2,553,098 for 1996 from
$2,475,151 for 1995. This increase reflects continued improvement in market
conditions and the effect of an increase in the number of institutional
commission clients.
Underwriting and management fees increased by $9,977, or 3.5%, to $296,757
for 1996 from $286,780 for 1995. This increase reflects an increase in revenue
from municipal financial advisory services.
Total expense for 1996 decreased by $290,775, or 10.9%, to $2,370,771 from
$2,661,546 for 1995. Total expenses decreased to 82.1% of total revenue for 1996
as compared to 95.1% of total revenue for 1995.
Compensation and benefits decreased by $209,178, or 16.6%, to $1,050,193 for
1996 from $1,259,371 for 1995. As a percent of total revenue, these expenses
decreased to 36.4% in 1996 from 45.0% in 1995. The decrease in compensation and
benefits is primarily attributable to the Company's reduced use of temporary
employment services.
Brokerage and clearing fees decreased by $85,218, or 26.4%, to $238,027 for
1996 from $323,245 for 1995. Although the volume of fixed income securities
transactions remained relatively constant in 1996 as compared to 1995, brokerage
and clearing fees decreased due to a relative increase in the percentage of
fixed income transactions pertaining to securities that carry a lower clearing
charge.
Communication expense increased by $9,797, or 6.3%, to $164,303 for 1996
from $154,506 for 1995, reflecting an increase in long distance charges as a
result of the Company's efforts to increase its institutional commission
revenue.
Occupancy and equipment expense increased by $53,735, or 14.6%, to $422,598
for 1996 from $368,863 for 1995, reflecting the opening of the Company's sales
offices in Pennsylvania and Texas.
Travel and business development expense decreased by $15,509, or 8.0%, to
$177,793 for 1996 from $193,302 for 1995, reflecting better planning of travel
expenditures and a reduction of non-sales related travel and business
expenditures.
Professional fees increased by $19,903, or 14.7%, to $154,993 for 1996 from
$135,090 for 1995. This increase was primarily related to a proposed financing
which was postponed.
18
<PAGE>
Other expense decreased by $64,365, or 28.3%, to $162,804 for 1996 from
$227,169 for 1995 reflecting a decrease in advertising, printing and promotional
expense.
Income taxes from continuing operations increased in 1996 by $238,000 to
$166,000 from an income tax benefit of $72,000 in 1995. The increase was
attributable to the increase in income from continuing operations during 1996
and the income tax benefit recognized in 1995 from a reduction in a valuation
reserve related to the utilization of a net operating loss carryforward.
Net income from continuing operations increased by $143,892, or 69.7%, to
$350,338 for 1996 from $206,446 for 1995.
Net income from discontinued operations decreased by $96,606, or 63.9%, to
$54,643 for 1996 from $151,249 for 1995 due primarily to a change in accounting
principal for income taxes as partially offset by increased assets under
management for CCM, the Company's former investment advisor subsidiary.
Net income increased by $47,286, or 13.2%, to $404,981 for 1996 from
$357,695 for 1995.
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 for the ten
months ended October 31, 1997 and 1996, were $2,818,525 and $2,798,356,
respectively.
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 positions for the
fiscal year ended December 31, 1996 and the ten months ended October 31, 1997
were $426,067 and $496,653, respectively, which were $326,067 and $396,688,
respectively, in excess of the Company's minimum net capital requirement. See
"Business--Government Regulation."
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 following
this Offering.
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. Based upon these reviews, to take advantage of
strong market conditions and to fully implement the Company's DEM strategy, the
Company believes it will require increased net capital provided by the proceeds
of this Offering. The Company believes that its capital structure is adequate
for current operations.
The Company's cash and cash equivalents were $271,122 as of October 31, 1997
compared to $497,758 as of December 31, 1996. The decrease in cash and cash
equivalents was primarily due to the use of $217,500 to repurchase common stock
of The Chapman Co.
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.
19
<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
------------------------ TEN MONTHS ENDED
1995 1996 OCTOBER 31, 1997
----- ----- ---------------------
<S> <C> <C> <C>
TYPE OF REVENUE
Commissions.................................................................. 89% 89% 88%
Underwriting and management fees............................................. 10 10 11
Interest and dividends....................................................... 1 1 1
--- --- ---
Total revenue............................................................ 100% 100% 100%
--- --- ---
--- --- ---
SOURCE OF REVENUE
Brokerage business........................................................... 42% 30% 39%
Secondary market trading..................................................... 28 43 28
Corporate finance............................................................ 18 19 17
Government finance........................................................... 11 7 15
Interest and dividends....................................................... 1 1 1
--- --- ---
Total revenue............................................................ 100% 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
42%, 30% and 39% of the Company's revenue during 1995, 1996 and the ten months
ended October 31, 1997, 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 28%,
20
<PAGE>
43% and 28% of the Company's revenue during 1995, 1996 and the ten months ended
October 31, 1997, respectively, was derived from secondary market trading.
As of October 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 1995, 1996 and the ten months ended October 31, 1997, approximately 18%,
19% and 17%, 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 1995, 1996 and the ten months ended October 31, 1997, approximately
11%, 7% and 15%, 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 has 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. The Company believes
its ability to participate in government agency debt offerings has been limited
by its capital position.
STRATEGY
With the net proceeds of this 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 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.
21
<PAGE>
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 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 this 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 this 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 40% 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
22
<PAGE>
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.
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 October 31, 1997, the Company had approximately $1.5 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 year ending December 31,
1996 and for the ten months ended October 31, 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
Securities and Exchange Commission (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
23
<PAGE>
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.
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 Securities and Exchange Commission (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 October 31, 1997, the Company had net capital and a net
capital requirement of $496,653 and $100,000, respectively. The Company's net
capital ratio was 0.47-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 subsidiaries 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 subsidiaries, 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 render 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.
24
<PAGE>
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, 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 October 31, 1997, the Company had 25 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."
25
<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 three 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.
26
<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.
27
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of December 31, 1997, and
assuming the Minimum and Maximum are sold in the Offering, 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>
PERCENT OF CLASS
-------------------------------------
NAME AND ADDRESS OF AMOUNT AND NATURE OF DECEMBER
BENEFICIAL OWNER BENEFICIAL OWNERSHIP 30, 1997 MINIMUM MAXIMUM
- -------------------------------------------------- -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr............................. 1,828,115 shares 91.9% 64.4% 61.2%
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 92.3% 64.7% 61.5%
Officers as a Group
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of Common Stock.
28
<PAGE>
CERTAIN TRANSACTIONS
On or before the closing of the sale of the Minimum, the Company intends to
effect the Spin-off pursuant to which The Chapman Co.'s two wholly-owned
subsidiaries, CCM and CIA, will become wholly-owned subsidiaries of separate
holding companies and the stock of such holding companies will be distributed to
the existing stockholders of the Company. Investors that purchase Shares in the
Offering will 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.
29
<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.
30
<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 1,989,235 shares of Common
Stock issued and outstanding, held of record by 19 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, and
the Common Stock to be outstanding upon completion of this Offering will be,
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.
Pursuant to the Underwriting Agreement the Company has agreed to indemnify
the Underwriter and the Underwriter has agreed to indemnify the Company and its
directors, officers and controlling persons against certain civil liabilities
that may be incurred in connection with this Offering, including certain
liabilities under the Securities Act. Pursuant to the QIU Agreement, the Company
has also agreed to indemnify the QIU for liabilities in connection with the
Offering.
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
31
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no trading market for the Common
Stock. Although the Company will apply for quotation of the Common Stock 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 after the Offering.
The 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." There can be no assurance
that the public offering price will correspond to the price at which the Common
Stock will trade in the public market subsequent to the Offering.
As of the date of the Minimum closing, the Company will have a minimum of
2,839,235 shares of Common Stock outstanding, of which 1,828,115 will be owned
by Nathan A. Chapman, Jr. The Company is offering up to a Maximum of 1,000,000
Shares and, accordingly, upon sale of the Maximum, the Company will have
outstanding 2,989,235 shares of Common Stock. All shares acquired in this
Offering, other than shares that may be acquired by "affiliates" of the Company
as defined by Rule 144 under the Securities Act, will be 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 December 31, 1997, Mr. Chapman beneficially owns 1,828,115 shares of
Common Stock or approximately 64.4% and 61.2% of the Company's outstanding
Common Stock assuming the sale of the Minimum and Maximum, respectively. 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 1,161,120 shares
of Common Stock or approximately 38.8% of the Company's outstanding Common Stock
may be eligible for sale following the Offering 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
The Company is offering up to a Maximum of 1,000,000 Shares. The Shares will
be offered on a "best-efforts" basis by the Underwriter, The Chapman Co., acting
as the exclusive dealer-manager solely on an agency basis. The Offering has an
aggregate Minimum of 850,000 Shares. The Termination Date of the Offering is on
the earlier to occur of: the date selected by the Company; the date of the sale
of the Maximum; or, if the Minimum is not sold, 180 days after the date of this
Prospectus, unless extended by the Company for one or more additional periods
not to exceed an additional 30 days in the aggregate. All proceeds from
subscriptions will be deposited promptly into an escrow account with UMB Bank,
N.A. as escrow agent. Funds will be transmitted to the escrow agent for deposit
into the escrow account no later
32
<PAGE>
than noon of the business day following receipt. All checks must be made payable
to "UMB Bank, N.A., as escrow agent for Chapman Holdings, Inc." If the Minimum
is not sold by the Termination Date, all funds will be returned promptly to
investors without deduction or interest. During the escrow period, investors who
purchase Shares will not be entitled to a refund of their payments. If the
Minimum is sold before the Termination Date, a Minimum closing will be held at
the offices of the Company. At such Minimum closing, the funds in escrow will be
released to the Company and the investors will become stockholders of the
Company.
The minimum investment requirement is 100 Shares. Investors who purchase
Shares must pay for the Shares by the third business day following the date of
the confirmation of their purchase of such Shares. Investors should consult
their brokers concerning the manner and method of payment for the Shares. The
Company and the Underwriter reserve the right to withdraw, cancel or modify the
Offering with respect to any specific Shares without notice prior to the closing
of the sale of such Shares and to reject any order in whole or in part in the
exercise of their sole discretion.
Prior to this Offering, there has been no public market for the Common
Stock. An application has been made to have the Common Stock quoted on the
SmallCap Market. There can be no assurance that the Common Stock will qualify
for initial quotation on the SmallCap Market or that, if achieved, such
quotation will be maintained. See "Risk Factors--No Prior Market" and "--Risks
of Low Prices Stocks."
Pursuant to the Conduct Rules of the NASD, when a member of the NASD, such
as The Chapman Co., participates in the public distribution of its own or an
affiliate's securities, the public offering price can be no higher than
recommended by a qualified independent underwriter. In accordance with this
requirement, the QIU, Ferris Baker Watts, Incorporated, has agreed to recommend
an initial public offering price for the Shares. As part of its compliance with
Rule 2720 of the NASD's Conduct Rules, the QIU has participated in the
preparation of the Registration Statement of which this Prospectus forms a part
and has performed "due diligence" with respect thereto.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined by
negotiation between the Company and the QIU. The factors considered in
determining the offering price were prevailing market and economic conditions,
the Company's revenue and earnings, estimates of its business operations, an
assessment of its management, the consideration of these factors in relation to
the market valuation of comparable companies in related businesses and the
current condition of the markets in which the Company operates.
The Shares will be offered directly to the public at the public offering
price set forth on the cover of this Prospectus. The Underwriter will be paid a
management fee of $0.12 per Share sold. In addition, the Underwriter and any
other broker-dealer participating in the selling group will be paid a commission
not in excess of $0.27 per Share sold. For acting as a qualified independent
underwriter, the QIU will receive fees equal to the greater of $100,000 or $0.17
per Share sold.
Both the Underwriter and the QIU will be reimbursed their counsel fees and
for their out-of-pocket expenses and will receive fees as described above. In
the QIU Agreement, the Company has agreed to indemnify the QIU (and their
controlling persons) with respect to certain liabilities, including liabilities
under the Securities Act.
The Underwriter has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and the QIU Agreement and does not purport to be complete. Reference
is made to the foregoing documents which are on file as exhibits to the
Registration Statement of which this Prospectus is a part.
33
<PAGE>
TRANSFER AGENT, ESCROW AGENT AND REGISTRAR
The transfer agent, escrow 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. The Underwriter has not been
separately represented by counsel in this Offering. Whiteford, Taylor & Preston
L.L.P. has acted as counsel for the QIU in connection with this Offering.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Prospectus 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 Securities and Exchange Commission (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 this 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.
34
<PAGE>
CHAPMAN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index...................................................................................................... F-1
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1996 and October 31, 1997 (unaudited).................................... F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... F-4
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and for the
Ten Months Ended October 31, 1997 (unaudited)............................................................ F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... 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 balance sheet of Chapman Holdings, Inc. and
Subsidiaries (a Maryland corporation) as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Chapman Holdings, Inc. and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
January 31, 1997, except for notes 2 and 3
as to which are dated December 29, 1997
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
--------------------------
<S> <C> <C>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................................... $ 497,758 $ 271,122
Cash deposits with clearing organization........................................... 35,000 35,000
Investments available for sale..................................................... 157,500 169,306
Receivables from brokers and dealers............................................... 93,560 278,999
Receivables from affiliates........................................................ 200 1,649
Receivables from discontinued operations........................................... 682,643 763,367
Advances to officer/employee....................................................... 109,673 156,204
Office equipment, net.............................................................. 7,558 17,343
Prepaids and other assets.......................................................... 57,008 73,528
Net assets from discontinued operations............................................ 1,157,456 1,052,007
------------ ------------
Total assets..................................................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses.............................................. $ 92,968 $ 81,089
Accrued compensation............................................................... 76,371 70,123
Deferred rent...................................................................... 89,048 89,048
Payable to affiliated partnership.................................................. 59,076 --
Income taxes payable............................................................... 150,341 161,337
Net liabilities from discontinued operations....................................... 1,201,345 1,190,996
------------ ------------
Total liabilities................................................................ 1,669,149 1,592,593
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 1,944,890 and
1,792,640 shares issued and outstanding, respectively............................ 1,945 1,793
Additional paid-in capital......................................................... 1,309,005 1,091,657
(Accumulated deficit) retained earnings............................................ (181,743) 132,482
------------ ------------
Total stockholders' equity....................................................... 1,129,207 1,225,932
------------ ------------
Total liabilities and stockholders' equity....................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions............................................ $ 2,475,151 $ 2,553,098 $ 1,776,898 $ 2,246,180
Underwriting and management fees....................... 286,780 296,757 171,850 268,654
Interest and dividends................................. 34,061 37,194 33,112 28,986
------------ ------------ ------------ ------------
Total revenue........................................ 2,795,992 2,887,049 1,981,860 2,543,820
------------ ------------ ------------ ------------
EXPENSE:
Compensation and benefits.............................. 1,259,371 1,050,193 813,363 942,867
Floor brokerage and clearing fees...................... 323,245 238,027 195,249 237,713
Communications......................................... 154,506 164,303 133,036 124,117
Occupancy, equipment rental, and depreciation.......... 368,863 422,598 328,939 296,718
Travel and business development........................ 193,302 177,793 169,126 196,511
Professional fees...................................... 135,090 154,993 109,377 76,775
Other operating expense................................ 227,169 162,804 140,434 234,312
------------ ------------ ------------ ------------
Total expense........................................ 2,661,546 2,370,711 1,889,524 2,109,013
------------ ------------ ------------ ------------
Income from continuing operations before income tax
provision.......................................... 134,446 516,338 92,336 434,807
INCOME TAX PROVISION (Notes 1 and 5)..................... (72,000) 166,000 29,000 173,900
------------ ------------ ------------ ------------
Income from continuing operations.................... 206,446 350,338 63,336 260,907
INCOME FROM DISCONTINUED OPERATIONS, net of income taxes
of $89,000, $44,000, $36,400 and $35,000,
respectively........................................... 151,249 54,643 31,779 53,318
------------ ------------ ------------ ------------
Net income........................................... $ 357,695 $ 404,981 $ 95,115 $ 314,225
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME PER SHARE DATA:
Income from continuing operations...................... $ 0.09 $ 0.16 $ 0.03 $ 0.13
Income from discontinued operations.................... 0.07 0.02 0.01 0.03
------------ ------------ ------------ ------------
Net income........................................... $ 0.16 $ 0.18 $ 0.04 $ 0.16
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average share outstanding....................... 2,201,414 2,191,374 2,200,514 2,001,914
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
SUBSCRIBED STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... $ 4,000 $ 2,005 $ 1,492,045 $ (944,419) $ 553,631
Net income................................... -- -- -- 357,695 357,695
Purchase of 5,780 shares of stock............ -- (6) (104,994) -- (105,000)
Redemption of 5,600 shares of stock.......... -- (6) 6 -- --
Issuance of 8,220 shares of stock............ -- 8 149,392 -- 149,400
Issuance of 4,000 shares of stock
subscribed................................. (4,000) 4 3,996 -- --
----------- ----------- ------------ ------------ ------------
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................................... -- -- -- 314,225 314,225
Purchase of 152,250 shares of stock.......... -- (152) (217,348) -- (217,500)
----------- ----------- ------------ ------------ ------------
BALANCE, October 31, 1997 (unaudited).......... $ -- $ 1,793 $ 1,091,657 $ 132,482 $1,225,932
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
------------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----------- ------------ ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............................................................ $ 357,695 $ 404,981 $ 95,115 $ 314,225
Adjustments to reconcile net income to net cash provided by operating
activities-
Changes in assets and liabilities-
Decrease (increase) in receivables from brokers and dealers......... 19,745 12,808 (52,940) (185,439)
Increase in receivables from affiliates............................. (19,233) (165) (482) (1,449)
Increase in receivables from discontinued operations................ (129,097) (338,354) (449,409) (80,724)
Increase in advances to officer/employee............................ (67,686) (19,656) (64,883) (46,531)
Decrease (increase) in income taxes receivable...................... 21,058 -- (6,186) --
Decrease (increase) in prepaids and other assets.................... 136 17,713 (4,669) (16,520)
(Increase) decrease in net assets from discontinued operations...... (296,365) (790,668) (280,840) 105,449
Decrease in payable to clearing organization........................ (18,349) (11,261) (11,261) --
(Decrease) increase in accounts payable and accrued expenses........ (6,224) (5,334) 59,450 (11,879)
(Decrease) increase in accrued compensation......................... (23,209) 24,524 (30) (6,248)
Increase in deferred rent........................................... 60,782 -- -- --
Increase (decrease) in payable to affiliated partnership............ -- 19,692 12,432 (59,076)
Increase (decrease) in income taxes payable......................... 10,000 140,341 58,465 10,996
Decrease in interest payable on subordinated debt................... (4,704) -- -- --
Increase (decrease) in net liabilities from discontinued
operations........................................................ 240,228 788,286 585,238 (10,349)
----------- ------------ ----------- -----------
Net cash provided by (used by) operating activities................. 144,777 242,907 (60,000) 12,455
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment, net..................................... (12,163) (2,150) (2,150) (9,785)
Investment in affiliate............................................... (3,005) 3,000 3,000 --
Purchase of investments............................................... -- (147,500) (147,500) (11,806)
----------- ------------ ----------- -----------
Net cash used in investing activities............................... (15,168) (146,650) (146,650) (21,591)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock..................................................... 149,400 -- -- --
Purchase of stock..................................................... (105,000) (231,500) (17,860) (217,500)
Repayment of subordinated loan........................................ (64,152) -- -- --
----------- ------------ ----------- -----------
Net cash provided by (used in) financing activities................. (19,752) (231,500) (17,860) (217,500)
----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 109,857 (135,243) (224,510) (226,636)
CASH AND CASH EQUIVALENTS,
beginning of year/period.............................................. 523,144 633,001 633,001 497,758
----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year/period.................................................... $ 633,001 $ 497,758 $ 408,491 $ 271,122
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Chapman Holdings, Inc. (the "Company") provides securities brokerage and
investment banking services. The Company, formed subsequent to October 31, 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, wholly-owned
subsidiaries of Chapman, will be spun off from the Company 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.
USE OF ESTIMATES
The accompanying 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. While
actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
INTERIM FINANCIAL STATEMENTS
The financial statements for the ten months ended October 31, 1996 and 1997,
are unaudited, but, in the opinion of management, such financial statements have
been presented on the same basis as the audited financial statements for the
year ended December 31, 1996. These financial statements include all
adjustments, consisting of normal recurring adjustments and adjustments for the
spin off of CIA and CCM, necessary for a fair presentation of the financial
position and results of operations and cash flows for these periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are primarily invested in money market funds.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Investments as of December 31, 1996, and October 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 balance sheets for cash and cash
equivalents, receivables, accounts payable and accrued expenses approximate fair
value.
EARNINGS PER SHARE
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. The weighted average shares outstanding is calculated as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Common stock.................................................. 2,004,820 1,994,780 2,003,920 1,805,320
Dilutive effect of warrants outstanding..................... 196,594 196,594 196,594 196,594
---------- ---------- ---------- ----------
2,201,414 2,191,374 2,200,514 2,001,914
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Subsequent to October 31, 1997, a warrant outstanding to acquire shares of
Chapman stock was exchanged for 196,594 shares of the Company's common stock.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which becomes effective December 15, 1997, and which early
adoption is not permitted. Under SFAS No. 128, a company would 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 adoption of this pronouncement will require
restatement of all prior periods presented. The adoption of this pronouncement
will not have a material effect on earnings per share.
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
becomes effective December 15, 1997. Under SFAS No. 131, a company would
disclose certain information about the operating segments in the 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
does not expect the adoption of this pronouncement to have a material effect on
its financial statement presentation from adopting this pronouncement.
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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 more quickly 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, 1996 and October 31,
1997, accumulated depreciation was $10,520 and $13,835, respectively.
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 filed
consolidated Federal tax returns on a cash basis for the years ended December
31, 1996 and 1995.
The Company has calculated income taxes allocated to the subsidiaries
accounted for on a discontinued operations basis on a stand-alone basis as if
the subsidiaries had to provide for income taxes not as a part of the
consolidated group.
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 costs
related to starting the trust. These amounts, net of accumulated amortization,
are included in net assets from discontinued operations in the accompanying
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 the sale of the minimum number of shares to be sold in the IPO, the Company
intends to effect a tax-free spin-off transaction which Chapman's two
wholly-owned subsidiaries, CCM and CIA, will become wholly-owned subsidiaries of
separate holding companies and the stock of such holding 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 balance sheets and
statements of operations as assets and liabilities from discontinued operations
and income from discontinued operations, respectively.
Assets and liabilities as of December 31, 1996 and October 31, 1997 of the
operations to be spun off are listed below:
<TABLE>
<CAPTION>
OCTOBER 31,
DECEMBER 31, 1996 1997
----------------- ---------------
<S> <C> <C>
(UNAUDITED)
Cash and cash equivalents................................ $ 8,196 $ 109,793
Management and underwriting receivables.................. 186,373 163,021
Related party receivables................................ 24,414 31,363
Office equipment, net.................................... 3,936 5,872
Prepaids and other assets, net........................... 934,537 741,958
----------------- ---------------
$ 1,157,456 $ 1,052,007
----------------- ---------------
----------------- ---------------
Accounts payable and accrued expenses.................... 73,702 202,629
Due to officer........................................... 145,000 75,000
Due to parent company.................................... 682,643 763,367
Non-compete agreement payable............................ 300,000 150,000
----------------- ---------------
$ 1,201,345 $ 1,190,996
----------------- ---------------
----------------- ---------------
</TABLE>
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
3. CAPITAL STOCK:
The common stock activity included in the accompanying 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 stated 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 $209,049, $209,052, $174,210 and $174,210 for the years ended December 31,
1995 and 1996, and for the ten months ended October 31, 1996 and 1997,
respectively. The aggregate minimum future annual rental for the following
fiscal years ending December 31 is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 209,052
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. 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
for the years ended December 31, 1995 and 1996, and $98,460 for the ten months
ended October 31, 1996 and 1997. As of December 31, 1996, and October 31, 1997,
$59,076 and $-0-, respectively, was payable to the Partnership.
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 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. As of October 31, 1997, the Company has approximately $1.2 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.
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
5. INCOME TAXES:
As of December 31, 1996, there was a deferred tax liability of approximately
$32,000 related to the Company being on the cash basis of accounting for income
tax purposes. For the years ended December 31, 1995 and 1996, the tax provision
of $147,000 and $259,000, respectively, is net of a reduction in the valuation
reserve of $130,000 and $49,000, respectively, 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, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Statutory tax (at 34% rate).......................................... $ 127,000 $ 209,000
Effect of state income taxes......................................... 18,000 34,500
Effect of permanent book to tax differences.......................... 2,000 15,500
Reduction in valuation reserve....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The components of the income tax provision for the years ended December 31,
1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current.............................................................. $ 82,000 $ 169,000
Deferred............................................................. (24,000) 33,000
Discontinued operations.............................................. 89,000 57,000
Reduction in valuation service....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The Company's tax rate for the ten months ended October 31, 1996 and 1997,
was management's estimate based on the effective tax rate for the years ended
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), Chapman is required to maintain
net capital, as defined, of not less than $100,000 and a ratio of aggregate
indebtedness to net capital, as defined, not to exceed 15 to 1. As of December
31, 1996, the Chapman had excess net capital of $326,067 and a ratio of
aggregate indebtedness to net capital of 0.7 to 1.0.
Chapman is subject to compliance with various SEC and National Association
of Securities Dealers, Inc. ("NASD") regulations. Also, the NASD periodically
reviews Chapman's records and procedures for compliance with its requirements.
Any acts of noncompliance may subject Chapman to fines and other punitive
remedies, and may significantly effect the Company's ability to operate.
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
7. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1995 and
1996, and for the ten months ended October 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid-
Interest........................................................... $ 20,132 $ 86,616 $ 85,462 $ 9,341
Income taxes....................................................... -- 5,000 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 1995, and the ten months ended
October 31, 1997.
9. RELATED PARTY TRANSACTIONS:
Chapman served as the underwriter for DEM, Inc. ("DEM-TM-"), a registered
non-diversified closed-ended management investment company. CCM provides
investment advisory and administrative services to DEM-TM- under an investment
advisory and administrative services agreement which sets forth the services to
be provided and the fees to be charged. In 1995, Chapman 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 FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Included in continuing operations................................ $ 354,679 $ 455,000 $ 140,000 $ 368,000
Included in discontinued operations.............................. -- 53,041 43,605 108,525
---------- ---------- ---------- ----------
$ 354,679 $ 508,041 $ 183,605 $ 476,525
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
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, 1996, and October 31, 1997, the Company had outstanding
advances to its majority stockholder and other employees of $129,000 and
$173,881, respectively, of which $19,327 and $29,327, respectively, is included
in discontinued operations.
F-13
<PAGE>
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<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING 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 BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR 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................................. 13
Dilution........................................ 14
Capitalization.................................. 15
Dividend Policy................................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business........................................ 20
Management...................................... 26
Principal Stockholders.......................... 28
Certain Transactions............................ 29
Description of Capital Stock.................... 31
Shares Eligible for Future Sale................. 32
Plan of Distribution............................ 32
Transfer Agent and Registrar.................... 34
Legal Matters................................... 34
Experts......................................... 34
Additional Information.......................... 34
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL MARCH 21, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
MINIMUM 850,000 SHARES
MAXIMUM 1,000,000 SHARES
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
FEBRUARY 24, 1998
- --------------------------------------------------------------------------------
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