<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999 OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-23587
CHAPMAN HOLDINGS, INC.
(Name of small business issuer in its charter)
MARYLAND 52-206977
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation)
401 EAST PRATT STREET, 28TH FLOOR, BALTIMORE, MARYLAND 21202
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(Address of Principal Executive Office)
Issuer's telephone number, including area code: (410) 625-9656
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes [X ]No [ ]
Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
----------------------------------------
(Title of Class)
As of August 10, 1999, 2,953,622 shares of the issuer's common stock, par value
$0.001 per share, were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
PART I...................................................................... 1
ITEM 1 FINANCIAL STATEMENTS......................................... 1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 9
PART II.....................................................................17
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS....................17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.............................17
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The consolidated financial statements for the six months ended June 30,
1999 have not been audited but, in the opinion of management, contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position and results of operations of the Company
as of such date and for such periods. The unaudited consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto appearing in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998. The results
of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1999 or any future periods.
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998, AND JUNE 30, 1999
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents .................................. $ 3,090,000 $ 1,853,000
Cash deposits with clearing organization ................... 2,389,000 2,769,000
Investments ................................................ 204,000 239,000
Securities owned ........................................... 2,080,000 2,240,000
Receivables from brokers and dealers ....................... 331,000 731,000
Receivables from affiliates ................................ 380,000 93,000
Income taxes receivable .................................... 294,000 298,000
Advances to officer/employee ............................... 657,000 747,000
Fixed assets, net .......................................... 38,000 105,000
Prepaids and other assets .................................. 583,000 574,000
Intangible assets .......................................... 145,000 124,000
Deferred tax asset ......................................... 14,000 114,000
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Total assets ......................................... $ 10,205,000 $ 9,887,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses ...................... $ 261,000 $ 363,000
Margin loan payable ........................................ 2,559,000 2,415,000
Accrued compensation ....................................... 243,000 335,000
Deferred rent .............................................. 78,000 56,000
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Total liabilities .................................... 3,141,000 3,169,000
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized,
2,953,622 shares issued and outstanding ................ 3,000 3,000
Additional paid-in capital ................................. 7,903,000 7,903,000
Accumulated deficit ........................................ (842,000) (1,188,000)
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Total stockholders' equity .......................... 7,064,000 6,718,000
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Total liabilities and stockholders' equity .......... $ 10,205,000 $ 9,887,000
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</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------
1998 1999 1998 1999
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<S> <C> <C> <C> <C>
REVENUE:
Commissions $ 458,000 $ 1,134,000 $ 1,160,000 $ 2,348,000
Underwriting and management fees 96,000 317,000 143,000 379,000
Interest and dividends 110,000 50,000 166,000 105,000
Gain (loss) on trading -- (83,000) -- 309,000
----------- ----------- ----------- -----------
Total revenue 664,000 1,418,000 1,469,000 3,141,000
----------- ----------- ----------- -----------
EXPENSE:
Compensation and benefits 424,000 824,000 771,000 1,585,000
Floor brokerage and clearing fees 111,000 168,000 200,000 354,000
Communications 43,000 68,000 88,000 132,000
Occupancy, equipment rental, and
depreciation 102,000 158,000 194,000 329,000
Travel and business development 64,000 132,000 98,000 211,000
Professional fees 23,000 200,000 58,000 431,000
Other operating expense 105,000 315,000 174,000 540,000
----------- ----------- ----------- -----------
Total expense 872,000 1,865,000 1,583,000 3,582,000
----------- ----------- ----------- -----------
Loss from continuing operations
before income tax benefit (208,000) (447,000) (114,000) (441,000)
INCOME TAX BENEFIT (78,000) (97,000) (40,000) (95,000)
----------- ----------- ----------- -----------
Net loss $ (130,000) $ (350,000) $ (74,000) $ (346,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTIVE EARNINGS PER
SHARE DATA:
Net loss $ (.04) $ (.12) $ (.03) $ (.12)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding . 2,954,000 2,954,000 2,632,000 2,954,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
1998 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,000) $ (346,000)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation/amortization expense -- 29,000
Gain on securities owned -- (309,000)
Deferred tax assets -- (99,000)
Effect from changes in assets and liabilities-
Deposits with clearing organization (9,000) (380,000)
Receivables from brokers and dealers 215,000 (400,000)
Receivables from affiliates (163,000) 287,000
Receivables from affiliated company 103,000 --
Income tax receivable -- (4,000)
Advances to officer/employee (33,000) (90,000)
Prepaids and other assets (286,000) 9,000
Net assets from discontinued operations 6,000 --
Accounts payable and accrued expenses 93,000 102,000
Accrued compensation 59,000 92,000
Deferred rent (5,000) (22,000)
Payable to affiliated partnership 10,000 --
Income taxes payable (69,000) --
----------- -----------
Net cash used in operating activities (153,000) (1,131,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (3,000) (75,000)
Purchase of investments (32,000) (35,000)
Advances to officer/employee (386,000) --
Other assets (50,000) --
Proceeds from sale of investments -- 4,000
----------- -----------
Net cash used in investing activities (471,000) (106,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 6,812,000 --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 6,188,000 (1,237,000)
CASH AND CASH EQUIVALENTS, beginning of period 211,000 3,090,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,399,000 $ 1,853,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Chapman Holdings, Inc. provides securities brokerage and investment banking
services. The accompanying unaudited consolidated financial statements include
the accounts of Chapman Holdings, Inc. (CHI) and its wholly owned subsidiary,
The Chapman Co. (collectively, the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements are presented on the accrual
basis of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the three and six months ended June
30, 1998 and 1999, are unaudited, but in the opinion of management, such
financial statements have been presented on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations, for the periods.
As permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financial statements do not include all disclosures
normally included with audited consolidated financial statements, and
accordingly, should be read in conjunction with the consolidated financial
statements and notes thereto as of December 31, 1998, included in the Company's
Form 10K-SB filed. The results of operations presented in the accompanying
consolidated financial statements are not necessarily representative of
operations for an entire year and because of the nature of the Company's
operations can be materially different between periods.
SECURITIES OWNED AND NOT YET PURCHASED
Securities owned consist of trading proprietary stock, which is carried at
market. The proprietary stock is primarily stock of CHI and Chapman Capital
Management Holdings, Inc. (CCMH), an affiliate. The Chapman Co. is the market
maker for CHI and for CCMH and, thus, holds this stock in inventory. As of June
30, 1999, the Chapman Co. held 118,478 shares of common stock of CHI. The
proprietary stock was purchased on margin.
<PAGE>
-2-
EARNINGS PER SHARE
As of June 30, 1999, there were 43,900 options outstanding; however the common
stock equivalents of these options was not included in the diluted earnings per
share as the stock options are antidulutive.
SUBSEQUENT EVENT
In July 1999, the Company borrowed $3,220,000 from Chapman Capital Management
Holdings, Inc., an affiliate, in connection with the Company's participation
in a municipal underwriting syndicate. The note is payable on demand and
accrues interest at an interest rate of 5.45% per annum.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note Regarding Forward-Looking Information
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this Report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, general
economic and business conditions in the Company's market area, inflation,
fluctuations in interest rates, changes in government regulations,
competition and the ability of the Company to implement its business strategy
and other risks discussed in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998, and in this and other reports filed by the
Company.
Forward-looking statements are intended to apply only at the time
they are made. Moreover, whether or not stated in connection with a
forward-looking statement, the Company undertakes no obligation to correct or
update a forward-looking statement should the Company later become aware that
it is not likely to be achieved. If the Company were to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
The following discussion should be read in conjunction with the
financial statements contained in Item 1 of Part I of this Form 10-QSB.
<PAGE>
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as
dollar amounts and as percentages of total revenue.
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June, 30
---------------------------------------------- ----------------------------------------------
1999 1998 1999 1998
---------------------- --------------------- ---------------------- ----------------------
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Commissions $1,134,000 80.0% $458,000 68.9% $2,348,000 74.8% $1,160,000 79.0%
Underwriting and management
fees 317,000 22.4 96,000 14.5 379,000 12.1 143,000 9.8
Interest and dividends 50,000 3.5 110,000 16.6 105,000 3.3 166,000 11.2
(Loss) Gain on trading (83,000) (5.9) -- 309,000 9.8 -- --
--------- ----- --------- ----- --------- ----- --------- ----
Total revenue 1,418,000 100.00 664,000 100.0 3,141,000 100.0 1,469,000 100.0
--------- ----- --------- ----- --------- ----- --------- ----
Expenses
Compensation and benefits 824,000 58.1 424,000 63.8 1,585,000 50.4 771,000 52.5
Brokerage and clearing 168,000 11.9 111,000 16.7 354,000 11.3 200,000 13.6
Communications 68,000 4.8 43,000 6.5 132,000 4.2 88,000 6.0
Occupancy and equipment 158,000 11.1 102,000 15.4 329,000 10.5 194,000 13.2
Professional fees 200,000 14.1 23,000 3.5 431,000 13.7 58,000 3.9
Travel and business development 132,000 9.3 64,000 9.6 211,000 6.7 98,000 6.7
Other operating expenses 315,000 22.2 105,000 15.8 540,000 17.2 174,000 11.8
--------- ----- --------- ----- --------- ----- --------- ----
Total expenses 1,865,000 131.5 872,000 131.3 3,582,000 114.0 1,583,000 107.7
--------- ----- --------- ----- --------- ----- ---------- -----
Loss before income tax benefit (447,000) (31.5) (208,000) (31.3) (441,000) (14.0) (114,000) (7.7)
Income tax benefit (97,000) (6.8) (78,000) (11.7) (95,000) (3.0) (40,000) (2.7)
--------- ----- --------- ----- --------- ----- --------- ----
Net loss $(350,000) (24.7)% $(130,000) (19.6)% $(346,000) (11.0)% $ (74,000) (5.0)%
--------- ----- --------- ----- --------- ----- --------- ----
--------- ----- --------- ----- --------- ----- --------- ----
</TABLE>
Total revenue increased $754,000, or 113.6%, to $1,418,000 for the
three months ended June 30, 1999 from $664,000 for the prior comparable period.
Total revenue increased by $1,672,000, or 113.8%, to $3,141,000 for the six
months ended June 30, 1999 from $1,469,000 for the prior comparable period. The
increase in revenue reflects an increase in commission revenue from underwriting
participations, increased management fee revenue and a gain on trading.
Commission revenue increased by $676,000, or 147.6%, to $1,134,000
for the three months ended June 30, 1999 from $458,000 for the prior
comparable period. Commission revenue increased by $1,188,000, or 102.4%, to
$2,348,000 for the six months ended June 30, 1999 from $1,160,000 in the
comparable prior period. The increase was primarily due to targeted growth in
revenue from municipal underwritings which increased $580,000, or 333.3%, to
$754,000 for the six months ended June 30, 1999 from $174,000 for the prior
comparable period. The Company participated in 22 underwriting syndicates
during the six months ended June 30, 1999 compared to 18 underwriting
syndicates in the prior comparable period. Commission revenue from the sale
of retail equities increased $287,000, or 122.6%, to $521,000 for the six
months ended June 30, 1999 from $234,000 for the prior comparable period.
This increase in retail equities is attributed to the increase in retail
brokers.
<PAGE>
Commission revenue on fixed income securities increased $285,000, or 445.3%,
to $349,000 for the six months ended June 30, 1999 from $64,000 for the prior
comparable period. This increase in commission revenue from fixed income
securities can be attributable to presence of favorable interest rates during
the first six months of 1999.
Underwriting and management fee revenue increased $221,000, or 230.2%,
to $317,000 for the three months ended June 30, 1999 from $96,000 for the prior
comparable period. Underwriting and management fee revenue increased by
$236,000, or 165.0%, to $379,000 for the six months ended June 30, 1999 from
$143,000 for the prior comparable period. The increase in underwriting and
management fee revenue reflects an increase in management advisory services.
Interest and dividend revenue decreased by $60,000, or 54.5%, to
$50,000 for the three months ended June 30, 1999 from $110,000 for the prior
comparable period. Interest and dividend revenue decreased by $61,000, or 36.7%,
to $105,000 for the six months ended June 30, 1999 from $166,000 for the prior
comparable period. This decrease in interest and divided revenue resulted from
the Company's lower cash balances and corresponding lower interest and dividend
earnings in connection with expenditures made with a view toward the Company's
business expansion strategy.
The loss on trading was $83,000 for the three months ended June 30,
1999. An unrealized gain on trading of $309,000 was reported for the six months
ended June 30, 1999. The Company's unrealized gain on trading is attributable to
an increase in the market value of its market making securities inventory.
Total expenses increased by $993,000, or 113.9%, to $1,865,000 for
the three months ended June 30, 1999 from $872,000 for the prior comparable
period. Total expenses increased by $1,999,000, or 126.3%, to $3,582,000 for
the six months ended from $1,583,000 for the prior comparable period. The
largest components of the increase in total expenses are associated with the
opening of new regional offices in Colorado and California, business
development costs associated with the Company's marketing strategy and
increased staffing in connection with the Company's business expansion
strategy.
Compensation and benefits increased by $400,000, or 94.3%, to $824,000
for the three months ended June 30, 1999 from $424,000 for the prior comparable
period. As a percentage of total revenue, these expenses decreased to 58.1% for
the three months ended June 30, 1999 from 63.8% for the prior comparable period.
Compensation and benefits increased by $814,000, or 105.6%, to $1,585,000 for
the six months ended June 30, 1999 from $771,000 from the prior comparable
period. As a percentage of revenues, these expenses decreased to 50.4% for the
six months ended June 30, 1999 from 52.5% for the prior comparable period.
Compensation expense includes sales commissions paid to brokers and varies in
relation to changes in commission revenue. The increase in compensation and
benefits is attributable to the increase in commissions paid to brokers due to
increased retail and municipal sales volume and the addition of 25 employees
compared to June 30, 1998.
Floor brokerage and clearing fees increased by $57,000, or 51.4%, to
$168,000 for the three months ended June 30, 1999 from $111,000 for the prior
comparable period. Floor
<PAGE>
brokerage and clearing fees increased by $154,000, or 77.0%, to $354,000 for
the six months ended June 30, 1999 from $200,000 for the prior comparable
period. This increase is primarily due to an increase in the number of brokers
and related transaction volume offset by a slight decline in the average
dollar amount per transaction, as well as administrative costs incurred as a
result of changing clearing firms in June 1999.
Communication expense increased by $25,000, or 58.1%, to $68,000 for
the three months ended June 30, 1999 from $43,000 for the prior comparable
period. Communication expense increased by $44,000, or 50.0%, to $132,000 for
the six months ended June 30, 1999 from $88,000 for the prior comparable
period. This increase was primarily attributable to increased communication
costs and increased usage associated with the Company's opening of new
offices and implementation of its business expansion strategy.
Occupancy and equipment expense increased by $56,000, or 54.9%, to
$158,000 for the three months ended June 30, 1999 from $102,000 for the prior
comparable period. Occupancy and equipment expense increased $135,000, or 69.6%,
to $329,000 for the six months ended June 30, 1999 from $194,000 for the prior
comparable period. The increase was primarily attributable to the Company's
opening of new offices and implementation of its business expansion strategy.
Professional fees increased by $177,000, or 769.6%, to $200,000 for the
three months ended June 30, 1999 from $23,000 for the prior comparable period.
Professional fees increased by $373,000, or 643.1%, to $431,000 for the six
months ended June 30, 1999 from $58,000 for the prior comparable period. This
increase is associated with the Company's increased use of legal services,
independent audit and review services and marketing consultants related to the
Company's business expansion strategy.
Travel and business development expense increased by $68,000, or
106.3%, to $132,000 for the three months ended June 30, 1999 from $64,000 for
the prior comparable period. Travel and business development expense increased
by $113,000, or 115.3%, to $211,000 for the six months ended June 30, 1999 from
$98,000 for the prior comparable period. The increase reflects costs incurred in
connection with the Company's increased business development related travel and
activities.
Other operating expenses increased by $210,000, or 200.0%, to
$315,000 for the three months ended June 30, 1999 from $105,000 for the prior
comparable period. Other operating expenses increased by $366,000, or 210.3%,
to $540,000 for the six months ended June 30,1999 from $174,000 for the prior
comparable period. This increase primarily reflects increases in advertising,
postage, printing and filing fees expense.
Income tax benefit increased by $19,000 to a tax benefit of $97,000
for the three months ended June 30, 1999 from $78,000 for the prior
comparable period. The income tax benefit increased $55,000 to a tax benefit
of $95,000 for the six month period ended June 30, 1999 from $40,000 for the
prior comparable period. The income tax benefit is due to an increase in loss
from continuing operations for the three months and six months ended June 30,
1999.
<PAGE>
The Company's net loss increased by $220,000 to $350,000 for the
three months ended June 30, 1999 from a net loss of $130,000 for the prior
comparable period. The net loss increased by $272,000 to $346,000 for the six
months ended June 30, 1999 from a net loss of $74,000 for the prior
comparable period. The change was a result of items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, investment securities, and receivables
from other broker-dealers and the Company's clearing agent, all of which
fluctuate depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and the Company's clearing agent turnover
rapidly. Both the Company's total assets as well as the individual components as
a percentage of total assets may vary significantly from period to period
because of changes relating to customer demand, economic and market conditions,
and proprietary trading strategies. The Company's total assets as of June 30,
1999 were $9,887,000.
The Chapman Co., the Company's wholly-owned broker-dealer subsidiary,
is subject to the net capital rules of the NASD. As such, The Chapman Co. is
subject to certain restrictions on the use of capital and its related liquidity.
The net capital position of The Chapman Co. as of June 30, 1999 was $485,000,
which was $235,000 in excess of its minimum NASD net capital requirement.
The Company's cash and cash equivalents were $1,853,000 as of June 30,
1999.
Historically, the Company has financed its operations through the
sale of equity securities and cash flow from operations. On July 29, 1999,
the Company borrowed $3,220,000 from Chapman Capital Management Holdings,
Inc., an affiliate, in connection with The Chapman Co.'s, participation in a
municipal underwriting syndicate. The loan is payable on demand and accrues
interest equal to the interest rate of 5.45% per annum. At June 30, 1999, the
Company had margin debt of $2.4 million to finance the purchase of securities
owned which is primarily the stock of the Company and Chapman Capital
Management Holdings, Inc., an affiliate.
The Company's overall capital and funding needs are continually
reviewed to ensure that its capital base can support the estimated needs of its
business. These reviews take into account business needs as well as the
Company's regulatory capital requirements. The Company believes that its capital
structure is adequate for current operations.
YEAR 2000 SOFTWARE ISSUE
As the Year 2000 approaches, existing software programs and operating
systems must be reviewed to determine if they can accommodate information that
employs dates after December 31, 1999. As of June 30, 1999, the Company had
incurred Year 2000 compliance costs of approximately $60,000, to cover
assessment of systems, internal testing, point-to-point testing, training, and
replacement and modification of existing systems. A portion the Company's Year
2000 compliance costs consisting primarily of expenses for upgraded computers,
software, and communication systems will be allocated to Chapman Capital
Management, Inc. ("CCM"), an affiliate of the Company, through increased charges
for administrative support under its expense allocation agreement with the
Company.
<PAGE>
During 1999, the Company's Year 2000 compliance costs are estimated at
approximately $100,000 of which approximately $65,000 will be allocated to CCM.
The Company estimates that over the next three years its total Year 2000
compliance costs will be approximately $300,000 of which approximately $95,000
will be allocated to CCM.
Management has prepared a written plan detailing the Company's software
and operating systems compliance issues for the Year 2000. The plan identifies
critical and non-critical operating systems of the Company and addresses
external interfaces with third-party computer systems. The Company is currently
working with its hardware and software vendors and other third parties to
prepare for the Year 2000. The Company substantially completed its hardware and
software renovations needed to render the Company Year 2000 compliant during the
second quarter of 1999.
The Company's Year 2000 compliance plan involves four phases:
Phase I - Assessment. This phase involved the identification of all
systems that are date dependent. This phase was substantially completed during
the first quarter of 1998.
Phase II - Renovation. This phase involved the identification and
replacement of critical systems unable to be updated or certified as Year
2000 compliant. This phase was substantially completed in the second quarter
of 1999. Remaining activities relate to monitoring and follow-up with third
parties.
Phase III - Testing. This phase involves testing all systems that are
date dependent and upgrading all non-compliant systems. The Company expects to
complete this phase during the third quarter of 1999.
Phase IV - Contingency. This phase involves an assessment of all
critical systems for potential problems that may result from Year 2000 related
system failures as well as the development of plans and strategies to continue
operations should such failures occur. The Company expects to complete this
phase by the end of the third quarter of 1999.
The table below summarizes the Company's estimate of the status of key
elements of the Company's Year 2000 compliance plan:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Number of Critical
Number of Systems for which
Number of Critical Critical Systems Number of Critical Phase Not
Phase Systems Complete Systems In Process Applicable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assessment 32 32
- --------------------------------------------------------------------------------------------------------------------
Renovation 32 12 11 9
- --------------------------------------------------------------------------------------------------------------------
Testing 32 17 6 9
- --------------------------------------------------------------------------------------------------------------------
Contingency Planning 32 32
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company has relationships with third parties that may have computer
systems that are not Year 2000 compliant. The Company has identified the third
parties upon which it relies for mission-critical systems and has contacted or
is contacting such third parties to confirm that their systems are in compliance
with the Year 2000 requirements. The Company monitors the progress of its
vendors and suppliers compliance efforts. The Company's contingency plan calls
for the replacement, when feasible, of any suppliers or vendors of mission
critical systems unable to certify Year 2000 compliance by September 30, 1999.
While the Company believes that it is taking prudent and necessary
action to comply with Year 2000 requirements, there can be no assurance that the
Year 2000 issue will not result in information or communications systems
interruptions. Any such interruptions could be expected to have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects and may subject the Company to liability to
its clients. The Company is currently building upon its existing contingency
plan in the event that the Company or third parties do not successfully complete
their compliance efforts, or if vendors or third parties controlling systems
critical to the Company are unable to confirm that their systems will be Year
2000 compliant. These efforts may result in additional costs in excess of
current allocations and estimates.
<PAGE>
PART II
OTHER INFORMATION
ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 23, 1998, the Company's Registration Statement on Form SB-2
(File No. 333-43487) pertaining to its initial public offering of shares of the
Company's common stock, par value $0.001 (the "Offering") was declared
effective.
The Company has applied Offering proceeds in the amount of
approximately $3 million to expand net capital to participate in corporate and
government finance transactions, $333,000 to expand market-making and research
capabilities, $150,000 to implement the DEM strategy, $880,000 to expand sales
and marketing efforts, $965,000 to hire sales personnel to staff additional
sales offices and corporate finance staff to implement the DEM strategy and
$1,000,000 for working capital and general corporate purposes. The remaining
Offering proceeds have been invested by the Company in The Chapman U.S. Treasury
Money Fund, an affiliate, pending final application of such proceeds.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 25, 1999.
The following directors of the Company were re-elected at the meeting: Nathan A.
Chapman, Jr., Earl U. Bravo, Sr., Lottie H. Shackelford, and Donald V. Watkins.
In addition to the election of directors, the Company's stockholders voted at
the annual meeting to ratify and approve the Company's independent public
accountants. The selection of the accounting firm, Arthur Andersen LLP,
Baltimore, Maryland, nominated by management, was approved as indicated below.
The following chart indicates the number of shares outstanding on the record
date, the number of shares present at the meeting and the number of shares
voting in favor of the matters presented at the annual meeting.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Shares Outstanding Shares Present at Shares Voting in Favor of
on the Record Date the Annual Meeting Matters Proposed
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock 2,953,662 2,365,853 2,357,193
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits required by Item 601 of Regulation S-B:
Exibit 10.1: $3,220,000 Promissory Note of the Company to
Chapman Capital Management Holdings, Inc. dated as
of July 29, 1999.
Exhibit 27: Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHAPMAN HOLDINGS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
---------------------------------------------
Nathan A. Chapman, Jr.
President, Chairman of the Board and Director
/s/ DEMETRIS B. BROWN
---------------------------------------------
Demetris B. Brown
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Date: August 12, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
10.1 $3,220,000 Promissory Note of the Company to
Chapman Capital Management Holdings, Inc. dated as
of July 29, 1999.
27 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 10.1
PROMISSORY NOTE
---------------
$3,220,000.00 BALTIMORE, MARYLAND
JULY 29 1999
ON DEMAND, the undersigned promises to pay to the order of Chapman Capital
Management Holdings, Inc. Three million two hundred and twenty thousand dollars
($3,220,000,00) at its offices in Baltimore, Maryland together with interest
thereon from the date hereof until paid at the rate of 5.45% per annum.
/S/ NATHAN A. CHAPMAN, JR.
---------------------------------------
CHAPMAN HOLDINGS, INC.
NATHAN A. CHAPMAN, JR.
PRESIDENT
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 3,090,000 1,853,000
<SECURITIES> 2,320,000 2,769,000
<RECEIVABLES> 1,005,000 1,122,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,008,000 9,544,000
<PP&E> 38,000 113,000
<DEPRECIATION> 0 (8,000)
<TOTAL-ASSETS> 10,205,000 9,887,000
<CURRENT-LIABILITIES> 3,063,000 3,113,000
<BONDS> 0 0
0 0
0 0
<COMMON> 3,000 3,000
<OTHER-SE> 7,061,000 6,715,000
<TOTAL-LIABILITY-AND-EQUITY> 10,205,000 9,887,000
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1999 JUN-30-1998 JUN-30-1999
<PERIOD-START> APR-01-1998 APR-01-1999 JAN-01-1998 JAN-01-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999 JUN-30-1998 JUN-30-1999
<CASH> 0 0 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 0 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 0 0 0 0
<CURRENT-LIABILITIES> 0 0 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 0
<SALES> 554,000 1,451,000 1,303,000 2,727,000
<TOTAL-REVENUES> 664,000 1,418,000 1,469,000 3,141,000
<CGS> 0 0 0 0
<TOTAL-COSTS> 872,000 1,865,000 1,583,000 3,582,000
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 11,000 1,400 12,000
<INCOME-PRETAX> (208,000) (447,000) (114,000) (441,000)
<INCOME-TAX> (78,000) (97,000) (40,000) (95,000)
<INCOME-CONTINUING> (130,000) (350,000) (74,000) (346,000)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (130,000) (350,000) (74,000) (346,000)
<EPS-BASIC> (0.04) (0.12) (0.03) (0.12)
<EPS-DILUTED> (0.04) (0.12) (0.03) (0.12)
</TABLE>
