<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998
REGISTRATION NO. 333-51883
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
------------------------------
<TABLE>
<S> <C> <C>
MARYLAND 6282 52-2097010
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
401 EAST PRATT STREET
SUITE 2800
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Address and Telephone Number of Principal Executive Office)
------------------------------
NATHAN A. CHAPMAN, JR., PRESIDENT
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
401 EAST PRATT STREET
28TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Name, Address and Telephone Number of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ELIZABETH R. HUGHES, ESQ. FRANK S. JONES, JR., ESQ.
Venable, Baetjer and Howard, LLP Whiteford, Taylor & Preston L.L.P.
1800 Mercantile Bank & Trust Building Seven Saint Paul Street
Two Hopkins Plaza Baltimore, Maryland 21202-1626
Baltimore, Maryland 21201-2978 (410) 347-8707
(410) 244-7400
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this Registration Statement is effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM IS TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST
THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER REGISTRATION STATEMENT FOR THE SAME
OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: one for use in
connection with the offering by the Company of Common Stock (the "Prospectus")
and one for use in connection with the sales by The Chapman Co. of the Company's
Common Stock in market-making transactions (the "Market-Making Prospectus"). The
Prospectus and the Market-Making Prospectus are identical except for the
following: (i) the outside front cover page; (ii) page 32, which will contain
alternate language for the "Plan of Distribution" section; and (iii) the outside
back cover page. Alternate language for the Market-Making Prospectus is labeled
"Alternate Language for Market-Making Prospectus" and follows the outside back
cover page of the Prospectus.
<PAGE>
SUBJECT TO COMPLETION: DATED: MAY 5, 1998
THIS REGISTRATION STATEMENT AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS
REGISTRATION STATEMENT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
PROSPECTUS
MINIMUM OFFERING: 850,000 SHARES
MAXIMUM OFFERING: 1,250,000 SHARES
CHAPMAN CAPITAL
[LOGO]
MANAGEMENT HOLDINGS, INC.
COMMON STOCK
------------------
Chapman Capital Management Holdings, Inc., a Maryland corporation (the
"Company"), is offering for sale up to 1,250,000 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
intends to apply for quotation on the Nasdaq SmallCap Market (the "SmallCap
Market") under the symbol "CMGT". However, there can be no assurance that the
Company's Common Stock will be accepted for quotation on the SmallCap Market and
the Offering is not conditioned upon such listing. See "Risk Factors--Risks of
Low Priced Stocks." It is currently anticipated that the initial public offering
price of the shares of Common Stock offered by this Prospectus (the "Shares")
will be between $7.00 and $9.00 per share. The initial public offering price
will be 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 68% 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"
ON PAGE 13.
---------------------
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
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(3)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total Minimum............................................ $ $ $
Total Maximum............................................ $ $ $
</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.
The 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.
, 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 THE C-EAGLE LOGO-TM- (THE LOGO APPEARING ON THE FRONT AND BACK COVERS OF
THIS PROSPECTUS), DEM-TM-, DEM INDEX-TM-, DEM PROFILE-TM- AND DEM MULTI-
MANAGER-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.
2
<PAGE>
PROSPECTUS SUMMARY
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD
BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE DISCUSSION APPEARING UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," ARE
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
SEE "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." ON JANUARY 8, 1998, CHAPMAN CAPITAL
MANAGEMENT HOLDINGS, INC., A NEWLY-FORMED CORPORATION (THE "COMPANY"), ISSUED
SHARES OF COMMON STOCK TO THE CHAPMAN CO., A MARYLAND CORPORATION, IN EXCHANGE
FOR ALL OF THE OUTSTANDING EQUITY SECURITIES OF CHAPMAN CAPITAL MANAGEMENT,
INC., A WASHINGTON, D.C. CORPORATION ("CCM"). ACCORDINGLY, CCM IS CURRENTLY A
WHOLLY-OWNED DIRECT SUBSIDIARY OF THE COMPANY. ON FEBRUARY 26, 1998, THE CHAPMAN
CO. AND ITS SOLE STOCKHOLDER, CHAPMAN HOLDINGS, INC., A MARYLAND CORPORATION
("CHI"), EFFECTED A TAX-FREE SPIN-OFF TRANSACTION (THE "SPIN-OFF") PURSUANT TO
WHICH THE OUTSTANDING COMMON STOCK OF THE COMPANY WAS DISTRIBUTED TO CHI AND,
IMMEDIATELY FOLLOWING SUCH DISTRIBUTION, SUCH COMMON STOCK WAS DISTRIBUTED TO
THE THEN-EXISTING STOCKHOLDERS OF CHI. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE COMPANY HEREIN REFER TO CHAPMAN CAPITAL MANAGEMENT HOLDINGS,
INC. AND ITS WHOLLY-OWNED, DIRECT SUBSIDIARY, CHAPMAN CAPITAL MANAGEMENT, INC.
THE COMPANY
The Company is an African-American owned and controlled investment advisory
and investment management company. Through its wholly-owned subsidiary, CCM, the
Company is registered with the Securities and Exchange Commission (the
"Commission") as an investment advisor. The Company manages funds for two
registered open-end investment companies, the DEM Equity Fund and The Chapman
U.S. Treasury Money Fund, each a portfolio of The Chapman Funds, Inc., and for
DEM, Inc., a registered closed-end investment company. In December 1996, the
Company established a private group trust, the DEM-MET Fund for Qualified
Employee Benefit Plans (the "DEM-MET Trust") for which it provides investment
management services. As of March 31, 1998, the Company had approximately $511.8
million in total assets under management. The DEM Equity Fund, The Chapman U.S.
Treasury Money Fund and DEM, Inc. are sometimes referred to herein as the
"Funds."
The Company has implemented a strategic initiative called the Domestic
Emerging Markets ("DEM") strategy which seeks investment in domestic companies
controlled by African-Americans, Asian-Americans, Hispanic/Latino-Americans and
women (the "DEM Profile"). Based on its implementation of the DEM strategy to
date, the Company believes that there exists a demand, particularly from
government entities and large institutions, to invest in companies that meet the
DEM Profile ("DEM Companies") and has designed its investment products to
provide a single source for meeting this objective while achieving a competitive
rate of return. As of March 31, 1998, the Company has identified 159 public
companies that meet the DEM Profile.
To implement the DEM strategy, the Company has established and acts as
advisor to the DEM Equity Fund and DEM, Inc. through which investors can invest
in DEM Companies. DEM, Inc., established in November 1995, was the first
proprietary investment product established by the Company to implement the DEM
strategy and as of March 31, 1998, it had approximately $21.5 million in assets
under management. In April 1998, the Company commenced marketing of the DEM
Equity Fund and as of April 9, 1998, the fund had approximately $10 million in
assets under management.
In addition, in December 1996, the Company established and currently acts as
advisor to the DEM MET Trust. As advisor, the Company allocates investment
responsibility for the trust's assets among investment managers that meet the
DEM Profile ("DEM Investment Managers"). The Company introduced this strategy,
known as the DEM Multi-Manager strategy, through its introduction of the DEM-
3
<PAGE>
MET Trust and will seek to increase its assets under management through the
development of additional products using this strategy. As of March 31, 1998,
assets were allocated among fourteen DEM Investment Managers. The Company
evaluates such sub-advisors monthly and reallocates assets among existing and
new sub-advisors as necessary. As of March 31, 1998, the DEM-MET Trust had
assets of approximately $230.9 million.
The Company intends to establish and act as advisor and sub-advisor for
additional DEM investment vehicles and to seek additional opportunities to
manage individual and institutional separate accounts using the DEM and DEM
Multi-Manager strategies. As of March 31, 1998, the Company had $87.4 million
and $230.9 million in assets under management invested pursuant to the DEM and
DEM Multi-Manager strategies, respectively. In addition, in April 1998, the
Company commenced marketing of the DEM Equity Fund and as of April 9, 1998 the
fund had approximately $10 million in assets under management.
The Company is headquartered at the World Trade Center--Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, Maryland 21202 and its telephone number is
(410) 625-9656.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered
Minimum:................... 850,000 Shares
Maximum:................... 1,250,000 Shares
Common Stock outstanding
Prior to the Offering:..... 2,486,543 Shares
After the Offering
Minimum:................. 3,336,543 Shares
Maximum:................. 3,736,543 Shares
Use of proceeds:............. The Company proposes to use the net proceeds from this
Offering to create new investment products, expand sales and
marketing efforts (primarily for such new products), further
promote the DEM and DEM Multi-Manager strategies, including
expanding the Company's research capabilities, repay
indebtedness to affiliates of the Company (See "Certain
Transactions") and for working capital and general corporate
purposes. Although the Company does not have any current
plans regarding mergers or acquisitions, the Company may use
a portion of the net proceeds of the Offering for such
purposes, although greater emphasis on such application will
be given, if at all, to the extent that net proceeds of the
Offering approaching the Maximum are received. The extent to
which the Company will implement the above objectives will
be determined by the total amount of proceeds raised in the
Offering. If only the Minimum is sold, the Company intends
to devote a substantial amount of the net proceeds to the
creation of new proprietary investment products, the sales
and marketing thereof and the repayment of indebtedness to
affiliates. To the extent net proceeds in excess of the
Minimum are received, the Company expects to devote such
amounts to the creation of new investment products,
marketing activities and the other listed uses of proceeds.
See "Use of Proceeds."
Risk Factors:................ Prospective investors should carefully consider the
information discussed under the heading "Risk Factors."
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary of financial information set forth below is derived from the
Company's audited financial statements for the years ended December 31, 1996 and
1997, which have been audited by Arthur Andersen LLP, independent public
accountants. The financial data for the three months ended March 31, 1997 and
1998, 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 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>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
-------------------------- ---------------------------
1996 1997 1997 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA
Total revenue.................................. $ 849,872 $2,286,615 $ 509,516 $ 771,841
Income (loss) before income taxes.............. 92,157 88,101 (4,642) 40,565
Net income (loss).............................. $ 51,157 $ 48,101 $ (2,542) $ 26,365
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Basic and diluted earnings per share........... $ 0.02 $ 0.02 $ -- $ 0.01
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average shares outstanding............ 2,486,543 2,486,543 2,486,543 2,486,543
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
AS ADJUSTED (1)
---------------------------
ACTUAL MINIMUM MAXIMUM
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA
Cash............................................................ $ 8,405 $6,032,405 $ 9,008,405
Total assets.................................................... 1,076,662 7,100,662 10,076,662
Total long-term debt............................................ -- -- --
Total stockholders' (deficit) equity............................ (66,469) 5,957,531 8,933,531
</TABLE>
(1) As adjusted gives effect to the sale of the Minimum and Maximum,
respectively, at an assumed public offering price of $8.00 per share (the
mid-point of the range) less underwriting discounts, commissions and
estimated offering expenses.
5
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS 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 INCLUDING: (I)
THE COMPANY'S BUSINESS STRATEGY FOR FUTURE GROWTH, INCLUDING PLANS REGARDING
INCREASES IN PERSONNEL, EXPANSION OF SALES AND MARKETING EFFORTS, AND THE
CREATION OF NEW INVESTMENT PRODUCTS; AND (II) THE COMPANY'S ABILITY TO
DISTINGUISH ITSELF AND ITS STRATEGY FROM CURRENT AND FUTURE COMPETITORS. WHEN
USED IN THE PROSPECTUS, THE WORDS "BELIEVES," "INTENDS," "ANTICIPATES," AND
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S
CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES.
IN ADDITION TO THE OTHER RISKS DESCRIBED ELSEWHERE IN THIS "RISK FACTORS"
SECTION, IMPORTANT FACTORS TO CONSIDER IN EVALUATING SUCH FORWARD-LOOKING
STATEMENTS INCLUDE: (I) CHANGES IN EXTERNAL COMPETITIVE MARKET FACTORS WHICH
MIGHT IMPACT TRENDS IN THE COMPANY'S RESULTS OF OPERATIONS; (II) UNANTICIPATED
WORKING CAPITAL AND OTHER CASH REQUIREMENTS; (III) GENERAL CHANGES IN THE
INDUSTRY IN WHICH THE COMPANY COMPETES; AND (IV) VARIOUS OTHER COMPETITIVE OR
REGULATORY FACTORS THAT MAY PREVENT THE COMPANY FROM COMPETING SUCCESSFULLY IN
THE MARKETPLACE. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, MANY OF WHICH ARE
DESCRIBED IN GREATER DETAIL IN THE RISK FACTORS SET FORTH BELOW, ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
PROSPECTUS.
DIFFICULTY IN MANAGING GROWTH
The Company has experienced and expects to continue to experience
significant growth in its business activities. This growth has required and will
continue to require increased investment in personnel, financial and management
systems and controls and facilities. The Company intends to apply a portion of
the net proceeds of the Offering to create new proprietary investment products
and to expand its selling, research and marketing efforts. In addition, the
Company intends to add personnel to support the increase in assets under
management that the Company will seek in executing its DEM and DEM Multi-Manager
strategies. 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. Further, as is common in the investment advisory business, 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. See "Business--Year 2000 Software Issue;" "--Strategy" and "Use of
Proceeds."
DEPENDENCE ON KEY INVESTMENT MANAGEMENT CLIENTS
All of the Company's agreements with its advisory clients are terminable by
the client upon short notice (typically 30-60 days prior written notice). As of
March 31, 1998, three clients represented approximately 70% of the Company's
total assets under management. As of March 31, 1998, DEM-MET Trust, with $230.9
million in assets under management, represented approximately 45.1% of the
Company's total assets under management. If the DEM-MET Trust or any of the
Company's key investment management clients were to terminate their advisory
arrangements with the Company, the Company's advisory fee revenue would be
materially and adversely affected. See "Business."
HIGHLY COMPETITIVE INDUSTRY
The investment advisory business is extremely competitive. The Company
encounters intense competition in all aspects of the investment advisory
business and competes directly with other 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
6
<PAGE>
competition from firms currently in the investment advisory 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 implemented and seeks to promote its DEM and DEM
Multi-Manager strategies which target those companies, individuals and
institutional investors seeking either to invest in DEM Companies or to have
their assets managed by DEM Investment Managers, respectively. As of March 31,
1998, the Company had approximately $87.4 million and $230.9 million in assets
under management using the DEM and DEM Multi-Manager strategies, respectively.
The success of the DEM and the DEM Multi-Manager strategies will be
dependent upon the Company's ability to attract funds for investment in DEM
Companies and for management by DEM Investment Managers, respectively. The
success of these strategies will also be dependent on the Company's ability to
identify appropriate investments from the universe of DEM Companies and to
identify successful DEM Investment Managers. Because each of these strategies is
in the initial stages of implementation, its market acceptance is unknown and
there can be no assurance that the Company will be able to attract significant
amounts of investment capital for management under such strategies. Moreover,
the Company's belief that the DEM and DEM Multi-Manager strategies offer a
significant opportunity for growth is not based upon marketing studies,
demographic, or feasibility reports, but is based solely upon the judgment of
the Company's management and the Company's experience to date from its limited
marketing of DEM and DEM Multi-Manager products. Further, the Company will incur
significant marketing, legal and accounting expenses in the creation of new
investment products. Such expenses are ordinarily incurred significantly in
advance of the introduction of such products. If such products do not gain broad
market acceptance, the Company would likely lose such initial investment.
Although, as of March 31, 1998, the Company has identified 159 publicly-traded
DEM Companies, there can be no assurance that the Company will be able to
identify additional DEM Companies or that such companies will provide successful
investment opportunities. The ability of the Company to successfully promote its
DEM and DEM Multi-Manager strategies is key to the Company's goal of
diversifying and growing its base of investment management clients. 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 would have a material adverse
effect on the business, operations, revenue and/or prospects of the Company. The
Company does not maintain key executive insurance for Mr. Chapman. Mr. Chapman
also serves as President and Chairman of the Board of Directors of (i) CHI, a
publicly-traded holding company, and its wholly-owned subsidiary, The Chapman
Co., a full-service securities brokerage and investment banking firm that is a
member firm of the NASD and is registered as a broker-dealer with the Commission
and in approximately one-half of the states, and (ii) Chapman Insurance
Holdings, Inc., and its wholly-owned subsidiary, The Chapman Insurance Agency
Incorporated, a licensed insurance agency, which has had limited operations to
date. Further, at the Company's request, Mr. Chapman serves as President and
Chairman of the Board of DEM, Inc. and The Chapman Funds, Inc., investment
companies advised by the Company. Accordingly, Mr. Chapman will not devote all
of his time to the operation of the Company and will devote significant time to
duties owed to these other entities. Although there is no written agreement, the
Company expects that Mr. Chapman will devote approximately 50% of his time to
the operation of the Company and entities that he serves at the request of the
Company. See "Certain Transactions."
7
<PAGE>
POTENTIAL ADVERSE EFFECTS OF CHANGES IN ECONOMY AND MARKET CONDITIONS
The financial markets and the investment management and advisory industry in
general have experienced record performance and growth in recent years.
According to the Investment Company Institute, the U.S. economy in 1997 was once
again a favorable setting for mutual funds, experiencing its seventh year of
economic expansion. The financial markets and businesses operating in the
securities industry, however, are highly volatile and are directly affected by,
among other factors, domestic and foreign economic conditions and general trends
in business and finance, all of which are beyond the control of the Company.
There can be no assurance that broader market performance will be favorable in
the future. Any decline in the financial markets or a lack of sustained growth
may result in a corresponding decline in performance by the Company's investment
products and separate accounts which may adversely affect assets under
management and/or fees. The Company's revenues from investment management are
directly related to fluctuations in the dollar amount of assets under
management. According to the Investment Company Institute, assets in mutual
funds increased 27% in 1997 to $4.5 trillion, with net new cash flow rising for
the third straight year to a record $378 billion. Significant investor trends,
including a desire for alternatives to investment in either open- or closed-end
funds, or a significant change in overall market conditions, could have a
negative impact on the Company by reducing the total assets under management.
RELATIONSHIPS WITH OTHER CHAPMAN ENTITIES AND POTENTIAL CONFLICTS OF INTEREST
The Company acts as investment advisor, pursuant to investment advisory
agreements, for three active registered investment portfolios: DEM, Inc., a
closed-end investment company, the DEM Equity Fund and The Chapman U.S. Treasury
Money Fund. The Company's revenues in connection with these related-party
agreements (excluding the DEM Equity Fund which became active on April 9, 1998)
accounted for 30.2%, 12.4% and 11.3% of the Company's revenues in the years
ended December 31, 1996, 1997 and for the three months ended March 31, 1998,
respectively. At the request of the Company, Nathan A. Chapman, Jr., the
Company's President and Chairman of the Board; Earl U. Bravo, Sr., the Company's
Vice President, Secretary and Assistant Treasurer; and M. Lynn Ballard, the
Company's Treasurer, Assistant Secretary and Controller; serve as President and
Chairman of the Board; Secretary and Assistant Treasurer; and Treasurer,
Assistant Secretary and Controller, respectively, of each of these investment
companies. 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 The Chapman Co. and The Chapman Insurance
Agency Incorporated. The common management and/or ownership among the Company
and these other companies 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. For example, the Company has engaged and expects to
continue to engage The Chapman Co. as the principal distributor of the Company's
investment products. 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 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.
As of March 31, 1998, the Company owed CHI $771,889, as evidenced by 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 advances by CHI to the Company were
used by the Company for expenses incurred in the introduction of the DEM-MET
Trust and for a related non-competition agreement. As of March 31, 1998, the
Company has not made any payments on this note. In December 1995, Mr. Chapman
loaned CCM $100,000, payable on
8
<PAGE>
demand. In March 1996, Mr. Chapman loaned CCM an additional $45,000, payable on
demand, with a fixed interest payment of $14,500 due at the time of repayment.
As of March 31, 1998, the Company had made payments in the amount of $145,627 on
these loans from Mr. Chapman and owed Mr. Chapman $13,873. The advances by Mr.
Chapman were used by the Company for the purchase of common stock of an
affiliate. As of December 31, 1997 and March 31, 1998, the Company also owed CHI
$28,782 and $106,267 pursuant to certain allocation arrangements pertaining to
shared overhead and other expenses of the Company and CHI. The Company expects
to use part of the net proceeds of the Offering to repay all of its indebtedness
to CHI and Mr. Chapman. See "Use of Proceeds" and "Certain Transactions."
POTENTIAL CONFLICTS CAUSED BY SELF-UNDERWRITING; NEED FOR QUALIFIED INDEPENDENT
UNDERWRITER
The Chapman Co. is the Underwriter of the Offering on a best efforts basis.
Nathan A. Chapman, Jr., the Company's President, Chairman of the Board and
majority stockholder is President, Chairman of the Board and majority
stockholder of CHI, the sole stockholder of the Underwriter. 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
the 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. Ferris
Baker Watts, Incorporated is not expected to receive an allocation of Shares for
sale in the Offering and does not intend to participate in any selling efforts.
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 will be 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 at an assumed public offering price of $8.00 per
share (the mid-point of the range) will involve immediate and substantial
dilution of $6.41 per share, or 80.1%, 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 assumed public offering price of $8.00 per share.
See "Dilution."
EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
As of the Minimum closing, the Company will have 3,336,543 shares of Common
Stock outstanding, of which 2,285,143 will be beneficially owned by Nathan A.
Chapman, Jr. With the exception of 2,285,143 shares of Common Stock owned by Mr.
Chapman, all of the shares outstanding prior to the Offering may 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 February 25, 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."
9
<PAGE>
BEST EFFORTS NATURE OF OFFERING; UNDERWRITER HAS NO COMMITMENT 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 and DEM Multi-Manager
strategies and expand its operations will be diminished to the extent that less
than the Maximum is sold. See "Use of Proceeds" and "Plan of Distribution."
REGULATORY RISKS
The Company's business, and the investment management industry generally,
are subject to extensive regulation at both the federal and state levels. These
regulations are designed primarily for the protection of the Company's customers
rather than the Company's stockholders. Failure to comply with any of the laws,
rules or regulations of any state or federal regulatory authority could result
in a fine, injunction, suspension or expulsion from the industry, which could
have a material adverse impact upon the Company. Although the Company has
implemented procedures designed to achieve compliance with such laws, rules and
regulations, there can be no assurance that any failure to so comply will not
have a material adverse effect upon the Company. 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" and "--Legal
Proceedings."
CONTROL BY PRINCIPAL STOCKHOLDER
Nathan A. Chapman, Jr. will beneficially own approximately 68% and 61% of
the outstanding shares of Common Stock assuming the Minimum and Maximum,
respectively, are sold in the 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
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, that it will continue after the
Offering. In the absence of an active public trading market, an investor may be
unable to liquidate an investment in the Shares. The trading price of the Shares
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. The Company believes that there
will be sufficient market-makers to qualify for and maintain a SmallCap Market
listing; 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.
RISKS OF LOW PRICED STOCKS
There is currently no public market for the Common Stock. The Company
intends to apply for quotation on the SmallCap Market under the symbol "CMGT";
however, there can be no assurance that the Nasdaq Stock Market will approve the
Company's application and the Offering is not conditioned on
10
<PAGE>
receiving such approval. 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 $4,000,000 or $2,000,000 or
or
Market Capitalization $50,000,000 or $35,000,000 or
or
Net Income (latest year or
two of last three years) $750,000 $500,000
and
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. In addition, in order to
be eligible for quotation on the SmallCap Market, the Company must have two
independent directors. As of the date of this Prospectus, the Company has only
one independent director and is seeking an additional independent director to
meet this SmallCap Market requirement. 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.
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. See "Dividend Policy."
DISCRETIONARY USE OF PROCEEDS
The Company will have broad discretion as to the application of the offering
proceeds. At an assumed public offering price of $8.00 per share (the mid-point
of the range), if the Minimum is sold, 14.6% and 14.8% of the net proceeds to
the Company from the sale of the Shares will be applied to general corporate
purposes, such as working capital and repayment of indebtedness to affiliates,
respectively. In the event the Maximum is sold, 14.6% and 9.9% of the net
proceeds will be used in connection with such general corporate purposes and
repayment of indebtedness to affiliates, respectively. The Company may also use
a portion of the offering proceeds to effectuate suitable business combinations,
including mergers, consolidations and/or corporate acquisitions, although the
Company has no current plans in this regard. See "Use of Proceeds."
11
<PAGE>
USE OF PROCEEDS
The Company proposes to use the net proceeds from this Offering to create
new investment products, expand sales and marketing efforts (primarily for such
new products), implement and promote the DEM and DEM Multi-Manager strategies,
including expanding the Company's research capabilities, repay indebtedness to
affiliates of the Company and for working capital and general corporate
purposes.
<TABLE>
<CAPTION>
MINIMUM PERCENT MAXIMUM PERCENT
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Creation of new investment products............................... $ 2,000,000 33.2% $ 3,000,000 33.3%
Expand sales and marketing efforts................................ 1,250,000 20.8 1,800,000 20.0
Promote DEM strategies............................................ 1,000,000 16.6 2,000,000 22.2
Repayment of indebtedness to affiliates of the Company............ 892,031 14.8 892,031 9.9
Working capital and general corporate purposes.................... 881,969 14.6 1,307,969 14.6
------------ --------- ------------ ---------
Totals............................................................ $ 6,024,000 100% $ 9,000,000 100%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
Although 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.
As of March 31, 1998, the Company owed CHI $771,889, as evidenced by 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 March 31, 1998, the Company has not
made any payments on this note. In December 1995, Mr. Chapman loaned CCM
$100,000, payable on demand, for the purchase of common stock of an affiliate.
In March 1996, Mr. Chapman loaned CCM an additional $45,000, payable on demand,
with a fixed interest payment of $14,500 due at the time of repayment. As of
March 31, 1998, the Company had made payments in the amount of $145,627 and owed
Mr. Chapman $13,873 on the indebtedness above. The Company expects to use part
of the net proceeds of the Offering to repay its indebtedness to CHI and Mr.
Chapman. Further, to the extent part of the net proceeds of the Offering are
used for working capital and general corporate purposes, a portion of the net
proceeds may be used for payments to CHI in connection with shared overhead and
other expenses. See "Certain Transactions."
The above proposed allocation represents the Company's best estimate 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 change, the Company may find it necessary or advisable to
reallocate some of the proceeds within the above-described categories, use
portions thereof for other purposes or 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 a material 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. See "Risk Factors--Discretionary Use of Proceeds."
The Company intends to invest net proceeds not immediately required for the
purposes described above, principally in The Chapman U.S. Treasury Money Fund or
directly in United States' government securities, short-term certificates of
deposit, other money market funds or other short-term interest-bearing
investments.
12
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the net tangible book value per share of Common Stock after this Offering
constitutes dilution to purchasers of the Shares. Net tangible book value per
share is determined by dividing the net tangible book value (total tangible
assets less total liabilities) by the number of outstanding shares of Common
Stock.
The net tangible book value of the Company as of March 31, 1998, is
$(702,469) or $(0.28) per share of Common Stock. After giving effect to the sale
of the Minimum at the assumed public offering price of $8.00 per Share (after
deducting underwriting discounts, commissions and estimated offering expenses)
the net tangible book value at that date would have been $5,321,531 or $1.59 per
share. This represents an immediate increase in net tangible book value of $1.87
per share to existing stockholders and an immediate dilution of $6.41 per share
to the purchasers of the Shares.
The following table illustrates the per share dilution effect as of March
31, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................................ $ 8.00
Net tangible book value before this Offering................................. $ (0.28)
Increase attributable to new investors....................................... 1.87
---------
Net tangible book value after this Offering.................................. 1.59
---------
Dilution to new investors.................................................... $ 6.41
---------
---------
</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 an assumed public offering price of $8.00 per share
(the mid-point of the range) and the sale of the Minimum:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............................. 2,486,543 74.5% $ 2,487 0.0% $ 0.00
New Investors...................................... 850,000 25.5 6,800,000 100.0 8.00
------------ ----- ------------ -----
Total.............................................. 3,336,543 100.0% $ 6,802,487 100.0% $ 2.04
------------ ----- ------------ ----- -----
------------ ----- ------------ ----- -----
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, and as adjusted to give effect to the sale of the Minimum number of
Shares offered hereby at an assumed price of $8.00 per share (the mid-point of
the range) and the receipt of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL MINIMUM
---------- ------------
<S> <C> <C>
Long-term debt:......................................................................... $ -- $ --
---------- ------------
Stockholders' equity:
Common Stock--$.001 par value, 20,000,000 shares authorized, 2,486,543 and 3,336,543
shares issued and outstanding, respectively........................................... 2,487 3,337
Additional paid-in capital.............................................................. -- 6,023,150
Accumulated Deficit..................................................................... (68,956) (68,956)
---------- ------------
Total Stockholders' (Deficit) Equity.................................................... (66,469) 5,957,531
---------- ------------
Total Capitalization.................................................................... $ (66,469) $ 5,957,531
---------- ------------
---------- ------------
</TABLE>
14
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate doing so in the foreseeable future. The payment of cash
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 capital
requirements and financial condition, and other relevant factors. The Company
intends to retain any earnings in the foreseeable future for the Company's
continued development and expansion of its business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Strategy."
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
Advisory and administrative revenue is earned by the Company through
investment advisory and administrative services. For the fiscal year ended
December 31, 1997, the Company generated revenue of $2,286,615 and income before
income taxes of $88,101. For the quarter ended March 31, 1998, the Company
generated revenue of $771,841 and income before income taxes of $40,565. The
Company's total assets under management were approximately $351.1 million,
$429.6 million and $511.8 million as of December 31, 1996, 1997 and as of March
31, 1998, respectively.
The Company's primary sources of revenue are advisory and administrative
fees. The Company's principal business activities are affected by many factors,
including general economic and financial conditions, movement of interest rates
and competitive conditions. Although the Company seeks to maintain cost
controls, a significant portion of the Company's expenses are fixed and do not
vary greatly with the factors listed above. As a result, substantial
fluctuations can occur in the Company's revenue and net income from period to
period.
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997 1997 1998
---------------------------- -------------------------- ---------------------------- -----------
<CAPTION>
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:
Advisory and
administrative....... $ 832,970 98.0% $2,284,054 99.9% $ 509,052 99.9% $ 768,953
Other income........... 16,902 2.0 2,561 0.1 464 0.1 2,888
----------- ----- --------- ----- ----------- ----- -----------
Total revenue........ 849,872 100.0 2,286,615 100.0 509,516 100.0 771,841
----------- ----- --------- ----- ----------- ----- -----------
OPERATING EXPENSE:
Management fees........ -- -- 869,355 38.0 200,802 39.4 306,903
Compensation and
benefits............. 291,155 34.3 594,993 26.0 185,502 36.4 174,734
General and
administrative....... 261,271 30.7 492,644 21.5 63,724 12.5 179,891
Amortization........... 19,000 2.2 228,000 10.0 57,000 11.2 57,000
Interest............... 77,806 9.2 13,522 0.6 7,130 1.4 12,748
----------- ----- --------- ----- ----------- ----- -----------
Total Operating
expense............ 649,232 76.4 2,198,514 96.1 514,158 100.9 731,276
----------- ----- --------- ----- ----------- ----- -----------
Loss on sale of
securities........... 108,483 12.8 -- -- -- -- --
----------- ----- --------- ----- ----------- ----- -----------
Income (loss) before
income tax
provision.......... 92,157 10.8 88,101 3.9 (4,642) (-0.9) 40,565
Income tax provision
(benefit)............ 41,000 4.8 40,000 1.8 (2,100) (-0.4) 14,200
----------- ----- --------- ----- ----------- ----- -----------
Net income (loss)...... $ 51,157 6.0% $ 48,101 2.1% ($ 2,542) (-0.5)% $ 26,365
----------- ----- --------- ----- ----------- ----- -----------
----------- ----- --------- ----- ----------- ----- -----------
<CAPTION>
<S> <C>
PERCENTAGE OF
TOTAL REVENUE
---------------
<S> <C>
REVENUE:
Advisory and
administrative....... 99.6%
Other income........... 0.4
-----
Total revenue........ 100.0
-----
OPERATING EXPENSE:
Management fees........ 39.8
Compensation and
benefits............. 22.6
General and
administrative....... 23.3
Amortization........... 7.4
Interest............... 1.7
-----
Total Operating
expense............ 94.8
-----
Loss on sale of
securities........... --
-----
Income (loss) before
income tax
provision.......... 5.2
Income tax provision
(benefit)............ 1.8
-----
Net income (loss)...... 3.4%
-----
-----
</TABLE>
16
<PAGE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Total revenue increased by $262,325, or 51.5%, to $771,841 in the quarter
ended March 31, 1998 from $509,516 in the prior comparable period. Advisory and
administrative fee revenue increased by $259,901, or 51.1%, to $768,953 in the
quarter ended March 31, 1998 from $509,052 in the prior comparable period
reflecting an increase in assets under management due largely to the
introduction of the DEM-MET Trust. As of March 31, 1998, three clients accounted
for 78% of the Company's revenue.
Total expense increased by $217,118, or 42.2%, to $731,276 in the quarter
ended March 31, 1998 from $514,158 in the prior comparable period. As a
percentage of total revenue, total expense decreased to 94.8% in the quarter
ended March 31, 1998 compared to 100.9% in the prior comparable period due to
the increase in revenues because of the increase in assets under management and
certain economies of scale resulting therefrom.
Management fee expense increased by $106,101, or 52.8%, to $306,903 in the
quarter ended March 31, 1998 from $200,802 in the prior comparable period
reflecting the increase in assets under management of the DEM-MET Trust.
Compensation and benefits expense decreased by $10,768, or 5.8%, to $174,734
in the quarter ended March 31, 1998 from $185,502 in the prior comparable period
due primarily to the payment of certain bonuses in the prior comparable period
that were not repeated in the quarter ended March 31, 1998 which was partially
offset by the addition of five new employees and annual pay increases. As a
percentage of total revenue, compensation and benefits expense decreased to
22.6% in the quarter ended March 31, 1998 from 36.4% in the prior comparable
period.
General and administrative expense increased by $116,167, or 182.3%, to
$179,891 in the quarter ended March 31, 1998 from $63,724 in the prior
comparable period due to advertising and travel expense pertaining to increased
marketing activities during the period. As a percentage of total revenue,
general and administrative expense increased to 23.3% in the quarter ended March
31, 1998 from 12.5% in the prior comparable period.
Interest expense was $12,748, in the quarter ended March 31, 1998 compared
to $7,130 in the prior comparable period.
The Company's income tax provision increased by $16,300 to $14,200 in the
quarter ended March 31, 1998 versus a $2,100 tax benefit in the prior comparable
period due to an increase in income before income taxes during the period.
Net income increased by $28,907 to $26,365 in the quarter ended March 31,
1998 from a loss of $2,542 in the prior comparable period as a result of the
items discussed above.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1996.
Total revenue increased by $1,436,743, or 169.1%, to $2,286,615 in 1997 from
$849,872 in 1996. Advisory and administrative fee revenue increased by
$1,415,084, or 174.2%, to $2,284,054 in 1997 from $832,970 in 1996 reflecting
increased fees as a result of an increase in total assets under management due
largely to the introduction of the DEM-MET Trust.
Total expense increased by $1,549,282, or 238.6%, to $2,198,514 in 1997 from
$649,232 in 1996. As a percentage of total revenue, total expense increased to
96.1% in 1997 compared to 76.4% in 1996. The increase of total expense as a
percentage of total revenue in 1997 compared to 1996 is due primarily to an
increase in compensation and benefits expense because of additional employees,
amortization expense related to DEM-MET Trust, an increase in professional fees
related to a proposed financing that was postponed and advertising and travel
expense pertaining to increased marketing activities during the period.
17
<PAGE>
Management fee expense, which consists primarily of the Company's payments
to sub-advisors in connection with its multi-manager investment product, the
DEM-MET Trust, was $869,355 in 1997. Management fee expense was not incurred in
1996 prior to the commencement of operations of the DEM-MET Trust.
Compensation and benefits expense increased by $303,838, or 104.4%, to
$594,993 in 1997 from $291,155 in 1996 due primarily to the addition of new
employees, annual pay increases and bonuses. As a percentage of total revenue,
compensation and benefits expense decreased to 26.0% for 1997 from 34.3% for
1996.
General and administrative expense increased by $231,373, or 88.6%, to
$492,644 in 1997 from $261,271 in 1996 due to professional fees incurred in
connection with a proposed financing that was postponed and advertising and
travel expense pertaining to increased marketing activities during the period.
As a percentage of total revenue, general and administrative expense decreased
to 21.5% for 1997 from 30.7% in 1996.
Amortization of intangible assets increased in 1997, reflecting twelve
months of amortization of the DEM-MET Trust start-up cost for the year 1997 as
compared to only one month of amortization in 1996.
Interest expense decreased by $64,284, or 82.6%, to $13,522 in 1997 from
$77,806 in 1996 substantially due to the elimination of a securities position
held on margin.
The Company's income tax provision decreased by $1,000, or 2.4%, to $40,000
in 1997 from $41,000 in 1996 due to a reduction in income before income taxes.
Net income decreased by $3,056, or 6.0%, to $48,101 for 1997 from $51,157
for 1996 as a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through capital
contributions from its principal stockholder, loans from affiliates and cash
flow from operations.
A substantial majority of the Company's assets are illiquid consisting
primarily of certain intangibles related to non-competition agreements and
rights and interests in the DEM-MET Trust. The Company's liquid assets consist
primarily of receivables from advisory clients. A relatively small percentage of
the Company's total assets are fixed. The Company's total assets as of December
31, 1997 and March 31, 1998 were $1,085,308 and $1,076,662, respectively.
The final payment of $150,000 on a noncompete agreement pertaining to the
DEM-MET Trust is due in the third quarter of 1998. Management expects that the
Company's liquid assets and cash provided by operations will be sufficient to
make this payment. As of March 31, 1998, the Company owes $771,889 to an
affiliated company. See "Certain Transactions." The Company currently intends to
use a portion of the estimated net proceeds from this Offering to repay this
debt. The Company may seek lines of credit following this Offering.
The Company's overall capital and funding needs are continually reviewed to
ensure that the capital base can support the estimated needs of the business.
Based upon these reviews, the Company believes it will require the increased
capital provided by the estimated net proceeds of this Offering or alternative
financing to fully implement the Company's DEM and DEM Multi-Manager strategies.
The Company's cash was $8,405 as of March 31, 1998 as compared to $8,677 as
of December 31, 1997.
EFFECTS OF INFLATION
The Company's assets are to a large extent illiquid in nature and are not
significantly affected by inflation. However, the rate of inflation affects the
Company's expenses, such as employee compensation and occupancy expenses, 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 position and results of operations.
18
<PAGE>
BUSINESS
GENERAL
The Company is an African-American owned and controlled investment advisory
and investment management company. Through its wholly-owned subsidiary, CCM, the
Company is registered with the Commission as an investment advisor and manages
the assets of registered investment companies, a private group trust, and the
funds of individual and institutional investors on a separate account basis. As
of March 31, 1998, the Company had approximately $511.8 million in total assets
under management. As of March 31, 1998, three clients represented approximately
70% of the Company's total assets under management.
The Company manages assets for two registered open-end investment
portfolios, the DEM Equity Fund and The Chapman U.S. Treasury Money Fund, each a
portfolio of The Chapman Funds, Inc., and for DEM, Inc., a registered closed-end
investment company. In December 1996, the Company established a private group
trust, the DEM-MET Trust for qualified employee benefit plans for which it
provides investment management services. As of March 31, 1998, DEM-MET Trust,
with $230.9 million in assets under management, represented approximately 45.1%
of the Company's total assets under management.
The Company is headquartered at the World Trade Center--Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, Maryland 21202 and its telephone number is
(410) 625-9656. The Company was incorporated in Maryland on January 8, 1998. Its
wholly-owned subsidiary, CCM, a District of Columbia corporation, was
established as an investment advisor in 1988.
STRATEGY
The Company has implemented a strategic initiative called the Domestic
Emerging Markets or DEM strategy which seeks investment in domestic companies
controlled by African-Americans, Asian-Americans, Hispanic/Latino-Americans and
women, the DEM Profile. Based on its implementation of the DEM strategy to date,
the Company believes that there exists a substantial demand, particularly from
government entities and large institutions, to invest in companies that meet the
DEM Profile and has designed its investment products to provide a single source
for meeting this objective while achieving a competitive rate of return.
In addition, in December 1996, the Company established and currently acts as
advisor to the DEM MET Trust. As advisor, the Company allocates investment
responsibility for the trust's assets among DEM Investment Managers. The Company
introduced this strategy, known as the DEM Multi-Manager strategy, through the
introduction of the DEM-MET Trust and will seek to increase its assets under
management through the development of additional products under this strategy.
As of March 31, 1998, the Company had $87.4 million and $230.9 million
invested pursuant to the DEM and DEM Multi-Manager strategies, respectively. In
addition, in April 1998, the Company commenced marketing of the DEM Equity Fund
and as of April 9, 1998 the fund had approximately $10 million in assets under
management.
The Company's DEM and DEM Multi-Manager strategies are in the early stages
of implementation. The Company has not conducted any marketing, demographic or
feasibility surveys to test their viability nor has the Company engaged in any
significant marketing of these strategies. Therefore, the viability of the DEM
and DEM Multi-Manager strategies and their level of market acceptance is largely
unknown. The Company intends to devote a substantial amount of the net proceeds
of the Offering and its other resources to the implementation and promotion of
the DEM and DEM Multi-Manager strategies, as well as the creation of new
investment products and services that further such strategies. See "Risk
Factors" and "Use of Proceeds."
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<PAGE>
INVESTMENT PRODUCTS
The Company currently manages three registered investment portfolios, the
DEM Equity Fund, The Chapman U.S. Treasury Money Fund, each a portfolio of The
Chapman Funds, Inc., and DEM, Inc., a registered closed-end investment company.
The Company has formed and manages one private investment trust, the DEM-MET
Trust. The Company also advises corporate, institutional and individual
investors on a separate account basis.
DEM EQUITY FUND is a newly created non-diversified portfolio of The Chapman
Funds, Inc., an open-end investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The principal
investment objective of the DEM Equity Fund is aggressive long-term growth
through investment in equity securities of companies meeting the DEM Profile. As
of April 9, 1998, the DEM Equity Fund had approximately $10.0 million in assets
under management.
THE CHAPMAN U.S. TREASURY MONEY FUND, also a portfolio of The Chapman Funds,
Inc., invests solely in short-term direct obligations of the U.S. Government and
repurchase agreements collateralized fully by direct obligations of the U.S.
Government. This fund is intended primarily for state and local governments and
their authorities and agencies. As of March 31, 1998, The Chapman U.S. Treasury
Money Fund had approximately $50.3 million in assets. A third portfolio of The
Chapman Funds, Inc., The Chapman Institutional Cash Management Fund, invests in
short-term money market securities, including U.S. Government obligations,
commercial paper, bank instruments and repurchase agreements. This fund is
intended primarily for corporations, pension and endowment funds and other
institutions and is currently inactive.
DEM, INC. is a registered, non-diversified closed-end investment company.
The principal investment objective of DEM, Inc. is aggressive long-term growth
from investment in securities of companies meeting the DEM Profile. See
"--Strategy." Although it has conducted no market survey, the Company believes
that DEM, Inc. is the first registered investment company focusing on companies
meeting the DEM Profile. As of March 31, 1998, DEM, Inc. had approximately $21.5
million in assets under management.
DEM-MET TRUST, or the DEM-MET Group Trust for Employee Benefit Plans, was
organized in 1996 under New York law. The DEM-MET Trust is intended to qualify
as a tax-exempt pooled trust for qualified employee benefit plans and certain
governmental plans. The DEM-MET Trust is the first product introduced by the
Company that employs the DEM Multi-Manager strategy. See "--Strategy." The DEM-
MET Trust allocates assets to investment portfolios managed by DEM Investment
Managers. These money managers invest their allocated assets in the securities
of domestic and foreign issuers which may consist of common stock, or other
types of equity investments, convertible preferred stocks, bonds, debentures,
notes or other fixed income investments. The Company acts as investment advisor
to the DEM-MET Trust and in such capacity is responsible for selecting and
monitoring the sub-advisors, all of whom meet the DEM Profile. As of March 31,
1998, the Company had subadvisory relationships with fourteen DEM Investment
Managers. The Company evaluates such sub-advisors monthly and reallocates assets
among existing and new sub-advisors as necessary. See "--Strategy." The DEM-MET
Trust was created in December 1996 pursuant to an agreement between The Chapman
Co. and Bankers Trust Company, as custodial trustee of the Trust. As of March
31, 1998, the DEM-MET Trust had approximately $230.9 million in assets and the
beneficial interests in the DEM-MET Trust were held by four institutional
investors.
SEPARATE ACCOUNTS The Company also provides investment advisory services to
separate accounts under individually tailored investment advisory agreements.
The Company manages portfolios with varied investment objectives including
long-term capital appreciation, current income or portfolio diversification. As
of March 31, 1998, approximately 31.5% of separate account assets under
management incorporate the DEM strategy as an investment objective. The Company
will continue to attempt to differentiate itself from other investment managers
by providing the DEM strategy as an investment objective. Compensation for
individual investment advisory services include both fixed fee arrangements and
fees based upon assets under management. As of March 31, 1998, the Company
managed approximately $209.0 million in assets
20
<PAGE>
under management for separate accounts, with $65.9 million invested in DEM
Companies. Two of the Company's clients represented 60.7% of the assets managed
on a separate account basis as of March 31, 1998.
All of the Company's investment advisory services including portfolio
management, marketing, research and customer service are provided from the
Company's Baltimore headquarters and each of Company's affiliated investment
companies maintains its office at the Baltimore headquarters.
MARKETING AND CUSTOMER SERVICE
The Company's marketing strategy is to provide a single source for investing
in DEM Companies while achieving a competitive rate of return. The Company
intends to aggressively market to large corporations, government entities and
other institutions seeking such targeted investments.
The Company targets its marketing to the various types of customers that use
its investment advisory and asset management services. The Company's separate
accounts are typically high net worth individuals and large institutional
investors. The Company markets to these accounts through customer support
activities and personal sales efforts by officers of the Company. This strategy
has also been utilized with the DEM-MET Trust due to the small number of large
investors that have invested in the trust.
The Company's proprietary investment products are distributed by The Chapman
Co., an affiliate of the Company. To date, the Company's investment product
marketing activities have been providing "wholesale" marketing assistance to
support The Chapman Co.'s direct retail selling efforts. The Company intends to
offer proprietary investment funds to banks, insurance companies, providers of
401(k) deferred compensation plans and other institutions ("Institutional
Resellers") for resale to their customers. The Company will provide support to
The Chapman Co. in marketing to Institutional Resellers and to the Institutional
Resellers' own retail sales forces. The Company may also commence some limited
advertising of its proprietary investment products.
In addition to separate accounts and proprietary investment products, the
Company will seek to enter into agreements with other investment advisors
whereby the Company will act as a sub-advisor with respect to their proprietary
investment products. The Company will provide wholesale marketing assistance to
the distributors of such third-party proprietary investment products to ensure
that such products are effectively marketed by the third-party distributors to
the investment community.
RESEARCH
As of March 31, 1998, the Company employed three portfolio managers. The
Company intends to hire additional portfolio managers to support existing
investment advisory and management services and to facilitate the introduction
and maintenance of new investment products.
The Company currently employs a buy-side analyst to assist portfolio
managers in investment research, monitoring of investment opportunities and the
development and maintenance of the Company's proprietary DEM valuation and
screening model. The Company also utilizes the research services of The Chapman
Co. for coverage on a substantial number of companies meeting the DEM Profile.
The Company intends to expand its research staff by hiring additional buy-side
analysts. See "Use of Proceeds."
INDUSTRY
Revenues in the investment management industry are fee based and determined
primarily by total assets under management. Therefore, the principal determinant
of industry growth is the growth of total assets under management. The major
factors which influence changes in assets under management are changes in the
market value of securities; net cash flow into or out of existing accounts; and
the introduction of new products by the industry or by particular firms.
21
<PAGE>
In general, assets under management in the industry have increased steadily.
According to the Investment Company Institute, the combined assets of the
nation's mutual funds increased by $185.2 billion in March 1998 to a total of
approximately $5 trillion under management. Assets under management rose
approximately 27% for the year 1997, reflecting both increased performance of
the stock markets as well as new investment by mutual fund owners. Net new cash
flow into mutual funds rose for the third straight year to a record $378 billion
in 1997 with increases in all fund categories including equity, bond and income,
and money market.
GOVERNMENT REGULATION
The Company's business is subject to various federal and state laws and
regulations. These laws and regulations are primarily intended to protect
investment advisory clients and stockholders of registered investment companies.
Under these laws and regulations, agencies that regulate investment advisors
have broad administrative powers, including the power to limit, restrict, or
prohibit an advisor from carrying on its business in the event that it fails to
comply with applicable laws and regulations. Possible sanctions that may be
imposed include the suspension of individual employees, limitations on engaging
in certain lines of business for specified periods of time, revocation of
investment advisor and other registrations, censures, and fines. The Company
believes that it is in substantial compliance with all material laws and
regulations.
The Company is registered with the Commission under the Investment Advisers
Act of 1940, as amended (the "Advisers Act"), and is subject to examination by
the Commission. Under Section 206 of the Advisers Act, it is unlawful for any
investment advisor to: (i) employ any device, scheme, or artifice to defraud any
client or prospective client; (ii) engage in any transaction, practice, or
course of business which operates as a fraud or deceit upon any client or
prospective client; or (iii) engage in any act, practice, or course of business
which is fraudulent, deceptive or manipulative. The Advisers Act imposes
numerous other obligations on registered investment advisors including fiduciary
duties, recordkeeping requirements, operational requirements, and disclosure
obligations. The Commission is authorized to institute proceedings and impose
sanctions for violations of the Advisers Act, ranging from censure to
termination of an investment advisor's registration. The failure of the Company
to comply with the requirements of the Commission could have a material adverse
effect on the Company.
An investment advisor to a registered investment company, its principals,
and its employees may also be subject to proceedings initiated by the Commission
to impose remedial sanctions for violation of any provision of the federal
securities laws and the regulations adopted thereunder, and the Commission may
prohibit such investment advisor to an investment company from continuing to act
in such capacity. Stockholders of registered investment companies or the
Commission may also bring an action against the officers, directors, and
investment advisor for breach of fiduciary duty in establishing the compensation
paid to the investment advisor.
The Funds are registered with the Commission under the Investment Company
Act and the sale of shares in the Funds has been registered under the Securities
Act of 1933, as amended (the "Securities Act"). Investment companies such as
DEM, Inc. and The Chapman Funds, Inc. and any future registered investment
companies established and/or advised by the Company, are subject to considerable
substantive regulation. Such companies must comply with periodic reporting
requirements. Proxy solicitations are subject to the general proxy rules as well
as to special proxy rules applicable only to investment companies. Shares of
open-end investment companies such as the DEM Equity Fund and The Chapman U.S.
Treasury Money Fund, can only be offered at a uniform public offering price
based on the current net asset value per share plus the sales load. No more than
60% of the directors of registered investment companies can be interested
persons, defined to include, among others, persons affiliated with the
management company or underwriter, and a majority of the directors must not be
affiliated with the underwriter. The advisory agreement must initially be
approved by a majority of the outstanding shares and, after two years, must be
annually approved, either by the board or by the outstanding voting shares. The
advisory agreement must be subject to termination upon 60 days notice by the
board or by the outstanding voting shares. The
22
<PAGE>
underwriting agreement must be annually approved by the board or by a vote of a
majority of the outstanding voting shares, and must provide for automatic
termination in the event of an assignment. With limited exceptions, transactions
between the investment company and an affiliate can be entered into only if
approved by the Commission, after notice and opportunity for hearing, as fair
and equitable.
The Company derives a large portion of its revenues from its investment
management agreements. Under the Advisers Act, the Company's investment
management agreements terminate automatically if assigned without the client's
consent. Under the Investment Company Act, advisory agreements with registered
investment companies such as the Funds terminate automatically upon assignment.
The term "assignment" is broadly defined and includes direct assignments as well
as assignments that may be deemed to occur, under certain circumstances, upon
the transfer, directly or indirectly, of a controlling interest in the Company.
COMPETITION
The Company's investment advisory business competes with a number of larger,
more established investment advisors and securities firms. Competition is
influenced by various factors, including product offering, quality of service
and price. All aspects of Company's advisory business are competitive, including
competition for assets to manage. The investment advisory industry is
characterized by relatively low cost of entry and the formation of new
investment advisory entities which may compete directly with the Company. Large
national firms, often with more personnel, have much greater marketing,
financial, technical, research, and other capabilities. These firms offer a
broader range of financial services than the Company and compete not only with
the Company and among themselves but also with commercial banks, insurance
companies and others for retail and institutional clients. The investment funds
managed by the Company are similarly subject to competition from nationally and
regionally distributed funds offering equivalent financial products with returns
equal to or greater than those offered by the Company's affiliated investment
funds.
A large number of investment products including closed-end companies and
mutual funds, are sold to the public by investment management firms,
broker/dealers, insurance companies and banks in competition with the investment
products offered by the Company. Many of the Company's competitors apply
substantial resources to advertising and marketing their investment products
which may adversely affect the ability of the Company's investment products to
attract new assets. The Company expects that there will be increasing pressures
among investment advisors to obtain and hold market share. See "Risk Factors--
Competition."
YEAR 2000 SOFTWARE ISSUE
As the year 2000 approaches, existing application software programs and
operating systems need to be critically reviewed to determine if they 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 be required to incur material costs in order 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.
23
<PAGE>
PERSONNEL
At March 31, 1998, the Company had approximately eight full-time employees
and shares four employees with affiliated companies. None of the Company's
employees is covered by a collective bargaining agreement. Management considers
the Company's relationship with 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. The
Company does not presently maintain an errors and omissions insurance policy
insuring against these risks.
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 shares approximately 10,000 square feet of office space
under a lease maintained by The Chapman Co. The Chapman Co.'s lease for these
premises expires in 2000. The Company is allocated furniture and equipment
leased by The Chapman Co. from an affiliated entity. See "Certain Transactions."
24
<PAGE>
MANAGEMENT
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, Chairman of the Board and Director
Earl U. Bravo, Sr................... 50 Vice President, Secretary, Assistant Treasurer and Director
Theron Stokes....................... 47 Director
M. Lynn Ballard..................... 55 Treasurer, Assistant Secretary and Controller
</TABLE>
The Board of Directors is actively recruiting an additional independent
member and intends to have an additional independent Director added to the Board
prior to the closing of the Offering. The Board of Directors intends to
designate an Audit Committee of the Board of Directors consisting of two
independent Directors, that will review the scope of accounting audits, review
with the independent public accountants the corporate accounting practices and
policies and recommend to whom reports should be submitted within the Company,
review with the independent public accountants their final report, review with
the independent public accountants overall accounting and financial controls,
and be available to the independent public accountants during the year for
consultation purposes. The Board of Directors intends to designate a
Compensation Committee of the Board of Directors consisting of two independent
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, Chairman of the Board and a
Director of the Company since its inception. Mr. Chapman founded the Company's
subsidiary, CCM in 1988, and has been President of CCM since 1996 and President
and Chairman of the Board of Chapman Holdings, Inc. and its investment banking
and brokerage subsidiary, The Chapman Co., and The Chapman Insurance Agency
Incorporated since the inception of each such entity. Mr. Chapman was a broker
for Alex. Brown and Sons, Incorporated from 1982 to 1987. Mr. Chapman is a
Certified Public Accountant, a General Securities Principal, a Financial and
Operations Principal, a Registered Options Principal, and a Registered Municipal
Principal. Mr. Chapman is a Director of Chapman Holdings, Inc., DEM, Inc. and
The Chapman Funds, Inc.
EARL U. BRAVO, SR. has been Vice President, Secretary, Assistant Treasurer
and a Director of the Company since its inception. Mr. Bravo has been Senior
Vice President, Secretary and Assistant Treasurer of Chapman Holdings, Inc.
since 1997. He has been a senior executive of The Chapman Co. since 1992 and CCM
since 1990. Mr. Bravo is a General Securities Principal, Financial and
Operations Principal, and Registered Representative. Mr. Bravo holds an MBA from
the University of Maryland and is a Director of Chapman Holdings, Inc.
THERON STOKES has been a director of the Company since its inception. He has
been an attorney for the Alabama Education Association since 1982.
M. LYNN BALLARD has been Treasurer, Assistant Secretary and Controller of
the Company since its inception. Ms. Ballard has been Treasurer, Assistant
Secretary and Controller of Chapman Holdings, Inc. since 1997. Ms. Ballard has
been Controller of The Chapman Co. and CCM since 1988, Treasurer of CCM since
1990 and Treasurer of The Chapman Co. since 1997.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by
the Company during the year ended December 31, 1997, for all services rendered
in all capacities to the Company and its subsidiary, CCM, to the Chief Executive
Officer. No other executive officer of the Company received salary and bonus of
$100,000 or more during such year.
25
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
<S> <C> <C> <C>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ----------------------------------------------------------------------------------- --------- --------- ---------
Nathan A. Chapman, Jr. 1997 $ 79,500 $ 15,000
Chief Executive Officer..........................................................
</TABLE>
The Board of Directors of the Company has established the 1998 Chapman
Capital Management Holdings, Inc. Omnibus Stock Plan (the "Plan") to enable the
Company to grant equity compensation to the Company's Directors, officers,
employees and consultants. Pursuant to the Plan, 150,000 shares have been
reserved for award thereunder. 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of April 30, 1998, 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) each 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 APRIL ----------------------------
BENEFICIAL OWNER BENEFICIAL OWNERSHIP 30, 1998 MINIMUM MAXIMUM
- ---------------------------------------------------------- -------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr..................................... 2,285,143 shares 91.9% 68.5% 61.2%
401 E. Pratt Street
Baltimore, MD 21202
Earl U. Bravo, Sr. ....................................... 2,375 shares * * *
Theron Stokes............................................. 8,750 shares * * *
All Directors and Executive
Officers as a Group..................................... 2,296,268 shares 92.3% 68.8% 61.5%
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of Common Stock.
27
<PAGE>
CERTAIN TRANSACTIONS
On January 8, 1998, the Company, a newly-formed Maryland corporation, issued
shares of Common Stock to The Chapman Co. in exchange for all of the outstanding
equity securities of CCM, a registered investment advisor. Accordingly, CCM is
currently a wholly-owned direct subsidiary of the Company. On February 26, 1998,
The Chapman Co. and its sole stockholder, CHI effected a tax-free Spin-Off
transaction pursuant to which all the outstanding Common Stock of the Company
was distributed to CHI and, immediately following such distribution, such Common
Stock was distributed to the then-existing stockholders of CHI.
The Chapman Co. is registered as a broker-dealer with the Commission and in
approximately one-half of the states and the District of Columbia. The Chapman
Co. is a member firm of the NASD with revenue primarily deriving from brokerage
services, corporate finance and government finance activities.
Nathan A. Chapman, Jr., the President, Chairman of the Board, a Director and
controlling stockholder of the Company, is the President, Chairman of the Board
and a Director of CHI and The Chapman Co. and controlling stockholder of CHI. At
the request of the Company, Mr. Chapman also serves as President and Chairman of
the Board of CCM, DEM, Inc. and The Chapman Funds, Inc. Earl U. Bravo, Sr., the
Vice President, Secretary, Assistant Treasurer and a Director of the Company, is
Senior Vice President, Secretary, Assistant Treasurer and a Director of CHI and
Vice President, Secretary and Assistant Treasurer of The Chapman Co. M. Lynn
Ballard, Treasurer, Assistant Secretary and Controller of the Company is
Treasurer, Assistant Secretary and Controller of CHI and The Chapman Co. At the
request of the Company, Mr. Bravo and Ms. Ballard serve as Secretary and
Assistant Treasurer and Treasurer, Assistant Secretary and Controller,
respectively, of CCM, DEM, Inc. and The Chapman Funds, Inc. At the request of
the Company, Mr. Bravo also serves as Vice President of DEM, Inc.
DEM, Inc., a closed-end investment company and The Chapman Funds, Inc., a
multi-series open-end investment company, are registered under the Investment
Company Act and were organized by the Company.
The Company is the investment advisor and administrator of DEM, Inc.
pursuant to an Investment Advisory and Administrative Services Agreement. In
connection therewith, the Company was paid $53,041, $138,614 and $48,847 in
advisory and administrative fees in the years ended December 31, 1996, 1997 and
the three months ended March 31, 1998, respectively.
The Company is the investment advisor and administrator of The Chapman U.S.
Treasury Money Fund, a portfolio of The Chapman Funds, Inc., pursuant to an
Advisory and Administrative Services Agreement. In connection therewith, the
Company was paid $203,827, $144,935 and $38,147 in advisory and administrative
fees in the years ended December 31, 1996, 1997 and the three months ended March
31, 1998, respectively.
The Company is the investment advisor and administrator of the DEM Equity
Fund, a series of The Chapman Funds, Inc., pursuant to an Advisory and
Administrative Services Agreement. The DEM Equity Fund became active in April
1998 and has not paid any fees to the Company.
In December 1995, Mr. Chapman loaned CCM $100,000, payable on demand, for
the purchase of common stock of an affiliate. In March 1996, Mr. Chapman loaned
CCM an additional $45,000, payable on demand, with a fixed interest payment of
$14,500 due at the time of repayment. As of March 31, 1998, the Company had made
payments on these loans in the amount of $145,627 and owed Mr. Chapman $13,873.
As of December 31, 1997, the Company owed CHI $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. 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 and for a
non-competition agreement. A portion of
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<PAGE>
the proceeds of this Offering will be used to repay all the indebtedness of the
Company owed to Mr. Chapman and CHI. See "Use of Proceeds."
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 Chapman Co. leases furniture and equipment from the
Partnership, with part of such cost being allocated to the Company. The lease
requires monthly payments of $9,846 and contains one year renewable terms, at
the option of The Chapman Co., through September 2000, at which time The Chapman
Co. can purchase the furniture and equipment at fair market value. Rent expense
allocated to the Company under this lease agreement was $29,538 and $39,384 in
1996 and 1997, and $14,769 for the three months ended March 31, 1998. Management
believes that the terms of these transactions were substantially as favorable to
the Company as those available from non-affiliates.
The Company shares office space, certain employees and other overhead with
certain other entities controlled by Mr. Chapman including The Chapman Co. and
The Chapman Insurance Agency Incorporated, a licensed insurance agency that has
not engaged in significant operations to date. The Company is allocated
compensation and benefits expense based upon the estimated percentage of such
employees' time spent performing services for the Company. The Company is
charged for other expenses based on actual or estimated usage. Pursuant to such
expense allocation arrangements the Company owed CHI, $28,782 and $106,267 as of
December 31, 1997 and as of the three months ended March 31, 1998, respectively.
The Company treats such outstanding allocation amounts as normal expenses 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, Domestic
Emerging Markets and stylized C-Eagle trademarks that are owned by Mr. Chapman.
The Company intends that 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, independent Directors, and the Company intends
that such transactions will be on terms no less favorable to the Company than
could be obtained from unaffiliated third parties.
29
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20 million shares of
Common Stock, par value $0.001 per share.
COMMON STOCK
As of the date of this Prospectus, there are 2,486,543 shares of Common
Stock issued and outstanding, held of record by 20 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, if any, 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 Articles of Incorporation of the Company (the "Charter") 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 amended from time to time (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 MGCL 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, no Director or officer shall be liable to the Company or
its stockholders for monetary damages arising out of events occurring at the
time such person is serving as a Director or officer, regardless of whether such
person is a Director or officer at the time of a proceeding in which liability
is asserted. Under current Maryland law, the effect of this provision is to
eliminate the rights of the Company and its stockholders to recover monetary
damages from a Director or officer except (i) to the extent that it is proved
that the Director or officer actually received an improper benefit, or profit in
money, property, or services for the amount of the benefit or profit in money,
property or services actually received, or (ii) to the extent that a judgment or
other final adjudication adverse to the person is entered in a proceeding based
on a finding in the proceeding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. In situations to which the Charter
30
<PAGE>
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 the Company's application will
be approved or that an active trading market for the Common Stock will develop
or, 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. 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.
Further, the Company will be required to elect one additional independent
director. See "Risk Factors--Risks of Low Priced Stocks."
As of the date of the Minimum closing, the Company will have 3,336,543
shares of Common Stock outstanding. The Company is offering up to a Maximum of
1,250,000 Shares and, accordingly, upon sale of the Maximum, the Company will
have outstanding 3,736,543 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 April 30, 1998, Mr. Chapman beneficially owned 2,285,143 shares of
Common Stock or approximately 68% and 61% 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 February 25, 1999. Accordingly, following the sale of the
Minimum up to 1,051,400 shares of Common Stock or approximately 32% of the
Company's outstanding Common Stock may be eligible for sale 90 days 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.
31
<PAGE>
PLAN OF DISTRIBUTION
The Company is offering up to a Maximum of 1,250,000 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 than noon of the business day following
receipt. All checks must be made payable to "UMB Bank, N.A., as escrow agent for
Chapman Capital Management 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. The Offering is not conditioned upon the
acceptance of the Common Stock for quotation on the SmallCap Market. Until such
listing is received or if such listing is not received it is anticipated that
the Common Stock will be quoted on the Nasdaq Electronic Bulletin Board or in
the so-called "pink sheets" over the counter market. 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, the QIU. 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.
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 $ 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 $ per Share sold. For acting as a qualified independent
underwriter,
32
<PAGE>
the QIU will receive fees equal to the greater of $ or % of the
aggregate public offering price of Shares sold in the Offering.
Both the Underwriter and the QIU will be reimbursed their counsel fees and
for their actual 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 have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
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. 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 Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Shares offered by this Prospectus. 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, D.C. 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
Web site 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 Web
site is http://www.sec.gov.
33
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 (Unaudited)....................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1997, and for the Three
Months Ended March 31, 1997 and 1998 (Unaudited)......................................................... F-4
Consolidated Statements of Changes In Stockholders' Deficit for the Years Ended December 31, 1996 and
1997, and for the Three Months Ended March 31, 1998 (Unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1997, and for the Three
Months Ended March 31, 1997 and 1998 (Unaudited)......................................................... F-6
Notes To Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Capital Management Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Chapman
Capital Management Holdings, Inc. (a Maryland corporation) and subsidiary as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for the years ended December 31,
1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Capital Management Holdings, Inc. and subsidiary as of December 31, 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1996 and 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 25, 1998
F-2
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash................................................................................. $ 8,677 $ 8,405
Management fees receivable:
From proprietary funds............................................................. 73,921 94,641
From individually managed accounts................................................. 179,081 202,490
Receivables from affiliates.......................................................... 35,533 34,588
Advances to officer.................................................................. 72,000 --
Office equipment, net................................................................ 5,204 4,205
Prepaids and other assets............................................................ 8,645 19,603
Intangible assets, net............................................................... 693,000 636,000
Investment in affiliate.............................................................. 9,247 10,730
Deferred taxes....................................................................... -- 66,000
------------ ------------
Total assets..................................................................... $1,085,308 $ 1,076,662
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued expenses................................................ $ 150,997 $ 193,169
Due to affiliated company............................................................ 800,672 771,889
Due to officer....................................................................... 28,473 13,873
Income taxes payable................................................................. 48,000 14,200
Noncompete agreement obligation...................................................... 150,000 150,000
------------ ------------
Total liabilities................................................................ 1,178,142 1,143,131
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 20,000,000 shares authorized, 2,486,543 issued and
outstanding...................................................................... 2,487 2,487
Accumulated deficit................................................................ (95,321) (68,956)
------------ ------------
Total stockholders' deficit...................................................... (92,834) (66,469)
------------ ------------
Total liabilities and stockholders' deficit...................................... $1,085,308 $ 1,076,662
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheet.
F-3
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Advisory and administrative fees....................... $ 832,970 $ 2,284,054 $ 509,052 $ 768,953
Other income........................................... 16,902 2,561 464 2,888
------------ ------------ ------------ ------------
Total revenues....................................... 849,872 2,286,615 509,516 771,841
------------ ------------ ------------ ------------
OPERATING EXPENSE:
Management fees........................................ -- 869,355 200,802 306,903
Compensation and benefits.............................. 291,155 594,993 185,502 174,734
General and administrative............................. 261,271 492,644 63,724 179,891
Amortization........................................... 19,000 228,000 57,000 57,000
Interest............................................... 77,806 13,522 7,130 12,748
------------ ------------ ------------ ------------
Total operating expense.............................. 649,232 2,198,514 514,158 731,276
------------ ------------ ------------ ------------
LOSS ON SALE OF SECURITIES............................... 108,483 -- -- --
------------ ------------ ------------ ------------
Income (loss) before income tax provision............ 92,157 88,101 (4,642) 40,565
INCOME TAX PROVISION (BENEFIT)........................... 41,000 40,000 (2,100) 14,200
------------ ------------ ------------ ------------
Net income (loss).................................... $ 51,157 $ 48,101 $ (2,542) $ 26,365
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and Diluted Earnings per Share..................... $ 0.02 $ 0.02 $ -- $ 0.01
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted Average Shares Outstanding...................... 2,486,543 2,486,543 2,486,543 2,486,543
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
----------- ------------ ------------
<S> <C> <C> <C>
BALANCE, December 31, 1995................................................. $ 2,487 $ (194,579) $ (192,092)
Net income............................................................... -- 51,157 51,157
----------- ------------ ------------
BALANCE, December 31, 1996................................................. 2,487 (143,422) (140,935)
Net income............................................................... -- 48,101 48,101
----------- ------------ ------------
BALANCE, December 31, 1997................................................. 2,487 (95,321) (92,834)
Net income............................................................... -- 26,365 26,365
----------- ------------ ------------
BALANCE, March 31, 1998 (Unaudited)........................................ $ 2,487 $ (68,956) $ (66,469)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
------------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 51,157 $ 48,101 $ (2,542) $ 26,365
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 22,791 231,982 57,983 57,999
Loss on sale of stock.................................. 108,483 -- -- --
Effect of changes in assets and liabilities-
Management fees receivable........................... 49,486 (71,508) (16,130) (44,129)
Due from affiliates.................................. 14,319 (30,654) 2,879 945
Advances to officer.................................. (19,327) (84,200) (10,000) 72,000
Prepaids and other assets............................ (2,529) (4,326) 1,930 (10,958)
Accounts payable and accrued expenses................ 43,144 134,295 12,319 42,172
Income taxes payable................................. 41,000 (134,000) (14,100) (33,800)
Deferred tax asset................................... -- -- -- (66,000)
Due to affiliated company............................ 305,279 151,104 26,511 (28,783)
------------- ----------- ----------- -----------
Net cash provided by operating activities.......... 613,803 240,794 58,850 15,811
------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment............................. -- (5,250) (5,250) --
Purchase of intangible assets............................ (640,000) -- -- --
Investment in affiliate.................................. (2,954,842) (29) -- (1,483)
Proceeds from sale of investment......................... 2,937,146 -- -- --
------------- ----------- ----------- -----------
Net cash used in investing activities.............. (657,696) (5,279) (5,250) (1,483)
------------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) due to officer.............. 45,000 (85,000) (60,000) (14,600)
Payment of noncompete agreement.......................... -- (150,000) -- --
------------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... 45,000 (235,000) (60,000) (14,600)
------------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................ 1,107 515 (6,400) (272)
CASH, beginning of year/period............................. 7,055 8,162 8,162 8,677
------------- ----------- ----------- -----------
CASH, end of year/period................................... $ 8,162 $ 8,677 $ 1,762 $ 8,405
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, AND MARCH 31, 1998
1. ORGANIZATION:
During January 1998, Chapman Capital Management Holdings, Inc. (the
"Company"), a newly formed corporation, became the parent of Chapman Capital
Management, Inc. ("CCM"). The Company was a wholly-owned subsidiary of Chapman
Holdings, Inc. prior to a spinoff from Chapman Holdings, Inc. effective on the
date of the initial public offering (IPO) of Chapman Holdings, Inc. The
accompanying financial statements include the activity of the Company and CCM.
The Company plans an initial public offering ("IPO") of common stock. 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 1,250,000 shares of common
stock. The proceeds will be used to create new investment products, expand its
sales and marketing efforts, repayment of indebtedness to affiliates of the
Company and for working capital to support growth and other general corporate
purposes.
The Company's operations are subject to certain risks, including the
Company's strategic initiative it calls "Domestic Emerging Markets," the
unproven nature of this strategy, dependence on key personnel, market conditions
and its ability to maintain or increase its investment dollars managed.
The Chapman Co., Chapman Holdings Inc.'s wholly-owned subsidiary, pays for
routine operating expenses and provides certain management, data processing,
accounting and administrative services to the Company, for which The Chapman Co.
is reimbursed. The Chapman Co. also pays salary and benefit expenses of which
the Company is allocated a portion. The Chapman Co. allocates those salary and
benefit expenses to the Company based on actual salaries related to the Company.
These financial statements may not necessarily be indicative of the financial
results that would have existed had the Company been operated as a unaffiliated
corporation.
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Significant intercompany transactions have been eliminated in consolidation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACQUISITIONS
In December 1996, the Company started DEM-MET, a tax-exempt pooled interest
trust for qualified employee benefit plans. As part of the start-up of this
trust, the Company entered into a noncompete agreement for $300,000 and paid
$640,000 in cost related to starting the trust. These amounts are included in
intangible assets (see Note 3).
The management fees included in the accompanying consolidated statements of
operations are related to DEM-MET Trust.
INTERIM FINANCIAL STATEMENT
The financial statements for the three months ended March 31, 1997 and 1998,
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, 1997. These financial statements include all
F-7
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, AND MARCH 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations and cash flows
for these periods. The Company's operating results are significantly effected by
the size of the portfolio it manages, and, thus, the operating results for the
three months ended March 31, 1997 and 1998, are not necessarily representative
of the results of operations for the year.
OFFICE EQUIPMENT
Office equipment is depreciated using the straight-line method over the
estimated useful life of 3 to 5 years. As of December 31, 1997, and for the
three months ended March 31, 1998, accumulated depreciation was $14,502 and
$15,501, respectively. Depreciation expense for the years ended December 31,
1996 and 1997, and the three months ended March 31, 1997 and 1998, was $3,791,
$3,982, $983 and $999, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance
sheets for cash, receivables, and accounts payable and accrued expenses
approximate fair value.
EARNINGS PER SHARE
As of December 31, 1997, the Company adopted the Statement of Financial
Accounting Standards Statement No. 128, "Earnings Per Share" (SFAS No. 128).
Under SFAS No. 128, a company must disclose basic earnings per share (the
principal difference being that common stock equivalents would not be considered
in the compilation of basic earnings per share) and diluted earnings per share.
The adoption of this pronouncement did not have a material effect on earnings
per share.
Earnings per share are based on the weighted average number of common shares
outstanding during the period the calculation is made. The weighted average
shares outstanding for all periods presented are 2,486,543, for both basic and
diluted earnings per share.
NEW ACCOUNTING STANDARD
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
becomes effective during the Company's 1998 fiscal year. Under SFAS No. 131, a
company must disclose certain information about the operating segments in the
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.
INCOME TAXES
The Company was included in the consolidated Federal income tax return of
The Chapman Co. on a cash basis through the date it was spun off. The Chapman
Co. allocated Federal tax expense to the Company based on its portion of
consolidated taxable income calculation on a stand-alone basis. After the spin
off, the Company will file a separate Federal income tax return. The tax
provision for the three months ended March 31, 1997 and 1998, are based of the
Company's estimate of its effective tax rate for the year. The Company files a
separate state income tax return.
F-8
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, AND MARCH 31, 1998
3. INTANGIBLE ASSETS:
Intangible assets consists of a noncompete agreement and acquisition costs.
The $300,000 noncompete agreement is being amortized over 3 years, the term of
the agreement. The $640,000 in acquisition costs are being amortized over 5
years. The noncompete agreement is to be paid in two equal installments in 1997
and 1998. Accumulated amortization as of December 31, 1997, and March 31, 1998,
is $247,000 and $304,000, respectively. Amortization expense for the years ended
December 31, 1996 and 1997, and for the three months ended March 31, 1997 and
1998, was $19,000, $228,000, $57,000 and $57,000, respectively.
4. COMMON STOCK:
The Company effected a 25% stock split effected as a stock dividend. As
such, all share data related to the Company prior to the stock split have been
restated.
5. TRANSACTIONS WITH AFFILIATES:
The Company 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 and to
the extent that any Funds' expenses exceed specified limitations. Included in
the accompanying consolidated statements of operations for the years ended
December 31, 1996 and 1997, and for the three months ended March 31, 1997 and
1998, are management fees related to The Chapman Funds totaling $203,827,
$144,935, $15,285 and $38,147, respectively.
The Company provides investment advisory and administrative services to DEM,
Inc. (DEM), a registered non-diversified closed-ended management investment
company, under an investment advisory and administrative services agreement
which sets forth the services to be provided and the fees to be charged.
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1996 and 1997, and for the three months ended March 31, 1997
and 1998, is management fees related to DEM totalling $53,041, $138,614, $27,951
and $48,847, respectively. In November 1995, the Company purchased 6,667 shares
for $100,005 of common stock in DEM. In 1996, the Company purchased 196,333
additional shares of DEM stock. During 1996, the stock was sold at a loss of
$108,483.
Included in management fees receivable as of December 31, 1997, and March
31, 1998, is $73,921 and $94,641, respectively, due from proprietary funds for
services provided under the above-described agreement.
Included in receivable from affiliates as of December 31, 1997, and March
31, 1998, is $25,526 and $31,876, respectively, due from Chapman Insurance
Agency ("CIA") for expenses paid on their behalf.
As of December 31, 1997, the Company has outstanding advances to the
majority stockholder of The Chapman Co. of $72,000, which is recorded as due to
affiliated company in the accompanying consolidated balance sheets.
As of December 31, 1997, and the three months ended March 31, 1998, the
Company owes The Chapman Co. $800,672 and $771,889, respectively, which is
recorded as due to affiliated company in the accompanying consolidated balance
sheets.
In December 1995, the majority stockholder of the Company loaned the Company
$100,000, payable on demand, for the purchase of DEM stock. In March 1996, the
majority stockholder of the Company
F-9
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, AND MARCH 31, 1998
5. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
loaned the Company an additional $45,000, payable on demand. During fiscal year
1997, the majority stockholder of the Company collected $85,000 of this payable.
As of December 31, 1997, and March 31, 1998, the net due to officer was $28,473
and $13,873, respectively.
The Chapman Co. has entered into an agreement in which it leases furniture
and equipment from Chapman Limited Partnership, an entity in which certain
officers and stockholders of the Company are partners. The Chapman Co.,
allocates a portion of the $9,846 monthly payment to the Company based on the
space used by the Company. The Chapman Co. allocated $29,538, $39,384, $9,846
and $14,769 during the years ended December 31, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998, respectively, to the Company.
6. STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosures for the years ended December 31, 1996 and
1997, for the three months ended March 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ------------------------
1996 1997 1997 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Noncompete agreement obligation............................... $ 300,000 $ -- $ -- $ --
Dividend reinvestment in affiliate............................ 9,218 29 -- 29
Cash paid for:
Interest.................................................... 77,806 5,000 5,000 --
Income taxes................................................ 5,000 174,000 -- 114,000
</TABLE>
7. CONCENTRATION OF CREDIT RISKS:
Two clients accounted for 55%, 72% and 76% of the Company's advisory and
administrative fees for the years ended December 31, 1996 and 1997, and for the
three months ended March 31, 1997, respectively. One client accounted for 63% of
the Company's advisory and administrative fees for the three months ended March
31, 1998. As of December 31, 1997, and March 31, 1998, receivables due from
these clients were $114,002 and $63,450, respectively.
8. STOCK OPTION PLANS:
In 1998, the Company established the Chapman Capital Management Holdings,
Inc. Omnibus Stock Plan (the Plan) to enable the Company to grant equity
compensation to the Company's directors, officers, employees and consultants.
Under the Plan, 150,000 shares of common stock have been reserved for issuance
upon exercise of stock options granted. The price per share of each option
exercised will be determined by the Compensation Committee of the Board of
Directors. No options have been issued pursuant to this Plan as of March 31,
1998.
F-10
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.................................. 12
Dilution......................................... 13
Capitalization................................... 14
Dividend Policy.................................. 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 16
Business......................................... 19
Management....................................... 25
Principal Stockholders........................... 27
Certain Transactions............................. 28
Description of Capital Stock..................... 30
Shares Eligible for Future Sale.................. 31
Plan of Distribution............................. 32
Transfer Agent, Escrow Agent and Registrar....... 33
Legal Matters.................................... 33
Experts.......................................... 33
Additional Information........................... 33
Index to Financial Statements.................... F-1
</TABLE>
UNTIL , 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 1,250,000 SHARES
[LOGO]
CHAPMAN CAPITAL
MANAGEMENT HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
SUBJECT TO COMPLETION DATED: MAY 5, 1998
PROSPECTUS
CHAPMAN CAPITAL
[LOGO]
MANAGEMENT HOLDINGS, INC.
COMMON STOCK
------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 6 AND "DILUTION"
ON PAGE 13.
The Common Stock is quoted on the Nasdaq SmallCap Market (the "SmallCap
Market") under the symbol "CMGT."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus will be used by The Chapman Co. in connection with offers
and sales of the shares of Common Stock of Chapman Capital Management Holdings,
Inc. related to market-making transactions, at prevailing prices, related prices
or negotiated prices. The Company will not receive any of the proceeds of such
sales. The Chapman Co. may act as principal or agent in such transactions.
------------------------
THE CHAPMAN CO.
The date of this Prospectus is , 1998
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This Prospectus may be used by The Chapman Co. in connection with offers and
sales related to market-making transactions in shares of Common Stock effected
from time to time. The Chapman Co. may act as principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or at negotiated prices.
For a description of certain relationships and transactions between The
Chapman Co. and its affiliates and the Company, see "Management," "Certain
Transactions" and "Principal Stockholders."
The Company has been advised by The Chapman Co. that, subject to applicable
laws and regulations, The Chapman Co. currently intends to make a market in the
Common Stock. However, The Chapman Co. is not obligated to do so and any
market-making activity will be subject to the limits imposed by the Securities
Act and the Securities Exchange Act of 1934, as amended. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors--Risks of Low Priced Stock."
The Chapman Co., has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority without
the prior specific written approval of such transactions by the customer.
32
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET--MAKING PROSPECTUS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.................................. 12
Dilution......................................... 13
Capitalization................................... 14
Dividend Policy.................................. 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 16
Business......................................... 19
Management....................................... 25
Principal Stockholders........................... 27
Certain Transactions............................. 28
Description of Capital Stock..................... 30
Shares Eligible for Future Sale.................. 31
Plan of Distribution............................. 32
Transfer Agent, Escrow Agent and Registrar....... 33
Legal Matters.................................... 33
Experts.......................................... 33
Additional Information........................... 33
Index to Financial Statements.................... F-1
</TABLE>
[LOGO]
CHAPMAN CAPITAL
MANAGEMENT HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that the Company may indemnify any director who was, is or is threatened to be
made a named defendant or respondent to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director of the Company,
or while a director, is or was serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, against reasonable expenses (including attorneys' fees),
judgments, penalties, fines and settlements, actually incurred by the director
in connection with such action, suit or proceeding, unless it is established
that: (i) the act or omission of the director was material to the matter giving
rise to such action, suit or proceeding, and was committed in bad faith or was
the result of active and deliberate dishonesty; (ii) the director actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. If the action, suit or proceeding
was one by or in the right of the Company, no indemnification shall be made with
respect to any action, suit or proceeding in which the director shall have been
adjudged to be liable to the Company. A director also may not be indemnified
with respect to any action, suit or proceeding charging improper personal
benefit to the director, whether or not involving action in the director's
official capacity, in which the director is adjudged to be liable on the basis
that a personal benefit was improperly received. Unless limited by the Company's
Charter: (i) a court of appropriate jurisdiction, upon application of a
director, may order such indemnification as the court shall deem proper if it
determines that the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances, regardless of
whether the director has met the standards of conduct required by MGCL Section
2-418; and (ii) the Company shall indemnify a director if such director is
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above. However, with respect to any action, suit or
proceeding by or in the right of the Company or in which the director was
adjudged to be liable on the basis that a personal benefit was improperly
received, the Company may only indemnify the director for any expenses
(including attorneys' fees) incurred in connection with such action, suit or
proceeding.
MGCL Section 2-418 further provides that unless limited by the Company's
Charter, the Company: (i) shall (a) indemnify an officer of the Company if such
officer is successful on the merits or otherwise in defense of any action, suit
or proceeding referred to above, and (b) indemnify an officer of the Company if
a court of appropriate jurisdiction, upon application of an officer, shall order
indemnification; (ii) may indemnify and advance expenses to an officer, employee
or agent of the Company to the same extent that it may indemnify directors; and
(iii) may indemnify and advance expenses to an officer, employee or agent who is
not a director to such further extent, consistent with law, as may be provided
by the Charter, Bylaws, general or specific action of the Company's Board of
Directors or contract.
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 MGCL, as from time to time
amended. If approved by the Board of Directors, the Company may indemnify its
employees, agents and persons who serve and 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 MGCL and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
II-1
<PAGE>
The Company's Charter provides that, to the fullest extent permitted by the
MGCL, as amended or interpreted, no director or officer of the Company shall be
personally liable to the Company or its stockholders for monetary damages in
connection with events occurring at the time such person served as a director or
officer.
Pursuant to the Underwriting and the Qualified Independent Underwriter
Agreements filed as Exhibits 1.1 and 1.2 to this Registration Statement, the
Company has agreed to indemnify the Underwriter the QIU, and their respective
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 of 1933, as amended (the "Securities Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
offering described in this Registration Statement (other than the underwriting
discount and commissions and reasonable expense allowance) will be as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 3,000
NASD filing fee................................................... 3,500
Nasdaq SmallCap Stock Market listing fee.......................... 5,000
Printing and engraving expenses................................... 50,000
Accounting fees and expenses...................................... 50,000
Legal fees and expenses (including Blue Sky)...................... 167,500
Miscellaneous..................................................... 21,000
---------
Total......................................................... $ 300,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following securities were issued by the
Company without registration under the Securities Act:
On January 8, 1998, the Company issued 1,989,235 shares of Common stock to
The Chapman Co. in exchange for all of the outstanding shares of capital stock
of Chapman Capital Management, Inc. This transaction was exempt from
registration under the Securities Act under Section 4(2) because it did not
involve a public offering. Such transaction was completed without an
underwriter.
On April 30, 1998, the Company issued 497,308 shares of Common Stock to its
stockholders of record as of April 29, 1998 as a stock dividend. This
transaction was exempt from registration under the Securities Act because it did
not involve the sale of a security.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement between the Company and The Chapman Co. (2)
1.2 Form of Qualified Independent Underwriter Agreement between the Company and Ferris
Baker Watts Incorporated (2)
1.3 Form of Escrow Agreement between the Company and UMB Bank, N.A (2).
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4 Form of Common Stock Certificate (1)
5 Opinion of Venable, Baetjer and Howard, LLP (2)
10.1 Advisory and Administrative Services Agreement between Chapman Capital Management,
Inc. and DEM Equity Fund dated October 28, 1997 (1)
10.2 Advisory and Administrative Services Agreement between Chapman Capital Management,
Inc. and The Chapman Funds, Inc. dated April 30, 1997 (1)
10.3 Advisory and Administrative Services Agreement between Chapman Capital Management,
Inc. and DEM, Inc. dated November 30, 1995 (1)
10.4 Chapman Capital Management Holdings, Inc. 1997 Omnibus Stock Plan (1)
10.5 Advisory Agreement for Separate Account dated June 1, 1995 (2)
10.6 Agreement & Declaration of Trust between Chapman Capital Management, Inc. and Bankers
Trust Company dated November 1, 1996 (1)
10.7 Agreement between Bankers Trust Company and Chapman Capital Management, Inc. dated
November 1, 1996 (1)
10.8 Agreement between Bankers Trust Company and Chapman Capital Management, Inc. dated
November 1, 1996, Tremont Partners, Inc. and Stamberg Prestia, Ltd. (1)
10.9 Agreement between the Company and Chapman Holdings, Inc. as to Allocation of Shared
Expenses dated as of April, 1998 (2)
10.10 License Agreement between the Company and Nathan A. Chapman, Jr. dated as of April,
1998 (2)
10.11 Lock-up Agreement between the Company and Nathan A. Chapman, Jr. dated December 28,
1997 (2)
21 Subsidiaries of Company (1)
23.1 Consent of Arthur Andersen LLP (3)
23.2 Consent of Venable, Baetjer and Howard, LLP (included in Exhibit 5)
24 Power of Attorney (1)
27 Financial Data Schedule (1)
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-51883) as filed with the Securities and Exchange
Commission on May 5, 1998.
(2) To be filed by amendment.
(3) Filed herewith.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement (or the most recent post-
effective amendment thereof); and notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of Prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any additional or changed material information with
respect to the plan of distribution.
(2) That, for the purpose of determining liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(b) The undersigned Company hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Act"), the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorizes this
Pre-Effective Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Baltimore,
state of Maryland, on May 8, 1998.
<TABLE>
<S> <C> <C>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
PRESIDENT
</TABLE>
Pursuant to the requirements of the Act, this Pre-Effective Amendment No. 1
to this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------ -------------------------------------------- -----------------
<C> <S> <C>
/s/ NATHAN A. CHAPMAN, JR.
-------------------------------------- President, Chairman of the Board and May 8, 1998
Nathan A. Chapman, Jr. Director (Principal Executive Officer)
/s/ M. LYNN BALLARD Treasurer and Controller (Principal
-------------------------------------- Financial Officer and Principal Accounting May 8, 1998
M. Lynn Ballard Officer)
The Entire Board of Directors
Nathan A. Chapman, Jr.
Earl U. Bravo, Sr.
Theron Stokes
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ NATHAN A. CHAPMAN, JR.
--------------------------------
Nathan A. Chapman, Jr. May 8, 1998
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
23.1 Consent of Arthur Andersen, LLP
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
May 8, 1998
