<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission file number 0-24213
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
-----------------------------------------------
(Name of Small Business Issuer in Its Charter)
MARYLAND 52-2097010
---------------- ---------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
401 EAST PRATT STREET, 28TH FLOOR, BALTIMORE, MARYLAND 21202
------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (410) 625-9656
----------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
----------------------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were: $4,622,000.
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates computed by reference to the average bid and asked
price of such common equity on March 10, 2000 was $12,585,004.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of outstanding shares of Common Stock of the registrant as of
March 10, 2000 was 3,351,334.
Transitional Small Business Disclosure Format
(check one). Yes [ ] No [ X ]
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. DESCRIPTION OF BUSINESS....................................... 1
ITEM 2. DESCRIPTION OF PROPERTY....................................... 19
ITEM 3. LEGAL PROCEEDINGS............................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 21
ITEM 7. FINANCIAL STATEMENTS.......................................... 28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.... 42
ITEM 10. EXECUTIVE COMPENSATION........................................ 44
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 47
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K......................... 52
Domestic Emerging Markets(R) and DEM(R) are registered trademarks and DEM
Profile(TM), DEM Universe(TM), DEM Company(TM) DEM Index (TM) and the stylized
C-Eagle logo are trademarks of Nathan A. Chapman, Jr.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Chapman Capital Management Holdings, Inc. is an African-American controlled
holding company. Its investment advisory subsidiary, Chapman Capital Management,
currently manages three mutual funds: the DEM Equity Fund, the DEM Index Fund
and The Chapman U.S. Treasury Money Fund, each a portfolio of The Chapman
Funds, Inc., a diversified, open-end management investment company registered
under the Investment Company Act of 1940. Chapman Capital Management has formed
and manages one private investment trust, the DEM-MET Trust. Chapman Capital
Management also advises corporate, institutional and individual investors on a
separate account basis. In addition, Chapman Capital Management is in the
process of establishing two new mutual funds which will use the DEM
Multi-Manager strategy.
As of February 29, 2000, Chapman Capital Management's total assets under
management attributable to mutual funds were approximately 8.2% of its total
assets under management.
DEM EQUITY FUND is a non-diversified portfolio of The Chapman Funds, Inc.
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 February 29, 2000, the DEM Equity Fund had approximately
$34.6 million in assets. The DEM Equity Fund commenced operations in
April 1998.
DEM INDEX FUND is also a non-diversified portfolio of The Chapman
Funds, Inc. The DEM Index Fund seeks to match, as closely as possible, the DEM
Index, an index composed of 100 stocks from the universe of publicly-traded
companies which meet the DEM profile. As of February 29, 2000, the DEM Index
Fund had approximately $302,000 in assets. The DEM Index Fund commenced
operations in March 1999.
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 February 29, 2000, The
Chapman U.S. Treasury Money Fund had approximately $36.3 million in assets. The
Chapman U.S. Treasury Money Fund began operations in June 1989.
THE DEM MULTI-MANAGER FUNDS AND THE DEM MULTI-MANAGER STRATEGY. Chapman
Capital Management has registered but has not yet begun to sell the DEM Multi-
Manager Bond Fund and the DEM Multi-Manager Equity Fund. The amendment to The
Chapman Funds registration statement registering, the DEM Multi-Manager Equity
Fund became effective on December 14, 1998 by virtue of Rule 485(a)(2)
1
<PAGE>
under the Securities Act. Similarly, the amendment to The Chapman Funds
registration statement registering the DEM Multi-Manager Bond Fund became
effective on September 28, 1999.
In addition, the Chapman Funds filed its annual update to its registration
statement with respect to these funds on December 30, 1999. This registration
statement became effective on February 28, 2000 under Rule 485(a)(i) under the
Securities Act. We have delayed sales of these funds until there is a greater
public awareness of the DEM Multi-Manager Strategy, and we anticipate that the
launch of our web site will help to provide this promotion; however, at present
we cannot provide a realistic estimate of when we expect to begin to market and
sell these two funds.
The DEM Multi-Manager Bond Fund will seek to earn high current income with
the potential for capital appreciation through investment in fixed income
securities of companies identified by multiple sub-advisors. The DEM
Multi-Manager Equity Fund will seek aggressive long-term growth through capital
appreciation by investment in equity securities of companies identified by
multiple sub-advisors.
In managing the DEM Multi-Manager funds, Chapman Capital Management will
seek to enhance performance and reduce market risk of each fund by allocating
each fund's assets among multiple sub-advisers. The sub-advisers may have, but
are not necessarily required to have, dissimilar investment styles and security
selection disciplines. Chapman Capital Management will monitor the performance
of both the total fund portfolio and the portion of the total fund portfolio
allocated to each sub-adviser and will reallocate fund assets among individual
sub-advisers, or recommend to the board of directors of The Chapman Funds that
the fund employ or terminate particular sub-advisers, to the extent Chapman
Capital Management deems appropriate to achieve the overall investment
objectives of the particular fund. Chapman Capital Management may recommend
reallocations if, in Chapman Capital Management's opinion, a sub-adviser's
allocation becomes overweighted as a result of extended appreciation and in
order that undervalued securities and management styles receive additional
allocations.
Other circumstances under which Chapman Capital Management might reallocate
a fund's assets among a fund's sub-adviser include poor performance of the
assets under the management of a sub-adviser, concerns about the manner in which
a sub-adviser is conducting its business or a change in a sub-adviser's
portfolio management team. Chapman Capital Management also uses this
multi-manager management style in the DEM-MET Trust, which is discussed below.
When selecting sub-advisers for the Multi-Manager funds, Chapman Capital
Management intends to actively recruit sub-advisers which meet the DEM profile;
however, Chapman Capital Management does not intend to discriminate on the basis
of race, gender or national origin in the selection of sub-advisers.
2
<PAGE>
We refer to this strategy as the DEM Multi-Manager strategy. The DEM Multi-
Manager strategy is in the early stages of implementation. We have not conducted
any marketing surveys to test its marketability, and we have not conducted any
significant marketing of these strategies. Therefore, the viability of the DEM
Multi-Manager strategy and its potential level of market acceptance is largely
unknown.
DEM-MET TRUST 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 was the first product
introduced by Chapman Capital Management that employs the DEM Multi-Manager
strategy. In managing the DEM-MET Trust, Chapman Capital Management actively
recruits money managers which meet the DEM profile to manage a portion of the
assets of the trust. 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, or temporary money market funds chosen by
Chapman Capital Management. Chapman Capital Management acts as investment
adviser to the DEM-MET Trust and in such capacity is responsible for selecting
and monitoring the sub-advisors.
As of February 29, 2000, Chapman Capital Management had sub-advisory
relationships with 12 investment advisors. When selecting sub-advisers for the
DEM-MET Trust, Chapman Capital Management actively recruits sub-advisers which
meet the DEM profile; however, Chapman Capital Management does not intend to
discriminate on the basis of race, gender or national origin in the selection of
sub-advisers.
Chapman Capital Management evaluates such sub-advisors monthly and
reallocates assets among existing sub-advisors and new sub-advisors as
necessary. The DEM-MET Trust was created in December 1996 pursuant to an
agreement between Chapman Capital Management and Bankers Trust Company, as
custodial trustee.
As of February 29, 2000, the DEM-MET Trust had approximately $329.3 million
in assets, representing 38.1% of Chapman Capital Management's total assets under
management. However, one of the participants in the DEM-MET Trust recently
informed us that it intends to withdrawal approximately $100 million of its
investment in the trust. This withdrawal represents approximately 11.6% of
Chapman Capital Management's assets under management as of February 29, 2000 and
approximately 30.4% of the assets under management in the DEM-MET Trust as of
February 29, 2000. We expect this withdrawal to be effective early in
April 2000.
DEM, INC. In June 1998, the board of directors of DEM, Inc., a closed end
investment company managed by Chapman Capital Management, determined that the
3
<PAGE>
continued operation of the company was not in the best interests of the
company's stockholders considering all relevant factors including, that the
company's shares had been trading at a discount from their net asset value for
approximately six months and that since inception, the company's expense ratio
had continuously been above the average expense ratio of small capitalization
growth funds as reported by Morningstar. The board of directors concluded that
(1) the discount on the company's shares could be attributed primarily to the
small size of the fund and its relatively high expense ratio; and (2) that
because investors could purchase shares of DEM, Inc. in the secondary market
below the shares' net asset value and because the Investment Company Act of 1940
generally prohibits investment companies from offering shares below their net
asset value, there was no feasible way in which to successfully increase the
size of the fund in order to reduce the expense ratio and reduce or eliminate
the discount at which the company's shares were then trading.
The stockholders of DEM, Inc. approved the liquidation and dissolution of
the company on September 1, 1998, at which time the officers of the company
began liquidating its assets in order to distribute the net proceeds to the
stockholders. The Chapman Co. incurred a loss on trading of DEM, Inc. stock of
$159,000 in connection with stock of DEM, Inc. held in market-making inventory
at the time of the liquidation.
SEPARATE ACCOUNTS. Chapman Capital Management also provides investment
advisory services to separate accounts under individual investment advisory
agreements. Chapman Capital Management manages equity and debt portfolios with
varied investment objectives including long term capital appreciation and
current income. As of February 29, 2000, approximately 78.2% of the separate
accounts under management incorporate the DEM strategy as an investment
objective. Chapman Capital Management will continue to attempt to differentiate
itself from other investment managers by providing the DEM strategy as an
investment objective.
As of February 29, 2000, Chapman Capital Management managed approximately
$463.9 million in assets for separate accounts, of which approximately
$362.6 million was invested pursuant to the DEM Strategy.
MARKETING AND CUSTOMER SERVICE
Chapman Capital Management's marketing strategy is to provide a single
source for investing in DEM companies while achieving a competitive rate of
return. Chapman Capital Management aggressively markets to large corporations,
government entities and other institutions seeking investment in DEM companies.
Chapman Capital Management targets its marketing efforts to the various
types of customers that use its investment advisory and asset management
services. Chapman Capital Management's separate accounts are typically large
institutional investors. Chapman Capital Management markets to these accounts
through customer support activities and personal sales efforts by officers of
Chapman Capital
4
<PAGE>
Management. 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.
Chapman Capital Management's proprietary investment products are distributed
by The Chapman Co. To date, Chapman Capital Management's investment product
marketing activities have been providing "wholesale" marketing assistance to
support The Chapman Co.'s direct retail selling efforts. Chapman Capital
Management intends to offer its proprietary investment funds to banks, insurance
companies, providers of 401(k) deferred compensation plans and other
institutions for resale to their customers. Chapman Capital Management will
provide support to The Chapman Co. in marketing to institutional resellers and
to the institutional resellers' own retail sales forces. Chapman Capital
Management may also undertake some limited advertising of its proprietary
investment products.
In addition to separate accounts and proprietary investment products,
Chapman Capital Management will seek to enter into agreements with other
investment advisors whereby Chapman Capital Management will seek to act as a
sub-advisor with respect to their investment products. Chapman Capital
Management will seek to provide wholesale marketing assistance to the
distributors of such third-party investment products to ensure that such
products are effectively marketed by the third-party distributors to the DEM
community.
RESEARCH
As of February 29, 2000, Chapman Capital Management employed four portfolio
managers. Chapman Capital Management intends to hire additional portfolio
managers to support its existing investment advisory and management services and
to facilitate the introduction and maintenance of new investment products.
Chapman Capital Management currently employs a buy-side analyst to assist
the portfolio managers in investment research, monitoring of investment
opportunities and the development and maintenance of Chapman Capital
Management's proprietary DEM valuation and screening model. Chapman Capital
Management also utilizes the research services of The Chapman Co. for coverage
on certain companies meeting the DEM profile. Chapman Capital Management intends
to expand its research staff by hiring additional buy-side analysts.
DEPENDENCE ON KEY INVESTMENT MANAGEMENT CLIENTS
At February 29, 2000, there were three participants in the DEM-MET Trust.
The $329.3 million in assets in the DEM-MET Trust represented 38.1% of Chapman
Capital Management's assets under management as of February 29, 2000. In
addition, for the year ending December 31, 1999, the DEM-MET Trust accounted for
approximately 50.4% of Chapman Capital Management Holdings' revenue. One
participant in the DEM-MET Trust recently informed us that it intends to
withdrawal approximately $100 million of its investment from the trust. If the
participants of the trust terminated their agreements with the DEM-MET Trust or
make additional
5
<PAGE>
withdrawals of a substantial amount of their assets, our advisory fee revenue
would be materially and adversely affected.
GOVERNMENT REGULATION
Chapman Capital Management'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 adviser 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:
- Suspension of individual employees
- Limitations on engaging in certain lines of business for specified periods
of time
- Revocation of investment adviser and other registrations
- Censures
- Fines
Chapman Capital Management is registered with the SEC under the Investment
Advisers Act of 1940 and is subject to examination by the SEC. Under
Section 206 of the Advisers Act, it is unlawful for any investment adviser to:
- Employ any device, scheme, or artifice to defraud any client or
prospective client
- Engage in any transaction, practice, or course of business which operates
as a fraud or deceit upon any client or prospective client
- 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
- Disclosure obligations
The SEC 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 SEC could have a material adverse effect on EChapman.com.
An investment adviser to a registered investment company, its principals,
and its employees may also be subject to proceedings initiated by the SEC to
impose remedial sanctions for violation of any provision of the federal
securities laws and the
6
<PAGE>
regulations adopted thereunder, and the SEC may prohibit an investment adviser
to an investment company from continuing to act in its capacity as an investment
adviser to an investment company. Stockholders of registered investment
companies or the SEC may also bring an action against the officers, directors,
and investment adviser for breach of fiduciary duty in establishing the
compensation paid to the investment adviser.
The mutual funds managed by Chapman Capital Management are registered with
the SEC under the Investment Company Act, and the sale of shares in these fund
has been registered under the Securities Act. Investment companies, such as The
Chapman Funds, Inc. and any future registered investment companies established
and/or advised by Chapman Capital Management, 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, the DEM Index 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 such as
The Chapman Funds, Inc. 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. In the
case of investment companies, such as The Chapman Funds, which have adopted
12b-1 plans for its portfolios in order to permit these portfolios to pay for
distribution expenses, the rules under the Investment Company Act require that
no more than 50% of the fund's directors can be interested persons.
The advisory agreement must have initially been 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 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. We do not believe that the
merger of Chapman Holdings will result in an assignment and automatic
termination of The Chapman Co.'s underwriting agreements with The Chapman Funds,
because we do not believe that the merger constitutes a change of control for
purposes of the Investment Company Act. With limited exceptions, transactions
between the investment company and an affiliate can be entered into only if
approved by the SEC, after notice and opportunity for hearing, as fair and
equitable.
Chapman Capital Management derives a large portion of its revenues from its
investment company management agreements. Under the Advisers Act, Chapman
Capital Management investment management agreements terminate automatically if
assigned without the client's consent. Under the Investment Company Act,
advisory
7
<PAGE>
agreements with registered investment companies such as the mutual funds managed
by Chapman Capital Management 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 Chapman Capital
Management. We do not believe that the merger of Chapman Capital Management
Holdings will result in an assignment and automatic termination of Chapman
Capital Management's advisory agreements, because we do not believe that the
merger constitutes a change of control for purposes of the Investment Company
Act.
COMPETITION
Chapman Capital Management'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 the advisory business are
competitive, including competition for assets to manage. 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 Chapman Capital Management and compete not only with Chapman
Capital Management and among themselves but also with commercial banks,
insurance companies and others for retail and institutional clients.
The mutual funds managed by Chapman Capital Management 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 Chapman Capital Management's affiliated investment funds. 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 Chapman Capital Management. Chapman Capital Management's ability to
increase and retain assets under management could be materially adversely
affected if client accounts or Chapman Capital Management's affiliated
investment funds under-perform specified market benchmarks. Chapman Capital
Management's ability to compete with other investment management firms also is
dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions.
A large number of investment products including 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 Chapman Capital
Management. Many of Chapman Capital Management's competitors apply substantial
resources to advertising and marketing their investment products which may
adversely affect the ability of Chapman Capital Management's investment products
to attract new assets. Chapman Capital Management expects that there will be
increasing pressures among investment advisors to obtain and hold market share.
8
<PAGE>
PERSONNEL
At December 31, 1999, Chapman Capital Management Holdings had 12 full-time
employees and shared three officers with affiliated companies. None of these
personnel is covered by a collective bargaining agreement. Management considers
Chapman Capital Management Holdings' relationship with its employees to be good.
TRADEMARKS
We have the right to use the following registered trademarks and common law
trademarks under our non-exclusive royalty-free service mark licensing agreement
with Nathan A. Chapman, Jr.
- Domestic Emerging Markets-Registered Trademark-
- DEM-Registered Trademark-
- C-Eagle Logo-TM- appearing on the front page of this prospectus and proxy
statement
- DEM Index-TM-
- DEM Profile-TM-
- DEM Universe-TM-
- DEM Company-TM-
- DEM Multi-Manager-TM-
- Chapman-TM-
We regard our trademarks and other intellectual property as critical to our
success. We rely on trademark law to protect our intellectual property rights.
Despite our precautions, it may be possible for third parties to obtain and use
our intellectual property rights without authorization.
9
<PAGE>
PLAN OF MERGER
On November 15, 1999, the Company signed a merger agreement which is
subject to stockholder approval and the completion of an initial public
offering of common stock by eChapman.com, among other things, to merge into a
wholly-owned subsidiary of eChapman.com. In the event the merger is
consummated, each share of common stock of the Company, other than shares
held by stockholders who properly perfect their dissenters' rights under the
Maryland General Corporation Law, automatically shall be converted into the
right to receive 2.23363 shares of eChapman.com common stock and a cash
payment for fractional shares.
This merger would result in the Company, Chapman Holdings Inc. and
Chapman Insurance Holdings, Inc. becoming wholly-owned subsidiaries of
eChapman.com. eChapman.com is a newly formed corporation designed to bring
these companies together to take advantage of the unique opportunities
presented by the growth of the Internet. eChapman.com is owned by the major
stockholder of the Company.
The merger will be fully described in the Company's proxy materials
for the special meeting of stockholders, currently expected to be held in
April 2000. The discussion set forth above and the risks discussed below
pertaining to the merger are qualified in their entirety by reference to the
proxy materials and the merger agreement that will be attached thereto.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The words "believes," "intends," "anticipates," and "expects," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are based on our current expectations and are subject
to a number of risks and uncertainties. In light of these risks and
uncertainties, many of which are described in detail in the risk factors set
forth below, actual results could differ materially from the forward-looking
statements contained in this document.
NET LOSS; RISK OF INABILITY TO MANAGE GROWTH
We have experienced and expect to continue to experience significant
growth in our business activities and the number of our employees. This growth
requires increased investment in personnel, financial and management systems and
controls and facilities. In addition, we intend to add personnel to support the
increase in assets under management that we will seek in executing our
strategies. Unless we achieve revenue growth in line with our growth in
expenses, we will continue to incur operating losses. Furthermore, our inability
to manage such growth could have a material adverse effect on our continued
operations. During 1999, we had a net loss of $853,000.
DEPENDENCE ON KEY INVESTMENT MANAGEMENT CLIENTS
All of our agreements with our advisory clients are terminable by the
client upon short notice (typically 30-60 days prior written notice). If the
DEM-MET Trust or any of our key investment management clients were to terminate
their advisory arrangements with us or if large investors of the DEM-MET Trust
were to withdraw their funds, our advisory fee revenue would be materially and
adversely affected.
The DEM-MET Trust, with three investors and $329.3 million in assets
under management, represents approximately 38.19% of our assets under
management as of February 29, 2000, 50.4% of our total revenues in 1999 and
54.4% of our net advisory and administrative fees in 1999. Excluding the
DEM-MET Trust and its clients, the Company's two largest clients represent
21.1% of the Company's assets under management as of February 29, 2000 and
6.7% of the Company's revenues for 1999.
10
<PAGE>
HIGHLY COMPETITIVE INDUSTRY
The investment advisory business is extremely competitive. We encounter
intense competition in all aspects of the investment advisory business and
compete directly with other firms, a significant number of which have greater
capital, experience and other resources than ours. Competition also exists for
experienced personnel including technical personnel and account executives. In
addition to 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.
UNPROVEN NATURE OF DEM AND DEM MULTI-MANAGER STRATEGIES
We have implemented and intend to use substantial resources to
promote our DEM and DEM Multi-Manager strategies. The Domestic Emerging
Markets, or DEM, strategy seeks investment in domestic companies that meet
the DEM Profile in that they are controlled by African-Americans,
Asian-Americans, Hispanic-Americans and women. The DEM Multi-Manager strategy
seeks investment management clients who wish to allocate investment
responsibility for their assets among multiple investment managers. As of
February 29, 2000, we had approximately $726.8 million in assets under
management using the DEM and DEM-Multi-Manager investment strategies,
respectively.
The success of the DEM and DEM Multi-Manager strategies will be
dependent upon our ability to attract funds earmarked for investment in such
strategies on both an institutional and retail basis. The DEM strategy is
further dependent on our ability to identify appropriate investments from the
universe of DEM companies. Because the DEM and DEM Multi-Manager strategies are
in the initial stages of introduction, their market acceptance is unknown and
there can be no assurance that we will be able to attract significant amounts of
investment capital for management under such strategies. Moreover, our belief
that these strategies offer a significant opportunity for the growth of our
business is not based upon marketing studies, or demographic or feasibility
reports, but is based solely upon the judgment of our management team and our
experience to date from our limited marketing of DEM and DEM Multi-Manager
products. Further, we have and will continue to 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, we would
likely lose such initial investments. Although, we have identified approximately
180 publicly-traded companies that meet the DEM Profile, there can be no
assurance that the investment portfolios of such companies will attract initial
or continued investment or that the companies meeting the DEM Profile will be
able to maintain continued growth.
DEPENDENCE ON KEY PERSONNEL; DUTIES TO OTHER COMPANIES
For the foreseeable future, we will place substantial reliance upon the
personal efforts and abilities of Nathan A. Chapman, Jr., our President, who
will not devote his full time to our activities. The loss of the services of Mr.
Chapman may have a material adverse effect on our business, operations, revenue
and/or business prospects.
11
<PAGE>
POTENTIAL ADVERSE EFFECTS OF CHANGES IN ECONOMY AND MARKET CONDITIONS
The financial markets and businesses operating in the securities
industry 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 our control. There can be no assurance that
broad 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 our investment products and separate accounts, which
may adversely affect assets under management and/or fees. Our revenues from
investment management are directly related to fluctuations in the dollar amount
of assets under management.
RELATIONSHIPS WITH OTHER CHAPMAN ENTITIES AND POTENTIAL CONFLICTS OF INTEREST
We act as investment advisor, pursuant to investment advisory
agreements, for three active registered investment portfolios, the DEM Equity
Fund, the DEM Index Fund and The Chapman U.S. Treasury Money Fund, each an
open-end portfolio of The Chapman Funds, Inc. Our revenues in connection with
these related-party agreements accounted for 12.8% and 15.5% of our total
revenues in the years ended December 31, 1998 and 1999, respectively. At our
request, Nathan A. Chapman, Jr., our President and Chairman of the Board;
Earl U. Bravo, Sr., our Vice President, Secretary and Assistant Treasurer;
and M. Lynn Ballard, our Treasurer and Assistant Secretary; serve as
President and Chairman of the Board; Secretary and Assistant Treasurer; and
Treasurer and Assistant Secretary, respectively, of The Chapman Funds, Inc.
In addition, several of our 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 us and
such other companies. Further, because our key executives are also senior
executives of other companies, they will not be able to devote all of their
time to our business affairs. Although there is no written agreement, we
expect that Mr. Chapman will devote no less than 33% of his time to our
operations and entities that he serves at our request. All business
transactions and allocations of overhead between us and such other companies
are approved by a committee of the Board of Directors composed of
independent, outside directors. Furthermore, the compensation of our
President will be approved by the Compensation Committee of the Board of
Directors, a majority of the members of which are independent, outside
directors.
12
<PAGE>
EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE/CONTROL BY
PRINCIPAL STOCKHOLDER
Nathan A. Chapman, Jr. directly holds 2,285,143 shares, or
approximately 68.1%, of the outstanding shares of Common Stock. All of such
shares are available for resale in the public market under Rule 144
promulgated pursuant to the Securities Act. As of March 10, 2000, an
additional 134,165 shares, or approximately 4.00% of the outstanding Common
Stock, were held in inventory by a subsidiary of an affiliate of the Company
and Mr. Chapman, The Chapman Co., in its capacity as market-maker for the
Common Stock. All of the shares held by The Chapman Co. are available for
immediate resale. 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. Further, due to his share ownership, Mr. Chapman controls
the outcome of all matters submitted to our stockholders for approval,
including the election of all of our directors.
REGULATORY RISKS
Our business, and the investment management industry generally, are
subject to regulation at both the federal and state levels. Pursuant to the
National Securities Markets Improvement Act of 1996, regulatory oversight of
investment advisors is divided between the Securities and Exchange Commission
and state regulatory authorities. Because our wholly-owned subsidiary, Chapman
Capital Management, Inc., or CCM, has assets under management in excess of $25
million, CCM is required to be registered with, and is subject to regulation by,
the Securities and Exchange Commission and, with the exception of state
anti-fraud regulations, CCM is generally exempt from registration and regulation
at the state level. These regulations are designed primarily for the protection
of our clients rather than our stockholders. Failure of CCM or its employees 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 us. Although
we have implemented procedures designed to achieve compliance with such laws,
rules and regulations, we cannot be sure that a failure to comply will not have
a material adverse effect upon us. Furthermore, amendments to existing statutes
and regulations or the adoption of new statutes and regulations could require us
to alter our methods of operation at costs which could be substantial.
NO DIVIDENDS
13
<PAGE>
To date, we have not paid any cash dividends on our Common Stock and do
not expect to declare or pay any cash dividends in the foreseeable future. We
intend to retain all earnings, if any, for the foreseeable future for our
continued growth.
ADDITIONAL FACTORS RELATED TO PROPOSED MERGER THAT MAY AFFECT FUTURE RESULTS
The risks described in the preceding section pertain to the continued
operation of the Company as a stand-alone entity. In the event the proposed
merger is consummated, the operations of eChapman.com after the merger are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the Company's current stockholders.
RISKS ASSOCIATED WITH ECHAPMAN.COM
WE ARE A NEW COMPANY WITH MINIMAL OPERATIONS TO DATE, AND WE HAVE NOT FORMALLY
LAUNCHED OUR WEB SITE; IF WE EXPERIENCE A DELAY IN COMPLETING AND LAUNCHING OUR
WEB SITE, OUR EARNINGS WILL SUFFER.
EChapman.com was formed in 1999 and has had minimal operations to date,
which have consisted solely of expenses incurred in developing our business
plan. Although we have launched a prototype of our web site, we are still in the
process of designing and developing our actual web site, and we have not made
final decisions with respect to a web design firm, web development firm, a
hosting services provider or other necessary Internet vendors. If we experience
a delay in identifying and retaining qualified vendors for the completion and
launch of our web site, our ability to successfully implement our business
strategy will be adversely affected. In addition, since we are dependent upon
outside vendors for these services, our estimated time frames will depend upon
their availability.
BECAUSE WE HAVE NO INTERNET-RELATED OPERATING HISTORY, WE CANNOT ENSURE YOU THAT
OUR EXPANSION INTO THE AREA WILL BE PROFITABLE.
Although we have a history with respect to the securities brokerage,
investment banking and investment advisory businesses, we have no Internet-based
operating history from which you can evaluate our combined business plan and
prospects.
As a new entrant to the Internet business, we face risks and uncertainties
relating to our ability to implement successfully the Internet component of our
business strategy, including:
- Successful design, development and launch of the EChapman.com web site
- Creation of public awareness of the EChapman.com brand and web site
- Successful expansion of our financial service businesses on the Internet
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be materially and
adversely affected.
14
<PAGE>
WE CURRENTLY HAVE NO AGREEMENTS WITH ADVERTISERS, STRATEGIC PARTNERS OR CONTENT
PROVIDERS, AND IF WE ARE UNABLE TO ESTABLISH AND MAINTAIN THESE RELATIONSHIPS,
OUR EARNINGS WILL SUFFER.
Although we intend to pursue advertising relationships and strategic
alliances with third parties and enter into agreements with content providers,
we have not entered into negotiations with any companies, and we cannot assure
you that we will be able to establish or maintain these relationships. If we
cannot establish and maintain these relationships, our earnings will be
adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE EXPECT TO CONTINUE TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
On a pro forma basis, after giving effect to the mergers of Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance Holdings
into our wholly-owned subsidiaries, we had net losses of $4,718,000 for the year
ended December 31, 1999. Following the offering and the consummation of the
mergers, we expect to continue to increase our operating expenses significantly,
expand our marketing and staff and continue to develop and expand our web site
and our online information and services. These expenses will be significant and
generally will precede revenues, and if they are not followed by increased
revenues, our business, results of operations and financial condition will be
materially and adversely affected.
BECAUSE OF OUR LIMITED EXPERIENCE WITH BUILDING THE ECHAPMAN.COM BRAND, WE MIGHT
NOT EFFECTIVELY UTILIZE RESOURCES NEEDED TO BUILD OUR BRAND, WHICH COULD
NEGATIVELY IMPACT OUR REVENUE AND OUR ABILITY TO ATTRACT USERS, ADVERTISERS AND
STRATEGIC PARTNERS.
We believe that establishing and maintaining our brand is critical to our
success and that the importance of brand recognition will increase due to the
growing number of web sites, particularly those targeted to discrete segments of
the DEM community. We intend to build our brand through advertising targeted to
segments of the DEM community and the DEM community as a whole, including print,
broadcast placements, public relations campaigns and the development of
strategic relationships with other companies which target segments of the DEM
community or, conversely, which desire access to the DEM community. We have
minimal practical experience with building our brand through these channels or
in establishing strategic relationships. If our efforts to build our brand
through these channels do not generate a corresponding increase in revenue, our
financial results could be adversely affected. Successful promotion and
marketing of our brand will also depend on providing up-to-date, interesting and
compelling content, community, commerce and personalized services, and we will
need to increase our marketing and branding expenditures in our effort to
increase our brand awareness. If our brand building strategy is unsuccessful, we
may never recover these expenses, we may be unable to increase our future
revenues, and our business would be materially and adversely affected.
15
<PAGE>
NATHAN A. CHAPMAN, JR. HAS BEEN AN INSTRUMENTAL FORCE IN THE GROWTH OF CHAPMAN
HOLDINGS AND CHAPMAN CAPITAL MANAGEMENT HOLDINGS AND IN THE CREATION OF THE DEM
STRATEGY, AND THE LOSS OF MR. CHAPMAN'S SERVICES WOULD DEPRIVE US OF MR.
CHAPMAN'S KNOWLEDGE OF AND SKILL IN THE FINANCIAL SERVICES AND DEM MARKETS,
WHICH WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND GROWTH PROSPECTS.
For the foreseeable future, we intend to place substantial reliance upon the
personal efforts and abilities of Nathan A. Chapman, Jr., president of
EChapman.com. Mr. Chapman has provided the strategic vision for and has played a
key role in executing the business plans of Chapman Holdings and Chapman Capital
Management Holdings and the DEM strategy in the past. Therefore, the loss of the
services of Mr. Chapman would have a material adverse effect on our business,
operations, revenue and business prospects because of our reliance on his
strategic vision and his experience in the financial services and DEM markets.
We do not have an employment agreement with Mr. Chapman. The Chapman Co.
currently maintains "key man" life insurance coverage in the amount of
$7,000,000 on Mr. Chapman.
USE OF THE DEM STRATEGY ON THE INTERNET IS NEW AND UNTESTED, AND IF WE ARE
UNABLE TO ATTRACT MEMBERS OF THE DEM COMMUNITY TO OUR WEB SITE, OUR FUTURE
PROFITABILITY WILL BE MATERIALLY AND ADVERSELY AFFECTED.
We plan to use the DEM strategy in our Internet business to focus on
attracting African-Americans, Asian-Americans, Hispanic-Americans and women to
our web site. The success of our business will depend on our ability to attract
members of the DEM community to our web site; however, we cannot assure you that
these individuals will use our web site or that the expansion of the DEM
strategy on the Internet will be profitable because of the existing and
increasing competition for Internet-based business and the relatively limited
market represented by members of the DEM community compared to the market for
Internet users as a whole.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND IF A PUBLIC MARKET FOR
OUR SECURITIES DOES NOT DEVELOP OR IS NOT SUSTAINED, OUR STOCK PRICE COULD BE
ADVERSELY AFFECTED.
Prior to our initial public offering, our common stock has not been publicly
traded, and we cannot assure you that an active public market for our common
stock will develop or, if developed, that it will continue after the offering.
Because we lack an operating history and because the Internet industry is
relatively new and rapidly evolving, it is difficult to predict the extent to
which investor interest in our common stock will lead to a trading market or how
liquid that market might become.
16
<PAGE>
RISKS RELATED TO ECOMMERCE AND THE INTERNET
WE FACE INTENSE COMPETITION, AND IF WE DO NOT RESPOND TO THIS COMPETITION
EFFECTIVELY, WE MAY NOT BE ABLE TO RETAIN AND ATTRACT USERS, ADVERTISERS AND
STRATEGIC PARTNERS, WHICH COULD REDUCE OUR REVENUE AND HARM OUR FINANCIAL
RESULTS.
The number of web sites competing for the attention and spending of users
and advertisers has greatly increased, and we expect it to continue to increase.
The market for Internet content sites is rapidly evolving and financial,
technical and legal barriers to entry are low, enabling newcomers to launch
competitive sites at relatively low costs.
We will compete for users, advertisers and strategic partners with the
following types of companies:
- Online services or web sites targeted at the various segments of the DEM
community, such as msbet.com, netnoir.com, quepasa.com, ivillage.com,
women.com and womencentral.com
- Web search and retrieval and other online service companies, commonly
referred to as portals
- Publishers and distributors of traditional media, such as television,
radio and print
- Online and traditional brokerages and investment banks
- Traditional brokerages and investment banks
If we do not respond to this competition effectively, we may not be able to
attract users, advertisers and strategic partners, which would reduce our
revenue and harm our financial results. In addition, increased competition could
result in price reductions, reduced margins or loss of market share, any of
which could adversely affect our business.
FAILURES OF OUR NETWORK INFRASTRUCTURE COULD RESULT IN UNANTICIPATED EXPENSES
AND PREVENT OUR USERS FROM EFFECTIVELY UTILIZING OUR SERVICES, WHICH COULD
NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN USERS AND ADVERTISERS AND
OTHER STRATEGIC PARTNERS.
Our ability to successfully create an interactive online community and to
deliver our financial services online depends in large part on the capacity,
reliability and security of our network hardware, software and
telecommunications infrastructure. Failures of our network infrastructure could
result in unanticipated expenses to address these failures and could prevent our
users from effectively utilizing our services, which could prevent us from
retaining and attracting users, advertisers and other strategic partners. In
addition, if we were to experience a network failure, we could be subject to
regulatory sanctions in connection with our online brokerage services.
17
<PAGE>
Our system is susceptible to natural and man-made disasters, including fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect the operation of our web site.
Our insurance policies may not compensate us for any losses that may occur due
to any failures or interruptions in our systems. We do not presently have any
secondary "off-site" systems or a formal disaster recovery plan. Any system
failure that causes an interruption in service or decreases the responsiveness
of our service could impair our reputation, damage our brand name and harm our
revenues.
In addition, our users will depend on Internet service providers, online
service providers and other web site operators for access to our web site. Due
to the rapid growth of the Internet, many of these service providers have
experienced significant outages in the past and could experience outages, delays
and other difficulties due to system failures unrelated to our systems. These
problems could also harm our business by preventing users from effectively
utilizing our services.
THE CHAPMAN CO. IS PARTICULARLY SUSCEPTIBLE TO LIQUIDITY RISK WHILE TRADING FOR
ITS OWN ACCOUNT DUE TO ITS LARGE INVENTORY OF ECHAPMAN.COM COMMON STOCK.
As a result of the mergers, The Chapman Co.'s inventory of Chapman Holdings
common stock and Chapman Capital Management Holdings common stock will convert
into shares of EChapman.com common stock. EChapman.com common stock has been
approved for listing on the Nasdaq National Market. As a newly-listed Nasdaq
National Market security, EChapman.com common stock may have less liquidity and
higher spreads between bid and ask prices than other securities listed on the
New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market. Accordingly, The Chapman Co. is subject to liquidity risk with respect
to this security and may take longer to liquidate its inventory of these
securities than it would for investments in more liquid securities. Liquidity
risk is the risk that this security may be difficult or impossible to sell at
the time and for the price that The Chapman Co. deems appropriate. Further,
liquidity risk implies that any effort on the part of The Chapman Co. to
liquidate its portfolio in a short period of time may adversely affect the price
of the EChapman.com common stock.
OUR INVESTMENT ADVISORY SUBSIDIARY IS DEPENDENT ON A FEW MAJOR INVESTMENT
MANAGEMENT CLIENTS, AND IF ANY OF THESE CLIENTS TERMINATED THEIR ADVISORY
ARRANGEMENTS WITH US, OUR ADVISORY FEE REVENUE WOULD BE MATERIALLY HARMED.
All of Chapman Capital Management's agreements with its advisory clients are
terminable by the client upon short notice (typically 30-60 days prior written
notice). As of February 29, 2000, eight clients, including all three of those
invested in DEM-MET Trust and The Chapman U.S. Treasury Money Fund, represented
approximately 74.5% of our total assets under management. As of February 29,
2000, DEM-MET Trust, with $329.3 million in assets under management, represented
approximately 38.1% of our total assets under management. One of the
participants in the
18
<PAGE>
DEM-MET Trust has informed us that it intends to withdrawal approximately
$100 million of its investment in the trust. This withdrawal represents
approximately 11.6% of Chapman Capital Management's assets under management as
of February 29, 2000 and approximately 30.4% of the assets under management in
the DEM-MET Trust as of February 29, 2000. We expect this withdrawal to be
effective early in April 2000. If the DEM-MET Trust or any of our key investment
management clients terminate their advisory arrangements with us or make
additional substantial withdrawals of their assets under management, our
advisory fee revenue would be materially and adversely affected.
ITEM 2. DESCRIPTION OF PROPERTY
Chapman Capital Management Holdings' principal executive offices are located
at the World Trade Center-Baltimore, 401 East Pratt Street, 28(th) Floor,
Baltimore, Maryland 21202 where it 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 October 2000 and The Chapman Co. has an option to
renew this lease for another five years.
ITEM 3. LEGAL PROCEEDINGS
Many aspects of Chapman Capital Management Holdings' business involve
substantial risks of liability, including exposure under federal and state
securities laws. Chapman Capital Management Holdings maintains an errors and
omissions insurance policy in the amount of $1 million insuring it against these
risks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE AND DIVIDEND INFORMATION
Since August 14, 1998, Chapman Capital Management Holdings common stock has
been traded in the over-the-counter market, and prices for Chapman Capital
Management Holdings common stock are quoted on the Nasdaq SmallCap Market under
the symbol CMGT. The following table sets forth the high and low bid prices of
Chapman Capital Management Holdings common stock as reported on the Nasdaq
SmallCap Market. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
PRICE RANGE PER SHARE
<TABLE>
<CAPTION>
CHAPMAN CAPITAL
MANAGEMENT
HOLDINGS
(CMGT)
-----------------------
HIGH LOW
---------- ----------
<S> <C> <C>
1998
3(rd) Quarter(1).......................................... 8 7
4(th) Quarter............................................. 8 3/8 7 1/16
1999
1(st) Quarter............................................. 8 1/4 7 1/4
2(nd) Quarter............................................. 8 3/8 7 1/4
3(rd) Quarter............................................. 7 3/4 7
4(th) Quarter............................................. 20 1 7/8
2000
1(st) Quarter(2).......................................... 16 1/2 11 3/8
</TABLE>
- ------------------------
(1) From August 14, 1998.
(2) Through March 28, 2000.
On January 25, 2000, there were approximately 22 record holders of Chapman
Capital Management Holdings' common stock. As of January 25, 2000, Chapman
Capital Management Holdings had 3,351,334 outstanding shares of common stock.
DIVIDENDS
Since its initial public offering in August 1998, Chapman Capital Management
Holdings has never declared or paid cash or other dividends on its common stock
and does not anticipate doing so in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of the board of
directors and will depend upon Chapman Capital Management Holdings' earnings, if
any, its financial condition, and other relevant factors. Chapman Capital
Management Holdings intends to retain any earnings in the foreseeable future for
its continued growth.
PROCEEDS OF THE OFFERING
On June 30, 1998, the Company's Registration Statement on Form SB-2
(File No. 333-51883) pertaining to its initial public offering of shares of the
Company's common stock, par value $0.001 (the "Offering") was declared
effective.
The Company has applied Offering proceeds in the amount of
approximately $813,000 for the repayment of indebtedness to affiliates of the
Company. The Company applied approximately $745,000 to the creation of new
investment products, $1,045,000 to expand sales and marketing efforts;
$444,000 to promote the DEM strategies, and $850,000 for working capital and
general corporate purposes. The remaining Offering proceeds have been
invested by the Company in The Chapman U.S. Treasury Money Fund, an
affiliate, pending final Application of such proceeds.
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Chapman Capital Management Holdings, Inc. consolidated financial
statements and the notes included elsewhere in this document. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such result or trends will necessarily continue in the future.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
Advisory and administrative revenue is earned by Chapman Capital Management
Holdings through its investment advisory and administrative services operations.
For the year ended December 31, 1999 Chapman Capital Management Holdings
generated revenues of $4,622,000 and a loss before income taxes of $853,000. For
the fiscal year ended December 31, 1998, Chapman Capital Management Holdings
generated revenue of $3,218,000 and loss before income taxes of $151,000.
Chapman Capital Management Holdings' primary source of revenue is advisory
and administrative fees. Chapman Capital Management Holdings' principal business
activities are by their nature affected by many factors, including general
economic and financial conditions, movement of interest rates and competitive
conditions. Although Chapman Capital Management Holdings seeks to maintain cost
controls, a significant portion of Chapman Capital Management Holdings' expenses
are fixed and do not vary significantly with the factors listed above. As a
result, substantial fluctuations can occur in Chapman Capital Management
Holdings' revenue and net income from period to period.
Revenues are derived primarily from fees for investment advisory services
provided to institutional and other clients. Investment advisory fees are
generally a function of the overall fee rate charged to each account and the
level of assets under management. Assets under management can be affected by the
addition of new client accounts or client contributions to existing accounts,
withdrawals of assets from or terminations of client accounts and investment
performance, which may depend on general market conditions. Assets under
management were $771 million as of December 31, 1999, compared to $591 million
as of December 31, 1998. The $180 million increase in assets under management
during 1999 resulted from investment performance.
On September 30, 1999 Chapman Capital Management was notified that one of
its clients, accounting for less than 1% of total revenues, was withdrawing its
funds from a separate account managed by Chapman Capital Management. The amount
withdrawn effective October 14, 1999 was $3.9 million, or less than 1% of assets
under management. The reduction in assets under management is expected to have a
corresponding reduction in the management and advisory fee revenues received in
future periods.
In order to comply with the expense limitation requirements of a proposed
sub-distributor of institutional shares of the DEM portfolios of The Chapman
Funds, Inc., Chapman Capital Management has agreed to a fee limitation in favor
of the institutional shares of the following portfolios in the following
percentages of average daily net assets:
- DEM Equity Fund 1.25%
21
<PAGE>
- DEM Index Fund 2.00%
- DEM Multi-Manager Equity Fund 2.00%
- DEM Multi-Manager Bond Fund 2.00%
These expense limitations went into effect as of March 17, 2000.
In order to facilitate retail distribution of the investor shares of the DEM
portfolios, Chapman Capital Management has agreed to fee limitations in favor of
the investor shares of the following portfolios in the following percentages of
average daily net assets:
- DEM Equity Fund, 2.00%
- DEM Index Fund, 2.69%
- DEM Multi-Manager Equity Fund, 3.00%
- DEM Multi-Manager Bond Fund, 3.00%
These expense limitations went into effect as of March 17, 2000 and July 1,
1999, respectively.
In connection with these expense limitations, Chapman Capital Management has
agreed to reimburse the portfolios for all fees and expenses in excess of their
respective expense limitations until at least December 31, 2000. The service
providers to the portfolios typically charge a fixed fee combined with a
variable fee determined by such factors as the number of accounts and the net
assets of the portfolio. Due to these fixed fees, when the assets of a portfolio
are low, as they typically are at the commencement of operations, the fees
assessed by service providers can result in expenses significantly in excess of
the fee limitations discussed above, requiring reimbursement or direct payments
by Chapman Capital Management Holdings.
On December 31, 1999, the amount under management in the DEM Index Fund was
$516, and Chapman Capital Management Holdings paid costs of $63,085 pursuant to
the DEM Index Fund expense limitations for the year ended December 31, 1999.
Chapman Capital Management Holdings believes that it will be required to
reimburse expenses for DEM Index Fund in progressively lower amounts as net
assets rise until the expiration of the expense limitations or until the net
assets of DEM Index Fund exceed approximately $17 million. Further, Chapman
Capital Management Holdings expects the amounts that are required to be
reimbursed may increase in future periods with the implementation of the DEM
Equity Fund expense limitations and the commencement of operations of additional
DEM portfolios with their own expense limitations. There can be no assurance
that these portfolios will attract net assets sufficient to lower their expenses
below their respective expense limitations. To the extent these portfolios are
unsuccessful in lowering their expenses below their respective expense
limitations, Chapman Capital Management Holdings' results of operations could be
materially adversely affected.
22
<PAGE>
RESULT OF OPERATIONS
The following table reflects items in the Statements of Operation as dollar
amounts and as percentages of total revenue:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNTS REVENUES AMOUNTS REVENUES
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Advisory and administrative
fees...................................................... $4,282,000 92.6% $3,136,000 97.5%
Other income................................................ 340,000 7.4 82,000 2.5
---------- ----- ---------- -----
Total revenue......................................... 4,622,000 100.0 3,218,000 100.0
---------- ----- ---------- -----
OPERATING EXPENSES:
Management fees............................................. 1,524,000 33.0 1,178,000 36.6
Compensation and benefits................................... 1,211,000 26.2 857,000 26.6
General and administrative.................................. 1,955,000 42.3 827,000 25.7
Amortization and depreciation expense....................... 234,000 5.1 232,000 7.2
Advertising, Promotion and Publicity........................ 545,000 11.8 249,000 7.8
Interest expense............................................ 6,000 0.1 26,000 0.8
---------- ----- ---------- -----
Total operating expenses.............................. 5,475,000 118.5 3,369,000 104.7
---------- ----- ---------- -----
Loss before income tax benefit.............................. (853,000) (18.5) (151,000) (4.7)
Income tax benefit.......................................... -- -- 45,000 1.4
---------- ----- ---------- -----
Net loss.................................................... $ (853,000) (18.5)% $ (106,000) (3.3)%
========== ===== ========== =====
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998
Total Revenue increased by $1,404,000 or 43.6%, to $4,622,000 for 1999 from
$3,218,000 for 1998.
Net advisory and management fee revenue increased by $1,146,000 or 36.5%, to
$4,282,000 for 1999 from $3,136,000 for 1998. This increase was primarily due to
a net increase of $180,001,000 or 30.4% in assets under management to
$771,386,000 at the end of 1999, up from $591,385,000 at the end of 1998. The
increase in assets under management was due to investment performance and the
net changes in client decisions regarding the placement of their funds for
investment. During 1999, the net change in assets under management increased by
$180 million to a total of $771 million as of December 31, 1999 from
$591 million as of December 31, 1998.
Interest and other revenue increased by $258,000 or 314.6% to $340,000 for
1999 from $82,000 for 1998. This increase is due to higher cash balances
associated with the net proceeds from the Company's public offering of common
stock and a short-term loan to Chapman Holdings, Inc.
Total expense for 1999 increased by $2,106,000 or 62.5%, to $5,475,000 for
1999 from $3,369,000 for 1998. Expenses increased in all areas due expanded
operations and marketing efforts, development of new mutual funds and increases
in administrative support. Total expense increased to 118.5% of total revenue
for 1999 as compared to 104.7% of total revenue for 1998.
23
<PAGE>
Management fee expense increased by $346,000 or 29.4%, to $1,524,000 for
1999 from $1,178,000 for 1998. This increase is attributable to additional
assets under management in the DEM-MET product as a result of investment
performance. Management fee expense as a percentage of revenues decreased to
33.0% of total revenue for 1999 as compared to 36.6% of total revenue for 1998.
Compensation and benefits increased by $354,000 or 41.3%, to $1,211,000 for
1999 from $857,000 for 1998. This increase is largely due to the addition of 4
employees during the year to support marketing efforts, a full year of salary
for two senior positions added in the fourth quarter of 1998, and associated
taxes. As a percentage of total revenue, these expenses decreased to 26.2% in
1999 from 26.6% 1998.
General and administrative expense increased by $1,128,000 or 136.4%, to
$1,955,000 for 1999 from $827,000 for 1998. An increase of $251,000 was caused
by the payment of expenses of new mutual funds, which primarily relate to
covering fund expenses in excess of expense limitation agreements. Professional
fee expenses increased $291,000 due to $161,000 of legal expenses of developing
the new mutual funds, the additional costs of legal and accounting reviews
associated with operating as a public company, and use of marketing consultants
to expand the DEM Strategy. Travel and business development increased $168,000
to pay costs associated with additional employees, and ancillary activities to
support the Company's increased marketing efforts.
The remainder of the change in general and administrative expense was
primarily due to increases in administrative support of $76,000 as a result of
increased staff, printing expenses of $76,000, and conferences and seminars of
$60,000.
Amortization and depreciation expense increased by $2,000 or 0.9%, to
$234,000 for 1999 from $232,000 for 1998. This increase is due to purchasing
additional equipment.
Advertising, promotion and publicity expense increased by $296,000 or
118.9%, to $545,000 for 1999 from $249,000 for 1998. This increase is
attributable to the Company's efforts to expand its market share and build name
awareness in the financial markets. As a percentage of total revenue, these
expenses increased to 11.8% in 1999 from 7.8% in 1998.
Interest expense decreased by $20,000 or 76.9%, to $6,000 in 1999 from
$26,000 in 1998. This decrease is attributable to the retirement of a note
payable to The Chapman Co., a subsidiary of Chapman Holdings, Inc. As a
percentage of total revenue, this expense decreased to 0.1% in 1999 from 0.8%
1998.
Income tax benefit decreased by $45,000 or 100.0% to $0 in 1999 from $45,000
for 1998. This decrease was due to a valuation reserve established for the year
ended December 31, 1999.
The net loss increased by $747,000 or 704.7% to $853,000 for 1999 from a net
loss of $106,000 for 1998. This change was a result of the items discussed
above.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, Chapman Capital Management Holdings has financed its
operations through capital contributions from its principal stockholder, loans
from affiliates, cash flow from operations and the sale of equity securities.
Chapman Capital Management Holdings' liquid assets consist primarily of
cash, cash equivalents and receivables from advisory clients. Chapman Capital
Management Holdings' total assets as of December 31, 1999 were $4,838,000.
On August 14, 1998, Chapman Capital Management Holdings consummated an
initial public offering of its common stock pursuant to which Chapman Capital
Management Holdings received net proceeds of approximately $5,240,000. Prior to
Chapman Capital Management Holdings' loans made on July 29, 1999, Chapman
Capital Management Holdings' offering proceeds were invested in The Chapman U.S.
Treasury Money Fund which invests in short-term U.S. government securities and
repurchase agreements collateralized by such securities.
On July 29, 1999, Chapman Capital Management Holdings made an unsecured loan
of $3,220,000 to Chapman Holdings, Inc., an affiliate of Chapman Capital
Management Holdings in connection with its broker-dealer subsidiary, The Chapman
Co., seeking to qualify to participate in a municipal underwriting syndicate.
The loan was issued pursuant to a demand note that required Chapman Holdings to
repay the amount of the loan upon Chapman Capital Management Holdings' demand
and with interest due thereon at the brokers call rate as in effect from time to
time. Chapman Holdings repaid this loan with accrued interest in full on
September 14, 1999.
The final payment of $150,000 on a non-compete agreement pertaining to the
DEM-MET Trust is due on demand.
On July 29, 1999, the Company advanced Nathan A. Chapman, Jr., President of
the Company, $242,000 pursuant to an unsecured demand note bearing interest at
the rate of 5.45% per annum. As of December 31, 1999, the Company had
outstanding unsecured loans to Mr. Chapman in the amount of $372,000.
The Company's balance of cash and cash equivalents, following the
transactions above, was 2,680,000 as of December 31, 1999.
EFFECTS OF INFLATION
Chapman Capital Management Holdings' assets are to a large extent liquid in
nature and, accordingly, may be significantly affected by inflation. Chapman
Capital Management Holdings' expenses, such as employee compensation and
occupancy expenses are subject to inflation and the effects of inflation may not
be readily recoverable in the prices of services offered to Chapman Capital
Management Holdings customers. To the extent inflation results in rising
interest rates or has adverse effects upon the securities market, it may
adversely affect the Chapman Capital Management Holdings' financial position,
results of operations and assets under management.
25
<PAGE>
YEAR 2000 SOFTWARE ISSUE
With the arrival of the Year 2000, existing software programs and operating
systems were reviewed to determine if they can accommodate information that
employs dates after December 31, 1999. As of December 31, 1999, Chapman Capital
Management Holdings' Year 2000 readiness costs were approximately $99,000 to
cover assessment of systems, internal testing, point-to-point testing, training,
replacement and modification of existing systems, and contingency planning.
Chapman Capital Management Holdings' Year 2000 readiness costs consist of
direct expenses incurred with respect to software, consulting and employee time
and Chapman Capital Management Holdings' share of readiness expenses for
upgraded computers, software, and communication systems to be paid or financed
by Chapman Holdings. Chapman Capital Management Holdings will reimburse Chapman
Holdings for its share of these Year 2000 expenses through increased charges for
support under the terms of its expense allocation agreement with Chapman
Holdings.
Chapman Capital Management Holdings estimates that its total Year 2000
readiness costs, direct and allocated by Chapman Holdings, will be approximately
$115,000 which primarily relates to future lease payments.
Chapman Capital Management Holdings' management prepared a written plan
detailing Chapman Capital Management Holdings' software and operating systems
readiness issues for the Year 2000. The plan identified mission critical and
non-mission critical operating systems of Chapman Capital Management Holdings.
Working with its hardware and software vendors and other third parties to
prepare for the Year 2000, Chapman Capital Management Holdings substantially
completed necessary hardware and software renovations during the second quarter
of 1999. We tested during the third quarter of 1999 to determine the effect of
our readiness efforts, and we continued to work with our hardware and software
vendors and other third parties to complete our Year 2000 contingency plan
through the end of 1999 and during the first quarter of the year 2000.
Chapman Capital Management Holdings' Year 2000 readiness plan involved four
phases:
PHASE I--ASSESSMENT. This phase involved the identification of all
systems that are date dependent. This phase was substantially completed
during the first quarter of 1998.
PHASE II--RENOVATION. This phase involved the identification and
replacement of mission critical systems which Chapman Capital Management
was unable to update or certify as compliant. This phase commenced in the
first quarter of 1998 and was substantially completed in the second
quarter of 1999.
PHASE III--TESTING. This phase involved testing all systems that are date
dependent and upgrading all non-compliant systems. Chapman Capital
Management Holdings completed this phase during the third quarter of
1999.
26
<PAGE>
PHASE IV--CONTINGENCY PLANNING. This phase involves an assessment of all
mission critical systems for potential problems that would result from
Year 2000 related failures of software or hardware and also the
development of plans and strategies to continue operations should such
failures occur. Chapman Capital Management has prepared an initial plan
and will continue to refine and expand it as required through the first
quarter of 2000.
Within Chapman Capital Management Holdings' Year 2000 readiness plan, we
identified systems as "mission critical" and "non-mission critical." Systems
were identified as "mission critical" if the loss of the system, software or
facility would cause an immediate stoppage of activity or a significant
impairment of a core business area. Systems were determined to be non-Y2K
compliant based on information from manufacturers. Systems were identified as
"non-mission critical" if loss of the system, although inconvenient, would not
cause an immediate stoppage of activity or significant impairment of a core
business area. The following table summarizes Chapman Capital Management
Holdings' estimate of the status of mission critical elements of Chapman Capital
Managements' Year 2000 readiness plan.
<TABLE>
<CAPTION>
NUMBER OF
CRITICAL
NUMBER OF CRITICAL CRITICAL SYSTEMS FOR
CRITICAL SYSTEMS SYSTEMS IN WHICH PHASE
Y2K PLAN PHASE SYSTEMS COMPLETED PROCESS NOT APPLICABLE
- -------------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Assessment....................................... 32 32 -- --
Renovation....................................... 32 23 -- 9
Testing.......................................... 32 23 -- 9
Contingency Planning............................. 32 32 -- --
</TABLE>
Chapman Capital Management Holdings identified the third parties upon which
it relies for mission critical systems and contacted such third parties to
confirm that their systems are Year 2000 ready. Responses from the majority of
these vendors during the first and second quarters of 1999 indicated that they
expected to reach compliance by the third quarter of 1999. As of the date of
this prospectus and proxy statement, all of our vendors of mission critical
systems have verified readiness, and we have not had any problems with these
vendors' systems not being Year 2000 ready.
Although we have suffered no significant Year 2000 problems at the start of
2000 or as of March 29, 2000, and while Chapman Capital Management Holdings
believes that it is taking prudent and necessary action to become Year 2000
ready, there can be no assurance that the Year 2000 issue will not result in
information or communications systems interruptions. Any such interruptions
could be expected to have a material adverse effect on Chapman Capital
Management Holdings' business, financial condition, results of operations and
business prospects and may subject Chapman Capital Management Holdings to
liability to its clients. Chapman Capital Management Holdings is currently
building upon its existing contingency plan in the event that Chapman Capital
Management Holdings or third parties do not successfully complete their
readiness efforts. These efforts may result in additional costs in excess of
current allocations and estimates.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
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, 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the two years ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999, and
the results of their operations and their cash flows for the two years ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
March 29, 2000
28
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
ASSETS:
Cash and cash equivalents................................. $ 2,680,000
Investments, at market.................................... 356,000
Management fees receivable:
From proprietary funds.................................. 129,000
From individually managed accounts...................... 446,000
Receivables from affiliates............................... 278,000
Advances to officer....................................... 372,000
Fixed assets, net......................................... 52,000
Prepaids and other assets................................. 280,000
Intangible assets, net.................................... 245,000
-----------
Total assets............................................ $ 4,838,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses..................... $ 356,000
Due to affiliates......................................... 144,000
Noncompete agreement obligation........................... 150,000
-----------
Total liabilities....................................... 650,000
===========
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares
authorized, 3,351,334 issued and outstanding............ 3,000
Additional paid-in capital................................ 5,239,000
Accumulated deficit....................................... (1,054,000)
-----------
Total stockholders' equity.............................. 4,188,000
-----------
Total liabilities and stockholders' equity.............. $ 4,838,000
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
29
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
REVENUE:
Advisory and administrative fees.......................... $4,282,000 $3,136,000
Investment and other income............................... 340,000 82,000
---------- ----------
Total revenue......................................... 4,622,000 3,218,000
---------- ----------
EXPENSE:
Management fees........................................... 1,524,000 1,178,000
Compensation and benefits................................. 1,211,000 857,000
Professional fees......................................... 470,000 179,000
Administrative support.................................... 148,000 72,000
Interest expense.......................................... 6,000 26,000
Amortization and depreciation expense..................... 234,000 232,000
Advertising, promotion and publicity...................... 545,000 249,000
Other operating expenses.................................. 1,337,000 576,000
---------- ----------
Total expense......................................... 5,475,000 3,369,000
---------- ----------
Loss before income tax benefit........................ (853,000) (151,000)
INCOME TAX BENEFIT.......................................... -- 45,000
---------- ----------
Net loss.............................................. $ (853,000) $ (106,000)
========== ==========
BASIC AND DILUTIVE EARNINGS PER SHARE DATA:
Net loss.................................................. $ (.25) $ (.04)
========== ==========
Weighted Average Shares Outstanding....................... 3,351,000 2,811,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997..................... $ 2,000 $ -- $ (95,000) $ (93,000)
Proceeds from initial public offering........ 1,000 5,239,000 -- 5,240,000
Net loss..................................... -- -- (106,000) (106,000)
------- ---------- ----------- ----------
BALANCE, December 31, 1998..................... 3,000 5,239,000 (201,000) 5,041,000
Net loss..................................... -- -- (853,000) (853,000)
------- ---------- ----------- ----------
BALANCE, December 31, 1999..................... $ 3,000 $5,239,000 $(1,054,000) $4,188,000
======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (853,000) $ (106,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 234,000 232,000
Deferred tax asset...................................... -- (45,000)
Unrealized gain......................................... (106,000) --
Effect of changes in assets and liabilities-
Management fees receivable............................ (211,000) (111,000)
Receivable from affiliates............................ (158,000) (84,000)
Prepaids and other assets............................. (112,000) (115,000)
Accounts payable and accrued expenses................. 184,000 21,000
Due to affiliates..................................... (141,000) (516,000)
Income taxes payable.................................. -- (48,000)
----------- ----------
Net cash used in operating activities............... (1,163,000) (772,000)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment.............................. (45,000) (19,000)
Sale of investments....................................... -- 9,000
Purchase of investments................................... (100,000) (150,000)
Advances to officer....................................... (254,000) (46,000)
----------- ----------
Net cash used in investing activities............... (399,000) (206,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering..................... -- 6,053,000
Issuance costs............................................ -- (814,000)
Proceeds from officer..................................... -- (28,000)
----------- ----------
Net cash provided by financing activities........... -- 5,211,000
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (1,562,000) 4,233,000
CASH AND CASH EQUIVALENTS, beginning of year................ 4,242,000 9,000
----------- ----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,680,000 $4,242,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND BUSINESS:
Chapman Capital Management Holdings, Inc. is an investment advisory and
investment management company.
During February 1998, Chapman Capital Management, Inc. became the wholly-
owned subsidiary of Chapman Capital Holdings Management, Inc. ("CCMH," the
"Company"), a newly formed corporation. CCMH was the wholly-owned subsidiary of
The Chapman Co. until it spun off from The Chapman Co. as part of the initial
public offering (IPO) of Chapman Holdings, Inc. on February 26, 1998.
The Company shares office space, certain employees and other overhead with
The Chapman Co., an affiliated company. The Chapman Co. 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 for 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
and based on cost sharing arrangements approved by the Board of Directors. The
Chapman Co. allocated approximately $599,000 and $852,000 in expenses related to
the above sharing agreement during the years ended December 31, 1999 and 1998,
respectively. As of December 31, 1999, the Company owed The Chapman Co. $97,000
for the costs of these services. These financial statements may not necessarily
be indicative of the financial results that would have existed had the Company
been operated as an unaffiliated corporation.
On November 15, 1999, the Company signed a merger agreement which is subject
to stockholders approval and the completion of an initial public stock offering
of common stock by EChapman.com, among other things, to merge into a wholly
owned subsidiary of EChapman.com. This merger would result in the Company,
Chapman Holdings Inc. and Chapman Insurance Holdings Inc., affiliates, becoming
wholly owned subsidiaries of eChapman.com. EChapman.com is a new formed
corporation designed to bring these companies together and to take advantage of
the unique opportunities presented by the growth of the Internet. EChapman.com
is owned by the major stockholder of the Company.
The planned merger and the operations of EChapman.com after the merger are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the future results from operations and financial
position of the Company. These risk items include the fact that EChapman.com has
not launched a website and has no Internet-related operating history; the web
site must be designed,
33
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND BUSINESS: (CONTINUED)
developed, hosted by a service provider and marketed; EChapman.com must raise at
least $20 million from its planned public offering to complete this merger; the
EChapman.com brand must be successful in order for it to attract users,
advertisers and strategic partners; and the success of the "Domestic Emerging
Markets" strategy through the use of the Internet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles and
include the operations of the Company and Chapman Capital Management, Inc. 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.
ACQUISITION
In December 1996, the Company acquired DEM-MET, a tax-exempt pooled interest
trust for qualified employee benefit plans. As part of the acquisition of this
trust, the Company entered into a noncompete agreement for $300,000 and paid
$640,000 in costs related to acquiring the trust. These amounts are included in
intangible assets (see Note 4).
During the years ended December 31, 1999 and 1998, the Company paid Deutsche
Bank custodian fees for acting as trustee and custodian for the trust. Those
fees are included in management fees in the accompanying statements of
operations for the years ended December 31, 1999 and 1998.
CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents as of December 31, 1999 is $2,430,000
of cash invested in the Chapman U.S. Treasury Money Fund, a fund managed by
Chapman Capital Management, Inc.
34
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Included in investments is an investment in DEM Index Fund, an affiliate,
which is carried at market value in accordance with SFAS 115. Investments also
include common stock ownership in an investment company carried at cost which
approximates market.
ASSETS UNDER MANAGEMENT
In the normal course of operations of an investment manager, clients add
investments to and withdraw investments from the asset portfolio. This activity
is done by clients as they continue to make investment decisions and diversify
their portfolio.
During 1999, the net change in assets under management increased
$180 million to $771 million as of December 31, 1999, from $591 million as of
December 31, 1998. The net increase in assets under management included growth
attributable to investment performance, additions of assets totaling
$25 million from two clients and a reduction of $86 million in assets by four
clients. The reduction included partial withdrawals in the accounts of two
clients of $49 million and $22 million, or 6.36% and 2.85%, respectively, of the
assets under management as of December 31, 1999. The reduction in assets also
included a withdrawal by one of the four participants in the Company's DEM-MET
Trust, which withdrew its total investment of approximately $13.7 million, in
June 1999 which represented approximately 2.1%, of the total assets under
management of the DEM-MET Trust as of June 30, 1999.
The loss of these assets under management has not had a material impact on
the operations of the Company during 1999.
Subsequent to year-end, one of the participants in the DEM-MET Trust
informed the Company that it intends to withdraw approximately $100 million of
its investment in the trust. This withdrawal represents approximately 13% of the
Company's assets under management as of December 31, 1999.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash,
investments, receivables, accounts payable and accrued expenses approximate fair
value.
35
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method. The weighted average shares
outstanding as of December 31, 1999 and 1998, are the weighted average common
shares outstanding of 3,351,000 and 2,811,000, respectively. The options granted
are antidilutive for 1999 and 1998 and thus, are not required in the earnings
per share calculation.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998, and has determined
that the Company has only one segment, investment advisory and investment
management services. The Company came to this conclusion because the Company
operates in one regulatory environment and has only one management group that
manages the entire Company. Information on the Company's operating results are
provided as one segment to the key decision-maker to make decisions.
REVENUE RECOGNITION
The Company recognizes investment management fees in the period the services
are provided.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" and
has determined that the Company does not have any comprehensive income
adjustments for the periods presented, and therefore, comprehensive income
equals net income.
INCOME TAXES
The Company accounts for income taxes under the separate company liability
method, whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
36
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Prior to the Company being spun off from The Chapman Co., the Company was
included in the consolidated Federal income tax return of its Parent on a cash
basis. The Parent allocated Federal tax expense to the Company based on its
portion of consolidated taxable income and its taxes on that income if the
Company were taxed on a stand-alone basis.
RECLASSIFICATIONS
Certain reclassifications have been made to 1998 financial statements to
conform to 1999 financial statement presentation.
3. INITIAL PUBLIC OFFERING:
On August 14, 1998, the Company consummated an initial public offering (the
Offering) of its common stock, pursuant to which the Company sold 864,791 shares
and received net proceeds, after offering costs, of approximately $5,240,000.
4. INTANGIBLE ASSETS:
Intangible assets consists of a noncompete agreement and acquisition costs
(see Note 2). The $300,000 noncompete agreement is being amortized over
3 years, the term of the agreement. As of December 31, 1999, the noncompete
agreement is fully amortized. The $640,000 in acquisition costs is being
amortized over 5 years. The noncompete liability as of December 31, 1999 is
payable on demand. Accumulated amortization as of December 31, 1999 is $695,000.
5. CAPITAL STOCK:
During 1998, the Company effected a 25% stock split through a stock
dividend. As such, all share data related to the Company prior to the stock
split have been restated.
6. 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
37
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
accompanying statements of operations for the years ended December 31, 1999 and
1998, are advisory management fees related to The Chapman Funds totaling
$334,000 and $260,000, respectively.
The Company provided 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. During
the fourth quarter of 1998, DEM was dissolved. Included in the accompanying
statements of operations for the years ended December 31, 1999 and 1998, is an
advisory management fee related to DEM totaling $0 and $150,000, respectively.
The Company agreed to waive certain investment management fees with Treasury
funds its has sponsored. It has waived these fees by having its investment
management fee limited to a certain percentage of the average daily net asset
balance in the fund.
Included in management fees receivable as of December 31, 1999, is $129,000
due from proprietary funds for services provided under the above described
agreement.
The Company is the investment advisor and administrator of the DEM Equity
Fund, a portfolio of The Chapman Funds, Inc. The DEM Equity Fund became active
in April 1998 and the Company was paid $93,000 and $69,000 in advisory and
administrative fees for the years ended December 31, 1999 and 1998,
respectively.
Included in receivables from affiliates as of December 31, 1999, is $33,000
due from Chapman Insurance Agency ("CIA") for expenses paid on its behalf.
Included in receivables from affiliates as of December 31, 1999, is $219,000 due
from EChapman.com related to costs paid on their behalf. The Company also paid
costs on behalf of Chapman Limited Partnership during 1999. The $26,000 of these
costs is included in receivables from affiliates as of December 31, 1999.
Included in due to affiliated company are costs paid on the Company's behalf
based on the allocation agreement discussed in Note 1. The Company also pays
expenses on behalf of several affiliate funds for costs incurred in excess of a
certain percentage of the average daily net asset balance. Included in due to
affiliates as of December 31, 1999, is $47,000 related to these expense
limitations.
As of December 31, 1999, the Company had outstanding advances to the
majority stockholder of the Company of $372,000. These advances are reflected in
three notes. Two demand promissory notes which accrue interest at 5.4% per annum
and one
38
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
three-year note that accrues interest at 5.5% per annum. No interest or
principal payments are due until maturity, which is August 21, 2001. The
interest rates on these notes are based on the IRS applicable federal rate in
effect from time to time.
On July 29, 1999, the Company made a loan of $3,220,000 to Chapman
Holdings, Inc. ("Chapman Holdings"), an affiliate of the Company. The loan was
issued pursuant to a demand note that required Chapman Holdings to repay the
amount of the loan upon the Company's demand and with interest due equal on the
broker call rate. Chapman Holdings repaid this loan in full in September 1999.
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 Chapman Co. are partners. The Chapman Co.
allocates a portion of the $10,000 monthly payment to the Company based on the
space used by the Company. The Chapman Co. allocated $59,000 in lease expense
for the years ended December 31, 1999 and 1998. These amounts are included in
other operating expenses in the statements of operations for the years ended
December 31, 1999 and 1998, respectively.
7. INCOME TAXES:
A reconciliation of the statutory income taxes to the recorded income tax
benefit for the years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Statutory tax (at 35% rate)............................ $(299,000) $(53,000)
Effect of state income taxes........................... (42,000) (7,500)
Effect of graduated tax rate........................... 10,000 5,500
Effect of permanent book to tax differences............ 28,000 10,000
Valuation reserve...................................... 303,000 --
--------- --------
Income tax benefit..................................... $ -- $(45,000)
========= ========
</TABLE>
39
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
7. INCOME TAXES: (CONTINUED)
The components of the income tax benefit for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Current................................................ $ -- $ --
Deferred............................................... (303,000) (45,000)
Valuation reserve...................................... 303,000 --
--------- --------
Income tax benefit..................................... $ -- $(45,000)
========= ========
</TABLE>
The Company's deferred income tax asset as of December 31, 1999, consists of
the following:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward.......................................... $ 400,000
Intangible assets......................................... 72,000
---------
Total................................................. 472,000
Deferred tax liability:
Cash to accrual........................................... (154,000)
Valuation reserve........................................... (303,000)
---------
Net deferred tax asset recorded on the consolidated
balance sheet........................................... $ 15,000
=========
</TABLE>
A valuation reserve was applied against the net deferred tax asset as of
December 31, 1999, as its realization was not more likely than not to be
realized.
8. STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosures for the years ended December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash paid for:
Interest................................................ $6,000 $ 25,000
Income taxes............................................ -- 114,000
</TABLE>
9. CONCENTRATION OF CREDIT RISKS:
The DEM-MET Trust accounted for 75% and 62% of the Company's advisory and
administrative fees during the years ended December 31, 1999 and 1998. As of
December 31, 1999, receivables due from this client was $94,000.
40
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
10. OMNIBUS STOCK PLAN:
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. On May 14, 1999, 24,000
stock options were granted at a stock price range of $8.38 to $9.22 per share.
These options expire over a three-year period and vest immediately. None of
these options had been exercised, expired or canceled as of December 31,1999.
The Company accounts for its stock-based compensation plans as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," which allows
the Company to follow Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 1999, using the Black-Scholes option pricing model. The
following assumptions were used for grants for the year ended December 31, 1999.
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.32%
Expected dividend yield..................................... 0.0%
Expected volatility......................................... 86%
</TABLE>
Options were assumed to be exercised upon vesting for the purposes of this
valuation. Had compensation costs for compensatory options been determined
consistent with SFAS No. 123, the Company's pro forma net loss and earnings per
share information reflected on the accompanying consolidated statement of
operations would have been increased to the following "as adjusted" amount for
the year ended December 31, 1999:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(853,000)
As adjusted............................................... (911,000)
Basic earnings:
Per share --
As reported............................................. (.25)
As adjusted............................................. (.27)
</TABLE>
Weighted average fair value of options granted for the year ended
December 31, 1999, was in the range of $3.86 to $4.07. The value was calculated
using the Black-Scholes option pricing model.
41
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
The directors and executive officers of Chapman Capital Management Holdings
are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- ------------------------------------------ -------- ------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr..................... 42 President, chairman of the board and
director
Earl U. Bravo, Sr......................... 52 Vice president, secretary, assistant
treasurer and director
Theron Stokes............................. 47 Director
Robert L. Wallace......................... 42 Director
Maria Markham Thompson.................... 42 Chief financial officer
M. Lynn Ballard........................... 56 Treasurer and assistant secretary
Tracey C. Rancifer........................ 29 Senior vice president
</TABLE>
The board of directors has appointed an audit committee, currently
consisting of its two independent directors. The audit committee reviews the
scope of accounting audits, reviews with the independent public accountants the
corporate accounting practices and policies and recommends to whom reports
should be submitted within the company, reviews with the independent public
accountants their final report, reviews with the independent public accountants
overall accounting and financial controls, and is available to the independent
public accountants during the year for consultation purposes.
The board of directors has also appointed a compensation committee of the
board of directors, currently consisting of the two independent directors. The
compensation committee reviews the performance of senior management, approves
the compensation of the president, recommends appropriate compensation levels
for officers other than the president and approves the issuance of stock options
pursuant to Chapman Capital Management Holdings' stock option plan. All
directors and officers serve until their successors are duly elected and
qualify.
NATHAN A. CHAPMAN, JR. founded Chapman Holdings, Inc. in 1997 and its
subsidiary, The Chapman Co., in 1986. Mr. Chapman also founded Chapman Capital
Management Holdings, Inc. in 1998, and its subsidiary Chapman Capital
Management, Inc. in 1988. Mr. Chapman founded EChapman.com in 1999. Mr. Chapman
founded Chapman Insurance Holdings, Inc. in 1997 and its subsidiary, The Chapman
Insurance Agency Incorporated, in 1987. Mr. Chapman has served as president,
chairman of the board and a director of all of these entities since their
inception. Mr. Chapman is also the president, chairman of the board and a
director of The Chapman Funds, Inc., a registered open end investment company
for which Chapman Capital Management acts as investment adviser. Prior to
founding The Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons from
1982 to 1987. Mr. Chapman is a certified public accountant, a general securities
principal, registered options principal, and registered municipal principal. In
July 1999, the University of Maryland Office of the board of regents elected
Mr. Chapman chairman of the board of regents.
42
<PAGE>
EARL U. BRAVO, SR. has been chief operating officer of The Chapman Co. since
1992 and secretary and assistant treasurer since 1997. Mr. Bravo has been senior
vice president, secretary, assistant treasurer and a director of Chapman
Holdings, Inc. since 1997 and of Chapman Capital Management Holdings, Inc. since
1998. Mr. Bravo is a director, senior vice president, secretary and assistant
treasurer of EChapman.com. Mr. Bravo is a general securities principal,
financial and operations principal and registered representative. Mr. Bravo
holds an MBA from the University of Maryland, College Park.
LYNN BALLARD has been treasurer and assistant secretary since 1997 of The
Chapman Co., treasurer and assistant secretary of Chapman Holdings, Inc. since
1997 and Chapman Capital Management Holdings, Inc. since 1998. Ms. Ballard has
been employed as a senior financial executive of The Chapman Co. and Chapman
Capital Management, Inc. since 1988. Ms. Ballard is treasurer and assistant
secretary of The Chapman Funds, Inc.
THERON STOKES has been an attorney for the Alabama Education Association
since 1993 and has been a director of Chapman Capital Management Holdings, Inc.
since 1998.
ROBERT L. WALLACE has been President of the BiTH Group, Inc., an information
technology consulting and human development services firm, since 1993.
Mr. Wallace is the author of "Black Wealth Through Black Entrepreneurship." He
has been a director of Chapman Capital Management Holdings, Inc. since 1998.
MARIA MARKHAM THOMPSON has been chief financial officer of Chapman Capital
Management Holdings since 1998 and portfolio manager and administrator of
Chapman Capital Management, Inc. since 1997. Ms. Thompson was in private
practice as a certified public accountant from 1996 to 1997 and was director of
the Maryland Water Quality Financing Administration from 1989 to 1996, during
which she also served as director of finance and central services for the
Maryland Department of the Environment for 18 months.
TRACEY RANCIFER has been the senior vice president of corporate development
for Chapman Capital Management and EChapman.com since 1998. Prior to joining
Chapman Capital Management, Ms. Rancifer was executive assistant to the Mayor of
Memphis, Tennessee and the director of government affairs from 1997 to 1999.
From 1996 to 1997, Ms. Rancifer was the administrative operations director for
the City of Little Rock, Arkansas. Ms Rancifer was a graduate research assistant
at the Arkansas Institute of Government, a research and policy organization,
from 1995 to 1996, and from 1993 to 1995, Ms. Rancifer was the special assistant
to the United States Secretary of Commerce. In 1993, Ms. Rancifer served as the
eastern manager of corporate and government relations for E.W. Moon, Inc., a
construction management firm. Ms. Rancifer received her B.A. in Political
Science from Rhodes College and her Masters of Public Affairs and Administration
from the University of Little Rock.
43
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Company's directors and executive officers, and persons who
own more than 10% of a registered class of the Company's equity securities,
file with the Securities and Exchange Commission (the "Commission") initial
reports of ownership and reports of change in ownership of Common Stock of
the Company. The same persons are also required by Commission regulation to
furnish the Company with copies of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company, and written representations that no
other reports were required during the fiscal year ended December 31, 1999,
compliance was made with all Section 16(a) filing requirements applicable to
the Company's executive officers and directors except as follows: Tracey C.
Rancifer filed one late Form 3 and one late Form 5 disclosing one
transaction; Nathan A. Chapman, Jr., Earl U. Bravo, Sr., Theron Stokes,
Robert L. Wallace, Maria Markham Thompson and M. Lynn Ballard each filed one
late Form 5 disclosing one transaction.
With respect to greater than 10% beneficial owners, other than
Nathan A. Chapman, Jr., the Company has not received copies of any reports
filed by any such persons with the Commission and has received no written
representations from any such persons.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by
Chapman Capital Management Holdings during the last three fiscal years, for
services rendered in all capacities to Chapman Capital Management Holdings and
its subsidiary, Chapman Capital Management, to the chief executive officer and
the other most highly paid executive officers Chapman Capital Management
Holdings whose total annual salary and bonus exceeded $100,000 during the year
ended December 31, 1998. No other executive officer of Chapman Capital
Management Holdings received salary and bonus of $100,000 or more during such
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr......................... 1999 $266,667 $100,000 5,000
President 1998 $200,000 $100,000 --
1997 $159,500 $100,000 --
Earl U. Bravo, Sr............................. 1999 $105,000 $ 50,000 5,000
Senior vice president, secretary and 1998 $105,000 $ 10,000 --
assistant treasurer 1997 $100,000 $ 5,000 --
Tracey Rancifer,.............................. 1999 $ 95,000 $ 20,000 1,000
Senior vice president 1998 N/A N/A N/A
1997 N/A N/A N/A
</TABLE>
Mr. Chapman's and Mr. Bravo's annual compensation for 1998 and 1999 includes
approximately 50% allocated to Chapman Holdings and The Chapman Insurance Agency
under certain expense sharing arrangements. Mr. Chapman's and Mr. Bravo's annual
compensation for 1997 includes amounts allocated to The Chapman Co., a
subsidiary of Chapman Holdings and then-parent of Chapman Capital Management and
The Chapman Insurance Agency, under certain informal expense allocation
agreements.
Ms. Rancifer's annual salary and bonus for 1998 was less than $100,000, and
she was not employed by Chapman Capital Management Holdings during 1997.
44
<PAGE>
The board of directors of Chapman Capital Management Holdings has
established the 1998 Chapman Capital Management Holdings, Inc. Omnibus Stock
Plan to enable Chapman Capital Management Holdings to grant equity compensation
to Chapman Capital Management Holdings directors, officers, employees and
consultants. Chapman Capital Management has reserved 150,000 shares for award
under the plan. The plan is administered by the compensation committee of the
board of directors. On May 14, 1999, the compensation committee granted a total
of 24,000 stock options under the plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR BASE
NAME OPTIONS GRANTED FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE
- ---- --------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr.,........... 5,000 20.8% $9.22 5/14/2002
President
Earl U. Bravo, Sr.,............... 5,000 20.8% $8.38 5/14/2002
Senior vice president, secretary
and assistant treasurer
Tracey Rancifer,.................. 1,000 4.2% $8.38 5/14/2002
Senior vice president
</TABLE>
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for their service as directors;
however, they are reimbursed for all out-of-pocket expenses relating to
attendance at meetings of the Board of Directors and any committee thereof.
Members of the Board of Directors are eligible to receive stock options pursuant
to the stock option plan. On May 14, 1999, directors Stokes and Wallace were
awarded three-year stock options to purchase 1,000 shares each at $8.38 per
share, the then current market price.
45
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of shares of the Chapman Capital Management Holdings common stock as
of January 25, 2000 by
- Each person known by Chapman Capital Management Holdings to own
beneficially 5% or more of its outstanding shares of common stock,
- Each director,
- Each executive officer, and
- All directors and executive officers as a group.
Except as otherwise indicated, Chapman Capital Management Holdings
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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL SHARES
OWNER (1) OWNERSHIP OUTSTANDING
- ---------------------------------------------------------- ----------------------- -----------
<S> <C> <C>
Nathan A. Chapman, Jr. (2)(3)............................. 2,433,666 shares 72.5%
Earl U. Bravo, Sr. (4).................................... 7,375 shares *
Theron Stokes (5)......................................... 9,750 shares *
Robert L. Wallace (6)..................................... 1,000 shares *
Tracey C. Rancifer (7).................................... 1,000 shares *
All Directors and Executive Officers as a Group (5 2,452,791 shares 72.9%
persons)................................................
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of common stock.
(1) Each stockholder's address is 401 East Pratt Street, suite 2800, Baltimore,
Maryland 21202 unless otherwise noted.
(2) Includes 137,875 shares, or 4.1% of the outstanding shares, held in
inventory by The Chapman Co., as market-maker for the common stock, and
5,628 shares held in investment advisory accounts over which the Chapman
Capital Management Holdings' wholly-owned subsidiary, Chapman Capital
Management, has dispository discretion. Such shares have no voting rights as
long as they are held by a subsidiary of Chapman Capital Management
Holdings. The Chapman Co. is a wholly-owned subsidiary of Chapman Holdings
and Mr. Chapman is president and director of Chapman Holdings and chairman
and majority stockholder of Chapman Holdings. Mr. Chapman is the sole
director of The Chapman Co. The executive officers of The Chapman Co. are
Mr. Chapman, president, Earl U. Bravo, Sr., secretary and assistant
treasurer, and M. Lynn Ballard, treasurer and assistant secretary.
Mr. Chapman disclaims beneficial ownership of the shares held by The Chapman
Co. and Chapman Capital Management.
(3) Includes shares issuable upon exercise of options to purchase 5,000 shares
of Chapman Capital Management Holdings common stock.
(4) Includes shares issuable upon exercise of options to purchase 5,000 shares
of Chapman Capital Management Holdings common stock.
(5) Includes shares issuable upon exercise of options to purchase 1,000 shares
of Chapman Capital Management Holdings common stock.
(6) Includes shares issuable upon exercise of options to purchase 1,000 shares
of Chapman Capital Management Holdings common stock.
(7) Includes shares issuable upon exercise of options to purchase 1,000 shares
of Chapman Capital Management Holdings common stock.
46
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 8, 1998, Chapman Capital Management Holdings, a newly-formed
Maryland corporation, issued shares of common stock to The Chapman Co. in
exchange for all of the outstanding equity securities of Chapman Capital
Management. Accordingly, Chapman Capital Management is currently a wholly-owned
direct subsidiary of Chapman Capital Management Holdings.
On February 26, 1998, Chapman Holdings and its subsidiary The Chapman Co.
effected tax-free spin-off transactions in which all of the outstanding shares
of stock of the former subsidiaries of The Chapman Co., Chapman Capital
Management Holdings, Inc., parent of Chapman Capital Management, Inc. and
Chapman Insurance Holdings, Inc., parent of The Chapman Insurance
Agency, Incorporated were distributed to Chapman Holdings stockholders.
Nathan A. Chapman, Jr., the president, chairman of the board of directors
and majority stockholder of Chapman Capital Management Holdings, is the
president and chairman of the board of directors of each of EChapman.com,
Chapman Holdings, The Chapman Co., Chapman Capital Management, Chapman Insurance
Holdings, Chapman Insurance Agency and The Chapman Funds, Inc. and majority
stockholder of Chapman Holdings, Chapman Insurance Holdings and EChapman.com.
Earl U. Bravo, Sr., senior vice president, secretary, assistant treasurer,
and a director of Chapman Capital Management Holdings, is senior vice president,
secretary, assistant treasurer and a director of Chapman Capital Management
Holdings and Chapman Insurance Holdings. He also serves as secretary and
assistant treasurer of Chapman Capital Management, The Chapman Co. and The
Chapman Funds. He also serves as vice president of Chapman Capital Management.
M. Lynn Ballard, the treasurer and assistant secretary of Chapman Capital
Management Holdings and Chapman Capital Management, is also treasurer and
assistant secretary of The Chapman Co., Chapman Holdings and The Chapman Funds.
Lottie H. Shackelford, a director of Chapman Holdings, is a director of The
Chapman Funds.
Donald Watkins, a director of Chapman Holdings, served as a director of
Chapman Insurance Holdings.
Until its liquidation in 1998, Mr. Chapman, Mr. Bravo, and Ms. Ballard
served as senior executive officers of DEM, Inc., a closed-end registered
investment company managed and sponsored by Chapman Capital Management. Mr.
Chapman, Benjamin Hooks, Glenda Glover and Lottie Shackelford, a director of
Chapman Holdings, each a director of The Chapman Funds, James B. Lewis, a
director of The Chapman Funds until 1999, and Robert L. Wallace, a director of
Chapman Capital Management Holdings, each served as a director of DEM, Inc.
47
<PAGE>
The Chapman Co. acted as the underwriter, on a best efforts basis, for the
sale of DEM, Inc. common stock. The Chapman Co. was paid $432,008 and $0 in
management fees and commissions in the years ended December 31, 1997 and
December 31, 1998, respectively.
Until DEM, Inc.'s liquidation, Chapman Capital Management served as the
investment adviser and administrator of DEM, Inc. In connection with its
investment advisory relationship with DEM, Inc., Chapman Capital Management was
paid $139,000 and $150,000 in advisory and administrative fees in the years
ended December 31, 1997 and December 31, 1998, respectively.
Chapman Holdings acted as the underwriter, on a best efforts basis, for the
sale of Chapman Capital Management Holdings common stock. Chapman Holdings was
paid $296,623 in underwriting fees and commissions in the year ended
December 31, 1998.
In connection with Chapman Capital Management's provision of investment
advisory services to The Chapman U.S. Treasury Money Fund, Chapman Capital
Management was paid $259,991 and $593,568 in advisory and administrative fees
for the years ended December 31, 1998 and 1999, respectively. For the year ended
December 31, 1999, Chapman Capital Management has reimbursed the Chapman Funds,
on behalf of The Chapman U.S. Treasury Money Fund, $129,879 under an expense
limitation agreement with The Chapman Funds.
The DEM Equity Fund became active in April 1998, and Chapman Capital
Management was paid $69,356 and $121,862 in advisory and administrative fees for
the years ended December 31, 1998 and 1999, respectively. For the year ended
December 31, 1999, Chapman Capital Management has reimbursed The Chapman Funds
$29,056 under an expense limitation agreement with The Chapman Funds.
The DEM Index Fund became active in March 1999, and Chapman Capital
Management was paid $516 in advisory and administrative fees through
December 31, 1999. Chapman Capital Management has reimbursed The Chapman Funds,
on behalf of the DEM Index Fund, $63,085 in connection with its expense
limitation agreement with The Chapman Funds.
Chapman Capital Management has entered into agreements with The Chapman
Funds on behalf of three additional portfolios, the DEM Fixed Income Fund, the
DEM Multi-Manager Bond Fund and the DEM Multi-Manager Equity Fund, to provide
investment advisory and administration services. These funds are not currently
active. However, Chapman Capital Management has paid approximately $196,000 of
start-up expenses for these funds and the DEM Index Fund.
On March 17, 2000, Chapman Capital Management entered into a new ten year
expense limitation agreement with The Chapman Funds on behalf of certain of its
portfolios, including the DEM Equity Fund and the DEM Index Fund, under which
Chapman Capital Management will reimburse the covered portfolios for expenses
48
<PAGE>
incurred on behalf of these portfolios in excess of stated percentages of the
portfolios' net assets.
The Chapman Co. is the distributor for The Chapman U.S. Treasury Money Fund,
DEM Equity Fund and DEM Index Fund under distribution agreements between The
Chapman Co. and The Chapman Funds. The Chapman Co. receives no compensation for
the distribution of shares of The Chapman U.S. Treasury Money Fund. The DEM
Index Fund had no operations in 1998. The Chapman Co. was paid $14,221 and
$31,639 in management fees and commissions in the years ended December 31, 1998,
1999, respectively, in connection with its distribution agreement with The
Chapman Funds pertaining to the DEM Equity Fund. Chapman Holdings has entered
into distribution agreements with The Chapman Funds with respect to three
additional funds; however, these funds have not yet commenced operations.
As of October 31, 1997, Chapman Capital Management executed a 10-year note
to Chapman Holdings in the amount of $771,889 accruing interest at 6.68% per
annum. Chapman Capital Management repaid this note in full during 1998. The
largest amounts owed by Chapman Capital Management, including this loan and
Chapman Capital Management's allocation of shared overhead, and other advances
were $958,302 and $800,672 during fiscal years ended December 31, 1998 and 1997,
respectively.
As of December 31, 1999, Mr. Chapman owed Chapman Capital Management
Holdings and Chapman Holdings $1,038,174 in connection with the following notes,
including accrued interest, which notes were issued for purposes unrelated to
the businesses of EChapman.com, Chapman Holdings, Chapman Capital Management
Holdings, or their respective affiliates:
- Three-year promissory note to The Chapman Co. dated February 11, 1998 in
the amount of $176,250, which accrues interest at 5.54% per annum and
requires no payments of principal or interest until maturity.
- Three-year promissory note to Chapman Holdings dated March 11, 1998 in the
amount of $285,587, which accrues interest at 5.5% per annum.
- Demand promissory note to The Chapman Co. dated May 1, 1998 in the amount
of $100,000, which accrues interest at 5.5% per annum.
- Demand promissory note to Chapman Capital Management dated July 2, 1998 in
the amount of $45,000, which accrues interest at 5.48% per annum.
- Three year promissory note to Chapman Capital Management Holdings dated
August 21, 1998 in the amount of $65,000, which accrues interest at 5.48%
per annum.
- Three-year promissory note to Chapman Holdings dated December 31, 1998 in
the amount of $51,690, which accrues interest at 4.33% per annum.
49
<PAGE>
- Demand promissory note to Chapman Capital Management Holdings dated
July 29, 1999 in the amount of $242,000, which accrues interest at 5.45%
per annum.
- Three-year promissory note to The Chapman Co. dated December 31, 1999 in
the amount of $32,837, which accrues interest at 4.33% per annum.
Chapman Capital Management Holdings executed a 10-year note to Chapman
Holdings as of October 31, 1996 in the amount of $763,367 which accrued interest
at 6.68% per annum. The proceeds of this loan were used by Chapman Capital
Management to pay start-up costs in connection with its development of a
proprietary investment product and for a non-competition agreement. On
August 14, 1998, this loan was repaid in full.
On July 29, 1999, Chapman Capital Management Holdings made an unsecured loan
of $3,220,000 to Chapman Holdings, in connection with The Chapman Co., which was
seeking to qualify to participate in a municipal underwriting syndicate. The
loan was issued pursuant to a demand note that required Chapman Holdings to
repay the amount of the loan upon chapman Capital Management Holdings' demand
and with interest due thereon at the brokers call rate as in effect from time to
time. Chapman Holdings repaid this loan with accrued interest in full on
September 14, 1999.
Mr. Chapman is president and treasurer and Mr. Bravo is secretary of Chapman
General Partner One, Inc.,a Maryland corporation and the general partner of
Chapman Limited Partnership I, a Maryland limited partnership, the operations of
which consist solely of the ownership and rental of furniture and equipment to
The Chapman Co. The Chapman Co. leases furniture and equipment from this
partnership, with part of such cost being allocated to Chapman Capital
Management Holdings. 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 Chapman Co. under the lease was
$118,152 in each of 1998, 1999, of which $0 and $0 were payable to the Chapman
Limited Partnership as of December 31, 1998 and December 31, 1999, respectively.
Rent expenses allocated to Chapman Capital Management Holdings under this lease
agreement was $59,076 in 1998 and $59,076 in 1999.
On December 14, 1998, The Chapman Co. and Chapman Capital Management paid
$19,536 on behalf of Chapman Limited Partnership I for certain taxes and related
payments, interest, and penalties. The Chapman Co. and Chapman Capital
Management characterized these 1998 payments as an expense for which they will
not be reimbursed by the partnership and which is related to The Chapman Co.'s
administration of the partnership. On October 22, 1999, Chapman Holdings and
Chapman Capital Management Holdings each paid $49,018 on behalf of the
partnership for the payment of certain taxes and related payments. Chapman
Holdings
50
<PAGE>
and Chapman Capital Management Holdings each characterized $24,509 of these 1999
payments as an expense for which they will not be reimbursed by the partnership
and which is related to the administration of the partnership. The partnership
reimbursed each of Chapman Holdings and Chapman Capital Management Holdings
$19,000 of the 1999 payments on March 13, 2000.
Chapman Holdings shares office space, certain employees and other overhead
with certain other entities controlled by Mr. Chapman, including Chapman Capital
Management Holdings and Chapman Insurance Agency. Chapman Holdings allocates
compensation and benefits expense to Chapman Capital Management Holdings and
Chapman Insurance Agency based on actual compensation and benefits expense and
the estimated percentage of the employee's time spent performing services for
each entity. Chapman Holdings allocates other expenses based on estimated usage.
In connection with these allocation arrangements, as of December 31, 1998 and
December 31, 1999, Chapman Capital Management Holdings owed Chapman Holdings
$180,699 and $96,440, respectively. Chapman Holdings treats these outstanding
allocation amounts as normal receivables to be paid in the ordinary course of
business, and Chapman Capital Management Holdings treats these outstanding
allocation amounts as normal expenses to be paid in the ordinary course of
business.
On November 10, 1998, a receivable of The Chapman Co. was incorrectly coded
for deposit to Chapman Capital Management's account. This resulted in an
erroneous deposit of $291,207 in the securities account of Chapman Capital
Management Holdings. As of December 31, 1998, Chapman Capital Management
Holdings owed Chapman Holdings $104,270 of this amount. Chapman Capital
Management Holdings repaid the amount in full on January 12, 1999.
Chapman Holdings and Mr. Chapman entered into a non-exclusive, royalty-free
License Agreement on December 26, 1997 pertaining to the company's use of the
DEM-Registered Trademark- and Domestic Emerging Markets-Registered Trademark-
trademarks that are owned by Mr. Chapman.
As of June 9, 1998, Chapman Capital Management Holdings and Mr. Chapman
entered into a non-exclusive, royalty-free service mark licensing agreement
pertaining to the use of the DEM-Registered Trademark-, Domestic Engineering
Markets-Registered Trademark-, DEM Index-TM-, DEM Profile-TM-, DEM Universe-TM-,
DEM Company-TM-, DEM Multi-Manager-TM-, Chapman-TM-, and C-Eagle-TM- trademarks
that are owned by Mr. Chapman.
EChapman.com has entered into a non-exclusive, royalty-free licensing
agreement with Mr. Chapman pertaining to our use of the C-Eagle Logo-TM-,
Chapman, Chapman Trading-TM-, Chapman Network-TM-, Chapman Education-TM-,
Chapman Marketplace-TM-, Chapman Kids Club-TM-, DEM Index-TM-, DEM Profile-TM-,
DEM Universe-TM-, DEM Company-TM-, DEM Community-TM-, DEM Multi-Manager-TM-,
EChapman.com-TM-, Domestic Emerging Markets-Registered Trademark-,
DEM-Registered Trademark-, trademarks that are owned by Mr. Chapman.
All transactions with affiliates of Chapman Holdings and Chapman Capital
Management Holdings are approved by a majority of the Board of Directors,
including a majority of the disinterested Directors, in accordance with Maryland
law.
51
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
3.1 Articles of Incorporatiion of the Company (Incorporated by reference to Pre-Effective Amendment 2
to the Company's Registration Statement on Form SB-2 (File No. 333-51883) as filed with the Securities and
Exchange Commission on June 22, 1998).
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998 and incorporated herein by reference).
4 Form of common stock certificate (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998, as filed with the Securities and Exchange Commission).
10.1 Agreement and Plan of Merger by and between the Company, and eChapman.com, Inc. dated November 15, 1999
(Filed as Exhibit 10.4 to Pre-effective Amendment No. 1 to eChapman.com,Inc. Registration Statement on
Form SB-2 (File No. 333-90987) as filed with the Securities and Exchange Commission on January 18, 2000
and hereby incorporated by reference)
10.2 $763,367 Promissory Note to The Chapman Co. from Chapman Capital Management dated October 31, 1997 (Filed as
Exhibit 10.11 to Pre-Effective Amendment No. 1 to Chapman Holdings, Inc.'s Registration Statement on Form SB-2
(File No. 333-43487) as filed with the Securities and Exchange Commission on February 17, 1998 and hereby
incorporated by reference)
10.3 Agreement between Chapman Holdings, Inc. and Chapman Capital Management Holdings, Inc. as to Allocation of
Shared Expenses dated as of January 1, 1999 (Filed as Exhibit 10.1 to Chapman Holdings, Inc.'s Quarterly Report
on Form 10Q-SB (File No. 0-23587) as filed with the Securities and Exchange Commission on May 17, 1999 and hereby
incorporated by reference)
10.4 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and The Chapman Funds,
Inc. on behalf of The Chapman U.S. Treasury Money Fund and The Chapman Institutional Cash Management Fund dated
April 30, 1997 (Filed as Exhibit 5(A) to Post-Effective Amendment No. 13 to The Chapman Funds, Inc.'s
Registration Statement on Form N-1A (file Nos. 33-25716;811-5697) as filed with the Securities and Exchange
Commission on August 7, 1997 and hereby incorporated by reference)
10.5 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and The Chapman Funds,
Inc. on behalf of the DEM Equity Fund dated October 28, 1997 (Filed as Exhibit 5(B) to Post-Effective Amendment
No. 15 to The Chapman Funds, Inc.'s Registration Statement on Form N-1A (File No. 33-25716;811-5697) as filed
with the Securities and Exchange Commission on March 2, 1998 and hereby incorporated by reference)
10.6 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and The Chapman Funds,
Inc. on behalf of the DEM Index Fund dated October 28, 1997 (Filed as Exhibit 4(C) to Post-Effective Amendment
No. 16 to The Chapman Funds, Inc.'s Registration Statement on Form N-1A (File Nos. 33-25716;811-5697) as filed
with the Securities and Exchange Commission on May 29, 1998 and hereby incorporated by reference)
10.7 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and The Chapman Funds,
Inc. on behalf of the DEM Fixed Income Fund dated February 11, 1998 (Filed as Exhibit 4(D) to Post-Effective
Amendment No. 17 to The Chapman Funds, Inc.'s Registration Statement on Form N-1A (File Nos. 33-25716;811-5697)
as filed with the Securities and Exchange Commission on June 12, 1998 and hereby incorporated by reference)
10.8 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and The Chapman Funds,
Inc. on behalf of the DEM Multi-Manager Equity Fund dated October 23, 1999 (Filed as Exhibit 4(E) to Post-
Effective Amendment No. 18 to The Chapman Funds, Inc.'s Registration Statement on Form N-1A (File Nos.
33-25716;811-5697) as filed with the Securities and Exchange Commission on September 30, 1998 and hereby
incorporated by reference)
10.9 Advisory and Administrative Services Agreement between Chapman Capital Management, Inc. and the Chapman Funds,
Inc. on behalf of the DEM Multi-Manager Bond Fund dated October 23, 1998 (Filed as Exhibit 4(F) to Post-Effective
Amendment No. 21 to The Chapman Funds, Inc.'s Registration Statement on Form N-1A (File Nos. 33-25716;811-5697)
as filed with the Securities and Exchange Commission on July 15, 1999 and hereby incorporated by reference)
52
<PAGE>
10.10 Advisory Agreement for Separate Account dated June 1, 1995 (Filed as Exhibit 10.5 to Amendment No. 2 to Chapman
Capital Management Holdings, Inc.'s Registration Statement on From SB-2 (File No. 333-51883) as filed with the
Securities and Exchange Commission on June 22, 1998 and hereby incorporated by reference)
10.11 Agreement & Declaration of Trust between Chapman Capital Management, Inc. and Bankers Trust Company dated
November 1, 1996 (Filed as Exhibit 10.6 to Chapman Capital Management Holding's Registration Statement on
Form SB-2 (File No. 333-51883) as filed with the Securities and Exchange Commission on May 5, 1998 and hereby
incorporated by reference)
10.12 Agreement between Bankers Trust Company and Chapman Capital Management, Inc. dated November 1, 1996 (Filed as
Exhibit 10.7 to Chapman Capital Management Holding's Registration Statement on Form SB-2 (File No. 333-51883) as
filed with the Securities and Exchange Commission on May 5, 1998 and hereby incorporated by reference)
10.13 Agreement between Bankers Trust Company and Chapman Capital Management and Tremont Partners, Inc. and Stamberg
Prestia, Ltd. dated November 1, 1996 (Filed as Exhibit 10.8 to Chapman Capital Management Holding's Registration
Statement on Form SB-2 (File No. 333-51883) as filed with the Securities and Exchange Commission on May 5, 1998
and hereby incorporated by reference)
10.14 Service Mark License Agreement between Chapman Capital Management Holdings, Inc., Chapman Capital Management,
Inc. and Nathan A. Chapman, Jr. dated as of June 9, 1998 Filed as Exhibit 10.10 to Amendment No. 2 to Chapman
Capital Management Holdings, Inc.'s Registration Statement on Form SB-2 (File No. 333-51883) as filed with the
Securities and Exchange Commission on June 22, 1998 and hereby incorporated by reference)
10.15 $65,000 Promissory Note to Chapman Capital Management Holdings, Inc. from Nathan A. Chapman, Jr. dated
August 21, 1998 (Filed as Exhibit 10.1 to Chapman Capital Management Holdings, Inc.'s Quarterly Report on
Form 10Q-SB (File No. 0-24213) as filed with the Securities and Exchange Commission on November 16, 1998 and
hereby incorporated by reference)
10.16 $45,000 Demand Note to Chapman Capital Management, Inc. from Nathan A. Chapman, Jr. dated July 2, 1998 (Filed as
Exhibit 10.2 to Chapman Capital Management Holdings, Inc.'s Quarterly Report on Form 10Q-SB (File No. 0-24213)
as filed with the Securities and Exchange Commission on November 16, 1998 and hereby incorporated by reference)
10.17 $242,000 Promissory Note to Chapman Capital Management Holdings, Inc. from Nathan A. Chapman, Jr. dated as of
July 29, 1999 (Filed as Exhibit 10.2 to Chapman Capital Management Holdings, Inc.'s Quarterly Report on
Form 10Q-SB as filed with the Securities and Exchange Commission on August 20, 1999 and hereby incorporated by
reference)
10.18 Amended and Restated Expense Limitation Agreement by and among The Chapman Funds, Inc., on behalf of
The Chapman U.S. Treasury Money Fund, DEM Equity Fund, DEM Index Fund, DEM Multi-Manager Equity Fund and DEM
Multi-Manager Bond Fund, and Chapman Capital Management, Inc. dated March 17, 2000 (Filed as
Exhibit 10.43 to eChapman.com, Inc. Registration Statement on Form S-4 (File No. 333-91329 as filed with the
Securities and Exchange Commission on March 29, 2000, and incorporated by reference).
10.19 Chapman Capital Management Holdings, Inc. 1997 Omnibus Stock Plan (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).
21 Subsidiaries of the Company (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).
27 Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K:
The Company has filed no reports on Form 8-K during the fourth quarter
of fiscal year 1999.
53
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHAPMAN CAPITAL MANAGEMENT
HOLDINGS, INC.
Dated: March 29, 2000 By: /S/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board of
Directors and President
In accordance with the Exchange Act, this report is signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
SIGNATURES TITLE AND CAPACITY DATE
/S/ NATHAN A. CHAPMAN, JR. President and Chairman of the March 29, 2000
- -------------------------- Board (Principal Executive
Nathan A. Chapman, Jr. Officer)
/S/ MARIA MARKHAM-THOMPSON Chief Financial Officer March 29, 2000
- -------------------------- (Principal Financial Officer
Maria Markham-Thompson and Principal Accounting
Officer)
The Entire Board of Directors
Nathan A. Chapman, Jr.
Theron Stokes
Earl U. Bravo, Sr.
Robert L. Wallace
By: /S/ NATHAN A. CHAPMAN, JR. March 29, 2000
--------------------------
Nathan A. Chapman, Jr.
Attorney-in-Fact
54
<PAGE>
EXHIBIT INDEX
Exhibit Exhibit Description
No.
23.1 Consent of Arthur Andersen, LLP
24 Power of Attorney
27 Financial Data Schedule
55
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports in this Form 10-KSB. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1999 or
performed any audit procedures subsequent to the date of our report.
/S/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 30, 2000
<PAGE>
Exhibit 24
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Directors and
Executive Officers of Chapman Capital Management Holdings, Inc., incorporated in
the State of Maryland, hereby constitute and appoint Nathan A. Chapman, Jr. and
Earl U. Bravo, Sr., and either of them, the true and lawful agents and
attorney-in-fact of the undersigned with full power and authority in either said
agent and attorney-in-fact, to sign for the undersigned and in their respective
names as Directors and/or Executive Officers of Chapman Capital Management
Holdings, Inc., the Annual Report on Form 10-KSB, and any and all further
amendments to said report, hereby ratifying and confirming all acts taken by
such agent and attorney-in-fact, as herein authorized.
Dated as of: March 25, 2000
/S/ NATHAN A. CHAPMAN, JR. /S/ ROBERT L. WALLACE
- ------------------------------------------- -----------------------------
Nathan A. Chapman, Jr., President, Chairman Robert L. Wallace, Director
of the Board and Director (Principal
Executive Officer)
/S/ EARL U. BRAVO, SR. /S/ THERON STOKES
- ------------------------------------------- -----------------------------
Earl U. Bravo, Sr., Director Theron Stokes, Director
/S/ MARIA MARKHAM-THOMPSON
- -------------------------------------------
Maria Markham-Thompson, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999
AND 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 2,680,000 0
<SECURITIES> 356,000 0
<RECEIVABLES> 1,225,000 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,541,000 0
<PP&E> 76,000 0
<DEPRECIATION> (24,000) 0
<TOTAL-ASSETS> 4,838,000 0
<CURRENT-LIABILITIES> 650,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 3,000 0
<OTHER-SE> 4,185,000 0
<TOTAL-LIABILITY-AND-EQUITY> 4,838,000 0
<SALES> 4,622,000 3,136,000
<TOTAL-REVENUES> 4,622,000 3,136,000
<CGS> 5,475,000 3,369,000
<TOTAL-COSTS> 5,475,000 3,369,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,000 26,000
<INCOME-PRETAX> (853,000) (151,000)
<INCOME-TAX> 0 (45,000)
<INCOME-CONTINUING> (853,000) (106,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (853,000) (106,000)
<EPS-BASIC> 0.25 (0.04)
<EPS-DILUTED> 0.25 (0.04)
</TABLE>
