<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHAPMAN HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
MARYLAND 6211 52-2069777
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
401 EAST PRATT STREET
SUITE 2800
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Address and Telephone Number of Principal Executive Office)
------------------------------
NATHAN A. CHAPMAN, JR., PRESIDENT
CHAPMAN HOLDINGS, INC.
401 EAST PRATT STREET
28TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Name, Address and Telephone Number of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ELIZABETH R. HUGHES, ESQ. FRANK S. JONES, JR., ESQ.
VENABLE, BAETJER AND HOWARD, LLP WHITEFORD, TAYLOR & PRESTON L.L.P.
1800 MERCANTILE BANK & TRUST BUILDING SEVEN SAINT PAUL STREET
TWO HOPKINS PLAZA BALTIMORE, MARYLAND 21202-1626
BALTIMORE, MARYLAND 21201-2978 (410) 347-8707
(410) 244-7400
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
AFTER THIS REGISTRATION STATEMENT IS EFFECTIVE.
If any of the securities being registered on this form is to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
MAXIMUM NO. OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES SHARES OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED (1) PER SHARE OFFERING PRICE(1) REGISTERED FEE
<S> <C> <C> <C> <C>
Common Stock,
par value $0.001 per share................. 1,000,000 shares $9.00 $9,000,000 $2660
</TABLE>
(1) Estimated solely for purposes of determining the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION DATED: DECEMBER 30, 1997
MINIMUM OFFERING: 850,000 SHARES
MAXIMUM OFFERING: 1,000,000 SHARES
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
--------------------
Chapman Holdings, Inc., a Maryland corporation (the "Company"), is offering
for sale up to 1,000,000 shares (the "Maximum") of its common stock, $0.001 par
value per share (the "Common Stock") (the offering made is referred to herein as
the "Offering"). A minimum of 850,000 shares of Common Stock must be sold in
order for the Offering to close (the "Minimum"). Prior to the Offering, there
has been no public market for the Common Stock and there can be no assurance
that any such market will develop in the future. The Company intends to apply
for quotation on the Nasdaq SmallCap Market (the "SmallCap Market") under the
symbol "CMAN". It is currently anticipated that the initial public offering
price of the shares of Common Stock offered by this Prospectus (the "Shares")
will be between $7.00 and $9.00 per share. The initial public offering price
will be determined by negotiation between the Company and a qualified
independent underwriter as required by the Rules of the National Association of
Securities Dealers, Inc. (the "NASD"). See "Plan of Distribution." Upon sale of
the Minimum, the current President of the Company will exercise voting control
over approximately 64.4% of the Company's outstanding Common Stock. See
"Principal Stockholders."
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1)(2) COMPANY(3)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total Minimum................................... $ $ $
Total Maximum................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify The Chapman Co. (the "Underwriter") and
the qualified independent underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) Includes fees payable to the qualified independent underwriter. See "Plan of
Distribution."
(3) Before deducting expenses payable by the Company that are estimated at
$300,000.
------------------------
The Shares are offered on a best efforts basis by the Underwriter, subject
to prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering without notice and to reject any order in whole or in part.
This Offering is conditioned upon the sale of the Minimum. Until the Minimum
is sold, all funds received from purchasers will be held by UMB Bank, N.A. as
escrow agent and returned promptly if the Minimum is not sold by the termination
date, without interest or deduction. The termination date of the Offering is on
the earlier to occur of: the date selected by the Company; the date of the sale
of the Maximum; or, if the Minimum is not sold, 180 days after the date of this
Prospectus, unless extended by the Company for one or more additional periods
not to exceed an additional 30 days in the aggregate (the "Termination Date").
THE CHAPMAN CO.
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." IN CONNECTION WITH
THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "PLAN OF DISTRIBUTION."
------------------------
FURTHER INFORMATION
The Company will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent accounting
firm.
DOMESTIC EMERGING MARKETS-REGISTERED TRADEMARK-, IS A REGISTERED TRADEMARK
AND DEM-TM- AND DEM INDEX-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.
2
<PAGE>
PROSPECTUS SUMMARY
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD
BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE DISCUSSION APPEARING UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," ARE
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
SEE "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." ON DECEMBER 29, 1997, THE COMPANY, A NEWLY
FORMED MARYLAND CORPORATION, EFFECTED A TAX-FREE HOLDING COMPANY REORGANIZATION
PURSUANT TO WHICH THE CHAPMAN CO. BECAME A WHOLLY-OWNED DIRECT SUBSIDIARY OF THE
COMPANY. IMMEDIATELY PRIOR TO THE CLOSING OF THE SALE OF THE MINIMUM, THE
COMPANY INTENDS TO EFFECT A TAX-FREE SPIN-OFF TRANSACTION PURSUANT TO WHICH THE
CHAPMAN CO.'S TWO WHOLLY-OWNED SUBSIDIARIES, CHAPMAN CAPITAL MANAGEMENT, INC
("CCM") AND THE CHAPMAN INSURANCE AGENCY INCORPORATED ("CIA"), WILL BECOME
WHOLLY-OWNED SUBSIDIARIES OF SEPARATE HOLDING COMPANIES AND THE STOCK OF SUCH
HOLDING COMPANIES WILL BE DISTRIBUTED TO THE EXISTING STOCKHOLDERS OF THE
COMPANY (THE "SPIN-OFF"). INVESTORS THAT PURCHASE SHARES IN THE OFFERING WILL
NOT RECEIVE STOCK IN EITHER HOLDING COMPANY. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE COMPANY HEREIN ASSUME COMPLETION OF THE SPIN-OFF AND THE
INFORMATION SET FORTH IN THIS PROSPECTUS GIVES EFFECT TO THE SPIN-OFF. UNLESS
OTHERWISE INDICATED, ALL REFERENCES TO THE COMPANY HEREIN REFER TO CHAPMAN
HOLDINGS, INC. AND ITS WHOLLY-OWNED DIRECT SUBSIDIARY, THE CHAPMAN CO.
THE COMPANY
The Company is an African-American owned and controlled full service
securities brokerage and investment banking firm. Through its wholly-owned
subsidiary, The Chapman Co., the Company is registered as a broker-dealer with
the Securities and Exchange Commission (the "Commission") and in 24 states and
the District of Columbia and is a member firm of the NASD. The Company's primary
sources of revenue are derived from brokerage services, corporate finance and
government finance activities. These activities are supported by the Company's
research capabilities.
The Company provides sales and trading services to institutional and retail
clients. Commissions are charged for executing buy and sell orders of securities
on national and regional exchanges and in the over-the-counter market.
The Company has been a member of over 200 underwriting syndicates for
corporate issues, substantially all of which were equity offerings. The number
of transactions in which the Company participated during the last three years
declined primarily due to its limited capital position. The Company has been
involved in government finance for over nine years. The Company has managed,
primarily as co-manager, over 200 tax-exempt public finance transactions,
including approximately 35 transactions in the past two years. The Company has
also participated in the direct offering, as a selling group member, of debt of
the Tennessee Valley Authority and in competitive syndicates for other
government agencies.
The Company has recently launched a new corporate finance strategic
initiative called the Domestic Emerging Markets ("DEM") strategy which targets
domestic companies controlled by African-Americans, Asian-Americans,
Hispanic/Latino Americans and women as candidates for the Company's investment
banking services. The Company intends to market its investment banking services
to companies meeting the DEM profile and to make markets in the stocks of
selected DEM companies. The Company believes that its DEM strategy will permit
it to develop a market niche for its corporate finance business.
The Company is headquartered at The World Trade Center--Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, MD 21202 and its telephone number is (410)
625-9656. The Company has sales offices in Alabama, Tennessee, Illinois, Texas,
Pennsylvania and Mississippi.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered
Minimum: 850,000 Shares
Maximum: 1,000,000 Shares
Common Stock Outstanding
Prior to the 1,989,235 Shares
Offering:
After the Offering
Minimum: 2,839,235 Shares
Maximum: 2,989,235 Shares
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds: The Company proposes to use the net proceeds from this Offering
to increase its net capital to participate in corporate and
government finance transactions, expand market-making and
research efforts, implement its DEM strategy, expand sales and
marketing efforts (primarily for new products), hire sales
personnel to staff additional sales offices and corporate finance
staff to implement its DEM strategy and to provide general
corporate working capital. While the Company does not have any
current plans regarding mergers or acquisitions, the Company may
use a portion of the net proceeds from this Offering for such
purposes. The extent to which the Company will seek to implement
the above objectives will be determined by the total amount of
proceeds raised from the Offering. If the Minimum is sold, the
Company intends to devote a substantial amount of the net
proceeds to increase net capital as needed to participate in
corporate and public finance transactions, expand market- making
and research, implement its DEM strategy and the remainder to
sales and marketing. To the extent net proceeds in excess of the
Minimum are received, the Company expects to devote increasing
amounts to implement the DEM strategy and to expand market-making
and research. See "Use of Proceeds."
Risk Factors: Prospective investors in the Common Stock should carefully
consider the information discussed under the heading "Risk
Factors."
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary of financial information set forth below is derived from the
Company's audited financial statements for each of the years ended December 31,
1995 and 1996, which have been audited by Arthur Andersen LLP, independent
public accountants. The financial data for the ten months ended October 31, 1996
and 1997 have been derived from unaudited financial statements of the Company.
The unaudited financial data, in the opinion of management, includes all
adjustments, consisting of normal recurring adjustments and adjustments for
discontinued operations, necessary for the fair presentation of the financial
condition and results of operations of the Company. This information should be
read in conjunction with such financial statements, including the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenues......................................... $ 2,795,992 $ 2,887,049 $ 1,981,860 $ 2,543,820
Income from continuing operations before income tax
provision............................................ 134,446 516,338 92,336 434,807
Net income from continuing operations.................. $ 206,446 $ 350,338 $ 63,336 $ 260,907
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share:
from continuing operations........................... $ 0.09 $ 0.16 $ 0.03 $ 0.13
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding.................... 2,201,414 2,191,374 2,200,514 2,001,914
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED AS ADJUSTED
ACTUAL (1) MINIMUM(2) MAXIMUM(2)
----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities......... $ 440,428 $ 440,428 $ 6,464,436 $7,580,436
Total assets............................................. 2,818,525 1,766,518 7,790,526 8,906,526
Total long-term debt..................................... -- -- -- --
Total stockholders' equity............................... 1,225,932 1,364,921 7,388,929 8,504,929
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to the Spin-off.
(2) Pro forma as adjusted minimum and pro forma as adjusted maximum give effect
to the sale of the Minimum and Maximum, respectively, at an estimated
offering price of $8.00 per share less underwriting discounts, commissions
and offering expenses.
5
<PAGE>
RISK FACTORS
THE SHARES INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE
SHARES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors, including those set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Shares.
GENERAL SECURITIES BUSINESS RISKS
The securities business is, by its nature, subject to numerous and
substantial risks, particularly in volatile or illiquid markets and in markets
influenced by sustained periods of low or negative economic growth, including
the risk of losses resulting from the underwriting or ownership of securities,
trading, principal activities, counterparty failure to meet commitments,
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders), failures in connection with the processing of
securities transactions, litigation, the risks of reduced revenue in periods of
reduced demand for public offerings or reduced activity in the secondary markets
and the risk of reduced spreads on the trading of securities.
MANAGEMENT OF GROWTH
The Company has experienced and expects to continue to experience
significant growth in its business activities and the number of its employees.
This growth has required and will continue to require increased investment in
personnel, financial and management systems and controls and facilities. The
absence of continued revenue growth, or the Company's inability to manage such
growth, could have a material adverse effect on the Company's operations. In
addition, as is common in the securities industry, the Company is and will
continue to be highly dependent on the effective and reliable operation of its
communications and information systems. Any difficulty in the operation of
existing systems, the implementation of new systems or the training of personnel
could adversely affect the Company's ability to manage growth.
HIGHLY COMPETITIVE INDUSTRY
The investment banking and brokerage industry is extremely competitive. The
Company encounters intense competition in all aspects of the securities business
and competes directly with other securities firms, a significant number of which
have greater capital, experience and other resources than the Company.
Competition also exists for experienced personnel including technical personnel
and account executives. In addition to competition from firms currently in the
securities business, recently there has been increasing competition from other
sources, such as commercial banks and insurance companies offering financial
services. See "Business--Competition."
UNPROVEN NATURE OF DOMESTIC EMERGING MARKETS STRATEGY
The Company has recently launched the DEM strategic initiative which targets
U.S. companies controlled by African-Americans, Asian-Americans, Hispanic/Latino
Americans and women as candidates for investment banking services. The Company
will seek to expand its investment banking business through the implementation
of its DEM strategy, by earning fees from the distribution of DEM products, such
as investment companies with DEM-driven portfolios, from the provision of
financial advisory and investment banking services to DEM companies and by
making markets in the securities of DEM companies. Although the Company has
identified approximately 150 publicly traded companies with DEM characteristics,
there can be no assurance that companies meeting the DEM profile will select the
Company for
6
<PAGE>
investment banking or other services. The Company has had limited corporate
finance experience in a management role; therefore its ability to provide DEM
companies with investment banking services, such as management of underwriting
syndicates, will require adding personnel with investment banking expertise and
development of a track record in the management of underwriting syndicates.
There can be no assurance that the Company will be able to attract, hire and
retain such personnel. Furthermore, because a substantial number of companies
meeting the DEM profile are expected to trade in the over-the-counter markets,
the formation of underwriting syndicates for and the distribution of securities
of such companies as well as making markets in the stocks of such companies may
be more difficult than for companies having larger capitalizations and greater
market liquidity. See "Business--Strategy."
PROPOSED EXPANSION
The Company intends to apply a portion of the net proceeds of the Offering
to increase its net capital to participate in corporate and government finance
transactions. There can be no assurance that the Company will continue to be
invited to participate in such transactions or that the number of such
transactions in which it is invited to participate will grow. The Company also
intends to deploy a portion of the net proceeds in efforts to obtain government
finance business in those states with the most tax-exempt bond offerings in
which the Company does not already have an office. The addition of personnel to
staff such offices (together with any corporate finance staff added to implement
the DEM strategy) can be expected to significantly increase the Company's
operating expenses. There can be no assurance that the Company will be able to
increase its revenue in an amount sufficient to offset such increased expenses.
DEPENDENCE ON KEY PERSONNEL; DUTIES TO OTHER COMPANIES
For the foreseeable future, the Company will place substantial reliance upon
the personal efforts and abilities of Nathan A. Chapman, Jr., President of the
Company. The loss of the services of Mr. Chapman may have a material adverse
effect on the business, operations, revenue and/or business prospects of the
Company. The Company maintains key man life insurance on Mr. Chapman in the
amount of $11 million. Mr. Chapman also serves as President and Chief Executive
Officer of CCM, CIA and certain investment companies sponsored by CCM.
Therefore, Mr. Chapman will not devote full time to the operation of the Company
and will devote significant time to his duties to these other entities. The
Company expects that Mr. Chapman will devote no less than 50% of his time to the
operation of the Company. See "Certain Transactions."
CERTAIN TRANSACTIONS; RELATIONSHIPS WITH OTHER CHAPMAN ENTITIES; CONFLICTS OF
INTEREST
The Company acts as an underwriter for the securities of three active
registered investment companies, DEM, Inc., a closed-end company, and DEM Equity
Fund and The Chapman U.S. Treasury Money Fund, each an open-end portfolio of The
Chapman Funds, Inc. Each of these investment companies was sponsored and is
managed by CCM. CCM's majority owner, through a holding company, is Nathan A.
Chapman, Jr., the Company's President. In addition, several of the Company's key
executives, including Mr. Chapman, are also officers and/or directors of holding
companies owning all of the outstanding equity securities of CCM and CIA. The
common management and/or ownership among CCM, CIA, DEM, Inc., The Chapman Funds,
Inc. and the Company may involve potential conflicts of interest with respect to
the terms of business transactions, allocations of shared expenses for overhead
(including compensation of shared employees, lease payments and other expenses)
and the allocation of business opportunities between the Company and such other
companies. See "Certain Transactions." Further, because the key executives of
the Company are also senior executives of other companies, the Company's
management will not be able to devote all of its time to the business affairs of
the Company. Management intends to have all business transactions and
allocations of overhead between the Company and such other companies
7
<PAGE>
approved by a committee of the Board of Directors composed of independent,
outside directors. Furthermore, the compensation of the Company's officers will
be approved by the Compensation Committee of the Board of Directors, a majority
of the members of which are independent, outside directors.
POTENTIAL CONFLICTS CAUSED BY SELF-UNDERWRITING; NEED FOR QUALIFIED INDEPENDENT
UNDERWRITER
The Chapman Co. (which is a wholly-owned subsidiary of the Company) is the
Underwriter of the Offering on a best efforts basis. As a wholly-owned
subsidiary of the Company, The Chapman Co.'s role as Underwriter may involve
certain conflicts of interest. Pursuant to the Conduct Rules of the NASD, the
Shares are being offered at a price no higher than that recommended by Ferris
Baker Watts, Incorporated, which is acting as qualified independent underwriter
(the "QIU"). Although the QIU has participated in the preparation of the
Registration Statement of which this Prospectus forms a part and is required to
exercise the usual standards of "due diligence" with respect thereto, there can
be no assurance that certain conflicts will not arise with respect to this
Offering, or if conflicts do arise, that they will be resolved in a manner
favorable to investors. See "Plan of Distribution."
NEGOTIATED OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined
through negotiation between the Company and the QIU and may not be indicative of
the market price of the Common Stock after the Offering. For a discussion of the
factors considered in determining the offering price, see "Plan of
Distribution." Certain factors, such as subsequent sales of Common Stock into
the market by existing stockholders and market conditions generally, could cause
the market price of the Common Stock to fluctuate substantially. Furthermore,
there can be no assurance that the offering price will correspond to the price
at which the Common Stock will trade in the public market at any time subsequent
to the Offering. See "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The sale of the Minimum would involve immediate and substantial dilution of
$5.40 per share, or 67.5%, to investors because the net tangible book value per
share of Common Stock upon the sale of the Minimum would be substantially less
than the per share offering price, assuming an $8.00 per share offering price.
See "Dilution."
EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
As of the Minimum closing, the Company will have 2,839,235 shares of Common
Stock outstanding, of which 1,828,115 will be beneficially owned by Nathan A.
Chapman, Jr. With the exception of 196,595 shares of Common Stock owned by Mr.
Chapman, all of the shares outstanding prior to the Offering will be available
for resale in the public market, under Rule 144 promulgated pursuant to the
Securities Act, 90 days after the date of this Prospectus. Mr. Chapman has
agreed not to publicly sell any of the shares of Common Stock that he owns as of
the date of this Prospectus prior to the first anniversary of the closing of the
sale of the Minimum. Sales of a significant number of shares of Common Stock in
the public market could have a material adverse effect on the market price of
the Common Stock. See "Shares Eligible for Future Sale."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including the
number of underwriting transactions in which the Company participates, access to
public markets for companies in which the Company has invested as a principal,
the valuations of the Company's principal investments, the level of
institutional and retail
8
<PAGE>
brokerage transactions, variations in expenditures for personnel, litigation
expenses and expenses of establishing new business units. The Company's revenue
from an underwriting transaction is recorded only when the underwritten security
commences trading; accordingly, the timing of the Company's recognition of
revenue from a significant transaction can materially affect the Company's
quarterly operating results.
BEST EFFORTS NATURE OF OFFERING
The Underwriter shall use its best efforts to sell the Shares; however,
there is no commitment by the Underwriter or any other person to purchase the
Shares. Consequently, the Company can give no assurance that any of the Shares
will be sold. Although the Offering will not close unless the Minimum is
achieved, the Company's ability to implement the DEM strategy and expand its
operations will be diminished to the extent less than the Maximum is sold. See
"Use of Proceeds" and "Plan of Distribution."
REGULATORY RISKS
The Company's business, and the securities industry generally, are subject
to extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance with
their rules and regulations. Among other things, these regulatory authorities
impose restrictions on sales methods, trading practices, use and safekeeping of
customer funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to broker-dealers, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance requirements on the Company. Failure to
comply with any of the laws, rules or regulations of any independent, state or
federal regulatory authority could result in a fine, injunction, suspension or
expulsion from the industry, which could have a material adverse effect on the
Company. Although the Company has implemented procedures designed to achieve
compliance with such laws, rules and regulations, there can be no assurance that
such compliance procedures will prevent violations. Furthermore, amendments to
existing statutes and regulations or the adoption of new statutes and
regulations could require the Company to alter its methods of operation at costs
which could be substantial. See "Business--Government Regulation," "--Net
Capital Requirements" and "--Legal Proceedings."
NET CAPITAL REQUIREMENTS
The Commission and the NASD have adopted stringent provisions with respect
to net capital requirements applicable to the operation of securities firms. A
significant operating loss or any charge against the net capital of the
Company's brokerage subsidiary, The Chapman Co., could adversely affect its
ability to operate, expand or, depending upon the magnitude of the loss or
charge, maintain its present level of business. These rules could also restrict
the ability of the Company to withdraw capital from The Chapman Co., even in
circumstances where The Chapman Co. has more than the minimum amount of required
capital, which, in turn, could limit the ability of the Company to implement its
strategies.
CONTROL BY PRINCIPAL STOCKHOLDER
Nathan A. Chapman, Jr. will beneficially own in the aggregate approximately
64.4% and 61.2% of the outstanding shares of Common Stock assuming the Minimum
and Maximum, respectively, are sold in this Offering. Accordingly, Mr. Chapman
will control the outcome of all matters submitted to the stockholders for
approval, including the election of directors of the Company. See "Management"
and "Principal Stockholders."
9
<PAGE>
NO PRIOR PUBLIC MARKET FOR AND POSSIBLE PRICE VOLATILITY OF THE SHARES;
LIMITATIONS ON MARKET MAKING ACTIVITIES
Prior to the Offering, there has been no public trading market for the
Common Stock and there is no assurance that an active public market for the
Common Stock will develop or, if developed, will continue after the Offering. In
the absence of an active public trading market, an investor may be unable to
liquidate his investment. The trading prices of the Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of material business events by the Company or its
competitors and other events or factors. Moreover, due to Commission and NASD
regulations limiting the circumstances under which a company may engage in
market making transactions in its own or an affiliate's securities, the Company
will not be able, in the absence of a current market making prospectus, to
engage in trading or market making activities relating to the Common Stock
following consummation of this Offering. The Company believes that there will be
sufficient market makers to qualify for and maintain a SmallCap Market
quotation; however, no firms are under any obligation to make a market in the
Common Stock and any firm which commences market making activities may cease
such activities at any time. Further, other rules, including those relating to
the use of "insider information," may prevent the Company's registered
representatives from recommending the Common Stock to its customers. To the
extent that the Company is unable to make a market in, or recommendations
regarding, the Common Stock following this Offering, the ability of investors to
sell the Common Stock in the secondary market may be limited and the price of
the Common Stock may be adversely affected.
RISKS OF LOW PRICED STOCKS
There is currently no public market for the Company's Common Stock. The
Company has applied for quotation on the SmallCap Market; however, there can be
no assurance that the Nasdaq Stock Market will approve the Company's
application. A summary of the current financial requirements for initial
quotation and maintenance of such quotation on the SmallCap Market as currently
in effect are set forth below:
<TABLE>
<CAPTION>
INITIAL
ATTRIBUTE QUOTATION MAINTENANCE
- --------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Net Tangible Assets $4,000,000 or $2,000,000 or
or
Market Capitalization $50,000,000 or $35,000,000 or
or
Net Income (latest $750,000 $500,000
year or two of last three
years)
Public Float (Shares) 1,000,000 500,000
Market Value of $5,000,000 $1,000,000
Public Float
Stockholders 300 300
Minimum Bid Price $4.00 $1.00
Number of Market 3 2
Makers
</TABLE>
The Company expects that at the time of the Minimum closing it will meet the
current initial quotation and maintenance requirements. However, the Offering is
not conditioned on achieving listing on the SmallCap Market, and there can be no
assurance that a market will develop for the Common Stock, or that the Company
will continue to meet the other requirements for quotation. Until such time as
the Company's application is approved and the Common Stock is quoted on the
SmallCap Market, trading in the Common Stock, should a market develop, could be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's Electronic Bulletin Board.
10
<PAGE>
CREDIT RISKS
The Company clears all transactions for its brokerage customers on a fully
disclosed basis with its clearing agent, which carries and clears all customer
securities accounts. The clearing agent also lends funds to the Company's
brokerage customers through the use of margin credit. These loans are made to
customers on a secured basis, with the clearing agent maintaining collateral in
the form of salable securities, cash or cash equivalents. Pursuant to the terms
of the agreement between the Company and the clearing agent, in the event that
customers fail to pay for their purchases, to supply the securities that they
have sold, or to repay funds they have borrowed, and the clearing agent
satisfies any customer obligations, the Company would be obligated to indemnify
the clearing agent for any resulting losses.
LEGAL PROCEEDINGS AND ARBITRATION RISKS
Many aspects of the Company's business involve substantial risks of
liability and regulatory enforcement by state and federal regulators.
Additionally, in recent years, there has been increased litigation involving
participants in the securities industry. Underwriters and agents are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. Claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty are regularly made against
broker-dealers. Customer claims may be made in arbitration proceedings, which
claims could result in awards of compensatory and/or punitive damages against
the Company.
CURRENT AND POTENTIAL REFORMS IN THE NASDAQ STOCK MARKET
The Nasdaq Stock Market has come under intense scrutiny in the media and
Congress during the past few years and has been the subject of Commission
investigations into its operations. Concerns have been raised with respect to
the size of the spreads between the price paid by investors purchasing Nasdaq-
quoted securities and the dealers who process the transactions. Concerns also
have been raised with respect to whether Nasdaq's listing requirements are
sufficiently stringent and whether the NASD, the trade organization controlling
the Nasdaq market, carefully polices Nasdaq-quoted companies. In response, the
NASD has begun to boost its internal compliance and monitoring programs,
including establishing a separate regulatory unit, National Association of
Securities Dealers Regulation, Inc. ("NASDR"). More specifically, NASDR has
taken numerous steps to better monitor trading activities among dealers and to
scrutinize companies' compliance with applicable standards for quotation, and
has heightened its overall monitoring of small capitalization companies.
The effects of current and proposed Nasdaq reform on the operations of
brokerage firms, especially those specializing in the securities of small
capitalization companies, such as the Company, cannot be fully anticipated. The
cost of compliance with any new rules, regulations and procedures instituted by
the NASDR could be significant. Additionally, the implementation of stricter
standards for initial and continued inclusion of companies on Nasdaq could
adversely affect the prospects of small capitalization companies, the stock
performance of such companies, and the liquidity of investors' investments in
such companies. Increased compliance costs or the inability to attain or
maintain the quotation of underwriting clients on the Nasdaq system, or a
combination thereof, could adversely affect the financial performance of the
Company.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash dividends in the foreseeable future.
The Company intends to retain all earnings, if any, for the foreseeable future
for the Company's continued growth. Moreover, the Company's ability to pay
dividends in the future may be restricted by the obligations of its wholly owned
broker-dealer subsidiary, The Chapman Co., to comply with the net capital rules
applicable to broker-dealers. See "Dividend Policy" and "Business--Government
Regulation, Net Capital Requirements."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares, assuming a
public offering price of $8.00 per share and, after deducting underwriting
discounts, commissions and estimated offering expenses, are estimated to be
approximately $6,024,000 if the Minimum is sold. In the event the Maximum is
sold, net proceeds are estimated to be approximately $7,140,000.
The Company proposes to use the net proceeds from this Offering to increase
its net capital to participate in corporate and government finance transactions,
expand market-making and research efforts, implement its DEM strategy, expand
sales and marketing efforts (primarily for new products), hire sales personnel
to staff additional sales offices and corporate finance staff to implement its
DEM strategy and to provide general corporate working capital. While the Company
does not have any current plans regarding mergers and acquisitions, the Company
may use a portion of the net proceeds from this Offering for such purposes. The
extent to which the Company will seek to implement the above objectives will be
determined by the total amount of proceeds raised from the Offering.
If the Minimum is sold, the Company intends to devote a substantial amount
of the net proceeds to increase net capital as needed to participate in
corporate and public finance transactions, expand market-making and research,
implement its DEM strategy and the remainder to sales and marketing. To the
extent net proceeds in excess of the Minimum are received, the Company expects
to devote increasing amounts to implement its DEM strategy and to expand
market-making and research.
The proposed allocation of net proceeds of this Offering represents the
Company's best estimates based upon current plans and certain assumptions
regarding industry and general economic conditions and the Company's future
revenue and expenditures. If any of these factors changes, the Company may find
it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes or may
be required to seek additional financing. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all. Any failure to obtain additional financing, if required, could have an
adverse effect on the Company, including possibly requiring the Company to
curtail its operations.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
12
<PAGE>
DILUTION
The difference between the offering price per share of Common Stock and the
pro forma net tangible book value per share of Common Stock after this Offering
constitutes dilution to purchasers of the Shares. Pro forma net tangible book
value per share is determined by dividing the pro forma net tangible book value
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock.
The pro forma net tangible book value of the Company as of October 31, 1997,
after giving effect to the Spin-off would have been $1,364,929 or $0.69 per
share of Common Stock. After giving effect to the sale of the Minimum at an
assumed offering price of $8.00 per Share (after deducting underwriting
discounts, commissions and estimated offering expenses) the pro forma net
tangible book value at that date would have been $7,388,929 or $2.60 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.91 per share to existing stockholders and an immediate dilution of $5.40 per
share to the purchasers of the Shares.
The following table illustrates the per share dilution effect as of October
31, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................................... $ 8.00
Pro forma net tangible book value before this Offering........................ $ 0.69
Increase attributable to new investors........................................ 1.91
---------
Pro forma net tangible book value after this Offering......................... 2.60
---------
Dilution to new investors..................................................... $ 5.40
---------
---------
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid and the average price per share paid by existing stockholders and by the
purchasers of the Shares, at an assumed offering price of $8.00 per share and
the sale of the Minimum:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------ ----------- -----------------
Existing stockholders............................. 1,989,235 70.1% $ 1,093,450 13.9% $ 0.55
New investors..................................... 850,000 29.9 6,800,000 86.1 8.00
---------- ----- ------------ -----
Total............................................. 2,839,235 100.0% $ 7,893,450 100.0% $ 2.78
---------- ----- ------------ ----- -----
---------- ----- ------------ ----- -----
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997, and as adjusted to give effect to the sale of the Minimum at
an assumed offering price of $8.00 per share and the receipt of the estimated
net proceeds therefrom:
<TABLE>
<CAPTION>
PRO FORMA
MINIMUM
ACTUAL PRO FORMA(1) AS ADJUSTED
------------ ------------- ------------
<S> <C> <C> <C>
Long term debt......................................................... $ -- $ -- $ --
------------ ------------- ------------
Common stock--$0.001 par value; 20,000,000 shares authorized,
1,792,640(2), 1,792,640(2) and 2,839,235 shares issued and
outstanding, respectively............................................ 1,793 1,793 2,839
Additional paid-in capital............................................. 1,091,657 1,091,657 7,114,619
Retained earnings...................................................... 132,482 271,471 271,471
------------ ------------- ------------
Total stockholders' equity............................................. $ 1,225,932 $ 1,364,921 $ 7,388,929
------------ ------------- ------------
------------ ------------- ------------
Total capitalization................................................... $ 1,225,932 $ 1,364,921 $ 7,388,929
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
- ------------------------
(1) Pro forma adjustments give effect to the Spin-off.
(2) Excludes 196,594 shares of Common Stock issued to the Company's majority
stockholder on December 22, 1997 in exchange for a warrant to purchase
common stock of The Chapman Co. owned by such stockholder.
DIVIDEND POLICY
The Company has never declared or paid cash or other dividends on its Common
Stock and does not anticipate doing so in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon the Company's earnings, if any, its financial
condition, and other relevant factors. The Company intends to retain any
earnings in the foreseeable future for the Company's continued growth. The
Company's ability to pay dividends in the future also may be restricted by
regulatory limitations on the ability of its wholly-owned subsidiary to pay
dividends due to its obligation to comply with the net capital requirements
imposed on broker-dealers under both Commission and NASD rules. See
"Business--Net Capital Requirements."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the Summary Financial Data included
elsewhere in this Prospectus.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
The Company's primary sources of revenue are commissions earned from
brokerage services and fees earned from corporate finance and government finance
activities. The Company's principal business activities are, by their nature,
affected by many factors, including general economic and financial conditions,
movement of interest rates, security valuations in the marketplace, competitive
conditions, transaction volume and market liquidity. Consequently, brokerage
commission revenue and investment banking fees can be volatile. While the
Company seeks to maintain cost controls, a significant portion of the Company's
expenses are fixed and do not vary with market activity. As a result,
substantial fluctuations can occur in the Company's revenue and net income from
period to period. Unless otherwise indicated, in this section, references to
years are to fiscal years.
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TEN MONTHS ENDED OCTOBER 31,
---------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1996 1997
---------------------------- ---------------------------- ---------------------------- -----------
<CAPTION>
(UNAUDITED)
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS
----------- --------------- ----------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Commissions................. $ 2,475,151 88.5% $ 2,553,098 88.4% $ 1,776,898 89.6% $ 2,246,180
Underwriting and management
fees...................... 286,780 10.3% 296,757 10.3% 171,850 8.7% 268,654
Interest and dividends...... 34,061 1.2% 37,194 1.3% 33,112 1.7% 28,986
----------- ----- ----------- ------ ----------- ------ -----------
Total revenue............. 2,795,992 100.0% 2,887,049 100.00% 1,981,860 100.00% 2,543,820
----------- ----- ----------- ------ ----------- ------ -----------
EXPENSE:
Compensation and benefits... 1,259,371 45.0% 1,050,193 36.4% 813,363 41.0% 942,867
Brokerage and clearing
fees...................... 323,245 11.6% 238,027 8.2% 195,249 9.9% 237,713
Communications.............. 154,506 5.5% 164,303 5.7% 133,036 6.7% 124,117
Occupancy and equipment..... 368,863 13.2% 422,598 14.6% 328,939 16.6% 296,718
Travel and business
development............... 193,302 6.9% 177,793 6.2% 169,126 8.5% 196,511
Professional fees........... 135,090 4.8% 154,993 5.4% 109,377 5.5% 76,775
Other operating expense..... 227,169 8.1% 162,804 5.6% 140,434 7.1% 234,312
----------- ----- ----------- ------ ----------- ------ -----------
Total expense............. 2,661,546 95.1% 2,370,711 82.1% 1,889,524 95.3% 2,109,013
----------- ----- ----------- ------ ----------- ------ -----------
Income from continuing
operations................ 134,446 4.8% 516,338 17.9% 92,336 4.7% 434,807
Income tax provision........ (72,000) (2.6)% 166,000 5.7% 29,000 1.5% 173,900
----------- ----- ----------- ------ ----------- ------ -----------
Net income from continuing
operations................ $ 206,446 7.4% $ 350,338 12.1% $ 63,336 3.2% $ 260,907
----------- ----- ----------- ------ ----------- ------ -----------
----------- ----- ----------- ------ ----------- ------ -----------
<CAPTION>
<S> <C>
PERCENTAGE OF
TOTAL REVENUE
---------------
<S> <C>
REVENUE:
Commissions................. 88.3%
Underwriting and management
fees...................... 10.6%
Interest and dividends...... 1.1%
-----
Total revenue............. 100.0%
-----
EXPENSE:
Compensation and benefits... 37.1%
Brokerage and clearing
fees...................... 9.3%
Communications.............. 4.9%
Occupancy and equipment..... 11.7%
Travel and business
development............... 7.7%
Professional fees........... 3.0%
Other operating expense..... 9.2%
-----
Total expense............. 82.9%
-----
Income from continuing
operations................ 17.1%
Income tax provision........ 6.8%
-----
Net income from continuing
operations................ 10.3%
-----
-----
</TABLE>
15
<PAGE>
TEN MONTHS ENDED OCTOBER 31, 1997 COMPARED TO TEN MONTHS ENDED OCTOBER 31, 1996.
Total revenue for the ten months ended October 31, 1997 increased by
$561,960, or 28.4%, to $2,543,820 from $1,981,860 for the prior comparable
period. Revenue increased in each of the Company's three major business areas
during the ten months ended October 31, 1997.
Commission revenue increased by $469,282, or 26.4%, to $2,246,180 for the
ten months ended October 31, 1997 from $1,776,898 for the prior comparable
period. The increase was due to an increase in sales volume from the Company's
existing clients, an increase in the number of clients resulting from the
Company's business development activity and the strong investment market. The
Company's institutional business increased by $374,800, or 57.6%, to $1,026,000
for the ten months ended October 31, 1997 from $651,200 for the prior comparable
period.
Underwriting and management fees increased by $96,804, or 56.3%, to $268,654
for the ten months ended October 31, 1997 from $171,850 for the prior comparable
period. The increase was primarily due to fees earned by the Company in a single
corporate finance underwriting managed by the Company. The number of municipal
finance underwriting syndicates in which the Company participated as a
co-manager increased during the ten months ended October 31, 1997; however, the
Company's municipal finance revenue per transaction was adversely affected by an
industry-wide decrease in the amount of management fees paid to co-managers in
municipal finance underwriting syndicates.
Total expenses for the ten months ended October 31, 1997 increased by
$219,489, or 11.6%, to $2,109,013 from $1,889,524 for the prior comparable
period. Total expenses decreased to 82.9% of total revenue for the ten months
ended October 31, 1997 from 95.3% of total revenue for the prior comparable
period.
Compensation and benefits increased by $129,504, or 15.9%, to $942,867 for
the ten months ended October 31, 1997 from $813,363 for the prior comparable
period. As a percentage of total revenue, these expenses decreased to 37.1% for
the ten months ended October 31, 1997 from 41.0% for the prior comparable
period. The compensation expense portion of compensation and benefits increased
by 48% for the ten months ended October 31, 1997. Compensation expense consists
primarily of sales commissions paid to brokers on the sale of securities and
varies in relation to changes in commission revenue. Commissions paid to brokers
as a percentage of compensation expense increased to 30% for the ten months
ended October 31, 1997 from 24% for the prior comparable period. This percentage
increase accounted for the majority of the increase in compensation and benefits
in the ten months ended October 31, 1997.
Brokerage and clearing fees increased by $42,464, or 21.7%, to $237,713 for
the ten months ended October 31, 1997 from $195,249 for the prior comparable
period. This increase is attributable to the increase in both sales volume to
existing clients and in the number of clients.
Communications expense decreased by $8,919, or 6.7%, to $124,117 for the ten
months ended October 31, 1997 from $133,036 for the prior comparable period.
This decrease was primarily attributed to a change in telephone service
providers.
Occupancy and equipment expense decreased by $32,221, or 9.8%, to $296,718
for the ten months ended October 31, 1997 from $328,939 for the prior comparable
period, due to a reduction of rental overhead allocated to the Company.
Travel and business development expense increased by $27,385, or 16.2%, to
$196,511 for the ten months ended October 31, 1997 from $169,126 for the prior
comparable period, due to increased travel and promotional activities.
Professional fees decreased by $32,602, or 29.8%, to $76,775, for the ten
months ended October 31, 1997 from $109,377 for the prior comparable period. The
Company incurred professional fees in connection with a proposed financing in
each period.
16
<PAGE>
Other operating expense increased by $93,878, or 66.8%, to $234,312 for the
ten months ended October 31, 1997 from $140,434 for the prior comparable period.
This increase was attributable to increased advertising, supplies and conference
expenses to support the Company's sales programs.
Income taxes from continuing operations increased by $144,900, or 499.7%, to
$173,900 for the ten months ended October 31, 1997 from $29,000 for the prior
comparable period. This increase was due to increased income during the ten
months ended October 31, 1997 and a lower effective tax rate during the prior
comparable period because of the elimination of the valuation reserve related to
the full utilization of the net operating loss carryforward.
Net income from continuing operations increased by $197,571, or 311.9%, to
$260,907 for the ten months ended October 31, 1997 from $63,336 for the prior
comparable period.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995.
Total revenue for 1996 increased by $91,057, or 3.3%, to $2,887,049 from
$2,795,992 for 1995. This increase is primarily due to an increase in commission
revenue of $77,947 for 1996 versus 1995.
Commissions increased by $77,947, or 3.1%, to $2,553,098 for 1996 from
$2,475,151 for 1995. This increase reflects continued improvement in market
conditions and the effect of an increase in the number of institutional
commission clients.
Underwriting and management fees increased by $9,977, or 3.5%, to $296,757
for 1996 from $286,780 for 1995. This increase reflects an increase in revenue
from municipal financial advisory services.
Total expenses for 1996 decreased by $290,775, or 10.9%, to $2,370,771 from
$2,661,546 for 1995. Total expenses decreased to 82.1% of total revenue for 1996
as compared to 95.2% of total revenue for 1995.
Compensation and benefits decreased by $209,178, or 16.6%, to $1,050,193 for
1996 from $1,259,371 for 1995. As a percent of total revenue, these expenses
decreased to 36.4% in 1996 from 45.0% in 1995. The decrease in compensation and
benefits is primarily attributable to the Company's reduced use of temporary
employment services.
Brokerage and clearing fees decreased by $85,218, or 26.4%, to $238,027 for
1996 from $323,245 for 1995. Although the volume of fixed income securities
transactions remained relatively constant in 1996 as compared to 1995, brokerage
and clearing fees decreased due to a relative increase in the percentage of
fixed income transactions pertaining to securities that carry a lower clearing
charge.
Communication expense increased by $9,797, or 6.3%, to $164,303 for 1996
from $154,506 for 1995, reflecting an increase in long distance charges as a
result of the Company's efforts to increase its institutional commission
revenue.
Occupancy and equipment expense increased by $53,735, or 14.6%, to $422,598
for 1996 from $368,863 for 1995, reflecting the opening of the Company's sales
offices in Pennsylvania and Texas.
Travel and business development expense decreased by $15,509, or 8.0%, to
$177,793 for 1996 from $193,302 for 1995, reflecting better planning of travel
expenditures and a reduction of non-sales related travel and business
expenditures.
Professional fees increased by $19,903, or 14.7%, to $154,993 for 1996 from
$135,090 for 1995. This increase was primarily related to a proposed financing
which was postponed.
Other expenses decreased by $64,365, or 28.3%, to $162,804 for 1996 from
$227,169 for 1995 reflecting a decrease in advertising, printing and promotional
expense.
Income taxes from continuing operations increased in 1996 by $238,000 to
$166,000 from an income tax benefit of $72,000 in 1995. The increase was
attributable to the increase in income from continuing
17
<PAGE>
operations during 1996 and the income tax benefit recognized in 1995 from a
reduction in a valuation reserve related to the utilization of a net operating
loss carryforward.
Net income from continuing operations increased by $143,892, or 69.7%, to
$350,338 in 1996 from $206,446 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, investment securities, and receivables
from other broker-dealers and the Company's clearing agent, all of which
fluctuate depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and the Company's clearing agent turnover
rapidly. Both the Company's total assets as well as the individual components as
a percentage of total assets may vary significantly from period to period
because of changes relating to customer demand, economic and market conditions,
and proprietary trading strategies. The Company's total assets for the ten
months ended October 31, 1997 and 1996, were $2,818,525 and $2,798,356,
respectively.
As a broker-dealer, the Company is subject to the net capital rules of the
NASD. As such, the Company is subject to certain restrictions on the use of
capital and its related liquidity. The Company's net capital positions for the
fiscal year ended December 31, 1996 and the ten months ended October 31, 1997
were $426,067 and $496,688, respectively, which were $326,067 and $396,688,
respectively, in excess of the Company's net capital minimum requirement. See
"Business--Government Regulation."
Historically, the Company has financed its operations through the private
placement of equity securities and cash flow from operations. The Company has
not employed any significant leverage or debt. The Company intends to use debt
prudently in the future and may seek to arrange for lines of credit following
this Offering.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business.
These reviews take into account business needs as well as the Company's
regulatory capital requirements. Based upon these reviews, to take advantage of
strong market conditions and to fully implement the Company's DEM strategy, the
Company believes it will require increased net capital provided by the proceeds
of this Offering. The Company believes that its capital structure is adequate
for current operations.
The Company's cash and cash equivalents were $271,122 as of October 31, 1997
compared to $497,758 as of December 31, 1996. The decrease in cash and cash
equivalents was primarily due to the use of $217,500 to repurchase common stock
of The Chapman Co.
EFFECTS OF INFLATION
Market prices of securities are generally influenced by changes in
inflation. Moreover, the rate of inflation affects the Company's expenses, such
as employee compensation, occupancy expenses and communications costs, which may
not be readily recoverable in the prices of services offered to the Company's
customers. To the extent inflation results in rising interest rates or has
adverse effects upon the securities markets, it may adversely affect the
Company's financial condition and results of operations.
18
<PAGE>
BUSINESS
GENERAL
The Company is an African-American owned and controlled full service
securities brokerage and investment banking firm. Through its wholly-owned
subsidiary, The Chapman Co., the Company is registered as a broker-dealer with
the Commission and in 24 states and the District of Columbia, and is a member
firm of the NASD. The Company is headquartered in Baltimore, Maryland and has
sales offices in Birmingham, Alabama; Memphis, Tennessee; Chicago, Illinois;
Dallas, Texas; Philadelphia, Pennsylvania; and Jackson, Mississippi. The
Company's principal executive offices are located at The World Trade
Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, MD 21202 and
its telephone number is (410) 625-9656. The Company was incorporated in the
State of Maryland on December 12, 1997. Its wholly-owned subsidiary, The Chapman
Co., was incorporated in Maryland in 1986.
The Company's primary sources of revenue are derived from brokerage
services, corporate finance, and government finance activities. These activities
are supported by the Company's research capabilities.
BROKERAGE SERVICES
The Company provides brokerage services to institutional and retail clients.
Commissions are charged to these clients for executing buy and sell orders for
securities on national and regional exchanges and in the over-the-counter
market. The Company's primary source of revenue for its brokerage business has
historically been commissions generated from institutional brokerage. The
Company's institutional clients include investment managers, corporate
retirement plans and municipal retirement plan sponsors. The Company maintains
floor broker relationships on the New York, American and Chicago Stock Exchanges
and executes buy and sell orders in the over-the-counter markets. Approximately
41.9%, 30.7% and 39.5% of the Company's revenue during 1995, 1996 and the ten
months ended October 31, 1997, respectively, has been derived from its brokerage
business.
The Company also participates in fixed income secondary market trading
primarily for fixed income investment managers, municipal treasurers and other
investment professionals. This business is done on a competitive basis where the
Company acts as a broker. Approximately 28.2%, 42.7% and 27.8% of the Company's
revenue during 1995, 1996 and the ten months ended October 31, 1997,
respectively, was derived from secondary market trading.
As of October 31, 1997, the Company employed six brokers.
The Company is approved to make markets in the securities of five companies.
To date, the Company's ability to engage in any significant over-the-counter
market-making activities has been limited by its capital position.
CORPORATE FINANCE
To date, the Company's corporate finance activities have been limited
primarily to participation in syndicates. The Company has been a member of over
200 underwriting syndicates for corporate issues, substantially all of which
were equity offerings. In the last three years, the number of transactions in
which the Company participated declined primarily due to the limitations imposed
by applicable net capital rules. See "Government Regulation--Net Capital Rule."
During 1995, 1996 and the ten months ended October 31, 1997, approximately
18.2%, 19.5% and 17.2%, respectively, of the Company's revenue was derived from
corporate finance transactions. In each of these periods, over half of the
Company's revenue from corporate finance transactions was derived from the sale
of the stock of DEM, Inc. for which the Company was the sole underwriter. DEM,
Inc. is a publicly-traded closed-end company managed by CCM, a former subsidiary
of the Company.
19
<PAGE>
GOVERNMENT FINANCE
The Company participates in the tax-exempt public finance market and has
managed, primarily as co-manager, over 200 transactions in 17 states and the
District of Columbia, including approximately 35 transactions in the past two
years. Over half of the total dollar amount of these transactions has been with
jurisdictions located in Maryland, Illinois, Texas and Pennsylvania.
During 1995, 1996 and the ten months ended October 31, 1997, approximately
10.5%, 6.9% and 14.8%, respectively, of the Company's revenue was derived from
management fees, financial advisory fees and selling concessions in public
finance transactions. The Company currently employs two investment bankers whose
primary responsibility is the development of the Company's public finance
business.
In 1996, the Company has participated as a selling group member in one
direct offering of debt of the Tennessee Valley Authority. The Company has also
participated in syndicates of other government agencies. The Company believes
its ability to participate in government agency debt offerings has been limited
by its capital position.
STRATEGY
With the net proceeds of this Offering, the Company intends to both
implement its DEM strategy and to expand its existing business activities.
DOMESTIC EMERGING MARKETS
To compete effectively in the investment banking and brokerage market, the
Company intends to implement its Domestic Emerging Markets, or DEM, strategy
pursuant to which the Company will market financial services, primarily
investment banking services to domestic companies that are owned or controlled
by African-Americans, Asian-Americans, Hispanic/Latino Americans or women. As
part of DEM strategy, the Company will seek to make markets in the stocks of
selected DEM companies. The Company believes that the DEM market is underserved
and its DEM strategy will permit the Company to develop a market niche for its
corporate finance business.
The Company has identified in excess of 150 DEM companies and intends to
establish relationships with such companies that are seeking to raise additional
equity or debt financing. Management currently anticipates that the typical
client will be a small capitalization company traded in the over-the-counter
market or a privately held company undertaking an initial public offering. While
the size of any particular offering may vary, the Company anticipates that most
the transactions would range from $2 million to $15 million. The Company will
seek to manage or co-manage a substantial portion of these underwritings in
which it participates.
The Company's ability to implement its DEM strategy in the context of
corporate underwritings will be dependent upon its ability to identify potential
clients fitting the DEM company profile and convincing such potential clients
that the Company is the right investment banking firm for their needs. There can
be no assurance that the Company will be successful in this regard. The Company
has not conducted any independent research to test the marketability of the DEM
strategy, nor has the Company engaged in any significant marketing of the
strategy. Therefore, while the Company believes the concept to be viable, the
level of market acceptance is largely unknown. The Company intends to devote a
substantial amount of its resources and the proceeds of this Offering to the
execution of the DEM strategy. See "Risk Factors" and "Use of Proceeds."
EXPANSION OF EXISTING BUSINESS
The Company believes its brokerage, corporate finance and government finance
business has been limited by its capital position. With the increased capital
from the net proceeds of this Offering, the Company intends to expand its
existing business as follows:
20
<PAGE>
The Company intends to expand its research capabilities, focusing primarily
on DEM companies, hiring additional brokers and providing specialized products
to be marketed to retail and institutional clients.
In addition to the DEM corporate finance strategy discussed above, the
Company intends to aggressively seek larger allocations in corporate
underwriting syndicates managed by other investment banking firms.
The Company intends to seek larger positions in state and local public
finance transactions. As a result of its ability to undertake larger
participations, the Company believes it will be better positioned to seek
manager roles in these transactions, entitling the Company to receive management
fees in addition to selling concessions. The Company intends to expand its
participation in the state and local public finance market by establishing a
presence in states with major issuers of negotiated tax-exempt bonds and by
seeking more assignments as managers of transactions. The Company has identified
California, New York, Texas, Illinois, Pennsylvania, Michigan, Ohio and Florida
as representing over 50% of the dollar amount of aggregate tax-exempt bonds
issued in the U.S. in 1997. The Company currently has offices in Texas, Illinois
and Pennsylvania and may seek to establish offices in California, Florida, New
York, Michigan and Ohio.
The Company intends to use its increased capital to expand its participation
in federal agency debt transactions as a member of selling groups in direct
offerings and syndicates, as well as aggressively seeking management roles in
these offerings.
RESEARCH
The Company currently employs three research analysts and provides research
primarily on selected DEM companies. The Company intends to substantially
increase the number of DEM companies covered by its research.
The Company has created the DEM Index which tracks the results of certain of
those companies meeting the DEM profile. The Company believes that inclusion of
a DEM company in the DEM Index offers certain advantages such as facilitating
identification by fund managers and other institutions seeking to invest in
minority or women controlled businesses. The Company will seek to earn fees from
subscriptions to the DEM Index and the sale of limited information regarding the
companies included in the DEM Index.
CLEARING AGENT AND CUSTOMER CREDIT
The Company currently utilizes the services of RPR Clearing Services, Inc.
as its clearing agent on a fully disclosed basis (the "Clearing Agent"). The
Clearing Agent processes all securities transactions and maintains the accounts
of customers. Customer accounts are protected through the Securities Investor
Protection Corporation for up to $500,000, of which coverage for cash balances
is limited to $100,000.
The services of the Clearing Agent include billing, credit control, receipt
and custody and delivery of securities. The Clearing Agent provides the
operational support necessary to process, record and maintain securities
transactions for the Company's brokerage and distribution activities. The total
cost of the Clearing Agent's services to the Company is less than the cost the
Company would incur to provide these services itself.
The Clearing Agent lends funds to the Company's customers through the use of
margin credit. These loans are made to customers on a secured basis, with the
Clearing Agent maintaining collateral in the form of salable securities, cash or
cash equivalents. Under the terms of the Company's clearing agreement, the
Company indemnifies the Clearing Agent for any loss on these credit
arrangements. As of October 31, 1997, the Company had approximately $1.2 million
of margin credit outstanding to its customers through its Clearing Agent. There
have been no defaults on margin loans in the last two years. The net interest
21
<PAGE>
income to the Company from margin activities for the year ending December 31,
1996 and for the ten months ended October 31, 1997 was not material.
GOVERNMENT REGULATION
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the
Commission and various state agencies and self-regulatory organizations, such as
the NASD. The Company is registered as a broker-dealer with the Commission and
is a member firm of the NASD. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally the NASD, which has been
designated by the Commission as the Company's primary regulator. The NASD adopts
rules (which are subject to approval by the Commission) that govern its members
and conducts periodic examinations of member firms' operations. Securities firms
are also subject to regulation by state securities administrators in those
states in which they conduct business. The Company is registered as a
broker-dealer in 24 states and the District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the Commission and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers.
The Commission, self-regulatory organizations and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
integrity of the securities markets.
Under the Investment Company Act of 1940 (the "1940 Act"), the distribution
agreement between the Company and The Chapman U.S. Treasury Money Fund, DEM
Equity Fund or any future open-end investment company that retains the Company
as distributor will terminate automatically upon its assignment. The term
"assignment" includes direct assignments as well as assignments which may be
deemed to occur, under certain circumstances, upon the transfer, directly or
indirectly, of a controlling block of the Company's voting securities. The 1940
Act presumes that any transfer of more than 25% of the voting securities of any
person represents a transfer of a controlling block of voting securities. The
Company does not believe that the transactions contemplated by this Offering
will result in an "assignment" of the distribution agreement with The Chapman
U.S. Treasury Money Fund or DEM Equity Fund.
The Company's mutual fund distribution business is subject to extensive
regulation as to its duties, affiliations, conduct and limitations on fees.
Section 22(b) of the 1940 Act provides that a securities association registered
under Section 15A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") may adopt rules prohibiting its members from receiving a
commission, discount, spread or fees except in accordance with a method or
methods, and within such limitations as to the relation thereof to said public
offering price, as such rules may prescribe in order that the price at which
such security is offered or sold to the public shall not include an excessive
sales load but shall allow for reasonable compensation for sales personnel,
broker/dealers, and underwriters, and for reasonable sales loads to investors.
Section 22(c) of the 1940 Act further states that the Commission may make rules
and regulations applicable to registered investment companies and to principal
underwriters of, and dealers in, the redeemable securities of any registered
investment company, whether or not members of any securities association. Any
rules and regulations so made by the Commission, to the extent that they may be
inconsistent with the rules of any securities association, shall, so long as
they remain in force, supersede the rules of the association and be binding upon
its members as well as all other underwriters and dealers to whom they may be
applicable.
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<PAGE>
As discussed above, the Company is an NASD member. The NASD, a securities
association registered under Section 15A of the Exchange Act has prescribed
rules (Rule 2830 of the NASD Conduct Rules) with respect to maximum commissions,
charges and fees related to investment in any open-end investment company
registered under the 1940 Act.
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member firm of the NASD, the Company is
subject to the Commission's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth (assets
minus liabilities), plus qualifying subordinated borrowings and less certain
mandatory deductions that result from excluding assets not readily convertible
into cash and from valuing certain other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition. The Company has elected to compute its net capital under the
standard aggregate indebtedness method permitted by the net capital rule, which
requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed a 15-to-1 ratio. At October 31, 1997, the Company had
net capital and a net capital requirement of $426,067 and $100,000,
respectively. The Company's net capital ratio was 0.7-to-1.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than a specified
percentage (currently 120%) of the minimum net capital requirement. Compliance
with the net capital rule could limit those operations of the Company's
brokerage subsidiaries that require the intensive use of capital, such as
underwriting and trading activities, and also could restrict the Company's
ability to withdraw capital from its operating subsidiaries, which in turn,
could limit the Company's ability to pay dividends, repay debt and redeem or
purchase shares of its outstanding capital stock.
COMPETITION
The Company encounters intense competition in all aspects of its securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes that the principal factors affecting
competition in the securities industry are the quality and abilities of
professional personnel, including their ability to effectuate a firm's
commitments, and the quality, range and relative prices of services and products
offered.
Although the Company may expand the financial services it can render to its
customers, it does not now offer as broad a range of financial services as
national stock exchange member firms, commercial banks, insurance companies and
others.
PERSONNEL
At October 31, 1997, the Company had approximately 24 full-time employees,
including 14 registered representatives. None of the Company's personnel is
covered by a collective bargaining agreement. The Company considers its
relationships with its employees to be good.
23
<PAGE>
LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
liability, including exposure under federal and state securities laws in
connection with the underwriting and distribution of securities. The Company
does not presently maintain an errors and omissions insurance policy insuring it
against these risks. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages. Additionally, securities
brokerage firms become parties to arbitrations brought by dissatisfied customers
in the general course of business. The Company has been and is currently a party
to such proceedings, none of which has resulted or is expected to result in any
material liability.
PROPERTIES
The principal executive offices of the Company are located at The World
Trade Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland
21202 where the Company leases approximately 10,000 square feet of office space.
The lease for these premises expires in 2000. The Company leases furniture and
equipment from an affiliated entity. See "Certain Transactions."
24
<PAGE>
MANAGEMENT
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- --------------------------------------- --------------- ------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr.................. 40 President and Chairman of the Board of Directors
Earl U. Bravo, Sr...................... 50 Senior Vice President, Secretary, Assistant
Treasurer and Director
Lottie H. Shackelford.................. 56 Director
Donald V. Watkins...................... 50 Director
M. Lynn Ballard........................ 55 Treasurer, Assistant Secretary and Controller
</TABLE>
The Board of Directors has designated an Audit Committee of the Board of
Directors consisting of two Directors, that will review the scope of accounting
audits, review with the independent auditors the corporate accounting practices
and policies and recommend to whom reports should be submitted within the
Company, review with the independent auditors their final report, review with
internal and independent auditors overall accounting and financial controls, and
be available to the independent auditors during the year for consultation
purposes. The Board of Directors has also designated a Compensation Committee of
the Board of Directors consisting of three Directors, which will review the
performance of senior management, recommend appropriate compensation levels and
approve the issuance of stock options pursuant to the Company's stock option
plan. All Directors and officers of the Company serve until their successors are
duly elected and qualify.
NATHAN A. CHAPMAN, JR. has been President and Chairman of the Board of
Directors of the Company since its inception. Mr. Chapman founded the Company's
subsidiary, The Chapman Co., in 1986 and has served as its President and
Chairman of the Board of Directors since inception. Prior to founding The
Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons from 1982 to
1987. Mr. Chapman is a Certified Public Accountant, a General Securities
Principal, Financial and Operations Principal, Registered Options Principal, and
Registered Municipal Principal. Mr. Chapman is a Director of DEM, Inc. and The
Chapman Funds, Inc.
EARL U. BRAVO, SR. has been Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company since its inception. Mr. Bravo has been
Chief Operating Officer of The Chapman Co. since 1992 and Secretary and
Assistant Treasurer since 1997. Mr. Bravo is a General Securities Principal,
Financial and Operations Principal, and Registered Representative. Mr. Bravo
holds an MBA from the University of Maryland, College Park.
LOTTIE H. SHACKELFORD has been a Director of the Company since its
inception. Since 1994, Ms. Shackelford has been Executive Vice President of
Global USA, a management consulting firm. From 1992 to 1994, Ms. Shackelford
worked as an independent political consultant. In 1988 and 1989, Ms. Shackelford
was Vice-Chair and Co-Chair, respectively, of the Democratic National Committee.
From 1987 to 1989, Ms. Shackelford was Mayor of Little Rock, Arkansas. Ms.
Shackelford has graduated from the Harvard University Program for Senior
Executives in State and Local Government, the Hendrix College Institute of
Politics and the Broadway School of Real Estate and has attended the University
of Arkansas at Little Rock School of Law. Ms. Shackelford is a Director of DEM,
Inc. and The Chapman Funds, Inc.
DONALD V. WATKINS has been a director of the Company since its inception. He
has been President of Donald V. Watkins, PC, a law firm located in Birmingham,
Alabama since 1973. Mr. Watkins holds a J.D. from the University of Alabama Law
School.
25
<PAGE>
M. LYNN BALLARD has been Treasurer, Assistant Secretary and Controller of
the Company since its inception. Ms. Ballard has been Controller of The Chapman
Co. and Treasurer of CCM since 1988. Ms. Ballard has been Treasurer and
Assistant Secretary of The Chapman Co. since 1997.
EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the Company, as well
as certain other compensation paid or accrued, during the fiscal year ended
December 31, 1996 to the Chief Executive Officer of the Company. No other
executive officer or employee received compensation of $100,000 or greater
during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY
- ------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Nathan A. Chapman, Jr. Chief Executive Officer....................................... 1996 $ 144,000(1)
</TABLE>
- ------------------------
(1) Includes approximately 50% allocated to CCM and CIA pursuant to certain
expense sharing arrangements. See "Certain Transactions."
The Board of Directors of the Company has established the 1997 Chapman
Holdings, Inc. Omnibus Stock Plan (the "Plan") to enable the Company to grant
equity compensation to the Company's directors, officers, employees and
consultants. The Plan will be administered by the Compensation Committee of the
Board of Directors. No securities have been issued pursuant to the Plan as of
the date of this Prospectus.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of December 30, 1997, and
assuming the Minimum and Maximum are sold in the Offering, by (i) each person
known by the Company to own beneficially 5% or more of its outstanding shares of
Common Stock prior to the Offering, (ii) each Director, (iii) the Chief
Executive Officer, and (iv) all Directors and executive officers of the Company
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF CLASS
-------------------------------------
NAME AND ADDRESS OF AMOUNT AND NATURE OF DECEMBER
BENEFICIAL OWNER BENEFICIAL OWNERSHIP 30, 1997 MINIMUM MAXIMUM
- -------------------------------------------------- -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr............................. 1,828,115 shares 91.9% 64.4% 61.2%
401 E. Pratt Street
Baltimore, MD 21202
Earl U. Bravo, Sr................................. 1,900 shares * * *
401 E. Pratt Street
Baltimore, MD 21202
Donald V. Watkins................................. 7,000 shares * * *
401 E. Pratt Street
Baltimore, MD 21202
Lottie H. Shackelford............................. -0- shares * * *
401 E. Pratt Street
Baltimore, MD 21202
All Directors and Executive....................... 1,837,015 shares 92.3% 64.7% 61.5%
Officers as a Group
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of Common Stock.
26
<PAGE>
CERTAIN TRANSACTIONS
On or before the closing of the sale of the Minimum, the Company intends to
effect the Spin-off pursuant to which The Chapman Co.'s two wholly-owned
subsidiaries, CCM and CIA will become wholly-owned subsidiaries of separate
holding companies and the stock of such holding companies will be distributed to
the existing stockholders of the Company. Investors that purchase Shares in the
Offering will not receive stock in either holding company.
CCM is registered with the Commission as an investment adviser and manages
funds for institutional investors and individuals on a separate account basis,
for a registered closed-end investment company, DEM, Inc., for two registered
open-end investment companies, DEM Equity Fund and The Chapman U.S. Treasury
Money Fund, each a portfolio of The Chapman Funds, Inc., and a private group
trust for qualified employee benefit plans. As of October 31, 1997, CCM had
approximately $400 million in total assets under management. CIA is a variable
annuity provider formed primarily to serve retail clients and its operations
have not been significant to date.
Nathan A. Chapman, Jr., the President and Chairman of the Board of Directors
of the Company, is the President and Chairman of the Board of Directors of each
of CCM, CIA, DEM, Inc. and The Chapman Funds, Inc. and controlling stockholder
of CCM and CIA. Earl U. Bravo, Sr., Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company is Secretary, Assistant Treasurer and a
Director of CCM and CIA, Secretary and Assistant Treasurer of The Chapman Funds,
Inc. and Vice President, Secretary and Assistant Treasurer of DEM, Inc. M. Lynn
Ballard, Treasurer, Assistant Secretary and Controller of the Company is
Treasurer, Assistant Secretary and Controller of CCM and CIA and Treasurer and
Assistant Secretary of DEM, Inc. and The Chapman Funds, Inc. Lottie H.
Shackelford, a Director of the Company is a Director of each of DEM, Inc. and
The Chapman Funds, Inc.
The Company is the underwriter, on a best efforts basis, for the sale of
DEM, Inc. common stock. The Company was paid $354,679, $455,000 and $368,000 in
management fees and commissions in the years ended December 31, 1995 and
December 31, 1996 and in the ten months ended October 31, 1997, respectively. As
of October 31, 1997, the Company has sold approximately $11,000,000 of the DEM,
Inc. common stock.
The Company is the distributor for The Chapman U.S. Treasury Money Fund
pursuant to a distribution agreement between the Company and The Chapman Funds,
Inc. Such distribution agreement must be extended annually for one year periods
by the board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives no compensation for the
distribution of shares of The Chapman U.S. Treasury Money Fund.
The Company is the distributor for the DEM Equity Fund pursuant to a
distribution agreement between the Company and The Chapman Funds, Inc. Such
distribution agreement must be extended annually for one year periods by the
board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.50% of the average daily net assets per annum
of the Investor Shares of the DEM Equity Fund (the "Investor Shares") for
selling and administrative services pertaining to the Investor Shares. Further,
the Company receives a front-end load of up to 4.75% of the offering price on
the sale of the Investor Shares. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.25% of the average daily net assets per annum
of the Institutional Shares of the DEM Equity Fund (the "Institutional Shares")
for selling and administrative services pertaining to the Institutional Shares.
The Company recently began providing services pursuant to this agreement and no
fees have yet been earned by the Company.
27
<PAGE>
As of October 31, 1997, CCM owed the Company $763,367 pursuant to a 10 year
note which accrues interest at 6.68% per annum. The note requires annual
principal payments equal to 10% of the original principal amount of the note.
As of October 31, 1997 and December 31, 1996 and 1995, the Company had
outstanding advances to Mr. Chapman of $144,554, $106,923 and $76,017,
respectively. As of December 31, 1996, Mr. Chapman executed a promissory note to
the Company in the amount of $106,923. The promissory note is payable on demand
and carries interest at the prime rate per annum.
Mr. Chapman is President and Treasurer and Mr. Bravo is Secretary of Chapman
General Partner One, Inc., the general partner of Chapman Limited Partnership I
(the "Partnership"). The Company leases furniture and equipment from the
Partnership. The lease requires monthly payments of $9,846 and contains one year
renewable terms, at the option of the Company, through September 2000, at which
time the Company can purchase the furniture and equipment at fair value. Rent
expense under this lease agreement was $98,460 for the ten months ended October
31, 1997 and $118,152 in each of 1996 and 1995 of which $0, $39,384 and $59,076
were payable to the Partnership as of October 31, 1997 and December 31, 1996 and
1995, respectively. Management believes that the terms of these transactions
were substantially as favorable to the Company as those available from
non-affiliates. The rent expense under the lease agreement has been shared
equally between the Company and CCM.
The Company shares office space, certain employees and other overhead with
certain other entities controlled by Mr. Chapman including CCM and CIA. The
Company allocates compensation and benefits expense to CCM and CIA based on
actual compensation and benefits expense and the estimated percentage of the
employee's time spent performing services for each entity. The Company allocates
other expenses based on estimated usage. The common management and/or ownership
among the Company and other entities controlled by Mr. Chapman may involve
potential conflicts of interest. See "Risk Factors-- Certain Transactions;
Relationships with Other Chapman Entities; Conflicts of Interest."
The Company and Mr. Chapman have entered into a non-exclusive, royalty-free
licensing agreement pertaining to the Company's use of the DEM and Domestic
Emerging Markets trademarks that are owned by Mr. Chapman.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20 million shares of
Common Stock, par value $0.001 per share.
COMMON STOCK
As of the date of this Prospectus, there are 1,989,235 shares of Common
Stock issued and outstanding, held of record by 19 stockholders. Holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Stockholders do not have cumulative
voting rights. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
dissolution, liquidation or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no right to convert their Common Stock
into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Common Stock to be outstanding upon completion of this Offering will be,
duly authorized, validly issued, fully paid and nonassessable.
MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
The Charter of the Company provides that the Company shall indemnify its
currently acting and its former Directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the Maryland General Corporation
Law, as from time to time amended (the "MGCL"). If approved by the Board of
Directors, the Company may indemnify its employees, agents and persons who serve
or have served, at its request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture or other
enterprise to the extent determined to be appropriate by the Board of Directors.
The Company shall advance expenses to its Directors and officers entitled to
mandatory indemnification to the maximum extent permitted by the Maryland
General Corporation Law and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
Pursuant to the Underwriting Agreement the Company has agreed to indemnify
the Underwriter and the Underwriter has agreed to indemnify the Company and its
directors, officers and controlling persons against certain civil liabilities
that may be incurred in connection with this Offering, including certain
liabilities under the Securities Act. Pursuant to the QIU Agreement, the Company
has also agreed to indemnify the QIU for liabilities in connection with the
Offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Furthermore, the Charter of the Company provides that, to the fullest extent
permitted by the MGCL as it may be amended from time to time, no Director or
officer of the Company shall be liable to the Company or its stockholders for
monetary damages arising out of events occurring at the time such person is
serving as a Director or officer, regardless of whether such person is a
Director or officer at the time of a proceeding in which liability is asserted.
Under current Maryland law, the effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages from a
Director or officer except (i) to the extent that it is proved that the Director
or officer actually received an improper benefit, or profit in money, property,
or services for the amount of the benefit or profit in money, property or
services actually received, or (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
in the proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
29
<PAGE>
adjudicated in the proceeding. In situations to which the Charter provision
applies, the remedies available to the Company or a stockholder are limited to
equitable remedies such as injunction or rescission.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no trading market for the Common
Stock. Although the Company will apply for quotation of the Common Stock on the
SmallCap Market, there can be no assurance that an active trading market for the
Common Stock will develop and, if developed, will continue after the Offering.
The quotation of the Common Stock on the SmallCap Market is conditioned upon the
Company meeting certain asset, capital and surplus, stock price and public float
tests. See "Risk Factors--Risks of Low Priced Stocks." There can be no assurance
that the public offering price will correspond to the price at which the Common
Stock will trade in the public market subsequent to the Offering.
As of the date of the Minimum closing, the Company will have 2,839,235
shares of Common Stock outstanding, of which 1,828,115 will be owned by Nathan
A. Chapman, Jr. The Company is offering up to a Maximum of 1,000,000 Shares and,
accordingly, upon sale of the Maximum, the Company will have outstanding
2,989,235 shares of Common Stock. All shares acquired in this Offering, other
than shares that may be acquired by "affiliates" of the Company as defined by
Rule 144 under the Securities Act, will be freely transferable without
restriction or further registration under the Securities Act. No prediction can
be made as to the effect, if any, that sales of shares of Common Stock or the
availability of such shares for sale will have on the market prices prevailing
from time to time. Nevertheless, the possibility that substantial amounts of
Common Stock may be sold in the public market may adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
As of December 30, 1997, Mr. Chapman beneficially owns 1,828,115 shares of
Common Stock or approximately 64.4% and 61.2% of the Company's outstanding
Common Stock assuming the sale of the Minimum and Maximum, respectively. Mr.
Chapman has agreed not to sell any shares of Common Stock that he owns as of the
date of this Prospectus until the first anniversary of the closing of the sale
of the Minimum. Accordingly, up to 1,161,120 shares of Common Stock or
approximately 38.8% of the Company's outstanding Common Stock will be eligible
for sale following the Offering pursuant to Rule 144.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least one year is entitled to sell within
any three-month period, shares equal in number to the greater of: (i) 1% of the
then-outstanding shares of Common Stock; or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of the required notice of sale with the Commission. In addition, any person (or
persons whose shares are aggregated) who is not, at the time of the sale, nor
during the preceding three months, an affiliate of the Company, and who has
beneficially owned restricted shares for at least two years, can sell such
shares under Rule 144 without regard to the notice, manner of sale, public
information or volume limitations described above.
PLAN OF DISTRIBUTION
The Company is offering up to a Maximum of 1,000,000 Shares. The Shares will
be offered on a "best-efforts" basis by the Underwriter, The Chapman Co., acting
as the exclusive dealer-manager solely on an agency basis. The Offering has an
aggregate Minimum of 850,000 Shares. The Termination Date of the Offering is on
the earlier to occur of: the date selected by the Company; the date of the sale
of the Maximum; or, if the Minimum is not sold, 180 days after the date of this
Prospectus, unless extended by the Company for one or more additional periods
not to exceed an additional 30 days in the aggregate. Until the Minimum is sold,
all funds will be held by UMB Bank, N.A. as escrow agent. If the Minimum is not
sold by the Termination Date, all funds will be returned promptly to investors
without deduction or
30
<PAGE>
interest. During the escrow period, investors who purchase Shares will be
entitled to a refund of his or her payment. If the Minimum is sold before the
Termination Date, a Minimum closing will be held at the offices of the Company.
At such Minimum closing, the funds in escrow will be released to the Company and
the investors will become stockholders of the Company.
The minimum investment requirement is 100 Shares. Investors who purchase
Shares must pay for the Shares by the third business day following the date of
the confirmation of their purchase such Shares. Investors should consult their
brokers concerning the manner and method of payment for the Shares. The Company
and the Underwriter reserve the right to withdraw, cancel or modify the Offering
without notice and to reject any order in whole or in part in the exercise of
their sole discretion.
Prior to this Offering, there has been no public market for the Common
Stock. An application will be made to have the Common Stock quoted on the
SmallCap Market. There can be no assurance that the Common Stock will qualify
for initial quotation on the SmallCap Market or that, if achieved, such
quotation will be maintained. See "Risk Factors--No Prior Market" and "--Risks
of Low Prices Stocks."
Pursuant to the Conduct Rules of the NASD, when a member of the NASD, such
as The Chapman Co., participates in the public distribution of its own or an
affiliate's securities, the public offering price can be no higher than
recommended by a qualified independent underwriter. In accordance with this
requirement, the QIU, Ferris Baker Watts, Incorporated, has agreed to recommend
an initial public offering price for the Shares. The QIU has participated in the
preparation of the Registration Statement of which this Prospectus forms a part
and has performed "due diligence" with respect thereto.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined by
negotiation between the Company and the QIU. The factors considered in
determining the offering price were prevailing market and economic conditions,
the Company's revenue and earnings, estimates of its business operations, an
assessment of its management, the consideration of these factors in relation to
the market valuation of comparable companies in related businesses and the
current condition of the markets in which the Company operates.
The Underwriter has advised the Company that it proposes initially to offer
the Shares directly to the public at the public offering price set forth on the
cover of this Prospectus and to selected dealers at such price less a concession
not in excess of $ per Share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $ per Share to certain
other dealers. After the initial public offering of the Shares, the offering
price and the other selling terms may be changed by the Underwriter. For acting
as a qualified independent underwriter, the QIU will receive fees equal to the
greater of $100,000 or $ per Share sold.
Both the Underwriter and the QIU will be reimbursed their counsel fees and
for their out-of-pocket expenses and will receive fees as described above. In
the Underwriting Agreement and the QIU Agreement, respectively, the Company has
agreed to indemnify the Underwriter and the QIU (and their controlling persons)
with respect to certain liabilities, including liabilities under the Securities
Act.
The Underwriter has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority.
In connection with the Offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock, including purchases of the Common Stock to stabilize the market price,
purchases of the Common Stock to cover some or all of a short position in the
Common Stock maintained by the Underwriter and the imposition of penalty bids.
Such transactions may also include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which persons may bid for
or purchase Common Stock for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result in the maintenance of
the price of the Common Stock at a level above that which might otherwise
prevail in the open market. None of the transactions described in this paragraph
is required, and, if they are undertaken, they may be discontinued at any time.
31
<PAGE>
In connection with this Offering, the Underwriter may engage in passive
market making transactions in the Common Stock on the SmallCap Market in
accordance with Securities Act Rule 103 of Regulation M.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and the QIU Agreement and does not purport to be complete. Reference
is made to the foregoing documents which are on file as exhibits to the
Registration Statement of which this Prospectus is a part.
TRANSFER AGENT, ESCROW AGENT AND REGISTRAR
The transfer agent, escrow agent and registrar for the Common Stock is UMB
Bank, N.A.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Venable, Baetjer and Howard, LLP. The Underwriter has not been
separately represented by counsel in this Offering. Whiteford, Taylor & Preston
L.L.P. has acted as counsel for the QIU in connection with this Offering.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, DC, a registration statement under the Securities
Act with respect to the Shares offered by this Prospectus (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement, including the exhibits filed therewith, copies of which may be
obtained at prescribed rates from the Commission at the public reference
facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, DC 20549. Descriptions contained in this Prospectus as
to the contents of any contract or other documents filed as an exhibit to the
Registration Statement are not necessarily complete and each such description is
qualified by reference to such contract or document. The Commission maintains a
website on the Internet that will contain all future reports, proxy and
information statements and other information that the Company is required to
file electronically with the Commission. The address of the Commission's website
is http://www.sec.gov.
32
<PAGE>
CHAPMAN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index...................................................................................................... F-1
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1996 and October 31, 1997 (unaudited).................................... F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... F-4
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and for the
Ten Months Ended October 31, 1997 (unaudited)............................................................ F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Holdings, Inc.:
We have audited the accompanying balance sheet of Chapman Holdings, Inc. and
Subsidiaries (a Maryland corporation) as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chapman Holdings, Inc. and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
January 31, 1997, except for notes 2 and 3
as to which are dated December 29, 1997
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
--------------------------
<S> <C> <C>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................................... $ 497,758 $ 271,122
Cash deposits with clearing organization........................................... 35,000 35,000
Investments available for sale..................................................... 157,500 169,306
Receivables from brokers and dealers............................................... 93,560 278,999
Receivables from affiliates........................................................ 200 1,649
Receivables from discontinued operations........................................... 682,643 763,367
Advances to officer/employee....................................................... 109,673 156,204
Office equipment, net.............................................................. 7,558 17,343
Prepaids and other assets.......................................................... 57,008 73,528
Net assets from discontinued operations............................................ 1,157,456 1,052,007
------------ ------------
Total assets..................................................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses.............................................. $ 92,968 $ 81,089
Accrued compensation............................................................... 76,371 70,123
Deferred rent...................................................................... 89,048 89,048
Payable to affiliated partnership.................................................. 59,076 --
Income taxes payable............................................................... 150,341 161,337
Net liabilities from discontinued operations....................................... 1,201,345 1,190,996
------------ ------------
Total liabilities................................................................ 1,669,149 1,592,593
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 1,944,890 and
1,792,640 shares issued and outstanding, respectively............................ 1,945 1,793
Additional paid-in capital......................................................... 1,309,005 1,091,657
(Accumulated deficit) retained earnings............................................ (181,743) 132,482
------------ ------------
Total stockholders' equity....................................................... 1,129,207 1,225,932
------------ ------------
Total liabilities and stockholders' equity....................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions............................................ $ 2,475,151 $ 2,553,098 $ 1,776,898 $ 2,246,180
Underwriting and management fees....................... 286,780 296,757 171,850 268,654
Interest and dividends................................. 34,061 37,194 33,112 28,986
------------ ------------ ------------ ------------
Total revenue........................................ 2,795,992 2,887,049 1,981,860 2,543,820
------------ ------------ ------------ ------------
EXPENSE:
Compensation and benefits.............................. 1,259,371 1,050,193 813,363 942,867
Floor brokerage and clearing fees...................... 323,245 238,027 195,249 237,713
Communications......................................... 154,506 164,303 133,036 124,117
Occupancy, equipment rental, and depreciation.......... 368,863 422,598 328,939 296,718
Travel and business development........................ 193,302 177,793 169,126 196,511
Professional fees...................................... 135,090 154,993 109,377 76,775
Other operating expense................................ 227,169 162,804 140,434 234,312
------------ ------------ ------------ ------------
Total expense........................................ 2,661,546 2,370,711 1,889,524 2,109,013
------------ ------------ ------------ ------------
Income from continuing operations before income tax
provision.......................................... 134,446 516,338 92,336 434,807
INCOME TAX PROVISION (Notes 1 and 5)..................... (72,000) 166,000 29,000 173,900
------------ ------------ ------------ ------------
Income from continuing operations.................... 206,446 350,338 63,336 260,907
INCOME FROM DISCONTINUED OPERATIONS, net of income taxes
of $89,000, $44,000, $36,400 and $35,000,
respectively........................................... 151,249 54,643 31,779 53,318
------------ ------------ ------------ ------------
Net income........................................... $ 357,695 $ 404,981 $ 95,115 $ 314,225
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME PER SHARE DATA:
Income from continuing operations...................... $ 0.09 $ 0.16 $ 0.03 $ 0.13
Income from discontinued operations.................... 0.07 0.02 0.01 0.03
------------ ------------ ------------ ------------
Net income........................................... $ 0.16 $ 0.18 $ 0.04 $ 0.16
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average share outstanding....................... 2,201,414 2,191,374 2,200,514 2,001,914
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
SUBSCRIBED STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... $ 4,000 $ 2,005 $ 1,492,045 $ (944,419) $ 553,631
Net income................................... -- -- -- 357,695 357,695
Purchase of 5,780 shares of stock............ -- (6) (104,994) -- (105,000)
Redemption of 5,600 shares of stock.......... -- (6) 6 -- --
Issuance of 8,220 shares of stock............ -- 8 149,392 -- 149,400
Issuance of 4,000 shares of stock
subscribed................................. (4,000) 4 3,996 -- --
----------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1995..................... -- 2,005 1,540,445 (586,724) 955,726
Net income................................... -- -- -- 404,981 404,981
Purchase of 59,750 shares of stock........... -- (60) (231,440) -- (231,500)
----------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1996..................... -- 1,945 1,309,005 (181,743) 1,129,207
Net income................................... -- -- -- 314,225 314,225
Purchase of 152,250 shares of stock.......... -- (152) (217,348) -- (217,500)
----------- ----------- ------------ ------------ ------------
BALANCE, October 31, 1997 (unaudited).......... $ -- $ 1,793 $ 1,091,657 $ 132,482 $1,225,932
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
------------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----------- ------------ ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............................................................ $ 357,695 $ 404,981 $ 95,115 $ 314,225
Adjustments to reconcile net income to net cash provided by operating
activities-
Changes in assets and liabilities-
Decrease (increase) in receivables from brokers and dealers......... 19,745 12,808 (52,940) (185,439)
Increase in receivables from affiliates............................. (19,233) (165) (482) (1,449)
Increase in receivables from discontinued operations................ (129,097) (338,354) (449,409) (80,724)
Increase in advances to officer/employee............................ (67,686) (19,656) (64,883) (46,531)
Decrease (increase) in income taxes receivable...................... 21,058 -- (6,186) --
Decrease (increase) in prepaids and other assets.................... 136 17,713 (4,669) (16,520)
(Increase) decrease in net assets from discontinued operations...... (296,365) (790,668) (280,840) 105,449
Decrease in payable to clearing organization........................ (18,349) (11,261) (11,261) --
(Decrease) increase in accounts payable and accrued expenses........ (6,224) (5,334) 59,450 (11,879)
(Decrease) increase in accrued compensation......................... (23,209) 24,524 (30) (6,248)
Increase in deferred rent........................................... 60,782 -- -- --
Increase (decrease) in payable to affiliated partnership............ -- 19,692 12,432 (59,076)
Increase (decrease) in income taxes payable......................... 10,000 140,341 58,465 10,996
Decrease in interest payable on subordinated debt................... (4,704) -- -- --
Increase (decrease) in net liabilities from discontinued
operations........................................................ 240,228 788,286 585,238 (10,349)
----------- ------------ ----------- -----------
Net cash provided by (used by) operating activities................. 144,777 242,907 (60,000) 12,455
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment, net..................................... (12,163) (2,150) (2,150) (9,785)
Investment in affiliate............................................... (3,005) 3,000 3,000 --
Purchase of investments............................................... -- (147,500) (147,500) (11,806)
----------- ------------ ----------- -----------
Net cash used in investing activities............................... (15,168) (146,650) (146,650) (21,591)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock..................................................... 149,400 -- -- --
Purchase of stock..................................................... (105,000) (231,500) (17,860) (217,500)
Repayment of subordinated loan........................................ (64,152) -- -- --
----------- ------------ ----------- -----------
Net cash provided by (used in) financing activities................. (19,752) (231,500) (17,860) (217,500)
----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 109,857 (135,243) (224,510) (226,636)
CASH AND CASH EQUIVALENTS,
beginning of year/period.............................................. 523,144 633,001 633,001 497,758
----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year/period.................................................... $ 633,001 $ 497,758 $ 408,491 $ 271,122
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Chapman Holdings, Inc. (the "Company") provides securities brokerage and
investment banking services. The Company, formed subsequent to October 31, 1997,
became the parent of a wholly-owned subsidiary, The Chapman Co. ("Chapman") and
its two subsidiaries, Chapman Capital Management, Inc. ("CCM") and Chapman
Insurance Agency, Incorporated ("CIA") pursuant to the merger of a newly formed
wholly-owned subsidiary of the Company into Chapman. CCM and CIA, wholly-owned
subsidiaries of Chapman, will be spun off from the Company as part of a planned
initial public offering ("IPO") with Chapman being the remaining subsidiary. The
IPO will be on a best efforts basis conditioned upon the sale of a minimum of
850,000 shares of common stock and a maximum of 1,000,000 shares of common
stock. The proceeds of the IPO will be used to expand the Company's regulatory
capacity to participate in corporate and public finance transactions, for
working capital to support the planned growth of its business and other general
corporate purposes.
The Company's operations are subject to certain risks, including the
Company's recently launched new strategic initiative it calls "Domestic Emerging
Markets," and the unproven nature of this strategy, and its dependence on key
personnel.
The Company allocates compensation, benefits and other costs to CCM and CIA
on a proportional allocation cost method which management believes is
reasonable. Compensation and benefits are allocated based on management's
estimate of the percentage of time employees spend performing services for CCM
and CIA. Other costs, consisting of communications, occupancy, and
administrative support, are allocated based on estimated usage by CCM and CIA.
USE OF ESTIMATES
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
INTERIM FINANCIAL STATEMENTS
The financial statements for the ten months ended October 31, 1996 and 1997,
are unaudited, but, in the opinion of management, such financial statements have
been presented on the same basis as the audited financial statements for the
year ended December 31, 1996. These financial statements include all
adjustments, consisting of normal recurring adjustments and adjustments for the
spin off of CIA and CCM, necessary for a fair presentation of the financial
position and results of operations and cash flows for these periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are primarily invested in money market funds.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Investments as of December 31, 1996, and October 31, 1997, consist primarily
of certificates of deposit in which cost approximates market. All investments
are classified as available for sale.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, receivables, accounts payable and accrued expenses approximate fair
value.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method and the estimated IPO price
of $8.00 per share. The weighted average shares outstanding is calculated as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Common stock.................................................. 2,004,820 1,994,780 2,003,920 1,805,320
Dilutive effect of warrants outstanding..................... 196,594 196,594 196,594 196,594
---------- ---------- ---------- ----------
2,201,414 2,191,374 2,200,514 2,001,914
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Subsequent to October 31, 1997, a warrant outstanding to acquire shares of
the Chapman Co. stock was exchanged for 196,594 shares of the Company's common
stock.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which becomes effective December 15, 1997, and which early
adoption is not permitted. Under SFAS No. 128, a company would disclose basic
earnings per share (the principal difference being that common stock equivalence
would not be considered in the compilation of basic earnings per share) and
diluted earnings per share. The adoption of this pronouncement will require
restatement of all prior periods presented. The adoption of this pronouncement
will not have a material change.
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
becomes effective December 15, 1997. Under SFAS No. 131, a company would
disclose certain information about the operating segments in the financial
statements of the company and information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
does not expect a material effect to its financial statement presentation from
adopting this pronouncement.
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMMISSION REVENUES
The Company records commission revenues and related expenses on a trade date
basis.
UNDERWRITING AND MANAGEMENT FEES
The Company records underwriting and management fee revenues and the related
expenses on a trade date basis.
VOLATILITY OF BUSINESS
The Company's revenues and operating results may fluctuate from month to
month, quarter to quarter and year to year due to a combination of factors,
including the number of underwriting transactions in which the Company
participates, access to public markets for companies in which the Company has
invested as a principal, the level of institutional and retail brokerage
transactions, variations in expenditures for personnel, litigation expenses and
expenses of establishing new business units. The Company's revenues from an
underwriting transaction are recorded only when the underwritten security
commences trading; accordingly, the timing of the Company's recognition of
revenue from a significant transaction can materially affect the Company's
operating results. As a result, the Company could experience losses if demand
for the above transactions declines more quickly than the Company's ability to
change its cost structure.
OFFICE EQUIPMENT
Office equipment is depreciated using the straight-line method over the
estimated useful life of 3 to 5 years. As of December 31, 1996 and October 31,
1997, accumulated depreciation was $10,520 and $13,835, respectively.
TRANSACTIONS WITH CLEARING ORGANIZATION
The Company is required to have cash on deposit with its clearing agent for
general trading purposes. In addition, receivables from and payables to the
clearing organization arise from cash settlements on ordinary trading activity
and clearing expenses.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The Company and its subsidiaries filed
consolidated Federal tax returns on a cash basis for the years ended December
31, 1996 and 1995.
The Company has calculated income taxes allocated to the subsidiaries
accounted for on a discontinued operations basis on a stand-alone basis as if
the subsidiaries had to provide for income taxes not as a part of the
consolidated group.
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CCM ACQUISITION
In December 1996, CCM started DEM-MET, a tax-exempt pooled interest trust
for qualified employee benefit plans. As part of the start-up of this trust, CCM
entered into a noncompete agreement for $300,000 and paid $640,000 in costs
related to starting the trust. These amounts, net of accumulated amortization,
are included in net assets from discontinued operations in the accompanying
balance sheets.
2. SPIN OFF OF OPERATIONS:
On December 29, 1997, the Company, a newly formed Maryland corporation,
effected a tax-free holding company reorganization pursuant to which Chapman
became a wholly-owned direct subsidiary of the Company. On or before the closing
of the sale of the minimum number of shares to be sold in the IPO, the Company
intends to effect a tax-free spin-off transaction which Chapman's two
wholly-owned subsidiaries, CCM and CIA, will become wholly-owned subsidiaries of
separate holding companies and the stock of such holding companies will be
distributed to the existing stockholders of the Company. The financial position
and results of operations of CCM and CIA are reflected on the balance sheets and
statements of operations as assets and liabilities from discontinued operations
and income from discontinued operations, respectively.
Assets and liabilities as of December 31, 1996 and October 31, 1997 of the
operations to be spun off are listed below:
<TABLE>
<CAPTION>
OCTOBER 31,
DECEMBER 31, 1996 1997
----------------- ---------------
<S> <C> <C>
(UNAUDITED)
Cash and cash equivalents................................ $ 8,196 $ 109,793
Management and underwriting receivables.................. 186,373 163,021
Related party receivables................................ 24,414 31,363
Office equipment, net.................................... 3,936 5,872
Prepaids and other assets, net........................... 934,537 741,958
----------------- ---------------
$ 1,157,456 $ 1,052,007
----------------- ---------------
----------------- ---------------
Accounts payable and accrued expenses.................... 73,702 202,629
Due to officer........................................... 145,000 75,000
Due to parent company.................................... 682,643 763,367
Non-compete agreement payable............................ 300,000 150,000
----------------- ---------------
$ 1,201,345 $ 1,190,996
----------------- ---------------
----------------- ---------------
</TABLE>
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
3. CAPITAL STOCK:
The common stock activity included in the accompanying financial statements
has been restated to reflect the one-for-five share exchange of stock related to
the merger of Chapman into the Company. As such, all share data related to
Chapman prior to the merger has been stated at the Company's stock conversion
amounts.
4. COMMITMENTS AND CONTINGENCIES:
The Company has entered into an operating lease agreement for office
facilities which expires on October 15, 2000. Rent expense under this agreement
was $209,049, $209,052, $174,210 and $174,210 for the years ended December 31,
1995 and 1996, and for the ten months ended October 31, 1996 and 1997,
respectively. The aggregate minimum future annual rental for the following
fiscal years ending December 31 is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 209,052
1998.............................................................. 219,954
1999.............................................................. 252,660
2000.............................................................. 200,022
</TABLE>
In addition, a proportionate share of real estate taxes and building
expenses in excess of base year amounts are charged to the Company. This lease
agreement includes scheduled rent increases which are recognized on a
straight-line basis. The Company recorded $89,048 in deferred rent relating to
this straight-line basis of rent expense recognition.
The Company leases furniture and equipment from the Chapman Limited
Partnership I (the Partnership), an entity in which certain officers and
stockholders of the Company are partners. The lease requires monthly payments of
$9,846 and contains one year renewable terms, at the option of the Company,
through September 2000, at which time the Company can purchase the furniture and
equipment at fair value. Rent expense under this lease agreement was $118,152
for the years ended December 31, 1995 and 1996, and $98,460 for the ten months
ended October 31, 1996 and 1997. As of December 31, 1996, and October 31, 1997,
$59,076 and $-0-, respectively, was payable to the Partnership.
The Company clears all transactions for its brokerage customers through its
clearing agent, which carries and clears all customer securities accounts. The
clearing agent also lends funds to the Company's brokerage customers through the
use of margin credit. These loans are made to customers on a secured basis, with
the clearing agent maintaining collateral in the form of salable securities,
cash or cash equivalents. Pursuant to the terms of the agreement between the
Company and the clearing agent, in the event that customers fail to pay for
their purchases, to supply the securities that they have sold, or to repay funds
they have borrowed, and the clearing agent satisfies any customer obligations,
the Company would be obligated to indemnify the clearing agent for any resulting
losses. As of October 31, 1997, the Company has approximately $1.2 million of
margin credit outstanding to its customers through its clearing agent.
Securities brokerage firms become parties to arbitrations brought by
dissatisfied customers in the general course of business. The Company has been
and is currently a party to such proceedings, none of which has resulted or
which management believes will result in any material liability.
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
5. INCOME TAXES:
As of December 31, 1996, there was a deferred tax liability of approximately
$32,000 related to the Company being on the cash basis of accounting for income
tax purposes. For the years ended December 31, 1995 and 1996, the tax provision
of $147,000 and $259,000, respectively, is net of a reduction in the valuation
reserve of $130,000 and $49,000, respectively, as a result of utilization of a
net operating loss which was applied against the provision for continuing
operations because the net operating loss was generated from continuing
operations.
A reconciliation of the statutory income taxes to the recorded income tax
provision for the years ended December 31, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Statutory tax (at 34% rate).......................................... $ 127,000 $ 209,000
Effect of state income taxes......................................... 18,000 34,500
Effect of permanent book to tax differences.......................... 2,000 15,500
Reduction in valuation reserve....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The components of the income tax provision for the years ended December 31,
1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current.............................................................. $ 82,000 $ 169,000
Deferred............................................................. (24,000) 33,000
Discontinued operations.............................................. 89,000 57,000
Reduction in valuation service....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The Company's tax rate for the ten months ended October 31, 1996 and 1997,
was management's estimate based on the effective tax rate for the years ended
December 31, 1996 and 1997.
6. REGULATORY REQUIREMENTS:
Pursuant to the requirements of the Securities and Exchange Commission's
(SEC) Uniform Net Capital Rule (Rule 15c3-1), Chapman is required to maintain
net capital, as defined, of not less than $100,000 and a ratio of aggregate
indebtedness to net capital, as defined, not to exceed 15 to 1. As of December
31, 1996, the Chapman had excess net capital of $326,067 and a ratio of
aggregate indebtedness to net capital of .7 to 1.
Chapman is subject to compliance with various SEC and National Association
of Securities Dealers, Inc. (NASD) regulations. Also, the NASD periodically
reviews Chapman's records and procedures for compliance with its requirements.
Any acts of noncompliance may subject Chapman to fines and other punitive
remedies, and may significantly effect the Company's ability to operate.
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
7. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1995 and
1996, and for the ten months ended October 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid-
Interest........................................................... $ 20,132 $ 86,616 $ 85,462 $ 9,341
Income taxes....................................................... -- 5,000 5,000 182,232
</TABLE>
8. EMPLOYEE SAVINGS PLAN:
The Company's Retirement Savings Plan, a 401(k) plan, provides participants
a mechanism for making contributions for retirement savings. Each participant
may make pre-tax and after-tax contributions based upon eligible compensation.
The Company may make discretionary contributions based on the participants'
compensation for the plan year. The Company elected not to contribute to the
plan for the years ended December 31, 1996 and 1995, and the ten months ended
October 31, 1997.
9. RELATED PARTY TRANSACTIONS:
The Company served as the underwriter for DEM, Inc. ("DEM-TM-"), a
registered non-diversified closed-ended management investment company. CCM
provides investment advisory and administrative services to DEM-TM- under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. In 1995, the Company and CCM
owned a total of 6,867 shares of DEM-TM-'s stock, with a cost basis of $103,005.
In 1996, CCM purchased 196,333 additional shares of DEM-TM- stock and sold the
shares recognizing a loss of $108,483.
Listed below are fees and commissions earned from DEM.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Included in continuing operations................................ $ 354,679 $ 455,000 $ 140,000 $ 368,000
Included in discontinued operations.............................. -- 53,041 43,605 108,525
---------- ---------- ---------- ----------
$ 354,679 $ 508,041 $ 183,605 $ 476,525
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
CCM provides investment advisory and administrative services to The Chapman
Funds, Inc. (the Funds), an affiliated group of mutual funds, under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. The agreement also provides
that expense reimbursements be made to the Funds for specified expenses.
As of December 31, 1996, and October 31, 1997, the Company had outstanding
advances to its majority stockholder of $129,000 and $173,881, respectively, of
which $19,327 and $29,327, respectively, is included in discontinued operations.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS
SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 12
Dilution........................................ 13
Capitalization.................................. 14
Dividend Policy................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business........................................ 19
Management...................................... 25
Principal Stockholders.......................... 26
Certain Transactions............................ 27
Description of Capital Stock.................... 29
Shares Eligible for Future Sale................. 30
Plan of Distribution............................ 30
Transfer Agent and Registrar.................... 32
Legal Matters................................... 32
Experts......................................... 32
Additional Information.......................... 32
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
MINIMUM 850,000 SHARES
MAXIMUM 1,000,000 SHARES
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that the Company may indemnify any director who was, is or is threatened to be
made a named defendant or respondent to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director of the Company,
or while a director, is or was serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, against reasonable expenses (including attorneys' fees),
judgments, penalties, fines and settlements, actually incurred by the director
in connection with such action, suit or proceeding, unless it is established
that: (i) the act or omission of the director was material to the matter giving
rise to such action, suit or proceeding, and was committed in bad faith or was
the result of active and deliberate dishonesty; (ii) the director actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. If the action, suit or proceeding
was one by or in the right of the Company, no indemnification shall be made with
respect to any action, suit or proceeding in which the director shall have been
adjudged to be liable to the Company. A director also may not be indemnified
with respect to any action, suit or proceeding charging improper personal
benefit to the director, whether or not involving action in the director's
official capacity, in which the director is adjudged to be liable on the basis
that a personal benefit was improperly received. Unless limited by the Company's
Charter: (i) a court of appropriate jurisdiction, upon application of a
director, may order such indemnification as the court shall deem proper if it
determines that the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances, regardless of
whether the director has met the standards of conduct required by MGCL Section
2-418; and (ii) the Company shall indemnify a director if such director is
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above. However, with respect to any action, suit or
proceeding by or in the right of the Company or in which the director was
adjudged to be liable on the basis that a personal benefit was improperly
received, the Company may only indemnify the director for any expenses
(including attorneys' fees) incurred in connection with such action, suit or
proceeding.
MGCL Section 2-418 further provides that unless limited by the Company's
Charter, the Company: (i) shall (a) indemnify an officer of the Company if such
officer is successful on the merits or otherwise in defense of any action, suit
or proceeding referred to above, and (b) indemnify an officer of the Company if
a court of appropriate jurisdiction, upon application of an officer, shall order
indemnification; (ii) may indemnify and advance expenses to an officer, employee
or agent of the Company to the same extent that it may indemnify directors; and
(iii) may indemnify and advance expenses to an officer, employee or agent who is
not a director to such further extent, consistent with law, as may be provided
by the Charter, Bylaws, general or specific action of the Company's Board of
Directors or contract.
The Charter of the Company, provides that the Company shall indemnify its
currently acting and its former directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the MGCL, as from time to time
amended. If approved by the Board of Directors, the Company may indemnify its
employees, agents and persons who serve and have served, at its request as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture or other enterprise to the extent determined to be
appropriate by the Board of Directors. The Company shall advance expenses to its
directors and officers entitled to mandatory indemnification to the maximum
extent permitted by the MGCL and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
II-1
<PAGE>
The Company's Charter provides that, to the fullest extent permitted by the
MGCL, as amended or interpreted, no director or officer of the Company shall be
personally liable to the Company or its stockholders for monetary damages in
connection with events occurring at the time such person served as a director or
officer.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to the
Registration Statement and the Qualified Independent Underwriter Agreement filed
as Exhibit 1.2 to the Registration Statement, the Company has agreed to
indemnify the Underwriter and the QIU, respectively, and their directors,
officers and controlling persons against certain civil liabilities that may be
incurred in connection with this offering, including certain liabilities under
the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
offering described in the Registration Statement (other than the underwriting
discount and commissions and reasonable expense allowance) will be as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 3,000
NASD filing fee................................................... 3,500
Nasdaq SmallCap Market listing fee................................ 5,000
Printing and engraving expenses................................... 50,000
Accounting fees and expenses...................................... 50,000
Legal fees and expenses (including Blue Sky)...................... 167,500
Miscellaneous..................................................... 21,000
---------
Total......................................................... $ 300,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following securities were issued by the
Company without registration under the Securities Act:
On December 12, 1997, in connection with the organization of the Company,
the Company issued one share of Common Stock, to Nathan A. Chapman, Jr. for an
aggregate price of $8.00. This transaction was exempt from registration under
the Securities Act under Section 4(2) because it did not involve a public
offering. Such transaction was completed without an underwriter.
On December 22, 1997, the Company issued 196,594 shares of Common Stock to
Mr. Chapman in consideration for which Mr. Chapman contributed a warrant for
1,048,500 shares of The Chapman Co., currently the Company's wholly-owned
subsidiary, then exercisable at a price of $0.10 per share. This transaction was
exempt from registration under the Securities Act under Section 4(2) because it
did not involve a public offering. Such transaction was completed without an
underwriter.
On December 29, 1997, the Company issued 1,792,640 shares of Common Stock to
19 former stockholders of The Chapman Co. in a statutory merger pursuant to a
vote of the security holders of The Chapman Co. Specifically, a wholly-owned
subsidiary of the Company was organized and merged into The Chapman Co. with The
Chapman Co. surviving the merger as a wholly-owned subsidiary of the Company.
All shares of Common Stock, Preferred Stock and Preferred Stock--Series B of The
Chapman Co. that were outstanding prior to the merger automatically converted at
the effective time of the merger into shares of Common Stock of the Company.
This transaction was exempt from registration under the Securities Act under
Section 4(2) because it did not involve a public offering. Such transaction was
completed without an underwriter.
II-2
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Company and the Chapman Co.(1)
1.2 Form of Qualified Independent Underwriter Agreement between the Company and Ferris Baker Watts
Incorporated(1)
1.3 Form of Escrow Agreement between the Company and UMB Bank N.A.(1)
3.1 Articles of Incorporation of the Company.(2)
3.2 By-laws of the Company.(2)
4 Form of Common Stock Certificate.(2)
5 Opinion of Venable, Baetjer and Howard, LLP.(1)
10.1 $106,922.68 Promissory Note to The Chapman Co. from Nathan A. Chapman, Jr. dated December 31,
1996.(2)
10.2 Chapman Holdings, Inc. 1998 Omnibus Stock Plan.(2)
10.3 Fully Disclosed Clearing Agreement between RPR Clearing Services and The Chapman Co. dated April 1,
1993, as amended June 16, 1993 and February 4, 1997.(2)
10.4 Placement Agency Agreement between DEM, Inc. and The Chapman Co. dated May 30, 1997(2)
10.5 Distribution Agreement between The Chapman Co. 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.(2)
10.6 Distribution Agreement between The Chapman Co. and The Chapman Funds, Inc. on behalf of the DEM
Equity Fund dated October 28, 1997.(2)
10.7 Equipment Lease Agreement between The Chapman Co. and Chapman Limited Partnership I dated October 1,
1993.(2)
10.8 Trademark Assignment from The Chapman Co. to Nathan A. Chapman, Jr. dated December 24, 1997(2)
10.9 Trademark Assignment from The Chapman Co. to Nathan A. Chapman, Jr. dated December 24, 1997(2)
10.10 License Agreement between The Chapman Co. and Nathan A. Chapman, Jr dated December 26, 1997.(2)
10.11 763,367 Promissory Note to The Chapman Co. from Chapman Capital Management dated as of October 31,
1997.(1)
21 Subsidiaries of the Company.(2)
23.1 Consent of Arthur Andersen, LLP.(1)
23.2 Consent of Venable, Baetjer and Howard, LLP (included in Exhibit 5).
24 Power of Attorney.(2)
27 Financial Data Schedule.(2)
</TABLE>
- ------------------------
(1) To be filed by amendment.
(2) Filed herewith.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement (or the most recent post-
effective amendment thereof); and notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of Prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) To include any additional or changed material information with
respect to the plan of distribution.
(2) That, for the purpose of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(b) The undersigned Company hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(d) The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Baltimore, state of Maryland, on
December 30, 1997.
<TABLE>
<S> <C> <C>
CHAPMAN HOLDINGS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
PRESIDENT
</TABLE>
Pursuant to the requirements of the Act, the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ NATHAN A. CHAPMAN, JR. President and Director
- ------------------------------ (Principal Executive December 30, 1997
Nathan A. Chapman, Jr. Officer)
Treasurer and Controller
/s/ M. LYNN BALLARD (Principal Financial
- ------------------------------ Officer and Principal December 30, 1997
M. Lynn Ballard Accounting Officer)
The Entire Board of Directors
Nathan A. Chapman, Jr.
Donald V. Watkins
Earl U. Bravo
Lottie Shackelford
*By: /s/ NATHAN A. CHAPMAN,
JR.
------------------------- December 30, 1997
Nathan A. Chapman, Jr.
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
3.1 Articles of Incorporation
3.2 Bylaws
4 Form of Common Stock Certificate
10.1 $106,922.68 Promissory Note to The Chapman Co. from Nathan A. Chapman, Jr. dated December
31, 1996
10.2 Chapman Holdings, Inc. 1998 Omnibus Stock Plan
10.3 Fully Disclosed Clearing Agreement between RPR Clearing Services and The Chapman Co.
dated April 1, 1993, as amended June 16, 1993 and February 4, 1997
10.4 Placement Agency Agreement between DEM, Inc. and The Chapman Co. dated May 30, 1997
10.5 Distribution Agreement between The Chapman Co. 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
10.6 Distribution Agreement between The Chapman Co. and The Chapman Funds, Inc. on behalf of
the DEM Equity Fund dated October 28, 1997
10.7 Equipment Lease Agreement between The Chapman Co. and Chapman Limited Partnership I dated
October 1, 1993
10.8 Trademark Assignment from The Chapman Co. to Nathan A. Chapman, Jr. dated December 24,
1997
10.9 Trademark Assignment from The Chapman Co. to Nathan A. Chapman, Jr. dated December 24,
1997
10.10 License Agreement between The Chapman Co. and Nathan A. Chapman, Jr. dated December 26,
1997
21 Subsidiaries of Company
23.1 Consent of Arthur Andersen, LLP
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
CHAPMAN HOLDINGS, INC.
FIRST: The undersigned, Michael W. Conron, whose post office address is
1800 Mercantile Bank and Trust Building, 2 Hopkins Plaza, Baltimore, Maryland
21201, being over eighteen years of age and acting as incorporator, hereby
forms a Corporation under the Maryland General Corporation Law.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is: Chapman Holdings, Inc.
THIRD: The purposes for which the Corporation is formed are as follows:
(a) To carry on the following: investment banking; the conducting of
transactions in the securities, commodities, financial, investment, advisory
and related businesses as a broker, dealer, underwriter or investment adviser
or in a related capacity; the acting as an administrative distributor,
adviser or otherwise; on the part of investment funds and mutual funds; the
acting as agent or otherwise in connection with the insurance business;
acting as principal, agent, adviser or otherwise in connection with the real
estate or mortgage banking business; and acting as a holding company with
respect to other companies engaged in any of the businesses listed above or
any other business.
(b) To carry on any and all business, transactions and activities
permitted by the Maryland General Corporation Law which may be deemed
desirable by
<PAGE>
the Board of Directors of the Corporation, whether or not identical with or
related to the business described in the foregoing paragraphs of this
Article, as well as all activities and things necessary and incidental
thereto, to the full extent empowered by such laws.
FOURTH: The post office address of the principal office of the
Corporation in this State is 11 East Chase Street, Suite 9-E, Baltimore,
Maryland 21202. The resident agent of the Corporation in this State is
CSC-Lawyers Incorporating Service Company, whose post office address is 11
East Chase Street, Suite 9-E, Baltimore, Maryland 21202. Said resident agent
is a citizen of the State of Maryland, and actually resides therein.
FIFTH: The total number of shares of stock of all classes which the
Corporation has authority to issue is Twenty Million (20,000,000) shares of
Common Stock, par value One Mill ($0.001) per share. The aggregate par value
of all shares having par value is Twenty Thousand Dollars ($20,000.00).
SIXTH: The Corporation shall have two (2) Directors (which number may be
increased or decreased, but to not less than the lesser of three (3) or the
number of stockholders, pursuant to the Bylaws of the Corporation), and
Nathan A. Chapman, Jr., and Earl U. Bravo, Sr. shall act as such until the
first annual meeting or until their successors are duly chosen and qualified.
SEVENTH: The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
directors and stockholders:
2
<PAGE>
(a) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of its stock of any class,
whether now or hereafter authorized, and securities convertible into shares
of its stock, of any class or classes, whether now or hereafter authorized,
for such consideration as the Board of Directors may deem advisable.
(b) No contract or other transaction between this Corporation and any
other corporation, partnership, individual or other entity and no act of this
Corporation shall in any way be affected or invalidated by the fact that any
of the directors of this Corporation are directors, principals, partners or
officers of such other entity, or are pecuniarily or otherwise interested in
such contract, transaction or act; provided that (i) the existence of such
relationship or such interest shall be disclosed to the Board of Directors or
to a committee of the Board of Directors if the matter involves a committee
decision, and the contract, transaction or act shall be authorized, approved
or ratified by a majority of disinterested directors on the Board or on such
committee, as the case may be, even if the number of disinterested directors
constitutes less than a quorum or (ii) the contract, transaction or act shall
be authorized, ratified or approved in any other manner permitted by the
Maryland General Corporation Law.
(c) The Corporation reserves the right to make, from time to time, any
amendments of its charter which may now or hereafter be authorized by law,
including any amendments which alter the contract rights of any class of
outstanding stock as expressly set forth in the charter.
3
<PAGE>
(d) The Board of Directors shall have the power to classify or
reclassify any unissued stock, whether now or hereafter authorized, by
setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms
or conditions of redemption of such stock.
(e) Notwithstanding any provision of law requiring any action to be
taken or authorized by the affirmative vote of the holders of a designated
proportion of the votes of all classes or of any class of stock of the
Corporation, such action shall be effective and valid if taken or authorized
by the affirmative vote of a majority of the total number of votes entitled
to be cast thereon, except as otherwise provided in this charter.
(f) Unless otherwise provided by the Board of Directors, no holder of
stock of any class shall be entitled to preemptive rights to subscribe for or
purchase or receive any part of any new or additional issue of stock of any
class of the Corporation or securities convertible into stock of any class of
the Corporation.
(g) The Corporation elects not to be governed by Subtitle 6 of Title 3
of the Maryland General Corporation Law with respect to any "business
combination" as defined in such Subtitle. In addition, any acquisition of
any shares of stock of the Corporation, including any acquisition of voting
rights or other interests in any such stock, shall be exempt from the
provisions of Title 3, Subtitle 7 of the Maryland General Corporation Law.
Accordingly, the provisions of Title 3, Subtitle 6 (Business Combination) and
Subtitle 7 (Control Shares) of the Maryland General Corporation Law shall not
apply to this Corporation.
4
<PAGE>
EIGHTH:
(a) The Corporation shall indemnify its currently acting and its former
directors and officers against any and all liabilities and expenses incurred
in connection with their services in such capacities to the maximum extent
permitted by the Maryland General Corporation Law, as from time to time
amended.
(b) If approved by the Board of Directors, the Corporation may indemnify
its employees, agents and persons who serve and have served, at its request
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture or other enterprise to the extent
determined to be appropriate by the Board of Directors.
(c) The Corporation shall advance expenses to its directors and officers
entitled to mandatory indemnification to the maximum extent permitted by the
Maryland General Corporation Law and may in the discretion of the Board of
Directors advance expenses to employees, agents and others who may be granted
indemnification.
(d) The Board of Directors may, by bylaw, resolution or agreement, make
further provision for indemnification of directors, officers, employees and
agents.
(e) To the maximum extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, as from
time to time amended, no director or officer of the Corporation shall have
any liability to the Corporation or its stockholders for money damages. This
limitation on liability applies to events occurring at the time a person
serves as a director or officer of the
5
<PAGE>
Corporation whether or not such person is a director or officer at the time
of any proceeding in which liability is asserted.
(f) No amendment or repeal of any section of this Article, or the
adoption of any provision of the Corporation's Charter inconsistent with this
Article, shall apply to or affect in any respect the rights to
indemnification or limitation of liability of any director or officer of the
Corporation with respect to any alleged act or omission which occurred prior
to such amendment, repeal or adoption.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation on the
12th day of December 1997, and have acknowledged such Articles to be my act.
/s/ MICHAEL W. CONRON
------------------------
Michael W. Conron
Incorporator
6
<PAGE>
Exhibit 3.2
BYLAWS
OF
CHAPMAN HOLDINGS, INC.
ARTICLE I.
Stockholders
Section 1. Annual Meetings.
The annual meeting of the stockholders of the Corporation shall
be held on such date within the month of April as may be fixed from time to
time by the Board of Directors. Not less than ten nor more than 90 days'
written or printed notice stating the place, day and hour of each annual
meeting shall be given in the manner provided in Section 1 of Article IX
hereof. The business to be transacted at the annual meetings shall include
the election of directors, consideration and action upon the reports of
officers and directors, and any other business within the power of the
Corporation. All annual meetings shall be general meetings at which any
business may be considered without being specified as a purpose in the notice
unless otherwise required by law.
Section 2. Special Meetings Called by Chairman of the Board, President or Board
of Directors.
At any time in the interval between annual meetings, special
meetings of stockholders may be called by the Chairman of the Board, or by
the President, or by the Board of Directors. Not less than ten days' nor
more than 90 days' written notice stating the place, day and hour of such
meeting and the matters proposed to be acted on thereat shall be given in the
manner provided in Section 1 of Article IX. No business shall be transacted
at any special meeting except that specified in the notice.
Section 3. Special Meeting Called by Stockholders.
Upon the request in writing delivered to the Secretary by the
stockholders entitled to cast at least 25% of all the votes entitled to be
cast at the meeting, it shall be the duty of the Secretary to call forthwith
a special meeting of the stockholders. Such request shall state the purpose
of such meeting and the matters proposed to be acted on thereat, and no other
business shall be transacted at any such special meeting. The Secretary
shall inform such stockholders of the reasonably estimated costs of preparing
and mailing the notice of the meeting, and upon payment to the Corporation of
such costs, the Secretary shall give not less than ten nor more than 90 days'
notice of the time, place and purpose of the meeting in the manner provided
in Section I of Article IX. If, upon payment of such costs the Secretary
shall fail to issue a call for such meeting within ten days after the receipt
<PAGE>
of such payment (unless such failure is excused by law), then the
stockholders entitled to cast 25% or more of the outstanding shares entitled
to vote may do so upon giving not less than ten days' nor more than 90 days'
notice of the time, place and purpose of the meeting in the manner provided
in Section 1 of Article IX.
Section 4. Place of Meetings.
All meetings of stockholders shall be held at the principal
office of the Corporation in the State of Maryland or at such other place
within the United States as may be fixed from time to time by the Board of
Directors and designated in the notice.
Section 5. Quorum.
At any meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of the votes thereat shall
constitute a quorum. In the absence of a quorum, the stockholders present in
person or by proxy, by majority vote and without notice other than by
announcement, may adjourn the meeting from time to time, but not for a period
exceeding 60 days until a quorum shall attend.
Section 6. Adjourned Meetings.
A meeting of stockholders convened on the date for which it was
called (or one adjourned to achieve a quorum as above provided in Section 5
of this Article) may be adjourned from time to time without further notice to
a date not more than 120 days after the record date, and any business may be
transacted at any adjourned meeting which could have been transacted at the
meeting as originally called.
Section 7. Voting.
A majority of the votes cast at a meeting of stockholders, duly
called and at which a quorum is present, shall be sufficient to take or
authorize action upon any matter which may properly come before the meeting,
unless more than a majority of votes cast is required by statute or by the
Charter. The Board of Directors may fix the record date for the
determination of stockholders entitled to vote in the manner provided in
Article VIII, Section 3 of these Bylaws.
Section 8. Proxies.
A stockholder may vote the shares owned of record by him either
in person or by proxy executed in writing and signed by the stockholder or by
his duly authorized attorney-in-fact. Every proxy shall be dated, but need
not be sealed, witnessed or acknowledged. No proxy shall be valid after 11
months from its date, unless otherwise provided in the proxy. In the case of
stock held of record by more than one person, any co-owner or co-fiduciary
may execute the proxy without the joinder of his co-owner(s) or
co-fiduciary(ies), unless the Secretary of the Corporation is notified in
2
<PAGE>
writing by any co-owner or co-fiduciary that the joinder of more than one is
to be required. At all meetings of stockholders, the proxies shall be filed
with and verified by the Secretary of the Corporation, or, if the meeting
shall so decide, by the Secretary of the meeting.
Section 9. Order of Business.
At all meetings of stockholders, any stockholder, present and
entitled to vote in person or by proxy shall be entitled to require, by
written request to the Chairman of the meeting, that the order of business
shall be as follows:
(1) Organization
(2) Proof of notice of meeting or of waivers thereof. (The
certificate of the Secretary of the Corporation, or the affidavit of any
other person who mailed or published the notice or caused the same to be
mailed or published, shall be proof of service of notice.)
(3) Submission by Secretary of the Corporation of a list of
the stockholders entitled to vote, present in person or by proxy.
(4) A reading of unapproved minutes of preceding meetings and
action thereon.
(5) Reports.
(6) If an annual meeting, or a special meeting called for that
purpose, the election of directors.
(7) Unfinished business.
(8) New business.
(9) Adjournment.
Section 10. Removal of Directors.
At any special meeting of the stockholders called in the manner
provided for by this Article, the stockholders, by the affirmative vote of a
majority of all the votes entitled to be cast for the election of directors,
may remove any director or directors from office, with or without cause, and
may elect a successor or successors to fill any resulting vacancies for the
remainder of his or their terms.
3
<PAGE>
Section 11. Informal Action by Stockholders.
Any action required or permitted to be taken at any meeting of
stockholders may be taken without a meeting if a consent in writing setting
forth such action is signed by all the stockholders entitled to vote thereon
and such consent is filed with the records of stockholders' meetings.
ARTICLE II.
Directors
Section 1. Powers.
The business and affairs of the Corporation shall be managed
under the direction of its Board of Directors. All powers of the Corporation
may be exercised by or under the authority of the Board of Directors except
as conferred on or reserved to the stockholders by law, by the Charter or by
these Bylaws. A director need not be a stockholder. The Board of Directors
shall keep minutes of its meetings and full and fair accounts of its
transactions.
Section 2. Number; Term of Office; Removal.
The number of directors of the Corporation shall be not less
than three or the same number as the number of stockholders, whichever is
less; provided, however, that such number may be increased and thereafter
decreased from time to time by vote of a majority of the entire Board of
Directors to a number not exceeding ten (10). The first directors of the
Corporation shall hold their office until the first annual meeting of the
Corporation, or until their successors are elected and qualify, and
thereafter the directors shall hold office for the term of one year, or until
their successors are elected and qualify. A director may be removed from
office as provided in Article I, Section 10 of these Bylaws.
Section 3. Annual Meeting; Regular Meetings.
As soon as practicable after each annual meeting of
stockholders, the Board of Directors shall meet for the purpose of
organization and the transaction of other business. No notice of the annual
meeting of the Board of Directors need be given if it is held immediately
following the annual meeting of stockholders and at the same place. Other
regular meetings of the Board of Directors may be held at such times and at
such places, within or without the State of Maryland, as shall be designated
in the notice for such meeting by the party making the call. All annual and
regular meetings shall be general meetings, and any business may be
transacted thereat.
4
<PAGE>
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by the
Chairman of the Board or the President, or by a majority of the directors.
Section 5. Quorum; Voting.
A majority of the Board of Directors shall constitute a quorum
for the transaction of business at every meeting of the Board of Directors;
but, if at any meeting there be less than a quorum present, a majority of
those present may adjourn the meeting from time to time, but not for a period
exceeding ten days at any one time or 60 days in all, without notice other
than by announcement at the meeting, until a quorum shall attend. At any
such adjourned meeting at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
called. Except as hereinafter provided or as otherwise provided by the
Charter or by law, directors shall act by a vote of a majority of those
members in attendance at a meeting at which a quorum is present.
Section 6. Notice of Meetings.
Notice of the time and place of every regular and special
meeting of the Board of Directors shall be given to each director in the
manner provided in Section 2 of Article IX hereof. Subsequent to each Board
meeting, and as soon as practicable thereafter, each director shall be
furnished with a copy of the minutes of said meeting. At least 24 hours'
notice shall be given of all meetings. The purpose of any meeting of the
Board of Directors need not be stated in the notice.
Section 7. Vacancies.
(a) If the office of a director becomes vacant for any reason
other than removal or increase in the size of the Board, such vacancy may be
filled by the Board by a vote of a majority of directors then in office,
although such majority is less than a quorum.
(b) If the vacancy occurs as a result of the removal of a
director, the stockholders may elect a successor or may delegate that
authority to the Board of Directors.
(c) If the vacancy occurs as a result of an increase in the
number of directors, it may be filled by vote of a majority of the entire
Board of Directors.
(d) If the entire Board of Directors shall become vacant, any
stockholder may call a special meeting in the same manner that the Chairman
of the Board or the President may call such meeting, and directors for the
unexpired term may be elected at such special meeting in the manner provided
for their election at annual meetings.
5
<PAGE>
(e) A director elected by the Board of Directors to fill a
vacancy shall serve until the next annual meeting of stockholders and until
his successor is elected and qualifies. A director elected by the
stockholders to fill a vacancy shall serve for the unexpired term and until
his successor is elected and qualifies.
Section 8. Rules and Regulations.
The Board of Directors may adopt such rules and regulations for
the conduct of its meetings and the management of the affairs of the
Corporation as it may deem proper and not inconsistent with the laws of the
State of Maryland or these Bylaws or the Charter.
Section 9. Executive Committee.
The Board of Directors may constitute an Executive Committee,
composed of at least one director, from among its members. The Executive
Committee shall hold office at the pleasure of the Board of Directors.
Between sessions of the Board of Directors, such Committee shall have all of
the powers of the Board of Directors in the management of the business and
affairs of the Corporation, except those powers specifically denied by law.
If any position on the Executive Committee becomes vacant, or if the number
of members is increased, such vacancy may be filled by the Board of
Directors. The taking of any action by the Executive Committee shall be
conclusive evidence that the Board of Directors was not in session at the
time of such action. The Executive Committee shall hold formal meetings and
keep minutes of all of its proceedings. A copy of such minutes shall, after
approval by the members of the Committee, be sent to all directors as a
matter of information. Any action taken by the Executive Committee within
the limits permitted by law shall have the force and effect of Board action
unless and until revised or altered by the Board. The presence of not less
than a majority of the Committee shall be necessary to constitute a quorum.
Action may be taken without a meeting if unanimous written consent is signed
by all of the members of the Committee, and if such consent is filed with the
records of the Committee. The Executive Committee shall have the power to
elect one of its members to serve as its Chairman unless the Board of
Directors shall have designated such Chairman.
Section 10. Compensation.
The directors may receive a stated salary for their services,
and/or fixed sum and expenses of attendance may be allowed for attendance
fee, if any, shall be determined by resolution of the Board; provided,
however, that nothing herein contained shall be construed as precluding a
director from serving the Corporation in any other capacity and receiving
compensation therefor.
6
<PAGE>
Section 11. Place of Meetings.
Regular or special meetings of the Board may be held within or
without the State of Maryland, as the Board may from time to time determine.
The time and place of meeting may be fixed by the party making the call.
Section 12. Informal Action by the Directors.
Any action required or permitted to be taken at any meeting of
the Board may be taken without a meeting, if a written consent to such action
is signed by all members of the Board and such consent is filed with the
minutes of the Board.
Section 13. Telephone Conference.
Members of the Board of Directors or any committee thereof may
participate in a meeting of the Board or such committee by means of a
conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other at the same time
and participation by such means shall constitute presence in person at the
meeting.
ARTICLE III.
Officers
Section 1. In General.
The Board of Directors may choose a Chairman of the Board from
among the directors. The Board of Directors shall elect a President, a
Treasurer, a Secretary, and such Vice Presidents, Assistant Secretaries and
Assistant Treasurers as the Board may from time to time deem appropriate.
All officers shall hold office only during the pleasure of the Board or until
their successors are chosen and qualify. Any two of the above offices,
except those of President and Vice President, may be held by the same person,
but no officer shall execute, acknowledge or verify any instrument in more
than one capacity when such instrument is required to be executed,
acknowledged or verified by any two or more officers. The Board of Directors
may from time to time appoint such other agents and employees with such
powers and duties as the Board may deem proper. In its discretion, the Board
of Directors may leave unfilled any offices except those of President,
Treasurer and Secretary.
Section 2. Chairman of the Board.
The Chairman of the Board, if one is elected, shall have the
responsibility for the implementation of the policies determined by the Board
of Directors and for the administration of the business affairs of the
Corporation. He shall preside over the meetings of the Board and of the
7
<PAGE>
stockholders at which he is present. He shall be the Chief Executive Officer
of the Corporation if so designated by resolution of the Board.
Section 3. President.
The President shall have the responsibility for the active
management of the business and general supervision and direction of all of
the affairs of the Corporation. In the absence of a Chairman of the Board,
he shall preside over the meetings of the Board and of the stockholders at
which he shall be present, and shall perform such other duties as may be
assigned to him by the Board of Directors or the Executive Committee. The
President shall have the authority on the Corporation's behalf to endorse
securities owned by the Corporation and to execute any documents requiring
the signature of an executive officer. He shall perform such other duties as
the Board of Directors may direct. He shall be the Chief Executive Officer
of the Corporation unless the Chairman of the Board is so designated by
resolution of the Board.
Section 4. Vice Presidents.
The Vice Presidents, in the order of priority designated by the
Board of Directors, shall be vested with all the power and may perform all
the duties of the President in his absence. They may perform such other
duties as may be prescribed by the Board of Directors or the Executive
Committee or the President.
Section 5. Treasurer.
The Treasurer shall be the Chief financial officer of the
Corporation and shall have general supervision over its finances. He shall
perform such other duties as may be assigned to him by the Board of Directors
or the President. If required by resolution of the Board, he shall furnish
bond (which may be a blanket bond) with such surety and in such penalty for
the faithful performance of his duties as the Board of Directors may from
time to time require, the cost of such bond to be defrayed by the Corporation.
Section 6. Secretary.
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors and shall attend to the giving and
serving of all notices of the Corporation required by law or these Bylaws.
He shall maintain at all times in the principal office of the Corporation at
least one copy of the Bylaws with all amendments to date, and shall make the
same, together with the minutes of the meeting of the stockholders, the
annual statement of affairs of the Corporation and any voting trust or other
stockholders agreement on file at the office of the Corporation, available
for inspection by any officer, director or stockholder during reasonable
business hours. He shall perform such other duties as may be assigned to him
by the Board of Directors.
8
<PAGE>
Section 7. Assistant Treasurer and Secretary.
The Board of Directors may designate from time to time
Assistant Treasurers and Secretaries, who shall perform such duties as may
from time to time be assigned to them by the Board of Directors or the
President.
Section 8. Compensation; Removal; Vacancies.
The Board of Directors shall have power to fix the compensation
of all officers of the Corporation. It may authorize any committee or
officer, upon whom the power of appointing subordinate officers may have been
conferred, to fix the compensation of such subordinate officers. The Board
of Directors shall have the power at any regular or special meeting to remove
any officer, if in the judgment of the Board the best interests of the
Corporation will be served by such removal. The Board of Directors may
authorize any officer to remove subordinate officers. The Board of Directors
may authorize the Corporation's employment of an officer for a period in
excess of the term of the Board. The Board of Directors at any regular or
special meeting shall have power to fill a vacancy occurring in any office
for the unexpired portion of the term.
Section 9. Substitutes.
The Board of Directors may from time to time in the absence of
any one of its officers or at any other time, designate any other person or
persons, on behalf of the Corporation to sign any contracts, deeds, notes or
other instruments in the place or stead of any of such officers, and may
designate any person to fill any one of said offices, temporarily or for any
particular purpose; and any instruments so signed in accordance with a
resolution of the Board shall be the valid act of the Corporation as fully as
if executed by any regular officer.
ARTICLE IV.
Resignation
Any director or officer may resign his office at any time.
Such resignation shall be made in writing and shall take effect from the time
of its receipt by the Corporation, unless some time be fixed in the
resignation, and then from that date. The acceptance of a resignation shall
not be required to make it effective.
ARTICLE V.
Commercial Paper, Etc.
All bills, notes, checks, drafts and commercial paper of all
kinds to be executed by the Corporation as maker, acceptor, endorser or
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otherwise, and all assignments and transfers of stock, contracts, or written
obligations of the Corporation, and all negotiable instruments, shall be made
in the name of the Corporation and shall be signed by any one or more of the
following officers as the Board of Directors may from time to time designate,
i.e., the Chairman of the Board, the President, any Vice President, or the
Treasurer, or by such other person or persons as the Board of Directors or
Executive Committee may from time to time designate.
ARTICLE VI.
Fiscal Year
The fiscal year of the Corporation shall cover such period of
12 months as the Board of Directors may determine. In the absence of any
such determination, the accounts of the Corporation shall be kept on a
calendar year basis.
ARTICLE VII.
Seal
The seal of the Corporation shall be in the form of two
concentric circles inscribed with the name of the Corporation and the year
and State in which it is incorporated. The Secretary or Treasurer, or any
Assistant Secretary or Assistant Treasurer, shall have the right and power to
attest to the corporate seal. In lieu of affixing the corporate seal to any
document, it shall be sufficient to meet the requirements of any law, rule or
regulation relating to a corporate seal to affix the word "(SEAL)" adjacent
to the signature of the person authorized to sign the document on behalf of
the Corporation.
ARTICLE VIII.
Stock
Section 1. Issue.
Each stockholder shall be entitled to a certificate or
certificates which shall represent and certify the number and class of shares
of stock owned by him in the Corporation. Each certificate shall be signed
by the Chairman of the Board, the President or any Vice President, and
countersigned by the Secretary or any Assistant Secretary or the Treasurer or
any Assistant Treasurer, and sealed with the seal of the Corporation. The
signatures of the Corporation's officers and its corporate seal appearing on
stock certificates may be facsimiles if each such certificate is
authenticated by the manual signature of an officer of a duly authorized
transfer agent. Stock certificates shall be in such form not inconsistent
with law or with the Charter, as shall be approved by the Board of Directors.
In case any officer of the Corporation who has signed any certificate ceases
to be an officer of the Corporation, whether by reason of death, resignation
or otherwise, before such certificate is issued, then the certificate may
<PAGE>
nevertheless be issued by the Corporation with the same effect as if the
officer had not ceased to be such officer as of the date of such issuance.
Section 2. Transfers.
The Board of Directors shall have power and authority to make
all such rules and regulations as the Board may deem expedient concerning the
issue, transfer and registration of stock certificates. The Board of
Directors may appoint one or more transfer agents and/or registrars for its
outstanding stock, and their duties may be combined. No transfer of stock
shall be recognized or binding upon the Corporation until recorded on the
books of the Corporation, or, as the case may be, of its transfer agent
and/or of its registrar, upon surrender and cancellation of a certificate or
certificates for a like number of shares.
Section 3. Record Dates for Dividends and Stockholders' Meeting.
The Board of Directors may fix a date not exceeding 90 days
preceding the date of any meeting of stockholders, any dividend payment date
or any date for the allotment of rights, as a record date for the
determination of the stockholders entitled to notice of and to vote at such
meeting, or entitled to receive such dividends or rights, as the case may be,
and only stockholders of record on such date shall be entitled to notice of
and to vote at such meeting or to receive such dividends or rights as the
case may be. In the case of a meeting of stockholders, the record date shall
be fixed not less than ten days prior to the date of the meeting.
Section 4. New Certificates.
In case any certificate of stock is lost, stolen, mutilated or
destroyed, the Board of Directors may authorize the issue of a new
certificate in place thereof upon indemnity to the Corporation against loss
and upon such other terms and conditions as it may deem advisable. The Board
of Directors may delegate such power to any officer or officers of the
Corporation or to any transfer agent or registrar of the Corporation; but the
Board of Directors, such officer or officers or such transfer agent or
registrar may, in their discretion, refuse to issue such new certificate save
upon the order of some court having jurisdiction in the premises.
ARTICLE IX.
Notice
Whenever by law or these Bylaws notice is required to be given
to any stockholder, such notice shall be in writing and may be given to each
stockholder by leaving the same with him or at his residence or usual place
of business, or by mailing it, postage prepaid, and addressed to him at his
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address as it appears on the books of the Corporation or its transfer agent.
Such leaving or mailing of notice shall be deemed the time of giving such
notice.
Section 2. Notice to Directors and Officers.
Whenever by law or these Bylaws notice is required to be given
to any director or officer, such notice may be given in any one of the
following ways: by personal notice to such director or officer, by telephone
communication with such director or officer personally, by telegram,
cablegram or radiogram, addressed to such director or officer at his then
address or at his address as it appears on the books of the Corporation, or
by depositing the same in writing in the post office or in a letter box in a
postage paid, sealed wrapper addressed to such director or officer at his
address as it appears on the books of the Corporation. The time when such
notice shall be consigned to a communication company for delivery shall be
deemed to be the time of the giving of such notice, and 48 hours after the
time when such notice shall be mailed shall be deemed to be the time of the
giving of such notice by mail.
Section 3. Waiver of Notice.
Notice to any stockholder or director of the time, place and/or
purpose of any meeting of stockholders or directors required by these Bylaws
may be dispensed with if such stockholder shall either attend in person or by
proxy, or if such director shall attend in person, or if such absent
stockholder or director shall, in writing filed with the records of the
meeting either before or after the holding thereof, waive such notice.
ARTICLE X.
Voting of Stock in Other Corporations
Any stock in other corporations, which may from time to time be
held by the Corporation, may be represented and voted at any meeting of
stockholders of such other corporations by the President or a Vice-President
or by proxy or proxies appointed by the President or a Vice-President, or
otherwise pursuant to authorization thereunto given by a resolution of the
Board of Directors adopted by a vote of a majority of the directors.
ARTICLE XI.
Indemnification
To the maximum extent permitted by the Maryland General
Corporation Law as from time to time amended, the Corporation shall indemnify
its currently acting and its former directors and officers and those persons
who, at the request of the corporation serve or have served another
corporation, partnership, joint venture, trust or other enterprise in one or
more of such capacities against any and all liabilities incurred in
connection with their services in such capacities.
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ARTICLE XII.
Amendments
These Bylaws may be added to, altered, amended, repealed or
suspended by a vote of a majority of the Board of Directors at any regular or
special meeting of the Board.
<PAGE>
Exhibit 4
STATE OF MARYLAND
NUMBER SHARES
SPECIMEN ______
CHAPMAN HOLDINGS, INC.
COMMON STOCK
PAR VALUE--$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT SPECIMEN is the registered holder of ________
(______)Shares of the Common Stock of Chapman Holdings, Inc. transferable
only on the books of the Corporation by the holder hereof in person or by
Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and its Corporate Seal to be
hereunto affixed this ______ day of ______ A.D. 1997.
- -------------------------------- ---------------------------------
Earl U. Bravo, Sr., Secretary Nathan A. Chapman, Jr., President
Par Value
$0.001
<PAGE>
Exhibit 10.1
PROMISSORY NOTE
$106,922.68 BALTIMORE, MARYLAND
DECEMBER 31, 1996
ON DEMAND, the undersigned promises to pay to the order of The Chapman Co.
One hundred six thousand nine hundred twenty-two dollars and sixty-eight cents
($106,922.68), at its offices in Baltimore, Maryland, together with interest
thereon from the date hereof until paid at the prime rate per annum as published
in The Wall Street Journal from time to time.
/s/ NATHAN A. CHAPMAN, JR.
--------------------------
<PAGE>
Exhibit 10.2
CHAPMAN HOLDINGS, INC.
1998 OMNIBUS STOCK PLAN
1. Establishment, Purpose and Types of Awards
Chapman Holdings, Inc. hereby establishes the CHAPMAN HOLDINGS, INC. 1998
OMNIBUS STOCK PLAN (the "Plan"). The purpose of the Plan is to promote the
long-term growth and profitability of Chapman Holdings, Inc. (the "Corporation")
by (i) providing key people with incentives to improve stockholder value and to
contribute to the growth and financial success of the Corporation, and (ii)
enabling the Corporation to attract, retain and reward the best available
persons for positions of substantial responsibility.
The Plan permits the granting of stock options (including nonqualified stock
options and incentive stock options qualifying under Section 422 of the Code),
stock appreciation rights (including free-standing, tandem and limited stock
appreciation rights), restricted or unrestricted share awards, phantom stock,
performance awards, or any combination of the foregoing (collectively,
"Awards").
The Plan is a compensatory benefit plan within the meaning of Rule 701 under
the Securities Act of 1933 (the "Securities Act"). Except to the extent any
other exemption from the Securities Act is expressly relied upon in connection
with any agreement entered into pursuant to the Plan or the securities issuable
hereunder are registered under the Securities Act, the issuance of Common Stock
pursuant to the Plan is intended to qualify for the exemption from registration
under the Securities Act provided by Rule 701. To the extent that an exemption
from registration under the Securities Act provided by Rule 701 is unavailable,
all unregistered offers and sales of Awards and shares of Common Stock issuable
upon exercise of an Award are intended to be exempt from registration under the
Securities Act in reliance upon the private offering exemption contained in
Section 4(2) of the Securities Act, or other available exemption, and the Plan
shall be so administered.
2. Definitions
Under this Plan, except where the context otherwise indicates, the following
definitions apply:
(a) "Award" shall mean any stock option, stock appreciation right, stock
award, phantom stock award, or performance award.
(b) "Board" shall mean the Board of Directors of the Corporation.
(c) "Change in Control" shall mean (i) any sale, exchange or other
disposition of substantially all of the Corporation's assets; or (ii) any
merger, share exchange, consolidation or other reorganization or business
combination in which the Corporation is not the surviving or continuing
corporation, or in which the Corporation's stockholders become entitled to
receive cash, securities of the Corporation other than voting common stock, or
securities of another issuer.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
regulations issued thereunder.
<PAGE>
(e) "Committee" shall mean the Board or committe of Board members appointed
pursuant to Section 3 of the Plan to administer the Plan.
(f) "Common Stock" shall mean shares of the Corporation's common stock, par
value of one-tenth cent ($0.001) per share.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" of a share of the Corporation's Common Stock for any
purpose on a particular date shall be determined in a manner such as the
Committee shall in good faith determine to be appropriate; provided, however,
that if the Common Stock is publicly traded, then Fair Market Value shall mean
the last reported sale price per share of Common Stock, regular way, or, in case
no such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on a national securities exchange or included for quotation on the
Nasdaq-National Market, or if the Common Stock is not so listed or admitted to
trading or included for quotation, the last quoted price, or if the Common Stock
is not so quoted, the average of the high bid and low asked prices, regular way,
in the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then be
in use or, if the Common Stock is not quoted by any such organization, the
average of the closing bid and asked prices, regular way, as furnished by a
professional market maker making a market in the Common Stock as selected in
good faith by the Committee or by such other source or sources as shall be
selected in good faith by the Committee; and provided further, that in the case
of incentive stock options, the determination of Fair Market Value shall be made
by the Committee in good faith in conformance with the Treasury Regulations
under Section 422 of the Code. If, as the case may be, the relevant date is not
a trading day, the determination shall be made as of the next preceding trading
day. As used herein, the term "trading day" shall mean a day on which public
trading of securities occurs and is reported in the principal consolidated
reporting system referred to above, or if the Common Stock is not listed or
admitted to trading on a national securities exchange or included for quotation
on the Nasdaq-National Market, any day other than a Saturday, a Sunday or a day
in which banking institutions in the State of New York are closed.
(i) "Grant Agreement" shall mean a written agreement between the Corporation
and a grantee memorializing the terms and conditions of an Award granted
pursuant to the Plan.
(j) "Grant Date" shall mean the date on which the Committee formally acts to
grant an Award to a grantee or such other date as the Committee shall so
designate at the time of taking such formal action.
(k) "Parent" shall mean a corporation, whether now or hereafter existing,
within the meaning of the definition of "parent corporation" provided in Section
424(e) of the Code, or any successor thereto of similar import.
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(l) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the Exchange Act
on the effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan (and
further transactions in such securities) from Section 16(b) of the Exchange Act.
(m) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto of similar import.
3. Administration
(a) Procedure. The Plan shall be administered by the Board. In the
alternative, the Board may appoint a Committee consisting of not less than two
(2) members of the Board to administer the Plan on behalf of the Board, subject
to such terms and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and, thereafter, directly administer the Plan.
Members of the Board or Committee who are either eligible for Awards or have
been granted Awards may vote on any matters affecting the administration of the
Plan or the grant of Awards pursuant to the Plan, except that no such member
shall act upon the granting of an Award to himself or herself, but any such
member may be counted in determining the existence of a quorum at any meeting of
the Board or the Committee during which action is taken with respect to the
granting of an Award to him or her.
The Committee shall meet at such times and places and upon such notice as it
may determine. A majority of the Committee shall constitute a quorum. Any acts
by the Committee may be taken at any meeting at which a quorum is present and
shall be by majority vote of those members entitled to vote. Additionally, any
acts reduced to writing or approved in writing by all of the members of the
Committee shall be valid acts of the Committee.
(b) Procedure After Registration of Common Stock. Notwithstanding the
provisions of subsection (a) above, in the event that the Common Stock or any
other capital stock of the Corporation becomes registered under Section 12 of
the Exchange Act, the Plan shall be administered by a Committee appointed by the
Board, and all members of the Committee shall be persons who qualify as "outside
directors" as defined in Section 162 of the Code. The Board may require that all
members of the Committee also be "non-employee directors" as defined in Rule
16b-3 of the Securities and Exchange Commission. Unless otherwise provided by
the Board, the Compensation Committee of the Board (or such members of the
Compensation Committee as shall constitute "outside directors" if all such
members do not constitute "outside directors") shall constitute the Committee
hereunder.
(c) Powers of the Committee. The Committee shall have all the powers vested
in it by the terms of the Plan, such powers to include authority, in its sole
and absolute
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discretion, to grant Awards under the Plan, prescribe Grant Agreements
evidencing such Awards and establish programs for granting Awards. The Committee
shall have full power and authority to take all other actions necessary to carry
out the purpose and intent of the Plan, including, but not limited to, the
authority to:
(i) determine the eligible persons to whom, and the time or times at
which Awards shall be granted,
(ii) determine the types of Awards to be granted,
(iii) determine the number of shares to be covered by or used for
reference purposes for each Award,
(iv) impose such terms, limitations, restrictions and conditions upon
any such Award as the Committee shall deem appropriate,
(v) modify, extend or renew outstanding Awards, accept the surrender of
outstanding Awards and substitute new Awards, provided that no such action
shall be taken with respect to any outstanding Award which would adversely
affect the grantee without the grantee's consent,
(vi) accelerate or otherwise change the time in which an Award may be
exercised or becomes payable and to waive or accelerate the lapse, in whole
or in part, of any restriction or condition with respect to such Award,
including, but not limited to, any restriction or condition with respect to
the vesting or exercisability of an Award following termination of any
grantee's employment, and
(vii) to establish objectives and performance-based conditions, if any,
for earning Awards and determining whether Awards will be paid after the end
of a performance period.
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and for the conduct of its
business as the Committee deems necessary or advisable and to interpret same,
all within the Committee's sole and absolute discretion.
(d) Limited Liability. To the maximum extent permitted by law, no member of
the Board or Committee shall be liable for any action taken or decision made in
good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law, the members of
the Board and Committee shall be indemnified by the Corporation in respect of
all their activities under the Plan.
(f) Effect of Committee's Decision. All actions taken and decisions and
determinations made by the Committee on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Committee's sole
and absolute discretion and
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shall be conclusive and binding on all parties concerned, including the
Corporation, its stockholders, any participants in the Plan and any other
employee of the Corporation, and their respective successors in interest.
4. Shares Available for the Plan; Maximum Awards
The maximum aggregate number of shares of stock that may be issued with
respect to Awards granted under the Plan shall not exceed 150,000 shares of
Common Stock. The Corporation shall reserve said number of shares for Awards
under the Plan. If any Award, or portion of an Award, under the Plan expires or
terminates unexercised, becomes unexercisable or is forfeited or otherwise
terminated, surrendered or canceled as to any shares without the delivery of
shares of Common Stock or other consideration, the shares subject to such Award
shall thereafter be available for further Awards under the Plan.
The maximum aggregate number of shares of Common Stock that may be delivered
or purchased or used for reference purposes (with respect to stock appreciation
rights, phantom stock units, or performance awards payable in cash) that may be
granted during any one calendar year to any one individual shall be limited to
50,000; provided, however, that shares of Common Stock underlying a tandem grant
of options and corresponding stock appreciation rights shall be counted only
once in calculating this limit. If an Award of Common Stock subject to this per
individual limit is terminated, surrendered or canceled, the shares of Common
Stock under this Award shall continue to be counted against the per individual
limit.
The maximum aggregate number of shares of Common Stock that may be issued
under this Plan as a whole and to each individual shall be subject to adjustment
as provided in Section 12.
5. Participation
Participation in the Plan shall be open to all employees, officers,
directors and consultants of the Corporation, or of any Parent or Subsidiary of
the Corporation, as may be selected by the Committee from time to time.
Notwithstanding the foregoing, participation in the Plan with respect to Awards
of incentive stock options shall be limited to employees of the Corporation or
of any Parent or Subsidiary of the Corporation. To the extent necessary to
comply with Rule 16b-3 or to constitute an "outside director" within the meaning
of Section 162(m) of the Code, and only in the event that Rule 16b-3 or Section
162(m) of the Code is applicable to the Plan or an Award made thereunder,
Committee members shall not be eligible to participate in the Plan while members
of the Committee.
Awards may be granted to such eligible persons and for or with respect to
such number of shares of Common Stock as the Committee shall determine, subject
to the limitations in Section 4 of the Plan. A grant of any type of Award made
in any one year to an eligible person shall neither guarantee nor preclude a
further grant of that or any other type of Award to such person in that year or
subsequent years.
6. Stock Options
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Subject to the other applicable provisions of the Plan, the Committee may
from time to time grant to eligible participants Awards of nonqualified stock
options or incentive stock options as that term is defined in Section 422 of the
Code. The stock option Awards granted shall be subject to the following terms
and conditions.
(a) Grant of Option. The grant of a stock option shall be evidenced by a
Grant Agreement, executed by the Corporation and the grantee, stating the number
of shares of Common Stock subject to the stock option evidenced thereby and the
terms and conditions of such stock option, in such form as the Committee may
from time to time determine.
(b) Price. The price per share payable upon the exercise of each stock
option ("exercise price") shall be determined by the Committee; provided,
however, that in the case of incentive stock options, the exercise price shall
not be less than 100% of the Fair Market Value of the shares on the date the
stock option is granted.
(c) Payment. Stock options may be exercised in whole or in part by payment
of the exercise price of the shares to be acquired in accordance with the
provisions of the Grant Agreement, and/or such rules and regulations as the
Committee may have prescribed, and/or such determinations, orders, or decisions
as the Committee may have made. Payment may be made in cash (or cash equivalents
acceptable to the Committee) or, unless otherwise determined by the Committee,
in shares of Common Stock or a combination of cash and shares of Common Stock,
or by such other means as the Committee may prescribe. The Fair Market Value of
shares of Common Stock delivered on exercise of stock options shall be
determined as of the date of exercise. Shares of Common Stock delivered in
payment of the exercise price may be previously owned shares or, if approved by
the Committee, shares acquired upon exercise of the stock option. Any fractional
share will be paid in cash. The Corporation may make or guarantee loans to
grantees to assist grantees in exercising stock options and satisfying any
related withholding tax obligations.
If the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the exercise price, in whole or in part, by delivery of
a properly executed exercise notice, together with irrevocable instructions, to:
(i) a brokerage firm designated by the Corporation to deliver promptly to the
Corporation the aggregate amount of sale or loan proceeds to pay the exercise
price and any withholding tax obligations that may arise in connection with the
exercise, and (ii) the Corporation to deliver the certificates for such
purchased shares directly to such brokerage firm.
(d) Terms of Options. The term during which each stock option may be
exercised shall be determined by the Committee; provided, however, that in no
event shall a stock option be exercisable more than ten years from the date it
is granted. Prior to the exercise of the stock option and delivery of the share
certificates represented thereby, the grantee shall have none of the rights of a
stockholder with respect to any shares represented by an outstanding stock
option.
(e) Reload Options. The terms of a stock option may provide for the
automatic grant of a new stock option Award when the exercise price of the stock
option and/or any related tax withholding obligation is paid by tendering shares
of Common Stock, provided that such automatic replenishment feature shall be
limited to any extent required by rules,
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regulations, or interpretations under the Exchange Act with respect to any
particular grant of an Award in the case of a grantee who is or becomes
subject to Section 16 of the Exchange Act. Any stock option Award which would
automatically be granted pursuant to this Section 6(e) without any further
Committee action may be exercisable for not more than the number of shares
tendered to exercise the initial stock option and/or to pay any tax
withholding obligation related to such exercise, shall have an exercise price
set at the then Fair Market Value of such shares, and shall have a term that
does not extend beyond the term of the initial stock option. The Committee
may include such a reload feature in a stock option Award at the time of the
initial grant of the Award or may add such a reload feature to an outstanding
stock option Award as the Committee deems desirable; provided, however, that
a reload feature shall not be added to any outstanding incentive stock option
Award without the consent of the grantee.
(f) Restrictions on Incentive Stock Options. Incentive stock option Awards
granted under the Plan shall comply in all respects with Code Section 422 and,
as such, shall meet the following additional requirements:
(i) Grant Date. An incentive stock option must be granted within 10
years of the earlier of the Plan's adoption by the Board of Directors or
approval by the Corporation's shareholders.
(ii) Exercise Price and Term. The exercise price of an incentive stock
option shall not be less than 100% of the Fair Market Value of the shares on
the date the stock option is granted. Also, the exercise price of any
incentive stock option granted to a grantee who owns (within the meaning of
Section 422(b)(6) of the Code, after the application of the attribution
rules in Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of shares of the Corporation or its Parent or
Subsidiary corporations (within the meaning of Sections 422 and 424 of the
Code) shall be not less than 110% of the Fair Market Value of the Common
Stock on the grant date and the term of such stock option shall not exceed
five years.
(iii) Maximum Grant. The aggregate Fair Market Value (determined as of
the Grant Date) of shares of Common Stock with respect to which all
incentive stock options first become exercisable by any grantee in any
calendar year under this or any other plan of the Corporation and its Parent
and Subsidiary corporations may not exceed $100,000 or such other amount as
may be permitted from time to time under Section 422 of the Code. To the
extent that such aggregate Fair Market Value shall exceed $100,000, or other
applicable amount, such stock options shall be treated as nonqualified stock
options. In such case, the Corporation may designate the shares of Common
Stock that are to be treated as stock acquired pursuant to the exercise of
an incentive stock option by issuing a separate certificate for such shares
and identifying the certificate as incentive stock option shares in the
stock transfer records of the Corporation.
(iv) Grantee. Incentive stock options shall only be issued to employees
of the Corporation, or of a Parent or Subsidiary of the Corporation.
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(v) Designation. No stock option shall be an incentive stock option
unless so designated by the Committee at the time of grant or in the Grant
Agreement evidencing such stock option.
(g) Other Terms and Conditions. Stock options may contain such other
provisions, not inconsistent with the provisions of the Plan, as the Committee
shall determine appropriate from time to time.
7. Stock Appreciation Rights
(a) Award of Stock Appreciation Rights. Subject to the other applicable
provisions of the Plan, the Committee may at any time and from time to time
grant stock appreciation rights ("SARs") to eligible participants, either on a
free-standing basis (without regard to or in addition to the grant of a stock
option) or on a tandem basis (related to the grant of an underlying stock
option), as it determines. SARs granted in tandem with or in addition to a stock
option may be granted either at the same time as the stock option or at a later
time; provided, however, that a tandem SAR shall not be granted with respect to
any outstanding incentive stock option Award without the consent of the grantee.
SARs shall be evidenced by Grant Agreements, executed by the Corporation and the
grantee, stating the number of shares of Common Stock subject to the SAR
evidenced thereby and the terms and conditions of such SAR, in such form as the
Committee may from time to time determine. The term during which each SAR may be
exercised shall be determined by the Committee. However, in no event shall an
SAR be exercisable more than ten years from the date it is granted. The grantee
shall have none of the rights of a stockholder with respect to any shares of
Common Stock represented by an SAR.
(b) Restrictions of Tandem SARs. No incentive stock option may be
surrendered in connection with the exercise of a tandem SAR unless the Fair
Market Value of the Common Stock subject to the incentive stock option is
greater than the exercise price for such incentive stock option. SARs granted in
tandem with stock options shall be exercisable only to the same extent and
subject to the same conditions as the stock options related thereto are
exercisable. The Committee may, in its discretion, prescribe additional
conditions to the exercise of any such tandem SAR.
(c) Amount of Payment Upon Exercise of SARs. An SAR shall entitle the
grantee to receive, subject to the provisions of the Plan and the Grant
Agreement, a payment having an aggregate value equal to the product of (i) the
excess of (A) the Fair Market Value on the exercise date of one share of Common
Stock over (B) the base price per share specified in the Grant Agreement times
(ii) the number of shares specified by the SAR, or portion thereof, which is
exercised. In the case of exercise of a tandem SAR, such payment shall be made
in exchange for the surrender of the unexercised related stock option (or any
portion or portions thereof which the grantee from time to time determines to
surrender for this purpose).
(d) Form of Payment Upon Exercise of SARs. Payment by the Corporation of the
amount receivable upon any exercise of an SAR may be made by the delivery of
Common Stock or cash, or any combination of Common Stock and cash, as determined
in the sole discretion of the Committee from time to time. If upon settlement of
the exercise of an SAR a grantee is to receive a portion of such payment in
shares of Common Stock, the number of
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shares shall be determined by dividing such portion by the Fair Market Value of
a share of Common Stock on the exercise date. No fractional shares shall be used
for such payment and the Committee shall determine whether cash shall be given
in lieu of such fractional shares or whether such fractional shares shall be
eliminated.
8. Stock Awards (Including Restricted and Unrestricted Shares and Phantom
Stock)
(a) Stock Awards, In General. Subject to the other applicable provisions of
the Plan, the Committee may at any time and from time to time grant stock Awards
to eligible participants in such amounts and for such consideration, including
no consideration or such minimum consideration as may be required by law, as it
determines. A stock Award may be denominated in shares of Common Stock or
stock-equivalent units ("phantom stock"), and may be paid in Common Stock, in
cash, or in a combination of Common Stock and cash, as determined in the sole
discretion of the Committee from time to time.
(b) Restricted Shares. Each stock Award shall specify the applicable
restrictions, if any, on such shares of Common Stock, the duration of such
restrictions, and the time or times at which such restrictions shall lapse with
respect to all or a specified number of shares of Common Stock that are part of
the Award. Notwithstanding the foregoing, the Committee may reduce or shorten
the duration of any restriction applicable to any shares of Common Stock awarded
to any grantee under the Plan. Share certificates with respect to restricted
shares of Common Stock granted pursuant to a stock Award may be issued at the
time of grant of the stock Award, subject to forfeiture if the restrictions do
not lapse, or upon lapse of the restrictions. If share certificates are issued
at the time of grant of the stock Award, the certificates shall bear an
appropriate legend with respect to the restrictions applicable to such stock
Award or, alternatively, the grantee may be required to deposit the certificates
with the Corporation during the period of any restriction thereon and to execute
a blank stock power or other instrument of transfer therefor. Except as
otherwise provided by the Committee, during such period of restriction following
issuance of share certificates, the grantee shall have all of the rights of a
holder of Common Stock, including but not limited to the rights to receive
dividends (or amounts equivalent to dividends) and to vote with respect to the
restricted shares. If share certificates are issued upon lapse of restrictions
on a stock Award, the Committee may provide that the grantee will be entitled to
receive any amounts per share pursuant to any dividend or distribution paid by
the Corporation on its Common Stock to stockholders of record after grant of the
stock Award and prior to the issuance of the share certificates.
(c) Phantom Stock. The grant of phantom stock units shall be evidenced by a
Grant Agreement, executed by the Corporation and the grantee, that incorporates
the terms of the Plan and states the number of phantom stock units evidenced
thereby and the terms and conditions of such phantom stock units in such form as
the Committee may from time to time determine. Phantom stock units granted to a
participant shall be credited to a bookkeeping reserve account solely for
accounting purposes and shall not require a segregation of any of the
Corporation's assets. Phantom stock units may be exercised in whole or in part
by delivery of an appropriate exercise notice to the Committee in accordance
with the provisions of the Grant Agreement, and/or such rules and regulations as
the Committee may prescribe, and/or such determinations, orders, or decisions as
the Committee may make.
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Except as otherwise provided in the applicable Grant Agreement, the grantee
shall have none of the rights of a stockholder with respect to any shares of
Common Stock represented by a phantom stock unit as a result of the grant of
a phantom stock unit to the grantee. Phantom stock units may contain such
other provisions, not inconsistent with the provisions of the Plan, as the
Committee shall determine appropriate from time to time.
9. Performance Awards
The Committee may in its discretion grant performance Awards. Performance
goals shall be based upon one or more of the following business criteria as
applied to an individual participant, a business unit or the Corporation as a
whole:
- earnings per share
- share price
- revenue growth
- return on equity
- return on assets or net assets
- timely completion of specific projects
- retention or hiring of key employees
- earnings before interest, taxes, depreciation, and amortization
- income or net income (before or after taxes)
- sales
- operating income or net operating income
- operating margin
- return on operating revenue
- market share
- cash flow
- costs
- total shareholder equity
- return on capital
The Committee may adopt other performance goals in its sole and absolute
discretion, provided, however, that in the event the Committee determines to
adopt performance goals based on criteria other than those stated above, the
Committee shall obtain shareholder approval of such criteria if such
performance goals are intended to comply with Section 162 of the Code.
Performance Awards may be paid by the delivery of Common Stock or cash, or
any combination of Common Stock and cash, as determined in the sole discretion
of the Committee from time to time.
10. Withholding of Taxes
The Corporation may require, as a condition to the grant of any Award under
the Plan or exercise pursuant to such Award or to the delivery of certificates
for shares issued or payments of cash to a grantee pursuant to the Plan or a
Grant Agreement (hereinafter collectively referred to as a "taxable event"),
that the grantee pay to the Corporation, in cash
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or, unless otherwise determined by the Corporation, in shares of Common Stock,
including shares acquired upon grant of the Award or exercise of the Award,
valued at Fair Market Value on the date as of which the withholding tax
liability is determined, any federal, state or local taxes of any kind required
by law to be withheld with respect to any taxable event under the Plan. The
Corporation, to the extent permitted or required by law, shall have the right to
deduct from any payment of any kind (including salary or bonus) otherwise due to
a grantee any federal, state or local taxes of any kind required by law to be
withheld with respect to any taxable event under the Plan, or to retain or sell
without notice a sufficient number of the shares to be issued to such grantee to
cover any such taxes.
11. Transferability
Unless otherwise provided by the Committee, no Award granted under the Plan
shall be transferable by a grantee except by will or the laws of descent and
distribution. Unless otherwise determined by the Committee in accord with the
provisions of the immediately preceding sentence, an Award may be exercised
during the lifetime of the grantee, only by the grantee or, during the period
the grantee is under a legal disability, by the grantee's guardian or legal
representative.
12. Adjustments; Business Combinations
In the event of a reclassification, recapitalization, stock split, stock
dividend, combination of shares, or other similar event, the maximum number and
kind of shares reserved for issuance or with respect to which Awards may be
granted under the Plan as provided in Section 4 shall be adjusted to reflect
such event, and the Committee shall make such adjustments as it deems
appropriate and equitable in the number, kind and price of shares covered by
outstanding Awards made under the Plan, and in any other matters which relate to
Awards and which are affected by the changes in the Common Stock referred to
above.
In the event of any proposed Change in Control, the Committee shall take
such action as it deems appropriate and equitable to effectuate the purposes of
this Plan and to protect the grantees of Awards, which action may include, but
without limitation, any one or more of the following: (i) acceleration or change
of the exercise dates of any Award; (ii) arrangements with grantees for the
payment of appropriate consideration to them for the cancellation and surrender
of any Award; and (iii) in any case where equity securities other than Common
Stock of the Corporation are proposed to be delivered in exchange for or with
respect to Common Stock of the Corporation, arrangements providing that any
Award shall become one or more Awards with respect to such other equity
securities.
The Committee is authorized to make adjustments in the terms and conditions
of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in the
preceding two paragraphs of this Section 12) affecting the Corporation, or the
financial statements of the Corporation or any Subsidiary, or of changes in
applicable laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
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In the event the Corporation dissolves and liquidates (other than pursuant
to a plan of merger or reorganization), then notwithstanding any restrictions on
exercise set forth in this Plan or any Grant Agreement, or other agreement
evidencing a stock option, stock appreciation right or restricted stock Award:
(i) each grantee shall have the right to exercise his stock option or stock
appreciation right, or to require delivery of share certificates representing
any such restricted stock Award, at any time up to ten (10) days prior to the
effective date of such liquidation and dissolution; and (ii) the Committee may
make arrangements with the grantees for the payment of appropriate consideration
to them for the cancellation and surrender of any stock option, stock
appreciation right or restricted stock Award that is so canceled or surrendered
at any time up to ten (10) days prior to the effective date of such liquidation
and dissolution. The Committee may establish a different period (and different
conditions) for such exercise, delivery, cancellation, or surrender to avoid
subjecting the grantee to liability under Section 16(b) of the Exchange Act. Any
stock option or stock appreciation right not so exercised, canceled, or
surrendered shall terminate on the last day for exercise prior to such effective
date; and any restricted stock as to which there has not been such delivery of
share certificates or that has not been so canceled or surrendered, shall be
forfeited on the last day prior to such effective date. The Committee shall give
to each grantee written notice of the commencement of any proceedings for such
liquidation and dissolution of the Corporation and the grantee's rights with
respect to his outstanding Award.
13. Termination and Modification of the Plan
The Board, without further approval of the stockholders, may modify or
terminate the Plan or any portion thereof at any time, except that no
modification shall become effective without prior approval of the stockholders
of the Corporation if stockholder approval is necessary to comply with any tax
or regulatory requirement or rule of any exchange or Nasdaq System upon which
the Common Stock is listed or quoted; including for this purpose stockholder
approval that is required for continued compliance with Section 162(m) of the
Code or Rule 16b-3, or stockholder approval that is required to enable the
Committee to grant incentive stock options pursuant to the Plan.
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Corporation
or that may be authorized or made desirable by such laws. The Committee may
amend or modify the grant of any outstanding Award in any manner to the extent
that the Committee would have had the authority to make such Award as so
modified or amended.
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14. Non-Guarantee of Employment
Nothing in the Plan or in any Grant Agreement thereunder shall confer any
right on an employee to continue in the employ of the Corporation or shall
interfere in any way with the right of the Corporation to terminate an employee
at any time.
15. Termination of Employment
For purposes of maintaining a grantee's continuous status as an employee and
accrual of rights under any Award, transfer of an employee among the Corporation
and the Corporation's Parent or Subsidiaries shall not be considered a
termination of employment. Nor shall it be considered a termination of
employment for such purposes if an employee is placed on military or sick leave
or such other leave of absence which is considered as continuing intact the
employment relationship; in such a case, the employment relationship shall be
continued until the date when an employee's right to reemployment shall no
longer be guaranteed either by law or contract.
16. Written Agreement
Each Grant Agreement entered into between the Corporation and a grantee with
respect to an Award granted under the Plan shall incorporate the terms of this
Plan and shall contain such provisions, consistent with the provisions of the
Plan, as may be established by the Committee.
17. Non-Uniform Determinations
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive Awards, the form, amount and timing of
such Awards, the terms and provisions of such Awards and the agreements
evidencing same) need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, Awards under the Plan, whether
or not such persons are similarly situated.
18. Limitation on Benefits
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
19. Listing and Registration
If the Corporation determines that the listing, registration or
qualification upon any securities exchange or upon any listing or quotation
system established by the National Association of Securities Dealers, Inc.
("Nasdaq System") or under any law, of shares subject to any Award is necessary
or desirable as a condition of, or in connection with, the granting of same or
the issue or purchase of shares thereunder, no such Award may be exercised in
whole or in part and no restrictions on such Award shall lapse, unless such
listing, registration or qualification is effected free of any conditions not
acceptable to the Corporation.
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20. Compliance with Securities Law
The Corporation may require that a grantee, as a condition to exercise of an
Award, and as a condition to the delivery of any share certificate, provide to
the Corporation, at the time of each such exercise and each such delivery, a
written representation that the shares of Common Stock being acquired shall be
acquired by the grantee solely for investment and will not be sold or
transferred without registration or the availability of an exemption from
registration under the Securities Act and applicable state securities laws. The
Corporation may also require that a grantee submit other written representations
which will permit the Corporation to comply with federal and applicable state
securities laws in connection with the issuance of the Common Stock, including
representations as to the knowledge and experience in financial and business
matters of the grantee and the grantee's ability to bear the economic risk of
the grantee's investment. The Corporation may require that the grantee obtain a
"purchaser representative" as that term is defined in applicable federal and
state securities laws. The stock certificates for any shares of Common Stock
issued pursuant to this Plan may bear a legend restricting transferability of
the shares of Common Stock unless such shares are registered or an exemption
from registration is available under the Securities Act and applicable state
securities laws. The Corporation may notify its transfer agent to stop any
transfer of shares of Common Stock not made in compliance with these
restrictions. Common Stock shall not be issued with respect to an Award granted
under the Plan unless the exercise of such Award and the issuance and delivery
of share certificates for such Common Stock pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any national securities exchange or Nasdaq System upon which the
Common Stock may then be listed or quoted, and shall be further subject to the
approval of counsel for the Corporation with respect to such compliance to the
extent such approval is sought by the Committee.
21. No Limit on Other Compensation Arrangements
Nothing contained in the Plan shall prevent the Corporation or its Parent or
Subsidiary corporations from adopting or continuing in effect other compensation
arrangements (whether such arrangements be generally applicable or applicable
only in specific cases) as the Committee in its discretion determines desirable,
including without limitation the granting of stock options, stock awards, stock
appreciation rights or phantom stock units otherwise than under the Plan.
22. No Trust or Fund Created
Neither the Plan nor any Award shall create or be construed to create a
trust or separate fund of any kind or a fiduciary relationship between the
Corporation and a grantee or any other person. To the extent that any grantee or
other person acquires a right to receive payments from the Corporation pursuant
to an Award, such right shall be no greater than the right of any unsecured
general creditor of the Corporation.
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23. Governing Law
The validity, construction and effect of the Plan, of Grant Agreements
entered into pursuant to the Plan, and of any rules, regulations, determinations
or decisions made by the Board or Committee relating to the Plan or such Grant
Agreements, and the rights of any and all persons having or claiming to have any
interest therein or thereunder, shall be determined exclusively in accordance
with applicable federal laws and the laws of the State of Maryland, without
regard to its conflict of laws rules and principles.
24. Plan Subject to Charter and By-Laws
This Plan is subject to the Charter and By-Laws of the Corporation, as they
may be amended from time to time.
25. Effective Date; Termination Date
The Plan is effective as of the date on which the Plan was adopted by the
Board, subject to approval of the stockholders within twelve months before or
after such date. No Award shall be granted under the Plan after the close of
business on the day immediately preceding the tenth anniversary of the effective
date of the Plan. Subject to other applicable provisions of the Plan, all Awards
made under the Plan prior to such termination of the Plan shall remain in effect
until such Awards have been satisfied or terminated in accordance with the Plan
and the terms of such Awards.
Date Approved by the Board: __________________
Date Approved by the Shareholders: __________________
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Exhibit 10.3
FULLY DISCLOSED CLEARING AGREEMENT
This Fully Disclosed Clearing Agreement between RPR Clearing Services
("RPRCS"), a division of Rauscher Pierce Refsnes, Inc. ("RPR"), a Delaware
corporation, with its principal place of business at 515 Olive, Suite 504,
St. Louis, Missouri, and the party signing below with its principal place of
business, and form of organization as set below ("Correspondent").
1. Agreement
1.1
Pursuant to this Agreement, RPRCS will i) receive from the Correspondent
and cause to be executed orders to buy and sell Securities for the
accounts of Correspondent or its customers (the "Accounts"); ii) clear
and settle Trades by causing the Securities sold and delivered to,
borrowed by or held by RPRCS to be delivered to buyer against payment of
the purchase price, and, where funds are on hand for the account of, or
credit may be extended to, the buyer, as more fully provided for herein,
receive Securities purchased and pay the purchase price therefore; iii)
collect for Correspondent the fees, commissions and other charges, as set
by Correspondent, paid by Customers and other income collected for
Correspondent and hold the same in an account therefore (the "Payment
Account"); and iv) extend credit to, and finance Account Debits of,
Customers pursuant to Applicable Rules and RPRCS's Credit Policies. In
utilizing and performing the aforesaid services (the "Services"),
Correspondent and RPRCS shall do so in accordance with RPRCS's Procedures
and Applicable Rules.
1.2
Correspondent will utilize the clearance services for the clearance of
Trades. Notwithstanding the foregoing, RPRCS may refuse to execute, clear
or settle any Trade, to carry or continue to carry any Account, or to
finance or continue to finance any Account Debit and may liquidate any
and all Trades for an Account and collateral for Account Debits if: i)
Correspondent requests; ii) the Customer dies, becomes incapacitated,
becomes bankrupt, insolvent or fails to honor its obligations timely;
iii) to do otherwise would violate an Applicable Rule or RPRCS's Credit
Policy; or iv) RPRCS, in its sole discretion, determines to do so.
1.3
As used herein: i) Trades means purchases or sales of Securities; ii)
Account Debits are debits and charges to an Account, whether arising out
of a Trade, an extension of credit or financial accommodation or
otherwise; iii) Applicable Rules are the laws, rules and regulations and
interpretations thereof of the Federal and all applicable state
governments and regulatory bodies and the rules, constitutions and
by-laws of all Self
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Regulatory Organizations and the customs and usages of the exchange or
market where a Trade is effected and the Clearing House for such market
to the extent any of the aforesaid are applicable to the party referred
to in the context of this Agreement; iv) Customers means the legal and
beneficial owners of Accounts and may include Correspondent; and v)
Credit Policies are the standards established by RPRCS, from time to
time, on the basis of which RPRCS will extend or maintain credit for a
party and are as set forth in the RPRCS Procedures. With respect to
RPRCS's Procedures and Credit Policies, RPRCS may, from time to time,
change, add to or delete said Procedures or Credit Policies. All other
capitalized terms are as defined in this Agreement, and in the absence
thereof shall have the meaning set forth in the Securities Exchange Act
of 1934 and the rules adopted thereunder.
2. Functions and Obligations of RPRCS
2.1
As part of the Services, RPRCS will issue confirmations and periodic
statements of account directly to Customers on RPRCS's forms indicating
that the Account is serviced by RPRCS, courtesy of Correspondent, and
shall send Correspondent copies of such confirmations, statements and all
other written communications sent to or received from or for a Customer
or Account. However, if RPRCS arranges for or provides Correspondent
facilities and access to data for the preparation and transmission of
confirmations and statements of account, Correspondent shall promptly
issue confirmations for each Trade and timely issue periodic statements
of account in accordance with Applicable Rules.
2.2
RPRCS has furnished Correspondent forms of agreements and information
statements for Accounts which, if completed, will provide RPRCS the
agreements and information necessary for the Services. Correspondent will
use such agreements and statements or such other agreements and
statements as RPRCS approves in writing. It is Correspondent's obligation
to obtain and supply RPRCS with such executed documents, data and other
information and to update such data and documents when necessary in such
form or format, to establish and maintain an Account. Until the foregoing
is accomplished, no Account will be deemed established, no Account Debits
will be allowed or Trades placed by Correspondent, provided, however,
that RPRCS may, on Correspondent's specific request, accept and process
Trades for an Account, pending completion of the documentation, as Trades
for a Cash Account.
2.3
RPRCS will prepare and maintain books and records with respect to the
Accounts and trades required by Applicable Rules. To the extent
information in these books and
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records is supplied by Correspondent, Correspondent is responsible for
the completeness, accuracy, timeliness and sufficiency thereof.
2.4
RPRCS will receive, hold and deliver cash and securities to, from or for
the Accounts pursuant to instructions from Correspondent or in
performance of the Services, provided, however, that RPRCS shall not be
responsible for any Securities until received by, or any cash until
collected by RPRCS, and further provided that RPRCS need not accept any
instruction which is contrary to or would violate Applicable Rules,
RPRCS's Credit Policies and Procedures or this Agreement. To the extent
Customers' funds and securities are held by RPRCS, RPRCS shall be
responsible for the safeguarding thereof, collecting and disbursing
dividends and interest thereon, processing Customers' directions
regarding the exercise of proxies, exchange and tender offers and rights
and warrant offerings and redemptions with respect thereto, and
processing directions to transfer Accounts. Except for instructions to
transfer an Account to another broker, RPRCS need not accept any order or
direction with respect to an Account or Trade from or for a Customer,
other than from Correspondent, and Correspondent shall promptly direct
RPRCS to implement any proper order or direction Correspondent receives
from Customer.
2.5
In performing the Services, RPRCS may use the services of banks, trust
companies, clearing corporations, automated clearing houses, SEC
registered Clearing Agencies, the Federal Reserve book entry system and
wire transfer system, courier and armored car services, and the U.S.
Postal Service. In causing Trades to be executed, RPRCS may use other
brokers, dealers, and automated order execution systems offered by
various Self Regulatory Organizations. In performing the recordkeeping,
accounting, confirmation and statement preparation and other Services,
RPRCS may use services and facilities, including computers, programs and
telecommunications, provided by third parties (the "Vendors"). RPRCS
shall have no liability for the failure to perform, errors or omissions
in performance or delay in, inadequacy or insufficiency of performance of
such other entities unless RPRCS shall have been negligent in choosing
such third parties to provide such services and facilities.
2.6
RPRCS may identify to Correspondent one or more of the Vendors.
Correspondent will contract with such Vendor(s) as RPRCS reasonably
designates for such services as RPRCS designates so as to enable
Correspondent and RPRCS to perform hereunder, provided, however, that if
permitted by RPRCS, Correspondent may contract with a party other than
Vendor for such services.
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3. Fees
3.1
Correspondent shall pay RPRCS the fees set forth in the Fee Schedule
attached hereto. RPRCS may deduct such fees and all other sums
Correspondent owes it from the Payment Account, the Deposit Account or
any other money and property of Correspondent held by or in the
possession or control of RPRCS. After making the aforementioned
deductions, RPRCS will each month pay Correspondent the balance in the
Payment Account. RPRCS may at anytime i) on 90 days notice effective no
sooner than one year from the date hereof, increase the fees in the Fee
Schedule, and ii) add new or expanded services and set the price thereof,
as an amendment to the Fee Schedule, on notice to Correspondent.
Correspondent will reimburse RPRCS's expenses at cost subject to a
maximum of $5,000.00 to convert the Accounts to any other party at the
termination of this Agreement other than a termination by RPRCS without
cause.
3.2
As additional consideration for performing the Services, RPRCS shall
retain the benefit, if any, of utilizing the funds and Securities in the
Accounts and of carrying Account Debits. RPRCS shall be responsible for
compliance with Applicable Rules regarding extension and maintenance of
credit and financing of Account Debits, the payment and charging of
interest and the hypothecation and lending of Securities. RPRCS shall
bear the costs to finance Account Debits and to effect stock borrows.
4. Functions and Obligations of Correspondent
4.1
Correspondent will obtain, verify and retain proper and customary
documentation which is current, correct and appropriate for each Account,
and will supply RPRCS with such as is necessary for RPRCS to perform the
Services. Correspondent will give all Customers notices, disclosure
documents and Prospectuses required under Applicable Rules, provided,
however, that the notices required by New York Stock Exchange Rule 382
and Securities Exchange Act Rule 10b-16 and any other document referring
to RPRCS shall be only as approved by RPRCS. No Account may be opened or
Trade accepted until the Account has been approved in writing by a
principal of Correspondent with options Accounts to be approved by a
Registered Options Principal employed by Correspondent.
4.2
Correspondent will learn the essential facts relative to each Customer,
every order, every Trade, every Cash or Margin Account and every person
holding power of
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attorney over any Account. Correspondent will establish and maintain
compliance and supervisory procedures adequate to assure compliance by
Correspondent, its agents, servants and employees with all Applicable
Rules and this Agreement and will not act or omit to act so as to cause
RPRCS to violate Applicable Rules or this Agreement. Correspondent's
compliance and supervisory procedures shall include, among other things:
opening, approving and monitoring Accounts, including checking for
suitability and appropriate trading; review and supervision of orders,
Trades, instructions and Accounts, including assuring that all orders,
Trades and instructions received from Customers have been executed and
are as ordered by the Customer; the furnishing of investment advice and
recommendations; handling and supervision of discretionary accounts;
handling of Accounts for employees or officers of a) Self Regulatory
Organizations of which either RPR or Correspondent are members or b)
member firms thereof or c) other financial institutions; compliance with
restricted/ control stock requirement; and the securing and transmission,
as directed by RPRCS, of orders for execution in form and format
satisfactory to RPRCS.
4.3
Correspondent assures RPRCS that: i) Customers who effect transactions in
Margin Accounts or have or establish Account Debits will timely deliver
initial margin and maintenance margin and timely pay Account Debits and
interest and other charges incurred; and ii) Customers who effect
transactions in Cash Accounts will timely deliver the purchase price or
Securities sold in readily negotiable form. Correspondent will promptly
deliver to RPRCS all funds and Securities received from or for Customers
and will follow the procedures established by RPRCS for transmitting
funds, Securities and information to RPRCS regarding Customers, Accounts,
Trades, orders and Securities. Correspondent will promptly transmit to
Customers requests for initial and maintenance margin, and funds or
Securities to settle Trades or pay Account Debits. If a Customer fails
timely to make such deposits, deliveries, or payments, Correspondent will
effect a "buy-in" or "sell-out" of the Trade or Account or liquidate an
Account Debit. Notwithstanding the foregoing, RPRCS, in its sole
discretion, may "buy-in" or "sell-out" any Trade or Account or liquidate
an Account Debit. It is Correspondent's obligation that Customers
promptly pay any deficiency resulting from any "buy-in" or "sell-out" or
liquidation. Correspondent may request RPRCS to alter or waive compliance
with any one or more provisions of its Procedures as regards one or more
Accounts or one or more Trades and by so requesting, undertakes to
reimburse, indemnify and hold harmless RPRCS by reason of such request(s)
and accommodation by RPRCS.
4.4
Correspondent shall obtain and maintain the necessary documents,
information, systems and interfaces with RPRCS's systems in order to
perform its duties hereunder. Correspondent assures RPRCS that: i) all
Accounts opened, orders placed, Trades effected, credit obtained, Account
Debits established or maintained are
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duly and validly authorized, legally binding upon and enforceable
according to their terms against the Customer; ii) all securities
delivered by a Customer or Correspondent to RPRCS are genuine, will be in
good delivery form, free of liens, claims and encumbrances and have not
been reported as lost, missing or stolen; iii) all documents delivered to
RPRCS will be genuine and duly executed by the parties named therein.
4.5
Correspondent shall handle and resolve between itself and Customer all
complaints and inquiries from Customers. RPRCS shall reasonably cooperate
with Correspondent by providing such information and copies of documents
and records as are reasonably necessary for Correspondent to respond to
such inquiries and complaints.
5. Representations and Warranties
Correspondent and RPR each make the following and continuing
representations and warranties to the other:
a) It is duly organized and in good standing under the laws of the
jurisdiction pursuant to which it was formed and is qualified to do
business in each state in which it does business and is required to
qualify;
b) it has the requisite power and authority to enter into, execute and
perform under this Agreement and when so executed and delivered to the
other party this Agreement constitutes a legal, valid and binding
obligation upon it;
c) it and its employees, when so required, are registered as a broker,
dealer or agent under the applicable state "blue sky" laws and the
Securities Exchange Act of 1934 and is a member in good standing of
every Self Regulatory Organization of which it is a member or
participant;
d) it, its officers, directors, agents, employees and servants are in
compliance with all Applicable Rules and there is no claim, action,
proceeding, arbitration, investigation or inquiry pending or
threatened before any federal, state, municipal, foreign or other
court or governmental or administrative body or agency or Self
Regulatory Organization or private arbitration tribunal alleging a
violation of an Applicable Rule seeking damages in excess of 5% of the
party's net worth nor is there any basis for any such claim, action,
suit, proceeding, arbitration, investigation or inquiry; and
e) each party in acting hereunder may rely upon and follow the oral or
written instructions of the officers, agents, employees and servants
of the other party provided, however, that with respect to
Correspondent such officers, agents,
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employees and servants shall have been identified by Correspondent to
RPRCS in writing from time to time.
6. Information and Cooperation
6.1
Each party shall promptly furnish to the other, as soon as it is
available, copies of the audited annual financial statement and such
other financial statements as it is required to send to Customers under
Applicable Rules. Correspondent shall promptly furnish RPRCS its
unaudited quarterly financial statement (Focus Report if it is a
broker-dealer), copies of all other documents or reports on the results
of its operations and financial conditions as it publicly disseminates,
and such interim and additional financial information as RPRCS may, from
time to time, request.
6.2
Promptly after Correspondent knows or has reason to believe that it is or
will be the subject of or named in any claim, action, suit, proceeding,
arbitration, investigation or inquiry before any federal, state,
municipal, foreign or other court, or governmental or administrative body
or agency or Self Regulatory Organization or private arbitration tribunal
alleging violation of Applicable Rules or seeking damages in excess of
$10,000 which are not otherwise covered by insurance and the defense of
which or liability therefor has not been assumed or acknowledged by its
insurers, Correspondent will furnish RPRCS a statement setting forth the
material facts and circumstances with respect thereto.
6.3
Each party shall cooperate fully with the other so as to aid each other
in complying with Applicable Rules, and will make available to the other,
its attorneys, accountants and authorized agents such documents, books
and records as may be necessary to comply with Applicable Rules or to
defend against a charge alleging, or investigation into whether there has
been, a violation of Applicable Rule.
6.4
Correspondent shall not advertise, publicly refer to or hold out this
Agreement the services provided hereunder or the existence of any
relationship with RPRCS without RPRCS's prior written consent as to each
such advertisement, reference or holding out. Correspondent shall not
make this Agreement or its fee schedule(s) available to any third party
except for a Self Regulatory Organization.
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6.5
Each party shall use its best efforts to prevent unauthorized access to,
disclosure of, and will keep confidential, any information it receives
pursuant to or in connection with this Agreement which is private or
confidential to the other party and is not otherwise publicly available.
This shall not preclude disclosing information to persons where such is
required for a party's performance hereunder. Neither party shall be
prohibited from disclosing information pursuant to a subpoena, search
warrant, summons or request of a governmental agency or Self Regulatory
Organization, provided it first gives notice thereof to the other party.
7. Indemnity
7.1
Each party shall indemnify and hold harmless the other, and its
controlling persons, officers, directors, agents, servants and employees
(the "Indemnified Party") from and against costs, losses, claims,
liabilities, fines, penalties, damages and expenses (including reasonable
attorneys' and accountants' fees) ("Claims") arising out of or resulting
from any actual or alleged breach by the indemnifying party of this
Agreement or its failure or omission fully to carry out its duties or
obligations hereunder, including Correspondent's obligations under
paragraph 4 and RPRCS's obligations under paragraph 2.
7.2
The Indemnified Party shall give prompt notice of a Claim (the "Notice of
Claim") to the indemnifying party and, when known, the facts forming the
basis for such Claim, and the indemnifying party shall promptly pay such
claim. If a Claim involves any claim or demand by third party, the
indemnifying party shall be entitled (without prejudice to the right of
any Indemnified Party to participate at its own expense through counsel
of its own choosing) to defend or prosecute such Claim at its expense and
through counsel of its own choosing, if it gives written notice to the
Indemnified Party within 5 days after the Notice of Claim is given. If
the indemnifying party has assumed the defense of a Claim, the
Indemnified Party shall not settle or compromise such Claim without the
prior written consent of the indemnifying party, which consent shall not
be unreasonably withheld, provided, that an Indemnified Party may settle
or compromise any Claim without such consent if the Indemnified Party
does not seek indemnification therefor.
7.3
The indemnifying party shall promptly pay the expense of an Indemnified
Party on a continuing basis in defending against a Claim. All such proper
expenses not paid within 30 days after an invoice is rendered therefore
shall bear interest at a rate equal
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to one hundred and twenty-five percent (125%) of the interest rate
charged for an Account Debit.
7.4
Unless specifically provided otherwise in this Agreement, neither party
shall be responsible or liable for any Claim or damages of a third party,
including a Customer, arising out of or caused, directly or indirectly,
by its failure to perform or delay in performance of any obligations
under this Agreement to the extent such failure or delay is caused by
circumstances beyond that party's reasonable control, including, without
limitation: acts of God; interruption, delay in, loss (partial or
complete) of computer (hardware or software), public utility or
telecommunication service; act of civil or military authority; sabotage;
natural emergency; epidemic; war; government action; civil disturbance;
explosion; flood; earthquake; fire; or other catastrophe; strike or other
labor disturbance; government or Self Regulatory Organization order, rule
or regulation; riot; energy or natural resource difficulty or shortage;
and inability to obtain materials, equipment, or transportation; provided
however, that upon the occurrence of any of these events, the party
excused from liability or responsibility shall use reasonable efforts to
remedy or otherwise overcome such event.
8. Deposit Account: Payment Account
8.1
Upon execution hereof, RPRCS shall establish on its books an account for,
and in the name of, Correspondent entitled Clearing Deposit Account
("Deposit Account"). RPRCS shall not be obligated to perform or to
continue to perform any of the Services at any time that the aggregate of
the cash and the fair market value, as determined by RPRCS in the sole
exercise of its discretion, of Securities which are a) direct obligations
of, or guaranteed as to timely payment of principal and interest by, the
United States, b) acceptable to RPRCS and c) registered in RPRCS's name
or otherwise in form for good delivery, is less than the amount set forth
at the foot of this Agreement as the Minimum Balance. Promptly upon being
so notified by RPRCS, Correspondent shall deposit additional cash
or Securities of the type described above so that the balance in the
Deposit Account at least equals the Minimum Balance. On notice to
Correspondent, given 10 business days in advance, RPRCS may increase or
decrease the Minimum Balance up to an amount equal to the aggregate of
all Claims plus ten percent of all Account Debits plus all sums owed to
RPRCS by Correspondent.
8.2
The Deposit Account is not part of RPRCS's capital, does not constitute a
partnership or equity interest in RPRCS, will not be subordinated to the
claims of RPRCS's creditors and shall not be deemed to be margin for any
Account, unless specifically
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agreed to in writing by both RPRCS and Correspondent. RPRCS may use the
funds and Securities in the Deposit Account in the course of RPRCS's
business and shall not be obligated to pay Correspondent any fee or
interest received on or derived from such use, except for interest
payable on the Securities therein, and interest on the cash balances at
the rate set forth in the Fee Schedule.
8.3
For any claim RPRCS may have, from time to time, against Correspondent
and for any claim RPRCS may have against any Account or Customer, RPRCS
shall have a continuing security interest, general lien and right of
setoff with respect to and Correspondent pledges to RPRCS:
a) the Deposit Account, the Payment Account and the relevant Accounts;
and b) all the monies, Securities and other property belonging to the
Correspondent in the possession or control of Correspondent or a
financial intermediary for the account of Correspondent and authorizes
RPRCS to perfect such security interest by giving notice thereof to such
financial intermediary. If RPRCS shall have a claim against Correspondent
(including Claims) or against an Account or Customer which has not been
promptly paid after RPRCS demands payment thereof, RPRCS shall have the
right, at any time, to withdraw the amount thereof, including liquidating
Securities and property to raise such sums, from the Accounts and other
property in the following order: i) the relevant Account, ii) the Payment
Account; iii) the Deposit Account and iv) other Securities and property
held by RPRCS for the Account, Customer or Correspondent. RPRCS shall
promptly notify Correspondent of any such liquidations and withdrawals.
8.4
Promptly upon termination or expiration of this Agreement, RPRCS shall
deliver to Correspondent the contents of the Deposit Account, less any
withdrawals made pursuant to this Agreement. In addition, RPRCS may
withhold such amounts from any Account, including the Payment Account and
Deposit Account, as RPRCS deems appropriate with respect to any open
items or pending or anticipated claims or proceedings regarding such
Account, Customer or Correspondent until the final resolution thereof.
9. Termination
9.1
Either party may terminate this Agreement by written notice given to the
other party:
a) as of a date not less than 90 days from the date of the notice and
effective no sooner than one year from the date hereof provided, however,
that if Correspondent
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terminates prior to one year from the date hereof, Correspondent shall pay,
as liquidated damages, an amount equal to 12 less the number of completed
months in which the Services have been performed multiplied by the Minimum
Fee listed in the Fee Schedule or, if no Minimum Fee is listed, the sum of
all Fees for Services due, owing or paid divided by the number of completed
calendar months covered by such Fees, and further provided Correspondent
may terminate by notice not less than 60 days before the date an increase
in fees is effected by RPRCS pursuant to 3.1 hereof; or
b) as of a date not less than 5 business days after notice if the other
party shall materially fail to perform or observe any provision of this
Agreement applicable to it, whether or not such party is responsible or
liable for any loss resulting from such failure to perform, and such
failure shall continue unremedied for a period of 30 days after written
notice is given by the non-defaulting party specifying the failure and
demanding that it be remedied; or
c) effective immediately if the other party or any parent, affiliate or
subsidiary shall: i) become or be declared insolvent; ii) voluntarily
file, or be the subject of, a petition commencing a case under any
chapter of Title 11 of the United States Code; iii) make a general
assignment for the benefit of its creditors; iv) admit in writing its
inability to pay its debts as they mature; v) sell or enter into
negotiations to sell substantially all of its assets; vi) file an
application for, or consent to, the appointment of or there is appointed
any receiver, or a permanent or interim trustee of that party or any of
its subsidiaries, as the case may be, or of all or any portion of its
property, including, without limitation, the appointment or authorization
of a trustee, receiver or agent under applicable law or under a contract
to take charge of its property for the purpose of enforcing a lien
against such property or for the purpose of general administration of
such property for the benefit of its creditors; vii) file a petition
seeking a reorganization of its financial affairs or to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or file an answer admitting
the material allegations of a petition filed against it in any proceeding
under any such law or statute, or viii) take any corporate action for the
purpose of effecting any of the foregoing; or
d) effective immediately if any statement, representation or warranty
made herein or in any document provided in connection with this Agreement
shall be, or have been at the time made, false or misleading in any
material respect.
9.2
RPRCS may terminate this Agreement on notice to Correspondent if, at
anytime, RPRCS, in its sole discretion, determines that: i) there has
been a material adverse change in the financial condition or results of
operations of Correspondent; ii) as a result of event(s) or
circumstance(s) there has been a material adverse change in the
creditworthiness of Correspondent; or iii) it has or may have Claim(s)
arising out of
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Correspondent's breach of its obligations hereunder, including those
under paragraphs 3 and 4 hereof, in excess of ninety percent (90%) of the
balances in the Payment Account and the deposit Account.
9.3
Notwithstanding the termination of this Agreement, the rights and
obligations of the parties set forth in paragraph 7 hereof shall continue
and survive any termination.
10. General Provisions
10.1
This Agreement shall be governed by, interpreted under and enforced in
accordance with the laws of the State of New York applicable to contracts
made and to be performed within the State of New York.
10.2
To the extent that any provision herein is inconsistent with or in
violation of an Applicable Rule, that provision shall be deemed deleted
as a part of this Agreement and shall not otherwise affect any other
provision of this Agreement. The parties shall use their best efforts to
agree upon a valid and enforceable provision which shall be a reasonable
substitute for such deleted provision in light of the tenor of this
Agreement. Any provision of this Agreement that is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining provisions of this
Agreement or affecting the validity or enforceability of that provision
in any other jurisdiction.
10.3
Notices hereunder, other than in connection with the performance of the
Services which may be given orally, shall be in writing delivered to the
party at the address set forth herein or such other address as each shall
designate to the other and shall be deemed given when received but may be
given orally if confirmed in a writing which is promptly delivered.
10.4
Without the prior written consent of the other party, neither party may
transfer its rights or duties hereunder, except to one succeeding to its
business by operation of law.
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10.5
This agreement represents the entire agreement among the parties hereto,
supersedes all prior agreements and understandings with respect to the
subject matter hereof, and may be modified or breach waived only in
writing by an instrument signed by the party against which such amendment
or waiver is sought to be enforced. The waiver or failure to act by a
party with respect to the breach by the other party of any provision of
this Agreement shall not constitute a waiver of any subsequent breaches
of that or any other provision of this Agreement, or an amendment of this
Agreement.
10.6
The headings contained in this Agreement are for convenience only and
shall not be deemed to be a part of this Agreement or affect the meaning
or interpretation of this Agreement or any provision hereof.
10.7
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which together shall constitute
one and the same agreement.
10.8
The imposition or allocation of any burden or duty on or to one or the
other party by this Agreement does not and is not intended to, impose or
create any burden, duty or right in favor of or for the benefit of any
person or entity not a party to this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement in St. Louis,
Missouri, as of the date set forth below.
RPR CLEARING SERVICES
By: /S/ JOHN E. HICKEY
------------------------------------
John E. Hickey, President
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THE CHAPMAN COMPANY
By: /S/ NATHAN A. CHAPMAN, JR.
------------------------------------
Nathan A. Chapman, Jr., President
Address: Two Hopkins Plaza, Suite 1010
Baltimore, Maryland 21201
a x corporation __limited partnership __partnership
State of Organization: Maryland
Minimum Balance: $35,000.00
Dated : 1-22-91
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I. Clearance Fees
A. Equities $21.00 per ticket
B. Options $18.00 per ticket
C. Principal Equities
1. Customer $22.00 per ticket
2. Firm
a. Executed Through RPR No Charge
b. Executed Away, give-up RPR
1. NSCC/DTC Eligible $12.50 per ticket
2. Physical $25.00 per ticket
D. Principal Bonds
1. Customer $25.00 per ticket
2. Firm
a. Executed through RPR Desk No Charge
b. Executed away, give-up RPR $25.00 per ticket
E. Syndicate
1. Customer $22.00 per ticket
2. Pick-up/Dealer Ticket $25.00
F. Mutual Funds
1. Fund Serve Trade $20.00 per ticket
2. Non-Fund Serve Trade $25.00 per ticket
G. Volume Discounts
1. Clearance charges will be discounted for the first three
months Broker transacts its business through RPR Clearing.
a. First Month 35%
b. Second Month 25%
c. Third Month 10%
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2. Once Broker has gone beyond the first six months of transacting
its business through RPR Clearing, RPR agrees to the following
customer ticket discounts based on total monthly customer ticket
volume. The total number of customer tickets determines the
discount on the total of the clearance charges.
a. Less than 750 tickets per month No Discount
b. 750 to 999 tickets per month 3%
c. 1,000 to 1,999 tickets per month 5%
d. 2,000 tickets per month and above 7.5%
II. Execution Fees
A. Listed Equities
1. Machine Market Orders
a. From 1 to 2,099 shares $2.00 flat
b. 2,100 and above .01 per share
2. Voice and Limit Orders .01 per share
B. OTC Away. If you would do your OTC agency trades through another
broker and give-up RPR for clearance, we would charge $5.00 per ticket.
C. Agency Corporate Bond $1.00 per bond
$3.00 minimum,
$15.00 maximum
D. Options
Price Charge per Contract
1. 1/16--7/16 .75
2. 1/2--15/16 1.00
3. 1--3 15/16 1.50
4. 4--7 15/16 2.00
5. 8--13 15/16 2.50
6. 14 and up 3.00
III. Miscellaneous Fees
A. Extensions $10.00
B. Mailgrams $10.00
C. Bank Wire Customer Funds $10.00
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D. Returned Check $25.00
E. Accommodation Transfer $20.00
F. Legal Deposit $10.00
G. Legal Transfer $15.00
H. Physical Reorganization Item $30.00
I. Non Physical Reorganization Item $10.00
J. Rule 144 Item $25.00
K. Cancel & Rebill $ l5.00
L. Transfer Agent Fees At Cost
M. Rush Transfer At Cost
N. Registered Mail At Cost
O. Forms At Cost
P. Postage will be charged to client on confirmation at $1.75 per
transaction. Broker will be credited with $.50 per ticket if
confirmations are printed and mailed from their office. Postage is
not charged on institutional DVP/RVP transactions.
IV. Interest
A. Margin Debits
1. RPR will charge interest on Broker's customer margin debit balances
to Broker's customers' margin accounts using RPR schedule.
2. RPR will charge Broker the broker call rate plus 1/2% for all of
Broker's customers' debit balances on a daily basis.
3. RPR will credit Broker with the interest we charge on Broker's
customer accounts and deduct the RPR charge.
B. Customer free credits. RPR will credit Broker 25 basis points for all
of Broker's customer free credit balances.
C. Money market fund rebate. RPR will credit Broker with 50% of the money
market rebate received by RPR on all Broker's customer money market
fund balances.
V. Monthly Minimum of Combined Clearance and Executions $1,000.00
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AMENDMENT TO FULLY DISCLOSED CLEARING AGREEMENT
This amendment (the "Amendment") to the agreement (the "Existing Agreement")
between RPR Clearing Services ("RPRCS"), a division of Rauscher Pierce Refsnes,
Inc., a Delaware corporation ("Rauscher"), its affiliate, Regional Operations
Group, Inc., a Minnesota corporation ("ROG"), and the party signing below
("Correspondent"), is made as of the date set forth below. Except as otherwise
specified in this Amendment, defined terms used herein have the meanings set
forth in the Existing Agreement. The Existing Agreement, as modified to reflect
the additions, deletions and changes contained in this Amendment, is referred to
herein as the "Agreement."
1. RECITALS. The second paragraph contained under the heading "Recitals" in the
Existing Agreement is hereby amended to read as follows:
"WHEREAS, the Clearing Firms have established certain procedures with
respect to the offer, use and performance of the Services (the
"Procedures"), have adopted standards for the extension of Margin (the
"Credit Policies") and have allocated between themselves the functions to be
performed and Services to be provided by each of RPRCS and ROG (as set forth
in Section 1 below); "
2. SERVICES TO BE PERFORMED BY THE CLEARING FIRMS. Section 1 of the Existing
Agreement is hereby amended as follows:
a. ALLOCATION OF FUNCTIONS BETWEEN RPRCS AND ROG. The lead-in and Sections
1.1 through 1.7 of the Existing Agreement are hereby amended to read as
follows:
SECTION 1. SERVICES TO BE PERFORMED BY THE CLEARING FIRMS
The Clearing Firms, acting as the Correspondent's agents, shall perform the
following Services with respect to the Accounts opened by Correspondent and
introduced to ROG through the courtesy of RPRCS in accordance with Section
2.1 below:
1.1 FUNCTIONS AND OBLIGATIONS OF RPRCS. RPRCS shall perform the
following functions and provide the following Services to the Accounts
introduced to ROG by the Correspondent through the courtesy of RPRCS:
(a) OPENING OF ACCOUNTS. RPRCS will forward to ROG promptly upon
receipt from the Correspondent in accordance with Section 2.1 below
the basic information required in order for ROG to establish an
account (the name, address, tax identification number, standing
instructions, representative number and such other information as ROG
may deem necessary to perform the services in accordance with the
Applicable Rules and
<PAGE>
the Procedures), and will deliver to ROG copies of such documents and
agreements as may be requested by ROG in order to perform its
Services in accordance with the Applicable Rules and the Procedures.
Upon receipt of information from a Correspondent changing or
correcting any information with respect to the Account, RPRCS will
either enter such changed or corrected information directly into the
computer system established and maintained by ROG or forward such
information (along with any additional or revised documents or
agreements) to ROG in order to enable it to make such change or
correction.
(b) EXECUTION OF TRADES. In accordance with orders and instructions
from the Correspondent pursuant to Section 2.2 below, and except as
otherwise agreed pursuant to such section, RPRCS shall execute all
Trades within the Accounts and forward such orders and instructions
with respect to such Trades to ROG for clearing and settlement. In
accordance with Section 2.5 below, RPRCS shall receive from
Correspondent or directly from Customer any securities sold and will
deliver such securities overnight to ROG for delivery to the buyer
against payment of the purchase price therefor and shall receive from
Correspondent or directly from Customer and promptly deposit in local
ROG bank accounts established for the benefit of RPRCS all funds and
checks for transactions in the Account.
(c) CONFIRMATIONS AND STATEMENTS. Except as may otherwise be agreed
pursuant to Section 2.2 below, RPRCS shall generate and mail directly
to Customers in accordance with instructions received and accepted
from Correspondent confirmations with respect to all Trades in an
Account. In addition, RPRCS shall prepare using information provided
by ROG and shall mail directly to Customers in accordance with
instructions received and accepted from the Correspondent periodic
statements in accordance with the Applicable Rules. RPRCS shall
provide copies to the Correspondent of all confirmations and
statements prepared or sent by it and any other written
communications sent or received from the Customer. All confirmations
and statements prepared and mailed pursuant to this Agreement shall
indicate that the Account is carried and Trades are cleared and
settled by ROG through the courtesy of RPRCS, a division of Rauscher.
Each statement shall contain the name and telephone number of the
Customer Service Department at RPRCS that Customers can contact with
questions regarding the Account and shall disclose that all funds and
securities of Customers are located at ROG and not the Correspondent.
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(d) BOOKS AND RECORDS. RPRCS will forward to ROG such information
as is necessary for ROG to prepare and maintain books and records
with respect to the Trades and Accounts in accordance with the
Applicable Rules. RPRCS shall also maintain on behalf of the
Correspondent such additional books, records, and other documents or
information as the Correspondent shall request and RPRCS shall agree.
RPRCS shall promptly upon request of the Correspondent provide
Correspondent with access to and, at the Correspondent's expense,
originals or copies of any such books, records, documents and
information in the possession of RPRCS.
(e) CASHIERING. RPRCS shall assist ROG in performing certain
cashiering functions for Correspondent, including the receipt and
deposit to local ROG bank accounts established for the benefit of
RPRCS of funds and checks and cash and the receipt and overnight
delivery to ROG of securities sold for the Accounts as well as
certain administrative functions relating thereto. RPRCS shall be
responsible for performing all administrative and bookkeeping
functions and certain other Services functions with respect to the
collection of deposits, fees and charges from Correspondent and its
Customers on behalf of itself and ROG and shall perform such Services
with respect to the reconciliation of ROG bank accounts established
for the benefit of RPRCS as shall be agreed from time to time by ROG
and RPRCS. The Clearing Firms shall not be responsible for any
securities until received by RPRCS or any funds until collected by
RPRCS from Correspondent or Customer. The Clearing Firms need not
accept any instruction in violation of the Applicable Rules or
contrary to the Procedures or Credit Policies.
(f) MARGIN. With respect to any Account in which Margin is
requested to be extended, RPRCS shall obtain from Correspondent and
Forward to ROG an agreement executed by the Customer in form and
substance satisfactory to the Clearing Firms (the "Margin
Agreement"). RPRCS will act as the agent of ROG in performing such
Services in connection with Margin Accounts and the extension of
Margin as may be agreed from time to time by ROG and RPRCS in order
to assist ROG in performing its obligations as creditor under the
Applicable Rules. The Clearing Firms shall cooperate with each other
in determining the applicable Credit Policies, shall generate and
make all Margin maintenance calls in accordance with such Credit
Policies and the Applicable Rules and shall have sole discretion with
respect to the amount of Margin maintained by any Account.
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(g) ACCOUNT TRANSFERS. Pursuant to written notification received by
the Correspondent and forwarded to either of the Clearing Firms, any
Account of the Correspondent may choose to reject the Services to be
performed by the Clearing Firms pursuant to this Agreement. Upon
receipt of written notice from another broker dealer that an Account
is to be transferred to such a broker dealer, the Clearing Firms
shall expedite such transfer. All such notices received by RPRCS
shall be forwarded immediately to ROG. Upon receipt of such notice,
ROG shall have exclusive responsibility for compliance with Rule 412
of the New York Stock Exchange (the "NYSE") and any similar
Applicable Rule. The Clearing Firms may accept and process directions
received directly from the Customer with respect to the transfer of
the Account to another broker dealer; the Clearing Firms may refuse
to accept any other orders or instructions received directly from a
Customer except those received from the correspondent through RPRCS.
(h) CORRESPONDENT AND CUSTOMER SERVICE. RPRCS shall be responsible
for receiving and, with such assistance or information as may be
necessary from ROG, responding to all inquiries from Correspondents
and Customers regarding the Accounts and all confirmations and
statement relating to the Accounts or Trades therein. All such
inquiries should initially be directed to the RPRCS Customer Service
Department.
1.2 FUNCTIONS AND OBLIGATIONS OF ROG. ROG shall carry on a fully
disclosed basis, all Accounts introduced to it by the Correspondent
through the courtesy of RPRCS in accordance with Sections 2.1 below and
l.l(a) above and shall perform the following Services with respect to
such Accounts:
(a) OPENING OF ACCOUNTS. ROG will receive from RPRCS the basic
information required to open an account (the name, address, tax
identification number, standing instructions, representative number
and such other information or agreements as it may deem necessary in
order to perform the Services in accordance with the Applicable Rules
and Procedures) and will promptly upon receipt establish a new
Account reflecting such information. In addition, promptly upon
receipt of any changed or corrected information with respect to the
Account, ROG will make such change or correction to the Account
records.
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<PAGE>
(b) SETTLEMENT AND CLEARING OF TRADES. Upon receipt and acceptance
of orders and instructions with respect to Trades executed within the
Accounts by RPRCS as agent of Correspondent, ROG shall clear and
settle such Trades for the Accounts by causing any securities sold to
be delivered to the buyer against payment of the purchase price
therefor or by receiving any securities purchased and paying the
purchase price therefor by applying funds credited to the Account or
extending Margin to the Account for the purchase in accordance with
subsection 1.2(g) below.
(c) STATEMENTS. ROG shall generate Account information necessary to
prepare periodic statements for the Accounts in accordance with
Applicable Rules and shall transmit such information to RPRCS for use
in the preparation of such periodic statements. All statements
prepared and mailed pursuant to this Agreement shall indicate that
the Account is carried and Trades are cleared and settled by ROG
through the courtesy of RPRCS, a division of Rauscher. Each statement
shall disclose that all funds and securities of Customers are located
at ROG.
(d) BOOKS AND RECORDS. ROG shall prepare and maintain books and
records with respect to the Trades and Accounts in accordance with
the Applicable Rules. ROG shall promptly upon request of the
Correspondent provide Correspondent with access to and, at the
Correspondent's expense, originals or copies of any such books and
records. All Corespondent requests for access to or copies of books
and records maintained by ROG should initially be directed to the
RPRCS Customer Service Department as set forth in Section 1.1(h)
above.
(e) CASHIERING. ROG shall perform all cashiering functions for
Correspondent, including the receipt, delivery and transfer of funds,
checks, and securities sold, loaned, purchased or borrowed to, from
or for the Accounts in the performance of the Services pursuant to
the Procedures and Credit Policies or instructions of the
Correspondent received through RPRCS, including collection of any
commissions, fees or charges payable to the Correspondent by
Customers. The Clearing Firms shall not be responsible for any
securities until received by RPRCS or any funds until collected by
RPRCS from Correspondent or Customer. The Clearing Firms need not
accept any instruction in violation of the Applicable Rules or
contrary to the Procedures or Credit Policies.
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<PAGE>
(f) SAFEKEEPING. ROG shall hold in custody and safe-keeping all
securities and payments received for the Accounts, collect and
disburse dividends and other distributions with respect to securities
within the Accounts and process in accordance with any instructions
received through RPRCS from any Correspondent exchange offers, rights
offerings, warrants, tender offers, redemptions or proxy requests
received with respect to securities in the Accounts.
(g) MARGIN. ROG shall provide Margin in accordance with the Credit
Policies to the Accounts for which the Customer has executed a Margin
Agreement. ROG, as creditor, is responsible for compliance with
Regulation T, 12 CFR, part 220, the Federal Margin Regulation
promulgated by the Board of Governors of the Federal Reserve System
(the "Board"), any interpretive ruling issued by the Board, and any
other applicable Margin and maintenance requirements of the
Applicable Rules with respect to Margin Accounts. ROG may request
that RPRCS act as its agent in performing certain Services in
connection with Margin Accounts as may be agreed from time to time by
ROG and RPRCS. The Clearing Firms shall cooperate with each other in
determining the applicable Credit Policies, shall generate and make
all Margin maintenance calls in accordance with such Credit Policies
and Applicable Rules and shall have sole discretion with respect to
the amount of Margin maintained by any Account.
(h) ACCOUNT TRANSFERS. Pursuant to written notification received by
the Correspondent and forwarded to either of the Clearing Firms, any
Account of the Correspondent may choose to reject the Services to be
performed by the Clearing Firms pursuant to this Agreement. Upon
receipt of written notice from another broker dealer that an Account
is to be transferred to such a broker dealer, ROG shall expedite such
transfer. ROG shall have exclusive responsibility for compliance with
Rule 412 of the New York Stock Exchange (the "NYSE") and any similar
Applicable Rule. The Clearing Firms may accept and process directions
received directly from the Customer with respect to the transfer of
the Account to another broker dealer; the Clearing Firms may refuse
to accept any other orders or instructions received directly from a
Customer except those received from the Correspondent through RPRCS."
b. RENUMBERING. Sections 1.8 and 1.9 of the Existing Agreement are hereby
renumbered Sections 1.3 and 1.4 respectively.
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<PAGE>
c. LIMITATIONS AND RESTRICTIONS. Section 1.4(d) of the Agreement (Section
1.9(d) of the Existing Agreement) is hereby amended to read as follows:
"(d) For purposes of the Securities Investor Protection Act of 1970 and
the Securities and Exchange Commission financial responsibility rules,
Customers are Customers of ROG and not the Correspondent."
3. FUNCTIONS AND OBLIGATIONS OF CORRESPONDENT.
a. OPENING AND APPROVING OF ACCOUNTS. The second sentence of Section 2.1 of
the Existing Agreement is hereby amended to read as follows:
"The correspondent shall introduce the Accounts for acceptance by ROG
through the courtesy of RPRCS by furnishing to RPRCS the basic
information required to open the account (the name, address, tax
identification number, standing instructions, representative number and
such other information or agreements as the Clearing Firms may deem
necessary to perform the Services) and such Account Documents as the
Clearing Firms may require in accordance with the Procedures."
b. CUSTOMER PAYMENTS. Section 2.5 of the Existing Agreement is hereby
amended to read as follows:
"2.5 CUSTOMER PAYMENTS. In all Accounts, the Correspondent shall be
responsible for purchases of securities until actual and complete
payment therefor has been made. The Correspondent shall be
responsible for sales of securities until acceptable deliveries of
such securities have been completed. If Correspondent maintains
minimum net capital of less than $250,000, it shall direct Customers
to make all payments and deliver all securities directly to RPRCS for
securities transactions within the account. If Correspondent
maintains minimum net capital of less than $50,000, Correspondent
shall notify Customers that Correspondent is prohibited from
receiving funds (other than checks made payable to third parties,
including the Clearing Firms) or securities. Correspondent shall
deposit in ROG bank accounts established for the benefit of RPRCS
prior to the close of business on the day of receipt all funds and
checks received by Correspondent with respect to any Account in
accordance with the Procedures to enable the Clearing Firms promptly
and properly to record such remittances and receipts in the Account.
Correspondent shall send all securities received by it to RPRCS by
overnight delivery service on the day of receipt in accordance with
the Procedures to enable the Clearing Firms to promptly and properly
record such delivery for the Account. The Correspondent is
responsible to the Clearing Firms for the collection of the initial
Margin required pursuant to the Applicable Rules to support each
Margin transaction for an Account, the amount of any Margin
maintenance
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<PAGE>
requirement pursuant to the Applicable Rules and the Procedures, and
the timely payment of all Account Debits, interest and other charges
incurred in an Account in which Margin is provided. The Correspondent
is also responsible to the Clearing Firms for the collection of funds
or securities required to settle any Trades in the Account. The
Correspondent will promptly transmit to Customers all requests for
initial and maintenance Margin and for funds or securities to settle
Trades or pay Account Debits. The Correspondent shall be solely and
exclusively responsible to the Clearing Firms for any loss,
liability, damage, cost or expense (including but not otherwise
limited to fees and expenses of legal counsel) incurred or sustained
by the Correspondent or one or both of the Clearing Firms as a result
of the failure of any Account to timely make payments or deposits of
securities to settle Trades or to comply with initial or maintenance
Margin calls. In the event of such Customer failure, the
Correspondent shall promptly effect a "buy-in" or "sell-out" of the
Trade for the Account or liquidate an Account Debit and shall collect
any deficiency resulting from the "buy-in" or "sell-out" or
liquidation from the Customer. Notwithstanding the foregoing, either
of the Clearing Firms may, in its sole discretion, effect a "buy-in"
or "sell-out" of the Trade for the Account or liquidate an Account
Debit at any time in accordance with the Applicable Rules."
4. DEPOSIT ACCOUNT. Section 5.2 of the Existing Agreement is hereby amended to
read as follows:
"5.2 DEPOSIT ACCOUNT. Upon execution of this Agreement, RPRCS shall
establish an account with ROG for, and in the name of, Correspondent
entitled the "Deposit Account." The Correspondent shall deliver to RPRCS for
deposit to the Deposit Account cash and securities which are (a) direct
obligations of, or guaranteed as to the timely payment of principal and
interest by, the United States, (b) acceptable to the Clearing Firms, and
(c) registered in the name specified by the Clearing Firms or in good
deliverable form and which in the aggregate have a fair market value, as
determined solely in the discretion of the Clearing Firms, equal to the
Minimum Balance set forth at the end of this Agreement. The Clearing Firms
shall not be obligated to perform any of the Services at any time that the
aggregate fair market value of the Deposit Account is less than the Minimum
Balance. Correspondent shall be obligated to deposit additional cash or
securities acceptable to the Clearing Firms to cause the fair market value
of the Deposit Account to be maintained in an amount equal to the Minimum
Balance. The Clearing Firms, upon 10 days notice to the Correspondent, may
require the Minimum Balance to equal the aggregate of all claims for which
indemnity may be sought by the Clearing Firms pursuant to Section 7.1."
5. ADDITIONAL CONSIDERATION. The next to the last sentence of Section 6.2 of
the Existing Agreement shall be amended to read as follows:
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<PAGE>
"ROG shall be responsible for compliance with the Applicable Rules regarding
Margin, the payment and charging of interest and hypothecation and lending
of securities. ROG shall bear the costs of any Margin and to effect stock
borrows."
6. TERMINATION BY NOTICE. Section 8.2 of the Existing Agreement shall be
amended to read as follows:
"8.2 TERMINATION BY NOTICE. This Agreement may be terminated without cause
by any party upon ninety (90) days written notice to the other parties. In
the event the Correspondent terminates this Agreement, the Correspondent
shall pay the reasonable out-of-pocket expenses of the Clearing Finns in
connection with converting and/or closing the Accounts. Correspondent may
terminate this Agreement upon notice given 60 days prior to any date
established by the Clearing Firms for the effective date of an increase in
fees in accordance with Section 6.1."
7. AMENDMENTS. The Existing Agreement as amended by this Amendment represents
the entire Agreement between the parties with respect to the subject matter
contained herein. This Agreement may not be changed orally but only by an
agreement in writing and signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. This Agreement
represents the entire agreement among the parties, supersedes all prior
agreements and understandings with respect to the subject matter contained
herein. The waiver or failure to act by a party with respect to a breach by
the other party of any provision of this Agreement shall not constitute a
waiver of any subsequent breaches of that or any other provisions of this
Agreement and shall not constitute an amendment of this Agreement.
8. COUNTERPARTS. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the Correspondent and the Clearing Firms have executed this
Amendment as of the date set forth below.
RPR CLEARING SERVICES A DIVISION OF
RAUSCHER PIERCE REFSNES, INC.
By: /S/ JOHN E. HICKEY
------------------------------------
John E. Hickey, President
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<PAGE>
REGIONAL OPERATIONS GROUP, INC.
By: /S/ JOHN E. HICKEY
------------------------------------
John E. Hickey, Vice President
THE CHAPMAN COMPANY
By: /S/ NATHAN A. CHAPMAN, JR.
------------------------------------
Nathan A Chapman, Jr., President
Dated: 6-16-93
------------------------------------
10
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I. Clearance Fees
A. Equities $21.00 per ticket
B. Options $18.00 per ticket
CMTA Option Transactions $4.50 per ticket
C. Principal Equities
1. Customer $22.00 per ticket
2. Firm
a. Executed Through RPR No Charge
b. Executed Away, give-up RPR
1) NSCC/DTC Eligible $12.50 per ticket
2) Physical $25.00 per ticket
D. Principal Bonds
1. Customer $25.00 per ticket
2. Firm
a. Executed through RPR Desk No Charge
b. Executed away, give-up RPR $25.00 per ticket
E. Syndicate
1. Customer $22.00 per ticket
2. Pick-up/Dealer Ticket $25.00
F. Mutual Funds
1. Fund Serve Trade $20.00 per ticket
2. Non-Fund Serve Trade $25.00 per ticket
G. Volume Discounts
1. Clearance charges will be discounted for the first three months
Broker transacts its business through RPR Clearing.
a. First Month 35%
b. Second Month 25%
c. Third Month 10%
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2. Once Broker has gone beyond the first six months of transacting
its business through RPR Clearing, RPR agrees to the following
customer ticket discounts based on total monthly customer ticket
volume. The total number of customer tickets determines the
discount on the total of the clearance charges.
a. Less than 750 tickets per month No Discount
b. 750 to 999 tickets per month 3%
c. 1,000 to 1,999 tickets per month 5%
d. 2,000 tickets per month and above 7.5%
II. Execution Fees
A. Listed Equities
1. Machine Market Orders
a. From 1 to 2,099 shares $2.00 flat
b. 2,100 and above .01 per share
2. Voice and Limit Orders .01 per share
3. Done Away $3.00 flat
B. OTC Away. If you would do your OTC agency trades through another
broker and give-up RPR for clearance, we would charge $5.00 per
ticket.
C. Agency Corporate Bond $1.00 per bond
$3.00 minimum,
$15.00 maximum
D. Options
Price Charge per Contract
1. 1/16--7/16 .75
2. 1/2--15/16 1.00
3. 1--3 15/16 1.50
4. 4--7 15/16 2.00
5. 8--13 15/16 2.50
6. 14 and up 3.00
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<PAGE>
CMTA Option Transactions
Price Charge per Contract
1. 1/16--7/16 .65
2. 1/2--15/16 .90
3. 1--3 15/16 1.30
4. 4 and above 1.75
III. Miscellaneous Fees
A. Extensions $10.00
B. Mailgrams $10.00
C. Bank Wire Customer Funds $10.00
D. Returned Check $25.00
E. Accommodation Transfer $20.00
F. Legal Deposit $10.00
G. Legal Transfer $15.00
H. Physical Reorganization Item $30.00
I. Non Physical Reorganization Item $10.00
J. Rule 144 Item $25.00
K. Cancel & Rebill $20.00
L. Transfer Agent Fees At Cost
M. Rush Transfer At Cost
N. Registered Mail At Cost
O. Forms At Cost
P. Duplicate Confirmations $1.25
Q. Duplicate Statements $1.25
R. Postage will be charged to client on confirmation at $1.75 per
transaction. Correspondent will be credited with $.50 per ticket if
confirmations are printed and mailed from their office. Postage is not
charged on institutional DVP/RVP transactions.
IV. Interest
A. Margin Debits
1. RPR will charge interest on Broker's customer margin debit
balances to Broker's customers' margin accounts using RPR
schedule.
2. RPR will charge Broker the broker call rate plus 1/2% for all of
Broker's customers' debit balances on a daily basis.
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<PAGE>
3. RPR will credit Broker with the interest we charge on Broker's
customer accounts and deduct the RPR charge.
B. Customer free credits.
RPR will credit Broker 25 basis points for all of Broker's customer
free credit balances.
C. Money market fund rebate.
RPR will credit Broker 17 1/2 basis points for Broker's customer
money market fund balances.
V. Monthly Minimum of Combined Clearance and Execution $ 1,000.00
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AMENDMENT, to the Fully-Disclosed Clearing Agreement by and between RPR
Correspondent Services, a division of Rauscher Pierce Refsnes, Inc. ("RPRCS"),
Interra Clearing Services, Inc., a Minnesota Corporation, and The Chapman
Company, is hereby amended and modified as follows:
1. The Chapman Company hereby agrees that it shall:
(a) Allow Customers to use the checkwriting account provided by RPRCS
(the "Checkwriting Account") in a manner consistent with Securities
and Exchange Rules 15C3-3, as amended;
(b) draw upon the Checkwriting Account only as agent for Customers; and
(c) abide by the policies and procedures established by RPRCS with
respect to the use of the Checkwriting Account.
2. The Chapman Company further agrees that RPRCS reserves the right to
terminate the Agreement in the event that RPRCS determines, in its sole
judgment, that The Chapman Company has failed to abide by the policies
and procedures respecting the operation of the Checkwriting Account.
Date: 12-9-97
------------------------------------
RPR CORRESPONDENT SERVICES, A DIVISION OF
RAUSCHER PIERCE REFSNES, INC.
By. /S/ JOHN E. HICKEY
------------------------------------
John E. Hickey
Its: President
THE CHAPMAN COMPANY
By: /S/ NATHAN A. CHAPMAN
------------------------------------
Nathan A. Chapman
15
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Exhibit 10.4
1,194,917 Shares
Common Stock
DEM, INC.
The World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
PLACEMENT AGENCY AGREEMENT
May 30, 1997
The Chapman Co.
The World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Ladies and Gentlemen:
DEM, Inc. a Maryland corporation registered under the Investment Company
Act of 1940, as amended (the "Act") as a closed-end investment company, (the
"Corporation"), proposes to cause to be issued, and sold through The Chapman
Co. (the "Placement Agent") on a "best efforts" basis a maximum of 1,194,917
Shares (the "Shares") of common stock, $.00001 par value per share (the
"Common Stock") at a public offering price per share equal to the greater of
$15.00 or the Company's net asset value per share (calculated within 48 hours
prior to any sale) (the "Offering").
SECTION 1. APPOINTMENT
The Corporation hereby appoints the Placement Agent, and the Placement
Agent hereby agrees, to act as Placement Agent for the Shares for the period
and on the terms set forth in this Agreement. In connection therewith, the
Corporation has delivered to the Placement Agent copies of its Articles of
Incorporation and Bylaws, the Corporation's Registration Statement with
respect to the Shares and all amendments thereto filed pursuant to the
Securities Act of 1933, as amended (the "Securities Act") or the Act (the
"Registration Statement"), and the Corporation's current Prospectus and
Statement of Additional Information with respect to the Shares (collectively,
as currently in effect and as amended or supplemented, the "Prospectus") and
shall promptly furnish the Placement Agent with all amendments of or
supplements to the foregoing.
SECTION 2. DISTRIBUTION SERVICES
Subject to the direction and control of the Corporation's Board of
Directors (the "Board"), the Placement Agent shall serve as Placement Agent
for the Shares.
<PAGE>
(a) As agent for the Corporation, the Placement Agent shall offer, and
solicit offers to purchase the Shares. An offer to purchase the Shares shall
not be binding on the Corporation until the Placement Agent, on behalf of the
Corporation confirms the acceptance of such offer by delivery of a
confirmation of sale and if not previously delivered, a final Prospectus. The
Placement Agent's rights hereunder shall not apply to Shares issued in
connection with the reinvestment in shares by the Corporation's stockholders
of dividends or other distributions or any other offering by the Corporation
of securities to its stockholders.
(b) The Placement Agent shall use its best efforts to obtain offers to
purchase Shares upon the terms and conditions contained herein and in the
Prospectus, including the offering price. The Placement Agent shall notify
the Corporation promptly of all offers to purchase the Shares that the
Placement Agent intends to accept on behalf of the Corporation. The
Corporation shall furnish to the Placement Agent from time to time, for use
in connection with the offering of Shares, such information with respect to
the Corporation and Shares as the Placement Agent may reasonably request. The
Corporation shall supply the Placement Agent with such copies of the
Prospectus as the Placement Agent may request. The Placement Agent may use
its employees, agents and other persons who need not be its employees, at its
cost and expense, to assist it in carrying out its obligations hereunder, but
no such employee, agent or other person shall be deemed to be an agent of the
Corporation or have any rights under this Agreement.
(c) The Corporation reserves the right to suspend the offering of Shares
at any time, in the absolute discretion of the Board, and upon notice of such
suspension the Placement Agent shall cease to offer the Shares.
(d) The Corporation and the Placement Agent will cooperate with each
other in taking such action as may be necessary to qualify Shares for sale
under the securities laws of such states as the Corporation may designate.
The Corporation shall pay all fees and expenses of registering Shares under
the Securities Act and of registering or qualifying Shares and the
Corporation's qualification under applicable state securities laws. The
Placement Agent shall pay all expenses relating to its broker-dealer
qualification. The Placement Agent shall not confirm sales to any purchasers
unless the Shares to be sold are qualified for sale under the securities laws
of any state applicable to such sale.
(e) The Corporation represents that its Registration Statement and
Prospectus under the Securities Act have been or will be, as the case may be,
carefully prepared in conformity with the requirements of the Securities Act
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder. The Corporation represents and warrants that its
Registration Statement and Prospectus contain or will contain all statements
required to be stated therein in accordance with the Securities Act and the
rules and regulations of the Commission thereunder, and that the
Corporation's Registration Statement and Prospectus, when they shall become
effective or be authorized for use, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading to a purchaser of
Shares. The Corporation will from time to time file such amendment or
amendments to its Registration Statement and Prospectus as, in the light of
future developments, shall, in the opinion of the Corporation's counsel, be
necessary in order to have such Registration Statement and Prospectus at all
times contain all material facts required to be stated therein or necessary
to make any statements therein not mislead-
2
<PAGE>
ing to a purchaser of Shares, but, if the Corporation shall not file such
amendment or amendments within fifteen days after receipt of a written
request from the Placement Agent to do so, the Placement Agent may, at its
option, terminate this Agreement immediately. The Corporation shall not file
any amendment to its Registration Statement and Prospectus without giving the
Placement Agent reasonable notice thereof in advance; provided, however, that
nothing in this Agreement shall in any way limit the Corporation's right to
file at any time such amendments to its Registration Statement and
Prospectus, of whatever character, as it deems advisable, such right being in
all respects absolute and unconditional. The Corporation represents and
warrants that any amendment to its Registration Statement and Prospectus
hereafter filed will, when it becomes effective, contain all statements
required to be stated therein in accordance with the Act and the rules and
regulations of the Commission thereunder, that all statements of fact
contained therein will, when the same shall become effective, be true and
correct and that no such amendment, when it becomes effective, will include
an untrue statement of a material fact or will omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares.
(f) The Corporation will indemnify, defend and hold the Placement Agent,
its several officers and directors, and any person who controls the Placement
Agent within the meaning of Section 15 of the Securities Act (collectively,
the "Placement Agent Indemnitees"), free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which any Placement Agent
Indemnitee may incur, under the Securities Act, or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Corporation's Registration Statement and
Prospectus under the Securities Act or arising out of or based upon any
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that in no event shall anything contained in this paragraph (f) be so
construed as to protect the Placement Agent against any liability to the
Corporation or its security holders to which the Placement Agent would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this Section 2. This agreement
to indemnify the Placement Agent Indemnitees is expressly conditioned upon
the Corporation being notified of any action brought against any Placement
Agent Indemnitee, such notification to be given by letter, facsimile
transmission or telegram to the Corporation and referring to the person
against whom such action is brought within ten days after the summons or
other first legal process shall have been served on such person. The failure
so to notify the Corporation of any such action shall not relieve the
Corporation from any liability which it may have to any Placement Agent
Indemnitee otherwise than on account
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<PAGE>
of the indemnification provided for in this paragraph (f). The Corporation
will be entitled to assume the defense of any suit brought to enforce any
such claim, and to retain counsel of good standing chosen by it and approved
by the Placement Agent. In the event the Corporation elects to assume the
defense of any such suit and retain counsel of good standing approved by the
Placement Agent, the defendants in such suit shall bear the fees and expenses
of any additional counsel retained by any of them. In the event the
Corporation does not elect to assume the defense of any such suit, or in case
the Placement Agent does not approve of counsel chosen by the Corporation or
has been advised that it may have available defenses or claims which are not
available to or conflict with those available to the Corporation, the
Corporation will reimburse any Placement Agent Indemnitee named as defendant
in such suit for the fees and expenses of any counsel retained by such
person. The indemnification provisions contained in this paragraph (f) and
the Corporation's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Placement Agent Indemnitee and shall survive the
sale of any Shares made pursuant to subscriptions obtained by the Placement
Agent. The indemnification provisions of this paragraph (f) will inure
exclusively to the benefit of the Placement Agent Indemnitees and their
respective successors and assigns. The Corporation agrees promptly to notify
the Placement Agent of the commencement of any litigation or proceeding
against the Corporation or any of its Directors or officers in connection
with the issue or sale of Shares.
(g) The Placement Agent agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls
the Corporation within the meaning of Section 15 of the Securities Act
(collectively, the "Corporation Indemnitees"), free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and
any reasonable counsel fees incurred in connection therewith) which any
Corporation Indemnitee may incur under the Act, or under common law or
otherwise, but only to the extent that such liability or expense incurred by
the Corporation Indemnitees resulting from such claims or demands shall arise
out of or be based upon any alleged untrue statement of a material fact
contained in information furnished in writing by the Placement Agent in its
capacity as distributor to the Corporation for use in the Corporation's
Registration Statement or Prospectus under the Securities Act, or shall arise
out of or be based upon any alleged omission to state a material fact in
connection with such information required to be stated in the Registration
Statement or Prospectus or necessary to make such information not misleading.
The Placement Agent's agreement to indemnify the Corporation Indemnitees is
expressly conditioned upon the Placement Agent being notified of any action
brought against a Corporation Indemnitee, such notification to be given by
letter, facsimile transmission or telegram addressed and referring to the
person against whom such action is brought within ten days after the summons
or other first legal process shall have been served on such person. The
Placement Agent shall have a right to control the defense of such action,
with counsel of its own choosing, satisfactory to the Corporation, if such
action is based solely upon such alleged misstatement or omission on the
Placement Agent's part, and in any other event the Placement Agent and
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<PAGE>
the Corporation Indemnitees named shall each have the right to participate in
the defense or preparation of the defense of any such action. The failure to
so notify the Placement Agent of any such action shall not relieve the
Placement Agent from any liability which it may have to any Corporation
Indemnitee otherwise than on account of the indemnification provisions in
this paragraph (g).
(h) The Corporation shall advise the Placement Agent immediately: (i) of
any request by the Commission for amendments to the Corporation's
Registration Statement or Prospectus or for additional information; (ii) in
the event of the issuance by the Commission or any stop order suspending the
effectiveness of the Corporation's Registration Statement or Prospectus or
the initiation of any proceedings for that purpose; (iii) of the happening of
any material event which makes untrue any statement made in the Corporation's
Registration Statement or Prospectus or which requires the making of a change
in either thereof in order to make the statements therein not misleading; and
(iv) of all action of the Commission with respect to any amendments to the
Corporation's Registration Statement or Prospectus which may from time to
time be filed with the Commission under the Act or the Securities Act.
SECTION 3. STANDARD OF CARE
The Placement Agent shall give the Corporation the benefit of its best
judgment and efforts in rendering its services to the Corporation and shall
not be liable for error of judgment or mistake of law, for any loss arising
out of any investment, or in any event whatsoever, provided that nothing
herein shall be deemed to protect, or purport to protect, the Placement Agent
against any liability to the Corporation or to the security holders of the
Corporation to which it would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties
hereunder, or by reason of reckless disregard of its obligations and duties
hereunder.
SECTION 4. EXPENSES
The Corporation will pay all fees, costs and expenses incident to the
performance by the Corporation of its obligations hereunder, including: (a)
the preparation, printing, filing and distribution of the Registration
Statement (including the exhibits thereto), all amendments and supplements
thereto and the Prospectus; (b) the preparation, printing, and issuance of
the Shares including any stamp taxes and transfer agent and registrar fees
payable in connection with the original issuance of the Shares; (c) the
registrations or qualifications referred to in Section (2)(d) and 2(e) hereof
including fees and disbursements of counsel for the Placement Agent relating
to such registrations or qualifications; (d) the fees and expenses of the
Corporation's accountants and the fees and expenses of counsel for the
Corporation; (e) the expenses of delivery to the Placement Agent of copies of
the Prospectus, as may be requested for use in connection with the offering
and sale of the Shares; (f) any filings required to be made by the Placement
Agent with the National Association of Securities Dealers, Inc.; (g) the fees
and expenses incurred with respect to the listing of the Shares on the NASDAQ
SmallCap Market.
5
<PAGE>
SECTION 5. TERMS OF THE OFFERING
The Offering shall commence upon the effectiveness of the Registration
Statement and shall continue until such date as all of the Shares are sold or
the Offering is terminated by the Corporation or the Placement Agent as
provided in Section 6 hereof (the "Termination Date").
Subscription proceeds will be held by the Corporation pending a closing
("Closing"). Subject to the terms and conditions of this Agreement, Closings
shall be held with respect to sales of the Shares on a monthly basis or on
such a more frequent basis as the Corporation and Placement Agent shall agree.
The public offering price per share is the greater of $15.00 or the
Company's net asset value per share (calculated within 48 hours prior to any
sale) (the "Offering Price"). The minimum subscription will be for 100
shares. The Placement Agent shall be paid a management fee of 2.7% of the
Offering Price from all sales of the Shares. The Placement Agent will also be
paid a selling concession of 4.3% of the Offering Price from all sales of the
Shares all, or any portion, of which the Placement Agent may reallow to other
selling agents. The Corporation shall have the right to accept or reject in
whole or in part offers to purchase for the Shares.
SECTION 6. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, (i) by the Board of Directors of the Corporation or by a vote of a
majority of the outstanding voting securities of the Corporation, on 10 days'
written notice to the Placement Agent or (ii) by the Placement Agent on 10
days' written notice to the Corporation. This Agreement shall automatically
terminate in the event of its assignment.
SECTION 7. ACTIVITIES OF PLACEMENT AGENT
Except to the extent necessary to perform its obligations under this
Agreement, nothing herein shall be deemed to limit or restrict the Placement
Agent's right, or the right of any of its officers, directors or employees
(whether or not they are a director, officer, employee or other affiliated
person of the Corporation) to engage in any other business or to devote time
and attention to the management or other aspects of any other business,
whether of a similar or dissimilar nature, or to render services of any kind
to any other company, corporation, firm, individual or association.
SECTION 8. MISCELLANEOUS
(a) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto and, if required by the Act, by a vote of a majority of the
outstanding voting securities of the Corporation.
6
<PAGE>
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion
or portions shall be considered severable and not be affected, and the rights
and obligations of the parties shall be construed and enforced as if the
Agreement did not contain the particular part, term or provision held to be
illegal or invalid.
(c) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(d) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have
been properly given.
(e) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of Maryland without reference to
principles of conflict of law.
(f) The terms "vote of a majority of the outstanding voting securities,"
"affiliated person," and "assignment" shall have the meanings ascribed
thereto in the Act.
(g) This Agreement has been and is made solely for the benefit of the
Placement Agent, the Corporation and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. The term "successors" shall not include any
purchaser of the Shares merely because of such purchase.
(h) The indemnification agreement contained in this Agreement and the
representations, warranties and covenants in this Agreement shall remain in
full force and effect regardless of (i) any termination of this Agreement,
(ii) any investigation made by or on behalf of the Placement Agent or
controlling person thereof, or by or on behalf of the Corporation or its
directors or officers, and (iii) a Closing under this Agreement.
(i) This Agreement embodies the entire agreement between the Corporation
and the Placement Agent relating to the subject matter hereof and supersedes
all prior agreements, representations and understandings, if any, relating to
the subject matter hereof.
7
<PAGE>
(j) Please confirm that the foregoing correctly sets forth the agreement
between the Corporation and the Placement Agent.
Very Truly Yours,
DEM, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
Chairman and President
THE CHAPMAN CO.
By: /S/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
Chairman and President
8
<PAGE>
Exhibit 10.5
DISTRIBUTION AGREEMENT
THE CHAPMAN FUNDS, INC.
The World Trade Center-Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
WHEREAS, The Chapman Funds, Inc., a Maryland corporation (the "Company"),
desires to enter into an agreement regarding the distribution of the shares
(the "Shares") of the Company's two investment portfolios: The Chapman US
Treasury Money Fund and The Chapman Institutional Cash Management Fund
(collectively, the "Funds"); and
WHEREAS, the Company has agreed that The Chapman Co., Inc. (the
"Distributor"), a Maryland corporation, shall act as the exclusive
distributor of the Shares;
WHEREAS, the Distributor agrees to act as the exclusive distributor of
the Shares for the period of this Distribution Agreement (the "Agreement").
NOW, THEREFORE, in consideration of the agreements hereinafter contained,
it is agreed as follows:
1. Services as Distributor.
1.1 The Distributor shall use reasonable efforts to promote the
Company and to solicit orders for the purchase of Shares and shall undertake
such advertising and promotion as it believes reasonable in connection with
such solicitation. Distributor shall be the exclusive distributor of the
Shares. The Distributor shall sell the Shares only at the offering price at
the time of such sale (computed in the manner described in the Funds' then
effective prospectus), and the Funds shall receive not less than the full net
asset value per share for all the Shares sold. No sales charge shall be
imposed on sales of any Shares. The Company agrees, provided that the Shares
may be legally issued, to fill all orders confirmed by the Distributor in
accordance with the provisions of this Agreement.
1.2 The Distributor shall conduct the offering of Shares and other
activities pursuant hereto in strict accordance with the Registration
Statement and the applicable requirements of the Articles of Incorporation
and the By-Laws of the Company, as each may be from time to time amended, and
in strict accordance with all applicable state and federal statutes, rules
and regulations, including in particular, the Investment Company Act of 1940
as amended (the "1940 Act"), the Securities Act of 1933 as amended (the
"Securities Act"), the Securities Exchange Act of 1934 as amended
<PAGE>
(the "Exchange Act"), the rules and regulations of the Securities Exchange
Commission promulgated under the 1940 Act, the Securities Act and the
Exchange Act, the applicable rules and regulations of any securities
association registered under the Exchange Act, and all applicable state Blue
Sky laws, rules and regulations.
1.3 The Distributor shall transmit any orders received by it for
purchase or redemption of Shares to the Company's transfer agent and
custodian, process inquiries from stockholders and communicate with the
Company and transfer agent on behalf of stockholders.
1.4 The Distributor shall bear all its expenses in connection with
the performance of this Agreement, including, but not limited to, the
printing and distribution of prospectuses included in the Registration
Statement as defined below to stockholders other than to existing
stockholders and shall receive no reimbursement or compensation in connection
therewith from the Company therefor.
2. Duties of the Company.
2.1 The Company agrees to file all required reports with the
Securities and Exchange Commission in a timely manner and to maintain on file
with the Securities and Exchange Commission a current prospectus and
statement of additional information during the term of this Agreement.
2.2 The Company agrees at its own expense to execute any and all
documents and to furnish, at its own expense, any and all documents and all
information and otherwise to take all actions that may be reasonably
necessary in connection with the qualification of Shares for sale in such
states as the Company and the Distributor may designate.
2.3 The Company shall furnish from time to time, for use in
connection with the sale of Shares such information with respect to the Funds
and the Shares as the Distributor may reasonably request; and the Company
warrants that any such information shall be true and correct.
3. Representations of the Company.
3.1 The Company represents to the Distributor that any registration
statement, prospectus, and statement of additional information filed with the
Commission and any amendments and supplements thereto (the "Registration
Statement") with respect to the Shares have been prepared in conformity with
the requirements of the Securities Act, the 1940 Act and the rules and
regulations of the Commission thereunder. The Company represents and
warrants to the Distributor that any Registration Statement, when such
becomes effective, will contain all statements required to be stated therein
in conformity with the Securities Act, the 1940 Act and the rules and
regulations of Commission; that all statements of fact contained in such
2
<PAGE>
Registration Statement will be true and correct when such becomes effective;
and that no Registration Statement, when such becomes effective will include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares.
4. Indemnification.
4.1 The Company shall indemnify and hold harmless the Distributor,
each person, if any, who controls the Distributor within the meaning of
Section 15 of the Securities Act, and any person with whom the Distributor
enters into agreements for the sale of Shares of the Company or to prepare
sales literature for the Company against any loss, liability, claim, damage
or expense (including the reasonable cost of investigating or defending any
alleged loss, liability, claim, damage or expense and counsel fees incurred
in connection therewith), insofar as such loss, liability, claim, damage,
expense, actions or proceedings in respect thereof arise out of or are based
upon an untrue statement of a material fact contained in the Registration
Statement then in effect, annual or interim reports to shareholders or sales
literature used in connection with the sale of Shares or omission to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, written information furnished to the Company
specifically for use therein; provided, however, no person shall be entitled
to indemnity in the event of its willful malfeasance, bad faith or gross
negligence in the performance of its duties under this Agreement or such
other agreement or by reason of its reckless disregard of its obligations and
duties under this Agreement or such other agreement.
5. Offering of Shares.
5.1 None of the Shares shall be offered by the Distributor under
this Agreement, and no orders for the purchase or sale of Shares hereunder
shall be accepted by the Company, if and so long as the effectiveness of the
Registration Statement or any necessary amendments thereto shall be suspended
under any of the provisions of the Securities Act; provided, however, that
nothing contained in this paragraph 5.1 shall in any way restrict or have any
application to or bearing upon the Company's obligation to redeem Shares from
any shareholder in accordance with the provisions of the Company's prospectus
or Articles of Incorporation. The Company shall notify the Distributor of
any suspension of the effectiveness of the Registration Statement.
6. Term.
6.1 Either party shall have the right to terminate this Agreement
upon sixty (60) days' written notice to the other. This agreement shall
become effective as of the date hereof and shall continue in effect, unless
sooner terminated as herein provided, until December 29, 1998, and from year
to year thereafter
3
<PAGE>
if such continuance is approved at least annually in the manner required by
the 1940 Act. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act).
7. Miscellaneous
7.1 This Agreement shall be governed by the laws of the State of
Maryland.
7.2 The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their constructions or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the 30th day of April 1997.
THE CHAPMAN FUNDS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
---------------------------
Nathan A. Chapman, Jr.
President
THE CHAPMAN CO.
By: /S/ NATHAN A. CHAPMAN, JR.
---------------------------
Nathan A. Chapman, Jr.
President
4
<PAGE>
Exhibit 10.6
DISTRIBUTION AGREEMENT
THE CHAPMAN FUNDS, INC.
DOMESTIC EMERGING MARKETS EQUITY FUND
The World Trade Center-Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
October 28, 1997
The Chapman Co.
The World Trade Center -- Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, The Chapman Funds, Inc. an open-end,
diversified, management investment company organized as a corporation under
the laws of the State of Maryland (the "Corporation"), on behalf of Domestic
Emerging Markets Equity Fund, a series of the Corporation (the "Fund"), has
agreed that The Chapman Co. shall be, for the period of this Agreement, the
distributor of shares of Domestic Emerging Markets Equity Fund Investor Class
and Institutional Class Common Stock, par value $.001 per share ("Investor
Shares" and "Institutional Shares," respectively).
1. Services as Distributor
1.1 The Chapman Co. will act as agent for the distribution of the
Investor Shares and Institutional Shares covered by the post-effective
amendment to the Fund's registration statement on Form N-1A, under the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act") pertaining to the Investor
Shares and the Institutional Shares of the Fund (the post-effective amendment
to the registration statement, together with the prospectuses (the
"prospectus") and statement of additional information (the "statement of
additional information") included as part thereof, any amendments or
supplements thereto, or material incorporated by reference into the
prospectus or statement of additional information, being referred to
collectively in this Agreement as the "registration statement").
<PAGE>
The Chapman Co.
October 28, 1997
Page 2
1.2 The Chapman Co. agrees to use appropriate efforts to solicit
orders for the sale of the Investor Shares and Institutional Shares at such
prices and on the terms and conditions set forth in the registration
statement and will undertake such advertising and promotion as it believes is
reasonable in connection with such solicitation.
1.3 All activities by The Chapman Co. as distributor of the
Investor Shares and Institutional Shares shall comply with all applicable
laws, rules and regulations, including, without limitation, all rules and
regulations made or adopted by the Securities and Exchange Commission (the
"SEC") or by any securities association registered under the Securities
Exchange Act of 1934, as amended.
1.4 The Chapman Co. agrees to (a) provide one or more persons
during normal business hours to respond to telephone questions concerning the
Fund and its performance and (b) perform such other services as are described
in the registration statement and in the Investor Class Distribution Plan
(the "Investor Class Plan") and in the Institutional Class Distribution Plan
(the "Institutional Class Plan"), each adopted by the Fund pursuant to Rule
12b-1 under the 1940 Act ("Rule 12b-1") to be performed by The Chapman Co.,
without limitation, distributing and receiving subscription order forms and
receiving written redemption requests.
1.5 (a) The Chapman Co. will be paid fees under the Investor Class
Plan to compensate The Chapman Co. or enable The Chapman Co. to compensate
other persons, ("Service Providers"), including any other distributor of
Investor Shares, for providing: (i) services primarily intended to result in
the sale of Investor Shares ("Investor Selling Services"), and (ii)
stockholder servicing, administrative and accounting services ("Investor
Administrative Services" and collectively with Investor Selling Services,
"Investor Services"). Investor Selling Services may include, but are not
limited to: the printing and distribution to prospective investors in
Investor Shares of prospectuses and statements of additional information
describing the Fund; the preparation, including printing, and distribution of
sales literature, reports and media advertisements relating to the Investor
Shares; providing telephone services relating to the Fund; distributing
Investor Shares; costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct
mail promotions and television, radio, newspaper, magazine and other mass
media advertising, and related travel and entertainment expenses; and costs
involved in obtaining whatever information, analyses and reports with respect
to marketing and promotional activities that the Fund may, from time to time,
deem advisable. In
<PAGE>
The Chapman Co.
October 28, 1997
Page 3
providing compensation for Investor Selling Services in accordance with the
Investor Class Plan, The Chapman Co. is expressly authorized (i) to make, or
cause to be made, payments reflecting an allocation of overhead and other
office expenses related to providing Investor Services; (ii) to make, or
cause to be made, payments, or to provide for the reimbursement of expenses
of, persons who provide support services in connection with the distribution
of Investor Shares including, but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Fund, and
providing any other Investor Service; and (iii) to make, or cause to be made,
payments to compensate selected dealers or other authorized persons for
providing any Investor Services. Administrative Services may include, but are
not limited to, (i) responding to inquiries of prospective investors
regarding the Fund; (ii) services to stockholders not otherwise required to
be provided by the Fund's custodian or any co-administrator; (iii)
establishing and maintaining accounts and records on behalf of Fund
stockholders; (iv) processing purchase, redemption and exchange transactions
in Investor Shares; and (v) other similar services not otherwise required to
be provided by the Fund's transfer agent or any co-administrator. Payments
under the Investor Class Plan are not tied exclusively to the selling and
administrative expenses actually incurred by The Chapman Co. or any Service
Provider, and the payments may exceed expenses actually incurred by The
Chapman Co. and/or a Service Provider. Furthermore, any portion of any fee
paid to The Chapman Co. or to any of its affiliates by the Fund or any of
their past profits or other revenue may be used in their sole discretion to
provide services to stockholders of the Fund or to foster distribution of
Investor Shares.
(b) Pursuant to the Investor Class Plan, the Fund will pay
The Chapman Co. on the first business day of each quarter a fee for the
previous quarter calculated at an annual rate of up to .75% of the average
daily net assets of the Investor Shares of the Fund consisting of up to .50%
as compensation for Investor Selling Services and .25% as compensation for
Investor Administrative Services provided by The Chapman Co. to the Investor
Shares pursuant to this Agreement.
1.6 (a) The Chapman Co. will be paid fees under the
Institutional Class Plan to compensate The Chapman Co. or enable The Chapman
Co. to compensate other persons, including any other distributor of the
Institutional Shares or institutional stockholders of record of the
Institutional Shares, including but not limited to retirement plans,
broker-dealers, depository institutions, and other financial intermediaries
("Institutions"), who own Institutional Shares on behalf of their customers,
clients or (in the case of retirement plans) participants ("Customers") and
companies providing certain services to Customers (collectively with
Institutions, "Service
<PAGE>
The Chapman Co.
October 28, 1997
Page 4
Organizations"), for providing (i) services primarily intended to result in
the sale of the Institutional Shares ("Institutional Selling Services"), and
(ii) stockholder servicing, administrative and accounting services to
Customers ("Institutional Administrative Services").
(b) The annual fee paid to The Chapman Co. with respect to
Institutional Selling Services will compensate The Chapman Co., or allow The
Chapman Co. to compensate Service Organizations, to cover certain expenses
primarily intended to result in the sale of the Institutional Shares,
including, but not limited to: (i) costs of payments made to employees that
engage in the distribution of the Institutional Shares; (ii) payments made
to, and expenses of, persons who provide support services in connection with
the distribution of the Institutional Shares, including, but not limited to,
office space and equipment, telephone facilities, processing stockholder
transactions and providing any other stockholder services not otherwise
provided by the Fund's transfer agent; (iii) costs relating to the
formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (iv) costs of printing
and distributing prospectuses, statements of additional information and
reports of the Fund to prospective holders of the Institutional Shares; (v)
costs involved in preparing, printing and distributing sales literature
pertaining to the Fund, and (vi) costs involved in obtaining whatever
information, analyses and reports with respect to marketing and promotional
activities that the Fund may, from time to time, deem advisable.
(c) The annual fee paid to The Chapman Co. with respect to
Institutional Administrative Services will compensate The Chapman Co., or
allow The Chapman Co. to compensate Service Organizations, for personal
service and/or the maintenance of Customer accounts, including but not
limited to (i) responding to Customer inquiries, (ii) providing information
on Customer investments, and (iii) providing other stockholder liaison
services and for administrative and accounting services to Customers,
including, but not limited to: (a) aggregating and processing purchase and
redemption requests from Customers and placing net purchase and redemption
orders with the Fund's distributor or transfer agent; (b) providing Customers
with a service that invests the assets of their accounts in the Institutional
Shares; (c) processing dividend payments from the Fund on behalf of
Customers; (d) providing information periodically to Customers showing their
positions in the Institutional Shares; (e) arranging for bank wires; (f)
providing sub-accounting with respect to the Institutional Shares
beneficially owned by Customers or the information to the Fund necessary for
<PAGE>
The Chapman Co.
October 28, 1997
Page 5
sub-accounting; (g) forwarding stockholder communications from the Fund (for
example, proxies, stockholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers, if
required by law and, (h) providing other similar services to the extent
permitted under applicable statutes, rules and regulations. Payments under
the Institutional Class Plan are not tied exclusively to the selling and
administrative expenses actually incurred by The Chapman Co. or any Service
Organization, and the payments may exceed expenses actually incurred by The
Chapman Co. or any Service Organization. Furthermore, any portion of any fee
paid to The Chapman Co. or to any of its affiliates by the Fund or any of
their past profits or other revenue may be used in their sole discretion to
provide services to stockholders of the Fund or to foster distribution of the
Institutional Shares.
(d) Pursuant to the Institutional Class Plan, the Fund will
pay The Chapman Co. on the first business day of each quarter a fee for the
previous quarter calculated at an annual rate of up to .25% of the average
daily net assets of the Institutional Shares of the Fund for Selling Services
and Administrative Services provided by The Chapman Co. or any Service
Organizations to the Institutional Shares pursuant to this Agreement.
1.7 The Chapman Co. acknowledges that, whenever in the judgment of
the Corporation's officers such action is warranted for any reason,
including, without limitation, market, economic or political conditions,
those officers may decline to accept any orders for, or make any sales of,
the Investor Shares or Institutional Shares until such time as those officers
deem it advisable to accept such orders and to make such sales.
1.8 The Chapman Co. will transmit any orders received by it for
purchase or redemption of the Investor Shares and Institutional Shares to
Fund/Plan Services, Inc. ("Fund/Plan"), the Fund's transfer and dividend
disbursing agent, or its successor of which The Chapman Co. is notified in
writing. The Fund will promptly advise The Chapman Co. of the determination
to cease accepting orders or selling Investor Shares or Institutional Shares
or to recommence accepting orders or selling Investor Shares or Institutional
Shares. The Fund (or its agent) will confirm orders for Investor Shares and
Institutional Shares placed through The Chapman Co. upon their receipt, or in
accordance with any exemptive order of the SEC, and will make appropriate
book entries pursuant to the instructions of The Chapman Co. The Chapman Co.
agrees to cause payment for Investor Shares and Institutional Shares and
instructions as to book entries to be delivered promptly to the Fund (or its
agent).
<PAGE>
The Chapman Co.
October 28, 1997
Page 6
1.9 The outstanding Investor Shares and Institutional Shares are
subject to redemption as set forth in the prospectus. The price to be paid to
redeem the Investor Shares and Institutional Shares will be determined as set
forth in the prospectus.
1.10 The Chapman Co. will prepare and deliver reports to the
Treasurer of the Corporation on a regular, at least quarterly, basis, showing
the distribution expenses incurred pursuant to this Agreement, the Investor
Class Plan and the Institutional Class Plan adopted by the Fund pursuant to
Rule 12b-1 and the purposes therefor, as well as any supplemental reports as
the Directors from time to time may reasonably request.
1.11 The Chapman Co. will create and maintain all records required
of it pursuant to its duties hereunder in accordance with all applicable
laws, rules and regulations, including records required by Section 31(a) of
the 1940 Act. All such records will be the property of the Corporation and
will be available upon request of the Corporation for inspection, copying and
use by the Corporation and will be surrendered to the Corporation promptly
upon demand of the Corporation. Where applicable, such records will be
maintained by The Chapman Co. for the periods and in the places required by
Rule 31a-2 under the 1940 Act. Upon termination of this Agreement, The
Chapman Co. will promptly surrender all such records to the Corporation or
such person as the Corporation may designate.
2. Duties of the Fund
2.1 The Corporation, on behalf of the Fund, agrees at its own
expense to execute any and all documents, to furnish any and all information
and to take any other actions that may be reasonably necessary in connection
with the qualification of the Investor Shares and Institutional Shares for
sale in those states that The Chapman Co. may designate.
2.2 The Corporation shall furnish from time to time, for use in
connection with the sale of the Investor Shares and Institutional Shares,
such informational reports with respect to the Fund and the Investor Shares
and Institutional Shares as The Chapman Co. may reasonably request, all of
which shall be signed by one or more of the Corporation's duly authorized
officers; and the Corporation warrants that the statements contained in any
such reports, when so signed by one or more of the Corporation's officers,
shall be true and correct. The Corporation shall also furnish The Chapman
Co. upon request with: (a) annual audits of the Fund's books and accounts
<PAGE>
The Chapman Co.
October 28, 1997
Page 7
made by independent public accountants regularly retained by the Corporation,
(b) semiannual unaudited financial statements pertaining to the Fund, (c)
quarterly earnings statements prepared by the Corporation, (d) a monthly
itemized list of the securities held by the Fund, (e) monthly balance sheets
as soon as practicable after the end of each month and (f) from time to time
such additional information regarding the Fund's financial condition as The
Chapman Co. may reasonably request.
3. Representations and Warranties
The Corporation, on behalf of the Fund, represents to The Chapman
Co. that the registration statement has been or will be carefully prepared in
conformity with the requirements of the 1933 Act, the 1940 Act and the rules
and regulations of the SEC thereunder. The Fund represents and warrants to
The Chapman Co. that any registration statement pertaining to the Investor
Shares and/or Institutional Shares, or prospectus and statement of additional
information contained therein, when such registration statement becomes
effective, will include all statements required to be contained therein in
conformity with the 1933 Act, the 1940 Act and the rules and regulations of
the SEC; that all statements of fact contained in any registration statement
with respect to the Investor Shares and/or Institutional Shares, prospectus
or statement of additional information will be true and correct when such
registration statement becomes effective; and that neither any registration
statement nor any prospectus or statement of additional information with
respect to the Investor Shares and/or Institutional Shares when such
registration statement becomes effective will include an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading to a
purchaser of the Investor Shares and/or Institutional Shares. The Chapman Co.
may, but shall not be obligated to, propose from time to time such amendment
or amendments to any registration statement and such supplement or
supplements to any prospectus or statement of additional information as, in
the light of future developments, may, in the opinion of The Chapman Co.'s
counsel, be necessary or advisable. If the Corporation shall not propose
such amendment or amendments and/or supplement or supplements within fifteen
(15) days after receipt by the Corporation of a written request from The
Chapman Co. to do so, The Chapman Co. may, at its option, terminate this
Agreement. The Corporation shall not file any amendment to any registration
statement or supplement to any prospectus or statement of additional
information without giving The Chapman Co. reasonable notice thereof in
advance; provided, however, that nothing contained in this Agreement shall in
any way limit the Corporation's right to file at any time such amendments to
any registration statement and/or supplements to any prospectus or statement
of additional information with respect
<PAGE>
The Chapman Co.
October 28, 1997
Page 8
to the Investor Shares and/or Institutional Shares, of whatever character, as
the Corporation may deem advisable, such right being in all respects absolute
and unconditional.
4. Indemnification
4.1 The Corporation, on behalf of the Fund, agrees to indemnify,
defend and hold The Chapman Co., its several officers and directors, and any
person who controls The Chapman Co. within the meaning of Section 15 of the
1933 Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which The Chapman Co., its officers and directors, or
any such controlling person, may incur under the 1933 Act, the 1940 Act or
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement, any prospectus or any statement of additional information with
respect to the Investor Shares and/or Institutional Shares, or arising out of
or based upon any omission or alleged omission to state a material fact
required to be stated in any registration statement, any prospectus or any
statement of additional information with respect to the Investor Shares
and/or Institutional Shares, or necessary to make the statements in any of
them not misleading; provided, however, that the Corporation's agreement, on
behalf of the Fund, to indemnify The Chapman Co., its officers, or directors,
and any such controlling person, and any claims, demands, liabilities or
expenses arising out of or based upon such indemnity shall be limited to the
"assets belonging to" (as such expression is defined in the Corporation's
charter) the Fund; and further provided that the Corporation's agreement, on
behalf of the Fund, to indemnify The Chapman Co., its officers or directors,
and any such controlling person shall not be deemed to cover any claims,
demands, liabilities or expenses arising out of or based upon any statements
or representations made by The Chapman Co. or its representatives or agents
other than such statements and representations as are contained in any
registration statement, prospectus or statement of additional information
with respect to the Investor Shares and/or Institutional Shares and in such
financial and other statements as are furnished to The Chapman Co. pursuant
to paragraph 2.2 hereof; and further provided that the Corporation's
agreement, on behalf of the Fund, to indemnify The Chapman Co. and the
Corporation's representations and warranties, on behalf of the Fund,
hereinbefore set forth in paragraph 3 shall not be deemed to cover any
liability to the Fund or its stockholders to which The Chapman Co. would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of The Chapman
Co.'s reckless disregard of its obligations and duties
<PAGE>
The Chapman Co.
October 28, 1997
Page 9
under this Agreement. The Corporation's agreement, on behalf of the Fund, to
indemnify The Chapman Co., its officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon the
Corporation's being notified of any action brought against The Chapman Co.,
its officers or directors, or any such controlling person, such notification
to be given by letter or by telegram addressed to the Corporation at its
principal office in Baltimore, Maryland and sent to the Corporation by the
person against whom such action is brought, within ten (10) days after the
summons or other first legal process shall have been served. The failure to
so notify the Corporation of any such action shall not relieve the
Corporation from any liability that the Corporation may have to the person
against whom such action is brought by reason of any such untrue or alleged
untrue statement or omission or alleged omission otherwise than on account of
the Corporation's indemnity agreement, on behalf of the Fund, contained in
this paragraph 4.1. The Corporation's indemnification agreement, on behalf
of the Fund, contained in this paragraph 4.1 and the Corporation's
representations and warranties, on behalf of the Fund, in this Agreement
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of The Chapman Co., its officers and
directors, or any controlling person, and shall survive the delivery of any
of the Corporation's shares. This agreement of indemnity will inure
exclusively to The Chapman Co.'s benefit, to the benefit of its several
officers and directors, and their respective estates, and to the benefit of
the controlling persons and their successors. The Corporation, on behalf of
the Fund, agrees to notify The Chapman Co. promptly of the commencement of
any litigation or proceedings against the Corporation or any of its officers
or directors in connection with the issuance and sale of any of the Investor
Shares and/or Institutional Shares.
4.2 The Chapman Co. agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls
the Corporation or the Fund within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the costs of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
that the Corporation, its officers or directors or any such controlling
person may incur under the 1933 Act, the 1940 Act or common law or otherwise,
but only to the extent that such liability or expense incurred by the
Corporation, its officers or directors or such controlling person resulting
from such claims or demands shall arise out of or be based upon (a) any
unauthorized sales literature, advertisements, information, statements or
representations or (b) any untrue or alleged untrue statement of a material
fact contained in information furnished in writing by The Chapman Co. to the
Corporation specifically for use in the registration statement
<PAGE>
The Chapman Co.
October 28, 1997
Page 10
and used in the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or statement of
additional information, or shall arise out of or be based upon any omission
or alleged omission to state a material fact in connection with such
information furnished in writing by The Chapman Co. to the Corporation and
required to be stated in such answers or necessary to make such information
not misleading. The Chapman Co.'s agreement to indemnify the Corporation,
its officers and directors, and any such controlling person, as aforesaid, is
expressly conditioned upon The Chapman Co.'s being notified of any action
brought against the Corporation, its officers or directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to The Chapman Co. at its principal office in Baltimore, Maryland
and sent to The Chapman Co. by the person against whom such action is
brought, within ten (10) days after the summons or other first legal process
shall have been served. The failure to so notify The Chapman Co. of any such
action shall not relieve The Chapman Co. from any liability that The Chapman
Co. may have to the Corporation, its officers or directors, or to such
controlling person by reason of any such untrue or alleged untrue statement
or omission or alleged omission otherwise than on account of The Chapman
Co.'s indemnity agreement contained in this paragraph 4.2. The Chapman Co.
agrees to notify the Corporation promptly of the commencement of any
litigation or proceedings against The Chapman Co. or any of its officers or
directors in connection with the issuance and sale of any of the Investor
Shares and/or Institutional Shares.
4.3 In case any action shall be brought against any indemnified
party under paragraph 4.1 or 4.2, and it shall timely notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate in, and, to the extent that it shall wish to do so, to assume
the defense thereof with counsel satisfactory to such indemnified party. If
the indemnifying party opts to assume the defense of such action, the
indemnifying party will not be liable to the indemnified party for any legal
or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than (a) reasonable costs of
investigation or the furnishing of documents or witnesses and (b) all
reasonable fees and expenses of separate counsel to such indemnified party if
(i) the indemnifying party and the indemnified party shall have agreed to the
retention of such counsel or (ii) the indemnified party shall have concluded
reasonably that representation of the indemnifying party and the indemnified
party by the same counsel would be inappropriate due to actual or potential
differing interests between them in the conduct of the defense of such action.
<PAGE>
The Chapman Co.
October 28, 1997
Page 11
5. Effectiveness of Registration
None of the Investor Shares or Institutional Shares shall be
offered by either The Chapman Co. or the Corporation under any of the
provisions of this Agreement and no orders for the purchase or sale of the
Investor Shares or Institutional Shares shall be accepted by the Corporation
if and so long as the effectiveness of the registration statement shall be
suspended under any of the provisions of the 1933 Act or if and so long as
the prospectus is not on file with the SEC; provided, however, that nothing
contained in this paragraph 5 shall in any way restrict or have an
application to or bearing upon the Corporation's obligation to repurchase its
shares from any stockholder in accordance with the provisions of the
prospectus or statement of additional information.
6. Notice to The Chapman Co.
The Corporation, on behalf of the Fund, agrees to advise The
Chapman Co. immediately in writing:
(a) of any request by the SEC for amendments to
the registration statement, prospectus or statement of
additional information then in effect with respect to the
Investor Shares and/or Institutional Shares or for
additional information;
(b) in the event of the issuance by the SEC of
any stop order suspending the effectiveness of the
registration statement, prospectus or statement of
additional information then in effect with respect to the
Investor Shares and/or Institutional Shares or the
initiation of any proceeding for that purpose;
(c) of the happening of any event that makes
untrue any statement of a material fact made in the
registration statement, prospectus or statement of
additional information then in effect with respect to the
Investor Shares and/or Institutional Shares or that requires
the making of a change in such registration statement,
prospectus or statement of additional information in order
to make the statements therein not misleading; and
(d) of all actions of the SEC with respect to any
amendment to any registration statement, prospectus or
statement of additional information with respect to the
Investor Shares or Institutional Shares which may from time
to time be filed with the SEC.
<PAGE>
The Chapman Co.
October 28, 1997
Page 12
7. Term of Agreement
This Agreement shall continue until December 29, 1998 with respect
to each of the Investor Shares and Institutional Shares, and thereafter shall
continue automatically for successive annual periods ending on the
anniversary of such date, provided such continuance is specifically approved
at least annually by (a) a vote of a majority of the Corporation's Board of
Directors or (b) a vote of a majority (as defined in the 1940 Act) of each of
the outstanding Investor Shares and Institutional Shares, respectively,
provided that the continuance is also approved by a vote of a majority of the
Corporation's Directors who are not interested persons (as defined in the
1940 Act) of the Corporation and who have no direct or indirect financial
interest in the operation of the Investor Class Plan or the Institutional
Class Plan, in this Agreement or in any agreement related to the Investor
Class Plan or Institutional Class Plan ("Qualified Directors"), by vote cast
in person at a meeting called for the purpose of voting on such approval.
This Agreement is terminable with respect to the Investor Shares or the
Institutional Shares without penalty (a) on sixty (60) days' written notice,
by a vote of a majority of the Fund's Qualified Directors or by vote of a
majority (as defined in the 1940 Act) of the outstanding Investor Shares or
Institutional Shares, as applicable, or (b) on ninety (90) days' written
notice by The Chapman Co. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act).
8. Amendments
This Agreement may not be amended to increase materially the amount
of the fee with respect to the Investor Shares and/or Institutional Shares
described in Section 1.5 above without approval of at least a majority (as
defined in the 1940 Act) of the outstanding Investor Shares and/or
Institutional Shares, respectively. In addition, all material amendments to
this Agreement must be approved by a vote of the Corporation's Board of
Directors, and by a vote of a majority of the Qualified Directors, cast in
person at a meeting called for the purpose of voting on the approval.
<PAGE>
The Chapman Co.
October 28, 1997
Page 13
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
THE CHAPMAN FUNDS, INC., on behalf
of Domestic Emerging Markets Equity
Fund
By: /S/ NATHAN A. CHAPMAN, JR.
---------------------------
Name: Nathan A. Chapman, Jr.
Title: President
Accepted:
THE CHAPMAN CO.
By: /S/ NATHAN A. CHAPMAN, JR.
--------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
Exhibit 10.7
EQUIPMENT LEASE AGREEMENT
THIS EQUIPMENT LEASE AGREEMENT ("this Agreement"), effective as of
October 1, 1993, is made between CHAPMAN LIMITED PARTNERSHIP I, a Maryland
limited partnership ("Lessor"), and THE CHAPMAN CO., a Maryland corporation
("Lessee").
In consideration of the mutual covenants, terms and conditions contained
herein, the parties hereto, intending to be legally bound, covenant and agree as
follows:
1. LEASE. Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees
to lease and hire from Lessor, the equipment listed and described on Schedule A
attached hereto, together with all components, parts, additions, accessories,
and attachments incorporated therein (all such property hereinafter collectively
referred to as the "Equipment"), upon the terms and conditions set forth herein.
2. TERM. The term of this Lease (the "Term") shall begin on , 1993, and
shall expire on the first anniversary unless sooner terminated as set forth
herein. The Lessee may renew the Lease for successive one-year terms for the
rent set forth in Section 3.1 below. At the end of a term, the Lessee may
purchase the Equipment at its fair market value as determined by an appraiser
chosen by the Lessee and an appraiser chosen by the Lessor. If the two
appraisers determine values that are within 10% of one another, the fair market
value shall be deemed to be the average of the two values. If the two values
differ from one another by more than 10%, the appraisers shall appoint a third
appraiser and the fair market value shall be deemed the average of the three
values. The purchase price shall be payable in cash within 30 days after the
fair market value shall have been determined. The Lessee and Lessor shall bear
the expense of the appraiser chosen by each and shall share the expense of any
third appraiser equally.
3. RENT.
3.1 General. Lessee covenants and agrees to pay to Lessor, as rent for the
Equipment and subject to this Lease, without prior notice or demand, the amount
of $118,152 per annum, payable in equal monthly installments. Such rent shall be
payable on the last day of each calendar month, commencing on October 31, 1993.
If a monthly installment has not been paid by the fifteenth (15th) day of the
succeeding month, Lessor shall provide written notice to Lessee. If any monthly
rental payment that is due to Lessor is not made within fifteen (15) days after
its due date, Lessee shall pay a late payment penalty on such delinquent payment
equal to five percent (5%) of the amount then due for each month or portion of a
month until paid (the "Late Payment Penalty").
<PAGE>
The annual rent in subsequent lease years, if the Lessee chooses to renew
the Lease, shall equal the higher of fair market value or the gross rent for the
applicable year noted is Exhibit C hereto. The Lessee shall obtain quotations
from two vendors of similar equipment for purposes of determining the fair
market value.
3.2 Net Lease. This Lease is a net lease, and Lessee's obligation to pay
rent shall be absolute and unconditional and shall not be affected by any
circumstance, including without limitation: (i) any setoff, counterclaim,
recoupment, deduction, defense, or other right that Lessee may have against
Lessor, against any seller, supplier, or manufacturer of any Equipment, or
against any other person for any reason whatsoever, (ii) any defect in the
title, condition, design, operation, merchantability or fitness for use or a
particular purpose of any Equipment, (iii) any loss or destruction of or damage
to any Equipment, or (iv) any interruption or cessation in the use or possession
thereof for any reason whatsoever and of whatever duration, and shall not be
prorated for any cause or reason except as herein specifically provided.
3.3 Taxes. Lessor shall pay and discharge, when due, all license fees,
fines, and assessments, and, in addition, all sales, use, property, and other
tax or taxes (exclusive of income taxes), now or hereafter imposed by any State,
Federal, or local government upon the Equipment or payments hereunder, whether
the same be payable by or billed or assessed to Lessor or to Lessee, together
with any penalties or interest payable in connection therewith.
4. DELIVERY OF EQUIPMENT. Lessee acknowledges that it is in possession of
the Equipment at the premises known as Suite 2800, 401 East Pratt Street,
Baltimore, MD 21202 (the "Premises").
5. USE AND OPERATION.
5.1 Use of Equipment. Lessee shall use the Equipment leased hereunder
solely in the conduct of its business and shall comply with and conform to all
applicable laws and regulations that relate in any way to the possession, use,
or maintenance of the Equipment. Lessee shall not (i) use, operate, maintain, or
store any Equipment leased hereunder improperly, imprudently, carelessly, or in
violation of this Agreement, or of any applicable laws or regulations, (ii) use
or operate any Equipment other than in a manner contemplated by the manufacturer
thereof, (iii) let or use the same for hire except to a bona fide tenant of the
Premises, (iv) assign this Agreement or any rights herein or assign or sublease
any Equipment or rights thereto except to a bona fide tenant of the Premises,
(v) permit anyone other than its authorized agents or employees to operate the
same, (vi) remove any Equipment from the Premises, and/or (vii) attach or
incorporate the Equipment, or suffer the same to be attached
2
<PAGE>
or incorporated, to or in any other item of property in such a manner that
the Equipment becomes, or may be deemed to have become, an accessory to or
part of such property.
5.2 Maintenance and Repairs. Lessee shall, at its sole cost and expense,
at all times during the Term of this Agreement, maintain the Equipment in good
operating order, repair, condition, and appearance, ordinary wear and tear
excepted. Lessee will not, without the prior consent of Lessor, affix or install
any accessory, equipment, or device on any Equipment leased hereunder, if such
addition would impair the originally intended function or use of any such
Equipment. All repairs, parts, supplies, accessories, equipment, and devices
furnished or affixed to any Equipment shall thereupon become the property of
Lessor (except as such may in Lessor's opinion be removed without in any way
affecting or impairing the originally intended function or use of such
Equipment). Lessor shall have the right to inspect the Equipment and maintenance
records relating thereto at any reasonable time (with or without prior notice)
during normal business hours.
6. LOSS OR DAMAGE TO EQUIPMENT.
6.1 General. Lessor assumes all risks of loss, theft, or destruction of,
and damage to all Equipment during the Term of this Agreement. Any replacements,
repairs, or substitutes of parts or equipment in or on the Equipment, or any of
them, shall be at Lessor's expense and the same shall constitute an accession to
the Equipment, title to which shall vest and remain in the Lessor.
6.2 Damaged Equipment Capable of Repair. Should the Equipment be damaged
so as to preclude its use for the purposes intended and should the Equipment be
capable of repair, Lessor shall repair the Equipment at its sole cost and
expense, and the proceeds of any insurance recovery pertaining to such Equipment
shall be applied to the cost of the repair.
6.3 Damaged Equipment Incapable of Repair. Should any Equipment be damaged
beyond repair or be lost, stolen, or wholly destroyed, then this Agreement shall
cease and terminate as to such Equipment as of the date of such damage, loss, or
destruction.
6.4 Insurance Proceeds. The full proceeds of the insurance recovered with
respect to any Equipment damaged, lost, or destroyed, plus any salvage value (in
the case of Equipment not repairable), shall inure to the benefit of Lessor.
7. INSURANCE. Lessor is responsible for, at its sole cost and expense,
obtaining and maintaining (1) standard fire, theft, and extended coverage
3
<PAGE>
insurance insuring the Equipment against loss or damage for no less than the
greater of full replacement value or the Stipulated Loss Value thereof, and
(2) public liability insurance, both personal injury and property damage,
covering the operation, condition, use, maintenance, and possession of the
Equipment.
8. REPORTS.
Without demand, Lessee will immediately notify Lessor of any damage or other
loss involving any Equipment leased hereunder. Such notice shall contain a brief
description of the nature and estimate of the damage or loss involved.
9. DEFAULT.
9.1 General. Should Lessee (i) fail to pay any rentals or any other sum
payable by Lessee to or for the account of Lessor hereunder within fifteen (15)
days after the due date, or (ii) fail to perform or observe any term or covenant
contained herein or under this Agreement at the time and in the manner herein
specified, or (iii) be the subject of any proceeding under any bankruptcy act
which is not dismissed within sixty (60) days after filing, or (iv) become
insolvent (i.e., unable to pay its debts as they become due), or (v) any
substantial part of Lessee's property be subject to any levy, seizure,
assignment, application, or sale for or by any creditor or governmental agency,
and within sixty (60) days thereof Lessee fails to secure a discharge thereof
(the foregoing items (i) through (v) constituting a "Default" hereunder), then
Lessor may, at its option, upon such notice of its election and demand as may be
required by applicable law, deem this Lease to be automatically in default, and
at any time thereafter, may do any one or more of the following, all of which
are hereby authorized by Lessee: (1) sue for and recover all rent and other
payments hereunder, then accrued or thereafter accruing, with respect to any or
all of the Equipment; (2) take possession of any or all of the Equipment,
wherever it may be located; (3) require Lessee to return promptly, at Lessee's
expense, any or all of the Equipment in accordance with all of the terms hereof;
(4) sell, release, or otherwise dispose of any or all of the Equipment,
regardless of whether in Lessor's possession, in a commercially reasonable
manner at public or private sale or lease and with or without notice to Lessee,
and apply the net proceeds of such sale or lease, after deducting all costs of
such sale or lease (including, but not limited to, costs of transportation,
possession, storage, refurbishing, advertising, and brokers' fees), to the
obligations of Lessee hereunder, with Lessee remaining liable for any
deficiency; (5) retain any repossessed Equipment and credit the reasonable value
of the remaining leasehold interest therein to the obligations of Lessee
hereunder, with Lessee remaining liable for any deficiency, to the maximum
extent permitted by applicable law, and with Lessor having no obligation to
reimburse Lessee on account of any excess of such reasonable value over such
obligations; (6) terminate this Agreement as to any of the Equipment; (7)
declare this
4
<PAGE>
Agreement to be in default and pursue any or all remedies in connection
therewith; or (8) exercise any other right or remedy available to Lessor at
law or in equity.
For purposes of the remedies set forth in clause (4) above, the net proceeds
of any re-lease by Lessor shall be determined by discounting to present value,
at the rate of four percent (4%) above the then Prime Rate (as established in
the Wall Street Journal) per annum, any rentals payable to Lessor pursuant to
such re-lease up to and including the expiration date of this Lease.
In addition, Lessee shall be liable, to the maximum extent permitted by
applicable law, for any and all legal fees and other costs and expenses incurred
by reason of any Default or the exercise of any of Lessor's remedies with
respect thereto, including all costs and expenses incurred in connection with
the return of any Equipment in accordance with the terms hereof or in placing
the Equipment in the condition required hereby. No right or remedy referred to
in this Section 9 is intended to be exclusive, but each shall be cumulative and
shall be in addition to any other remedy referred to herein or otherwise
available at law or in equity and may be exercised concurrently or separately
from time to time.
Unless otherwise expressly provided herein, a termination hereunder shall
occur only upon written notice by Lessor to Lessee and only with respect to
such items of Equipment as Lessor specifically elects to terminate in such
notice. Except as to such items of Equipment with respect to which there is a
termination, this Lease shall remain in full force and effect and Lessee
shall be and remain liable for the full performance of all its obligations
hereunder. The failure of Lessor to exercise the rights granted hereunder
upon any Default by Lessee shall not constitute a waiver of any such right
upon the continuation or reoccurrence of such Default.
9.2 Fees. In the event of any Default, Lessee shall pay to Lessor a
reasonable sum as and for attorneys' fees, and such other costs and expenses as
shall have been expended or incurred by Lessor in the enforcement of any right
or privilege hereunder.
10. QUIET POSSESSION. Lessor covenants that (i) it has the full right and
authority to enter into this Agreement on the terms herein stated, (ii) that it
is the lawful owner of the Equipment leased hereunder, and (iii) that
conditioned upon the Lessee performing all of the covenants and conditions
hereof, Lessee shall peaceably and quietly hold, possess and use the Equipment
during the term of this Agreement.
11. LIABILITY OF LESSOR. LESSOR SHALL NOT BE LIABLE TO LESSEE, ITS SERVANTS,
EMPLOYEES, AGENTS, OR TO
5
<PAGE>
ANY PERSON, FIRM OR CORPORATION FOR BUSINESS LOSS OR ANY LOSS OR INTER-
RUPTION OR DAMAGE TO BUSINESS OR PROFITS, OR FOR OTHER DAMAGES OF ANY KIND OR
NATURE WHATSOEVER, CAUSED BY REASON OF THEFT, CONVERSION, DESTRUCTION, LOSS,
REPAIRS, ADJUSTMENTS, SERVICING, REPLACEMENT,OR ANY INTERRUPTION IN THE
SERVICE OR AVAILABILITY FOR ANY REASON OF ANY EQUIPMENT PROVIDED UNDER THIS
AGREEMENT, PROVIDED, THAT LESSEE MAY PURSUE ANY CLAIMS AGAINST THE
MANUFACTURER OR DISTRIBUTOR OF ANY EQUIPMENT, AND LESSOR SHALL AT LESSEE'S
EXPENSE, COOPERATE IN SUCH EFFORT.
12. DISCLAIMER OF WARRANTIES. LESSOR, NOT BEING THE MANUFACTURER OR SUPPLIER
OF THE EQUIPMENT, NOR THE MANUFAC- TURER'S OR SUPPLIER'S AGENT, HEREBY EXPRESSLY
DISCLAIMS AND MAKES TO LESSEE NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR OTHERWISE,
INCLUDING, BUT NOT LIMITED TO: THE FITNESS FOR USE OR DESIGN OF THE EQUIPMENT;
THE QUALITY OR CAPACITY OF THE EQUIPMENT; THE WORKMANSHIP IN THE EQUIPMENT; THAT
THE EQUIPMENT WILL SATISFY THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR
CONTRACT PERTAINING THERETO; AND ANY GUARANTY OR WARRANTY AGAINST PATENT
INFRINGEMENT OR LATENT DEFECTS, it being agreed that all such risks, as between
Lessor and Lessee, are to be borne by Lessee. All assignable warranties made by
the manufacturer or supplier to Lessor are hereby assigned to Lessee for and
during the term of this Agreement and Lessee agrees to settle all such claims
directly with the manufacturer or supplier. Any such claim shall not affect in
any manner the unconditional obligation of Lessee to make rental and other
payments hereunder.
13. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to perform or
comply with any of its agreement contained herein, Lessor shall have the right,
but not the obligation, to effect such performance or compliance, and the amount
of any out-of-pocket expenses of Lessor incurred in connection with the
performance of or compliance with such agreement, together with the Late Payment
Penalty, shall be deemed additional rent, payable by Lessee upon demand.
14. MISCELLANEOUS.
14.1 Title. This Agreement is intended to constitute a lease only and
nothing herein contained shall give or convey to Lessee any right, title, or
interest in and to any Equipment leased hereunder except as a lessee.
6
<PAGE>
Lessee shall not at any time during the Term of this Agreement be or become
the agent of the Lessor, and Lessor shall not be responsible for the acts or
omissions of Lessee, or its agents, representations or its employees.
14.2 Title to Equipment. All Equipment leased hereunder shall remain the
property of Lessor, and shall be titled and/or registered in the name of the
Lessor.
14.3 Remaining Obligations. Any cancellation or termination by Lessor
pursuant to the provisions hereof shall not release Lessee from any outstanding
obligations to Lessor hereunder.
14.4 Enforcement. Lessor's failure to enforce strictly any provision of
this Lease shall not be construed as a waiver thereof or as excusing Lessee from
future performance.
14.5 Severability. The invalidity of any portion of this Lease shall not
affect the force and effect of the remaining valid portion hereof.
14.6 Notices. All notices shall be binding upon the parties hereto if
delivered by hand or sent by certified mail, return receipt requested, at the
following address, or at such other address as such party shall from time to
time designate in writing to the other party, and shall be effective from the
date of such hand delivery or mailing:
If to Lessor:
Chapman Limited Partnership I
Suite 2800
401 East Pratt Street
Baltimore, MD 21202
7
<PAGE>
If to Lessee:
The Chapman Co.
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
14.7 Entire Agreement. This Agreement shall constitute the entire
agreement between the parties hereto. Any change or modification of this
Agreement must be in writing and signed by the parties hereto. If the parties
hereto mutually desire that additional equipment purchased by the Lessor after
the date hereof, become subject to the terms and conditions of this Agreement,
the parties agree to mutually cooperate to amend this Agreement to include such
equipment, and to take any and all such other action as may be necessary or
desirable to accomplish such amendment.
14.8 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the respective parties, their successors, legal representatives and
assigns, provided, however, that neither this Agreement nor any interest herein
shall be assigned, alienated, pledged, or hypothecated voluntarily by Lessee or
by operation of law, nor shall any of the Equipment covered hereby be assigned
or sublet by Lessee, without the prior written consent of Lessor.
14.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original.
14.10 Further Assurances. Lessee shall promptly and duly execute and
deliver to Lessor such further instruments and assurances and take such further
action as Lessor may from time to time reasonably request to carry out the
intent and purpose of this Agreement and to establish and protect the rights and
remedies created or intended to be created in favor of Lessor hereunder.
14.11 Governing Law. This Agreement shall be deemed to have been made in
and shall be construed in accordance with the laws of the State of Maryland.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed these presents, as a
document under seal, as of the date first above written.
LESSOR:
WITNESS: CHAPMAN LIMITED PARTNERSHIP I
/S/ ELIZABETH R.HUGHES By: /S/ NATHAN A. CHAPMAN, JR. (SEAL)
- ---------------------- ------------------------------------
Name: Nathan A. Chapman, Jr.
-----------------------------
Title: President of Chapman General
----------------------------
Partner One, Inc.
----------------------------
Date: As of 10/1/93
-----------------------------
LESSEE:
/S/ ELIZABETH R.HUGHES THE CHAPMAN CO.
- ----------------------
By: /S/ NATHAN A. CHAPMAN, JR. (SEAL)
---------------------------------
Name: Nathan A. Chapman, Jr.
---------------------------------
Title: President
---------------------------------
Date: As of 10/1/93
---------------------------------
9
<PAGE>
EXHIBIT A
DESCRIPTION OF EQUIPMENT
10
<PAGE>
SCHEDULE C
<TABLE>
<CAPTION>
LEASE YEAR GROSS RENT
- ----------------- -----------
<S> <C>
1 ............... $ 118,152
2 ............... 118,152
3 ............... 118,152
4 ............... 118,152
5 ............... 118,152
6 ............... 118,152
7 ............... 118,152
</TABLE>
<PAGE>
AMENDMENT TO EQUIPMENT LEASE
AGREEMENT DATED OCTOBER 1, 1993
This Amendment is made effective as of October 1, 1993 by and between
Chapman Limited Partnership I ("Lessor") and The Chapman Co. ("Lessee").
WHEREAS, the equipment to be leased by Lessor to Lessee pursuant to the
Equipment Lease Agreement dated October 1, 1993 ("Lease") was not all available
as of such date.
THEREFORE, in consideration of the mutual covenants herein contained the
parties hereto agree as follows
The Lessor and Lessee desire to amend the Lease to reflect a rental schedule
in line with the Equipment leased during the periods indicated as follows:
The rent shall be payable as follows:
<TABLE>
<CAPTION>
RENTAL PERIOD AMOUNT
- ------------------------------------------- -------------
<S> <C>
October 1, 1993--October 31, 1993........... $ 6,892.20
November 1, 1993--November 30, 1993......... $ 8,861.40
December 1, 1993--December 31, 1993......... $ 9,846.00
</TABLE>
Annual rent commencing January 1, 1994 shall equal $118,152 in equal monthly
installments as provided in the Lease.
The Lease remains in full force and effecting all other respects.
CHAPMAN LIMITED PARTNERSHIP I THE CHAPMAN CO.
By: /S/ NATHAN A. CHAPMAN, JR. By: /S/ NATHAN A. CHAPMAN, JR.
- ------------------------------ ------------------------------
<PAGE>
Exhibit 10.8
ASSIGNMENT OF TRADEMARK
The Chapman Co., a corporation existing under the laws of Maryland,
located and doing business at World Trade Center - Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, Maryland 21202, (the "Assignor"), and having
adopted, used, is using, and is the owner of a certain trademark described
more fully below, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledge:
Sells, signs, and transfers to, Nathan A. Chapman, Jr., an individual and
US Citizen with a business at World Trade Center -- Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, Maryland 21202 (the "Assignee"), the entire
right, title, and interest, in and to the following trademark, together with
the goodwill of the business symbolized by said trademarks:
U.S. Trademark Application Serial No. 75/054,284
Assignor warrants and covenants that no assignment, grant, mortgage,
license, or other agreement affecting the rights and property herein
conveyed, other than the above-recited permitted exceptions, has been or will
be made to others by the Assignor or any predecessor in title thereto and
that the full right to convey the same as herein expressed is possessed
thereby;
To be binding on the successors and assigns of the Assignor and to extend
to the successors, assigns, and nominees of the Assignee.
THE CHAPMAN CO.
By: ____________________________________
Name: Nathan A. Chapman, Jr.
Title: President
STATE OF MARYLAND
COUNTY OF BALTIMORE
SWORN TO AND SUBSCRIBED before me this the ______ day of
_____________________________, 199_____.
____________________________________
Notary Public
<PAGE>
Exhibit 10.9
ASSIGNMENT OF TRADEMARK
The Chapman Co., a corporation existing under the laws of Maryland,
located and doing business at World Trade Center - Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, Maryland 21202, (the "Assignor"), and having
adopted, used, is using, and is the owner of a certain trademark described
more fully below, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledge:
Sells, signs, and transfers to, Nathan A. Chapman, Jr., an individual and
US Citizen with a business at World Trade Center - Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, Maryland 21202 (the "Assignee"), the entire
right, title, and interest, in and to the following trademark, together with
the goodwill of the business symbolized by said trademarks:
U.S. Trademark Application Serial No. 2,106,044
Assignor warrants and covenants that no assignment, grant, mortgage,
license, or other agreement affecting the rights and property herein
conveyed, other than the above-recited permitted exceptions, has been or will
be made to others by the Assignor or any predecessor in title thereto and
that the full right to convey the same as herein expressed is possessed
thereby;
To be binding on the successors and assigns of the Assignor and to extend
to the successors, assigns, and nominees of the Assignee.
THE CHAPMAN CO.
By: ____________________________________
Name: Nathan A. Chapman, Jr.
Title: President
STATE OF MARYLAND
COUNTY OF BALTIMORE
SWORN TO AND SUBSCRIBED before me this the ______ day of
____________________________, 199_____.
____________________________________
Notary Public
<PAGE>
Exhibit 10.10
LICENSE AGREEMENT
THIS AGREEMENT made as of the 26th day of December, 1997 by and between
Nathan A. Chapman, Jr., an individual and citizen of the United States, and
The Chapman Co., a Maryland Corporation.
RECITALS:
A. Nathan A. Chapman, Jr. is the owner of the service marks, DOMESTIC
EMERGING MARKETS and DEM (collectively, the "Marks").
B. Nathan A. Chapman, Jr. was assigned the entire interest and good
will of the Marks by agreements with The Chapman Co. dated December 24, 1997.
C. The Chapman Co. desires to use the Marks in its business operations.
D. On the terms set forth herein, Nathan A. Chapman, Jr. is willing to
grant the Chapman Co. license to use the Marks in its operations as an
investment banking firm and brokerage.
NOW, THEREFORE, in consideration of the mutual agreements and covenants
herein contained, and for other good and valuable consideration, Nathan A.
Chapman, Jr. and The Chapman Co., do hereby agree as follows:
AGREEMENT:
1. Nathan A. Chapman, Jr. hereby grants The Chapman Co. a revocable,
nonexclusive license to use the Marks in its operations as an investment
banking firm and brokerage, subject to the terms and conditions set forth
herein (the "License").
2. The Chapman Co. acknowledges that the Marks have incalculable value
to Nathan A. Chapman, Jr. and that Nathan A. Chapman, Jr. may, therefore,
revoke the License at any time upon 60 days' notice to The Chapman Co. As
soon as practicable after any revocation, The Chapman Co. shall (i)
discontinue all use by its agents to cease using, all letterhead advertising
materials and other materials (printed or otherwise) that include the Marks.
Without limiting the foregoing, if the employment of Nathan A. Chapman, Jr.
by The Chapman Co. should be terminated for any reason, Nathan A. Chapman,
Jr. may, without notice, revoke the License.
3. Nathan A. Chapman, Jr. reserves and shall have the right to grant to
any other company, including without limitation, any investment company, the
right to use the Marks or any variations of such Marks in its name and no
consent or permission of The Chapman Co. shall be necessary in connection
with such grant; but, if required by
<PAGE>
any applicable laws of any state or other jurisdiction, The Chapman Co. will
forthwith grant any consent, give any permission and execute any certificate
or instrument as may be requested by Nathan A. Chapman, Jr.
4. The Chapman Co. agrees that its use of the Marks pursuant to this
license is subject to the approval of and supervision by Nathan A. Chapman,
Jr. and that it will fully cooperate with an and assist Nathan A. Chapman,
Jr. in his exercise of these rights.
5. The Chapman Co. shall not, without the express written permission of
Nathan A. Chapman, Jr., grant, consent or give permission to any other
company or entity the right, to use the Marks or any similar marks.
6. This Agreement may be amended at any time by written agreement
executed by each of the parties.
7. This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
By: ______________________________
Nathan A. Chapman, Jr.
THE CHAPMAN CO.
By: ______________________________
Name: Nathan A. Chapman, Jr.
Title: President
2
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The Chapman Co., a Maryland corporation
<PAGE>
[LETTERHEAD]
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
Baltimore, Maryland /s/ Arthur Andersen LLP
December 29, 1997
<PAGE>
Exhibit 24
CHAPMAN HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director(s) and
Executive Officers of CHAPMAN HOLDINGS, INC., a Maryland corporation, 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 Executive Officers of Chapman Holdings, Inc., the
Registration Statement on Form SB-2, and any and all further amendments to
said Registration Statement, hereby ratifying and confirming all acts taken
by such agent and attorney-in-fact, as herein authorized.
DATE
/s/ NATHAN A. CHAPMAN, JR. December 30, 1997
- -------------------------------------- --------------------
Nathan A. Chapman, Jr., President and
Director (Principal Executive Officer)
/s/ EARL U. BRAVO, SR. December 30, 1997
- ------------------------------------- --------------------
Earl U. Bravo, Sr., Director
/s/ DONALD V. WATKINS December 12, 1997
- ------------------------------------- --------------------
Donald V. Watkins, Director
/s/ LOTTIE H. SHACKELFORD December 30, 1997
- ------------------------------------- --------------------
Lottie H. Shackelford, Director
/s/ M. LYNN BALLARD December 30, 1997
- ------------------------------------- ---------------------
M. Lynn Ballard, Treasurer and
Controller (Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
The schedule contains summary financial information extracted from the financial
statements of the Company for the fiscal years ended December 31, 1995 and 1996
and for the ten months ended October 31, 1996 and 1996 and 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 10-MOS 10-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 OCT-31-1996 OCT-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 OCT-31-1996 OCT-31-1997
<CASH> 0 532,758 0 306,122
<RECEIVABLES> 0 886,076 0 1,200,219
<SECURITIES-RESALE> 0 0 0 0
<SECURITIES-BORROWED> 0 0 0 0
<INSTRUMENTS-OWNED> 0 157,500 0 169,306
<PP&E> 0 7,558 0 17,343
<TOTAL-ASSETS> 0 2,798,356 0 2,818,525
<SHORT-TERM> 0 0 0 0
<PAYABLES> 0 1,669,149 0 1,592,593
<REPOS-SOLD> 0 0 0 0
<SECURITIES-LOANED> 0 0 0 0
<INSTRUMENTS-SOLD> 0 0 0 0
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 1,945 0 1,793
<OTHER-SE> 0 1,127,262 0 1,224,139
<TOTAL-LIABILITY-AND-EQUITY> 0 2,798,356 0 2,818,525
<TRADING-REVENUE> 0 0 0 0
<INTEREST-DIVIDENDS> 34,061 37,194 33,112 28,986
<COMMISSIONS> 2,475,151 2,553,098 1,776,898 2,246,180
<INVESTMENT-BANKING-REVENUES> 0 0 0 0
<FEE-REVENUE> 286,780 296,757 171,850 268,654
<INTEREST-EXPENSE> 0 0 0 0
<COMPENSATION> 1,259,371 1,050,193 813,363 942,867
<INCOME-PRETAX> 134,446 516,338 92,336 434,807
<INCOME-PRE-EXTRAORDINARY> 134,446 516,338 92,336 434,807
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 357,695 404,981 95,115 314,225
<EPS-PRIMARY> 0.16 0.18 0.04 0.16
<EPS-DILUTED> 0 0 0 0
</TABLE>
