<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-43487
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM SB-2
PRE-EFFECTIVE AMENDMENT NO. 1 TO
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>
--------------------------
THE WORLD TRADE CENTER - BALTIMORE
401 EAST PRATT STREET
28TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Address and Telephone Number of Principal Executive Office)
------------------------------
NATHAN A. CHAPMAN, JR., PRESIDENT
CHAPMAN HOLDINGS, INC.
THE WORLD TRADE CENTER - BALTIMORE
401 EAST PRATT STREET
28TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Name, Address and Telephone Number of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ELIZABETH R. HUGHES, ESQ. FRANK S. JONES, JR., ESQ.
VENABLE, BAETJER AND HOWARD, LLP WHITEFORD, TAYLOR & PRESTON L.L.P.
1800 MERCANTILE BANK & TRUST BUILDING SEVEN SAINT PAUL STREET
TWO HOPKINS PLAZA BALTIMORE, MARYLAND 21202-1626
BALTIMORE, MARYLAND 21201-2978 (410) 347-8707
(410) 244-7400
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
AFTER THIS REGISTRATION STATEMENT IS EFFECTIVE.
If any of the securities being registered on this form is to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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: FEBRUARY 17, 1998
MINIMUM OFFERING: 850,000 SHARES
MAXIMUM OFFERING: 1,000,000 SHARES
[LOGO]
CHAPMAN HOLDINGS, INC.
COMMON STOCK
--------------------
Chapman Holdings, Inc., a Maryland corporation (the "Company"), is offering
for sale up to 1,000,000 shares (the "Maximum") of its common stock, $0.001 par
value per share (the "Common Stock") (the offering made is referred to herein as
the "Offering"). A minimum of 850,000 shares of Common Stock must be sold in
order for the Offering to close (the "Minimum"). Prior to the Offering, there
has been no public market for the Common Stock and there can be no assurance
that any such market will develop in the future. The Company has applied for
quotation on the Nasdaq SmallCap Market (the "SmallCap Market") under the symbol
"CMAN". 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>
------------------------
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 National Association of
Securities Dealers, Inc. (the "NASD"). The Company's primary sources of revenue
are derived from brokerage services, corporate finance and government finance
activities. These activities are supported by the Company's research
capabilities.
The Company provides sales and trading services to institutional and retail
clients. Commissions are charged for executing buy and sell orders of securities
on national and regional exchanges and in the over-the-counter market.
The Company has been a member of over 200 underwriting syndicates for
corporate issues, substantially all of which were equity offerings. The number
of transactions in which the Company participated during the last three years
declined primarily due to its limited capital position. The Company has been
involved in government finance for over nine years. The Company has managed,
primarily as co-manager, over 200 tax-exempt public finance transactions,
including approximately 35 transactions in the past two years. The Company has
also participated in the direct offering, as a selling group member, of debt of
the Tennessee Valley Authority and in competitive syndicates for other
government agencies.
The Company has recently launched a new corporate finance strategic
initiative called the Domestic Emerging Markets ("DEM") strategy which targets
domestic companies controlled by African-Americans, Asian-Americans,
Hispanic/Latino Americans and women as candidates for the Company's investment
banking services. The Company intends to market its investment banking services
to companies meeting the DEM profile and to make markets in the stocks of
selected DEM companies. The Company believes that its DEM strategy will permit
it to develop a market niche for its corporate finance business.
The Company is headquartered at The World Trade Center--Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, MD 21202 and its telephone number is (410)
625-9656. The Company has sales offices in Alabama, Tennessee, Illinois, Texas
and Pennsylvania.
3
<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 increase its net capital and the amounts of net
proceeds allocated to the other specified uses of proceeds. See
"Use of Proceeds."
Risk Factors: Prospective investors in the Common Stock should carefully
consider the information discussed under the heading "Risk
Factors."
</TABLE>
4
<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 estimated offering expenses.
5
<PAGE>
RISK FACTORS
THE SHARES INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE
SHARES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors, including those set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Shares.
GENERAL SECURITIES BUSINESS RISKS
The securities business is, by its nature, subject to numerous and
substantial risks, particularly in volatile or illiquid markets and in markets
influenced by sustained periods of low or negative economic growth, including
the risk of losses resulting from the underwriting or ownership of securities,
trading, principal activities, counterparty failure to meet commitments,
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders), failures in connection with the processing of
securities transactions, litigation, the risks of reduced revenue in periods of
reduced demand for public offerings or reduced activity in the secondary markets
and the risk of reduced spreads on the trading of securities.
MANAGEMENT OF GROWTH
The Company has experienced and expects to continue to experience
significant growth in its business activities and the number of its employees.
This growth has required and will continue to require increased investment in
personnel, financial and management systems and controls and facilities. The
absence of continued revenue growth, or the Company's inability to manage such
growth, could have a material adverse effect on the Company's operations. In
addition, as is common in the securities industry, the Company is and will
continue to be highly dependent on the effective and reliable operation of its
communications and information systems. Any difficulty in the operation of
existing systems, the implementation of new systems or the training of personnel
could adversely affect the Company's ability to manage growth.
HIGHLY COMPETITIVE INDUSTRY
The investment banking and brokerage industry is extremely competitive. The
Company encounters intense competition in all aspects of the securities business
and competes directly with other securities firms, a significant number of which
have greater capital, experience and other resources than the Company.
Competition also exists for experienced personnel including technical personnel
and account executives. In addition to competition from firms currently in the
securities business, recently there has been increasing competition from other
sources, such as commercial banks and insurance companies offering financial
services. See "Business--Competition."
UNPROVEN NATURE OF DOMESTIC EMERGING MARKETS STRATEGY
The Company has recently launched the DEM strategic initiative which targets
U.S. companies controlled by African-Americans, Asian-Americans, Hispanic/Latino
Americans and women as candidates for investment banking services. The Company
will seek to expand its investment banking business through the implementation
of its DEM strategy, by earning fees from the distribution of DEM products, such
as investment companies with DEM-driven portfolios, from the provision of
financial advisory and investment banking services to DEM companies and by
making markets in the securities of DEM companies. Although the Company has
identified approximately 150 publicly traded companies with DEM characteristics,
there can be no assurance that companies meeting the DEM profile will select the
Company for
6
<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. See "Use of Proceeds." There can be no assurance that the Company
will continue to be invited to participate in such transactions or that the
number of such transactions in which it is invited to participate will grow. The
Company also intends to deploy a portion of the net proceeds in efforts to
obtain government finance business in those states with the most tax-exempt bond
offerings in which the Company does not already have an office. The addition of
personnel to staff such offices (together with any corporate finance staff added
to implement the DEM strategy) can be expected to significantly increase the
Company's operating expenses. There can be no assurance that the Company will be
able to increase its revenue in an amount sufficient to offset such increased
expenses. See "Business Strategy."
DEPENDENCE ON KEY PERSONNEL; DUTIES TO OTHER COMPANIES
For the foreseeable future, the Company will place substantial reliance upon
the personal efforts and abilities of Nathan A. Chapman, Jr., President of the
Company. The loss of the services of Mr. Chapman may have a material adverse
effect on the business, operations, revenue and/or business prospects of the
Company. The Company maintains key man life insurance on Mr. Chapman in the
amount of $7 million. Mr. Chapman also serves as President and Chief Executive
Officer of CCM, CIA and certain investment companies sponsored by CCM.
Therefore, Mr. Chapman will not devote full time to the operation of the Company
and will devote significant time to his duties to these other entities. The
Company expects that Mr. Chapman will devote no less than 50% of his time to the
operation of the Company. See "Certain Transactions."
CERTAIN TRANSACTIONS; RELATIONSHIPS WITH OTHER CHAPMAN ENTITIES; CONFLICTS OF
INTEREST
The Company acts as an underwriter for the securities of three active
registered investment companies, DEM, Inc., a closed-end company, and DEM Equity
Fund and The Chapman U.S. Treasury Money Fund, each an open-end portfolio of The
Chapman Funds, Inc. These related party transactions accounted for 14%, 16% and
13% of the Company's revenues in the ten month ended October 31, 1997, and the
years ended 1996 and 1995, respectively. Each of these investment companies was
sponsored and is managed by CCM. CCM's majority owner, through a holding
company, is Nathan A. Chapman, Jr., the Company's President. In addition,
several of the Company's key executives, including Mr. Chapman, are also
officers and/or directors of holding companies owning all of the outstanding
equity securities of CCM and CIA. The common management and/or ownership among
CCM, CIA, DEM, Inc., The Chapman Funds, Inc. and the Company may involve
potential conflicts of interest with respect to the terms of business
transactions, allocations of shared expenses for overhead (including
compensation of shared employees, lease payments and other expenses) and the
allocation of business opportunities between the Company and such other
companies. See "Certain Transactions." Further, because the key executives of
the Company are also senior executives of other companies, the Company's
management will not be able to devote all of its time to the business affairs of
the Company. Management intends to have all business
7
<PAGE>
transactions and allocations of overhead between the Company and such other
companies approved by a committee of the Board of Directors composed of
independent, outside directors. Furthermore, the compensation of the Company's
President will be approved by the Compensation Committee of the Board of
Directors, all of the members of which are independent, outside directors. The
Company currently has outstanding loans to certain affiliated parties. As of
December 31, 1997, CCM owed the Company $771,889 as evidenced by in a 10-year
note executed as of October 31, 1997 in the amount of $763,367 which accrues
interest at 6.68% per annum. As of December 31, 1997, CCM has not made any
payments on this note. As of December 31, 1997, CCM also owed the Company
$28,782 pursuant to certain allocation arrangements pertaining to shared
overhead and other expenses of the Company and CCM. As of December 31, 1997, the
Company had outstanding advances to Mr. Chapman of $164,601, of which $116,011
represents outstanding principal and interest on a $106,923 demand note dated
December 31, 1996 which bears interest at the prime rate, and $48,590 of which
represents additional advances to Mr. Chapman since the date of such note. As of
December 31, 1997, Mr. Chapman has made no payments to the Company with respect
to the note or the additional advances. As of February 11, 1998, with the
approval of the independent members of the Board of Directors, Mr. Chapman
executed a three-year note in the amount of $176,250 which accrues interest at
5.54% per annum to replace the note executed December 31, 1996. The Company's
advances to Mr. Chapman were used by Mr. Chapman for personal expenses. See
"Certain Transactions."
POTENTIAL CONFLICTS CAUSED BY SELF-UNDERWRITING; NEED FOR QUALIFIED INDEPENDENT
UNDERWRITER
The Chapman Co. (which is a wholly-owned subsidiary of the Company) is the
Underwriter of the Offering on a best efforts basis. As a wholly-owned
subsidiary of the Company, The Chapman Co.'s role as Underwriter may involve
certain conflicts of interest. Pursuant to the Conduct Rules of the NASD, the
Shares are being offered at a price no higher than that recommended by Ferris
Baker Watts, Incorporated, which is acting as qualified independent underwriter
(the "QIU"). Although the QIU has participated in the preparation of the
Registration Statement of which this Prospectus forms a part and is required to
exercise the usual standards of "due diligence" with respect thereto, there can
be no assurance that certain conflicts will not arise with respect to this
Offering, or if conflicts do arise, that they will be resolved in a manner
favorable to investors. See "Plan of Distribution."
ARBITRARY NEGOTIATED OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined
through negotiation between the Company and the QIU and may not be indicative of
the market price of the Common Stock after the Offering. For a discussion of the
factors considered in determining the offering price, see "Plan of
Distribution." Certain factors, such as subsequent sales of Common Stock into
the market by existing stockholders and market conditions generally, could cause
the market price of the Common Stock to fluctuate substantially. Furthermore,
there can be no assurance that the offering price will correspond to the price
at which the Common Stock will trade in the public market at any time subsequent
to the Offering. See "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The sale of the Minimum would involve immediate and substantial dilution of
$5.40 per share, or 67.5%, to investors because the net tangible book value per
share of Common Stock upon the sale of the Minimum would be substantially less
than the per share offering price, assuming an $8.00 per share offering price.
See "Dilution."
8
<PAGE>
EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
As of the Minimum closing, the Company will have 2,839,235 shares of Common
Stock outstanding, of which 1,828,115 will be beneficially owned by Nathan A.
Chapman, Jr. With the exception of 196,595 shares of Common Stock owned by Mr.
Chapman, all of the shares outstanding prior to the Offering will be available
for resale in the public market, under Rule 144 promulgated pursuant to the
Securities Act, 90 days after the date of this Prospectus. Mr. Chapman has
agreed not to publicly sell any of the shares of Common Stock that he owns as of
the date of this Prospectus until June 28, 1999. Sales of a significant number
of shares of Common Stock in the public market could have a material adverse
effect on the market price of the Common Stock. See "Shares Eligible for Future
Sale."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including the
number of underwriting transactions in which the Company participates, access to
public markets for companies in which the Company has invested as a principal,
the valuations of the Company's principal investments, the level of
institutional and retail brokerage transactions, variations in expenditures for
personnel, litigation expenses and expenses of establishing new business units.
The Company's revenue from an underwriting transaction is recorded only when the
underwritten security commences trading; accordingly, the timing of the
Company's recognition of revenue from a significant transaction can materially
affect the Company's quarterly operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BEST EFFORTS NATURE OF OFFERING; UNDERWRITER HAS NO COMMITTMENT TO PURCHASE
SHARES
The Underwriter shall use its best efforts to sell the Shares; however,
there is no commitment by the Underwriter or any other person to purchase the
Shares. Consequently, the Company can give no assurance that any of the Shares
will be sold. Although the Offering will not close unless the Minimum is
achieved, the Company's ability to implement the DEM strategy and expand its
operations will be diminished to the extent less than the Maximum is sold. See
"Use of Proceeds" and "Plan of Distribution."
REGULATORY RISKS
The Company's business, and the securities industry generally, are subject
to extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance with
their rules and regulations. Among other things, these regulatory authorities
impose restrictions on sales methods, trading practices, use and safekeeping of
customer funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to broker-dealers, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance requirements on the Company. Failure to
comply with any of the laws, rules or regulations of any independent, state or
federal regulatory authority could result in a fine, injunction, suspension or
expulsion from the industry, which could have a material adverse effect on the
Company. Although the Company has implemented procedures designed to achieve
compliance with such laws, rules and regulations, there can be no assurance that
such compliance procedures will prevent violations. Furthermore, amendments to
existing statutes and regulations or the adoption of new statutes and
regulations could require the Company to alter its methods of operation at costs
which could be substantial. See "Business--Government Regulation," "--Net
Capital Requirements" and "--Legal Proceedings."
NET CAPITAL REQUIREMENTS
The Securities and Exchange Commission (the "Commission") and the NASD have
adopted stringent provisions with respect to net capital requirements applicable
to the operation of securities firms. A
9
<PAGE>
significant operating loss or any charge against the net capital of the
Company's brokerage subsidiary, The Chapman Co., could adversely affect its
ability to operate, expand or, depending upon the magnitude of the loss or
charge, maintain its present level of business. These rules could also restrict
the ability of the Company to withdraw capital from The Chapman Co., even in
circumstances where The Chapman Co. has more than the minimum amount of required
capital, which, in turn, could limit the ability of the Company to implement its
strategies. See "Business--Government Regulations."
CONTROL BY PRINCIPAL STOCKHOLDER
Nathan A. Chapman, Jr. will beneficially own in the aggregate approximately
64.4% and 61.2% of the outstanding shares of Common Stock assuming the Minimum
and Maximum, respectively, are sold in this Offering. Accordingly, Mr. Chapman
will control the outcome of all matters submitted to the stockholders for
approval, including the election of directors of the Company. See "Management"
and "Principal Stockholders."
NO PRIOR PUBLIC MARKET FOR AND POSSIBLE PRICE VOLATILITY OF THE SHARES;
LIMITATIONS ON MARKET MAKING ACTIVITIES
Prior to the Offering, there has been no public trading market for the
Common Stock and there is no assurance that an active public market for the
Common Stock will develop or, if developed, will continue after the Offering. In
the absence of an active public trading market, an investor may be unable to
liquidate his investment. The trading prices of the Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of material business events by the Company or its
competitors and other events or factors. Moreover, pursuant to Commission and
NASD regulations, a company engaging in market making transactions in its own or
an affiliate's securities must deliver a current market making prospectus to
purchasers. Therefore, the Company and its wholly-owned brokerage subsidiary,
The Chapman Co., will not be able, in the absence of a current market making
prospectus, to engage in trading or market making activities relating to the
Common Stock following consummation of this Offering. A "market making"
prospectus is a continuously updated prospectus that is part of an effective
registration statement filed with the Securities and Exchange Commission (the
"Commission") and must be delivered to purchasers of securities from the issuer
of such securities or a broker-dealer affiliate of such issuer in market making
transactions. The costs of maintaining a current prospectus and the prospectus
delivery requirements can increase the costs of making a market in securities to
both the issuer and the broker-dealer. The Company believes that there will be
sufficient market makers to qualify for and maintain a SmallCap Market
quotation; however, no firms are under any obligation to make a market in the
Common Stock and any firm which commences market making activities may cease
such activities at any time. Further, other rules, including those relating to
the use of "insider information," may prevent the Company's registered
representatives from recommending the Common Stock to its customers. To the
extent that the Company is unable to make a market in, or recommendations
regarding, the Common Stock following this Offering, the ability of investors to
sell the Common Stock in the secondary market may be limited and the price of
the Common Stock may be adversely affected.
RISKS OF LOW PRICED STOCKS
There is currently no public market for the Company's Common Stock. The
Company has applied for quotation on the SmallCap Market; however, there can be
no assurance that the Nasdaq Stock Market will
10
<PAGE>
approve the Company's application. A summary of the current financial
requirements for initial quotation and maintenance of such quotation on the
SmallCap Market as currently in effect are set forth below:
<TABLE>
<CAPTION>
INITIAL
ATTRIBUTE QUOTATION MAINTENANCE
- --------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Net Tangible Assets
or $4,000,000 or $2,000,000 or
Market Capitalization
or $50,000,000 or $35,000,000 or
Net Income (latest
year or two of last three
years) $750,000 $500,000
Public Float (Shares) 1,000,000 500,000
Market Value of
Public Float $5,000,000 $1,000,000
Stockholders 300 300
Minimum Bid Price $4.00 $1.00
Number of Market
Makers 3 2
</TABLE>
The Company expects that at the time of the Minimum closing it will meet the
current initial quotation and maintenance requirements. However, the Offering is
not conditioned on achieving listing on the SmallCap Market, and there can be no
assurance that a market will develop for the Common Stock, or that the Company
will continue to meet the other requirements for quotation. Until such time as
the Company's application is approved and the Common Stock is quoted on the
SmallCap Market, trading in the Common Stock, should a market develop, could be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's Electronic Bulletin Board.
CREDIT RISKS
The Company clears all transactions for its brokerage customers on a fully
disclosed basis with its clearing agent, which carries and clears all customer
securities accounts. The clearing agent also lends funds to the Company's
brokerage customers through the use of margin credit. These loans are made to
customers on a secured basis, with the clearing agent maintaining collateral in
the form of salable securities, cash or cash equivalents. Pursuant to the terms
of the agreement between the Company and the clearing agent, in the event that
customers fail to pay for their purchases, to supply the securities that they
have sold, or to repay funds they have borrowed, and the clearing agent
satisfies any customer obligations, the Company would be obligated to indemnify
the clearing agent for any resulting losses. See "Business-- Clearing Agent and
Customer Credit."
LEGAL PROCEEDINGS AND ARBITRATION RISKS
Many aspects of the Company's business involve substantial risks of
liability and regulatory enforcement by state and federal regulators.
Additionally, in recent years, there has been increased litigation involving
participants in the securities industry. Underwriters and agents are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. Claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty are regularly made against
broker-dealers. Customer claims may be made in arbitration proceedings, which
claims could result in awards of compensatory and/or punitive damages against
the Company. The Company has been, and is currently, a party to such
proceedings, none of which management believes will result in any material
liability. See "Business--Legal Proceedings."
11
<PAGE>
CURRENT AND POTENTIAL REFORMS IN THE NASDAQ STOCK MARKET
The Nasdaq Stock Market has come under intense scrutiny in the media and
Congress during the past few years and has been the subject of Commission
investigations into its operations. Concerns have been raised with respect to
the size of the spreads between the price paid by investors purchasing Nasdaq-
quoted securities and the dealers who process the transactions. Concerns also
have been raised with respect to whether Nasdaq's listing requirements are
sufficiently stringent and whether the NASD, the trade organization controlling
the Nasdaq market, carefully polices Nasdaq-quoted companies. In response, the
NASD has begun to boost its internal compliance and monitoring programs,
including establishing a separate regulatory unit, National Association of
Securities Dealers Regulation, Inc. ("NASDR"). More specifically, NASDR has
taken numerous steps to better monitor trading activities among dealers and to
scrutinize companies' compliance with applicable standards for quotation, and
has heightened its overall monitoring of small capitalization companies.
The effects of current and proposed Nasdaq reform on the operations of
brokerage firms, especially those specializing in the securities of small
capitalization companies, such as the Company, cannot be fully anticipated. The
cost of compliance with any new rules, regulations and procedures instituted by
the NASDR could be significant. Additionally, the implementation of stricter
standards for initial and continued inclusion of companies on Nasdaq could
adversely affect the prospects of small capitalization companies, the stock
performance of such companies, and the liquidity of investors' investments in
such companies. Increased compliance costs or the inability to attain or
maintain the quotation of underwriting clients on the Nasdaq system, or a
combination thereof, could adversely affect the financial performance of the
Company.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash dividends in the foreseeable future.
The Company intends to retain all earnings, if any, for the foreseeable future
for the Company's continued growth. Moreover, the Company's ability to pay
dividends in the future may be restricted by the obligations of its wholly-owned
broker-dealer subsidiary, The Chapman Co., to comply with the net capital rules
applicable to broker-dealers. See "Dividend Policy" and "Business--Government
Regulation, Net Capital Requirements."
DISCRETIONARY USE OF PROCEEDS
The Company will have broad discretion as to the application of the offering
proceeds. Assuming an offering price of $8.00 per share, if the Minimum is sold,
14.9% of the net proceeds to the Company from the sale of the Shares will be
applied to general corporate purposes, such as working capital. In the event the
Maximum is sold, 14.0% of the net proceeds will be used in connection with such
general corporate purposes. The Company may also use a portion of the offering
proceeds to effectuate suitable business combinations, including mergers,
consolidations and/or corporate acquisitions. Such transactions may be
consummated notwithstanding the stockholders' inability to conduct a financial
review of any potential target or the lack of a stockholder vote approving the
potential business combination. See "Use of Proceeds."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares, 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.
USE OF PROCEEDS
<TABLE>
<CAPTION>
MINIMUM PERCENT MAXIMUM PERCENT
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Expand net capital to participate in corporate & government finance
transactions..................................................... $ 2,624,000 43.6% $ 3,140,000 43.9%
Expand market-making and research capabilities..................... 500,000 8.3 600,000 8.4
Implement DEM strategy............................................. 500,000 8.3 600,000 8.4
Expand sales and marketing efforts................................. 1,000,000 16.6 1,200,000 16.8
Hire sales personnel to staff additional sales office and corporate
finance staff to implement DEM strategy.......................... 500,000 8.3 600,000 8.4
Working capital and general corporate purposes..................... 900,000 14.9 1,000,000 14.0
------------ --- ------------ ---
Totals............................................................. $ 6,024,000 100% $ 7,140,000 100%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
While the Company does not have any current plans regarding mergers and
acquisitions, the Company may use a portion of the net proceeds from this
Offering for such purposes.
The proposed allocation of net proceeds of this Offering represents the
Company's best estimates based upon current plans and certain assumptions
regarding industry and general economic conditions and the Company's future
revenue and expenditures. If any of these factors changes, the Company may find
it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes or may
be required to seek additional financing. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all. Any failure to obtain additional financing, if required, could have an
adverse effect on the Company, including possibly requiring the Company to
curtail its operations. Since a portion of the net proceeds will be applied to
general corporate purposes and working capital, the Company will have broad
discretion as to the application of such net proceeds.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments. None of the net proceeds of the Offering are specifically
designated for payments to officers, directors, or other affiliates of the
Company.
13
<PAGE>
DILUTION
The difference between the 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
estimated 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>
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997, and as adjusted to give effect to the sale of the Minimum at
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."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the Summary Financial Data included
elsewhere in this Prospectus.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
The Company's primary sources of revenue are commissions earned from
brokerage services and fees earned from corporate finance and government finance
activities. The Company's principal business activities are, by their nature,
affected by many factors, including general economic and financial conditions,
movement of interest rates, security valuations in the marketplace, competitive
conditions, transaction volume and market liquidity. Consequently, brokerage
commission revenue and investment banking fees can be volatile. While the
Company seeks to maintain cost controls, a significant portion of the Company's
expenses are fixed and do not vary with market activity. As a result,
substantial fluctuations can occur in the Company's revenue and net income from
period to period. Unless otherwise indicated, in this section, references to
years are to fiscal years.
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TEN MONTHS ENDED OCTOBER 31,
---------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1996 1997
---------------------------- ---------------------------- ---------------------------- -----------
<CAPTION>
(UNAUDITED)
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS TOTAL REVENUE AMOUNTS
----------- --------------- ----------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Commissions................. $ 2,475,151 88.5% $ 2,553,098 88.4% $ 1,776,898 89.6% $ 2,246,180
Underwriting and management
fees...................... 286,780 10.3% 296,757 10.3% 171,850 8.7% 268,654
Interest and dividends...... 34,061 1.2% 37,194 1.3% 33,112 1.7% 28,986
----------- ----- ----------- ------ ----------- ------ -----------
Total revenue............. 2,795,992 100.0% 2,887,049 100.00% 1,981,860 100.00% 2,543,820
----------- ----- ----------- ------ ----------- ------ -----------
EXPENSE:
Compensation and benefits... 1,259,371 45.0% 1,050,193 36.4% 813,363 41.0% 942,867
Brokerage and clearing
fees...................... 323,245 11.6% 238,027 8.2% 195,249 9.9% 237,713
Communications.............. 154,506 5.5% 164,303 5.7% 133,036 6.7% 124,117
Occupancy and equipment..... 368,863 13.2% 422,598 14.6% 328,939 16.6% 296,718
Travel and business
development............... 193,302 6.9% 177,793 6.2% 169,126 8.5% 196,511
Professional fees........... 135,090 4.8% 154,993 5.4% 109,377 5.5% 76,775
Other operating expense..... 227,169 8.1% 162,804 5.6% 140,434 7.1% 234,312
----------- ----- ----------- ------ ----------- ------ -----------
Total expense............. 2,661,546 95.1% 2,370,711 82.1% 1,889,524 95.3% 2,109,013
----------- ----- ----------- ------ ----------- ------ -----------
Income from continuing
operations................ 134,446 4.8% 516,338 17.9% 92,336 4.7% 434,807
Income tax provision........ (72,000) (2.6)% 166,000 5.7% 29,000 1.5% 173,900
----------- ----- ----------- ------ ----------- ------ -----------
Net income from continuing
operations................ 206,446 7.4% 350,338 12.1% 63,336 3.2% 260,907
Net income from discontinued
operations................ 151,249 5.4% 54,643 1.8% 31,779 1.6% 53,318
Net income.................. $ 357,695 12.8% $ 404,981 14.0% $ 95,115 4.8% $ 314,225
----------- ----- ----------- ------ ----------- ------ -----------
----------- ----- ----------- ------ ----------- ------ -----------
<CAPTION>
<S> <C>
PERCENTAGE OF
TOTAL REVENUE
---------------
<S> <C>
REVENUE:
Commissions................. 88.3%
Underwriting and management
fees...................... 10.6%
Interest and dividends...... 1.1%
-----
Total revenue............. 100.0%
-----
EXPENSE:
Compensation and benefits... 37.1%
Brokerage and clearing
fees...................... 9.3%
Communications.............. 4.9%
Occupancy and equipment..... 11.7%
Travel and business
development............... 7.7%
Professional fees........... 3.0%
Other operating expense..... 9.2%
-----
Total expense............. 82.9%
-----
Income from continuing
operations................ 17.1%
Income tax provision........ 6.8%
-----
Net income from continuing
operations................ 10.3%
Net income from discontinued
operations................ 2.1%
Net income.................. 12.4%
-----
-----
</TABLE>
16
<PAGE>
TEN MONTHS ENDED OCTOBER 31, 1997 COMPARED TO TEN MONTHS ENDED OCTOBER 31, 1996.
Total revenue for the ten months ended October 31, 1997 increased by
$561,960, or 28.4%, to $2,543,820 from $1,981,860 for the prior comparable
period. Revenue increased in each of the Company's three major business areas
during the ten months ended October 31, 1997.
Commission revenue increased by $469,282, or 26.4%, to $2,246,180 for the
ten months ended October 31, 1997 from $1,776,898 for the prior comparable
period. The increase was due to an increase in sales volume from the Company's
existing clients, an increase in the number of clients resulting from the
Company's business development activity and the strong investment market. The
Company's institutional business increased by $374,800, or 57.6%, to $1,026,000
for the ten months ended October 31, 1997 from $651,200 for the prior comparable
period.
Underwriting and management fees increased by $96,804, or 56.3%, to $268,654
for the ten months ended October 31, 1997 from $171,850 for the prior comparable
period. The increase was primarily due to fees earned by the Company in a single
corporate finance underwriting managed by the Company. The number of municipal
finance underwriting syndicates in which the Company participated as a
co-manager increased during the ten months ended October 31, 1997; however, the
Company's municipal finance revenue per transaction was adversely affected by an
industry-wide decrease in the amount of management fees paid to co-managers in
municipal finance underwriting syndicates.
Total expense for the ten months ended October 31, 1997 increased by
$219,489, or 11.6%, to $2,109,013 from $1,889,524 for the prior comparable
period. Total expenses decreased to 82.9% of total revenue for the ten months
ended October 31, 1997 from 95.3% of total revenue for the prior comparable
period.
Compensation and benefits increased by $129,504, or 15.9%, to $942,867 for
the ten months ended October 31, 1997 from $813,363 for the prior comparable
period. As a percentage of total revenue, these expenses decreased to 37.1% for
the ten months ended October 31, 1997 from 41.0% for the prior comparable
period. The compensation expense portion of compensation and benefits increased
by 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 attributable to a change in telephone service
providers.
Occupancy and equipment expense decreased by $32,221, or 9.8%, to $296,718
for the ten months ended October 31, 1997 from $328,939 for the prior comparable
period, due to a reduction of rental overhead allocated to the Company.
Travel and business development expense increased by $27,385, or 16.2%, to
$196,511 for the ten months ended October 31, 1997 from $169,126 for the prior
comparable period, due to increased travel and promotional activities.
Professional fees decreased by $32,602, or 29.8%, to $76,775, for the ten
months ended October 31, 1997 from $109,377 for the prior comparable period. The
Company incurred professional fees in connection with a proposed financing in
each period.
17
<PAGE>
Other operating expense increased by $93,878, or 66.8%, to $234,312 for the
ten months ended October 31, 1997 from $140,434 for the prior comparable period.
This increase was attributable to increased advertising, supplies and conference
expenses to support the Company's sales programs.
Income taxes from continuing operations increased by $144,900, or 499.7%, to
$173,900 for the ten months ended October 31, 1997 from $29,000 for the prior
comparable period. This increase was due to increased income during the ten
months ended October 31, 1997 and a lower effective tax rate during the prior
comparable period because of the elimination of the valuation reserve related to
the full utilization of the net operating loss carryforward.
Net income from continuing operations increased by $197,571, or 311.9%, to
$260,907 for the ten months ended October 31, 1997 from $63,336 for the prior
comparable period.
Net income from discontinued operations increased by $21,539, or 67.8%, to
$53,318 for the ten months ended October 31, 1997 from $31,779 for the prior
comparable period due primarily to increased assets under management for CCM,
the Company's former investment advisor subsidiary.
Net income increased by $219,110, or 230.4%, to $314,225 for the ten months
ended October 31, 1997 from $95,115 for the prior comparable period.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995.
Total revenue for 1996 increased by $91,057, or 3.3%, to $2,887,049 from
$2,795,992 for 1995. This increase is primarily due to an increase in commission
revenue of $77,947 for 1996 versus 1995.
Commissions increased by $77,947, or 3.1%, to $2,553,098 for 1996 from
$2,475,151 for 1995. This increase reflects continued improvement in market
conditions and the effect of an increase in the number of institutional
commission clients.
Underwriting and management fees increased by $9,977, or 3.5%, to $296,757
for 1996 from $286,780 for 1995. This increase reflects an increase in revenue
from municipal financial advisory services.
Total expense for 1996 decreased by $290,775, or 10.9%, to $2,370,771 from
$2,661,546 for 1995. Total expenses decreased to 82.1% of total revenue for 1996
as compared to 95.1% of total revenue for 1995.
Compensation and benefits decreased by $209,178, or 16.6%, to $1,050,193 for
1996 from $1,259,371 for 1995. As a percent of total revenue, these expenses
decreased to 36.4% in 1996 from 45.0% in 1995. The decrease in compensation and
benefits is primarily attributable to the Company's reduced use of temporary
employment services.
Brokerage and clearing fees decreased by $85,218, or 26.4%, to $238,027 for
1996 from $323,245 for 1995. Although the volume of fixed income securities
transactions remained relatively constant in 1996 as compared to 1995, brokerage
and clearing fees decreased due to a relative increase in the percentage of
fixed income transactions pertaining to securities that carry a lower clearing
charge.
Communication expense increased by $9,797, or 6.3%, to $164,303 for 1996
from $154,506 for 1995, reflecting an increase in long distance charges as a
result of the Company's efforts to increase its institutional commission
revenue.
Occupancy and equipment expense increased by $53,735, or 14.6%, to $422,598
for 1996 from $368,863 for 1995, reflecting the opening of the Company's sales
offices in Pennsylvania and Texas.
Travel and business development expense decreased by $15,509, or 8.0%, to
$177,793 for 1996 from $193,302 for 1995, reflecting better planning of travel
expenditures and a reduction of non-sales related travel and business
expenditures.
Professional fees increased by $19,903, or 14.7%, to $154,993 for 1996 from
$135,090 for 1995. This increase was primarily related to a proposed financing
which was postponed.
18
<PAGE>
Other expense decreased by $64,365, or 28.3%, to $162,804 for 1996 from
$227,169 for 1995 reflecting a decrease in advertising, printing and promotional
expense.
Income taxes from continuing operations increased in 1996 by $238,000 to
$166,000 from an income tax benefit of $72,000 in 1995. The increase was
attributable to the increase in income from continuing operations during 1996
and the income tax benefit recognized in 1995 from a reduction in a valuation
reserve related to the utilization of a net operating loss carryforward.
Net income from continuing operations increased by $143,892, or 69.7%, to
$350,338 for 1996 from $206,446 for 1995.
Net income from discontinued operations decreased by $96,606, or 63.9%, to
$54,643 for 1996 from $151,249 for 1995 due primarily to a change in accounting
principal for income taxes as partially offset by increased assets under
management for CCM, the Company's former investment advisor subsidiary.
Net income increased by $47,286, or 13.2%, to $404,981 for 1996 from
$357,695 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, investment securities, and receivables
from other broker-dealers and the Company's clearing agent, all of which
fluctuate depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and the Company's clearing agent turnover
rapidly. Both the Company's total assets as well as the individual components as
a percentage of total assets may vary significantly from period to period
because of changes relating to customer demand, economic and market conditions,
and proprietary trading strategies. The Company's total assets for the ten
months ended October 31, 1997 and 1996, were $2,818,525 and $2,798,356,
respectively.
As a broker-dealer, the Company is subject to the net capital rules of the
NASD. As such, the Company is subject to certain restrictions on the use of
capital and its related liquidity. The Company's net capital positions for the
fiscal year ended December 31, 1996 and the ten months ended October 31, 1997
were $426,067 and $496,653, respectively, which were $326,067 and $396,688,
respectively, in excess of the Company's minimum net capital requirement. See
"Business--Government Regulation."
Historically, the Company has financed its operations through the private
placement of equity securities and cash flow from operations. The Company has
not employed any significant leverage or debt. The Company intends to use debt
prudently in the future and may seek to arrange for lines of credit following
this Offering.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business.
These reviews take into account business needs as well as the Company's
regulatory capital requirements. Based upon these reviews, to take advantage of
strong market conditions and to fully implement the Company's DEM strategy, the
Company believes it will require increased net capital provided by the proceeds
of this Offering. The Company believes that its capital structure is adequate
for current operations.
The Company's cash and cash equivalents were $271,122 as of October 31, 1997
compared to $497,758 as of December 31, 1996. The decrease in cash and cash
equivalents was primarily due to the use of $217,500 to repurchase common stock
of The Chapman Co.
EFFECTS OF INFLATION
Market prices of securities are generally influenced by changes in
inflation. Moreover, the rate of inflation affects the Company's expenses, such
as employee compensation, occupancy expenses and communications costs, which may
not be readily recoverable in the prices of services offered to the Company's
customers. To the extent inflation results in rising interest rates or has
adverse effects upon the securities markets, it may adversely affect the
Company's financial condition and results of operations.
19
<PAGE>
BUSINESS
GENERAL
The Company is an African-American owned and controlled full service
securities brokerage and investment banking firm. Through its wholly-owned
subsidiary, The Chapman Co., the Company is registered as a broker-dealer with
the Commission and in 24 states and the District of Columbia, and is a member
firm of the NASD. The Company is headquartered in Baltimore, Maryland and has
sales offices in Birmingham, Alabama; Memphis, Tennessee; Chicago, Illinois;
Dallas, Texas; and Philadelphia, Pennsylvania. The Company's principal executive
offices are located at The World Trade Center-- Baltimore, 401 East Pratt
Street, 28th Floor, Baltimore, MD 21202 and its telephone number is (410)
625-9656. The Company was incorporated in the State of Maryland on December 12,
1997. Its wholly-owned subsidiary, The Chapman Co., was incorporated in Maryland
in 1986.
The Company's primary sources of revenue are derived from brokerage
services, corporate finance, and government finance activities. These activities
are supported by the Company's research capabilities.
The table below shows the types of revenue as a percentage of total revenue
and sources of revenue as a percentage of total revenue during 1995, 1996 and
the ten months ended October 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------ TEN MONTHS ENDED
1995 1996 OCTOBER 31, 1997
----- ----- ---------------------
<S> <C> <C> <C>
TYPE OF REVENUE
Commissions.................................................................. 89% 89% 88%
Underwriting and management fees............................................. 10 10 11
Interest and dividends....................................................... 1 1 1
--- --- ---
Total revenue............................................................ 100% 100% 100%
--- --- ---
--- --- ---
SOURCE OF REVENUE
Brokerage business........................................................... 42% 30% 39%
Secondary market trading..................................................... 28 43 28
Corporate finance............................................................ 18 19 17
Government finance........................................................... 11 7 15
Interest and dividends....................................................... 1 1 1
--- --- ---
Total revenue............................................................ 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
BROKERAGE SERVICES
The Company provides brokerage services to institutional and retail clients.
Commissions are charged to these clients for executing buy and sell orders for
securities on national and regional exchanges and in the over-the-counter
market. The Company's primary source of revenue for its brokerage business has
historically been commissions generated from institutional brokerage. The
Company's institutional clients include investment managers, corporate
retirement plans and municipal retirement plan sponsors. The Company maintains
floor broker relationships on the New York, American and Chicago Stock Exchanges
and executes buy and sell orders in the over-the-counter markets. Approximately
42%, 30% and 39% of the Company's revenue during 1995, 1996 and the ten months
ended October 31, 1997, respectively, has been derived from its brokerage
business.
The Company also participates in fixed income secondary market trading in
government securities primarily for fixed income investment managers, municipal
treasurers and other investment professionals. This business is done on a
competitive basis where the Company acts as a broker. Approximately 28%,
20
<PAGE>
43% and 28% of the Company's revenue during 1995, 1996 and the ten months ended
October 31, 1997, respectively, was derived from secondary market trading.
As of October 31, 1997, the Company employed six brokers.
The Company is approved to make markets in the securities of five companies.
To date, the Company's ability to engage in any significant over-the-counter
market-making activities has been limited by its capital position.
CORPORATE FINANCE
To date, the Company's corporate finance activities have been limited
primarily to participation in syndicates. The Company has been a member of over
200 underwriting syndicates for corporate issues, substantially all of which
were equity offerings. In the last three years, the number of transactions in
which the Company participated declined primarily due to the limitations imposed
by applicable net capital rules. See "Government Regulation--Net Capital Rule."
During 1995, 1996 and the ten months ended October 31, 1997, approximately 18%,
19% and 17%, respectively, of the Company's revenue was derived from corporate
finance transactions. In each of these periods, over half of the Company's
revenue from corporate finance transactions was derived from the sale of the
stock of DEM, Inc. for which the Company was the sole underwriter. DEM, Inc. is
a publicly-traded closed-end company managed by CCM, a former subsidiary of the
Company.
GOVERNMENT FINANCE
The Company participates in the tax-exempt public finance market and has
managed, primarily as co-manager, over 200 transactions in 17 states and the
District of Columbia, including approximately 35 transactions in the past two
years. Over half of the total dollar amount of these transactions has been with
jurisdictions located in Maryland, Illinois, Texas and Pennsylvania.
During 1995, 1996 and the ten months ended October 31, 1997, approximately
11%, 7% and 15%, respectively, of the Company's revenue was derived from
management fees, financial advisory fees and selling concessions in public
finance transactions. The Company currently employs two investment bankers whose
primary responsibility is the development of the Company's public finance
business.
In 1996, the Company has participated as a selling group member in one
direct offering of debt of the Tennessee Valley Authority. The Company has also
participated in syndicates of other government agencies. The Company believes
its ability to participate in government agency debt offerings has been limited
by its capital position.
STRATEGY
With the net proceeds of this Offering, the Company intends to both
implement its DEM strategy and to expand its existing business activities.
DOMESTIC EMERGING MARKETS
To compete effectively in the investment banking and brokerage market, the
Company intends to implement its Domestic Emerging Markets, or DEM, strategy
pursuant to which the Company will market financial services, primarily
investment banking services to domestic companies that are owned or controlled
by African-Americans, Asian-Americans, Hispanic/Latino Americans or women. As
part of DEM strategy, the Company will seek to make markets in the stocks of
selected DEM companies. The Company believes that the DEM market is underserved
and its DEM strategy will permit the Company to develop a market niche for its
corporate finance business.
21
<PAGE>
The Company has identified in excess of 150 DEM companies and intends to
establish relationships with such companies that are seeking to raise additional
equity or debt financing. Management currently anticipates that the typical
client will be a small capitalization company traded in the over-the-counter
market or a privately held company undertaking an initial public offering. While
the size of any particular offering may vary, the Company anticipates that most
such transactions would range from $2 million to $15 million. The Company will
seek to manage or co-manage a substantial portion of these underwritings in
which it participates.
The Company's ability to implement its DEM strategy in the context of
corporate underwritings will be dependent upon its ability to identify potential
clients fitting the DEM company profile and convincing such potential clients
that the Company is the right investment banking firm for their needs. There can
be no assurance that the Company will be successful in this regard. The Company
has not conducted any independent research to test the marketability of the DEM
strategy, nor has the Company engaged in any significant marketing of the
strategy. Therefore, while the Company believes the concept to be viable, the
level of market acceptance is largely unknown. The Company intends to devote a
substantial amount of its resources and the proceeds of this Offering to the
execution of the DEM strategy. See "Risk Factors" and "Use of Proceeds."
EXPANSION OF EXISTING BUSINESS
The Company believes its brokerage, corporate finance and government finance
business has been limited by its capital position. With the increased capital
from the net proceeds of this Offering, the Company intends to expand its
existing business as follows:
The Company intends to expand its research capabilities, focusing primarily
on DEM companies, hire additional brokers and market specialized products to
retail and institutional clients.
In addition to the DEM corporate finance strategy discussed above, the
Company intends to aggressively seek larger allocations in corporate
underwriting syndicates managed by other investment banking firms.
The Company intends to seek larger positions in state and local public
finance transactions. As a result of its ability to undertake larger
participations, the Company believes it will be better positioned to seek
manager roles in these transactions, entitling the Company to receive management
fees in addition to selling concessions. The Company intends to expand its
participation in the state and local public finance market by establishing a
presence in states with major issuers of negotiated tax-exempt bonds and by
seeking more assignments as manager of such transactions. The Company has
identified California, New York, Texas, Illinois, Pennsylvania, Michigan, Ohio
and Florida as representing over 40% of the dollar amount of aggregate
tax-exempt bonds issued in the U.S. in 1997. The Company currently has offices
in Texas, Illinois and Pennsylvania and may seek to establish offices in
California, Florida, New York, Michigan and Ohio.
The Company intends to use its increased capital to expand its participation
in federal agency debt transactions as a member of selling groups in direct
offerings and syndicates, as well as aggressively seeking management roles in
these offerings.
RESEARCH
The Company currently employs three research analysts and provides research
primarily on selected DEM companies. The Company intends to substantially
increase the number of DEM companies covered by its research.
The Company has created the DEM Index which tracks the results of certain of
those companies meeting the DEM profile. The Company believes that inclusion of
a DEM company in the DEM Index offers certain advantages such as facilitating
identification by fund managers and other institutions seeking
22
<PAGE>
to invest in minority or women controlled businesses. The Company will seek to
earn fees from subscriptions to the DEM Index and the sale of limited
information regarding the companies included in the DEM Index.
CLEARING AGENT AND CUSTOMER CREDIT
The Company currently utilizes the services of RPR Clearing Services, Inc.
as its clearing agent on a fully disclosed basis (the "Clearing Agent"). The
Clearing Agent processes all securities transactions and maintains the accounts
of customers. Customer accounts are protected through the Securities Investor
Protection Corporation for up to $500,000, of which coverage for cash balances
is limited to $100,000.
The services of the Clearing Agent include billing, credit control, receipt
and custody and delivery of securities. The Clearing Agent provides the
operational support necessary to process, record and maintain securities
transactions for the Company's brokerage and distribution activities. The total
cost of the Clearing Agent's services to the Company is less than the cost the
Company would incur to provide these services itself.
The Clearing Agent lends funds to the Company's customers through the use of
margin credit. These loans are made to customers on a secured basis, with the
Clearing Agent maintaining collateral in the form of salable securities, cash or
cash equivalents. Under the terms of the Company's clearing agreement, the
Company indemnifies the Clearing Agent for any loss on these credit
arrangements. As of October 31, 1997, the Company had approximately $1.2 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
income to the Company from margin activities for the year ending December 31,
1996 and for the ten months ended October 31, 1997 was not material.
GOVERNMENT REGULATION
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the
Securities and Exchange Commission (the "Commission") and various state agencies
and self-regulatory organizations, such as the NASD. The Company is registered
as a broker-dealer with the Commission and is a member firm of the NASD. Much of
the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD, which has been designated by the Commission
as the Company's primary regulator. The NASD adopts rules (which are subject to
approval by the Commission) that govern its members and conducts periodic
examinations of member firms' operations. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business. The Company is registered as a broker-dealer in 24 states and
the District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the Commission and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers.
The Commission, self-regulatory organizations and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
integrity of the securities markets.
The Company's mutual fund distribution business is subject to extensive
regulation as to its duties, affiliations, conduct and limitations on fees under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Investment Company Act of 1940, as amended (the "1940 Act"), and the regulations
23
<PAGE>
of the NASD. As discussed above, the Company is an NASD member. The NASD has
prescribed rules (Rule 2830 of the NASD Conduct Rules) with respect to maximum
commissions, charges and fees related to investment in any open-end investment
company registered under the 1940 Act.
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member firm of the NASD, the Company is
subject to the net capital rule of the Securities and Exchange Commission (the
"Commission"). The net capital rule, which specifies minimum net capital
requirements for registered brokers and dealers, is designed to measure the
general financial integrity and liquidity of a broker-dealer and requires that
at least a minimum part of its assets be kept in relatively liquid form. Net
capital is essentially defined as net worth (assets minus liabilities), plus
qualifying subordinated borrowings and less certain mandatory deductions that
result from excluding assets not readily convertible into cash and from valuing
certain other assets, such as a firm's positions in securities, conservatively.
Among these deductions are adjustments in the market value of securities to
reflect the possibility of a market decline prior to disposition. The Company
has elected to compute its net capital under the standard aggregate indebtedness
method permitted by the net capital rule, which requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed a
15-to-1 ratio. At October 31, 1997, the Company had net capital and a net
capital requirement of $496,653 and $100,000, respectively. The Company's net
capital ratio was 0.47-to-1.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The Company entered into a consent
agreement with the NASD regarding alleged violations of the net capital rules in
late 1993 and early 1994. Pursuant to such agreement, the Company and Mr.
Chapman were jointly fined $30,000 and Mr. Chapman was suspended from
association with the Company for 10 days. The Company has exceeded all net
capital requirements since such alledged violations. The net capital rule also
prohibits payments of dividends, redemption of stock and the prepayment or
payment in respect of principal of subordinated indebtedness if net capital,
after giving effect to the payment, redemption or repayment, would be less than
a specified percentage (currently 120%) of the minimum net capital requirement.
Compliance with the net capital rule could limit those operations of the
Company's brokerage subsidiaries that require the intensive use of capital, such
as underwriting and trading activities, and also could restrict the Company's
ability to withdraw capital from its operating subsidiaries, which in turn,
could limit the Company's ability to pay dividends, repay debt and redeem or
purchase shares of its outstanding capital stock.
COMPETITION
The Company encounters intense competition in all aspects of its securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes that the principal factors affecting
competition in the securities industry are the quality and abilities of
professional personnel, including their ability to effectuate a firm's
commitments, and the quality, range and relative prices of services and products
offered.
Although the Company may expand the financial services it can render to its
customers, it does not now offer as broad a range of financial services as
national stock exchange member firms, commercial banks, insurance companies and
others.
24
<PAGE>
YEAR 2000 SOFTWARE ISSUE
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate information
that employs dates after December 31, 1999. Management is working with its
software vendors to prepare the Company for the year 2000. Based on information
currently available, management does not anticipate that the Company will incur
significant operating expenses or be required to incur material costs to be year
2000 compliant. The Company is, however, still analyzing and modifying its
systems and requirements. In addition, the Company has relationships with third
parties that have computer systems that may not be year 2000 compliant. To the
extent such third parties' systems are not fully year 2000 compliant, there can
be no assurance that potential systems interruptions or the cost necessary to
update software would not have a material adverse effect on the Company's
business, financial condition, results of operations, or business prospects.
PERSONNEL
At October 31, 1997, the Company had 25 full-time employees, including 14
registered representatives. None of the Company's personnel is covered by a
collective bargaining agreement. The Company considers its relationships with
its employees to be good.
LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
liability, including exposure under federal and state securities laws in
connection with the underwriting and distribution of securities. The Company
does not presently maintain an errors and omissions insurance policy insuring it
against these risks. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages. Additionally, securities
brokerage firms become parties to arbitrations brought by dissatisfied customers
in the general course of business. The Company has been and is currently a party
to such proceedings, none of which has resulted or is expected to result in any
material liability.
PROPERTIES
The principal executive offices of the Company are located at The World
Trade Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland
21202 where the Company leases approximately 10,000 square feet of office space.
The lease for these premises expires in 2000. The Company leases furniture and
equipment from an affiliated entity. See "Certain Transactions."
25
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- --------------------------------------- --------------- ------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr.................. 40 President and Chairman of the Board of Directors
Earl U. Bravo, Sr...................... 50 Senior Vice President, Secretary, Assistant
Treasurer and Director
Lottie H. Shackelford.................. 56 Director
Donald V. Watkins...................... 49 Director
M. Lynn Ballard........................ 55 Treasurer, Assistant Secretary and Controller
</TABLE>
The Board of Directors has designated an Audit Committee of the Board of
Directors consisting of two Directors, that will review the scope of accounting
audits, review with the independent auditors the corporate accounting practices
and policies and recommend to whom reports should be submitted within the
Company, review with the independent auditors their final report, review with
internal and independent auditors overall accounting and financial controls, and
be available to the independent auditors during the year for consultation
purposes. The Board of Directors has also designated a Compensation Committee of
the Board of Directors consisting of three Directors, which will review the
performance of senior management, recommend appropriate compensation levels and
approve the issuance of stock options pursuant to the Company's stock option
plan. All Directors and officers of the Company serve until their successors are
duly elected and qualify.
NATHAN A. CHAPMAN, JR. has been President and Chairman of the Board of
Directors of the Company since its inception. Mr. Chapman founded the Company's
subsidiary, The Chapman Co., in 1986 and has served as its President and
Chairman of the Board of Directors since inception. Prior to founding The
Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons from 1982 to
1987. Mr. Chapman is a Certified Public Accountant, a General Securities
Principal, Financial and Operations Principal, Registered Options Principal, and
Registered Municipal Principal. Mr. Chapman is a Director of DEM, Inc. and The
Chapman Funds, Inc.
EARL U. BRAVO, SR. has been Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company since its inception. Mr. Bravo has been
Chief Operating Officer of The Chapman Co. since 1992 and Secretary and
Assistant Treasurer since 1997. Mr. Bravo is a General Securities Principal,
Financial and Operations Principal, and Registered Representative. Mr. Bravo
holds an MBA from the University of Maryland, College Park.
LOTTIE H. SHACKELFORD has been a Director of the Company since its
inception. Since 1994, Ms. Shackelford has been Executive Vice President of
Global USA, a management consulting firm. From 1992 to 1994, Ms. Shackelford
worked as an independent political consultant. In 1988 and 1989, Ms. Shackelford
was Vice-Chair and Co-Chair, respectively, of the Democratic National Committee.
From 1987 to 1989, Ms. Shackelford was Mayor of Little Rock, Arkansas. Ms.
Shackelford has graduated from the Harvard University Program for Senior
Executives in State and Local Government, the Hendrix College Institute of
Politics and the Broadway School of Real Estate and has attended the University
of Arkansas at Little Rock School of Law. Ms. Shackelford is a Director of DEM,
Inc. and The Chapman Funds, Inc.
DONALD V. WATKINS has been a director of the Company since its inception. He
has been President of Donald V. Watkins, PC, a law firm located in Birmingham,
Alabama since 1973. Mr. Watkins holds a J.D. from the University of Alabama Law
School.
M. LYNN BALLARD has been Treasurer, Assistant Secretary and Controller of
the Company since its inception. Ms. Ballard has been Controller of The Chapman
Co. and Treasurer of CCM since 1988. Ms. Ballard has been Treasurer and
Assistant Secretary of The Chapman Co. since 1997.
26
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by
the Company during the fiscal years ended December 31, 1997 and 1996, for all
services rendered in all capacities to the Company and its subsidiary, to the
Chief Executive Officer and each executive officer of the Company that received
salary and bonus of $100,000 or more during the fiscal years ended December 31,
1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ---------------------------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Nathan A. Chapman, Jr.(1)......................................................... 1997 $ 159,000 $ 100,000
Chief Executive Officer 1996 144,000 --
Earl U. Bravo, Sr.(1)............................................................. 1997 $ 100,000 $ 5,000
Senior Vice President 1996 (2) (2)
</TABLE>
- ------------------------
(1) Includes approximately 50% allocated to CCM and CIA pursuant to certain
expense sharing arrangements. See "Certain Transactions."
(2) Annual salary and bonus received by Mr. Bravo in fiscal year ended December
31, 1996 was less than $100,000.
The Board of Directors of the Company has established the 1998 Chapman
Holdings, Inc. Omnibus Stock Plan (the "Plan") to enable the Company to grant
equity compensation to the Company's Directors, officers, employees and
consultants. The Plan will be administered by the Compensation Committee of the
Board of Directors. No securities have been issued pursuant to the Plan as of
the date of this Prospectus.
27
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of December 31, 1997, and
assuming the Minimum and Maximum are sold in the Offering, by (i) each person
known by the Company to own beneficially 5% or more of its outstanding shares of
Common Stock prior to the Offering, (ii) each Director, (iii) the Chief
Executive Officer, and (iv) all Directors and executive officers of the Company
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF CLASS
-------------------------------------
NAME AND ADDRESS OF AMOUNT AND NATURE OF DECEMBER
BENEFICIAL OWNER BENEFICIAL OWNERSHIP 30, 1997 MINIMUM MAXIMUM
- -------------------------------------------------- -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr............................. 1,828,115 shares 91.9% 64.4% 61.2%
401 E. Pratt Street
Baltimore, MD 21202
Earl U. Bravo, Sr................................. 1,900 shares * * *
401 E. Pratt Street
Baltimore, MD 21202
Donald V. Watkins................................. 7,000 shares * * *
401 E. Pratt Street
Baltimore, MD 21202
Lottie H. Shackelford............................. -0- shares * * *
401 E. Pratt Street
Baltimore, MD 21202
All Directors and Executive....................... 1,837,015 shares 92.3% 64.7% 61.5%
Officers as a Group
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of Common Stock.
28
<PAGE>
CERTAIN TRANSACTIONS
On or before the closing of the sale of the Minimum, the Company intends to
effect the Spin-off pursuant to which The Chapman Co.'s two wholly-owned
subsidiaries, CCM and CIA, will become wholly-owned subsidiaries of separate
holding companies and the stock of such holding companies will be distributed to
the existing stockholders of the Company. Investors that purchase Shares in the
Offering will not receive stock in either holding company.
CCM is registered with the Commission as an investment adviser and manages
funds for institutional investors and individuals on a separate account basis,
for a registered closed-end investment company, DEM, Inc., for two registered
open-end investment companies, DEM Equity Fund and The Chapman U.S. Treasury
Money Fund, each a portfolio of The Chapman Funds, Inc., and a private group
trust for qualified employee benefit plans. As of December 31, 1997, CCM had
approximately $430 million in total assets under management. CIA is a variable
annuity provider formed primarily to serve retail clients and its operations
have not been significant to date.
Nathan A. Chapman, Jr., the President and Chairman of the Board of Directors
of the Company, is the President and Chairman of the Board of Directors of each
of CCM, CIA, DEM, Inc. and The Chapman Funds, Inc. and controlling stockholder
of CCM and CIA. Earl U. Bravo, Sr., Senior Vice President, Secretary, Assistant
Treasurer and a Director of the Company is Secretary, Assistant Treasurer and a
Director of CCM and CIA, Secretary and Assistant Treasurer of The Chapman Funds,
Inc. and Vice President, Secretary and Assistant Treasurer of DEM, Inc. M. Lynn
Ballard, Treasurer, Assistant Secretary and Controller of the Company is
Treasurer, Assistant Secretary and Controller of CCM and CIA and Treasurer and
Assistant Secretary of DEM, Inc. and The Chapman Funds, Inc. Lottie H.
Shackelford, a Director of the Company is a Director of each of DEM, Inc. and
The Chapman Funds, Inc.
The Company is the underwriter, on a best efforts basis, for the sale of
DEM, Inc. common stock. The Company was paid $455,000 and $432,008 in management
fees and commissions in the years ended December 31, 1996 and December 31, 1997,
respectively.
The Company is the distributor for The Chapman U.S. Treasury Money Fund
pursuant to a distribution agreement between the Company and The Chapman Funds,
Inc. Such distribution agreement must be extended annually for one year periods
by the board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives no compensation for the
distribution of shares of The Chapman U.S. Treasury Money Fund.
The Company is the distributor for the DEM Equity Fund pursuant to a
distribution agreement between the Company and The Chapman Funds, Inc. Such
distribution agreement must be extended annually for one year periods by the
board of directors of The Chapman Funds, Inc. or it expires by its terms.
Further, such agreement is terminable on 60 days notice and terminates
automatically upon assignment. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.50% of the average daily net assets per annum
of the Investor Shares of the DEM Equity Fund (the "Investor Shares") for
selling and administrative services pertaining to the Investor Shares. Further,
the Company receives a front-end load of up to 4.75% of the offering price on
the sale of the Investor Shares. The Company receives compensation pursuant to a
Rule 12b-1 plan in the amount of 0.25% of the average daily net assets per annum
of the Institutional Shares of the DEM Equity Fund (the "Institutional Shares")
for selling and administrative services pertaining to the Institutional Shares.
The Company recently began providing services pursuant to this agreement and no
fees have yet been earned by the Company.
As of December 31, 1997, CCM owed the Company $771,889 as reflected in a 10
year note executed as of October 31, 1997 in the amount of $763,367 which
accrues interest at 6.68% per annum. The note requires annual principal payments
equal to 10% of the original principal amount of the note.
29
<PAGE>
The proceeds of this loan, as reflected by the note, were used by CCM to pay
start-up costs in connection with its development of a proprietary investment
product. The largest amounts owed to the Company by CCM, including this loan and
CCM's allocation of shared overhead as set forth below, were $800,806 and
$344,289 during fiscal years ended December 31, 1997 and 1996, respectively.
As of December 31, 1996, Mr. Chapman executed a promissory note to the
Company in the amount of $106,923. The promissory note is payable on demand and
carries interest at the prime rate. As of December 31, 1997 and December 31,
1996, the Company had outstanding advances to Mr. Chapman of $164,601 and
$106,923, respectively. As of February 11, 1998, with the approval of the
independent members of the Board of Directors, Mr. Chapman executed a three-year
note in the amount of $176,250 which accrues interest at 5.54% per annum to
replace the note executed December 31, 1996. The Company's advances to Mr.
Chapman were used by Mr. Chapman for personal expenses.
Mr. Chapman is President and Treasurer and Mr. Bravo is Secretary of Chapman
General Partner One, Inc., the general partner of Chapman Limited Partnership I
(the "Partnership"). The Company leases furniture and equipment from the
Partnership. The lease requires monthly payments of $9,846 and contains one year
renewable terms, at the option of the Company, through September 2000, at which
time the Company can purchase the furniture and equipment at fair value. Rent
expense under this lease agreement was $118,152 in each of 1997 and 1996 of
which $9,846 and $39,384 were payable to the Partnership as of December 31, 1997
and 1996, respectively. Management believes that the terms of these transactions
were substantially as favorable to the Company as those available from
non-affiliates. The rent expense under the lease agreement has been shared
equally between the Company and CCM.
The Company shares office space, certain employees and other overhead with
certain other entities controlled by Mr. Chapman including CCM and CIA. The
Company allocates compensation and benefits expense to CCM and CIA based on
actual compensation and benefits expense and the estimated percentage of the
employee's time spent performing services for each entity. The Company allocates
other expenses based on estimated usage. Pursuant to such allocation
arrangements, as of December 31, 1997, CCM owed the Company $28,782. The Company
treats such outstanding allocation amounts as normal receivables to be paid in
the ordinary course of business. The common management and/or ownership among
the Company and other entities controlled by Mr. Chapman may involve potential
conflicts of interest. See "Risk Factors--Certain Transactions; Relationships
with Other Chapman Entities; Conflicts of Interest."
The Company and Mr. Chapman have entered into a non-exclusive, royalty-free
licensing agreement pertaining to the Company's use of the DEM and Domestic
Emerging Markets trademarks that are owned by Mr. Chapman.
All future transactions with affiliates of the Company will be approved by a
majority of the Board of Directors, including a majority of the disinterested
Directors and the Company intends that such transactions will be on terms no
less favorable to the Company than could be obtained from an unaffiliated third
party.
30
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20 million shares of
Common Stock, par value $0.001 per share.
COMMON STOCK
As of the date of this Prospectus, there are 1,989,235 shares of Common
Stock issued and outstanding, held of record by 19 stockholders. Holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Stockholders do not have cumulative
voting rights. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
dissolution, liquidation or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no right to convert their Common Stock
into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Common Stock to be outstanding upon completion of this Offering will be,
duly authorized, validly issued, fully paid and nonassessable.
MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
The Charter of the Company provides that the Company shall indemnify its
currently acting and its former Directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the Maryland General Corporation
Law, as from time to time amended (the "MGCL"). If approved by the Board of
Directors, the Company may indemnify its employees, agents and persons who serve
or have served, at its request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture or other
enterprise to the extent determined to be appropriate by the Board of Directors.
The Company shall advance expenses to its Directors and officers entitled to
mandatory indemnification to the maximum extent permitted by the Maryland
General Corporation Law and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
Pursuant to the Underwriting Agreement the Company has agreed to indemnify
the Underwriter and the Underwriter has agreed to indemnify the Company and its
directors, officers and controlling persons against certain civil liabilities
that may be incurred in connection with this Offering, including certain
liabilities under the Securities Act. Pursuant to the QIU Agreement, the Company
has also agreed to indemnify the QIU for liabilities in connection with the
Offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Furthermore, the Charter of the Company provides that, to the fullest extent
permitted by the MGCL as it may be amended from time to time, no Director or
officer of the Company shall be liable to the Company or its stockholders for
monetary damages arising out of events occurring at the time such person is
serving as a Director or officer, regardless of whether such person is a
Director or officer at the time of a proceeding in which liability is asserted.
Under current Maryland law, the effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages from a
Director or officer except (i) to the extent that it is proved that the Director
or officer actually received an improper benefit, or profit in money, property,
or services for the amount of the benefit or profit in money, property or
services actually received, or (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
in the proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
31
<PAGE>
adjudicated in the proceeding. In situations to which the Charter provision
applies, the remedies available to the Company or a stockholder are limited to
equitable remedies such as injunction or rescission.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no trading market for the Common
Stock. Although the Company will apply for quotation of the Common Stock on the
SmallCap Market, there can be no assurance that an active trading market for the
Common Stock will develop and, if developed, will continue after the Offering.
The quotation of the Common Stock on the SmallCap Market is conditioned upon the
Company meeting certain asset, capital and surplus, stock price and public float
tests. See "Risk Factors--Risks of Low Priced Stocks." There can be no assurance
that the public offering price will correspond to the price at which the Common
Stock will trade in the public market subsequent to the Offering.
As of the date of the Minimum closing, the Company will have a minimum of
2,839,235 shares of Common Stock outstanding, of which 1,828,115 will be owned
by Nathan A. Chapman, Jr. The Company is offering up to a Maximum of 1,000,000
Shares and, accordingly, upon sale of the Maximum, the Company will have
outstanding 2,989,235 shares of Common Stock. All shares acquired in this
Offering, other than shares that may be acquired by "affiliates" of the Company
as defined by Rule 144 under the Securities Act, will be freely transferable
without restriction or further registration under the Securities Act. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
the prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
As of December 31, 1997, Mr. Chapman beneficially owns 1,828,115 shares of
Common Stock or approximately 64.4% and 61.2% of the Company's outstanding
Common Stock assuming the sale of the Minimum and Maximum, respectively. Mr.
Chapman has agreed not to sell any shares of Common Stock that he owns as of the
date of this Prospectus until June 28, 1999. Accordingly, up to 1,161,120 shares
of Common Stock or approximately 38.8% of the Company's outstanding Common Stock
may be eligible for sale following the Offering pursuant to Rule 144.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least one year is entitled to sell within
any three-month period, shares equal in number to the greater of: (i) 1% of the
then-outstanding shares of Common Stock; or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of the required notice of sale with the Commission. In addition, any person (or
persons whose shares are aggregated) who is not, at the time of the sale, nor
during the preceding three months, an affiliate of the Company, and who has
beneficially owned restricted shares for at least two years, can sell such
shares under Rule 144 without regard to the notice, manner of sale, public
information or volume limitations described above.
PLAN OF DISTRIBUTION
The Company is offering up to a Maximum of 1,000,000 Shares. The Shares will
be offered on a "best-efforts" basis by the Underwriter, The Chapman Co., acting
as the exclusive dealer-manager solely on an agency basis. The Offering has an
aggregate Minimum of 850,000 Shares. The Termination Date of the Offering is on
the earlier to occur of: the date selected by the Company; the date of the sale
of the Maximum; or, if the Minimum is not sold, 180 days after the date of this
Prospectus, unless extended by the Company for one or more additional periods
not to exceed an additional 30 days in the aggregate. All proceeds from
subscriptions will be deposited promptly into a non-interest bearing escrow
account with UMB Bank, N.A. as escrow agent. Funds will be transmitted to the
escrow agent for deposit into the
32
<PAGE>
escrow account no later than noon of the business day following receipt. All
checks must be made payable to "UMB Bank, N.A., as escrow agent for Chapman
Holdings, Inc." If the Minimum is not sold by the Termination Date, all funds
will be returned promptly to investors without deduction or interest. During the
escrow period, investors who purchase Shares will not be entitled to a refund of
their payments. If the Minimum is sold before the Termination Date, a Minimum
closing will be held at the offices of the Company. At such Minimum closing, the
funds in escrow will be released to the Company and the investors will become
stockholders of the Company.
The minimum investment requirement is 100 Shares. Investors who purchase
Shares must pay for the Shares by the third business day following the date of
the confirmation of their purchase of such Shares. Investors should consult
their brokers concerning the manner and method of payment for the Shares. The
Company and the Underwriter reserve the right to withdraw, cancel or modify the
Offering 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 has been made to have the Common Stock quoted on the
SmallCap Market. There can be no assurance that the Common Stock will qualify
for initial quotation on the SmallCap Market or that, if achieved, such
quotation will be maintained. See "Risk Factors--No Prior Market" and "--Risks
of Low Prices Stocks."
Pursuant to the Conduct Rules of the NASD, when a member of the NASD, such
as The Chapman Co., participates in the public distribution of its own or an
affiliate's securities, the public offering price can be no higher than
recommended by a qualified independent underwriter. In accordance with this
requirement, the QIU, Ferris Baker Watts, Incorporated, has agreed to recommend
an initial public offering price for the Shares. As part of its compliance with
Rule 2720 of the NASD's Conduct Rules, the QIU has participated in the
preparation of the Registration Statement of which this Prospectus forms a part
and has performed "due diligence" with respect thereto.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the Shares has been determined by
negotiation between the Company and the QIU. The factors considered in
determining the offering price were prevailing market and economic conditions,
the Company's revenue and earnings, estimates of its business operations, an
assessment of its management, the consideration of these factors in relation to
the market valuation of comparable companies in related businesses and the
current condition of the markets in which the Company operates.
The Shares will be offered directly to the public at the public offering
price set forth on the cover of this Prospectus. The Underwriter will be paid a
management fee of $ per Share sold. In addition, the Underwriter and any
other broker-dealer participating in the selling group will be paid a commission
not in excess of $ per Share sold. For acting as a qualified independent
underwriter, 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.
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.
33
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Venable, Baetjer and Howard, LLP. The Underwriter has not been
separately represented by counsel in this Offering. Whiteford, Taylor & Preston
L.L.P. has acted as counsel for the QIU in connection with this Offering.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, DC, a registration statement under the Securities
Act with respect to the Shares offered by this Prospectus (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement, including the exhibits filed therewith, copies of which may be
obtained at prescribed rates from the Commission at the public reference
facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, DC 20549. Descriptions contained in this Prospectus as
to the contents of any contract or other documents filed as an exhibit to the
Registration Statement are not necessarily complete and each such description is
qualified by reference to such contract or document. The Commission maintains a
website on the Internet that will contain all future reports, proxy and
information statements and other information that the Company is required to
file electronically with the Commission. The address of the Commission's website
is http://www.sec.gov.
34
<PAGE>
CHAPMAN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index...................................................................................................... F-1
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1996 and October 31, 1997 (unaudited).................................... F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... F-4
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and for the
Ten Months Ended October 31, 1997 (unaudited)............................................................ F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, and for the Ten Months Ended
October 31, 1996 and 1997 (unaudited).................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Holdings, Inc.:
We have audited the accompanying balance sheet of Chapman Holdings, Inc. and
Subsidiaries (a Maryland corporation) as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chapman Holdings, Inc. and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
January 31, 1997, except for notes 2 and 3
as to which are dated December 29, 1997
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
--------------------------
<S> <C> <C>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................................... $ 497,758 $ 271,122
Cash deposits with clearing organization........................................... 35,000 35,000
Investments available for sale..................................................... 157,500 169,306
Receivables from brokers and dealers............................................... 93,560 278,999
Receivables from affiliates........................................................ 200 1,649
Receivables from discontinued operations........................................... 682,643 763,367
Advances to officer/employee....................................................... 109,673 156,204
Office equipment, net.............................................................. 7,558 17,343
Prepaids and other assets.......................................................... 57,008 73,528
Net assets from discontinued operations............................................ 1,157,456 1,052,007
------------ ------------
Total assets..................................................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses.............................................. $ 92,968 $ 81,089
Accrued compensation............................................................... 76,371 70,123
Deferred rent...................................................................... 89,048 89,048
Payable to affiliated partnership.................................................. 59,076 --
Income taxes payable............................................................... 150,341 161,337
Net liabilities from discontinued operations....................................... 1,201,345 1,190,996
------------ ------------
Total liabilities................................................................ 1,669,149 1,592,593
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 1,944,890 and
1,792,640 shares issued and outstanding, respectively............................ 1,945 1,793
Additional paid-in capital......................................................... 1,309,005 1,091,657
(Accumulated deficit) retained earnings............................................ (181,743) 132,482
------------ ------------
Total stockholders' equity....................................................... 1,129,207 1,225,932
------------ ------------
Total liabilities and stockholders' equity....................................... $2,798,356 $ 2,818,525
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions............................................ $ 2,475,151 $ 2,553,098 $ 1,776,898 $ 2,246,180
Underwriting and management fees....................... 286,780 296,757 171,850 268,654
Interest and dividends................................. 34,061 37,194 33,112 28,986
------------ ------------ ------------ ------------
Total revenue........................................ 2,795,992 2,887,049 1,981,860 2,543,820
------------ ------------ ------------ ------------
EXPENSE:
Compensation and benefits.............................. 1,259,371 1,050,193 813,363 942,867
Floor brokerage and clearing fees...................... 323,245 238,027 195,249 237,713
Communications......................................... 154,506 164,303 133,036 124,117
Occupancy, equipment rental, and depreciation.......... 368,863 422,598 328,939 296,718
Travel and business development........................ 193,302 177,793 169,126 196,511
Professional fees...................................... 135,090 154,993 109,377 76,775
Other operating expense................................ 227,169 162,804 140,434 234,312
------------ ------------ ------------ ------------
Total expense........................................ 2,661,546 2,370,711 1,889,524 2,109,013
------------ ------------ ------------ ------------
Income from continuing operations before income tax
provision.......................................... 134,446 516,338 92,336 434,807
INCOME TAX PROVISION (Notes 1 and 5)..................... (72,000) 166,000 29,000 173,900
------------ ------------ ------------ ------------
Income from continuing operations.................... 206,446 350,338 63,336 260,907
INCOME FROM DISCONTINUED OPERATIONS, net of income taxes
of $89,000, $44,000, $36,400 and $35,000,
respectively........................................... 151,249 54,643 31,779 53,318
------------ ------------ ------------ ------------
Net income........................................... $ 357,695 $ 404,981 $ 95,115 $ 314,225
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME PER SHARE DATA:
Income from continuing operations...................... $ 0.09 $ 0.16 $ 0.03 $ 0.13
Income from discontinued operations.................... 0.07 0.02 0.01 0.03
------------ ------------ ------------ ------------
Net income........................................... $ 0.16 $ 0.18 $ 0.04 $ 0.16
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average share outstanding....................... 2,201,414 2,191,374 2,200,514 2,001,914
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
SUBSCRIBED STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... $ 4,000 $ 2,005 $ 1,492,045 $ (944,419) $ 553,631
Net income................................... -- -- -- 357,695 357,695
Purchase of 5,780 shares of stock............ -- (6) (104,994) -- (105,000)
Redemption of 5,600 shares of stock.......... -- (6) 6 -- --
Issuance of 8,220 shares of stock............ -- 8 149,392 -- 149,400
Issuance of 4,000 shares of stock
subscribed................................. (4,000) 4 3,996 -- --
----------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1995..................... -- 2,005 1,540,445 (586,724) 955,726
Net income................................... -- -- -- 404,981 404,981
Purchase of 59,750 shares of stock........... -- (60) (231,440) -- (231,500)
----------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1996..................... -- 1,945 1,309,005 (181,743) 1,129,207
Net income................................... -- -- -- 314,225 314,225
Purchase of 152,250 shares of stock.......... -- (152) (217,348) -- (217,500)
----------- ----------- ------------ ------------ ------------
BALANCE, October 31, 1997 (unaudited).......... $ -- $ 1,793 $ 1,091,657 $ 132,482 $1,225,932
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
------------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----------- ------------ ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............................................................ $ 357,695 $ 404,981 $ 95,115 $ 314,225
Adjustments to reconcile net income to net cash provided by operating
activities-
Changes in assets and liabilities-
Decrease (increase) in receivables from brokers and dealers......... 19,745 12,808 (52,940) (185,439)
Increase in receivables from affiliates............................. (19,233) (165) (482) (1,449)
Increase in receivables from discontinued operations................ (129,097) (338,354) (449,409) (80,724)
Increase in advances to officer/employee............................ (67,686) (19,656) (64,883) (46,531)
Decrease (increase) in income taxes receivable...................... 21,058 -- (6,186) --
Decrease (increase) in prepaids and other assets.................... 136 17,713 (4,669) (16,520)
(Increase) decrease in net assets from discontinued operations...... (296,365) (790,668) (280,840) 105,449
Decrease in payable to clearing organization........................ (18,349) (11,261) (11,261) --
(Decrease) increase in accounts payable and accrued expenses........ (6,224) (5,334) 59,450 (11,879)
(Decrease) increase in accrued compensation......................... (23,209) 24,524 (30) (6,248)
Increase in deferred rent........................................... 60,782 -- -- --
Increase (decrease) in payable to affiliated partnership............ -- 19,692 12,432 (59,076)
Increase (decrease) in income taxes payable......................... 10,000 140,341 58,465 10,996
Decrease in interest payable on subordinated debt................... (4,704) -- -- --
Increase (decrease) in net liabilities from discontinued
operations........................................................ 240,228 788,286 585,238 (10,349)
----------- ------------ ----------- -----------
Net cash provided by (used by) operating activities................. 144,777 242,907 (60,000) 12,455
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment, net..................................... (12,163) (2,150) (2,150) (9,785)
Investment in affiliate............................................... (3,005) 3,000 3,000 --
Purchase of investments............................................... -- (147,500) (147,500) (11,806)
----------- ------------ ----------- -----------
Net cash used in investing activities............................... (15,168) (146,650) (146,650) (21,591)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock..................................................... 149,400 -- -- --
Purchase of stock..................................................... (105,000) (231,500) (17,860) (217,500)
Repayment of subordinated loan........................................ (64,152) -- -- --
----------- ------------ ----------- -----------
Net cash provided by (used in) financing activities................. (19,752) (231,500) (17,860) (217,500)
----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 109,857 (135,243) (224,510) (226,636)
CASH AND CASH EQUIVALENTS,
beginning of year/period.............................................. 523,144 633,001 633,001 497,758
----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year/period.................................................... $ 633,001 $ 497,758 $ 408,491 $ 271,122
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Chapman Holdings, Inc. (the "Company") provides securities brokerage and
investment banking services. The Company, formed subsequent to October 31, 1997,
became the parent of a wholly-owned subsidiary, The Chapman Co. ("Chapman") and
its two subsidiaries, Chapman Capital Management, Inc. ("CCM") and Chapman
Insurance Agency, Incorporated ("CIA") pursuant to the merger of a newly formed
wholly-owned subsidiary of the Company into Chapman. CCM and CIA, wholly-owned
subsidiaries of Chapman, will be spun off from the Company as part of a planned
initial public offering ("IPO") with Chapman being the remaining subsidiary. The
IPO will be on a best efforts basis conditioned upon the sale of a minimum of
850,000 shares of common stock and a maximum of 1,000,000 shares of common
stock. The proceeds of the IPO will be used to expand the Company's regulatory
capacity to participate in corporate and public finance transactions, for
working capital to support the planned growth of its business and other general
corporate purposes.
The Company's operations are subject to certain risks, including the
Company's recently launched new strategic initiative it calls "Domestic Emerging
Markets," and the unproven nature of this strategy, and its dependence on key
personnel.
The Company allocates compensation, benefits and other costs to CCM and CIA
on a proportional allocation cost method which management believes is
reasonable. Compensation and benefits are allocated based on management's
estimate of the percentage of time employees spend performing services for CCM
and CIA. Other costs, consisting of communications, occupancy, and
administrative support, are allocated based on estimated usage by CCM and CIA.
USE OF ESTIMATES
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
INTERIM FINANCIAL STATEMENTS
The financial statements for the ten months ended October 31, 1996 and 1997,
are unaudited, but, in the opinion of management, such financial statements have
been presented on the same basis as the audited financial statements for the
year ended December 31, 1996. These financial statements include all
adjustments, consisting of normal recurring adjustments and adjustments for the
spin off of CIA and CCM, necessary for a fair presentation of the financial
position and results of operations and cash flows for these periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are primarily invested in money market funds.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Investments as of December 31, 1996, and October 31, 1997, consist primarily
of certificates of deposit in which cost approximates market. All investments
are classified as available for sale.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, receivables, accounts payable and accrued expenses approximate fair
value.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method and the estimated IPO price
of $8.00 per share. The weighted average shares outstanding is calculated as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Common stock.................................................. 2,004,820 1,994,780 2,003,920 1,805,320
Dilutive effect of warrants outstanding..................... 196,594 196,594 196,594 196,594
---------- ---------- ---------- ----------
2,201,414 2,191,374 2,200,514 2,001,914
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Subsequent to October 31, 1997, a warrant outstanding to acquire shares of
Chapman stock was exchanged for 196,594 shares of the Company's common stock.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which becomes effective December 15, 1997, and which early
adoption is not permitted. Under SFAS No. 128, a company would disclose basic
earnings per share (the principal difference being that common stock equivalence
would not be considered in the compilation of basic earnings per share) and
diluted earnings per share. The adoption of this pronouncement will require
restatement of all prior periods presented. The adoption of this pronouncement
will not have a material effect on earnings per share.
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
becomes effective December 15, 1997. Under SFAS No. 131, a company would
disclose certain information about the operating segments in the financial
statements of the company and information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
does not expect the adoption of this pronouncement to have a material effect on
its financial statement presentation from adopting this pronouncement.
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMMISSION REVENUES
The Company records commission revenues and related expenses on a trade date
basis.
UNDERWRITING AND MANAGEMENT FEES
The Company records underwriting and management fee revenues and the related
expenses on a trade date basis.
VOLATILITY OF BUSINESS
The Company's revenues and operating results may fluctuate from month to
month, quarter to quarter and year to year due to a combination of factors,
including the number of underwriting transactions in which the Company
participates, access to public markets for companies in which the Company has
invested as a principal, the level of institutional and retail brokerage
transactions, variations in expenditures for personnel, litigation expenses and
expenses of establishing new business units. The Company's revenues from an
underwriting transaction are recorded only when the underwritten security
commences trading; accordingly, the timing of the Company's recognition of
revenue from a significant transaction can materially affect the Company's
operating results. As a result, the Company could experience losses if demand
for the above transactions declines more quickly than the Company's ability to
change its cost structure.
OFFICE EQUIPMENT
Office equipment is depreciated using the straight-line method over the
estimated useful life of 3 to 5 years. As of December 31, 1996 and October 31,
1997, accumulated depreciation was $10,520 and $13,835, respectively.
TRANSACTIONS WITH CLEARING ORGANIZATION
The Company is required to have cash on deposit with its clearing agent for
general trading purposes. In addition, receivables from and payables to the
clearing organization arise from cash settlements on ordinary trading activity
and clearing expenses.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The Company and its subsidiaries filed
consolidated Federal tax returns on a cash basis for the years ended December
31, 1996 and 1995.
The Company has calculated income taxes allocated to the subsidiaries
accounted for on a discontinued operations basis on a stand-alone basis as if
the subsidiaries had to provide for income taxes not as a part of the
consolidated group.
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CCM ACQUISITION
In December 1996, CCM started DEM-MET, a tax-exempt pooled interest trust
for qualified employee benefit plans. As part of the start-up of this trust, CCM
entered into a noncompete agreement for $300,000 and paid $640,000 in costs
related to starting the trust. These amounts, net of accumulated amortization,
are included in net assets from discontinued operations in the accompanying
balance sheets.
2. SPIN OFF OF OPERATIONS:
On December 29, 1997, the Company, a newly formed Maryland corporation,
effected a tax-free holding company reorganization pursuant to which Chapman
became a wholly-owned direct subsidiary of the Company. On or before the closing
of the sale of the minimum number of shares to be sold in the IPO, the Company
intends to effect a tax-free spin-off transaction which Chapman's two
wholly-owned subsidiaries, CCM and CIA, will become wholly-owned subsidiaries of
separate holding companies and the stock of such holding companies will be
distributed to the existing stockholders of the Company. The financial position
and results of operations of CCM and CIA are reflected on the balance sheets and
statements of operations as assets and liabilities from discontinued operations
and income from discontinued operations, respectively.
Assets and liabilities as of December 31, 1996 and October 31, 1997 of the
operations to be spun off are listed below:
<TABLE>
<CAPTION>
OCTOBER 31,
DECEMBER 31, 1996 1997
----------------- ---------------
<S> <C> <C>
(UNAUDITED)
Cash and cash equivalents................................ $ 8,196 $ 109,793
Management and underwriting receivables.................. 186,373 163,021
Related party receivables................................ 24,414 31,363
Office equipment, net.................................... 3,936 5,872
Prepaids and other assets, net........................... 934,537 741,958
----------------- ---------------
$ 1,157,456 $ 1,052,007
----------------- ---------------
----------------- ---------------
Accounts payable and accrued expenses.................... 73,702 202,629
Due to officer........................................... 145,000 75,000
Due to parent company.................................... 682,643 763,367
Non-compete agreement payable............................ 300,000 150,000
----------------- ---------------
$ 1,201,345 $ 1,190,996
----------------- ---------------
----------------- ---------------
</TABLE>
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
3. CAPITAL STOCK:
The common stock activity included in the accompanying financial statements
has been restated to reflect the one-for-five share exchange of stock related to
the merger of Chapman into the Company. As such, all share data related to
Chapman prior to the merger has been stated at the Company's stock conversion
amounts.
4. COMMITMENTS AND CONTINGENCIES:
The Company has entered into an operating lease agreement for office
facilities which expires on October 15, 2000. Rent expense under this agreement
was $209,049, $209,052, $174,210 and $174,210 for the years ended December 31,
1995 and 1996, and for the ten months ended October 31, 1996 and 1997,
respectively. The aggregate minimum future annual rental for the following
fiscal years ending December 31 is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 209,052
1998.............................................................. 219,954
1999.............................................................. 252,660
2000.............................................................. 200,022
</TABLE>
In addition, a proportionate share of real estate taxes and building
expenses in excess of base year amounts are charged to the Company. This lease
agreement includes scheduled rent increases which are recognized on a
straight-line basis. The Company recorded $89,048 in deferred rent relating to
this straight-line basis of rent expense recognition.
The Company leases furniture and equipment from the Chapman Limited
Partnership I (the Partnership), an entity in which certain officers and
stockholders of the Company are partners. The lease requires monthly payments of
$9,846 and contains one year renewable terms, at the option of the Company,
through September 2000, at which time the Company can purchase the furniture and
equipment at fair value. Rent expense under this lease agreement was $118,152
for the years ended December 31, 1995 and 1996, and $98,460 for the ten months
ended October 31, 1996 and 1997. As of December 31, 1996, and October 31, 1997,
$59,076 and $-0-, respectively, was payable to the Partnership.
The Company clears all transactions for its brokerage customers through its
clearing agent, which carries and clears all customer securities accounts. The
clearing agent also lends funds to the Company's brokerage customers through the
use of margin credit. These loans are made to customers on a secured basis, with
the clearing agent maintaining collateral in the form of salable securities,
cash or cash equivalents. Pursuant to the terms of the agreement between the
Company and the clearing agent, in the event that customers fail to pay for
their purchases, to supply the securities that they have sold, or to repay funds
they have borrowed, and the clearing agent satisfies any customer obligations,
the Company would be obligated to indemnify the clearing agent for any resulting
losses. As of October 31, 1997, the Company has approximately $1.2 million of
margin credit outstanding to its customers through its clearing agent.
Securities brokerage firms become parties to arbitrations brought by
dissatisfied customers in the general course of business. The Company has been
and is currently a party to such proceedings, none of which has resulted or
which management believes will result in any material liability.
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
5. INCOME TAXES:
As of December 31, 1996, there was a deferred tax liability of approximately
$32,000 related to the Company being on the cash basis of accounting for income
tax purposes. For the years ended December 31, 1995 and 1996, the tax provision
of $147,000 and $259,000, respectively, is net of a reduction in the valuation
reserve of $130,000 and $49,000, respectively, as a result of utilization of a
net operating loss which was applied against the provision for continuing
operations because the net operating loss was generated from continuing
operations.
A reconciliation of the statutory income taxes to the recorded income tax
provision for the years ended December 31, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Statutory tax (at 34% rate).......................................... $ 127,000 $ 209,000
Effect of state income taxes......................................... 18,000 34,500
Effect of permanent book to tax differences.......................... 2,000 15,500
Reduction in valuation reserve....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The components of the income tax provision for the years ended December 31,
1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current.............................................................. $ 82,000 $ 169,000
Deferred............................................................. (24,000) 33,000
Discontinued operations.............................................. 89,000 57,000
Reduction in valuation service....................................... (130,000) (49,000)
----------- ----------
Income tax provision................................................. $ 17,000 $ 210,000
----------- ----------
----------- ----------
</TABLE>
The Company's tax rate for the ten months ended October 31, 1996 and 1997,
was management's estimate based on the effective tax rate for the years ended
December 31, 1996 and 1997.
6. REGULATORY REQUIREMENTS:
Pursuant to the requirements of the Securities and Exchange Commission's
("SEC") Uniform Net Capital Rule (Rule 15c3-1), Chapman is required to maintain
net capital, as defined, of not less than $100,000 and a ratio of aggregate
indebtedness to net capital, as defined, not to exceed 15 to 1. As of December
31, 1996, the Chapman had excess net capital of $326,067 and a ratio of
aggregate indebtedness to net capital of 0.7 to 1.0.
Chapman is subject to compliance with various SEC and National Association
of Securities Dealers, Inc. ("NASD") regulations. Also, the NASD periodically
reviews Chapman's records and procedures for compliance with its requirements.
Any acts of noncompliance may subject Chapman to fines and other punitive
remedies, and may significantly effect the Company's ability to operate.
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
AND OCTOBER 31, 1996 AND 1997 (UNAUDITED)
7. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1995 and
1996, and for the ten months ended October 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid-
Interest........................................................... $ 20,132 $ 86,616 $ 85,462 $ 9,341
Income taxes....................................................... -- 5,000 5,000 182,232
</TABLE>
8. EMPLOYEE SAVINGS PLAN:
The Company's Retirement Savings Plan, a 401(k) plan, provides participants
a mechanism for making contributions for retirement savings. Each participant
may make pre-tax and after-tax contributions based upon eligible compensation.
The Company may make discretionary contributions based on the participants'
compensation for the plan year. The Company elected not to contribute to the
plan for the years ended December 31, 1996 and 1995, and the ten months ended
October 31, 1997.
9. RELATED PARTY TRANSACTIONS:
Chapman served as the underwriter for DEM, Inc. ("DEM-TM-"), a registered
non-diversified closed-ended management investment company. CCM provides
investment advisory and administrative services to DEM-TM- under an investment
advisory and administrative services agreement which sets forth the services to
be provided and the fees to be charged. In 1995, Chapman and CCM owned a total
of 6,867 shares of DEM-TM-'s stock, with a cost basis of $103,005, which
approximated market. In 1996, CCM purchased 196,333 additional shares of DEM-TM-
stock and sold the shares recognizing a loss of $108,483. The Company accounted
for the DEM-TM- stock at market value.
Listed below are fees and commissions earned from DEM.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Included in continuing operations................................ $ 354,679 $ 455,000 $ 140,000 $ 368,000
Included in discontinued operations.............................. -- 53,041 43,605 108,525
---------- ---------- ---------- ----------
$ 354,679 $ 508,041 $ 183,605 $ 476,525
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
CCM provides investment advisory and administrative services to The Chapman
Funds, Inc. (the Funds), an affiliated group of mutual funds, under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. The agreement also provides
that expense reimbursements be made to the Funds for specified expenses.
As of December 31, 1996, and October 31, 1997, the Company had outstanding
advances to its majority stockholder and other employees of $129,000 and
$173,881, respectively, of which $19,327 and $29,327, respectively, is included
in discontinued operations.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS
SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 13
Dilution........................................ 14
Capitalization.................................. 15
Dividend Policy................................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business........................................ 20
Management...................................... 26
Principal Stockholders.......................... 28
Certain Transactions............................ 29
Description of Capital Stock.................... 31
Shares Eligible for Future Sale................. 32
Plan of Distribution............................ 32
Transfer Agent and Registrar.................... 34
Legal Matters................................... 34
Experts......................................... 34
Additional Information.......................... 34
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 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)
10.12 Lock-up Agreement between the Company and Nathan A. Chapman, Jr. dated December 28, 1997.(1)
10.13 $176,250 Promissory Note to The Chapman Co. from Nathan A. Chapman, Jr. dated February 11, 1998.(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) Filed herewith.
(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No: 333-43487) as filed with the Securities and Exchange
Commission on December 30, 1997.
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 Pre-Effective Amendment 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Baltimore, state of Maryland, on February 17, 1998.
<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, Pre-Effective Amendment 1 to 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 February 17, 1998
Nathan A. Chapman, Jr. Officer)
Treasurer and Controller
/s/ M. LYNN BALLARD (Principal Financial
- ------------------------------ Officer and Principal February 17, 1998
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.
------------------------- February 17, 1998
Nathan A. Chapman, Jr.
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement between the Company and The Chapman Co.
1.2 Form of Qualified Independent Underwriter Agreement between the Company and Ferris Baker
Watts, Incorporated.
1.3 Form of Escrow Agreement between the Company and UMB Bank N.A.
5 Opinion of Venable, Baetjer and Howard, LLP.
10.11 $763,367 Promissory Note to the Chapman Co. from Chapman Capital Management, Inc. dated
as of October 31, 1997.
10.12 Lock-up Agreement between the Company and Nathan A. Chapman, Jr. dated December 28, 1997.
10.13 $176,250 Promissory Note to The Chapman Co. from Nathan A. Chapman, Jr. dated February
11, 1998.
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Venable, Baetjer and Howard, LLP (included in Exhibit 5).
</TABLE>
<PAGE>
Exhibit 1.1
1,000,000 Shares Maximum
850,000 Shares Minimum
Common Stock
CHAPMAN HOLDINGS, INC.
The World Trade Center - Baltimore
410 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
PLACEMENT AGENCY AGREEMENT
[ ], 1998
The Chapman Co.
The World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Ladies and Gentlemen:
Chapman Holdings, Inc. a Maryland corporation (the "Corporation"),
proposes to cause to be issued, and sold (the Offering") through The Chapman Co.
(the "Placement Agent") on a "best efforts" basis, a minimum of 850,000 (the
"Minimum") and a maximum of 1,000,000 (the "Maximum") shares (the "Shares") of
common stock, $0.001 par value per share (the "Common Stock") at a public
offering price of $[6] per share (the "Offering Price").
SECTION 1. APPOINTMENT
The Corporation hereby appoints the Placement Agent, and the Placement
Agent hereby agrees, to act as underwriter of 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 and all amendments thereto
filed pursuant to the Securities Act of 1933, as amended (the "Securities Act")
(the "Registration Statement"), and the Corporation's current prospectus (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 underwriter of the
Shares.
(a) As agent of and underwriter for the Corporation, the Placement Agent
shall offer, and solicit offers to subscribe to, the Shares as shall then be
effectively regis-
<PAGE>
tered under the Securities Act and applicable state securities laws. All
subscriptions for the Shares obtained by the Placement Agent shall be directed
to the Corporation for acceptance and shall not be binding on the Corporation
until accepted by it. The Placement Agent shall have no authority to make
binding subscriptions on behalf of the Corporation. The Placement Agent's rights
hereunder shall not apply to shares of Common Stock issued in connection with
the reinvestment 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 subscriptions
to the Shares upon the terms and conditions contained herein and in the
Prospectus, including the Offering Price. The Corporation shall furnish to the
Placement Agent from time to time, for use in connection with the Offering, such
information with respect to the Corporation and the 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 at any
time, in the absolute discretion of the Board of Directors, 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 the 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 the Shares under the
Securities Act and of registering or qualifying the Shares and the Corporation's
qualification under applicable state securities laws. The Placement Agent shall
pay all expenses relating to its broker-dealer qualification.
(e) 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 Securities Act.
SECTION 3. EXPENSES
-2-
<PAGE>
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) hereof including fees and disbursements of counsel
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; (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 quotation of the Shares on the Nasdaq SmallCap Market. In the
event the Offering is terminated pursuant to Section (5) hereof, the Placement
Agent will be entitled to reimbursement only for its actual accountable
out-of-pocket expenses.
SECTION 4. TERMS OF THE OFFERING
The Offering shall commence upon the effectiveness of the Registration
Statement (the "Effective Date"). All subscription proceeds shall be
immediately deposited into an escrow account established at UMB Bank, N.A. The
termination date of the Offering is on the earlier to occur of: the date
selected by the Corporation; the date of the sale of the Maximum; or the date
that is 180 days after the Effective Date, unless extended by the Corporation
for one or more additional periods not to exceed an additional 30 days in the
aggregate, in which case, on that date which such additional period expires (the
"Termination Date"). If the Minimum is not sold by 5:00 p.m. Baltimore Time on
the Termination Date, the Offering shall terminate and all subscription proceeds
shall be returned to prospective investors, without discount and without
interest.
On such date after the sale of the Minimum and on or before the Termination
Date as shall be determined by the Corporation and subject to the terms and
conditions of this Agreement, a closing shall occur pursuant to which the Shares
shall be issued to subscribers against release of the Offering proceeds held in
escrow with respect to such subscribers' subscriptions ("Initial Closing").
After the Initial Closing, subscription proceeds will be held by the Corporation
pending a subsequent closing. Subject to the terms and conditions of this
Agreement, subsequent closings ("Subsequent Closings") shall be held thereafter
with respect to additional sales of the Shares on a monthly basis or on such a
more frequent basis as the Corporation and Placement Agent shall agree until the
earlier of the Termination Date or termination of the Offering as provided
herein. Initial Closing or a Subsequent Closing is hereinafter referred to
sometimes as a Closing.
The Offering Price will be $[] per Share. The minimum subscription will be
for 100 Shares. The Placement Agent, at its option, may be paid a selling
concession of up to seven percent (7%) of the subscription proceeds ($.[ ] per
share) from all sales of the
-3-
<PAGE>
Shares all, or any portion, of which the Placement Agent may reallow to other
selling agents or any qualified independent underwriter. The Corporation shall
have the right to accept or reject in whole or in part subscriptions for the
Shares.
SECTION 5. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, (i) by the Board of Directors 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 6. 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 7. 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.
(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) 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,
-4-
<PAGE>
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.
(g) 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.
(h) Please confirm that the foregoing correctly sets forth the agreement
between the Corporation and the Placement Agent.
Very truly yours,
CHAPMAN HOLDINGS, INC.
By:__________________________
Nathan A. Chapman, Jr.
President
Accepted,
THE CHAPMAN CO.
By:__________________________
Nathan A. Chapman, Jr.
President
-5-
<PAGE>
[FBW Letterhead]
Exhibit 1.2
___________, 1998
Chapman Holdings, Inc.
World Trade Center - Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
The Chapman Co.
World Trade Center - Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
Re: Agreement to Act as "Qualified Independent Underwriter"
Ladies and Gentlemen:
You have advised us that Chapman Holdings, Inc. (the "Company"), a
Maryland corporation, has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form SB-2 (Reg. No.
333-43487), relating to the offering by the Company of up to 1,000,000 shares
of the common stock, par value $.001 per share, of the Company (the "Common
Stock" or the "Shares").
The Company intends to engage The Chapman Co. (sometimes referred to
herein as the "Underwriter") to sell the Common Stock to the public on a
best-efforts basis (the "Offering"). The Underwriter will not purchase the
Shares from the Company but rather will act on an agency basis pursuant to an
Underwriting Agreement to be entered into by the Company and the Underwriter
(the "Underwriting Agreement").
We understand that, as a member of the National Association of
Securities Dealers, Inc. ("NASD"), the Underwriter may participate in the
Offering only if the price at which the Common Stock is to be offered to the
public is no higher than the price recommended by a "Qualified Independent
Underwriter" (as such term is defined in Rule 2720(b)(15) of the NASD Conduct
Rules) and such Qualified Independent Underwriter participates in the
preparation of the registration statement and prospectus relating to the
Offering and exercises the usual standards of due diligence with respect
thereto. This Agreement describes the terms on which Ferris Baker Watts,
Incorporated ("FBW") agrees to serve as a Qualified Independent Underwriter
in connection with the Offering. In connection with the services to be
provided by FBW hereunder and based upon the representations and warranties
of, and subject to the performance of the covenants by, the Company herein
set forth and FBW's satisfaction with the results of its due diligence
review, FBW agrees to deliver to the Company and the Underwriter, and file
with the NASD, a letter (the "Letter"), substantially in the form of Appendix
A hereto, on the date the Registration Statement (as hereinafter defined) is
first declared effective by the Commission (the "Effective Date") or, if the
Offering is
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 2
not priced on the Effective Date, on the date of the pricing of the Offering
(the "Pricing Date"). As a condition to the delivery of the Letter, the
Registration Statement and each amendment thereto will include any revisions
that in the reasonable judgment of FBW and its legal counsel are required to
enable FBW to deliver the Letter.
As herein used, the term "Registration Statement" means the registration
statement on Form SB-2 (including the related prospectuses, financial
statements, exhibits, schedules and all other documents filed as parts
thereof or incorporated therein) for the registration of the Common Stock
under the Securities Act of 1933, as amended (the "Securities Act"), in the
form declared effective, filed with the Commission and any amendments
thereto. The term "Prospectus" means the prospectus, including any
preliminary or final prospectus (including the form of prospectus first filed
with the Commission pursuant to Rule 424(b) or 430A under the Securities Act
after the Registration Statement with respect to such Offering becomes
effective or, if no such filing is required, each prospectus in the form
included in the Registration Statement with respect to such Offering at the
time it is first declared effective), and any amendment or supplement
thereto, to be used in connection with the Offering.
1. NASD Requirement. FBW hereby confirms its agreement to act in
connection with the Offering as a "Qualified Independent Underwriter" within
the meaning of Rule 2720 of the NASD Conduct Rules and represents that FBW
satisfies or will satisfy at the times designated in Rule 2720(b)(15) the
requirements set forth therein.
2. Consent. FBW hereby consents to be named in the Registration
Statement and Prospectus with respect to the Offering as having acted as the
Qualified Independent Underwriter and to the filing of this Agreement as an
exhibit to the Registration Statement. All references to FBW in the
Registration Statement or Prospectus or in any other filing, report,
document, release or other communication prepared, issued or transmitted in
connection with the Offering by the Company or the Underwriter or any entity
controlling, controlled by or under common control with, or by any of them,
shall be subject to FBW's prior consent with respect to location, form and
substance. FBW's obligation to act as a Qualified Independent Underwriter
hereunder shall terminate if the Company shall breach in any material respect
any representation, warranty or covenant hereunder and such breach shall not
be cured within ten days of written notice thereof to the Company.
3. Fees and Expenses. The Company agrees to pay FBW a fee equal to
the greater of $100,000 or 30% of the aggregate underwriting discount of 7.0%
for each share of Common Stock sold in the Offering (the "Fee") for its
services hereunder, which shall be payable on each date on which payment for
and delivery of any of the Shares are made (each a "Closing Date"). The
Company also agrees to reimburse FBW for all reasonable out-of-pocket
expenses, including all reasonable fees and expenses of FBW's counsel
(including accrued expenses), incurred by FBW in connection with this
Agreement and the Offering. If, for whatever reason, it is determined that
the Offering shall not commence or will not be consummated, FBW shall be
entitled to be paid in full for the above-mentioned expenses, including fees
and expenses of counsel, promptly following such determination, and shall
continue to be entitled to any amount payable to FBW under Section 7 hereof.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 3
4. Representations, Warranties and Covenants of the Company. The
Company represents and warrants to FBW that:
(a) Prior to the date of this Agreement, The Chapman Co. became a
subsidiary of the Company hereinafter sometimes referred to as the
"Subsidiary") pursuant to a reorganization transaction (the "Reorganization")
that is fully described in the Information Statement of The Chapman Co.
pertaining to its annual meeting of stockholders held December 22, 1997, the
plan of merger included therein as an exhibit and the articles of merger
filed with the Maryland State Department of Assessments and Taxation on
December 29, 1997 (the "Reorganization Documents"). The Reorganization
Documents have been provided to FBW and FBW hereby acknowledges receipt
thereof. The Reorganization was conducted in accordance with all applicable
Federal and state laws and regulations, was duly authorized, approved and
adopted by all requisite corporate action of all constituent corporations,
and [TAX REPRESENTATION TO FOLLOW].
(b) Prior to the date of this Agreement, each of Chapman Capital
Management, Inc. ("CCM") and The Chapman Insurance Agency Incorporated
("CIA") became a wholly-owned subsidiary of a separate wholly-owned holding
company subsidiary of The Chapman Co. pursuant to a reorganization
transaction (the "Subsidiary Reorganization"). The Subsidiary Reorganization
was accomplished as follows: (i) The Chapman Co. caused two Maryland
corporations, Chapman Insurance Holdings, Inc. ("CIH") and Chapman Capital
Holdings, Inc. ("CCH") to be organized; (ii) The Chapman Co. transferred all
of the outstanding equity securities of CCM to CCH in exchange for the
issuance of shares of common stock of CCH; and (iii) The Chapman Co.
transferred all of the outstanding equity securities of CIA to CIH in
exchange for the issuance of shares of common stock of CIH. The Subsidiary
Reorganization was conducted in accordance with all applicable Federal and
state laws and regulations, was duly authorized, approved and adopted by all
requisite corporate action of all constituent corporations and
[TAX REPRESENTATION TO FOLLOW].
(c) The Company has an authorized capitalization as set forth in
the Prospectus under the caption "Capitalization;" the outstanding shares of
capital stock of the Company and the Subsidiary, have been duly and validly
authorized and issued and are fully paid and non-assessable; except as
disclosed in the Prospectus, there are no outstanding (i) securities or
obligations of the Company or the Subsidiary convertible into or exchangeable
for any capital stock of the Company or any such Subsidiary, (ii) warrants,
rights or options to subscribe for or purchase from the Company or any such
Subsidiary any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company or any such
Subsidiary to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or
options;
(d) the Company and the Subsidiary each has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
its respective jurisdiction of incorporation with full corporate power and
authority to own its respective properties and to conduct its respective
business as described in the Registration Statement and the Prospectus;
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 4
(e) the Company and the Subsidiary are duly qualified or licensed
by each jurisdiction in which they conduct their respective businesses and in
which the failure, individually or in the aggregate, to be so qualified or
licensed could reasonably be expected to have a material adverse effect on
the assets, operations, business, prospects or condition (financial or
otherwise) of the Company and the Subsidiary taken as a whole, and the
Company and the Subsidiary are duly qualified, and are in good standing, in
each jurisdiction in which they own or lease real property or maintain an
office and in which such qualification is necessary, except where,
individually or in the aggregate, the failure to be so qualified and in good
standing would not have a material adverse effect on the assets, operations,
business, prospects or condition (financial or otherwise) of the Company and
the Subsidiary taken as a whole; except as disclosed in the Prospectus, the
Subsidiary is not prohibited or restricted, directly or indirectly, from
paying dividends to the Company, or from making any other distribution with
respect to such Subsidiary's capital stock or from paying the Company any
loans or advances to such Subsidiary from the Company or from transferring
the Subsidiary's property or assets to the Company;
(f) the Company and the Subsidiary are in compliance with all
applicable federal, state, local and foreign laws, rules and regulations,
including, without limitation, the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Investment Company Act of
1940, as amended (the "Investment Company Act"), the Investment Advisers Act
of 1940, as amended, and the regulations promulgated thereunder
(collectively, the "Securities Laws"), orders, decrees and judgments,
including those relating to transactions with affiliates, except where,
individually or in the aggregate, the failure to be in compliance in a
material respect therewith would not have a material adverse effect on the
assets, operations, business, prospects or condition (financial or otherwise)
of the Company and the Subsidiary taken as a whole;
(g) neither the Company nor the Subsidiary is in breach of, or in
default under, nor has any event occurred which with giving of notice, lapse
of time, or both would constitute a breach of, or default under, its
respective articles of incorporation or charter or by-laws or in the
performance or observance of any obligation, agreement, covenant or condition
contained in any license, indenture, mortgage, deed of trust, loan or credit
agreement or other agreement or instrument to which the Company or the
Subsidiary is a party or by which any of them or their respective properties
is bound, except for such breaches or defaults which, individually or in the
aggregate, would not have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiary taken as a whole, and the execution, delivery and
performance of this Agreement and the Underwriting Agreement, and
consummation of the transactions contemplated hereby and thereby will not
result in the creation or imposition of any lien, charge, claim or
encumbrance upon any property or asset of the Company or the Subsidiary, or
conflict with, or result in any breach of, or constitute a default under, or
constitute an event which with giving of notice, lapse of time, or both would
constitute a breach of, or default under, (i) any provision of the articles
of incorporation or charter or by-laws of the Company or the Subsidiary, or
(ii) any provision of any license, indenture, mortgage, deed of trust, loan
or credit agreement or other agreement or instrument to which the Company or
the Subsidiary is a party or by which either of them or their respective
properties may be bound or affected, or (iii) any federal, state, local or
foreign law, regulation or rule, including, without limitation, the
Securities Laws, or any decree, judgment or order
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 5
applicable to the Company or the Subsidiary, except in the case of this
clause (iii) for such breaches or defaults which, individually or in the
aggregate, would not have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiary taken as a whole;
(h) this Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, and by general principles
of equity, and except to the extent that the indemnification and contribution
provisions of Section 7 hereof may be limited by federal or state securities
laws and public policy considerations in respect thereof;
(i) no approval, authorization, consent or order of or filing with
any federal, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the execution,
delivery and performance of this Agreement and the Underwriting Agreement,
the consummation of the transactions contemplated hereby and thereby, or the
sale and delivery of the Shares by the Company as contemplated hereby other
than (i) such as have been obtained, or will have been obtained at each
Closing Date under the Securities Act, (ii) such approvals as have been
obtained in connection with the approval of the quotation of the Shares on
the Nasdaq SmallCap Market (the "SmallCap Market") and (iii) any necessary
qualification under the securities or blue sky laws of the various
jurisdictions in which the Shares are being offered through the Underwriter;
(j) each of the Company and the Subsidiary has all necessary
licenses, authorizations, consents and approvals and has made all necessary
filings required under any federal, state, local and foreign law, regulation
and rule, including, without limitation, the Securities Laws, and has
obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct their respective businesses as
described in the Prospectus, except to the extent that any failure to have
any such licenses, authorizations, consents or approvals, to make any such
filings or to obtain any such authorizations, consents or approvals would
not, individually or in the aggregate, have a material adverse effect on the
assets, operations, business, prospects or condition (financial or otherwise)
of the Company and the Subsidiary taken as a whole; neither the Company nor
the Subsidiary is in violation of, in default under, or has received any
notice regarding a possible violation, default or revocation of any such
license, authorization, consent or approval applicable to the Company or the
Subsidiary, the effect of which, individually or in the aggregate, could be
material and adverse to the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiary taken as
a whole; and no such license, authorization, consent or approval contains a
materially burdensome restriction that is not adequately disclosed in the
Registration Statement and the Prospectus;
(k) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the Securities Act
and no proceedings for that purpose have been instituted or are pending or,
to the knowledge of the
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 6
Company, are threatened by the Commission, and any request on the part of the
Commission for additional information has been complied with;
(l) the Preliminary Prospectus and the Registration Statement
comply and the Prospectus and any further amendments or supplements thereto
will, when they have become effective or are filed with the Commission, as
the case may be, comply in all material respects with the requirements of the
Securities Act and the Securities Act Regulations; the Registration Statement
did not, and any amendment thereto will not, in each case as of the
applicable effective date, contain 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, in the light of the circumstances under which
they were made, not misleading; and the Preliminary Prospectus does not, and
the Prospectus or any amendment or supplement thereto will not, as of the
applicable filing date and at each Closing Date contain 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, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no warranty or representation with respect to any
statement contained in the Registration Statement or the Prospectus in
reliance upon and in conformity with the information concerning FBW and
furnished in writing by or on behalf of FBW to the Company expressly for use
in the Registration Statement or the Prospectus (that information being
limited to that described in Section 7(e) hereof);
(m) the Preliminary Prospectus was and the Prospectus delivered to
the Underwriter for use in connection with the Offering will be identical in
all material respects to the versions of the Preliminary Prospectus and the
Prospectus created to be transmitted to the Commission for filing via the
Electronic Data Gathering Analysis and Retrieval System ("EDGAR"), except to
the extent permitted by Regulation S-T;
(n) all legal or governmental proceedings, contracts or documents
of a character required to be filed as exhibits to the Registration Statement
or to be summarized or described in the Prospectus have been so filed,
summarized or described as required and any such summaries or descriptions
present fairly the information required to be shown;
(o) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the Company's knowledge, threatened against the
Company or the Subsidiary or any of their respective officers or directors or
to which the properties, assets or rights of either entity are subject, at
law or in equity, before or by any federal, state, local or foreign court,
governmental or regulatory commission, board, body, authority, arbitration
panel or agency which, individually or in the aggregate, could result in a
judgment, decree, award or order having a material adverse effect on the
assets, operations, business, prospects or condition (financial or otherwise)
of the Company and the Subsidiary taken as a whole;
(p) the financial statements, including the notes thereto,
included in the Registration Statement and the Prospectus present fairly the
consolidated financial position of the Company and the Subsidiary as of the
dates indicated and the consolidated results of operations and changes in
stockholders' equity and cash flows of the Company and the Subsidiary for the
periods specified; such
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 7
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
involved (except as indicated in the notes thereto); the financial statement
schedules included in the Registration Statement and the amounts in the
Prospectus under the captions "Prospectus Summary -- Summary Financial Data,"
"Capitalization," "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly present the information
shown therein and have been compiled on a basis consistent with the financial
statements included in the Registration Statement and the Prospectus;
(q) Arthur Andersen LLP, whose reports on the consolidated
financial statements of the Company and the Subsidiary are filed with the
Commission as part of the Registration Statement and Prospectus, are and were
during the periods covered by their reports independent public accountants as
required by the Securities Act and the Securities Act Regulations;
(r) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may be
otherwise stated in the Registration Statement or the Prospectus, there has
not been (i) any material adverse change, in the assets, liabilities,
capital, operations, business or condition (financial or otherwise), present
or prospective, of the Company and the Subsidiary taken as a whole, whether
or not arising in the ordinary course of business, (ii) any transaction,
which is material to the Company and the Subsidiary taken as a whole,
contemplated or entered into by the Company or the Subsidiary, (iii) any
obligation, contingent or otherwise, directly or indirectly incurred by the
Company or the Subsidiary, which is material to the Company and the
Subsidiary taken as a whole or (iv) any dividend or distribution of any kind
declared, paid or made by the Company or the Subsidiary on any class of
capital stock;
(s) the Company is not, and upon the sale of the Shares as herein
contemplated will not be, an investment company which is required to register
under the Investment Company Act;
(t) the Shares will conform in all material respects to the
description thereof contained in the Registration Statement and the
Prospectus;
(u) except as disclosed in the Prospectus, there are no persons
with registration or other similar rights to have any equity securities
registered pursuant to the Registration Statement or otherwise registered by
the Company under the Securities Act;
(v) the Shares have been duly authorized and, when the Shares have
been issued and duly delivered against payment therefor as contemplated by
the Underwriting Agreement and the Prospectus, the Shares will be validly
issued, fully paid and nonassessable, free and clear of any pledge, lien,
encumbrance, security interest, mortgage or other claim whatsoever, and the
issuance and sale of the Shares by the Company is not subject to preemptive
or other similar rights arising by operation of law, under the articles of
incorporation or by-laws of the Company, under any agreement to which the
Company or the Subsidiary is a party, or otherwise;
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 8
(w) the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares;
(x) any certificate signed by any officer of the Company or the
Subsidiary delivered to FBW or to counsel for FBW pursuant to or in
connection with this Agreement shall be deemed a representation and warranty
by the Company to each of FBW and its counsel as to the matters covered
thereby;
(y) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the articles of incorporation and by-laws
of the Company, and with the requirements of the SmallCap Market;
(z) in connection with the Offering, the Company has not offered
and will not offer its Common Stock or any other securities convertible into
or exchangeable or exercisable for Common Stock in a manner in violation of
the Securities Act;
(aa) except as disclosed in the Prospectus, the Company has not
incurred any liability for any finder's fees or similar payments in
connection with the transactions herein contemplated; and
(bb) The Company, the Subsidiary and their predecessors have filed
all necessary federal, state and foreign income and franchise tax returns
that they were required to file and have paid all taxes shown as due thereon
(including, but not limited to, all penalties, interest and other additions
thereto), except for failures to file or pay which would not, individually or
in the aggregate, have a material adverse effect on the assets, operations,
business, prospects or condition (financial or otherwise) of the Company and
the Subsidiary taken as a whole. All such tax returns were correct and
complete in all material respects. All tax liabilities are adequately
provided for on the books of the Company and the Subsidiary, except to such
extent as would not, individually or in the aggregate, have a material
adverse affect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company and the Subsidiary taken as a whole.
The Company, the Subsidiary and their predecessors have made all necessary
payroll and employment tax payments and are current and up-to-date with
respect to such tax payments as of the date of this Agreement, except where
failure to make any such payment would not, individually or in the aggregate,
have a material adverse affect on the assets, operations, business, prospects
or condition (financial or otherwise) of the Company and the Subsidiary taken
as a whole. The Company and the Subsidiary have no knowledge of any tax
proceedings or other action pending or threatened against the Company or the
Subsidiary which, individually or in the aggregate, could have a material
adverse affect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company and the Subsidiary taken as a whole.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 9
5. Certain Covenants of the Company. The Company hereby covenants and
agrees with FBW that:
(a) The Company will furnish such information as may be required
and otherwise to cooperate in qualifying the Shares for offering and sale
under the securities or blue sky laws of such states as the Underwriter may
designate and to maintain such qualifications in effect as long as required
for the distribution of the Shares, provided that the Company shall not be
required to qualify as a foreign corporation or to consent to the service of
process under the laws of any such state (except for service of process with
respect to the offering and sale of the Shares).
(b) The Company will prepare immediately an amended Prospectus in
a form approved by FBW and the Underwriter and file or transmit for filing
such Prospectus with the Commission in accordance with Rule 430A and to
furnish promptly to the Underwriter as many copies of the Prospectus (or of
the Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the
Registration Statement) as the Underwriter may reasonably request for the
purposes contemplated by the Securities Act Regulations, which Prospectus and
any amendments or supplements thereto furnished to the Underwriter will be
identical to the version created to be transmitted to the Commission for
filing via EDGAR, except to the extent permitted by Regulation S-T.
(c) The Company will advise FBW promptly, confirming such advice
in writing, of (i) the receipt of any comments from, or any request by, the
Commission for amendments or supplements to the Registration Statement or the
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes.
The Company will make every reasonable effort to obtain the lifting or
removal of such order as soon as possible. The Company will advise FBW
promptly of any proposal to amend or supplement the Registration Statement or
the Prospectus and will file no such amendment or supplement to which FBW has
reasonably objected in writing.
(d) The Company will advise FBW promptly of the happening of any
event known to the Company within the time during which a Prospectus relating
to the Shares is required to be delivered under the Securities Act
Regulations which, in the judgment of the Company, would require the making
of any change in the Prospectus then being used so that the Prospectus would
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, in the light of the circumstances under which they were
made, not misleading, and, during such time, the Company will prepare and
furnish, at the Company's expense, to FBW promptly such amendments or
supplements to such Prospectus as may be necessary to reflect any such change
and to furnish to FBW a copy of such proposed amendment or supplement before
filing any such amendment or supplement with the Commission.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 10
(e) The Company will furnish promptly to FBW a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith or
incorporated by reference therein) and such number of conformed copies of the
foregoing as FBW may reasonably request.
(f) The Company will furnish to FBW, not less than one business
day before filing with the Commission subsequent to the effective date of the
Registration Statement and during the period referred to in paragraph (d)
above, a copy of any document proposed to be filed with the Commission
pursuant to Section 13, 14, or 15(d) of the Exchange Act.
(g) The Company will apply the net proceeds of the sale of the
Shares in accordance with its statements under the caption "Use of Proceeds"
in the Prospectus.
(h) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than the end of
the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement complying
with the provisions of Section 11(a) of the Securities Act (in form, at the
option of the Company, complying with the provisions of Rule 158 of the
Securities Act Regulations) covering a period of 12 months beginning after
the effective date of the Registration Statement.
(i) The Company will use its best efforts to effect and maintain
the quotation of the Shares on the SmallCap Market and to file with the
SmallCap Market all documents and notices required of companies that have
securities included for quotation on the SmallCap Market.
(j) At no time prior to the completion of the Offering will the
Company issue any press releases or other communications directly or
indirectly and will hold no press conferences with respect to the Company or
the Subsidiary, on the financial condition, results of operations, business,
properties, assets or liabilities of the Company or the Subsidiary, or the
Offering of the Shares, without the prior written consent of FBW.
(k) Prior to the Initial Closing, the Company will effect a
spin-off transaction pursuant to which the outstanding equity securities of
CCH and CIH will be distributed to the then existing stockholders of the
Company (the "Spin-off"). The Spin-off will be conducted in accordance with
all applicable Federal and state laws and regulations, will be duly
authorized, approved and adopted by all requisite corporate action of all
constituent corporations and [TAX COVENANT TO FOLLOW].
6. Conditions of FBW's Obligations:
The obligations of FBW hereunder are subject to the accuracy of the
representations and warranties on the part of the Company in all material
respects on the date hereof and on each Closing Date, the performance by the
Company of its obligations hereunder in all material respects and to the
following further conditions:
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 11
(a) The Company shall furnish to FBW on the date hereof and on
each Closing Date an opinion of Venable, Baetjer and Howard, LLP, counsel for
the Company, addressed to FBW and dated as of each such Closing Date, and in
a form reasonably satisfactory to Whiteford, Taylor & Preston L.L.P., counsel
for FBW, stating that:
(i) the Reorganization was duly authorized, approved and adopted
by all requisite corporate action of all constituent corporations, and [TAX
OPINION TO FOLLOW].
(ii) the Subsidiary Reorganization was duly authorized, approved
and adopted by all requisite corporate action of all constituent
corporations, and [TAX OPINION TO FOLLOW].
(iii) the Company has an authorized capitalization as set forth
in the Prospectus under the caption "Capitalization;" the outstanding
shares of capital stock of the Company and the Subsidiary have been duly
and validly authorized and issued and are fully paid and non-assessable;
except as disclosed in the Prospectus, to such counsel's knowledge, there
are no outstanding (A) securities or obligations of the Company or the
Subsidiary convertible into or exchangeable for any capital stock of the
Company or any such Subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such Subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such Subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options;
(iv) the Company and the Subsidiary each has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation with full
corporate power and authority to own its respective properties and to
conduct its respective business as described in the Registration Statement
and the Prospectus and, in the case of the Company, to execute and deliver
this Agreement and the Underwriting Agreement;
(v) the execution, delivery and performance of this Agreement
and the Underwriting Agreement by the Company and the consummation by the
Company of the transactions contemplated under this Agreement or the
Underwriting Agreement, as the case may be, do not and will not (A)
conflict with, or result in any breach of, or constitute a default under,
or constitute an event which with giving of notice, lapse of time, or both
would constitute a breach of or default under, (I) any provisions of the
articles of incorporation, charter or by-laws of the Company or the
Subsidiary, (II) to the best of such counsel's knowledge, any provision of
any material license, indenture, mortgage, deed of trust, loan or credit
agreement or other agreement or instrument to which the Company or
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 12
the Subsidiary is a party or by which either of them or their respective
properties may be bound or affected, or (III) to the best of such
counsel's knowledge, any law or regulation, including, without
limitation, the Securities Laws, or any decree, judgment or order
applicable to the Company or the Subsidiary, except in the case of
clause (II) for such conflicts, breaches or defaults which, individually
or in the aggregate, would not have a material adverse effect on the
assets, operations, business, prospects or condition (financial or
otherwise) of the Company and the Subsidiary taken as a whole; or (B) to
such counsel's knowledge, result in the creation or imposition of any
lien, charge, claim or encumbrance upon any property or assets of the
Company or the Subsidiary;
(vi) to such counsel's knowledge, no approval, authorization,
consent or order of or filing with any federal or state governmental or
regulatory commission, board, body, authority or agency is required in
connection with the execution, delivery and performance of this Agreement
and the Underwriting Agreement, the consummation of the transactions
contemplated hereby and thereby, the sale and delivery of the Shares by the
Company as contemplated hereby other than such as have been obtained or
made under the Securities Act, and except that such counsel need express no
opinion as to any necessary qualification under the rules of the NASD or
the state securities or blue sky laws of the various jurisdictions in which
the Shares are being offered by the Underwriter;
(vii) the Company is not, and upon the sale of the Shares as
herein contemplated will not be, an investment company required to be
registered under the Investment Company Act;
(viii) the Shares have been duly authorized and, when the Shares
have been issued and duly delivered against payment therefor as
contemplated by the Underwriting Agreement, the Shares will be validly
issued, fully paid and nonassessable, free and clear of any pledge, lien,
encumbrance, security interest, mortgage or other claim whatsoever;
(ix) the issuance and sale of the Shares by the Company is not
subject to preemptive or other similar rights arising by operation of law,
under the articles of incorporation or by-laws of the Company, under any
agreement known to such counsel to which the Company or the Subsidiary is a
party or, to the best of such counsel's knowledge, otherwise;
(x) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the articles of
incorporation and by-laws of the Company and the requirements of the
SmallCap Market;
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 13
(xi) the Registration Statement has become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the best of such counsel's
knowledge, no proceedings with respect thereto have been commenced or
threatened;
(xii) as of the Effective Date, the Registration Statement and
the Prospectus (except as to the financial statements and other financial
and statistical data contained in such Registration Statement or
Prospectus, as to which such counsel need express no opinion) complied as
to form in all material respects with the requirements of the Securities
Act and the Securities Act Regulations;
(xiii) the statements under the captions "Capitalization," "Risk
Factors -- Regulatory Risks," "Business -- Government Regulation," "Certain
Transactions," "Description of Capital Stock," and "Shares Eligible for
Future Sale," in the Registration Statement and the Prospectus, insofar as
such statements constitute a summary of the legal matters referred to
therein, constitute accurate summaries thereof in all material respects;
and
(xiv) except as set forth in the Prospectus, to the best of
such counsel's knowledge, there are no material legal or governmental
proceedings pending or threatened against, or involving the properties of
the Company or the Subsidiary required to be disclosed in the Prospectus;
provided that for this purpose such counsel need not regard any litigation
or governmental proceedings to be "threatened" unless the potential
litigant or governmental authority has manifested to the Company or the
Subsidiary, or to their management, a present intention to initiate such
proceedings.
(xv) to such counsel's knowledge, there are no contracts or
documents of a character which are required to be filed as exhibits to the
Registration Statement or to be described or summarized in the Prospectus
which have not been so filed, summarized or described.
In addition, such counsel shall state that they have participated in the
preparation of the Prospectus and the Registration Statement and in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company and
with FBW at which the contents of the Prospectus and the Registration
Statement and related matters were discussed and, although such counsel is
not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and
the Registration Statement and have not made any independent investigation or
verification thereof, nothing has come to their attention during the course
of such participation that leads them to believe that at the time the
Registration Statement became effective, the Prospectus and the Registration
Statement (other than the financial statements and schedules and other
financial and statistical data and information included therein or omitted
therefrom, as to which they need express no opinion) contained or contains an
untrue statement
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 14
of a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) In addition to the items set forth in paragraph (a) of this
Section 6, the opinion of Venable, Baetjer & Howard, LLP delivered on the
Initial Closing Date shall state that the Spin-off was duly authorized,
approved and adopted by all requisite corporate action of all constituent
corporations, and [TAX OPINION TO FOLLOW].
(c) FBW shall have received, on each of the date hereof and each
Closing Date, a letter dated the date hereof or such Closing Date, as the
case may be, in form and substance satisfactory to FBW, from Arthur Andersen
LLP, independent public accountants, confirming that they are independent
public accountants within the meaning of the Securities Act and the
Securities Act Regulations and stating that in their opinion the financial
statements examined by them and included in the Registration Statement comply
in form in all material respects with the applicable accounting requirements
of the Securities Act and the Securities Act Regulations; and containing the
information and statements of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement and
the Prospectus.
(d) No amendment or supplement to the Registration Statement or
the Prospectus shall have been filed to which FBW has objected in writing.
(e) Prior to the completion of the Offering (i) no stop order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus shall have been issued by the Commission, (ii) no suspension of
the qualification of the Shares for offering or sale in any jurisdiction
shall have occurred, and no proceeding for such suspension shall have been
initiated or threatened; and (ii) the Registration Statement and the
Prospectus shall not contain an untrue statement of material fact or omit to
state a material fact, individually or in the aggregate, required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and each
Closing Date (i) no material and unfavorable change in the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiary taken as a whole shall have occurred or become
known (whether or not arising in the ordinary course of business), and (ii)
no transaction which is material and unfavorable to the Company shall have
been entered into by the Company or the Subsidiary.
(g) On the Effective Date, the Underwriting Agreement shall have
been entered into and delivered by all required parties.
(h) On each Closing Date, all filings required to have been made
pursuant to Rules 424 or 430A under the Securities Act have been made.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 15
(i) On the Initial Closing Date, the Shares shall have been
approved for listing upon notice of issuance on the SmallCap Market.
(j) The NASD shall not have raised any objection with respect to
the fairness and reasonableness of the underwriting terms and arrangements.
(k) FBW shall have received a letter from Nathan A. Chapman, Jr.,
in form and substance satisfactory to FBW, confirming his agreement that for
a period of 12 months commencing on the Effective Date he will not sell any
shares of Common Stock, or any securities convertible into or exchangeable
for any shares of Common Stock, or any option, warrant or other right to
acquire any shares of Common Stock, or publicly announce any intention to do
any of the foregoing, without the prior written consent of FBW, which consent
may be withheld in their sole discretion.
(l) The Company shall, on the date hereof and at each Closing
Date, deliver to FBW a certificate of its president and its chief financial
officer to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth in this Agreement and
the conditions set forth in paragraphs (d) through (i) inclusive of this
Section 6 have been met and are true and correct as of such date.
(m) The Company shall have furnished to FBW such other documents
and certificates as to the accuracy and completeness of any statement in the
Registration Statement and the Prospectus, the representations, warranties
and statements of the Company contained herein, and the performance by the
Company of the covenants contained herein, and the fulfillment of any
conditions contained herein or therein, as of each Closing Date as FBW may
reasonably request.
(n) The Company shall have performed such of its obligations under
this Agreement as are to be performed by the terms hereof at or before each
Closing Date.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless FBW and its
directors, officers and each person, if any, who controls FBW within the
meaning of Section 15 of the 1933 Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the ''Exchange Act"), from and against any
and all losses, claims, damages, liabilities and judgments (including,
without limitation, any legal or other expenses incurred in connection with
investigating or defending any matter, including any action, that could give
rise to any such losses, claims, damages, liabilities or judgments and any
amount paid in settlement of, any action, suit or proceeding commenced or any
claim asserted), to which FBW may become subject under the 1933 Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, related to, based upon or arising out of (i) an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any preliminary prospectus (unless corrected in the Prospectus),
or the omission or alleged omission to state therein a material fact required
to be stated therein or necessary
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 16
to make the statements therein not misleading, (ii) any breach or alleged
breach by the Company of its representations, warranties and agreements
contained in this Agreement or (iii) FBW's performance of its duties under
this Agreement; provided, however, that the Company will have no obligation
under this Section 7(a) to the extent that any such loss, claim, damage,
liability or action pursuant to clause (iii) above shall have been determined
in a final judgment of a court of competent jurisdiction to have been due to
the willful misconduct or gross negligence of FBW.
FBW agrees to indemnify and hold harmless the Company, its directors and
officers, and each person, if any, who controls the Company within the
meaning of either Section 15 of the 1933 Act or Section 20 of the Exchange
Act to the same extent as the foregoing indemnity from the Company to FBW,
but only with respect to (i) any breach or alleged breach by FBW of its
representations, warranties and agreements contained in this Agreement or
(ii) information relating to FBW furnished in writing by FBW expressly for
use in the Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any preliminary prospectus; provided, however, that
the foregoing indemnity by FBW shall not apply to any untrue statement or
omission contained in any preliminary prospectus which is not contained in
the Prospectus.
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought under this Section 7, such person
shall promptly notify each indemnifying party in writing and such
indemnifying party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to such indemnified party, and the payment
of all fees and expenses of such counsel, as incurred. Any indemnified party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the employment
of such counsel by such indemnified party shall have been specifically
authorized in writing by the indemnifying parties, (ii) the indemnifying
party shall have failed to assume the defense of such action or employ
counsel reasonably satisfactory to the indemnified party, or (iii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party, and the indemnified party shall
have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
the indemnified party). In any such case, the indemnifying party shall not,
in connection with any one action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by FBW, in the
case of parties indemnified pursuant to the first paragraph of Section 7(a),
and by the Company, in the case of the parties indemnified pursuant to the
second paragraph of Section 7(a). The indemnifying party shall indemnify and
hold harmless the indemnified party from and against any and all losses,
claims, damages, liabilities and judgments by reason of any settlement of any
action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business
days after the indemnifying party shall have received a request from the
indemnified party for reimbursement for the fees and expense of counsel
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 17
(in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the
indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement or compromise of, or consent to
the entry of judgment with respect to, any pending or threatened action in
respect of which the indemnified party is or could have been a party and
indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
on claims that are or could have been the subject matter of such action and
(ii) does not include a statement as to or an admission of fault, culpability
or a failure to act, by or on behalf of the indemnified party.
(c) To the extent the indemnification provided for in Section 7(a)
is unavailable to, or insufficient to hold harmless any indemnified party
under Section 7(a), in respect of any loss, claim, damage, liability or
judgment referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company, on the one hand,
and FBW, on the other, from the Offering or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, or if the indemnified
party failed to give the notice required under Section 7(b), in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company,
on the one hand, and FBW, on the other, in connection with FBW's activities
under this Agreement or the statements or omissions that resulted in such
losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and FBW, on the other, shall be deemed to be in the
same proportion as the total net proceeds from the Offering (after deducting
expenses) bear to the total fee paid to FBW pursuant to Section 3. The
relative fault of the Company, on the one hand, and of FBW, on the other,
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by FBW, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and FBW agree that it would not be just and equitable if
contribution pursuant to this Section 7(c) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
matter, including any action that could have given rise to such losses,
claims, damages, liabilities or judgments. Notwithstanding the provisions of
this Section 7, FBW shall not be required to contribute any amount in excess
of the amount by which the fee paid to FBW pursuant to Section 3 exceeds the
amount of any damages FBW has otherwise been required to pay by reason of
such activities under this Agreement or such untrue or alleged untrue
statement or omission or
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 18
alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available
to any indemnified party at law or in equity.
(e) The statements with respect to FBW in the fourth paragraph
under the caption "Plan of Distribution" in the Prospectus constitute the
only information furnished to the Company in writing on behalf of FBW
expressly for use in the Registration Statement, the Prospectus or any
amendment or supplement thereto, or any preliminary prospectus.
(f) The indemnity and contribution agreements contained in this
Section 7, and the covenants, representations and warranties of the Company
in this Agreement, shall remain operative and in full force and effect
regardless of (i) any investigation made by FBW or on its behalf or by or on
behalf of any person who controls FBW or (ii) any termination of this
Agreement or the Offering.
8. Successors and Assigns. The benefits of this Agreement shall inure
to the respective successors and assigns of the parties hereto and the
obligations and liabilities assumed in this Agreement by the parties hereto
shall be binding upon their respective successors and assigns.
9. Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented unless the Company, the Underwriter and
FBW consent in writing to such amendment, modification or supplement.
10. Notice. Whenever notice is required to be given pursuant to this
Agreement, such notice shall be in writing and shall be delivered by hand or
by commercial messenger service or mailed by first class mail, postage
prepaid, addressed (a) if to FBW, at 100 Light Street, Baltimore, Maryland
21202, Attention: Steven L. Shea, (b) if to the Company or the Underwriter,
at the address on the first page of this Agreement, Attention: Nathan A.
Chapman, Jr., or such other address as to which any party shall notify the
other parties hereto in writing.
11. Governing Law. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with and governed by the
laws of the State of Maryland applicable to agreements made and to be
performed wholly within such jurisdiction. The Company and FBW irrevocably
consent to the service of any complaint, summons, notice or other process
relating to any such action or proceeding by delivery thereof to it in the
manner provided for in Section 9 hereof.
12. Counterparts. This Agreement may be signed in two or more
counterparts with the same force and effect as if the signatures thereto and
hereto were upon the same instrument.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 19
13. Termination. This Agreement will terminate on the Termination
Date, except that the provisions of Section 7 hereof, shall survive the
termination of this Agreement.
14. Entire Agreement. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof and thereof.
If the above terms are in accordance with your understanding of our
agreement, please sign the enclosed copy of this Agreement and return such
copy to us.
Very truly yours,
FERRIS BAKER WATTS INCORPORATED
By:
---------------------------
CONFIRMED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN:
CHAPMAN HOLDINGS, INC.
By:
-----------------------------
Name: Nathan A. Chapman, Jr.
Title: President
THE CHAPMAN CO.
By:
-----------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
[FBW Letterhead]
APPENDIX A
_______________, 1998
Chapman Holdings, Inc.
World Trade Center - Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
The Chapman Co.
World Trade Center - Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
Re: Qualified Independent Underwriter
Ladies and Gentlemen:
You have advised us that Chapman Holdings, Inc. (the "Company"), a
Maryland corporation, has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form SB-2 (Registration No.
333-43487), relating to the offering by the Company of up to 1,000,000 common
stock, par value $.001 per share, of the Company (the "Common Stock" or the
"Shares"). It is anticipated that The Chapman Co. (the "Underwriter") will
act as an Underwriter of the Company in the sale of the Shares to the public
on a best efforts, minimum/maximum basis.
We understand that, as a member of the National Association of
Securities Dealers, Inc. (the "NASD"), the Underwriter may participate in the
Offering only if the price of each Share offered to the public is no higher
than the price recommended by a "Qualified Independent Underwriter."
Pursuant to a letter agreement, dated ______, 1998, among the Company, the
Underwriter and us (the "QIU Agreement"), we have been retained as a
"Qualified Independent Underwriter" (as such term is defined in Rule
2720(b)(15) of the NASD Conduct Rules) to recommend to you the maximum price
for the Shares to be sold to the public.
We have participated in the preparation of the Registration Statement
and the Prospectus (as such terms are defined in the QIU Agreement) with
respect to the Offering, and have exercised the usual standards of due
diligence with respect thereto. Assuming that the Offering is commenced on
_______, 1998, and further assuming compliance by the Corporation and the
Underwriter with their representations,
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
________________, 1998
Page 2
warranties and covenants in Sections 4 and 5 of the QIU Agreement, we
recommend that the price of the Shares be no higher than $______.
Very truly yours,
FERRIS BAKER WATTS INCORPORATED
By:
---------------------------
Steven L. Shea
Senior Vice President
AGREED TO AND ACCEPTED:
THE CHAPMAN CO.
By:
--------------------------------
Name: Nathan A. Chapman, Jr.
Title: President
CHAPMAN HOLDINGS, INC.
By:
--------------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
Exhibit 1.3
ESCROW AGREEMENT
This ESCROW AGREEMENT (the "Agreement") is made and entered into this ___ day
of __________, 1998, by and between Chapman Holdings, Inc., a corporation
organized under the laws of the State of Maryland (the "Company"), The
Chapman Co., a corporation organized under the laws of the State of Maryland
(the "Underwriter"), and UMB BANK, N.A., a national banking association
organized and existing under the laws of the United States of America, as
Escrow Agent (the "Escrow Agent").
W I T N E S S E T H :
WHEREAS, the Company is a corporation organized under the laws of the State
of Maryland and the Underwriter is a corporation organized under the laws of
the State of Maryland and is a wholly-owned direct subsidiary of the Company;
WHEREAS, the Company desires to offer for sale a maximum of 1,000,000 shares
(the "Maximum Offering") of its common stock, $.001 par value, (the
"Shares"); and
WHEREAS, the Company has filed a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act of 1933, as amended, and
has made filings with certain state securities commissions under applicable
state "blue sky" laws relating to the issuance and sale of the Shares;
WHEREAS, in compliance with the terms of the proposed offering set forth in
the Preliminary and Final Prospectuses which are a part of the Registration
Statement (the "Prospectus"), the Company will establish a segregated escrow
account with the Escrow Agent (the "Escrow Account") into which proceeds (the
"Subscription Proceeds") from subscriptions submitted by subscribers (the
"Applicants") to purchase Shares (the "Subscriptions") will be deposited;
WHREAS, THE OFFERING PERIOD FOR Subscriptions shall commence upon the
effectiveness of the Registration Statement, which date of effectiveness will
be certified in writing to the Escrow Agent by the Company and the
Underwriter (the "Effective Date");
WHEREAS, the termination date of the offering period for Subscriptions will
be on the earlier to occur of: the date selected by the Company, which date
will be certified in writing to the Escrow Agent by the Company and the
Underwriter; the date of the sale of the Maximum Offering; or the date that
is one hundred eighty (180) days after the Effective Date, unless extended by
the Company for one or more additional periods not to exceed an additional
thirty (30) days in the aggregate (the "Additional Periods"), in which case,
on that date which such Additional Periods expire, provided that such
Additional Periods are certified in writing to the Escrow Agent by the
Company and the Underwriter, and provided further that the receipt of such
notice by the Escrow Agent is prior to the termination of this Escrow
Agreement (the "Termination Date" and the
<PAGE>
period from the Effective Date until the Termination Date is hereinafter
referred to as the "Offering Period");
WHEREAS, upon the receipt by the Escrow Agent of not less than the Minimum
Amount of Subscription Proceeds, the Escrow Agent shall notify the
Underwriter and deliver the Subscription Proceeds to the order of the
Company. The Escrow Agent shall continue to receive and deliver any
Subscription Proceeds to the Company until the end of the Offering Period, on
which date the Escrow Account shall terminate (the "Closing Date"); and
WHEREAS, the Escrow Agent has agreed to act as escrow agent in connection
with and under this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
l. Until the Closing Date, the Escrow Agent shall act as escrow
agent hereunder and agrees to receive and hold the Subscriptions in
accordance with this Agreement.
2. All Subscriptions and checks received and not rejected by the
Underwriter on behalf of the Company pursuant to the Prospectus during the
Offering Period shall be transmitted directly to the Escrow Agent by 12:00
Noon Central Time of the next business day after the receipt thereof by the
Underwriter, and shall be deposited by the Escrow Agent in the Escrow
Account. In addition, the Underwriter shall deliver to the Escrow Agent
names, addresses and a completed Form W-9 for each Applicant and such other
information regarding any Applicant as the Escrow Agent may from time to
time request in writing. The Escrow Agent shall provide the Underwriter a
statement of the assets held and transactions of the Escrow Account as the
Underwriter shall from time to time request in writing.
3. Notwithstanding the provisions of Paragraph 2 hereof, if at any
time the Underwriter shall provide written notice to the Escrow Agent that
any Subscription is invalid or unacceptable, in whole or in part, or that
any Subscription Proceeds deposited with the Escrow Agent cannot be
lawfully accepted, in whole or in part, the Escrow Agent shall promptly
(within not less than ten (10) days) deliver to the Applicant submitting
such Subscription , without deduction, the Subscription Proceeds (or
portion thereof) which has been rejected.
4. Upon acceptance of any Subscription and the deposit of the
related Subscription Proceeds into the Escrow Account, the Underwriter
shall provide prompt written notice to the Applicant of such acceptance.
5. Promptly upon the Escrow Agent's receipt of Subscription Proceeds
from the Underwriter, the Escrow Agent shall proceed to collect upon such
payment instrument(s). All such collection efforts shall be subject to the
Escrow Agent's collection procedures in the ordinary course of its banking
business; provided, however, that if any payment
2
<PAGE>
instrument at any time delivered to Escrow Agent hereunder shall be
returned to Escrow Agent as being uncollectable, Escrow Agent shall attempt
a second time to collect such item before returning such item to the
Underwriter as uncollectable. Subject to the foregoing, Escrow Agent shall
promptly give written notice to the Underwriter of any uncollected item
delivered to Escrow Agent under this Agreement. Escrow Agent shall not be
required or have a duty to take legal action to enforce payment of any
uncollected item delivered to it under this Agreement. The Escrow Agent
shall have no duty or obligation to collect (except for collection in the
ordinary course of its banking business) any amounts at any time due in
respect of any Subscriptions, and shall not be responsible for any defaults
thereunder or hereunder by any other party, or for the application of any
funds received by it from the Applicants after payment of such funds by it
to the Company as herein provided. In the event that Escrow Agent shall
have disbursed Subscription Proceeds to the Company or returned such moneys
to the Applicant in accordance with this Agreement with respect to any
payment instrument and subsequently it shall be determined that such item
shall be uncollectable, the Company shall upon Escrow Agent's demand
reimburse it for the amount so disbursed.
6. Escrow Agent shall invest all Subscription Proceeds deposited
with it hereunder, and earnings thereon, if any, in obligations of the
United States Government or any agency thereof with maturities of no
greater than ninety (90) days or in bank money market deposits or funds as
the Company shall from time to time direct in writing, and the Escrow Agent
shall incur no liability when investing in accordance with such direction.
7. The Company and the Underwriter agree to certify in writing to
the Escrow Agent the Effective Date and any Additional Periods. The
Offering Period shall commence on the Effective Date and shall expire on
the Termination Date.
8. If Subscription Proceeds for not less
than__________________________ Dollars ($_______________) (the "Minimum
Amount") are received and accepted by the Underwriter and not less than the
Minimum Amount in Subscription Proceeds have been delivered to the Escrow
Agent (along with other items required by Section 2 hereof), have cleared
the banking system and are on deposit in available funds with the Escrow
Agent, the Escrow Agent will notify the Underwriter and pay over to the
order of the Company all of the Subscription Proceeds then on deposit in
the Escrow Account, together with all interest or other income, if any ,
earned on the Subscription Proceeds held hereunder. Following such
payment, the Escrow Agent shall continue to receive Subscription Proceeds
as provided in Paragraph 2 hereof, and upon receipt of available funds on
or before the Closing Date, shall deliver such Subscription Proceeds, from
time to time, to the order of the Company. On the Closing Date, all duties
and responsibilities of the Escrow Agent shall cease and terminate,
including without limitation, the obligation to receive and collect
Subscription Proceeds and deliver same to Company.
9. If Subscription Proceeds for not less than the Minimum Amount
have not been received by the Escrow Agent in available funds by 4:00 P.M.
Central Time on the final day of the Offering Period, Subscription Proceeds
held hereunder by the Escrow Agent will be
3
<PAGE>
returned by the Escrow Agent to the Applicants and any interest earned upon
the Subscription Proceeds shall be paid over to the order of the Company
promptly following the expiration of the Offering Period.
10. Prior to delivery to it of the Subscription Proceeds, the Company
shall have no title, right, claim, lien or any other interest in the funds
held in escrow hereunder, and such funds shall under no circumstances be
available to the Company or its creditors for payment or reimbursement for
liabilities or indebtedness.
11. It is understood and agreed, further, that the Escrow Agent
shall:
A. have no duty to compel delivery of any Subscription by
the Underwriter or the Company and shall be under no duty to
deliver any Subscription, or to pay and transfer any moneys
hereunder, unless the same shall have been first received by the
Escrow Agent pursuant to the provisions of this Agreement;
B. be under no duty to enforce payment of any Subscription
which is to be paid to and held by it hereunder;
C. be under no duty to accept any information from any
person or entity other than the Underwriter and the Company, or
their designated agents, and then only to the extent and in the
manner expressly provided for in this Agreement;
D. act hereunder as a depository only and be protected in
acting upon any Subscription, and related items supplied pursuant
to Section 2 hereof, and the information contained therein
without responsibility to determine the validity or sufficiency
of the same, and be protected in acting upon any other notice,
opinion, request, certificate, approval, consent or other paper
delivered to it and represented to it to be genuine and to be
signed by the proper party or parties;
E. be deemed conclusively to have given and delivered any
notice required to be given or delivered hereunder if the same is
in writing, signed by any one of its authorized officers and (1)
mailed, by registered or certified mail, postage prepaid, or (2)
by hand delivery, in a sealed wrapper, addressed to the
Underwriter or the Company and manually receipted for by the
addressee;
F. be indemnified and held harmless by the Company and the
Underwriter, jointly and severally, against any claim made
against it by reason of its acting or failing to act in
connection with any of the transactions contemplated hereby and
against any loss, liability, cost, suit or expense, including
attorneys' fees and other expense of defending itself against any
claim of liability it may sustain in carrying out the terms of
this Agreement except such claims which are occasioned by its
gross negligence or willful misconduct;
4
<PAGE>
G. have no liability or duty to inquire into the terms and
conditions of the Prospectus, Registration Statement,
Subscriptions or any of the exhibits annexed thereto, nor to
ascertain or compel compliance by the Company or the Underwriter
with any of the requirements thereof or of law or regulation, and
that its duties and responsibilities shall be limited to those
expressly set forth under this Agreement and are purely
ministerial in nature;
H. be permitted to consult with counsel of its choice,
including in-house counsel, and shall not be liable for any
action taken, suffered or omitted by it in good faith in
accordance with the advice of such counsel, provided, however,
that nothing contained in this Subparagraph H, nor any action
taken by the Escrow Agent, or of any such counsel, shall relieve
the Escrow Agent from liability for any claims which are
occasioned by its gross negligence or willful misconduct, all as
provided in Subparagraph F above;
I. not be bound by any amendment or revocation of this
Agreement, unless the same shall be in writing and signed by all
of the parties to this Agreement;
J. be entitled, should it be uncertain as to its duties
and rights hereunder (including, without limitation, uncertainty
resulting from receipt of conflicting instructions or directions
from any of the parties hereto), to refrain from taking any
action other than to keep all property held by it in escrow
hereunder until it shall be directed otherwise in writing by the
Underwriter and the Company, or by a final judgment by a court of
competent jurisdiction;
K. have no liability for following the instructions herein
contained or expressly provided for, or written instructions
given, by the Underwriter or the Company;
L. have the right, at any time, to resign hereunder by
giving written notice of its resignation to the Underwriter and
the Company at their address as set forth in Paragraph 12 hereof,
at least thirty (30) days before the date specified for such
resignation to take effect, and upon the effective date of such
resignation:
(l) all cash and other funds and all other property
then held by the Escrow Agent hereunder shall be delivered
by it to such successor Escrow Agent as may be designated in
writing by the Company, whereupon the Escrow Agent's
obligations hereunder shall cease and terminate;
(2) if no such successor Escrow Agent has been
designated by such date, all obligations of the Escrow Agent
hereunder shall, nevertheless, cease and terminate, and the
Escrow Agent's sole responsibility thereafter shall be to
keep all property then held by it and to deliver the same to
a person designated in writing by the Company or in
accordance with the directions of a final order or judgment
of a court of competent jurisdiction; yet, if no such
designation,
5
<PAGE>
order or judgment is received by Escrow Agent within thirty
(30) days after its giving such resignation notice, it is
unconditionally and irrevocably authorized and empowered to
petition a court of competent jurisdiction for directions.
M. be reimbursed by the Company at the termination of the
escrow for all reasonable costs, fees, charges, expenses,
disbursements and advances (including, but not limited to,
acceptance and administration fees and expenses as provided
in Exhibit A hereto, as well as legal, consultant and
advisor fees and charges) incurred or made by it in
accordance with any provision of this Agreement, or as a
result of the acceptance of this Agreement.
12. By acceptance of its duties hereunder, the Escrow Agent makes no
representation as to and is not responsible or liable in any manner for the
sufficiency, correctness, genuineness, or validity of this Agreement, the
Shares, the Registration Statement, the Prospectus, or any related document
or instrument.
13. All deliveries and notices to the Escrow Agent shall be effective
upon receipt by the Escrow Agent and shall be in writing and sent or
delivered to:
UMB BANK, N.A.
ATTN: Corporate Trust Division
928 Grand Avenue
P. O. Box 419226
Kansas City, MO 64141-6226
Any notice given on behalf of the Company or the Underwriter shall be
signed by one or more of the officers of the Company or the Underwriter, as
the case may be, and shall be sufficient for all purposes hereunder.
All deliveries and notices hereunder to the Company and the
Underwriter shall be in writing and shall be sent or delivered to:
The Company at:
Chapman Holdings, Inc.
Attn: Nathan A. Chapman, Jr.
The World Trade Center - Baltimore
401 E. Pratt Street, 28th Floor
Baltimore, MD 21202
6
<PAGE>
The Underwriter at:
The Chapman Co.
Attn: Nathan A. Chapman, Jr.
The World Trade Center - Baltimore
401 E. Pratt Street, 28th Floor
Baltimore, MD 21202
A copy of each delivery, notice and/or report, whether given by the
Underwriter, the Company or the Escrow Agent, shall be simultaneously sent
or delivered to each of the other parties to this Agreement.
14.Any invalidity, in whole or in part, of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement.
5. Nothing in this Agreement is intended to or shall confer upon
anyone other than the parties hereto any legal or equitable right, remedy
or claim. This Agreement shall be construed in accordance with the laws of
the State of Missouri and may be amended or resolved only by a writing
executed by the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf
of each of the parties hereto as of the day and year first above written.
Chapman Holdings, Inc.,
Company
By:
----------------------------
Title
--------------------------
The Chapman Co.,
Underwriter
By:
----------------------------
Title
--------------------------
UMB BANK, N.A., as Escrow Agent,
Escrow Agent
By:
-----------------------------
Bbds0038 Title
---------------------------
7
<PAGE>
EXHIBIT A
<TABLE>
<S> <C>
Acceptance and Annual Fee - review
escrow agreement and establish and
maintain account $1,500.00
Transaction Fees
(a) per subscriber deposit 2.00
(b) per subscriber interest payment 3.00
(c) per subscriber return of
subscription amount if
minimum amount not sold 5.00
(d) per subscriber subscription rejection 10.00
(e) per returned check 10.00
(f) per Form 1099 (Int., B or Misc.) 1.00
</TABLE>
In addition to the specified fees, all expenses related to the administration
of the Agreement and the Escrow Account (other than normal overhead expenses
of the regular staff) such as, but not limited to, travel, postage, shipping,
courier, telephone, facsimile, supplies, legal fees, accounting fees, etc.,
will be reimbursable. The acceptance and annual fee will be payable by
Chapman Holdings, Inc. at the termination of the escrow. Other fees and
expenses will be billed as incurred or at the termination of the escrow.
8
<PAGE>
Exhibit 5
VENABLE, BAETJER AND HOWARD, LLP
1800 Mercantile Bank & Trust Company
Two Hopkins Plaza
Baltimore, MD 21201-2978
February 13, 1998
Chapman Holdings, Inc.
The World Trade Center-Baltimore
401 E. Pratt Street
28th Floor
Baltimore, Maryland 21202
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel for Chapman Holdings, Inc., a Maryland corporation
(the "Company"), in connection with the organization of the Company and the
issuance of up to 1,000,000 shares of its common stock, par value $0.001 per
share (the "Common Stock").
As counsel for the Company, we are familiar with its Charter and Bylaws.
We have examined the prospectus included in its Registration Statement on Form
SB-2 (File No. 333-43487) (the "Registration Statement"), substantially in the
form in which it is to become effective (collectively, the "Prospectus"). We
have further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Company is duly
incorporated and existing under the laws of the State of Maryland and is in good
standing and duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the Company
and other documents and certificates
<PAGE>
Chapman Holdings, Inc.
February 13, 1998
Page 2
with respect to factual matters as we have deemed necessary to render the
opinion expressed herein. With respect to the documents we have received, we
have assumed, without independent verification, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion and so advise you that the
1,000,000 shares of Common Stock to be offered for sale pursuant to the
Prospectus are duly authorized and, when sold, issued and paid for as
contemplated by the Prospectus, will be validly and legally issued and will be
fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Registration Statement
under the heading "Legal Matters."
Very truly yours,
/S/ VENABLE, BAETJER AND HOWARD, LLP
-----------------------------------------------------
VENABLE, BAETJER AND HOWARD, LLP
<PAGE>
Exhibit 10.11
PROMISSORY NOTE
$763,367.00 BALTIMORE, MARYLAND
OCTOBER 31, 1997
WITHIN TEN YEARS, Chapman Capital Management, Incorporated promises to
pay to the order of The Chapman Co., Seven hundred sixty-three thousand
three hundred sixty-seven dollars ($763,367.00), at its offices in
Baltimore, Maryland, together with interest thereon from the date hereof
until paid at the rate of 6.68% per annum.
/S/ NATHAN A. CHAPMAN, JR.
------------------------------
NATHAN A. CHAPMAN, JR PRESIDENT
CHAPMAN CAPITAL MANAGEMENT
<PAGE>
Exhibit 10.12
Nathan A. Chapman, Jr.
The World Trade Center--Baltimore
28th Floor
401 East Pratt Street
Baltimore, MD 21201
December 29, 1997
Chapman Holdings, Inc.
The Chapman Co.
The World Trade Center--Baltimore
28th Floor
401 East Pratt Street
Baltimore, MD 21201
Re: Chapman Holdings, Inc.
Corporate Separation Lock-up Agreement
--------------------------------------
Ladies and Gentlemen:
In connection with efforts to raise capital for the business
operations of The Chapman Co., a Maryland corporation ("CCO") and Chapman
Capital Management, Inc., a Washington, DC corporation ("CCM"): (i) CCO and its
parent, Chapman Holdings, Inc., a Maryland corporation ("CHI") entered into a
merger transaction (the "Merger") effective December 29, 1997, pursuant to a
plan of merger (the "Plan") and articles of merger approved by the Board of
Directors and stockholders of CHI whereby the former stockholders of CCO became
stockholders of CHI and CCO became a wholly-owned subsidiary of CHI; (ii)
effective January 8, 1998, CCO transferred the outstanding shares of its
wholly-owned subsidiaries CCM and The Chapman Insurance Agency Incorporated, a
Maryland corporation ("CIA") to two newly-formed, wholly-owned Maryland
corporation subsidiaries of CCO, Chapman Capital Holdings, Inc. ("CCH") and
Chapman Insurance Holdings, Inc. ("CIH"); (iii) CHI currently intends to
undertake an initial public offering of its equity securities (the "IPO"); (iv)
immediately prior to the closing of the IPO, CCO currently intends to distribute
all of the outstanding shares of common stock, par value $0.001 per share, of
CCH ("Common Stock of CCH") and common stock, par value $0.001 per share, of CIH
("Common Stock of CIH") to CHI; and (v) immediately upon the receipt of the
shares of Common Stock of CCH and CIH by CHI, CHI currently intends to
distribute one share of Common Stock of CIH and one
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
December 29, 1997
Page 2
share of Common Stock of CCH to each CHI stockholder for each share of common
stock, par value $0.001 per share, of CHI ("Common Stock of CHI") held by such
CHI stockholder as of the record date for such distribution as set by the Board
of Directors of CHI (the transactions set forth in subparagraphs (iv) and (v)
are hereinafter referred to as the "Separation"). The Separation is intended to
be a tax-free spin-off transaction pursuant to Section 355 of the Internal
Revenue Code. Each of the transactions set forth above is more fully described
in The Chapman Co. Information Statement dated December 23, 1997 (the
"Information Statement").
The undersigned understands, as set forth in the Plan and the
Information Statement, that the tax-free nature of the Separation may be
threatened by any transfer of shares of Common Stock of CHI received by the
former stockholders of CCO in the Merger (the "Shares") prior to June 28, 1999.
Accordingly, in order to facilitate the consummation of the Separation and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the undersigned agrees that, without the prior written
consent of CHI, the undersigned will not (i) directly or indirectly, offer,
sell, pledge, contract to sell, grant any option to purchase or otherwise
dispose of any of the Shares beneficially owned or otherwise held by the
undersigned (including, without limitation, Shares which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common Stock
of CHI which may be issued upon exercise of a stock option or warrant) or any
securities convertible into, derivative of or exercisable or exchangeable for
such Common Stock of CHI for a period commencing on December 29, 1997 and ending
on June 28, 1999; and (ii) notwithstanding clause (i) above, until June 28,
1999, directly or indirectly, sell short any equity securities of CHI.
The undersigned agrees that CHI may, and that the undersigned will,
with respect to any of the Shares for which the undersigned is the record
holder, cause the transfer agent for CHI to note stop transfer instructions with
respect to the Shares on the transfer books and records of CHI.
<PAGE>
Chapman Holdings, Inc.
The Chapman Co.
December 29, 1997
Page 3
The undersigned understands that CHI and CCO will proceed with the
Separation in reliance on this agreement. This agreement shall be governed by
and construed in accordance with the internal laws (and not the laws pertaining
to conflicts of laws) of the State of Maryland.
The undersigned understands that CHI and CCO will proceed with the
Separation in reliance on this agreement and that nothing in this agreement
obligates CHI or CCO to proceed with the Separation. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
estate, heirs, personal representatives, successors and assigns of the
undersigned.
Very truly yours,
/S/ NATHAN A. CHAPMAN, JR.
--------------------------
Signature of Stockholder
Nathan A. Chapman, Jr.
---------------------------
Printed Name of Stockholder
<PAGE>
Exhibit 10.13
PROMISSORY NOTE
$176,250.00 BALTIMORE, MARYLAND
FEBRUARY 11, 1998
WITHIN THREE YEARS, the undersigned promises to pay to the order of The
Chapman Co., One hundred seventy-six thousand two hundred fifty dollars
($176,250.00), at its offices in Baltimore, Maryland, together with
interest thereon from the date hereof until paid at the rate of 5.54%
per annum.
/S/ NATHAN A. CHAPMAN, JR.
--------------------------
NATHAN A. CHAPMAN, JR.
<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
February 17, 1998
