<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2000
REGISTRATION NO. 333-90987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ECHAPMAN.COM, INC.
(Name of Small Business Issuer in its Charter)
--------------------------
<TABLE>
<S> <C> <C>
MARYLAND 7375 52-2184621
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
401 EAST PRATT STREET
SUITE 2800
BALTIMORE, MARYLAND 21202
(410) 625-9656
(Address and Telephone Number of Principal Executive Office)
--------------------------
NATHAN A. CHAPMAN, JR., PRESIDENT
EChapman.com, Inc.
401 East Pratt Street
Suite 2800
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.
LARA L. HJORTSBERG, ESQ. Whiteford, Taylor & Preston L.L.P.
MICHAEL W. CONRON, ESQ. Seven Saint Paul Street
Venable, Baetjer and Howard, LLP Baltimore, Maryland 21202-1626
1800 Mercantile Bank & Trust Building (410) 347-8707
Two Hopkins Plaza
Baltimore, Maryland 21201-2978
(410) 244-7608
</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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of Prospectus: one for use in
connection with the offering by EChapman.com, Inc. of shares of common stock
(the "Prospectus") and one for use in connection with the sales by The Chapman
Co. of EChapman.com's shares of common stock in market making transactions (the
"Market Making Prospectus"). The Prospectus and the Market Making Prospectus are
identical except for the following: (i) the outside front cover page; (ii) page
65, which will contain alternate language for the "Underwriting" section; and
(iii) the outside back cover page. Alternate language for the Market Making
Prospectus is labeled "Alternate Language for Market Making Prospectus" and
follows the outside back cover page of the Prospectus.
<PAGE>
SUBJECT TO COMPLETION DATED: JANUARY 18, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
3,333,333 SHARES
$ PER SHARE INITIAL PUBLIC OFFERING PRICE
ECHAPMAN.COM
COMMON STOCK
[LOGO]
This is our initial public offering, and no public market currently exists
for our common stock. We expect our initial public offering price to be between
$14 and $16 per share.
<TABLE>
<CAPTION>
OFFERING INFORMATION
---------------------
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Initial public offering price............................
Underwriting discounts/commissions.......................
Estimated offering expenses..............................
Net offering proceeds to EChapman.com, Inc. .............
</TABLE>
We are selling the shares of our common stock to the underwriters on a firm
commitment basis. EChapman.com and Nathan A. Chapman, Jr. have granted the
underwriters a 30-day option to purchase up to an additional 200,000 shares of
EChapman.com common stock on the same terms and conditions as set forth in this
prospectus, solely to cover over-allotments, if any, of which 120,000 shares
will be sold by EChapman.com and 80,000 shares will be sold by Mr. Chapman.
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "ECMN".
---------------------
INVESTMENT IN OUR COMMON STOCK INVOLVES RISK.
SEE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
THE CHAPMAN CO.
, 2000
<PAGE>
[ALTERNATIVE COVER PAGE FOR MARKET MAKING PROSPECTUS]
PROSPECTUS
ECHAPMAN.COM
COMMON STOCK
[LOGO]
---------------------
INVESTMENT IN OUR COMMON STOCK INVOLVES RISK.
SEE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
---------------------
Our common stock is quoted on the Nasdaq National Market under the symbol
"ECMN".
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
This prospectus has been prepared for and is to be used by The Chapman Co.
in connection with offers and sales of shares of common stock related to
market-making transactions at prevailing prices, related prices or negotiated
prices. EChapman.com will not receive any of the proceeds of these sales. The
Chapman Co. may act as a principal or agent in these sales.
---------------------
THE CHAPMAN CO.
, 2000
<PAGE>
PROSPECTUS SUMMARY
WE URGE YOU TO READ THIS ENTIRE PROSPECTUS. UNLESS WE INDICATE OTHERWISE,
THE TERMS "WE," "US," "ECHAPMAN.COM" OR "ECHAPMAN" REFER TO ECHAPMAN.COM, INC.
AFTER THE MERGERS OF CHAPMAN HOLDINGS, INC., CHAPMAN CAPITAL MANAGEMENT
HOLDINGS, INC. AND CHAPMAN INSURANCE HOLDINGS, INC. INTO THREE WHOLLY-OWNED
SUBSIDIARIES OF ECHAPMAN.COM. CHAPMAN HOLDINGS, INC. IS THE PARENT OF THE
CHAPMAN CO. CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. IS THE PARENT OF CHAPMAN
CAPITAL MANAGEMENT, INC. CHAPMAN INSURANCE HOLDINGS, INC. IS THE PARENT OF THE
CHAPMAN INSURANCE AGENCY INCORPORATED. UNLESS WE INDICATE OTHERWISE, "COMMON
STOCK" REFERS TO THE COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF
ECHAPMAN.COM, INC. UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS
PROSPECTUS (1) GIVES EFFECT TO THE CONSUMMATION OF THE MERGERS AND (2) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THIS SUMMARY SHOULD BE READ TOGETHER WITH THE MORE DETAILED INFORMATION AND
THE FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES, THAT APPEAR ELSEWHERE IN
THIS PROSPECTUS. SOME OF THE STATEMENTS IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE DISCUSSION 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".
THE ECHAPMAN.COM BUSINESS STRATEGY
EChapman.com is a newly formed corporation designed to bring together the
financial services capabilities of The Chapman Co., Chapman Capital Management
and The Chapman Insurance Agency while taking advantage of the unique
opportunities presented by the growth of the Internet. Our web site, the
EChapman.com network, which is currently under development, will seek to be a
leading interactive online community offering both financial services and a
variety of lifestyle, educational and cultural content selected to appeal
particularly to African-Americans, Asian-Americans, Hispanic-Americans and women
market segments. We refer to these groups collectively as the Domestic Emerging
Markets, or DEM, community. We believe that our creation of and leadership
position in employing the Domestic Emerging Markets concept will allow us to
successfully combine online financial services with an online portal.
We are currently working internally and with third party service providers
to design and develop our web site. We intend to launch the online trading
portion of the EChapman.com web site within two months of the closing of this
offering. Although we expect to add content and functionality on a continuous
basis, we anticipate that the layout, content and functionality of the
lifestyle, educational and cultural portions of our web site should be
substantially complete within six months following the closing of this offering.
A key part of our strategy will be our financial services component, and we
intend to draw upon Nathan A. Chapman, Jr.'s prominence and experience in the
3
<PAGE>
financial services industry. Mr. Chapman, our founder, president and chairman,
is the president and chairman of the first and currently the only
African-American controlled publicly traded investment bank, The Chapman Co.,
and the president and chairman of the first and currently the only
African-American controlled publicly traded investment management company,
Chapman Capital Management. The Chapman Co. is a full-service securities
brokerage and investment banking company that engages in corporate and
government finance, retail and institutional brokerage, research and
market-making activities and trading. Chapman Capital Management is a registered
investment adviser that as of October 31, 1999 had over $690 million in assets
under management. Chapman Capital Management acts as financial adviser to
separate accounts, a group trust and a family of mutual funds. The Chapman
Insurance Agency is a privately held insurance agency with limited operations to
date.
We believe an online network designed to appeal to African-Americans, Asian-
Americans, Hispanic-Americans and women, as well as the DEM community as a
whole, will allow us to leverage the DEM concept and promote brand
differentiation for our financial and other services. In addition, we believe
that the Internet will provide us with cost-efficient access to new markets for
our financial services. EChapman.com will seek to attract members of the DEM
community by providing a wide range of content of particular interest to the DEM
community and its various segments, as well as content of general interest.
THE MERGERS
On November 15, 1999, EChapman.com entered into separate merger agreements
with Chapman Holdings, Chapman Capital Management Holdings and Chapman Insurance
Holdings. The merger agreements provide that each of Chapman Holdings, Chapman
Capital Management Holdings and Chapman Insurance Holdings will merge into
separate wholly-owned subsidiaries of EChapman.com. Upon consummation of the
mergers, EChapman.com will indirectly control:
- The Chapman Co., a full service securities brokerage and investment
banking firm
- Chapman Capital Management, Inc., an investment advisory firm
- The Chapman Insurance Agency Incorporated, which sells annuity products on
an agency basis
The mergers will close concurrently with the closing of this offering. The
closing of this offering is contingent upon the closing of these mergers, and
the mergers of Chapman Holdings and Chapman Capital Management are contingent
upon each other and the completion of this offering. Based on the shares of
common stock of Chapman Holdings and Chapman Capital Management Holdings
outstanding as of December 31, 1999, upon the closing of this offering and
consummation of the mergers, Nathan A. Chapman, Jr., our president, will be the
majority stockholder of EChapman.com, with beneficial ownership of 58.3% of our
outstanding common stock excluding the exercise of the underwriters'
over-allotment option.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered: 3,333,333 shares
Common Stock Outstanding
Prior to the offering: 1 share
After the offering and the mergers: 16,528,178 shares
Proposed Nasdaq National Market Symbol: "ECMN"
Use of Proceeds: - Complete the design and development of the
EChapman.com web site
- Promote the EChapman.com brand and the DEM
and DEM Multi-Manager strategies
- Provide capital to The Chapman Co. in
connection with trading for its own account
and for use in underwriting activities
- Further explore the establishment of an
Internet-based DEM-oriented bank.
- Pay cash to dissenters, if any, in the
mergers of Chapman Holdings and Chapman
Capital Management Holdings
- Fund working capital and for general
corporate purposes, which may include
financing future acquisitions and capital
expenditures
</TABLE>
The number of shares of common stock outstanding excludes 850,000 shares of
common stock reserved for issuance under the EChapman.com, Inc. 1999 Omnibus
Stock Option Plan and excludes shares issuable upon exercise of the
underwriters' over-allotment option.
There is currently no public market for our common stock. We have applied
for quotation on the Nasdaq National Market; however, we cannot assure you that
the Nasdaq Stock Market will approve our application. This offering is not
conditioned on achieving listing, and we cannot assure you that a market will
develop for our common stock or that we will continue to meet the other
requirements of quotation. If our common stock does not qualify for inclusion on
the Nasdaq National Market, we intend to seek listing of our shares on the
Nasdaq SmallCap Market.
5
<PAGE>
USE OF CERTAIN TERMS
Throughout this prospectus we use certain phrases to refer to and to
describe our DEM and DEM Multi-Manager strategies and related concepts. The DEM
COMMUNITY refers to African-Americans, Asian-Americans, Hispanic-Americans and
women. A U.S. company which is controlled by members of the DEM community is a
DEM COMPANY. In order for a specific company to be controlled by a member of the
DEM community, at least 10% of the company's outstanding voting securities must
be beneficially owned by members of one or more of the segments of the DEM
community and at least one of the company's top three executive officers
(chairman, chief executive officer or president) must be a member of one or more
of the segments of the DEM community. Individuals or companies which possess the
criteria of the DEM community or a DEM company are said to meet the DEM PROFILE.
6
<PAGE>
CONSOLIDATED SUMMARY FINANCIAL DATA
The summary of financial information for the years ended December 31, 1997
and 1998 is derived from the financial statements for each of Chapman Holdings
and Chapman Capital Management Holdings for the years ended December 31, 1997
and 1998, which have been audited by Arthur Andersen LLP, independent public
accountants. The summary of financial information for the nine months ended
September 30, 1998 and 1999 has been derived from the respective unaudited
financial statements of Chapman Holdings and Chapman Capital Management
Holdings. The summary unaudited pro forma statement of operations data gives
effect to the mergers as if they had occurred as of January 1, 1998. The
unaudited pro forma balance sheet data gives effect to the mergers as if they
had occurred as of September 30, 1999. The pro forma as adjusted statement of
operations data gives effect to the mergers and this offering as if they had
occurred as of January 1, 1998. The unaudited pro forma as adjusted balance
sheet data gives effect to the mergers and this offering as if they had occurred
as of September 30, 1999. The summary unaudited pro forma consolidated financial
information does not purport to represent what our results of operations or
financial condition would actually have been had the transactions described
occurred on the dates indicated or to project our results of operations or
financial condition for any future period or date. Historical financial
information for Chapman Insurance Holdings is not included due to its minimal
activity during the periods presented. This information should be read in
conjunction with such financial statements, including the related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Selected Historical Pro Forma Financial Data."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998
------------------------ ------------------------- ---------------------------
(UNAUDITED)
CHAPMAN CHAPMAN
CAPITAL CAPITAL ECHAPMAN.COM
CHAPMAN MANAGEMENT CHAPMAN MANAGEMENT ECHAPMAN.COM PRO FORMA
HOLDINGS HOLDINGS HOLDINGS HOLDINGS PRO FORMA AS ADJUSTED
---------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................... $2,992,000 $2,287,000 $ 2,935,000 $3,218,000 $ 6,024,000 $ 6,024,000
Income (loss) from continuing
operations before income tax
provision....................... 491,000 88,000 (1,616,000) (151,000) (2,120,000) (2,120,000)
Net income (loss) from continuing
operations...................... $ 286,000 $ 48,000 $(1,131,000) $ (106,000) $(1,590,000) $(1,590,000)
========== ========== =========== ========== =========== ===========
Basic and dilutive earnings (loss)
per share....................... $ 0.14 $ 0.02 $ (0.40) $ (0.04) $ (0.12) $ (0.10)
========== ========== =========== ========== =========== ===========
Weighted average shares
outstanding..................... 2,002,000 2,487,000 2,793,000 2,811,000 13,195,000 16,528,000
========== ========== =========== ========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------------------------------ ---------------------------
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------ --------------------------------------- ---------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CHAPMAN CHAPMAN
CAPITAL CAPITAL ECHAPMAN.COM
CHAPMAN MANAGEMENT CHAPMAN MANAGEMENT ECHAPMAN.COM PRO FORMA
HOLDINGS HOLDINGS HOLDINGS HOLDINGS ECHAPMAN.COM PRO FORMA AS ADJUSTED
---------- ----------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total revenue........ $2,358,000 $2,383,000 $4,206,000 $3,198,000 $ -- $ 7,405,000 $ 7,405,000
Income (loss) from
continuing
operations before
income tax
provision.......... (407,000) 92,000 (1,141,000) (662,000) (220,000) (2,182,000) (2,182,000)
Net income (loss)
from continuing
operations......... $ (305,000) $ 59,000 $ (810,000) $ (498,000) $(220,000) $(1,621,000) $(1,621,000)
========== ========== ========== ========== ========= =========== ===========
Basic and dilutive
earnings (loss) per
share.............. $ (0.11) $ 0.02 $ (0.27) $ (0.15) $ (0.12) $ (0.10)
========== ========== ========== ========== =========== ===========
Weighted average
shares
outstanding........ 2,744,000 2,636,000 2,954,000 3,351,000 13,195,000 16,528,000
========== ========== ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------- --------------------------------
AS OF SEPTEMBER 30, 1999 AS OF SEPTEMBER 30, 1999
-------------------------------------- --------------------------------
(UNAUDITED) (UNAUDITED)
CHAPMAN
CAPITAL ECHAPMAN.COM
CHAPMAN MANAGEMENT ECHAPMAN.COM PRO FORMA
ECHAPMAN.COM HOLDINGS HOLDINGS PRO FORMA AS ADJUSTED
------------ ---------- ---------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents &
marketable securities....... $ -- $2,014,000 $3,370,000 $ 5,259,000 $50,759,000
Total assets.................. 18,000 9,263,000 5,204,000 18,532,000 64,032,000
Total debt.................... -- 2,200,000 150,000 2,200,000 2,200,000
Total stockholders' (deficit)
equity...................... (220,000) 6,254,000 4,543,000 14,734,000(1) 60,234,000(1)
</TABLE>
- ------------------------
(1) Total stockholders' equity excludes 138,464 shares issuable upon exercise of
options that were outstanding as of September 30, 1999 and the underwriters'
over-allotment option.
8
<PAGE>
RISK FACTORS
WE BELIEVE THAT THE RISKS DESCRIBED BELOW ARE THE MOST SIGNIFICANT FACTORS
THAT MAKE AN INVESTMENT IN ECHAPMAN.COM SPECULATIVE AND RISKY. THESE RISKS COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. IN ADDITION, ANY OF THESE ADVERSE EFFECTS COULD CAUSE THE TRADING
PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY CORRESPONDINGLY LOSE ALL OR
SOME PORTION OF YOUR INVESTMENT IN US.
RISKS ASSOCIATED WITH ECHAPMAN.COM
WE ARE A NEW COMPANY WITH MINIMAL OPERATIONS TO DATE, AND WE HAVE NOT FORMALLY
LAUNCHED OUR WEB SITE; IF WE EXPERIENCE A DELAY IN COMPLETING AND LAUNCHING OUR
WEB SITE, OUR ABILITY TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY WILL BE
ADVERSELY AFFECTED.
EChapman.com was formed in 1999 and has had minimal operations to date,
which have consisted solely of expenses incurred in developing our business
plan. Although we have launched a prototype of our web site, we are still in the
process of designing and developing our actual web site, and we have not made
final decisions with respect to a web design firm, web development firm, a
hosting services provider or other necessary Internet vendors. If we experience
a delay in identifying and retaining qualified vendors for the completion and
launch of our web site, our ability to successfully implement our business
strategy will be adversely affected. In addition, since we are dependent upon
outside vendors for these services, our estimated time frames will depend upon
their availability.
OUR LACK OF INTERNET-RELATED OPERATING HISTORY MAY IMPEDE OUR ABILITY TO
SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.
Although we have a history with respect to the securities brokerage,
investment banking and investment advisory businesses, we have no Internet-based
operating history from which you can evaluate our combined business plan and
prospects. In addition, although we intend to pursue advertising relationships
and strategic alliances with third parties and enter into agreements with
content providers, we have not entered into negotiations with any companies, and
we cannot assure you that we will be able to establish or maintain these
relationships.
As a new entrant to the Internet business, we face risks and uncertainties
relating to our ability to implement successfully the Internet component of our
business strategy, including:
- Successful design, development and launch of the EChapman.com web site
- Creation of public awareness of the EChapman.com brand and web site
- Successful expansion of our financial services businesses on the Internet
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be materially
adversely affected.
9
<PAGE>
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE EXPECT TO CONTINUE TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
On a pro forma basis, after giving effect to the mergers of Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance Holdings
into our wholly-owned subsidiaries, we had net losses of $1,621,000 and
$1,590,000 for the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively. Following the offering and the consummation of
the mergers, we expect to continue to increase our operating expenses
significantly, expand our marketing and staff and continue to develop and expand
our web site and our online information and services. These expenses will be
significant and generally will precede revenues, and if they are not followed by
increased revenues, our business, results of operations and financial condition
will be materially and adversely affected.
BECAUSE OF OUR LIMITED EXPERIENCE WITH BUILDING THE ECHAPMAN.COM BRAND, WE MIGHT
NOT EFFECTIVELY UTILIZE RESOURCES NEEDED TO BUILD OUR BRAND, WHICH COULD
NEGATIVELY IMPACT OUR REVENUE AND OUR ABILITY TO ATTRACT USERS, ADVERTISERS AND
STRATEGIC PARTNERS.
We believe that establishing and maintaining our brand is critical to our
success and that the importance of brand recognition will increase due to the
growing number of web sites, particularly those targeted to discrete segments of
the DEM community. We intend to build our brand through advertising targeted to
segments of the DEM community and the DEM community as a whole, including print,
broadcast placements, public relations campaigns and the development of
strategic relationships with other companies which target segments of the DEM
community or, conversely, which desire access to the DEM community. We have
minimal practical experience with building our brand through these channels or
in establishing strategic relationships. If our efforts to build our brand
through these channels do not generate a corresponding increase in revenue, our
financial results could be adversely affected. Successful promotion and
marketing of our brand will also depend on providing up-to-date interesting and
compelling content, community, commerce and personalized services. If our brand
building strategy is unsuccessful, we may never recover these expenses, we may
be unable to increase our future revenues, and our business would be materially
and adversely affected. We intend to use a significant portion of the proceeds
of this offering for promotion of our web site.
NATHAN A. CHAPMAN, JR. HAS BEEN AN INSTRUMENTAL FORCE IN THE GROWTH OF CHAPMAN
HOLDINGS, CHAPMAN CAPITAL MANAGEMENT HOLDINGS AND IN THE CREATION OF THE DEM
STRATEGY, AND THE LOSS OF MR. CHAPMAN'S SERVICES WOULD DEPRIVE US OF MR.
CHAPMAN'S KNOWLEDGE OF AND SKILL IN THE FINANCIAL SERVICES AND DEM MARKETS,
WHICH WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND GROWTH PROSPECTS.
For the foreseeable future, we intend to place substantial reliance upon the
personal efforts and abilities of Nathan A. Chapman, Jr., president of
EChapman.com. Mr. Chapman has provided the strategic vision for and has played a
key role in
10
<PAGE>
executing the business plans of Chapman Holdings, Chapman Capital Management
Holdings and the DEM strategy in the past. Therefore, the loss of the services
of Mr. Chapman would have a material adverse effect on our business, operations,
revenue and business prospects because of our reliance on his strategic vision
and his experience in the financial services and DEM markets. We do not have an
employment agreement with Mr. Chapman. The Chapman Co. currently maintains "key
man" life insurance coverage in the amount of $7,000,000 on Mr. Chapman.
USE OF THE DEM STRATEGY ON THE INTERNET IS NEW AND UNTESTED, AND IF WE ARE
UNABLE TO ATTRACT MEMBERS OF THE DEM COMMUNITY TO OUR WEB SITE, OUR FUTURE
PROFITABILITY WILL BE MATERIALLY AND ADVERSELY AFFECTED.
We plan to use the DEM strategy in our Internet business to focus on
attracting African-Americans, Asian-Americans, Hispanic-Americans and women to
our web site. The success of our business will depend on our ability to attract
members of the DEM community to our web site; however, we cannot assure you that
these individuals will use our web site or that the expansion of the DEM
strategy on the Internet will be profitable because of the existing and
increasing competition for Internet-based business and the relatively limited
market represented by members of the DEM community compared to the market for
Internet users as a whole.
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT.
The sale of the offering amount involves immediate and substantial dilution
of $11.66 per share, or 77.7%, as of September 30, 1999 to investors because the
pro forma as adjusted net tangible book value per share of common stock after
completion of this offering and the mergers will be substantially less than the
per-share offering price, assuming a $15 per share offering price, the midpoint
of the offering range.
WE ARE AFFILIATED WITH THE UNDERWRITER OF THIS OFFERING AND ALTHOUGH WE ARE
REQUIRED TO ENGAGE A QUALIFIED INDEPENDENT UNDERWRITER, WE CANNOT ASSURE YOU
THAT CONFLICTS WILL NOT ARISE WITH RESPECT TO THIS OFFERING, OR IF CONFLICTS DO
ARISE, THAT THEY WILL BE RESOLVED IN A MANNER FAVORABLE TO YOU.
The Chapman Co. is the underwriter of this offering. Nathan A. Chapman, Jr.,
our president and chairman of the board, is president, chairman of the board and
majority stockholder of Chapman Holdings, Inc., the sole stockholder of the
underwriter. The Chapman Co.'s role as underwriter may involve conflicts of
interest. In order to comply with the Conduct Rules of the NASD, we will offer
the shares of our common stock in this offering at a price no higher than that
recommended by Ferris, Baker Watts, Incorporated, which is acting as qualified
independent underwriter. Although Ferris, Baker Watts has participated in the
preparation of the registration statement, including this prospectus, and is
required to exercise the usual standards of "due diligence" with respect to the
registration statement, we cannot
11
<PAGE>
assure you that 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.
THE INITIAL OFFERING PRICE OF OUR COMMON STOCK MAY NOT CORRESPOND WITH THE PRICE
IN THE PUBLIC MARKET.
Prior to this offering, there has been no public market for our common
stock. EChapman.com and Ferris, Baker Watts determined the initial price to the
public for the shares through negotiation. This negotiated price may not be
indicative of the market price of our common stock after the offering. 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 vary substantially. We cannot assure you 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.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Immediately after the closing of this offering and the consummation of the
mergers, we will have 16,528,178 shares of common stock outstanding and 138,464
shares of common stock subject to issuance upon exercise of options, of which
8,648,988 shares, or 8,568,988 shares if the underwriters exercise the
over-allotment option in full, will be beneficially owned by Nathan A. Chapman,
Jr. With the exception of Mr. Chapman's shares and shares held by our affiliates
as defined in Rule 144 under the Securities Act, all of the shares outstanding
after the offering will be freely transferable without further registration
under the Securities Act. 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 our common stock. See "Shares Eligible for Future Sale" for a more
detailed description of the eligibility of shares of our common stock for future
sale.
AFTER THE MERGERS, NATHAN A. CHAPMAN, JR. WILL RETAIN VOTING CONTROL OF
ECHAPMAN.COM, WHICH WILL ALLOW HIM TO CONTROL MATTERS SUBMITTED TO STOCKHOLDERS
FOR APPROVAL IN A MANNER THAT MAY BE ADVERSE TO YOUR INTERESTS.
Following this offering and consummation of the mergers, Nathan A. Chapman,
Jr. will beneficially own 58.3%, or 57.4% assuming exercise of the underwriters'
option to purchase additional shares, of the common stock of EChapman.com.
Accordingly, Mr. Chapman will have control over all fundamental matters
affecting EChapman.com, such as the election of directors, mergers, sales of all
or substantially all of our assets, charter amendments and other matters
requiring stockholder approval. Mr. Chapman's votes with respect to these
matters may be adverse to your interests. In addition, this concentration of
ownership may also have the effect of delaying or preventing a change in
control, which could have an adverse effect on our stock price.
12
<PAGE>
OUR MANAGEMENT HAS BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING, AND
WE CANNOT ASSURE YOU THAT WE WILL EFFECTIVELY UTILIZE THE PROCEEDS.
We intend to use a portion of the net proceeds from this offering to
complete the development of the EChapman.com web site and to promote the
EChapman.com brand and our DEM and DEM Multi-Manager strategies. We also intend
to use a portion of the net proceeds to provide The Chapman Co. with capital for
its underwriting activities and trading for its own account. We have not
allocated the remainder of our proceeds for specific purposes, and our
management will have significant flexibility in applying the balance of the net
proceeds of the offering. You will not have the opportunity, as part of your
investment decision, to assess whether management is using the proceeds
appropriately. We cannot assure you that management will expend the proceeds
effectively.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND IF A PUBLIC MARKET FOR
OUR SECURITIES DOES NOT DEVELOP OR IS NOT SUSTAINED, OUR STOCK PRICE COULD BE
ADVERSELY AFFECTED.
Prior to this offering, our common stock has not been publicly traded, and
we cannot assure you that an active public market for our common stock will
develop or, if developed, that it will continue after the offering. Because we
lack an operating history and because the Internet industry is relatively new
and rapidly evolving, it is difficult to predict the extent to which investor
interest in our common stock will lead to a trading market or how liquid that
market might become. You may be unable to resell your shares at or above the
initial offering price.
A REDUCTION IN OUR STOCK PRICE FOLLOWING THIS OFFERING COULD LEAD TO CLASS
ACTION LITIGATION, WHICH COULD RESULT IN SUBSTANTIAL COSTS.
The trading prices of our common stock could be subject to wide fluctuations
in response to quarterly variations in operating results, announcements of
material business events by us or our competitors and other events or factors.
Recently, the trading prices for the stock of Internet-based companies have
exhibited considerably more volatility than the stock market generally. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted.
Litigation could result in substantial costs and a diversion of management's
attention and resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND MARYLAND LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, WHICH COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Maryland corporate law and our charter restrict transactions between us and
our affiliates and potential acquirers. The applicability of these provisions
may discourage bids for our common stock at a premium over the market price and
may adversely affect the market price and the voting rights of our common stock.
These statutory provisions may discourage, delay or prevent someone from
acquiring or merging with us. These anti-takeover provisions could adversely
affect our stock price. For a
13
<PAGE>
detailed description of the anti-takover provisions in our charter documents,
see "Description of Capital Stock--Business combination law."
RISKS RELATED TO ECOMMERCE AND THE INTERNET
WE FACE INTENSE COMPETITION, AND IF WE DO NOT RESPOND TO THIS COMPETITION
EFFECTIVELY, WE MAY NOT BE ABLE TO RETAIN AND ATTRACT USERS, ADVERTISERS AND
STRATEGIC PARTNERS, WHICH COULD REDUCE OUR REVENUE AND HARM OUR FINANCIAL
RESULTS.
The number of web sites competing for the attention and spending of users
and advertisers has greatly increased, and we expect it to continue to increase.
The market for Internet content sites is rapidly evolving and financial,
technical and legal barriers to entry are low, enabling newcomers to launch
competitive sites at relatively low costs.
We will compete for users, advertisers and strategic partners with the
following types of companies:
- Online services or web sites targeted at the various segments of the DEM
community, such as msbet.com, netnoir.com, quepasa.com, ivillage.com,
women.com and womencentral.com
- Web search and retrieval and other online service companies, commonly
referred to as portals
- Publishers and distributors of traditional media, such as television,
radio and print
- Online and traditional brokerages and investment banks
If we do not respond to this competition effectively, we may not be able to
attract users, advertisers and strategic partners, which would reduce our
revenue and harm our financial results. In addition, increased competition could
also result in price reductions, reduced margins or loss of market share, any of
which could adversely affect our business.
CONCERNS ABOUT THE SECURITY OF THE PERSONAL INFORMATION WE GATHER FROM OUR USERS
COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY BY HARMING OUR
ABILITY TO ATTRACT AND RETAIN USERS AND TO DEVELOP USER PROFILES TO ATTRACT
ADVERTISERS AND OTHER STRATEGIC PARTNERS, RESULTING IN SIGNIFICANT EXPENSES TO
PREVENT BREACHES, AND SUBJECTING US TO LIABILITY FOR FAILING TO PROTECT OUR
USERS' INFORMATION.
If the security of our web site is compromised, the information we gather
from our users, including credit card information, may be accessed by
unauthorized users accessing our systems remotely. In such an event, current and
potential users may be reluctant to use our services or provide us with the
personal information we need to adequately develop and maintain individual user
profiles. This could prevent us from attracting and retaining the advertisers
and other strategic partners we require to achieve and sustain revenue growth.
In addition, as a result of these security and
14
<PAGE>
privacy concerns, we may incur significant costs to protect against the threat
of security breaches or to alleviate problems caused by security breaches, and
we may be subject to legal claims of users if unauthorized third parties gain
access to our system and alter, destroy or misappropriate our user's personal
information. Also, any public perception that we engaged in the unauthorized
release of user information, whether or not correct, would adversely affect our
ability to attract and retain users. In addition, the FTC and state agencies
have been investigating the use by Internet companies of personal information.
We could incur additional expenses if new regulations regarding the use of
personal information are introduced or if our privacy practices are
investigated.
FAILURES OF OUR NETWORK INFRASTRUCTURE COULD RESULT IN UNANTICIPATED EXPENSES
AND PREVENT OUR USERS FROM EFFECTIVELY UTILIZING OUR SERVICES, WHICH COULD
NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN USERS AND ADVERTISERS AND
OTHER STRATEGIC PARTNERS.
Our ability to successfully create an interactive online community and to
deliver our financial services online depends in large part on the capacity,
reliability and security of our network hardware, software and
telecommunications infrastructure. Failures of our network infrastructure could
result in unanticipated expenses to address these failures and could prevent our
users from effectively utilizing our services, which could prevent us from
retaining and attracting users, advertisers and other strategic partners. In
addition, if we were to experience a network failure, we could be subject to
regulatory sanctions in connection with our online brokerage services.
Our system is susceptible to natural and man-made disasters, including fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect the operation of our web site.
Our insurance policies may not compensate us for any losses that may occur due
to any failures or interruptions in our systems. We do not presently have any
secondary "off-site" systems or a formal disaster recovery plan. Any system
failure that causes an interruption in service or decreases the responsiveness
of our service could impair our reputation, damage our brand name and harm our
revenues.
In addition, our users will depend on Internet service providers, online
service providers and other web site operators for access to our web site. Due
to the rapid growth of the Internet, many of these service providers have
experienced significant outages in the past and could experience outages, delays
and other difficulties due to system failures unrelated to our systems. These
problems could also harm our business by preventing users from effectively
utilizing our services.
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<PAGE>
THE CONTENT CONTAINED ON OUR WEB SITE OR ACCESSIBLE THROUGH LINKS ON OUR WEB
SITE MAY SUBJECT US TO SIGNIFICANT LIABILITY FOR DEFAMATION, NEGLIGENCE, PATENT,
COPYRIGHT OR TRADEMARK INFRINGEMENT.
If any of the content that we create and deliver to our users or any content
that is accessible from our web site to other web sites contains errors, third
parties could make claims against us for defamation, negligence, patent,
copyright or trademark infringement, trade secret misappropriation, personal
injury or other legal theories relating to the information we publish on our web
site. These types of claims have been brought, sometimes successfully, against
companies offering online services, as well as other print publications, in the
past. We could also be subjected to claims based upon the content that is
accessible from our web sites through links with other web sites or through
content and materials that may be posted by members in chat rooms or on bulletin
boards. Our insurance may not cover claims of these types or may not be adequate
to indemnify us for all liability that may be imposed. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage, could result in significant costs and expenses and
damage our reputation.
RISKS RELATED TO OUR SECURITIES BROKERAGE, INVESTMENT BANKING AND
INVESTMENT ADVISORY BUSINESSES
OUR SECURITIES BROKERAGE, INVESTMENT BANKING AND INVESTMENT ADVISORY BUSINESSES
COULD BE HARMED BY MARKET FLUCTUATIONS AND OTHER SECURITIES INDUSTRY RISKS.
Our securities brokerage, investment banking and investment advisory
businesses are concentrated in the securities industry, which is 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.
Such risks include the risk of losses resulting from:
- Underwriting and ownership of securities
- Trading and 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
In addition, our investment banking revenues may decline in periods of
reduced demand for public offerings or reduced activity in the secondary markets
and when there are reduced spreads on the trading of securities.
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<PAGE>
WE HAVE EXPERIENCED, AND IN THE FUTURE WE MAY EXPERIENCE, LOSSES WHILE TRADING
FOR OUR OWN ACCOUNT.
Our security brokerage subsidiary's trading activities involve the purchase,
sale or short sale of securities as a principal, and, accordingly, involve risks
of a change in market price of such securities and of a decrease in the
liquidity of markets, which can limit our ability to sell securities purchased
or to purchase securities sold in such transactions. The Chapman Co. experienced
a loss on trading of $638,000 for the year ended December 31, 1998 and a gain on
trading of $246,000 for the nine months ended September 30, 1999. Most of the
1998 loss is attributable to an unrealized loss of value on The Chapman Co.'s
market-making inventory of approximately $405,000 and a realized loss on this
inventory of $74,000. The September 1999 gain is attributable to the unrealized
gain on the value of The Chapman Co.'s market-making inventory. As of
December 31, 1998, The Chapman Co.'s inventory of market-making securities was
$2,080,000, of which $580,000 was attributable to Chapman Holdings' stock and
$1,500,000 was attributable to Chapman Capital Management Holdings' stock. As of
September 30, 1999, The Chapman Co.'s inventory of market-making securities was
$1,813,273, of which $681,373 was attributable to Chapman Holdings' stock and
$1,131,900 was attributable to Chapman Capital Management Holdings' stock.
OUR INVESTMENT ADVISORY SUBSIDIARY IS DEPENDENT ON A FEW MAJOR INVESTMENT
MANAGEMENT CLIENTS, AND IF ANY OF THESE CLIENTS TERMINATED THEIR ADVISORY
ARRANGEMENTS WITH US, OUR ADVISORY FEE REVENUE WOULD BE MATERIALLY HARMED.
All of Chapman Capital Management's agreements with its advisory clients are
terminable by the client upon short notice (typically 30-60 days prior written
notice). As of October 31, 1999, five clients, including two invested in DEM-MET
Trust and The Chapman U.S. Treasury Money Fund, represented approximately 69.0%
of our total assets under management. As of October 31, 1999, DEM-MET Trust,
with $290.3 million in assets under management, represented approximately 41.6%
of our total assets under management. If the DEM-MET Trust or any of our key
investment management clients terminate their advisory arrangements with us, our
advisory fee revenue would be materially and adversely affected.
WARNING AS TO OUR USE OF FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements concerning
EChapman.com. These forward-looking statements are based on the beliefs of our
management, as well as on assumptions made by and information currently
available to us at the time such statements are made. In particular, because we
are a new company, the discussion of our proposed business strategy, expansion
plans and plan of operation are not based on historical facts but are forward
looking statements based upon numerous assumptions about future conditions,
which may ultimately prove to be inaccurate. When we use words such as
"anticipate," "believe," "estimate," "intend" and similar expressions in this
prospectus, we intend to identify
17
<PAGE>
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below, the matters set forth or incorporated in this prospectus generally
and economic and business factors, some of which are beyond our control. In
analyzing an investment in our common stock, you should carefully consider,
along with other matters referred to in this prospectus, the risk factors
detailed in this Risk Factors section and throughout this prospectus.
18
<PAGE>
USE OF PROCEEDS
Assuming the sale of 3,333,333 shares of common stock at an initial public
offering price of $15 per share and after deducting underwriting discounts,
commissions and estimated offering expenses of this offering, we will receive
net proceeds of approximately $45.5 million.
We intend to use the net proceeds from this offering to:
- Complete the design and development of the EChapman.com web site
- Promote the EChapman.com brand and continue to promote the DEM and DEM
Multi-Manager strategies
- Provide capital to The Chapman Co. in connection with trading for its own
account and for use in underwriting activities
- Further explore the establishment of an Internet-based DEM-oriented bank
- Pay cash to dissenters, if any, in the mergers of Chapman Holdings and
Chapman Capital Management Holdings
- Fund working capital and for general corporate purposes, including
financing possible future acquisitions, capital expenditures and working
capital
In connection with our ability to provide capital to our investment banking
subsidiary, it may be difficult, if not impossible, for the subsidiary to repay
this capital because of the restrictions imposed by the net capital requirements
discussed above under "Risk Factors" and under "Business--Government
Regulation."
Other than the pending mergers of Chapman Holdings, Chapman Capital
Management Holdings and Chapman Insurance Holdings, we do not have any current
plans regarding mergers and acquisitions. Our strategy with respect to future
acquisitions may entail numerous risks, including:
- Difficulties in identifying appropriate acquisition candidates
- Competition from others for acquisition candidates
- Difficulties in assessing values for acquired businesses and technologies
- Difficulties in the integration of acquired operations and products
- Diversion of management's attention from core business concerns
- Assumption of unknown material liabilities of acquired companies
- Amortization of acquired intangible assets, which could reduce future
reported earnings
- Potential loss of customers or key employees of acquired companies
19
<PAGE>
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.
Our use of the net proceeds of this offering is based upon current plans and
certain assumptions regarding industry and general economic conditions and our
future revenue and expenditures. As these factors change, we may find it
necessary or advisable to use portions thereof for other purposes. As a result
of these changes, we may be required to seek additional financing. We can give
no assurance that additional financing will be available to us on acceptable
terms, or at all. Any failure to obtain additional financing, if required, could
have an adverse effect on us, including possibly requiring us to curtail our
operations.
20
<PAGE>
DILUTION
The difference between the initial offering price per share of common stock
and the pro forma net tangible book value per share of common stock after this
offering constitutes the dilution to purchasers of our common stock in this
offering. Pro forma net tangible book value per share is determined by dividing
our pro forma net tangible book value, which consists of total tangible assets
less total liabilities, by the number of outstanding shares of our common stock.
As of September 30, 1999, the pro forma net tangible book value per share,
after giving effect to the mergers of Chapman Holdings, Chapman Capital
Management Holdings and Chapman Insurance Holdings was $9,737,000 or $0.74 per
share of common stock. Our pro forma as adjusted net tangible book value after
the adjustments listed and this offering of 3,333,333 shares of common stock at
an assumed offering price of $15 per share would have been $55,237,000 or $3.34
per share of common stock. At an assumed offering price of $15.00 per share,
this represents an immediate dilution of $11.66 per share to the purchasers of
our common stock in this offering. As of September 30, 1999, there were also
outstanding options to purchase an additional 138,464 shares of common stock. To
the extent these options are exercised, there will be further dilution to new
investors in the pro forma net tangible book value of their shares.
The following table illustrates the per share dilution effect as of
September 30, 1999:
<TABLE>
<CAPTION>
PER SHARE
---------
<S> <C> <C>
Assumed initial public offering price....................... $15.00
Pro forma net tangible book value before this offering and
after the mergers....................................... $0.74
Increase in pro forma net tangible book value per share
attributable to this offering........................... 2.60
-----
Pro forma as adjusted net tangible book value after this
offering and the mergers................................ 3.34
------
Pro forma as adjusted dilution of net tangible book value to
new investors in this offering............................ $11.66
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1999, the number and percentage of shares of common stock, the amount and
percentage of consideration paid and the average price per share paid by
existing stockholders and by the purchasers of our common stock in this
offering, at an assumed offering price of $15 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER(2) PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)....................... 13,194,845 79.8% $13,148,000 20.8% $1.00
New Investors.................................. 3,333,333 20.2 50,000,000 79.2 15.00
---------- ----- ----------- -----
Total.......................................... 16,528,178 100.0% $63,148,000 100.0% 3.82
========== ===== =========== =====
</TABLE>
- ------------------------------
(1) The existing stockholders consist of the stockholders of Chapman Holdings
and Chapman Capital Management Holdings who will receive shares of common
stock in the mergers.
(2) This number excludes the underwriters' over-allotment option and 138,464
shares issuable upon the exercise of options outstanding as of
September 30, 1999.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of EChapman.com as of
September 30, 1999:
- On a pro forma basis to reflect the consummation of the mergers with
Chapman Holdings, Chapman Capital Management Holdings and Chapman
Insurance Holdings
- On a pro forma, as adjusted basis, to reflect the consummation of the
mergers and the receipt by EChapman.com of the estimated net proceeds from
the sale of 3,333,333 shares of common stock at an assumed offering price
of $15 per share.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............................... $ -- $ 4,753,000 $50,253,000
========= =========== ===========
Debt.................................................... $ -- $ 2,200,000 $ 2,200,000
--------- ----------- -----------
Common stock--$0.001 par value; 50,000,000 shares
authorized, 1, 13,194,845 and 16,528,178 shares issued
and outstanding, respectively(1)...................... -- 13,000 16,000
Additional paid-in capital.............................. -- 15,420,000 60,917,000
Accumulated deficit..................................... (220,000) (699,000) (699,000)
--------- ----------- -----------
Total stockholders' (deficit) equity.................... (220,000) 14,734,000 60,234,000
--------- ----------- -----------
Total capitalization.................................... $(220,000) $16,934,000 $62,434,000
========= =========== ===========
</TABLE>
- ------------------------
(1) Shares outstanding exclude shares issuable upon exercise of options that
were outstanding as of September 30, 1999 and the underwriters'
over-allotment option.
DIVIDEND POLICY
We have never declared or paid cash or other dividends on our common stock
and do not anticipate doing so in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of our board of
directors. Any such payments depend upon our earnings, if any, our financial
condition, and other relevant factors. We intend to retain any earnings in the
foreseeable future to fund our growth strategies. Our ability to pay dividends
in the future also may be restricted by regulatory limitations. The ability of
our brokerage subsidiary, The Chapman Co., to pay dividends may be limited due
to its obligation imposed by the SEC and the NASD to satisfy net capital
requirements.
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<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The unaudited pro forma balance sheet and statements of operations are based
on available information and certain assumptions and adjustments described in
the accompanying notes, which we believe are reasonable. The unaudited pro forma
statements of operations are provided for informational purposes only and do not
purport to present the results of operations of EChapman.com had the assumed
transactions occurred on or as of the dates indicated, nor are they necessarily
indicative of the results of operations which may be achieved in the future. The
unaudited pro forma balance sheet and statements of operations should be read in
conjunction with the historical financial statements of EChapman.com, Chapman
Holdings and Chapman Capital Management Holdings including the related notes.
Financial statements for EChapman.com, Chapman Holdings and Chapman Capital
Management Holdings are included elsewhere in this prospectus.
The unaudited pro forma financial data gives effect to the Chapman Holdings,
Chapman Capital Management Holdings and Chapman Insurance Holdings mergers as if
they occurred at January 1, 1998 for operating results and as of September 30,
1999 for balance sheet data. The unaudited pro forma as adjusted financial data
gives effect to the mergers and the sale of 3,333,333 shares of common stock at
an assumed offering price of $15 per share less underwriting discounts,
commissions and offering costs.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------------------------------------------------------------------------
CHAPMAN
CAPITAL CHAPMAN
CHAPMAN MANAGEMENT INSURANCE
ECHAPMAN HOLDINGS HOLDINGS HOLDINGS PRO FORMA
HISTORICAL (A) HISTORICAL (B) HISTORICAL (B) HISTORICAL ADJUSTMENTS PRO FORMA
-------------- -------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA BALANCE SHEET:
Assets
Cash, cash equivalents and
marketable securities..... $ -- $2,014,000 $3,370,000 $ -- $ (125,000)(c) $ 5,259,000
Cash deposits with clearing
organization.............. -- 2,477,000 -- -- -- 2,477,000
Securities owned............ -- 1,813,000 -- -- -- 1,813,000
Management fees
receivable................ -- -- 510,000 -- -- 510,000
Receivables from brokers and
dealers................... -- 576,000 -- -- -- 576,000
Other receivables........... -- 537,000 227,000 -- (418,000)(d) 346,000
Advances to
officer/employee.......... -- 723,000 367,000 -- -- 1,090,000
Prepaids and other assets... 18,000 1,010,000 436,000 -- -- 1,464,000
Intangibles................. -- 113,000 294,000 -- 4,590,000 (e) 4,997,000
---------- ---------- ---------- --------- ----------- -----------
Total assets................ $ 18,000 $9,263,000 $5,204,000 $ -- $4,047,000 $18,532,000
========== ========== ========== ========= =========== ===========
Liabilities
Accounts payable and accrued
expenses.................. $ 238,000 $ 914,000 $ 511,000 $ 308,000 $ (418,000)(d) $ 1,553,000
Margin loan payable......... -- 2,050,000 -- -- -- 2,050,000
Other liabilities........... -- 45,000 150,000 -- -- 195,000
---------- ---------- ---------- --------- ----------- -----------
Total liabilities........... 238,000 3,009,000 661,000 308,000 (418,000) 3,798,000
Stockholders' Equity
Common stock................ -- 3,000 3,000 2,000 5,000 (f) 13,000
Additional paid-in
capital................... -- 7,903,000 5,239,000 -- 2,278,000 (f) 15,420,000
Accumulated deficit......... (220,000) (1,652,000) (699,000) (310,000) 2,182,000 (g) (699,000)
---------- ---------- ---------- --------- ----------- -----------
Total stockholders'
(deficit) equity.......... (220,000) 6,254,000 4,543,000 (308,000) 4,465,000 14,734,000
---------- ---------- ---------- --------- ----------- -----------
Total liabilities and
stockholders' equity...... $ 18,000 $9,263,000 $5,204,000 $ -- $4,047,000 $18,532,000
========== ========== ========== ========= =========== ===========
<CAPTION>
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
PRO FORMA BALANCE SHEET:
Assets
Cash, cash equivalents and
marketable securities..... $45,500,000(h) $50,759,000
Cash deposits with clearing
organization.............. -- 2,477,000
Securities owned............ -- 1,813,000
Management fees
receivable................ -- 510,000
Receivables from brokers and
dealers................... -- 576,000
Other receivables........... -- 346,000
Advances to
officer/employee.......... -- 1,090,000
Prepaids and other assets... -- 1,464,000
Intangibles................. -- 4,997,000
----------- -----------
Total assets................ $45,500,000 $64,032,000
=========== ===========
Liabilities
Accounts payable and accrued
expenses.................. $ -- $ 1,553,000
Margin loan payable......... -- 2,050,000
Other liabilities........... -- 195,000
----------- -----------
Total liabilities........... -- 3,798,000
Stockholders' Equity
Common stock................ 3,000(h) 16,000
Additional paid-in
capital................... 45,497,000(h) 60,917,000
Accumulated deficit......... -- (699,000)
----------- -----------
Total stockholders'
(deficit) equity.......... 45,500,000 60,234,000
----------- -----------
Total liabilities and
stockholders' equity...... $45,500,000 $64,032,000
=========== ===========
</TABLE>
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<PAGE>
- ----------------------------------
(a) See the financial statements included elsewhere in this prospectus.
(b) See the consolidated financial statements included elsewhere in this
prospectus.
(c) To reflect the $125,000 that will be paid to the stockholders of Chapman
Insurance Holdings in the purchase of all of the stock of Chapman Insurance
Holdings.
(d) To eliminate intercompany receivable and payable.
(e) To reflect the step up of the assets from the acquisitions of Chapman
Holdings, Chapman Insurance Holdings and EChapman.com. As Chapman Capital
Management Holdings has the same majority owner as Chapman Holdings, the
market value in excess of Chapman Holdings' net book value for the
percentage of Chapman Holdings shares held by owners of Chapman Holdings
other than the majority owner was stepped up. The portion of Chapman
Holdings' net book value representing the shares of the same majority owner
is recorded at historical net book value.
<TABLE>
<S> <C> <C>
Chapman Holdings' market value as of September 30, 1999..... $16,614,000
Less Chapman Holdings' book value as of September 30,
1999...................................................... 6,254,000
-----------
Excess market value......................................... 10,360,000
Percentage of stock held by non-controlling owners.......... 38%
-----------
Step up adjustment for Chapman Holdings..................... 3,937,000
Goodwill from EChapman.com merger........................... 220,000
Goodwill from Chapman Insurance Holdings acquisition:
Negative book value....................................... $308,000
Purchase price............................................ 125,000
--------
433,000
-----------
Total goodwill.............................................. $4,590,000
===========
</TABLE>
(f) To reflect the exchange of Chapman Holdings and Chapman Capital Management
Holdings common shares for EChapman.com common shares, the step up
adjustment related to the purchase of Chapman Holdings, Chapman Insurance
Holdings and EChapman.com, the elimination of the accumulated deficit of
EChapman, Chapman Holdings and Chapman Insurance Holdings, and the
elimination of Chapman Insurance Holdings shares.
(g) To eliminate the accumulated deficit of EChapman, Chapman Holdings and
Chapman Insurance Holdings.
(h) To reflect net proceeds from issuance of 3,333,333 shares of common stock at
an assumed offering price of $15 per share less underwriting discounts and
commissions and offering costs.
24
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------------------------------------------------------------------------
CHAPMAN
CAPITAL CHAPMAN
CHAPMAN MANAGEMENT INSURANCE
ECHAPMAN HOLDINGS HOLDINGS HOLDINGS PRO FORMA PRO FORMA AS
HISTORICAL (A) HISTORICAL (B) HISTORICAL (B) HISTORICAL ADJUSTMENTS ADJUSTED
-------------- -------------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
OPERATIONS:
REVENUE
Commissions................ $ -- $3,243,000 $ -- $ 35,000 $ -- $ 3,278,000
Underwriting and management
fees..................... -- 554,000 -- -- -- 554,000
Investment management
fees..................... -- -- 3,046,000 -- -- 3,046,000
Interest, dividends and
other income............. -- 163,000 152,000 -- (34,000)(c) 281,000
Gains on trading........... -- 246,000 -- -- -- 246,000
---------- ---------- ---------- --------- --------- ------------
Total revenue.......... -- 4,206,000 3,198,000 35,000 (34,000) 7,405,000
---------- ---------- ---------- --------- --------- ------------
EXPENSE
Compensation and
benefits................. 89,000 2,324,000 836,000 12,000 -- 3,261,000
Floor brokerage and
clearing fees............ -- 528,000 -- -- -- 528,000
Management fees............ -- -- 1,109,000 -- -- 1,109,000
Other expenses............. 131,000 2,495,000 1,915,000 305,000 (157,000)(d) 4,689,000
---------- ---------- ---------- --------- --------- ------------
Total expense.......... 220,000 5,347,000 3,860,000 317,000 (157,000) 9,587,000
---------- ---------- ---------- --------- --------- ------------
(Loss) Income from
continuing operations
before income tax
benefit.................. (220,000) (1,141,000) (662,000) (282,000) 123,000 (2,182,000)
INCOME TAX BENEFIT......... -- 331,000 164,000 -- 66,000 (e) 561,000
---------- ---------- ---------- --------- --------- ------------
Net loss................... $ (220,000) $ (810,000) $ (498,000) $(282,000) $ 189,000 $ (1,621,000)
========== ========== ========== ========= ========= ============
</TABLE>
- ------------------------------
(a) See the financial statements included elsewhere in this prospectus.
(b) See the consolidated financial statements included elsewhere in this
prospectus.
(c) To eliminate interest on intercompany loan.
(d) To reflect amortization of the goodwill, resulting from the mergers because
of the step up in basis (see page 24 and accompanying footnotes), of
$172,000 for the period ($4,590,000 over 20 years), to eliminate costs
incurred by Chapman Insurance Holdings of $295,000, related to a potential
financing that did not occur as these costs would not have been incurred by
EChapman.com and to eliminate the intercompany interest expense of $34,000.
(e) To reflect the increase in the income tax benefit to adjust to the effective
tax rate.
25
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
CHAPMAN
CAPITAL CHAPMAN
CHAPMAN MANAGEMENT INSURANCE
ECHAPMAN HOLDINGS HOLDINGS HOLDINGS PRO FORMA PRO FORMA AS
HISTORICAL (A) HISTORICAL (B) HISTORICAL (B) HISTORICAL ADJUSTMENTS ADJUSTED
-------------- -------------- -------------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
OPERATIONS:
REVENUE
Commissions................ $ -- $ 2,538,000 $ -- $ 21,000 $(124,000)(c) $ 2,435,000
Underwriting and management
fees..................... -- 700,000 -- -- -- 700,000
Investment management
fees..................... -- -- 3,136,000 -- -- 3,136,000
Interest, dividends and
other income............. -- 335,000 82,000 -- (26,000)(d) 391,000
Loss on trading............ -- (638,000) -- -- -- (638,000)
---------- ----------- ---------- --------- --------- -----------
Total revenue............ -- 2,935,000 3,218,000 21,000 (150,000) 6,024,000
---------- ----------- ---------- --------- --------- -----------
EXPENSE
Compensation and
benefits................. -- 2,185,000 857,000 8,000 -- 3,050,000
Floor brokerage and
clearing fees............ -- 431,000 -- -- -- 431,000
Management fees............ -- -- 1,178,000 -- -- 1,178,000
Interest expense........... -- -- 26,000 -- (26,000)(d) --
Other expenses............. -- 1,935,000 1,308,000 12,000 230,000 (e) 3,485,000
---------- ----------- ---------- --------- --------- -----------
Total expense.......... -- 4,551,000 3,369,000 20,000 204,000 8,144,000
---------- ----------- ---------- --------- --------- -----------
(Loss) Income from
continuing operations
before income tax
benefit.................. -- (1,616,000) (151,000) 1,000 (354,000) (2,120,000)
INCOME TAX BENEFIT......... -- 485,000 45,000 -- -- 530,000
---------- ----------- ---------- --------- --------- -----------
Net (loss) income........ $ -- $(1,131,000) $ (106,000) $ 1,000 $(354,000) $(1,590,000)
========== =========== ========== ========= ========= ===========
</TABLE>
- ------------------------------
(a) This entity has not been created as of December 31, 1998.
(b) See the Consolidated Financial Statements included elsewhere in this
prospectus.
(c) To eliminate commission revenue earned by Chapman Holdings from Chapman
Capital Management Holdings' initial public offering.
(d) To eliminate interest on intercompany loan.
(e) To reflect the amortization of the goodwill resulting from the mergers
because of the step up in basis (see page 24 and accompanying footnotes)
($4,590,000 over 20 years).
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMBINED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF eCHAPMAN.COM SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES AS WELL AS OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
COMBINED RESULTS OF OPERATIONS
The following table and discussion of the combined results of operations
gives effect to the combination of Chapman Holdings and Chapman Capital
Management Holdings for the periods presented. This information does not include
the results of operations of Chapman Insurance Holdings because it has not had
significant operations to date. This information also does not include the
results of operations for EChapman.com because (1) EChapman.com was not
incorporated until May 14, 1999 and had no operations during 1998; and (2) its
operations since May 1999 have consisted of approximately $220,000 in expenses,
which were for salaries and other costs related to starting the company and
developing its operating plan and web site. The combined results of operations
and the discussion thereof were derived from Chapman Holdings' and Chapman
Capital Management Holdings' historical financial statements, which are included
elsewhere in this prospectus. We are presenting the combined historical results
of operations of Chapman Holdings and Chapman Capital Management Holdings
because we believe it is a better presentation than discussing each company
separately. We are providing this combined presentation for informational
purposes only. The combined presentation does not purport to present the results
of operations of EChapman.com had the mergers occurred on or as of the dates
indicated.
The combined presentation excludes the pro forma adjustments relating to the
creation of approximately $4.6 million in goodwill, which will be amortized over
its estimated life of 20 years, and the elimination of intercompany
transactions. This goodwill amortization will result in a charge against
earnings of $230,000 per year on a pre-tax basis.
27
<PAGE>
The following table reflects items in the combined statements of operations
for Chapman Holdings and Chapman Capital Management Holdings as dollar amounts
and as a percentage of total revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998
----------------------- ------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNTS REVENUE AMOUNTS REVENUE
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions.............. $2,612,000 49.5% $ 2,414,000 40.0%
Underwriting and
management fees........ 325,000 6.1 700,000 11.6
Investment management
fees................... 2,284,000 43.3 3,136,000 52.0
Interest and dividends... 58,000 1.1 417,000 7.0
Gain (loss) on trading... -- -- (638,000) (10.6)
---------- ----- ----------- -----
Total revenue.......... 5,279,000 100.0% 6,029,000 100.0%
---------- ===== ----------- =====
EXPENSE:
Compensation and
benefits............... 1,716,000 32.5% 3,042,000 50.5%
Floor brokerage and
clearing fees.......... 286,000 5.4 431,000 7.1
Management fees.......... 869,000 16.5 1,178,000 19.6
Other expense............ 1,815,000 34.4 3,243,000 53.8
---------- ----- ----------- -----
Total expense.......... 4,686,000 88.8 7,894,000 131.0
---------- ----- ----------- -----
Income (loss) from
continuing operations
before income tax
(benefit).............. 593,000 11.2 (1,865,000) (31.0)
INCOME TAX PROVISION
(BENEFIT)................ 249,000 4.7 (559,000) (9.3)
---------- ----- ----------- -----
Income (loss) from
continuing
operations............. 344,000 6.5 (1,306,000) (21.7)
INCOME FROM DISCONTINUED
OPERATIONS............... 51,000 1.0 -- --
---------- ----- ----------- -----
Net income (loss)........ $ 395,000 7.5% $(1,306,000) (21.7)%
========== ===== =========== =====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
1998 1999
------------------------ ------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNTS REVENUE AMOUNTS REVENUE
----------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions.............. $ 1,909,000 40.3% $ 3,243,000 43.8%
Underwriting and
management fees........ 376,000 7.9 554,000 7.5
Investment management
fees................... 2,344,000 49.5 3,046,000 41.1
Interest and dividends... 286,000 6.0 315,000 4.3
Gain (loss) on trading... (174,000) (3.7) 246,000 3.3
----------- ------ ----------- ------
Total revenue.......... 4,741,000 100.0% 7,404,000 100.0%
----------- ====== ----------- ======
EXPENSE:
Compensation and
benefits............... 1,816,000 38.3% 3,160,000 42.7%
Floor brokerage and
clearing fees.......... 302,000 6.4 528,000 7.1
Management fees.......... 912,000 19.2 1,109,000 15.0
Other expense............ 2,000,000 42.2 4,404,000 59.5
----------- ------ ----------- ------
Total expense.......... 5,030,000 106.1 9,201,000 124.3
----------- ------ ----------- ------
Income (loss) from
continuing operations
before income tax
(benefit).............. (289,000) (6.1) (1,797,000) (24.3)
INCOME TAX PROVISION
(BENEFIT)................ (61,000) (1.3) (493,000) (6.7)
----------- ------ ----------- ------
Income (loss) from
continuing
operations............. (228,000) (4.8) (1,304,000) (17.6)
INCOME FROM DISCONTINUED
OPERATIONS............... -- -- -- --
----------- ------ ----------- ------
Net income (loss)........ $ (228,000) (4.8)% $(1,304,000) (17.6)%
=========== ====== =========== ======
</TABLE>
- ------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenue increased by $2,663,000, or 56.2%, to $7,404,000 for the nine
months ended September 30, 1999 from $4,741,000 for the comparable prior period.
This increase reflects an increase in commission revenue and municipal
designations combined with gains on trading. Additionally, there were increased
assets under management and investment income on the investment of funds.
Commissions revenue increased by $1,334,000, or 69.9%, to $3,243,000 for the
nine months ended September 30, 1999 from $1,909,000 in the comparable prior
28
<PAGE>
period. This increase is primarily due to growth in revenues from municipal
designations, which increased $613,000, or 190%, to $936,000 for the nine months
ended September 30, 1999 from $323,000 for the prior comparable period. We
participated in 36 municipal designations, during the nine months ended
September 30, 1999 compared to 28 in the prior comparable period. Commission
revenue from the sale of equities increased $318,000, or 21.4%, to $1,807,000
for the nine months ended September 30, 1999 from $1,489,000 for the prior
comparable period.
Commission revenue on fixed income securities increased $375,000, or 390.6%,
to $471,000 for the nine months ended September 30, 1999 from $96,000 for the
prior comparable period. This increase is attributable to favorable interest
rates during the first nine months of 1999.
Underwriting and management fees revenue increased by $178,000, or 47.3%, to
$554,000 for the nine months ended September 30, 1999 from $376,000 for the
prior comparable period. This increase was due both to an increase in
underwriting syndications of $58,000, or 33.3%, to $232,000 from $174,000 and an
increase in management and advisory fees of $126,000, or 62.7%, to $327,000 from
$201,000 for the nine months ended September 30, 1999.
Investment management fees revenue increased by $702,000, or 29.9%, to
$3,046,000 for the nine months ended September 30, 1999 from $2,344,000 for the
prior comparable period. This increase is primarily due to increases in assets
under management. Assets under management were $686,532,000 and $498,889,000,
respectively, for the nine months ended September 30, 1999 and 1998. Advisory
fees are net of amounts waived pursuant to The Chapman US Treasury Money Fund
fee waiver. Pursuant to such waiver, we agreed to limit our advisory and
administrative fee to ensure that the annual expense ratio of The Chapman US
Treasury Money fund is below 0.65% of average daily net assets, provided
however, that we are not required to reimburse amounts in excess of our advisory
and administrative fee.
Interest and dividend revenue increased by $29,000, or 10.1%, to $315,000
for the nine months ended September 30, 1999 from $286,000 for the prior
comparable period. This increase in interest and dividend revenue is due to
investing higher cash balances associated with net proceeds from the public
offering of common stock.
An unrealized gain on trading of $246,000 was reported for the nine months
ended September 30, 1999. The unrealized gain on trading is attributable to an
increase in the market value of our market-making securities inventory.
Total expenses increased by $4,171,000, or 82.9%, to $9,201,000 for the nine
months ended September 30, 1999 from $5,030,000 for the prior comparable period.
The largest components of the increase in total expenses are associated with the
opening of new regional offices in selected markets, business development costs
associated with our marketing strategy and increased staffing pursuant to our
business expansion strategy.
29
<PAGE>
Compensation and benefits increased $1,344,000, 74.0%, to $3,160,000 for the
nine months ended September 30, 1999 from $1,816,000 from the prior comparable
period. As a percentage of revenues, these expenses increased to 42.7% for the
nine months ended September 30, 1999 from 38.3% for the prior comparable period.
The increase is due to 34 additional employees hired and annual compensation
increases to certain existing employees. Additionally, compensation expense
includes sales commissions paid to brokers and varies in relation to changes in
commission revenue. Therefore, the increase is also attributable to the increase
in commissions paid to brokers due to increased retail and municipal sales
volume.
Floor brokerage and clearing fees increased by $226,000, or 74.8%, to
$528,000 for the nine months ended September 30, 1999 from $302,000 for the
prior comparable period. The increase is primarily due to an increase in the
number of brokers and related transaction volume offset by a slight decline in
the average dollar amount per transaction as a result of changing clearing firms
in June 1999.
Management fees, which consist primarily of our investment advisory
subsidiary's payments to sub-advisors in connection with the DEM-MET Trust,
increased by $197,000, or 21.6%, to $1,109,000 for the nine months ended
September 30, 1999 from $912,000 for the prior comparable period. This increase
in management fees expense largely reflects an increase of $72,163,000, or
35.8%, in assets under management of the DEM-MET Trust to $273,834,000 as of
September 30, 1999 from $201,671,000 for the prior comparable period, offset by
a reduction in fees due to two fewer sub-advisors working for the DEM-MET Trust.
Other operating expenses increased by $2,404,000, or 120.2%, to $4,404,000
for the nine months ended September 30, 1999 from $2,000,000 for the prior
comparable period. The increase was primarily due to increased communication
expense of $86,000, travel and business development expense of $138,000,
equipment and occupancy costs related to the opening of new offices of $158,000,
printing costs of $152,000, postage costs of $44,000 and conference and seminar
costs of $77,000. These costs are related to the implementation of our business
expansion strategy and the increased cost of being a public company. This
expansion strategy and being a public company have required us to increase our
use of professional services, which has resulted in an increase in legal fees of
$690,000, and increased marketing and advertising costs of $428,000. The
increase in legal fees is also due to legal expenses of $226,000 for developing
and registering four new DEM strategy mutual funds for which we will not be
reimbursed.
The income tax benefit increased $432,000 to a tax benefit of $493,000 for
the nine month period ended September 30, 1999 from $61,000 for the prior
comparable period. The income tax benefit is due to an increase in loss before
benefit for income taxes for the nine month period ended September 30, 1999 as a
result of the items discussed above.
30
<PAGE>
The net loss increased by $1,076,000 to $1,304,000 for the nine months ended
September 30, 1999 from a net loss of $228,000 for the prior comparable period.
This increase is a result of items discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenue increased by $750,000, or 14.2%, to $6,029,000 for 1998 from
$5,279,000 for 1997. The increase in revenue reflects an increase in
underwriting fees, investment management fees and interest income. This increase
was offset by a loss of $638,000 related to our inventory of trading stock and a
decrease in commissions revenue.
Commissions revenue decreased $198,000, or 7.6% to $2,414,000 for 1998 from
$2,612,000 for 1997. The decrease was primarily due to an 88% decrease in
commissions for government securities primarily related to the volume of such
transactions. Increases in equities, institutional and fixed income commissions
of 73.2%, 19.5% and 53%, respectively, partially offset this decrease.
Underwriting and management fees, increased by $375,000, or 115.4%, to
$700,000 for 1998 from $325,000 for 1997. The increase was primarily due to an
increase in management fees from municipal transactions and underwriting fees of
$334,000, or 120.1%, to $612,000 for 1998 from $278,000 for 1997.
Investment management fees revenue increased by $852,000, or 37.3%, to
$3,136,000 in 1998 from $2,284,000 in 1997, reflecting increased fees as a
result of an increase in total assets under management. Assets under management
were $591,385,000 and $429,593,000, respectively, for the year ended
December 31, 1998 and 1997. This was due largely to investment performance, the
addition of the DEM Equity Fund, new separate accounts under the DEM strategy
and additional assets from a DEM-MET Trust client.
Interest and dividend revenue increased by $359,000 to $417,000 for 1998
from $58,000 for 1997. The increase is mainly due to higher cash balances
associated with the net proceeds from Chapman Holdings' public offering of
common stock.
The loss on trading accounts was $638,000 for 1998. Our loss on trading
accounts is attributable to an unrealized loss of value on The Chapman Co.'s
market-making securities inventory of approximately $405,000 and a realized loss
of $74,000. A realized loss of $159,000 was recognized on sales related to
trading stock of DEM, Inc., a closed end investment company for which Chapman
Capital Management acted as investment advisor and The Chapman Co. acted as
distributor until DEM, Inc.'s dissolution in 1998.
Total expense for 1998 increased by $3,208,000, or 68.5%, to $7,894,000 for
1998 from $4,686,000 for 1997. Total expense increased to 131.0% of total
revenue for 1998 as compared to 88.8% of total revenue for 1997. Expenses
increased in all areas due to increased staffing, the opening of new offices and
our efforts to expand our operations.
31
<PAGE>
Compensation and benefits increased by $1,326,000 or 77.3%, to $3,042,000
for 1998 from $1,716,000 for 1997. As a percentage of total revenue, these
expenses increased to 50.5% in 1998 from 32.5% in 1997. This increase is largely
due to the addition of new employees in connection with our ongoing business
expansion efforts, along with annual pay raises and bonuses to certain existing
employees. Compensation expense includes sales commissions paid to brokers and
varies in relation to changes in commission revenue. Notwithstanding that
commission revenue decreased in 1998, commissions paid to brokers increased
primarily due to an increased municipal sales volume.
Floor brokerage and clearing fees increased by $145,000, or 50.7%, to
$431,000 for 1998 from $286,000 for 1997. This increase is attributable to an
increase in the number of transactions and a decrease in the average dollar
amount of such transactions.
Management fee expense, which consists primarily of Chapman Capital
Management's payments to sub-advisors in connection with the DEM-MET Trust,
increased by $309,000, or 35.6%, to $1,178,000 in 1998 from $869,000 in 1997.
The increase in such fees reflects an increase in assets under management of
$79,199,000 or 47.5% in the DEM-MET Trust to $245,822,000 for the year ended
December 31, 1998 from $166,623,000 for the prior comparable period, including
approximately $40 million of new assets added by an existing trust client.
Other operating expenses increased by $1,428,000, or 78.7%, to $3,243,000
for 1998, from $1,815,000 for 1997. The increase was primarily due to increased
advertising expenses of $388,000, filing fees of $58,000, travel expenses of
$187,000, occupancy and equipment expense of $104,000 related to the opening of
new offices, and professional fees of $313,000 related to the increased use of
legal services, professional recruiters and marketing consultants. The increase
in these costs is due to our growth and expansion efforts.
Income taxes from continuing operations decreased by $808,000 to a tax
benefit of $559,000 in 1998 from a tax provision of $249,000 for 1997. This
decrease was due to the loss from continuing operations.
We had no income from discontinued operations in 1998 versus $51,000 for
1997.
We had a net loss of $1,306,000 for 1998 versus net income of $395,000 for
1997. This change was a result of items discussed above.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
Our assets are reasonably liquid with a substantial majority consisting of
cash and cash equivalents, investment securities, and receivables from clients,
all of which fluctuate depending upon the levels of customer business and
trading activity. Receivables from clients turnover rapidly. Both our 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
32
<PAGE>
market conditions, and proprietary trading strategies. Our combined total assets
as of September 30, 1999 were $14,467,000.
The Chapman Co. is subject to the net capital rules of the NASD. As such,
The Chapman Co. is subject to certain restrictions on the use of capital and its
related liquidity. The net capital position of The Chapman Co. as of
September 30, 1999 was $355,000, which was $105,000 in excess of its minimum
NASD net capital requirement.
Our combined cash and cash equivalents were $4,878,000 as of September 30,
1999.
Cash flows used in operating activities decreased by $244,000 or 11.5% to
$1,885,000 for the nine months ended September 30, 1999 from $2,129,000 for the
nine months ended September 30, 1998. This decrease was due to a change in
operating assets and liabilities.
Cash flows used in investing activities increased by $4,000, or .7%, to
$569,000 for the nine months ended September 30, 1999 from $565,000 for the nine
months ended September 30, 1998.
Cash flows from financing activities were $0 for the nine months ended
September 30, 1999 compared to $12,029,000 for the nine months ended
September 30, 1998. This amount relates to the net proceeds from the Chapman
Holdings' and Chapman Capital Management Holdings' initial public offerings in
February and August 1998, respectively.
On August 14, 1998, Chapman Capital Management Holdings consummated an
initial public offering of its common stock as a result of which Chapman Capital
Management Holdings received net proceeds of approximately $5,240,000. Offering
proceeds were invested in The Chapman U.S. Treasury Money Fund, which invests in
short-term U.S. government securities and repurchase agreements collateralized
by U.S. government securities. On July 29, 1999, Chapman Capital Management
Holdings lent $3.2 million to Chapman Holdings, which was repaid on
September 14, 1999.
On July 29, 1999, The Chapman Co. advanced Nathan A. Chapman, Jr. $242,000
pursuant to an unsecured demand note bearing interest at the rate of 5.45% per
annum. As of September 30, 1999, we had outstanding unsecured loans to
Mr. Chapman in the amount of $1,006,089, including accrued interest.
Our overall capital and funding needs are continually reviewed to ensure
that our capital base can support the estimated needs of our business. These
reviews take into account business needs as well as our regulatory capital
requirements.
33
<PAGE>
YEAR 2000 SYSTEM COSTS
Because of the arrival of the Year 2000, existing software programs and
operating systems must be reviewed to determine if they can accommodate
information that employs dates after December 31, 1999. As of September 30,
1999, we have incurred direct Year 2000 readiness costs of approximately
$152,000 to cover assessment of systems, internal testing, point-to-point
testing, training, and replacement and modification of existing systems. Our
Year 2000 readiness costs consist of direct expenses incurred with respect to
software, consulting, and employee time and readiness expenses for upgraded
computers, software and communication systems.
Our Year 2000 costs during 1999 were approximately $225,000. We estimate
that our total Year 2000 readiness costs will be approximately $339,000.
Our management has prepared a written plan detailing our software and
operating systems readiness issues for the Year 2000. The plan identifies
mission-critical and non mission-critical operating systems. Working with our
hardware and software vendors and other third parties to prepare for the Year
2000, we substantially completed necessary hardware and software renovations
during the second quarter of 1999. We tested our systems during the third
quarter of 1999 to determine the effect of our readiness efforts, and we are
currently working with our hardware and software vendors and other third parties
to complete our Year 2000 contingency plan.
Our Year 2000 readiness plan involves four phases:
PHASE I--ASSESSMENT. This phase involved the identification of all systems
that are date dependent. This phase was substantially completed during the first
quarter of 1998.
PHASE II--RENOVATION. This phase involved the identification and
replacement of mission-critical systems which we were unable to update or
certify as compliant. This phase commenced in the first quarter of 1998 and was
substantially completed in the second quarter of 1999. Remaining activities
relate to monitoring and following up with third parties as part of our
contingency planning activities in Phase IV.
PHASE III--TESTING. This phase involves testing all systems that are date
dependent and upgrading all non-compliant systems. We completed this phase
during the third quarter of 1999.
PHASE IV--CONTINGENCY PLANNING. This phase involves an assessment of all
mission-critical systems for potential problems that would result from Year 2000
related failures of software and hardware and also the development of plans and
strategies to continue operations should a failure occur. We have prepared the
initial plan and will continue to refine and expand it as required through the
first quarter of 2000.
Within our Year 2000 readiness plan, we have identified systems as "mission-
critical" and "non mission-critical". We have identified systems as
"mission-critical" if
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the loss of the system, software or facility would cause an immediate stoppage
of activity or a significant impairment of a core business area. We determined
systems to be non-Y2K ready based on information from manufacturers. We
identified systems as "non mission-critical" if loss of the system, although
inconvenient, would not cause an immediate stoppage of activity or significant
impairment of the status of a core business area. The following table summarizes
our estimate of the status of mission-critical elements of our Year 2000
readiness plan:
<TABLE>
<CAPTION>
NUMBER OF
MISSION-
NUMBER OF MISSION- NUMBER OF MISSION- CRITICAL SYSTEMS FOR
NUMBER OF MISSION- CRITICAL SYSTEMS CRITICAL WHICH PHASE
CRITICAL SYSTEMS COMPLETED SYSTEMS IN PROCESS NOT APPLICABLE
------------------ ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
ASSESSMENT................ 32 32 -- --
RENOVATION................ 32 23 -- 9
TESTING................... 32 23 -- 9
CONTINGENCY PLANNING...... 32 -- 32 --
</TABLE>
We have relationships with third parties that may have computer systems that
are not Year 2000 ready. We have identified the third parties upon which we rely
for mission-critical systems and have contacted or are contacting these third
parties to confirm that their systems are Year 2000 ready. Responses from the
majority of these vendors during the first and second quarters indicated that
they expected to reach compliance by the third quarter of 1999. We continue to
monitor the progress of our vendors and suppliers. Our contingency plan calls
for the replacement, whenever feasible, of any vendors of mission critical
systems that have not verified readiness by September 30, 1999. As of the date
of this prospectus, all of our vendors of mission critical systems have verified
readiness.
Although we suffered no significant Year 2000 problems at the start of 2000
and while we believe that we are taking prudent and necessary action to become
Year 2000 ready, we can give no assurance that the Year 2000 issue will not
result in information or communications systems interruptions. Any interruptions
could be expected to have a material adverse effect on our business, financial
condition, results of operations and business prospects and may subject us to
liability to our clients. We are currently building upon our existing
contingency plan in the event that either we or third parties do not
successfully complete our readiness efforts, or if vendors or third parties
controlling mission-critical systems to us are unable to confirm that their
systems will be Year 2000 ready. These efforts may result in additional costs in
excess of current allocation and estimates.
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THE MERGERS
On November 15, 1999, EChapman.com entered into merger agreements with each
of Chapman Holdings, Inc., Chapman Capital Management Holdings, Inc. and Chapman
Insurance Holdings, Inc. These merger agreements provide that Chapman Holdings,
Chapman Capital Management Holdings and Chapman Insurance Holdings will merge
with three separate wholly-owned subsidiaries of EChapman.com, which were formed
solely for the purpose of effecting these mergers. The merger subsidiaries will
be the surviving entities in these mergers, and upon consummation of the
mergers, each of Chapman Holdings, Chapman Capital Management Holdings, and
Chapman Insurance Holdings will be wholly-owned subsidiaries of EChapman.com. In
addition, we will have three indirect subsidiaries:
- The Chapman Co., a full service securities brokerage and investment
banking firm
- Chapman Capital Management, Inc., an investment advisory firm
- The Chapman Insurance Agency Incorporated, which sells annuity products on
an agency basis
In the mergers:
- Stockholders of Chapman Holdings will receive 1.93295 shares of
EChapman.com stock for each share of Chapman Holdings;
- Stockholders of Chapman Capital Management Holdings will receive 2.23363
shares of EChapman.com stock for each share of Chapman Capital Management
Holdings; and
- Stockholders of Chapman Insurance Holdings will receive $0.06284 in cash
for each share of Chapman Insurance Holdings
As a result, EChapman.com will issue an aggregate of 13,194,844 shares of
common stock in the mergers of Chapman Holdings and Chapman Capital Management
Holdings. EChapman.com will use approximately $125,000 of the net proceeds of
this offering to pay the consideration in the Chapman Insurance Holdings merger.
Since 1998, both of Chapman Holdings common stock and Chapman Capital
Management Holdings common stock have been traded in the over-the-counter
market, and prices for their common stock are quoted on the Nasdaq SmallCap
Market under the symbols CMAN and CMGT, respectively. Chapman Insurance
Holdings' common stock is not publicly-traded. The following table sets forth
the high and low selling prices of each of Chapman Holdings' and Chapman Capital
Management Holdings' common stock as reported by the Nasdaq SmallCap Market.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
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<PAGE>
PRICE RANGE OF
COMMON STOCK
<TABLE>
<CAPTION>
CHAPMAN CAPITAL
CHAPMAN MANAGEMENT
HOLDINGS HOLDINGS
(CMAN) (CMGT)
----------------------------------------- -----------------------
HIGH LOW HIGH LOW
------------------- ------------------- ---------- ----------
<S> <C> <C> <C> <C>
1998
1(st) Quarter(1).......................................... 10 5/8 9 N/A N/A
2(nd) Quarter............................................. 11 10 N/A N/A
3(rd) Quarter(2).......................................... 10 1/4 9 1/2 8 7
4(th) Quarter............................................. 9 3/4 4 1/2 8 3/8 7 1/16
1999
1(st) Quarter............................................. 7 5 8 1/4 7 1/4
2(nd) Quarter............................................. 6 3/4 5 11/16 8 3/8 7 1/4
3(rd) Quarter............................................. 6 9/16 5 5/8 7 3/4 7
4(th) Quarter............................................. 19 1/2 2 20 1 7/8
</TABLE>
- ------------------------
(1) With respect to Chapman Holdings, from February 27, 1998.
(2) With respect to Chapman Capital Management Holdings, from August 14, 1998.
On November 12, 1999, the day preceding public announcement of the offering
and the mergers, there were approximately 28 record holders of Chapman Holdings'
common stock and 23 record holders of Chapman Capital Management Holdings'
common stock. As of November 12, 1999, Chapman Holdings had 2,953,622
outstanding shares of common stock, and Chapman Capital Management Holdings had
3,351,334 outstanding shares of common stock. On the day before the announcement
of the offering, the combined market capitalization of Chapman Holdings and
Chapman Capital Management Holdings was $33,931,726. Accordingly, the
stockholders of Chapman Holdings and Chapman Capital Management Holdings are
expected to receive a substantial premium for their shares in the mergers.
The mergers are subject to, among other customary conditions, approval by
the stockholders of each of the target companies in the mergers. Each merger
requires the affirmative vote of a majority of the outstanding shares of common
stock of the target company. Nathan A. Chapman, Jr. is the majority stockholder
of each of the target companies and has agreed to support and to vote in favor
of the mergers by executing an irrevocable support agreement in connection with
each of the three mergers.
The mergers will close concurrently with the closing of this offering. The
closing of this offering is contingent upon the closing of the mergers.
Upon consummation of the mergers, Nathan A. Chapman, Jr. will be the
majority stockholder of EChapman.com with 58.3%, or 57.4% if the underwriter
exercises the over-allotment option in full, beneficial ownership of the
outstanding common stock of EChapman.com.
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BUSINESS
GENERAL
EChapman.com, Inc. is a newly-formed Maryland corporation. We were
incorporated in Maryland on May 14, 1999, and we have had minimal operations to
date, which have consisted solely of expenses incurred in connection with the
development of our business plan. We estimate that we have incurred
approximately $220,000 of expenses since our inception. Upon consummation of the
pending mergers of Chapman Holdings, Chapman Capital Management Holdings and
Chapman Insurance Holdings, we will have three indirect operating subsidiaries:
- The Chapman Co., which was incorporated in Maryland in 1986
- Chapman Capital Management, Inc., which was incorporated in the District
of Columbia in 1987
- The Chapman Insurance Agency Incorporated, which was incorporated in
Maryland in 1987
Chapman Holdings was incorporated in Maryland on December 12, 1997 and has
been publicly traded company since February 1998.
Chapman Capital Management Holdings was incorporated in Maryland on
January 8, 1998 and has been publicly traded since August 1998.
Chapman Insurance Holdings was incorporated in Maryland on January 8, 1998.
The operating subsidiary of Chapman Insurance Holdings sells annuity products.
Neither Chapman Insurance Holdings nor The Chapman Insurance Agency has had
significant operations to date.
Following the completion of the mergers, we will act as the holding company
for Chapman Holdings, Chapman Capital Management Holdings and Chapman Insurance
Holdings and their respective operating subsidiaries. In addition, EChapman.com
will be the entity responsible for the coordination and implementation of the
Internet strategy described below.
Prior to February 27, 1998, both Chapman Capital Management and Chapman
Insurance Agency were subsidiaries of The Chapman Co. The Chapman Co. spun-off
its subsidiaries in 1998 in order to facilitate the initial public offering of
Chapman Holdings. Because our operating subsidiaries were previously part of one
integrated company, we do not expect the integration of the operations of our
securities brokerage and investment banking, investment advisory and insurance
subsidiaries to pose a material hurdle to our combined operations and the
implementation of our Internet strategy. By combining our operations in this
manner, Nathan A. Chapman, Jr., who is currently acting as our president and
chief executive officer and the president and chief executive officer of each of
the merging companies, will be able to devote substantially all of his time and
effort to the combined company and to pursuing the EChapman.com business
strategy.
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THE ECHAPMAN.COM STRATEGY
OVERVIEW
EChapman.com is a newly formed corporation designed to bring together the
financial services capabilities of The Chapman Co., Chapman Capital Management
and The Chapman Insurance Agency while taking advantage of the unique
opportunities presented by the growth of the Internet. Our web site, the
EChapman.com network, which is currently under development, will seek to be an
interactive online community offering both financial services and a variety of
lifestyle, educational and cultural content selected to appeal particularly to
African-Americans, Asian-Americans, Hispanic-Americans and women. We refer to
these groups collectively as the Domestic Emerging Markets, or DEM, community.
We believe that our creation of and leadership position in employing the
Domestic Emerging Markets concept will allow us to successfully combine online
financial services with an online portal.
We are also in the exploratory stages of establishing an Internet bank
servicing the DEM community, an undertaking which we believe would round out our
financial product lines and make EChapman.com a complete, one-stop financial
services company. The establishment of a bank involves a lengthy application
process and requires regulatory approval. These plans are in the preliminary
stages, and we cannot assure you that these plans will come to fruition or
represent a significant source of revenue.
We are currently working internally and with third party service providers
to design and develop our web site, a prototype of which was launched in
November 1999 under the domain name "EChapman.com." We intend to continue use
this address once the formal site is up and running. We intend to launch the
online trading portion of the EChapman.com web site within two months following
the closing of this offering. Although we expect to add content and
functionality on a continuous basis, we anticipate that the layout, content and
functionality of the lifestyle, educational and cultural portions of our web
site should be substantially complete within six months following the closing of
this offering.
BACKGROUND
NATHAN A. CHAPMAN, JR.
A key part of our strategy will be our financial services component. We
intend to draw upon Nathan A. Chapman, Jr.'s prominence and experience in the
financial services industry and the operating histories of The Chapman Co. and
Chapman Capital Management. Mr. Chapman, our founder, president and chairman, is
president and chairman of the first and currently the only African-American
controlled publicly traded investment bank, The Chapman Co., and the president
and chairman of the first and currently the only African-American controlled
publicly traded investment management company, Chapman Capital Management. The
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Chapman Co. is a full service securities brokerage and investment banking
company that engages in corporate and government finance, retail and
institutional brokerage, research and marketing-making activities and trading.
Chapman Capital Management is a registered investment adviser that at
October 31, 1999, had over $690 million in assets under management. Chapman
Capital Management acts as financial adviser to separate accounts, a group trust
and a family of mutual funds. The Chapman Insurance Agency is a privately held
insurance agency with limited operations to date.
DOMESTIC EMERGING MARKETS STRATEGY
In the mid-1990s, Mr. Chapman pioneered an investment management strategy
that consists of managing portfolios invested in securities of companies
controlled by African-Americans, Asian-Americans, Hispanic-Americans and women.
We call this strategy the Domestic Emerging Markets, or DEM, strategy, and we
call companies which meet this profile DEM companies.
Chapman Capital Management was the first investment management firm to
establish the DEM strategy as an investment option when it launched DEM, Inc., a
closed end investment management company, in 1995. A mutual fund managed by
Chapman Capital Management using the DEM strategy is included as an investment
option in certain retirement plans administered by Aetna Retirement Services and
Nationwide Retirement Solutions. Chapman Capital Management further extends the
DEM strategy by actively recruiting investment managers which meet the DEM
profile to manage investment portfolios that may or may not be invested in DEM
companies. We call this strategy the DEM Multi-Manager strategy. Since launching
the DEM strategy, Chapman Capital Management has increased assets managed under
the DEM and DEM Multi-Manager strategies to over $450 million as of October 31,
1999.
The Chapman Co. uses the DEM strategy in its brokerage and investment
banking business by participating in syndicates for underwritings of DEM
companies, publishing research on DEM companies, making markets in the stocks of
DEM companies and acting as distributor for the mutual funds that Chapman
Capital Management manages according to the DEM strategy. In addition, The
Chapman Co. seeks to act as lead underwriter for DEM companies.
ECHAPMAN.COM
We believe an online network designed to appeal to African-Americans, Asian-
Americans, Hispanic-Americans and women, as well as the DEM community as a
whole, will allow us to leverage the DEM concept and promote brand
differentiation for our financial and other services. In addition, we believe
that the Internet will provide us with cost-efficient access to new markets for
our financial services.
EChapman.com will seek to attract the members of the DEM community to our
web site by providing lifestyle, educational and cultural, as well as financial
services, information with the goal of becoming a dynamic online community,
known as
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EChapman.com. We currently intend that this material will initially be organized
around four channels on our web site.
The CHAPMAN NETWORK will cover a variety of topics and features, including:
- Lifestyle pages providing content about travel, finance, fashion, food,
sports, entertainment, health & wellness, and family and parenting issues
and featuring presentations by personalities and celebrities appealing to
the various segments of the DEM community
- Music/Video pages allowing visitors to participate in online chats with
artists and personalities, listen to music, preview videos and make
purchases online at the CHAPMAN MARKETPLACE
- Kids and Teens pages offering chat rooms and programming about school
safety, money, contests, quizzes, puzzles, sports
- Chapman Kids Club enabling kids and teens to open virtual stock accounts
and view real time stock information about companies that appeal to youth
- International, domestic and business news
- Sports, weather and local news
CHAPMAN TRADING will offer:
- Online brokerage services
- A variety of mutual fund choices, including our proprietary funds: the DEM
Equity Fund, the DEM Index Fund and the Chapman US Treasury Fund, as well
as any future mutual fund offerings
- Insurance products, such as variable annuities, variable life and term
life products, on an agency basis, subject to regulatory approval
- Research reports
- Online access to corporate and public finance products
- Toll-free call center for personalized assistance
CHAPMAN EDUCATION will focus on financial education by providing:
- Interactive seminars addressing a wide range of topics, ranging from how
to make a budget to investment strategies
- Interviews with business people, particularly those who are prominent in
the DEM community
- DEM Index performance information
- Financial tools, such as mortgage and loan calculators and tips on how to
conduct investment research
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CHAPMAN MARKETPLACE will offer for sale:
- Chapman-branded apparel and accessories
- Other products, including many of special interest to the DEM community
such as videos, music and books featuring DEM personalities and apparel
- Links with other Internet merchants which desire access to the DEM
community or segments of it
SOURCES OF ONLINE REVENUE
EChapman.com will seek to derive revenue from its online business in the
following ways:
- Online brokerage commissions, including commissions from our proprietary
and other mutual fund sales
- Investment management fees from increasing assets under management through
online sales of our proprietary mutual funds
- Advertising revenues from sales of banner ads and links to web sites
seeking to reach the DEM community or segments of it
- Sharing with ecommerce partners in sales generated by visitors coming from
our web site
- Possible online sales of annuity and insurance products created through
alliances with companies such as The Manufacturers Life Insurance Company
of North America
- Sales of products through the CHAPMAN MARKETPLACE channel
- Potential interest and fee income generated from the contemplated Internet
bank
BRAND AWARENESS
EChapman.com will seek to establish brand awareness through:
- Conventional off-line advertising and promotion, such as print media,
radio and television, event sponsorship, conferences and seminars
specifically targeted at the DEM community and its various segments
- Distribution of DEM products through third parties, such as Aetna
Retirement Services and Nationwide Retirement Solutions
- Online advertising and marketing strategies, including:
- One-to-one banner exchanges
- Basic text links
- Content sponsorship
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- E-mail promotions
- Registration with search engines and directories
- Registration of alternative domain names, such as chapmanonline.com,
africanamericanstocks.com, asianamericanstocks.com,
hispanicamericanstocks.com and womenstocks.com, which will lead users
to the EChapman.com web site
OFFLINE STRATEGY
We intend to grow the financial services products and services we have
offered through our traditional channels of distribution and believe these
businesses will complement our online strategy. In particular, we will continue
to pursue and expand:
- Corporate finance transactions involving DEM companies, including
underwriting syndicate participations and manager roles in these
transactions
- Government finance transactions, including seeking larger positions and
manager roles in these transactions by establishing a presence in the
states with major issuers of negotiated tax-exempt bonds
- Retail brokerage services targeting the DEM community
- Market-making activities focused on securities of DEM companies, as well
as other companies
- Proprietary trading for our own account
- Investment management services such as advisory services for institutional
separate accounts and our proprietary mutual funds
- Distribution of our proprietary mutual funds and mutual funds managed by
others through alliances with strategic partners, such as Aetna Retirement
Services
- Management of assets according to the DEM and DEM Multi-Manager strategies
- Sales of annuity and other insurance products on an agency basis for
insurance underwriters, such as The Manufacturers Life Insurance Company
of North America
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THE INTERNET
GROWTH OF THE INTERNET
GENERAL
The Internet has become a significant global medium for obtaining news and
information, communicating and conducting commerce. Both the number of Internet
users and the amount of time they spend online are growing. According to Jupiter
Communications, an independent market research firm specializing in online
research and analysis, in a presentation given in 1999, approximately one-third
of all homes in the United States now have access to the Internet, and this
percentage is expected to increase to more than two-thirds by 2003. We believe
that this growth is the result of a number of factors, including:
- A growing number of computers in the home and workplace
- Improvements in network infrastructure
- More convenient, faster and less expensive Internet access
- Advances in computer and modem technology
- An increased public awareness of the benefits of using the Internet
- Development of "user friendly" interfaces
ECOMMERCE
The interactive nature of the Internet as well as the growing online
community have also resulted in dramatic growth in the amount of Ecommerce that
is being transacted on the Internet. As reported by NETWORK WORLD FUSION in
September 1999, an analyst from International Data Corporation, an independent
market research firm, reported during a conference on Internet economy that
online purchases, which were $50 billion in 1998, are expected to grow to $1.3
trillion by 2003. We believe that growth in ecommerce can be attributed to a
number of factors, including:
- Consumer confidence in Internet technology and security
- Improved ease of use
- Validation of ecommerce resulting from the participation of nationally
recognized companies
ONLINE BROKERAGE
The online brokerage industry is also experiencing rapid growth. In a report
dated July 1999, Jupiter Communications forecasts that the total number of
online trading households is expected to grow from 4.3 million in 1998 to more
than 20.3 million in 2003. In another report dated July 1999, Jupiter
Communications also estimates that assets under management in online trading
accounts will increase
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sevenfold from $415 billion at the end of 1998 to more than $3 trillion by 2003.
We believe that this anticipated growth is largely due to:
- Growing consumer acceptance of the Internet as a convenient, secure and
reliable method of conducting retail financial transactions
- An increasing desire on the part of investors to take greater personal
control of their financial future
- Lowering of commission prices for online brokerage transactions
- An increasing amount of high-quality investment research and information
available on the Internet to assist investors in making their trading
decisions
- Extensive media attention focused on the online brokerage industry
- Increasing interest by retail investors in purchasing individual stocks
- A favorable investing environment
MARKETING AND ADVERTISING OPPORTUNITIES
A growing number of advertisers and businesses are capitalizing on the
Internet's interactive nature to market their products to highly targeted
audiences. The Internet offers these advertisers a flexible way to target their
message and measure their results. Internet advertisers can tailor their
messages to specific groups of consumers and can change advertisement content
frequently in response to market factors, current events and consumer feedback.
Moreover, advertisers can more accurately track the effectiveness of their
advertising messages based on the rate that consumers directly respond to
advertisements through keystrokes or "click throughs" that their advertisements
receive.
Leading content providers can develop a loyal following of repeat users who
register with their sites by providing personal information and preferences.
Registration can benefit both the user and the site. Registered users are often
eligible for additional services from a site, such as customization options or
access to premium content. As a content provider learns more about its users as
they register and spend more time online, it can tailor content to meet their
needs and preferences. This user information also provides advertisers and
merchants with more focused demographic information, which can then be used to
maximize marketing opportunities.
However, future demand and market acceptance for Internet advertising
remains uncertain. There are currently no uniform standards for the measurement
of the effectiveness of Internet advertising, and the industry may need to
develop standard measurements to support and promote Internet advertising as a
significant advertising medium. If such standards do not develop, existing
advertisers may not continue their levels of Internet advertising. Furthermore,
advertisers that have traditionally relied upon other advertising media may be
reluctant to advertise on the Internet. Our
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business would be adversely affected if the market for Internet advertising
fails to continue to develop or develops more slowly than expected.
Different pricing models are used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to predict our future advertising rates and revenues. Our
advertising revenues could be adversely affected if we are unable to adapt to
new forms of Internet advertising. Moreover, software programs that limit or
prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this software could adversely affect the
commercial viability of Internet advertising.
Our ability to fully capitalize on these growth opportunities depends
primarily on the continued growth of the Internet. Our business would be
adversely affected if Internet usage does not continue to grow, particularly
usage by members of the DEM community. A number of factors unique to the
Internet may inhibit usage, including:
- Inadequate network infrastructure
- Security and privacy concerns
- Inconsistent quality of service
- Lack of cost-effective, high speed service
- Failure of the Internet as a viable commercial marketplace.
On the other hand, if Internet usage grows too quickly, the infrastructure
may not be able to support the demands placed on it, and its performance and
reliability may decline. In addition, in the past, web sites have experienced
interruptions in service as a result of outages and other delays occurring
throughout the Internet infrastructure. If these outages or delays occur
frequently in the future, Internet usage, as well as usage of our web site,
could grow more slowly or decline.
Because the Internet is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards,
to achieve our goals, we need to integrate effectively the various software
programs and tools required to enhance and improve our product offerings and
manage our business. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our services. We may experience difficulties that delay or
prevent the successful marketing of new products and services. In addition, any
enhancements must meet the requirements of our users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our service or infrastructure to adapt to these changes.
In addition, we are and expect to continue to be dependent on various third
parties for software, systems and related services. For example, we expect to
rely on third party service providers for the design and development of our web
site web hosting and technical support, and on a licensed software package to
track
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demographic information of users of our web site. We have not yet selected these
vendors. Some of the third parties that provide software and services to us may
have a limited operating history, may have relatively immature technology and
may themselves be dependent on other service providers. As a result, our ability
to deliver various services to our users may be adversely affected by the
failure of these third parties to provide reliable software, systems and related
services to us. This failure could harm our business.
THE DEM COMMUNITY ON THE INTERNET
According to the Population Estimates Program, Population Division, of the
United States Census Bureau, Data Sheets published by the Population Reference
Bureau, racial and ethnic minorities account for approximately 25% of the adult
U.S. population as of October 31, 1999. This figure is expected to increase to
approximately 33% by the year 2015. However, based on population estimates and
trends derived from the Population Estimates Program released on September 1,
1999, it appears that racial and ethnic minorities account for a relatively
smaller percentage of the total U.S. online population than of the U.S.
population as a whole. For example, African-Americans, who account for 12.79% of
the U.S. population, represent 7.82% of the total estimated U.S. online
population of 92 million. Asian-Americans, who represent 4.00% of the U.S.
population, represent 2.85% of the total U.S. online population, and
Hispanic-Americans, who make up 11.44% of the U.S. population, account for 1.64%
of the U.S. online population. These Data Sheets estimate that women, who
comprise 51.13% of the U.S. population, account for approximately 46% of the
U.S. online population.
Because the core of our business strategy is the expansion of the DEM
strategy onto the Internet, our future success will depend on our ability to
attract members of the DEM community to our web site. Although this particular
population segment is more limited in terms of number and percentage of Internet
users than the overall U.S. population, we believe that the potential growth in
Internet usage by members of the DEM community represents an opportunity for
EChapman.com. However, if the DEM community does not follow the general trend
toward increased Internet usage or if we are unable to attract these potential
users to our web site, our business, results of operations and financial
condition would be materially and adversely affected.
ECHAPMAN.COM PLAN OF OPERATION
Our ability to implement our business strategy depends primarily upon the
successful and timely completion and launch of our web site. Although we
launched a prototype web site in November 1999, we are currently developing the
formal site, and we expect that we will be able to offer the online brokerage
and certain other features of the CHAPMAN TRADING channel of the Web site within
approximately two months after the closing of this offering.
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Simultaneously with the development of the financial services component of
our web site, we will also be designing and developing the other features of the
EChapman.com web site. In this regard, we intend to establish relationships with
content providers and third parties who wish to advertise on our site. We also
intend to develop strategic relationships with other companies which desire to
market their products and services to the DEM community. Although our web site
design and development, as well as promotion of the EChapman.com brand, will be
an ongoing process, we estimate that the portal component of the EChapman.com
web site will be substantially completed and ready for visitors within six
months after the closing of this offering.
These time frames are based upon our management's research of the online
industry as well as discussions with web site design and development firms.
Although we have engaged a web site design and development firm in connection
with the development of our prototype web site, we are only in the preliminary
stages of negotiations with respect to the design, development and hosting of
our formal web site and have not finalized any agreements with respect to those
services. Our ability to retain a qualified web site design, development firm
and hosting services are essential to our ability to implement our plan of
operation.
We expect to incur significant expenses in two main areas:
- Promotion of the EChapman.com web site and the EChapman.com brand
- Web site design and development
During our first 12 months of operations, the expenses we expect to incur in
connection with our web site include:
- Development of our portal content, including news, weather and sports
feeds from third-party providers and the production costs associated with
streaming video presentations for the CHAPMAN EDUCATION and CHAPMAN
NETWORK channels
- Marketing and promoting the EChapman.com Web site and brand
- Testing the site once the initial framework is completed
- Further design, development and testing of our online financial services
offerings
- General software and hardware expenses associated with the operation of
the site
- Web hosting and related expenses
We currently estimate that during the next twelve months, the cost of web
site design and development will be at least $5 million and that our marketing
and advertising expenditures will total approximately $14 million. Because we
are a new
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entrant to the Internet market, these expenditures may be significantly higher
than we anticipate.
Marketing and promotional activities will include targeted advertising of
EChapman.com online, including placement of banner ads and links to the
EChapman.com Web site on other Web sites, and through traditional print, radio
and television advertising. We will also incur expenses in establishing
strategic relationships with other companies.
As our online trading capabilities develop, and as we move toward the
completion of the EChapman.com portal, we expect to increase significantly the
size of our workforce in response to the anticipated growth of our online
business and the continued expansion of our traditional lines of business. We
expect to hire approximately 115 employees for our Web site, including an
information technology professional, a sales manager, sales personnel and
administrative staff in connection with the online community component of the
Web site and call center personnel and licensed brokers for our financial
services component of the Web site. We also anticipate increasing the number of
employees in our traditional brokerage, investment banking and investment
advisory businesses by adding a total of approximately 10 employees to these
areas. These increases represent almost a 200% increase in our current staffing
levels, and we expect commensurate increases in our compensation and benefits
expenses for the first 12 months of operations, as well as increases in our
occupancy and equipment expenses in order to accommodate these additional
employees.
Currently, we believe that the net proceeds of this offering will be
sufficient for the funding of our business for at least the first 12 months of
our operations. However, to the extent that our management deems it necessary to
the implementation of our business strategy, we may require additional financing
beyond the proceeds of this offering. We have made no arrangements for
additional financing, and in the event that we require additional financing, we
may not be able to obtain it on favorable terms, if at all.
OUR INVESTMENT PRODUCTS AND SERVICES
We intend to continue to offer the products and services that The Chapman
Co., Chapman Capital Management and The Chapman Insurance Agency currently offer
through their traditional channels of distribution, while at the same time
expanding our distribution focus to the Internet in order to gain access to a
much larger audience.
SECURITIES BROKERAGE AND INVESTMENT BANKING SERVICES
Our securities brokerage and investment banking subsidiary, The Chapman Co.,
intends to use the DEM strategy in its business by marketing financial services,
primarily investment banking services, to DEM companies. We have identified
almost 200 DEM companies with which we seek to establish a relationship. Our
target client
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with respect to our brokerage and investment banking services are small
capitalization companies traded in the over-the-counter market and
privately-held companies undertaking an initial public offering.
BROKERAGE SERVICES
The Chapman Co. provides brokerage services to institutional and retail
clients. The Chapman Co. charges commissions to these clients for executing buy
and sell orders for securities on national and regional exchanges and in the
over-the-counter market. The Chapman Co.'s primary source of revenue for its
brokerage business has historically been commissions generated from
institutional brokerage. The Chapman Co.'s institutional clients include
investment managers, corporate retirement plans and municipal retirement plan
sponsors. The Chapman Co. 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 46%, 39% and 46% of The Chapman Co.'s
revenue during the years ended December 31, 1998 and 1997 and for the nine
months ended September 30, 1999, respectively, were derived from its brokerage
business.
The Chapman Co. clears all transactions for its brokerage customers on a
fully-disclosed basis with its clearing agent, which carries and clears all
customer securities accounts. In the future, the clearing agent may lend funds
to our brokerage customers through the use of margin credit. These loans will be
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 our agreement with 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, we would be obligated to
indemnify the clearing agent for any resulting losses.
The Chapman Co. 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 Chapman Co. acts as a broker. Approximately
10%, 36% and 31% of The Chapman Co.'s revenue during the years ended December
31, 1998 and 1997 and for the nine months ended September 30, 1999,
respectively, were derived from secondary market trading.
The Chapman Co. is a market-maker for the securities of five companies,
including Chapman Holdings and Chapman Capital Management Holdings.
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CORPORATE FINANCE
To date, The Chapman Co.'s corporate finance activities have been limited
primarily to participation in syndicates. The Chapman Co. has been a member of
more than 190 underwriting syndicates for corporate issues, substantially all of
which were equity offerings. During the years ended December 31, 1998 and 1997
and for the nine months ended September 30, 1999, approximately 17%, 16% and 6%,
respectively, of The Chapman Co.'s revenue was derived from corporate finance
transactions. In 1998, approximately 50% of The Chapman Co.'s corporate finance
revenue was derived from the sale of the stock of Chapman Capital Management
Holdings, for whom The Chapman Co. acted as sole underwriter.
In 1997, approximately 38% of The Chapman Co.'s corporate finance revenue
was derived from the sale of the stock of DEM, Inc., a publicly-traded
closed-end investment company for which The Chapman Co. was the sole
underwriter. Prior to DEM, Inc.'s liquidation in 1998, DEM, Inc. was managed by
Chapman Capital Management.
In the future, The Chapman Co. plans to seek to manage or co-manage an
increasing number of the underwritings in which The Chapman Co. participates.
Our ability to extend the DEM strategy to corporate underwritings depends on our
ability to identify potential clients fitting the DEM company profile and
convincing such potential clients that The Chapman Co. is the right investment
banking firm for their needs. We have not conducted any independent research to
test the marketability of the DEM strategy, nor have we engaged in any
significant marketing of the strategy. Therefore, while we believe that the
concept is viable, the level of market acceptance is largely unknown. In
addition to this DEM corporate finance strategy, The Chapman Co. is aggressively
seeking larger allocations in corporate underwriting syndicates managed by other
investment banking firms.
GOVERNMENT FINANCE
The Chapman Co. participates in the tax-exempt public finance market and has
managed, primarily as co-manager, more than 300 transactions in 22 states and
the District of Columbia, including approximately 76 transactions in the past
two years. More than half of the total dollar amount of these transactions has
been with jurisdictions located in Alabama, California, Pennsylvania and
Tennessee.
During the years ended December 31, 1998 and 1997 and for the nine months
ended September 30, 1999, approximately 21%, 7% and 14%, respectively, of The
Chapman Co.'s revenue was derived from management fees, financial advisory fees
and selling concessions in public finance transactions. The Chapman Co.
currently employs six investment bankers whose primary responsibility is the
development of its public finance business.
The Chapman Co. is seeking larger positions in state and local public
finance transactions. We expect that the availability of the net proceeds from
this offering should enhance our ability to undertake larger participations, and
we believe that The
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Chapman Co. will be in a better position to seek manager roles in these
transactions, entitling it to receive management fees in addition to selling
concessions. We intend to expand The Chapman Co.'s presence in states with major
issuers of negotiated tax-exempt bonds and by seeking more assignments as
manager of such transactions. We also intend to expand The Chapman Co.'s
participation in 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 Chapman Co. currently employs four research analysts and provides
research primarily on selected DEM companies. We intend to increase
substantially the number of DEM companies covered by The Chapman Co.'s research.
We believe that initially this expansion will not require increases in our
current staffing levels. Over the last 18 months, we have added three analysts
to our research department, and these analysts are working to build their list
of covered companies. We believe that these efforts will allow us to increase
the number of DEM companies covered by our research from 20 to 40 by the end of
2000 without hiring additional research personnel. However, we are also
contemplating hiring of up to three additional analysts over the next 12 months
as part of the overall EChapman.com plan of operation, and we believe that this
will allow us to further augment our research efforts and allow us to provide
research coverage of additional DEM companies.
The Chapman Co. has also created the DEM Index, which tracks the performance
of the stocks of certain companies meeting the DEM profile. We believe that
inclusion of a DEM company in the DEM Index offers certain advantages such as
facilitating identification by fund managers and other institutions seeking to
invest in minority or women controlled businesses. The Chapman Co. 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.
INVESTMENT ADVISORY SERVICES
Our investment advisory subsidiary, Chapman Capital Management, currently
manages three mutual funds: the DEM Equity Fund, the DEM Index Fund and The
Chapman U.S. Treasury Money Fund, each a portfolio of The Chapman Funds, Inc., a
diversified, open-end management investment company registered under the
Investment Company Act of 1940. Chapman Capital Management has formed and
manages one private investment trust, the DEM-MET Trust. Chapman Capital
Management also advises corporate, institutional and individual investors on a
separate account basis. In addition, Chapman Capital Management is in the
process of establishing two new mutual funds which will use the DEM
Multi-Manager strategy.
As of October 31, 1999, Chapman Capital Management's total assets under
management attributable to mutual funds were approximately 19.1% of its total
assets under management.
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DEM EQUITY FUND is a non-diversified portfolio of The Chapman Funds, Inc.
The principal investment objective of the DEM Equity Fund is aggressive
long-term growth through investment in equity securities of companies meeting
the DEM profile. As of October 31, 1999, the DEM Equity Fund had approximately
$17.4 million in assets. The DEM Equity Fund commenced operations in
April 1998.
DEM INDEX FUND is also a non-diversified portfolio of The Chapman
Funds, Inc. The DEM Index Fund seeks to match, as closely as possible, the DEM
Index, an index composed of 100 stocks from the universe of publicly-traded
companies which meet the DEM profile. As of October 31, 1999, the DEM Index Fund
had approximately $146,000 in assets. The DEM Index Fund commenced operations in
March 1999.
THE CHAPMAN U.S. TREASURY MONEY FUND, also a portfolio of The Chapman
Funds, Inc., invests solely in short-term direct obligations of the U.S.
Government and repurchase agreements collateralized fully by direct obligations
of the U.S. Government. This fund is intended primarily for state and local
governments and their authorities and agencies. As of October 31, 1999, The
Chapman U.S. Treasury Money Fund had an average for the ten month period of
approximately $91.5 million in assets. The Chapman U.S. Treasury Money Fund
began operations in June 1989.
THE DEM MULTI-MANAGER FUNDS AND THE DEM MULTI-MANAGER STRATEGY. Chapman
Capital Management has registered but has not yet begun to sell the DEM Multi-
Manager Bond Fund and the DEM Multi-Manager Equity Fund. The amendment to The
Chapman Funds registration statement registering, the DEM Multi-Manager Equity
Fund became effective on December 14, 1998 by virtue of Rule 485(a)(2) under the
Securities Act. Similarly, the amendment to The Chapman Fund registration
statement registering the DEM Multi-Manager Bond Fund became effective on
September 28, 1999. The In addition, the Chapman Funds filed its annual update
to its registration statement with respect to these funds on December 30, 1999.
This registration statement will be automatically effective on February 28, 1999
under Rule 485(a)(i) under the Securities Act. We have delayed sales of these
funds until there is a greater public awareness of the DEM Multi-Manager
Strategy, and we anticipate that the launch of our web site will help to provide
this promotion; however, at present we cannot provide a realistic estimate of
when we expect to begin to market and sell these two funds.
The DEM Multi-Manager Bond Fund will seek to earn high current income with
the potential for capital appreciation through investment in fixed income
securities of companies identified by multiple sub-advisers. The DEM
Multi-Manager Equity Fund will seek aggressive long-term growth through capital
appreciation by investment in equity securities of companies identified by
multiple sub-advisers.
In managing the DEM Multi-Manager funds, Chapman Capital Management will
seek to enhance performance and reduce market risk of each fund by allocating
each fund's assets among multiple sub-advisers. The sub-advisers may have, but
are not necessarily required to have, dissimilar investment styles and security
selection
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disciplines. Chapman Capital Management will monitor the performance of both the
total fund portfolio and the portion of the total fund portfolio allocated to
each sub-adviser and will reallocate fund assets among individual sub-advisers,
or recommend to the board of directors of The Chapman Funds that the fund employ
or terminate particular sub-advisers, to the extent Chapman Capital Management
deems appropriate to achieve the overall investment objectives of the particular
fund. Chapman Capital Management may recommend reallocations if, in Chapman
Capital Management's opinion, a sub-adviser's allocation becomes overweighted as
a result of extended appreciation and in order that undervalued securities and
management styles receive additional allocations. Other circumstances under
which Chapman Capital Management might reallocate a fund's assets among a fund's
sub-adviser include poor performance of the assets under the management of a
sub-adviser, concerns about the manner in which a sub-adviser is conducting its
business or a change in a sub-adviser's portfolio management team. Chapman
Capital Management also uses this multi-manager management style in the DEM-MET
Trust, which is discussed below.
When selecting sub-advisers for the Multi-Manager funds, Chapman Capital
Management intends to actively recruit sub-advisers which meet the DEM profile;
however, Chapman Capital Management will not discriminate on the basis of race,
gender or national origin in the selection of sub-advisers. We refer to this
strategy as the DEM Multi-Manager strategy. The DEM Multi-Manager strategy is in
the early stages of implementation. We have not conducted any marketing surveys
to test its marketability, and we have not conducted any significant marketing
of these strategies. Therefore, the viability of the DEM Multi-Manager strategy
and its potential level of market acceptance is largely unknown. However, we
intend to use a portion of the net proceeds of this offering to promote this
strategy.
DEM-MET TRUST was organized in 1996 under New York law. The DEM-MET Trust is
intended to qualify as a tax-exempt pooled trust for qualified employee benefit
plans and certain governmental plans. The DEM-MET Trust was the first product
introduced by Chapman Capital Management that employs the DEM Multi-Manager
strategy. In managing the DEM-MET Trust, Chapman Capital Management actively
recruits money managers which meet the DEM profile to manage a portion of the
assets of the trust. These money managers invest their allocated assets in the
securities of domestic and foreign issuers which may consist of common stock, or
other types of equity investments, or temporary money market funds chosen by
Chapman Capital Management. Chapman Capital Management acts as investment
advisor to the DEM-MET Trust and in such capacity is responsible for selecting
and monitoring the sub-advisors. As of September 30, 1999, Chapman Capital
Management had sub-advisory relationships with 12 investment advisors, all of
which meet the DEM profile. Chapman Capital Management evaluates such
sub-advisors monthly and reallocates assets among existing sub-advisors and new
sub-advisors as necessary. The DEM-MET Trust was created in December 1996
pursuant to an agreement between Chapman Capital Management and Bankers Trust
Company, as custodial trustee.
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In June 1999, one of the four participants in the DEM-MET Trust withdrew the
entire amount of its investment in the trust, totaling approximately $11.4
million, or 3.7%, of the total assets managed by the DEM-MET Trust.
As of October 31, 1999, the DEM-MET Trust had approximately $290.3 million
in assets, representing 41.6% of Chapman Capital Management's total assets under
management.
DEM, INC.
In June 1998, the board of directors of DEM, Inc., a closed end investment
company managed by Chapman Capital Management, determined that the continued
operation of the company was not in the best interests of the company's
stockholders considering all relevant factors including, that the company's
shares had been trading at a discount from their net asset value for
approximately six months and that since inception, the company's expense ratio
had continuously been above the average expense ratio of small capitalization
growth funds as reported by Morningstar. The board of directors concluded that
the discount on the company's shares could be attributed primarily to the small
size of the fund and its relatively high expense ratio and that the expense
ratio was above average because the limited assets of the company prevented it
from achieving economies of scale that would permit a reduction in company's
expense ratio. The stockholders of DEM, Inc. approved the liquidation and
dissolution of the company on September 1, 1998, at which time the officers of
the company began liquidating its assets in order to distribute the net proceeds
to the stockholders. The Chapman Co. incurred a loss on trading of DEM, Inc.
stock of $159,000 in connection with stock of DEM, Inc. held in market-making
inventory at the time of the liquidation.
SEPARATE ACCOUNTS. Chapman Capital Management also provides investment
advisory services to separate accounts under individual investment advisory
agreements. Chapman Capital Management manages equity and debt portfolios with
varied investment objectives including long term capital appreciation and
current income. As of October 31, 1999, approximately 57.5% of the separate
accounts under management incorporate the DEM strategy as an investment
objective. Chapman Capital Management will continue to attempt to differentiate
itself from other investment managers by providing the DEM strategy as an
investment objective.
Effective June 30, 1999, two clients withdrew an aggregate amount of
$66.5 million from each of their separate accounts. The amount of the withdrawn
funds represented 10.3% of Chapman Capital Management's assets under management
as of June 30, 1999.
As of October 31, 1999, Chapman Capital Management managed approximately
$274.1 million in assets for separate accounts, of which approximately
$157.5 million was invested pursuant to the DEM Strategy.
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MARKETING AND CUSTOMER SERVICE
Chapman Capital Management's marketing strategy is to provide a single
source for investing in DEM companies while achieving a competitive rate of
return. Chapman Capital Management aggressively markets to large corporations,
government entities and other institutions seeking investment in DEM companies.
Chapman Capital Management targets its marketing efforts to the various
types of customers that use its investment advisory and asset management
services. Chapman Capital Management's separate accounts are typically large
institutional investors. Chapman Capital Management markets to these accounts
through customer support activities and personal sales efforts by officers of
Chapman Capital Management. This strategy has also been utilized with the
DEM-MET Trust due to the small number of large investors that have invested in
the trust.
Chapman Capital Management's proprietary investment products are distributed
by The Chapman Co. To date, Chapman Capital Management's investment product
marketing activities have been providing "wholesale" marketing assistance to
support The Chapman Co.'s direct retail selling efforts. Chapman Capital
Management intends to offer its proprietary investment funds to banks, insurance
companies, providers of 401(k) deferred compensation plans and other
institutions for resale to their customers. Chapman Capital Management will
provide support to The Chapman Co. in marketing to institutional resellers and
to the institutional resellers' own retail sales forces. Chapman Capital
Management may also undertake some limited advertising of its proprietary
investment products.
In addition to separate accounts and proprietary investment products,
Chapman Capital Management will seek to enter into agreements with other
investment advisors whereby Chapman Capital Management will seek to act as a
sub-advisor with respect to their investment products. Chapman Capital
Management will seek to provide wholesale marketing assistance to the
distributors of such third-party investment products to ensure that such
products are effectively marketed by the third-party distributors to the DEM
community.
RESEARCH
As of September 30, 1999, Chapman Capital Management employed three
portfolio managers. Chapman Capital Management intends to hire additional
portfolio managers to support its existing investment advisory and management
services and to facilitate the introduction and maintenance of new investment
products.
DEPENDENCE ON KEY INVESTMENT MANAGEMENT CLIENTS
There are currently three participants in the DEM-MET Trust. The
$290.3 million in assets in the DEM-MET Trust represented 41.6% of Chapman
Capital Management's assets under management as of October 31, 1999. In
addition, for the year ending December 31, 1998 and for the nine month period
ended September 30, 1999, the DEM-MET Trust accounted for approximately 59% and
54%
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of Chapman Capital Management Holdings' revenue, respectively. If the
participants of the trust terminated their agreements with the DEM-MET Trust or
withdrew a substantial amount of their assets, our advisory fee revenue would be
materially and adversely affected.
Chapman Capital Management currently employs a buy-side analyst to assist
the portfolio managers in investment research, monitoring of investment
opportunities and the development and maintenance of Chapman Capital
Management's proprietary DEM valuation and screening model. Chapman Capital
Management also utilizes the research services of The Chapman Co. for coverage
on certain companies meeting the DEM profile. Chapman Capital Management intends
to expand its research staff by hiring additional buy-side analysts.
ANNUITY PRODUCTS
Our insurance subsidiary, The Chapman Insurance Agency, sells annuity
products on an agency basis for insurance underwriters such as The Manufacturers
Life Insurance Company of North America; however, Chapman Insurance Agency has
not had significant operations to date. Chapman Insurance Agency currently
offers only variable annuities. Variable annuities are long-term savings
vehicles which contain two accounts, a separate and a fixed account. The fixed
account usually offers various fixed allocations which are credited with fixed
rates of interest for the guaranteed periods selected by the policyholder.
Policyholders will be able to choose among several available separate account
fund options offered by Chapman Capital Management or other investment managers
with whom we may ally our operations and transfer monies between the various
annuity options on a tax-deferred basis.
The Chapman Insurance Agency sells products on an agency basis only, meaning
that it sells insurance products underwritten by other insurance companies. The
Chapman Insurance Agency does not underwrite annuities on its own. Annuity
products currently enjoy an advantage over certain other retirement savings
products because the payment of federal income taxes on interest credited to
annuity policies is deferred during the accumulation period. We believe that the
individual annuity business is a growing segment of the savings and retirement
market.
Following the consummation of the merger of Chapman Insurance Holdings, we
intend to continue to offer annuity products on an agency basis through Chapman
Insurance Agency. We also expect to expand our insurance operation to include
sales of annuity products through our web site. Our implementation of this
Internet strategy will, however, require us to register as an insurance agent in
all states in which we propose to sell insurance over the Internet. Because
Chapman Insurance Agency is currently registered as an agent only in Maryland,
we anticipate that obtaining the necessary regulatory approvals to sell
insurance in the remaining 49 states will be a lengthy and costly process.
However, because we have not begun this process, we cannot estimate the exact
amount of time or the cost which we may incur in pursuing this online insurance
strategy.
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GOVERNMENT REGULATION
ECOMMERCE AND THE INTERNET
There are currently a limited number of federal or state laws or regulations
that specifically regulate communications or commerce on the Internet. However,
federal and state governments are increasingly asserting an intent to more
actively regulate the Internet. These efforts include attempts to apply existing
laws of general applicability to the Internet, including actions involving:
- User privacy, including sending of unsolicited email or "spamming"
- Consumer protection to ensure quality products and services and fair
dealing
- Media regulation, such as libel and obscenity
In addition, federal and state legislatures and administrative agencies are
beginning to consider or adopt a variety of Internet-specific statutes and
regulations. In 1998, Congress passed the Children's On-Line Privacy Protection
Act of 1998, which strictly limits the collection of "personal information" by
Web sites of information of children under the age of 13 by requiring, among
other things, prior parental consent.
The National Conference of Commissioners of the Uniform State Laws has
recently recommended two new laws for adoption by the states. The first, the
Uniform Electronic Transaction Act, seeks to recognize the scope and
enforceability of electronic contracts and agreements generally. Separately, the
Uniform Computer Information Transaction Act seeks to impose a general contract
law framework for electronic transactions. We expect that states may adopt
either or both of these uniform acts in the near future and, a consequence may
be additional requirements and liability for Internet-based businesses.
Additional legislation could be introduced if self-regulatory efforts by online
businesses are deemed ineffective.
Several states have adopted or are considering adoption of statutes that
address "spamming" practices on the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as copyright, trademark, trade secrets and other
intellectual property law; libel and defamation; and privacy are applicable to
the Internet. These current, new and subsequent laws and regulations could
adversely affect our business.
Securities trading and investment advisory services are activities that have
drawn particularly intensive scrutiny from regulatory agencies when conducted
over the Internet. The recent substantial increase in securities trading over
the Internet has created a renewed attention to and concern over the integrity
of brokerage firms. As a result, there may be a substantial growth in the volume
of regulations and enforcement actions with respect to online brokerage and
financial services companies. That growth is expected to be somewhat chaotic and
inconsistent since it is expected that a number of government agencies,
including foreign government
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agencies, will attempt to assert jurisdiction over online trading and financial
services concerns.
SECURITIES BROKERAGE AND INVESTMENT BANKING SERVICES
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the SEC and
various state agencies and self-regulatory organizations, such as the NASD.
The Chapman Co. is registered as a broker-dealer with the SEC 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 SEC as The Chapman Co.'s primary regulator. The NASD adopts
rules, which are subject to approval by the SEC, 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 Chapman Co. is registered as a broker-dealer in
50 states and the District of Columbia and Puerto Rico.
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
- Record keeping
- Conduct of directors, officers, and employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the integrity of the securities markets. Additional
legislation, changes in rules promulgated by the SEC 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 SEC, self-regulatory organizations and state securities commissions may
conduct administrative proceedings which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees.
The Chapman Co.'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, the Investment Company Act of 1940, and the
regulations of the NASD. As discussed above, The Chapman Co. is an NASD member.
The NASD has prescribed rules with respect to maximum commissions, charges and
fees related to investment in any mutual fund registered under the 1940 Act.
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As a registered broker-dealer and a member firm of the NASD, The Chapman Co.
is subject to the net capital rule of the SEC. 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, which
consists of 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 Chapman Co. 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 September 30,
1999, The Chapman Co. had net capital and a net capital requirement of $355,088
and $250,000, respectively. The Chapman Co.'s ratio of aggregate indebtedness to
net capital was 2.15 to 1, representing a significant increase from the ratio of
0.7 to 1 at December 31, 1998. This increase is attributed primary to our
strategic plan to expand into new markets, which resulted in higher accounts
payable, accrued expenses and wages payable for the nine month period ended
September 30, 1999. This resulted in a 35% increase in aggregate indebtedness
and a 50% decrease in net capital caused by losses incurred during the expansion
phase.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the SEC and other regulatory bodies and
ultimately may require its liquidation. In 1995 and 1998, The Chapman Co. and
Mr. Chapman entered into consent agreements with the NASD regarding alleged
violations of the net capital rules in late 1993 and early 1994 and early 1996,
respectively. The 1998 consent agreement also addressed alleged violations of
Rule 144 under the Securities Act with respect to the alleged 1996 net capital
violation. The Chapman Co. and Mr. Chapman were censured and jointly fined
$30,000, and Mr. Chapman was suspended from association with The Chapman Co. for
10 days under the 1995 consent agreement. Under the 1998 consent agreement, The
Chapman Co. was censured and fined $7,500, and Mr. Chapman was censured, fined
$7,500 and required to requalify by examination as a financial and operations
principal. Mr. Chapman has not requalified as a financial and operations
principal; however, we do not believe that this will adversely affect our
business because other officers of The Chapman Co. are serving as the firm's
Financial and Operations Principals. The Chapman Co. has exceeded all net
capital requirements since such alleged 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
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Chapman Co. that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict EChapman.com's ability to withdraw
capital from The Chapman Co., which in turn, could limit our ability to invest
in our operations, pay dividends, repay debt and redeem or purchase shares of
its outstanding capital stock.
INVESTMENT ADVISORY SERVICES
Chapman Capital Management's business is subject to various federal and
state laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and stockholders of registered investment
companies. Under these laws and regulations, agencies that regulate investment
advisors have broad administrative powers, including the power to limit,
restrict, or prohibit an advisor from carrying on its business in the event that
it fails to comply with applicable laws and regulations. Possible sanctions that
may be imposed include:
- Suspension of individual employees,
- Limitations on engaging in certain lines of business for specified periods
of time
- Revocation of investment advisor and other registrations
- Censures
- Fines
Chapman Capital Management is registered with the SEC under the Investment
Advisers Act of 1940 and is subject to examination by the SEC. Under
Section 206 of the Advisers Act, it is unlawful for any investment advisor to:
- Employ any device, scheme, or artifice to defraud any client or
prospective client
- Engage in any transaction, practice, or course of business which operates
as a fraud or deceit upon any client or prospective client
- Engage in any act, practice, or course of business which is fraudulent,
deceptive or manipulative. The Advisers Act imposes numerous other
obligations on registered investment advisors including:
- Fiduciary duties
- Recordkeeping requirements
- Operational requirements
- Disclosure obligations
The SEC is authorized to institute proceedings and impose sanctions for
violations of the Advisers Act, ranging from censure to termination of an
investment
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adviser's registration. The failure of the Company to comply with the
requirements of the SEC could have a material adverse effect on EChapman.com.
An investment advisor to a registered investment company, its principals,
and its employees may also be subject to proceedings initiated by the SEC to
impose remedial sanctions for violation of any provision of the federal
securities laws and the regulations adopted thereunder, and the SEC may prohibit
an investment advisor to an investment company from continuing to act in its
capacity as an investment advisor to an investment company. Stockholders of
registered investment companies or the SEC may also bring an action against the
officers, directors, and investment advisor for breach of fiduciary duty in
establishing the compensation paid to the investment advisor.
The mutual funds managed by Chapman Capital Management are registered with
the SEC under the Investment Company Act, and the sale of shares in these fund
has been registered under the Securities Act. Investment companies such as The
Chapman Funds, Inc. and any future registered investment companies established
and/or advised by Chapman Capital Management, are subject to considerable
substantive regulation. Such companies must comply with periodic reporting
requirements. Proxy solicitations are subject to the general proxy rules as well
as to special proxy rules applicable only to investment companies. Shares of
open-end investment companies such as the DEM Equity Fund, the DEM Index Fund
and The Chapman U.S. Treasury Money Fund, can only be offered at a uniform
public offering price based on the current net asset value per share plus the
sales load. No more than 50% of the directors of registered investment companies
such as The Chapman Funds, Inc. can be interested persons, defined to include,
among others, persons affiliated with the management company or underwriter, and
a majority of the directors must not be affiliated with the underwriter. The
advisory agreement must have initially been approved by a majority of the
outstanding shares and, after two years, must be annually approved, either by
the board or by the outstanding voting shares. The advisory agreement must be
subject to termination upon 60 days notice by the board or by the outstanding
voting shares. The underwriting agreement must be annually approved by the board
or by a vote of a majority of the outstanding voting shares, and must provide
for automatic termination in the event of an assignment. With limited
exceptions, transactions between the investment company and an affiliate can be
entered into only if approved by the SEC, after notice and opportunity for
hearing, as fair and equitable.
Chapman Capital Management derives a large portion of its revenues from its
investment company management agreements. Under the Advisers Act, the Company's
investment management agreements terminate automatically if assigned without the
client's consent. Under the Investment Company Act, advisory agreements with
registered investment companies such as the mutual funds managed by Chapman
Capital Management terminate automatically upon assignment. The term
"assignment" is broadly defined and includes direct assignments as well as
assignments that may be deemed to occur, under certain circumstances, upon the
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transfer, directly or indirectly, of a controlling interest in Chapman Capital
Management.
INTERNET BANKING
Our plans for establishing an Internet bank are still at a very preliminary
stage. At this point in our exploratory process, we have not yet decided whether
to proceed with owning and operating an Internet bank, nor have we determined,
among other things, which type of depository institution might offer the most
flexibility, or whether to charter a new institution or acquire an existing
institution. If we acquire a financial institution, we will be would be limited
by federal banking law, and particularly by the recently-enacted
Gramm-Leach-Bliley Act ("GLB Act") to activities that are financial in nature. A
company that owns or controls a bank or thrift may not engage in commercial
activities, including retail or manufacturing activities. While EChapman.com's
current activities in providing securities brokerage, investment banking,
investment advisory and annuity activities appear to be permissible financial
activities for a financial holding company that owns a bank or thrift under the
provisions of the recently enacted GLB Act. However, the acquisition of a bank
or thrift could have the effect of curtailing EChapman.com's future business
opportunities, including those commercial activities conducted via the Internet.
The banking regulators have not yet issued regulations or otherwise
interpreted the GLB Act; therefore, it is unclear what range of Internet
activities will be viewed as permissible because they are deemed financial in
nature or incidental to financial activities. Therefore, we must also evaluate
whether the establishment of an Internet Bank would prohibit or seriously limit
our expansion into the offering of non-financial products and services to the
DEM community.
If we do enter the banking business, the chartering and ownership of a bank
or thrift involve certain additional costs and risks. The acquisition of a bank
or thrift, particularly a bank or thrift proposing to engage in extensive
Internet activities, involves a lengthy and costly application process which
involves preparation of a detailed business plan, development of extensive
policies and procedures, and integration of a comprehensive back office
structure with systems to conduct the business, keep the records, and ensure
regulatory compliance of the institution.
The application process also provides an opportunity for public comment on
the application, which could further delay the processing of an application.
Further, the banking agency reviews a plan to meet the needs of the community to
be served by the proposed bank or thrift and particularly low- and
moderate-income areas. The banking agency reviewing the proposed acquisition of
a bank or thrift could also impose additional conditions on the financial
institution and its proposed integration with the other financial services
subsidiaries of EChapman.com.
By owning a bank or thrift, EChapman.com would become a regulated holding
company of a financial institution. Not only the newly-chartered financial
institution, but EChapman.com itself, as the parent company, is likely to be
required to meet
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certain capital requirements and to subject itself to the regulatory
requirements and supervision of a federal and/or state banking agency. The bank
or thrift would be subject to extensive regulation, including regulations of its
activities and investments, its capitalization, its risk management policies and
procedures and its relationships with affiliated companies.
The need to address extensive regulatory conditions as well as the
comprehensive banking regulations could extend the period to integrate fully any
Internet bank with our existing range of financial products and thus could delay
the synergies we would hope to realize in acquiring a financial institution.
Therefore, we cannot assure you that we will implement our plans to establishing
an Internet bank or that, if established, this bank would represent a
significant source of revenue.
COMPETITION
The number of web sites competing for the attention and spending of members,
users and advertisers has increased, and we expect it to continue to increase.
On the Internet, we will compete for users, investors and advertisers with the
following types of companies:
- Online services or Web sites targeted at discrete segments of the DEM
community, such as msbet.com, netnoir.com, quepasa.com, ivillage.com,
Women.com and womencentral.com
- Web search and retrieval and other online service companies, commonly
referred to as portals, such as Excite, Inc., Infoseek Corporation,
Lycos, Inc. and Yahoo! Inc.
- Publishers and distributors of traditional media, such as television,
radio and print
- Online brokerages and investment banks, such as Ameritrade, DLJdirect,
eSchwab, E*Trade and Wit Capital
- Traditional brokerages and investment banks
Many of these competitors are larger national firms with access to greater
financial, technical, marketing, personnel and other resources. Increased
competition from these firms, as well as emerging Internet companies, could
result in price reductions, reduced margins or loss of market share, any of
which could adversely affect our business. We believe that our experience with
implementing and using the DEM and DEM Multi-Manager strategies will provide us
with a strong advantage that will enable us to compete effectively in the market
for Internet-based products and services.
To remain competitive, we must constantly expand and develop new content
areas and services; however, we may not be able to respond to changing consumer
preferences and industry standards. EChapman.com may not be able to introduce
new products and services before competitors or improve existing products to
match
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competitors' products and services. If we do not timely and continually improve
our product and service offerings and introduce new products, our business could
be adversely affected.
We also expect to encounter intense competition in the traditional facets of
our business. The traditional securities and investment advisory businesses are
extremely competitive, and both The Chapman Co. and Chapman Capital Management
compete directly with other larger national securities firms and investment
advisors, a significant number of which have greater capital and other
resources, including, among other advantages, more personnel and greater
marketing, financial, technical and research capabilities. In addition, these
firms offer a broader range of financial services than The Chapman Co. and
Chapman Capital Management and compete not only with The Chapman Co. and Chapman
Capital Management and among themselves but also with commercial banks,
insurance companies and others for retail and institutional clients. We expect
this competition to intensify with the passage of the GLB Act, which removes
barriers to affiliation between banks, insurance companies and securities firms,
and which the President signed the bill into law on November 12, 1999.
The mutual investment funds managed by Chapman Capital Management are
similarly subject to competition from nationally and regionally distributed
funds offering equivalent financial products with returns equal to or greater
than those offered by Chapman Capital Management's affiliated investment funds.
The investment advisory industry is characterized by relatively low cost of
entry and the formation of new investment advisory entities which may compete
directly with Chapman Capital Management. Chapman Capital Management's ability
to increase and retain assets under management could be materially adversely
affected if client accounts or the Chapman Capital Management's affiliated
mutual funds under-perform specified market benchmarks. Chapman Capital
Management's ability to compete with other investment management firms also
depends, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions.
PROPERTIES
Our principal executive offices are located at the World Trade
Center-Baltimore, 401 East Pratt Street, 28(th) Floor, Baltimore, Maryland 21202
where we lease approximately 10,000 square feet of office space. The lease for
these premises expires in October 2000, and we have an option to renew this
lease for another five years. In order to accommodate the additional employees
we plan to hire during our first 12 months of operations, we expect to lease
additional space.
We also maintain leases in the following cities for our securities
brokerage's branch sales offices:
- San Francisco, California--three year lease expiring December 2001
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- Chicago, Illinois--one year lease expiring October 2000
- Dallas, Texas--six month lease with automatic six month extensions
Until November 30, 1999, we leased office space in Birmingham, Alabama on a
month-to-month basis. On March 10, 1999, we entered into a pre-lease agreement
for new office space in Birmingham, Alabama, which we have occupied since
December 1, 1999, and we are currently in the process of negotiating the terms
of this lease. In addition, we lease office space on a month-to-month basis in
Philadelphia, Pennsylvania. Our lease for our Memphis, Tennessee office expires
in January 2000, and we are currently trying to locate new office space. We also
maintain a lease in Denver, Colorado which expires in May 2000. This space
previously housed one brokerage employee; however, we have subleased this space
to a third party and have relocated our Denver sales office to the home office
of our employee.
TRADEMARKS
We have the right to use the following registered trademarks and common law
trademarks pursuant to our non-exclusive royalty-free Service Mark Licensing
Agreement with Nathan A. Chapman, Jr.:
- Domestic Emerging Markets-Registered Trademark-
- DEM-Registered Trademark-
- C-Eagle Logo-TM- appearing on the front of this prospectus
- DEM Index-TM-
- DEM Profile-TM-
- DEM Universe-TM-
- DEM Community-TM-
- DEM Company-TM-
- DEM Multi-Manager-TM-
- Chapman-TM-
- Chapman Education-TM-
- Chapman Network-TM-
- Chapman Trading-TM-
- Chapman Marketplace-TM-
- Chapman Kids Club-TM-
- EChapman.com-TM-
We regard our trademarks and other intellectual property as critical to our
success. We rely on trademark law to protect our intellectual property rights.
Despite
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our precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
EMPLOYEES
At September 30, 1999, we had 65 full-time employees. As of September 30,
1999, EChapman.com had one full-time employee. As of September 30, 1999, The
Chapman Co. had 52 full-time employees, including 31 registered representatives.
As of September 30, 1999, Chapman Capital Management had 12 full-time employees
and three employees which it shares with The Chapman Co. These shared employees
serve as executive officers for both Chapman Capital Management and The
Chapman Co. As of September 30, 1999, The Chapman Insurance Agency had no
employees. We consider our relationship with our employees and those of The
Chapman Co. and Chapman Capital Management to be good. EChapman.com's future
success will depend on its ability to identify, attract, retain and motivate
highly skilled technical, managerial, sales, marketing and customer service
personnel. Competition for these persons is intense. We cannot assure you that
we will be able to attract or retain these personnel.
LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings and claims
incident to the normal conduct of our business. We believe that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on our financial condition or results of
operations.
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MANAGEMENT
Our Directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- ---- -------------------- ------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. ................... 42 President, chairman of the board and
director
Earl U. Bravo, Sr. ....................... 52 Director, senior vice president, secretary
and assistant treasurer
Demetris Brown............................ 43 Treasurer, assistant secretary and chief
financial officer
Sabrina Warren Bush....................... 41 Senior vice president, equity sales
Tracey Rancifer........................... 29 Senior vice president, corporate
development
Michael Easterling........................ 51 Vice President, media
Vincent McCarley.......................... Senior vice president, public finance, of
The Chapman Co.
Charles Owens............................. 56 Vice president, special events
Raymond Haysbert.......................... 79 Director nominee
Kweisi Mfume.............................. 51 Director nominee
Mark Jefferson............................ 31 Director nominee
Adolph Washington......................... 59 Director nominee
</TABLE>
NATHAN A. CHAPMAN, JR. has been president of EChapman.com since our
inception. Mr. Chapman founded Chapman Holdings, Inc. in 1997 and its
subsidiary, The Chapman Co., in 1986. Mr. Chapman also founded Chapman Capital
Management Holdings, Inc. in 1998, and its subsidiary Chapman Capital
Management, Inc. in 1988. Mr. Chapman founded Chapman Insurance Holdings, Inc.
in 1997 and its subsidiary, Chapman Insurance Agency, Incorporated, in 1987.
Mr. Chapman has served as president, chairman of the board and a director of all
of these entities since their inception. Mr. Chapman is also the president,
chairman of the board and a director of The Chapman Funds, Inc. Prior to
founding The Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons, an
investment banking and securities brokerage firm, from 1982 to 1987.
Mr. Chapman is a certified public accountant, a general securities principal,
registered options principal and registered municipal principal. In July 1999,
the University of Maryland Office of the Board of Regents elected Mr. Chapman
chairman of the board of regents.
EARL U. BRAVO, SR. has been a director, senior vice president, secretary and
assistant treasurer of EChapman.com since our inception. Mr. Bravo has been
chief operating officer of The Chapman Co. since 1992 and secretary and
assistant treasurer since 1997. Mr. Bravo has been senior vice president,
secretary, assistant treasurer and a director of Chapman Holdings, Inc. since
1997 and of Chapman Capital Management Holdings, Inc. since 1998. Mr. Bravo is a
general securities principal, financial and operations principal and registered
representative. Mr. Bravo holds an MBA from the University of Maryland, College
Park.
DEMETRIS BROWN has been treasurer, assistant secretary and chief financial
officer since our inception. Mr. Brown has been chief financial officer of The
Chapman Co. since 1998. From 1993 to 1998, Mr. Brown was the vice president of
finance for the
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Injured Workers' Insurance Fund, a casualty insurance underwriter. Mr. Brown
served as the director of finance for Computer Sciences Corporation, an
information technology consulting firm, from 1989 to 1993. Mr. Brown is a
certified public accountant, certified management accountant, financial and
operations principal, and registered representative.
MICHAEL EASTERLING is our vice president of media and has served in the same
capacity for The Chapman Co. since July 1999. From 1988 to 1998, Mr. Easterling
worked for WJZ-TV, a local Baltimore CBS affiliate for 17 years, holding various
positions, including Manager of Programming and Public Affairs from 1994 to
1998. In 1997, Mr. Easterling founded Straight Talk Communications, a production
company. Mr. Easterling earned his B.A. in Marketing from Howard University.
SABRINA WARREN BUSH is our senior vice president of equity sales and has
served in the same capacity for The Chapman Co. since 1992. From 1982 to 1992,
Ms. Bush was employed with Maryland National Bank in various capacities
including vice president of employee relations for all the subsidiaries of MNC
Financial Inc., the former bank holding company of Maryland National Bank, and
vice president of strategic planning for the retail banking division. Ms. Bush
attended the University of Florida and received her M.S. in business with a
concentration in finance from The Johns Hopkins University in 1998.
TRACEY RANCIFER is our senior vice president of corporate development and
has served in the same capacity for Chapman Capital Management since 1998. Prior
to joining Chapman Capital Management, Ms. Rancifer was executive assistant to
the Mayor of Memphis, Tennessee and the director of government affairs from 1997
to 1999. From 1996 to 1997, Ms. Rancifer was the administrative operations
director for the City of Little Rock, Arkansas. Ms Rancifer was a graduate
research assistant at the Arkansas Institute of Government, a research and
policy organization, from 1995 to 1996, and from 1993 to 1995, Ms. Rancifer was
the special assistant to the United States Secretary of Commerce. In 1993,
Ms. Rancifer served as the eastern manager of corporate and government relations
for E.W. Moon, Inc., a construction management firm. Ms. Rancifer received her
B.A. in Political Science from Rhodes College and her Masters of Public Affairs
and Administration from the University of Little Rock.
VINCENT MCCARLEY is senior vice president of public finance of The Chapman
Co. and has served in that capacity since 1998. From 1986 to 1998, Mr. McCarley
was a senior vice president at Sieber Branford Shank & Co. LLC and the former
Grigsby Branford & Co. where he focused on lease purchase/certificates of
participation, infrastructure, school and redevelopment financings. Mr McCarley
holds an MBA from Pepperdine University and a municipal securities principal.
CHARLES OWENS is our vice president of special events and has served as the
vice president of special events for The Chapman Company since 1998. Prior to
his association with The Chapman Company, Mr. Owens was the executive director
of the
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Maryland District of Columbia Minority Supplier Development Council, a business
development organization, from 1990 to 1998. Mr. Owens is a graduate of
Dartmouth College's Amos Tuck School of Business.
RAYMOND HAYSBERT has been nominated to serve as a member of the board of
directors of EChapman.com upon the closing of this offering. Mr. Haysbert is the
retired president and chairman of the Parks Sausage Company, the first African-
American controlled publicly traded company, a position he held from 1969 to
1990. Mr. Haysbert is currently a director emeritus of Bell Atlantic Nynex. Mr.
Haysbert taught in the School of Business at Morgan State University for 17
years and presently serves as the chairman of the Entrepreneurial Institute at
the EDGE Center of Sojourner Douglass College.
KWEISI MFUME has been nominated to serve as a member of the board of
directors of EChapman.com upon the closing of this offering. Mr. Mfume has
served as the president and chief executive officer of the NAACP since
February 15, 1996. From 1986 to 1996, Mr. Mfume represented Maryland's 7(th)
Congressional District in the United States Congress, where he also served on
several committees during his terms of office, including the Banking and
Financial Services Committee, the General Oversight and Investigations
Subcommittee, the Committee on Education and the Small Business Committee and
the full Ethics Committee and Joint Economic Committee of the House of
Representatives and Senate. Mr. Mfume also served two years as the Chairman of
the Congressional Black Caucus and later served as the Chair of the Caucus' Task
Force to Preserve Affirmative Action. During his last term in Congress,
Mr. Mfume was appointed by the House Democratic Caucus to Vice Chairman for
Communications.
MARK JEFFERSON has been nominated to serve as a member of the board of
directors of EChapman.com upon the closing of this offering. In 1999,
Mr. Jefferson founded Funburst Media, LLC, an online service provider, for which
he also serves as chairman. In 1998, Mr. Jefferson founded and became principal
of Envue Technologies, an Ecommerce service provider, a position he still holds.
Mr. Jefferson served as vice president of CertCo., Inc., an Ecommerce security
firm from 1997 to 1998. From 1995 to 1997, Mr. Jefferson was a Manager at Cisco
Systems, a firm specializing in networking equipment.
ADOLPH WASHINGTON has been nominated to serve as a member of the board of
directors of EChapman.com upon the closing of this offering. Since 1999,
Mr. Washington has served as the vice president of field promotions with Capitol
Records in Hollywood, California. From 1996 to 1999, Mr. Washington served as
senior vice president of marketing and promotions at Warner Bros. Records.
Mr. Washington was the senior vice president of marketing and promotions at MCA
Records from 1991 to 1996. He received his B.A. in Social Sciences from the
University of Arkansas at Pine Bluff.
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COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has appointed an audit committee of the board of
directors that will review the scope of accounting audits, review with our
independent auditors the corporate accounting practices and policies and
recommend to whom reports should be submitted within EChapman.com, review with
the independent auditors their final report, review with internal and
independent auditors overall accounting and financial controls, and be available
to our independent auditors during the year for consultation purposes. Upon the
closing of this offering, a majority of the directors on the audit committee
will be independent directors.
The board of directors has also appointed a compensation committee of the
board of directors which will review the performance of senior management,
recommend appropriate compensation levels and approve the issuance of stock
options pursuant to our stock option plan. Upon the closing of this offering,
the compensation committee will consist of two independent directors.
All directors and officers of EChapman.com serve until their successors are
duly elected and qualify.
EXECUTIVE COMPENSATION
The summary compensation and option grants in last fiscal year tables give
effect to the Chapman Holdings and Chapman Capital Management Holdings mergers
as if they occurred at January 1, 1998 and set forth compensation paid to
executive officers by Chapman Holdings and/or Chapman Capital Management
Holdings.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid
during the last two fiscal years, to the chief executive officer and the other
four most highly compensated executive officers of EChapman.com whose total
annual salary and bonus exceeded $100,000 during the year ended December 31,
1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Nathan A. Chapman Jr................................. 1999 $266,667 $100,000 11,168
President 1998 $200,000 $100,000 --
Vincent McCarley..................................... 1999 $150,000 $ 25,000 --
Senior vice president 1998 (1) (1) (1)
Earl U. Bravo, Sr.................................... 1999 $105,000 $ 50,000 11,168
Senior vice president, secretary and assistant 1998 $105,000 $ 10,000 9,665
treasurer
Tracey Rancifer...................................... 1999 $ 95,000 $ 20,000 2,234
Senior vice president 1998 (1) (1) (1)
Demetris Brown....................................... 1999 $ 90,000 $ 20,000 --
Chief financial officer 1998 (1) (1) (1)
</TABLE>
- ------------------------
(1) Annual salary was less than $100,000.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
in 1999 to the executive officers named in the summary compensation table.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ---------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr....................... 11,168 20.8% $4.13 5/14/2002
President
Earl U. Bravo, Sr........................... 11,168 20.8% $3.75 5/14/2002
Senior vice president, secretary and
assistant treasurer
Tracey Rancifer............................. 2,234 4.2% $3.75 5/14/2002
Senior vice president
</TABLE>
1999 ECHAPMAN.COM, INC. OMNIBUS STOCK OPTION PLAN
Our board of directors has established the 1999 EChapman.com, Inc. Omnibus
Stock Option Plan to enable us to grant equity compensation to the our
directors, officers, employees and consultants. Our stock plan will be
administered by the compensation committee of the board of directors. We have
reserved 850,000 shares of our common stock for issuance under our stock option
plan. No securities have been issued pursuant to the stock option plan as of the
date of this prospectus; however, in connection with the mergers, the
outstanding stock options of Chapman Holdings and Chapman Capital Management
Holdings will be converted on the same basis as the shares of common stock of
these companies into outstanding stock options under the EChapman.com Omnibus
Stock Option Plan. At that time, there will be 138,464 shares subject to
outstanding stock options upon consummation of this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of December 31, 1999, as adjusted to
reflect the sale of common stock in this offering and the mergers, of
- Each person known by us who will beneficially own 5% or more of the
outstanding shares of common stock following the offering and the mergers,
- Each of our directors and director nominees,
- Each chief executive officer named in the summary compensation table, and
- all of our directors, director nominees and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based on information furnished by such owners, will
have sole voting and investment power with respect to such shares.
The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes options exercisable within 60 days of
December 31, 1999 but excludes shares of common stock underlying options or
warrants held by any other person. Percentage of beneficial ownership is based
on 13,194,845 shares of common stock outstanding as of December 31, 1999, and
16,528,178 shares outstanding upon consummation of this offering assuming
completion of the pending mergers of Chapman Holdings and Chapman Capital
Management Holdings.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER THE MERGERS
AND PRIOR TO OFFERING(2) SHARES
NAME AND ADDRESS OF --------------------------------------------------- BEING
BENEFICIAL HOLDER(1) NUMBER PERCENTAGE OFFERED
- ----------------------------------------- -------------------------- ---------------------- --------
<S> <C> <C> <C>
Nathan A. Chapman, Jr.(4)(5)............. 9,646,435 73.0% 80,000
Earl U. Bravo, Sr.(6).................... 29,810 *
Demetris Brown........................... 2,234 *
Raymond Haysbert......................... 1,933 *
Mark Jefferson........................... 0 --
Kweisi Mfume............................. 0 --
Adolph Washington........................ 0 --
Vincent McCarley(7)...................... 1,933 --
Tracey Rancifer(8)....................... 2,234 --
All Directors and Executive Officers as a
Group (9 persons)...................... 9,684,579 73.2%
<CAPTION>
SHARES BENEFICIALLY
OWNED
AFTER THE OFFERING(3)
NAME AND ADDRESS OF ---------------------------------------------------
BENEFICIAL HOLDER(1) NUMBER PERCENTAGE
- ----------------------------------------- -------------------------- ----------------------
<S> <C> <C>
Nathan A. Chapman, Jr.(4)(5)............. 9,646,435 58.3%
Earl U. Bravo, Sr.(6).................... 29,810 *
Demetris Brown........................... 2,234 *
Raymond Haysbert......................... 1,933 *
Mark Jefferson........................... 0 *
Kweisi Mfume............................. 0 *
Adolph Washington........................ 0 *
Vincent McCarley(7)...................... 1,933 *
Tracey Rancifer(8)....................... 2,234 *
All Directors and Executive Officers as a
Group (9 persons)...................... 9,684,579 58.5%
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of common stock.
(1) Each stockholder's address is 401 East Pratt Street, Suite 2800, Baltimore,
Maryland 21202 unless otherwise noted.
(2) Includes a total of 36,168 shares subject to options that are currently
exercisable which are held by the persons named in the table.
(3) Assumes the underwriters' over-allotment option is not exercised. Exercise
in full of the underwriter's over-allotment option would reduce
Mr. Chapman's ownership percentage following
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the offering to 57.4% and would reduce the ownership percentage of all
directors and executive officers to 57.6%.
(4) Includes shares issuable upon exercise of currently exercisable options to
purchase 11,168 shares.
(5) Includes 551,379 shares held in inventory by The Chapman Co., as market
maker for the common stock, and 446,068 shares held by investment advisory
accounts over which Chapman Capital Management has voting and/or dispository
discretion. These shares have no voting rights as long as they are held by a
subsidiary of EChapman.com. Mr. Chapman disclaims beneficial ownership of
the shares held by The Chapman Co. and Chapman Capital Management.
(6) Includes shares issuable upon exercise of options to purchase 20,833 shares.
(7) Includes shares issuable upon the exercise of currently exercisable options
to purchase 1,933 shares.
(8) Includes shares issuable upon the exercise of currently exercisable options
to purchase 2,234 shares.
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CERTAIN TRANSACTIONS
Nathan A. Chapman, Jr., the president and a director of our company, is the
president, a director of each of Chapman Holdings, Chapman Capital Management
Holdings, Chapman Insurance Holdings and The Chapman Funds, Inc. He is also a
controlling stockholder of Chapman Holdings, Chapman Capital Management Holdings
and Chapman Insurance Holdings. Earl U. Bravo, Sr., a director, senior vice
president, secretary and assistant treasurer of EChapman.com, is secretary,
assistant treasurer and a director of Chapman Capital Management Holdings and
Chapman Holdings and secretary and assistant treasurer of The Chapman Funds.
Demetris Brown, treasurer, chief financial officer and assistant secretary of
EChapman.com, is the chief financial officer of The Chapman Co.
Mr. Chapman is president and treasurer and Mr. Bravo is secretary of Chapman
General Partner One, Inc., a Maryland partnership and the general partner of
Chapman Limited Partnership I, a Maryland limited partnership the operations of
which consist solely of the ownership and rental of furniture and equipment to
The Chapman Co. Chapman Holdings leases furniture and equipment from this
partnership. The lease requires monthly payments of $9,846 and contains one year
renewable terms, at our option, through September 2000, at which time we can
purchase the furniture and equipment at fair market value. Rent expense pursuant
to this lease agreement was $118,512 in 1997, $118,152 in 1998 and $88,614 for
the nine months ended September 30, 1999. We believe that the terms of these
transactions were substantially favorable to us as those available from
non-affiliates.
On December 14, 1998, The Chapman Co. and Chapman Capital Management each
advanced to Chapman Limited Partnership I $19,536 for payment of certain taxes
and related payments, interest, and penalties. On October 22, 1999, Chapman
Holdings and Chapman Capital Management Holdings each advanced the partnership
$49,037 for payment of certain taxes and related payments. As of September 30,
1999, all of these advances remained outstanding. Future lease payments will be
applied to such advances until repaid in full.
As of September 30, 1999, Mr. Chapman owed EChapman.com's subsidiaries
$1,006,089 in connection with the following notes, including accrued interest:
- Three-year promissory note to The Chapman Co. dated February 11, 1998 in
the amount of $176,250, which accrues interest at 5.54% per annum and
requires no payments of principal or interest until maturity.
- Three-year promissory note to Chapman Holdings dated March 11, 1998 in the
amount of $285,587, which accrues interest at 5.5% per annum.
- Demand promissory note to The Chapman Co. dated May 1, 1998 in the amount
of $100,000, which accrues interest at 5.5% per annum.
- Demand promissory note to Chapman Capital Management dated July 2, 1998 in
the amount of $65,000, which accrues interest at 5.48% per annum.
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- Three year promissory note to Chapman Capital Management Holdings dated
August 21, 1998 in the amount of $45,000, which accrues interest at 5.48%
per annum.
- Three-year promissory note to Chapman Holdings dated December 31, 1998 in
the amount of $51,690, which accrues interest at 4.33% per annum.
- Demand promissory note to Chapman Capital Management Holdings dated
July 29, 1999 in the amount of $242,000, which accrues interest at 5.45%
per annum.
Following the closing of the offering, we will acquire Chapman Holdings,
Chapman Capital Management and Chapman Insurance Holdings pursuant to merger
agreements between and among EChapman.com, each target company and, in each
case, a wholly-owned subsidiary of EChapman.com. Following the mergers, Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance Holdings
will become wholly-owned subsidiaries of EChapman.com. Because Mr. Chapman, the
President and a director of EChapman.com, is the president, a director and
controlling stockholder of each of the two publicly traded target companies, the
mergers of Chapman Holdings and Chapman Capital Management Holdings have been
approved by the disinterested members of the boards of directors of each of
Chapman Holdings and Chapman Capital Management Holdings in accordance with
Maryland law.
We have entered into a non-exclusive, royalty-free licensing agreement with
Mr. Chapman pertaining to our use of the C-Eagle Logo-TM-, Chapman, Chapman
Trading-TM-, Chapman Network-TM-, Chapman Education-TM-, Chapman
Marketplace-TM-, Chapman Kids Club-TM-, DEM Index-TM-, DEM Profile-TM-, DEM
Universe-TM-, DEM Company-TM-, DEM Community-TM-, DEM Multi-Manager-TM-,
EChapman.com-TM-, Domestic Emerging Markets-Registered Trademark-,
DEM-Registered Trademark-, trademarks that are owned by Mr. Chapman.
In the past, transactions between Chapman Holdings or Chapman Capital
Management have been approved by a majority of the board of directors of the
respective Chapman affiliated-entity, including a majority of the directors who
do not have a material financial interest in the transactions. EChapman.com
intends to continue its practice of obtaining board and disinterested director
approval for future transactions with affiliates.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of EChapman.com, Inc. consists of 50 million
shares of common stock, par value $0.001 per share.
COMMON STOCK
As of the date of this prospectus, there is one share of our common stock
issued and outstanding held of record by one stockholder. Following the
consummation of the mergers, 13,194,845 shares of our common stock will be
issued and outstanding, held of record by approximately 51 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 our 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 EChapman.com, 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.
INDEMNIFICATION
Our charter provides that EChapman.com will indemnify our currently acting
and our 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 (the "MGCL"),
as from time to time amended. If approved by the board of directors,
EChapman.com may indemnify its employees, agents and persons who serve or have
served, at our 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. EChapman.com
will advance expenses to our directors and officers entitled to mandatory
indemnification to the maximum extent permitted by the MGCL and may in the
discretion of the board of directors advance expenses to employees, agents and
others who may be granted indemnification.
Pursuant to the underwriting agreement, EChapman.com has agreed to indemnify
the underwriter and the underwriter has agreed to indemnify us and our
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 our agreement with the
qualified independent underwriter, we have also agreed to indemnify Ferris,
Baker Watts, Incorporated for liabilities in connection with this offering.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been informed that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Furthermore, our charter provides that, to the fullest extent permitted by
the MGCL as it may be amended from time to time, no director or officer of
EChapman.com shall be liable to EChapman.com 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
EChapman.com and its stockholders to recover monetary damages from a director or
officer except (i) to the extent that it is proved that the director or officer
actually received an improper benefit, or profit in money, property, or services
for the amount of the benefit or profit in money, property or services actually
received, or (ii) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. In situations to which the charter provision applies, the
remedies available to EChapman.com or its stockholders are limited to equitable
remedies such as injunction or rescission.
BUSINESS COMBINATION LAW
The MGCL also imposes conditions and restrictions on certain business
combinations, including, among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance of equity securities, between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's stock. The statute
refers to these beneficial owners as "interested stockholders". Unless approved
in advance by the board of directors, or otherwise exempted by the statute, such
a business combination is prohibited for a period of five years after the most
recent date on which the interested stockholder became an interested
stockholder. After such five-year period, a business combination with an
interested stockholder must be:
- recommended by the corporation's board of directors; and
- approved by the affirmative vote of at least
- 80% of the corporation's outstanding shares entitled to vote and
- two-thirds of the outstanding shares entitled to vote which are not
held by the interested stockholder with whom the business combination
is to be effected, unless, among other things, the corporation's common
stockholders receive a "fair price," as defined in the statute for
their
78
<PAGE>
shares and the consideration is received in cash or in the same form as
previously paid by the interested stockholder for his shares.
EChapman.com is subject to the provisions of this statute; however,
EChapman.com's charter exempts Nathan A. Chapman, Jr., our president and
controlling stockholder, persons to whom Mr. Chapman directly transfers his
voting stock and the respective affiliates and associates of Mr. Chapman and
these transferees.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no trading market for the common
stock. Although we have applied for quotation of the common stock on the Nasdaq
National Market System, there can be no assurance that an active trading market
for the common stock will develop and, if developed, will continue after the
offering. Quotation of our common stock on the Nasdaq National Market System is
conditioned upon our meeting certain asset, capital and surplus, stock price and
public float tests. There can be no assurance that the public offering price
will correspond to the price at which our common stock will trade in the public
market subsequent to this offering.
As of the date of the closing of this offering and after the consummation of
the mergers, EChapman.com will have 16,528,178 outstanding shares of common
stock, or 16,648,178 shares if the underwriters exercise the over-allotment
option in full. All shares acquired in this offering, other than shares that may
be acquired by our "affiliates" as defined by Rule 144 under the Securities Act,
will be registered under the Securities Act and freely transferable. In
addition, the shares of EChapman.com stock to be issued in the mergers will be
registered under the Securities Act and will be freely transferable under the
Securities Act except for shares issued to any person who is deemed to be an
"affiliate" of EChapman.com, Chapman Holdings or Chapman Capital Management
Holdings. Shares of EChapman.com common stock received by stockholders of
Chapman Holdings or Chapman Capital Management Holdings who are deemed to be
affiliates of Chapman Holdings or Chapman Capital Management Holdings at the
time of the stockholder meetings to approve the mergers may resell their shares
only as permitted by Rule 145 under the Securities Act or as otherwise permitted
thereunder. Any person deemed to be an affiliate of EChapman.com may resell
their shares without registration only as permitted by Rule 144 under the
Securities Act, or pursuant to another exemption 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 our ability to raise capital through the sale of our equity securities.
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<PAGE>
On a pro forma as adjusted basis giving effect to the mergers and this
offering, as of September 30, 1999, Mr. Chapman beneficially owned 8,648,988
shares, or 8,568,988 shares if the underwriters exercise the over-allotment
option in full, of common stock or approximately 58.3%, or 57.4% if the
underwriters exercise the over-allotment option in full, of our outstanding
common stock. Except for the shares he may sell to the underwriter as part of
the over-allotment option, Mr. Chapman has agreed not to sell any shares of
common stock that he owns as of the date of this prospectus during the 180 days
following the closing of this offering except pursuant to the over-allotment
option. After the lock-up period, Mr. Chapman may resell his shares without
registration by complying with Rule 144 discussed below.
In general, under Rule 144, a person, or persons whose shares are required
to be aggregated, including any of our affiliates, 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:
- 1% of the then-outstanding shares of common stock; or
- 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, our affiliate,
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.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
between EChapman.com and The Chapman Co. EChapman.com has agreed to sell to each
of the underwriters named below, for which The Chapman Co. is acting as
representative, and each of the underwriters has severally agreed to purchase
from EChapman.com, the respective number of shares of common stock set forth
opposite its name below at the initial public offering price, less the
underwriting discount set forth on the cover page of this prospectus. The
underwriting agreement provides that, subject to the terms and conditions set
forth therein, the underwriters are obligated to purchase all of the shares of
common stock being sold pursuant to the underwriting agreement if any of the
shares of common stock are purchased. Under certain circumstances, under the
underwriting agreement, the commitments of non-defaulting underwriters may be
increased.
<TABLE>
<CAPTION>
NUMBER OF FIRM
UNDERWRITERS SHARES TO BE PURCHASED
------------ ----------------------
<S> <C>
The Chapman Co...........................................
---------
Total................................................ 3,333,333
=========
</TABLE>
The Chapman Co., as representative of the underwriters, has advised
EChapman.com that the underwriters propose initially to offer the common stock
to the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers which are NASD dealers at the same price less
a concession not in excess of $ per share. The underwriters may allow, and
these dealers may reallow, a concession not in excess of $ per share of
common stock on sales to certain other dealers. The public offering price,
discount and concession will not be changed until after the offering has been
completed.
Nathan A. Chapman, Jr., as selling stockholder, has granted the underwriters
an option to purchase up to an additional 80,000, and EChapman.com has granted
the underwriters an option to purchase up to an additional 120,000 shares of
common stock at the initial public offering price set forth on the cover page of
this prospectus, less the underwriting discount. Such option, which will expire
30 days after the date of this prospectus, may be exercised solely to cover
over-allotments, if any, made in connection with the sale of common stock
offered by this prospectus. To the extent this option is not exercised in full,
the shares sold by EChapman.com pursuant to the option will be reduced. To the
extent that this option is exercised, each of the underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased
initially by that underwriter bears to the total number of shares of common
stock to be purchased initially by all underwriters. If purchased, the
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<PAGE>
underwriters will offer such additional shares on the same terms as those on
which the 3,333,333 shares of common stock are being offered by this prospectus.
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, Ferris, Baker Watts, Incorporated, has agreed to serve as qualified
independent underwriter and to recommend an initial public offering price for
the shares of our common stock. Ferris, Baker Watts, Incorporated has
participated in the preparation of the registration statement of which this
prospectus forms a part and has performed "due diligence" with respect thereto.
For acting as a qualified independent underwriter, Ferris, Baker Watts will
receive fees equal to 20% of the underwriting discount.
In connection with the merger of Chapman Holdings into a subsidiary of
EChapman.com, Ferris, Baker Watts, Incorporated will deliver to Chapman Holdings
its written opinion that, as of the date of the merger, and based upon and
subject to the assumptions, limitations and qualifications set forth therein,
the consideration to be received by the holders of Chapman Holdings common stock
pursuant to the merger is fair, from a financial point of view. In connection
with rendering this opinion Ferris, Baker Watts, Incorporated in entitled to
receive a fee of $75,000.
Prior to this offering there has been no public market for our common stock.
The initial price to the public for the shares of our common stock has been
determined by negotiation between us and Ferris, Baker Watts, Incorporated. The
factors considered in determining the offering price were:
- prevailing market and economic conditions
- our revenue and earnings
- estimates of our business operations
- an assessment of our management
- the consideration of these factors in relation to the market valuation of
comparable companies in related businesses
- the current condition of the markets in which we operate
There can be no assurance, however, that the prices at which our common
stock will trade in the public market after this offering will not be lower than
the price at which it is sold by the underwriters.
All of the underwriters and Ferris, Baker Watts will be reimbursed for their
counsel fees and for their out-of-pocket expenses and will receive fees as
described above. In the underwriting agreement, we have agreed to indemnify the
underwriters and their respective controlling persons with respect to certain
liabilities, including liabilities under the Securities Act. In addition, we
have agreed to indemnify Ferris, Baker Watts, Incorporated against claims and
liabilities arising from its engagement as
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qualified independent underwriter, including certain liabilities under the
Securities Act.
The Chapman Co., as representative of the underwriters, has informed us that
the underwriters do not intend to confirm sales to any accounts over which any
of them exercises discretionary authority.
Mr. Chapman has agreed not to offer, pledge, sell, contract to sell, grant
any option for the sale of, otherwise dispose of the 8,648,988 shares of
EChapman.com or 8,568,988 shares if the underwriters exercise the over-allotment
in full, that he owns for a period of 180 days following the closing of the
offering.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the market price of our common
stock, including purchases of our common stock to stabilize the market price,
purchases of our common stock to cover some or all of a short position in the
common stock maintained by the underwriters and the imposition of penalty bids.
Such transactions may also include stabilization transactions effected in
accordance with Rule 104 of Regulation M, in which persons may bid for or
purchase common stock for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result in the maintenance of
the price of our common stock at a level above that which might otherwise
prevail in the open market. Neither The Chapman Co., as representative of the
underwriters, nor any of the underwriters can make any prediction or
representation as to the effect that any such transactions may have on the price
of our common stock. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
Additionally, in connection with this offering, the underwriters may engage in
passive market making transactions in our common stock on the Nasdaq National
Market System in accordance with Securities Act Rule 103 of Regulation M.
The foregoing includes a summary of the principal terms of the underwriting
agreement and the agreement with the qualified independent underwriter.
Reference is made to these documents which are on file as exhibits to the
registration statement of which this prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is UMB Bank, N.A.
LEGAL MATTERS
The legality of the securities being offered in this prospectus has been
passed upon for EChapman.com by Venable, Baetjer and Howard, LLP. Whiteford,
Taylor & Preston L.L.P. has acted as counsel for the underwriters in connection
with this offering.
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EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
EChapman.com, Inc. has filed with the SEC in Washington, DC, a registration
statement under the Securities Act with respect to the shares of common stock
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement, as some information is
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to EChapman.com, reference is made to the registration
statement, including the exhibits filed therewith, copies of which may be
obtained at prescribed rates from the SEC at the public reference facilities
maintained by the SEC 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 SEC maintains a website
on the Internet that will contain all future reports, proxy and information
statements and other information that EChapman.com is required to file
electronically with the SEC. The address of the SEC's website is
http://www.sec.gov.
EChapman.com will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent accounting
firm.
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ECHAPMAN.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Index....................................................... F-1
CHAPMAN HOLDINGS, INC.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets of December 31,1998 and
September 30, 1999 (unaudited).......................... F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1998 and 1997, and for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)........... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998 and 1997 and for
the Nine Months Ended September 30, 1999 (unaudited).... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997, and for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)........... F-6
Notes to Financial Statements............................. F-7
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
Report of Independent Public Accountants.................. F-17
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited).......................... F-18
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997, and for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)........... F-19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998 and 1997 and for
the Nine Month Ended September 30, 1999 (unaudited)..... F-20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 and for the Nine Months ended
September 30, 1999 and 1998 (unaudited)................. F-21
Notes to Financial Statements............................. F-22
ECHAPMAN.COM, INC.
Report of Independent Public Accountants.................. F-31
Balance Sheet as of September 30, 1999.................... F-32
Statement of Operations for the Period May 14, 1999
(inception) to September 30, 1999....................... F-33
Statement of Changes in Stockholders' Deficit for the
Period May 14, 1999 (inception) to September 30, 1999... F-34
Statement of Cash Flows for the Period May 14, 1999
(inception) to September 30, 1999....................... F-35
Notes to Financial Statements............................. F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Holdings, Inc:
We have audited the accompanying consolidated balance sheet of Chapman
Holdings, Inc. and Subsidiaries (a Maryland corporation) as of December 31,
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the two years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Holdings, Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the two years ended December 31, 1998
in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 22, 1999
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 3,090,000 $1,775,000
Cash deposits with clearing organization.................. 2,389,000 2,477,000
Investments, available for sale........................... 204,000 239,000
Securities owned.......................................... 2,080,000 1,813,000
Receivables from brokers and dealers...................... 331,000 576,000
Receivables from affiliates............................... 380,000 237,000
Income taxes receivable................................... 294,000 300,000
Advances to officer/employee.............................. 657,000 723,000
Fixed assets, net......................................... 38,000 95,000
Prepaids and other assets................................. 583,000 570,000
Intangible assets......................................... 145,000 113,000
Deferred tax asset........................................ 14,000 345,000
----------- ----------
Total assets............................................ $10,205,000 $9,263,000
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses..................... $ 261,000 $ 676,000
Margin loan payable....................................... 2,559,000 2,050,000
Accrued compensation...................................... 243,000 238,000
Deferred rent............................................. 78,000 45,000
----------- ----------
Total liabilities....................................... 3,141,000 3,009,000
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares
authorized,
2,953,622 shares issued and outstanding................. 3,000 3,000
Additional paid-in capital................................ 7,903,000 7,903,000
Accumulated deficit....................................... (842,000) (1,652,000)
----------- ----------
Total stockholders' equity.............................. 7,064,000 6,254,000
----------- ----------
Total liabilities and stockholders' equity.............. $10,205,000 $9,263,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------------
1998 1997 1999 1998
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions..................................... $ 2,538,000 $2,612,000 $3,243,000 $1,909,000
Underwriting and management fees................ 700,000 325,000 554,000 376,000
Interest and dividends.......................... 335,000 55,000 163,000 247,000
(Loss) gain on trading.......................... (638,000) -- 246,000 (174,000)
----------- ---------- ---------- ----------
Total revenue............................... 2,935,000 2,992,000 4,206,000 2,358,000
----------- ---------- ---------- ----------
EXPENSE:
Compensation and benefits....................... 2,185,000 1,121,000 2,324,000 1,317,000
Floor brokerage and clearing fees............... 431,000 286,000 528,000 302,000
Communications.................................. 193,000 154,000 216,000 130,000
Occupancy, equipment rental, and depreciation... 460,000 356,000 489,000 331,000
Travel and business development................. 255,000 211,000 260,000 167,000
Professional fees............................... 416,000 103,000 656,000 192,000
Other operating expense......................... 611,000 270,000 874,000 326,000
----------- ---------- ---------- ----------
Total expense............................... 4,551,000 2,501,000 5,347,000 2,765,000
----------- ---------- ---------- ----------
(Loss) income from continuing operations
before income tax (benefit) provision..... (1,616,000) 491,000 (1,141,000) (407,000)
INCOME TAX BENEFIT (PROVISION).................... 485,000 (205,000) 331,000 102,000
----------- ---------- ---------- ----------
(Loss) income from continuing operations.... (1,131,000) 286,000 (810,000) (305,000)
INCOME FROM DISCONTINUED OPERATIONS, net of income
taxes of $40,000................................ -- 51,000 -- --
----------- ---------- ---------- ----------
Net (loss) income........................... $(1,131,000) $ 337,000 $ (810,000) $ (305,000)
=========== ========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE DATA:........
Income from continuing operations............. $ (.40) $ 0.14 $ (.27) $ (0.11)
Income from discontinued operations........... -- 0.03 -- --
----------- ---------- ---------- ----------
Net (loss) income........................... $ (.40) $ 0.17 $ (.27) $ (0.11)
=========== ========== ========== ==========
Weighted average shares outstanding........... 2,793,000 2,002,000 2,954,000 2,744,000
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT) EQUITY
-------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996..................... $2,000 $1,309,000 $ (182,000) $ 1,129,000
Net income................................... -- -- 337,000 337,000
Purchase of 152,250 shares of stock.......... -- (217,000) -- (217,000)
Issuance of 196,594 shares of stock in
exchange for a stock warrant............... -- -- -- --
------ ---------- ----------- -----------
BALANCE, December 31, 1997..................... 2,000 1,092,000 155,000 1,249,000
Net loss..................................... -- -- (1,131,000) (1,131,000)
Accumulated deficit from discounted
operations................................. -- -- 134,000 134,000
Net proceeds from issuance of common stock... 1,000 6,811,000 -- 6,812,000
------ ---------- ----------- -----------
BALANCE, December 31, 1998..................... 3,000 7,903,000 (842,000) 7,064,000
Net loss..................................... -- -- (810,000) (810,000)
------ ---------- ----------- -----------
BALANCE, September 30, 1999
(Unaudited).................................. $3,000 $7,903,000 $(1,652,000) $ 6,254,000
====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) Income............................... $(1,131,000) $ 337,000 $ (810,000) $ (305,000)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation and amortization expense......... 8,000 -- 38,000 --
Unrealized/realized loss on securities
owned....................................... 638,000 -- (246,000) 36,000
Deferred taxes................................ (122,000) -- (331,000) --
Effect from changes in assets and
liabilities--
Deposits with clearing organization......... (2,349,000) (5,000) (88,000) (1,599,000)
Receivables from brokers and dealers........ 54,000 (229,000) (245,000) (48,000)
Receivables from discontinued operations.... 801,000 (118,000) -- --
Receivables from affiliates................. (380,000) -- 143,000 801,000
Income tax receivable....................... (294,000) -- (6,000) --
Prepaids and other assets................... (495,000) (24,000) 13,000 (309,000)
Net assets from discontinued operations..... 6,000 113,000 -- 6,000
Accounts payable and accrued expenses....... 193,000 (24,000) 415,000 120,000
Accrued compensation........................ 174,000 (8,000) (5,000) 47,000
Deferred rent............................... (11,000) -- (33,000) (8,000)
Payable to affiliated partnership........... (10,000) (49,000) -- (5,000)
Income taxes payable........................ (98,000) 55,000 -- (131,000)
Net liability from discontinued
operations................................ -- (29,000) -- --
----------- ---------- ----------- -----------
Net cash (used in) provided by operating
activities............................ (3,016,000) 19,000 (1,155,000) (1,395,000)
----------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment.................... (23,000) (10,000) (63,000) (4,000)
Purchase of Charles A. Bell..................... (220,000) -- -- --
Purchase of investments......................... (1,207,000) (12,000) (35,000) (69,000)
Proceeds from sale of investments............... 1,014,000 -- 4,000 --
Advances to officer/employee.................... (481,000) (66,000) (66,000) (448,000)
----------- ---------- ----------- -----------
Net cash used in investing activities... (917,000) (88,000) (160,000) (521,000)
----------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...... 7,715,000 -- -- 7,715,000
Issuance costs.................................. (903,000) -- -- (903,000)
Purchase of stock............................... -- (218,000) -- --
----------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities............................ 6,812,000 (218,000) -- 6,812,000
----------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 2,879,000 (287,000) (1,315,000) 4,896,000
CASH AND CASH EQUIVALENTS, beginning of period.... 211,000 498,000 3,090,000 211,000
----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.......... $3,090,000 $ 211,000 $ 1,775,000 $ 5,107,000
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Chapman Holdings, Inc. (the "Company") provides securities brokerage and
investment banking services. The Company, during December 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 were spun off from
Chapman as part of the initial public offering ("IPO") on February 26, 1998.
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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are presented on the
accrual basis of accounting in accordance with generally accepted accounting
principles and include the operations of the Company, Chapman and Charles A.
Bell Securities, Inc. All significant intercompany balances have been eliminated
in consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for the nine months ended
September 30, 1999 and 1998, are unaudited, but in the opinion of management,
such financial statements have been presented on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations, for the periods. The results of
operations presented in the accompanying consolidated financial statements are
not necessarily representative of operations for an entire year and because of
the nature of the Company's operations can be materially different between
periods.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Subsequent to September 30, 1999, the Company signed a merger agreement,
which is subject to stockholders approval and the completion of an initial
public stock offering of common stock by EChapman.com, among other things, to
merge into a wholly owned subsidiary of EChapman.com. This merger would result
in the Company, Chapman Capital Management Holdings Inc. and Chapman Insurance
Holdings Inc. becoming wholly-owned subsidiaries of EChapman.com. EChapman.com
is a newly formed corporation designed to bring these companies together and to
take advantage of the unique opportunities presented by the growth of the
Internet. EChapman.com is owned by the major stockholder of the Company.
This planned merger and the operations of EChapman.com after the merger, are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the future results from operations and financial
position of the Company. These risk items include the fact that EChapman.com has
not launched a website and has no Internet-related operating history; the web
site must be designed, developed, hosted by a service provider and marketed;
EChapman.com must raise at least $20 million from its planned public offering to
complete this merger; the EChapman.com brand must be successful in order for it
to attract users, advertisers and strategic partners; and the success of the
"Domestic Emerging Markets" strategy through the use of the Internet.
In July 1999, the Company borrowed $3,220,000 from Chapman Capital
Management Holdings, Inc., an affiliate, in connection with the Company's
participation in a municipal underwriting syndicate. The note was payable on
demand and accrued interest at the broker call rate. The note was paid in full
in September 1999.
ACQUISITION
Chapman acquired all of the outstanding stock of Charles A. Bell (Bell), a
securities brokerage firm located in San Francisco, California, on December 29,
1998, for approximately $391,200. The acquisition resulted in recording
approximately $145,000 of intangible assets from the purchase price being in
excess of the book value of Bell. The assets acquired consist of cash, current
assets, property and intangibles.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents primarily consists of cash invested in the U.S.
Treasury Money Fund, a fund managed by Chapman Capital Management, Inc., an
affiliate.
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Investments as of December 31, 1998 and September 30, 1999, consist
primarily of certificates of deposit in which cost approximates market. As of
December 31, 1998 and September 30, 1999, the $204,000 and $239,000,
respectively of investments held were classified as available for sale in
accordance with Statement of Financial Accounting Standards 115.
SECURITIES OWNED AND NOT YET PURCHASED
Securities owned consist of trading proprietary stock, which is carried at
market. The proprietary stock is primarily stock of Chapman Capital Management
Holdings, Inc. (CCMH), a company whose majority stockholder is also the majority
stockholder of the Company. Chapman is the market maker for the Company and CCMH
and, thus, holds their stock in inventory. As of December 31, 1998 and
September 30, 1999, Chapman held 116,000 and 121,000 shares of common stock of
the Company with a market value of approximately $580,000 and $680,000,
respectively. As of December 31, 1998 and September 30, 1999, Chapman also held
218,000 and 162,000 shares of common stock of CCMH with a market value of
approximately $1,500,000 and $1,130,000, respectively. The proprietary stock was
purchased on margin.
The Company had a margin loan payable balance of $2,559,000 and $2,050,000
as of December 31, 1998 and September 30, 1999, respectively. This margin loan
is a non-interest bearing loan. The Company also had cash on deposit with the
clearing agent of $2,389,000 and $2,477,000 as of December 31, 1998 and
September 30, 1999, respectively. The Company does not earn interest on this
deposit. The loan is used to purchase securities for trading purposes. The
securities purchased with the funds are held by the clearing agent as
collateral. The margin loan is due and repaid as the securities are sold.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, receivables, investments, securities owned, advances,
accounts payable, accrued expenses and margin loan payable approximate fair
value.
EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" (SFAS No. 128). Under SFAS
No. 128, a company must disclose basic earnings per share (the principal
difference
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
being that common stock equivalents would not be considered in the compilation
of basic earnings per share) and diluted earnings per share. The Company adopted
this pronouncement which required restatement of all prior periods presented.
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method. The weighted average shares
outstanding for the years ended December 31, 1998 and 1997 and the nine months
ended September 30, 1999 and 1998, are 2,793,000, 2,002,000, 2,954,000 and
2,744,000, respectively. The options granted during 1998 are antidilutive and,
thus, are not required in the earnings per share calculation.
INTANGIBLE ASSETS
Intangible assets consist of a non-compete agreement of $75,000 being
amortized over 2 years and goodwill of $70,000 being amortized over 15 years.
These intangibles are related to the Bell acquisition.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998, and has determined
that the Company has only one segment, securities brokerage and investment
banking services. The Company came to this conclusion because the Company
operates in one regulatory environment and has only one management group that
manages the entire Company. Information on the Company's results are provided as
one segment to the key decision-maker to make decisions.
COMPREHENSIVE INCOME
The Company has adopted SFAS, No. 130, "Reporting Comprehensive Income" and
has determined that the Company does not have any comprehensive income
adjustments for the periods presented, and therefore, comprehensive income
equals net income.
REVENUE RECOGNITION
The Company records commission revenue and related expenses on a trade date
basis as the securities transactions occur. Management fees are recognized in
the period the services are provided, and underwriting fees are recognized when
the transactions close.
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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, 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 faster 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, 1998 and
September 30, 1999, accumulated depreciation was $8,000 and $14,000,
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 separate company liability
method, whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
2. INITIAL PUBLIC OFFERING AND SPIN-OFF OF OPERATIONS:
On February 26, 1998, the Company consummated an initial public offering
(the Offering) of its Common Stock pursuant to which the Company received net
proceeds, after the offering costs, of approximately $6,812,000. Effective
February 26, 1998, concurrent with the Company's completed initial public
offering, the Company spun off two of its wholly-owned subsidiaries, CCM and
CIA.
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
3. CAPITAL STOCK:
The common stock activity included in the accompanying consolidated
financial statements has been restated to reflect the one-for-five share
exchange of stock related to the merger of Chapman into the Company during 1998.
As such, all share data related to Chapman prior to the merger has been restated
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 $209,000 in 1998. The aggregate minimum future annual rental for the
following fiscal years ending December 31 is as follows:
<TABLE>
<S> <C>
1999, remaining............................................. $ 63,000
2000........................................................ 200,000
</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. As of December 31, 1998 and September 30, 1999, the Company
recorded $78,000 and $45,000, respectively, 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 $118,000 in
1998 and 1997 and $102,000 for the nine months in 1999 and 1998.
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 saleable 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. For the years ended
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
4. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
December 31, 1998 and 1997 and the nine months ended September 30, 1999 and
1998, the Company did not incur such losses.
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.
5. INCOME TAXES:
A reconciliation of the statutory income taxes to the recorded income tax
(benefit) provision for the years ended December 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Statutory tax (at 35% rate)............................ $(566,000) $167,000
Effect of state income taxes........................... (79,000) 24,000
Effect of graduated tax rate........................... 120,000 --
Effect of permanent book to tax differences............ 40,000 14,000
--------- --------
Income tax (benefit) provision......................... $(485,000) $205,000
========= ========
</TABLE>
The components of the income tax (benefit) provision for the years ended
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Current................................................ $(363,000) $ 57,000
Deferred............................................... (122,000) 108,000
Discontinued operations................................ -- 40,000
--------- --------
Income tax (benefit) provision......................... $(485,000) $205,000
========= ========
</TABLE>
The Company's deferred income tax asset and liability as of December 31,
consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Deferred tax asset:
NOL carryforward..................................... $ 65,000 $ --
Deferred tax liability:
Other................................................ (51,000) (108,000)
-------- ---------
Net deferred tax asset (liability) recorded on the
consolidated balance sheets...................... $ 14,000 (108,000)
======== =========
</TABLE>
6. REGULATORY REQUIREMENTS:
Pursuant to the requirements of the Securities and Exchange Commission's
(SEC) Uniform Net Capital Rule (Rule 15c3-1), the Company 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, 1998, the Company
F-13
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
6. REGULATORY REQUIREMENTS: (CONTINUED)
had excess net capital of $697,000 and a ratio of aggregate indebtedness to net
capital of .7 to 1.
The Company is subject to compliance with various SEC and National
Association of Securities Dealers, Inc. (NASD) regulations. Also, the NASD
periodically reviews the Company's records and procedures for compliance with
its requirements. Any acts of noncompliance may subject the Company to fines and
other punitive remedies and may significantly effect the Company's ability to
operate.
7. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1998 and
1997 and the nine months ended September 30, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid--
Interest........................... $10,000 $ 9,000 $ 3,000 $ 66,000
Income taxes....................... 29,000 182,000 22,000 5,000
</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, 1998 and 1997 and the nine months ended
September 30, 1999 and 1998.
9. OMNIBUS STOCK PLAN:
In March 1998, Chapman started an Omnibus Stock Plan (the Plan) to enable
selected management, employees, consultants and directors to acquire interest in
Chapman through ownership of common stock. The Plan has 150,000 shares of common
stock registered. On September 28, 1998, Chapman granted options for 43,900
shares of common stock at fair market value at the date of grant, which was
$9.50. The options vested on the grant date and have a three-year term. None of
those options had been exercised, expired or canceled as of September 30, 1999.
The Company accounts for its stock-based compensation plans as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," which allows
F-14
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
9. OMNIBUS STOCK PLAN: (CONTINUED)
the Company to follow Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 1998, using the Black-Scholes option pricing model. The
following assumptions were used for grants for the year ended December 31, 1998:
<TABLE>
<S> <C>
Risk free interest rate..................................... 4.51%
Expected dividend yield..................................... 0.0%
Expected lives.............................................. 2 years
Expected volatility......................................... 59%
</TABLE>
Options were assumed to be exercised upon vesting for the purposes of this
valuation. Had compensation costs for compensatory options been determined
consistent with SFAS No. 123, the Company's pro forma net loss and earnings per
share information reflected on the accompanying consolidated statements of
operations would have been increased to the following "as adjusted" amount for
the year ended December 31, 1998:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $1,131,000
As adjusted............................................... 1,235,000
Basic earnings:
Per share--
As reported............................................. (.40)
As adjusted............................................. (.44)
</TABLE>
Weighted average fair value of options granted for the year ended
December 31, 1998, was $3.37. The value was calculated using the Black-Scholes
option pricing model.
10. RELATED PARTY TRANSACTIONS:
The Company served as the underwriter for DEM, Inc. (DEM), a registered
non-diversified closed-ended management investment company. CCM provided
investment advisory and administrative services to DEM under an investment
advisory and administrative services agreement which sets forth the services to
be provided and the fees to be charged. The Company purchased 69,000 shares of
DEM stock during 1998. During the fourth quarter of 1998, DEM was dissolved. The
Company recognized a $159,000 loss on trading due to this dissolution.
F-15
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
Listed below are fees and commissions earned from DEM for the year ended
December 31, 1997.
<TABLE>
<S> <C>
Included in continuing operations (underwriting fees)....... $432,000
Included in discontinued operations......................... 139,000
--------
$571,000
========
</TABLE>
The Company acted as the underwriter, on a best efforts basis, for the sale
of CCMH common stock. The Company was paid $297,000 in underwriting fees and
commissions in the year ended December 31, 1998.
As of October 31, 1997, CCM executed a 10-year note to the Company in the
amount of $772,000 accruing interest at 6.68% per annum. CCM repaid this note in
full during 1998.
As of December 31, 1998 and September 30, 1999, the Company had outstanding
advances to its majority stockholder of $640,000, respectively. The advances to
the majority stockholder are reflected in four notes. Three of the notes are
three-year notes that accrue interest at a range of 4.33% to 5.54% per annum. No
interest or principal payments are due until maturity, which is February through
December, 2001. There is also a demand note that accrues interest at 5.5% per
annum. The interest rates on the notes are based on the IRS applicable federal
rate in effect from time to time. The Company also has $17,000 and $83,000,
respectively, of advances to employees as of December 31, 1998 and
September 30, 1999. Management will collect these advances through payroll
deductions.
The Company shares office space, certain employees and other overhead with
certain other entities controlled by the majority stockholder 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.
Receivables from affiliates consist of receivables from CCM related to the
above allocation agreement. As of December 31, 1998 and September 30, 1999, the
Company had receivables from CCM of $271,000 and $202,000, respectively, related
to the allocation agreement. There is also an additional $104,000 included in
receivables from affiliates as of December 31, 1998, which is due from CCM
because of a deposit made by the Company into CCM's securities account, which
should have been deposited into the Company's account. Also, included in
receivables from affiliates is $5,000 and $35,000 as of December 31, 1998 and
September 30, 1999, respectively, due from other affiliates for expenses paid on
their behalf.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Capital Management Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Chapman
Capital Management Holdings, Inc. (a Maryland corporation) and Subsidiary as of
December 31, 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Capital Management Holdings, Inc. and Subsidiary as of December 31, 1998, and
the results of their operations and their cash flows for the two years ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 5, 1999
F-17
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $4,242,000 $3,103,000
Investments................................................. 150,000 267,000
Management fees receivable:
From proprietary funds.................................... 107,000 132,000
From individually managed accounts........................ 257,000 378,000
Receivables from affiliates................................. 120,000 227,000
Advances to officer......................................... 118,000 367,000
Fixed assets, net........................................... 21,000 56,000
Prepaids and other assets................................... 123,000 171,000
Intangible assets, net...................................... 465,000 294,000
Deferred tax asset.......................................... 45,000 209,000
---------- ----------
Total assets............................................ $5,648,000 $5,204,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 172,000 $ 309,000
Due to affiliated company................................... 285,000 202,000
Noncompete agreement obligation............................. 150,000 150,000
---------- ----------
Total liabilities....................................... 607,000 661,000
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares
authorized, 3,351,334 issued and outstanding............ 3,000 3,000
Additional paid-in capital................................ 5,239,000 5,239,000
Accumulated deficit....................................... (201,000) (699,000)
---------- ----------
Total stockholders' equity.............................. 5,041,000 4,543,000
---------- ----------
Total liabilities and stockholders' equity.............. $5,648,000 $5,204,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-18
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTH ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1999 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Investment management fees.................. $3,136,000 $2,284,000 $3,046,000 $2,344,000
Other income................................ 82,000 3,000 152,000 39,000
---------- ---------- ---------- ----------
Total revenue............................. 3,218,000 2,287,000 3,198,000 2,383,000
---------- ---------- ---------- ----------
OPERATING EXPENSE:
Management fees............................. 1,178,000 869,000 1,109,000 912,000
Compensation and benefits................... 857,000 595,000 836,000 499,000
General and administrative.................. 1,076,000 489,000 1,713,000 680,000
Interest expense............................ 26,000 14,000 6,000 26,000
Amortization and depreciation expense....... 232,000 232,000 196,000 174,000
---------- ---------- ---------- ----------
Total operating expense................... 3,369,000 2,199,000 3,860,000 2,291,000
---------- ---------- ---------- ----------
(Loss) income before income tax benefit
(provision)............................. (151,000) 88,000 (662,000) 92,000
INCOME TAX BENEFIT (PROVISION)................ 45,000 (40,000) 164,000 (33,000)
---------- ---------- ---------- ----------
Net (loss) income......................... $ (106,000) $ 48,000 $ (498,000) $ 59,000
========== ========== ========== ==========
BASIC AND DILUTIVE EARNINGS PER SHARE DATA:
Net (loss) income........................... $ (.04) $ .02 $ (.15) $ .02
========== ========== ========== ==========
Weighted Average Shares Outstanding........... 2,811,000 2,487,000 3,351,000 2,636,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-19
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN ACCUMULATED (DEFICIT)
STOCK CAPITAL DEFICIT EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996...................... $2,000 $ -- $(143,000) $ (141,000)
Net Income.................................... -- -- 48,000 48,000
------ ---------- --------- ----------
BALANCE, December 31, 1997...................... 2,000 -- (95,000) (93,000)
Proceeds from initial public offering......... 1,000 5,239,000 -- 5,240,000
Net loss...................................... -- -- (106,000) (106,000)
------ ---------- --------- ----------
BALANCE, December 31, 1998...................... 3,000 5,239,000 (201,000) 5,041,000
Net loss...................................... -- -- (498,000) (498,000)
------ ---------- --------- ----------
BALANCE, September 30, 1999
(Unaudited)................................... $3,000 $5,239,000 $(699,000) $4,543,000
====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-20
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1999 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................. $ (106,000) $ 48,000 $ (498,000) $ 59,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization................... 231,000 232,000 196,000 174,000
Unrealized gain on investments.................. -- -- (17,000) --
Deferred tax asset.............................. (45,000) -- (164,000) (66,000)
Effect of changes in assets and liabilities-
Management fees receivable.................... (111,000) (71,000) (146,000) (43,000)
Receivable from affiliates.................... (84,000) (31,000) (107,000) (160,000)
Prepaids and other assets..................... (114,000) (4,000) (48,000) (16,000)
Accounts payable and accrued expenses......... 21,000 134,000 137,000 132,000
Due to affiliated company..................... (516,000) 151,000 (83,000) (801,000)
Income taxes payable.......................... (48,000) (134,000) -- (15,000)
Investment in affiliate....................... -- -- -- 2,000
---------- ---------- ---------- ----------
Net cash (used in) provided by operating
activities................................ (772,000) 325,000 (730,000) (734,000)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment...................... (19,000) (5,000) (60,000) --
Sale of investments............................... 9,000 -- -- --
Purchase of investments........................... (150,000) -- (100,000) --
Advances to officer............................... (46,000) (84,000) (249,000) (44,000)
---------- ---------- ---------- ----------
Net cash used in investing activities....... (206,000) (89,000) (409,000) (44,000)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering............. 6,053,000 -- -- 5,245,000
Issuance costs.................................... (814,000) -- -- --
Repayments of loan to officer..................... (28,000) (85,000) -- (28,000)
Payment of noncompete agreement................... -- (150,000) -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................ 5,211,000 (235,000) -- 5,217,000
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 4,233,000 1,000 (1,139,000) 4,439,000
CASH AND CASH EQUIVALENTS, beginning of year........ 9,000 8,000 4,242,000 9,000
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year.............. $4,242,000 $ 9,000 $3,103,000 $4,448,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
1. ORGANIZATION:
Chapman Capital Management Holdings, Inc. is an investment advisory and
investment management company.
During February 1998, Chapman Capital Management, Inc. became the wholly-
owned subsidiary of Chapman Capital Holdings Management, Inc. ("CCMH," the
"Company"), a newly formed corporation. CCMH was the wholly-owned subsidiary of
The Chapman Co. until it spun off from The Chapman Co. as part of the initial
public offering (IPO) of Chapman Holdings, Inc. on February 26, 1998.
The Company shares office space, certain employees and other overhead with
The Chapman Co., an affiliated company. The Chapman Co. pays for routine
operating expenses and provides certain management, data processing, accounting
and administrative services to the Company, for which The Chapman Co. is
reimbursed. As of December 31, 1998, and September 30, 1999, the Company owed
The Chapman Co. $181,000 and $202,000, respectively, for the costs of these
services. The Chapman Co. also pays for salary and benefit expenses of which the
Company is allocated a portion. The Chapman Co. allocates those salary and
benefit expenses to the Company based on actual salaries related to the Company
and based on cost sharing arrangements approved by the Board of Directors. These
financial statements may not necessarily be indicative of the financial results
that would have existed had the Company been operated as an unaffiliated
corporation.
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for the nine months ended
September 30, 1999 and 1998, are unaudited, but in the opinion of management,
such financial statements have been presented on the same basis as the audited
consolidated
F-22
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
financial statements and include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the financial
position and results of operations, for the periods.
The Company's operating results are significantly affected by the size of
the portfolio it manages. The results of operations presented in the
accompanying consolidated financial statements are not necessarily
representative of operations for an entire year and because of the nature of the
Company's operations can be materially different between periods.
Subsequent to September 30, 1999, the Company signed a merger agreement
which is subject to stockholders approval and the completion of an initial
public stock offering of common stock by EChapman.com, among other things, to
merge into a wholly owned subsidiary of EChapman.com. This merger would result
in the Company, Chapman Holdings Inc. and Chapman Insurance Holdings Inc.
becoming wholly-owned subsidiaries of EChapman.com. EChapman.com is a newly
formed corporation designed to bring these companies together and to take
advantage of the unique opportunities presented by the growth of the Internet.
EChapman.com is owed by the major stockholder of the Company.
This planned merger and the operations of EChapman.com after the merger are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the future results from operations and financial
position of the Company. These risk items include the fact that EChapman.com has
not launched a website and has no Internet-related operating history; the web
site must be designed, developed, hosted by a service provider and marketed;
EChapman.com must raise at least $20 million from its planned public offering to
complete this merger; the EChapman.com brand must be successful in order for it
to attract users, advertisers and strategic partners; and the success of the
"Domestic Emerging Markets" strategy through the use of the Internet.
On July 29, 1999, the Company made a loan of $3,220,000 to Chapman
Holdings, Inc., an affiliate of the Company ("Chapman Holdings"). The loan was
issued pursuant to a demand note that required Chapman Holdings to repay the
amount of the loan upon the Company's demand and with interest due equal to the
broker call rate. Chapman Holdings repaid this loan in full in September 1999.
On July 29, 1999, the Company also advanced the President of the Company
$242,000 pursuant to an unsecured demand note bearing interest at 5.45% per
annum.
F-23
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company agreed to waive certain investment management fees with funds
its has sponsored. It has waived these fees by having its investment management
fee limited to a certain percentage of the average daily net asset balance in
the fund.
In the normal course of operations of an investment manager, clients add
investments to and withdraw investments from the asset portfolio. This activity
is done by clients as they continue to make investment decisions and diversify
their portfolio.
In June 1999, one of the four participants in the Company's DEM-MET Trust
decided to withdraw the entire amount of their funds totaling approximately
$11.4 million, or approximately 3.7%, of the total assets managed by the DEM-MET
Trust.
During June 1999, the Company was notified that two of its clients,
accounting for 6.3% and 2.5% of the Company's total revenues respectively, were
withdrawing portions of each of their separate accounts managed by the Company.
The amounts withdrawn, effective July 1, 1999, collectively totaled $66.5
million, or 10.3% of the Company's assets under management as of June 30, 1999.
The withdrawal of these assets under management is not expected to have a
material impact on the Company. The loss of these assets under management as a
result of these withdrawals is not expected to cause additional loss of assets
under management outside of the normal course of operations. The Company has
increased its assets under management by $43,104,000 from $643,428,000 as of
June 30, 1999, to $686,532,000 as of September 30, 1999.
ACQUISITION
In December 1996, the Company acquired DEM-MET, a tax-exempt pooled interest
trust for qualified employee benefit plans. As part of the acquisition of this
trust, the Company entered into a noncompete agreement for $300,000 and paid
$640,000 in costs related to acquiring the trust. These amounts are included in
intangible assets (see Note 4).
During the years ended December 31, 1998 and 1997, and the nine months ended
September 30, 1999 and 1998, the Company paid Bankers Trust management fees for
managing the trust. Those fees are included in management fees in the
accompanying statements of operations for the years ended December 31, 1998 and
1997, and the nine months ended September 30, 1999 and 1998.
F-24
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents as of December 31, 1998, and
September 30, 1999, is $4,046,000 and $3,030,000, respectively, of cash invested
in the Chapman U.S. Treasury Money Fund, a fund managed by Chapman Capital
Management, Inc.
INVESTMENTS
Investments consist of common stock ownership in an investment company which
cost approximates market value.
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, 1998 and
September 30, 1999, accumulated depreciation was $10,000 and $35,000,
respectively.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash,
investments, receivables, accounts payable and accrued expenses approximate fair
value.
EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" (SFAS No. 128). Under SFAS
No. 128, a company must disclose basic earnings per share (the principal
difference being that common stock equivalence would not be considered in the
compilation of basic earnings per share) and diluted earnings per share. The
Company adopted this pronouncement which required restatement of all prior
periods presented.
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method. The weighted average shares
outstanding for the years ended December 31, 1998 and 1997, and the nine months
ended September 30, 1999 and 1998, are 2,811,000, 2,487,000, 3,351,000 and
2,636,000, respectively.
F-25
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998, and has determined
that the Company has only one segment, investment advisory and investment
management services. The Company came to this conclusion because the Company
operates in one regulatory environment and has only one management group that
manages the entire Company. Information on the Company's operating results are
provided as one segment to the key decision-maker to make decisions.
REVENUE RECOGNITION
The Company recognizes investment management fees in the period the services
are provided.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" and
has determined that the Company does not have any comprehensive income
adjustments for the periods presented, and therefore, comprehensive income
equals net income.
INCOME TAXES
The Company accounts for income taxes under the separate company liability
method, whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
Prior to the Company being spun off from its Parent, the Company was
included in the consolidated Federal income tax return of its Parent on a cash
basis. The Parent allocated Federal tax expense to the Company based on its
portion of consolidated taxable income and its taxes on that income if the
Company were taxed on a stand-alone basis.
RECLASSIFICATIONS
Certain reclassifications have been made to 1997 financial statements to
conform to 1998 financial statement presentation.
F-26
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
3. INITIAL PUBLIC OFFERING:
On August 14, 1998, the Company consummated an initial public offering (the
Offering) of its common stock, pursuant to which the Company sold 864,791 shares
and received net proceeds, after offering costs, of approximately $5,240,000.
4. INTANGIBLE ASSETS:
Intangible assets consists of a noncompete agreement and acquisition costs
(see Note 2). The $300,000 noncompete agreement is being amortized over
3 years, the term of the agreement. The $640,000 in acquisition costs is being
amortized over 5 years. The noncompete agreement will be paid in two equal
installments, payable on demand. Accumulated amortization as of December 31,
1998 and September 30, 1999, is $475,000 and $646,000, respectively.
5. COMMON STOCK:
During 1998, the Company effected a 25% stock split effected as a stock
dividend. As such, all share data related to the Company prior to the stock
split have been restated.
6. TRANSACTIONS WITH AFFILIATES:
The Company provides investment advisory and administrative services to The
Chapman Funds, Inc. (the Funds), an affiliated group of mutual funds, under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. The agreement also provides
that expense reimbursements be made to the Funds for specified expenses and to
the extent that any Funds' expenses exceed specified limitations. Included in
the accompanying statements of operations for the years ended December 31, 1998
and 1997 and the nine months ended September 30, 1999 and 1998, are advisory
management fees related to The Chapman Funds totaling $260,000, $145,000,
$353,000 and $100,000, respectively.
The Company provided investment advisory and administrative services to
DEM, Inc. (DEMI), a registered non-diversified closed-ended management
investment company, under an investment advisory and administrative services
agreement which sets forth the services to be provided and the fees to be
charged. During the fourth quarter of 1998, DEMI was dissolved. Included in the
accompanying statements of operations for the years ended December 31, 1998 and
1997 and the nine months ended September 30, 1999 and 1998, is an advisory
management fee related to DEMI totaling $150,000, $139,000, $-0- and $149,000,
respectively.
F-27
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
Included in management fees receivable as of December 31, 1998, and
September 30, 1999, is $107,000 and $132,000, respectively, due from proprietary
funds for services provided under the above described agreement.
The Company is the investment advisor and administrator of the DEM Equity
Fund, a portfolio of The Chapman Funds, Inc. The DEM Equity Fund became active
in April 1998 and the Company was paid $69,000, $55,000 and $46,000 in advisory
and administrative fees for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 and 1998, respectively.
The Company executed a 10-year note to Chapman Holdings as of October 31,
1996, in the amount of $763,000, which accrued interest at 6.8% per annum. The
proceeds of this loan were used by the Company to pay start-up costs in
connection with its development of a proprietary investment product and for a
non-competition agreement. In August 1998, this loan was repaid in full.
Included in receivables from affiliates as of December 31, 1998, and
September 30, 1999, is $32,000 and $26,000, respectively, due from Chapman
Insurance Agency ("CIA") for expenses paid on their behalf. As of September 30,
1999, the Company has $185,000 due from EChapman.com included in receivables
from affiliates related to costs paid on their behalf. Also included in
receivables from affiliates as of December 31, 1998, is $88,000 due from newly
created funds using the DEM strategy. The receivable from these new funds
represents reimbursement of start-up costs paid on their behalf. As of
September 30, 1999, the $88,000 receivable was written off as the Company
believed this receivable was no longer realizable.
Included in due to affiliated company are costs paid on the Company's behalf
based on the allocation agreement discussed in Note 1. Also, included in due to
affiliated company as of December 31, 1998, is $104,000 related to a deposit
made by The Chapman Co. into the Company's securities account, which should have
been deposited into The Chapman Co.'s account. This deposit was transferred in
full in January 1999.
As of December 31, 1998 and September 30, 1999, the Company had outstanding
advances to the majority stockholder of the Company of $118,000 and $367,000,
respectively. These advances are reflected in three notes. Two demand promissory
notes which accrue interest at 5.4% per annum and one three-year note that
accrues interest at 5.5% per annum. No interest or principal payments are due
until maturity, which is August 28, 2001. The interest rates on these notes are
based on the IRS applicable federal rate in effect from time to time.
F-28
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
The Chapman Co. has entered into an agreement in which it leases furniture
and equipment from Chapman Limited Partnership, an entity in which certain
officers and stockholders of The Chapman Co. are partners. The Chapman Co.
allocates a portion of the $9,846 monthly payment to the Company based on the
space used by the Company. The Chapman Co. allocated $59,000, $39,000, $45,000
and $30,000 in lease expense for the years ended December 31, 1998 and 1997, and
the nine months ended September 30, 1999 and 1998, respectively. These amounts
are included in other operating expenses in the statements of operations for the
years ended December 31, 1998 and 1997, and the nine months ended September 30,
1999 and 1998, respectively.
7. INCOME TAXES:
A reconciliation of the statutory income taxes to the recorded income tax
(benefit) provision for the years ended December 31, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Statutory tax (at 35% rate)................................. $(53,000) $31,000
Effect of state income taxes................................ (8,000) 4,000
Effect of graduated tax rate................................ 6,000 --
Effect of permanent book to tax differences................. 10,000 5,000
-------- -------
Income tax (benefit) provision.............................. $(45,000) $40,000
======== =======
</TABLE>
The components of the income tax (benefit) provision for the years ended
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current..................................................... $ -- $40,000
Deferred.................................................... (45,000) --
-------- -------
Income tax (benefit) provision.............................. $(45,000) $40,000
======== =======
</TABLE>
The Company's deferred income tax assets as of December 31, 1998, consists
of the following:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward.......................................... $25,000
Other..................................................... 20,000
-------
Net deferred tax asset recorded on the consolidated
balance sheet........................................ $45,000
=======
</TABLE>
F-29
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (CONTINUED)
8. STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosures for the years ended December 31, 1998 and
1997 and the nine months ended September 30, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
(UNAUDITED)
1998 1997 1998 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Cash paid for:
Interest...................................... $ 25,000 $ 5,000 $25,000 $6,000
Income taxes.................................. 114,000 174,000 -- --
</TABLE>
9. CONCENTRATION OF CREDIT RISKS:
One client accounted for 59% of the Company's advisory and administrative
fees during the year ended December 31, 1998. Two clients accounted for 72% of
the Company's advisory and administrative fees for the year ended December 31,
1997. As of December 31, 1998, receivables due from this client were $68,000.
10. STOCK OPTIONS PLANS:
In 1998, the Company established the Chapman Capital Management
Holdings, Inc. Omnibus Stock Plan (the Plan) to enable the Company to grant
stock options to the Company's directors, officers, employees and consultants.
Under the Plan, 150,000 shares of common stock have been reserved for issuance
upon exercise of stock options granted. On May 14, 1999, there were 24,000 stock
options issued at a stock price range of $8.38 to $9.22 per share. These options
expire over a three-year period and vest immediately. The common stock
equivalents of these options was not included in the diluted earnings per share
as the stock options are antidilutive.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
EChapman.com:
We have audited the accompanying balance sheet of EChapman.com (a Maryland
corporation) as of September 30, 1999, and the related statements of operations,
changes in stockholder's deficit, and cash flows for the period May 14, 1999
(inception) to September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 EChapman.com as of
September 30, 1999, and the results of its operations and its cash flows for the
period May 14, 1999 (inception) to September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 28, 1999
F-31
<PAGE>
ECHAPMAN.COM
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS:
Prepaids and other assets................................. $ 18,000
---------
Total assets............................................ $ 18,000
=========
LIABILITIES AND STOCKHOLDLER'S DEFICIT:
Accounts payable and accrued expenses..................... $ 238,000
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, $.001 par value, 50,000,000 shares
authorized, 0 shares issued and outstanding............. --
Accumulated deficit....................................... (220,000)
---------
Total stockholder's deficit............................. (220,000)
---------
Total liabilities and stockholder's deficit............. $ 18,000
=========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-32
<PAGE>
ECHAPMAN.COM
STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 14, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<S> <C>
REVENUE..................................................... $ --
---------
EXPENSE:
Compensation and benefits................................. 89,000
Other operating expense................................... 131,000
---------
Total expense........................................... 220,000
Loss before income taxes................................ (220,000)
INCOME TAXES................................................ --
---------
Net loss................................................ $(220,000)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
ECHAPMAN.COM
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE PERIOD MAY 14, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT DEFICIT
--------- ----------- -------------
<S> <C> <C> <C>
BALANCE, May 14, 1999...................................... $ -- $ -- $ --
Net loss for the period.................................. -- (220,000) (220,000)
--------- --------- ---------
BALANCE, September 30, 1999................................ $ -- $(220,000) $(220,000)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE>
ECHAPMAN.COM
STATEMENT OF CASH FLOWS
FOR THE PERIOD MAY 14, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(220,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Effect of changes in assets and liabilities--
Prepaids and other assets............................. (18,000)
Accounts payable and accrued expenses................. 238,000
---------
Net cash used in operating activities............... --
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... --
CASH AND CASH EQUIVALENTS, beginning of period.............. --
---------
CASH AND CASH EQUIVALENTS, end of period.................... $ --
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION:
EChapman.com (the Company) was formed on May 14, 1999. The Company was
formed to acquire the existing businesses of Chapman Holdings, Inc., Chapman
Capital Management Holdings, Inc., and Chapman Insurance Holdings, Inc., (the
majority stockholder of these 3 companies is the sole stockholder of the
Company) and to take advantage of the opportunities presented by the growth in
the Internet. The Company's web site, EChapman.com, is currently under
development. The web site will offer both financial services and a variety of
lifestyle, educational and cultural content selected to appeal particularly to
African-Americans, Asian-Americans, Hispanic-Americans and women. These groups
are collectively referred to as Domestic Emerging Markets (DEM). The Company is
planning an initial public offering to sell 3,333,333 shares of common stock.
The proceeds will be used to complete the design and development of the web
site, to promote EChapman.com and the DEM strategy, and for working capital to
support planned growth of the Company and other general corporate expenses.
The operations of the Company are subject to certain risks. The negative
impact from these risks could have material adverse effects on the future
results from operations and financial position of the Company. These risk items
include the fact that EChapman.com has no Internet-related operating history;
the web site must be designed, developed, hosted by a service provider and
marketed; EChapman.com must raise at least $20 million from its planned public
offering to complete the mergers; the EChapman.com brand must be successful in
order for it to attract users, advertisers and strategic partners; and the
success of the "Domestic Emerging Markets" strategy through the use of the
Internet.
The Company did not have any operations, except for organizational matters,
up until June 30, 1999. The operations of the Company since July 1, 1999, mainly
include costs incurred for salary and benefit expenses and professional fees
related to organizing the Company and designing and developing its web site. The
Company has a December 31 year-end.
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the
F-36
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for accounts payable and
accrued expenses approximate fair value.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of September 30, 1999, and has determined
that the Company has only one segment. The Company came to this conclusion
because the Company has had minimal operations and has only one management group
that manages the entire Company. Information on the Company's operating results
are provided as one segment to the key decision-maker to make decisions.
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. As of September 30, 1999, the Company
has not recorded a 100% valuation allowance on its income tax benefit of
approximately $50,000.
3. TRANSACTIONS WITH AFFILIATES:
Subsequent to September 30, 1999, the Company signed a merger agreement to
acquire Chapman Holdings, Inc., Chapman Capital Management Holdings, Inc., and
Chapman Insurance Holdings, Inc.
As of September 30, 1999, the Company owes Chapman Holdings, Inc. $35,000
and Chapman Capital Management Holdings, Inc. $185,000 for expenses paid on its
behalf. These amounts are included in accounts payable and accrued expenses on
the balance sheet.
F-37
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
4. STOCK OPTIONS PLANS:
On November 12, 1999, the Company approved the EChapman.com, Inc. 1999
Omnibus Stock Plan (the Plan) to provide key people with incentives to improve
stockholder value and to grant equity compensation to the Company's directors,
officers, employees and consultants. Under the Plan, 850,000 shares of common
stock have been reserved for issuance upon exercise of stock options granted.
The price per share of each option exercised will be determined by the
Compensation Committee of the Board of Directors. No options have been issued
pursuant to this Plan as of September 30, 1999.
F-38
<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........................... 10
Use of Proceeds........................ 20
Dilution............................... 22
Capitalization......................... 24
Dividend Policy........................ 24
Selected Historical and Pro Forma
Financial Data....................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 29
The Mergers............................ 38
Business............................... 40
Management............................. 70
Principal and Selling Stockholders..... 74
Certain Transactions................... 76
Description of Capital Stock........... 78
Shares Eligible for Future Sale........ 81
Underwriting........................... 83
Transfer Agent and Registrar........... 85
Legal Matters.......................... 85
Experts................................ 86
Index to Financial Statements.......... F-1
</TABLE>
------------------------
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATIONS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,333,333 SHARES
[LOGO]
ECHAPMAN.COM, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus may be used by The Chapman Co. in connection with offers and
sales related to market-making transactions in shares of common stock effected
from time to time. The Chapman Co. may act as principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or at negotiated prices.
For a description of certain relationships and transactions between The
Chapman Co. and its affiliates and EChapman.com, see "Management," "Certain
Transactions" and "Principal Stockholders."
EChapman.com has been advised by The Chapman Co. that, subject to applicable
laws and regulations, The Chapman Co. currently intends to make a market in the
common stock. However, The Chapman Co. is not obligated to do so and any market-
making activity will be subject to the limits imposed by the Securities Act and
the Securities Exchange Act of 1934, as amended. There can be no assurance that
an active trading market will develop or be sustained.
The Chapman Co., has informed EChapman.com that it does not intend to
confirm sales to any accounts over which it exercises discretionary authority
without the prior specific written approval of such transactions by the
customer.
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.................... 10
Use of Proceeds................. 20
Dilution........................ 22
Capitalization.................. 24
Dividend Policy................. 24
Selected Historical and Pro
Forma Financial Data.......... 25
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 29
The Mergers..................... 38
Business........................ 40
Management...................... 70
Principal and Selling
Stockholders.................. 74
Certain Transactions............ 76
Description of Capital Stock.... 78
Shares Eligible for Future
Sale.......................... 81
Plan of Distribution............ 83
Transfer Agent and Registrar.... 85
Legal Matters................... 85
Experts......................... 86
Index to Financial Statements... F-1
</TABLE>
[LOGO]
ECHAPMAN.COM, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE CHAPMAN CO.
[ ], 2000
<PAGE>
- ---------------------------------------
- ---------------------------------------
<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
II-1
<PAGE>
may in the discretion of the Board of Directors advance expenses to employees,
agents and others who may be granted indemnification.
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........................................ $ 15,000
NASD filing fee............................................. 6,154
Nasdaq National Market System listing fee................... 95,000
Printing and engraving expenses............................. 150,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses (including Blue Sky)................ 400,000
Miscellaneous............................................... 133,846
----------
Total..................................................... $1,000,000
</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 November 12, 1999, in connection with the organization of the Company,
the Company issued one share of Common Stock, to Nathan A. Chapman, Jr. for $1.
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. (To be filed by amendment)
1.2 Form of Qualified Independent Underwriter Agreement between
the Company and Ferris, Baker Watts, Incorporated (To be
filed by amendment)
1.3 Form of Master Agreement Among Underwriters among The
Chapman Co. and the several Underwriters (To be filed by
amendment)
3.1 Articles of Amendment and Restatement of the Company (Filed
as Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (File No. 333-90987) as filed with the Securities
and Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (File No. 333-90987) as
filed with the Securities and Exchange Commission on
November 15, 1999 and hereby incorporated by reference.)
4 Form of common stock Certificate (Filed herewith)
5 Opinion of Venable, Baetjer and Howard, LLP (To be filed by
amendment)
10.1 EChapman.com, Inc. 1999 Omnibus Stock Option Plan (Filed as
Exhibit 10.1 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
10.2 Service Mark License Agreement between the Company and
Nathan A. Chapman, Jr. dated November 12, 1999 (Filed as
Exhibit 10.2 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
10.3 Agreement and Plan of Merger by and among the Company, CHI
Merger Subsidiary, Inc. and Chapman Holdings, Inc. dated
November 15, 1999 (Filed herewith)
10.4 Agreement and Plan of Merger by and among the Company, CCMH
Merger Subsidiary, Inc. and Chapman Capital Management, Inc.
dated November 15, 1999 (Filed herewith)
10.5 Agreement and Plan of Merger by and among the Company, CIH
Merger Subsidiary, Inc. and Chapman Insurance Holdings, Inc.
dated November 15, 1999 (Filed herewith)
10.6 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Holdings, Inc.) (Filed
as Exhibit 10.6 to the Company's Registration Statement on
Form SB-2 (File No. 333-90987) as filed with the Securities
and Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
10.7 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Capital Management
Holdings, Inc.) (Filed herewith)
10.8 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Insurance Holdings,
Inc.) (Filed herewith)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.9 Fully Disclosed Clearing Agreement between the Pershing
Division, Donaldson, Lufkin & Jenrette Securities
Corporation and The Chapman Co. dated March 16, 1999 (Filed
as Exhibit 10.9 to the Company's Registration Statement on
Form SB-2 (File No. 333-90987) as filed with the Commission
on November 15, 1999 and hereby incorporated by reference.)
10.10 $106,922 Promissory Note to The Chapman Co. from Nathan A.
Chapman, Jr. dated December 31, 1996 (Filed as Exhibit 10.1
to Chapman Holdings, Inc.'s Registration Statement on Form
SB-2 (File No. 333-43487) as filed with the Securities and
Exchange Commission on December 30, 1997 and hereby
incorporated by reference)
10.11 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 (Filed as Exhibit 5(A) to
Post-Effective Amendment No. 13 to The Chapman Funds, Inc.'s
Registration Statement on Form N-1A (File Nos.
33-25716;811-5697) as filed with the Securities and Exchange
Commission on August 7, 1997 and hereby incorporated by
reference)
10.12 Distribution Agreement between The Chapman Co. and The
Chapman Funds, Inc. on behalf of the DEM Equity Fund dated
October 28, 1997 (Filed as Exhibit 5(B) to Post-Effective
Amendment No. 15 to The Chapman Funds, Inc.'s Registration
Statement on Form N-1A (File No. 33-25716;811-5697) as filed
with the Securities and Exchange Commission on March 2, 1998
and hereby incorporated by reference)
10.13 Distribution Agreement between The Chapman Co. and The
Chapman Funds, Inc. on behalf of the DEM Index Fund dated
October 28, 1997 (Filed as Exhibit 5(C) to Post-Effective
Amendment No. 16 to The Chapman Funds, Inc.'s Registration
Statement on Form N-1A (File Nos. 33-25716;811-5697) as
filed with the Securities and Exchange Commission on May 29,
1998 and hereby incorporated by reference.)
10.14 Distribution Agreement between The Chapman Co. and The
Chapman Funds, Inc. on behalf of the DEM Fixed Income Fund
dated February 11, 1998 (Filed as Exhibit 5(D) to
Post-Effective Amendment No. 17 to The Chapman Funds, Inc.'s
Registration Statement on Form N-1A (File Nos.
33-25716;811-5697) as filed with the Securities and Exchange
Commission on June 12, 1998 and hereby incorporated by
reference.)
10.15 Distribution Agreement between The Chapman Co. and The
Chapman Funds, Inc. on behalf of the DEM Multi-Manager
Equity Fund dated February 11, 1998 (Filed as Exhibit 5(E)
to Post-Effective Amendment No. 18 to The Chapman Fund,
Inc.'s Registration Statement on Form N-1A (File Nos.
33-25716;811-5697) as filed with the Securities and Exchange
Commission on September 30, 1998 and hereby incorporated by
reference.)
10.16 Distribution Agreement between The Chapman Co. and The
Chapman Funds, Inc. on behalf of the DEM Multi-Manager Bond
Fund dated February 11, 1998 (Filed as Exhibit 5(F) to
Post-Effective Amendment No. 21 to The Chapman Funds, Inc.'s
Registration Statement on Form N-1A (File Nos.
33-25716;811-5697) as filed with the Securities and Exchange
Commission on July 15, 1999 and hereby incorporated by
reference.)
10.17 Equipment Lease Agreement between The Chapman Co. and
Chapman Limited Partnership dated October 1, 1993 (Filed as
Exhibit 10.7 to Chapman Holdings, Inc.'s Registration
Statement on Form SB-2 (File No. 333-43487) as filed with
the Securities and Exchange Commission on December 30, 1997
and hereby incorporated by reference)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.18 Trademark Assignment from The Chapman Co. to Nathan A.
Chapman, Jr. dated December 24, 1997 (Filed as Exhibit 10.8
to Chapman Holdings, Inc.'s Registration Statement on Form
SB-2 (File No. 333-43487) as filed with the Securities and
Exchange Commission on December 30, 1997 and hereby
incorporated by reference)
10.19 Trademark Assignment from The Chapman Co. to Nathan A.
Chapman, Jr. dated December 24, 1997 (Filed as Exhibit 10.9
to Chapman Holdings, Inc.'s Registration Statement on Form
SB-2 (File No. 33343487) as filed with the Securities and
Exchange Commission on December 30, 1997 and hereby
incorporated by reference)
10.20 License Agreement between The Chapman Co. and Nathan A.
Chapman, Jr. dated December 26, 1997 (Filed as Exhibit 10.10
to Chapman Holdings, Inc.'s Registration Statement on Form
SB-2 (File 333-43487) as filed with the Securities and
Exchange Commission on December 30, 1997 and hereby
incorporated by reference)
10.21 $763,367 Promissory Note to The Chapman Co. from Chapman
Capital Management dated October 31, 1997 (Filed as Exhibit
10.11 to Pre-Effective Amendment No. 1 to Chapman Holdings,
Inc.'s Registration Statement on Form SB-2 (File No.
333-43487) as filed with the Securities and Exchange
Commission on February 17, 1998 and hereby incorporated by
reference)
10.22 $176,250 Promissory Note to The Chapman Co. from Nathan A.
Chapman, Jr. dated February 11, 1998 (Filed as Exhibit 10.13
to Pre-Effective Amendment No. 1 to Chapman Holdings, Inc.'s
Registration Statement on Form SB-2 (File No. 333-43487) as
filed with the Securities and Exchange Commission on
February 17, 1998 and hereby incorporated by reference)
10.23 $100,000 Promissory Note to Chapman Holdings, Inc. from
Nathan A. Chapman, Jr. dated May 1, 1998 (Filed as Exhibit
10.1 to Chapman Holding's Quarterly Report on Form 10Q-SB
(File No. 0-23587) as filed with the Securities and Exchange
Commission on November 16, 1998 and hereby incorporated by
reference)
10.24 $285,587.34 Promissory Note to Chapman Holdings, Inc. from
Nathan A. Chapman, Jr. dated March 11, 1998 (Filed as
Exhibit 10.2 to Chapman Holding, Inc.'s Quarterly Report on
Form 10Q-SB as filed with the Securities and Exchange
Commission on November 16, 1998 and hereby incorporated by
reference)
10.25 $51,690 Promissory Note to Chapman Holdings, Inc. from
Nathan A. Chapman, Jr. dated December 31, 1998 (Filed as
Exhibit 10.17 to Post-Effective Amendment No. 2 to Chapman
Holdings, Inc.'s Registration Statement on Form SB-2 (File
No. 333-48419) as filed with the Securities and Exchange
Commission on March 18, 1999 and hereby incorporated by
reference)
10.26 Agreement between Chapman Holdings, Inc. and Chapman Capital
Management Holdings, Inc. as to Allocation of Shared
Expenses dated as of January 1, 1999 (Filed as Exhibit 10.1
to Chapman Holdings, Inc.'s Quarterly Report on Form 10Q-SB
(File No. 0-23587) as filed with the Securities and Exchange
Commission on May 17, 1999 and hereby incorporated by
reference)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.27 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and The Chapman Funds, Inc.
on behalf of The Chapman U.S. Treasury Money Fund and The
Chapman Institutional Management Fund dated April 20, 1997
(Filed as Exhibit 4(A) to Post-Effective Amendment No. 13 to
The Chapman Funds, Inc.'s Registration Statement on Form
N-1A (file Nos. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on August 7, 1997 and
hereby incorporated by reference)
10.28 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and The Chapman Funds, Inc.
on behalf of the DEM Equity Fund dated October 28, 1997
(Filed as Exhibit 4(B) to Post-Effective Amendment No. 15 to
The Chapman Funds, Inc.'s Registration Statement on Form
N-1A (File No. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on March 2, 1998 and
hereby incorporated by reference)
10.29 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and The Chapman Funds, Inc.
on behalf of the DEM Index Fund dated October 28, 1997
(Filed as Exhibit 4(C) to Post-Effective Amendment No. 16 to
The Chapman Funds, Inc.'s Registration Statement on Form
N-1A (File Nos. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on May 29, 1998 and
hereby incorporated by reference.)
10.30 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and The Chapman Funds, Inc.
on behalf of the DEM Fixed Income Fund dated February 11,
1998 (Filed as Exhibit 4(D) to Post-Effective Amendment No.
17 to The Chapman Funds, Inc.'s Registration Statement on
Form N-1A (File Nos. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on June 12, 1998 and
hereby incorporated by reference.)
10.31 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and The Chapman Funds, Inc.
on behalf of the DEM Multi-Manager Equity Fund dated October
23, 1999 (Filed as Exhibit 4(E) to Post-Effective Amendment
No. 18 to The Chapman Funds, Inc.'s Registration Statement
on Form N-1A (File Nos. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on September 30, 1998 and
hereby incorporated by reference.)
10.32 Advisory and Administrative Services Agreement between
Chapman Capital Management, Inc. and the Chapman Funds, Inc.
on behalf of the DEM Multi-Manager Bond Fund dated October
23, 1998 (Filed as Exhibit 4(F) to Post-Effective Amendment
No. 21 to The Chapman Funds, Inc.'s Registration Statement
on Form N-1A (File Nos. 33-25716;811-5697) as filed with the
Securities and Exchange Commission on July 15, 1999 and
hereby incorporated by reference.)
10.33 Advisory Agreement for Separate Account dated June 1, 1995
(Filed as Exhibit 10.5 to Amendment No. 2 to Chapman Capital
Management Holdings, Inc.'s Registration Statement on From
SB-2 (File No. 333-51883) as filed with the Securities and
Exchange Commission on June 22, 1998 and hereby incorporated
by reference)
10.34 Agreement & Declaration of Trust between Chapman Capital
Management, Inc. and Bankers Trust Company dated November 1,
1996 (Filed as Exhibit 10.6 to Chapman Capital Management
Holding's Registration Statement on Form SB-2 (File No.
333-51883) as filed with the Securities and Exchange
Commission on May 5, 1998 and hereby incorporated by
reference)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.35 Agreement between Bankers Trust Company and Chapman Capital
Management, Inc. dated November 1, 1996 (Filed as Exhibit
10.7 to Chapman Capital Management Holding's Registration
Statement on Form SB-2 (File No. 333-51883) as filed with
the Securities and Exchange Commission on May 5, 1998 and
hereby incorporated by reference)
10.36 Agreement between Bankers Trust Company and Chapman Capital
Management and Tremont Partners, Inc. and Stamberg Prestia,
Ltd. dated November 1, 1996 (Filed as Exhibit 10.8 to
Chapman Capital Management Holding's Registration Statement
on Form SB-2 (File No. 333-51883) as filed with the
Securities and Exchange Commission on May 5, 1998 and hereby
incorporated by reference)
10.37 Service Mark License Agreement between Chapman Capital
Management Holdings, Inc., Chapman Capital Management, Inc.
and Nathan A. Chapman, Jr. dated as of June 9, 1998 Filed as
Exhibit 10.10 to Amendment No. 2 to Chapman Capital
Management Holdings, Inc.'s Registration Statement on Form
SB-2 (File No. 333-51883) as filed with the Securities and
Exchange Commission on June 22, 1998 and hereby incorporated
by reference)
10.38 $65,000 Promissory Note to Chapman Capital Management
Holdings, Inc. from Nathan A. Chapman, Jr. dated August 21,
1998 (Filed as Exhibit 10.1 to Chapman Capital Management
Holdings, Inc.'s Quarterly Report on Form 10Q-SB (File No.
0-24213) as filed with the Securities and Exchange
Commission on November 16, 1998 and hereby incorporated by
reference)
10.39 $45,000 Demand Note to Chapman Capital Management, Inc. from
Nathan A. Chapman, Jr. dated July 2, 1998 (Filed as Exhibit
10.2 to Chapman Capital Management Holdings, Inc.'s
Quarterly Report on Form 10Q-SB (File No. 0-24213) as filed
with the Securities and Exchange Commission on November 16,
1998 and hereby incorporated by reference)
10.40 $242,000 Promissory Note to Chapman Capital Management
Holdings, Inc. from Nathan A. Chapman, Jr. dated as of July
29, 1999 (Filed as Exhibit 10.2 to Chapman Capital
Management Holdings, Inc.'s Quarterly Report on Form 10Q-SB
(File No. 0-24213) as filed with the Securities and Exchange
Commission on August 20, 1999 and hereby incorporated by
reference)
21 Subsidiaries of the Company (Filed herewith)
23.1 Consent of Arthur Andersen LLP (Filed herewith)
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5) (To be filed by amendment)
24.1 Power of Attorney (Filed as Exhibit 24.1 to the Company's
Registration Statement on Form SB-2 (File No. 333-90987) as
filed with the Securities and Exchange Commission on
November 15, 1999 and hereby incorporated by reference.)
24.2 Consent to serve as director (Raymond Haysbert) (Filed as
Exhibit 24.2 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
24.3 Consent to serve as director (Kweisi Mfume) (Filed as
Exhibit 24.3 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
24.4 Consent to serve as director (Mark Jefferson) (Filed as
Exhibit 24.4 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
24.5 Consent to serve as director (Adolph Washington) (Filed as
Exhibit 24.5 to the Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on November 15, 1999 and hereby
incorporated by reference.)
27 Financial Data Schedule (Filed as Exhibit 27 to the
Company's Registration Statement on Form SB-2 (File No.
333-90987) as filed with the Securities and Exchange
Commission on November 15, 1999 and hereby incorporated by
reference.)
</TABLE>
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
II-8
<PAGE>
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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Baltimore, state of Maryland, on January 18, 2000.
<TABLE>
<S> <C> <C>
ECHAPMAN.COM, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
PRESIDENT
</TABLE>
Pursuant to the requirements of the Act, the registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ NATHAN A. CHAPMAN, JR. President and Director (Principal January 18, 2000
- -------------------------------------- Executive Officer)
Nathan A. Chapman, Jr.
/s/ DEMETRIS BROWN Treasurer and Chief Financial January 18, 2000
- -------------------------------------- Officer (Principal Financial
Demetris Brown Officer and Principal Accounting
Officer)
The Entire Board of Directors
Nathan A. Chapman, Jr.
Earl U. Bravo, Sr.
By: /s/ NATHAN A. CHAPMAN, JR. January 18, 2000
----------------------------------
Nathan A. Chapman, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
4 Form of common stock Certificate
10.3 Agreement and Plan of Merger by and among the Company, CHI
Merger Subsidiary, Inc. and Chapman Holdings, Inc. dated
November 15, 1999.
10.4 Agreement and Plan of Merger by and among the Company, CCMH
Merger Subsidiary, Inc. and Chapman Capital Management
Holdings, Inc. dated November 15, 1999.
10.5 Agreement and Plan of Merger by and among the Company, CIH
Merger Subsidiary, Inc. and Chapman Insurance Holdings, Inc.
dated November 15, 1999
10.7 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Capital Management
Holdings, Inc.)
10.8 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Insurance Holdings,
Inc.)
21. Subsidiaries of EChapman.com, Inc.
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE>
Exhibit 4
STATE OF MARYLAND
NUMBER SHARES
SPECIMEN ------
ECHAPMAN.COM, INC.
COMMON STOCK
PAR VALUE -- $0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT SPECIMEN is the registered holder of __________
(_____) Shares of the Common Stock of EChapman.com, Inc. transferable only on
the books of the Corporation by the holder hereof in person or by Attorney
upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and its Corporate Seal to be
hereunto affixed this ____ day of ____ A.D. 2000.
- ------------------------------------- --------------------------------------
Earl U. Bravo, Sr., Secretary Nathan A. Chapman, Jr., President
Par Value
$0.001
<PAGE>
Exhibit 10.3
AGREEMENT AND PLAN
OF MERGER
BY AND AMONG
ECHAPMAN.COM, INC.,
CHI MERGER SUBSIDIARY, INC.
AND
CHAPMAN HOLDINGS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER........................................ 1
SECTION 1.1. The Merger................................... 1
SECTION 1.2. Effective Time of the Merger................. 1
ARTICLE II THE SURVIVING CORPORATION........................ 2
SECTION 2.1. Charter...................................... 2
SECTION 2.2. By-laws...................................... 2
SECTION 2.3. Effect of the Merger......................... 2
SECTION 2.4. Directors.................................... 2
SECTION 2.5. Officers..................................... 2
ARTICLE III CONVERSION OF SHARES............................ 3
SECTION 3.1. Conversion of CHI Shares in the Merger....... 3
SECTION 3.2. Consideration................................ 4
SECTION 3.3. Exchange of Certificates..................... 4
SECTION 3.4. No Fractional Securities..................... 6
SECTION 3.5. Closing...................................... 6
SECTION 3.6. Closing of CHI's Transfer Books.............. 6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EChapman AND
MERGER SUBSIDIARY........................................... 7
SECTION 4.1. Organization................................. 7
SECTION 4.2. Capitalization............................... 7
SECTION 4.3. Authority; Non-Contravention; Approvals...... 8
SECTION 4.4. Absence of Undisclosed Liabilities........... 9
SECTION 4.5. Absence of Litigation........................ 9
SECTION 4.6. Registration Statement and Proxy Statement... 10
SECTION 4.7. Compliance with Agreements................... 10
SECTION 4.8. EChapman Stockholders' Approval.............. 10
SECTION 4.9. Brokers and Finders.......................... 10
SECTION 4.10. Chapman Capital Management Holdings, Inc.... 11
SECTION 4.11. Anti-takeover Statutes...................... 11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF CHI............. 11
SECTION 5.1. Organization and Qualification............... 11
SECTION 5.2. Capitalization............................... 11
SECTION 5.3. Subsidiaries................................. 12
SECTION 5.4. Authority; Non-Contravention; Approvals...... 12
SECTION 5.5. Securities Reports and Financial
Statements.............................................. 14
SECTION 5.6. Absence of Undisclosed Liabilities........... 14
SECTION 5.7. Absence of Certain Changes or Events......... 14
SECTION 5.8. Absence of Litigation........................ 15
SECTION 5.9. Registration Statement and Proxy Statement... 15
SECTION 5.10. No Violation of Law......................... 15
SECTION 5.11. Compliance with Agreements.................. 16
SECTION 5.12. Taxes....................................... 16
SECTION 5.13. Employee Benefits Plans; ERISA.............. 16
SECTION 5.14. Labor Controversies......................... 18
SECTION 5.15. Title to Assets............................. 18
SECTION 5.16. CHI Stockholders' Approval.................. 19
SECTION 5.17. Trademarks and Intellectual Property
Compliance.............................................. 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 5.18. Material Agreements......................... 19
SECTION 5.19. Insurance................................... 19
SECTION 5.20. Brokers and Finders......................... 20
SECTION 5.21. Certain Transactions........................ 20
SECTION 5.22. Opinion of Financial Advisor................ 20
SECTION 5.23. Anti-takeover Statutes...................... 20
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER........... 20
SECTION 6.1. Conduct of Business by CHI Pending the
Merger.................................................. 20
SECTION 6.2. Conduct of Business by EChapman Pending the
Merger.................................................. 22
SECTION 6.3. Control of CHI's Operations.................. 23
SECTION 6.4. Control of EChapman's Operations............. 23
SECTION 6.5. Acquisition Transactions..................... 23
ARTICLE VII ADDITIONAL AGREEMENTS........................... 24
SECTION 7.1. Access to Information........................ 24
SECTION 7.2. Stockholders' Approval....................... 24
SECTION 7.3. Affiliates of CHI............................ 25
SECTION 7.4. Expenses and Fees............................ 25
SECTION 7.5. Agreement to Cooperate....................... 25
SECTION 7.6. Public Statements............................ 26
SECTION 7.7. Notification of Certain Matters.............. 26
SECTION 7.8. Proxy Statement/Prospectus and Registration
Statement............................................... 26
SECTION 7.9. Tax-Free Treatment of Merger................. 26
SECTION 7.10. Directors' and Officers' Indemnification.... 27
SECTION 7.11. Amendment to CCMHI Merger Agreement......... 28
ARTICLE VIII CONDITIONS..................................... 28
SECTION 8.1. Conditions to Each Party's Obligation to
Effect the Merger....................................... 28
SECTION 8.2. Additional Conditions to Obligation of CHI to
Effect the Merger....................................... 29
SECTION 8.3. Additional Conditions to Obligations of
EChapman and Merger Subsidiary to Effect the Merger..... 30
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER................ 30
SECTION 9.1. Termination.................................. 30
SECTION 9.2. Effect of Termination........................ 31
SECTION 9.3. Amendment.................................... 31
SECTION 9.4. Waiver....................................... 31
ARTICLE X GENERAL PROVISIONS................................ 31
SECTION 10.1. Non-Survival of Representations and
Warranties.............................................. 32
SECTION 10.2. Notices..................................... 32
SECTION 10.3. Interpretation.............................. 33
SECTION 10.4. Miscellaneous............................... 33
SECTION 10.5. Counterparts................................ 33
SECTION 10.6. Parties In Interest......................... 33
SECTION 10.7. Exhibits and Schedules...................... 33
SECTION 10.8. Severability................................ 33
SECTION 10.9. Definition of Knowledge..................... 34
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), made this 15(th)day of
November, 1999, by and among EChapman.com, Inc., a Maryland corporation
("EChapman"), CHI Merger Subsidiary, Inc., a Maryland corporation and wholly
owned subsidiary of EChapman ("Merger Subsidiary"), and Chapman Holdings, Inc.,
a Maryland corporation ("CHI").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of EChapman and CHI have each
determined that the merger of CHI with and into Merger Subsidiary (the "Merger")
is consistent with and in furtherance of the long-term business strategy of
EChapman and CHI and subject to receipt of the fairness opinion referred to
hereinafter is fair to, and in the best interests of, CHI and its stockholders;
WHEREAS, the respective Boards of Directors of EChapman, Merger Subsidiary
and CHI have each approved the Merger, upon the terms and subject to the
conditions set forth herein; and
WHEREAS, EChapman, Merger Subsidiary and CHI intend to qualify the Merger as
a tax-free reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Maryland General Corporation Law (the "MGCL"), CHI shall be merged with
and into Merger Subsidiary and the separate corporate existence of CHI shall
thereupon cease. Merger Subsidiary shall be the surviving corporation under the
name Chapman Holdings, Inc. in the Merger and is hereinafter sometimes referred
to as the "Surviving Corporation." The Surviving Corporation will be governed by
laws of the State of Maryland as a direct, wholly owned subsidiary of EChapman.
SECTION 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
at such time (the "Effective Time") as shall be stated in Articles of Merger, in
a form mutually acceptable to EChapman and CHI, to be filed with the State
Department of Assessments and Taxation of Maryland (the "SDAT") in accordance
with the MGCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the Closing (as defined in
Section 3.5) of the transactions contemplated by this Agreement.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1. CHARTER. The Charter of Merger Subsidiary, as in effect
immediately prior to the Effective Time, except that the name of the Surviving
Corporation will change to Chapman Holdings, Inc., shall be the Charter of the
Surviving Corporation until duly amended in accordance with applicable law.
SECTION 2.2. BY-LAWS. The By-laws of Merger Subsidiary, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until duly amended in accordance with applicable law.
1
<PAGE>
SECTION 2.3. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions of
the MGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, except as otherwise provided herein, all the property,
rights, privileges, powers and franchises of Merger Subsidiary and CHI shall
vest in the Surviving Corporation, all debts, liabilities and duties of Merger
Subsidiary and CHI shall become the debts, liabilities and duties of the
Surviving Corporation in the same manner as if the Surviving Corporation had
itself incurred them, and the separate corporate existence of Merger Subsidiary
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth herein.
SECTION 2.4. DIRECTORS. The directors of Merger Subsidiary immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation and shall hold office until their respective successors are duly
elected and qualified in accordance with the Charter and By-laws of the
Surviving Corporation, or their earlier death, resignation or removal.
SECTION 2.5. OFFICERS. The officers of Merger Subsidiary immediately prior
to the Effective Time shall be the initial officers of the Surviving Corporation
and shall serve as the officers of the Surviving Corporation at the pleasure of
the Board of Directors of the Surviving Corporation.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. CONVERSION OF CHI SHARES IN THE MERGER. Subject to Section 3.4
regarding fractional shares, at the Effective Time, by virtue of the Merger and
without any action on the part of any holder of any shares of CHI's common
stock, par value $0.001 per share ("CHI Common Stock"):
(a) Each share of CHI Common Stock issued and outstanding immediately prior
to the Effective Time, other than CHI Common Stock owned by EChapman or Merger
Subsidiary, or owned by an Objecting Stockholder (as defined in Section 3.1(c))
shall be converted in accordance with Section 3.3 into the right to receive the
Merger Consideration (as defined in Section 3.2).
(b) Each share of CHI Common Stock owned by EChapman or Merger Subsidiary
(each a "Non-Converting Share") immediately prior to the Effective Time, if any,
shall be cancelled and extinguished without conversion thereof into EChapman
Shares (as defined in Section 3.2(a)) or payment therefor.
(c) Any holder (an "Objecting Stockholder") of CHI Common Stock ("Objecting
Shares") who files with CHI a written objection to the proposed Merger at or
before the stockholders' meeting at which the proposed Merger will be
considered, whose shares are not voted in favor of the approval of the Merger at
the meeting of CHI stockholders at which the Merger is approved, and who, within
twenty (20) days after the Effective Time (which time will be set forth in a
notice provided to any such stockholder by EChapman and Merger Subsidiary by
certified mail, return receipt requested pursuant to Section 3-207(b) of the
MGCL), makes a written demand upon Merger Subsidiary for payment for such
Objecting Shares, accompanied by a surrender of the certificates for such
Objecting Shares, all pursuant to the provisions of Title 3, Subtitle 2 of the
MGCL, or any successor statute thereto, shall be entitled to receive from Merger
Subsidiary in cash the fair value of such Objecting Shares determined in
accordance with the aforesaid provisions of the MGCL, or any successor statute
thereto. The amount paid to any Objecting Stockholder shall be debited against
the capital accounts of Merger Subsidiary. If any Objecting Stockholder objects
to the Merger and demands payment in cash for his Objecting Shares as aforesaid,
EChapman shall pay to Merger Subsidiary, as a contribution to its capital, cash
at a price per share equal to the price per share paid by Merger Subsidiary to
such Objecting Stockholder.
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(d) Each unexpired option to purchase CHI Common Stock ("CHI Options") that
is outstanding at the Effective Time shall be converted into an option to
purchase the number of EChapman Shares (as defined in Section 3.2) equal to the
number of shares of CHI Common Stock which could be acquired upon the exercise
of such CHI Options multiplied by the Exchange Ratio (as defined in
Section 3.2), at an exercise price per share equal to the per share exercise
price of such CHI Options divided by the Exchange Ratio rounded to the nearest
whole cent and in any case an amount which, is not less than the par value, if
any, of EChapman Shares (the "Exchanged Options"). EChapman shall maintain
sufficient authorized shares of stock to issue EChapman Shares that will become
issuable upon the exercise of the Exchanged Options.
(e) At the Effective Time, each issued and outstanding share of common
stock, par value $.001 per share, of Merger Subsidiary shall remain outstanding.
(f) No share of CHI Common Stock shall be deemed to be outstanding or to
have any rights other than those set forth in this Section 3.1 after the
Effective Time unless specified by applicable provisions of the MGCL.
SECTION 3.2. CONSIDERATION.
(a) The consideration to be issued to each holder of CHI Common Stock in the
Merger ("Merger Consideration") will be that number of shares of EChapman common
stock, par value $0.001 per share ("EChapman Shares"), which is determined by
multiplying the Exchange Ratio (as defined below) by the number of shares of CHI
Common Stock held by such holder of CHI Common Stock on the Closing Date (as
defined in Section 3.5). The "Exchange Ratio" shall equal 1.93295 EChapman
Shares for each share of CHI Common Stock.
(b) No fractional EChapman Shares shall be issued, and, in lieu thereof, a
Fractional Share Payment shall be made (as defined in Section 3.4).
(c) The Merger Consideration shall be subject to equitable adjustment in the
event of any stock split, stock dividend, reverse stock split or other change
(other than pursuant to exercises of outstanding options) in the number of
EChapman Shares or CHI Common Stock outstanding prior to Closing.
SECTION 3.3. EXCHANGE OF CERTIFICATES.
(a) Except as otherwise provided in Section 3.1(c) or by the MGCL, from and
after the Effective Time, all CHI Common Stock shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist, and
each holder of a certificate representing shares of CHI Common Stock shall cease
to have any rights with respect thereto, except the right to receive in exchange
therefor, upon surrender thereof to a bank or trust company designated by
EChapman and acceptable to CHI (the "Exchange Agent"), a certificate
representing EChapman Shares to which such holder is entitled pursuant to
Section 3.1 plus the Fractional Share Payment. Notwithstanding any other
provision of this Agreement, until holders or transferees of certificates
theretofore representing shares of CHI Common Stock have surrendered them for
exchange as provided herein, no dividends or other distributions declared or
made after the Effective Time with respect to EChapman Shares with a record date
after the Effective Time shall be paid with respect to any EChapman Shares
represented by such certificates and no Fractional Share Payment shall be made.
Upon surrender of a certificate which immediately prior to the Effective Time
represented shares of CHI Common Stock, there shall be paid to the holder of
such certificate by EChapman without interest, (i) promptly, the amount of any
Fractional Share Payment with respect to a fractional EChapman Share to which
such holder is entitled, (ii) except as provided in (iii), below, the amount of
dividends or other distributions (without interest) with a record date after the
Effective Time which theretofore became payable with respect to whole EChapman
Shares, and (iii) at the appropriate payment date, the amount of dividends or
other
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distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole EChapman Shares.
(b) If any EChapman Shares are to be issued in a name other than that in
which the certificate for shares of CHI Common Stock surrendered in exchange
therefor is registered, it shall be a condition of such exchange that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and the person requesting such exchange shall have paid to
EChapman or the Exchange Agent any applicable transfer or other taxes required
by reason of such issuance.
(c) As of the Effective Time, EChapman shall deposit, or cause to be
deposited, with the Exchange Agent, for the account of Merger Subsidiary, the
number of EChapman Shares required to effect the exchanges referred to in
paragraph (a) above, and cash for purposes of the Fractional Share Payment.
EChapman shall thereafter from time to time deposit, or cause to be deposited,
with the Exchange Agent cash for payment of any dividend or distributions in
respect of such EChapman Shares with a record date after the Effective Time.
(d) As soon as reasonably practicable after the Effective Time, EChapman or
the Surviving Corporation shall cause the Exchange Agent to mail to each holder
of record as of the Effective Time of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of CHI
Common Stock (the "CHI Certificates"), whose shares were converted into the
right to receive EChapman Shares (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to CHI
Certificates shall pass, only upon delivery of CHI Certificates to the Exchange
Agent), and (ii) instructions for use in effecting the surrender of CHI
Certificates in exchange for EChapman Shares. Upon surrender of a CHI
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal, the holder of such CHI Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole EChapman Shares into which the shares of CHI Common Stock theretofore
represented by CHI Certificates so surrendered shall have been converted
pursuant to the provisions of Section 3.1, and CHI Certificates so surrendered
shall be cancelled. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of shares of CHI Common Stock
for any EChapman Shares or dividends or distributions thereon delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(e) Promptly following the date which is six (6) months after the Effective
Time, EChapman or the Surviving Corporation shall cause the Exchange Agent to
deliver to EChapman all certificates, property and other documents in its
possession relating to the transactions described in this Agreement. Thereafter,
each holder of a CHI Certificate may surrender such CHI Certificate to EChapman
and (subject to applicable abandoned property, escheat and similar laws) receive
in exchange therefor a certificate representing EChapman Shares to which such
person is entitled, any dividends or distributions with respect to the EChapman
Shares and any Fractional Share Payment, in each case without any interest
thereon. Notwithstanding the foregoing, none of the Exchange Agent, EChapman,
Merger Subsidiary, or the Surviving Corporation shall be liable to a holder of
CHI Common Stock for any EChapman Shares delivered to a public official pursuant
to applicable abandoned property, escheat and similar laws.
(f) In the event any CHI Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such CHI Certificate to be lost, stolen or destroyed, and the posting of a bond
by such person in such amount as EChapman may direct as indemnity against any
claim that may be made against it or the Exchange Agent with respect to such CHI
Certificate, the Exchange Agent, EChapman or the Surviving Corporation, as the
case may be, shall issue in exchange for such lost, stolen or destroyed CHI
Certificate, a certificate representing the proper number of EChapman Shares
deliverable in respect thereof determined in accordance with this Section 3.3,
and
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cash for the Fractional Share Payment and any other dividends or distributions
in respect of EChapman Shares with a record date after the Effective Time.
SECTION 3.4. NO FRACTIONAL SECURITIES. No fractional EChapman Shares shall
be issued in the Merger and no stock dividend, stock split or interest shall
relate to any fractional security, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a security holder.
In lieu of any such fractional shares, each holder of CHI Common Stock, who
would otherwise have been entitled to receive a certificate representing a
fractional EChapman Share upon surrender of CHI Certificates for exchange
pursuant to this Article III, shall be entitled to receive from the Exchange
Agent a cash payment (the "Fractional Share Payment") equal to the product of
the fractional share interest to which such holder would otherwise be entitled
multiplied by $29.
SECTION 3.5. CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Venable,
Baetjer and Howard, LLP, Suite 1800, 2 Hopkins Plaza, Baltimore, MD 21201, on
the day of CHI's Stockholders' Approval as such term is defined in Section 7.2,
below, or at such other time and place as EChapman and CHI shall reasonably
agree (the date on which the Closing occurs is referred to in this Agreement as
the "Closing Date").
SECTION 3.6. CLOSING OF CHI'S TRANSFER BOOKS. At the Effective Time, the
stock transfer books of CHI shall be closed and no transfer of shares of CHI
Common Stock which were outstanding immediately prior to the Effective Time
shall thereafter be made. From and after the Effective Time, the holders of CHI
Certificates representing shares of CHI Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights as stockholders of
CHI, except as otherwise provided herein or by law. If, after the Effective
Time, subject to the terms and conditions of this Agreement, CHI Certificates
formerly representing CHI Common Stock are presented to the Exchange Agent,
EChapman or Surviving Corporation, as the case may be, they shall be cancelled
and exchanged for certificates representing EChapman Shares and cash for the
Fractional Share Payment and any other dividends or distributions in respect of
EChapman Shares with a record date after the Effective Time in accordance with
this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EChapman AND MERGER
SUBSIDIARY
EChapman and Merger Subsidiary each represent and warrant to CHI as of the
date hereof as follows:
SECTION 4.1. ORGANIZATION. The Merger Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Maryland. EChapman is a corporation duly organized and validly existing and in
good standing under the laws of the state of Maryland. Each of EChapman and
Merger Subsidiary has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted. Neither EChapman nor Merger Subsidiary is in violation of any
of the provisions of their respective charters or By-laws.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of EChapman consists of 50,000,000 shares
of EChapman Shares, of which one share is outstanding. The issued and
outstanding EChapman Share is, and all EChapman Shares to be issued at the
Effective Time shall be, when issued, duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights granted by EChapman or by
applicable law.
(b) Except as set forth in this Agreement, the Affiliate Agreements (as
defined in Section 7.3) and the CCMHI Merger Agreement (as defined in
Section 4.10) or in connection with the EChapman
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Public Offering (as defined in Section 8.1(f)), there are (i) no outstanding
subscriptions, options, calls, contracts, commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement and also including any rights plan or other anti-takeover agreement,
obligating EChapman or any subsidiary of EChapman to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital stock of
EChapman or obligating EChapman or any subsidiary of EChapman to grant, extend
or enter into any such agreement or commitment, and (ii) no voting trusts,
proxies or other agreements or understandings to which EChapman or any
subsidiary of EChapman is a party or is bound with respect to the voting of any
shares of capital stock of EChapman and, to the knowledge of EChapman, there are
no such trusts, proxies, agreements or understandings by, between or among any
of EChapman's stockholders with respect to EChapman Shares.
(c) The authorized capital stock of Merger Subsidiary consists of 20,000,000
shares of Merger Subsidiary Common Stock, of which 1,000 shares are issued and
outstanding all of which are owned beneficially and of record by EChapman.
EChapman has no other direct or indirect subsidiaries, except for CCMHI Merger
Subsidiary, Inc. and CIHI Merger Subsidiary, Inc.
SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) EChapman and Merger Subsidiary each have full corporate power and
authority to enter into this Agreement and, subject to EChapman Required
Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Boards
of Directors of EChapman and Merger Subsidiary and by the sole stockholder of
EChapman and Merger Subsidiary, and no other corporate proceedings on the part
of EChapman or Merger Subsidiary are necessary to authorize the execution and
delivery of this Agreement or the consummation by EChapman and Merger Subsidiary
of the transactions contemplated hereby. This Agreement has been duly executed
and delivered by each of EChapman and Merger Subsidiary, and, assuming the due
authorization, execution and delivery hereof by CHI, constitutes a valid and
legally binding agreement of each of EChapman and Merger Subsidiary, enforceable
against each of them in accordance with its terms, except that such enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally, and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of EChapman and
Merger Subsidiary does not, and the performance of this Agreement and the
transactions contemplated hereby by EChapman and Merger Subsidiary shall not,
violate, conflict with or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of EChapman or Merger
Subsidiary, under any of the terms, conditions or provisions of (i) the
respective Charters and By-laws of EChapman or Merger Subsidiary, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority, domestic or
foreign, applicable to EChapman or Merger Subsidiary or any of their respective
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which EChapman or Merger
Subsidiary is now a party or by which EChapman or Merger Subsidiary or any of
their respective properties or assets may be bound. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms, conditions
or provisions described in clauses (ii) and (iii) of the first sentence of this
paragraph (b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or encumbrances
that would not, in the aggregate, have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of EChapman and Merger Subsidiary, taken as a whole (an
"EChapman Material Adverse Effect").
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(c) Except for (i) the filing of the Registration Statement (as defined in
Section 4.6) with the SEC pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the declaration of the effectiveness thereof by the
SEC and filings with various state blue sky authorities and any other required
filings in other jurisdictions to register or exempt EChapman Shares issuable
pursuant hereto, and (ii) the making of the Merger Filing with the SDAT in
connection with the Merger (collectively referred to as the "EChapman Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority, domestic or foreign, is necessary for the execution and
delivery of this Agreement by EChapman or Merger Subsidiary or the consummation
by EChapman or Merger Subsidiary of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have an EChapman Material Adverse Effect, or affect
Merger Subsidiary's ability to consummate the Merger.
SECTION 4.4. ABSENCE OF UNDISCLOSED LIABILITIES. Neither EChapman nor Merger
Subsidiary has any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except liabilities that were incurred in
the ordinary course of business and that will not have an EChapman Material
Adverse Effect.
SECTION 4.5. ABSENCE OF LITIGATION. There is no claim of any kind, suit,
action, proceeding, litigation, arbitration, investigation or controversy
affecting EChapman or Merger Subsidiary pending or, to the knowledge of
EChapman, threatened and neither EChapman nor any of its subsidiaries is subject
to any continuing order of, or written agreement or memorandum of understanding
with, or continuing material investigation by, any governmental entity or
authority, or any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator.
SECTION 4.6. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by EChapman for inclusion in (a) the
Registration Statement on Form S-4 to be filed under the Securities Act with the
SEC by EChapman and CHI in connection with the Merger for the purpose of
registering EChapman Shares and Exchanged Options to be issued in connection
with the Merger (the "Registration Statement"), or (b) the proxy statement to be
distributed in connection with CHI's meeting of stockholders to vote upon this
Agreement and the transactions contemplated hereby (the "Proxy Statement" and,
together with the prospectus included in the Registration Statement, the "Proxy
Statement/Prospectus") will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, at the time of the
meeting of stockholders of CHI to be held in connection with the transactions
contemplated by this Agreement, and at the Effective Time, or, in the case of
the Registration Statement, as amended or supplemented, at the time it is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Registration Statement and Proxy
Statement/Prospectus shall comply in all material respects as to form and
substance with the requirements of the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder, except that no representation is
made by EChapman with respect to information supplied by CHI for inclusion
therein.
SECTION 4.7. COMPLIANCE WITH AGREEMENTS. EChapman and Merger Subsidiary are
not in breach or violation of or in default in the performance or observance of
any term or provision of, and no event has occurred which, with notice or lapse
of time or action by a third party, could result in a default under (a) their
respective charters or By-Laws; or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which EChapman or Merger Subsidiary is a party or by which
any of them is bound or to which any of their
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property is subject, which breaches, violations and defaults, in the case of
clause (b) of this Section 4.11, would have, in the aggregate, an EChapman
Material Adverse Effect.
SECTION 4.8. EChapman Stockholders' Approval. The affirmative vote of the
holders of a majority of the outstanding shares of EChapman Shares entitled to
vote is not necessary to approve the transactions contemplated by this
Agreement.
SECTION 4.9. BROKERS AND FINDERS. Neither EChapman nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby.
SECTION 4.10. CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. The representations
and warranties of Chapman Capital Management Holdings, Inc. set forth in
Article V of the Agreement and Plan of Merger dated as of the date of this
Agreement (the "CCMHI Merger Agreement") by and between Chapman Capital
Management Holdings, Inc., CCMHI Merger Subsidiary, Inc. and EChapman are true
and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement is true and correct in all respects).
SECTION 4.11. ANTI-TAKEOVER STATUTES. The provisions of Section 3-601 et
seq. (Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to EChapman or
Merger Subsidiary in connection with the transactions contemplated by this
Agreement.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CHI
CHI represents and warrants to EChapman as of the date hereof as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. CHI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. CHI is qualified to do business and is in good standing, where
applicable, in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of CHI and its
subsidiaries, taken as a whole (a "CHI Material Adverse Effect"). CHI is not in
violation of any of the provisions of its charter or By-Laws.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of CHI consists of 20 million shares of
CHI Common Stock of which 2,953,622 shares are issued and outstanding. All of
the issued and outstanding shares of CHI's capital stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights granted by CHI or by applicable law.
(b) Except as disclosed in CHI SEC Reports (as defined in Section 5.5) or
the CHI minute book, as of the date hereof, there are (i) no outstanding
subscriptions, options, calls, contracts, commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement and also including any rights plan or other anti-takeover agreement,
obligating CHI or any subsidiary of CHI to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of CHI or
obligating CHI or any subsidiary of CHI to grant, extend or enter into any such
agreement or commitment, and (ii) no voting trusts, proxies or other agreements
or understandings to which CHI or any subsidiary of CHI is a party or is bound
with respect to the voting of any shares of capital stock of CHI and, to the
knowledge of CHI, there are no such trusts, proxies, agreements or
understandings by, between or among any of CHI's stockholders with respect to
CHI Common Stock.
SECTION 5.3. SUBSIDIARIES. Except as disclosed in CHI SEC Reports (as
defined in Section 5.5), CHI has no subsidiaries. Each direct and indirect
subsidiary of CHI is duly organized, validly existing and in good standing,
where applicable, under the laws of its jurisdiction of incorporation or
organization and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, except where any failure would not have a CHI Material Adverse
Effect. Each subsidiary of CHI is qualified to do business, and is in good
standing, where applicable, in each jurisdiction (except California and Illinois
for The Chapman Co.) in which the properties owned, leased or operated by it or
the nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified and in good standing would not have
a CHI Material Adverse Effect. All of the outstanding shares of capital stock of
each corporate subsidiary of CHI have been duly authorized and validly issued
and are fully paid, nonassessable and free of preemptive rights and are
beneficially owned directly or indirectly by CHI, free and clear of any liens,
claims or encumbrances. There are no subscriptions, options, warrants, rights,
calls, contracts, voting trusts, proxies or other commitments, understandings,
restrictions or arrangements relating to the issuance, sale, voting, transfer,
ownership or other rights with respect to any shares of capital stock of any
subsidiary of CHI, including any right of conversion or exchange under any
outstanding security, instrument or agreement.
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
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(a) CHI has full corporate power and authority to enter into this Agreement
and, subject to CHI Stockholders' Approval (as defined in Section 7.2 and CHI
Required Statutory Approvals (as defined in Section 5.4(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors of CHI, and no other corporate proceedings on the part of CHI are
necessary to authorize the execution and delivery of this Agreement or, except
for CHI Stockholders' Approval, the consummation by CHI of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by CHI,
and, assuming the due authorization, execution and delivery hereof by EChapman
and Merger Subsidiary, constitutes a valid and legally binding agreement of CHI,
enforceable against CHI in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by CHI does not, and the
performance of this Agreement and the transactions contemplated hereby by CHI
shall not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of CHI or any of its
subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or By-laws of CHI or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to CHI
or any of its subsidiaries or any of their respective properties or assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which CHI or any of its subsidiaries is now a party or by which
CHI or any of its subsidiaries or any of their respective properties or assets
may be bound. The consummation by CHI of the transactions contemplated hereby
will not result in any violation, conflict, breach, termination, acceleration or
creation of liens under any of the terms, conditions or provisions described in
clauses (i) through (iii) of the preceding sentence, subject (x) in the case of
the terms, conditions or provisions described in clause (ii) above, to obtaining
(prior to the Effective Time) CHI Required Statutory Approvals and CHI
Stockholders' Approval, and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Effective
Time) consents required from lenders, lessors or other third parties. Excluded
from the foregoing sentences of this paragraph (b), insofar as they apply to the
terms, conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a CHI Material
Adverse Effect.
(c) Except for (i) the filing of the Registration Statement with the SEC
pursuant to the Securities Act and the Exchange Act and the declaration of the
effectiveness thereof by the SEC and filings with various state blue sky
authorities, and (ii) the making of the Merger Filing with the SDAT in
connection with the Merger (the filings and approvals referred to in clauses
(i) through (ii) above are collectively referred to as the "CHI Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by CHI or the consummation by CHI of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have a CHI Material Adverse Effect.
SECTION 5.5. SECURITIES REPORTS AND FINANCIAL STATEMENTS. Since
December 31, 1998, CHI has filed with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it under each of the Securities Act, the Exchange Act
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and the respective rules and regulations thereunder, all of which, as amended if
applicable, complied in all material respects with all applicable requirements
of the appropriate act and the rules and regulations thereunder (collectively,
the "CHI SEC Reports"). As of their respective dates, CHI SEC Reports did not
contain any 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
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim consolidated
financial statements of CHI included in such reports (collectively, the "CHI
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
CHI and its subsidiaries as of the dates thereof and the results of their
operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and any other adjustments described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in CHI
SEC Reports, neither CHI nor any of its subsidiaries had at December 31, 1998,
nor has incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except:
(a) liabilities, obligations or contingencies (i) which are accrued or reserved
against in CHI Financial Statements or reflected in the notes thereto, or
(ii) which were incurred after December 31, 1998 and were incurred in the
ordinary course of business and consistent with past practices;
(b) liabilities, obligations or contingencies which (i) would not, in the
aggregate, have a CHI Material Adverse Effect, or (ii) have been discharged or
paid in full prior to the date hereof; and (c) liabilities and obligations which
are of a nature not required to be reflected in the consolidated financial
statements of CHI and its subsidiaries prepared in accordance with generally
accepted accounting principles consistently applied and which were incurred in
the normal course of business.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
CHI SEC Reports since December 31, 1998, CHI and its subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
past practice and since December 31, 1998, there has not been (a) any change in
the financial condition, results of operations or business of CHI or any of its
subsidiaries having, in the aggregate, a CHI Material Adverse Effect; (b) any
damage, destruction or loss (whether or not covered by insurance) with respect
to any assets of CHI or any of its subsidiaries having, in the aggregate, a CHI
Material Adverse Effect; (c) any change by CHI in its accounting methods,
principles or practices; (d) any revaluation by CHI of any of its material
assets in any material respect; (e) any entry by CHI or any of its subsidiaries
into any commitment or transactions material to CHI and its subsidiaries, taken
as a whole; or (f) any declaration, setting aside or payment of any dividends or
distributions in respect of shares of CHI Common Stock or any redemption,
purchase or other acquisition of any of its securities or any of the securities
of any subsidiary of CHI.
SECTION 5.8. ABSENCE OF LITIGATION. Except as disclosed in CHI SEC Reports,
a claim by Bishop, Rosen & Co., Inc. v. The Chapman Company, NASD Arbitration
No. 98-05015 currently proceeding in arbitration in New York and a threatened
claim by Boca Raton Resort & Club, which has not been filed as of the date of
this Agreement, (a) there is no claim of any kind, suit, action, proceeding,
litigation, arbitration, investigation or controversy affecting CHI or any of
its subsidiaries pending or, to the knowledge of CHI, threatened; and
(b) neither CHI nor any of its subsidiaries is subject to any continuing order
of, or written agreement or memorandum of understanding with, or continuing
material investigation by, any governmental entity or authority, or any
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator.
SECTION 5.9. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by CHI or its subsidiaries for inclusion
in (a) the Registration Statement, or (b) the Proxy Statement will, in the case
of the Proxy Statement or any amendments thereof or supplements
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thereto, at the time of the mailing of the Proxy Statement and any amendments or
supplements thereto, at the time of the meetings of stockholders of CHI to be
held in connection with the transactions contemplated by this Agreement, and at
the Effective Time, or, in the case of the Registration Statement, as amended or
supplemented, at the time it is declared effective by the SEC, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement and Proxy Statement/Prospectus will comply in all
material respects as to form and substance with the requirements of the
Securities Act, the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by CHI with respect to
information supplied by EChapman for inclusion therein.
SECTION 5.10. NO VIOLATION OF LAW. Except as disclosed in CHI SEC Reports
and a finding by the National Association of Securities Dealers, Inc. of a net
cap violation by The Chapman Co., on February 9, 16, and 23, 1996, neither CHI
nor any of its subsidiaries is in violation of or has been given notice or been
charged with any violation of, any law, statute, order, rule, regulation,
ordinance or judgment including, without limitation, any applicable
environmental law, ordinance or regulation of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a CHI Material Adverse Effect. CHI and its
subsidiaries have all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct their businesses as presently conducted (collectively, the "CHI
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or in
the aggregate, would not have a CHI Material Adverse Effect. CHI and its
subsidiaries are not in violation of the terms of any CHI Permit, except for
delays in filing reports or violations which, alone or in the aggregate, would
not have a CHI Material Adverse Effect.
SECTION 5.11. COMPLIANCE WITH AGREEMENTS. Except as disclosed in CHI SEC
Reports, CHI and each of its subsidiaries are not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or action by a third
party, could result in a default under (a) the respective charters or By-laws of
CHI or any of its subsidiaries; or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which CHI or any of its subsidiaries is a party or by which
any of them is bound or to which any of their property is subject, which
breaches, violations and defaults, would have, in the aggregate, a CHI Material
Adverse Effect.
SECTION 5.12. TAXES. CHI and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns required to be filed by
them for all periods ending on or prior to the date hereof, and such Tax Returns
are true, correct and complete in all material respects, and (ii) duly paid in
full all Taxes due in connection with or with respect to the filing of such Tax
Returns and have paid all other Taxes as are due, except such as are being
contested in good faith by appropriate government proceedings and with respect
to which CHI is maintaining reserves adequate for their payment. Neither the IRS
nor any other governmental entity or taxing authority or agency is now
asserting, either through audits, administrative proceedings, court proceedings
or otherwise, or, to the best of CHI's knowledge, threatening to assert against
CHI or any of its subsidiaries any deficiency or claim for additional Taxes.
Neither CHI nor any of its subsidiaries has been granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax. There are no tax liens on any assets of CHI or any of
its subsidiaries. Neither CHI nor any of its subsidiaries has received a ruling
or entered into an agreement with the IRS or any other governmental entity or
taxing authority or agency that would have a CHI Material Adverse Effect, taken
as a whole, after the Effective Time. The accruals and reserves for Taxes
reflected in the CHI balance sheet reflected in the latest CHI SEC Report are
adequate to cover all Taxes accruable through the date thereof (including Taxes
being contested) in accordance with generally accepted accounting principles.
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No agreements relating to allocating or sharing of Taxes exist among CHI and its
subsidiaries. Neither CHI nor any of its subsidiaries is required to include in
income either (i) any material amount in respect of any adjustment under
Section 481 of the Code, or (ii) any material installment sale gain. Neither CHI
nor any of its subsidiaries has made an election under Section 341(f) of the
Code.
SECTION 5.13. EMPLOYEE BENEFITS PLANS; ERISA.
(a) Neither CHI nor its subsidiaries has any obligation to create any
material employee benefit plans, programs, arrangements and practices for
employees (such plans, programs, arrangements and practices of CHI and its
subsidiaries being referred to as the "CHI Plans"), including employee benefit
plans within the meaning set forth in Section 3(3) of ERISA, or other similar
material arrangements for the provision of benefits or to amend any such plan so
as to increase benefits thereunder, except as required under the terms of CHI
Plans, under existing collective bargaining agreements or to comply with
applicable law.
(b) No member of CHI's "controlled group," within the meaning of
Section 4001(a)(14) of ERISA, maintains or contributes to, or within the five
(5) years preceding the Effective Time has maintained or contributed to, an
employee pension benefit plan subject to Title IV of ERISA. None of the CHI
Plans obligates CHI or any of its subsidiaries to pay material separation,
severance, termination or similar-type benefits solely as a result of any
transaction contemplated by this Agreement or as a result of a "change in
control," within the meaning of such term under Section 280G of the Code. None
of CHI Plans provides for or promises retiree medical, disability or life
insurance benefits to any current or former employee, officer or director of CHI
or any of its subsidiaries except as otherwise required with respect to health
plan coverage in Section 4980B of the Code. Each of CHI Plans is subject only to
the laws of the United States or a political subdivision thereof.
(c) Each CHI Plan has been operated in all respects in accordance with the
requirements of all applicable laws and all persons who participate in the
operation of such CHI Plans and all CHI Plan "fiduciaries" (within the meaning
of Section 3(21) of ERISA) have acted in accordance with the provisions of all
applicable laws, except where violations of such applicable laws would not,
individually or in the aggregate, have a CHI Material Adverse Effect, taken as a
whole. CHI and its subsidiaries have performed all obligations required to be
performed by any of them under, are not in any respect in default under or in
violation of, and CHI has no knowledge of any default or violation by any party
to, any CHI Plan, except where such failures, defaults or violations would not,
individually or in the aggregate, have a CHI Material Adverse Effect, taken as a
whole. No legal action, suit or claim is pending or, to the knowledge of CHI,
threatened with respect to any CHI Plan (other than claims for benefits in the
ordinary course) and, to the knowledge of CHI, no fact or event exists that
could give rise to any such action, suit or claim. Neither CHI nor any of its
subsidiaries has incurred any material liability to the Pension Benefit Guaranty
Corporation (other than premiums payable to the Pension Benefit Guaranty
Corporation in the ordinary course) or any material "withdrawal liability"
within the meaning of Section 4201 of ERISA.
(d) Each CHI Plan that is intended to be qualified under Section 401(a) of
the Code or Section 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified, and each trust established in
connection with any CHI Plan that is intended to be exempt from federal income
taxation under Section 501(a) of the Code is so exempt, and, to the knowledge of
CHI, no fact or event has occurred since the date of such determination letter
from the IRS to adversely affect the qualified status of any such CHI Plan or
the exempt status of any such trust. No trust maintained or contributed to by
CHI or any of its subsidiaries is intended to be qualified as a voluntary
employees' beneficiary association or is intended to be exempt from federal
income taxation under Section 501(c)(9) of the Code.
(e) To CHI's knowledge, there has been no non-exempt prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) with
respect to any CHI Plan. CHI
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and each of its subsidiaries has not incurred any liability for any excise tax
arising under Section 4972 or 4980B of the Code and, to the knowledge of CHI, no
fact or event exists that could give rise to any such liability except for
liability which singly or in the aggregate could not reasonably be expected to
cause a CHI Material Adverse Effect.
(f) All contributions, premiums or payments required to be made with
respect to any CHI Plan have been made on or before their due dates.
(g) The CHI Minute Book sets forth a true and complete list of each current
or former employee, officer or director of CHI or any of its subsidiaries who
holds any option to purchase CHI Common Stock as of the date of this Agreement,
together with the number of shares of CHI Common Stock subject to such option,
the date of grant of such option, the option price of such option, whether such
option is intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO") and the expiration date of such option.
The CHI Minute Book also sets forth the total number of such ISOs and such
non-qualified options.
(h) Neither CHI nor any of its subsidiaries is a party to any employment,
severance, consulting or other similar contracts with any employees, officers or
directors of CHI or any of its subsidiaries other than such contracts that are
disclosed in CHI SEC Reports. Neither CHI nor any of its subsidiaries is a party
to any collective bargaining agreements.
SECTION 5.14. LABOR CONTROVERSIES. Except as set forth in the CHI SEC
Reports, (a) there are no material controversies pending or, to the knowledge of
CHI, threatened between CHI or its subsidiaries and any representatives of any
of their employees; (b) to the knowledge of CHI, there are no material
organizational efforts presently being made or threatened involving any of the
presently unorganized employees of CHI or its subsidiaries; (c) CHI and its
subsidiaries have, to the knowledge of CHI, complied in all material respects
with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, civil rights, administration of leave and rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985 and the payment of social
security and similar taxes; and (d) no person has, to the knowledge of CHI,
asserted that CHI or any of its subsidiaries is liable in any material amount
for any arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing, except for such controversies, organizational efforts,
non-compliance and liabilities which, singly or in the aggregate, could not
reasonably be expected to cause a CHI Material Adverse Effect.
SECTION 5.15. TITLE TO ASSETS. CHI and each of its subsidiaries has good and
marketable title to all their respective properties and assets, real and
personal, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (a) liens for Taxes not yet due
and payable; (b) such imperfections in title and easements and encumbrances, if
any, as are not material in character, amount or extent and do not materially
and adversely affect the value or interfere with the present use of the property
subject thereto or affected thereby, or otherwise materially impair CHI's
present business operations; (c) as disclosed in CHI SEC Reports; or
(d) mortgages incurred in the ordinary course of business, and except for such
matters which, singly or in the aggregate, could not reasonably be expected to
cause a CHI Material Adverse Effect. All leases under which CHI leases any
material real or personal property are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event which with notice or lapse of time or both
would become a default other than defaults under such leases which in the
aggregate will not have a CHI Material Adverse Effect.
SECTION 5.16. CHI STOCKHOLDERS' APPROVAL. The affirmative vote of the
holders of a majority of the outstanding shares of CHI Common Stock entitled to
vote is necessary to approve the transactions contemplated by this Agreement.
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SECTION 5.17. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. CHI and its
subsidiaries own or have the right to use all of their Intellectual Property
Rights without any conflict with the rights of others, except for such conflicts
that have not had and are not reasonably likely to have a CHI Material Adverse
Effect, and the consummation of the transactions contemplated hereby will not
alter or impair such rights in any material respect. To the knowledge of CHI, no
claims are pending by any person with respect to the ownership, validity,
enforceability or use of any such Intellectual Property Rights challenging or
questioning the validity or effectiveness of any of the foregoing which claims
could reasonably be expected to have a CHI Material Adverse Effect. To CHI's
knowledge, none of it or its subsidiaries' key technical personnel is in
violation of any term of any employment agreement, patent disclosure agreement
or any other contract or agreement relating to the relationship of any such
employee with it or its subsidiaries or any other party the result of which has
had or is reasonably likely to have a CHI Material Adverse Effect.
SECTION 5.18. MATERIAL AGREEMENTS. CHI has no material agreements other than
those filed as exhibits to CHI SEC Reports or which will be filed with the
Registration Statement as follows: Support Agreement between CHI and Nathan A.
Chapman, Jr. dated November 12, 1999; Fully Disclosed Clearing Agreement between
Pershing Division, Donaldson, Lufkin & Jenrette Securities Corporation and the
Chapman Co., dated March 16, 1999.
SECTION 5.19. INSURANCE. Except to the extent there would be no CHI Material
Adverse Effect, to CHI's knowledge, all of CHI's and its subsidiaries'
liability, theft, life, health, fire, title, worker's compensation and other
forms of insurance, surety bonds and umbrella policies, insuring CHI and its
subsidiaries and their directors, officers, employees, independent contractors,
properties, assets and businesses, are valid and in full force and effect
(without any premium past due or pending notice of cancellation) and are, in the
reasonable judgment of CHI, adequate for the business of CHI and its
subsidiaries as now conducted, and there are no claims, singly or in the
aggregate, in excess of the limitations of coverage set forth in such policies.
The provision and/or reserves in CHI Financial Statements are adequate for any
and all self insurance programs maintained by CHI or its subsidiaries.
SECTION 5.20. BROKERS AND FINDERS. Neither CHI nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby, except that CHI has retained Ferris,
Baker Watts, Incorporated as its financial advisor.
SECTION 5.21. CERTAIN TRANSACTIONS. Except as set forth in the CHI SEC
Reports, since December 31, 1998, none of the officers or directors of CHI or of
any of its subsidiaries, and, to CHI's knowledge, none of their employees or the
employees of any of its subsidiaries is a party to any transaction with it or
any of its subsidiaries (other than for services as an employee, officer or
director and other than transactions between it and one or more of its direct or
indirect wholly owned subsidiaries or between such subsidiaries), including
without limitation, any contract, agreement or other arrangement (i) providing
for the furnishing of services to or by, (ii) providing for rental of real or
personal property to or from, or (iii) otherwise requiring payments to or from,
any such officer, director, affiliate or employee, any member of the family of
any such officer, director or employee or any corporation, partnership, trust or
other entity in which any such officer, director or employee has a substantial
interest or which is an affiliate of such officer, director or employee (a "CHI
Affiliated Transaction") other than transactions which would not have a CHI
Material Adverse Effect.
SECTION 5.22. OPINION OF FINANCIAL ADVISOR. CHI received the opinion of
Ferris, Baker Watts, Incorporated, its financial advisor, dated November 11,
1999, to the effect that, as of such date, the transactions contemplated hereby
are fair to its stockholders from a financial point of view, a copy of which has
been delivered to the other parties hereto.
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SECTION 5.23. ANTI-TAKEOVER STATUTES. The provisions of Section 3-601 et
seq. (Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to CHI in
connection with the transactions contemplated by this Agreement.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY CHI PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless EChapman shall
otherwise agree in writing, CHI shall, and shall cause its subsidiaries to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a wholly owned subsidiary of CHI;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell, pledge
or dispose of or otherwise cause to become outstanding, any additional shares
of, or any options, warrants or rights of any kind to acquire any shares of
their capital stock of any class or any debt or equity securities convertible
into or exchangeable for such capital stock, except that CHI may issue shares
upon the exercise of CHI Options outstanding on the date hereof;
(d) not (i) incur or become contingently liable with respect to any
material indebtedness for borrowed money other than (x) borrowings in the
ordinary course of business not to exceed $100,000 or in other cases for amounts
in excess of $100,000 which shall be on terms reasonably acceptable to EChapman,
or (y) borrowings to refinance existing indebtedness, in the ordinary course of
business, (ii) redeem, purchase, acquire or offer to purchase or acquire any
shares of its capital stock or any options, warrants or rights to acquire any of
its capital stock or any security convertible into or exchangeable for its
capital stock, (iii) take or fail to take any action which action or failure
would cause CHI or its stockholders (except to the extent that any stockholders
receive cash in lieu of fractional shares) to recognize gain or loss for federal
income tax purposes as a result of the consummation of the Merger, (iv) make any
acquisition of any assets or businesses and expenditures for fixed or capital
(in each case, after consultation with EChapman) or expenditures in the ordinary
course of business which, in such cases of $100,000 or more, shall be on terms
reasonably acceptable to EChapman, (v) sell, pledge, dispose of or encumber any
assets or businesses other than sales in the ordinary course of business which,
in such cases involving $100,000 or more, shall be on terms reasonably
acceptable to EChapman, or (vi) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(e) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees, and preserve the goodwill
and business relationships with customers, vendors and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(f) confer on a regular and frequent basis with one or more representatives
of EChapman to report operational matters of materiality and the general status
of ongoing operations;
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(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees except
in the ordinary course and consistent with past practice which shall be on terms
acceptable to EChapman;
(h) not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health care,
employment or other employee benefit plan, agreement, trust, fund or arrangement
for the benefit or welfare of any employee or retiree except as required to
comply with changes in applicable law and increases in wages in the ordinary
course and consistent with past practice for non-executive employees which, in
such cases involving $25,000 or more, shall be on terms acceptable to EChapman;
(i) maintain with adequately capitalized insurance companies insurance
coverage for its assets and its businesses in such amounts and against such
risks and losses as are consistent with past practice; and
(j) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.2. CONDUCT OF BUSINESS BY ECHAPMAN PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless CHI shall
otherwise agree in writing, EChapman shall, and shall cause Merger Subsidiary,
to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a subsidiary of EChapman and except for cash dividends in
historic amounts payable in a manner consistent with past practices;
(c) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(d) confer on a regular and frequent basis with one or more representatives
of CHI to report operational matters of materiality and the general status of
ongoing operations;
(e) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.3. CONTROL OF CHI'S OPERATIONS. Nothing contained in this
Agreement shall give to EChapman, directly or indirectly, rights to control or
direct CHI's operations prior to the Effective Time. Prior to the Effective
Time, CHI shall exercise, consistent with and subject to the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.4. CONTROL OF ECHAPMAN'S OPERATIONS. Nothing contained in this
Agreement shall give to CHI, directly or indirectly, rights to control or direct
EChapman's operations prior to the Effective Time. Prior to the Effective Time,
EChapman shall exercise, consistent with and subject to the terms and conditions
of this Agreement, complete control and supervision of its operations.
SECTION 6.5. ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, CHI shall not, and shall not permit any of its
subsidiaries to, (i) initiate, solicit or seek,
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directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) to acquire all or any substantial part of the business and
properties of CHI and its subsidiaries or more than fifty percent (50%) of the
capital stock of CHI and its subsidiaries, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof except for the transaction contemplated
herein (any such transactions being referred to herein as "Acquisition
Transactions"), or (ii) otherwise cooperate in any effort or attempt to
initiate, solicit or seek an Acquisition Transaction.
(b) Notwithstanding any other provision of this Agreement, in response to
an unsolicited proposal or inquiry (or a proposal or inquiry arising from a
general solicitation) with respect to an Acquisition Transaction and subject to
the duties of CHI's Board of Directors under applicable law, if such Acquisition
Transaction is a tender offer subject to the provisions of Section 14(d) under
the Exchange Act, CHI's Board of Directors may take and disclose to CHI's
stockholders a position contemplated by Rule 14e-2(a) under the Exchange Act.
(c) In the event CHI shall receive any offer of an Acquisition Transaction,
it shall (i) immediately inform EChapman of such offer, and (ii) furnish to
EChapman the identity of the proponent of such offer and, unless the Board of
Directors of CHI concludes that such disclosure is inconsistent with its duties
under applicable law, a description of the material terms thereof.
(d) CHI may terminate this Agreement, withdraw, modify or not make its
recommendations referred to in Section 7.2, and enter into a definitive
agreement for an Acquisition Transaction if, but only if, (i) the Board of
Directors of CHI shall have consulted with legal counsel concerning its
obligations under applicable law and (ii) CHI shall have determined in good
faith after consultation with the independent financial advisors of CHI that
such Acquisition Transaction would be more favorable to CHI's stockholders from
a financial point of view than the Merger.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION. From and after the date hereof, each
party shall furnish promptly to one another a copy of each report and other
document filed or received by any of them pursuant to the requirements of
federal or state securities laws or which may have a material effect on their
respective businesses, properties or personnel, and work papers of their
respective accountants and other information or copies of such documentation and
access to senior management personnel as reasonably deemed necessary by the
requesting party's respective accountants, legal counsel or financial advisors
to complete the Proxy Statement/Prospectus and Registration Statement, and the
opinion referred to in Section 8.2(d) below. EChapman and its subsidiaries shall
hold and shall use their commercially reasonable efforts to cause EChapman's
representatives to hold, and CHI and its subsidiaries shall hold and shall use
their commercially reasonable efforts to cause CHI's representatives to hold, in
strict confidence all non-public documents and information furnished to EChapman
and Merger Subsidiary or to CHI, as the case may be, in connection with the
transactions contemplated by this Agreement. Notwithstanding the foregoing
(i) EChapman and CHI may disclose such information as may be necessary in
connection with seeking EChapman Required Statutory Approvals, CHI Required
Statutory Approvals and CHI Stockholders' Approval (as defined in Section 7.2
below), and (ii) each of EChapman, Merger Subsidiary and CHI may disclose any
information that it is required by law or judicial or administrative order to
disclose.
SECTION 7.2. STOCKHOLDERS' APPROVAL. Subject to the duties of the Board of
Directors of CHI under applicable law, CHI shall, as promptly as practicable,
submit the transactions contemplated hereby for the approval of its stockholders
at a meeting of stockholders and, subject to the duties of the Board of
Directors of CHI under applicable law, shall use its commercially reasonable
efforts to obtain stockholder approval and adoption (the "CHI Stockholders'
Approval") of this Agreement and the transactions contemplated hereby. Such
meeting of the stockholders shall be held as soon as practicable following the
date upon which the Registration Statement becomes effective. CHI shall, through
its Board of Directors, but subject to the duties of the members thereof under
applicable law, recommend to its stockholders approval of the transactions
contemplated by this Agreement. CHI acknowledges and agrees: (i) that a breach
of its covenant contained in this Section 7.2 to convene a meeting of its
stockholders and call for a vote with respect to the approval of this Agreement
and the Merger will result in irreparable harm to EChapman which will not be
compensable in money damages, and (ii) that such covenant shall be specifically
enforceable and that specific performance and injunctive relief shall be a
remedy properly available to EChapman for a breach of such covenant.
SECTION 7.3. AFFILIATES OF CHI. Within 30 days after the date of this
Agreement: (i) CHI shall deliver to EChapman a letter identifying all persons
who may be deemed affiliates of CHI under Rule 145 of the Securities Act
("Rule 145"), including, without limitation, all directors and executive
officers of CHI; (ii) CHI shall advise the persons identified in such letter of
the resale restrictions imposed by applicable securities laws; (iii) the persons
identified in such letter shall each execute a Memorandum to Persons Deemed to
be Affiliated Persons of Chapman Holdings, Inc. in such form as is acceptable to
EChapman (the "145 Memorandum"); and (iv) Nathan A. Chapman, Jr. shall execute a
Support Agreement in such form as is acceptable to EChapman (the 145 Memorandum
and the Support Agreement are collectively referred to herein as the "Affiliate
Agreements").
SECTION 7.4. EXPENSES AND FEES. Each party hereto agrees to bear its own
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement, except:
(a) CHI shall pay and be responsible for all fees and expenses incurred in
connection with the printing, filing and mailing of the Proxy
Statement/Prospectus; and
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(b) If CHI (i) fails to fulfill its obligations as set forth in Section
6.5(a)-(c) or (ii) terminates this Agreement pursuant to Section 6.5(d), CHI
shall pay to EChapman the sum of $3.0 million in lieu of any other payments
or penalties or the reimbursement of expenses incurred by EChapman.
SECTION 7.5. AGREEMENT TO COOPERATE.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto shall use all commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable pursuant to all agreements, contracts,
indentures or other instruments to which the parties hereto are a party, or
under any applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including using its
commercially reasonable efforts to (i) obtain all necessary or appropriate
waivers, consents and approvals from lenders, landlords, security holders or
other parties whose waiver, consent or approval is required to consummate the
Merger, (ii) effect all necessary registrations, filings and submissions, and
(iii) lift any injunction or other legal bar to the Merger (and, in such
case, to proceed with the Merger as expeditiously as possible).
(b) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, EChapman shall have the right, at its own expense, to
participate therein, and CHI will not settle any such litigation without the
consent of EChapman, which consent will not be unreasonably withheld.
SECTION 7.6. PUBLIC STATEMENTS. The parties (i) shall consult with each
other prior to issuing any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby, and
(ii) shall not issue any such press release or written public statement prior to
such consultation, except as may be required by law and applicable listing
requirements.
SECTION 7.7. NOTIFICATION OF CERTAIN MATTERS. Each of CHI, EChapman and
Merger Subsidiary agrees to give prompt notice to each other of, and to use
their respective commercially reasonable efforts to prevent or promptly remedy
(i) the occurrence or failure to occur or the impending or threatened occurrence
or failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (ii) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 7.8. PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
EChapman and CHI shall prepare and file with the SEC a Proxy
Statement/Prospectus and Registration Statement on Form S-4 relating to the
approval of the Merger by the stockholders of CHI and shall use all commercially
reasonable efforts to cause the Registration Statement to become effective as
soon thereafter as practicable.
(b) Prior to the date of approval of the Merger by CHI's stockholders, each
of CHI, EChapman and Merger Subsidiary shall correct promptly any information
provided by it to be used specifically in the Proxy Statement/Prospectus and
Registration Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the SEC and
have declared effective or cleared by the SEC any amendment or supplement to the
Proxy Statement/Prospectus or the Registration Statement so as to correct the
same and to cause the Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of CHI and EChapman, in each case to the extent
required by applicable law.
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SECTION 7.9. TAX-FREE TREATMENT OF MERGER. EChapman and CHI shall each use
its commercially reasonable efforts to cause the Merger to be treated as a
tax-free reorganization for federal, state and foreign income tax purposes and
agree that this Agreement shall serve as the Plan of Reorganization therefor.
SECTION 7.10. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) The Surviving Corporation shall maintain in full force and observe any
liability, exculpation or indemnification provision (including payment or
advance of expenses) now existing in the Charter or By-laws of CHI for the
benefit of any individual who served as a director or officer of CHI at any time
prior to the Effective Time.
(b) For a period of six years from and after the Effective Time, the
Surviving Corporation and EChapman shall indemnify, defend and hold harmless
each individual who served as a director, or officer of CHI or any of its
subsidiaries (the "Indemnified Parties") at any time prior to the Effective Time
from and against (i) all losses, claims, damages, costs, expenses, liabilities
or judgments or amounts that are paid in settlement with the approval of the
indemnifying party which approval shall not be unreasonably withheld (net of any
insurance proceeds obtained by the Indemnified Parties) of or in connection with
any claim, action, suit, proceeding or investigation based in whole or in part
on or arising in whole or in part out of the fact that such person is or was a
director or officer of the Company or any of its subsidiaries, whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after the Effective Time
("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the full
extent a corporation is permitted under the MGCL to indemnify its own directors
and officers, as the case may be (and the Surviving Corporation and EChapman
will pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law).
Without limiting the foregoing, in the event that any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Party (whether
arising before or after the Effective Time), (x) the Indemnified Parties may
retain counsel satisfactory to them and CHI (or them and the Surviving
Corporation and EChapman after the Effective Time), (y) CHI (or after the
Effective Time, the Surviving Corporation and EChapman) shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received, and (z) the Company (or after the Effective
Time, the Surviving Corporation and EChapman) will use all commercially
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither CHI nor the Surviving Corporation or EChapman shall be
liable for any settlement of any claim effected without their written consent,
which consent, however, shall not be unreasonably withheld. Any Indemnified
Party wishing to claim indemnification under this Section 7.10, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify CHI
or, after the Effective Time, the Surviving Corporation or EChapman (but the
failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this Section 7.10 except to the extent such
failure prejudices such party). The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
(c) The provisions of this Section 7.10 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her heirs
and representatives.
SECTION 7.11. AMENDMENT TO CCMHI MERGER AGREEMENT. Without the consent of
CHI, EChapman will not consent to any material amendment to the CCMHI Merger
Agreement.
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ARTICLE VIII
CONDITIONS
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. Unless waived by the parties, the respective obligations of each party
to effect the Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) this Agreement and the transactions contemplated hereby, as appropriate,
shall have been approved and adopted by the requisite vote of the stockholders
of CHI under applicable law and applicable listing requirements;
(b) the Registration Statement shall have been declared effective by the SEC
in accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued by the SEC and remain in
effect and no proceedings for that purpose shall, on or prior to the Effective
Time, have been instituted or, to the knowledge of EChapman or CHI, threatened
by the SEC.
(c) no preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Merger shall have
been issued and remain in effect (each party agreeing to use its commercially
reasonable efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency which would prevent the consummation of the Merger or make the
consummation of the Merger illegal;
(e) all material governmental waivers, consents, orders and approvals,
legally required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect at the Effective
Time;
(f) EChapman shall have completed a public offering (pursuant to an
effective registration statement under the Securities Act of 1933, as then in
effect, or any comparable statement under any similar federal statute then in
force) of EChapman Shares in which (i) EChapman receives gross proceeds of no
less than Twenty Million dollars ($20,000,000), and (ii) the price paid by the
public for such shares reflects a preoffering valuation of EChapman of no less
than Eighty Million Dollars ($80,000,000.00) (the "EChapman Public Offering");
and
(g) The transactions contemplated by the CCMHI Merger Agreement shall have
closed; and
(h) CHI shall have received from Ferris, Baker Watts, Incorporated an
updated opinion reasonably acceptable to CHI, dated as of the date on or about
which the Proxy Statement/Prospectus is first distributed to the stockholders of
CHI, to the effect that the consideration to be received by the stockholders of
CHI in the Merger is fair, from a financial point of view, to the holders of CHI
Common Stock, and such opinion shall not have been withdrawn as of the Closing
Date.
SECTION 8.2. ADDITIONAL CONDITIONS TO OBLIGATION OF CHI TO EFFECT THE
MERGER. Unless waived by CHI, the obligation of CHI to effect the Merger shall
be subject to the fulfillment on or prior to the Closing Date of the following
additional conditions:
(a) EChapman and Merger Subsidiary shall have performed in all material
respects their agreements contained in this Agreement required to be performed
on or prior to the Closing Date and the representations and warranties of
EChapman and Merger Subsidiary contained in this Agreement shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects) on and as of the date made
and on and as of the Closing Date, except for those representations and
warranties which address matters only as of a particular date (which shall
remain
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true and correct as of such date), as if made at and as of such date, and CHI
shall have received a Certificate of the Chairman of the Board and the President
of EChapman and Merger Subsidiary to that effect;
(b) Chapman Capital Management Holdings, Inc. and CCMHI Merger
Subsidiary, Inc. shall have performed in all material respects their agreements
contained in the CCMHI Merger Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of Chapman Capital
Management Holdings, Inc. and CCMHI Merger Subsidiary, Inc. contained in the
CCMHI Merger Agreement shall be true and correct in all material respects
(except that where any statement in a representation or warranty expressly
includes a standard of materiality, such statement shall be true and correct in
all respects) on and as of the date made and on and as of the Closing Date,
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such date), as if
made at and as of such date, and CHI shall have received a Certificate of the
Chairman of the Board and the President of EChapman to that effect;
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, an EChapman Material Adverse Effect, taken as a
whole; and
(d) CHI shall have received an opinion from the law firm of Venable, Baetjer
and Howard, LLP, dated the Closing Date, to the effect that the Merger should be
treated as a tax-free reorganization for federal and state income tax purposes.
SECTION 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF EChapman and Merger
Subsidiary to Effect the Merger. Unless waived by EChapman and Merger
Subsidiary, the obligations of EChapman and Merger Subsidiary to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the additional following conditions:
(a) CHI shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of CHI contained in this Agreement
shall be true and correct in all material respects (except that where any
statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects) on and as
of the date made and on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), as if made at and as
of such date, and EChapman shall have received a Certificate of the Chairman of
the Board and President of CHI to that effect;
(b) the Affiliate Agreements required to be delivered to EChapman pursuant
to Section 7.3 shall have been furnished as required by Section 7.3; and
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, a CHI Material Adverse Effect, taken as a whole.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated by the mutual
consent of the parties, or at any time prior to the Closing Date, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of CHI, as follows:
(a) CHI shall have the right to terminate this Agreement;
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(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of CHI;
(ii) if the Merger or the transactions set forth in the CCMHI Merger
Agreement are enjoined by a final, unappealable court order not entered at
the request or with the support of CHI or any of their affiliates or
associates;
(iii) if the terms and conditions of Section 6.5(d) and Section 7.4(b)
are satisfied; or
(iv) if CHI's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
(b) EChapman shall have the right to terminate this Agreement;
(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of EChapman;
(ii) if the Merger or the transactions set forth in the CCMHI Merger
Agreement are enjoined by a final, unappealable court order; or
(iii) if CHI's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
SECTION 9.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either EChapman or CHI as provided in Section 9.1, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of CHI, EChapman, Merger Subsidiary, or their respective officers or directors
(except as set forth in this Section 9.2 and in Sections 7.1, 7.4 and 7.6, all
of which shall survive the termination). Nothing in this Section 9.2 shall
relieve any party from liability for any breach of this Agreement.
SECTION 9.3. AMENDMENT. This Agreement may not be amended except by action
taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 9.4. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall not be deemed to
be continuing or to apply to any future obligation or requirement of any part
hereto provided herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in Articles IV and V of this Agreement
shall not survive the Merger, and after effectiveness of the Merger, CHI,
EChapman, Merger Subsidiary or their respective officers or directors shall have
no further obligation with respect thereto. The covenants and agreements set
forth in this Agreement shall survive the Merger.
SECTION 10.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt
24
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requested) or sent via facsimile to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) If to EChapman or Merger Subsidiary to:
EChapman.com, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Nathan A. Chapman, Jr.
with a copy to:
Venable, Baetjer and Howard, LLP
Suite 1800
2 Hopkins Plaza
Baltimore, MD 21201
Attention: Elizabeth R. Hughes, Esq.
(b) If to CHI, to:
Chapman Holdings, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Donald V. Watkins
Lottie H. Shackelford
with a copy to:
Blank Rome Comisky & McCauley LLP
250 West Pratt Street
Baltimore, MD 21201
Attention: James R. Deveney, II, Esq.
SECTION 10.3. INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears (i) the words "herein," "hereof" and "hereunder" and other words of
similar impact refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 10.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof,
(b) is not intended to confer upon any other person any rights or remedies
hereunder except for rights of indemnified parties under Section 7.10, and
(c) shall not be assigned by operation of law or otherwise. THIS AGREEMENT SHALL
BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY
THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO CONTRACTS EXECUTED AND TO BE
PERFORMED WHOLLY WITHIN SUCH STATE.
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SECTION 10.5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement. Each of the parties agrees to
accept and be bound by facsimile signatures hereto.
SECTION 10.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.7. EXHIBITS AND SCHEDULES. All Exhibits and Schedules referred
to in this Agreement shall be attached hereto and are incorporated by reference
herein.
SECTION 10.8. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, and parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.9. DEFINITION OF KNOWLEDGE. For those warranties and
representations set forth in Article IV which are subject to the qualification
"to EChapman's knowledge," EChapman will be deemed to have knowledge of a matter
if (i) Nathan A. Chapman, Jr. has knowledge of the matter, or (ii) such matter
has come, or should reasonably be expected to have come, to the attention of
such individual if such individual had conducted a reasonable due diligence
review of EChapman's operations and business, including, without limitation,
reasonable inquiries to key personnel of EChapman regarding the business and
operations of EChapman and a review of, and discussion with key personnel
regarding, pertinent books and records of EChapman. For those warranties and
representations set forth in Article V which are subject to the qualification
"to CHI's knowledge," CHI will be deemed to have knowledge of a matter if
(i) Nathan A. Chapman, Jr. has knowledge of the matter, or (ii) such matter has
come, or should reasonably be expected to have come, to the attention of any of
such individual if such individual had conducted a reasonable due diligence
review of CHI's operations and business, including, without limitation,
reasonable inquiries to key personnel of CHI regarding the business and
operations of CHI and a review of, and discussion with key personnel regarding,
pertinent books and records of CHI.
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IN WITNESS WHEREOF, EChapman, Merger Subsidiary and CHI have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first written above.
<TABLE>
<S> <C> <C>
EChapman.COM, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board and President
CHI MERGER SUBSIDIARY, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
President
CHAPMAN HOLDINGS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board and President
</TABLE>
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- -------------------------------------------------------------------------------
Exhibit 10.4
AGREEMENT AND PLAN
OF MERGER
BY AND AMONG
ECHAPMAN.COM, INC.,
CCMH MERGER SUBSIDIARY, INC.
AND
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I.................................................................... 1
SECTION 1.1. THE MERGER.................................................. 1
SECTION 1.2. EFFECTIVE TIME OF THE MERGER................................ 1
ARTICLE II................................................................... 2
SECTION 2.1. CHARTER..................................................... 2
SECTION 2.2. BY-LAWS..................................................... 2
SECTION 2.3. EFFECT OF THE MERGER........................................ 2
SECTION 2.4. DIRECTORS................................................... 2
SECTION 2.5. OFFICERS.................................................... 2
ARTICLE III.................................................................. 3
SECTION 3.1. CONVERSION OF CCMH SHARES IN THE MERGER..................... 3
SECTION 3.2. CONSIDERATION............................................... 4
SECTION 3.3. EXCHANGE OF CERTIFICATES.................................... 4
SECTION 3.4. NO FRACTIONAL SECURITIES.................................... 6
SECTION 3.5. CLOSING..................................................... 6
SECTION 3.6. CLOSING OF CCMH'S TRANSFER BOOKS............................ 7
ARTICLE IV................................................................... 7
SECTION 4.1. ORGANIZATION................................................ 7
SECTION 4.2. CAPITALIZATION.............................................. 7
SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS..................... 8
SECTION 4.4. ABSENCE OF UNDISCLOSED LIABILITIES.......................... 9
SECTION 4.5. ABSENCE OF LITIGATION....................................... 9
SECTION 4.6. REGISTRATION STATEMENT AND PROXY STATEMENT.................. 9
SECTION 4.7. COMPLIANCE WITH AGREEMENTS.................................. 10
SECTION 4.8. ECHAPMAN STOCKHOLDERS' APPROVAL............................. 10
SECTION 4.9. BROKERS AND FINDERS......................................... 10
SECTION 4.10. CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.................... 10
SECTION 4.11. ANTI-TAKEOVER STATUTES...................................... 11
ARTICLE V.................................................................... 11
SECTION 5.1. ORGANIZATION AND QUALIFICATION.............................. 11
SECTION 5.2. CAPITALIZATION.............................................. 11
SECTION 5.3. SUBSIDIARIES................................................ 12
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS..................... 12
SECTION 5.5. SECURITIES REPORTS AND FINANCIAL STATEMENTS................. 13
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES.......................... 14
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS........................ 14
SECTION 5.8. ABSENCE OF LITIGATION....................................... 14
SECTION 5.9. REGISTRATION STATEMENT AND PROXY STATEMENT.................. 15
SECTION 5.10. NO VIOLATION OF LAW......................................... 15
SECTION 5.11. COMPLIANCE WITH AGREEMENTS.................................. 15
SECTION 5.12. TAXES....................................................... 16
SECTION 5.13. EMPLOYEE BENEFITS PLANS; ERISA.............................. 16
SECTION 5.14. LABOR CONTROVERSIES......................................... 18
SECTION 5.15. TITLE TO ASSETS............................................. 18
SECTION 5.16. CCMH STOCKHOLDERS' APPROVAL................................. 19
SECTION 5.17. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE............. 19
SECTION 5.18. MATERIAL AGREEMENTS......................................... 19
SECTION 5.19. INSURANCE................................................... 19
</TABLE>
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SECTION 5.20. BROKERS AND FINDERS......................................... 19
SECTION 5.21. CERTAIN TRANSACTIONS........................................ 19
SECTION 5.22. OPINION OF FINANCIAL ADVISOR................................ 20
SECTION 5.23. ANTI-TAKEOVER STATUTES...................................... 20
ARTICLE VI................................................................... 20
SECTION 6.1. CONDUCT OF BUSINESS BY CCMH PENDING THE MERGER.............. 20
SECTION 6.2. CONDUCT OF BUSINESS BY ECHAPMAN PENDING THE MERGER.......... 22
SECTION 6.3. CONTROL OF CCMH'S OPERATIONS................................ 22
SECTION 6.4. CONTROL OF ECHAPMAN'S OPERATIONS............................ 22
SECTION 6.5. ACQUISITION TRANSACTIONS.................................... 23
ARTICLE VII.................................................................. 23
SECTION 7.1. ACCESS TO INFORMATION....................................... 24
SECTION 7.2. STOCKHOLDERS' APPROVAL...................................... 24
SECTION 7.3. AFFILIATES OF CCMH.......................................... 24
SECTION 7.4. EXPENSES AND FEES........................................... 25
SECTION 7.5. AGREEMENT TO COOPERATE...................................... 25
SECTION 7.6. PUBLIC STATEMENTS........................................... 25
SECTION 7.7. NOTIFICATION OF CERTAIN MATTERS............................. 26
SECTION 7.8. PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT....... 26
SECTION 7.9. TAX-FREE TREATMENT OF MERGER................................ 26
SECTION 7.10. DIRECTORS' AND OFFICERS' INDEMNIFICATION.................... 26
SECTION 7.11. AMENDMENT TO CHI MERGER AGREEMENT........................... 27
ARTICLE VIII................................................................. 28
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER...................................................... 28
SECTION 8.2. ADDITIONAL CONDITIONS TO OBLIGATION OF CCMH TO EFFECT THE
MERGER...................................................... 29
SECTION 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ECHAPMAN AND MERGER
SUBSIDIARY TO EFFECT THE MERGER............................. 30
ARTICLE IX................................................................... 30
SECTION 9.1. TERMINATION................................................. 30
SECTION 9.2. EFFECT OF TERMINATION....................................... 31
SECTION 9.3. AMENDMENT................................................... 31
SECTION 9.4. WAIVER...................................................... 31
ARTICLE X.................................................................... 31
SECTION 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.............. 31
SECTION 10.2. NOTICES..................................................... 32
SECTION 10.3. INTERPRETATION.............................................. 33
SECTION 10.4. MISCELLANEOUS............................................... 33
SECTION 10.5. COUNTERPARTS................................................ 33
SECTION 10.6. PARTIES IN INTEREST......................................... 33
SECTION 10.7. EXHIBITS AND SCHEDULES...................................... 33
SECTION 10.8. SEVERABILITY................................................ 33
SECTION 10.9. DEFINITION OF KNOWLEDGE..................................... 34
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), made this 15(th) day of
November, 1999, by and among EChapman.com, Inc., a Maryland corporation
("EChapman"), CCMH Merger Subsidiary, Inc., a Maryland corporation and wholly
owned subsidiary of EChapman ("Merger Subsidiary"), and Chapman Capital
Management Holdings, Inc., a Maryland corporation ("CCMH").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of EChapman and CCMH have each
determined that the merger of CCMH with and into Merger Subsidiary (the
"Merger") is consistent with and in furtherance of the long-term business
strategy of EChapman and CCMH and subject to receipt of the fairness opinion
referred to hereinafter is fair to, and in the best interests of, CCMH and its
stockholders;
WHEREAS, the respective Boards of Directors of EChapman, Merger Subsidiary
and CCMH have each approved the Merger, upon the terms and subject to the
conditions set forth herein; and
WHEREAS, EChapman, Merger Subsidiary and CCMH intend to qualify the Merger
as a tax-free reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Maryland General Corporation Law (the "MGCL"), CCMH shall be merged
with and into Merger Subsidiary and the separate corporate existence of CCMH
shall thereupon cease. Merger Subsidiary shall be the surviving corporation
under the name Chapman Capital Management Holdings, Inc. in the Merger and is
hereinafter sometimes referred to as the "Surviving Corporation." The Surviving
Corporation will be governed by laws of the State of Maryland as a direct,
wholly owned subsidiary of EChapman.
SECTION 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as shall be stated in Articles of
Merger, in a form mutually acceptable to EChapman and CCMH, to be filed with the
State Department of Assessments and Taxation of Maryland (the "SDAT") in
accordance with the MGCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the Closing (as defined in
Section 3.5) of the transactions contemplated by this Agreement.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1. CHARTER. The Charter of Merger Subsidiary, as in effect
immediately prior to the Effective Time, except that the name of the Surviving
Corporation will change to Chapman Capital Management Holdings, Inc., shall be
the Charter of the Surviving Corporation until duly amended in accordance with
applicable law.
SECTION 2.2. BY-LAWS. The By-laws of Merger Subsidiary, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until duly amended in accordance with applicable law.
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SECTION 2.3. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement and the applicable provisions
of the MGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, except as otherwise provided herein, all the
property, rights, privileges, powers and franchises of Merger Subsidiary and
CCMH shall vest in the Surviving Corporation, all debts, liabilities and duties
of Merger Subsidiary and CCMH shall become the debts, liabilities and duties of
the Surviving Corporation in the same manner as if the Surviving Corporation had
itself incurred them, and the separate corporate existence of Merger Subsidiary
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth herein.
SECTION 2.4. DIRECTORS. The directors of Merger Subsidiary immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation and shall hold office until their respective successors are duly
elected and qualified in accordance with the Charter and By-laws of the
Surviving Corporation, or their earlier death, resignation or removal.
SECTION 2.5. OFFICERS. The officers of Merger Subsidiary immediately prior
to the Effective Time shall be the initial officers of the Surviving Corporation
and shall serve as the officers of the Surviving Corporation at the pleasure of
the Board of Directors of the Surviving Corporation.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. CONVERSION OF CCMH SHARES IN THE MERGER. Subject to
Section 3.4 regarding fractional shares, at the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any shares of CCMH's
common stock, par value $0.001 per share ("CCMH Common Stock"):
(a) Each share of CCMH Common Stock issued and outstanding immediately
prior to the Effective Time, other than CCMH Common Stock owned by EChapman
or Merger Subsidiary or owned by an Objecting Stockholder (as defined in
Section 3.1(c)) shall be converted in accordance with Section 3.3 into the
right to receive the Merger Consideration (as defined in Section 3.2).
(b) Each share of CCMH Common Stock owned by EChapman or Merger
Subsidiary (each a "Non-Converting Share") immediately prior to the
Effective Time, if any, shall be cancelled and extinguished without
conversion thereof into EChapman Shares (as defined in Section 3.2(a)) or
payment therefor.
(c) Any holder (an "Objecting Stockholder") of CCMH Common Stock
("Objecting Shares") who files with CCMH a written objection to the proposed
Merger at or before the stockholders' meeting at which the proposed Merger
will be considered, whose shares are not voted in favor of the approval of
the Merger at the meeting of CCMH stockholders at which the Merger is
approved, and who, within twenty (20) days after the Effective Time (which
time will be set forth in a notice provided to any such stockholder by
EChapman and Merger Subsidiary by certified mail, return receipt requested
pursuant to Section 3-207(b) of the MGCL), makes a written demand upon
Merger Subsidiary for payment for such Objecting Shares, accompanied by a
surrender of the certificates for such Objecting Shares, all pursuant to the
provisions of Title 3, Subtitle 2 of the MGCL, or any successor statute
thereto, shall be entitled to receive from Merger Subsidiary in cash the
fair value of such Objecting Shares determined in accordance with the
aforesaid provisions of the MGCL, or any successor statute thereto. The
amount paid to any Objecting Stockholder shall be debited against the
capital accounts of Merger Subsidiary. If any Objecting Stockholder objects
to the Merger and demands payment in cash for his Objecting Shares as
aforesaid, EChapman shall pay to Merger Subsidiary, as a contribution to its
capital, cash
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at a price per share equal to the price per share paid by Merger Subsidiary
to such Objecting Stockholder.
(d) Each unexpired option to purchase CCMH Common Stock ("CCMH
Options") that is outstanding at the Effective Time shall be converted into
an option to purchase the number of EChapman Shares (as defined in
Section 3.2) equal to the number of shares of CCMH Common Stock which could
be acquired upon the exercise of such CCMH Options multiplied by the
Exchange Ratio (as defined in Section 3.2), at an exercise price per share
equal to the per share exercise price of such CCMH Options divided by the
Exchange Ratio rounded to the nearest whole cent and in any case an amount
which, is not less than the par value, if any, of EChapman Shares (the
"Exchanged Options"). EChapman shall maintain sufficient authorized shares
of stock to issue EChapman Shares that will become issuable upon the
exercise of the Exchanged Options.
(e) At the Effective Time, each issued and outstanding share of common
stock, par value $.001 per share, of Merger Subsidiary shall remain
outstanding.
(f) No share of CCMH Common Stock shall be deemed to be outstanding or
to have any rights other than those set forth in this Section 3.1 after the
Effective Time unless specified by applicable provisions of the MGCL.
SECTION 3.2. CONSIDERATION.
(a) The consideration to be issued to each holder of CCMH Common Stock
in the Merger ("Merger Consideration") will be that number of shares of
EChapman common stock, par value $0.001 per share ("EChapman Shares"), which
is determined by multiplying the Exchange Ratio (as defined below) by the
number of shares of CCMH Common Stock held by such holder of CCMH Common
Stock on the Closing Date (as defined in Section 3.5). The "Exchange Ratio"
shall equal 2.23363 EChapman Shares for each share of CCMH Common Stock.
(b) No fractional EChapman Shares shall be issued, and, in lieu
thereof, a Fractional Share Payment shall be made (as defined in
Section 3.4).
(c) The Merger Consideration shall be subject to equitable adjustment
in the event of any stock split, stock dividend, reverse stock split or
other change (other than pursuant to exercises of outstanding options) in
the number of EChapman Shares or CCMH Common Stock outstanding prior to
Closing.
SECTION 3.3. EXCHANGE OF CERTIFICATES.
(a) Except as otherwise provided in Section 3.1(c) or by the MGCL, from
and after the Effective Time, all CCMH Common Stock shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease
to exist, and each holder of a certificate representing shares of CCMH
Common Stock shall cease to have any rights with respect thereto, except the
right to receive in exchange therefor, upon surrender thereof to a bank or
trust company designated by EChapman and acceptable to CCMH (the "Exchange
Agent"), a certificate representing EChapman Shares to which such holder is
entitled pursuant to Section 3.1 plus the Fractional Share Payment.
Notwithstanding any other provision of this Agreement, until holders or
transferees of certificates theretofore representing shares of CCMH Common
Stock have surrendered them for exchange as provided herein, no dividends or
other distributions declared or made after the Effective Time with respect
to EChapman Shares with a record date after the Effective Time shall be paid
with respect to any EChapman Shares represented by such certificates and no
Fractional Share Payment shall be made. Upon surrender of a certificate
which immediately prior to the Effective Time represented shares of CCMH
Common Stock, there shall be paid to the holder of such certificate by
EChapman without interest, (i) promptly, the amount of any Fractional Share
Payment with respect to a fractional EChapman Share to which such holder is
entitled, (ii) except as provided in (iii), below, the amount of dividends
or other distributions
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(without interest) with a record date after the Effective Time which
theretofore became payable with respect to whole EChapman Shares, and
(iii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect
to such whole EChapman Shares.
(b) If any EChapman Shares are to be issued in a name other than that
in which the certificate for shares of CCMH Common Stock surrendered in
exchange therefor is registered, it shall be a condition of such exchange
that the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer and the person requesting such exchange shall
have paid to EChapman or the Exchange Agent any applicable transfer or other
taxes required by reason of such issuance.
(c) As of the Effective Time, EChapman shall deposit, or cause to be
deposited, with the Exchange Agent, for the account of Merger Subsidiary,
the number of EChapman Shares required to effect the exchanges referred to
in paragraph (a) above, and cash for purposes of the Fractional Share
Payment. EChapman shall thereafter from time to time deposit, or cause to be
deposited, with the Exchange Agent cash for payment of any dividend or
distributions in respect of such EChapman Shares with a record date after
the Effective Time.
(d) As soon as reasonably practicable after the Effective Time,
EChapman or the Surviving Corporation shall cause the Exchange Agent to mail
to each holder of record as of the Effective Time of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding shares of CCMH Common Stock (the "CCMH Certificates"), whose
shares were converted into the right to receive EChapman Shares (i) a letter
of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to CCMH Certificates shall pass, only upon delivery
of CCMH Certificates to the Exchange Agent), and (ii) instructions for use
in effecting the surrender of CCMH Certificates in exchange for EChapman
Shares. Upon surrender of a CCMH Certificate for cancellation to the
Exchange Agent, together with a duly executed letter of transmittal, the
holder of such CCMH Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole EChapman Shares
into which the shares of CCMH Common Stock theretofore represented by CCMH
Certificates so surrendered shall have been converted pursuant to the
provisions of Section 3.1, and CCMH Certificates so surrendered shall be
cancelled. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of shares of CCMH Common Stock for
any EChapman Shares or dividends or distributions thereon delivered to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(e) Promptly following the date which is six (6) months after the
Effective Time, EChapman or the Surviving Corporation shall cause the
Exchange Agent to deliver to EChapman all certificates, property and other
documents in its possession relating to the transactions described in this
Agreement. Thereafter, each holder of a CCMH Certificate may surrender such
CCMH Certificate to EChapman and (subject to applicable abandoned property,
escheat and similar laws) receive in exchange therefor a certificate
representing EChapman Shares to which such person is entitled, any dividends
or distributions with respect to the EChapman Shares and any Fractional
Share Payment, in each case without any interest thereon. Notwithstanding
the foregoing, none of the Exchange Agent, EChapman, Merger Subsidiary, or
the Surviving Corporation shall be liable to a holder of CCMH Common Stock
for any EChapman Shares delivered to a public official pursuant to
applicable abandoned property, escheat and similar laws.
(f) In the event any CCMH Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such CCMH Certificate to be lost, stolen or destroyed, and the
posting of a bond by such person in such amount as EChapman may direct
4
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as indemnity against any claim that may be made against it or the Exchange
Agent with respect to such CCMH Certificate, the Exchange Agent, EChapman or
the Surviving Corporation, as the case may be, shall issue in exchange for
such lost, stolen or destroyed CCMH Certificate, a certificate representing
the proper number of EChapman Shares deliverable in respect thereof
determined in accordance with this Section 3.3, and cash for the Fractional
Share Payment and any other dividends or distributions in respect of
EChapman Shares with a record date after the Effective Time.
SECTION 3.4. NO FRACTIONAL SECURITIES. No fractional EChapman Shares shall
be issued in the Merger and no stock dividend, stock split or interest shall
relate to any fractional security, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a security holder.
In lieu of any such fractional shares, each holder of CCMH Common Stock, who
would otherwise have been entitled to receive a certificate representing a
fractional EChapman Share upon surrender of CCMH Certificates for exchange
pursuant to this Article III, shall be entitled to receive from the Exchange
Agent a cash payment (the "Fractional Share Payment") equal to the product of
the fractional share interest to which such holder would otherwise be entitled
multiplied by $34.
SECTION 3.5. CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Venable,
Baetjer and Howard, LLP, Suite 1800, 2 Hopkins Plaza, Baltimore, MD 21201, on
the day of CCMH's Stockholders' Approval as such term is defined in
Section 7.2, below, or at such other time and place as EChapman and CCMH shall
reasonably agree (the date on which the Closing occurs is referred to in this
Agreement as the "Closing Date").
SECTION 3.6. CLOSING OF CCMH'S TRANSFER BOOKS. At the Effective Time, the
stock transfer books of CCMH shall be closed and no transfer of shares of CCMH
Common Stock which were outstanding immediately prior to the Effective Time
shall thereafter be made. From and after the Effective Time, the holders of CCMH
Certificates representing shares of CCMH Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights as stockholders of
CCMH, except as otherwise provided herein or by law. If, after the Effective
Time, subject to the terms and conditions of this Agreement, CCMH Certificates
formerly representing CCMH Common Stock are presented to the Exchange Agent,
EChapman or Surviving Corporation, as the case may be, they shall be cancelled
and exchanged for certificates representing EChapman Shares and cash for the
Fractional Share Payment and any other dividends or distributions in respect of
EChapman Shares with a record date after the Effective Time in accordance with
this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ECHAPMAN AND MERGER SUBSIDIARY
EChapman and Merger Subsidiary each represent and warrant to CCMH as of the
date hereof as follows:
SECTION 4.1. ORGANIZATION. The Merger Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Maryland. EChapman is a corporation duly organized and validly existing and in
good standing under the laws of the state of Maryland. Each of EChapman and
Merger Subsidiary has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted. Neither EChapman nor Merger Subsidiary is in violation of any
of the provisions of their respective charters or By-laws.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of EChapman consists of 50,000,000
shares of EChapman Shares, of which one share is outstanding. The issued and
outstanding EChapman Share is, and all EChapman Shares to be issued at the
Effective Time shall be, when issued, duly authorized, validly
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issued, fully paid, nonassessable and free of preemptive rights granted by
EChapman or by applicable law.
(b) Except as set forth in this Agreement, the Affiliate Agreements (as
defined in Section 7.3) and the CHI Merger Agreement (as defined in
Section 4.10) and in connection with the EChapman Public Offering (as
defined in Section 8.1(f)), there are (i) no outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or
exchange under any outstanding security, instrument or other agreement and
also including any rights plan or other anti-takeover agreement, obligating
EChapman or any subsidiary of EChapman to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of the capital stock of
EChapman or obligating EChapman or any subsidiary of EChapman to grant,
extend or enter into any such agreement or commitment, and (ii) no voting
trusts, proxies or other agreements or understandings to which EChapman or
any subsidiary of EChapman is a party or is bound with respect to the voting
of any shares of capital stock of EChapman and, to the knowledge of
EChapman, there are no such trusts, proxies, agreements or understandings
by, between or among any of EChapman's stockholders with respect to EChapman
Shares.
(c) The authorized capital stock of Merger Subsidiary consists of
20,000,000 shares of Merger Subsidiary Common Stock, of which 1,000 shares
are issued and outstanding, all of which are owned beneficially and of
record by EChapman. EChapman has no other direct or indirect subsidiaries,
except CHI Merger Subsidiary, Inc. and CIHI Merger Subsidiary, Inc.
SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) EChapman and Merger Subsidiary each have full corporate power and
authority to enter into this Agreement and, subject to EChapman Required
Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the
Boards of Directors of EChapman and Merger Subsidiary and by the sole
stockholder of EChapman and Merger Subsidiary, and no other corporate
proceedings on the part of EChapman or Merger Subsidiary are necessary to
authorize the execution and delivery of this Agreement or the consummation
by EChapman and Merger Subsidiary of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by each of EChapman and
Merger Subsidiary, and, assuming the due authorization, execution and
delivery hereof by CCMH, constitutes a valid and legally binding agreement
of each of EChapman and Merger Subsidiary, enforceable against each of them
in accordance with its terms, except that such enforcement may be subject to
(i) bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally, and
(ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of EChapman
and Merger Subsidiary does not, and the performance of this Agreement and
the transactions contemplated hereby by EChapman and Merger Subsidiary shall
not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination
or acceleration under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
EChapman or Merger Subsidiary, under any of the terms, conditions or
provisions of (i) the respective charters and By-laws of EChapman or Merger
Subsidiary, (ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any court or
governmental authority, domestic or foreign, applicable to EChapman or
Merger Subsidiary or any of their respective properties or assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which EChapman or Merger Subsidiary
is now a party or by which EChapman or
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Merger Subsidiary or any of their respective properties or assets may be
bound. Excluded from the foregoing sentences of this paragraph (b), insofar
as they apply to the terms, conditions or provisions described in clauses
(ii) and (iii) of the first sentence of this paragraph (b), are such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would
not, in the aggregate, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of EChapman and Merger Subsidiary, taken as a whole (an "EChapman
Material Adverse Effect").
(c) Except for (i) the filing of the Registration Statement (as defined
in Section 4.6) with the SEC pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), and the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities and
any other required filings in other jurisdictions to register or exempt
EChapman Shares issuable pursuant hereto, and (ii) the making of the Merger
Filing with the SDAT in connection with the Merger (collectively referred to
as the "EChapman Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of,
any governmental or regulatory body or authority, domestic or foreign, is
necessary for the execution and delivery of this Agreement by EChapman or
Merger Subsidiary or the consummation by EChapman or Merger Subsidiary of
the transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not
made or obtained, as the case may be, would not, in the aggregate, have an
EChapman Material Adverse Effect, or affect Merger Subsidiary's ability to
consummate the Merger.
SECTION 4.4. ABSENCE OF UNDISCLOSED LIABILITIES. Neither EChapman nor
Merger Subsidiary has any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except liabilities that were incurred in
the ordinary course of business and that will not have an EChapman Material
Adverse Effect.
SECTION 4.5. ABSENCE OF LITIGATION. There is no claim of any kind, suit,
action, proceeding, litigation, arbitration, investigation or controversy
affecting EChapman or Merger Subsidiary pending or, to the knowledge of
EChapman, threatened and neither EChapman nor any of its subsidiaries is subject
to any continuing order of, or written agreement or memorandum of understanding
with, or continuing material investigation by, any governmental entity or
authority, or any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator.
SECTION 4.6. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by EChapman for inclusion in (a) the
Registration Statement on Form S-4 to be filed under the Securities Act with the
SEC by EChapman and CCMH in connection with the Merger for the purpose of
registering EChapman Shares and Exchanged Options to be issued in connection
with the Merger (the "Registration Statement"), or (b) the proxy statement to be
distributed in connection with CCMH's meeting of stockholders to vote upon this
Agreement and the transactions contemplated hereby (the "Proxy Statement" and,
together with the prospectus included in the Registration Statement, the "Proxy
Statement/Prospectus") will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, at the time of the
meeting of stockholders of CCMH to be held in connection with the transactions
contemplated by this Agreement, and at the Effective Time, or, in the case of
the Registration Statement, as amended or supplemented, at the time it is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Registration Statement and Proxy Statement/
Prospectus shall comply in all material respects as to form and substance with
the requirements of the Securities Act, the Exchange Act and the rules and
regulations promulgated thereunder, except that no
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representation is made by EChapman with respect to information supplied by CCMH
for inclusion therein.
SECTION 4.7. COMPLIANCE WITH AGREEMENTS. EChapman and Merger Subsidiary
are not in breach or violation of or in default in the performance or observance
of any term or provision of, and no event has occurred which, with notice or
lapse of time or action by a third party, could result in a default under
(a) their respective charters or By-Laws; or (b) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease, bond, license,
approval or other instrument to which EChapman or Merger Subsidiary is a party
or by which any of them is bound or to which any of their property is subject,
which breaches, violations and defaults, in the case of clause (b) of this
Section 4.11, would have, in the aggregate, an EChapman Material Adverse Effect.
SECTION 4.8. EChapman Stockholders' Approval. The affirmative vote of the
holders of a majority of the outstanding shares of EChapman Shares entitled to
vote is not necessary to approve the transactions contemplated by this
Agreement.
SECTION 4.9. BROKERS AND FINDERS. Neither EChapman nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby.
SECTION 4.10. CHAPMAN HOLDINGS, INC. The representations and warranties of
Chapman Holdings, Inc. set forth in Article V of the Agreement and Plan of
Merger dated as of the date of this Agreement (the "CHI Merger Agreement") by
and between Chapman Holdings, Inc., CHI Merger Subsidiary, Inc. and EChapman are
true and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement is true and correct in all respects).
SECTION 4.11. ANTI-TAKEOVER STATUTES The provisions of Section 3-601 et
seq. (Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to EChapman or
Merger Subsidiary in connection with the transactions contemplated by this
Agreement.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CCMH
CCMH represents and warrants to EChapman as of the date hereof as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. CCMH is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. CCMH is qualified to do business and is in good standing, where
applicable, in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of CCMH and its
subsidiaries, taken as a whole (a "CCMH Material Adverse Effect"). CCMH is not
in violation of any of the provisions of its charter or By-Laws.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of CCMH consists of 20 million shares of
CCMH Common Stock, of which 3,351,334 shares are issued and outstanding. All of
the issued and outstanding shares of CCMH's capital stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights granted by CCMH or by applicable law.
(b) Except as disclosed in CCMH SEC Reports (as defined in Section 5.5) and
in the CCMH minute book, as of the date hereof, there are (i) no outstanding
subscriptions, options, calls, contracts, commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement and also including any rights plan or other anti-takeover agreement,
obligating CCMH or any subsidiary of CCMH to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of CCMH or
obligating CCMH or any subsidiary of CCMH to grant, extend or enter into any
such agreement or commitment, and (ii) no voting trusts, proxies or other
agreements or understandings to which CCMH or any subsidiary of CCMH is a party
or is bound with respect to the voting of any shares of capital stock of CCMH
and, to the knowledge of CCMH, there are no such trusts, proxies, agreements or
understandings by, between or among any of CCMH's stockholders with respect to
CCMH Common Stock.
SECTION 5.3. SUBSIDIARIES. Except as disclosed in CCMH SEC Reports (as
defined in Section 5.5), CCMH has no subsidiaries. Each direct and indirect
subsidiary of CCMH is duly organized, validly existing and in good standing,
where applicable, under the laws of its jurisdiction of incorporation or
organization and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, except where any failure would not have a CCMH Material Adverse
Effect. Each subsidiary of CCMH is qualified to do business, and is in good
standing, where applicable, in each jurisdiction in which the properties owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified and in
good standing would not have a CCMH Material Adverse Effect. All of the
outstanding shares of capital stock of each corporate subsidiary of CCMH have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights and are beneficially owned directly or indirectly by
CCMH, free and clear of any liens, claims or encumbrances. There are no
subscriptions, options, warrants, rights, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting, transfer, ownership or other rights with
respect to any shares of capital stock of any subsidiary of CCMH, including any
right of conversion or exchange under any outstanding security, instrument or
agreement.
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SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) CCMH has full corporate power and authority to enter into this Agreement
and, subject to CCMH Stockholders' Approval (as defined in Section 7.2 and CCMH
Required Statutory Approvals (as defined in Section 5.4(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors of CCMH, and no other corporate proceedings on the part of CCMH are
necessary to authorize the execution and delivery of this Agreement or, except
for CCMH Stockholders' Approval, the consummation by CCMH of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
CCMH, and, assuming the due authorization, execution and delivery hereof by
EChapman and Merger Subsidiary, constitutes a valid and legally binding
agreement of CCMH, enforceable against CCMH in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally, and (ii) general equitable
principles.
(b) The execution and delivery of this Agreement by CCMH does not, and the
performance of this Agreement and the transactions contemplated hereby by CCMH
shall not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of CCMH or any of its
subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or By-laws of CCMH or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to
CCMH or any of its subsidiaries or any of their respective properties or assets,
or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which CCMH or any of its subsidiaries is now a party or by which
CCMH or any of its subsidiaries or any of their respective properties or assets
may be bound. The consummation by CCMH of the transactions contemplated hereby
will not result in any violation, conflict, breach, termination, acceleration or
creation of liens under any of the terms, conditions or provisions described in
clauses (i) through (iii) of the preceding sentence, subject (x) in the case of
the terms, conditions or provisions described in clause (ii) above, to obtaining
(prior to the Effective Time) CCMH Required Statutory Approvals and CCMH
Stockholders' Approval, and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Effective
Time) consents required from lenders, lessors or other third parties. Excluded
from the foregoing sentences of this paragraph (b), insofar as they apply to the
terms, conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a CCMH Material
Adverse Effect.
(c) Except for (i) the filing of the Registration Statement with the SEC
pursuant to the Securities Act and the Exchange Act and the declaration of the
effectiveness thereof by the SEC and filings with various state blue sky
authorities, and (ii) the making of the Merger Filing with the SDAT of the State
of Maryland in connection with the Merger (the filings and approvals referred to
in clauses (i) through (iii) above are collectively referred to as the "CCMH
Required Statutory Approvals"), no declaration, filing or registration with, or
notice to, or authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for the execution and delivery of this
Agreement by CCMH or the consummation by CCMH of the transactions contemplated
hereby, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not made or obtained, as the
case may be, would not, in the aggregate, have a CCMH Material Adverse Effect.
SECTION 5.5. SECURITIES REPORTS AND FINANCIAL STATEMENTS. Since
December 31, 1998, CCMH has filed with the SEC all forms, statements, reports
and documents (including all exhibits, amendments
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and supplements thereto) required to be filed by it under each of the Securities
Act, the Exchange Act and the respective rules and regulations thereunder, all
of which, as amended if applicable, complied in all material respects with all
applicable requirements of the appropriate act and the rules and regulations
thereunder (collectively, the "CCMH SEC Reports"). As of their respective dates,
CCMH SEC Reports did not contain any 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 light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements of CCMH included in such reports
(collectively, the "CCMH Financial Statements") have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
(except as may be indicated therein or in the notes thereto) and fairly present
the financial position of CCMH and its subsidiaries as of the dates thereof and
the results of their operations and changes in financial position for the
periods then ended, subject, in the case of the unaudited interim financial
statements, to normal year-end and audit adjustments and any other adjustments
described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in CCMH
SEC Reports, neither CCMH nor any of its subsidiaries had at December 31, 1998,
nor has incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except:
(a) liabilities, obligations or contingencies (i) which are accrued or reserved
against in CCMH Financial Statements or reflected in the notes thereto, or
(ii) which were incurred after December 31, 1998 and were incurred in the
ordinary course of business and consistent with past practices;
(b) liabilities, obligations or contingencies which (i) would not, in the
aggregate, have a CCMH Material Adverse Effect, or (ii) have been discharged or
paid in full prior to the date hereof; and (c) liabilities and obligations which
are of a nature not required to be reflected in the consolidated financial
statements of CCMH and its subsidiaries prepared in accordance with generally
accepted accounting principles consistently applied and which were incurred in
the normal course of business.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
CCMH SEC Reports since December 31, 1998, CCMH and its subsidiaries have
conducted their businesses only in the ordinary course and in a manner
consistent with past practice and since December 31, 1998, there has not been
(a) any change in the financial condition, results of operations or business of
CCMH or any of its subsidiaries having, in the aggregate, a CCMH Material
Adverse Effect; (b) any damage, destruction or loss (whether or not covered by
insurance) with respect to any assets of CCMH or any of its subsidiaries having,
in the aggregate, a CCMH Material Adverse Effect; (c) any change by CCMH in its
accounting methods, principles or practices; (d) any revaluation by CCMH of any
of its material assets in any material respect; (e) any entry by CCMH or any of
its subsidiaries into any commitment or transactions material to CCMH and its
subsidiaries, taken as a whole; or (f) any declaration, setting aside or payment
of any dividends or distributions in respect of shares of CCMH Common Stock or
any redemption, purchase or other acquisition of any of its securities or any of
the securities of any subsidiary of CCMH.
SECTION 5.8. ABSENCE OF LITIGATION. Except as disclosed in CCMH SEC Reports,
(a) there is no claim of any kind, suit, action, proceeding, litigation,
arbitration, investigation or controversy affecting CCMH or any of its
subsidiaries pending or, to the knowledge of CCMH, threatened; and (b) neither
CCMH nor any of its subsidiaries is subject to any continuing order of, or
written agreement or memorandum of understanding with, or continuing material
investigation by, any governmental entity or authority, or any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or authority, or any arbitrator.
SECTION 5.9. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by CCMH or its subsidiaries for inclusion
in (a) the Registration Statement, or (b) the Proxy Statement will, in the case
of the Proxy Statement or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement and any amendments or supplements
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thereto, at the time of the meetings of stockholders of CCMH to be held in
connection with the transactions contemplated by this Agreement, and at the
Effective Time, or, in the case of the Registration Statement, as amended or
supplemented, at the time it is declared effective by the SEC, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement and Proxy Statement/Prospectus will comply in all
material respects as to form and substance with the requirements of the
Securities Act, the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by CCMH with respect to
information supplied by EChapman for inclusion therein.
SECTION 5.10. NO VIOLATION OF LAW. Except as disclosed in CCMH SEC Reports,
neither CCMH nor any of its subsidiaries is in violation of or has been given
notice or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment including, without limitation, any applicable
environmental law, ordinance or regulation of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a CCMH Material Adverse Effect. CCMH and its
subsidiaries have all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct their businesses as presently conducted (collectively, the "CCMH
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or in
the aggregate, would not have a CCMH Material Adverse Effect. CCMH and its
subsidiaries are not in violation of the terms of any CCMH Permit, except for
delays in filing reports or violations which, alone or in the aggregate, would
not have a CCMH Material Adverse Effect.
SECTION 5.11. COMPLIANCE WITH AGREEMENTS. Except as disclosed in CCMH SEC
Reports, CCMH and each of its subsidiaries are not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or action by a third
party, could result in a default under (a) the respective charters or By-laws of
CCMH or any of its subsidiaries; or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which CCMH or any of its subsidiaries is a party or by which
any of them is bound or to which any of their property is subject, which
breaches, violations and defaults, would have, in the aggregate, a CCMH Material
Adverse Effect.
SECTION 5.12. TAXES. CCMH and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns required to be filed by
them for all periods ending on or prior to the date hereof, and such Tax Returns
are true, correct and complete in all material respects, and (ii) duly paid in
full all Taxes due in connection with or with respect to the filing of such Tax
Returns and have paid all other Taxes as are due, except such as are being
contested in good faith by appropriate government proceedings and with respect
to which CCMH is maintaining reserves adequate for their payment. Neither the
IRS nor any other governmental entity or taxing authority or agency is now
asserting, either through audits, administrative proceedings, court proceedings
or otherwise, or, to the best of CCMH's knowledge, threatening to assert against
CCMH or any of its subsidiaries any deficiency or claim for additional Taxes.
Neither CCMH nor any of its subsidiaries has been granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax. There are no tax liens on any assets of CCMH or any of
its subsidiaries. Neither CCMH nor any of its subsidiaries has received a ruling
or entered into an agreement with the IRS or any other governmental entity or
taxing authority or agency that would have a CCMH Material Adverse Effect, taken
as a whole, after the Effective Time. The accruals and reserves for Taxes
reflected in the CCMH balance sheet reflected in the latest CCMH SEC Report are
adequate to cover all Taxes accruable through the date thereof (including Taxes
being contested) in accordance with generally accepted accounting principles. No
agreements relating to allocating or sharing of Taxes exist
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among CCMH and its subsidiaries. Neither CCMH nor any of its subsidiaries is
required to include in income either (i) any material amount in respect of any
adjustment under Section 481 of the Code, or (ii) any material installment sale
gain. Neither CCMH nor any of its subsidiaries has made an election under
Section 341(f) of the Code.
SECTION 5.13. EMPLOYEE BENEFITS PLANS; ERISA.
(a) Neither CCMH nor its subsidiaries has any obligation to create any
material employee benefit plans, programs, arrangements and practices for
employees (such plans, programs, arrangements and practices of CCMH and its
subsidiaries being referred to as the "CCMH Plans"), including employee benefit
plans within the meaning set forth in Section 3(3) of ERISA, or other similar
material arrangements for the provision of benefits or to amend any such plan so
as to increase benefits thereunder, except as required under the terms of CCMH
Plans, under existing collective bargaining agreements or to comply with
applicable law.
(b) No member of CCMH's "controlled group," within the meaning of
Section 4001(a)(14) of ERISA, maintains or contributes to, or within the five
(5) years preceding the Effective Time has maintained or contributed to, an
employee pension benefit plan subject to Title IV of ERISA. None of the CCMH
Plans obligates CCMH or any of its subsidiaries to pay material separation,
severance, termination or similar-type benefits solely as a result of any
transaction contemplated by this Agreement or as a result of a "change in
control," within the meaning of such term under Section 280G of the Code. None
of CCMH Plans provides for or promises retiree medical, disability or life
insurance benefits to any current or former employee, officer or director of
CCMH or any of its subsidiaries except as otherwise required with respect to
health plan coverage in Section 4980B of the Code. Each of CCMH Plans is subject
only to the laws of the United States or a political subdivision thereof.
(c) Each CCMH Plan has been operated in all respects in accordance with the
requirements of all applicable laws and all persons who participate in the
operation of such CCMH Plans and all CCMH Plan "fiduciaries" (within the meaning
of Section 3(21) of ERISA) have acted in accordance with the provisions of all
applicable laws, except where violations of such applicable laws would not,
individually or in the aggregate, have a CCMH Material Adverse Effect, taken as
a whole. CCMH and its subsidiaries have performed all obligations required to be
performed by any of them under, are not in any respect in default under or in
violation of, and CCMH has no knowledge of any default or violation by any party
to, any CCMH Plan, except where such failures, defaults or violations would not,
individually or in the aggregate, have a CCMH Material Adverse Effect, taken as
a whole. No legal action, suit or claim is pending or, to the knowledge of CCMH,
threatened with respect to any CCMH Plan (other than claims for benefits in the
ordinary course) and, to the knowledge of CCMH, no fact or event exists that
could give rise to any such action, suit or claim. Neither CCMH nor any of its
subsidiaries has incurred any material liability to the Pension Benefit Guaranty
Corporation (other than premiums payable to the Pension Benefit Guaranty
Corporation in the ordinary course) or any material "withdrawal liability"
within the meaning of Section 4201 of ERISA.
(d) Each CCMH Plan that is intended to be qualified under Section 401(a) of
the Code or Section 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified, and each trust established in
connection with any CCMH Plan that is intended to be exempt from federal income
taxation under Section 501(a) of the Code is so exempt, and, to the knowledge of
CCMH, no fact or event has occurred since the date of such determination letter
from the IRS to adversely affect the qualified status of any such CCMH Plan or
the exempt status of any such trust. No trust maintained or contributed to by
CCMH or any of its subsidiaries is intended to be qualified as a voluntary
employees' beneficiary association or is intended to be exempt from federal
income taxation under Section 501(c)(9) of the Code.
(e) To CCMH's knowledge, there has been no non-exempt prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) with
respect to any CCMH Plan.
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CCMH and each of its subsidiaries has not incurred any liability for any excise
tax arising under Section 4972 or 4980B of the Code and, to the knowledge of
CCMH, no fact or event exists that could give rise to any such liability except
for liability which singly or in the aggregate could not reasonably be expected
to cause a CCMH Material Adverse Effect.
(f) All contributions, premiums or payments required to be made with respect
to any CCMH Plan have been made on or before their due dates.
(g) The CCMH Minute Book sets forth a true and complete list of each current
or former employee, officer or director of CCMH or any of its subsidiaries who
holds any option to purchase CCMH Common Stock as of the date of this Agreement,
together with the number of shares of CCMH Common Stock subject to such option,
the date of grant of such option, the option price of such option, whether such
option is intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO") and the expiration date of such option.
The CCMH Minute Book also sets forth the total number of such ISOs and such
non-qualified options.
(h) Neither CCMH nor any of its subsidiaries is a party to any employment,
severance, consulting or other similar contracts with any employees, officers or
directors of CCMH or any of its subsidiaries other than such contracts that are
disclosed in CCMH SEC Reports. Neither CCMH nor any of its subsidiaries is a
party to any collective bargaining agreements.
SECTION 5.14. LABOR CONTROVERSIES. Except as set forth in the CCMH SEC
Reports, (a) there are no material controversies pending or, to the knowledge of
CCMH, threatened between CCMH or its subsidiaries and any representatives of any
of their employees; (b) to the knowledge of CCMH, there are no material
organizational efforts presently being made or threatened involving any of the
presently unorganized employees of CCMH or its subsidiaries; (c) CCMH and its
subsidiaries have, to the knowledge of CCMH, complied in all material respects
with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, civil rights, administration of leave and rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985 and the payment of social
security and similar taxes; and (d) no person has, to the knowledge of CCMH,
asserted that CCMH or any of its subsidiaries is liable in any material amount
for any arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing, except for such controversies, organizational efforts,
non-compliance and liabilities which, singly or in the aggregate, could not
reasonably be expected to cause a CCMH Material Adverse Effect.
SECTION 5.15. TITLE TO ASSETS. CCMH and each of its subsidiaries has good
and marketable title to all their respective properties and assets, real and
personal, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (a) liens for Taxes not yet due
and payable; (b) such imperfections in title and easements and encumbrances, if
any, as are not material in character, amount or extent and do not materially
and adversely affect the value or interfere with the present use of the property
subject thereto or affected thereby, or otherwise materially impair CCMH's
present business operations; (c) as disclosed in CCMH SEC Reports; or
(d) mortgages incurred in the ordinary course of business, and except for such
matters which, singly or in the aggregate, could not reasonably be expected to
cause a CCMH Material Adverse Effect. All leases under which CCMH leases any
material real or personal property are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event which with notice or lapse of time or both
would become a default other than defaults under such leases which in the
aggregate will not have a CCMH Material Adverse Effect.
SECTION 5.16. CCMH STOCKHOLDERS' APPROVAL. The affirmative vote of the
holders of a majority of the outstanding shares of CCMH Common Stock entitled to
vote is necessary to approve the transactions contemplated by this Agreement.
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SECTION 5.17. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. CCMH and its
subsidiaries own or have the right to use all of their Intellectual Property
Rights without any conflict with the rights of others, except for such conflicts
that have not had and are not reasonably likely to have a CCMH Material Adverse
Effect, and the consummation of the transactions contemplated hereby will not
alter or impair such rights in any material respect. To the knowledge of CCMH,
no claims are pending by any person with respect to the ownership, validity,
enforceability or use of any such Intellectual Property Rights challenging or
questioning the validity or effectiveness of any of the foregoing which claims
could reasonably be expected to have a CCMH Material Adverse Effect. To CCMH's
knowledge, none of it or its subsidiaries' key technical personnel is in
violation of any term of any employment agreement, patent disclosure agreement
or any other contract or agreement relating to the relationship of any such
employee with it or its subsidiaries or any other party the result of which has
had or is reasonably likely to have a CCMH Material Adverse Effect.
SECTION 5.18. MATERIAL AGREEMENTS. CCMH has no material agreements other
than those filed as exhibits to CCMH SEC Reports or which will be filed with the
Registration Statement except for Support Agreement between CCMH and Nathan A.
Chapman, Jr., dated November 12, 1999.
SECTION 5.19. INSURANCE. Except to the extent there would be no CCMH
Material Adverse Effect, to CCMH's knowledge, all of CCMH's and its
subsidiaries' liability, theft, life, health, fire, title, worker's compensation
and other forms of insurance, surety bonds and umbrella policies, insuring CCMH
and its subsidiaries and their directors, officers, employees, independent
contractors, properties, assets and businesses, are valid and in full force and
effect (without any premium past due or pending notice of cancellation) and are,
in the reasonable judgment of CCMH, adequate for the business of CCMH and its
subsidiaries as now conducted, and there are no claims, singly or in the
aggregate, in excess of the limitations of coverage set forth in such policies.
The provision and/or reserves in CCMH Financial Statements are adequate for any
and all self insurance programs maintained by CCMH or its subsidiaries.
SECTION 5.20. BROKERS AND FINDERS. Neither CCMH nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby, except that CCMH has retained Tucker
Anthony Cleary Gull as its financial advisor.
SECTION 5.21. CERTAIN TRANSACTIONS. Except as set forth in the CCMH SEC
Reports, since December 31, 1998, none of the officers or directors of CCMH or
of any of its subsidiaries, and, to CCMH's knowledge, none of their employees or
the employees of any of its subsidiaries is a party to any transaction with it
or any of its subsidiaries (other than for services as an employee, officer or
director and other than transactions between it and one or more of its direct or
indirect wholly owned subsidiaries or between such subsidiaries), including
without limitation, any contract, agreement or other arrangement (i) providing
for the furnishing of services to or by, (ii) providing for rental of real or
personal property to or from, or (iii) otherwise requiring payments to or from,
any such officer, director, affiliate or employee, any member of the family of
any such officer, director or employee or any corporation, partnership, trust or
other entity in which any such officer, director or employee has a substantial
interest or which is an affiliate of such officer, director or employee (a "CCMH
Affiliated Transaction") other than transactions which would not have a CCMH
Material Adverse Effect.
SECTION 5.22. OPINION OF FINANCIAL ADVISOR. CCMH received the opinion of
Tucker Anthony Cleary Gull, its financial advisor, dated November 11, 1999, to
the effect that, as of such date, the transactions contemplated hereby are fair
to its stockholders from a financial point of view.
SECTION 5.23. ANTI-TAKEOVER STATUTES The provisions of Section 3-601 et seq.
(Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to CCMH in
connection with the transactions contemplated by this Agreement.
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY CCMH PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless EChapman shall
otherwise agree in writing, CCMH shall, and shall cause its subsidiaries to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a wholly owned subsidiary of CCMH;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell, pledge
or dispose of or otherwise cause to become outstanding, any additional shares
of, or any options, warrants or rights of any kind to acquire any shares of
their capital stock of any class or any debt or equity securities convertible
into or exchangeable for such capital stock, except that CCMH may issue shares
upon the exercise of CCMH Options outstanding on the date hereof;
(d) not (i) incur or become contingently liable with respect to any material
indebtedness for borrowed money other than (x) borrowings in the ordinary course
of business not to exceed $100,000 or in other cases for amounts in excess of
$100,000 which shall be on terms reasonably acceptable to EChapman, or
(y) borrowings to refinance existing indebtedness, in the ordinary course of
business, (ii) redeem, purchase, acquire or offer to purchase or acquire any
shares of its capital stock or any options, warrants or rights to acquire any of
its capital stock or any security convertible into or exchangeable for its
capital stock, (iii) take or fail to take any action which action or failure
would cause CCMH or its stockholders (except to the extent that any stockholders
receive cash in lieu of fractional shares) to recognize gain or loss for federal
income tax purposes as a result of the consummation of the Merger, (iv) make any
acquisition of any assets or businesses and expenditures for fixed or capital
(in each case, after consultation with EChapman) or expenditures in the ordinary
course of business which, in such cases of $100,000 or more, shall be on terms
reasonably acceptable to EChapman, (v) sell, pledge, dispose of or encumber any
assets or businesses other than sales in the ordinary course of business which,
in such cases involving $100,000 or more, shall be on terms reasonably
acceptable to EChapman, or (vi) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(e) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees, and preserve the goodwill
and business relationships with customers, vendors and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(f) confer on a regular and frequent basis with one or more representatives
of EChapman to report operational matters of materiality and the general status
of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees except
in the ordinary course and consistent with past practice which shall be on terms
acceptable to EChapman;
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(h) not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health care,
employment or other employee benefit plan, agreement, trust, fund or arrangement
for the benefit or welfare of any employee or retiree except as required to
comply with changes in applicable law and increases in wages in the ordinary
course and consistent with past practice for non-executive employees which, in
such cases involving $25,000 or more, shall be on terms acceptable to EChapman;
(i) maintain with adequately capitalized insurance companies insurance
coverage for its assets and its businesses in such amounts and against such
risks and losses as are consistent with past practice; and
(j) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.2. CONDUCT OF BUSINESS BY ECHAPMAN PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless CCMH shall
otherwise agree in writing, EChapman shall, and shall cause Merger Subsidiary,
to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a subsidiary of EChapman and except for cash dividends in
historic amounts payable in a manner consistent with past practices;
(c) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(d) confer on a regular and frequent basis with one or more representatives
of CCMH to report operational matters of materiality and the general status of
ongoing operations;
(e) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.3. CONTROL OF CCMH'S OPERATIONS. Nothing contained in this
Agreement shall give to EChapman, directly or indirectly, rights to control or
direct CCMH's operations prior to the Effective Time. Prior to the Effective
Time, CCMH shall exercise, consistent with and subject to the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.4. CONTROL OF ECHAPMAN'S OPERATIONS. Nothing contained in this
Agreement shall give to CCMH, directly or indirectly, rights to control or
direct EChapman's operations prior to the Effective Time. Prior to the Effective
Time, EChapman shall exercise, consistent with and subject to the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.5. ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, CCMH shall not, and shall not permit any of its
subsidiaries to, (i) initiate, solicit or seek, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its stockholders) to acquire all or
any substantial part of the business and properties of CCMH and its subsidiaries
or more than fifty percent (50%) of the capital stock of CCMH and its
subsidiaries, whether by merger, purchase of assets, tender offer or otherwise,
whether for cash, securities or any other consideration or combination thereof
except for the
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transaction contemplated herein (any such transactions being referred to herein
as "Acquisition Transactions"), or (ii) otherwise cooperate in any effort or
attempt to initiate, solicit or seek an Acquisition Transaction.
(b) Notwithstanding any other provision of this Agreement, in response to an
unsolicited proposal or inquiry (or a proposal or inquiry arising from a general
solicitation) with respect to an Acquisition Transaction and subject to the
duties of CCMH's Board of Directors under applicable law, if such Acquisition
Transaction is a tender offer subject to the provisions of Section 14(d) under
the Exchange Act, CCMH's Board of Directors may take and disclose to CCMH's
stockholders a position contemplated by Rule 14e-2(a) under the Exchange Act.
(c) In the event CCMH shall receive any offer of an Acquisition Transaction,
it shall (i) immediately inform EChapman of such offer, and (ii) furnish to
EChapman the identity of the proponent of such offer and, unless the Board of
Directors of CCMH concludes that such disclosure is inconsistent with its duties
under applicable law, a description of the material terms thereof.
(d) CCMH may terminate this Agreement, withdraw, modify or not make its
recommendations referred to in Section 7.2, and enter into a definitive
agreement for an Acquisition Transaction if, but only if, (i) the Board of
Directors of CCMH shall have consulted with legal counsel concerning its
obligations under applicable law and (ii) CCMH shall have determined in good
faith after consultation with the independent financial advisors of CCMH that
such Acquisition Transaction would be more favorable to CCMH's stockholders from
a financial point of view than the Merger, and (iii) the Board of Directors of
CCMH shall conclude in good faith that such action is necessary in order for the
Board of Directors of CCMH to act in a manner that is consistent with its
obligations under applicable law.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION. From and after the date hereof, each
party shall furnish promptly to one another a copy of each report and other
document filed or received by any of them pursuant to the requirements of
federal or state securities laws or which may have a material effect on their
respective businesses, properties or personnel, and work papers of their
respective accountants and other information or copies of such documentation and
access to senior management personnel as reasonably deemed necessary by the
requesting party's respective accountants, legal counsel or financial advisors
to complete the Proxy Statement/Prospectus and Registration Statement, and the
opinion referred to in Section 8.2(d) below. EChapman and its subsidiaries shall
hold and shall use their commercially reasonable efforts to cause EChapman's
representatives to hold, and CCMH and its subsidiaries shall hold and shall use
their commercially reasonable efforts to cause CCMH's representatives to hold,
in strict confidence all non-public documents and information furnished to
EChapman and Merger Subsidiary or to CCMH, as the case may be, in connection
with the transactions contemplated by this Agreement. Notwithstanding the
foregoing (i) EChapman and CCMH may disclose such information as may be
necessary in connection with seeking EChapman Required Statutory Approvals, CCMH
Required Statutory Approvals and CCMH Stockholders' Approval (as defined in
Section 7.2 below), and (ii) each of EChapman, Merger Subsidiary and CCMH may
disclose any information that it is required by law or judicial or
administrative order to disclose.
SECTION 7.2. STOCKHOLDERS' APPROVAL. Subject to the duties of the Board of
Directors of CCMH under applicable law, CCMH shall, as promptly as practicable,
submit the transactions contemplated hereby for the approval of its stockholders
at a meeting of stockholders and, subject to the duties of the Board of
Directors of CCMH under applicable law, shall use its commercially reasonable
efforts to obtain stockholder approval and adoption (the "CCMH Stockholders'
Approval") of this Agreement and the transactions contemplated hereby. Such
meeting of the stockholders shall be held as soon as practicable following the
date upon which the Registration Statement becomes effective. CCMH shall,
through its Board of Directors, but subject to the duties of the members thereof
under applicable law, recommend to its stockholders approval of the transactions
contemplated by this Agreement. CCMH acknowledges and agrees: (i) that a breach
of its covenant contained in this Section 7.2 to convene a meeting of its
stockholders and call for a vote with respect to the approval of this Agreement
and the Merger will result in irreparable harm to EChapman which will not be
compensable in money damages, and (ii) that such covenant shall be specifically
enforceable and that specific performance and injunctive relief shall be a
remedy properly available to EChapman for a breach of such covenant.
SECTION 7.3. AFFILIATES OF CCMH. Within 30 days after the date of this
Agreement: (i) CCMH shall deliver to EChapman a letter identifying all persons
who may be deemed affiliates of CCMH under Rule 145 of the Securities Act
("Rule 145"), including, without limitation, all directors and executive
officers of CCMH; (ii) CCMH shall advise the persons identified in such letter
of the resale restrictions imposed by applicable securities laws; (iii) the
persons identified in such letter shall each execute a Memorandum to Persons
Deemed to be Affiliated Persons of Chapman Capital Management Holdings, Inc. in
such form as is acceptable to EChapman (the "145 Memorandum"); and
(iv) Nathan A. Chapman, Jr. shall execute a Support Agreement in such form as is
acceptable to EChapman (the 145 Memorandum and the Support Agreement are
collectively referred to herein as the "Affiliate Agreements").
SECTION 7.4. EXPENSES AND FEES. Each party hereto agrees to bear its own
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement, except:
(a) CCMH shall pay and be responsible for all fees and expenses incurred in
connection with the printing, filing and mailing of the Proxy
Statement/Prospectus; and
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(b) If CCMH (i) fails to fulfill its obligations as set forth in
Section 6.5(a)-(c) or (ii) terminates this Agreement pursuant to
Section 6.5(d), CCMH shall pay to EChapman the sum of $3.0 million in lieu of
any other payments or penalties or the reimbursement of expenses incurred by
EChapman.
SECTION 7.5. AGREEMENT TO COOPERATE.
(a) Subject to the terms and conditions herein provided, each of the parties
hereto shall use all commercially reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable pursuant to all agreements, contracts, indentures or other
instruments to which the parties hereto are a party, or under any applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using its commercially reasonable
efforts to (i) obtain all necessary or appropriate waivers, consents and
approvals from lenders, landlords, security holders or other parties whose
waiver, consent or approval is required to consummate the Merger, (ii) effect
all necessary registrations, filings and submissions, and (iii) lift any
injunction or other legal bar to the Merger (and, in such case, to proceed with
the Merger as expeditiously as possible).
(b) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, EChapman shall have the right, at its own expense, to
participate therein, and CCMH will not settle any such litigation without the
consent of EChapman, which consent will not be unreasonably withheld.
SECTION 7.6. PUBLIC STATEMENTS. The parties (i) shall consult with each
other prior to issuing any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby, and
(ii) shall not issue any such press release or written public statement prior to
such consultation, except as may be required by law and applicable listing
requirements.
SECTION 7.7. NOTIFICATION OF CERTAIN MATTERS. Each of CCMH, EChapman and
Merger Subsidiary agrees to give prompt notice to each other of, and to use
their respective commercially reasonable efforts to prevent or promptly remedy
(i) the occurrence or failure to occur or the impending or threatened occurrence
or failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (ii) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 7.8. PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
EChapman and CCMH shall prepare and file with the SEC a Proxy
Statement/Prospectus and Registration Statement on Form S-4 relating to the
approval of the Merger by the stockholders of CCMH and shall use all
commercially reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable.
(b) Prior to the date of approval of the Merger by CCMH's stockholders, each
of CCMH, EChapman and Merger Subsidiary shall correct promptly any information
provided by it to be used specifically in the Proxy Statement/Prospectus and
Registration Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the SEC and
have declared effective or cleared by the SEC any amendment or supplement to the
Proxy Statement/ Prospectus or the Registration Statement so as to correct the
same and to cause the Proxy Statement/ Prospectus as so corrected to be
disseminated to the stockholders of CCMH and EChapman, in each case to the
extent required by applicable law.
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SECTION 7.9. TAX-FREE TREATMENT OF MERGER. EChapman and CCMH shall each use
its commercially reasonable efforts to cause the Merger to be treated as a
tax-free reorganization for federal, state and foreign income tax purposes and
agree that this Agreement shall serve as the Plan of Reorganization therefor.
SECTION 7.10. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) The Surviving Corporation shall maintain in full force and observe any
liability, exculpation or indemnification provision (including payment or
advance of expenses) now existing in the Charter or By-laws of CCMH for the
benefit of any individual who served as a director or officer of CCMH at any
time prior to the Effective Time.
(b) For a period of six years from and after the Effective Time, the
Surviving Corporation and EChapman shall indemnify, defend and hold harmless
each individual who served as a director, or officer of CCMH or any of its
subsidiaries (the "Indemnified Parties") at any time prior to the Effective
Time from and against (i) all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party which approval shall not be unreasonably
withheld (net of any insurance proceeds obtained by the Indemnified Parties)
of or in connection with any claim, action, suit, proceeding or investigation
based in whole or in part on or arising in whole or in part out of the fact
that such person is or was a director or officer of the Company or any of its
subsidiaries, whether pertaining to any matter existing or occurring at or
prior to the Effective Time and whether asserted or claimed prior to, or at
or after the Effective Time ("Indemnified Liabilities") and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in whole or
in part out of, or pertaining to this Agreement or the transactions
contemplated hereby, in each case to the full extent a corporation is
permitted under the MGCL to indemnify its own directors and officers, as the
case may be (and the Surviving Corporation and EChapman will pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law). Without limiting the
foregoing, in the event that any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Party (whether arising
before or after the Effective Time), (x) the Indemnified Parties may retain
counsel satisfactory to them (or them and the Surviving Corporation and
EChapman after the Effective Time), (y) CCMH (or after the Effective Time,
the Surviving Corporation and EChapman) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (z) the Company (or after the Effective Time, the
Surviving Corporation and EChapman) will use all commercially reasonable
efforts to assist in the vigorous defense of any such matter, provided that
neither CCMH nor the Surviving Corporation or EChapman shall be liable for
any settlement of any claim effected without their written consent, which
consent, however, shall not be unreasonably withheld. Any Indemnified Party
wishing to claim indemnification under this Section 7.10, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify the
CCMH or, after the Effective Time, the Surviving Corporation or EChapman (but
the failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this Section 7.10 except to the extent such
failure prejudices such party). The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct, a conflict on
any significant issue between the positions of any two or more Indemnified
Parties.
(c) The provisions of this Section 7.10 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her heirs
and representatives.
SECTION 7.11. AMENDMENT TO CHI MERGER AGREEMENT. Without the consent of
CCMH, EChapman will not consent to any material amendment to the CHI Merger
Agreement.
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ARTICLE VIII
CONDITIONS
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
Unless waived by the parties, the respective obligations of each party to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following conditions:
(a) this Agreement and the transactions contemplated hereby, as appropriate,
shall have been approved and adopted by the requisite vote of the stockholders
of CCMH under applicable law and applicable listing requirements;
(b) the Registration Statement shall have been declared effective by the SEC
in accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued by the SEC and remain in
effect and no proceedings for that purpose shall, on or prior to the Effective
Time, have been instituted or, to the knowledge of EChapman or CCMH, threatened
by the SEC.
(c) no preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Merger shall have
been issued and remain in effect (each party agreeing to use its commercially
reasonable efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency which would prevent the consummation of the Merger or make the
consummation of the Merger illegal;
(e) all material governmental waivers, consents, orders and approvals,
legally required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect at the Effective
Time;
(f) EChapman shall have completed a public offering (pursuant to an
effective registration statement under the Securities Act of 1933, as then in
effect, or any comparable statement under any similar federal statute then in
force) of EChapman Shares in which (i) EChapman receives gross proceeds of no
less than Twenty Million dollars ($20,000,000), and (ii) the price paid by the
public for such shares reflects a preoffering valuation of EChapman of no less
than Eighty Million Dollars ($80,000,000.00) (the "EChapman Public Offering");
and
(g) The transactions contemplated by the CHI Merger Agreement shall have
closed; and
(h) CCMH shall have received from Tucker Anthony Cleary Gull an updated
opinion reasonably acceptable to CCMH, dated as of the date on or about which
the Proxy Statement/Prospectus is first distributed to the stockholders of CCMH,
to the effect that the consideration to be received by the stockholders of CCMH
in the Merger is fair, from a financial point of view, to the holders of CCMH
Common Stock, and such opinion shall not have been withdrawn as of the Closing
Date; and
SECTION 8.2. ADDITIONAL CONDITIONS TO OBLIGATION OF CCMH TO EFFECT THE
MERGER. Unless waived by CCMH, the obligation of CCMH to effect the Merger shall
be subject to the fulfillment on or prior to the Closing Date of the following
additional conditions:
(a) EChapman and Merger Subsidiary shall have performed in all material
respects their agreements contained in this Agreement required to be performed
on or prior to the Closing Date and the representations and warranties of
EChapman and Merger Subsidiary contained in this Agreement shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects) on and as of the date made
and on and as of the Closing Date, except for those representations and
warranties which address matters only as of a particular date (which shall
remain
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true and correct as of such date), as if made at and as of such date, and CCMH
shall have received a Certificate of the Chairman of the Board and the President
of EChapman and Merger Subsidiary to that effect;
(b) Chapman Holdings, Inc. and CHI Merger Subsidiary, Inc. shall have
performed in all material respects their agreements contained in the CHI Merger
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Chapman Holdings, Inc. and CHI Merger
Subsidiary, Inc. contained in the CHI Merger Agreement shall be true and correct
in all material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) on and as of the date made and on and as of
the Closing Date, except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date), as if made at and as of such date, and CCMH shall have received a
Certificate of the Chairman of the Board and the President of EChapman to that
effect;
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, an EChapman Material Adverse Effect, taken as a
whole; and
(d) CCMH shall have received an opinion from the law firm of Venable,
Baetjer and Howard, LLP, dated the Closing Date, to the effect that the Merger
should be treated as a tax-free reorganization for federal and state income tax
purposes.
SECTION 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF EChapman and Merger
Subsidiary to Effect the Merger. Unless waived by EChapman and Merger
Subsidiary, the obligations of EChapman and Merger Subsidiary to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the additional following conditions:
(a) CCMH shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of CCMH contained in this Agreement
shall be true and correct in all material respects (except that where any
statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects) on and as
of the date made and on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), as if made at and as
of such date, and EChapman shall have received a Certificate of the Chairman of
the Board and President of CCMH to that effect;
(b) the Affiliate Agreements required to be delivered to EChapman pursuant
to Section 7.3 shall have been furnished as required by Section 7.3; and
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, a CCMH Material Adverse Effect, taken as a whole.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated by the mutual
consent of the parties, or at any time prior to the Closing Date, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of CCMH, as follows:
(a) CCMH shall have the right to terminate this Agreement;
23
<PAGE>
(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of CCMH;
(ii) if the Merger or the transactions set forth in the CHI Merger
Agreement are enjoined by a final, unappealable court order not entered at
the request or with the support of CCMH or any of their affiliates or
associates;
(iii) if the terms and conditions of Section 6.5(d) and Section 7.4(b)
are satisfied; or
(iv) if CCMH's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
(b) EChapman shall have the right to terminate this Agreement;
(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of EChapman;
(ii) if the Merger or the transactions set forth in the CHI Merger
Agreement are enjoined by a final, unappealable court order; or
(iii) if CCMH's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
SECTION 9.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either EChapman or CCMH as provided in Section 9.1, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of CCMH, EChapman, Merger Subsidiary, or their respective officers or directors
(except as set forth in this Section 9.2 and in Sections 7.1, 7.4 and 7.6, all
of which shall survive the termination). Nothing in this Section 9.2 shall
relieve any party from liability for any breach of this Agreement.
SECTION 9.3. AMENDMENT. This Agreement may not be amended except by action
taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 9.4. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall not be deemed to
be continuing or to apply to any future obligation or requirement of any part
hereto provided herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.The
representations and warranties contained in Articles IV and V of this Agreement
shall not survive the Merger, and after effectiveness of the Merger, CCMH,
EChapman, Merger Subsidiary or their respective officers or directors shall have
no further obligation with respect thereto. The covenants and agreements set
forth in this Agreement shall survive the Merger.
SECTION 10.2. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt
24
<PAGE>
requested) or sent via facsimile to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) If to EChapman or Merger Subsidiary to:
EChapman.com, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Nathan A. Chapman, Jr.
with a copy to:
Venable, Baetjer and Howard, LLP
Suite 1800
2 Hopkins Plaza
Baltimore, MD 21201
Attention: Elizabeth R. Hughes, Esq.
(b) If to CCMH, to:
Chapman Capital Management Holdings, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Robert Wallace
Theron Stokes
with a copy to:
Ballard Spahr Andrews & Ingersoll, LLP
300 E. Lombard Street
Suite 1900
Baltimore, MD 21202
Attention: James J. Hanks, Jr., Esq.
SECTION 10.3. INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears (i) the words "herein," "hereof" and "hereunder" and other words of
similar impact refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 10.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof,
(b) is not intended to confer upon any other person any rights or remedies
hereunder except for rights of indemnified parties under Section 7.10, and
(c) shall not be assigned by operation of law or otherwise. THIS AGREEMENT SHALL
BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY
THE LAWS OF THE STATE OF
25
<PAGE>
MARYLAND APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH
STATE.
SECTION 10.5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement. Each of the parties agrees to
accept and be bound by facsimile signatures hereto.
SECTION 10.6. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 10.7. EXHIBITS AND SCHEDULES. All Exhibits and Schedules referred to
in this Agreement shall be attached hereto and are incorporated by reference
herein.
SECTION 10.8. SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, and parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.9. DEFINITION OF KNOWLEDGE. For those warranties and
representations set forth in Article IV which are subject to the qualification
"to EChapman's knowledge," EChapman will be deemed to have knowledge of a matter
if (i) Nathan A. Chapman, Jr. has knowledge of the matter, or (ii) such matter
has come, or should reasonably be expected to have come, to the attention of
such individual if such individual had conducted a reasonable due diligence
review of EChapman's operations and business, including, without limitation,
reasonable inquiries to key personnel of EChapman regarding the business and
operations of EChapman and a review of, and discussion with key personnel
regarding, pertinent books and records of EChapman. For those warranties and
representations set forth in Article V which are subject to the qualification
"to CCMH's knowledge," CCMH will be deemed to have knowledge of a matter if
(i) Nathan A. Chapman, Jr. has knowledge of the matter, or (ii) such matter has
come, or should reasonably be expected to have come, to the attention of any of
such individual if such individual had conducted a reasonable due diligence
review of CCMH's operations and business, including, without limitation,
reasonable inquiries to key personnel of CCMH regarding the business and
operations of CCMH and a review of, and discussion with key personnel regarding,
pertinent books and records of CCMH.
26
<PAGE>
IN WITNESS WHEREOF, EChapman, Merger Subsidiary and CCMH have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first written above.
<TABLE>
<S> <C> <C>
ECHAPMAN.COM, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
CHAIRMAN OF THE BOARD AND PRESIDENT
CCMH MERGER SUBSIDIARY, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
PRESIDENT
CHAPMAN CAPITAL MANAGEMENT
HOLDINGS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------------------
Nathan A. Chapman, Jr.
CHAIRMAN OF THE BOARD AND PRESIDENT
</TABLE>
27
<PAGE>
Exhibit 10.5
CHAPMAN INSURANCE HOLDINGS, INC.
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), made this
15th day of November, 1999, by and among eChapman.com, Inc., a Maryland
corporation ("eChapman"), CIH Merger Subsidiary, Inc., a Maryland corporation
and wholly owned subsidiary of eChapman ("Merger Subsidiary"), and Chapman
Insurance Holdings, Inc., a Maryland corporation (the "Corporation").
1. THE MERGER
Chapman Insurance Holdings, Inc. (the "Corporation") will merge (the
"Merger") with and into Chapman Merger Subsidiary, Inc. (the "Merger
Subsidiary"). The Merger Subsidiary will be the surviving corporation (the
"Surviving Corporation") in the Merger. The Charter and the Bylaws of the Merger
Subsidiary, in effect on the date of the Merger, will continue in full force and
effect as the Charter and Bylaws of the Surviving Corporation. The Surviving
Corporation will continue to be liable for all of the Corporation's pre-Merger
debts and obligations.
Under this Agreement, eChapman, the parent of Merger Subsidiary,
will pay the holders of shares of Common Stock of the Corporation for each
share of Common Stock of the Corporation outstanding immediately prior to the
Merger $0.06284.
2. METHOD OF CARRYING OUT THE PLAN
The proposed merger has been declared advisable by the Board of
Directors of the Corporation on substantially the terms and conditions set forth
in this Agreement and the Board of Directors has directed that the Agreement be
presented for consideration and approval at a special meeting of the
Stockholders of the Corporation. If the Agreement is duly approved at the
special meeting of the stockholders of the Corporation by the holders of at
least a majority of all outstanding shares of Common Stock, then:
The Board of Directors of each of the Corporation and the Merger
Subsidiary will cause the appropriate officers of the respective corporations to
prepare and execute Articles of Merger in such form as said officers, with the
advice of counsel, deem appropriate and to file the Articles of Merger with the
State Department of Assessments and Taxation (the "SDAT").
<PAGE>
IN WITNESS WHEREOF, eChapman.com., Inc., CIH Merger Subsidiary, Inc. and
Chapman Insurance Holdings, Inc. have caused this Agreement and Plan to be
executed by their respective officers thereunto duly authorized as of the date
first above.
eCHAPMAN.COM, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board President
CIH MERGER SUBSIDIARY, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
President
CHAPMAN INSURANCE HOLDINGS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board and President
2
<PAGE>
Exhibit 10.7
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (the "Agreement") dated as of
November 12, 1999, between eChapman.com, Inc., a Maryland corporation
("eChapman"), and Nathan A. Chapman, Jr. (the "Stockholder").
WHEREAS, the Stockholder individually possesses the right
to vote, or direct the voting of, an aggregate of 2,290,143 shares of common
stock, $0.001 par value ("Shares"), of Chapman Capital Management Holdings,
Inc., a Maryland corporation ("CCMHI"), which constitute approximately 68.2%
of the outstanding capital stock of CCMHI, no other shares of any other class
of capital stock of CCMHI being issued or outstanding; and
WHEREAS, the Stockholder individually possesses the power
to dispose of, or to direct the disposition of, an aggregate of 2,290,143
Shares, which constitute approximately 68.2% of the outstanding capital stock
of CCMHI; and
WHEREAS, eChapman has entered into an Agreement of Merger
with CCMHI, dated as of the date hereof (the "Merger Agreement"), pursuant to
which eChapman would acquire CCMHI and Chapman Capital Management, Inc.,
CCMHI's wholly-owned subsidiary, through the conversion of each outstanding
Share into shares of common stock of eChapman and cash in lieu of fractional
shares pursuant to a merger of CCMHI into a subsidiary of eChapman (the
"Merger"); and
WHEREAS, as a condition to entering into the Merger
Agreement, eChapman has requested that the Stockholder agree, and the
Stockholder has agreed, to support the Merger.
NOW, THEREFORE, to induce eChapman to enter into the Merger
Agreement and in consideration of the mutual covenants and agreements set
forth herein and in the Merger Agreement, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. REPRESENTATIONS OF STOCKHOLDER. The Stockholder
represents that:
(a) (1) he possesses the sole right to vote, or the
voting of, all of the Shares, (2) such number of Shares constitutes all of
the Shares with respect to which the Stockholder possesses the sole right to
vote, or direct the voting of, as the case may be, and (3) he has good and
merchantable title to all of the Shares, free of all restrictions and
encumbrances of every kind and character.
(b) (1) he possesses the sole power to dispose of, or
the disposition of, the Shares, (2) such number of Shares constitutes all of
the
<PAGE>
Shares with respect to which the Stockholder possesses or will possess the
sole power to dispose of or direct the disposition of, and (3) he has good
and merchantable title to all of the Shares free of all restrictions and
encumbrances of any kind or character.
(c) he does not own, of record or beneficially, any
other shares of CCMHI's capital stock. For the purposes of this Agreement,
beneficial ownership has the meaning set forth in Rule 13d-3 of the
Securities Exchange Act of 1934, as amended.
(d) he has full right, power and authority to enter
into, deliver and perform this Agreement; this Agreement has been duly
executed and delivered by such stockholder; and this Agreement constitutes
the legal, valid and binding obligation of the Stockholder, and is
enforceable in accordance with its terms.
2. COVENANTS OF STOCKHOLDER. The Stockholder covenants as
follows:
(a) RESTRICTIONS ON TRANSFER. During the term of this
Agreement, the Stockholder shall not pledge, hypothecate, grant a security
interest in, sell, transfer or otherwise dispose of or encumber any of the
Shares and will not enter into any agreement, arrangement or understanding or
grant a proxy (other than a proxy for the purpose of voting his Shares in
accordance with Subparagraph 2(b) hereof) which would, during the term of
this Agreement (i) restrict, (ii) establish a right of first refusal to, or
(iii) otherwise relate to the transfer or voting of such Shares.
(b) MERGER. The Stockholder shall vote the Shares in
favor of the Merger Agreement, and the Merger and the transactions
contemplated thereby. The Stockholder agrees not to vote his Shares in favor
of any merger, consolidation, share exchange or sale of assets or other
business combination involving CCMHI other than the Merger during the term of
this Agreement.
(c) ADDITIONAL SHARES. The provisions of subparagraphs
(a) and (b) above shall apply to all Shares currently owned and hereafter
acquired, of record or beneficially, by each of the Stockholder.
3. TERMINATION. This Agreement shall terminate upon the
termination of the Merger Agreement.
4. GOVERNING LAW. This Agreement shall in all respects be
governed by and construed under the laws of Maryland, all rights and remedies
being governed by such laws, without regard to conflict of law principles.
5. BENEFIT OF AGREEMENT. This Agreement shall be binding
upon and inure to the benefit of, and shall be enforceable by, the parties
hereto and their respective personal representatives, successors and assigns,
except that neither party may transfer or assign any of its respective rights
or obligations hereunder without the prior written consent of the other party
or, if by eChapman, in accordance with the Merger Agreement.
-2-
<PAGE>
6. COUNTERPARTS. For convenience of the parties hereto,
this Agreement may be executed in several counterparts, each of which shall
be deemed an original, all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, eChapman and the Stockholder has caused
this Agreement to be duly executed as of the day and year first above written.
eCHAPMAN.COM, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
----------------------------------------
Nathan A. Chapman, Jr., President,
Chief Executive Officer and
Chairman of the Board
STOCKHOLDER
/s/ NATHAN A. CHAPMAN, JR.
-------------------------------------------
Nathan A. Chapman, Jr.
-3-
<PAGE>
Exhibit 10.8
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (the "Agreement") dated as of November
12, 1999, between EChapman.com, Inc., a Maryland corporation ("EChapman"), and
Nathan A. Chapman, Jr. (the "Stockholder").
WHEREAS, the Stockholder individually possesses the right to
vote, or direct the voting of, an aggregate of 1,828,115 shares of common stock,
$0.001 par value ("Shares"), of Chapman Insurance Holdings, Inc., a Maryland
corporation ("CIH"), which constitute approximately 91.9% of the outstanding
capital stock of CIH, no other shares of any other class of capital stock of CIH
being issued or outstanding; and
WHEREAS, the Stockholder individually possesses the power to
dispose of, or to direct the disposition of, an aggregate of 1,828,115 Shares,
which constitute approximately 91.9% of the outstanding capital stock of CIH;
and
WHEREAS, EChapman has entered into an Agreement of Merger
with CIH, dated as of the date hereof (the "Merger Agreement"), pursuant to
which EChapman would acquire CIH and The Chapman Insurance Agency
Incorporated, CIH's wholly-owned subsidiary, through the conversion of each
outstanding Share into shares of common stock of EChapman and cash in lieu of
fractional shares pursuant to a merger of CIH into a subsidiary of EChapman
(the "Merger"); and
WHEREAS, as a condition to entering into the Merger Agreement,
EChapman has requested that the Stockholder agree, and the Stockholder has
agreed, to support the Merger.
NOW, THEREFORE, to induce EChapman to enter into the Merger
Agreement and in consideration of the mutual covenants and agreements set forth
herein and in the Merger Agreement, and intending to be legally bound hereby,
the parties hereto agree as follows:
1. REPRESENTATIONS OF STOCKHOLDER. The Stockholder represents
that:
(a) (1) he possesses the sole right to vote, or direct the
voting of, all of the Shares, (2) such number of Shares constitutes all of the
Shares with respect to which the Stockholder possesses the sole right to vote,
or direct the voting of, as the case may be, and (3) he has good and
merchantable title to all of the Shares, free of all restrictions and
encumbrances of every kind and character.
(b) (1) he possesses the sole power to dispose of, or
direct the disposition of, the Shares, (2) such number of Shares constitutes all
of the Shares with respect to which the Stockholder possesses or will possess
the sole power to dispose of or direct the
<PAGE>
disposition of, and (3) he has good and merchantable title to all of the Shares
free of all restrictions and encumbrances of any kind or character.
(c) he does not own, of record or beneficially, any other
shares of CIH's capital stock. For the purposes of this Agreement, beneficial
ownership has the meaning set forth in Rule 13d-3 of the Securities Exchange Act
of 1934, as amended.
(d) he has full right, power and authority to enter into,
deliver and perform this Agreement; this Agreement has been duly executed and
delivered by such stockholder; and this Agreement constitutes the legal, valid
and binding obligation of the Stockholder, and is enforceable in accordance with
its terms.
2. COVENANTS OF STOCKHOLDER. The Stockholder covenants as
follows:
(a) RESTRICTIONS ON TRANSFER. During the term of this
Agreement, the Stockholder shall not pledge, hypothecate, grant a security
interest in, sell, transfer or otherwise dispose of or encumber any of the
Shares and will not enter into any agreement, arrangement or understanding or
grant a proxy (other than a proxy for the purpose of voting his Shares in
accordance with Subparagraph 2(b) hereof) which would, during the term of this
Agreement (i) restrict, (ii) establish a right of first refusal to, or (iii)
otherwise relate to the transfer or voting of such Shares.
(b) MERGER. The Stockholder shall vote the Shares in favor
of the Merger Agreement, and the Merger and the transactions contemplated
thereby. The Stockholder agrees not to vote his Shares in favor of any merger,
consolidation, share exchange or sale of assets or other business combination
involving CIH other than the Merger during the term of this Agreement.
(c) ADDITIONAL SHARES. The provisions of subparagraphs (a)
and (b) above shall apply to all Shares currently owned and hereafter acquired,
of record or beneficially, by each of the Stockholder.
3. TERMINATION. This Agreement shall terminate upon the
termination of the Merger Agreement.
4. GOVERNING LAW. This Agreement shall in all respects be
governed by and construed under the laws of Maryland, all rights and remedies
being governed by such laws, without regard to conflict of law principles.
5. BENEFIT OF AGREEMENT. This Agreement shall be binding upon
and inure to the benefit of, and shall be enforceable by, the parties hereto and
their respective personal representatives, successors and assigns, except that
neither party may transfer or assign any of its respective rights or obligations
hereunder without the prior written consent of the other party or, if by
EChapman, in accordance with the Merger Agreement.
-2-
<PAGE>
6. COUNTERPARTS. For convenience of the parties hereto, this
Agreement may be executed in several counterparts, each of which shall be deemed
an original, all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, EChapman and the Stockholder has caused
this Agreement to be duly executed as of the day and year first above written.
ECHAPMAN.COM, INC.
By:/s/ NATHAN A. CHAPMAN, JR.
-----------------------------------
Nathan A. Chapman, Jr., President,
Chief Executive Officer and
Chairman of the Board
STOCKHOLDER
/s/ NATHAN A. CHAPMAN, JR.
--------------------------------------
Nathan A. Chapman, Jr.
<PAGE>
Exhibit 21
SUBSIDIARIES OF ECHAPMAN.COM, INC.
CHI Merger Subsidiary, Inc., a Maryland corporation
CCMHI Merger Subsidiary, Inc., a Maryland corporation
CIH Merger Subsidiary, Inc., a Maryland corporation
<PAGE>
[LETTERHEAD]
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
registration statement.
Baltimore, Maryland /s/ ARTHUR ANDERSEN LLP
January 18, 2000
