<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
REGISTRATION NO. 333-90987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2 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. D. SCOTT FREED, ESQ.
MICHAEL W. CONRON, ESQ. Whiteford, Taylor & Preston L.L.P.
Venable, Baetjer and Howard, LLP Seven Saint Paul Street
1800 Mercantile Bank & Trust Building Baltimore, Maryland 21202-1626
Two Hopkins Plaza (410) 347-8707
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.
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<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
82, 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.
(ii)
<PAGE>
SUBJECT TO COMPLETION DATED: APRIL 14, 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.......................
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.
---------------------
INVESTMENT IN OUR COMMON STOCK INVOLVES RISK.
SEE "RISK FACTORS" SECTION BEGINNING ON PAGE 8 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 8 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, INCLUDING THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES, FOLLOWING
THIS SUMMARY. 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. UNLESS WE
INDICATE OTHERWISE, "COMMON STOCK" REFERS TO THE COMMON STOCK OF
ECHAPMAN.COM, INC. UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS
PROSPECTUS (1) GIVES EFFECT TO THE CLOSING OF THE MERGERS; (2) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND (3) ASSUMES NO EXERCISE
OF OPTIONS UNDER OUR 1999 OMNIBUS STOCK PLAN.
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.
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
February 29, 2000 had over $864 million in assets under management. Chapman
Capital Management acts as financial adviser to separate accounts, a group trust
and a family of mutual funds. If an expected $100 million withdrawal from the
group trust had occurred as of February 29, 2000, our assets under management
would have been approximately $764 million. The Chapman Insurance Agency is a
privately held insurance agency with limited operations to date.
Our web site 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 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, and 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.
We believe an online network designed to appeal to the DEM community will
allow us to leverage the DEM concept and promote brand differentiation for our
3
<PAGE>
financial and other services. We also believe that the Internet will provide us
with cost-efficient access to new markets for our financial services.
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 the closing of the
mergers, EChapman.com will indirectly control:
- The Chapman Co.
- Chapman Capital Management, Inc.
- The Chapman Insurance Agency Incorporated
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 Holdings are
contingent upon each other and the completion of this offering.
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
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>
There is currently no public market for our common stock. Our common stock
has been approved for listing on the Nasdaq National Market upon notice of
issuance; however, 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.
5
<PAGE>
CONSOLIDATED SUMMARY FINANCIAL DATA
The summary of financial information for the years ended December 31, 1998
and 1999 is derived from the financial statements for each of EChapman.com,
Chapman Holdings and Chapman Capital Management Holdings for the years ended
December 31, 1998 and 1999, which have been audited.
The summary unaudited pro forma statement of operations data gives effect to
the mergers as if they had occurred as of January 1, 1999. The unaudited pro
forma balance sheet data gives effect to the mergers as if they had occurred as
of December 31, 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, 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. 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 and Pro Forma Financial Data."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------------- -------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------------------- -------------------------------
CHAPMAN (UNAUDITED)
CAPITAL ECHAPMAN.COM
CHAPMAN MANAGEMENT ECHAPMAN.COM PRO FORMA
ECHAPMAN.COM HOLDINGS HOLDINGS PRO FORMA AS ADJUSTED
------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................ $ -- $7,374,000 $4,622,000 $10,546,000 $10,546,000
Loss before income tax
benefit.................... (281,000) (543,000) (853,000) (4,819,000) (4,819,000)
Net loss..................... $(281,000) $ (442,000) $ (853,000) $(4,718,000)(1) $(4,718,000)(1)
========= ========== ========== =========== ===========
Basic and dilutive loss per
share...................... $(281,000) $ (0.15) $ (0.25) $ (0.36) $ (0.29)
========= ========== ========== =========== ===========
Weighted average shares
outstanding................ -- 2,954,000 3,351,000 13,195,000 16,528,000
========= ========== ========== =========== ===========
</TABLE>
- --------------------------
(1) Reflects elimination of gain of $1,458,000 on the proprietary stock activity
of Chapman Capital Management Holdings stock held by Chapman Co. which is
treated like treasury stock in consolidation and reflects amortization of
goodwill, resulting from the mergers because of the step up in basis (see
page 19 and accompanying footnotes), of $1,417,000 ($28,342,000 over 20
years) for the period.
6
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------- --------------------------------
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1999
-------------------------------------- --------------------------------
(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....... $ -- $1,274,000 $3,036,000 $ 4,185,000 $49,685,000
Total assets.................. 934,000 8,535,000 4,838,000 39,984,000 84,550,000
Total debt.................... -- 1,750,000 150,000 1,900,000 1,900,000
Total stockholders' (deficit)
equity...................... (281,000) 5,878,000 4,188,000 35,617,000(1) 81,117,000(1)
</TABLE>
- ------------------------
(1) Total stockholders' equity excludes 136,510 shares issuable upon exercise of
options that were outstanding as of December 31, 1999 and the underwriters'
over-allotment option.
7
<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 EARNINGS WILL SUFFER.
EChapman.com was formed in 1999 and has had minimal operations to date,
which have consisted solely of expenses incurred in developing our business
plan. Although we have launched a prototype of our web site, we are still in the
process of designing and developing our actual web site, and we have not made
final decisions with respect to a web design firm, web development firm, a
hosting services provider or other necessary Internet vendors. If we experience
a delay in identifying and retaining qualified vendors for the completion and
launch of our web site, our ability to successfully implement our business
strategy will be adversely affected. In addition, since we are dependent upon
outside vendors for these services, our estimated time frames will depend upon
their availability.
BECAUSE WE HAVE NO INTERNET-RELATED OPERATING HISTORY, WE CANNOT ASSURE YOU THAT
OUR EXPANSION INTO THIS AREA WILL BE PROFITABLE.
Although we have a history with respect to the securities brokerage,
investment banking and investment advisory businesses, we have no Internet-based
operating history from which you can evaluate our combined business plan and
prospects.
As a new entrant to the Internet business, we face risks and uncertainties
relating to our ability to implement successfully the Internet component of our
business strategy, including:
- Successful design, development and launch of the EChapman.com web site
- Creation of public awareness of the EChapman.com brand and web site
- Successful expansion of our financial 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.
8
<PAGE>
WE CURRENTLY HAVE NO AGREEMENTS WITH ADVERTISERS, STRATEGIC PARTNERS OR CONTENT
PROVIDERS, AND IF WE ARE UNABLE TO ESTABLISH AND MAINTAIN THESE RELATIONSHIPS,
OUR EARNINGS WILL SUFFER.
Although we intend to pursue advertising relationships and strategic
alliances with third parties and enter into agreements with content providers,
we have not entered into negotiations with any companies, and we cannot assure
you that we will be able to establish or maintain these relationships. If we
cannot establish and maintain these relationships, our earnings will be
adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE EXPECT TO CONTINUE TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
On a pro forma basis, after giving effect to the mergers of Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance Holdings
into our wholly-owned subsidiaries, we had a net loss of $4,718,000 for the year
ended December 31, 1999. Following the offering and the closing 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.
9
<PAGE>
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 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 $11.83 per share, or 78.9%, as of December 31, 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.
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
10
<PAGE>
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.
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 womancentral.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.
11
<PAGE>
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.
RISKS RELATED TO OUR SECURITIES BROKERAGE, INVESTMENT BANKING AND
INVESTMENT ADVISORY BUSINESSES
THE CHAPMAN CO. IS PARTICULARLY SUSCEPTIBLE TO LOSSES WHILE TRADING FOR ITS OWN
ACCOUNT DUE TO ITS LARGE INVENTORY OF ECHAPMAN.COM COMMON STOCK.
As a result of the mergers, The Chapman Co.'s inventory of Chapman Holdings
common stock and Chapman Capital Management Holdings common stock will convert
into shares of EChapman.com common stock. EChapman.com common stock has been
approved for listing on the Nasdaq National Market. As a newly-listed Nasdaq
National Market security, EChapman.com common stock may have less liquidity and
higher spreads between bid and ask prices than other securities listed on the
New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market. Accordingly, The Chapman Co. is subject to liquidity risk with respect
to this security and may take longer to liquidate its inventory of these
securities than it would for investments in more liquid securities. Liquidity
risk is the risk that this security
12
<PAGE>
may be difficult or impossible to sell at the time and for the price that The
Chapman Co. deems appropriate. Further, liquidity risk implies that any effort
on the part of The Chapman Co. to liquidate its portfolio in a short period of
time may adversely affect the price of the EChapman.com common stock.
OUR INVESTMENT ADVISORY SUBSIDIARY IS DEPENDENT ON A FEW MAJOR INVESTMENT
MANAGEMENT CLIENTS, AND IF ANY OF THESE CLIENTS TERMINATED THEIR ADVISORY
ARRANGEMENTS WITH US, OUR ADVISORY FEE REVENUE WOULD BE MATERIALLY HARMED.
All of Chapman Capital Management's agreements with its advisory clients are
terminable by the client upon short notice (typically 30-60 days prior written
notice). As of February 29, 2000, eight clients, including all three of those
invested in DEM-MET Trust and The Chapman U.S. Treasury Money Fund, represented
approximately 74.5% of our total assets under management. As of February 29,
2000, DEM-MET Trust, with $329.3 million in assets under management, represented
approximately 38.1% of our total assets under management. Because of the
concentration of our assets under management with a limited number of customers,
our assets under management at any time can fluctuate. A representative of a
major customer of the DEM-MET Trust has informally advised us that the customer
currently intends to withdraw up to $100 million from the DEM-MET Trust. This
amount represents approximately 11.6% of our assets under management as of
February 29, 2000 and approximately 30.4% of the assets under management in the
DEM-MET Trust as of February 29, 2000. If the DEM-MET Trust or any of our key
investment management clients terminate their advisory arrangements with us or
make additional substantial withdrawals of their assets under management, our
advisory fee revenue would be materially and adversely affected.
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 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.
13
<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:
<TABLE>
<S> <C>
- - Complete the design and development of the
EChapman.com web site $ 6,000,000
- - Promote the EChapman.com brand and continue to promote
the DEM and DEM Multi-Manager strategies 14,000,000
- - Provide capital to The Chapman Co. for on-line trading 2,000,000
- - Provide capital to The Chapman Co. in connection with
trading for its own account and for use in
underwriting activities 5,000,000
- - Pay cash to dissenters in the mergers of Chapman
Holdings and Chapman Capital Management Holdings, if
any 1,500,000
- - Further explore the establishment of an Internet-based
DEM-oriented bank 1,000,000
- - Pay consideration to stockholders in Chapman Insurance
Holdings merger 125,000
- - Fund working capital and for general corporate
purposes, including financing future acquisitions and
capital expenditures 15,875,000
-----------
$45,500,000
===========
</TABLE>
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 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
14
<PAGE>
- Amortization of acquired intangible assets, which could reduce future
reported earnings
- Potential loss of customers or key employees of acquired companies
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 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.
15
<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 December 31, 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 $6,927,000 or $0.53 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 $52,427,000 or $3.17
per share of common stock. At an assumed offering price of $15.00 per share,
this represents an immediate dilution of $11.83 per share to the purchasers of
our common stock in this offering. As of December 31, 1999, there were also
outstanding options to purchase an additional 136,510 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
December 31, 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....................................... $0.53
Increase in pro forma net tangible book value per share
attributable to this offering........................... 2.64
-----
Pro forma as adjusted net tangible book value after this
offering and the mergers................................ 3.17
------
Pro forma as adjusted dilution of net tangible book value to
new investors in this offering............................ $11.83
======
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 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 PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.......................... 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>
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. The number of shares purchased excludes the underwriters'
over-allotment option and 136,510 shares issuable upon the exercise of options
outstanding as of December 31, 1999.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of EChapman.com as of
December 31, 1999:
- On a pro forma basis to reflect the closing of the mergers with Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance
Holdings
- On a pro forma, as adjusted basis, to reflect the closing 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............................... $ -- $ 3,590,000 $49,090,000
========= =========== ===========
Debt.................................................... $ -- $ 1,900,000 $ 1,900,000
--------- ----------- -----------
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.............................. -- 37,514,000 83,011,000
Accumulated deficit..................................... (281,000) (281,000) (281,000)
Proprietary stock of EChapman.com held by subsidiary, at
cost.................................................. -- (1,636,000) (1,636,000)
Cumulative realized gain on trading proprietary stock of
EChapman.com held by subsidiary....................... -- 7,000 7,000
--------- ----------- -----------
Total stockholders' (deficit) equity.................... (281,000) 35,617,000 81,117,000
--------- ----------- -----------
Total capitalization.................................... $(281,000) $37,517,000 $83,017,000
========= =========== ===========
</TABLE>
(1) Shares outstanding exclude shares issuable upon exercise of options that
were outstanding as of December 31, 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 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.
17
<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, Chapman Capital Management Holdings and Chapman Insurance Holdings
including the related notes, which 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, 1999 for operating results and as of December 31,
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.
18
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
CHAPMAN
CAPITAL CHAPMAN
CHAPMAN MANAGEMENT INSURANCE
ECHAPMAN HOLDINGS HOLDINGS HOLDINGS PRO FORMA
HISTORICAL (A) HISTORICAL (A) HISTORICAL (A) HISTORICAL (A) ADJUSTMENTS PRO FORMA
-------------- -------------- -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA BALANCE SHEET:
Assets
Cash, cash equivalents
and marketable
securities.......... $ -- $1,274,000 $3,036,000 $ -- $ (125,000)(b) $ 4,185,000
Cash deposits with
clearing
organization........ -- 2,674,000 -- -- -- 2,674,000
Securities owned...... -- 2,084,000 -- -- (2,084,000)(c) --
Management fees
receivable.......... -- -- 575,000 -- -- 575,000
Receivables from
brokers and
dealers............. -- 584,000 -- -- -- 584,000
Other receivables..... -- 629,000 278,000 -- (456,000)(d) 451,000
Advances to officer/
employee............ -- 688,000 372,000 -- -- 1,060,000
Prepaids and other
assets.............. 934,000 499,000 332,000 -- -- 1,765,000
Intangibles........... -- 103,000 245,000 -- 28,342,000 (e) 28,690,000
---------- ---------- ---------- --------- ------------ -----------
Total assets.......... $ 934,000 $8,535,000 $4,838,000 $ -- $25,677,000 $39,984,000
========== ========== ========== ========= ============ ===========
Liabilities
Accounts payable and
accrued expenses.... $ 805,000 $ 873,000 $ 500,000 $ 301,000 $ (175,000)(d) $ 2,304,000
Margin loan payable... -- 1,750,000 -- -- -- 1,750,000
Other liabilities..... 410,000 34,000 150,000 -- (281,000)(d) 313,000
---------- ---------- ---------- --------- ------------ -----------
Total liabilities..... 1,215,000 2,657,000 650,000 301,000 (456,000) 4,367,000
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 -- 24,372,000 (f) 37,514,000
Accumulated deficit... (281,000) (1,025,000) (1,054,000) (303,000) 2,382,000 (g) (281,000)
Proprietary stock, at
cost................ -- (842,000) -- -- (794,000)(h) (1,636,000)
Cumulative realized
(loss) gain on
proprietary stock... -- (161,000) -- -- 168,000 (h) 7,000
---------- ---------- ---------- --------- ------------ -----------
Total stockholders'
(deficit) equity.... (281,000) 5,878,000 4,188,000 (301,000) 26,133,000 35,617,000
---------- ---------- ---------- --------- ------------ -----------
Total liabilities and
stockholders'
equity.............. $ 934,000 $8,535,000 $4,838,000 $ -- $25,677,000 $39,984,000
========== ========== ========== ========= ============ ===========
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
PRO FORMA BALANCE SHEET:
Assets
Cash, cash equivalents
and marketable
securities.......... $45,500,000 (i) $49,685,000
Cash deposits with
clearing
organization........ -- 2,674,000
Securities owned...... -- --
Management fees
receivable.......... -- 575,000
Receivables from
brokers and
dealers............. -- 584,000
Other receivables..... -- 451,000
Advances to officer/
employee............ -- 1,060,000
Prepaids and other
assets.............. (934,000)(j) 831,000
Intangibles........... -- 28,690,000
----------- -----------
Total assets.......... $44,566,000 $84,550,000
=========== ===========
Liabilities
Accounts payable and
accrued expenses.... $ (805,000)(j) $ 1,499,000
Margin loan payable... -- 1,750,000
Other liabilities..... (129,000)(j) 184,000
----------- -----------
Total liabilities..... (934,000) 3,433,000
Stockholders' Equity
Common stock.......... 3,000 (i) 16,000
Additional paid-in
capital............. 45,497,000 (i) 83,011,000
Accumulated deficit... -- (281,000)
Proprietary stock, at
cost................ -- (1,636,000)
Cumulative realized
(loss) gain on
proprietary stock... -- 7,000
----------- -----------
Total stockholders'
(deficit) equity.... 45,500,000 81,117,000
----------- -----------
Total liabilities and
stockholders'
equity.............. $44,566,000 $84,550,000
=========== ===========
</TABLE>
- ------------------------------
(a) See the financial statements included elsewhere in this prospectus.
(b) 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.
(c) To eliminate the proprietary stock of Chapman Capital Management held by
Chapman Co. to account for it like treasury stock on a consolidated basis.
(d) To eliminate intercompany receivable and payable.
19
<PAGE>
(e) To reflect the step up of the assets from the acquisitions of Chapman
Holdings and Chapman Insurance Holdings. As Chapman Capital Management
Holdings has the same majority owner as Chapman Holdings, the market value
(at the assumed IPO price of $15 per share) 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 assuming the $15 per share
IPO price times the 5,709,204 (post split) shares
(2,953,622 shares @ a 1.93295 conversion ratio)........... $85,638,000
Less Chapman Holdings' book value as of December 31, 1999... 5,878,000
-----------
Excess market value......................................... 79,760,000
Percentage of stock held by non-controlling owners.......... 35%
-----------
Step up adjustment for Chapman Holdings..................... 27,916,000
Goodwill from Chapman Insurance Holdings acquisition:
Negative book value....................................... $301,000
Purchase price............................................ 125,000
--------
426,000
-----------
Total goodwill.............................................. $28,342,000
===========
</TABLE>
(f) To reflect the following changes to additional paid-in capital:
<TABLE>
<S> <C>
Eliminate accumulated deficit of Chapman Holdings........... $(1,025,000)
Eliminate accumulated deficit of Chapman Capital Management
Holdings.................................................. (1,054,000)
Eliminate accumulated deficit of Chapman Insurance
Holdings.................................................. (303,000)
Total Goodwill Step-up...................................... 28,342,000
Additional shares of common stock to reflect exchange of
Chapman Holdings and Chapman Capital Management Holdings
common shares for EChapman.com common shares.............. (5,000)
Eliminate effect of cash to be paid to the stockholders of
Chapman Insurance Holdings included in goodwill........... (125,000)
Eliminate the gain from proprietary stock of Chapman Capital
Management held by Chapman Co. in consolidation........... (1,458,000)
-----------
Total pro forma adjustment.................................. $24,372,000
===========
</TABLE>
(g) To eliminate the accumulated deficit of Chapman Holdings, Chapman Capital
Management Holdings and Chapman Insurance Holdings.
(h) To reflect cost of and realized gain on proprietary stock for Chapman
Capital Management Holdings held by Chapman Co. which is treated like
treasury stock in consolidation.
(i) 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.
(j) To record the offering cost incurred by EChapman.com against the net
offering proceeds and reduce the liability.
20
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
CHAPMAN
CAPITAL CHAPMAN
CHAPMAN MANAGEMENT INSURANCE
ECHAPMAN HOLDINGS HOLDINGS HOLDINGS PRO FORMA PRO FORMA AS
HISTORICAL (A) HISTORICAL (A) HISTORICAL (A) HISTORICAL (A) ADJUSTMENTS ADJUSTED
-------------- -------------- -------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
OPERATIONS:
REVENUE
Commissions............ $ -- $4,190,000 $ -- $ 45,000 $ -- $ 4,235,000
Underwriting and
management fees...... -- 1,168,000 -- -- -- 1,168,000
Investment management
fees................. -- -- 4,282,000 -- -- 4,282,000
Interest, dividends and
other income......... -- 399,000 340,000 -- (37,000)(b) 702,000
Gains on trading....... -- 1,617,000 -- -- (1,458,000)(c) 159,000
---------- ---------- ---------- --------- ----------- ------------
Total revenue...... -- 7,374,000 4,622,000 45,000 (1,495,000) 10,546,000
---------- ---------- ---------- --------- ----------- ------------
EXPENSE
Compensation and
benefits............. 62,000 3,567,000 1,211,000 16,000 -- 4,856,000
Floor brokerage and
clearing fees........ -- 702,000 -- -- -- 702,000
Management fees........ -- -- 1,524,000 -- -- 1,524,000
Other expenses......... 219,000 3,648,000 2,740,000 296,000 1,380,000(d) 8,283,000
---------- ---------- ---------- --------- ----------- ------------
Total expense...... 281,000 7,917,000 5,475,000 312,000 1,380,000 15,365,000
---------- ---------- ---------- --------- ----------- ------------
Loss before income tax
benefit.............. (281,000) (543,000) (853,000) (267,000) (2,875,000) (4,819,000)
INCOME TAX BENEFIT..... -- (101,000) -- -- -- (101,000)
---------- ---------- ---------- --------- ----------- ------------
Net loss............... $ (281,000) $ (442,000) $ (853,000) $(267,000) $(2,875,000) $ (4,718,000)
========== ========== ========== ========= =========== ============
Basic and diluted loss
per share............ $ (281,000) $ (0.15) $ (0.25) $ -- $ -- $ (0.29)(e)
========== ========== ========== ========= =========== ============
Weighted average shares
outstanding.......... -- 2,954,000 3,351,000 -- -- 16,528,000(e)
========== ========== ========== ========= =========== ============
</TABLE>
- ------------------------------
(a) See the financial statements included elsewhere in this prospectus.
(b) To eliminate interest on intercompany loan.
(c) To eliminate the gain on the proprietary stock activity of Chapman Capital
Management Holdings stock held by Chapman Co. which is treated like treasury
stock in consolidation.
(d) To reflect amortization of the goodwill, resulting from the mergers because
of the step up in basis (see page 19 and accompanying footnotes), of
$1,417,000 for the period ($28,342,000 over 20 years), and to eliminate the
intercompany interest expense of $37,000.
(e) The pro forma, basic, and diluted loss per share and the weighted average
shares outstanding would be $(0.36) and 13,195,000, respectively.
21
<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 (2) its operations since May 1999 have
consisted of approximately $281,000 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 $28.3 million in goodwill, which will be amortized
over its estimated life of 20 years. This goodwill amortization will result in a
charge against earnings of $1,417,000 per year on a pre-tax basis.
22
<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,
---------------------------------------------------
1998 1999
------------------------ ------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNTS REVENUE AMOUNTS REVENUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Commissions............................................... $ 2,414,000 36.6% $ 4,190,000 39.9%
Underwriting and management fees.......................... 700,000 10.6 1,168,000 11.1
Investment management fees................................ 3,136,000 47.6 4,282,000 40.8
Interest and dividends.................................... 502,000 7.6 702,000 6.7
(Loss) gain on trading.................................... (159,000) (2.4) 159,000 1.5
----------- ----- ----------- ------
Total revenue........................................... 6,593,000 100.0 10,501,000 100.0
----------- ===== ----------- ======
EXPENSE:
Compensation and benefits................................. 3,043,000 46.2 4,778,000 45.5
Floor brokerage and clearing fees......................... 431,000 6.5 702,000 6.7
Management fees........................................... 1,178,000 17.9 1,524,000 14.5
Other expense............................................. 3,353,000 50.8 6,345,000 60.3
----------- ----- ----------- ------
Total expense........................................... 8,005,000 121.4 13,349,000 127.0
----------- ----- ----------- ------
Loss before income tax benefit............................ (1,412,000) (21.4) (2,848,000) (27.0)
INCOME TAX BENEFIT.......................................... (450,000) (6.8) (101,000) (0.9)
----------- ----- ----------- ------
Net Loss.................................................. $ (962,000) (14.6)% $(2,747,000) (26.1)%
=========== ===== =========== ======
</TABLE>
- ------------------------
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenue increased by $3,908,000, or 59.3%, to $10,501,000 for 1999
from $6,593,000 for 1998. The increase in revenue was primarily related to an
increase in commission revenue and investment management fees. In addition, the
gain on trading increased by $318,000, or 200.0%, to a gain of $159,000 for 1999
compared to a loss on trading of $159,000 in 1998.
Commissions revenue increased by $1,776,000, or 73.6%, to $4,190,000 for
1999 from $2,414,000 for 1998. Commissions revenue from the sale of equities
increased $907,000, or 55.6%, to $2,538,000 for the year ended December 31, 1999
from $1,631,000 for the prior comparable period. Commission revenue on fixed
income securities increased $537,000, or 443.8%, to $658,000 for the year ended
December 31, 1999 from $121,000 for the prior comparable period. This increase
in fixed securities income can be attributed to favorable interest rates
throughout the year. The overall increase in commission revenue was also due to
targeted growth in revenues from municipal syndications which increased
$200,000, or 27.0%, to $942,000 for the year ended December 31, 1999 from
$742,000 for the prior comparable period. Chapman Co. participated in 48
municipal syndications during the year ended December 31, 1999 compared to 40 in
the prior comparable period. Chapman Co. was
23
<PAGE>
also senior manager of seven municipal transactions in 1999 compared to four in
1998.
Underwriting and management fees increased by $468,000, or 66.9%, to
$1,168,000 for 1999 from $700,000 for 1998. The net increase for the year ended
December 31, 1999 is due to an increase in management fees of $598,000 and a
decrease in syndication fees of $130,000. The increase in management fees is
attributable to increased staffing within the public finance sector of the
business.
Investment management fees revenue increased by $1,146,000, or 36.5%, to
$4,282,000 for 1999 from $3,136,000 for 1998. This increase was primarily due to
a net increase of $180,001,000, or 30.4%, in assets under management to
$771,386,000 at the end of 1999, up from $591,385,000 at the end of 1998. The
increase in assets under management was due to investment performance and the
net changes in client decisions regarding the placement of their funds for
investment.
As of February 29, 2000, we had assets under management of approximately
$864 million and the DEM-MET Trust had assets under management $329.3 million. A
representative of a major customer of the DEM-MET Trust has informally advised
us that the customer currently intends to withdraw up to $100 million from the
DEM-MET Trust. This amount represents approximately 11.6% of our assets under
management as of February 29, 2000 and approximately 30.4% of the assets under
management in the DEM-MET Trust as of February 29, 2000. We have not received an
official request for withdrwal of funds from this customer and, accordingly,
this withdrawal may or may not occur. If this major customer had withdrawn $100
million from the DEM-MET Trust as of February 29, 2000, its assets under
management would have been $229.3 million and our assets under management would
have been approximately $764 million. We expect this withdrawal, if it occurs,
to be effective in early April 2000. We do not believe that this withdrawal, if
it occurs, will have a material adverse effect on our results of operations
because our profit margin for the DEM-MET Trust is lower than investment
advisory products for which we are the sole investment advisor. As DEM-MET Trust
assets under management increase, the fees, based on assets under management,
that we pay to third-party sub-advisors, increase and, conversely, as DEM-MET
Trust assets under management decrease, these fees decrease.
Interest and dividend revenue increased by $200,000, or 39.8%, to $702,000
for 1999 from $502,000 for 1998. This increase is due to higher cash balances
associated with the net proceeds from Chapman Capital Management's offering of
common stock.
The gain on trading increased by $318,000, or 200.0%, to a gain of $159,000
for 1999 compared to a loss on trading of $159,000 in 1998. This is primarily
due to a increase in the market value of Chapman Co.'s market making securities
inventory during the year.
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<PAGE>
Total expense increased by $5,344,000, or 66.8%, to $13,349,000 for 1999
from $8,005,000 for 1998. Expenses increased in all areas due to expanded
operations and marketing efforts, the opening of new offices in selected
markets, and development of new mutual funds.
Compensation and benefits increased by $1,735,000, or 57.0%, to $4,778,000
for 1999 from $3,043,000 for 1998. As a percentage of revenue, these expenses
decreased to 45.5% in 1999 from 46.2% in 1998. Compensation expense includes
salaries and sales commissions paid to brokers, which varies in relation to
changes in commission revenue. The increase in compensation and benefits is
primarily attributable to the increase in commissions paid to brokers due to
increased retail and municipal sales volume. We added 18 salaried employees
during the year. In addition, there was a full year of salary for two senior
positions at Chapman Capital Management that were added during the fourth
quarter of 1998.
Floor brokerage and clearing fees increased by $271,000, or 62.9%, to
$702,000 for 1999 from $431,000 for 1998. This increase is mainly due to an
increase in the number of broker's and related transaction volume offset by a
slight decline in the average cost per transaction as a result of changing
clearing firms in June of 1999.
Management fee expense, which consists primarily of Chapman Capital
Management's payments to sub-advisors in connection with the DEM-MET Trust,
increased by $346,000, or 29.4%, to $1,524,000 for 1999 from $1,178,000 for
1998. The increase in such fees reflects an increase in assets under management
of $180,001,000, or 30.4%, to a total of $771,386,000 as of December 31, 1999
from $591,385,000 as of December 31, 1998. Management fee expense as a
percentage of revenue decreased to 14.5% of total revenue for 1999 as compared
to 17.9% of total revenue for 1998.
Other expense increased by $2,992,000, or 89.2%, to $6,345,000 for 1999 from
$3,353,000 for 1998. The increase was primarily due to increased travel and
development costs of $339,000, occupancy and equipment expense related to the
opening of new offices of $179,000, printing expenses of $159,000, communication
expense of $96,000, telephone costs of $84,000, and conference and seminar costs
of $92,000. The increase in these costs is due to our growth and expansion
efforts. The 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 and consulting fees of $701,000, and increased marketing and advertising
of $475,000. The increase in legal fees is also due to legal expenses of
$161,000 for developing and registering four new DEM strategy mutual funds for
which we will not be reimbursed. The increase in other expense is also due to
paying approximately $251,000 of expenses for the mutual funds, which relate
primarily to expenses in excess of expense limitation agreements that we have
with the mutual funds. As the size of these mutual funds grow, the amount that
we cannot be reimbursed for will increase.
Income tax benefit decreased by $349,000, or 77.6%, to a tax benefit of
$101,000 for 1999 from a tax benefit of $450,000 for 1998. The tax benefit
decreased due to the
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<PAGE>
valuation reserve established for Chapman Capital Management on its 1999 income
tax benefit.
The net loss increased by $1,785,000, or 185.6%, to $2,747,000 in 1999 from
$962,000 in 1998. This change was a result of the 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 market conditions, and proprietary trading strategies. Our
combined total assets as of December 31, 1999 were $11,289,000.
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
December 31, 1999 was $1,528,000, which was $1,278,000 in excess of its minimum
NASD net capital requirement.
Our combined cash and cash equivalents were $3,715,000 as of December 31,
1999.
Cash flows used in operating activities decreased by $806,000, or 21.3%, to
$2,982,000 for the year ended December 31, 1999 from $3,788,000 for the year
ended December 31, 1998. This decrease was due to a change in operating assets
and liabilities.
Cash flows used in investing activities decreased by $579,000, or 51.6%, to
$544,000 for the year ended December 31, 1999 from $1,123,000 for the year ended
December 31, 1998. This decrease was primarily due to fewer purchases of
investments during 1999 and less advances made to officer.
Cash flows from financing activities decreased by $12,044,000, or 100.8%, to
$91,000 used in financing activities for the year ended December 31, 1999
compared to $11,953,000 provided by financing activities for the year ended
December 31, 1998. This decrease is due to the net proceeds from the Chapman
Holdings' and Chapman Capital Management Holdings' initial public offerings
received in February and August 1998, respectively.
On August 14, 1998, Chapman Capital Management Holdings completed 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
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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
under an unsecured demand note bearing interest at the rate of 5.45% per annum.
As of December 31, 1999, we had outstanding unsecured loans to Mr. Chapman in
the amount of $1,038,174, 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.
YEAR 2000 SYSTEM COSTS
Because of the arrival of the Year 2000, existing software programs and
operating systems were reviewed to determine if they can accommodate information
that employs dates after December 31, 1999. As of December 31, 1999, we have
incurred direct Year 2000 readiness costs of approximately $226,000 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. We estimate that our total Year 2000 readiness costs will
be approximately $338,500, of which most of the additional cost are payments on
equipment leases.
Our management prepared a written plan detailing our software and operating
systems readiness issues for the Year 2000. The plan identified 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 continued to work with
our hardware and software vendors and other third parties to complete our Year
2000 contingency plan through the end of 1999 and during the first quarter of
the year 2000.
Our Year 2000 readiness plan involved four phases:
PHASE I--ASSESSMENT. This phase involved the identification of all systems
that are date dependent. This phase was substantially completed during the first
quarter of 1998.
PHASE II--RENOVATION. This phase involved the identification and
replacement of mission-critical systems which 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.
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PHASE III--TESTING. This phase involved 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 identified systems as
"mission-critical" and "non mission-critical". We have identified systems as
"mission-critical" if the loss of the system, software or facility would cause
an immediate stoppage of activity or a significant impairment of a core business
area. 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 identified the third parties upon which we rely for mission-critical
systems and contacted these third parties to confirm that their systems were
Year 2000 ready. Responses from the majority of these vendors during the first
and second quarters of 1999 indicated that they expected to reach compliance by
the third quarter of 1999. As of the date of this prospectus, all of our vendors
of mission critical systems have verified readiness, and we have not had any
problems with these vendors' systems not being Year 2000 ready.
Although we suffered no significant Year 2000 problems at the start of 2000
or through April 1, 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. These efforts may
result in additional costs in excess of current allocation and estimates.
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<PAGE>
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 the closing 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.
- Chapman Capital Management, Inc.
- The Chapman Insurance Agency Incorporated
In the mergers:
- Stockholders of Chapman Holdings will receive 1.93295 shares of
EChapman.com stock for each share of Chapman Holdings common stock;
- Stockholders of Chapman Capital Management Holdings will receive 2.23363
shares of EChapman.com stock for each share of Chapman Capital Management
Holdings common stock; and
- Stockholders of Chapman Insurance Holdings will receive $0.06284 in cash
for each share of Chapman Insurance Holdings common stock
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
2000
1(st) Quarter(3).......................................... 14 1/2 10 1/2 16 1/2 11 3/8
</TABLE>
- ------------------------
(1) With respect to Chapman Holdings, from February 27, 1998.
(2) With respect to Chapman Capital Management Holdings, from August 14, 1998.
(3) Through March 28, 2000
On November 15, 1999, the last full trading 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 15, 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 $32,647,156.
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.
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Upon closing 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, of the beneficial ownership of the
outstanding 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.
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<PAGE>
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 $281,000 of expenses since our inception. Upon closing 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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<PAGE>
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
members of the DEM community. We believe that our creation of and leadership
position in employing the DEM 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
Chapman Co. is a full service securities brokerage and investment banking
company that engages in corporate and government finance, retail and
institutional brokerage,
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<PAGE>
research and marketing-making activities and trading. Chapman Capital Management
is a registered investment adviser that at February 29, 2000, had over
$864 million in assets under management. If an expected $100 million withdrawal
from the DEM-MET Trust had occurred as of February 29, 2000, its assets under
management would have been $229.3 million and our assets under management would
have been approximately $764 million. 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 members of the DEM community. We refer to U.S. companies which are
controlled by members of the DEM community as DEM companies. 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.
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 $726.8 million as of
February 29, 2000.
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
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<PAGE>
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 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
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<PAGE>
- DEM Index performance information
- Financial tools, such as mortgage and loan calculators and tips on how to
conduct investment research
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:
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<PAGE>
- One-to-one banner exchanges
- Basic text links
- Content sponsorship
- 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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<PAGE>
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, 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
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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.
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 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.
In addition, 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 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.
Our ability to fully capitalize on the growth opportunities presented by the
Internet depends primarily on the continued growth of the Internet. Our business
would be adversely affected if Internet usage does not continue to grow,
particularly
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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 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.
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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. We have not
identified a developer for our formal web site at this point because we intend
to use a portion of the proceeds of this offering to retain a developer and to
pay for the design and development of the web site.
We intend to operate CHAPMAN TRADING through Chapman On-Line, Inc., a
subsidiary of The Chapman Co., under the terms of a separate clearing agreement
between Chapman On-Line and the Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation. Chapman On-Line has not yet commenced
operations. Chapman On-Line is separately licensed as a broker-dealer with the
SEC and in 36 states, Puerto Rico and the District of Columbia, has applications
for registration pending in 14 states, and is a member firm of the NASD.
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
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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 $6 million and that our marketing
and advertising expenditures will total approximately $14 million. Of the
$6 million we currently anticipate spending on web site design and development,
we presently expect that approximately $4 million will be capitalized. Because
we are a new entrant to the Internet market, these expenditures may be
significantly higher than we anticipate.
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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 with respect to our brokerage and investment banking services are
small capitalization
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companies traded in the over-the-counter market and privately-held companies
undertaking an initial public offering.
BROKERAGE SERVICES
The Chapman Co. is registered as a broker-dealer with the SEC and in 50
states, the District of Columbia, and Puerto Rico and is a member firm of the
NASD. 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 44% of The Chapman Co.'s revenue during
the years ended December 31, 1999 and 1998, 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. Under
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 25%
and 17% of The Chapman Co.'s revenue during the years ended December 31, 1999
and 1998, respectively, were derived from secondary market trading.
The Chapman Co. is approved to be a registered market-maker for the
securities of up to five companies at any time, including Chapman Holdings and
Chapman Capital Management Holdings. Of the number of trades of The Chapman Co.
as a registered market-maker during 1999, approximately 29.5% were in Chapman
Capital Management Holdings, 27.5% were in Broadvision, Inc., approximately
17.2% were in Popular, Inc., approximately 14.1% were in Gemstar International
Group LTD, approximately 9.5% were in Chapman Holdings, and approximately 4.1%
were in Autodesk, Inc.
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The Chapman Co.'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 these 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 stock of Chapman Holdings held by The
Chapman Co. in its market making inventory is recorded in the equity section of
our balance sheet at cost like treasury stock. The Chapman Co. experienced a
loss on trading of $264,000 for the year ended December 31, 1998 and a gain on
trading of $1,617,000 for the year ended December 31, 1999. Most of the 1998
loss is attributable to an unrealized loss of value on The Chapman Co.'s
market-making inventory of Chapman Capital Management Holdings stock of
approximately $105,000. The 1999 gain is primarily attributable to the
$1,290,000 unrealized gain and a $168,000 realized gain on the value of The
Chapman Co.'s market-making inventory of Chapman Capital Management Holdings
stock. As of December 31, 1998 and 1999, The Chapman Co.'s inventory of
market-making securities was $1,500,000 and $2,084,000, respectively, which
consisted of Chapman Capital Management Holdings' stock.
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, 1999 and 1998,
approximately 6% and 16%, 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 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.
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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 88 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, 1999 and 1998, approximately 18% 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 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.
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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 February 29, 2000, Chapman Capital Management's total assets under
management attributable to mutual funds were approximately 8.2% of its total
assets under management.
DEM EQUITY FUND is a non-diversified portfolio of The Chapman Funds, Inc.
The principal investment objective of the DEM Equity Fund is aggressive
long-term growth through investment in equity securities of companies meeting
the DEM profile. As of February 29, 2000, the DEM Equity Fund had approximately
$34.6 million in assets. The DEM Equity Fund commenced operations in
April 1998.
DEM INDEX FUND is also a non-diversified portfolio of The Chapman
Funds, Inc. The DEM Index Fund seeks to match, as closely as possible, the DEM
Index, an index composed of 100 stocks from the universe of publicly-traded
companies which meet the DEM profile. As of February 29, 2000, the DEM Index
Fund had approximately $302,000 in assets. The DEM Index Fund commenced
operations in March 1999.
THE CHAPMAN U.S. TREASURY MONEY FUND, also a portfolio of The Chapman
Funds, Inc., invests solely in short-term direct obligations of the U.S.
Government and repurchase agreements collateralized fully by direct obligations
of the U.S. Government. This fund is intended primarily for state and local
governments and their authorities and agencies. As of February 29, 2000, The
Chapman U.S. Treasury Money Fund had $36.3 million in assets. The Chapman U.S.
Treasury Money Fund began operations in June 1989.
THE DEM MULTI-MANAGER FUNDS AND THE DEM MULTI-MANAGER STRATEGY. Chapman
Capital Management has registered but has not yet begun to sell the DEM Multi-
Manager Bond Fund and the DEM Multi-Manager Equity Fund. The amendment to The
Chapman Funds registration statement registering, the DEM Multi-Manager Equity
Fund became effective on December 14, 1998 by virtue of Rule 485(a)(2) 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.
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The Chapman Funds filed its annual update to its registration statement with
respect to these funds on December 30, 1999. This registration statement became
effective on February 28, 2000 under Rule 485(a)(i) under the Securities Act. We
have delayed sales of these funds until there is a greater public awareness of
the DEM Multi-Manager Strategy, and we anticipate that the launch of our web
site will help to provide this promotion; however, at present we cannot provide
a realistic estimate of when we expect to begin to market and sell these two
funds.
The DEM Multi-Manager Bond Fund will seek to earn high current income with
the potential for capital appreciation through investment in fixed income
securities of companies identified by multiple sub-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 disciplines. Chapman Capital Management will monitor the performance
of both the total fund portfolio and the portion of the total fund portfolio
allocated to each sub-adviser and will reallocate fund assets among individual
sub-advisers, or recommend to the board of directors of The Chapman Funds that
the fund employ or terminate particular sub-advisers, to the extent Chapman
Capital Management deems appropriate to achieve the overall investment
objectives of the particular fund. Chapman Capital Management may recommend
reallocations if, in Chapman Capital Management's opinion, a sub-adviser's
allocation becomes overweighted as a result of extended appreciation and in
order that undervalued securities and management styles receive additional
allocations.
Other circumstances under which Chapman Capital Management might reallocate
a fund's assets among a fund's sub-adviser include poor performance of the
assets under the management of a sub-adviser, concerns about the manner in which
a sub-adviser is conducting its business or a change in a sub-adviser's
portfolio management team. Chapman Capital Management also uses this
multi-manager management style in the DEM-MET Trust, which is discussed below.
When selecting sub-advisers for the Multi-Manager funds, Chapman Capital
Management intends to actively recruit sub-advisers which meet the DEM profile;
however, Chapman Capital Management does not intend to discriminate on the basis
of race, gender or national origin in the selection of sub-advisers.
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
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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 February 29, 2000, Chapman Capital Management had sub-advisory
relationships with 12 investment advisors. When selecting sub-advisers for the
DEM-MET Trust, Chapman Capital Management actively recruits sub-advisers which
meet the DEM profile; however, Chapman Capital Management does not intend to
discriminate on the basis of race, gender or national origin in the selection of
sub-advisers.
Chapman Capital Management evaluates such sub-advisors monthly and
reallocates assets among existing sub-advisors and new sub-advisors as
necessary. The DEM-MET Trust was created in December 1996 under an agreement
between Chapman Capital Management and Bankers Trust Company, as custodial
trustee.
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 February 29, 2000, the DEM-MET Trust had approximately $329.3 million
in assets, representing 38.1% of Chapman Capital Management's total assets under
management. If an expected $100 million withdrawal from the DEM-MET Trust had
occurred as of February 29, 2000, its assets under management would have been
$229.3 million and our assets under management would have been approximately
$764 million.
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
(1) that the discount on the company's shares could
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be attributed primarily to the small size of the fund and its relatively high
expense ratio; and (2) that because investors could purchase shares of
DEM, Inc. in the secondary market below the shares' net asset value and because
the Investment Company Act of 1940 generally prohibits investment companies from
offering shares below their net asset value, there was no feasible way in which
to successfully increase the size of the fund in order to reduce the expense
ratio and reduce or eliminate the discount at which the company's shares were
then trading.
The stockholders of DEM, Inc. approved the liquidation and dissolution of
the company on September 1, 1998, at which time the officers of the company
began liquidating its assets in order to distribute the net proceeds to the
stockholders. The Chapman Co. incurred a loss on trading of DEM, Inc. stock of
$159,000 in connection with stock of DEM, Inc. held in market-making inventory
at the time of the liquidation.
SEPARATE ACCOUNTS. Chapman Capital Management also provides investment
advisory services to separate accounts under individual investment advisory
agreements. Chapman Capital Management manages equity and debt portfolios with
varied investment objectives including long term capital appreciation and
current income. As of February 29, 2000, approximately 78.2% of the separate
accounts under management incorporate the DEM strategy as an investment
objective. Chapman Capital Management will continue to attempt to differentiate
itself from other investment managers by providing the DEM strategy as an
investment objective.
As of February 29, 2000, Chapman Capital Management managed approximately
$463.9 million in assets for separate accounts, of which approximately
$362.6 million was invested under the DEM Strategy.
MARKETING AND CUSTOMER SERVICE
Chapman Capital Management's marketing strategy is to provide a single
source for investing in DEM companies while achieving a competitive rate of
return. Chapman Capital Management aggressively markets to large corporations,
government entities and other institutions seeking investment in DEM companies.
Chapman Capital Management targets its marketing efforts to the various
types of customers that use its investment advisory and asset management
services. Chapman Capital Management's separate accounts are typically large
institutional investors. Chapman Capital Management markets to these accounts
through customer support activities and personal sales efforts by officers of
Chapman Capital 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
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intends to offer its proprietary investment funds to banks, insurance companies,
providers of 401(k) deferred compensation plans and other institutions for
resale to their customers. Chapman Capital Management will provide support to
The Chapman Co. in marketing to institutional resellers and to the institutional
resellers' own retail sales forces. Chapman Capital Management may also
undertake some limited advertising of its proprietary investment products.
In addition to separate accounts and proprietary investment products,
Chapman Capital Management will seek to enter into agreements with other
investment advisors whereby Chapman Capital Management will seek to act as a
sub-advisor with respect to their investment products. Chapman Capital
Management will seek to provide wholesale marketing assistance to the
distributors of such third-party investment products to ensure that such
products are effectively marketed by the third-party distributors to the DEM
community.
RESEARCH
As of February 29, 2000, Chapman Capital Management employed four portfolio
managers. Chapman Capital Management intends to hire additional portfolio
managers to support its existing investment advisory and management services and
to facilitate the introduction and maintenance of new investment products.
Chapman Capital Management currently employs a buy-side analyst to assist
the portfolio managers in investment research, monitoring of investment
opportunities and the development and maintenance of Chapman Capital
Management's proprietary DEM valuation and screening model. Chapman Capital
Management also utilizes the research services of The Chapman Co. for coverage
on certain companies meeting the DEM profile. Chapman Capital Management intends
to expand its research staff by hiring additional buy-side analysts.
DEPENDENCE ON KEY INVESTMENT MANAGEMENT CLIENTS
At February 29, 2000, there were three participants in the DEM-MET Trust.
The $329.3 million in assets in the DEM-MET Trust represented 38.1% of Chapman
Capital Management's assets under management as of February 29, 2000. In
addition, for the year ending December 31, 1999, the DEM-MET Trust accounted for
approximately 50.4% of Chapman Capital Management Holdings' revenue. If an
expected $100 million withdrawal from the DEM-MET Trust had occurred as of
February 29, 2000, its assets under management would have been $229.3 million
and our assets under management would have been approximately $764 million. If
the participants of the trust terminated their agreements with the DEM-MET Trust
or make additional substantial withdrawals of their assets, our advisory fee
revenue would be materially and adversely affected.
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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 closing 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.
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
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- 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 agencies, will attempt to assert jurisdiction over
online trading and financial services concerns.
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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. and Chapman On-Line are each registered as broker-dealers
with the SEC and are member firms 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. Chapman On-Line is registered as a broker-dealer in 36 states, the
District of Columbia and Puerto Rico, has applications for registration pending
in 14 states and is a member firm of the NASD.
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. 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-dealers and member firms of the NASD, The Chapman Co.
and Chapman On-Line are 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. As of December 31, 1999, The Chapman Co. had net
capital of $1,528,000 and a net capital requirement of $250,000. The Chapman
Co.'s ratio of aggregate indebtedness to net capital was .5 to 1, which is
slightly less than the ratio of 0.7 to 1 at December 31, 1998. As Chapman
On-Line is not yet active, it had the minimum required net capital of $100,000
and net capital of $135,000 as of December 31, 1999, and it had no aggregate
indebtedness as of December 31, 1999.
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. As Chapman On-Line will be primarily involved in
brokerage activities it is not currently anticipated that its activities will
require intensive use of capital.
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
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The SEC is authorized to institute proceedings and impose sanctions for
violations of the Advisers Act, ranging from censure to termination of an
investment 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 60% of the directors of registered investment companies can be
interested persons, defined to include, among others, persons affiliated with
the management company or underwriter, and a majority of the directors must not
be affiliated with the underwriter. In the case of investment companies, such as
The Chapman Funds, which have adopted 12b-1 plans for their portfolios in order
to permit these portfolios to pay for distribution expenses, the rules under the
Investment Company Act require that no more than 50% of the fund's directors can
be interested persons.
The advisory agreement must have initially been approved by a majority of
the outstanding shares and, after two years, must be annually approved, either
by the board or by the outstanding voting shares. The advisory agreement must be
subject to termination upon 60 days notice by the board or by the outstanding
voting shares.
The underwriting agreement must be annually approved by the board or by a
vote of a majority of the outstanding voting shares, and must provide for
automatic termination in the event of an assignment. We do not believe that the
merger of Chapman Holdings will result in an assignment and automatic
termination of The Chapman Co.'s underwriting agreements with The Chapman Funds,
because we do
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not believe that the merger constitutes a change of control for purposes of the
Investment Company Act. With limited exceptions, transactions between the
investment company and an affiliate can be entered into only if approved by the
SEC, after notice and opportunity for hearing, as fair and equitable.
Chapman Capital Management derives a large portion of its revenues from its
investment company management agreements. Under the Advisers Act, 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
transfer, directly or indirectly, of a controlling interest in Chapman Capital
Management. We do not believe that the merger of Chapman Capital Management
Holdings will result in an assignment and automatic termination of Chapman
Capital Management's advisory agreements, because we do not believe that the
merger constitutes a change of control for purposes of the Investment Company
Act.
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 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 Gramm-Leach-Bliley 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 Gramm-Leach-Bliley 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,
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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 financial institution, but
EChapman.com itself, as the parent company, is likely to be required to meet
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 womancentral.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
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- 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 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 Gramm-Leach-Bliley 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-
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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.
Our securities brokerage and investment banking 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.
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
- Chicago, Illinois--one year lease expiring October 2000
- Memphis, Tennessee--one year lease expiring February 2001
- 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,
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Pennsylvania. 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 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
As of December 31, 1999, we had 61 full-time employees. As of December 31,
1999, EChapman.com had one full-time employee. As of December 31, 1999, The
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Chapman Co. had 48 full-time employees, including 31 registered representatives.
As of December 31, 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 December 31, 1999, The Chapman Insurance Agency and Chapman
On-Line 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.......................... 45 Senior vice president, public finance
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 Injured Workers' Insurance Fund, a casualty insurance
underwriter. Mr. Brown served
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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 our senior vice president of public finance and has
served in that capacity for The Chapman Co. 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 is 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 Maryland District of Columbia Minority Supplier Development Council, a
business
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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, the audit committee will consist of three 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 under our stock option plan. Upon the closing of this offering, the
compensation committee will consist of three 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 75,321 50,000 1,932
Earl U. Bravo, Sr.................................... 1999 $105,000 $ 50,000 11,168
Senior vice president, secretary and assistant 1998 $105,000 $ 10,000 9,664
treasurer
Tracey Rancifer...................................... 1999 $100,000 $ 28,046 2,233
Senior vice president 1998 N/A N/A N/A
Demetris Brown....................................... 1999 $ 90,000 $ 20,000 --
Chief financial officer 1998 N/A N/A N/A
</TABLE>
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<PAGE>
Ms. Rancifer's and Mr. Brown's annual salary for 1998 was less than
$100,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
in 1999 to the executive officers named in the summary compensation table.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ---------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr....................... 11,168 20.8% $4.13 5/14/2002
Earl U. Bravo, Sr........................... 11,168 20.8% $3.76 5/14/2002
Tracey Rancifer............................. 2,233 4.2% $3.76 5/14/2002
</TABLE>
On May 14, 1999, Chapman Capital Management Holdings granted Mr. Chapman an
option for 5,000 shares, Mr. Bravo an option for 5,000 shares and Ms. Rancifer
an option for 1,000 shares of its common stock under its Omnibus Stock Plan.
Mr. Chapman's options were granted with an exercise price of $9.22, which was
110% of the fair market value of the stock of Chapman Capital Management
Holdings at the time of the grant. Mr. Bravo's and Ms. Rancifer's options were
granted with an exercise price of $8.38, the fair market value of the stock at
the time of the grant. As a result of the Chapman Capital Management Holdings
merger, these options will convert into options under EChapman.com's Omnibus
Stock Plan.
The original option grants by Chapman Capital Management Holdings were not
made in contemplation of the mergers and EChapman.com's initial public offering.
The share numbers in the option table for Mr. Chapman, Ms. Rancifer and
Mr. Bravo are based upon the Chapman Capital Management option grants multiplied
by the 2.23363 exchange ratio for the Chapman Capital Management merger. The
exercise prices for these options were determined by dividing the original
exercise price of $9.22 in the case of Mr. Chapman and $8.38 in the cases of
Mr. Bravo and Ms. Rancifer by this exchange ratio.
1999 ECHAPMAN.COM, INC. OMNIBUS STOCK PLAN
Our board of directors has established the 1999 EChapman.com, Inc. Omnibus
Stock 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 under 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.
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<PAGE>
Chapman Holdings granted options to purchase a total of 42,900 shares of its
common stock, including options granted to Mr. Bravo to purchase 5,000 shares
and Mr. McCarley to purchase 1,000 shares on September 28, 1998. These options
were granted with an exercise price of $9.50 per share, the fair market value of
the Chapman Holdings common stock on the date of the option grants. Chapman
Capital Management Holdings granted options to purchase a total of 24,000
shares, including the options granted to Mr. Chapman, Mr. Bravo and
Ms. Rancifer reflected in the option table above, on May 14, 1999. These
options, except for that granted to Mr. Chapman, were granted with an exercise
price of $8.38, the fair market value of the Chapman Capital Management Holdings
common stock on the date of the option grants. Mr. Chapman's option was granted
at 110% of the fair market value of the Chapman Capital Management Holdings
common stock on the grant date.
Upon closing of the mergers and this offering, there will be 136,510 shares
subject to outstanding stock options. This number is based upon the option
grants made by Chapman Holdings and Chapman Capital Management Holdings under
their respective stock plans multiplied by the exchange ratios of 1.93295 and
2.23363 for the Chapman Holdings and Chapman Capital Management Holdings
mergers. The exercise price of the Chapman Holdings options will be $4.92 per
share, which is the original exercise price dividend by the Chapman Holdings
exchange ratio. As converted, the Chapman Holdings options constitute 82,910
shares subject to options under the EChapman.com stock plan, and the Chapman
Capital Management Holdings options constitute 53,600 shares subject to options
under the EChapman.com stock plan.
The exercise price of the Chapman Capital Management Holdings options,
except for the granted to Mr. Chapman, will be $3.76, which is the original
exercise price divided by the Chapman Capital Management Holdings exchange
ratio. Mr. Chapman's option will carry an exercise price of $4.13 per share.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of January 25, 2000, 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
January 25, 2000 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 January 25, 2000, and
16,528,178 shares outstanding upon closing 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)............. 9,643,008 73.0% 80,000
Earl U. Bravo, Sr.(6).................... 29,809 *
Demetris Brown........................... 2,233 *
Raymond Haysbert......................... 3,864 *
Mark Jefferson........................... 0 --
Kweisi Mfume............................. 1,382 --
Adolph Washington........................ 20,102 --
Vincent McCarley(7)...................... 1,932 --
Tracey Rancifer(8)(9).................... 6,699 --
All Directors and Executive Officers as a
Group (9 persons)...................... 9,709,029 73.4%
<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)............. 9,643,008 58.3%
Earl U. Bravo, Sr.(6).................... 29,809 *
Demetris Brown........................... 2,233 *
Raymond Haysbert......................... 3,864 *
Mark Jefferson........................... 0 *
Kweisi Mfume............................. 1,382 *
Adolph Washington........................ 20,102 *
Vincent McCarley(7)...................... 1,932 *
Tracey Rancifer(8)(9).................... 6,699 *
All Directors and Executive Officers as a
Group (9 persons)...................... 9,709,029 58.6%
</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 36,165 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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<PAGE>
the offering to 57.4% and would reduce the ownership percentage of all
directors and executive officers to 57.7%.
(4) Includes shares issuable upon exercise of currently exercisable options to
purchase 11,168 shares.
(5) Includes 547,952 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 20,832 shares.
(7) Includes shares issuable upon the exercise of currently exercisable options
to purchase 1,932 shares.
(8) Includes shares issuable upon the exercise of currently exercisable options
to purchase 2,233 shares.
(9) Includes 2,233 shares Ms. Rancifer owns jointly with her father.
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<PAGE>
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 corporation and the general partner of
Chapman Limited Partnership I, a Maryland limited partnership the operations of
which consist solely of the ownership and rental of furniture and equipment to
The Chapman Co. 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 under
this lease agreement was $118,512 in each of 1998 and 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 paid
$19,536 on behalf of Chapman Limited Partnership I for certain taxes and related
payments, interest, and penalties. The Chapman Co. and Chapman Capital
Management characterized these 1998 payments as an expense for which they will
not be reimbursed by the partnership and which is related to The Chapman Co.'s
administration of the partnership. On October 22, 1999, Chapman Holdings and
Chapman Capital Management Holdings each paid $49,018 on behalf of the
partnership for the payment of certain taxes and related payments. Chapman
Holdings and Chapman Capital Management Holdings each characterized $24,509 of
these 1999 payments as an expense for which they will not be reimbursed by the
partnership and which is related to the administration of the partnership. The
partnership reimbursed each of Chapman Holdings and Chapman Capital Management
Holdings $19,000 of the 1999 payments on March 13, 2000.
As of December 31, 1999, Mr. Chapman owed EChapman.com's subsidiaries
$1,038,174 in connection with the following notes, including accrued interest,
listed below. These notes were issued for purposes unrelated to the businesses
of EChapman.com, Chapman Holdings, Chapman Capital Management Holdings or their
respective affiliates.
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<PAGE>
- Three-year promissory note to The Chapman Co. dated February 11, 1998 in
the amount of $176,250, which accrues interest at 5.54% per annum and
requires no payments of principal or interest until maturity.
- Three-year promissory note to Chapman Holdings dated March 11, 1998 in the
amount of $285,587, which accrues interest at 5.5% per annum.
- Demand promissory note to The Chapman Co. dated May 1, 1998 in the amount
of $100,000, which accrues interest at 5.5% per annum.
- Demand promissory note to Chapman Capital Management dated July 2, 1998 in
the amount of $45,000, which accrues interest at 5.48% per annum.
- Three year promissory note to Chapman Capital Management Holdings dated
August 21, 1998 in the amount of $65,000, which accrues interest at 5.48%
per annum.
- Three-year promissory note to Chapman Holdings dated December 31, 1998 in
the amount of $51,690, which accrues interest at 4.33% per annum.
- Demand promissory note to Chapman Capital Management Holdings dated
July 29, 1999 in the amount of $242,000, which accrues interest at 5.45%
per annum.
- Three-year promissory note to The Chapman Co. dated December 31, 1999 in
the amount of $32,837, which accrues interest at 4.33% per annum.
The Chapman Co. acted as the underwriter, on a best efforts basis, for the
sale of DEM, Inc. common stock. The Chapman Co. was paid $432,008 and $0 in
management fees and commissions in the years ended December 31, 1997 and
December 31, 1998, respectively.
Until DEM, Inc.'s, liquidation in 1998, Chapman Capital Management served as
the investment adviser and administrator of DEM, Inc. In connection with its
investment advisory relationship with DEM, Inc., Chapman Capital Management was
paid $139,000 and $150,000 in advisory and administrative fees in the years
ended December 31, 1997 and December 31, 1998, respectively.
In connection with Chapman Capital Management's provisions of investment
advisory services to The Chapman U.S. Treasury Money Fund, Chapman Capital
Management Holdings was paid $259,991 and $593,568 in advisory and
administrative fees for the years ended December 31, 1998 and 1999,
respectively. For the year ended December 31, 1999, Chapman Capital Management
has reimbursed The Chapman Funds, on behalf of The Chapman U.S. Treasury Money
Fund, $129,879 under an expense limitation agreement with The Chapman Funds.
The DEM Equity Fund became active in April 1998, and Chapman Capital
Management was paid $69,356 and $121,862 in advisory and administrative fees for
the years ended December 31, 1998 and 1999, respectively. For the year ended
December 31, 1999, Chapman Capital Management has reimbursed The Chapman
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<PAGE>
Funds, on behalf of the DEM Equity Fund, $29,056 under an expense limitation
agreement with The Chapman Funds.
The DEM Index Fund became active in March 1999 and Chapman Capital
Management was paid $516 in advisory and administrative fees through
December 31, 1999. Chapman Capital Management reimbursed The Chapman Funds, on
behalf of the DEM Index Fund, $63,085 under an expense limitation agreement with
The Chapman Funds.
Chapman Capital Management has entered into agreements with The Chapman
Funds on behalf of three additional portfolios, the DEM Fixed Income Fund, the
DEM Multi-Manager Bond Fund and the DEM Multi-Manager Equity Fund, to provide
investment advisory and administration services. These funds are not currently
active. However, Chapman Capital Management has paid approximately $196,000 of
start-up expenses for these funds and the DEM Index Fund.
On March 17, 2000, Chapman Capital Management entered into a new ten year
expense limitation agreement with The Chapman Funds on behalf of certain of its
portfolios, including the DEM Equity Fund and the DEM Index Fund, under which
Chapman Capital Management will reimburse the covered portfolios for expenses
incurred on behalf of these portfolios in excess of stated percentages of the
portfolios' net assets.
The Chapman Co. is the distributor for The Chapman U.S. Treasury Money Fund,
DEM Equity Fund and DEM Index Fund under distribution agreements between The
Chapman Co. and The Chapman Funds, Inc. The Chapman Co. receives no compensation
for the distribution of shares of The Chapman U.S. Treasury Money Fund. The DEM
Index Fund had no operations in 1998. The Chapman Co. was paid $14,221 and
$31,639 in management fees and commissions in the years ended December 31, 1998
and, 1999, respectively, in connection with its distribution agreement with The
Chapman Funds pertaining to the DEM Equity Fund.
The Chapman Co. has entered into distribution agreements with The Chapman
Funds with respect to three additional funds; however, these funds have not yet
commenced operations.
Following the closing of the offering, we will acquire Chapman Holdings,
Chapman Capital Management and Chapman Insurance Holdings under merger
agreements between and among EChapman.com, each target company and, in each
case, a wholly-owned subsidiary 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
disinterested members of the boards of directors of each of Chapman Holdings and
Chapman Capital Management approved the mergers 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
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<PAGE>
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, in accordance
with Maryland law. EChapman.com intends to continue its practice of obtaining
board and disinterested director approval for future transactions with
affiliates, including future loans, if any, to Mr. Chapman or other affiliates
of EChapman.com. Maryland law does not impose specific numerical restrictions as
to the amount of these affiliated transactions and loans, and our board of
directors has not adopted a policy which imposes any such restrictions.
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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 closing
of the mergers, 13,194,845 shares of our common stock will be issued and
outstanding, held of record by approximately 52 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.
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, 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 Maryland General
Corporation Law and may in the discretion of the board of directors advance
expenses to employees, agents and others who may be granted indemnification.
Under 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. Under our agreement with the qualified independent
underwriter, we have also agreed to indemnify Ferris, Baker Watts, Incorporated
for liabilities in connection with this offering.
77
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons under 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 Maryland General Corporation Law 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
- 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
- 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 Maryland General Corporation Law 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
78
<PAGE>
- 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 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.
- any person that becomes an interested stockholder as a result of a
transfer of securities of EChapman.com under a written agreement to which
Mr. Chapman or any affiliate or associate of Mr. Chapman is a party that
provides for this exemption,
- the respective affiliates and associates of Mr. Chapman and these
transferees.
CONSTITUENCY PROVISION
Maryland law permits a corporation to include in its charter a constituency
provision that allows the board of directors of the corporation, in considering
a potential acquisition of control of the corporation, to consider the effect of
the potential acquisition of control on stockholders, employees, suppliers,
customers, and creditors of the corporation and the communities in which offices
or other establishments of the corporation are located. EChapman.com has
included such a provision in its charter.
ANTI-TAKEOVER EFFECT
The charter provisions discussed in "Business Combination Law" and
"Constituency Provision" above may reduce the vulnerability of EChapman.com to
an unsolicited proposal for takeover. In some circumstances, certain
stockholders may consider these provisions to have disadvantageous effects.
Takeover offers are frequently made at prices above the market price of the
target company's stock. In addition, acquisitions of stock by persons attempting
to acquire control through market purchases may cause the market price of the
target company's stock to reach levels that are higher than would otherwise be
the case. EChapman.com's charter provisions, as well as the statutory and
regulatory provisions mentioned above, may discourage any of these acquisitions,
even though these acquisitions might be beneficial to EChapman.com or its
stockholders. Accordingly, stockholders could be deprived of the opportunity to
sell their stock at prices in excess of current market prices, which often
prevail as the result of such occurrences.
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
79
<PAGE>
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 closing 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 under 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.
On a pro forma as adjusted basis giving effect to the mergers and this
offering, as of December 31, 1999, Mr. Chapman beneficially owned 9,643,008
shares, or 9,563,008 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 in connection with the
over-allotment option. After the lock-up period, Mr. Chapman may resell his
shares without registration by complying with Rule 144 discussed below.
80
<PAGE>
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.
81
<PAGE>
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 in that agreement, the underwriters are obligated to purchase all of the
shares of common stock being sold under 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. This 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 in connection with 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 of additional shares 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
82
<PAGE>
purchased, the 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.
The Conduct Rules of the NASD require that when a member of the NASD, such
as The Chapman Co., participates in the public distribution of its parent
company's securities, the public offering price can be no higher than
recommended by a qualified independent underwriter. In order to comply 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 aggregate 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
in the merger is fair, from a financial point of view. In connection with
rendering this opinion Ferris, Baker Watts, Incorporated is 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
83
<PAGE>
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 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.
These 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.
84
<PAGE>
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.
85
<PAGE>
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 Sheet as of December 31, 1999........ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999 and 1998.......... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-6
Notes to Financial Statements............................. F-7
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC.
Report of Independent Public Accountants.................. F-21
Consolidated Balance Sheet as of December 31, 1999........ F-22
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................. F-23
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999 and 1998.......... F-24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-25
Notes to Financial Statements............................. F-26
CHAPMAN INSURANCE HOLDINGS, INC.
Report of Independent Public Accountants.................. F-35
Consolidated Balance Sheet as of December 31, 1999........ F-36
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................. F-37
Consolidated Statements of Changes in Stockholders'
Deficit for the Years Ended December 31, 1999 and
1998.................................................... F-38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-39
Notes to Financial Statements............................. F-40
ECHAPMAN.COM, INC.
Report of Independent Public Accountants.................. F-43
Balance Sheet as of December 31, 1999..................... F-44
Statement of Operations for the Period May 14, 1999
(inception) to December 31, 1999........................ F-45
Statement of Changes in Stockholders' Deficit for the
Period May 14, 1999 (inception) to December 31, 1999.... F-46
Statement of Cash Flows for the Period May 14, 1999
(inception) to December 31, 1999........................ F-47
Notes to Financial Statements............................. F-48
</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,
1999, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the two years then ended (as revised for
1998--see Note 2). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Holdings, Inc. and Subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the two years then ended in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
January 31, 2000
F-2
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
----
<S> <C>
ASSETS:
Cash and cash equivalents................................. $1,035,000
Cash deposits with clearing organization.................. 2,674,000
Investments, available for sale........................... 239,000
Securities owned of affiliate, at market value............ 2,084,000
Receivables from brokers and dealers...................... 584,000
Receivables from affiliates............................... 333,000
Income taxes receivable................................... 296,000
Advances to officer/employee.............................. 688,000
Office equipment, net..................................... 93,000
Prepaids and other assets................................. 406,000
Intangible assets, net.................................... 103,000
----------
Total assets.......................................... $8,535,000
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses..................... $ 494,000
Margin loan payable....................................... 1,750,000
Accrued compensation...................................... 379,000
Deferred rent............................................. 34,000
----------
Total liabilities..................................... 2,657,000
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares
authorized, 2,953,622 shares issued and outstanding..... 3,000
Additional paid-in capital................................ 7,903,000
Accumulated deficit....................................... (1,025,000)
----------
Proprietary stock of Company held by subsidiary, at cost,
126,000 shares.......................................... (842,000)
Cumulative realized loss on trading proprietary stock of
Company held by subsidiary.............................. (161,000)
----------
Total stockholders' equity............................ 5,878,000
----------
Total liabilities and stockholders' equity............ $8,535,000
==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- -----------
(RESTATED)
<S> <C> <C>
REVENUE:
Commissions............................................... $4,190,000 $ 2,538,000
Underwriting and management fees.......................... 1,168,000 700,000
Interest and dividends.................................... 399,000 446,000
Trading, net gains (losses), primarily affiliate stock.... 1,617,000 (264,000)
---------- -----------
Total revenue......................................... 7,374,000 3,420,000
---------- -----------
EXPENSE:
Compensation and benefits................................. 3,567,000 2,186,000
Floor brokerage and clearing fees......................... 702,000 431,000
Communications............................................ 288,000 192,000
Occupancy, equipment rental, and depreciation............. 639,000 460,000
Travel and business development........................... 398,000 255,000
Professional fees......................................... 826,000 416,000
Advertising, promotion and publicity...................... 363,000 184,000
Other operating expense................................... 1,134,000 538,000
---------- -----------
Total expense......................................... 7,917,000 4,662,000
---------- -----------
Loss before income tax benefit........................ (543,000) (1,242,000)
INCOME TAX BENEFIT.......................................... (101,000) (370,000)
---------- -----------
Net loss.............................................. $ (442,000) $ (872,000)
========== ===========
BASIC AND DILUTIVE EARNINGS PER SHARE DATA:
Net loss.................................................. $ (.15) $ (.31)
========== ===========
Weighted average shares outstanding....................... 2,954,000 2,793,000
========== ===========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
CUMULATIVE
REALIZED
LOSS ON TRADING
PROPRIETARY
RETAINED PROPRIETARY STOCK OF
ADDITIONAL EARNINGS STOCK OF COMPANY BY TOTAL
COMMON PAID-IN (ACCUMULATED COMPANY HELD SUBSIDIARY STOCKHOLDERS'
STOCK CAPITAL DEFICIT) BY SUBSIDIARY OF COMPANY EQUITY
-------- ---------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997..... $2,000 $1,092,000 $ 155,000 $ -- $ -- $1,249,000
Net loss..................... -- -- (872,000) -- -- (872,000)
Accumulated deficit from
discontinued operations.... -- -- 134,000 -- -- 134,000
Net proceeds from issuance of
common stock............... 1,000 6,811,000 -- -- -- 6,812,000
Proprietary trading stock of
Company held by subsidiary,
at cost.................... -- -- -- (884,000) -- (884,000)
Realized loss on trading of
proprietary stock of
Company held by
subsidiary................. -- -- -- -- (70,000) (70,000)
------ ---------- ----------- --------- --------- ----------
BALANCE, December 31, 1998
(Restated)................... 3,000 7,903,000 (583,000) (884,000) (70,000) 6,369,000
Net loss..................... -- -- (442,000) -- -- (442,000)
Proprietary trading stock of
Company held by subsidiary,
at cost.................... -- -- -- 42,000 -- 42,000
Realized loss on trading of
proprietary stock of
Company held by
subsidiary................. -- -- -- -- (91,000) (91,000)
------ ---------- ----------- --------- --------- ----------
BALANCE, December 31, 1999..... $3,000 $7,903,000 $(1,025,000) $(842,000) $(161,000) $5,878,000
====== ========== =========== ========= ========= ==========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (442,000) $ (872,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense................... 70,000 8,000
Unrealized (gain) loss on securities owned.............. (1,355,000) 264,000
Deferred taxes.......................................... (101,000) 63,000
Effect from changes in assets and liabilities-
Deposits with clearing organization................... (285,000) (2,349,000)
Receivables from brokers and dealers.................. (253,000) 54,000
Receivables from discontinued operations.............. -- 801,000
Receivables from affiliates........................... 47,000 (380,000)
Income tax receivable................................. (2,000) (294,000)
Prepaids and other assets............................. 177,000 (495,000)
Net assets from discontinued operations............... -- 6,000
Accounts payable and accrued expenses................. 233,000 193,000
Accrued compensation.................................. 136,000 174,000
Deferred rent......................................... (44,000) (11,000)
Payable to affiliated partnership..................... -- (10,000)
Income taxes payable.................................. -- (98,000)
----------- -----------
Net cash used in operating activities............... (1,819,000) (2,946,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment.............................. (83,000) (23,000)
Purchase of stock of Chapman On-Line...................... -- (220,000)
Purchase of investments................................... (35,000) (1,207,000)
Proceeds from sale of investments......................... 4,000 1,014,000
Advances to officer/employee.............................. (31,000) (481,000)
----------- -----------
Net cash used in investing activities............... (145,000) (917,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ -- 7,715,000
Issuance costs............................................ -- (903,000)
Net proceeds from sales of treasury stock................. (91,000) (70,000)
----------- -----------
Net cash (used in) provided by financing
activities........................................ (91,000) 6,742,000
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (2,055,000) 2,879,000
CASH AND CASH EQUIVALENTS, beginning of year................ 3,090,000 211,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,035,000 $ 3,090,000
=========== ===========
</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, 1999 AND 1998
1. 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. The Company
allocated approximately $599,000 and $852,000 in expenses related to the above
costs during the years ended December 31, 1999 and 1998.
On November 15, 1999, the Company signed a merger agreement, which is
subject to stockholders' approval and the completion of an initial public stock
offering of common stock by EChapman.com, among other things, to merge into a
wholly owned subsidiary of EChapman.com. This merger would result in the
Company, Chapman Capital Management Holdings, Inc. (CCMH) and Chapman Insurance
Holdings, Inc., affiliates, 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. EChampan.com is owned by the major stockholder of the
Company.
The planned merger and the operations of EChapman.com after the merger, are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the future results from operations and financial
position of the Company. These risk items include the fact that EChapman.com has
not launched a website and has no internet-related operating history; the
website 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.
F-7
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 Chapman
On-Line, Inc. (formerly 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.
ACQUISITION
The Company acquired all of the outstanding stock of Chapman On-Line, Inc.
(formerly Charles A. Bell), a securities brokerage firm located in San
Francisco, California, on December 29, 1998, for approximately $391,000. The
acquisition resulted in recording approximately $145,000 of intangible assets
from the purchase price being in excess of the book value of Chapman
On-Line, Inc. 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.
INVESTMENTS
Investments as of December 31, 1999, consist primarily of certificates of
deposit in which cost approximates market. As of December 31, 1999, the $239,000
of investments held were classified as available for sale in accordance with
Statement of Financial Accounting Standards 115.
SECURITIES OWNED
Securities owned consist of trading proprietary stock, which is carried at
market on the balance sheet. Any unrealized gain (loss) on trading of
proprietary stock is included in earnings on the income statement. The
proprietary stock as of December 31, 1999 is stock of CCMH, a company whose
majority stockholder is also
F-8
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the majority stockholder of the Company. Chapman is the market maker for CCMH
and, thus, holds their stock in inventory. As of December 31, 1999, Chapman held
138,000 shares of common stock of CCMH with a market value of approximately
$2,084,000. The Company recorded an unrealized gain of approximately $1,290,000
and an unrealized loss of approximately $105,000 related to the CCMH stock held
for the years ended December 31, 1999 and 1998, respectively, in the
consolidated statements of operations.
The unrealized gain recorded in 1999 was earned primarily during the fourth
quarter of 1999. In November 1999, a registration statement was filed for an
initial public offering of EChapman.com and the announcement was made that the
Company, CCMH and Chapman Insurance Holdings would merge into EChapman.com, as
discussed in Note 1. Following this announcement, CCMH's common stock price
increased in value leading to some of the $1,290,000 unrealized gain. This
unrealized gain may be significantly effected if the EChapman.com transaction is
not completed or if it is completed at a market price less than disclosed in the
preliminary offering document.
TREASURY STOCK
Chapman is also the market maker for the Company. However, as the Company is
the parent of Chapman, all purchases and sales of the Company's stock by Chapman
have been accounted for as treasury stock transactions in the accompanying
consolidated financial statements. As of December 31, 1999, Chapman held 126,000
shares of the Company's stock in inventory.
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
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 options, using the treasury stock method. The weighted average shares
outstanding for the years ended December 31, 1999 and 1998, are the weighted
average common
F-9
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
shares outstanding of 2,954,000 and 2,793,000, respectively. The options granted
are antidilutive for 1999 and 1998 and, thus, are not included 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 Chapman On-Line 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.
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
F-10
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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, 1999, accumulated
depreciation was $36,000.
TRANSACTIONS WITH CLEARING ORGANIZATION
The Company had a margin loan payable, due to its clearing organization,
Pershing, of $1,750,000 as of December 31, 1999, which was used to purchase the
proprietary stock. This margin loan bears interest at a variable rate. This rate
was 7.75% as of December 31, 1999. Interest expense on the margin loan for the
years ended December 31, 1999 and 1998, was approximately $191,000 and $111,000,
respectively, and is included in other operating expense in the accompanying
consolidated statements of operations. The Company also had cash on deposit with
the clearing agent of $2,674,000 as of December 31, 1999. 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.
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.
Proprietary accounts held at the clearing organization (PAIB Assets) are
considered allowable assets in the computation of net capital pursuant to an
agreement between the Company and the clearing organization which requires,
among other things, for the clearing organization to perform a computation of
PAIB assets similar to the customer reserve computation set forth in
Rule 15c3-3.
F-11
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
RECLASSIFICATIONS
Certain reclassifications have been made to 1998 financial statements to
conform to 1999 financial statement presentation.
RESTATEMENT OF 1998 FINANCIAL STATEMENTS
Prior to 1999, the Company treated Chapman's ownership of its shares as
trading securities with any unrealized gains and losses being accounted for in
the income statement. It was the company's understanding that this accounting
was consistent with industry practice. After discussion with the staff of the
Securities and Exchange Commission, the Company revised its accounting to now
treat such transactions as treasury stock transactions, with any realized gains
and losses being reflected in equity. Unrealized gains or losses are not
reflected in the financial statements. The impact of this change on the 1998
consolidated financial statements resulted in a decrease in the loss before
income tax benefit, income tax benefit, net loss and basic and diluted net loss
per share of $374,000, $115,000, $259,000 and $.09, respectively.
3. 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.
4. 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
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
4. CAPITAL STOCK: (CONTINUED)
data related to Chapman prior to the merger has been restated at the Company's
stock conversion amounts.
5. 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 1999 and 1998. The aggregate minimum future rental under this
lease which expires in 2000 is $200,000.
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, 1999, the Company recorded $34,000 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
$10,000 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
1999 and 1998.
The Company leases computer equipment through a non-cancellable operating
lease with a three-year lease term. The lease requires monthly rent payments of
$8,500 a month and expires in July 2002. Rent expense under this lease was
$87,000 and $5,000 in 1999, and 1998, respectively.
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 December 31, 1999 and 1998, the Company did not
incur such losses.
F-13
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
6. INCOME TAXES:
A reconciliation of the statutory income taxes to the recorded income tax
benefit for the years ended December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Statutory tax (at 35% rate)........................... $(190,000) $(435,000)
Effect of state income taxes.......................... (23,000) (49,000)
Effect of graduated tax rate.......................... -- 74,000
Effect of permanent book to tax differences........... 11,000 40,000
Valuation allowance................................... 101,000 --
--------- ---------
Income tax benefit.................................... $(101,000) $(370,000)
========= =========
</TABLE>
The components of the income tax benefit for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current............................................... $ -- $(363,000)
Deferred.............................................. (202,000) (7,000)
Valuation allowance................................... 101,000 --
--------- ---------
Income tax benefit.................................... $(101,000) $(370,000)
========= =========
</TABLE>
F-14
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
6. INCOME TAXES: (CONTINUED)
The Company's deferred income tax asset and liability as of December 31,
1999, consist of the following:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward.......................................... $ 530,000
---------
Deferred tax liability:
Cash to accrual........................................... (42,000)
Unrealized gain........................................... (430,000)
Other..................................................... 43,000
---------
Total................................................. (429,000)
---------
Valuation allowance......................................... (101,000)
---------
Net deferred tax liability recorded on the consolidated
balance sheet........................................... $ --
=========
</TABLE>
A valuation reserve was applied against the next deferred tax asset as of
December 31, 1999, as its realization was not more likely than not to be
realized.
7. 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 $250,000 and $100,000 as of
December 31, 1999 and 1998, respectively, and a ratio of aggregate indebtedness
to net capital, as defined, not to exceed 15 to 1. As of December 31, 1999, the
Company had excess net capital of $1,278,000 and a ratio of aggregate
indebtedness to net capital of .5 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.
8. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosure for the years ended December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash paid-
Interest.............................................. $275,000 $121,000
Income taxes.......................................... 5,000 29,000
</TABLE>
F-15
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
8. STATEMENTS OF CASH FLOWS-SUPPLEMENTAL DISCLOSURE: (CONTINUED)
The Company's realized loss of $91,000 during 1999 was related to
proprietary stock proceeds of the Company of approximately $500,000 and sales of
approximately $591,000. The proceeds and sales for 1998 are not disclosed as the
information is not readily available.
9. 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, 1999 and 1998.
10. 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 December 31, 1999.
The Company accounts for its stock-based compensation plans as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," which allows
the Company to follow Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 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 volatility......................................... 59.0%
</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 income and earnings
per
F-16
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
10. OMNIBUS STOCK PLAN: (CONTINUED)
share information reflected on the accompanying consolidated statements of
operations would have been decreased to the following "as adjusted" amount for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Net income (loss):
As reported........................................ $(442,000) $ (872,000)
As adjusted........................................ (442,000) (976,000)
Basic earnings:
Per share-
As reported........................................ (.15) (.31)
As adjusted........................................ (.15) (.35)
</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.
11. RELATED PARTY TRANSACTIONS:
The Company served as the underwriter for DEM, Inc. (DEM), a registered
non-diversified closed-ended management investment company. CCM provides
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.
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 31,1999, the Company had outstanding advances to its majority
stockholder of $666,000. The advances to the majority stockholder are reflected
in five notes. Four 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
F-17
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
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
$22,000 of advances to employees as of December 31, 1999.
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 agreement. As of December 31, 1999, the Company had receivables from CCM
of $97,000, related to the allocation agreement. The Company has been paying
expenses on behalf of EChapman.com. Included in receivables from affiliates as
of December 31, 1999 is $191,000 due from EChapman.com related to these
expenses. Also, included in receivables from affiliates is $45,000 as of
December 31, 1999, due from other affiliates for expenses paid on their behalf.
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. The Company paid $37,000 in interest expense on this note.
12. CHANGE IN QUARTERLY RESULTS (UNAUDITED):
As discussed in Note 2, as of December 31, 1999, the Company revised how it
accounts for Company stock held by Chapman in the consolidated financial
F-18
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
12. CHANGE IN QUARTERLY RESULTS (UNAUDITED): (CONTINUED)
statements. This change resulted in the Company restating the quarterly results
for each of the quarters listed below.
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER
----------------------- ----------------------- -----------------------
AS FILED AS REVISED AS FILED AS REVISED AS FILED AS REVISED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF
OPERATIONS:
Total revenue............... $1,723,000 $1,533,000 $1,418,000 $1,517,000 $1,065,000 $1,069,000
Total expenses.............. 1,717,000 1,717,000 1,865,000 1,865,000 1,765,000 1,765,000
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
tax provision (benefit)... 6,000 (184,000) (447,000) (348,000) (700,000) (696,000)
Income tax provision
(benefit)................. 2,000 (61,000) (97,000) (76,000) (236,000) (236,000)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 4,000 $ (123,000) $ (350,000) $ (272,000) $ (464,000) $ (460,000)
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER
----------------------- ----------------------- -----------------------
AS FILED AS REVISED AS FILED AS REVISED AS FILED AS REVISED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED BALANCE SHEET
INFORMATION:
Total assets................ $9,616,000 $8,878,000 $9,887,000 $9,213,000 $9,263,000 $8,579,000
Total liabilities........... 2,548,000 2,597,000 3,169,000 3,239,000 3,009,000 3,079,000
Total stockholders'
equity.................... 7,068,000 6,281,000 6,718,000 5,974,000 6,254,000 5,500,000
</TABLE>
F-19
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
12. CHANGE IN QUARTERLY RESULTS (UNAUDITED): (CONTINUED)
<TABLE>
<CAPTION>
1998
-----------------------
3RD QUARTER
-----------------------
AS FILED AS REVISED
---------- ----------
<S> <C> <C>
CONDENSED STATEMENT OF OPERATIONS:
Total revenue............................................... $ 888,935 $ 958,569
Total expenses.............................................. 1,181,988 1,181,988
---------- ----------
Loss before income tax benefit.............................. (293,053) (223,419)
Income tax benefit.......................................... (61,851) (67,026)
---------- ----------
Net loss.................................................... $ (231,202) $ (156,393)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------
3RD QUARTER
-----------------------
AS FILED AS REVISED
---------- ----------
<S> <C> <C>
CONDENSED BALANCE SHEET INFORMATION:
Total assets................................................ $9,988,517 $9,988,517
Total liabilities........................................... 2,392,867 2,387,692
Total stockholders' equity.................................. 7,595,650 7,600,825
</TABLE>
This restatement has no effect on the statement of cash flows as filed for
each of the four quarters listed above.
F-20
<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, 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the two years ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Capital Management Holdings, Inc. and Subsidiary as of December 31, 1999, and
the results of their operations and their cash flows for the two years ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
March 29, 2000
F-21
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
ASSETS:
Cash and cash equivalents................................. $ 2,680,000
Investments, at market.................................... 356,000
Management fees receivable:
From proprietary funds.................................. 129,000
From individually managed accounts...................... 446,000
Receivables from affiliates............................... 278,000
Advances to officer....................................... 372,000
Fixed assets, net......................................... 52,000
Prepaids and other assets................................. 280,000
Intangible assets, net.................................... 245,000
-----------
Total assets............................................ $ 4,838,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses..................... $ 356,000
Due to affiliates......................................... 144,000
Noncompete agreement obligation........................... 150,000
-----------
Total liabilities....................................... 650,000
===========
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares
authorized, 3,351,334 issued and outstanding............ 3,000
Additional paid-in capital................................ 5,239,000
Accumulated deficit....................................... (1,054,000)
-----------
Total stockholders' equity.............................. 4,188,000
-----------
Total liabilities and stockholders' equity.............. $ 4,838,000
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-22
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
REVENUE:
Advisory and administrative fees.......................... $4,282,000 $3,136,000
Investment and other income............................... 340,000 82,000
---------- ----------
Total revenue......................................... 4,622,000 3,218,000
---------- ----------
EXPENSE:
Management fees........................................... 1,524,000 1,178,000
Compensation and benefits................................. 1,211,000 857,000
Professional fees......................................... 470,000 179,000
Administrative support.................................... 148,000 72,000
Interest expense.......................................... 6,000 26,000
Amortization and depreciation expense..................... 234,000 232,000
Advertising, promotion and publicity...................... 545,000 249,000
Other operating expenses.................................. 1,337,000 576,000
---------- ----------
Total expense......................................... 5,475,000 3,369,000
---------- ----------
Loss before income tax benefit........................ (853,000) (151,000)
INCOME TAX BENEFIT.......................................... -- 45,000
---------- ----------
Net loss.............................................. $ (853,000) $ (106,000)
========== ==========
BASIC AND DILUTIVE EARNINGS PER SHARE DATA:
Net loss.................................................. $ (.25) $ (.04)
========== ==========
Weighted Average Shares Outstanding....................... 3,351,000 2,811,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997..................... $ 2,000 $ -- $ (95,000) $ (93,000)
Proceeds from initial public offering........ 1,000 5,239,000 -- 5,240,000
Net loss..................................... -- -- (106,000) (106,000)
------- ---------- ----------- ----------
BALANCE, December 31, 1998..................... 3,000 5,239,000 (201,000) 5,041,000
Net loss..................................... -- -- (853,000) (853,000)
------- ---------- ----------- ----------
BALANCE, December 31, 1999..................... $ 3,000 $5,239,000 $(1,054,000) $4,188,000
======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-24
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (853,000) $ (106,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 234,000 232,000
Deferred tax asset...................................... -- (45,000)
Unrealized gain......................................... (106,000) --
Effect of changes in assets and liabilities-
Management fees receivable............................ (211,000) (111,000)
Receivable from affiliates............................ (158,000) (84,000)
Prepaids and other assets............................. (112,000) (115,000)
Accounts payable and accrued expenses................. 184,000 21,000
Due to affiliates..................................... (141,000) (516,000)
Income taxes payable.................................. -- (48,000)
----------- ----------
Net cash used in operating activities............... (1,163,000) (772,000)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment.............................. (45,000) (19,000)
Sale of investments....................................... -- 9,000
Purchase of investments................................... (100,000) (150,000)
Advances to officer....................................... (254,000) (46,000)
----------- ----------
Net cash used in investing activities............... (399,000) (206,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering..................... -- 6,053,000
Issuance costs............................................ -- (814,000)
Proceeds from officer..................................... -- (28,000)
----------- ----------
Net cash provided by financing activities........... -- 5,211,000
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (1,562,000) 4,233,000
CASH AND CASH EQUIVALENTS, beginning of year................ 4,242,000 9,000
----------- ----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,680,000 $4,242,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND BUSINESS:
Chapman Capital Management Holdings, Inc. is an investment advisory and
investment management company.
During February 1998, Chapman Capital Management, Inc. became the wholly-
owned subsidiary of Chapman Capital Holdings Management, Inc. ("CCMH," the
"Company"), a newly formed corporation. CCMH was the wholly-owned subsidiary of
The Chapman Co. until it spun off from The Chapman Co. as part of the initial
public offering (IPO) of Chapman Holdings, Inc. on February 26, 1998.
The Company shares office space, certain employees and other overhead with
The Chapman Co., an affiliated company. The Chapman Co. pays for routine
operating expenses and provides certain management, data processing, accounting
and administrative services to the Company, for which The Chapman Co. is
reimbursed. The Chapman Co. also pays for salary and benefit expenses of which
the Company is allocated a portion. The Chapman Co. allocates those salary and
benefit expenses to the Company based on actual salaries related to the Company
and based on cost sharing arrangements approved by the Board of Directors. The
Chapman Co. allocated approximately $599,000 and $852,000 in expenses related to
the above sharing agreement during the years ended December 31, 1999 and 1998,
respectively. As of December 31, 1999, the Company owed The Chapman Co. $97,000
for the costs of these services. These financial statements may not necessarily
be indicative of the financial results that would have existed had the Company
been operated as an unaffiliated corporation.
On November 15, 1999, the Company signed a merger agreement which is subject
to stockholders approval and the completion of an initial public stock offering
of common stock by EChapman.com, among other things, to merge into a wholly
owned subsidiary of EChapman.com. This merger would result in the Company,
Chapman Holdings Inc. and Chapman Insurance Holdings Inc., affiliates, becoming
wholly owned subsidiaries of eChapman.com. EChapman.com is a new formed
corporation designed to bring these companies together and to take advantage of
the unique opportunities presented by the growth of the Internet. EChapman.com
is owned by the major stockholder of the Company.
The planned merger and the operations of EChapman.com after the merger are
subject to certain risks. The negative impact from these risks could have
material adverse effects on the future results from operations and financial
position of the Company. These risk items include the fact that EChapman.com has
not launched a website and has no Internet-related operating history; the web
site must be designed,
F-26
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND BUSINESS: (CONTINUED)
developed, hosted by a service provider and marketed; EChapman.com must raise at
least $20 million from its planned public offering to complete this merger; the
EChapman.com brand must be successful in order for it to attract users,
advertisers and strategic partners; and the success of the "Domestic Emerging
Markets" strategy through the use of the Internet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements are presented on the accrual basis of
accounting in accordance with generally accepted accounting principles and
include the operations of the Company and Chapman Capital Management, Inc. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACQUISITION
In December 1996, the Company acquired DEM-MET, a tax-exempt pooled interest
trust for qualified employee benefit plans. As part of the acquisition of this
trust, the Company entered into a noncompete agreement for $300,000 and paid
$640,000 in costs related to acquiring the trust. These amounts are included in
intangible assets (see Note 4).
During the years ended December 31, 1999 and 1998, the Company paid Deutsche
Bank custodian fees for acting as trustee and custodian for the trust. Those
fees are included in management fees in the accompanying statements of
operations for the years ended December 31, 1999 and 1998.
CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents as of December 31, 1999 is $2,430,000
of cash invested in the Chapman U.S. Treasury Money Fund, a fund managed by
Chapman Capital Management, Inc.
F-27
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Included in investments is an investment in DEM Index Fund, an affiliate,
which is carried at market value in accordance with SFAS 115. Also, investments
consist of common stock ownership in an investment company carried at cost which
approximates market.
ASSETS UNDER MANAGEMENT
In the normal course of operations of an investment manager, clients add
investments to and withdraw investments from the asset portfolio. This activity
is done by clients as they continue to make investment decisions and diversify
their portfolio.
During 1999, the net change in assets under management increased
$180 million to $771 million as of December 31, 1999, from $591 million as of
December 31, 1998. The net increase in assets under management included growth
attributable to investment performance, additions of assets totaling
$25 million from two clients and a reduction of $86 million in assets by four
clients. The reduction included partial withdrawals in the accounts of two
clients of $49 million and $22 million, or 6.36% and 2.85%, respectively, of the
assets under management as of December 31, 1999. The reduction in assets also
included a withdrawal by one of the four participants in the Company's DEM-MET
Trust, which withdrew its total investment of approximately $13.7 million, in
June 1999 which represented approximately 2.1%, of the total assets under
management of as of June 30, 1999.
The loss of these assets under management has not had a material impact on
the operations of the Company during 1999.
A representative of one of the participants in the DEM-MET Trust informally
advised the Company that the participant currently intends to withdraw up to
$100 million from the trust, however this withdrawal may or may not occur. This
amount represents approximately 13% of the Company's assets under management as
of December 31, 1999.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash,
investments, receivables, accounts payable and accrued expenses approximate fair
value.
F-28
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
dilutive common equivalent shares outstanding during the period the calculation
is made. Common equivalent shares consist of shares issuable upon the exercise
of stock warrants, using the treasury stock method. The weighted average shares
outstanding as of December 31, 1999 and 1998, are the weighted average common
shares outstanding of 3,351,000 and 2,811,000, respectively. The options granted
are antidilutive for 1999 and 1998 and thus, are not required in the earnings
per share calculation.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998, and has determined
that the Company has only one segment, investment advisory and investment
management services. The Company came to this conclusion because the Company
operates in one regulatory environment and has only one management group that
manages the entire Company. Information on the Company's operating results are
provided as one segment to the key decision-maker to make decisions.
REVENUE RECOGNITION
The Company recognizes investment management fees in the period the services
are provided.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" and
has determined that the Company does not have any comprehensive income
adjustments for the periods presented, and therefore, comprehensive income
equals net income.
INCOME TAXES
The Company accounts for income taxes under the separate company liability
method, whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
F-29
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Prior to the Company being spun off from The Chapman Co., the Company was
included in the consolidated Federal income tax return of its Parent on a cash
basis. The Parent allocated Federal tax expense to the Company based on its
portion of consolidated taxable income and its taxes on that income if the
Company were taxed on a stand-alone basis.
RECLASSIFICATIONS
Certain reclassifications have been made to 1998 financial statements to
conform to 1999 financial statement presentation.
3. INITIAL PUBLIC OFFERING:
On August 14, 1998, the Company consummated an initial public offering (the
Offering) of its common stock, pursuant to which the Company sold 864,791 shares
and received net proceeds, after offering costs, of approximately $5,240,000.
4. INTANGIBLE ASSETS:
Intangible assets consists of a noncompete agreement and acquisition costs
(see Note 2). The $300,000 noncompete agreement is being amortized over
3 years, the term of the agreement. As of December 31, 1999, the noncompete
agreement is fully amortized. The $640,000 in acquisition costs is being
amortized over 5 years. The noncompete liability as of December 31, 1999 is
payable on demand. Accumulated amortization as of December 31, 1999 is $695,000.
5. CAPITAL STOCK:
During 1998, the Company effected a 25% stock split through a stock
dividend. As such, all share data related to the Company prior to the stock
split have been restated.
6. TRANSACTIONS WITH AFFILIATES:
The Company provides investment advisory and administrative services to The
Chapman Funds, Inc. (the Funds), an affiliated group of mutual funds, under an
investment advisory and administrative services agreement which sets forth the
services to be provided and the fees to be charged. The agreement also provides
that expense reimbursements be made to the Funds for specified expenses and to
the extent that any Funds' expenses exceed specified limitations. Included in
the
F-30
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
accompanying statements of operations for the years ended December 31, 1999 and
1998, are advisory management fees related to The Chapman Funds totaling
$334,000 and $260,000, respectively.
The Company provided investment advisory and administrative services to
DEM, Inc. (DEM), a registered non-diversified closed-ended management investment
company, under an investment advisory and administrative services agreement
which sets forth the services to be provided and the fees to be charged. During
the fourth quarter of 1998, DEM was dissolved. Included in the accompanying
statements of operations for the years ended December 31, 1999 and 1998, is an
advisory management fee related to DEM totaling $0 and $150,000, respectively.
The Company agreed to waive certain investment management fees with Treasury
funds its has sponsored. It has waived these fees by having its investment
management fee limited to a certain percentage of the average daily net asset
balance in the fund.
Included in management fees receivable as of December 31, 1999, is $129,000
due from proprietary funds for services provided under the above described
agreement.
The Company is the investment advisor and administrator of the DEM Equity
Fund, a portfolio of The Chapman Funds, Inc. The DEM Equity Fund became active
in April 1998 and the Company was paid $93,000 and $69,000 in advisory and
administrative fees for the years ended December 31, 1999 and 1998,
respectively.
Included in receivables from affiliates as of December 31, 1999, is $33,000
due from Chapman Insurance Agency ("CIA") for expenses paid on its behalf.
Included in receivables from affiliates as of December 31, 1999, is $219,000 due
from EChapman.com related to costs paid on their behalf. The Company also paid
costs on behalf of Chapman Limited Partnership during 1999. The $26,000 of these
costs is included in receivables from affiliates as of December 31, 1999.
Included in due to affiliated company are costs paid on the Company's behalf
based on the allocation agreement discussed in Note 1. The Company also pays
expenses on behalf of several affiliate funds for costs incurred in excess of a
certain percentage of the average daily net asset balance. Included in due to
affiliates as of December 31, 1999, is $47,000 related to these expense
limitations.
As of December 31, 1999, the Company had outstanding advances to the
majority stockholder of the Company of $372,000. These advances are reflected in
three notes. Two demand promissory notes which accrue interest at 5.4% per annum
and one
F-31
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
6. TRANSACTIONS WITH AFFILIATES: (CONTINUED)
three-year note that accrues interest at 5.5% per annum. No interest or
principal payments are due until maturity, which is August 21, 2001. The
interest rates on these notes are based on the IRS applicable federal rate in
effect from time to time.
On July 29, 1999, the Company made a loan of $3,220,000 to Chapman
Holdings, Inc. ("Chapman Holdings"), an affiliate of the Company. The loan was
issued pursuant to a demand note that required Chapman Holdings to repay the
amount of the loan upon the Company's demand and with interest due equal on the
broker call rate. Chapman Holdings repaid this loan in full in September 1999.
The Chapman Co. has entered into an agreement in which it leases furniture
and equipment from Chapman Limited Partnership, an entity in which certain
officers and stockholders of The Chapman Co. are partners. The Chapman Co.
allocates a portion of the $10,000 monthly payment to the Company based on the
space used by the Company. The Chapman Co. allocated $59,000 in lease expense
for the years ended December 31, 1999 and 1998. These amounts are included in
other operating expenses in the statements of operations for the years ended
December 31, 1999 and 1998, respectively.
7. INCOME TAXES:
A reconciliation of the statutory income taxes to the recorded income tax
benefit for the years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Statutory tax (at 35% rate)............................ $(299,000) $(53,000)
Effect of state income taxes........................... (42,000) (7,500)
Effect of graduated tax rate........................... 10,000 5,500
Effect of permanent book to tax differences............ 28,000 10,000
Valuation reserve...................................... 303,000 --
--------- --------
Income tax benefit..................................... $ -- $(45,000)
========= ========
</TABLE>
F-32
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
7. INCOME TAXES: (CONTINUED)
The components of the income tax benefit for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Current................................................ $ -- $ --
Deferred............................................... (303,000) (45,000)
Valuation reserve...................................... 303,000 --
--------- --------
Income tax benefit..................................... $ -- $(45,000)
========= ========
</TABLE>
The Company's deferred income tax asset as of December 31, 1999, consists of
the following:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward.......................................... $ 400,000
Intangible assets......................................... 72,000
---------
Total................................................. 472,000
Deferred tax liability:
Cash to accrual........................................... (154,000)
Valuation reserve........................................... (303,000)
---------
Net deferred tax asset recorded on the consolidated
balance sheet........................................... $ 15,000
=========
</TABLE>
A valuation reserve was applied against the net deferred tax asset as of
December 31, 1999, as its realization was not more likely than not to be
realized.
8. STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
Supplemental cash flow disclosures for the years ended December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash paid for:
Interest................................................ $6,000 $ 25,000
Income taxes............................................ -- 114,000
</TABLE>
9. CONCENTRATION OF CREDIT RISKS:
The DEM-MET Trust accounted for 75% and 62% of the Company's advisory and
administrative fees during the years ended December 31, 1999 and 1998. As of
December 31, 1999, receivables due from this client was $94,000.
F-33
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
10. OMNIBUS STOCK PLAN:
In 1998, the Company established the Chapman Capital Management
Holdings, Inc. Omnibus Stock Plan (the Plan) to enable the Company to grant
equity compensation to the Company's directors, officers, employees and
consultants. Under the Plan, 150,000 shares of common stock have been reserved
for issuance upon exercise of stock options granted. On May 14, 1999, 24,000
stock options were granted at a stock price range of $8.38 to $9.22 per share.
These options expire over a three-year period and vest immediately. None of
these options had been exercised, expired or canceled as of December 31,1999.
The Company accounts for its stock-based compensation plans as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," which allows
the Company to follow Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 1999, using the Black-Scholes option pricing model. The
following assumptions were used for grants for the year ended December 31, 1999.
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.32%
Expected dividend yield..................................... 0.0%
Expected volatility......................................... 86%
</TABLE>
Options were assumed to be exercised upon vesting for the purposes of this
valuation. Had compensation costs for compensatory options been determined
consistent with SFAS No. 123, the Company's pro forma net loss and earnings per
share information reflected on the accompanying consolidated statement of
operations would have been increased to the following "as adjusted" amount for
the year ended December 31, 1999:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(853,000)
As adjusted............................................... (911,000)
Basic earnings:
Per share --
As reported............................................. (.25)
As adjusted............................................. (.27)
</TABLE>
Weighted average fair value of options granted for the year ended
December 31, 1999, was in the range of $3.86 to $4.07. The value was calculated
using the Black-Scholes option pricing model.
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chapman Insurance Holdings, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Chapman
Insurance Holdings, Inc. (a Maryland corporation) and subsidiary as of
December 31, 1999, and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for each of the years in the
two-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chapman
Insurance Holdings, Inc. and subsidiary as of December 31, 1999, and the results
of their operations and their cash flows for flows for each of the years in the
two-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
March 17, 2000
F-35
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
---------
<S> <C>
ASSETS
Total assets................................................ $ --
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Due to affiliates, net...................................... $ 52,000
Accounts payable and accrued expenses....................... 249,000
---------
Total liabilities......................................... 301,000
---------
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 20,000,000 shares
authorized, 1,989,235 issued and outstanding............ 2,000
Accumulated deficit....................................... (303,000)
---------
Total stockholders' deficit........................... (301,000)
---------
Total liabilities and stockholders' deficit........... $ --
=========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-36
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
REVENUE $ 45,000 $21,000
--------- -------
OPERATING EXPENSE:
Commissions............................................... 16,000 8,000
General and administrative................................ 284,000 --
Administrative support allocation......................... 12,000 12,000
--------- -------
Total operating expense............................... 312,000 20,000
--------- -------
Income before income tax provision.................... (267,000) 1,000
INCOME TAX PROVISION........................................ -- --
--------- -------
Net (loss) income..................................... $(267,000) $ 1,000
========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT DEFICIT
-------- ----------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1997.................................. $2,000 $ (37,000) $ (35,000)
Net income................................................ -- 1,000 1,000
------ --------- ---------
BALANCE, December 31, 1998.................................. 2,000 (36,000) (34,000)
------ --------- ---------
Net loss.................................................. -- (267,000) (267,000)
------ --------- ---------
BALANCE, December 31, 1999.................................. $2,000 $(303,000) $(301,000)
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(267,000) $ 1,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Effect of changes in assets and liabilities--
Prepaid expenses...................................... 45,000 (45,000)
Due to affiliates..................................... 22,000 (1,000)
Accounts payable and accrued expenses................. 200,000 45,000
--------- --------
Net cash provided by operating activities........... -- --
--------- --------
NET INCREASE IN CASH........................................ -- --
CASH, beginning of year..................................... -- --
--------- --------
CASH, end of year........................................... $ -- $ --
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-39
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
During January 1998, Chapman Insurance Holdings, Inc. (the "Company"), a
newly formed corporation, became the parent of Chapman Insurance Agency, Inc.
("CIA"). Prior to February 24, 1998, the Company was a wholly owned subsidiary
of Chapman Holdings, Inc. The Company was spun off from Chapman Holdings, Inc.
as of February 24, 1998, the effective date of the initial public offering (IPO)
of Chapman Holdings, Inc. CIA sells annuity products. The accompanying financial
statements include the activity of the Company and CIA.
In 1998, the Company planed an initial public offering ("IPO") of common
stock on a best efforts basis. Subsequent to December 31, 1998, the IPO was
canceled. Also, on May 4, 1999, the Company entered into a merger agreement to
acquire all of the outstanding stock of Universal Life Insurance Company. During
the third quarter of 1999 this agreement was retracted. Thus, all costs
capitalized related to these transactions were expensed during 1999.
The Chapman Co., Chapman Holdings, Inc.'s wholly owned subsidiary, and
Chapman Capital Management Holdings, Inc., a former subsidiary of the Chapman
Co., pays for routine operating expenses and provide certain management, data
processing, accounting and administrative services to the Company, for which The
Chapman Co. and Chapman Capital Management Holdings, Inc. are reimbursed. 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.
Significant intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at 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.
F-40
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments of cash, due to affiliates and
accounts payable are reported in the accompanying consolidated balance sheet at
cost, which approximates fair value.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", and has determined the Company has only one
segment. The Company came to this conclusion because the Company has one product
or service and the key decision-maker obtains information on the Company's
results as one segment for key decisions.
INCOME TAXES
The Company was included in the consolidated Federal income tax return of
The Chapman Co. on a cash basis through the date it was spun off. The Chapman
Co. allocated Federal tax expense to the Company based on its portion of
consolidated taxable income calculated on a stand-alone basis. After the spin
off, the Company files a separate Federal income tax return. The Company files a
separate state income tax return.
A reconciliation of the statutory income taxes to the recorded income tax
provision for the years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Statutory tax (at 35% rate)................................ $(94,000) $ --
Effect of state income taxes............................... (11,000) --
Effect of graduated tax rate............................... 5,000 --
Valuation reserve.......................................... 100,000 --
-------- ----
$ -- $ --
======== ====
</TABLE>
The Company's deferred income tax asset as of December 31, 1999, is as
follows:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward........................................ $ 100,000
Valuation reserve....................................... (100,000)
---------
Net deferred tax asset...................................... $ --
=========
</TABLE>
A 100% valuation reserve was applied against the deferred tax asset as of
December 31, 1999, as its realization was not more likely than not to be
realized.
F-41
<PAGE>
CHAPMAN INSURANCE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES:
As of December 31, 1999, the Company owes The Chapman Co. for management
services and owes Chapman Capital Management Holdings, Inc. for expenses paid on
their behalf.
The administrative support expense included in the consolidated statements
of operations for the years ended December 31, 1999 and 1998, represent a $1,000
per month management fee charged by The Chapman Co. for administrative support
services provided for the Company.
F-42
<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 December 31, 1999, and the related statements of operations,
changes in stockholder's deficit, and cash flows for the period from May 14,
1999 (inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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
December 31, 1999, and the results of its operations and its cash flows for the
period from May 14, 1999 (inception) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/S/ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 21, 2000
F-43
<PAGE>
ECHAPMAN.COM
BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS:
Other assets.............................................. $ 934,000
---------
Total assets.......................................... $ 934,000
=========
LIABILITIES AND STOCKHOLDLER'S DEFICIT:
Accounts payable and accrued expenses..................... $ 805,000
Due to affiliates......................................... 410,000
---------
Total liabilities..................................... 1,215,000
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, $.001 par value, 50,000,000 shares
authorized, 1 share issued and outstanding.............. --
Accumulated deficit....................................... (281,000)
---------
Total stockholder's deficit........................... (281,000)
---------
Total liabilities and stockholder's deficit........... $ 934,000
=========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-44
<PAGE>
ECHAPMAN.COM
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
REVENUE: $ --
---------
EXPENSE:
Compensation and benefits................................. 62,000
Professional fees......................................... 219,000
---------
Total expense......................................... 281,000
---------
Loss before income taxes.............................. (281,000)
INCOME TAXES................................................ --
---------
Net loss.............................................. $(281,000)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-45
<PAGE>
ECHAPMAN.COM
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT DEFICIT
--------- ----------- -------------
<S> <C> <C> <C>
BALANCE, May 14, 1999....................................... $ -- $ -- $ --
Net loss for the period................................... -- (281,000) (281,000)
--------- --------- ---------
BALANCE, December 31, 1999.................................. $ -- $(281,000) $(281,000)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-46
<PAGE>
ECHAPMAN.COM
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(281,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Effect of changes in assets and liabilities-
Other assets.......................................... (934,000)
Accounts payable and accrued expenses................. 805,000
Due to affiliates..................................... 410,000
---------
Net cash used in operating activities............... --
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... --
CASH beginning of period.................................... --
---------
CASH end of period.......................................... $ --
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-47
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION:
EChapman.com (the Company) was formed on May 14, 1999, and is designed to
bring together the financial services capabilities of The Chapman Co., Chapman
Capital Management and Chapman Insurance Agency, while taking advantage of the
unique 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 is in the preliminary stages of designing and developing its website.
These costs include conceptual formulation, evaluation, technology requirements
and vendor software and consultant selection. These costs have been expensed as
incurred in accordance with SOP 98-1. Once the Company enters the application
development stage, and enters into committments and contracts for services for
application security, installation of website, testing, etc., those costs will
be capitalized. Once the Company enters the operational stage, costs for
services will be evaluated, and expensed as incurred or expensed over the
contract period. The Company has a December 31 year-end.
F-48
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for other assets, and
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.
OTHER ASSETS
Other assets consist of deferred stock offering costs.
F-49
<PAGE>
ECHAPMAN.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of the statutory income taxes to the recorded income tax
provision for the period ended December 31, 1999, is as follows:
<TABLE>
<S> <C>
Statutory tax (at 35% rate)................................. $ 98,000
Effect of state income taxes................................ 14,000
Effect of graduated tax rate................................ (6,000)
Valuation reserve........................................... (106,000)
---------
$ --
=========
</TABLE>
The Company's deferred income tax asset as of December 31, 1999, is as
follows:
<TABLE>
<S> <C>
Deferred tax asset:
NOL carryforward.......................................... $106,000
Valuation reserve......................................... (106,000)
--------
Net deferred tax asset...................................... $ --
========
</TABLE>
A 100% valuation reserve was applied against the deferred tax asset as of
December 31, 1999, as its realization was not more likely than not to be
realized.
3. TRANSACTIONS WITH AFFILIATES:
On November 15, 1999, the Company signed a merger agreement to acquire
Chapman Holdings, Inc., Chapman Capital Management Holdings, Inc., and Chapman
Insurance Holdings, Inc.
As of December 31, 1999, the Company owes Chapman Holdings, Inc. $191,000
and Chapman Capital Management Holdings, Inc. $219,000 for expenses paid on its
behalf.
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 December 31, 1999.
F-50
<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........................... 8
Use of Proceeds........................ 14
Dilution............................... 16
Capitalization......................... 17
Dividend Policy........................ 17
Selected Historical and Pro Forma
Financial Data....................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
The Mergers............................ 29
Business............................... 32
Management............................. 65
Principal and Selling Stockholders..... 71
Certain Transactions................... 73
Description of Capital Stock........... 77
Shares Eligible for Future Sale........ 79
Underwriting........................... 82
Transfer Agent and Registrar........... 84
Legal Matters.......................... 84
Experts................................ 85
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 and Selling 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.................... 8
Use of Proceeds................. 14
Dilution........................ 16
Capitalization.................. 17
Dividend Policy................. 17
Selected Historical and Pro
Forma Financial Data.......... 18
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 22
The Mergers..................... 29
Business........................ 32
Management...................... 65
Principal and Selling
Stockholders.................. 71
Certain Transactions............ 73
Description of Capital Stock.... 77
Shares Eligible for Future
Sale.......................... 79
Plan of Distribution............ 82
Transfer Agent and Registrar.... 84
Legal Matters................... 84
Experts......................... 85
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............................. 250,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses (including Blue Sky)................ 400,000
Miscellaneous............................................... 33,846
----------
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. (Filed herewith)
1.2 Form of Qualified Independent Underwriter Agreement between
the Company and Ferris, Baker Watts, Incorporated (Filed
herewith)
1.3 Form of Master Agreement Among Underwriters among The
Chapman Co. and the several Underwriters (Filed herewith)
3.1 Articles of Amendment and Restatement of the Company (Filed
as Exhibit 3.1 to Pre-Effective Amendment No. 3 to
EChapman.com, Inc. Registration Statement on Form S-4 (File
No. 333-91251) as filed with the Securities and Exchange
Commission on March 30, 2000 and hereby incorporated by
reference)
3.2 Amended and Restated Bylaws of the Company (Filed as
Exhibit 3.2 to Pre-Effective Amendment No. 3 to
EChapman.com, Inc. Registration Statement on Form S-4 (File
No. 333-91251) as filed with the Securities and Exchange
Commission on March 30, 2000 and hereby incorporated by
reference)
4 Form of common stock Certificate (Filed as Exhibit 4 to
Amendment No. 1 to Company's Registration Statement on Form
SB-2 (File No. 333-90987) as filed with the Securities and
Exchange Commission on January 18, 2000 and hereby
incorporated by reference)
5 Opinion of Venable, Baetjer and Howard, LLP (Filed herewith)
10.1 EChapman.com, Inc. 1999 Omnibus Stock Plan (Filed as
Exhibit 10.1 to EChapman.com, Inc. 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 as Exhibit 10.3 to Amendment No. 1
to Company's Registration Statement on Form SB-2 (File
No. 333-90987) as filed with the Securities and Exchange
Commission on January 18, 2000 and hereby incorporated by
reference)
10.4 Agreement and Plan of Merger by and among the Company, CCMH
Merger Subsidiary, Inc. and Chapman Capital Management, Inc.
dated November 15, 1999 (Filed as Exhibit 10.4 to Amendment
No. 1 to Company's Registration Statement on Form SB-2 (File
No. 333-90987) as filed with the Securities and Exchange
Commission on January 18, 2000 and hereby incorporated by
reference)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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 as Exhibit 10.5 to Amendment
No. 1 to Company's Registration Statement on Form SB-2 (File
No. 333-90987) as filed with the Securities and Exchange
Commission on January 18, 2000 and hereby incorporated by
reference)
10.6 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 as Exhibit 10.7 to the Amendment
No. 1 to Company's Registration Statement on Form SB-2 (File
No. 333-90987) as filed with the Securities and Exchange
Commission on January 18, 2000 and hereby incorporated by
reference)
10.8 Support Agreement between the Company and Nathan A. Chapman,
Jr. dated November 12, 1999 (Chapman Insurance Holdings,
Inc.) (Filed as Exhibit 10.8 to the Amendment No. 1 to
Company's Registration Statement on Form SB-2 (File
No. 333-90987) as filed with the Securities and Exchange
Commission on January 18, 2000 and hereby incorporated by
reference)
10.9 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 10.10
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.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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)
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)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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)
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 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)
10.28 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 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)
10.29 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.)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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)
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)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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)
10.41 Lock-up Agreement between Nathan A. Chapman, Jr. and The
Chapman Co. dated March 14, 2000 (Filed as Exhibit 10.41 to
Pre-Effective Amendment No. 3 to EChapman.com, Inc.
Registration Statement on Form S-4 (File No. 333-91251) as
filed with the Securities and Exchange Commission on
March 30, 2000 and hereby incorporated by reference)
10.42 $32,836.53 Promissory Note to The Chapman Co. from Nathan A.
Chapman, Jr. dated December 31, 1999 (Filed as
Exhibit 10.42 to Pre-Effective Amendment No. 3 to
EChapman.com, Inc. Registration Statement on Form S-4 (File
No. 333-91251) as filed with the Securities and Exchange
Commission on March 30, 2000 and hereby incorporated by
reference)
10.43 Amended and Restated Expense Limitation Agreement by and
among The Chapman Funds, Inc., on behalf of The Chapman U.S.
Treasury Money Fund, DEM Equity Fund, DEM Index Fund, DEM
Multi-Manager Equity Fund and DEM Multi-Manager Bond Fund,
and Chapman Capital Management, Inc. dated March 17, 2000
(Filed as Exhibit 10.43 to Pre-Effective Amendment No. 3 to
EChapman.com, Inc. Registration Statement on Form S-4 (File
No. 333-91251) as filed with the Securities and Exchange
Commission on March 30, 2000 and hereby incorporated by
reference)
21 Subsidiaries of the Company (Filed as Exhibit 21 to
Amendment No. to the Company's Registration Statement on
Form SB-2 (File No. 333-90987) as filed with the Securities
and Exchange commission on January 18, 2000 and hereby
incorporated by reference.)
23.1 Consent of Arthur Andersen LLP (Filed herewith)
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5) (Filed herewith)
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.)
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.)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
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 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.
II-9
<PAGE>
(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-10
<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 April 14, 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 April 14, 2000
- -------------------------------------- Executive Officer)
Nathan A. Chapman, Jr.
/s/ DEMETRIS BROWN Treasurer and Chief Financial April 14, 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. April 14, 2000
----------------------------------
Nathan A. Chapman, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement between the Company and The
Chapman Co.
1.2 Form of Qualified Independent Underwriter Agreement between
the Company and Ferris, Baker Watts, Incorporated
1.3 Form of Master Agreement Among Underwriters among The
Chapman Co. and the several Underwriters
5 Opinion of Venable, Baetjer and Howard, LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5)
</TABLE>
<PAGE>
3,333,333 SHARES
COMMON STOCK
ECHAPMAN.COM, INC.
WORLD TRADE CENTER - BALTIMORE
401 EAST PRATT STREET, 28TH FLOOR
BALTIMORE, MARYLAND 21202
UNDERWRITING AGREEMENT
_________, 2000
The Chapman Co.
as Representative of the several Underwriters
identified on Schedule I hereto
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Ladies and Gentlemen:
EChapman.com, Inc., a Maryland corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
underwriters named in Schedule I hereto (the "Underwriters") for which The
Chapman Co. is acting as Representative (the "Representative") an aggregate of
3,333,333 shares (the "Firm Shares") of common stock, $0.001 par value per share
(the "Common Stock"). The Company and a certain stockholder of the Company named
in Schedule II hereto (the "Selling Stockholder"), each propose, subject to the
terms and conditions stated herein, to sell to the Underwriters, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, and at the option of the Underwriters, up to an additional 120,000
shares and 80,000 shares respectively, (collectively, the "Additional Shares"),
of Common Stock. The Underwriters agree that to the extent the Underwriters
exercise their option with respect to the Additional Shares, such option shall
be exercised first with respect to the Additional Shares held by the Selling
Stockholder. The Firm Shares and the Additional Shares are referred to herein
collectively as the "Shares." The Shares are more fully described in the
EChapman Registration Statement referred to below.
On November 15, 1999, the Company entered into separate merger
agreements (the "Merger Agreements") with Chapman Holdings, Inc. ("CHI"),
Chapman Capital Management Holdings, Inc. ("CCMHI") and Chapman Insurance
Holdings, Inc. ("CIHI"), whereby each of CHI, CCMHI and CIHI will merge with and
into a separate wholly owned subsidiary of the Company (each a "Merger" and
together the "Mergers"). As a result of the Mergers, the Company will become a
holding company owning 100% of the outstanding capital stock of CHI, CCMHI and
CIHI, which will own 100% of the capital stock of their respective subsidiaries,
The Chapman Co., Chapman Capital Management, Inc.
<PAGE>
The Chapman Co.
_________, 2000
Page 2
and Chapman Insurance Agency, Inc. CHI, CCMHI and CIHI are sometimes referred to
herein individually as a "Chapman Entity" and collectively as the "Chapman
Entities." Upon the closing and consummation of the Mergers, references in this
Agreement to the Company shall be deemed to refer to the Company and its
subsidiaries, the Chapman Entities, after giving effect to the Mergers.
SECTION 1. REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form SB-2 (Registration No.
333-90987), as amended by [Amendment Nos. 1 and 2 thereto], and related
preliminary prospectuses, as amended, for the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the sale of 3,533,283 shares
(including the Additional Shares) of Common Stock, which registration statement,
as so amended, has been declared effective by the Commission on the date hereof
and copies of which have heretofore been delivered to the Underwriters. The
registration statement, as amended at the time it became effective, including
the exhibits and information (if any) deemed to be a part of the registration
statement at the time of effectiveness pursuant to paragraph (b) of Rule 430A of
the rules and regulations of the Commission under the Securities Act (the
"Securities Act Regulations"), and any post-effective amendments thereto under
Rule 462(d) through the Closing Date (as defined below) is hereinafter called
the "eChapman Registration Statement." If the Company has filed or is required
by the terms hereof to file a registration statement pursuant to Rule 462(b)
under the Securities Act Regulations registering additional shares of Common
Stock (a "Rule 462(b) Registration Statement"), then, and unless otherwise
specified, any reference herein to the term "EChapman Registration Statement"
shall be deemed to include such Rule 462(b) Registration Statement. Other than a
Rule 462(b) Registration Statement, if any, which became effective upon filing,
no other document with respect to the EChapman Registration Statement has
heretofore been filed with the Commission (other than acceleration requests
under Rule 461 under the Securities Act Regulations and prospectuses filed
pursuant to Rule 424(b) of the Securities Act Regulations, each in the form
heretofore delivered to the Underwriters). No stop order suspending the
effectiveness of the EChapman Registration Statement (including any Rule 462(b)
Registration Statement) has been issued and no proceeding for that purpose has
been initiated or, to the Company's knowledge, threatened by the Commission, and
any request on the part of the Commission for additional information has been
complied with. The prospectus relating to the Shares, in the form in which it is
to be filed with the Commission pursuant to Rule 424(b) of the Securities Act
Regulations, is hereinafter referred to as the "Prospectus," except that,
subject to Sections 5(a)
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The Chapman Co.
_________, 2000
Page 3
and 5(b) below, if any revised prospectus or prospectus supplement shall be
provided to the Underwriters by the Company for use in connection with the
offering and sale of the Shares (the "Offering") which differs from the
Prospectus (whether or not such revised prospectus or prospectus supplement is
required to be filed by the Company pursuant to Rule 424(b) of the Securities
Act Regulations), the term "Prospectus" shall refer to such revised prospectus
or prospectus supplement, as the case may be, from and after the time it is
first provided to the Underwriters for such use. Any preliminary prospectus or
prospectus subject to completion related to the Offering included in the
EChapman Registration Statement or filed by the Company with the Commission
pursuant to Rule 424 under the Securities Act is hereafter called a "Preliminary
Prospectus." All references in this Agreement to the EChapman Registration
Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus and
the Prospectus, or any amendments or supplements to any of the foregoing, shall
be deemed to include any copy thereof filed with the Commission pursuant to the
Commission's Electronic Data Gathering Analysis and Retrieval System ("EDGAR").
(b) The Company has filed with the Commission a registration statement
on Form S-4 (Registration No. 333-91251), as amended by Amendment Nos. 1
thereto, and related preliminary proxy statement/prospectus, as amended, for the
registration under the Securities Act of the issuance of 5,709,204 shares of
Common Stock (the "CHI Shares") to stockholders of CHI in the Merger of CHI with
and into a wholly-owned subsidiary of the Company, which registration statement,
as so amended, has been declared effective by the Commission and copies of which
have heretofore been delivered to the Underwriters. The registration statement,
as amended at the time it became effective, is hereinafter called the "CHI
Registration Statement." No stop order suspending the effectiveness of the CHI
Registration Statement has been issued and no proceeding for that purpose has
been initiated or, to the Company's knowledge, threatened by the Commission, and
any request on the part of the Commission for additional information has been
complied with. The proxy statement/prospectus relating to the Shares is
hereinafter referred to as the "CHI Proxy Statement/Prospectus." All references
in this Agreement to the CHI Registration Statement and the CHI Proxy
Statement/Prospectus, or any amendments or supplements to any of the foregoing,
shall be deemed to include any copy thereof filed with the Commission pursuant
to EDGAR.
(c) The Company has filed with the Commission a registration statement
on Form S-4 (Registration No. 333-91329), as amended by [Amendment Nos. 1 and 2
thereto], and related preliminary proxy statement/prospectus, as amended, for
the registration under the Securities Act of the issuance of 7,485,640 shares of
Common Stock (the "CCMHI Shares") to stockholders of CCMHI in the Merger of
CCMHI with and into a wholly-owned subsidiary of the Company, which registration
statement, as so amended, has
<PAGE>
The Chapman Co.
_________, 2000
Page 4
been declared effective by the Commission and copies of which have heretofore
been delivered to the Underwriters. The registration statement, as amended at
the time it became effective, is hereinafter called the "CCMHI Registration
Statement." No stop order suspending the effectiveness of the CCMHI Registration
Statement has been issued and no proceeding for that purpose has been initiated
or, to the Company's knowledge, threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with.
The proxy statement/prospectus relating to the Shares is hereinafter referred to
as the "CCMHI Proxy Statement/Prospectus." All references in this Agreement to
the CCMHI Registration Statement and the CCMHI Proxy Statement/Prospectus, or
any amendments or supplements to any of the foregoing, shall be deemed to
include any copy thereof filed with the Commission pursuant to EDGAR. The
EChapman Registration Statement, the CHI Registration Statement and the CCMHI
Registration Statement are collectively referred to herein as the "Chapman
Registration Statements."
(d) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of capital
stock of the Company and each of the Chapman Entities have been duly and validly
authorized and issued and are fully paid and non-assessable; except as disclosed
in the Prospectus, the CHI Proxy Statement/Prospectus or the CCMHI Proxy
Statement/Prospectus, as the case may be, there are no outstanding (i)
securities or obligations of the Company or such other Chapman Entity
convertible into or exchangeable for any capital stock of the Company or such
other Chapman Entity, as the case may be, (ii) warrants, rights or options to
subscribe for or purchase from the Company or such other Chapman Entity, as the
case may be, any capital stock or any convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or such other Chapman Entity to
issue any shares of capital stock, any convertible or exchangeable securities or
obligations, or any such warrants, rights or options;
(e) the Company and each of the Chapman Entities has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation with full corporate power
and authority to own its respective properties and to conduct its respective
business as described in the EChapman Registration Statement and the Prospectus;
(f) the Company and each of the Chapman Entities is duly qualified or
licensed by each jurisdiction in which it conducts its respective business and
in which the failure, individually or in the aggregate, to be so qualified or
licensed could reasonably be expected to have a material adverse effect on the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company or any such Chapman Entity, and the Company and each of the Chapman
Entities is duly qualified, and is in good standing, in each jurisdiction in
<PAGE>
The Chapman Co.
_________, 2000
Page 5
which it owns or leases real property or maintains an office and in which such
qualification is necessary, except where, individually or in the aggregate, the
failure to be so qualified and in good standing would not have a material
adverse effect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company or any such Chapman Entity; except as
disclosed in the Prospectus, none of the Chapman Entities is prohibited or
restricted, directly or indirectly, from (i) paying dividends to the Company,
(ii) making any other distribution with respect to its capital stock, (iii)
repaying the Company for any loans or advances made to it by the Company or (iv)
from transferring their property or assets to the Company;
(g) the Company and each of the Chapman Entities is in compliance with
all applicable federal, state, local and foreign laws, rules and regulations,
including, without limitation, the Securities Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the Investment Company Act of 1940, as
amended (the "Investment Company Act"), the Investment Advisers Act of 1940, as
amended, and the regulations promulgated thereunder (collectively, the
"Securities Laws"), orders, decrees and judgments, including those relating to
transactions with affiliates, except where, in the aggregate, the failure to be
in compliance therewith would not materially and adversely affect (a) the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company and any such Chapman Entity or (b) the ability of the Company and
its subsidiaries, subsequent to the consummation of the Mergers, to conduct
their businesses as described in the Prospectus;
(h) neither the Company nor any of the Chapman Entities is in breach
of, or in default under, nor has any event occurred which with giving of notice,
lapse of time, or both would constitute a breach of, or default under, its
respective articles of incorporation or charter or bylaws or in the performance
or observance of any obligation, agreement, covenant or condition contained in
any license, indenture, mortgage, deed of trust, loan or credit agreement or
other agreement or instrument to which the Company or any of the Chapman
Entities is a party or by which any of them or their respective properties is
bound, except for such breaches or defaults which, individually or in the
aggregate, would not have a material adverse effect on the assets, operations,
business, prospects or condition (financial or otherwise) of the Company or any
such Chapman Entity; and the execution, delivery and performance of this
Agreement, the Qualified Independent Underwriters Agreement (the "QIU
Agreement"), by and between the Company and Ferris, Baker Watts, Incorporated
(the "QIU"), and the Merger Agreements, and consummation of the transactions
contemplated hereby and thereby will not result in the creation or imposition of
any lien, charge, claim or encumbrance upon any property or asset of the Company
or any of the Chapman Entities, or conflict with, or result in any breach of, or
constitute a default under, or constitute an event which with giving of notice,
lapse of time, or both would constitute a breach of, or default
<PAGE>
The Chapman Co.
_________, 2000
Page 6
under, (i) any provision of the articles of incorporation or charter or by-laws
of the Company or any of the Chapman Entities, or (ii) any provision of any
license, indenture, mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company or any of the Chapman Entities is a
party or by which any of them or their respective properties may be bound or
affected, or (iii) any federal, state, local or foreign law, regulation or rule,
including, without limitation, the Securities Laws, or any decree, judgment or
order applicable to the Company or any of the Chapman Entities, except in the
case of clauses (ii) and (iii) for such breaches or defaults that, individually
or in the aggregate, would not materially and adversely affect (a) the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company or any of the Chapman Entities or (b) the ability of the Company and its
subsidiaries, subsequent to the consummation of the Mergers, to conduct their
respective businesses as described in the Prospectus;
(i) this Agreement has been duly authorized, executed and delivered by
the Company and is a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of equity, and
except to the extent that the indemnification and contribution provisions of
Section 11 hereof may be limited by federal or state securities laws and public
policy considerations in respect thereof;
(j) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the execution, delivery and
performance of this Agreement, the QIU Agreement and the Merger Agreements, the
consummation of the transactions contemplated hereby and thereby, or the sale
and delivery of the Shares by the Company as contemplated hereby other than (i)
such as have been obtained, or will have been obtained at each Closing Date
under the Securities Act and the Exchange Act, (ii) such approvals as have been
obtained or will have been obtained by the Closing Date in connection with the
approval of the quotation of the Shares on the Nasdaq National Market and (iii)
any necessary qualification under the securities or blue sky laws of the various
jurisdictions in which the Shares, the CHI Shares and the CCMHI Shares are being
offered;
(k) the Company and each Chapman Entity has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any federal, state, local and foreign law, regulation and rule,
including, without limitation, the Securities Laws, and has obtained all
necessary authorizations, consents and approvals from other persons, required in
order to conduct their respective businesses as described in the Prospectus,
except to the extent that any failure to have any such licenses, authorizations,
<PAGE>
The Chapman Co.
_________, 2000
Page 7
consents or approvals, to make any such filings or to obtain any such
authorizations, consents or approvals would not materially and adversely affect
(a) the assets, operations, business prospects or condition (financial or
otherwise) of the Company or any of the Chapman Entities or (b) the ability of
the Company and its subsidiaries, subsequent to the consummation of the Mergers,
to conduct their respective businesses as described in the Prospectus; neither
the Company nor any of the Chapman Entities is in violation of, in default
under, or has received any notice regarding a possible violation, default or
revocation of any such license, authorization, consent or approval applicable to
the Company or any of the Chapman Entities, and no such license, authorization,
consent or approval contains a materially burdensome restriction that is not
adequately disclosed in the Registration Statement and the Prospectus;
(l) the Preliminary Prospectus and the EChapman Registration Statement
comply and the Prospectus and any further amendments or supplements thereto
will, when they have become effective or are filed with the Commission, as the
case may be, comply in all material respects with the Securities Act
Regulations; the EChapman Registration Statement did not, and any amendment
thereto will not, in each case as of the applicable effective date, contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and the
Preliminary Prospectus does not, and the Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Date contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that the Company makes no warranty or representation with
respect to any statement contained in the EChapman Registration Statement or the
Prospectus in reliance upon and in conformity with the information concerning
the Underwriters and furnished in writing by or on behalf of the Underwriters to
the Company expressly for use in the EChapman Registration Statement or the
Prospectus (that information being limited to that described in Section 10(e)
hereof);
(m) the CHI Proxy Statement/Prospectus and the CHI Registration
Statement comply in all material respects with the requirements of the
Securities Act, the Securities Act Regulations and the proxy rules promulgated
under the Exchange Act (the "Proxy Rules"); the CHI Registration Statement did
not, and any amendment thereto will not, in each case as of the applicable
effective date, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and the CHI Proxy Statement/Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Date contain
<PAGE>
The Chapman Co.
_________, 2000
Page 8
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(n) the CCMHI Proxy Statement/Prospectus and the CCMHI Registration
Statement comply in all material respects with the requirements of the
Securities Act, the Securities Act Regulations and Proxy Rules; the CCMHI
Registration Statement did not, and any amendment thereto will not, in each case
as of the applicable effective date, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; and the CCMHI Proxy Statement/Prospectus or any
amendment or supplement thereto will not, as of the applicable filing date and
at the Closing Date contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(o) all legal or governmental proceedings, contracts or documents of a
character required to be filed as exhibits to the Chapman Registration
Statements or to be summarized or described in the Prospectus, the CHI Proxy
Statement/Prospectus or the CCMHI Proxy Statement/Prospectus have been so filed,
summarized or described as required and any such summaries or descriptions
present fairly the information required to be shown;
(p) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the Company's knowledge, threatened against the
Company or the Chapman Entities or any of their respective officers or directors
or to which the properties, assets or rights of any such entity are subject, at
law or in equity, before or by any federal, state, local or foreign court,
governmental or regulatory commission, board, body, authority, arbitration panel
or agency which, individually or in the aggregate, could result in a judgment,
decree, award or order materially and adversely affecting (a) the assets,
operations, business prospects or condition (financial or otherwise) of the
Company or any of the Chapman Entities or (b) the ability of the Company and its
subsidiaries, subsequent to the consummation of the Mergers, to conduct their
respective businesses as described in the Prospectus;
(q) the financial statements, including the notes thereto, included in
the Registration Statement and the Prospectus present fairly the respective
consolidated financial position of the Company, CHI and CCMHI as of the dates
indicated and the consolidated results of operations and changes in
stockholders' equity and cash flows of the Company, CHI and CCMHI for the
periods specified; such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
<PAGE>
The Chapman Co.
_________, 2000
Page 9
during the periods involved (except as indicated in the notes thereto); the
financial statement schedules included in the EChapman Registration Statement
and the amounts in the Prospectus under the captions "Prospectus Summary -
Consolidated Summary Financial Data," "Capitalization," "Dilution," "Selected
Historical and Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly present the
information shown therein and have been compiled on a basis consistent with the
financial statements included in the EChapman Registration Statement and the
Prospectus;
(r) Arthur Andersen LLP, whose reports on the consolidated financial
statements of CHI and CCMHI are filed with the Commission as part of the
EChapman Registration Statement and Prospectus, are and were during the periods
covered by their reports independent public accountants as required by the
Securities Act and the Securities Act Regulations;
(s) subsequent to the respective dates as of which information is given
in the EChapman Registration Statement and the Prospectus, and except as may be
otherwise stated in the EChapman Registration Statement or the Prospectus, there
has not been (i) any material adverse change, in the assets, liabilities,
capital, operations, business or condition (financial or otherwise), present or
prospective, of the Company or any of the Chapman Entities, whether or not
arising in the ordinary course of business, (ii) any transaction, which is
material to the Company or any of the Chapman Entities contemplated or entered
into by the Company or any of the Chapman Entities, (iii) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or any
of the Chapman Entities, which is material to the Company or any of the Chapman
Entities or (iv) any dividend or distribution of any kind declared, paid or made
by the Company or any of the Chapman Entities on any class of capital stock;
(t) the Company is not, and upon the sale of the Shares as herein
contemplated will not be, an investment company, which is required to register
under the Investment Company Act;
(u) the Shares will conform in all material respects to the description
thereof contained in the Registration Statement and the Prospectus;
(v) except as disclosed in the Prospectus, there are no persons with
registration or other similar rights to have any equity securities registered
pursuant to the Registration Statement or otherwise registered by the Company
under the Securities Act;
(w) the Shares have been duly authorized and, when the Shares have been
issued and duly delivered against payment therefor as contemplated by
<PAGE>
The Chapman Co.
_________, 2000
Page 10
this Agreement and the Prospectus, the Shares will be validly issued, fully paid
and nonassessable, free and clear of any pledge, lien, encumbrance, security
interest, mortgage or other claim whatsoever, and the issuance and sale of the
Shares by the Company is not subject to preemptive or other similar rights
arising by operation of law, under the articles of incorporation or bylaws of
the Company, under any agreement to which the Company or any of the Chapman
Entities is a party, or otherwise;
(x) other than any stabilization activities conducted by the
Underwriters in accordance with Rule 104 of Regulation M promulgated under the
Exchange Act, the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
(y) in connection with the Offering, the Company has not offered and
will not offer its Common Stock or any other securities convertible into or
exchangeable or exercisable for Common Stock in a manner in violation of the
Securities Act;
(z) except as disclosed in the Prospectus, the Company has not incurred
any liability for any finder's fees or similar payments in connection with the
transactions herein contemplated;
(aa) The Company, and each of the Chapman Entities and their
predecessors have filed all necessary federal, state and foreign income and
franchise tax returns that they were required to file and have paid all taxes
shown as due thereon (including, but not limited to, all penalties, interest and
other additions thereto), except for failures to file or pay which would not,
individually or in the aggregate, have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company or any of the Chapman Entities or materially and adversely affect the
ability of the Company and its subsidiaries, subsequent to the consummation of
the Mergers, to conduct their respective businesses as described in the
Prospectus. All such tax returns were correct and complete in all material
respects. All tax liabilities are adequately provided for on the books of the
Company and each of the Chapman Entities, except to such extent as would not,
individually or in the aggregate, have a material adverse affect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Chapman Entities or materially and adversely affect the ability
of the Company and its subsidiaries, subsequent to the consummation of the
Mergers, to conduct their respective businesses as described in the Prospectus.
The Company, the Chapman Entities and their predecessors have made all necessary
payroll and employment tax payments and are current and
<PAGE>
The Chapman Co.
_________, 2000
Page 11
up-to-date with respect to such tax payments as of the date of this Agreement,
except where failure to make any such payment would not, individually or in the
aggregate, have a material adverse affect on the assets, operations, business,
prospects or condition (financial or otherwise) of the Company or any of the
Chapman Entities or materially and adversely affect the ability of the Company
and its subsidiaries, subsequent to the Mergers, to conduct their respective
businesses as described in the Prospectus. The Company has no knowledge of any
tax proceedings or other action pending or threatened against the Company or any
of the Chapman Entities which, individually or in the aggregate, could have a
material adverse affect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company or any of the Chapman
Entities.
(bb) The Company and each of the Chapman Entities maintain insurance
covering its respective properties, operations, personnel and businesses with
institutions it believes to be financially responsible. Such insurance insures
against such losses and risks as are adequate in accordance with customary
industry practice to protect the Company, each of the Chapman Entities and their
respective businesses. None of the Company or any of the Chapman Entities has
received notice from any insurer or agent of such insurer that substantial
capital improvements or other expenditures will have to be made in order to
continue such insurance. All such insurance is outstanding and duly in force on
the date hereof, subject only to changes made in the ordinary course of
business, consistent with past practice, which do not, either individually or in
the aggregate, materially alter the coverage thereunder or the risks covered
thereby. None of the Company, or any of the Chapman Entities has any reason to
believe that it will not be able (a) to renew its existing insurance coverage as
and when such policies expire or (b) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted or as presently contemplated and at a reasonable cost.
(cc) The Company and any "employee benefit plan" (as defined under
ERISA) established or maintained by the Company or its "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company and assuming that the Mergers have
occurred, any member of any group organizations described in Sections 414(b),
(c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which the
Company is a member. The Company does not have, nor has it ever had, any
"employee benefit plan" subject to Title IV of ERISA. Neither the Company nor
any of its ERISA Affiliates has incurred or expects to incur any liability under
Sections 4975 or 4980B of the Code which, individually or in the aggregate,
could be reasonably expected to have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
<PAGE>
The Chapman Co.
_________, 2000
Page 12
Company or any of the Chapman Entities. Each "employee benefit plan" established
or maintained by the Company or any of its ERISA Affiliates that is intended to
be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or failure to act, which
could reasonably be expected to cause the loss of such qualification.
(dd) The computer systems of the Company and each of the Chapman
Entities and their respective subsidiaries (including all software, hardware,
workstations and related components, automated devices, embedded chips and other
date sensitive equipment) are Year 2000 Ready or will be Year 2000 Ready by
December 31, 1999 other than any failure to be Year 2000 Ready that could not
reasonably have a material adverse effect on the Company or the Chapman
Entities. "Year 2000 Ready" means that the computer systems: (i) are capable of
recognizing, processing, managing, representing, interpreting and manipulating
correctly date-related data for dates earlier and later than January 1, 2000,
including calculating, comparing, sorting, storing, tagging and sequencing,
without resulting in or causing logical or mathematical errors or
inconsistencies in any user-interface functionalities or otherwise, including
data input and retrieval, data storage, data fields, calculations, reports,
processing or any other input or output; (ii) have the ability to provide date
recognition for any data element without limitation (including date-related data
represented without a century designation, date-related data whose year is
represented by only two digits and date fields assigned special values); (iii)
have the ability to function automatically into and beyond the year 2000 without
human intervention and without any change in operations associated with the
advent of the year 2000; (iv) have the ability to interpret data, dates and time
correctly into and beyond the year 2000; (v) have the ability not to produce
noncompliance in existing information, nor otherwise corrupt such data into and
beyond the year 2000; (vi) have the ability to process correctly after January
1, 2000 data containing dates before that date; and (vii) have the ability to
recognize all "leap years," including February 29, 2000.
(ee) any certificate signed by any officer of the Company delivered to
the Underwriters or to counsel for the Underwriters pursuant to or in connection
with this Agreement shall be deemed a representation and warranty by the Company
to each of the Underwriters and its counsel as to the matters covered thereby;
and
(ff) the form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the articles of incorporation and by-laws of the
Company, and with the requirements of the Nasdaq National Market.
<PAGE>
The Chapman Co.
_________, 2000
Page 13
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER
The Selling Stockholder represents and warrants to the Underwriters that:
(a) The Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has good, valid
and marketable title to the Shares to be sold by it pursuant to this Agreement,
free and clear of all liens, encumbrances, adverse claims, security interests,
restrictions on transfer, stockholders' agreements, voting trusts, options and
other defects in title whatsoever, with full power to deliver such Shares
hereunder, and, upon the delivery of and payment for such Shares as herein
contemplated, the Underwriters will receive good, valid and marketable title to
the Shares purchased by it from the Selling Stockholder, free and clear of all
liens, encumbrances, adverse claims, security interests, restrictions on
transfer, stockholders' agreements, voting trusts, options and other defects in
title whatsoever created by or relating to the Selling Stockholder.
(b) The Selling Stockholder has, and will have at the time of delivery
of the Shares to be sold by it, full legal right, power, authority and capacity,
and, except as required under the Securities Act and state securities and Blue
Sky laws, all necessary consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits of and from all
public, regulatory or governmental agencies and bodies, as are required for the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby, including the sale, assignment, transfer
and delivery of the Shares to be sold, assigned, transferred and delivered by
the Selling Stockholder hereunder.
(c) This Agreement has been duly and validly authorized, executed and
delivered by the Selling Stockholder and is the valid and binding obligation of
the Selling Stockholder, enforceable against the Selling Stockholder in
accordance with its terms.
(d) The execution, delivery and performance of this Agreement by or on
behalf of the Selling Stockholder, the offering and sale of the Shares being
sold by the Selling Stockholder hereunder and the consummation of the
transactions contemplated hereby will not violate, conflict with or constitute a
breach of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a default)
or require consent under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the Selling Stockholder,
or result in an acceleration of any indebtedness of the Selling Stockholder,
pursuant to (i) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement or instrument to which the Selling Stockholder is a
party or by which his properties or assets are or may be bound, (iii) any
statute, rule or
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regulation applicable to the Selling Stockholder or any of his properties or
assets or (iv) any judgment, order or decree of any court or governmental agency
or authority having jurisdiction over the Selling Stockholder or any of his
properties or assets. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with (i) any court or any
governmental agency or authority having jurisdiction over the Selling
Stockholder or any of his properties or assets or (ii) any other person is
required for (A) the execution, delivery and performance by the Selling
Stockholder of this Agreement, (B) the sale and delivery of the Shares to be
sold and delivered by the Selling Stockholder hereunder and the consummation of
the transactions contemplated hereby, except such as have been obtained under
the Securities Act and such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(e) The Selling Stockholder has not directly or indirectly (i) taken
(other than through the actions, if any, of the Underwriters) any action
designed to, or that might reasonably be expected to, cause or result in or
which constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) since the filing of the
Preliminary Prospectus (A) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, shares of Common Stock or (B) paid or
agreed to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.
(f) The Selling Stockholder (i) does not directly or indirectly have
any preemptive right, co-sale right or right of first refusal or other similar
right to purchase any of the Shares that are to be sold by the Underwriters
pursuant to this Agreement, and (ii) does not directly or indirectly own any
warrants, options or similar rights to acquire, and does not directly or
indirectly have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company.
(g) The Selling Stockholder does not directly or indirectly possess any
registration rights with respect to any securities of the Company.
(h) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to the Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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(i) If there is any change in the information referred to in Section
2(h) from the first business day after the date of this Agreement and from time
to time thereafter for such period as in the opinion of counsel for the
Underwriters a prospectus is required by law to be delivered in connection with
sales by an underwriter or a dealer, the Selling Stockholder will immediately
notify you of such change.
(j) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Code with respect to the
transactions herein contemplated, the Selling Stockholder will deliver to you
prior to or on the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(k) Each certificate signed by the Selling Stockholder and delivered to
the Underwriters or counsel for the Underwriters pursuant to this Agreement
shall be deemed to be a representation and warranty by the Selling Stockholder
to the Underwriters as to the matters covered thereby.
The Selling Stockholder acknowledges that the Underwriters and, for
purposes of the opinion to be delivered to the Underwriters pursuant to Section
9(a) hereof, counsel to the Company will rely upon the accuracy and truth of the
foregoing representations and hereby consents to such reliance.
SECTION 3. PURCHASE, SALE AND DELIVERY OF THE SHARES
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, (i) the Company agrees to sell 3,333,333 of the Firm Shares to each of
the Underwriters, (ii) the Underwriters severally and not jointly agree to
purchase from the Company, at a purchase price per share of $_______, the number
of Firm Shares set forth opposite the name of such Underwriter on Schedule I
hereto.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the office of Venable, Baetjer & Howard, LLP, 2
Hopkins Plaza, Baltimore, Maryland 21201, or at such other place as shall be
agreed upon by you, as Representative, and the Company, at 10:00 A.M. on the
third or fourth business day (as permitted by Rule 15c6-1 under the Exchange
Act) following the date of the effectiveness of the Registration Statement (or,
if the Company has elected to rely upon Rule 430A of the Securities Act
Regulations, the third or fourth business day (as permitted by Rule 15c6-1 under
the Exchange Act) after the determination of the initial public offering price
of the Shares), or such other time not later than ten business days after such
date as shall be agreed upon by you, as Representative, and the Company (such
time and date of payment and delivery being herein called the "Closing Date").
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Payment shall be made to the Company and the Selling Stockholder by wire
transfer in same day funds, against delivery to you for the account of the
Underwriters of certificates for the Shares. Certificates for the Shares shall
be registered in such name or names and in such authorized denominations as you
may request in writing at least two full business days prior to the Closing
Date. The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Closing Date.
(c) In addition, the Company hereby grants the Underwriters the option
to purchase up to 120,000 Additional Shares and the Selling Stockholder hereby
grants to the Underwriters the option to purchase up to 80,000 Additional Shares
at the same purchase price per share to be paid by the Underwriters to the
Company for the Firm Shares as set forth in Section 3(a) hereof, for the sole
purpose of covering over-allotments, if any, in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, in whole or in part, on
or before the thirtieth day following the date of the Prospectus, by written
notice to the Company and Selling Stockholder from the Underwriters and shall,
if exercised in part, be exercised as to the Additional Shares held by the
Selling Stockholder first. Such notice shall set forth the aggregate number of
Additional Shares as to which the option is being exercised and the date and
time, as reasonably determined by the Underwriters, when the Additional Shares
are to be delivered (such date and time being herein sometimes referred to as
the "Additional Closing Date"); PROVIDED, HOWEVER, that the Additional Closing
Date shall not be earlier than the Closing Date or, if thereafter, earlier than
the second full business day after the date on which the option shall have been
exercised nor later than the fourth full business day after the date on which
the option shall have been exercised. Certificates for the Additional Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to the
Additional Closing Date. The Company will permit you to examine and package such
certificates for delivery at least one full business day prior to the Additional
Closing Date.
Payment for the Additional Shares shall be made by wire transfer in
same day funds to the Company and the Selling Stockholder, as applicable. The
Additional Closing shall be held at the offices of Venable, Baetjer & Howard,
LLP, 2 Hopkins Plaza, Baltimore, Maryland 21201 on the Additional Closing Date,
or such other location as may be agreed upon between you, the Company and the
Selling Stockholder as applicable, upon delivery of the certificates for the
Additional Shares to you for the respective accounts of the Underwriters.
SECTION 4. OFFERING
Upon your authorization of the release of the Firm Shares, the
Underwriters proposes to offer the Firm Shares for sale to the public upon the
terms set forth in the Prospectus.
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The Chapman Co.
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SECTION 5. CERTAIN COVENANTS OF THE COMPANY
(a) If the EChapman Registration Statement has not yet been declared
effective on the date of this Agreement, the Company will use its best efforts
to cause the EChapman Registration Statement and any amendments thereto to
become effective as promptly as possible, and if Rule 430A is used or the filing
of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the
Company will file the Prospectus (properly completed if Rule 430A has been used)
pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will
provide evidence satisfactory to you of such timely filing. If the Company
elects to rely on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.
The Company will notify you, as Representative, immediately (and, if
requested by you, will confirm such notice in writing) (i) when the EChapman
Registration Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the EChapman
Registration Statement or the Prospectus or for any additional information,
(iii) of the mailing or the delivery to the Commission for filing of any
amendment of or supplement to the EChapman Registration Statement or the
Prospectus, (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the EChapman Registration Statement or any post-effective
amendments thereto or of the initiation, or the threatening, of any proceedings
therefor, (v) of the receipt of any comments from the Commission and (vi) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for that purpose. If the Commission shall propose
or enter a stop order at any time, the Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file any
amendment to the EChapman Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b) or Rule 434) or any amendment of or supplement to any
Preliminary Prospectus that differs from the prospectus on file at the time of
the effectiveness of the EChapman Registration Statement before or after the
effective date of the EChapman Registration Statement to which you shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
(b) If at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act any event shall have occurred as a
result of which any Preliminary Prospectus as then amended or supplemented or
the Prospectus as then amended or supplemented would, in the judgment of the
Underwriters or the Company include an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
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The Chapman Co.
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make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement any Preliminary Prospectus, the Prospectus or the Chapman
Registration Statements to comply with the Securities Act or the Securities Act
Regulations, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
reasonably satisfactory to you) which will correct such statement or omission
and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two signed copies of the
EChapman Registration Statement, including exhibits and all amendments thereto,
and the Company will promptly deliver to each of the Underwriters such number of
copies of any preliminary prospectus, the Prospectus, the EChapman Registration
Statement, and all amendments of and supplements to such documents, if any, as
they may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the EChapman Registration Statement,
to qualify the Shares for offering and sale under the securities laws relating
to the offering or sale of the Shares of such jurisdictions as you, as
Representative, may designate and to maintain such qualification in effect for
so long as required for the distribution thereof; except that in no event shall
the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the EChapman
Registration Statement occurs, an earnings statement (in form complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a period of
at least twelve consecutive months beginning after the effective date of the
Registration Statement.
(f) Except for the sale of the Additional Shares by the Selling
Stockholder pursuant to the terms of this Agreement, and the issuance of the CHI
Shares and the CCMHI Shares in Mergers pursuant to the CHI Registration
Statement and the CCMHI Registration Statement, during the period of 180 days
from the date hereof, the Company and the Selling Stockholder will not, directly
or indirectly, to issue, sell, offer or agree to sell, grant any option for the
sale of, pledge, make any short sale or maintain any short position, establish
or maintain a "put equivalent position" (within the meaning of Rule 16a1(h)
under the Exchange Act), enter into any swap, derivative transaction or other
arrangement that transfers to another, in whole or in part, any of the economic
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The Chapman Co.
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consequences of ownership of the Common Stock (whether any such transaction is
to be settled by delivery of Common Stock, other securities, cash or other
consideration) or otherwise dispose of, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for Common Stock) or any
interest therein or announce any intention to do any of the foregoing without
the prior written consent of the Underwriters provided that the Company may,
without such consent, (i) grant options or other awards pursuant to the
Company's employee stock option plans, (ii) issue Common Stock upon the exercise
of outstanding options or warrants to purchase shares of Common Stock (iii)
issue Common Stock as consideration for acquisitions provided that prior to the
issuance thereof, the recipient thereof agrees in writing to be bound by the
same restrictions applicable to the Company for the remaining balance of such
180 day period or (iv) engage in market making activities in the ordinary course
of its brokerage subsidiary's business.
(g) During a period of three years from the effective date of the
EChapman Registration Statement, the Company will furnish or make available to
you copies of (i) all reports to its stockholders and (ii) all reports,
financial statements and proxy or information statements filed by the Company
with the Commission, the Nasdaq National Market or any national securities
exchange.
(h) The Company will apply its net proceeds from the sale of the Shares
as set forth under the caption "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
listed on the Nasdaq National Market.
(j) The Company will report the use of its net proceeds from the
Offering to the extent required pursuant to Rule 463 of the Securities Act
Regulations.
(k) If the Company elects to rely upon Rule 462(b) of the Securities
Act Regulations, the Rule 462(b) Registration Statement shall have become
effective by 10:00 p.m., Baltimore time, on the date of this Agreement, no stop
order suspending the effectiveness of the EChapman Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission, and all requests for
additional information on the part of the Commission shall have been complied
with to the Representative's reasonable satisfaction.
(l) The Company, during the period when the Prospectus is required to
be delivered under the Securities Act or the Exchange Act, shall file all
documents required to be filed with the Commission pursuant to Section 13, 14,
or 15 of the Exchange Act within the time periods set forth in the Exchange Act
and the rules and regulations thereunder.
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The Chapman Co.
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SECTION 6. CERTAIN COVENANTS OF THE SELLING STOCKHOLDER
The Selling Stockholder covenants and agrees with you and the Company that:
(a) The Selling Stockholder will pay or cause to be paid all transfer
taxes payable in connection with the transfer of the Additional Shares to be
sold by the Selling Stockholder to the Underwriters.
(b) The Selling Stockholder will do and perform all things to be done
and performed by the Selling Stockholder under this Agreement prior to the
Closing Date and to satisfy all conditions precedent to the delivery of the
Additional Shares to be sold by the Selling Stockholder pursuant to this
Agreement.
SECTION 7. EXPENSES
Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, the Company will pay all fees,
costs and expenses incident to the performance by the Company of its obligations
hereunder, including: (a) the preparation, printing, filing and distribution of
the EChapman Registration Statement (including the exhibits thereto), all
amendments and supplements thereto and the Prospectus; (b) the preparation,
printing, and issuance of the Shares including any stamp taxes and transfer
agent and registrar fees payable in connection with the original issuance of the
Shares; (c) the registrations or qualifications referred to in Section 1 hereof
including fees and disbursements of counsel relating to such registrations or
qualifications; (d) the fees and expenses of the Company's accountants and the
fees and expenses of counsel for the Company; (e) the expenses of delivery to
the Underwriters of copies of the Prospectus, as may be requested for use in
connection with the Offering; (f) any filings required to be made by the
Underwriters with the National Association of Securities Dealers, Inc.; (g) the
fees and expenses of the QIU and its counsel; and (h) the fees and expenses
incurred with respect to the quotation of the Shares on the Nasdaq National
Market.
SECTION 8. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND WARRANTIES
The respective indemnities of the Company, the Selling Stockholder and
the Underwriters and the representations and warranties of the Company and the
Selling Stockholder set forth in or made pursuant to this Agreement will remain
in full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation by or on behalf of the Company, the Selling
Stockholder or the Underwriters or any controlling person thereof, and shall
survive the issuance of the Shares, and any successor or assign of each of the
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The Chapman Co.
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Underwriters, the Company or the Selling Stockholder or any controlling person
of each of the foregoing or any legal representative of such controlling person
shall be entitled to the benefit of the respective indemnities, agreements,
warranties and representations.
SECTION 9. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of each Underwriter hereunder are subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholder in all material respects on the date hereof and on the
Closing Date, the performance by the Company and the Selling Stockholder of
their respective obligations hereunder in all material respects and to the
following further conditions:
(a) The Company shall furnish to the Underwriters on the Closing Date
and on the Additional Closing Date, if any, an opinion of Venable, Baetjer and
Howard, LLP, counsel for the Company, addressed to the Underwriters and dated as
of the Closing Date or the Additional Closing Date, as the case may be, and in a
form reasonably satisfactory to Whiteford, Taylor & Preston L.L.P., counsel for
the Underwriters, stating that:
(i) the Company has an authorized capitalization as
set forth in the Prospectus under the caption "Capitalization;" the
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable;
except as disclosed in the Prospectus, to such counsel's knowledge,
there are no outstanding (A) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the Company,
(B) warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (C) obligations of the Company to issue
any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options;
(ii) the Company and each of the Chapman Entities has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of its respective jurisdiction of incorporation
with full corporate power and authority to own its respective
properties and to conduct its respective business as described in the
EChapman Registration Statement and the Prospectus and to execute and
deliver this Agreement and the QIU Agreement;
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The Chapman Co.
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(iii) the execution, delivery and performance of this
Agreement and the QIU Agreement by the Company and the consummation by
the Company of the transactions contemplated under this Agreement or
the QIU Agreement, as the case may be, do not and will not (A) conflict
with, or result in any breach of, or constitute a default under, or
constitute an event which with giving of notice, lapse of time, or both
would constitute a breach of or default under, (I) any provisions of
the articles of incorporation, charter or by-laws of the Company or any
of the Chapman Entities, (II) to the best of such counsel's knowledge,
any provision of any material license, indenture, mortgage, deed of
trust, loan or credit agreement or other agreement or instrument to
which the Company or any of the Chapman Entities is a party or by which
any of them or their respective properties may be bound or affected, or
(III) to the best of such counsel's knowledge, any law or regulation,
including, without limitation, the Securities Laws, or any decree,
judgment or order applicable to the Company or any of the Chapman
Entities, except in the case of clause (I) for such conflicts, breaches
or defaults which, individually or in the aggregate, would not have a
material adverse effect on the assets, operations, business, prospects
or condition (financial or otherwise) of the Company or any of the
Chapman Entities; or (B) to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon
any property or assets of the Company or any of the Chapman Entities;
(iv) to such counsel's knowledge, no approval,
authorization, consent or order of or filing with any federal or state
governmental or regulatory commission, board, body, authority or agency
is required in connection with the execution, delivery and performance
of this Agreement and the QIU Agreement, the consummation of the
transactions contemplated hereby and thereby, the sale and delivery of
the Shares by the Company as contemplated hereby other than such as
have been obtained or made under the Securities Act and Exchange Act,
and except that such counsel need express no opinion as to any
necessary qualification under the rules of the NASD or state securities
laws;
(v) the Company is not, and upon the sale of the
Shares as herein contemplated will not be an investment company
required to be registered under the Investment Company Act;
(vi) the Shares have been duly authorized and, when
the Shares have been issued by the Company and duly delivered against
payment therefor as contemplated by this Agreement, the
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The Chapman Co.
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Shares will be validly issued, fully paid and nonassessable, free and
clear of any pledge, lien, encumbrance, security interest, mortgage or
other claim whatsoever;
(vii) the issuance and sale of the Shares by the
Company is not subject to preemptive or other similar rights arising by
operation of law, under the articles of incorporation or by-laws of the
Company, under any agreement known to such counsel to which the Company
or any of the Chapman Entities is a party or, to the best of such
counsel's knowledge, otherwise;
(viii) the form of certificate used to evidence the
Common Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the
articles of incorporation and by-laws of the Company and the
requirements of the Nasdaq National Market;
(ix) the EChapman Registration Statement has become
effective under the Securities Act and no stop order suspending the
effectiveness of the EChapman Registration Statement has been issued
and, to the best of such counsel's knowledge, no proceedings with
respect thereto have been commenced or threatened;
(x) as of the Effective Date, the EChapman
Registration Statement and the Prospectus (except as to the financial
statements and other financial and statistical data contained in such
registration statements or prospectuses, as to which such counsel need
express no opinion) complied as to form in all material respects with
the requirements of the Securities Act and the Securities Act
Regulations;
(xi) the statements under the captions
"Capitalization," "Business -- Government Regulation," "Certain
Transactions," "Description of Capital Stock," and "Shares Eligible for
Future Sale," in the EChapman Registration Statement and the
Prospectus, insofar as such statements constitute a summary of the
legal matters referred to therein, constitute accurate summaries
thereof in all material respects;
(xii) except as set forth in the Prospectus, to the
best of such counsel's knowledge, there are no material legal or
governmental proceedings pending or threatened against, or involving
the properties of the Company or any of the Chapman Entities required
to be disclosed in the Prospectus; provided that
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The Chapman Co.
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for this purpose such counsel need not regard any litigation or
governmental proceedings to be "threatened" unless the potential
litigant or governmental authority has manifested to the Company or
any of the Chapman Entities, or to their management, a present
intention to initiate such proceedings;
(xiii) to such counsel's knowledge, there are no
contracts or documents of a character which are required to be filed as
exhibits to the EChapman Registration Statement or to be described or
summarized in the Prospectus which have not been so filed, summarized
or described;
(xiv) The Selling Stockholder has, and will have at
the time of delivery of the Additional Shares, full legal right, power,
authority and capacity, and, except as required under the Securities
Act and state securities and Blue Sky laws, all necessary consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all public, regulatory
or governmental agencies and bodies, as are required for the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby, including the sale, assignment,
transfer and delivery of the Additional Shares to be sold, assigned,
transferred and delivered by the Selling Stockholder hereunder; and
(xv) The Underwriters (assuming they are BONA FIDE
purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the shares being sold by the
Selling Stockholder on the Additional Closing Date, free and clear of
any and all claims, liens, encumbrances and security interests.
In addition, such counsel shall state that they have participated in
the preparation of the Prospectus and the EChapman Registration Statement and in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company and with
the Underwriters and the QIU at which the contents of the Prospectus and the
EChapman Registration Statement and related matters were discussed and, although
such counsel is not passing upon and does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the Prospectus
and the EChapman Registration Statement and has not made any independent
investigation or verification thereof, nothing has come to their attention
during the course of such participation that leads them to believe that at the
time the EChapman Registration Statement became effective, the Prospectus and
the EChapman Registration Statement (other than the financial
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The Chapman Co.
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statements and schedules and other financial and statistical data and
information included therein or omitted therefrom, as to which they need express
no opinion) contained an untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) the Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or such Closing Date, as
the case may be, in form and substance satisfactory to the Underwriters, from
Arthur Andersen LLP, independent public accountants, confirming that they are
independent public accountants within the meaning of the Securities Act and the
Securities Act Regulations and stating that in their opinion the financial
statements examined by them and included in the EChapman Registration Statement
comply in form in all material respects with the applicable accounting
requirements of the Securities Act and the Securities Act Regulations; and
containing the information and statements of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the EChapman
Registration Statement and the Prospectus.
(c) No amendment or supplement to the EChapman Registration Statement
or the Prospectus shall have been filed to which the Underwriters have objected
in writing.
(d) Prior to the completion of the Offering (i) no stop order
suspending the effectiveness of the eChapman Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
shall have been issued by the Commission, (ii) no suspension of the
qualification of the Shares for offering or sale in any jurisdiction shall have
occurred, and no proceeding for such suspension shall have been initiated or
threatened; and (iii) the EChapman Registration Statement and the Prospectus
shall not contain an untrue statement of material fact or omit to state a
material fact, individually or in the aggregate, required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(e) Prior to the completion of the Offering (i) no stop order
suspending the effectiveness of the CHI Registration Statement or the CCMHI
Registration Statement or any order preventing or suspending the use of the CHI
Proxy Statement/Prospectus or the CCMHI Proxy Statement/Prospectus shall have
been issued by the Commission, (ii) no suspension of the qualification of the
CHI Shares or the CCMHI Shares for offering or sale in any jurisdiction shall
have occurred, and no proceeding for such suspension shall have been initiated
or threatened; and (iii) none of the CHI Registration Statement, the CCMHI
Registration Statement, the CHI Proxy Statement/Prospectus or the CCMHI Proxy
<PAGE>
The Chapman Co.
_________, 2000
Page 26
Statement/Prospectus shall contain an untrue statement of material fact or omit
to state a material fact, individually or in the aggregate, required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the Closing
Date (i) no material and unfavorable change in the assets, operations, business,
prospects or condition (financial or otherwise) of the Company and the Chapman
Entities taken as a whole, shall have occurred or become known (whether or not
arising in the ordinary course of business), and (ii) no transaction which is
material and unfavorable to the Company shall have been entered into by the
Company or any of the Chapman Entities.
(g) On the Effective Date, the QIU Agreement shall have been entered
into and delivered by all required parties.
(h) On or before the Closing Date, the stockholders of both CHI and
CCMHI shall have approved the Mergers by the vote required under the Maryland
General Corporation Law.
(i) On or before the Closing Date, all conditions to the Mergers, other
than the closing of the Offering, shall have been satisfied.
(j) On the Closing Date, all filings required to have been made
pursuant to Rules 424, 430A or 462(c)under the Securities Act have been made.
(k) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(l) The Company shall, on the date hereof and at the Closing Date,
deliver to the Underwriters a certificate of its president and its chief
financial officer to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth in this Agreement and
the conditions set forth in paragraphs (c) through (i) inclusive of this Section
9 have been met and are true and correct as of such date.
(m) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the EChapman Registration Statement and the Prospectus, the representations,
warranties and statements of the Company contained herein, and the performance
by the Company of the covenants contained herein, and the fulfillment of any
conditions contained herein or therein, as of the Closing Date as the
Underwriters may reasonably request.
<PAGE>
The Chapman Co.
_________, 2000
Page 27
(n) The Company shall have performed such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the Closing
Date.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION
(a) The Company agrees to indemnify and hold harmless each Underwriter
and its directors, officers and each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments and any amount paid in settlement of, any action, suit
or proceeding commenced or any claim asserted), to which the Underwriters may
become subject under the Securities Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, related to, based
upon or arising out of (i) an untrue statement or alleged untrue statement of a
material fact contained in the EChapman Registration Statement, the Prospectus,
or any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) any breach or alleged breach by
the Company of its representations, warranties and agreements contained in this
Agreement.
The Selling Stockholder agrees to indemnify and hold harmless each
Underwriter and its directors, officers and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as foregoing indemnity from
the Company to each Underwriter, but only with respect to (i) any breach or
alleged breach by the Selling Stockholder of the representations and warranties
contained in Section 2 of this Agreement or (ii) information furnished in
writing by or on behalf of the Selling Stockholder expressly for use in the
EChapman Registration Statement or the Prospectus.
Each Underwriter, severally, and not jointly, agrees to indemnify and
hold harmless the Company, its directors and officers who signed the EChapman
Registration Statement, the Selling Stockholder, and each person, if any, who
controls the Company or the Selling Stockholder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with respect to (i) any breach or alleged breach by any Underwriter of its
representations, warranties and agreements contained in this Agreement or (ii)
information relating to any Underwriter furnished in writing by the Underwriter
<PAGE>
The Chapman Co.
_________, 2000
Page 28
expressly for use in the EChapman Registration Statement, the Prospectus, or any
amendment or supplement thereto.
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought under this Section 10, such person
shall promptly notify each indemnifying party in writing and such indemnifying
party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party, and the payment of all fees
and expenses of such counsel, as incurred. Any indemnified party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of such counsel by
such indemnified party shall have been specifically authorized in writing by the
indemnifying parties, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party, or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by the Underwriters,
in the case of parties indemnified pursuant to the first and second paragraphs
of Section 10(a), and by the Company, in the case of the parties indemnified
pursuant to the third paragraph of Section 10(a). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expense of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
<PAGE>
The Chapman Co.
_________, 2000
Page 29
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(c) To the extent the indemnification provided for in Section 10(a) is
unavailable to, or insufficient to hold harmless any indemnified party under
Section 10(a), in respect of any loss, claim, damage, liability or judgment
referred to therein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
judgments (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, the Underwriters and the Selling Stockholder
from the Offering or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, or if the indemnified party failed to give the
notice required under Section 10(b), in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company, the Underwriters and the Selling Stockholder
in connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Underwriters and the Selling Stockholder shall be deemed to be in the same
proportion as the total net proceeds from the Offering (after deducting
expenses) bear to the total fee paid to the Underwriters pursuant to Section 3.
The relative fault of the Company, the Underwriters and the Selling Stockholder
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Underwriters or the Selling Stockholder, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Underwriters and the Selling Stockholder agree that it
would not be just and equitable if contribution pursuant to this Section 10(c)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any matter, including any action that could have given rise to such
losses, claims, damages, liabilities or judgments. Notwithstanding the
provisions of this Section 10, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to
<PAGE>
The Chapman Co.
_________, 2000
Page 30
the public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The remedies provided for in this Section 10 are not exclusive and
shall not limit any rights or remedies that may otherwise be available to any
indemnified party at law or in equity.
(e) The statements under the caption "Underwriting" in the Prospectus
constitute the only information furnished to the Company in writing on behalf of
the Underwriters expressly for use in the EChapman Registration Statement, the
Prospectus or any amendment or supplement thereto, or any preliminary
prospectus.
(f) The indemnity and contribution agreements contained in this Section 10, and
the covenants, representations and warranties of the Company in this Agreement,
shall remain operative and in full force and effect regardless of (i) any
investigation made by or on behalf of the Underwriters or by or on behalf of any
person who controls the Underwriters or (ii) any termination of this Agreement
or the Offering.
(g) Notwithstanding any other provision hereof, the liability of the
Selling Stockholder under such Selling Stockholder's representations and
warranties contained in Section 2 hereof and under the indemnity, contribution
and reimbursement agreements contained in the provisions of this Section 10
hereof shall be limited to an amount equal to the public offering price of the
stock sold by such Selling Stockholder to the Underwriters.
SECTION 11. MISCELLANEOUS
(a) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto.
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion or
portions shall be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid.
(c) Section headings in this Agreement are included for convenience
only and are not to be used to construe or interpret this Agreement.
<PAGE>
The Chapman Co.
_________, 2000
Page 31
(d) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have been
properly given.
(e) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of Maryland without reference to
principles of conflict of law.
(f) This Agreement has been and is made solely for the benefit of the
Underwriters, the Company, the Selling Stockholder and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares merely because of such purchase.
(g) This Agreement embodies the entire agreement between the
Underwriters, the Company and the Selling Stockholder relating to the subject
matter hereof and supersedes all prior agreements, representations and
understandings, if any, relating to the subject matter hereof.
Please confirm that the foregoing correctly sets forth the agreement
between the Underwriters, the Company and the Selling Stockholder.
Very truly yours,
ECHAPMAN.COM, INC
By:__________________________
Nathan A. Chapman, Jr.
President
Accepted, as of the date first above
written ,on behalf of itself and as
representative of the several
Underwriters named in Schedule I hereto
THE CHAPMAN CO. Accepted,
SELLING STOCKHOLDER
By:_____________________________________
Nathan A. Chapman, Jr. By:______________________________
President Nathan A. Chapman, Jr.,
<PAGE>
_______________, 2000
eChapman .com, Inc. Nathan A. Chapman, Jr.
World Trade Center - Baltimore c/o The Chapman Co.
401 East Pratt Street World Trade Center - Baltimore
Suite 2800 401 East Pratt Street
Baltimore, Maryland 21202 Suite 2800
Baltimore, Maryland 21202
The Chapman Co.
World Trade Center - Baltimore
401 East Pratt Street
Suite 2800
Baltimore, Maryland 21202
RE: AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
Ladies and Gentlemen:
You have advised us that eChapman.com, Inc., a Maryland corporation
(the "Company"), intends to engage The Chapman Co., as representative of the
several underwriters (sometimes referred to herein as the "Representative"), to
purchase 3,333,333 shares of the Common Stock (the "Firm Shares") for
distribution to the public in an initial public offering (the "Offering"),
pursuant to an Underwriting Agreement to be entered into by the Company, the
Representative, on behalf of itself and the several underwriters named therein
(the "Underwriters") and Nathan A. Chapman, Jr. (the "Selling Stockholder"). The
Company and the Selling Stockholder each propose, subject to the terms and
conditions stated in the Underwriting Agreement, to sell to the Underwriters,
for the sole purpose of covering over-allotments in connection with the sale of
the Firm Shares, and at the option of the Underwriters, up to an additional
120,000 shares and 80,000 shares respectively, (collectively, the "Additional
Shares"), of Common Stock. The Firm Shares and the Additional Shares are
referred to herein collectively as the "Shares." Other capitalized terms used
but not otherwise defined herein shall have the respective meanings given to
such terms in the Underwriting Agreement.
On November 15, 1999, the Company entered into the Merger Agreements
with CHI, CCMHI and CIHI, whereby each of CHI, CCMHI and CIHI will merge with
and into a separate wholly owned subsidiary of the Company. As a result of the
Mergers, the Company will become a holding company owning 100% of the
outstanding capital stock of CHI, CCMHI and CIHI, which will own 100% of the
capital stock of their respective subsidiaries. Upon the closing and
consummation of the Mergers, references in this Agreement to the Company shall
be deemed to refer to the Company and its subsidiaries, the Chapman Entities,
after giving effect to the Mergers.
We understand that, as a member of the National Association of
Securities Dealers, Inc. ("NASD"), the Representative may participate in the
Offering only if the price at which the Common Stock is to be offered to the
public is no higher than the
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 2
price recommended by a "Qualified Independent Underwriter" (as such term is
defined in Rule 2720(b)(15) of the NASD Conduct Rules) and such Qualified
Independent Underwriter participates in the preparation of the registration
statement and prospectus relating to the Offering and exercises the usual
standards of due diligence with respect thereto. This Agreement describes the
terms on which Ferris, Baker Watts, Incorporated ("FBW") agrees to serve as a
Qualified Independent Underwriter in connection with the Offering. In connection
with the services to be provided by FBW hereunder and based upon the
representations and warranties of, and subject to the performance of the
covenants by, the Company herein set forth and FBW's satisfaction with the
results of its due diligence review, FBW agrees to deliver to the Company and
the Representative, and file with the NASD, a letter (the "Letter"),
substantially in the form of Appendix A hereto, on the date the EChapman
Registration Statement is first declared effective by the Commission (the
"Effective Date") or, if the Offering is not priced on the Effective Date, on
the date of the pricing of the Offering (the "Pricing Date"), and at each
subsequent Closing Date. As a condition to the delivery of the Letter, the
EChapman Registration Statement and each amendment thereto will include any
revisions that in the reasonable judgment of FBW and its legal counsel are
required to enable FBW to deliver the Letter.
1. NASD REQUIREMENT. FBW hereby confirms its agreement to act in
connection with the Offering as a "Qualified Independent Underwriter" within the
meaning of Rule 2720 of the NASD Conduct Rules and represents that FBW satisfies
or will satisfy at the times designated in Rule 2720(b)(15) the requirements set
forth therein.
2. CONSENT. FBW hereby consents to be named in the eChapman
Registration Statement and Prospectus with respect to the Offering as having
acted as the Qualified Independent Underwriter and to the filing of this
Agreement as an exhibit to the eChapman Registration Statement. All references
to FBW in the eChapman Registration Statement or Prospectus or in any other
filing, report, document, release or other communication prepared, issued or
transmitted in connection with the Offering by the Company or the Underwriters
or any entity controlling, controlled by or under common control with, or by any
of them, shall be subject to FBW's prior consent with respect to location, form
and substance. FBW's obligation to act as a Qualified Independent Underwriter
hereunder shall terminate if the Company shall breach in any material respect
any representation, warranty or covenant hereunder and such breach shall not be
cured within ten days of written notice thereof to the Company.
3. FEES AND EXPENSES. The Company agrees to pay FBW a fee equal to 20%
of the aggregate underwriting discount for each share of Common Stock sold in
the Offering (the "Fee") for its services hereunder, which shall be payable on
each Closing Date. The Company also agrees to reimburse FBW for all reasonable
out-of-pocket expenses, including all reasonable fees and expenses of FBW's
counsel (including accrued expenses), incurred by FBW in connection with this
Agreement and the Offering. If, for whatever reason, it is determined that the
Offering shall not commence
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 3
or will not be consummated, FBW shall be entitled to
be paid in full for the above-mentioned expenses, including fees and expenses of
counsel, promptly following such determination, and shall continue to be
entitled to any amount payable to FBW under Section 10 hereof.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company represents and warrants to FBW that:
(a) The Company has filed with Commission the EChapman Registration
Statement and related preliminary prospectuses, as amended, for the registration
under the Securities Act of the sale of 3,533,283 shares (including the
Additional Shares) of Common Stock, which registration statement, as so amended,
has been declared effective by the Commission on the date hereof and copies of
which have heretofore been delivered to FBW. Other than a Rule 462(b)
Registration Statement, if any, which became effective upon filing, no other
document with respect to the EChapman Registration Statement has heretofore been
filed with the Commission (other than acceleration requests under Rule 461 under
the Securities Act Regulations and prospectuses filed pursuant to Rule 424(b) of
the Securities Act Regulations, each in the form heretofore delivered to FBW).
No stop order suspending the effectiveness of the EChapman Registration
Statement (including any Rule 462(b) Registration Statement) has been issued and
no proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission, and any request on the part of the
Commission for additional information has been complied with.
(b) The Company has filed with the Commission the CHI Registration
Statement for the registration under the Securities Act of the issuance of
5,709,204 CHI Shares to stockholders of CHI in the Merger of CHI with and into a
wholly-owned subsidiary of the Company, which registration statement, as so
amended, has been declared effective by the Commission and copies of which have
heretofore been delivered to FBW. No stop order suspending the effectiveness of
the CHI Registration Statement has been issued and no proceeding for that
purpose has been initiated or, to the Company's knowledge, threatened by the
Commission, and any request on the part of the Commission for additional
information has been complied with.
(c) The Company has filed with the Commission the CCMHI Registration
Statement for the registration under the Securities Act of the issuance of
7,485,640 CCMHI Shares to stockholders of CCMHI in the Merger of CCMHI with and
into a wholly-owned subsidiary of the Company, which registration statement, as
so amended, has been declared effective by the Commission and copies of which
have heretofore been delivered to FBW. No stop order suspending the
effectiveness of the CCMHI Registration Statement has been issued and no
proceeding for that purpose has been initiated or, to the Company's knowledge,
threatened by the Commission, and any request on the part of the Commission for
additional information has been complied with.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 4
(d) The Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of capital
stock of the Company and each of the Chapman Entities have been duly and validly
authorized and issued and are fully paid and non-assessable; except as disclosed
in the Prospectus, the CHI Proxy Statement/Prospectus or the CCMHI Proxy
Statement/Prospectus, as the case may be, there are no outstanding (i)
securities or obligations of the Company or such other Chapman Entity
convertible into or exchangeable for any capital stock of the Company or such
other Chapman Entity, as the case may be, (ii) warrants, rights or options to
subscribe for or purchase from the Company or such other Chapman Entity, as the
case may be, any capital stock or any convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or such other Chapman Entity,
as the case may be, to issue any shares of capital stock, any convertible or
exchangeable securities or obligations, or any such warrants, rights or options;
(e) The Company and each of the Chapman Entities has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation with full corporate power
and authority to own its respective properties and to conduct its respective
business as described in the EChapman Registration Statement and the Prospectus;
(f) The Company and each of the Chapman Entities is duly qualified or
licensed by each jurisdiction in which it conducts its respective business and
in which the failure, individually or in the aggregate, to be so qualified or
licensed could reasonably be expected to have a material adverse effect on the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company or any such Chapman Entity, and the Company and each of the Chapman
Entities is duly qualified, and is in good standing, in each jurisdiction in
which it owns or leases real property or maintains an office and in which such
qualification is necessary, except where, individually or in the aggregate, the
failure to be so qualified and in good standing could reasonably be expected to
have a material adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company or any such Chapman Entity;
except as disclosed in the Prospectus, none of the Chapman Entities is
prohibited or restricted, directly or indirectly, from (i) paying dividends to
the Company, (ii) making any other distribution with respect to its capital
stock, (iii) repaying the Company for any loans or advances made to it by the
Company or (iv) from transferring their property or assets to the Company;
(g) The Company and each of the Chapman Entities is in compliance the
Securities Laws, and all applicable orders, decrees and judgments, including
those relating to transactions with affiliates, except where, in the aggregate,
the failure to be in compliance in therewith would not materially and adversely
affect (a) the assets, operations, business, prospects or condition (financial
or otherwise) of the Company
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 5
and any such Chapman Entity or (b) the ability of the Company and its
subsidiaries, subsequent to the consummation of the Mergers, to conduct their
businesses as described in the Prospectus;
(h) Neither the Company nor any of the Chapman Entities is in breach
of, or in default under, nor has any event occurred which with giving of notice,
lapse of time, or both would constitute a breach of, or default under, its
respective articles of incorporation or charter or bylaws or in the performance
or observance of any obligation, agreement, covenant or condition contained in
any license, indenture, mortgage, deed of trust, loan or credit agreement or
other agreement or instrument to which the Company or any of the Chapman
Entities is a party or by which any of them or their respective properties is
bound, except for such breaches or defaults which, individually or in the
aggregate, would not have a material adverse effect on the assets, operations,
business, prospects or condition (financial or otherwise) of the Company or any
such Chapman Entity; and the execution, delivery and performance of this
Agreement, the Underwriting Agreement and the Merger Agreements, and
consummation of the transactions contemplated hereby and thereby will not result
in the creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or any of the Chapman Entities, or conflict
with, or result in any breach of, or constitute a default under, or constitute
an event which with giving of notice, lapse of time, or both would constitute a
breach of, or default under, (i) any provision of the articles of incorporation
or charter or by-laws of the Company or any of the Chapman Entities, or (ii) any
provision of any license, indenture, mortgage, deed of trust, loan or credit
agreement or other agreement or instrument to which the Company or any of the
Chapman Entities is a party or by which any of them or their respective
properties may be bound or affected, or (iii) any federal, state, local or
foreign law, regulation or rule, including, without limitation, the Securities
Laws, or any decree, judgment or order applicable to the Company or any of the
Chapman Entities, except in the case of clauses (ii) and (iii) for such breaches
or defaults which, individually or in the aggregate, would not materially and
adversely affect (a) the assets, operations, business, prospects or condition
(financial or otherwise) of the Company or any of the Chapman Entities or (b)
the ability of the Company and its subsidiaries, subsequent to the consummation
of the Mergers, to conduct their respective businesses as described in the
Prospectus;
(i) This Agreement and the Underwriting Agreement have been duly
authorized, executed and delivered by the Company and constitute legal, valid
and binding agreements of the Company enforceable against the Company in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by general principles of equity, and except to the extent
that the indemnification and contribution thereof may be limited by federal or
state securities laws and public policy considerations in respect thereof;
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 6
(j) No approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the execution, delivery and
performance of this Agreement, the Underwriting Agreement and the Merger
Agreements, the consummation of the transactions contemplated hereby and
thereby, or the sale and delivery of the Shares by the Company as contemplated
hereby other than (i) such as have been obtained, or will have been obtained by
the Closing Date under the Securities Act and the Exchange Act, (ii) such
approvals as have been obtained or will have been obtained by the Closing Date
in connection with the approval of the quotation of the Shares on the Nasdaq
National Market and (iii) any necessary qualification under the securities or
blue sky laws of the various jurisdictions in which the Shares, the CHI Shares
and the CCMHI Shares are being offered;
(k) The Company and each Chapman Entity has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any federal, state, local and foreign law, regulation and rule,
including, without limitation, the Securities Laws, and has obtained all
necessary authorizations, consents and approvals from other persons, required in
order to conduct their respective businesses as described in the Prospectus,
except to the extent that any failure to have any such licenses, authorizations,
consents or approvals, to make any such filings or to obtain any such
authorizations, consents or approvals would not materially and adversely affect
(a) the assets, operations, business prospects or condition (financial or
otherwise) of the Company or any of the Chapman Entities or (b) the ability of
the Company and its subsidiaries, subsequent to the consummation of the Mergers,
to conduct their respective businesses as described in the Prospectus; neither
the Company nor any of the Chapman Entities is in violation of, in default
under, or has received any notice regarding a possible violation, default or
revocation of any such license, authorization, consent or approval applicable to
the Company or any of the Chapman Entities, and no such license, authorization,
consent or approval contains a materially burdensome restriction that is not
adequately disclosed in the EChapman Registration Statement and the Prospectus;
(l) The Preliminary Prospectus and the EChapman Registration Statement
comply and the Prospectus and any further amendments or supplements thereto
will, when they have become effective or are filed with the Commission, as the
case may be, comply in all material respects with the Securities Act
Regulations; the EChapman Registration Statement did not, and any amendment
thereto will not, in each case as of the applicable effective date, contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and the
Preliminary Prospectus does not, and the Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Date, contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 7
light of the circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no warranty or representation with respect to
any statement contained in the EChapman Registration Statement or the Prospectus
in reliance upon and in conformity with the information concerning the QIU and
furnished in writing by or on behalf of the QIU to the Company expressly for use
in the EChapman Registration Statement or the Prospectus (that information being
limited to that described in Section 10(e) hereof);
(m) The CHI Proxy Statement/Prospectus and the CHI Registration
Statement comply in all material respects with the requirements of the
Securities Act, the Securities Act Regulations and Proxy Rules; the CHI
Registration Statement did not, and any amendment thereto will not, in each case
as of the applicable effective date, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; and the CHI Proxy Statement/Prospectus or any
amendment or supplement thereto will not, as of the applicable filing date and
at the Closing Date contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(n) The CCMHI Proxy Statement/Prospectus and the CCMHI Registration
Statement comply in all material respects with the requirements of the
Securities Act, the Securities Act Regulations and Proxy Rules; the CCMHI
Registration Statement did not, and any amendment thereto will not, in each case
as of the applicable effective date, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; and the CCMHI Proxy Statement/Prospectus or any
amendment or supplement thereto will not, as of the applicable filing date and
at the Closing Date, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(o) All legal or governmental proceedings, contracts or documents of a
character required to be filed as exhibits to the EChapman Registration
Statement, the CHI Registration Statement or the CCMHI Registration Statement,
or to be summarized or described in the Prospectus, the CHI Proxy
Statement/Prospectus or the CCMHI Proxy Statement/Prospectus have been so filed,
summarized or described as required and any such summaries or descriptions
present fairly the information required to be shown;
(p) There are no actions, suits, proceedings, inquiries or
investigations pending or, to the Company's knowledge, threatened against the
Company or the Chapman Entities or any of their respective officers or directors
or to which the
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 8
properties, assets or rights of any such entity are subject, at
law or in equity, before or by any federal, state, local or foreign court,
governmental or regulatory commission, board, body, authority, arbitration panel
or agency which, individually or in the aggregate, could result in a judgment,
decree, award or order materially and adversely affecting (a) the assets,
operations, business prospects or condition (financial or otherwise) of the
Company or any of the Chapman Entities or (b) the ability of the Company and its
subsidiaries, subsequent to the consummation of the Mergers, to conduct their
respective businesses as described in the Prospectus;
(q) The financial statements, including the notes thereto, included in
the EChapman Registration Statement and the Prospectus present fairly the
respective consolidated financial position of the Company, CHI and CCMHI as of
the dates indicated and the consolidated results of operations and changes in
stockholders' equity and cash flows of the Company, CHI and CCMHI for the
periods specified; such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as indicated in the notes thereto); the
financial statement schedules included in the EChapman Registration Statement
and the amounts in the Prospectus under the captions "Prospectus Summary
Consolidated Summary Financial Data," "Capitalization," "Dilution," "Selected
Historical and Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly present the
information shown therein and have been compiled on a basis consistent with the
financial statements included in the EChapman Registration Statement and the
Prospectus;
(r) Arthur Andersen LLP, whose reports on the consolidated financial
statements of CHI and CCMHI are filed with the Commission as part of the
EChapman Registration Statement and Prospectus, are and were during the periods
covered by their reports independent public accountants as required by the
Securities Act and the Securities Act Regulations;
(s) Subsequent to the respective dates as of which information is given
in the EChapman Registration Statement and the Prospectus, and except as may be
otherwise stated in the EChapman Registration Statement or the Prospectus, there
has not been (i) any material adverse change, in the assets, liabilities,
capital, operations, business or condition (financial or otherwise), present or
prospective, of the Company or any of the Chapman Entities, whether or not
arising in the ordinary course of business, (ii) any transaction, which is
material to the Company or any of the Chapman Entities contemplated or entered
into by the Company or any of the Chapman Entities, (iii) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or any
of the Chapman Entities, which is material to the Company or any of the Chapman
Entities or (iv) any dividend or distribution of any kind declared, paid or made
by the Company or any of the Chapman Entities on any class of capital stock;
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 9
(t) The Company is not, and upon the sale of the Shares as herein
contemplated will not be, an investment company, which is required to register
under the Investment Company Act;
(u) The Shares will conform in all material respects to the description
thereof contained in the Registration Statement and the Prospectus;
(v) Except as disclosed in the Prospectus, there are no persons with
registration or other similar rights to have any equity securities registered
pursuant to the EChapman Registration Statement or otherwise registered by the
Company under the Securities Act;
(w) The Shares have been duly authorized and, when the Shares have been
issued and duly delivered against payment therefor as contemplated by this
Agreement and the Prospectus, the Shares will be validly issued, fully paid and
nonassessable, free and clear of any pledge, lien, encumbrance, security
interest, mortgage or other claim whatsoever, and the issuance and sale of the
Shares by the Company is not subject to preemptive or other similar rights
arising by operation of law, under the articles of incorporation or bylaws of
the Company, under any agreement to which the Company or any of the Chapman
Entities is a party, or otherwise;
(x) Other than any stabilization activities conducted by the
Underwriters in accordance with Rule 104 of Regulation M promulgated under the
Exchange Act, the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
(y) In connection with the Offering, the Company has not offered and
will not offer its Common Stock or any other securities convertible into or
exchangeable or exercisable for Common Stock in a manner in violation of the
Securities Act;
(z) Except as disclosed in the Prospectus, the Company has not incurred
any liability for any finder's fees or similar payments in connection with the
transactions herein contemplated;
(aa) The Company, and each of the Chapman Entities and their
predecessors have filed all necessary federal, state and foreign income and
franchise tax returns that they were required to file and have paid all taxes
shown as due thereon (including, but not limited to, all penalties, interest and
other additions thereto), except for failures to file or pay which would not,
individually or in the aggregate, have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company or any of the Chapman Entities or materially and adversely affect the
ability of the Company and its subsidiaries, subsequent to the
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 10
consummation of the Mergers, to conduct their respective businesses as described
in the Prospectus. All such tax returns were correct and complete in all
material respects. All tax liabilities are adequately provided for on the books
of the Company and each of the Chapman Entities, except to such extent as would
not, individually or in the aggregate, have a material adverse affect on the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company and the Chapman Entities or materially and adversely affect the
ability of the Company and its subsidiaries, subsequent to the consummation of
the Mergers, to conduct their respective businesses as described in the
Prospectus. The Company, the Chapman Entities and their predecessors have made
all necessary payroll and employment tax payments and are current and up-to-date
with respect to such tax payments as of the date of this Agreement, except where
failure to make any such payment would not, individually or in the aggregate,
have a material adverse affect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company or any of the Chapman Entities
or materially and adversely affect the ability of the Company and its
subsidiaries, subsequent to the Mergers, to conduct their respective businesses
as described in the Prospectus. The Company has no knowledge of any tax
proceedings or other action pending or threatened against the Company or any of
the Chapman Entities which, individually or in the aggregate, could have a
material adverse affect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company or any of the Chapman
Entities.
(bb) The Company and each of the Chapman Entities maintain insurance
covering its respective properties, operations, personnel and businesses with
institutions it believes to be financially responsible. Such insurance insures
against such losses and risks as are adequate in accordance with customary
industry practice to protect the Company, each of the Chapman Entities and their
respective businesses. None of the Company or any of the Chapman Entities has
received notice from any insurer or agent of such insurer that substantial
capital improvements or other expenditures will have to be made in order to
continue such insurance. All such insurance is outstanding and duly in force on
the date hereof, subject only to changes made in the ordinary course of
business, consistent with past practice, which do not, either individually or in
the aggregate, materially alter the coverage thereunder or the risks covered
thereby. None of the Company, or any of the Chapman Entities has any reason to
believe that it will not be able (a) to renew its existing insurance coverage as
and when such policies expire or (b) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted or as presently contemplated and at a reasonable cost.
(cc) The Company and any "employee benefit plan" (as defined under
ERISA) established or maintained by the Company or its ERISA Affiliates are in
compliance in all material respects with ERISA. The Company does not have, nor
has it ever had, any "employee benefit plan" subject to Title IV of ERISA.
Neither the Company nor any of its ERISA Affiliates has incurred or expects to
incur any liability under Sections 4975 or 4980B
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 11
of the Code which, individually or in the aggregate, could be reasonably
expected to have a material adverse effect on the assets, operations, business,
prospects or condition (financial or otherwise) of the Company or any of the
Chapman Entities. Each "employee benefit plan" established or maintained by the
Company or any of its ERISA Affiliates that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and nothing
has occurred, whether by action or failure to act, which could reasonably be
expected to cause the loss of such qualification.
(dd) The computer systems of the Company and each of the Chapman
Entities and their respective subsidiaries (including all software, hardware,
workstations and related components, automated devices, embedded chips and other
date sensitive equipment) are Year 2000 Ready or will be Year 2000 Ready by
December 31, 1999, other than any failure to be Year 2900 Ready that could not
reasonably have a material adverse effect on the Company or any of the Chapman
Entities. "Year 2000 Ready" means that the computer systems: (i) are capable of
recognizing, processing, managing, representing, interpreting and manipulating
correctly date-related data for dates earlier and later than January 1, 2000,
including calculating, comparing, sorting, storing, tagging and sequencing,
without resulting in or causing logical or mathematical errors or
inconsistencies in any user-interface functionalities or otherwise, including
data input and retrieval, data storage, data fields, calculations, reports,
processing or any other input or output; (ii) have the ability to provide date
recognition for any data element without limitation (including date-related data
represented without a century designation, date-related data whose year is
represented by only two digits and date fields assigned special values); (iii)
have the ability to function automatically into and beyond the year 2000 without
human intervention and without any change in operations associated with the
advent of the year 2000; (iv) have the ability to interpret data, dates and time
correctly into and beyond the year 2000; (v) have the ability not to produce
noncompliance in existing information, nor otherwise corrupt such data into and
beyond the year 2000; (vi) have the ability to process correctly after January
1, 2000 data containing dates before that date; and (vii) have the ability to
recognize all "leap years," including February 29, 2000.
(ee) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the articles of incorporation and by-laws of the
Company, and with the requirements of the Nasdaq National Market; and
(ff) Any certificate signed by any officer of the Company delivered to
FBW or to counsel for FBW pursuant to or in connection with this Agreement shall
be deemed a representation and warranty by the Company to each of FBW and its
counsel as to the matters covered thereby.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 12
5. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
Selling Stockholder represents and warrants to FBW that:
(a) The Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to the Underwriting Agreement and has
good, valid and marketable title to the Shares to be sold by it pursuant to the
Underwriting Agreement, free and clear of all liens, encumbrances, adverse
claims, security interests, restrictions on transfer, stockholders' agreements,
voting trusts, options and other defects in title whatsoever, with full power to
deliver such Shares, and, upon the delivery of and payment for such Shares as
contemplated in the Underwriting Agreement, the Underwriters will receive good,
valid and marketable title to the Shares purchased by it from the Selling
Stockholder, free and clear of all liens, encumbrances, adverse claims, security
interests, restrictions on transfer, stockholders' agreements, voting trusts,
options and other defects in title whatsoever created by or relating to the
Selling Stockholder.
(b) The Selling Stockholder has, and will have at the time of delivery
of the Shares to be sold by it, full legal right, power, authority and capacity,
and, except as required under the Securities Act and state securities and Blue
Sky laws, all necessary consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits of and from all
public, regulatory or governmental agencies and bodies, as are required for the
execution, delivery and performance of this Agreement and the Underwriting
Agreement and the consummation of the transactions contemplated hereby and
thereby, including the sale, assignment, transfer and delivery of the Shares to
be sold, assigned, transferred and delivered by the Selling Stockholder.
(c) This Agreement and the Underwriting Agreement have been duly and
validly authorized, executed and delivered by the Selling Stockholder and
constitute the valid and binding obligation of the Selling Stockholder,
enforceable against the Selling Stockholder in accordance with their respective
terms.
(d) The execution, delivery and performance of this Agreement and the
Underwriting Agreement by or on behalf of the Selling Stockholder, the offering
and sale of the Shares being sold by the Selling Stockholder and the
consummation of the transactions contemplated hereby and thereby will not
violate, conflict with or constitute a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of time, or
both, would constitute a default) or require consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any properties or
assets of the Selling Stockholder, or result in an acceleration of any
indebtedness of the Selling Stockholder, pursuant to (i) any bond, debenture,
note, indenture, mortgage, deed of trust, contract or other agreement or
instrument to which the Selling Stockholder is a party or by which his
properties or assets are or may be bound, (iii) any statute, rule or regulation
applicable to the Selling Stockholder or any of his properties or assets or (iv)
any judgment, order or decree of any court or governmental agency or authority
having jurisdiction over the Selling
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 13
Stockholder or any of his properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with (i) any court or any governmental agency or authority having
jurisdiction over the Selling Stockholder or any of his properties or assets or
(ii) any other person is required for (A) the execution, delivery and
performance by the Selling Stockholder of this Agreement or the Underwriting
Agreement, (B) the sale and delivery of the Shares to be sold and delivered by
the Selling Stockholder and the consummation of the transactions contemplated
hereby and by the Underwriting, except such as have been obtained under the
Securities Act and such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(e) The Selling Stockholder has not directly or indirectly (i) taken
(other than through the actions, if any, of the Underwriters) any action
designed to, or that might reasonably be expected to, cause or result in or
which constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) since the filing of the
Preliminary Prospectus (A) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, shares of Common Stock or (B) paid or
agreed to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.
(f) The Selling Stockholder (i) does not directly or indirectly have
any preemptive right, co-sale right or right of first refusal or other similar
right to purchase any of the Shares that are to be sold by the Underwriters
pursuant to the Underwriting Agreement, and (ii) except for employee stock
outstanding options as disclosed in the Prospectus, does not directly or
indirectly own any warrants, options or similar rights to acquire, and does not
directly or indirectly have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company.
(g) The Selling Stockholder does not directly or indirectly possess any
registration rights with respect to any securities of the Company.
(h) The information in the EChapman Registration Statement under the
caption "Principal and Selling Stockholders" which specifically relates to the
Selling Stockholder does not, and will not on the Closing Date, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(i) If there is any change in the information referred to in Section
5(h) from the first business day after the date of this Agreement and from time
to time thereafter for such period as in the opinion of counsel for FBW a
prospectus is required by law to
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 14
be delivered in connection with sales by an underwriter or a dealer, the Selling
Stockholder will immediately notify you of such change.
(j) Each certificate signed by the Selling Stockholder and delivered to
FBW or counsel for FBW pursuant to this Agreement shall be deemed to be a
representation and warranty by the Selling Stockholder to FBW as to the matters
covered thereby.
The Selling Stockholder acknowledges that FBW and, for purposes of the
opinion to be delivered to FBW pursuant to Section 9(a) hereof, counsel to the
Company will rely upon the accuracy and truth of the foregoing representations
and hereby consents to such reliance.
6. CERTAIN COVENANTS OF THE COMPANY. The Company hereby covenants and
agrees with FBW that:
(a) If the EChapman Registration Statement has not yet been declared
effective on the date of this Agreement, the Company will use its best efforts
to cause the EChapman Registration Statement and any amendments thereto to
become effective as promptly as possible, and if Rule 430A is used or the filing
of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the
Company will file the Prospectus (properly completed if Rule 430A has been used)
pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will
provide evidence satisfactory to you of such timely filing. If the Company
elects to rely on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.
The Company will notify FBW immediately (and, if requested by FBW, will
confirm such notice in writing) (i) when the EChapman Registration Statement and
any amendments thereto become effective, (ii) of any request by the Commission
for any amendment of or supplement to the EChapman Registration Statement or the
Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
EChapman Registration Statement or the Prospectus, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the EChapman
Registration Statement or any post-effective amendments thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of the receipt
of any comments from the Commission and (vi) of the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for that purpose. If the Commission shall propose or enter a stop
order at any time, the Company will use its best efforts to prevent the issuance
of any such stop order and, if issued, to obtain the lifting of such order as
soon as possible. The Company will not file any amendment to the EChapman
Registration Statement or any amendment of or supplement to the Prospectus
(including the prospectus required to be filed pursuant to Rule 424(b) or Rule
434) or any amendment of or supplement to any Preliminary Prospectus that
differs from the prospectus on file at the time of the
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 15
effectiveness of the EChapman Registration Statement before or after the
effective date of the EChapman Registration Statement to which FBW shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
(b) If at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act any event shall have occurred as a
result of which any Preliminary Prospectus as then amended or supplemented or
the Prospectus as then amended or supplemented would, in the judgment of the
Underwriters, FBW or the Company include an untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement any Preliminary Prospectus, the Prospectus or the EChapman
Registration Statement to comply with the Securities Act or the Securities Act
Regulations, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
reasonably satisfactory to you) that will correct such statement or omission and
will use its best efforts to have any amendment to the Registration Statement
declared effective as soon as possible.
(c) The Company will promptly deliver to FBW two signed copies of the
EChapman Registration Statement, including exhibits and all amendments thereto,
and the Company will promptly deliver to FBW such number of copies of any
preliminary prospectus, the Prospectus, the EChapman Registration Statement, and
all amendments of and supplements to such documents, if any, as FBW may
reasonably request.
(d) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to FBW as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the EChapman
Registration Statement occurs, an earnings statement (in form complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a period of
at least twelve consecutive months beginning after the effective date of the
Registration Statement.
(e) Except for the sale of the Additional Shares by the Selling
Stockholder pursuant to the terms of the Underwriting Agreement, and the
issuance of the CHI Shares and the CCMHI Shares in Mergers pursuant to the CHI
Registration Statement and the CCMHI Registration Statement, respectively,
during the period of 180 days from the date hereof, the Company and the Selling
Stockholder will not, and will not permit any of its affiliates, directly or
indirectly, to issue, sell, offer or agree to sell, grant any option for the
sale of, pledge, make any short sale or maintain any short position, establish
or maintain a "put equivalent position" (within the meaning of Rule 16a1(h)
under the Exchange Act), enter into any swap, derivative transaction or other
arrangement that transfers to another, in whole or in part, any of the economic
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 16
consequences of ownership of the Common Stock (whether any such transaction is
to be settled by delivery of Common Stock, other securities, cash or other
consideration) or otherwise dispose of, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for Common Stock) or any
interest therein or announce any intention to do any of the foregoing without
the prior written consent of the Underwriters provided that the Company may,
without such consent, (i) grant options or other awards pursuant to the
Company's employee stock option plans, (ii) issue Common Stock upon the exercise
of outstanding options or warrants to purchase shares of Common Stock, (iii)
issue Common Stock as consideration for acquisitions provided that prior to the
issuance thereof, the recipient thereof agrees in writing to be bound by the
same restrictions applicable to the Company for the remaining balance of such
180 day period, or (iv) engage in market making activities in the ordinary
course of its brokerage subsidiaries' business.
(f) During a period of three years from the effective date of the
EChapman Registration Statement, the Company will furnish or make available to
you copies of (i) all reports to its stockholders and (ii) all reports,
financial statements and proxy or information statements filed by the Company
with the Commission, the Nasdaq National Market or any national securities
exchange.
(g) The Company will apply its net proceeds from the sale of the Shares
as set forth under the caption "Use of Proceeds" in the Prospectus.
(h) The Company will use its best efforts to cause the Shares to be
listed on the Nasdaq National Market.
(i) The Company will report the use of its net proceeds from the
Offering to the extent required pursuant to Rule 463 of the Securities Act
Regulations.
(j) If the Company elects to rely upon Rule 462(b) of the Securities
Act Regulations, the Rule 462(b) Registration Statement shall have become
effective by 10:00 p.m., Baltimore time, on the date of this Agreement, no stop
order suspending the effectiveness of the EChapman Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission, and all requests for
additional information on the part of the Commission shall have been complied
with to FBW's reasonable satisfaction.
(k) The Company, during the period when the Prospectus is required to
be delivered under the Securities Act or the Exchange Act, shall file all
documents required to be filed with the Commission pursuant to Section 13, 14,
or 15 of the Exchange Act within the time periods set forth in the Exchange Act
and the rules and regulations thereunder.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 17
7. CERTAIN COVENANTS OF THE SELLING STOCKHOLDER. The Selling
Stockholder covenants and agrees with you and the Company that:
(a) The Selling Stockholder will pay or cause to be paid all transfer
taxes payable in connection with the transfer of the Additional Shares to be
sold by the Selling Stockholder to the Underwriters.
(b) The Selling Stockholder will do and perform all things to be done
and performed by the Selling Stockholder under this Agreement prior to the
Closing Date and to satisfy all conditions precedent to the delivery of the
Additional Shares to be sold by the Selling Stockholder pursuant to the
Underwriting Agreement.
8. SURVIVAL OF AGREEMENTS; REPRESENTATIONS AND WARRANTIES. The
respective indemnities of the Company, the Selling Stockholder and FBW and the
representations and warranties of the Company and the Selling Stockholder set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation by or on behalf of the Company, the Selling Stockholder or FBW or
any controlling person thereof, and shall survive the issuance of the Shares,
and any successor or assign of FBW, the Company or the Selling Stockholder or
any controlling person of the foregoing or any legal representative of such
controlling person shall be entitled to the benefit of the respective
indemnities, agreements, warranties and representations.
9. CONDITIONS OF FBW'S OBLIGATIONS. The obligations of FBW hereunder
are subject to the accuracy of the representations and warranties on the part of
the Company and the Selling Stockholder in all material respects on the date
hereof and on the Closing Date, the performance by the Company and the Selling
Stockholder of their respective obligations hereunder in all material respects
and to the following further conditions:
(a) The Company shall furnish to FBW on the Closing Date and on the
Additional Closing Date, if any, an opinion of Venable, Baetjer and Howard, LLP,
counsel for the Company, addressed to FBW and dated as of the Closing Date or
the Additional Closing Date, as the case may be, and in a form reasonably
satisfactory to Whiteford, Taylor & Preston L.L.P., counsel for FBW, stating
that:
(i) the Company has an authorized capitalization as
set forth in the Prospectus under the caption "Capitalization;" the
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable;
except as disclosed in the Prospectus, to such counsel's knowledge,
there are no outstanding (A) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the Company,
(B) warrants, rights or options to subscribe for or purchase from the
Company any such
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 18
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options;
(ii) the Company and each of the Chapman Entities has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of its respective jurisdiction of incorporation
with full corporate power and authority to own its respective
properties and to conduct its respective business as described in the
EChapman Registration Statement and the Prospectus and to execute and
deliver this Agreement and the Underwriting Agreement;
(iii) the execution, delivery and performance of this
Agreement and the Underwriting Agreement by the Company and the
consummation by the Company of the transactions contemplated under this
Agreement or the Underwriting Agreement, as the case may be, do not and
will not (A) conflict with, or result in any breach of, or constitute a
default under, or constitute an event which with giving of notice,
lapse of time, or both would constitute a breach of or default under,
(I) any provisions of the articles of incorporation, charter or by-laws
of the Company or any of the Chapman Entities, (II) to the best of such
counsel's knowledge, any provision of any material license, indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company or any of the Chapman Entities is a
party or by which any of them or their respective properties may be
bound or affected, or (III) to the best of such counsel's knowledge,
any law or regulation, including, without limitation, the Securities
Laws, or any decree, judgment or order applicable to the Company or any
of the Chapman Entities, except in the case of clause (I) for such
conflicts, breaches or defaults which, individually or in the
aggregate, would not have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise)
of the Company or any of the Chapman Entities; or (B) to such counsel's
knowledge, result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property or assets of the Company or any
of the Chapman Entities;
(iv) to such counsel's knowledge, no approval,
authorization, consent or order of or filing with any federal or state
governmental or regulatory commission, board, body, authority or agency
is required in connection with the execution, delivery and performance
of this Agreement and the Underwriting Agreement, the consummation of
the transactions contemplated hereby and thereby, the sale and delivery
of the Shares by the Company other than such as
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 19
have been obtained or made under the Securities Act and the Exchange
Act, and except that such counsel need express no opinion as to any
necessary qualification under the rules of the NASD or state
securities laws;
(v) the Company is not, and upon the sale of the
Shares as herein contemplated will not be an investment company
required to be registered under the Investment Company Act;
(vi) the Shares have been duly authorized and, when
the Shares have been issued by the Company and duly delivered against
payment therefor as contemplated by the Underwriting Agreement, the
Shares will be validly issued, fully paid and nonassessable, free and
clear of any pledge, lien, encumbrance, security interest, mortgage or
other claim whatsoever;
(vii) the issuance and sale of the Shares by the
Company is not subject to preemptive or other similar rights arising by
operation of law, under the articles of incorporation or by-laws of the
Company, under any agreement known to such counsel to which the Company
or any of the Chapman Entities is a party or, to the best of such
counsel's knowledge, otherwise;
(viii) the form of certificate used to evidence the
Common Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the
articles of incorporation and by-laws of the Company and the
requirements of the Nasdaq National Market;
(ix) the EChapman Registration Statement has become
effective under the Securities Act and no stop order suspending the
effectiveness of the EChapman Registration Statement has been issued
and, to the best of such counsel's knowledge, no proceedings with
respect thereto have been commenced or threatened;
(x) as of the Effective Date, the EChapman
Registration Statement and the Prospectus (except as to the financial
statements and other financial and statistical data contained in such
registration statements or prospectuses, as to which such counsel need
express no opinion) complied as to form in all material respects with
the requirements of the Securities Act and the Securities Act
Regulations;
(xi) the statements under the captions "Business --
Government Regulation," "Certain Transactions," "Description of Capital
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 20
Stock," and "Shares Eligible for Future Sale," in the EChapman
Registration Statement and the Prospectus, insofar as such statements
constitute a summary of the legal matters referred to therein,
constitute accurate summaries thereof in all material respects;
(xii) except as set forth in the Prospectus, to the
best of such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against, or involving the properties
of the Company or any of the Chapman Entities required to be disclosed
in the Prospectus; provided that for this purpose such counsel need not
regard any litigation or governmental proceedings to be "threatened"
unless the potential litigant or governmental authority has manifested
to the Company or any of the Chapman Entities, or to their management,
a present intention to initiate such proceedings;
(xiii) to such counsel's knowledge, there are no
contracts or documents of a character which are required to be filed as
exhibits to the EChapman Registration Statement or to be described or
summarized in the Prospectus which have not been so filed, summarized
or described;
(xiv) The Selling Stockholder has, and will have at
the time of delivery of the Additional Shares, full legal right, power,
authority and capacity, and, except as required under the Securities
Act and state securities and Blue Sky laws, all necessary consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all public, regulatory
or governmental agencies and bodies, as are required for the execution,
delivery and performance of this Agreement and the Underwriting
Agreement and the consummation of the transactions contemplated hereby
and thereby, including the sale, assignment, transfer and delivery of
the Additional Shares to be sold, assigned, transferred and delivered
by the Selling Stockholder; and
(xv) the Underwriters (assuming they are BONA FIDE
purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the shares being sold by the
Selling Stockholder on the Additional Closing Date, free and clear of
any and all claims, liens, encumbrances and security interests.
In addition, such counsel shall state that they have participated in
the preparation of the Prospectus and the EChapman Registration Statement and in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company and with
the Underwriters and the QIU at which the contents of the Prospectus and the
EChapman Registration Statement and related matters were discussed and, although
such counsel
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 21
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and the
EChapman Registration Statement and has not made any independent investigation
or verification thereof, nothing has come to their attention during the course
of such participation that leads them to believe that at the time the EChapman
Registration Statement became effective, the Prospectus and the EChapman
Registration Statement (other than the financial statements and schedules and
other financial and statistical data and information included therein or omitted
therefrom, as to which they need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(b) FBW shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or such Closing Date, as the case may be,
in form and substance satisfactory to FBW, from Arthur Andersen LLP, independent
public accountants, confirming that they are independent public accountants
within the meaning of the Securities Act and the Securities Act Regulations and
stating that in their opinion the financial statements examined by them and
included in the EChapman Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Securities Act and
the Securities Act Regulations; and containing the information and statements of
the type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in the eChapman Registration Statement and the Prospectus.
(c) No amendment or supplement to the EChapman Registration Statement
or the Prospectus shall have been filed to which FBW has objected in writing.
(d) Prior to the completion of the Offering (i) no stop order
suspending the effectiveness of the eChapman Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
shall have been issued by the Commission, (ii) no suspension of the
qualification of the Shares for offering or sale in any jurisdiction shall have
occurred, and no proceeding for such suspension shall have been initiated or
threatened; and (iii) the EChapman Registration Statement and the Prospectus
shall not contain an untrue statement of material fact or omit to state a
material fact, individually or in the aggregate, required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(e) Prior to the completion of the Offering (i) no stop order
suspending the effectiveness of the CHI Registration Statement or the CCMHI
Registration Statement or any order preventing or suspending the use of the CHI
Proxy Statement/Prospectus or the CCMHI Proxy Statement/Prospectus shall have
been issued by the Commission, (ii) no suspension of the qualification of the
CHI Shares or the CCMHI Shares for offering or
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 22
sale in any jurisdiction shall have occurred, and no proceeding for such
suspension shall have been initiated or threatened; and (iii) none of the CHI
Registration Statement, the CCMHI Registration Statement, the CHI Proxy
Statement/Prospectus or the CCMHI Proxy Statement/Prospectus shall contain an
untrue statement of material fact or omit to state a material fact, individually
or in the aggregate, required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(f) Between the time of execution of this Agreement and the Closing
Date (i) no material and unfavorable change in the assets, operations, business,
prospects or condition (financial or otherwise) of the Company or any of the
Chapman Entities, shall have occurred or become known (whether or not arising in
the ordinary course of business), and (ii) no transaction which is material and
unfavorable to the Company shall have been entered into by the Company or any of
the Chapman Entities.
(g) On the Effective Date, the Underwriting Agreement shall have been
entered into and delivered by all required parties.
(h) On or before the Closing Date, the stockholders of both CHI and
CCMHI shall have approved the Mergers by the vote required under the Maryland
General Corporation Law.
(i) On or before the Closing Date, all conditions to the Mergers, other
than the closing of the Offering, shall have been satisfied.
(j) On the Closing Date, all filings required to have been made
pursuant to Rules 424, 430A or 462(c)under the Securities Act have been made.
(k) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements that have
not been resolved and the NASD shall have issued a letter stating that it has no
objections to the underwriting terms and arrangements.
(l) The Company shall, on the date hereof and at the Closing Date,
deliver to FBW a certificate of its president and its chief financial officer to
the effect that, to each of such officer's knowledge, the representations and
warranties of the Company set forth in this Agreement and the conditions set
forth in paragraphs (c) through (i) inclusive of this Section 9 have been met
and are true and correct as of such date.
(m) The Company shall have furnished to FBW such other documents and
certificates as to the accuracy and completeness of any statement in the
EChapman Registration Statement and the Prospectus, the representations,
warranties and statements of the Company contained herein, and the performance
by the Company
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 23
of the covenants contained herein, and the fulfillment of any conditions
contained herein or therein, as of the Closing Date as FBW may reasonably
request.
(n) The Company shall have performed such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the Closing
Date.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless FBW and its
directors, officers and each person, if any, who controls FBW within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments and any amount paid in settlement of, any action, suit or proceeding
commenced or any claim asserted), to which FBW may become subject under the
Securities Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, related to, based upon or arising out of
(i) an untrue statement or alleged untrue statement of a material fact contained
in the EChapman Registration Statement, the Prospectus, or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any breach or alleged breach by the Company of
its representations, warranties and agreements contained in this Agreement.
The Selling Stockholder agrees to indemnify and hold harmless FBW and
its directors, officers and each person, if any, who controls FBW within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as foregoing indemnity from the Company to FBW, but only with
respect to (i) any breach or alleged breach by the Selling Stockholder of the
representations and warranties contained in Section 5 of this Agreement or (ii)
information furnished in writing by or on behalf of the Selling Stockholder
expressly for use in the EChapman Registration Statement.
FBW agrees to indemnify and hold harmless the Company, its directors
and officers who signed the eChapman Registration Statement, the Selling
Stockholder, and each person, if any, who controls the Company or the Selling
Stockholder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to FBW, but only with respect to (i) any breach or alleged
breach by FBW of its representations, warranties and agreements contained in
this Agreement or (ii) information relating to FBW furnished in writing by FBW
expressly for use in the EChapman Registration Statement, the Prospectus, or any
amendment or supplement thereto.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 24
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought under this Section 10, such person
shall promptly notify each indemnifying party in writing and such indemnifying
party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party, and the payment of all fees
and expenses of such counsel, as incurred. Any indemnified party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of such counsel by
such indemnified party shall have been specifically authorized in writing by the
indemnifying parties, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party, or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by FBW, in the case
of parties indemnified pursuant to the first and second paragraphs of Section
10(a), and by the Company, in the case of the parties indemnified pursuant to
the third paragraph of Section 10(a). The indemnifying party shall indemnify and
hold harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written consent
if the settlement is entered into more than twenty business days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expense of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement or compromise
of, or consent to the entry of judgment with respect to, any pending or
threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 25
(c) To the extent the indemnification provided for in Section 10(a) is
unavailable to, or insufficient to hold harmless any indemnified party under
Section 10(a), in respect of any loss, claim, damage, liability or judgment
referred to therein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
judgments (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, FBW and the Selling Stockholder from the
Offering or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, or if the indemnified party failed to give the notice
required under Section 10(b), in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, FBW and the Selling Stockholder in connection
with FBW's activities under this Agreement or the statements or omissions that
resulted in such losses, claims, damages, liabilities or judgments, as well as
any other relevant equitable considerations. The relative benefits received by
the Company, FBW and the Selling Stockholder shall be deemed to be in the same
proportion as the total net proceeds from the Offering (after deducting
expenses) bear to the total fee paid to FBW pursuant to Section 3. The relative
fault of the Company, FBW and the Selling Stockholder shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, FBW or the Selling Stockholder,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, FBW and the Selling Stockholder agree that it would not be
just and equitable if contribution pursuant to this Section 10(c) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any matter, including any action that could have given rise to such
losses, claims, damages, liabilities or judgments. Notwithstanding the
provisions of this Section 10(c), FBW shall not be required to contribute any
amount in excess of the amount by which the fee paid to FBW pursuant to Section
3 exceeds the amount of any damages FBW has otherwise been required to pay by
reason of such activities under this Agreement or such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 26
(d) The remedies provided for in this Section 10 are not exclusive and
shall not limit any rights or remedies that may otherwise be available to any
indemnified party at law or in equity.
(e) The statements relating to FBW under the caption "Underwriting" in
the Prospectus constitute the only information furnished to the Company in
writing on behalf of FBW expressly for use in the EChapman Registration
Statement, the Prospectus or any amendment or supplement thereto, or any
preliminary prospectus.
(f) The indemnity and contribution agreements contained in this Section
10, and the covenants, representations and warranties of the Company in this
Agreement, shall remain operative and in full force and effect regardless of (i)
any investigation made by FBW or on its behalf or by or on behalf of any person
who controls FBW or (ii) any termination of this Agreement or the Offering.
(g) Notwithstanding any other provision hereof, the liability of the
Selling Stockholder under such Selling Stockholder's representations and
warranties contained in Section 5 hereof and under the indemnity, contribution
and reimbursement agreements contained in the provisions of this Section 10
hereof shall be limited to an amount equal to the public offering price of the
stock sold by such Selling Stockholder to the Underwriters.
11. SUCCESSORS AND ASSIGNS. The benefits of this Agreement shall inure
to the respective successors and assigns of the parties hereto and the
obligations and liabilities assumed in this Agreement by the parties hereto
shall be binding upon their respective successors and assigns.
12. AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented unless the Company, FBW and the Selling
Stockholder consent in writing to such amendment, modification or supplement.
13. NOTICE. Whenever notice is required to be given pursuant to this
Agreement, such notice shall be in writing and shall be delivered by hand or by
commercial messenger service or mailed by first class mail, postage prepaid,
addressed (a) if to FBW, at 100 Light Street, Baltimore, Maryland 21202,
Attention: Steven L. Shea, (b) if to the Company or the Selling Stockholder, at
the address on the first page of this Agreement, Attention: Nathan A. Chapman,
Jr., or such other address as to which any party shall notify the other parties
hereto in writing.
14. GOVERNING LAW. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with and governed by the
laws of the State of Maryland applicable to agreements made and to be performed
wholly within such jurisdiction. The Company and FBW irrevocably consent to the
service of any
<PAGE>
eChapman.com, Inc.
The Chapman Co.
Nathan A. Chapman, Jr.
________________, 2000
Page 27
complaint, summons, notice or other process relating to any such
action or proceeding by delivery thereof to it in the manner provided for in
Section 13 hereof.
15. COUNTERPARTS. This Agreement may be signed in two or more
counterparts with the same force and effect as if the signatures thereto and
hereto were upon the same instrument.
16. TERMINATION. This Agreement will terminate on the Termination Date,
except that the provisions of Section 10 hereof, shall survive the termination
of this Agreement.
17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof and thereof.
If the above terms are in accordance with your understanding of our
agreement, please sign the enclosed copy of this Agreement and return such copy
to us.
Very truly yours,
FERRIS, BAKER WATTS, INCORPORATED
By:------------------------------------
CONFIRMED AND AGREED TO AS OF CONFIRMED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN: THE DATE FIRST ABOVE WRITTEN:
e.CHAPMAN.com, INC.
By:
--------------------------------- ------------------------------------
Name: Nathan A. Chapman, Jr. Nathan A. Chapman, Jr., Individually
Title: President
THE CHAPMAN CO.
By:---------------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
Exhibit 1.3
MASTER AGREEMENT AMONG UNDERWRITERS
__________, 2000
The Chapman Co.
401 East Pratt Street, Suite 2800
Baltimore, Maryland 21202
Ladies and Gentlemen:
1. GENERAL. We understand that The Chapman Co. ("Chapman Co.") is
entering into this Agreement in counterparts with us and other firms who may be
underwriters for issues of securities in which Chapman Co. is acting as the
representative or one of the representatives of the several underwriters (the
"Representative" or "Representatives"). Whether or not we have executed this
Agreement, this Agreement shall apply to any offering of securities in which we
elect to act as an underwriter after receipt of an invitation from Chapman Co.
stating the identity of the issuer, certain terms of the securities proposed to
be offered, the amount of our proposed participation, the names of the other
Representatives, if any, and stating that our participation as an underwriter in
the proposed offering shall be subject to the provisions of this Agreement.
Your invitation will include instructions for our acceptance of such
invitation. At or prior to the time of an offering, you will advise us, to the
extent applicable, as to the expected offering date, the expected closing date,
the initial public offering price, the interest or dividend rate (or the method
by which such rate is to be determined), the conversion price, the underwriting
discount, the management fee, the selling concession and the reallowance. Such
information may be conveyed by you in one or more communications (such
communications received by us with respect to an offering being hereinafter
collectively referred to as the "Invitation"). This Agreement, as amended or
supplemented by the Invitation, shall become binding upon us and the
Representatives with respect to such offering if you receive our oral or written
acceptance and you do not receive a written communication revoking our
acceptance prior to the time and date specified in the Invitation (our unrevoked
acceptance after expiration of such time and date being hereinafter referred to
as our "Acceptance"). If we have not previously executed this Agreement, by our
Acceptance we shall be deemed to be signatories hereof with respect to the
offering to which the Acceptance relates. To the extent that any terms contained
in the Invitation are inconsistent with any provisions herein, such terms shall
supersede any such provisions. Our Acceptance will also constitute our
confirmation that, except as otherwise stated in such Acceptance, each
applicable statement included in the Master Underwriters' Questionnaire attached
as Exhibit A hereto (or otherwise furnished to us) is correct. We agree to
notify you immediately of any development before the termination of the Offering
Provisions pursuant to Section 11(a) hereof with respect to any particular
offering of Securities (as defined below) which makes untrue or incomplete any
information that we have given or are deemed to have given in response to the
Master Underwriters' Questionnaire. The obligations of each underwriter shall be
several and not joint. The securities offered in any offering of securities made
pursuant to this Agreement, including any guarantees relating to such securities
or any other securities into which such securities are convertible or for which
such securities are exercisable or exchangeable and any securities that may be
purchased upon exercise of an over-allotment option, are hereinafter referred to
as the "Securities." The issuer or issuers of the Securities are hereinafter
referred to as the "Company." All references herein to "you" or the
"Representatives" shall include Chapman Co. and the other firms, if any, which
are named as Representatives in the Invitation. Except as otherwise provided in
Section 11(c), the following provisions of this Agreement shall apply separately
to each individual offering of Securities.
<PAGE>
2. UNDERWRITING ARRANGEMENTS. The Representatives shall determine which
signatories or other parties deemed to be signatories to this Agreement will be
invited to become underwriters for the Securities. Changes may be made by the
Representatives in those who are to be underwriters and in the respective
amounts of Securities to be purchased by them, but the amount of Securities to
be purchased by us as set forth in the Invitation will not be changed without
our consent except as provided in the underwriting or purchase agreement or any
associated terms or similar agreement with the Company or any selling
securityholders or any amendment or supplement thereto (collectively, the
"Underwriting Agreement") covering the Securities. We authorize you on our
behalf to exercise and deliver the Underwriting Agreement or any agreement
between or among Underwriters (as defined below), on the one hand, and one or
more groups of underwriters for the Securities not acting as such pursuant to
this Agreement, on the other hand (an "Intersyndicate Agreement"), in such terms
as you determine and to take such action as you deem advisable in connection
with the performance of the Underwriting Agreement, any Intersyndicate Agreement
and this Agreement and the purchase, carrying, sale and distribution of the
Securities. The parties on whose behalf you execute the Underwriting Agreement
are hereinafter referred to as the "Underwriters." Chapman Co. may waive
performance or satisfaction by the Company, any selling securityholders or any
other party to the Underwriting Agreement of certain of its or their obligations
or conditions included in the Underwriting Agreement, if, in Chapman Co.'s sole
discretion, such waiver will not have a material adverse effect upon the
interests of the Underwriters. It is understood that, if so specified in the
Invitation for the issue, arrangements may be made for the sale of Securities by
the Company or selling securityholders pursuant to delayed delivery contracts
(the "Delayed Delivery Contracts"). Such Securities are hereinafter referred to
as "Delayed Delivery Securities." Securities for which such contracts are not
entered into by the Company or selling securityholders are hereinafter referred
to as "Immediate Delivery Securities." References herein to delayed delivery and
Delayed Delivery Contracts apply only to offerings in which delayed delivery is
authorized. The term "Underwriting Obligation," as used in this Agreement with
respect to any Underwriter, shall refer to the principal amount or number of
shares or units of the Securities (plus such additional Securities as may be
required by the Underwriting Agreement to be purchased by such Underwriter in
the event of a default by one or more of the Underwriters) which such
Underwriter is obligated to purchase pursuant to the provisions of the
Underwriting Agreement, without regard to any reduction in such obligation as a
result of Delayed Delivery Contracts which are entered into by the Company.
If the Securities consist in whole or in part of debt obligations maturing
serially, the serial Securities being purchased by each Underwriter pursuant to
the Underwriting Agreement will consist, subject to adjustment as provided in
the Underwriting Agreement, of serial Securities of each maturity in a principal
amount that bears the same proportion to the aggregate principal amount of the
serial Securities of such maturity to be purchased by all the Underwriters as
the respective principal amount of serial Securities set forth opposite such
Underwriter's name in the Underwriting Agreement bears to the aggregate
principal amount of the serial Securities to be purchased by all Underwriters.
As compensation for your services we will pay a management fee as
specified in the Invitation for the offering (without deduction with respect to
Delayed Delivery Securities), and you may charge our account therefor. If there
is more than one Representative, such compensation will be divided among the
Representatives in such proportions as they determine.
3. PROSPECTUS AND REGISTRATION STATEMENT; OFFERING CIRCULAR. We
understand that if registration of the offer and sale of the Securities as
contemplated by the Underwriting Agreement is required under the Securities Act
of 1933, as amended (the "Securities Act"), you will either provide us with the
file number or numbers of the registration statement or statements filed with
the Securities and Exchange Commission (the "Commission") with respect to the
Securities or, as soon as practicable after the later of the date of the
Invitation or the date made available to you by the Company, furnish to us (or
<PAGE>
make available for our review in your office) a copy of such registration
statement or statements (other than any documents incorporated therein by
reference and any exhibits) and any amendments thereto. In any event you will
furnish to us, as soon as practicable after sufficient quantities thereof are
made available to you by the Company, copies of the prospectus or supplemented
prospectus (excluding any documents incorporated by reference therein) to be
used in connection with the offering of the Securities. As used herein,
"Prospectus" means the form of prospectus (including any supplement and any
documents incorporated by reference therein; provided, however, that a
supplement to the Prospectus filed with the Commission pursuant to Rule 424
under the Securities Act with respect to an offering of Securities shall be
deemed to have supplemented the Prospectus only with respect to the offering of
Securities to which it relates) authorized for use in connection with such
offering, and "Registration Statement" means the registration statement (as
amended and including any documents incorporated by reference therein) under
which the offer and sale of the Securities are registered under the Securities
Act.
We understand that if the offer and sale of the Securities are exempt from
the registration requirements of the Securities Act, no registration statement
will be filed with the Commission. In any such case involving an offering
circular or other offering materials to be used in connection with the offering
of the Securities (any such circular or materials, as it or they may be amended
or supplemented, being hereinafter referred to as the "Offering Circular"), you
will either provide us with information as to the availability of a preliminary
offering circular through a specified regulatory authority or, as soon as
practicable after the later of the date of the Invitation or the date made
available to you by the Company, furnish to us (or make available for our review
in your office) a copy of any preliminary Offering Circular or a proof of the
Offering Circular. In any event, in any such offering involving an Offering
Circular you will furnish to us, as soon as practicable after sufficient
quantities thereof are made available to you by the Company, copies of the final
Offering Circular. The Prospectus or Offering Circular, as the case may be,
relating to an offering of Securities is herein referred to as the "Offering
Document."
We understand that we are not authorized to give any information or make
any representations not contained in the Offering Document, as amended or
supplemented, or in any document incorporated by reference therein in connection
with the offering of the Securities. Our Acceptance of an Invitation shall
constitute our agreement that, if requested by you, we will furnish a copy of
any amendment or supplement to any preliminary or final Offering Document to
each person to whom we have furnished a previous preliminary or final Offering
Document. Our Acceptance of an Invitation relating to an offering of Securities
registered under the Securities Act shall constitute (i) our acknowledgment that
we are familiar with the Registration Statement, including the documents
incorporated by reference therein and the forms of Underwriting Agreement and
indenture or other document describing the terms of the Securities filed as
exhibits thereto or otherwise made available to us, with any preliminary
Prospectus, preliminary supplemented Prospectus or Prospectus relating to the
Securities theretofore filed with the Commission, and with the information to be
set forth in an amendment to the Registration Statement or in the Prospectus
proposed to be filed with the Commission, (ii) our confirmation that we have
delivered, and our agreement that we will deliver, all preliminary and final
Prospectuses required for compliance with the provisions of Securities Act
Release No. 4968 and Rule 15c2-8 (or any successors thereto) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (iii) our
authorization that you, with the approval of counsel for the Underwriters, may
approve on our behalf any amendments or supplements to the Registration
Statement or Prospectus. Each Underwriter shall (i) keep an accurate record of
the names and addresses of all persons to whom it delivers copies of the
Registration Statement, any amendment thereto or any preliminary Prospectus or
any document incorporated therein by reference, and (ii) upon your request,
furnish promptly to the persons who received copies of the foregoing documents,
any subsequent amendment, revised preliminary Prospectus, Prospectus, any
document incorporated by reference or any memorandum furnished to the
undersigned outlining changes in the Registration Statement or any preliminary
Prospectus. Our Acceptance of an Invitation relating to an offering of
Securities exempt from registration under the Securities Act shall constitute
(i) our
<PAGE>
acknowledgment that we are familiar with the information set forth in any
preliminary Offering Circular or proof of the Offering Circular made available
to us and with the information to be set forth in the Offering Circular, (ii)
our confirmation that we have delivered, and our agreement that we will deliver,
all preliminary and final Offering Circulars required for compliance with the
applicable federal and state laws and the applicable rules and regulations of
any regulatory body promulgated thereunder governing the use and distribution of
offering circulars by underwriters, and (iii) to the extent consistent with such
laws, rules and regulations, our confirmation that we have delivered and our
agreement that we will deliver all preliminary and final Offering Circulars that
would be required if the provisions of Securities Act Release No. 4968 and Rule
15c2-8 (or any successor provisions thereto) under the Exchange Act applied to
such offering. Insofar as it relates to us, the information in the Registration
Statement as amended to this date and in the final form of Offering Document
does not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and we are willing to proceed with underwriting of the
Securities in the manner contemplated in the Underwriting Agreement and
described in the final form of Offering Document. We consent to being named in
the Offering Document as one of the Underwriters of the Securities, and, unless
we promptly notify you in writing or otherwise, our name as it should appear in
the Offering Document and our address are as set forth on the signature page
hereof.
4. PUBLIC OFFERING.
(a) We authorize you, as Representatives of the several
Underwriters, to manage the underwriting and the public offering of the
Securities and to take such action in connection therewith and in connection
with the purchase of the Securities and the carrying and resale of the
Securities, including without limitation the following, as you in your sole
discretion deem appropriate or desirable:
(i) to determine the time of the initial public offering;
(ii) to determine the amount of Securities, if any, to be
purchased by the Underwriters pursuant to any over-allotment option;
(iii) to change the public offering price and the concessions
and discounts to dealers after the initial public offering;
(iv) to furnish the Company with the information to be
included in the Registration Statement or Offering Document with respect to the
terms of the offering; and
(v) to determine all matters relating to advertising and
communications with dealers or others.
Our Acceptance shall constitute our representation that we have not
advertised the offering and we agree that we will not do so until after the
earlier of the Closing Date (as defined in the Underwriting Agreement) or such
date as you shall publicly advertise the offering. We understand that any
advertisement we may then make will be our own responsibility and at our own
expense.
We also authorize you, in your discretion, to reserve for sale and to sell
to dealers and others, which may include any Underwriters, selected by you
("Selected Dealers"), and to reserve for sale pursuant to Delayed Delivery
Contracts arranged by you through Selected Dealers, all or part of the
Securities to be purchased by us, all as you shall determine. Any such sale to
Selected Dealers may be made pursuant to the terms and conditions of your Master
Selected Dealers' Agreement or otherwise, as you may determine. Each Selected
Dealer shall be a person (a "Dealer") who is (i) a broker or dealer (as defined
in the By-Laws of the National Association of Securities Dealers, Inc. (the
"NASD")) actually engaged in the investment banking or securities business and
(a) a member in good standing of the NASD that makes the representations and
agreements applicable to such a member contained in Section 18 hereof or (b) a
foreign bank, broker, dealer or other institution not eligible for membership in
the NASD (a "foreign non-member") that makes the representations and agreements
applicable to such foreign institutions contained in Section 18 hereof, or (ii)
a "bank" as defined in Section 3(a)(6) of the Exchange Act (a "Bank") that is
<PAGE>
not a member of the NASD and that makes the representations and agreements
applicable to Banks contained in Section 18 hereof. Reservations for sales to
Selected Dealers for our account need not be in proportion to our Underwriting
Obligation, but sales of Securities reserved for our account for sale to
Selected Dealers shall be made as nearly as practicable in the ratio which the
amount of Securities reserved for our account bears to the aggregate amount of
Securities reserved for the account of all Underwriters, as calculated from day
to day. The price to Selected Dealers initially shall be the public offering
price less a concession not in excess of the Selected Dealers' concession set
forth in the Invitation and the price to persons other than Selected Dealers
shall be the public offering price. With your consent, the Underwriters may
allow, and Selected Dealers may re-allow, a discount on sales to Dealers in an
amount not in excess of the amount set forth in the Invitation. Upon your
request, we will advise you of the identity of any Dealer to whom we allow such
a discount and any Underwriter or Selected Dealer from whom we receive such a
discount.
We also authorize you, in your discretion, to buy Immediate Delivery
Securities for our account from Selected Dealers at the public offering price
less such amount not in excess of the Selected Dealers' concession as you
determine.
At or before the time the Securities are released for sale, you shall
notify us of the amount of Securities that has not been reserved for our account
for sale to Selected Dealers and for sale pursuant to Delayed Delivery Contracts
and the amount that is to be retained by us for direct sale. After advice from
you that the Securities are released for public offering, we will offer to the
public in conformity with the terms of the offering set forth in the Offering
Document such of our Securities as you advise are not reserved, not allowing any
discounts from the public offering price except as therein or herein provided.
In connection with any offering of Securities that are registered under the
Securities Act and issued by a Company that was not, immediately prior to the
filing of the Registration Statement, subject to the requirements of Section
13(a) or 15(d) of the Exchange Act, we agree that unless otherwise advised by
you and disclosed in the Prospectus we will not make sales to any account over
which we exercise discretionary authority with respect to that sale.
We will from time to time, upon your request, report to you the amount of
Securities retained by us for direct sale that remains unsold. Upon your
request, we will deliver to you for our account, or sell to you for the account
of one or more of the Underwriters, such amount of unsold Securities as you may
designate at the public offering price less, in the case of sales or deliveries
for the account of Selected Dealers, an amount determined by you not in excess
of the concession to Selected Dealers. You may also repurchase Securities from
other Underwriters and Selected Dealers, for the account of one or more of the
other Underwriters at the public offering price less, in the case of purchases
for the account of Selected Dealers, an amount determined by you not in excess
of the concession to Selected Dealers.
You may from time to time deliver to any Underwriter, for carrying
purposes or for sale by such Underwriter, any of the Securities then reserved
for sale pursuant to Delayed Delivery Contracts or for sale to, but not
purchased and paid for by, Selected Dealers, all as above provided; however, to
the extent that Securities are so delivered for sale by such Underwriter, the
amount of Securities then reserved for the account of such Underwriter shall be
correspondingly reduced. Securities delivered for carrying purposes only shall
be redelivered to you upon demand.
If, in accordance with the terms of offering set forth in the Offering
Document, the offering of the Securities is not at a fixed price but at varying
prices set by individual Underwriters based on market prices or at negotiated
prices, the provisions of the first paragraph of this Section relating to your
right to change the public offering and concessions and discounts to dealers
shall not apply, and other references in this Section and elsewhere in this
Agreement to the public offering price or Selected Dealers' concession shall be
deemed to mean the prices and concessions determined by you from time to time in
<PAGE>
your discretion.
Any Securities sold by us (otherwise than through you) which you purchase
in the open market for the account of any Underwriter will be repurchased by us
on demand at the cost of such purchase plus commissions and taxes on redelivery.
Securities delivered on such repurchase need not be the identical certificates
so purchased. In lieu of such action you may in your discretion sell the same
for our account, publicly or privately, without notice, at such prices and upon
such terms and to such persons, including any of the several Underwriters, as
you may determine, and debit or credit our account for the loss or profit
resulting from such sale, or charge our account with an amount not in excess of
the Selected Dealers' concession with respect to such Securities.
5. DELAYED DELIVERY ARRANGEMENTS. We authorize you to act on our behalf
in making all arrangements for the solicitation of offers to purchase Delayed
Delivery Securities from the Company pursuant to Delayed Delivery Contracts, and
we agree that all such arrangements will be made only through you, directly or
through Selected Dealers (including Underwriters acting as Selected Dealers) to
whom you may pay a commission as provided in the Offering Document and herein.
The obligation of each of the Underwriters to purchase and pay for
Securities as set forth in the Underwriting Agreement shall be reduced in the
proportion provided for therein, except that (i) as to any Delayed Delivery
Contract determined by you, in your discretion, to have been directed and
allocated by a purchaser to a particular Underwriter, such obligation of such
Underwriter shall be reduced by the amount of Delayed Delivery Securities
covered thereby, (ii) as to any Delayed Delivery Contracts for which
arrangements are made through Selected Dealers, such obligation of each
Underwriter shall be reduced as nearly as practicable in the proportion
determined by you that the amount of Securities of such Underwriter reserved and
sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers
bears to the total Securities so reserved and sold, and (iii) such reductions
shall be rounded, as you shall determine, to the nearest $1,000 principal amount
or whole share or unit of the Securities.
The fee payable by the Company to each Underwriter with respect to Delayed
Delivery Securities pursuant to the Underwriting Agreement shall be credited to
the account of such Underwriter based upon the amount by which such
Underwriter's Underwriting Obligation is reduced as specified in the preceding
paragraph.
If the amount of Delayed Delivery Securities applied to reduce an
Underwriter's Underwriting Obligation and the amount of Immediate Delivery
Securities sold by or for the account of such Underwriter exceeds such
Underwriter's Underwriting Obligation, there shall be credited to such
Underwriter with respect to such excess amount of Securities only the amount of
the Selected Dealers' concession; provided, however, that no amount shall be
credited to such Underwriter with respect to such excess amount of such
Securities if such Underwriter is a Bank and the Securities do not constitute
"exempted securities" within the meaning of Section 3(a)(12) of the Exchange
Act.
The commissions payable to Selected Dealers with respect to Delayed
Delivery Contracts arranged through them shall be charged to each Underwriter in
the proportion which the amount of Securities of such Underwriter reserved and
sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers
bears to the total Securities so reserved and sold.
6. PAYMENT AND DELIVERY. We authorize you to make payment on our behalf
to the Company or any selling securityholder of the purchase price of our
Securities, to take delivery of our Securities, and to deliver our reserved
Securities against sales. Unless notified at least one (1) full business day
prior to the date of delivery to make other arrangements, you may, in your
discretion, advise the Company or any selling securityholders to prepare each
Underwriter's certificates for the Securities to
<PAGE>
be purchased by it in the name of such Underwriter (or in such other name as you
shall designate, but such other name shall be for administrative convenience
only and shall not affect such Underwriter's title to such Securities or the
several nature of the obligations of the Underwriters hereunder) in such
denominations as you may determine. Any payment by you in accordance with this
Section will not relieve us from any of our obligations under this Agreement or
under the Underwriting Agreement. If you have not received funds as requested,
you may in your discretion make any such payment on our behalf and we will
promptly deliver funds to you in the amount so requested. At your request, on or
before such dates and in the manner that you specify in the Invitation, we will
pay you an amount equal to the public offering price, less the selling
concession, of either our Securities or our unreserved Securities as you direct,
and such payment will be credited to our account and applied to the payment of
the purchase price. After you receive payment for reserved Securities sold for
our account, you will remit to us the purchase price (if any) paid by us for
such Securities and credit or debit our account with the difference between the
sale prices and the purchase price thereof. You will make available for delivery
to each Underwriter at the office of The Chapman Co., 401 East Pratt Street,
Suite 2800, Baltimore, Maryland 21202 (or at such other address as the
Underwriter may be notified by the Representatives) our unreserved Securities as
soon as practicable after such Securities have been delivered to the
Representatives, and our reserved but unsold Securities, against payment of the
purchase price therefor (except in the case of Securities for which payment has
previously been made), except that if the aggregate amount of reserved but
unsold Securities upon such termination does not exceed twenty percent (20%) of
the total amount of the Securities, you may in your discretion sell such
reserved but unsold Securities for the accounts of the several Underwriters as
soon as practicable after such termination, at such prices and in such manner as
you determine.
In the event that the Underwriting Agreement for an offering provides for
the payment of a commission or other compensation to the Underwriters, we
authorize you to receive such commission or other compensation for our account.
Notwithstanding the foregoing provisions of this Section 6, if
transactions in the Securities can be settled through the facilities of The
Depository Trust Company or any other depository or similar facility, if we are
a member, you are authorized, in your discretion, to make appropriate
arrangements for payment and/or delivery through its facilities of the
Securities to be purchased by us, or if we are not a member, settlement may be
made through a correspondent that is a member pursuant to our timely
instructions.
7. AUTHORITY TO BORROW. In connection with the purchase or carrying of
our Securities or other securities purchased for our account, we authorize you,
in your discretion, to advance your funds for our account, charging current
interest rates, to arrange loans for our account, and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security any of our Securities or such other securities. Any lender may rely
upon your instructions in all matters relating to any such loan. Any Securities
or such other securities held by you for our account may be delivered to us for
carrying purposes, and if so delivered will be redelivered to you upon demand.
8. STABILIZATION AND OVER-ALLOTMENT. We authorize you, in your
discretion, to make purchases and sales of Securities, any other securities of
the Company, or any guarantor of the Securities (as specified in the
Invitation), of the same class and series and any other securities of the
Company or any guarantor of the Securities which you may designate in the open
market or otherwise, for long or short account, on such terms as you deem
advisable, and to over-allot in arranging sales. The existence of this provision
is no assurance that the price of the Securities will be stabilized or that
stabilizing, if commenced, may not be discontinued at any time. Such purchases
and sales and over-allotments will be made for the accounts of the Underwriters
as nearly as practicable in proportion to their respective Underwriting
Obligations. It is understood that you may have made purchases of securities of
the Company or any guarantor of the Securities for stabilizing purposes prior to
the time when we become
<PAGE>
one of the Underwriters, and we agree that any securities so purchased shall be
treated as having been purchased for the respective accounts of the Underwriters
pursuant to the foregoing authorization. We authorize you, in your discretion,
to cover any short position incurred pursuant to this Section by purchasing
securities on such terms as you deem advisable. Except as provided in this
Section 8, at no time will our net commitment under the foregoing provisions of
this Section 8 exceed twenty percent (20%) of our Underwriting Obligation,
excluding Securities which may be purchased upon exercise of an over-allotment
option. In the case of our net commitment for short account, our net commitment
will be computed assuming that all Securities which may be purchased upon
exercise of an over-allotment option are acquired. We will on demand take up at
cost any Securities so purchased and deliver any Securities so sold or
over-allotted for our account, and, if any other Underwriter defaults in its
corresponding obligation and the Underwriting Agreement is not terminated in
accordance with its terms pursuant to such default, we will assume our
proportionate share of such obligation without relieving the defaulting
Underwriter from liability. Upon request, we will advise you of the Securities
retained by us and unsold and will sell to you for the account of one or more of
the Underwriters such of our unsold Securities and at such price, not less than
the net price to Selected Dealers nor more than the public offering price, as
you determine.
If you effect any stabilizing purchase pursuant to this Section 8, you
shall promptly notify us of the date and time of the first stabilizing purchase
and the date and time when stabilizing was terminated. You shall prepare and
maintain such records as are required to be maintained by you as manager
pursuant to Rule 17a-2 under the Exchange Act.
Notwithstanding the foregoing provisions of this Section 8, you may not
make such purchases and sales and over-allotments for our account if we have
prior thereto advised you in writing that we are (i) a U.S. bank (other than a
U.S. bank which is empowered to underwrite and deal in securities of the type
being offered), (ii) a bank holding company (as defined in the United States
Bank Holding Company Act of 1956 (the "BHC Act")), (iii) a foreign bank (as
defined in Section 1(b)(7) of the United States International Banking Act of
1978 ("IBA")) that operates a branch, agency or company organized under Article
XII of the New York State Banking Law in the United States or a company of which
such a foreign bank is a subsidiary, or (iv) a company (other than a company
which has received approval under Section 4(c)(8) of the BHC Act to engage in
underwriting and dealing in securities of the type being offered) more than five
percent (5%) of any class of voting shares of which are owned or controlled,
directly or indirectly, by an entity covered in (ii) or (iii) above.
9. OPEN MARKET TRANSACTIONS. Until termination of this Agreement as
provided in Section 11(a), unless this restriction is sooner terminated by you,
we agree not to bid for, purchase, sell or attempt to induce others to purchase
or sell, directly or indirectly, either before or after issuance of the
Securities, any of the Securities or securities exchangeable for, or convertible
into, or exercisable against the Securities, any security of the same class and
series as the Securities and any right to purchase or sell the Securities or any
such security, including trading in any put or call option on any such security
other than (a) as provided for in this Agreement, or in the Underwriting
Agreement or (b) as a broker in executing unsolicited orders.
We represent that we have not participated in any transaction prohibited
by the preceding paragraph and that we have at all times complied with and will
at all times comply with the provisions of Rule 139 of the Securities Act and
Regulation M of the Exchange Act, each as interpreted by the Commission.
10. NET CAPITAL. We represent that the incurrence by us of our
obligations hereunder and under the Underwriting Agreement in connection with
the offering of the Securities will not place us in violation of Rule 15c3-1
under the Exchange Act, if such requirements are applicable to us, or, if we are
a financial institution subject to regulation by the Board of Governors of the
Federal Reserve System, the
<PAGE>
Comptroller of the Currency or the Federal Deposit Insurance Corporation, will
not place us in violation of the capital requirements of such regulator or any
other regulator to which we are subject.
11. TERMINATION; AMENDMENT.
(a) With respect to each offering of Securities pursuant to this
Agreement, all limitations in this Agreement on the price at which Securities
may be sold, the last paragraph of Section 4(a) referring to repurchase from or
resale by you of our previously sold Securities, the authority to stabilize and
over-allot in the first sentence of Section 8, and the restrictions on open
market transactions contained in Section 9 (collectively, the "Offering
Provisions") will terminate at the close of business on the forty-fifth (45th)
day after the date of the initial public offering or pursuant to the
Underwriting Agreement, whichever is later, unless in either such case the
effectiveness of such Offering Provisions is extended as hereinafter provided.
You may extend the effectiveness of the Offering Provisions up to an additional
fifteen (15) days in the aggregate by notice or notices to us to the effect that
the Offering Provisions of this Agreement are extended to the date or by the
number of days indicated in such notice or notices. You may terminate any or all
of the Offering Provisions at any prior time by notice to the Underwriters. All
other provisions of this Agreement shall remain operative and in full force and
effect with respect to such offering.
(b) This Agreement may be terminated by either party hereto upon
five (5) business days' written notice to the other party; provided, however,
that with respect to any particular offering of Securities, if you receive any
such notice from us after our Acceptance for such offering, this Agreement shall
remain in full force and effect as to such offering and shall terminate with
respect to such offering and all previous offerings only in accordance with and
to the extent provided in subsection (a) of this Section 11.
(c) This Agreement may be supplemented or amended by you by notice
to us by written communication and, except for supplements or amendments set
forth in an Invitation, any such supplement or amendment to this Agreement shall
be effective with respect to any offering to which this Agreement applies after
the date of such supplement or amendment. Each reference to "this Agreement"
herein shall, as appropriate, be to this Agreement as so supplemented and
amended.
12. EXPENSES AND SETTLEMENT. Except as otherwise provided herein, you
may charge our account with any transfer taxes on sales made by you of
Securities purchased by us under the Underwriting Agreement and with our
proportionate share (based upon our Underwriting Obligation) of all other
expenses incurred by you under this Agreement or in connection with the
purchase, carrying, sale or distribution of the Securities. The accounts
hereunder will be settled as promptly as practicable after the termination of
the Offering Provisions pursuant to Section 11(a), but you may reserve such
amount as you deem advisable for additional expenses. Your determination of the
amount to be paid to or by us will be conclusive. In the event of the default of
any Underwriter in carrying out its obligations under this Agreement, the
expenses chargeable to such Underwriter pursuant to this Agreement and not paid
by it, as well as any additional losses or expenses arising from such default,
may be charged against the other Underwriters not so defaulting in proportion to
the respective amounts of Securities which such other Underwriters are obligated
to purchase pursuant to the Underwriting Agreement. You may at any time make
partial distributions of credit balances or call for payment of debit balances.
Any of our funds in your hands may be held with your general funds without
accountability for interest. Notwithstanding any settlement, we will remain
liable for any taxes on transfers for our account, and for our proportionate
share (based upon our Underwriting Obligation) of all expenses and liabilities
which may be incurred by or for the accounts of the Underwriters or in
connection with the collection of the same.
13. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters
hereunder or under the Underwriting Agreement will not release the other
Underwriters from their obligations or affect the
<PAGE>
liability of any defaulting Underwriter to the other Underwriters for damages
resulting from such default. If one or more Underwriters default under the
Underwriting Agreement, you may (but are not obilgated to) arrange for the
purchase by others, including non-defaulting Underwriters, of Securities not
taken up by the defaulting Underwriter or Underwriters. In the event that such
arrangements are made, the respective underwriting obligations of the
non-defaulting Underwriters and the amounts of the Securities to be purchased by
others, if any, shall be taken as the basis for all rights and obligations
hereunder, but this shall not in any way affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from its default,
nor shall any such default relieve any other Underwriter of any of its
obligations hereunder or under the Underwriting Agreement except as herein or
therein provided.
In addition, in the event of default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement to purchase the
Securities agreed to be purchased by them thereunder and, to the extent that
arrangements shall not have been made by you for any person to assume the
obligations of such defaulting Underwriter or Underwriters, we agree, if
provided in the Underwriting Agreement, to assume our proportionate share, based
upon our underwriting obligation, of the obligations of each such defaulting
Underwriter (subject to any limitation contained in the Underwriting Agreement)
without relieving such defaulting Underwriter of its liability therefor.
In the event of default by one or more Underwriters in respect of
their obligations under this Agreement to take up and pay for any securities
purchased, or to deliver any securities sold or over-allotted, by you for the
respective accounts of the Underwriters, or to bear their proportion of expenses
or liabilities pursuant to this Agreement, and to the extent that arrangements
shall not have been made by you for any persons to assume the obligations of
such defaulting Underwriter or Underwriters, we agree to assume our
proportionate share, based upon our underwriting obligation, of the obligations
of each defaulting Underwriter without relieving any such defaulting Underwriter
of its liability therefor.
14. POSITION OF REPRESENTATIVES. You, either as Representatives or
individually, will be under no liability to us for any act or omission except
for obligations expressly assumed by you herein, and no obligations on your part
will be implied hereby or inferred herefrom. You do not waive any rights that
you may have under the Securities Act or the Exchange Act or the rules and
regulations promulgated thereunder. Your authority hereunder and under the
Underwriting Agreement may be exercised by you jointly or by Chapman Co. acting
alone. Nothing will constitute the Underwriters a partnership, association or
separate entity with you or with each other, or, except as herein expressly
provided, render any Underwriter liable for the obligation of any other
Underwriter.
If for federal income tax purposes the Underwriters should be deemed to
constitute a partnership then each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1986, as amended. You, as Representatives of the several Underwriters, are
authorized, in your discretion, to execute on behalf of the Underwriters such
evidence of such election as may be required by the Internal Revenue Service.
Notwithstanding any settlement of accounts under this Agreement, we agree to pay
our underwriting proportion of the amount of any claim, demand or liability
which may be asserted against and discharged by the Underwriters, or any of
them, based on the claim that the Underwriters, or any of them, constitute an
association, unincorporated business or other entity, and also to pay our
underwriting proportion of expenses approved by us incurred by the Underwriters,
or any of them, in contesting any such claims, demands or liabilities.
15. INDEMNIFICATION. We will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to
the extent and upon the terms upon which each Underwriter agrees to indemnify
the Company, any selling securityholders and certain other persons in the
Underwriting Agreement.
<PAGE>
16. CONTRIBUTION. Each Underwriter (including you) will pay upon your
request, as contribution, its proportionate share, based upon its Underwriting
Obligation, of any losses, claims, damages or liabilities, joint or several,
paid or incurred by an Underwriter to any person other than an Underwriter,
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact contained in the Offering Document, any amendment or
supplement thereto or any related preliminary Offering Document or any other
selling or advertising material approved by you for use by the Underwriters in
connection with the sale of the Securities, or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading (other than an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company by an
Underwriter through you specifically for use therein); and will pay such
proportionate share of any legal or other expenses reasonably incurred by you or
with your consent in connection with investigating or defending any such loss,
claim, damage or liability, or any action in respect thereof. In determining the
amount of any Underwriter's obligation under this Section, appropriate
adjustment may be made by you to reflect any amounts received by any one or more
Underwriters in respect of such claim from the Company, any selling
securityholder or any other person (other than an Underwriter) pursuant to the
Underwriting Agreement or otherwise. There shall be credited against any amount
paid or payable by us pursuant to this Section any loss, damage, liability or
expense which is incurred by us as a result of any such claim asserted against
us, and if such loss, claim, damage, liability or expense is incurred by us
subsequent to any payment by us pursuant to this Section 16, appropriate
provision shall be made to effect such credit, by refund or otherwise. If any
such claim is asserted, you may take such action in connection therewith as you
deem necessary or desirable, including retention of counsel for the
Underwriters, and in your discretion separate counsel for any particular
Underwriter or group of Underwriters, and the fees and disbursements of any
counsel so retained by you shall be included in the amounts payable pursuant to
this Section. In determining amounts payable pursuant to this Section, any loss,
claim, damage, liability or expense incurred by any person controlling any
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act which has been incurred by reason of such control
relationship shall be deemed to have been incurred by such Underwriter. Any
Underwriter may elect to retain at its own expense its own counsel. You may
settle or consent to the settlement of any such claim, on advice of counsel
retained by you, with the approval of a majority in interest of the
Underwriters. Whenever you receive notice of the assertion of any claim to which
the provisions of this Section 16 would be applicable, you will give prompt
notice thereof to each Underwriter, although your failure to do so will not
affect our obligations hereunder. You will also furnish each Underwriter with
periodic reports, at such times as you deem appropriate, as to the status of
such claim and the action taken by you in connection therewith. If any
Underwriter or Underwriters default in their obligation to make any payments
under this Section, each non-defaulting Underwriter shall be obligated to pay
its proportionate share of all defaulted payments, based upon such Underwriter's
Underwriting Obligation as related to the Underwriting Obligations of all
nondefaulting Underwriters.
The indemnification, contribution and reimbursement agreement of each
Underwriter contained in Section 15 and this Section 16 shall remain operative
and in full force and effect regardless of (i) any termination of this
Agreement, or (ii) any investigation made by or on behalf of any Underwriter or
controlling person. Any successor of any Underwriter, any Underwriter acting as
such by substitution in accordance with the Underwriting Agreement or any
controlling person shall be entitled to the benefits and obligations contained
in this Section.
17. REPORTS AND BLUE SKY MATTERS. You shall inform us, upon request, of
the states and other jurisdictions of the United States in which it is believed
that the Securities are qualified for sale under, or are exempt from the
requirements of, their respective securities laws, but you assume no
responsibility with respect to our right to sell Securities in any jurisdiction.
We authorize you to file with the
<PAGE>
Commission and any other governmental agency any reports required in connection
with any transactions effected by you for our account pursuant to this
Agreement, and we will furnish any information needed for such reports. We agree
to transmit to you for filing with the Commission any report required to be made
by us pursuant to the Exchange Act as a result of any transactions effected in
connection with the offering of the Securities. You will not have any
responsibility to the right of any Underwriter or other person to sell the
Securities in any jurisdiction, notwithstanding any information you may furnish
in that connection.
18. NASD MEMBERSHIP. You represent that you are a member in good
standing of the NASD, and we represent that we are (i) a member in good standing
of the NASD, (ii) a Bank that is not a member of the NASD, or (iii) a foreign
non-member. If we are an NASD a member we agree that in making sales of the
Securities we will comply with all applicable rules of the NASD, including,
without limitation, the NASD's Interpretation with Respect to Free-Riding and
Withholding (the "Interpretation") and Rule 2740 of the NASD's Conduct Rules. If
we are not a NASD member, we agree to comply as though we were a member with the
requirements of the Interpretation and Rules 2730, 2740 and 2750 of such Conduct
Rules. If we are such a foreign non-member, we agree not to offer or sell any
Securities in the United States of America, its territories or possessions or to
persons who are nationals thereof or residents therein, except through you and
as approved by you and in making sales of Securities we agree to comply with
Rule 2420 of such Conduct Rules as it applies to a non-member broker or dealer
in a foreign country. If we are such a foreign bank, we represent that, unless
otherwise notified in writing to you prior to the date hereof, we are not an
entity covered in (i), (ii) or (iii) of the last paragraph of Section 8 hereof.
If we are a Bank, we agree that we will not accept any portion of the management
fee paid by the Underwriters with respect to the offering of any Securities or,
in connection with the public offering of any Securities that do not constitute
"exempted securities" within the meaning of Section 3(a)(12) of the Exchange
Act, purchase any Securities at a discount from the offering price from any
Underwriter or Selected Dealer or otherwise accept any selling concession,
discount or other allowance from any Underwriter or Selected Dealer, which in
any such case is not permitted under such Conduct Rules, and we agree to comply
with Rule 2420 of such Conduct Rules of the Rules as though we were a member.
19. TITLE TO SHARES. The Shares purchased by the respective
Underwriters shall remain the property of such Underwriters until sold and no
title to any such Shares shall in any event pass to you by virtue of any of the
provisions of this Agreement.
20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
21. NOTICE. All notices to us will be considered duly given if mailed
or telegraphed to our address as set forth on the signature page hereof or sent
by facsimile to the number set forth on the signature page hereof (as such
address or facsimile number may be changed by written notice to you). All
notices to you will be considered duly given if mailed or telegraphed or sent by
facsimile as follows: The Chapman Co., 401 East Pratt Street, Suite 2800,
Baltimore, Maryland 21202, Attn: Syndicate Department (facsimile: (410)
625-9656).
Please confirm by signing and returning to us the enclosed copy of this
Agreement that your Acceptance of an Invitation with respect to an offering
shall constitute (i) acceptance of and agreement to the terms and conditions of
this Agreement (as supplemented and amended as provided herein), together with
and subject to any supplementary terms and conditions contained in the
Invitation and any other written communication from us in connection with such
offering, all of which shall constitute a binding agreement between us and you
as Representative of the Underwriters and among us and the Underwriters, (ii)
confirmation that our representations and warranties set forth herein are true
and correct at that time,
<PAGE>
(iii) confirmation that our agreements set forth
herein have been and will be performed by us to the extent and at the times
required thereby, and (iv) acknowledgment of familiarity with the Offering
Documents with respect to such offering.
Very truly yours,
---------------------------------
Name of Firm
By:------------------------------
---------------------------------
Print Name
---------------------------------
Title
Address:
-------------------------
-------------------------
Telephone:
-------------------------
Facsimile:
-------------------------
Confirmed as of the date
first set forth above:
THE CHAPMAN CO.
By:--------------------------------------------
Nathan A. Chapman, Jr., President and CEO
<PAGE>
EXHIBIT A
MASTER UNDERWRITERS' QUESTIONNAIRE
In connection with each offering of Securities to which the foregoing
Master Agreement Among Underwriters dated as of November 15, 1999, between The
Chapman Co. and the Underwriter executing the same relates, except as otherwise
disclosed to the Representative(s) in a written Acceptance, such Underwriter
advises the Representative(s) as follows and authorizes the Representative(s) to
use the information furnished in response to this Master Underwriters'
Questionnaire in the Registration Statement relating to the Securities:
(a) Neither such Underwriter nor any of its directors, officers or
partners, individually or as a part of a "group" (as that term is used in
Section 13(d)(3) of the Exchange Act) (i) has a "material" relationship (as
defined in Rule 405 under the Securities Act) with the Company or any other
seller of Securities in the Offering, (ii) is a director, officer or holder (of
record or beneficially, determined in accordance with Rule 13d-3 under the
Exchange Act) of 5% or more of any class of voting securities of the Company or
any other seller of Securities in the Offering, or (iii) other than as may be
stated in the Registration Statement, has any knowledge that more than 5% of any
class of voting securities of the Company is held or is to be held subject to
any voting trust or similar agreement;
(b) With reference to the Interpretation of the Board of Governors
of the NASD with respect to the Review of Corporate Financing, neither such
Underwriter nor any of its "related persons" (as defined by the NASD) (i) has
purchased or otherwise acquired from the Company any warrants, options or other
securities of the Company within 18 months prior to the date that the
Registration Statement was initially filed or subsequent to that date, and there
are no existing arrangements for any such purchase, or (ii) has had any dealings
with the Company (except those with respect to the Underwriting Agreement) or
any "affiliate" of the Company (as defined in Rule 405 under the Securities Act)
as to which documents or other information are required to be furnished to the
NASD pursuant to such Interpretation;
(c) Neither such Underwriter nor any of its "related persons" (as
defined by the NASD) is an "affiliate" of the Company as that term is defined in
Rule 2720 of the NASD's Conduct Rules or has a "conflict of interest" with the
Company under Rule 2710 or Rule 2720 of the NASD's Conduct Rules;
(d) Other than as stated in the Registration Statement, a copy of
which has been examined by us, the Master Agreement Among Underwriters, or the
Underwriting Agreement, such Underwriter does not know of any arrangements made
or to be made for limiting or restricting the sale of the Securities, for
stabilizing the market for the Securities, for withholding commissions or
otherwise to hold each Underwriter or dealer responsible for the distribution of
their participation in the Securities, or for any discounts or commissions to be
allowed or paid to dealers;
(e) If the Securities are to be issued pursuant to a trust
indenture, such Underwriter is not directly or indirectly in control of,
directly or indirectly controlled by, or under direct or indirect common control
with the Trustee, any other trustee under a trust indenture relating to
securities of the Company and qualified under the Trust Indenture Act of 1939,
as amended (an "Other Trustee"), or any of their respective affiliates, and none
of said companies or affiliates, or any of their respective directors or
executive officers, is a director, officer, partner, employee, appointee or
representative of such Underwriter;
(f) If the Securities are to be issued pursuant to a trust
indenture, such Underwriter and its directors, executive officers and partners,
taken as a group, did not, on the date of the Trustee's Statement of Eligibility
and Qualification on Form T-1, own beneficially more than 1% of the outstanding
voting
<PAGE>
securities of the Trustee, the Trustee's parent, any Other Trustee or the
parent of any Other Trustee;
(g) If the Registration Statement is on Form S-1, such Underwriter
has not prepared or had prepared for it within the past twelve months any
engineering, management or similar report or memorandum relating to the broad
aspects of the business, operations or products of the Company, except for
reports solely comprising recommendations to buy, sell or hold the Company's
securities, unless such recommendations have changed within the past six months;
(h) If the Registration Statement is on either Form S-2 or Form S-3,
such Underwriter has not prepared any report or memorandum for external use by
it or by the Company in connection with the Offering;
(i) If the Company does not have any securities registered under
Section 12 of the Exchange Act and is not subject to Section 15(d) of the
Exchange Act, such Underwriter does not intend to confirm sales of the
Securities to any accounts over which it exercises discretionary authority;
(j) Such Underwriter's proposed commitment to purchase Securities
will not result in a violation by it of the financial responsibility
requirements of Rule 15c3-1 under the Exchange Act and is not prohibited or
restricted by any action of the Commission, the NASD or of any national
securities exchange applicable to such Underwriter;
(k) Such Underwriter is familiar with the rules, regulations and
releases of the Commission dealing with the dissemination of information prior
to and during registration and has not distributed nor will it distribute any
written information outside of its organization relating to the Company or its
securities other than in accordance with such rules, regulations and releases;
and
(l) If the Company is a "public utility," such Underwriter is not a
"holding company" or a "subsidiary company" or an "affiliate" of a "holding
company" or of a "public utility," each as defined in the Public Utility Holding
Company Act of 1935, as amended.
All capitalized terms in this Questionnaire not otherwise defined herein
are used as defined in the foregoing Master Agreement Among Underwriters.
November 15, 1999.
<PAGE>
April 14, 2000
eChapman.com, Inc.
World Trade Center - Baltimore
40l E. Pratt Street
Suite 2800
Baltimore, MD 21202
Re: REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
We have acted as counsel for eChapman.com, Inc., a Maryland corporation
(the "Company"), in connection with the organization of the Company and the
issuance of up to 3,533,333 shares of its common stock, par value $0.001 per
share (the "Common Stock").
As counsel for the Company, we are familiar with its Charter and
Bylaws. We have examined the prospectus included in its Registration Statement
on Form SB-2 (File No. 333-90987) (the "Registration Statement"), substantially
in the form in which it is to become effective (collectively, the "Prospectus").
We have further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Company is duly
incorporated and existing under the laws of the State of Maryland and is in good
standing and duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the
Company and other documents and certificates with respect to factual matters as
we have deemed necessary to render the opinion expressed herein. With respect to
the documents we have received, we have assumed, without independent
verification, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based on such examination, we are of the opinion and so advise you that
the 3,533,333 shares of Common Stock to be offered for sale pursuant to the
Prospectus are
<PAGE>
eChapman.com, Inc.
April 14, 2000
Page 2
duly authorized and, when sold, issued and paid for as contemplated by the
Prospectus, will be validly and legally issued and will be fully paid and
nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Registration Statement
under the heading "Legal Matters."
Very truly yours,
/s/ VENABLE, BAETJER & HOWARD, LLP
<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
April 14, 2000
