<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION # 333-91251
<TABLE>
<S> <C>
--------------------
[LOGO] PROSPECTUS RELATING TO
5,709,204 SHARES COMMON STOCK
ECHAPMAN.COM, INC.
--------------------
PROXY STATEMENT RELATING TO A
SPECIAL MEETING OF STOCKHOLDERS OF
CHAPMAN HOLDINGS, INC.
</TABLE>
April 10, 2000
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Chapman Holdings, Inc. which we will hold at 7:00 a.m. local time on Thursday,
April 20, 2000 at the World Trade Center--Baltimore, 401 East Pratt Street,
Suite 2800, Baltimore, Maryland.
The purpose of the meeting is to approve the merger of Chapman Holdings into
a subsidiary of EChapman.com, Inc. In the merger, each Chapman Holdings share,
other than any dissenting shares, will convert into the right to receive 1.93295
shares of EChapman.com common stock, except that EChapman.com will pay cash for
fractional shares.
The board of directors of Chapman Holdings is soliciting your proxy for the
special meeting of stockholders to approve the merger. Chapman Holdings will
bear the costs of printing and mailing the prospectus and proxy statement and of
soliciting proxies.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR
TO AND IN THE BEST INTERESTS OF CHAPMAN HOLDINGS AND ITS STOCKHOLDERS AND
RECOMMENDS THAT YOU APPROVE THE MERGER AGREEMENT AND THE MERGER.
We are enclosing a proxy statement containing detailed information
concerning EChapman.com, the merger and the merger agreement. FOR RISKS IN
CONNECTION WITH THE MERGER, SEE "RISK FACTORS" BEGINNING ON PAGE 14.
Sincerely,
/s/ NATHAN A. CHAPMAN, JR.
President and Chairman of the Board
---------------------
THE SECURITIES AND EXCHANGE COMMISSION AND THE STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THE SHARES OF ECHAPMAN.COM COMMON STOCK TO BE ISSUED
IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus and proxy statement is dated April 10, 2000 and was first
mailed to stockholders on or about April 10, 2000.
---------------------
<PAGE>
<TABLE>
<S> <C>
CHAPMAN HOLDINGS, INC.
------------------
[LOGO] NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2000
------------------
</TABLE>
We will hold a special meeting of stockholders of Chapman Holdings, Inc. at
the World Trade Center--Baltimore, 401 East Pratt Street, Suite 2800, Baltimore,
Maryland 21202, on April 20, 2000 at 7:00 a.m. local time, for the following
purposes:
1. To consider and approve the Agreement and Plan of Merger, dated as of
November 15, 1999, by and among Chapman Holdings, Inc.,
EChapman.com, Inc. and CHI Merger Subsidiary, Inc., a copy of which
is included as Annex I to the accompanying prospectus and proxy
statement, which provides that (a) Chapman Holdings shall merge
into CHI Merger Subsidiary and (b) each share of Chapman Holdings
common stock, other than any dissenting shares, shall convert into
the right to receive 1.93295 shares of EChapman.com common stock,
except that cash will be paid in lieu of fractional shares.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Stockholders may, if the merger is approved and consummated, assert
dissenters' rights under Article 3, Subtitle 2 of the Maryland General
Corporation Law. Exercise of such rights requires strict compliance with the
procedures set forth in the applicable statute. A copy of Article 3, Subtitle 2
of the Maryland General Corporation Law is included as Annex III to the
accompanying prospectus and proxy statement.
We have fixed the close of business on January 25, 2000, as the record date
for determining those stockholders entitled to vote at the special meeting and
any adjournments or postponements of the special meeting. Accordingly, only
holders of record of Chapman Holdings common stock on that date are entitled to
receive notice of and to vote at the special meeting or any adjournments or
postponements of the special meeting.
By Order of the Board of Directors
Earl U. Bravo, Sr.
Secretary
April 10, 2000
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF CHAPMAN
HOLDINGS COMMON STOCK ENTITLED TO VOTE ON THESE MATTERS IS REQUIRED TO APPROVE
THE MERGER. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON,
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Questions and answers about the special meeting of Chapman
Holdings stockholders..................................... 3
Summary..................................................... 5
Chapman Holdings and EChapman.com summary financial
information............................................... 9
Risk factors................................................ 14
The Chapman Holdings special stckholders' meeting........... 20
The merger.................................................. 24
Certain other agreements.................................... 42
Description of Chapman Holdings............................. 44
Description of EChapman.com................................. 69
Selected historical and pro forma financial data............ 96
EChapman.com management's discussion and analysis of
financial condition and results of operations............. 100
Management of EChapman.com.................................. 108
Description of EChapman.com, Inc. capital stock............. 117
Comparison of stockholder rights of holders of EChapman.com,
Inc. common stock and Chapman Holdings, Inc. common
stock..................................................... 119
Shares eligible for future sale............................. 120
Legal matters............................................... 122
Experts..................................................... 122
Where you can find more information......................... 123
Index to financial statements............................... F-1
Annex I--Agreement of Merger................................ I-1
Annex II--Opinion of Ferris Baker Watts, Inc................ II-1
Annex III--Dissenters' rights statutory provisions.......... III-1
</TABLE>
THIS PROSPECTUS AND PROXY STATEMENT INCORPORATES CERTAIN IMPORTANT BUSINESS
AND FINANCIAL INFORMATION ABOUT ECHAPMAN.COM. THIS INFORMATION IS AVAILABLE,
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FOR STOCKHOLDERS OF CHAPMAN
HOLDINGS, INCLUDING ANY BENEFICIAL OWNER, FROM ECHAPMAN.COM, WORLD TRADE CENTER,
BALTIMORE, MARYLAND 21202, ATTENTION: SECRETARY (TELEPHONE (410) 625-9656). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
APRIL 13, 2000.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING OF CHAPMAN HOLDINGS STOCKHOLDERS
Q: WILL THE MERGER PROPOSAL BE APPROVED?
A: Yes. Nathan A. Chapman, Jr., the president and chairman of the board of both
Chapman Holdings and EChapman.com, has executed an irrevocable support
agreement. The support agreement requires Mr. Chapman to vote all shares with
respect to which he holds voting power as of the record date, which constitute
approximately 69.5% of the outstanding shares of our common stock, in favor of
the merger. This support agreement ensures that the merger will be approved even
if all of our other stockholders vote their shares against the merger.
Nevertheless, we encourage you to attend the special meeting, either in person
or by proxy, because of its importance to your investment in Chapman Holdings.
Q. WHAT DO I NEED TO DO NOW?
A. Simply indicate on your proxy card how you want to vote and then mail your
signed and dated proxy card in the enclosed postage-paid return envelope as soon
as possible.
Q. WHAT IF I PLAN TO ATTEND THE SPECIAL MEETING IN PERSON?
A. We recommend that you send in your proxy card even if you plan to attend the
special meeting in person. Sending in your proxy card will ensure that your vote
is counted in the event that you cannot attend the special meeting. However,
sending in your proxy card will not prevent you from attending the special
meeting or voting in person.
Q. IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A. Your broker will not be able to vote your shares of common stock without
voting instructions from you on the proposal. You should instruct your broker
how to vote your shares on the proposal, following the directions provided by
your broker.
Q. WHAT SHOULD I DO IF I WANT TO CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED
PROXY CARD?
A. You can change your vote by sending in a notice of revocation or a
later-dated, signed proxy card to Secretary, Chapman Holdings, Inc., World Trade
Center--Baltimore, 401 East Pratt Street, Suite 2800, Baltimore, Maryland 21202
before the special meeting or attending the special meeting in person and
voting. If you attend in person and vote, you will override any previously
submitted proxy.
3
<PAGE>
Q. WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A. We are working towards competing the merger as quickly as possible and expect
that the merger will become effective shortly after the special meeting.
Q. WHAT DO I NEED TO DO TO GET MY ECHAPMAN.COM SHARES?
A. After we complete the merger, we will send former Chapman Holdings
stockholders written instructions for exchange of their shares. If you hold
Chapman Holdings shares in physical form, you should not send in your stock
certificates now.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you have more questions about the proposal or the merger, you should
contact Mr. Earl U. Bravo, Sr. at: Chapman Holdings, Inc., World Trade
Center--Baltimore, 401 East Pratt Street, Suite 2800, Baltimore, Maryland 21202.
Telephone: (410) 625-9656. E-mail: [email protected].
4
<PAGE>
SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. WHERE APPROPRIATE, WE HAVE INCLUDED PAGE REFERENCES TO DIRECT YOU TO A MORE
COMPLETE DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
THE PARTIES
ECHAPMAN.COM, INC. (PAGE 69)
WORLD TRADE CENTER--BALTIMORE
401 EAST PRATT STREET, SUITE 2800
BALTIMORE, MARYLAND 21202
TELEPHONE: (410) 625-9656
EChapman.com is a newly formed corporation designed to bring together the
financial services capabilities of
- Chapman Holdings, Inc. and its operating subsidiary, The Chapman Co.
- Chapman Capital Management Holdings, Inc. and its subsidiary Chapman
Capital Management, Inc.
- Chapman Insurance Holdings, Inc. and its subsidiary, The Chapman Insurance
Agency Incorporated
EChapman.com intends to bring together these entities, while at the same
time taking advantage of the unique opportunities presented by the growth of the
Internet. The EChapman.com web site, which is currently under development, will
seek to be a leading interactive online community, offering both financial
services and a variety of lifestyle, educational and cultural content selected
to appeal particularly to African-Americans, Asian-Americans, Hispanic-Americans
and women market segments.
CHI Merger Subsidiary is a wholly-owned subsidiary of EChapman.com. CHI
Merger Subsidiary was formed solely for the purpose of effecting the merger with
Chapman Holdings.
CHAPMAN HOLDINGS, INC. (PAGE 44)
Chapman Holdings' address and telephone number are the same as those of
EChapman.com provided above.
Chapman Holdings is an African-American controlled holding company. Its full
service securities brokerage and investment banking subsidiary, The Chapman Co.,
is registered as a broker-dealer with the Commission and in 50 states and the
District of Columbia and Puerto Rico, and is a member firm of the National
Association of Securities Dealers, Inc. Chapman Holdings' primary sources of
revenue are brokerage services, corporate finance, and government finance
activities. These activities are supported by the research capabilities of
Chapman Holdings.
5
<PAGE>
THE MERGER (Page 24)
GENERAL. On November 15, 1999, Chapman Holdings entered into a merger
agreement with EChapman.com and Merger Subsidiary under which Chapman Holdings
will merge into CHI Merger subsidiary.
VOTE REQUIRED. The affirmative vote of at least a majority, or 1,476,812,
of the outstanding shares of Chapman Holdings common stock as of January 25,
2000, the record date for the special meeting, will be required to approve the
merger.
As of the record date:
- Mr. Chapman had voting power with respect to 2,052,382 shares constituting
approximately 69.5% of the outstanding shares of Chapman Holdings common
stock.
- Executive officers and directors of Chapman Holdings and their affiliates
had voting power with respect to 2,061,282 shares constituting
approximately 69.8% of the outstanding shares of Chapman Holdings common
stock
- Executive officers and directors of EChapman.com and their affiliates had
voting power with respect to 2,056,882 shares constituting approximately
69.6% of the outstanding shares of Chapman Holdings common stock
- Executive officers and directors of EChapman.com and Chapman Holdings and
their respective affiliates had voting power with respect to 2,063,882
shares constituting approximately 69.9% of the outstanding shares of
Chapman Holdings common stock
Mr. Chapman has agreed to vote his shares to approve the merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The board of directors believes
that the merger is fair to you and in your best interests, and unanimously
recommends that you vote FOR the proposal to approve the merger.
OUR REASONS FOR THE MERGER. We are proposing to merge because we believe
that by combining Chapman Holdings with EChapman.com we can create a stronger
and more diversified company. We believe that the merger will strengthen our
position as a competitor in the financial services industry, which is rapidly
changing and growing more competitive, while at the same time taking advantage
of the growth opportunities provided by the Internet.
CONDITIONS TO COMPLETION OF THE MERGER. The completion of the merger
depends on a number of conditions being met, including:
- Closing of the merger of Chapman Capital Management Holdings, Inc. into
CCMHI Merger Subsidiary, a wholly-owned subsidiary of EChapman.com; and
6
<PAGE>
- Successful completion of an initial public offering of EChapman.com common
stock in which
- EChapman.com receives cash gross proceeds of no less than $20 million
and
- the price paid by the public for such shares reflects a valuation of
EChapman.com of no less than $80 million following the mergers but
before the cash offering.
- Chapman Holdings' receipt of an opinion from its financial adviser that
the consideration to be received by the stockholders of Chapman Holdings
in the merger is fair, from a financial point of view, to the holders of
Chapman Holdings common stock.
- Chapman Holdings' receipt of an opinion from counsel to EChapman.com that
the merger will be treated as a tax-free reorganization for federal and
state income tax purposes.
ACCOUNTING TREATMENT. We will account for the merger using the purchase
method of accounting.
TRANSACTION GENERALLY TAX-FREE FOR CHAPMAN HOLDINGS STOCKHOLDERS (Page 39)
We expect that your exchange of shares of Chapman Holdings common stock for
shares of common stock of EChapman.com generally will not cause you to recognize
any gain or loss for U.S. federal income tax purposes. You will, however, have
to recognize income or gain in connection with any cash received in lieu of
fractional shares. THIS TAX TREATMENT MAY NOT APPLY TO ALL CHAPMAN HOLDINGS
STOCKHOLDERS. YOU SHOULD CONSULT YOUR TAX ADVISER FOR A FULL UNDERSTANDING OF
THE MERGER'S TAX CONSEQUENCES TO YOU.
STOCKHOLDERS HAVE APPRAISAL RIGHTS (Page 21)
Maryland law permits holders of Chapman Holdings common stock to dissent
from the merger and to have the fair value of their Chapman Holdings common
stock appraised by a court and paid to them in cash by Merger Subsidiary. TO DO
THIS, HOLDERS OF THESE SHARES MUST FOLLOW REQUIRED PROCEDURES, INCLUDING FILING
NOTICES WITH CHAPMAN HOLDINGS, AND, IF THEY ARE ENTITLED TO VOTE, EITHER
ABSTAINING OR VOTING AGAINST THE MERGER. If you hold shares of Chapman Holdings
common stock, and you dissent from the merger and follow the required
procedures, your shares of Chapman Holdings common stock will not become shares
of common stock of EChapman.com. Instead, your only right will be to receive the
appraised value of your shares in cash. The steps that you must take in order to
preserve these rights are described in "The Merger--Dissenters rights." We have
also attached the applicable provisions of Maryland law related to dissenters'
rights to this document as Annex III.
7
<PAGE>
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (Page 119)
The rights of stockholders of Chapman Holdings are governed by Maryland law
and by the charter and bylaws of Chapman Holdings. The rights of EChapman.com
stockholders are governed by Maryland law and by its charter and bylaws. Upon
completion of the merger, the rights of former stockholders of Chapman Holdings
will be governed by Maryland law and by the EChapman.com charter and bylaws
which are substantially similar to the existing charter and bylaws of Chapman
Holdings; however certain anti-takeover provisions of Maryland law from which
Chapman Holdings has opted out are applicable to EChapman.com.
MARKET PRICE DATA
Chapman Holdings common stock is publicly traded and quoted on the Nasdaq
SmallCap Market under the symbol "CMAN." The market value of Chapman Holdings
common stock on November 15, 1999, the last full trading day preceding the
public announcement of the execution of the merger agreement, based on the
closing price as reported on the Nasdaq SmallCap Market, was $5.38 per share.
The market value of Chapman Holdings common stock on March 28, 2000, the last
practicable date prior to the date of this prospectus and proxy statement, based
on the closing price as reported on the Nasdaq SmallCap Market, was $12.56 per
share.
EChapman.com common stock is not traded on any exchange, and no established
trading market exists for EChapman.com common stock; however, EChapman.com
common stock has been approved for listing on the Nasdaq National Market under
the symbol "ECMN".
USE OF CERTAIN TERMS
Unless we indicate otherwise, in each section of this prospectus and proxy
statement other than those sections which relate solely to Chapman Holdings and
the special meeting and the merger, such as "Chapman Holdings Special Meeting,"
"The Merger" and "Description of Chapman Holdings," the terms "we," "us,"
"EChapman.com" or "EChapman" refer to EChapman.com, Inc. after the mergers.
Unless we indicate otherwise, all information in this prospectus and proxy
statement (1) gives effect to the closing of the mergers and (2) the initial
public offering of EChapman.com at the minimum aggregate offering price.
8
<PAGE>
CHAPMAN HOLDINGS AND ECHAPMAN.COM SUMMARY FINANCIAL INFORMATION
The summary of financial information set forth below is derived from the
Chapman Holdings audited financial statements for each of the years ended
December 31, 1998 and 1999.
The summary unaudited pro forma Statement of Operations data for
EChapman.com gives effect to the mergers of Chapman Holdings and Chapman Capital
Management Holdings as if they had occurred as of January 1, 1999. The unaudited
pro forma balance sheet data for EChapman.com gives effect to the mergers as if
they had occurred as of December 31, 1999.
The summary unaudited as adjusted pro forma statement of operations data for
EChapman.com gives effect to the mergers and an initial public offering of
EChapman.com at the minimum aggregate offering price required for the merger to
close as if the mergers had occurred as of January 1, 1999. The unaudited pro
forma as adjusted balance sheet data for EChapman.com gives effect to the
mergers and an initial public offering at the minimum aggregate offering price
as if they had occurred as of December 31, 1999.
The summary unaudited pro forma consolidated financial information does not
purport to represent what EChapman.com's results of operations or financial
condition would actually have been had the transactions described occurred on
the dates indicated or to project EChapman.com's results of operations or
financial condition for any future period or date.
The historical financial information for Chapman Holdings should be read in
conjunction with such financial statements, including the notes, included
elsewhere in this prospectus and proxy statement.
<TABLE>
<CAPTION>
CHAPMAN HOLDINGS
HISTORICAL
------------------------
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenue............................................. $3,420,000 $ 7,374,000
Loss before income tax benefit............................ (1,242,000) (543,000)
Net loss.................................................. $ (872,000) $ (442,000)
========== ===========
Basic and diluted loss per share.......................... $ (0.31) $ (0.15)
========== ===========
Weighted average shares outstanding....................... 2,793,000 2,954,000
========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
ECHAPMAN PRO FORMA
-------------------------
YEAR ENDED DECEMBER 31,
1999
-------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................. $10,546,000 $10,546,000
Loss before income tax benefit............................ (4,819,000) (4,819,000)
Net loss.................................................. $(4,718,000) $(4,718,000)
=========== ===========
Basic and diluted loss per share.......................... $ (0.36) $ (0.29)
=========== ===========
Weighted average shares outstanding....................... 13,195,000 16,528,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
CHAPMAN HOLDINGS
HISTORICAL ECHAPMAN PRO FORMA
----------------------- -------------------------
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1999
----------------------- -------------------------
(UNAUDITED)
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities..................................... $ 1,274,000 $ 4,185,000 $21,785,000
Total assets..................................... 8,535,000 39,984,000 56,650,000
Total debt....................................... 1,750,000 1,900,000 1,900,000
Total stockholders' equity....................... 5,878,000 35,617,000(1) 53,217,000(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 related to the EChapman offering.
10
<PAGE>
COMPARATIVE PER SHARE DATA
The following financial information reflects certain comparative per share
data relating to the merger. The information shown below should be read in
conjunction with the historical financial statements of EChapman.com, Chapman
Capital Management Holdings, and Chapman Holdings including the related notes
which are included elsewhere in this prospectus and proxy statement.
The following information is not necessarily indicative of the results of
operations or financial position that would have resulted had the mergers of
Chapman Holdings and Chapman Capital Management Holdings been consummated on or
as of the dates indicated, nor is it necessarily indicative of the results of
operations in future periods.
The table below presents selected comparative consolidated per share
information
- For EChapman.com
- on a historical basis,
- on a pro forma basis assuming the mergers had occurred on January 1,
1998, and
- on a pro forma, as adjusted basis as if the mergers and the initial
public offering of EChapman.com's common stock at the minimum level
required for the merger to close had occurred on January 1, 1998
- For Chapman Holdings
- on a historical basis,
- on a pro forma equivalent basis, and
- on a pro forma, as adjusted, equivalent basis
- For Chapman Capital Management Holdings
- on a historical basis,
- on a pro forma equivalent basis, and
- on a pro forma, as adjusted, equivalent basis
Pro forma and pro forma, as adjusted, equivalent basis represent the pro
forma and pro forma, as adjusted, per share amounts of EChapman.com multiplied
by the exchange ratio of 1.93295 for Chapman Holdings and 2.23363 for Chapman
Capital Management Holdings
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
PER COMMON SHARE:
LOSS FROM CONTINUING OPERATIONS:
EChapman.com--historical(1)............................... $ -- $(281,000)
EChapman.com--pro forma................................... (0.18)(a) (0.36)(g)
EChapman.com--pro forma, as adjusted...................... (0.15)(b) (0.29)(h)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Chapman Holdings--historical.............................. $ (0.31) $ (0.15)
Chapman Holdings--pro forma equivalent.................... (0.35)(c) (0.69)(i)
Chapman Holdings--pro forma, as adjusted, equivalent...... (0.28)(d) (0.55)(j)
Chapman Capital Management Holdings--historical........... (0.04) (0.25)
Chapman Capital Management Holdings--pro forma
equivalent.............................................. (0.41)(e) (0.80)(k)
Chapman Capital Management Holdings--pro forma, as
adjusted, equivalent.................................... (0.33)(f) (0.64)(l)
CASH DIVIDENDS DECLARED:
EChapman.com--historical(1)............................... -- --
EChapman.com--pro forma combined.......................... -- --
EChapman.com--pro forma, as adjusted, equivalent.......... -- --
Chapman Holdings--historical.............................. -- --
Chapman Holdings--pro forma equivalent.................... -- --
Chapman Holdings--pro forma, as adjusted, equivalent...... -- --
Chapman Capital Management Holdings--historical........... -- --
Chapman Capital Management Holdings--pro forma
equivalent.............................................. -- --
Chapman Capital Management Holdings--pro forma, as
adjusted, equivalent.................................... -- --
BOOK VALUE:(2)
EChapman.com--historical(1)............................... (281,000)
EChapman.com--pro forma................................... 2.70 (m)
EChapman.com--pro forma, as adjusted...................... 3.22 (n)
Chapman Holdings--historical.............................. 1.99
Chapman Holdings--pro forma equivalent.................... 5.22 (o)
Chapman Holdings--pro forma, as adjusted, equivalent...... 6.22 (p)
Chapman Capital Management Holdings--historical........... 1.25
Chapman Capital Management Holdings--pro forma
equivalent.............................................. 6.03 (q)
Chapman Capital Management Holdings--pro forma, as
adjusted, equivalent.................................... 7.19 (r)
</TABLE>
- ------------------------
(1) EChapman.com was incorporated on May 14, 1999. EChapman.com had one share of
common stock outstanding as of December 31, 1999, and there is currently no
public market for EChapman.com's common stock.
(2) As a balance sheet for the year ended December 31, 1998, is not required
financial information for this filing, no per share book value information
is provided for December 31, 1998.
12
<PAGE>
(3) The following per share data represents amounts assuming the goodwill
step-up was at $6 per share (the minimum price for the mergers to close)
versus the $15 per share assumed in the pro forma financial statements.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
- ------------------------------ -----------------
<C> <S> <C> <C>
(a) $(0.11) (g) $(0.29)
(b) (0.09) (h) (0.23)
(c) (0.22) (i) (0.56)
(d) (0.18) (j) (0.45)
(e) (0.26) (k) (0.65)
(f) (0.20) (l) (0.52)
(m) 1.34
(n) 2.13
(o) 2.58
(p) 4.12
(q) 2.98
(r) 4.76
</TABLE>
13
<PAGE>
RISK FACTORS
THE MERGER AND OWNERSHIP OF ECHAPMAN.COM COMMON STOCK FOLLOWING THE MERGER
INVOLVE THE FOLLOWING RISKS. 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. YOU SHOULD CAREFULLY CONSIDER THESE RISKS
TOGETHER WITH ALL OTHER INFORMATION CONTAINED IN THIS DOCUMENT IN EVALUATING THE
PROPOSED MERGER AND YOUR INVESTMENT IN ECHAPMAN.COM COMMON STOCK.
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. In addition,
As a new entrant to the Internet business, we face risks and uncertainties
relating to our ability to implement successfully the Internet component of our
business strategy, including:
- Successful design, development and launch of the EChapman.com web site
- Creation of public awareness of the EChapman.com brand and web site
- Successful expansion of our financial service businesses on the Internet
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be materially
adversely affected.
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WE CURRENTLY HAVE NO AGREEMENTS WITH ADVERTISERS, STRATEGIC PARTNERS OR CONTENT
PROVIDERS, AND IF WE ARE UNABLE TO ESTABLISH AND MAINTAIN THESE RELATIONSHIPS,
OUR EARNINGS WILL SUFFER.
Although we intend to pursue advertising relationships and strategic
alliances with third parties and enter into agreements with content providers,
we have not entered into negotiations with any companies, and we cannot assure
you that we will be able to establish or maintain these relationships. If we
cannot establish and maintain these relationships, our earnings will be
adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE EXPECT TO CONTINUE TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
On a pro forma basis, after giving effect to the mergers of Chapman
Holdings, Chapman Capital Management Holdings and Chapman Insurance Holdings
into our wholly-owned subsidiaries, we had net losses of $4,718,000 for the year
ended December 31, 1999. Following the offering and the 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, and we will
need to increase our marketing and branding expenditures in our effort to
increase our brand awareness. If our brand building strategy is unsuccessful, we
may never recover these expenses, we may be unable to increase our future
revenues, and our business would be materially and adversely affected. We intend
to
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use a significant portion of the proceeds of this offering for promotion of our
web site.
NATHAN A. CHAPMAN, JR. HAS BEEN AN INSTRUMENTAL FORCE IN THE GROWTH OF CHAPMAN
HOLDINGS AND CHAPMAN CAPITAL MANAGEMENT HOLDINGS AND IN THE CREATION OF THE DEM
STRATEGY, AND THE LOSS OF MR. CHAPMAN'S SERVICES WOULD DEPRIVE US OF MR.
CHAPMAN'S KNOWLEDGE OF AND SKILL IN THE FINANCIAL SERVICES AND DEM MARKETS,
WHICH WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND GROWTH PROSPECTS.
For the foreseeable future, we intend to place substantial reliance upon the
personal efforts and abilities of Nathan A. Chapman, Jr., president of
EChapman.com. Mr. Chapman has provided the strategic vision for and has played a
key role in executing the business plans of Chapman Holdings, Chapman Capital
Management Holdings and the DEM strategy in the past. Therefore, the loss of the
services of Mr. Chapman would have a material adverse effect on our business,
operations, revenue and business prospects because of our reliance on his
strategic vision and his experience in the financial services and DEM markets.
We do not have an employment agreement with Mr. Chapman. The Chapman Co.
currently maintains "key man" life insurance coverage in the amount of
$7,000,000 on Mr. Chapman.
USE OF THE DEM STRATEGY ON THE INTERNET IS NEW AND UNTESTED, AND IF WE ARE
UNABLE TO ATTRACT MEMBERS OF THE DEM COMMUNITY TO OUR WEB SITE, OUR FUTURE
PROFITABILITY WILL BE MATERIALLY AND ADVERSELY AFFECTED.
We plan to use the DEM strategy in our Internet business to focus on
attracting African-Americans, Asian-Americans, Hispanic-Americans and women to
our web site. The success of our business will depend on our ability to attract
members of the DEM community to our web site; however, we cannot assure you that
these individuals will use our web site or that the expansion of the DEM
strategy on the Internet will be profitable because of the existing and
increasing competition for Internet-based business and the relatively limited
market represented by members of the DEM community compared to the market for
Internet users as a whole.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND IF A PUBLIC MARKET FOR
OUR SECURITIES DOES NOT DEVELOP OR IS NOT SUSTAINED, OUR STOCK PRICE COULD BE
ADVERSELY AFFECTED.
Prior to 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.
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RISKS RELATED TO ECOMMERCE AND THE INTERNET
WE FACE INTENSE COMPETITION, AND IF WE DO NOT RESPOND TO THIS COMPETITION
EFFECTIVELY, WE MAY NOT BE ABLE TO RETAIN AND ATTRACT USERS, ADVERTISERS AND
STRATEGIC PARTNERS, WHICH COULD REDUCE OUR REVENUE AND HARM OUR FINANCIAL
RESULTS.
The number of web sites competing for the attention and spending of users
and advertisers has greatly increased, and we expect it to continue to increase.
The market for Internet content sites is rapidly evolving and financial,
technical and legal barriers to entry are low, enabling newcomers to launch
competitive sites at relatively low costs.
We will compete for users, advertisers and strategic partners with the
following types of companies:
- Online services or web sites targeted at the various segments of the DEM
community, such as msbet.com, netnoir.com, quepasa.com, ivillage.com,
women.com and womencentral.com
- Web search and retrieval and other online service companies, commonly
referred to as portals
- Publishers and distributors of traditional media, such as television,
radio and print
- Online and traditional brokerages and investment banks
- Traditional brokerages and investment banks
If we do not respond to this competition effectively, we may not be able to
attract users, advertisers and strategic partners, which would reduce our
revenue and harm our financial results. In addition, increased competition could
result in price reductions, reduced margins or loss of market share, any of
which could adversely affect our business.
FAILURES OF OUR NETWORK INFRASTRUCTURE COULD RESULT IN UNANTICIPATED EXPENSES
AND PREVENT OUR USERS FROM EFFECTIVELY UTILIZING OUR SERVICES, WHICH COULD
NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN USERS AND ADVERTISERS AND
OTHER STRATEGIC PARTNERS.
Our ability to successfully create an interactive online community and to
deliver our financial services online depends in large part on the capacity,
reliability and security of our network hardware, software and
telecommunications infrastructure. Failures of our network infrastructure could
result in unanticipated expenses to address these failures and could prevent our
users from effectively utilizing our services, which could prevent us from
retaining and attracting users, advertisers and other strategic partners. In
addition, if we were to experience a network failure, we could be subject to
regulatory sanctions in connection with our online brokerage services.
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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 LIQUIDITY RISK WHILE TRADING FOR
ITS OWN ACCOUNT DUE TO ITS LARGE INVENTORY OF ECHAPMAN.COM COMMON STOCK.
As a result of the mergers, The Chapman Co.'s inventory of Chapman Holdings
common stock and Chapman Capital Management Holdings common stock will convert
into shares of EChapman.com common stock. EChapman.com common stock has been
approved for listing on the Nasdaq National Market. As a newly-listed Nasdaq
National Market security, EChapman.com common stock may have less liquidity and
higher spreads between bid and ask prices than other securities listed on the
New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market. Accordingly, The Chapman Co. is subject to liquidity risk with respect
to this security and may take longer to liquidate its inventory of these
securities than it would for investments in more liquid securities. Liquidity
risk is the risk that this security may be difficult or impossible to sell at
the time and for the price that The Chapman Co. deems appropriate. Further,
liquidity risk implies that any effort on the part of The Chapman Co. to
liquidate its portfolio in a short period of time may adversely affect the price
of the EChapman.com common stock.
OUR INVESTMENT ADVISORY SUBSIDIARY IS DEPENDENT ON A FEW MAJOR INVESTMENT
MANAGEMENT CLIENTS, AND IF ANY OF THESE CLIENTS TERMINATED THEIR ADVISORY
ARRANGEMENTS WITH US, OUR ADVISORY FEE REVENUE WOULD BE MATERIALLY HARMED.
All of Chapman Capital Management Holdings' 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,
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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 and proxy statement 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 and proxy
statement generally and economic and business factors, some of which are beyond
our control. In analyzing an investment in shares of our common stock, you
should carefully consider, along with other matters referred to in this
prospectus and proxy statement, the risk factors described below and throughout
this prospectus and proxy statement.
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THE CHAPMAN HOLDINGS SPECIAL STOCKHOLDERS MEETING
DATE, PLACE AND TIME
The Chapman Holdings special meeting of stockholders will be held at the
World Trade Center--Baltimore, 401 East Pratt Street, Suite 2800, Baltimore,
Maryland 21202, on April 20, 2000 at 7:00 a.m. local time.
PURPOSE OF THE SPECIAL MEETING
At the Chapman Holdings special meeting, stockholders will consider and vote
upon
- The proposal to approve the merger agreement and the merger contemplated
thereby under which each share of Chapman Holdings common stock (other
than shares held by Chapman Holdings stockholders who properly perfect
their dissenters' rights) automatically shall become and be converted into
the right to receive 1.93295 shares of EChapman.com common stock and cash
in lieu of fractional shares of EChapman.com common stock, and
- Such other matters as may properly be brought before the Chapman Holdings
special meeting
RECORD DATE
The Chapman Holdings board of directors has fixed the close of business on
January 25, 2000 as the record date for determining holders entitled to notice
of and to vote at the special meeting. Accordingly, only holders of record of
Chapman Holdings common stock at the close of business on the record date will
be entitled to notice of, and to cast their vote at, the special meeting. As of
January 25, 2000, there were 2,953,622 shares of Chapman Holdings common stock
issued and outstanding held by approximately 30 holders of record.
VOTING INFORMATION
Each holder of record of shares of Chapman Holdings common stock on the
record date is entitled to cast one vote per share, in person or by properly
executed proxy, on any matter that may properly come before the special meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the shares of Chapman Holdings common stock outstanding on the
Record Date is necessary to constitute a quorum at the special meeting.
The approval of the merger requires the affirmative vote of the holders of
at least a majority of the outstanding shares of Chapman Holdings common stock
entitled to vote thereon.
Votes cast by proxy or in person at the special meeting will be tabulated to
determine whether or not a quorum is present.
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ABSTENTIONS
Where, as to any matter submitted to the stockholders for a vote,
stockholders appear in person but abstain from voting, such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. If a broker indicates on the proxy that it
does not have discretionary authority as to certain shares to vote on a
particular matter (a "broker non-vote"), those shares are also treated as shares
that are present and entitled to vote for quorum purposes. Because the required
vote of stockholders on the merger agreement and the merger are based upon the
total number of outstanding shares of Chapman Holdings common stock, the failure
to submit a proxy card, or the failure to vote in person at the special meeting,
the abstention from voting and any broker non-vote will, except for purposes of
rights of dissenting stockholders, have the same effect as a vote against the
merger agreement and the merger.
REVOCATION OF PROXIES
You may revoke a previously submitted proxy at any time prior to its
exercise at the special meeting by giving written notice of your desire to
revoke your proxy on or prior to the date of the special meeting to Nathan A.
Chapman, Jr., president of Chapman Holdings, or Earl U. Bravo, Sr., secretary of
Chapman Holdings, by signing and returning a later dated proxy, or by voting in
person at the special meeting. Mere attendance at the special meeting will not
alone have the effect of revoking the proxy.
RIGHTS OF DISSENTING STOCKHOLDERS
Under the Maryland General Corporation Law, certain relevant sections of
which are attached to this prospectus and proxy statement as Annex III, each
holder of Chapman Holdings common stock will be entitled to demand and receive
payment of the "fair value" of his or her shares in cash, if he or she:
- prior to or at the special meeting, files with Chapman Holdings a written
objection to the merger,
- does not vote in favor of the merger by person or by proxy and
- within 20 days after Articles of Merger have been accepted for record by
the Maryland State Department of Assessments and Taxation, makes written
demand on Merger Subsidiary for payment of his or her shares, stating the
number and class of shares for which payment is demanded.
A written demand for payment should be sent to Earl U. Bravo, Sr.,
Secretary, CHI Merger Subsidiary, Inc., World Trade Center--Baltimore, 401 East
Pratt Street, Suite 2800, Baltimore, Maryland 21202. Any stockholder who fails
to comply with the requirements described above will be bound by the terms of
the merger agreement.
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A VOTE AGAINST OR AN ABSTENTION WITH REGARD TO THE MERGER WILL NOT ITSELF
CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT AND A FAILURE TO
VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT.
EChapman.com will promptly deliver or mail to each stockholder requesting
appraisal written notice of the date of acceptance of the Articles of Merger for
record by the State Department of Assessments and Taxation. Within 50 days after
acceptance of the Articles of Merger for record by the State Department of
Assessments and Taxation, any such stockholder who has not received payment for
his or her shares may petition a court of equity in Baltimore City, Maryland,
for an appraisal to determine the "fair value" of such shares as of the date of
the special meeting. If the court finds that a stockholder is entitled to
appraisal of his or her stock, the court will appoint three disinterested
appraisers to determine the "fair value" of such shares on terms and conditions
the court considers proper, and the appraisers will, within 60 days after
appointment, or such longer period as the court may direct, file with the court
and mail to each party to the proceeding their report stating their conclusion
as to the "fair value" of the shares.
Within 15 days after the filing of the report, any party may object to the
report and request a hearing. The court will, upon motion of any party, enter an
order either confirming, modifying or rejecting the report and, if confirmed or
modified, enter judgment directing the time within which payment must be made.
If the appraisers' report is rejected, the court may determine the "fair market"
value of the shares of the stockholders requesting appraisal or may remit the
proceeding to the same or other appraisers.
Any judgment entered in a court proceeding will include interest from the
date of the stockholders' vote related to the transaction giving rise to the
rights of appraisal, unless the court finds that the stockholder's refusal to
accept a written offer to purchase the stock which may previously have been made
by CHI Merger Subsidiary as required by Section 3-207 of the Maryland General
Corporation Law was arbitrary and vexatious or not in good faith. Costs of the
proceeding, excluding attorneys' fees, will be determined by the court and will
be assessed against CHI Merger Subsidiary or, under certain circumstances, the
stockholder requesting appraisal, or both.
At any time after the filing of a petition for appraisal, the court may
require any stockholder requesting appraisal to submit his or her certificates
representing shares to the clerk of the court for notation of the pendency of
the appraisal proceedings. In order to receive payment, whether by agreement
with EChapman.com or under a judgment, the stockholder must surrender the stock
certificates endorsed in blank and in proper form for transfer.
A stockholder demanding payment for shares will not have the right to
receive any dividends or distributions payable to holders of record after the
close of business on the date of the stockholders' vote and shall cease to have
any rights as a stockholder with respect to the shares except the right to
receive payment of the "fair
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value" for his or her shares. The stockholder's rights may be restored only upon
the withdrawal, with the consent of EChapman.com of the demand for payment,
failure of either party to file a petition for appraisal within the time
required, a determination of the court that the stockholder is not entitled to
an appraisal, or the abandonment or rescission of the merger.
Any dissenting stockholder who exercises his or her right to be paid the
value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for his or her shares. The amount
of gain or loss and its character as ordinary income or capital gain will be
determined in accordance with applicable provisions of the Internal Revenue
Code.
This summary of the rights of stockholders requesting appraisal contains all
material information relating to the exercise of appraisal rights. The
preservation and exercise of appraisal rights are conditioned on strict
adherence to the applicable provisions of the Maryland General Corporation Law.
Each stockholder desiring to exercise appraisal rights should refer to Title 3,
Subtitle 2, of the Maryland General Corporation Law for a complete statement of
the stockholder's rights and the steps which must be followed in connection with
the exercise of those rights. No further notice of the events giving rise to
dissenters' rights or any steps associated therewith will be furnished to
Chapman Holdings stockholders, except as indicated above or otherwise required
by law.
For further information relating to the exercise of appraisal rights, see
Annex III to this prospectus and proxy statement.
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THE MERGER
GENERAL
EChapman.com, Inc. is a newly-formed company and has had minimal operations
to date. EChapman.com has three wholly-owned subsidiaries:
- CHI Merger Subsidiary, Inc.
- CCMHI Merger Subsidiary, Inc.
- CIHI Merger Subsidiary, Inc.
These subsidiaries were formed for the sole purpose of effecting the mergers
described below.
On November 15, 1999, EChapman.com entered into merger agreements with each
of Chapman Holdings, Chapman Capital Management Holdings, Inc. and Chapman
Insurance Holdings, Inc. to acquire all of the outstanding stock of each of
these companies. The merger agreements provide that:
- Chapman Holdings will merge with CHI Merger Subsidiary,
- Chapman Capital Management Holdings will merge with CCMHI Merger
Subsidiary
- Chapman Insurance Holdings will merge with CIHI Merger Subsidiary. CHI
Merger Subsidiary, CCMHI Merger Subsidiary and CIHI Merger Subsidiary will
each be the surviving entities in their respective mergers and will be
renamed Chapman Holdings, Inc., Chapman Capital Management Holdings, Inc.
and Chapman Insurance Holdings, Inc., respectively.
Upon closing of the acquisitions, EChapman.com will directly own 100% of
Chapman Holdings, Chapman Capital Management Holdings and Chapman Insurance
Holdings and will indirectly control:
- The Chapman Co., a full service securities brokerage and investment
banking firm and wholly-owned subsidiary of Chapman Holdings
- Chapman Capital Management, Inc., an investment advisory firm and wholly-
owned subsidiary of Chapman Capital Management Holdings
- The Chapman Insurance Agency Incorporated, a licensed insurance agency
that sells annuity products and which is a wholly-owned subsidiary of
Chapman Insurance Holdings
Chapman Holdings was incorporated in Maryland on December 12, 1997, has been
publicly traded since February 1998 and is quoted on the Nasdaq SmallCap Market
under the symbol CMAN.
Chapman Capital Management Holdings was incorporated in Maryland on
January 8, 1998, has been publicly traded since August 1998 and is quoted on the
Nasdaq SmallCap Market under the symbol CMGT.
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Chapman Insurance Holdings was incorporated in Maryland on January 8, 1998,
has remained a privately-held company and has not had significant operations to
date.
Upon closing of the mergers and the initial public offering of EChapman.com,
Nathan A. Chapman, Jr., will be the majority stockholder of EChapman.com, with
beneficial ownership of 58.3% of the outstanding common stock. 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 EChapman.com's 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 EChapman.com's stock price.
THE MERGER AGREEMENT
GENERAL
The merger agreement provides that, subject to the satisfaction or waiver of
certain conditions. Chapman Holdings will be merged into CHI Merger Subsidiary,
whereupon, the separate existence of Chapman Holdings shall cease and Merger
Subsidiary will be the surviving corporation and change its name to Chapman
Holdings, Inc. Each share of Chapman Holdings common stock, other than shares
held by Chapman Holdings stockholders who properly perfect their dissenters'
rights, automatically shall become and be converted into the right to receive
1.93295 shares of EChapman.com common stock and payment for fractional shares
held. Certificates for Chapman Holdings common stock shall be exchanged for
certificates of EChapman.com common stock as described below.
Upon closing of the merger and the EChapman.com initial public offering,
former Chapman Holdings stockholders will own approximately 34.5% of the
outstanding EChapman.com common stock.
CONDITIONS TO MERGER
Closing of the merger is conditioned upon, among other things, approval of
the merger by an affirmative vote of at least a majority of the outstanding
shares of Chapman Holdings common stock entitled to vote on the merger. As of
January 25, 2000, the record date for the special meeting, Nathan A. Chapman,
Jr., the president and chairman of the board of both Chapman Capital Management
Holdings and EChapman.com, held the power to vote 2,052,382 shares, constituting
approximately 69.5% of the outstanding Chapman Capital Management Holdings
common stock. He has executed an irrevocable support agreement to support and to
vote to approve the merger. This support agreement ensures that the merger and
the merger agreement will be approved even if all of our other stockholders of
Chapman Capital Management Holdings vote their shares against the proposal.
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The obligation of EChapman.com and Chapman Holdings to consummate the merger
is subject to the satisfaction of certain further conditions including the
following:
- completion of an initial public offering of EChapman.com common stock in
which
- EChapman receives cash gross proceeds of no less than $20 million and
- the price paid by the public for such shares reflects a valuation of
EChapman after the mergers but before the cash offering of no less than
$80 million
- closing of the proposed merger of Chapman Capital Management
Holdings, Inc. into CCMHI Merger Subsidiary, a wholly-owned subsidiary of
EChapman
- receipt of an opinion of counsel confirming certain of the tax
consequences of the merger for Chapman Holdings stockholders as set forth
above under the heading "--Certain Federal Income Tax Consequences"
- the effectiveness of the Registration Statement pertaining to the issuance
of the shares of EChapman.com common stock to be issued to holders of
Chapman Holdings common stock in the merger
- the receipt by Chapman Holdings of the written opinion of Ferris, Baker
Watts to the effect that the consideration to be received by the
stockholders of Chapman Holdings in the merger is fair from a financial
point of view
- the accuracy and satisfaction of various financial and legal
representations and conditions, including representations and conditions
of Chapman Capital Management Holdings in the merger agreement by and
among EChapman.com, CCMHI Merger Subsidiary and Chapman Capital Management
Holdings, as of the date of closing of the EChapman.com initial public
offering
Where the law permits, a party to the merger agreement could elect to waive
a condition to its obligation to complete the merger although that condition has
not been satisfied. We cannot be certain when or if the conditions to the merger
will be satisfied or waived or that the merger will be completed. If the parties
to the merger waived material conditions to the merger, such as those conditions
requiring the merger of Chapman Capital Management Holdings and the initial
public offering of EChapman.com common stock, Chapman Holdings would resolicit
your proxy in order to obtain stockholder approval of the merger by filing an
amendment to the registration statement, of which this prospectus and proxy
statement forms a part, with the SEC and mailing you a revised prospectus and
proxy statement.
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INDEMNIFICATION
The merger agreement also provides that for a period of six years from and
after the merger, CHI Merger Subsidiary and EChapman.com shall indemnify, defend
and hold harmless each individual who served as a director, or officer of
Chapman Holdings or any of its subsidiaries at any time prior to the merger from
and against
- all losses, claims, damages, costs, expenses, liabilities or judgments or
amounts that are paid in settlement of or in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director or officer of Chapman Holdings or any of its subsidiaries,
whether pertaining to any matter existing or occurring at or prior to the
merger and whether asserted or claimed prior to, or at or after the merger
and
- all liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to the merger agreement or the transactions
contemplated by the merger agreement
in each case to the full extent a corporation is permitted under the Maryland
General Corporation Law to indemnify its own directors and officers.
NO SOLICITATION
The merger agreement provides that after the date of the merger agreement
and prior to the effective time of the merger, Chapman Holdings shall not, and
shall not permit any of its subsidiaries to
- initiate, solicit or seek, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) to acquire all or
any substantial part of the business and properties of Chapman Holdings
and its subsidiaries or more than fifty percent (50%) of the capital stock
of Chapman Holdings and its subsidiaries, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any
other consideration or combination thereof except for the transaction
contemplated herein (any such transactions being referred to herein as
"Acquisition Transactions"), or
- otherwise cooperate in any effort or attempt to make, implement or accept
an Acquisition Transaction.
Notwithstanding any other provision of the merger agreement, in response to
an unsolicited proposal or inquiry, or a proposal or inquiry arising from a
general solicitation with respect to an Acquisition Transaction and subject to
the duties of Chapman Holdings' board of directors under applicable law, if an
Acquisition Transaction is a tender offer subject to the provisions of
Section 14(d) under the Exchange Act, Chapman Holdings' Board of Directors may
take and disclose to
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Chapman Holdings' stockholders a position contemplated by Rule 14e-2(a) under
the Exchange Act.
In the event Chapman Holdings receives any offer of an Acquisition
Transaction, it shall
- immediately inform EChapman.com of such offer, and
- furnish to EChapman.com the identity of the proponent of such offer and,
unless the board of directors of Chapman Holdings concludes that such
disclosure is inconsistent with its duties under applicable law.
Chapman Holdings may terminate the merger agreement, withdraw, modify or not
recommend the merger to Chapman Holdings stockholders, and enter into a
definitive agreement for an Acquisition Transaction if, but only if,
- the board of directors of Chapman Holdings shall have consulted with legal
counsel concerning its obligations under applicable law,
- Chapman Holdings shall have determined in good faith after consultation
with the independent financial advisers of Chapman Holdings that such
Acquisition Transaction would be more favorable to Chapman Holdings
stockholders from a financial point of view than the merger, and
- the board of directors of Chapman Holdings shall conclude in good faith
that such action is necessary in order for the board of directors of
Chapman Holdings to act in a manner that is consistent with its
obligations under applicable law.
TERMINATION
The parties to the merger agreement may terminate it by mutual consent.
Chapman Holdings may unilaterally terminate the merger agreement at any time
prior to the closing of the merger even if the stockholders have approved the
merger if:
- the merger is not completed by June 30, 2000 other than on account of
delay or default on the part of Chapman Holdings;
- the merger or the transactions set forth in the CCMHI merger agreement are
enjoined by a final, unappealable court order not entered at the request
or with the support of Chapman Holdings or any of its affiliates or
associates;
- Chapman Holdings enters into a qualifying Acquisition Transaction and
Chapman Holdings has paid EChapman.com $3 million in lieu of any other
payments or penalties or the reimbursement of expenses incurred by
EChapman.com;
- Chapman Holdings stockholders' vote is not sufficient to approve the
merger and the merger agreement.
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EChapman.com may unilaterally terminate the merger agreement at anytime
prior to the closing if:
- the merger is not completed by June 30, 2000 other than on account of
delay or default on the part of EChapman.com;
- the merger or the transactions set forth in the merger agreement are
enjoined by a final, unappealable court order;
- Chapman Holdings stockholders' vote is not sufficient to approve the
merger.
The merger agreement may not be amended except by action taken by the
parties' respective boards of directors or duly authorized committees thereof
and then only by an instrument in writing signed on behalf of each of the
parties and in compliance with applicable law.
At any time prior to the effective time of the merger, any party to the
merger agreement may
- extend the time for the performance of any of the obligations or other
acts of the other parties,
- waive any inaccuracies in the representations and warranties contained
herein or in any document delivered in connection with the merger
agreement, and
- waive compliance with any of the agreements or conditions contained in the
merger agreement.
Any such extension or waiver will not be deemed to be continuing or to apply
to any future obligation or requirement of any part hereto provided in the
merger agreement. Any agreement on the part of a party to the merger agreement
to any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
RECOMMENDATION OF CHAPMAN HOLDINGS BOARD OF DIRECTORS
The board of directors has concluded that the terms of the merger are
advisable and are fair to, and in the best interests of, Chapman Holdings and
the Chapman Holdings stockholders. The board of directors recommends that the
Chapman Capital Management stockholders vote to approve the merger agreement and
the merger.
Upon closing of the merger, the former Chapman Holdings stockholders who
become holders of EChapman.com common stock will be stockholders in a larger
entity whose common stock will be publicly traded on the Nasdaq National Market.
Each Chapman Holdings stockholder who becomes a holder of EChapman.com common
stock will possess the same rights as other such holders, and former Chapman
Holdings stockholders as a group will no longer be taking action at the Chapman
Holdings corporate level because they will be stockholders of EChapman.com
rather than Chapman Holdings.
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BACKGROUND OF THE MERGER
Since the initial public offerings of Chapman Holdings and Chapman Capital
Management Holdings, their common management has discussed various strategies
that could be separately implemented to exploit opportunities available through
the Internet to market their traditional financial services to their target
market, the DEM community. They have further considered various alternatives
that would be available to raise the necessary capital to implement these
strategies.
Separate from these discussions, Nathan A. Chapman, Jr., president, chairman
of the board and majority stockholder of each of Chapman Holdings and Chapman
Capital Management Holdings, has recognized that, in addition to the traditional
financial services, other products and services can effectively be marketed to
the DEM community through the Internet. Over the past year, these separate
discussions have evolved into the EChapman.com business plan which includes the
combination of Chapman Holdings and Chapman Capital Management Holdings and
their various subsidiaries.
On August 25, 1999, Mr. Chapman discussed the proposed EChapman.com business
plan with the Chapman Holdings board of directors. On September 2, 1999,
Mr. Chapman made a presentation regarding the EChapman.com business plan,
including the proposed merger for their consideration. On September 3, 1999, the
board reconvened to continue consideration of the business plan and authorized
Chapman Holdings to retain legal, accounting and financial advisors to commence
implementation of the merger. At a meeting on October 28, 1999 and in light of
the interested status of Mr. Chapman and Earl U. Bravo, Sr. a director and the
secretary of each of Chapman Holdings and EChapman.com, the board established a
merger committee consisting of Lottie H. Shackelford and Donald V. Watkins, the
independent directors, of Chapman Holdings to consider the proposed merger. At
the meeting, the merger committee retained Blank Rome Comisky & McCauley LLP as
its counsel to assist in negotiating the terms of the merger and the merger
agreement.
Prior to the October 28, 1999 meeting, representatives of Blank Rome
conducted extensive due diligence reviews over a period of three days with
respect to Chapman Holdings and each of the other companies expected to merge
into EChapman.com, and due diligence reviews continued to November 11, 1999, the
date on which the merger committee of Chapman Holdings approved the merger. A
preliminary due diligence report was provided to the merger committee at a
meeting held on November 5, 1999. At that meeting, the merger committee formally
engaged Ferris, Baker Watts, Incorporated as its financial adviser to assist in
determining whether the merger is fair to the Chapman Holdings stockholders from
a financial point of view. At that time, the merger committee also engaged in
extensive discussions of the proposed terms of the merger and reviewed drafts of
the merger agreement and other documents relating to the merger
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On October 26, 1999, a representative of Ferris, Baker Watts conducted a due
diligence visit at the corporate headquarters of Chapman Holdings. In addition,
discussions were held with certain executives of Chapman Holdings. During the
week of November 8, 1999, representatives of Blank Rome continued to negotiate
the terms of the merger agreement with the legal advisors of EChapman.com.
During that week the merger committee reviewed drafts of the proposed written
opinion of Ferris, Baker Watts that the merger is fair to the stockholders of
Chapman Holdings from a financial point of view, the merger agreement and other
documents describing the proposed merger and the planned operations of
EChapman.com. The merger committee also reviewed documents relating to the
merger of Chapman Capital Management Holdings with EChapman.com.
At a merger committee meeting on November 11, 1999 Ferris, Baker Watts
presented its final written opinion, dated as of that date, to the merger
committee to the effect that the merger is fair to the Chapman Holdings
stockholders from a financial point of view and explained to the merger
committee in detail the analysis undertaken by Ferris, Baker Watts. Extensive
discussion and questioning followed the presentation by Ferris, Baker Watts.
Representatives of Chapman Holdings, including Nathan A. Chapman, Jr., were
invited to participate in part of the meeting of the merger committee for the
purpose of responding to questions from the merger committee and its legal and
financial advisors.
Following its discussions with Ferris, Baker Watts and management of Chapman
Holdings, the merger committee considered the proposed merger. Representatives
of Blank Rome gave a detailed presentation to the merger committee regarding the
material terms of the merger agreement, including the termination provisions and
presented a final due diligence report. After discussion and questioning by the
merger committee, the merger committee approved the merger and recommended
approval to the board of directors. At a board of directors meeting of Chapman
Holdings held immediately thereafter on November 11, 1999, Ferris, Baker Watts
reiterated the opinion delivered to the merger committee and the board of
directors unanimously approved the merger agreement and merger and recommended
approval to the stockholders.
REASONS FOR THE MERGER
In the course of evaluating recent trends in the financial industry, our
management has recognized both the opportunities presented by the Internet and
the challenges faced by us and comparably sized companies with respect to
exploiting such opportunities. These considerations led us to analyze
alternatives that would enhance stockholder value and permit us to implement an
Internet strategy. As a secondary objective, we would like to increase our
capital to enable us to participate in more and larger financial transactions.
The alternatives we considered included the possibility of additional
capital raising transactions and debt financing. However, we ultimately
determined that we
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could provide a more extensive line of services and achieve substantial
economies of scale if we pursued a common Internet strategy with Chapman Capital
Management Holdings. We also recognized that, in addition to financial services,
the combined company would be better able to raise capital and, therefore, could
provide additional, non-financial services to the DEM community that we have
developed. Further, we considered that a merger would diversify our existing
business, improve our prospects for long-term growth and thereby increase
stockholder value. The other alternatives analyzed by our board of directors did
not offer the same growth opportunities as the proposed merger.
The board determined that the merger with a wholly owned subsidiary of
EChapman.com was comparatively better than the alternative strategy of
individually accessing the capital markets or obtaining debt financing because
the merger offers us the opportunity to provide a broader line of financial
services to the DEM community and the proposed e-commerce strategy of
EChapman.com represents a new and exciting opportunity for our stockholders and
clients.
Our management believes that the merger will reduce risks associated with
our continued independent operations, including the:
- limited ability to access capital due to our smaller capital base and
operational resources;
- potential downside exposure associated with the limited financial services
that we currently provide; and
- the increasing challenge in meeting the growth expectations of our
stockholders.
Management believes that our stockholders will benefit from the merger and
resulting investment in EChapman.com because the merger provides:
- the potential for increasing products and services that we can offer our
client base;
- an experienced, growth-oriented management team focused on the combined
operations of EChapman.com;
- a means to create operational efficiencies and cost savings in the
combined operations through
- lowering our financing costs; and
- further integrating administrative operations.
- the opportunity to diversify our operations and, as a result, expand our
customer base;
- improved market liquidity and a greater ability to attract market makers,
stock market analysts and institutional investors to our stock; and
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- ownership in a larger entity with significant growth opportunities for our
stockholders.
Management also believes that there are some detriments and uncertainties to the
merger which are related to the fact that that following the merger you will be
a stockholder of EChapman.com and, therefore, subject to the risks of ownership
of this stock. The material risks associated with an investment in EChapman.com
are detailed in the "Risk Factors" section located at the beginning of this
prospectus and proxy statement.
After consulting with and considering the analysis of Ferris Baker Watts,
our board of directors determined that it was in the best interests of our
stockholders to pursue the merger. In making this determination, the board
considered the positive and negative factors set forth above. Our legal counsel
advised the board about its duties under Maryland law in the evaluation of the
proposed transaction. Among the items considered by the board were the
presentations made by Mr. Chapman at the board meetings of September 2-3, 1999
and October 28, 1999 and the written opinion of Ferris Baker Watts dated
November 11, 1999, to the effect that, subject to the assumptions, limitations
and qualifications set forth in the opinion, the exchange ratio used to
determine the number of shares of EChapman.com common stock to be issued in
exchange for our common stock in connection with the merger is fair to our
stockholders from a financial point of view. Our board of directors believes
that the terms of the merger remain fair and in the best interests of our
stockholders as of the date of this prospectus and proxy statement.
The preceding discussion sets forth the material information and factors
considered by our board of directors in determining the fairness to our
stockholders of the stock issuance in connection with the merger and the
associated change of control. In view of the variety of factors considered in
connection with its evaluation of the merger, the board did not find it
practicable or necessary to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination.
Moreover, the board did not expressly adopt the Ferris Baker Watts opinion as a
conclusive endorsement of the transaction, but did weigh it along with the other
factors described. Individual members of the board may have given different
weights to different factors.
EFFECTIVE DATE
As soon as practicable after the performance of all agreements and
obligations of the parties under the merger agreement and upon fulfillment or
waiver of all conditions precedent contained in the merger agreement, CHI Merger
Subsidiary and Chapman Holdings will execute and deliver Articles of Merger, and
will file the articles with the State Department of Assessments and Taxation of
the State of Maryland. The merger shall become effective on such date and time
as set forth in the Articles of the Merger as filed with the State Department of
Assessment and Taxation.
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PROCEDURES FOR EXCHANGE OF CERTIFICATES
On and after the effective date, of the merger certificates for shares of
Chapman Holdings common stock shall represent the right to receive certificates
representing the number of whole shares of EChapman.com common stock and cash in
lieu of fractional shares. Certificates representing shares of Chapman Holdings
common stock may be exchanged after the effective date of the Merger by
surrendering these certificates to UMB Bank, N.A., acting as exchange agent, or
such other or additional exchange agent as EChapman.com may select, in exchange
for new certificates representing the appropriate number of whole shares of
EChapman.com common stock determined by the exchange ratio and for cash in lieu
of any fractional shares.
No certificates for fractional shares of EChapman.com common stock shall be
issued but, in lieu thereof, and solely as a mechanism for rounding
stockholdings to whole shares, EChapman.com will pay cash for these fractional
shares on the basis of $29.00 per share, without interest, upon surrender of
certificates for Chapman Holdings common stock representing these fractional
shares. No holder of fractional shares shall be entitled to dividends, voting
rights or any other rights of stockholders in respect of any fractional share.
Shortly after the effective date of the merger, Chapman Holdings
stockholders will receive transmittal forms and instructions as to the time and
method of surrendering their certificates. Until so surrendered, certificates
formerly representing shares of Chapman Holdings common stock, other than shares
of dissenting stockholders, will be deemed for all corporate purposes to
evidence the number of whole shares of EChapman.com common stock that a holder
would be entitled to receive upon surrender and the cash to be paid in lieu of
fractional shares. Dividends and other distributions, if any, that become
payable on whole shares of EChapman.com common stock pending exchange of
certificates representing shares of Chapman Holdings common stock will be
retained by EChapman.com or the Exchange Agent until surrender of the
certificates, at which time those dividends and any other distributions will be
paid without interest.
CHAPMAN HOLDINGS STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL
THEY HAVE RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. CHAPMAN HOLDINGS
STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
OPINION OF FERRIS, BAKER WATTS, INCORPORATED
Ferris, Baker Watts has delivered to Chapman Holdings its written opinion,
dated November 11, 1999, to the effect that as of that date, 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
under the merger agreement is fair from a financial point of view.
Although Ferris, Baker Watts evaluated the fairness, from a financial point
of view, of the consideration the holders of Chapman Holdings common stock will
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receive in the merger, the type and amount of consideration itself was
determined by Chapman Holdings and EChapman.com through negotiations. The
fairness opinion is one of the many factors that the merger committee considered
in deciding that the merger is fair to and in the best interests of the
stockholders of Chapman Holdings and in recommending the merger to the full
board of directors and ultimately to the stockholders of Chapman Holdings.
Except as described in the following sentence, Chapman Holdings did not
provide specific instructions to, or place any limitations on, Ferris, Baker
Watts with respect to the procedures to be followed or factors to be considered
by Ferris, Baker Watts in performing its analyses or providing its opinion.
Chapman Holdings did not authorize Ferris, Baker Watts to approach, solicit or
hold discussions with third parties concerning an acquisition of Chapman
Holdings.
You should consider the following when reading this summary and Ferris,
Baker Watts' opinion, dated November 11, 1999, which has been confirmed as of
the date of this prospectus and proxy statement, that is set forth as Annex II
hereto:
- In its analyses, Ferris, Baker Watts took into account its assessment
of general business, market, monetary, financial and economic conditions,
industry performance and other matters, many of which are beyond the
control of Chapman Holdings, as well as Ferris, Baker Watts' experience in
securities valuation, its knowledge of the financial services industry and
its experience in similar transactions.
- The analyses were prepared solely to allow Ferris, Baker Watts to
provide its opinion as to the fairness of the merger consideration, from a
financial point of view, and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Any estimates contained in Ferris, Baker Watts' analyses are not
necessarily indicative of future results of operations or values, which may
be significantly more or less favorable than such estimates.
- Ferris, Baker Watts' opinion is just one of the many factors taken into
consideration by the merger committee in deciding that the merger is fair
to and in the best interests of the stockholders of Chapman Holdings and in
recommending the merger to the full board of directors and ultimately to
the stockholders of Chapman Holdings. Ferris, Baker Watts' opinion does not
address the relative merits of the merger as compared to any alternative
business strategies that might exist for Chapman Holdings, nor does it
address the effect of any other business combination in which Chapman
Holdings might engage.
- Ferris, Baker Watts' opinion is directed to Chapman Holdings board and
addresses only the fairness of the merger consideration to be received by
Chapman Holdings stockholders in the merger from a financial point of view.
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It does not constitute a recommendation to any Chapman Holdings stockholder
to vote in favor of the merger.
In arriving at its opinion, Ferris, Baker Watts among other things:
- reviewed the draft merger agreement
- reviewed annual, quarterly and periodic reports of Chapman Holdings
filed with the SEC
- reviewed selected public and internal information of Chapman Holdings
- held discussions with management of Chapman Holdings regarding the
business and prospects of Chapman Holdings
- reviewed the reported prices and trading activity for Chapman Holdings
common stock
- reviewed industry specific data regarding the valuation of publicly
traded companies in the brokerage, investment banking and asset management
industries, as well as other such information as Ferris, Baker Watts
considered appropriate
Ferris, Baker Watts did not assume responsibility for independent
verification of, and did not independently verify, the accuracy and completeness
of the information concerning either EChapman.com or Chapman Holdings furnished
to Ferris, Baker Watts for review, including financial information, forecasts or
projections considered in rendering its opinion. Nor did Ferris, Baker Watts
independently verify any third party data or information, whether publicly
available or privately furnished to Ferris, Baker Watts, including any financial
information, forecasts or projections considered in connection with rendering
its opinion.
Ferris, Baker Watts did not perform or obtain any independent appraisals or
evaluations of the assets and liabilities and potential and/or contingent
liabilities of either EChapman.com or Chapman Holdings. With respect to the
financial forecasts and projections made available to Ferris, Baker Watts and
used in its analyses, Ferris, Baker Watts assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgments as to the matters covered by the forecasts and projections. In
rendering its opinion, Ferris, Baker Watts expressed no view as to the
reasonableness of the forecasts and projections or the assumptions on which they
were based. Ferris, Baker Watts expresses no opinion on matters of a legal,
regulatory, tax or accounting nature.
Although the evaluation of the fairness, from a financial point of view, of
the consideration to be received by Chapman Holdings stockholders in the merger
was to some extent subjective based on the experience and judgment of Ferris,
Baker Watts, and not merely the result of mathematical analyses of financial
data, Ferris, Baker Watts relied, in part, on the financial analyses summarized
below in its determinations. With respect to the analysis below entitled
"Selected Publicly Traded
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Companies," no public company utilized as a comparison is identical to Chapman
Holdings and such analyses necessarily involve complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the acquisition values of
the companies concerned.
In connection with rendering its opinion, Ferris, Baker Watts performed a
variety of financial analyses that are summarized below. In addition, in
reaching its opinion as to the fairness of the consideration to be received by
the stockholders of Chapman Holdings in the merger from a financial point of
view, Ferris, Baker Watts considered that the implied value of EChapman.com
common stock to be received by Chapman Holdings stockholders, based upon the
proposed exchange ratio of 1.93295 shares of common stock of eChapman.com for
each outstanding share of common stock of Chapman Holdings, represents a
substantial premium over the closing market price of Chapman Holdings common
stock on November 10, 1999, the last trading day before Ferris, Baker Watts
issued its opinion, which was $5 1/2.
In considering this implied premium, Ferris, Baker Watts assumed that the
gross proceeds raised for EChapman.com's initial public offering will be at
least $20 million, which is a condition to the closing of the merger. This
merger closing condition effectively requires a post-money equity value for
EChapman.com of at least $100 million. Based on this minimum initial public
offering aggregate offering price and the proposed exchange ratio, the implied
per share value of the EChapman.com common stock to be received for each Chapman
Holdings share would be a minimum of $11.68.
FREE CASH FLOW ANALYSIS.
This methodology is premised on the assumption that a buyer purchases a time
series of free cash flows that are generated by the assets of a business. This
analysis separates and ascribes value only to the cash flows that can ultimately
be taken out of the business. Cash that is generated but used to sustain the
business, such as increases in working capital and capital expenditures, creates
no incremental value to the buyer. These free cash flows are then discounted to
the present at the firm's weighted average cost of capital. The weighted average
cost of capital is generally described as the average price a company must pay
to attract both debt and equity to properly capitalize the firm's growth. It is
this series of free cash flows that, when discounted to the present, and after
subtracting claims by debt holders and others, is one representation of the
economic value of a firm to its stockholders.
This analysis was based on internal projections prepared and provided by the
management of Chapman Holdings. The accuracy of this method of valuation depends
materially on the integrity of management's projections. Chapman Holdings'
management's projections show revenue and operating profit growth to $18.8
million and $4.7 million, respectively, in 2004. The cost of capital used in the
analysis was 14.36%. The analysis yielded an implied per share value for Chapman
Holdings of $4.82.
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SELECTED PUBLICLY TRADED COMPANIES.
Ferris, Baker Watts reviewed 11 publicly traded companies engaged in the
brokerage and investment banking business and compared the average price to
revenue multiple of the selected companies to that of Chapman Holdings. The
price to revenue multiple compares the market value of equity plus debt to
Chapman Holdings' revenue stream. Due to the operating losses incurred by
Chapman Holdings, valuation measures that rely on historical measures of
earnings, such as earnings before interest and taxes (EBIT) or net income are
not meaningful and were not utilized.
The merger compares favorably to the implied value of Chapman Holdings based
upon the price to revenue multiple.
No company used in this composite is identical to Chapman Holdings or the
merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies involved and other factors that could materially affect the public
trading values of the securities of the company or companies to which they are
being compared.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analyses or summary description. Ferris,
Baker Watts believes its analyses must be considered as a whole and that
selecting portions of such analyses and factors considered by Ferris, Baker
Watts without considering all such analyses and factors could create an
incomplete view of the process underlying Ferris, Baker Watts' opinion. Ferris,
Baker Watts' opinion was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of November 11,
1999 and as of the date of this prospectus and proxy statement. Events occurring
after the most recent of those dates could materially affect the assumptions
used in preparing the opinion.
As described above, Ferris, Baker Watts' opinion and presentation to the
Chapman Holdings board was one of many factors taken into consideration by the
Chapman Holdings board in making its determination to approve the merger
agreement. Although the foregoing summary describes the material components of
the analyses provided by Ferris, Baker Watts as of November 11, 1999 and updated
as of the date of this prospectus and proxy statement, in connection with its
opinion as of those dates, it does not purport to be a complete description of
all the analyses performed by Ferris, Baker Watts and is qualified by reference
to the written opinion of Ferris, Baker Watts set forth as Annex II hereto.
Ferris, Baker Watts is an investment banking firm which, as part of its
investment banking business, regularly is engaged in evaluating businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings of securities, private placements and valuations for corporate and
other purposes. Chapman Holdings' board selected Ferris, Baker Watts to act as
its financial adviser because of
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Ferris, Baker Watts' expertise in business valuation in general, and its
expertise in the financial services industry in particular.
In the ordinary course of its business, Ferris, Baker Watts may actively
trade in or hold the securities and other instruments and obligations of Chapman
Holdings for its own account and /or for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities,
instruments or obligations.
Ferris, Baker Watts has agreed to serve as a "qualified independent
underwriter" for EChapman.com's initial public offering. Under the Conduct Rules
of the NASD, when a member of the NASD, such as The Chapman Co., participates in
the public distribution of its own or an affiliate's securities, the public
offering price can be no higher than that recommended by a qualified independent
underwriter. Accordingly, Ferris, Baker Watts has agreed to recommend an initial
public offering price for the shares of EChapman.com common stock to be offered
to the public. That closing of the public offering is contingent on the closing
of the merger and both the public offering and the merger are scheduled to close
simultaneously.
Ferris, Baker Watts estimates that it will receive from Chapman Holdings
professional fees related to its engagement to render a fairness opinion of
approximately $75,000. In addition, Ferris, Baker Watts estimates that it will
receive fees related to its engagement as qualified independent underwriter for
EChapman.com's initial public offering of approximately $700,000 based on the
midpoint of the filing range of the EChapman.com initial public offering
registration statement. Chapman Holdings has agreed to reimburse Ferris, Baker
Watts for it reasonable travel and other out-of-pocket expenses, including
reasonable fees and disbursements of counsel, and to indemnify and hold harmless
to the fullest extent permitted by law, Ferris, Baker Watts and related parties
against liabilities, including liabilities under the federal securities laws,
relating to, or arising out of, its engagement.
The full text of the Ferris, Baker Watts' opinion dated as of the date of
this prospectus and proxy statement, setting forth the assumptions made,
procedures followed, matters considered and certain limitations on review
undertaken by Ferris, Baker Watts, is included as Annex II hereto.
THE OPINION OF FERRIS, BAKER WATTS RELATES ONLY TO WHETHER THE CONSIDERATION
TO BE RECEIVED BY THE STOCKHOLDERS OF CHAPMAN HOLDINGS IS FAIR FROM A FINANCIAL
POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF
CHAPMAN HOLDINGS AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE CHAPMAN HOLDINGS
MEETING TO CONSIDER THE MERGER TRANSACTION.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material Federal income tax
consequences of the merger; it is not intended to be a complete description of
those consequences.
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- the merger will qualify as a tax-free reorganization within the meaning of
Sections 368(a)(2)(D) of the Internal Revenue Code of 1986 (the "Code"),
to which EChapman.com, CHI Merger Subsidiary and Chapman Holdings will
each be a party;
- no gain or loss will be recognized by EChapman.com, CHI Merger Subsidiary
or Chapman Holdings in the merger;
- no gain or loss will be recognized by the Chapman Holdings stockholders
upon receipt by them of EChapman.com common stock in exchange for Chapman
Holdings common stock in the merger;
- provided that the Chapman Holdings common stock is held as a capital
asset, the tax basis of the EChapman.com common stock received by each
Chapman Holdings stockholder will be the same as the tax basis of the
Chapman Holdings common stock surrendered and exchanged in the merger
decreased by the amount of any cash received by the stockholder and
increased by the amount of any gain recognized by the stockholder; and
- provided that the Chapman Holdings common stock is held as a capital
asset, the holding period of the EChapman.com common stock received by the
Chapman Holdings stockholders will include the holding period during which
the Chapman Holdings common stock surrendered in exchange therefor was
held.
The obligation of Chapman Holdings to consummate the merger is subject to
the receipt of an opinion of Venable, Baetjer and Howard LLP, counsel to
EChapman.com, or such other qualified law firm as Chapman Holdings shall select,
with respect to the federal income tax consequences of the merger, substantially
to the effect of the paragraphs set forth above. This opinion will address the
state aspects of the merger, but it will not address the local or foreign tax
aspects of the merger.
Any cash received by Chapman Holdings stockholders, whether as a result of
the exercise of their dissenters' rights or in lieu of the issuance of
fractional shares, could result in taxable income to Chapman Holdings
stockholders. The receipt of cash generally will be treated as a sale or
exchange of the stock resulting in capital gain or loss measured by the
difference between the cash received and an allocable portion of the basis of
the stock relinquished. The receipt of cash may be treated as a dividend and
taxed as ordinary income in certain limited situations.
The discussion above is included for general information only. It does not
address the state, local or foreign tax aspects of the merger. In addition, it
does not discuss the federal income tax considerations that may be relevant to
certain persons, and may not apply to certain holders subject to special tax
rules, including dealers in securities and foreign holders. The discussion is
based upon currently existing provisions of the Internal Revenue Code, existing
Treasury regulations and current
40
<PAGE>
administrative rulings and court decisions. All of the foregoing are subject to
change and any such change could affect the continuing validity of this
discussion.
Each Chapman Holdings stockholder should consult his own tax adviser with
respect to the specific tax consequences of the merger to him, including the
application and effect of state, local and foreign tax laws.
ACCOUNTING TREATMENT
The merger will be treated as a purchase for accounting purposes. Under the
purchase method of accounting, the merger of Chapman Capital Management
Holdings, Chapman Holdings and EChapman.com will result in the recording and
recognition of approximately $28.3 million of goodwill. This amount of goodwill
may change depending on the market value of Chapman Holdings at the date of the
merger or the selling price of shares sold in the EChapman.com initial public
stock offering. The $28.3 million of goodwill will be amortized over an
estimated period of not more than 20 years.
RESALE OF ECHAPMAN.COM COMMON STOCK AFTER THE MERGER BY CONTROLLING PERSONS
Under federal securities laws there are certain potential limitations on the
sale of EChapman.com common stock received in the merger that will affect
certain Chapman Holdings stockholders who may be controlling persons of Chapman
Holdings. EChapman.com and Chapman Holdings believe that the only Chapman
Holdings stockholders who may be deemed controlling persons subject to these
limitations are the directors and certain officers of Chapman Holdings and
certain persons related to them who have been advised of these restrictions and
have agreed in writing to them.
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<PAGE>
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to EChapman.com entering into the merger agreement, Nathan A.
Chapman, Jr., the president and chairman of the board of both Chapman Holdings
and EChapman.com, who, as of January 25, 2000, the record date for the special
meeting, held voting power over 2,052,382 shares of Chapman Holdings common
stock constituting approximately 69.5% of the outstanding Chapman Holdings
common stock, has entered into a support agreement with EChapman.com.
Mr. Chapman has agreed:
- not to pledge, hypothecate, grant a security interest in, sell, transfer
or otherwise dispose of or encumber nor enter into any agreement,
arrangement or understanding which would restrict, establish a right of
first refusal to or otherwise relate to the transfer or voting of the
shares of Chapman Holdings common stock owned or acquired during the term
of the support agreement;
- subject to his obligations as a director of Chapman Holdings, not to
directly or indirectly, solicit, initiate or encourage inquiries or
proposals from, or participate in discussions or negotiations with, or
provide any information to, any individual or entity, other than
EChapman.com and its employees and agents, concerning any sale of assets,
sale or exchange of stock, merger, consolidation or similar transactions
involving Chapman Holdings, and to use all commercially reasonable efforts
to assure that Chapman Holdings takes no such steps;
- to promptly advise EChapman.com of any such inquiry or proposal of which
he has knowledge;
- to vote his shares of Chapman Holdings common stock in favor of the merger
agreement and the transactions contemplated thereby, and, in his capacity
as a stockholder, to use his best efforts to cause the merger to be
effected.
The support agreement expires upon the termination of the merger agreement.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the merger agreement, the
directors and officers of Chapman Holdings also executed a memorandum,
undertaking and agreement under which they have undertaken to comply with
certain provisions of the federal securities laws which restrict the sale of
shares of EChapman.com common stock by them.
UNDERWRITING AGREEMENT
In connection with the initial public offering of eChapman.com common stock,
eChapman.com and The Chapman Co., an affiliate of Chapman Holdings, will enter
into an underwriting agreement. The Chapman Co. will be entitled to receive up
to
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7% of the offering proceeds under the terms of this agreement; however, because
The Chapman Co has not determined how many underwriters will participate in the
underwriting syndicate, or the allocations each underwriter will receive, as of
the date of this prospectus and proxy statement, the exact amount of
underwriting compensation is not available.
THE SERVICE MARK LICENSE AGREEMENT
As of November 12, 1999, EChapman.com and Mr. Chapman entered into a
revocable, non-exclusive, royalty-free service mark licensing agreement
pertaining to the use of the DEM-TM-, Domestic Emerging Markets-TM-, DEM
Index-TM-, DEM Profile-TM-, DEM Universe-TM-, DEM Company-TM-, DEM
Multi-Manager-TM-, Chapman-TM-, Chapman Trading-TM-, Chapman Network-TM-,
Chapman Education-TM-, Chapman Marketplace-TM-, Chapman Kids Club-TM-,
EChapman.com-TM- and stylized C-Eagle-TM- trademarks that are owned by
Mr. Chapman.
SECTION 16(B) EXEMPTION
Section 16(b) of the Securities Exchange Act of 1934 provides that all
profits realized by 10% beneficial owners, directors and officers of an issuer
from the purchase and sale of the securities of such issuer are recoverable by
the issuer where the purchase and sale occur within six months of each other.
This section is intended to prevent insiders from benefiting from information
they gain due to their position with a company. Rule 16b-3 adopted under
Section 16(b) permits the board of directors of a company to exempt the
company's directors and officers from the provisions of Section 16(b) with
respect to a disposition of their securities in connection with a merger of the
company. Chapman Holdings expects its board of directors to exempt any
disposition by a Chapman Holdings director or officer of Chapman Holdings
securities in connection with the merger from the provisions of Section 16(b).
Accordingly, the merger will not result in a sale of Chapman Holdings securities
for purposes of Section 16(b) by the directors and officers of Chapman Holdings.
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DESCRIPTION OF CHAPMAN HOLDINGS, INC.
CHAPMAN HOLDINGS--BUSINESS
GENERAL
Chapman Holdings, Inc. is an African-American controlled holding company.
Its full service securities brokerage and investment banking subsidiary, 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 National
Association of Securities Dealers, Inc. (the "NASD").
Chapman Holdings, Inc. was incorporated in Maryland on December 12, 1997.
The Chapman Co. was incorporated in Maryland in 1986.
In addition to its Baltimore, Maryland headquarters, Chapman Holdings has
sales offices in Alabama, California, Colorado, Illinois, Pennsylvania,
Tennessee and Texas.
Chapman Holdings 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 companies traded in the
over-the-counter market and privately-held companies undertaking an initial
public offering.
BROKERAGE SERVICES
Chapman Holdings' securities brokerage and investment banking subsidiary,
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 December 31, 1998, were derived from its
brokerage business.
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
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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, 25.6% 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.
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 such securities and of a decrease in the liquidity of
markets, which can limit our ability to sell securities purchased or to purchase
securities sold in such transactions. The 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 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 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. As of December 31, 1998, The Chapman
Co.'s inventory of marketing-making securities was $1,500,000, which was
attributable to Chapman Capital Management Holdings' stock. As of December 1999,
The Chapman Co.'s inventory of market-making securities was $2,084,000, which
was attributable to 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 200 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
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is largely unknown. In addition to this DEM corporate finance strategy, The
Chapman Co. is aggressively seeking larger allocations in corporate underwriting
syndicates managed by other investment banking firms.
GOVERNMENT FINANCE
The Chapman Co. participates in the tax-exempt public finance market and has
managed, primarily as co-manager, more than 300 transactions in 22 states and
the District of Columbia, including approximately 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. Management intends 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.
The Chapman Co. has also created the DEM Index, which tracks the results of
certain companies meeting the DEM profile. Management believes that inclusion of
a DEM company in the DEM Index offers certain advantages such as facilitating
identification by fund managers and other institutions seeking to invest in
minority or women controlled businesses. The Chapman Co. will seek to earn fees
from
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subscriptions to the DEM Index and the sale of limited information regarding the
companies included in the DEM Index.
CLEARING AGENT AND CUSTOMER CREDIT
The Chapman Co. utilizes the services of the Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation, Pershing, as its clearing agent on a
fully disclosed basis. Pershing processes all securities transactions and
maintains the accounts of customers. Pershing commenced operations as The
Chapman Co.'s clearing agent in June 1999.
The services of the Pershing include billing, credit control, receipt and
custody and delivery of securities. Pershing provides the operational support
necessary to process, record and maintain securities transactions for The
Chapman Co.'s brokerage and distribution activities. The total cost of
Pershing's services to The Chapman Co. is less than the cost The Chapman Co.
would incur to provide these services.
Pershing lends funds to The Chapman Co. customers through the use of margin
credit. These loans are made to customers on a secured basis, with Pershing
maintaining collateral in the form of salable securities, cash or cash
equivalents. Under the terms of The Chapman Co.'s clearing agreement, The
Chapman Co. indemnifies Pershing for any loss on these credit arrangements. As
of December 31, 1999, The Chapman Co. had approximately $1,812,407 of margin
credit outstanding to its customers through Pershing. There have been no
defaults on margin loans in the last two years. The net interest income to The
Chapman Co. from margin activities for the year ending December 31, 1998 was not
material.
The Chapman Co. maintains an inventory of Chapman Holdings and Chapman
Capital Management Holdings common stock. As of December 31, 1999, The Chapman
Co. had margin loans from Pershing in the amount of approximately $1,750,000 in
connection with this inventory.
GOVERNMENT REGULATION
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 its subsidiary, Chapman On-Line, which is the entity
through which EChapman.com intends to operate its on-line brokerage, 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
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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 and has applications for registration
pending in 14 states.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including:
- Sales methods and supervision
- Trading practices among broker-dealers
- Use and safekeeping of customers' funds and securities
- Record keeping
- Conduct of directors, officers, and employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the integrity of the securities markets. Additional
legislation, changes in rules promulgated by the SEC and self-regulatory
organizations, or changes in the interpretation or enforcement of existing laws
and rules, may directly affect the mode of operation and profitability of
broker-dealers.
The SEC, self-regulatory organizations and state securities commissions may
conduct administrative proceedings which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees.
The Chapman Co.'s mutual fund distribution business is subject to extensive
regulation as to its duties, affiliations, conduct and limitations on fees under
the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the
regulations of the NASD. As discussed above, The Chapman Co. is an NASD member.
The NASD has prescribed rules with respect to maximum commissions, charges and
fees related to investment in any mutual fund registered under the 1940 Act.
As registered broker-dealers and a 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
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of aggregate indebtedness to net capital, both as defined, shall not exceed a
15-to-1 ratio. At December 31, 1999, The Chapman Co. had net capital and a net
capital requirement of $1,528,000 and $250,000, respectively. 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 net capital requirement 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 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.
COMPETITION
The Chapman Co. encounters intense competition in all aspects of its
securities business and competes directly with other larger national securities
firms, a significant number of which have greater capital and other resources
including, among other advantages, more personnel and greater marketing,
financial, technical and research
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capabilities. In addition to competition from firms currently in the securities
business, there has recently been increasing competition from other sources,
such as commercial banks and insurance companies offering financial services,
and from other investment alternatives. The Chapman Co. believes that the
principal factors affecting competition in the securities industry are the
quality and abilities of professional personnel, including their ability to
effectuate a firm's commitments, and the quality, range and relative prices of
services and products offered.
PERSONNEL
At December 31, 1999, Chapman Holdings had 48 full-time employees, including
31 registered representatives. None of Chapman Holdings' personnel is covered by
a collective bargaining agreement. Management considers Chapman Holdings'
relationships with its employees to be good.
CHAPMAN HOLDINGS--PROPERTY
Chapman Holdings' principal executive offices are located at the World Trade
Center-Baltimore, 401 East Pratt Street, Suite 2800, Baltimore, Maryland 21202
where it leases approximately 10,000 square feet of office space. The lease for
these premises expires in October, 2000 and Chapman Holdings has an option to
renew this lease for another five years.
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 office space in Birmingham, which we have occupied since December 1, 1999,
and we are currently in the process of negotiating the terms of this lease. In
addition, we lease office space on a month-to-month basis in Philadelphia,
Pennsylvania. 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.
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CHAPMAN HOLDINGS--TRADEMARKS
We have the right to use the following registered trademarks and common law
trademarks under our non-exclusive royalty-free service mark licensing agreement
with Nathan A. Chapman, Jr.:
- Domestic Emerging Markets-Registered Trademark-
- DEM-Registered Trademark-
- C-Eagle Logo-TM- appearing on the front page of this prospectus
- DEM Index-TM-
- DEM Profile-TM-
- DEM Universe-TM-
- DEM Community-TM-
- DEM Company-TM-
- DEM Multi-Manager-TM-
- Chapman-TM-
We regard our trademarks and other intellectual property as critical to our
success. We rely on trademark law to protect our intellectual property rights.
Despite our precautions, it may be possible for third parties to obtain and use
our intellectual property rights without authorization.
CHAPMAN HOLDINGS--LEGAL PROCEEDINGS
Chapman Holdings is involved from time to time in various legal proceedings
and claims incident to the normal conduct of its business. Chapman Holdings
believes that such legal proceedings and claims, individually and in the
aggregate, are not likely to have a material adverse effect on its financial
condition or results of operations.
CHAPMAN HOLDINGS--MARKET PRICE AND DIVIDEND INFORMATION
Since February 27, 1998, Chapman Holdings common stock has been traded in
the over-the-counter market, and prices for Chapman Holdings common stock are
quoted on the Nasdaq SmallCap Market under the symbol CMGT. The following table
sets forth the high and low bid prices of Chapman Holdings common stock as
reported on the Nasdaq SmallCap Market. These prices reflect inter-dealer prices
without retail mark-up, mark-down or commission and may not represent actual
transactions.
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PRICE RANGE PER SHARE
<TABLE>
<CAPTION>
CHAPMAN
HOLDINGS
(CMAN)
---------------------------------------
HIGH LOW
----------------- -------------------
<S> <C> <C>
1998
1(st) Quarter(1).......................................... 10 5/8 9
2(nd) Quarter............................................. 11 10
3(rd) Quarter............................................. 10 1/4 9 1/2
4(th) Quarter............................................. 9 3/4 4 1/2
1999
1(st) Quarter............................................. 7 5
2(nd) Quarter............................................. 6 3/4 5 11/16
3(rd) Quarter............................................. 6 9/16 5 5/8
4(th) Quarter............................................. 19 1/2 2
2000
1(st) Quarter(2).......................................... 14 1/2 10 1/2
</TABLE>
- ------------------------
(1) From February 27, 1998.
(2) Through March 28, 2000.
On January 25, 2000, there were approximately 28 record holders of Chapman
Holdings common stock. As of January 25, 2000, Chapman Holdings had 2,953,622
outstanding shares of common stock.
DIVIDENDS
Chapman Holdings has never declared or paid cash dividends on its common
stock and does not anticipate doing so in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of the board of
directors and will depend upon Chapman Holdings' earnings, if any, its financial
condition, and other relevant factors.
CHAPMAN HOLDINGS--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Chapman Holdings, Inc. consolidated financial statements and the notes included
elsewhere in this document.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
The primary sources of revenue of Chapman Holdings are commissions earned
from brokerage services and management fees. Chapman Holdings' principal
business activities are, by their nature, affected by many factors, including
general economic and financial conditions, movement of interest rates, security
valuations in the marketplace, competitive conditions, transaction volume and
market liquidity. Consequently, brokerage commission revenue and investment
banking fees can be
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volatile. While Chapman Holdings seeks to maintain cost controls, a significant
portion of Chapman Holdings' expenses are fixed and do not vary with market
activity. As a result, substantial fluctuations can occur in Chapman Holdings'
revenue and net income from period to period. Unless otherwise indicated, in
this section, references to years are to fiscal years.
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Operations as dollar
amounts and as percentages of total revenue.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL TOTAL
AMOUNTS REVENUE AMOUNTS REVENUE
----------- ------------- ----------- -------------
(RESTATED)
<S> <C> <C> <C> <C>
REVENUE:
Commissions $ 4,190,000 56.8% $ 2,538,000 74.2%
Underwriting and management fees............................ 1,168,000 15.9 700,000 20.5
Interest and dividends...................................... 399,000 5.4 446,000 13.0
Gain (loss) on trading...................................... 1,617,000 21.9 (264,000) (7.7)
----------- ----- ----------- ------
Total revenue........................................... 7,374,000 100.0 3,420,000 100.0
----------- ----- ----------- ------
EXPENSE:
Compensation and benefits................................... 3,567,000 48.4 2,186,000 63.9
Floor brokerage and clearing fees........................... 702,000 9.5 431,000 12.6
Communications.............................................. 288,000 3.9 192,000 5.6
Occupancy and equipment..................................... 639,000 8.7 460,000 13.5
Travel and business development............................. 398,000 5.4 255,000 7.5
Professional fees........................................... 826,000 11.2 416,000 12.1
Advertising promotion and publicity......................... 363,000 4.9 184,000 5.4
Other operating expense..................................... 1,134,000 15.4 538,000 15.7
----------- ----- ----------- ------
Total expense............................................. 7,917,000 107.4 4,662,000 136.3
----------- ----- ----------- ------
Loss before income tax benefit.............................. (543,000) (7.4) (1,242,000) (36.3)
Income tax benefit.......................................... (101,000) (1.4) (370,000) (10.8)
----------- ----- ----------- ------
Net loss.................................................... $ (442,000) (6.0)% $ (872,000) (25.5)%
=========== ===== =========== ======
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998.
Total revenue increased by $3,954,000, or 115.6%, to $7,374,000 for the year
ended December 31, 1999 from $3,420,000 for the prior comparable period. Revenue
was higher due to an increase in commission revenue and management and advisory
fees combined with a gain on trading.
Commission revenue increased by $1,652,000, or 65.1%, to $4,190,000 for the
year ended December 31, 1999 from $2,538,000 in the comparable prior period.
Commission 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
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$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 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. The company
participated in 48 municipal syndications during the year ended December 31,
1999 compared to 40 in the prior comparable period. Chapman Company also was
senior manager of 7 municipal transactions in 1999 compared to 4 in 1998.
Underwriting and management fee revenue increased by $468,000, or 66.9%, to
$1,168,000 for the year ended December 31, 1999 from $700,000 for the prior
comparable period. 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.
Interest and dividend revenue decreased by $47,000, or 10.5%, to $399,000
for the year ended December 31, 1999 from $446,000 for the prior comparable
period. This slight decrease is due to a combination of lower cash balances and
interest earned on our trading portfolio balances at an average interest rate
for 1999 of 7.19% compared to 8.25% for 1998.
An unrealized gain on trading of $1,617,000 was reported for the year ended
December 31, 1999. The Company's unrealized gain on trading is due to a
significant increase in the market value of its market making securities
inventory during the fourth quarter. This can be attributable to the
announcement in November, 1999 of the initial public offering of eChapman.com
and the merger of Chapman Holdings, Inc., Chapman Capital Management
Holdings, Inc. and Chapman Insurance Holdings into eChapman. com.
Total expenses increased by $3,255,000, or 69.8%, to $7,917,000 for the year
ended December 31, 1999 from $4,662,000 for the prior comparable period. The
largest components of the increase in expenses are associated with the opening
of new regional offices in selected markets, business development costs
associated with the Company's marketing strategy and increased staffing under
the Company's business expansion strategy.
Compensation and benefits increased by $1,381,000, or 63.2%, to $3,567,000
for the year ended December 31, 1999 from $2,186,000 from the prior comparable
period. 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 attributable to the increase in commissions paid
to brokers due to increased retail and municipal sales volume and the addition
of 14 salaried employees compared to December 31, 1998.
54
<PAGE>
Floor brokerage and clearing fees increased by $271,000, or 62.9%, to
$702,000 for the year ended December 31, 1999 from $431,000 for the prior
comparable period. 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.
Communication expense increased by $96,000, or 50.0%, to $288,000 for the
year ended December 31, 1999 from $192,000 for the prior comparable period. This
increase was primarily attributable to increased usage associated with new
offices and the Company's business expansion strategy.
Occupancy and equipment expense increased $179,000, or 38.9%, to $639,000
for the year ended December 31, 1999 from $460,000 for the prior comparable
period. The increase is mainly attributable to the opening of new offices and
the Company's business expansion strategy.
Travel and business development expense increased by $143,000, or 56.1%, to
$398,000 for the year ended December 31, 1999 from $255,000 for the prior
comparable period due to increased travel related to business development
activities.
Professional fees increased by $410,000, or 98.6%, to $826,000 for the year
ended December 31, 1999 from $416,000 for the prior comparable period. The
overall increase is due to the use of legal services, independent audit review
services and marketing consultants and is directly related to the Company's
business expansion strategy.
Advertising expense increased by $179,000, or 97.3%, to $363,000 for the
year ended December 31, 1999 from $184,000 for the prior comparable period,
which is directly related to increasing public awareness of the Chapman brand
name and the DEM (Domestic Emerging Market) strategy.
Other operating expenses increased by $596,000, or 110.8%, to $1,134,000 for
the year ended December 31,1999 from $538,000 for the prior comparable period.
Increases in bad debt write-off's of $110,000, telephone of $84,000, printing
costs of $83,000, interest expense of $60,000, postage of $45,000,
repairs/maintenance of $39,000, conferences of $32,000 and filing fees of
$30,000 represent 81.0% of the overall increase of $596,000 for the year ended
December 31, 1999.
The income tax benefit decreased $269,000 to a tax benefit of $101,000 for
the year ended December 31, 1999 from a tax benefit of $370,000 for the prior
comparable period. The decrease in the income tax benefit is due to a valuation
reserve established for the year ended December 31, 1999.
Net loss decreased by $430,000 to $442,000 for the year ended December 31,
1999 from $872,000 for the prior comparable period. This decrease is a result of
the items discussed above.
55
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Chapman Holdings' assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, investment securities, and receivables
from other broker-dealers and Chapman Holdings' clearing agent, all of which
fluctuate depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and Chapman Holdings' clearing agent turn over
rapidly. Both Chapman Holdings' 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. Chapman Holdings' total assets
as of December 31, 1999 were $8,535,000.
The Chapman Co., Chapman Holdings' wholly-owned broker-dealer subsidiary, 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.
Chapman Holdings' cash and cash equivalents were $1,035,000 as of
December 31, 1999.
Historically, Chapman Holdings has financed its operations through the sale
of equity securities and cash flow from operations. On July 29, 1999, Chapman
Holdings borrowed $3,220,000 from Chapman Capital Management Holdings, Inc., an
affiliate, in connection with The Chapman Co.'s, participation in a municipal
underwriting syndicate. The loan was payable on demand and accrued interest
equal to the broker call rate in effect from time to time. Chapman Holdings
repaid this loan in full on September 14, 1999. At December 31, 1999, Chapman
Holdings had margin debt of approximately $1,750,000 to finance the purchase of
securities owned which is primarily the stock of Chapman Holdings and Chapman
Capital Management Holdings, Inc.
Chapman Holdings' overall capital and funding needs are continually reviewed
to ensure that its capital base can support the estimated needs of its business.
These reviews take into account business needs as well as Chapman Holdings'
regulatory capital requirements. Chapman Holdings believes that its capital
structure is adequate for current operations.
EFFECTS OF INFLATION
Chapman Holdings' assets are to a large extent liquid in nature and,
accordingly, may be significantly affected by inflation. Market prices of
securities that Chapman Holdings may hold in inventory are also influenced by
changes in inflation. Moreover, the rate of inflation affects Chapman Holdings'
expenses, such as employee compensation, occupancy expenses and communications
costs, which may not be readily recoverable in the prices of services offered to
Chapman Holdings' customers. To the extent inflation results in rising interest
rates or has adverse effects upon the
56
<PAGE>
securities markets, it may adversely affect Chapman Holdings' financial
condition and results of operations.
YEAR 2000 SOFTWARE ISSUE
With the arrival of the Year 2000, existing software programs and operating
systems were reviewed to determine if they can accommodate information that
employs dates after December 31, 1999. As of December 31, 1999, Chapman
Holdings' Year 2000 readiness costs were approximately $127,000 to cover
assessment of systems, internal testing, point-to-point testing, training,
replacement and modification of existing systems, and contingency planning.
Chapman Holdings estimates that its total Year 2000 readiness costs will be
approximately $224,000, which primarily relates to future lease payments.
Chapman Holdings prepared a written plan detailing Chapman Holdings'
software and operating systems readiness issues for the Year 2000. The plan
identified mission-critical and non mission-critical operating systems of
Chapman Holdings. Working with its hardware and software vendors and other third
parties to prepare for the Year 2000, Chapman Holdings substantially completed
necessary hardware and software renovations during the second quarter of 1999.
We tested during the third quarter of 1999 to determine the effect of our
readiness efforts, and we continued to work with our hardware and software
vendors and other third parties to complete our Year 2000 contingency plan
through the end of 1999 and during the first quarter of the year 2000.
Chapman Holdings' Year 2000 readiness plan involved four phases:
PHASE I--ASSESSMENT. This phase involved the identification of all systems
that are date dependent. This phase was substantially completed during the first
quarter of 1998.
PHASE II--RENOVATION. This phase involved the identification and
replacement of mission-critical systems which Chapman Holdings was unable to
update or certify as Y2K ready. This phase commenced in the first quarter of
1998 and was substantially completed in the second quarter of 1999.
PHASE III--TESTING. This phase involved testing all systems that are date
dependent and upgrading all non-compliant systems. Chapman Holdings 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 or hardware and also the development of plans and
strategies to continue operations should such failures occur. The Chapman Co.
has prepared an initial plan and will continue to refine and expand it as
required through the first quarter of 2000.
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<PAGE>
Within Chapman Holdings' Year 2000 readiness plan, systems are identified as
"mission-critical" and "non mission-critical." We 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. Systems were determined to be non-Y2K ready based on information from
manufacturers. Systems were identified as "not mission critical" if loss of the
system, although inconvenient, would not cause an immediate stoppage of activity
or significant impairment of a core business area. The following table
summarizes Chapman Holdings' estimate of the status of mission-critical elements
of Chapman Holdings' Year 2000 readiness plan.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF CRITICAL
NUMBER OF CRITICAL CRITICAL SYSTEMS FOR
CRITICAL SYSTEMS SYSTEMS IN WHICH PHASE
Y2K PLAN PHASE SYSTEMS COMPLETED PROCESS NOT APPLICABLE
- -------------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Assessment....................................... 32 32 -- --
Renovation....................................... 32 23 -- 9
Testing.......................................... 32 23 -- 9
Contingency Planning............................. 32 32 -- --
</TABLE>
Chapman Holdings identified the third parties upon which it relies for
mission-critical systems and contacted such third parties to confirm that their
systems are Year 2000 ready. Responses from the majority of these vendors during
the first and second quarters of 1999 indicated that they expected to reach
readiness by the third quarter of 1999. As of the date of this prospectus and
proxy statement, all of our vendors of mission critical systems have verified
readiness, and we have not had any problems with these vendors' systems not
being Year 2000 ready.
Although Chapman Holdings suffered no significant Year 2000 problems at the
start of 2000 or as of March 29, 2000, and while Chapman Holdings believes that
it is taking prudent and necessary action to become with Year 2000 requirements,
there can be no assurance that the Year 2000 issue will not result in
information or communications systems interruptions. Any such interruptions
could be expected to have a material adverse effect on Chapman Holdings'
business, financial condition, results of operations and business prospects and
may subject Chapman Holdings to liability to its clients. Chapman Holdings is
currently building upon its existing contingency plan in the event that Chapman
Holdings or third parties do not successfully complete their readiness efforts.
These efforts may result in additional costs in excess of current allocations
and estimates.
58
<PAGE>
CHAPMAN HOLDINGS--MANAGEMENT
The directors and executive officers of Chapman Holdings are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS
- ---- -------------------- -------------------
<S> <C> <C>
Nathan A. Chapman, Jr.................. 42 President, chairman of the board and director
Earl U. Bravo, Sr...................... 52 Senior vice president, secretary, assistant
treasurer and director
Lottie H. Shackelford.................. 58 Director
Donald V. Watkins...................... 50 Director
Vincent McCarley....................... 45 Senior vice president, public finance of The Chapman
Co.
Charles Owens.......................... 56 Vice president special events
Demetris B. Brown...................... 43 Chief financial officer
M. Lynn Ballard........................ 57 Treasurer and assistant secretary
</TABLE>
The board of directors has appointed an audit committee, currently
consisting of its two independent Directors. The audit committee reviews the
scope of accounting audits, reviews with the independent public accountants the
corporate accounting practices and policies and recommends to whom reports
should be submitted within Chapman Holdings, reviews with the independent public
accountants their final report, reviews with the independent public accountants
overall accounting and financial controls, and is available to the independent
public accountants during the year for consultation purposes.
The board of directors has also appointed a compensation committee of the
board of directors, currently consisting of the two independent directors. The
compensation committee reviews the performance of senior management, approves
the compensation of the president, recommends appropriate compensation levels
for officers other than the president and approves the issuance of stock options
under Chapman Holdings' stock option plan. All directors and officers of Chapman
Holdings serve until their successors are duly elected and qualify.
NATHAN A. CHAPMAN, JR. founded Chapman Holdings, Inc. in 1997 and its
subsidiary, The Chapman Co., in 1986. Mr. Chapman also founded Chapman Capital
Management Holdings, Inc. in 1998, and its subsidiary Chapman Capital
Management, Inc. in 1988. Mr. Chapman founded EChapman.com in 1999. Mr. Chapman
founded Chapman Insurance Holdings, Inc. in 1997 and its subsidiary, The Chapman
Insurance Agency Incorporated, in 1987. Mr. Chapman has served as president,
chairman of the board and a director of all of these entities since their
inception. Mr. Chapman is also the president, chairman of the board and a
director of The Chapman Funds, Inc., a registered open end investment company
for which Chapman Capital Management acts as investment adviser. Prior to
founding The Chapman Co., Mr. Chapman was a broker for Alex. Brown and Sons from
1982 to 1987. Mr. Chapman is a certified public accountant, a general securities
principal, registered options principal, and registered municipal principal. In
July 1999, the University of Maryland Office of the board of regents elected
Mr. Chapman chairman of the board of regents.
59
<PAGE>
EARL U. BRAVO, SR. has been chief operating officer of The Chapman Co. since
1992 and secretary and assistant treasurer since 1997. Mr. Bravo has been senior
vice president, secretary, assistant treasurer and a director of Chapman
Holdings, Inc. since 1997 and of Chapman Capital Management Holdings, Inc. since
1998. Mr. Bravo is a director, senior vice president, secretary and assistant
treasurer of EChapman.com. Mr. Bravo is a general securities principal,
financial and operations principal and registered representative. Mr. Bravo
holds an MBA from the University of Maryland, College Park.
LOTTIE H. SHACKELFORD has been executive vice president of Global USA since
1994. From 1978 to 1992, Ms. Shackelford was city director of Little Rock,
Arkansas. In 1988 and 1989, Ms. Shackelford was vice-chair and co-chair,
respectively, of the Democratic National Committee. Ms. Shackelford is a
director of The Chapman Funds, Inc and has been a director of Chapman Holdings
since 1997.
DONALD V. WATKINS has been president of Donald V. Watkins, PC, a law firm
located in Birmingham, Alabama, since 1973. Mr. Watkins has been director of
Chapman Holdings since 1997.
VINCENT MCCARLEY has been Senior Vice President of Public Finance of The
Chapman Co. since 1998. Prior to his association with The Chapman Co.,
Mr. McCarley was a senior vice president at Sieber Brandford Shank & Co. LLC
(formerly Grigsby Brandford & Co.) from 1986 to 1998 where he focused on lease
purchase/COP, infrastructure, school and redevelopment financing. Mr. McCarley
holds an MBA Pepperdine University and is a municipal securities principal.
CHARLES OWENS has been Vice President of Special Events of The Chapman Co.
since 1998. Prior to his association with The Chapman Co., Mr. Owens was the
executive director of the Maryland District of Columbia Minority Supplier
Development Council from 1990 to 1998. Mr. Owens is a graduate of Dartmouth
College's Amos Tuck School of Business.
DEMETRIS BROWN has been chief financial officer of Chapman Holdings 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 as the director of finance for Computer Sciences Corporation from 1989 to
1993. Mr. Brown is a certified public accountant, certified management
accountant, financial and operations principal, and registered representative.
M. LYNN BALLARD has been treasurer and assistant secretary since 1997 of The
Chapman Co., treasurer and assistant secretary of Chapman Holdings since 1997
and Chapman Capital Management Holdings since 1998. Ms. Ballard has been
employed as a senior financial executive of The Chapman Co. and Chapman Capital
Management, Inc. since 1988. Ms. Ballard is treasurer and assistant secretary of
The Chapman Funds, Inc.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by
Chapman Holdings during the last three fiscal years, for services rendered in
all capacities to Chapman Holdings and its subsidiary, The Chapman Co., to the
chief executive officer and the other most highly paid executive officers of
Chapman Holdings whose total annual salary and bonus exceeded $100,000 during
the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr........................... 1999 $266,667 $100,000 --
President 1998 $200,000 $100,000 --
1997 $159,500 $100,000 --
Vincent McCarley,............................... 1999 $150,000 $ 25,000 --
Senior vice president, public finance 1998 N/A N/A N/A
of The Chapman Co. 1997 N/A N/A N/A
Earl U. Bravo, Sr............................... 1999 $105,000(1) $ 50,000(1) --
Senior vice president, secretary and assistant 1998 $105,000(1) $ 10,000(1) 5,000
treasurer 1997 $100,000(2) $ 5,000(2) --
Demetris Brown,................................. 1999 $ 90,000 $ 20,000 --
Chief financial officer 1998 N/A N/A N/A
1997 N/A N/A N/A
Charles Owens,.................................. 1999 $ 98,076 $ 4,000 --
Vice president 1998 N/A N/A N/A
1997 N/A N/A N/A
</TABLE>
Mr. Chapman's and Mr. Bravo's annual compensation for 1998 and 1999 includes
approximately 50% allocated to Chapman Capital Management Holdings and The
Chapman Insurance Agency under certain expense sharing arrangements.
Mr. Chapman's and Mr. Bravo's annual compensation for 1997 includes amounts
allocated to Chapman Capital Management and The Chapman Insurance Agency,
then-subsidiaries of The Chapman Co., under certain informal expense allocation
agreements.
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<PAGE>
Mr. McCarley's annual salary and bonus for 1998 was less than $100,000, and
he was not employed by Chapman Holdings during 1997. Mr. Brown's annual salary
and bonus for 1998 was less than $100,000, and he was not employed by Chapman
Holdings during 1997. Mr. Owens' annual salary and bonus for 1998 was less than
$100,000, and he was not employed by Chapman Holdings during 1997.
The Board of Directors of Chapman Holdings has established the 1998 Chapman
Holdings, Inc. Omnibus Stock Plan to enable Chapman Holdings to grant equity
compensation to directors, officers, employees and consultants. Chapman Holdings
has reserved 150,000 shares for award under the plan. The plan is administered
by the compensation committee of the board of directors. On September 28, 1999,
the compensation committee granted a total of 43,900 stock options under the
plan.
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for their service to Chapman Holdings
as directors; however, they are reimbursed for all out-of-pocket expenses
relating to attendance at meetings of the board of directors and any committee
thereof. Members of the board of directors are eligible to receive stock options
under the Plan. On September 28, 1998, directors Watkins and Shackelford were
awarded 3-year stock options to purchase 10,000 shares and 1,000 shares,
respectively, at $9.50 per share, the then current market price.
CHAPMAN HOLDINGS--PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Chapman Holdings common stock as of January 25, 2000 by
- Each person known by Chapman Holdings to own beneficially 5% or more of
its outstanding shares of common stock,
- Each director,
- Each executive officer named in the summary compensation table, and
- All directors and executive officers of Chapman Holdings as a group.
62
<PAGE>
Except as otherwise indicated, Chapman Holdings believes that the beneficial
owners of the common stock listed below, based on information furnished by such
owners, have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF SHARES OUTSTANDING
- ------------------- -------------------- -----------------------------
<S> <C> <C>
Nathan A. Chapman, Jr............................ 2,176,540 shares(2) 73.7%
Chapman Capital Management Holdings, Inc......... 224,267 shares(3) 7.6%
Lottie H. Shackelford............................ 1,000 shares(4) *
Donald V. Watkins................................ 17,000 shares(5) *
Earl U. Bravo, Sr................................ 6,900 shares(6) *
Vincent McCarley................................. 1,000 shares(4) *
Demetris Brown................................... -0- shares *
Charles Owens.................................... -0- shares *
All directors and executive officers as a 2,202,440 shares 74.1%
group..........................................
</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 124,158 shares held by The Chapman Co., in its market-making
inventory, that have no voting rights as long as they are held by a
subsidiary of Chapman Holdings, and 224,267 shares held by Chapman Capital
Management, a subsidiary of Chapman Capital Management Holdings, Inc.
Mr. Chapman is president and director of each of The Chapman Co., Chapman
Capital Management Holdings, Inc. and Chapman Capital Management and
chairman and majority stockholder of Chapman Capital Management
Holdings, Inc. Mr. Chapman is the sole director of Chapman Capital
Management. The executive officers of Chapman Capital Management are
Mr. Chapman, president, Earl U. Bravo, Sr., secretary and assistant
treasurer and M. Lynn Ballard, treasurer and assistant secretary.
Mr. Chapman disclaims beneficial ownership of the shares held by The Chapman
Co. and Chapman Capital Management Holdings, Inc.
(3) Represents 1,000 shares held by Chapman Capital Management, Inc., in
investment advisory accounts over which Chapman Capital Management exercises
voting and dispository discretion.
(4) Represents shares subject to stock options that are currently exercisable.
(5) Includes 10,000 shares subject to stock options that are currently
exercisable.
(6) Includes 5,000 shares subject to stock options that are currently
exercisable.
CHAPMAN HOLDINGS--CERTAIN TRANSACTIONS
On January 8, 1998, Chapman Capital Management Holdings, a newly-formed
Maryland corporation, issued shares of common stock to The Chapman Co. in
exchange for all of the outstanding equity securities of Chapman Capital
Management, a registered investment adviser. Accordingly, Chapman Capital
Management is currently a wholly-owned direct subsidiary of Chapman Capital
Management Holdings.
On February 26, 1998, Chapman Holdings and its subsidiary The Chapman Co.
effected tax-free spin-off transactions in which all of the outstanding shares
of stock of the former subsidiaries of The Chapman Co., Chapman Capital
Management
63
<PAGE>
Holdings, Inc., parent of Chapman Capital Management, Inc. and Chapman Insurance
Holdings, Inc. parent of The Chapman Insurance Agency Incorporated were
distributed to Chapman Holdings stockholders.
Nathan A. Chapman, Jr., the president, chairman of the board of directors
and majority stockholder of Chapman Holdings, is the president and chairman of
the board of directors of each of EChapman.com, Chapman Capital Management
Holdings, The Chapman Co., Chapman Capital Management, Chapman Insurance
Holdings, Chapman Insurance Agency and The Chapman Funds and majority
stockholder of Chapman Capital Management Holdings, Chapman Insurance Holdings
and EChapman.com.
Earl U. Bravo, Sr., senior vice president, secretary, assistant treasurer,
and a director of Chapman Holdings, is senior vice president, secretary,
assistant treasurer and a director of Chapman Capital Management Holdings and
Chapman Insurance Holdings. He also serves as secretary and assistant treasurer
of Chapman Capital Management, The Chapman Co. and The Chapman Funds. He also
serves as vice president of Chapman Capital Management.
M. Lynn Ballard, the treasurer and assistant secretary of Chapman Holdings
and The Chapman Co., is also treasurer and assistant secretary of Chapman
Capital Management, Chapman Capital Management Holdings and The Chapman Funds.
Lottie H. Shackelford, a director of Chapman Holdings, is a director of The
Chapman Funds.
Donald Watkins, a director of Chapman Holdings, served as a director of
Chapman Insurance Holdings until 1999.
Until its liquidation in 1998, Mr. Chapman, Mr. Bravo, and Ms. Ballard
served as senior executive officers of DEM, Inc., a closed-end registered
investment company managed and sponsored by Chapman Capital Management.
Mr. Chapman, Benjamin Hooks, Glenda Glover and Lottie Shackelford, a director of
Chapman Holdings, each a director of The Chapman Funds, and James B. Lewis, a
director of The Chapman Funds until 1999, and Robert L. Wallace, a director of
Chapman Capital Management Holdings, each served as a director of DEM, Inc.
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.
64
<PAGE>
The Chapman Co. acted as the underwriter, on a best efforts basis, for the
sale of Chapman Capital Management Holdings, Inc. common stock. The Chapman Co.
was paid $296,623 in underwriting fees and commissions in the year ended
December 31, 1998.
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
reimbursed The Chapman Funds on behalf of The Chapman Treasury Money Fund,
$129,879 under an expense limitation agreement with The Chapman Funds.
The DEM Equity Fund became active in April 1998, and Chapman Capital
Management was paid $69,356 and $121,862 in advisory and administrative fees for
the years ended December 31, 1998 and 1999, respectively. For the year ended
December 31, 1999, Chapman Capital Management has reimbursed The Chapman Funds,
on behalf of the DEM Equity Fund, $29,056 of expenses under an expense
limitation agreement with The Chapman Funds.
The DEM Index Fund became active in March 1999, and Chapman Capital
Management was paid $516 in advisory and administrative fees through
December 31, 1999. Chapman Capital Management has reimbursed The Chapman Funds
on behalf of The DEM Index Fund, $63,085 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
65
<PAGE>
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, such funds have not yet commenced
operations.
As of October 31, 1997, Chapman Capital Management executed a 10-year note
to Chapman Holdings in the amount of $771,889 accruing interest at 6.68% per
annum. Chapman Capital Management repaid this note in full during 1998. The
largest amounts owed by Chapman Capital Management, including this loan and
Chapman Capital Management's allocation of shared overhead were $958,302 and
$800,672 during fiscal years ended December 31, 1998 and 1997, respectively.
As of December 31, 1999, Mr. Chapman owed EChapman.com's subsidiaries
$1,038,174 in connection with the following notes, including accrued interest ,
which notes were issued for purposes unrelated to the businesses of
EChapman.com, Chapman Holdings, Chapman Capital Management Holdings, or their
respective affiliates:
- Three-year promissory note to The Chapman Co. dated February 11, 1998 in
the amount of $176,250, which accrues interest at 5.54% per annum and
requires no payments of principal or interest until maturity.
- Three-year promissory note to Chapman Holdings dated March 11, 1998 in the
amount of $285,587, which accrues interest at 5.5% per annum.
- Demand promissory note to The Chapman Co. dated May 1, 1998 in the amount
of $100,000, which accrues interest at 5.5% per annum.
- Demand promissory note to Chapman Capital Management dated July 2, 1998 in
the amount of $45,000, which accrues interest at 5.48% per annum.
- Three year promissory note to Chapman Capital Management Holdings dated
August 21, 1998 in the amount of $65,000, which accrues interest at 5.48%
per annum.
- Three-year promissory note to Chapman Holdings dated December 31, 1998 in
the amount of $51,690, which accrues interest at 4.33% per annum.
- Demand promissory note to Chapman Capital Management Holdings dated
July 29, 1999 in the amount of $242,000, which accrues interest at 5.45%
per annum.
- Three-year promissory note to The Chapman Co. dated December 31, 1999 in
the amount of $32,837, which accrues interest at 4.33% per annum.
Chapman Capital Management Holdings executed a 10-year note to Chapman
Holdings as of October 31, 1996 in the amount of $763,367 which accrued interest
at 6.68% per annum. The proceeds of this loan were used by Chapman Capital
Management to pay start-up costs in connection with its development of a
proprietary
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investment product and for a non-competition agreement. On August 14, 1998, this
loan was repaid in full.
On July 29, 1999, Chapman Capital Management Holdings made an unsecured loan
of $3,220,000 to Chapman Holdings, in connection with The Chapman Co., which was
seeking to qualify to participate in a municipal underwriting syndicate. The
loan was issued under a demand note that required Chapman Holdings to repay the
amount of the loan upon chapman Capital Management Holdings' demand and with
interest due thereon at the brokers call rate as in effect from time to time.
Chapman Holdings repaid this loan with accrued interest in full on
September 14, 1999.
Mr. Chapman is president and treasurer and Mr. Bravo is secretary of Chapman
General Partner One, Inc., a Maryland corporation and the general partner of
Chapman Limited Partnership I, a Maryland limited partnership, the operations of
which consist solely of the ownership and rental of furniture and equipment to
The Chapman Co. The Chapman Co. leases furniture and equipment from this
partnership, with part of such cost being allocated to Chapman Capital
Management Holding. The lease requires monthly payments of $9,846 and contains
one year renewable terms, at the option of The Chapman Co., through September
2000, at which time The Chapman Co. can purchase the furniture and equipment at
fair market value. Rent expense allocated to The Chapman Co. under the lease was
$118,152 in each of 1998 and 1999, of which $0, and $0 were payable to Chapman
Limited Partnership as of December 31, 1998, and December 31, 1999,
respectively. Rent expenses allocated to Chapman Capital Management Holdings
under this lease agreement was $59,076 in 1998 and $59,076 in 1999.
On December 14, 1998, The Chapman Co. and Chapman Capital Management paid
$19,536 on behalf of Chapman Limited Partnership I for certain taxes and related
payments, interest, and penalties. The Chapman Co. and Chapman Capital
Management characterized these 1998 payments as an expense for which they will
not be reimbursed by the partnership and which is related to The Chapman Co.'s
administration of the partnership. On October 22, 1999, Chapman Holdings and
Chapman Capital Management Holdings each paid $49,018 on behalf of the
partnership for the payment of certain taxes and related payments. Chapman
Holdings and Chapman Capital Management Holdings each characterized $24,509 of
these 1999 payments as an expense for which they will not be reimbursed by the
partnership and which is related to the administration of the partnership. The
partnership reimbursed each of Chapman Holdings and Chapman Capital Management
Holdings $19,000 of the 1999 payments on March 13, 2000.
Chapman Holdings shares office space, certain employees and other overhead
with certain other entities controlled by Mr. Chapman, including Chapman Capital
Management Holdings and Chapman Insurance Agency. Chapman Holdings allocates
compensation and benefits expense to Chapman Capital Management Holdings and
Chapman Insurance Agency based on actual compensation and benefits expense and
the estimated percentage of the employee's time spent performing services for
each
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entity. Chapman Holdings allocates other expenses based on estimated usage. In
connection with allocation arrangements, as of December 31, 1998 and
December 31, 1999, Chapman Capital Management Holdings owed Chapman Holdings
$180,699 and $96,440, respectively. Chapman Holdings treats these outstanding
allocation amounts as normal receivables to be paid in the ordinary course of
business, and Chapman Capital Management Holdings treats these outstanding
allocation amounts as normal expenses to be paid in the ordinary course of
business.
On November 10, 1998, a receivable of The Chapman Co. was incorrectly coded
for deposit to Chapman Capital Management's account. This resulted in an
erroneous deposit of $291,207 in the securities account of Chapman Capital
Management. As of December 31, 1998, Chapman Capital Management Holdings owed
Chapman Holdings $104,270 of this amount. Chapman Capital Management Holdings
repaid the amount in full on January 12, 1999.
Chapman Holdings and Mr. Chapman entered into a non-exclusive, royalty-free
License Agreement on December 26, 1997 pertaining to the company's use of the
DEM-Registered Trademark- and Domestic Emerging Markets-Registered Trademark-
trademarks that are owned by Mr. Chapman.
As of June 9, 1998, Chapman Capital Management Holdings and Mr. Chapman
entered into a non-exclusive, royalty-free service mark licensing agreement
pertaining to the use of the DEM-Registered Trademark-, Domestic Engineering
Markets-Registered Trademark-, DEM Index-TM-, DEM Profile-TM-, DEM Universe-TM-,
DEM Company-TM-, DEM Multi-Manager-TM-, Chapman, and C-Eagle-TM- trademarks that
are owned by Mr. Chapman.
EChapman.com has entered into a non-exclusive, royalty-free licensing
agreement with Mr. Chapman pertaining to our use of the C-Eagle Logo-TM-,
Chapman, Chapman Trading-TM-, Chapman Network-TM-, Chapman Education-TM-,
Chapman Marketplace-TM-, Chapman Kids Club-TM-, DEM Index-TM-, DEM Profile-TM-,
DEM Universe-TM-, DEM Company-TM-, DEM Community-TM-, DEM Multi-Manager-TM-,
EChapman.com-TM-, Domestic Emerging Markets-Registered Trademark-,
DEM-Registered Trademark-, trademarks that are owned by Mr. Chapman.
All transactions with affiliates of Chapman Holdings and Chapman Capital
Management Holdings are approved by a majority of the Board of Directors,
including a majority of the disinterested Directors, in accordance with Maryland
law.
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DESCRIPTION OF ECHAPMAN.COM, INC.
ECHAPMAN.COM 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
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devote substantially all of his time and effort to the combined company and to
pursuing the EChapman.com business strategy.
THE ECHAPMAN.COM STRATEGY
OVERVIEW
EChapman.com is a newly formed corporation designed to bring together the
financial services capabilities of The Chapman Co., Chapman Capital Management
and The Chapman Insurance Agency while taking advantage of the unique
opportunities presented by the growth of the Internet. Our web site, the
EChapman.com network, which is currently under development, will seek to be an
interactive online community offering both financial services and a variety of
lifestyle, educational and cultural content selected to appeal particularly to
African-Americans, Asian-Americans, Hispanic-Americans and women. We refer to
these groups collectively as the 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 to 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 the mergers. 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 the mergers.
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 only African-American controlled
publicly traded
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investment management company, Chapman Capital Management. The Chapman Co. is a
full service securities brokerage and investment banking company that engages in
corporate and government finance, retail and institutional brokerage, research
and marketing-making activities and trading. Chapman Capital Management is a
registered investment advisor 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 advisor
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.
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 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.
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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.COM MARKETPLACE
- Kids and Teens pages offering chat rooms and programming about school
safety, money, contests, quizzes, puzzles, sports
- Chapman Kids Club enabling kids and teens to open virtual stock accounts
and view real time stock information about companies that appeal to youth
- International, domestic and business news
- Sports, weather and local news
CHAPMAN TRADING will offer:
- Online brokerage services
- A variety of mutual fund choices, including our proprietary funds: the DEM
Equity Fund, the DEM Index Fund and the Chapman US Treasury Fund, as well
as any future mutual fund offerings
- Insurance products, such as variable annuities, variable life and term
life products, on an agency basis, subject to regulatory approval
- Research reports
- Online access to corporate and public finance products
- Toll-free call center for personalized assistance
CHAPMAN EDUCATION will focus on financial education by providing:
- Interactive seminars addressing a wide range of topics, ranging from how
to make a budget to investment strategies
- Interviews with business people, particularly those who are prominent in
the DEM community
- DEM Index performance information
- Financial tools, such as mortgage and loan calculators and tips on how to
conduct investment research
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CHAPMAN MARKETPLACE will offer for sale:
- Chapman-branded apparel and accessories
- Other products, including many of special interest to the DEM community
such as videos, music and books featuring DEM personalities and apparel
- Links with other Internet merchants which desire access to the DEM
community or segments of it
SOURCES OF ONLINE REVENUE
EChapman.com will seek to derive revenue from its online business in the
following ways:
- Online brokerage commissions, including commissions from proprietary and
other mutual fund sales
- Investment management fees from increasing assets under management through
online sales of our proprietary mutual funds
- Advertising revenues from sales of banner ads and links to web sites
seeking to reach the DEM community or segments of it
- Sharing with ecommerce partners in sales generated by visitors coming from
our web site
- Possible online sales of annuity and insurance products created through
alliances with companies such as The Manufacturers Life Insurance Company
of North America
- Sales of products through the CHAPMAN MARKETPLACE channel
- Potential interest and fee income generated from the contemplated Internet
bank
BRAND AWARENESS
EChapman.com will seek to establish brand awareness through:
- Conventional off-line advertising and promotion, such as print media,
radio and television, event sponsorship, conferences and seminars
specifically targeted at the DEM community and its various segments
- Distribution of DEM products through third parties, such as Aetna
Retirement Services and Nationwide Retirement Solutions
- Online advertising and marketing strategies, including:
- One-to-one banner exchanges
- Basic text links
- Content sponsorship
- E-mail promotions
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- 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
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
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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 call 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. Jupiter
Communications forecasts that the total number of online trading households will
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 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
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- 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 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
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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 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
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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. 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.
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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 the mergers.
Simultaneously with the development of the financial services component of
our web site, we will also be designing and developing the other features of the
EChapman.com web site. In this regard, we intend to establish relationships with
content providers and third parties who wish to advertise on our site. We also
intend to develop strategic relationships with other companies which desire to
market their products and services to the DEM community. Although our web site
design and development, as well as promotion of the EChapman.com brand, will be
an ongoing process, we estimate that the portal component of the EChapman.com
web site will be substantially completed and ready for visitors within six
months after the closing of the mergers. 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 our initial public 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.
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
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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.
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.
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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
The merger of Chapman Holdings will facilitate our provision of securities
brokerage and investment banking services.
A description of our securities brokerage and investment banking services is
located under the heading "Description of Chapman Holdings."
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.
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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 an average of approximately $36.3 million
in assets. The Chapman U.S. Treasury Money Fund began operations in June 1989.
THE DEM MULTI-MANAGER FUNDS AND THE DEM MULTI-MANAGER STRATEGY. Chapman
Capital Management has registered but has not yet begun to sell the DEM Multi-
Manager Bond Fund and the DEM Multi-Manager Equity Fund. The amendment to The
Chapman Funds registration statement registering, the DEM Multi-Manager Equity
Fund became effective on December 14, 1998 by virtue of Rule 485(a)(2) under the
Securities Act. Similarly, the amendment to The Chapman Funds' registration
statement registering the DEM Multi-Manager Bond Fund became effective on
September 28, 1999.
In addition, the Chapman Funds filed its annual update to its registration
statement with respect to these funds on December 30, 1999. This registration
statement became effective on February 28, 2000 under Rule 485(a)(i) under the
Securities Act. We have delayed sales of these funds until there is a greater
public awareness of the DEM Multi-Manager Strategy, and we anticipate that the
launch of our web site will help to provide this promotion; however, at present
we cannot provide a realistic estimate of when we expect to begin to market and
sell these two funds.
The DEM Multi-Manager Bond Fund will seek to earn high current income with
the potential for capital appreciation through investment in fixed income
securities of companies identified by multiple sub-advisers. The DEM
Multi-Manager Equity Fund
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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 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
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Chapman Capital Management. Chapman Capital Management acts as investment
adviser to the DEM-MET Trust and in such capacity is responsible for selecting
and monitoring the sub-advisors.
As of February 29, 2000, Chapman Capital Management had sub-advisory
relationships with 12 investment advisers. 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.
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 that
(1) the discount on the company's shares could be attributed primarily to the
small size of the fund and its relatively high expense ratio; and (2) that
because investors could purchase shares of DEM, Inc. in the secondary market
below the shares' net asset value and because the Investment Company Act of 1940
generally prohibits investment companies from offering shares below their net
asset value, there was no feasible way in which to successfully increase the
size of the fund in order to reduce the expense ratio and reduce or eliminate
the discount at which the company's shares were then trading.
The stockholders of DEM, Inc. approved the liquidation and dissolution of
the company on September 1, 1998, at which time the officers of the company
began liquidating its assets in order to distribute the net proceeds to the
stockholders. The Chapman Co. incurred a loss on trading of DEM, Inc. stock of
$159,000 in connection with stock of DEM, Inc. held in market-making inventory
at the time of the liquidation.
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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.
Effective June 30, 1999, two clients withdrew an aggregate amount of
$66.5 million from each of their separate accounts. The amount of the withdrawn
funds represented 10.3% of Chapman Capital Management's assets under management
as of June 30, 1999.
As of 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 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 advisers whereby Chapman Capital Management will seek to act as a
sub-advisor with respect
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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% and of Chapman Capital Management Holdings' revenue,
respectively. 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 made additional substantial withdrawals of their assets,
our advisory fee revenue would be materially and adversely affected.
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
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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 currently 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
- 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
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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.
SECURITIES BROKERAGE AND INVESTMENT BANKING SERVICES
A description of government regulation affecting our securities brokerage
and investment banking services is located under the heading "Description of
Chapman Holdings."
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
advisers have broad administrative powers, including the power to limit,
restrict, or prohibit an adviser from carrying on its business in the event that
it fails to comply with applicable laws and regulations. Possible sanctions that
may be imposed include:
- Suspension of individual employees
- Limitations on engaging in certain lines of business for specified periods
of time
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- Revocation of investment adviser and other registrations
- Censures
- Fines
Chapman Capital Management is registered with the SEC under the Investment
Advisers Act of 1940 and is subject to examination by the SEC. Under
Section 206 of the Advisers Act, it is unlawful for any investment adviser to:
- Employ any device, scheme, or artifice to defraud any client or
prospective client
- Engage in any transaction, practice, or course of business which operates
as a fraud or deceit upon any client or prospective client
- Engage in any act, practice, or course of business which is fraudulent,
deceptive or manipulative
The Advisers Act imposes numerous other obligations on registered investment
advisers including:
- Fiduciary duties
- Recordkeeping requirements
- Operational requirements
- Disclosure obligations.
The SEC is authorized to institute proceedings and impose sanctions for
violations of the Advisers Act, ranging from censure to termination of an
investment 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 adviser to a registered investment company, its principals,
and its employees may also be subject to proceedings initiated by the SEC to
impose remedial sanctions for violation of any provision of the federal
securities laws and the regulations adopted thereunder, and the SEC may prohibit
an investment adviser to an investment company from continuing to act in its
capacity as an investment adviser to an investment company. Stockholders of
registered investment companies or the SEC may also bring an action against the
officers, directors, and investment adviser for breach of fiduciary duty in
establishing the compensation paid to the investment adviser.
The mutual funds managed by Chapman Capital Management are registered with
the SEC under the Investment Company Act, and the sale of shares in these fund
has been registered under the Securities Act. Investment companies such as The
Chapman Funds, Inc. and any future registered investment companies established
and/or advised by Chapman Capital Management, are subject to considerable
substantive regulation. Such companies must comply with periodic reporting
requirements. Proxy solicitations
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are subject to the general proxy rules as well as to special proxy rules
applicable only to investment companies. Shares of open-end investment
companies, such as the DEM Equity Fund, the DEM Index Fund and The Chapman U.S.
Treasury Money Fund, can only be offered at a uniform public offering price
based on the current net asset value per share plus the sales load.
No more than 60% of the directors of registered investment companies such as
The Chapman Funds, Inc. can be interested persons, defined to include, among
others, persons affiliated with the management company or underwriter, and a
majority of the directors must not be affiliated with the underwriter. In the
case of investment companies, such as The Chapman Funds, which have adopted
12b-1 plans for its portfolios in order to permit these portfolios to pay for
distribution expenses, the rules under the Investment Company Act require that
no more than 50% of the fund's directors can be interested persons.
The advisory agreement must have initially been approved by a majority of
the outstanding shares and, after two years, must be annually approved, either
by the board or by the outstanding voting shares. The advisory agreement must be
subject to termination upon 60 days notice by the board or by the outstanding
voting shares.
The underwriting agreement must be annually approved by the board or by a
vote of a majority of the outstanding voting shares, and must provide for
automatic termination in the event of an assignment. We do not believe that the
merger of Chapman Holdings will result in an assignment and automatic
termination of The Chapman Co.'s underwriting agreements with The Chapman Funds,
because we do not believe that the merger constitutes a change of control for
purposes of the Investment Company Act. With limited exceptions, transactions
between the investment company and an affiliate can be entered into only if
approved by the SEC, after notice and opportunity for hearing, as fair and
equitable.
Chapman Capital Management derives a large portion of its revenues from its
investment company management agreements. Under the Advisers Act, 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.
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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.
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, 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
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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
- 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
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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
advisers, 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 as a result of the recently-enacted
Gramm-Leach-Bliley Act, which removes barriers to affiliation between banks,
insurance companies and securities firms.
Our securities brokerage and investment banking and investment advisory
businesses are concentrated in the securities industry, which is subject to
numerous and substantial risks, particularly in volatile or illiquid markets and
in markets influenced by sustained periods of low or negative economic growth.
Such risks include the risk of losses resulting from:
- Underwriting and ownership of securities
- Trading and principal activities
- Counterparty failure to meet commitments
- Customer fraud
- Employee errors
- Misconduct and fraud (including unauthorized transactions by traders)
- Failures in connection with the processing of securities transactions
In addition, our investment banking revenues may decline in periods of
reduced demand for public offerings or reduced activity in the secondary markets
and when there are reduced spreads on the trading of securities.
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.
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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, Pennsylvania. Our lease for our Memphis, Tennessee office expired
in January 2000, and we are currently trying to locate new office space. We also
maintain a lease in Denver, Colorado which expires in May 2000. This space
previously housed one brokerage employee; however, we have subleased this space
to a third party and have relocated our Denver sales office to the home office
of our employee.
TRADEMARKS
We have the right to use the following registered trademarks and common law
trademarks under our non-exclusive royalty-free Service Mark Licensing Agreement
with Nathan A. Chapman, Jr.:
- Domestic Emerging Markets-Registered Trademark-
- DEM-Registered Trademark-
- C-Eagle Logo-TM- appearing on the front 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-
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- 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
At 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
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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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 $6 per share (the minimum price for the mergers to
close) less underwriting discounts, commissions and offering costs.
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<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.......... $17,600,000 (i) $21,785,000
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.......... $16,666,000 $56,650,000
=========== ===========
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............. 17,597,000 (i) 55,111,000
Accumulated deficit... -- (281,000)
Proprietary stock, at
cost................ -- (1,636,000)
Cumulative realized
(loss) gain on
proprietary stock... -- 7,000
----------- -----------
Total stockholders'
(deficit) equity.... 17,600,000 53,217,000
----------- -----------
Total liabilities and
stockholders'
equity.............. $16,666,000 $56,650,000
=========== ===========
</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.
(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
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<PAGE>
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 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 $6 per share (the minimum price for the mergers
to close) 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.
(k) Assuming the goodwill step-up was at $6 per share versus the $15 per share
assumed in the above pro forma balance sheet, the intangibles, total assets
and total stockholders' equity on a pro forma, as adjusted basis, would be
$10,358,000, $38,666,000 and $35,233,000, respectively.
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<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)(f)
========== ========== ========== ========= =========== ============
Weighted average shares
outstanding................. -- 2,954,000 3,351,000 -- -- 16,528,000 (f)
========== ========== ========== ========= =========== ============
</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 97 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) Assuming the goodwill step-up was at $6 per share versus the $15 per share
assumed in the above pro forma income statement, the net loss, on a pro
forma as adjusted basis, would be $3,819,000.
(f) The pro forma, basic and diluted loss per share and the weighted average
shares outstanding would be $(0.36) and 13,195,000, respectively.
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ECHAPMAN.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND PLAN OF OPERATION
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.
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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 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 also senior manager of seven municipal transactions in 1999
compared to four in 1998.
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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 withdrawal 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 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.
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
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<PAGE>
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. The Company 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 (the
"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 valuation reserve established on its 1999 income tax
benefit.
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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 consummated an
initial public offering of its common stock as a result of which Chapman Capital
Management Holdings received net proceeds of approximately $5,240,000. Offering
proceeds were invested in The Chapman U.S. Treasury Money Fund, which invests in
short-term U.S. government securities and repurchase agreements collateralized
by U.S. government securities. On July 29, 1999, Chapman Capital Management
Holdings lent $3.2 million to Chapman Holdings, which was repaid on
September 14, 1999.
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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.
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.
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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 March 28, 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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ECHAPMAN.COM PRINCIPAL 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 3,333,333 shares of common stock in the initial public
offering of EChapman.com and the closing of the mergers, of
- Each person known by us who will own beneficially 5% or more of the
outstanding shares of common stock following the initial public offering
and the mergers,
- Each of our directors and director nominees,
- Each executive officer named in the summary compensation table, and
- All of our directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based on information furnished by such owners, will
have sole voting and investment power with respect to such shares.
The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes options exercisable within 60 days of
December 31, 1999 but excludes shares of common stock underlying options or
warrants held by any other person. Percentage of beneficial ownership is based
on 13,194,845 shares of common stock outstanding as of January 25, 2000, and
16,528,178 shares outstanding upon closing of the initial public offering
assuming completion of the pending mergers of Chapman Holdings and Chapman
Capital Management Holdings.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
AFTER MERGERS AND PRIOR AFTER THE MERGERS AND
TO OFFERING(2) OFFERING
NAME AND ADDRESS OF ---------------------------------- ----------------------------------
BENEFICIAL HOLDER(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
- --------------------------------------------------- --------- ---------------------- --------- ----------------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr.(3)(4)....................... 9,643,008 73.0% 9,643,008 58.3%
Earl U. Bravo, Sr.(5).............................. 29,809 * 29,809 *
Demetris Brown..................................... 2,233 * 2,233 *
Raymond Haysbert................................... 3,865 * 3,865 *
Mark Jefferson..................................... 0 -- 0 --
Kweisi Mfume....................................... 1,382 -- 1,382 --
Adolph Washington.................................. 20,102 -- 20,102 --
Vincent McCarley(6)................................ 1,932 * 1,932 *
Tracey Rancifer(7)(8).............................. 6,699 * 6,699 *
All Directors and Executive Officers as a Group (9 9,709,030 73.4% 9,709,030 58.8%
persons).........................................
</TABLE>
- ------------------------
* Represents less than one percent of the outstanding shares of common stock.
(1) Each stockholder's address is 401 East Pratt Street, Suite 2800, Baltimore,
Maryland 21202 unless otherwise noted.
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<PAGE>
(2) Includes a total of 36,165 shares subject to options that are currently
exercisable that are held by the persons named in the table.
(3) Includes shares issuable upon exercise of currently exercisable options to
purchase 11,168 shares.
(4) Includes 547,952 shares held by The Chapman Co. in its market-making
inventory and 446,068 shares held in investment advisory accounts over which
Chapman Capital Management, Inc. exercises voting and/or dispository
discretion. Mr. Chapman is the sole director of The Chapman Co. The
executive officers of The Chapman Co. are Nathan A. Chapman, Jr., president,
Earl U. Bravo, Sr. secretary and assistant treasurer and M. Lynn Ballard,
treasurer and assistant secretary. These shares have no voting rights so
long as they are held by a subsidiary of eChapman.com. Mr. Chapman disclaims
beneficial ownership of shares held by The Chapman Co. and Chapman Capital
Management, Inc.
(5) Includes shares issuable upon exercise of currently exercisable options to
purchase 20,832 shares of common stock.
(6) Includes shares issuable upon exercise of currently exercisable options to
purchase 1,932 shares.
(7) Includes shares issuable upon exercise of currently exercisable options to
purchase 2,233 shares.
(8) Includes 2,233 shares Ms. Rancifer owns jointly with her father.
MANAGEMENT OF ECHAPMAN.COM 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
Vincent McCarley.......................... 45 Senior vice president public finance
Demetris Brown............................ 43 Treasurer, assistant secretary and chief
financial officer
Sabrina Warren Bush....................... 41 Senior vice president, equity sales
Tracey C. Rancifer........................ 29 Senior vice president, corporate
development
Michael Easterling........................ 51 Vice president, media
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>
Background information for each of Mr. Chapman, Mr. Bravo, Mr. Brown,
Mr. McCarley, Ms. Bush and Mr. Owens is presented under the heading "Chapman
Holdings--Management" in this prospectus and proxy statement.
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 affiliate, for 17 years, holding various
positions including manager of programing and public affairs. In 1997,
Mr. Easterling founded Straight Talk Communications, a production company. From
1988 to 1994, Mr. Easterling was the program manager for WJZ-TV. Mr. Easterling
earned his B.A. in Marketing from Howard University.
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<PAGE>
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 C. 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 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.
RAYMOND HAYSBERT has been nominated to serve as a member of the board of
directors of EChapman.com upon the closing of the initial public offering of
EChapman.com's common stock. Mr. Haysbert has served as president of Forum
Caterers since 1991 and 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 the initial public offering of
EChapman.com's common stock. 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,
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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 the initial public offering of
EChapman.com's common stock. 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 the initial public offering of
EChapman.com's common stock. 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.
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 the initial public offering and the closing of the mergers, 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 the initial public
offering and the closing of the mergers, 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.
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<PAGE>
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, public finance of the 1998 75,321 50,000 1,932
Chapman Co.
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 $ 95,000 $ 20,000 2,234
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>
Mr. Brown's and Ms. Rancifer's annual compensation for 1998 was less than
$100,000.
The annual compensation information for each of Mr. Chapman, Mr. Bravo,
Mr. Brown, Mr. McCarley and Ms. Rancifer is the same as that presented in the
summary compensation table located under the heading "Chapman Holdings--
Management--Executive Compensation" in this prospectus and proxy statement. The
compensation figures represent the amounts paid to Mr. Chapman, Mr. Bravo,
Mr. Brown and Mr. McCarley by Chapman Holdings, and in the cases of Mr. Chapman
and Mr. Bravo by Chapman Capital Management Holdings and The Chapman Insurance
Agency, under certain expense sharing arrangements, in each of the years
indicated. The compensation figure for Ms. Rancifer represents the amount paid
to her by Chapman Capital Management Holdings in the year indicated.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
in 1999 to the executive officers named in the summary compensation table.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ---------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr....................... 11,168 8.2% $4.13 5/14/2002
Earl U. Bravo, Sr........................... 11,168 8.2% $3.76 5/14/2002
9,664 7.1% $4.92 9/28/2002
Vincent McCarley............................ 1,932 1.4% $4.92 9/28/2002
Tracey Rancifer............................. 2,235 1.6% $3.76 5/14/2002
</TABLE>
On September 28, 1998, Chapman Holdings granted Mr. Bravo an option to
purchase 5,000 shares and Vincent McCarley an option to purchase 1,000 shares of
its common stock, each with an exercise price of $9.50, the fair market value of
the stock at the time of the grant, under its Omnibus Stock Plan. As a result of
the Chapman Holdings merger, these options will convert into options under
EChapman.com's Omnibus Stock Plan.
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 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.
Neither of the original option grants by Chapman Holdings or Chapman Capital
Management Holdings were made in contemplation of the mergers and EChapman.com's
initial public offering.
The share number for Mr. McCarley and the 9,664 share number for Mr. Bravo
in the option table reflects the Chapman Holdings option grant multiplied by the
1.93295 exchange ratio for the Chapman Holdings merger, and the exercise price
reflects the original exercise price divided by this exchange ratio. The share
numbers in the option table for Mr. Chapman, Ms. Rancifer and 11,168 of
Mr. Bravo's shares 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.
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<PAGE>
1999 ECHAPMAN.COM, INC. OMNIBUS STOCK PLAN
Our board of directors has established the 1999 EChapman.com, Inc. Omnibus
Stock Option Plan to enable us to grant equity compensation to the our
directors, officers, employees and consultants. Our stock plan will be
administered by the compensation committee of the board of directors. We have
reserved 850,000 shares of our common stock for issuance under our stock option
plan.
No securities have been issued 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.
Chapman Holdings granted options to purchase a total of 42,900 shares of its
common stock, including the options granted to Mr. Bravo and Mr. McCarley
reflected in the option grant table above, 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, there will be 136,510 shares subject to
outstanding stock options upon closing of this offering. 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 divided 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 that 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>
ECHAPMAN.COM 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 whose operations
consist solely of the ownership and rental of furniture and equipment to The
Chapman Co. We lease 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
$118,152 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, 1999, Mr. Chapman owed EChapman.com's subsidiaries
$1,038,174 in connection with the following notes, including accrued interest,
which notes were issued for purposes unrelated to the businesses of
EChapman.com, Chapman Holdings, Chapman Capital Management Holdings, or their
respective affiliates:
- Three-year promissory note to The Chapman Co. dated February 11, 1998 in
the amount of $176,250, which accrues interest at 5.54% per annum and
requires no payments of principal or interest until maturity.
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<PAGE>
- 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.
In December 1995, Mr. Chapman loaned Chapman Capital Management $100,000,
payable on demand, for the purchase of common stock of an affiliate. In
March 1996, Mr. Chapman loaned Chapman Capital Management an additional $45,000,
payable on demand. These loans provided for a fixed-interest payment of $14,500,
or an effective flat rate of 10% of the principal. On June 30, 1998, Chapman
Capital Management Holdings repaid these loans in full.
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
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<PAGE>
the years ended December 31, 1998 and 1999, respectively. For year ended
December 31, 1999, Chapman Capital Management has reimbursed The Chapman Funds,
on behalf of the DEM Equity Fund, $29,055 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 initial public offering, we will acquire
Chapman Holdings, Chapman Capital Management and Chapman Insurance Holdings
under to 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 each of
Chapman Holdings and Chapman Capital Management Holdings in accordance with
Maryland law.
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We have entered into a non-exclusive, royalty-free licensing agreement with
Mr. Chapman pertaining to our use of the C-Eagle Logo-TM-, Chapman, Chapman
Trading-TM-, Chapman Network-TM-, Chapman Education-TM-, Chapman
Marketplace-TM-, Chapman Kids Club-TM-, DEM Index-TM-, DEM Profile-TM-, DEM
Universe-TM-, DEM Company-TM-, DEM Community-TM-, DEM Multi-Manager-TM-,
EChapman.com-TM-, Domestic Emerging Markets-Registered Trademark-,
DEM-Registered Trademark-, trademarks that are owned by Mr. Chapman.
In the past, transactions between Chapman Holdings or Chapman Capital
Management have been approved by a majority of the board of directors of the
respective Chapman affiliated-entity, including a majority of the directors who
do not have a material financial interest in the transactions, 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.
ECHAPMAN.COM MARKET PRICE AND DIVIDEND INFORMATION
EChapman.com is a privately-held company and its common stock does not trade
in any market. EChapman.com has never paid dividends on its common stock.
Payment of dividends in the future will be at the discretion of its board of
directors and will be dependent upon earnings, financial condition, capital
requirements and other factors deemed relevant by the EChapman.com board of
directors.
DESCRIPTION OF ECHAPMAN.COM CAPITAL STOCK
The authorized capital stock of EChapman.com consists of 50,000,000 shares
of common stock, par value $0.001 per share.
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 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 duly
authorized, validly issued, fully paid and nonassessable.
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MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
The charter of the EChapman.com, provides that EChapman.com shall indemnify
its currently acting and its former directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the Maryland General Corporation
Law, as from time to time amended. If approved by the board of directors,
EChapman.com may indemnify its employees, agents and persons who serve or have
served, at its request as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture or other enterprise to
the extent determined to be appropriate by the Board of Directors. EChapman.com
shall advance expenses to its directors and officers entitled to mandatory
indemnification to the maximum extent permitted by the Maryland General
Corporation Law and may in the discretion of the Board of Directors advance
expenses to employees, agents and others who may be granted indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of EChapman.com
pursuant to the foregoing provisions, or otherwise, EChapman.com has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Furthermore, the charter of EChapman.com 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 a stockholder are limited to equitable remedies such as
injunction or rescission.
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COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS ECHAPMAN.COM
AND CHAPMAN HOLDINGS COMMON STOCK
Upon completion of the merger, Chapman Holdings stockholders will become
EChapman.com stockholders and the rights of former Chapman Holdings stockholders
will continue to be governed by Maryland law, but will also be governed by the
EChapman.com certificate of incorporation and bylaws. There are no material
differences between the current rights of stockholders of Chapman Holdings and
the rights the EChapman.com stockholders will have after completion of the
merger, other than as set forth below:
- DISSENTERS' RIGHTS For a description of the rights of dissenting
stockholders of Chapman Holdings, see "The Merger--Dissenters' Rights."
Under the Maryland law, a stockholder does not have appraisal rights in
certain circumstances, including in a merger or consolidation, if the
stockholder's stock is listed on a national exchange or is designated as a
security listed on the Nasdaq National Market. Since EChapman.com has
filed an application for its common stock to be quoted on the Nasdaq
National Market under the symbol "ECMN", stockholders receiving
EChapman.com common stock in the merger, dissenters' rights with respect
to future such transactions affecting EChapman.com common stock will most
likely not be available.
- BUSINESS COMBINATION LAW Under certain circumstances, Maryland law
restricts transactions between a corporation and its affiliates and
potential acquirers. The charter of Chapman Holdings specifically opts out
of such provisions. The charter of EChapman.com specifically opts into
such provisions with the exception of transactions involving
- 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.
Maryland law 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
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<PAGE>
became an interested stockholder. After this five-year period, a business
combination with an interested stockholder must be:
- recommended by the corporation's board of directors; and
- approved by the affirmative vote of at least 80% of the corporation's
outstanding shares entitled to vote and two-thirds of the outstanding
shares entitled to vote which are not held by the interested stockholder
with whom the business combination is to be effected, unless, among other
things, the corporation's common stockholders receive a "fair price," as
defined in the statute for their shares and the consideration is received
in cash or in the same form as previously paid by the interested
stockholder for his shares.
- 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 the initial public offering of our common stock and the mergers,
there has been no trading market for the common stock. Although we have applied
for quotation of the common stock on the Nasdaq National Market System, there
can be no assurance that an active trading market for the common stock will
develop and, if developed, will continue after the offering. Quotation of our
common stock on the
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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 the initial public offering of our common
stock and after the closing of the mergers, EChapman.com will have 16,528,178
outstanding shares of common stock. 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 be
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 the
initial public offering, as of December 31, 1999, Mr. Chapman beneficially owned
9,643,008 shares of common stock or approximately 58.3% 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 for the initial
public offering of our common stock during the 180 days following the closing of
the initial public offering except under the over-allotment option. After the
lock-up period, Mr. Chapman may resell his shares without registration by
complying with Rule 144 discussed below.
In general, under Rule 144, a person, or persons whose shares are required
to be aggregated, including any of our affiliates, who beneficially owns
"restricted shares"
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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.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered hereby and the merger will be passed upon for EChapman.com by Venable,
Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The audited financial statements included in this prospectus and proxy
statement have been audited by Arthur Andersen LLP, independent certified 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.
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WHERE YOU CAN FIND MORE INFORMATION
Chapman Holdings is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and files reports, proxy statements
and other information with the SEC. These reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004. Copies of such materials may be obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Chapman Holdings
Common Stock is publicly traded and quoted on The Nasdaq SmallCap Market under
the symbol "CMAN."
The SEC maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information concerning Chapman
Holdings which files electronically with the SEC.
EChapman.com has filed with the Commission a registration statement on
Form S-4, together with any annexes, exhibits and amendments, under the
Securities Act of 1933, as amended covering 5,709,204 shares of EChapman.com
Common Stock. Statements contained in this prospectus and proxy statement
concerning any document filed as an exhibit to the registration statement are
not necessarily complete, and in each such instance reference is made to the
copy of the applicable document filed with the SEC or attached as an annex or
exhibit.
EChapman.com will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent accounting
firm.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
AND PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS AND PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROSPECTUS AND PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION, OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS AND PROXY STATEMENT NOR THE ISSUANCE OR
SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF OR INCORPORATED.
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ECHAPMAN.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Index....................................................... F-1
CHAPMAN HOLDINGS, INC.
Report of Independent Public Accountants.................. F-2
Consolidated Balance 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-19
Consolidated Balance Sheet as of December 31, 1999........ F-20
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................. F-21
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999 and 1998.......... F-22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-23
Notes to Financial Statements............................. F-24
CHAPMAN INSURANCE HOLDINGS, INC.
Report of Independent Public Accountants.................. F-33
Consolidated Balance Sheet as of December 31, 1999........ F-34
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................. F-35
Consolidated Statements of Changes in Stockholders'
Deficit for the Years Ended December 31, 1999 and
1998.................................................... F-36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-37
Notes to Financial Statements............................. F-38
ECHAPMAN.COM, INC.
Report of Independent Public Accountants.................. F-41
Balance Sheet as of December 31, 1999..................... F-42
Statement of Operations for the Period May 14, 1999
(inception) to December 31, 1999........................ F-43
Statement of Changes in Stockholders' Deficit for the
Period May 14, 1999 (inception) to December 31, 1999.... F-44
Statement of Cash Flows for the Period May 14, 1999
(inception) to December 31, 1999........................ F-45
Notes to Financial Statements............................. F-46
</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 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
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)
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 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.
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)
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 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
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)
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.
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-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)
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 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.
F-12
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
Securities brokerage firms become parties to arbitrations brought by
dissatisfied customers in the general course of business. The Company has been
and is currently a party to such proceedings, none of which has resulted or
which management believes will result in any material liability.
F-13
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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>
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
F-14
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
7. REGULATORY REQUIREMENTS: (CONTINUED)
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>
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.
F-15
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
10. OMNIBUS STOCK PLAN: (CONTINUED)
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 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.
F-16
<PAGE>
CHAPMAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
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 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-17
<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>
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Included in investments is an investment in DEM Index Fund, an affiliate,
which is carried at market value in accordance with SFAS 115. Investments also
include common stock ownership in an investment company carried at cost which
approximates market.
ASSETS UNDER MANAGEMENT
In the normal course of operations of an investment manager, clients add
investments to and withdraw investments from the asset portfolio. This activity
is done by clients as they continue to make investment decisions and diversify
their portfolio.
During 1999, the net change in assets under management increased
$180 million to $771 million as of December 31, 1999, from $591 million as of
December 31, 1998. The net increase in assets under management included growth
attributable to investment performance, additions of assets totaling
$25 million from two clients and a reduction of $86 million in assets by four
clients. The reduction included partial withdrawals in the accounts of two
clients of $49 million and $22 million, or 6.36% and 2.85%, respectively, of the
assets under management as of December 31, 1999. The reduction in assets also
included a withdrawal by one of the four participants in the Company's DEM-MET
Trust, which withdrew its total investment of approximately $13.7 million, in
June 1999 which represented approximately 2.1%, of the total assets under
management of the DEM-MET Trust as of June 30, 1999.
The loss of these assets under management has not had a material impact on
the operations of the Company during 1999.
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-26
<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-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)
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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<PAGE>
ANNEX I
AGREEMENT AND PLAN
OF MERGER
BY AND AMONG
ECHAPMAN.COM, INC.,
CHI MERGER SUBSIDIARY, INC.
AND
CHAPMAN HOLDINGS, INC.
I-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER........................................ 4
SECTION 1.1. The Merger................................... 4
SECTION 1.2. Effective Time of the Merger................. 4
ARTICLE II THE SURVIVING CORPORATION........................ 5
SECTION 2.1. Charter...................................... 5
SECTION 2.2. By-laws...................................... 5
SECTION 2.3. Effect of the Merger......................... 5
SECTION 2.4. Directors.................................... 5
SECTION 2.5. Officers..................................... 5
ARTICLE III CONVERSION OF SHARES............................ 5
SECTION 3.1. Conversion of CHI Shares in the Merger....... 5
SECTION 3.2. Consideration................................ 7
SECTION 3.3. Exchange of Certificates..................... 7
SECTION 3.4. No Fractional Securities..................... 9
SECTION 3.5. Closing...................................... 9
SECTION 3.6. Closing of CHI's Transfer Books.............. 9
ARTICLE IV REPRESENTATION AND WARRANTIES OF EChapman AND
MERGER SUBSIDIARY........................................... 10
SECTION 4.1. Organization................................. 10
SECTION 4.2. Capitalization............................... 10
SECTION 4.2. Authority; Non-Contravention; Approvals...... 11
SECTION 4.4. Absence of Undisclosed Liabilities........... 12
SECTION 4.5. Absence of Litigation........................ 12
SECTION 4.6. Registration Statement and Proxy Statement... 12
SECTION 4.7. Compliance with Agreements................... 13
SECTION 4.8. EChapman Stockholders' Approval.............. 13
SECTION 4.9. Brokers and Finders.......................... 13
SECTION 4.10. Chapman Capital Management Holdings, Inc.... 13
SECTION 4.11. Anti-takeover Statutes...................... 13
ARTICLE V REPRESENTATIONS AND WARRANTIES OF CHI............. 14
SECTION 5.1. Organization and Qualification............... 14
SECTION 5.2. Capitalization............................... 14
SECTION 5.3. Subsidiaries................................. 14
SECTION 5.4. Authority; Non-Contravention; Approvals...... 15
SECTION 5.5. Securities Reports and Financial
Statements.............................................. 16
SECTION 5.6. Absence of Undisclosed Liabilities........... 17
SECTION 5.7. Absence of Certain Changes or Events......... 17
SECTION 5.8. Absence of Litigation........................ 17
SECTION 5.9. Registration Statement and Proxy Statement... 18
SECTION 5.10. No Violation of Law......................... 18
SECTION 5.11. Compliance with Agreements.................. 18
SECTION 5.12. Taxes....................................... 19
SECTION 5.13. Employee Benefits Plans; ERISA.............. 19
SECTION 5.14. Labor Controversies......................... 21
SECTION 5.15. Title to Assets............................. 21
SECTION 5.16. CHI Stockholders' Approval.................. 22
SECTION 5.17. Trademarks and Intellectual Property
Compliance.............................................. 22
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 5.18. Material Agreements......................... 22
SECTION 5.19. Insurance................................... 22
SECTION 5.20. Brokers and Finders......................... 23
SECTION 5.21. Certain Transactions........................ 23
SECTION 5.22. Opinion of Financial Advisor................ 23
SECTION 5.23. Anti-takeover Statutes...................... 23
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER........... 23
SECTION 6.1. Conduct of Business by CHI Pending the
Merger.................................................. 23
SECTION 6.2. Conduct of Business by EChapman Pending the
Merger.................................................. 25
SECTION 6.3. Control of CHI's Operations.................. 25
SECTION 6.4. Control of EChapman's Operations............. 26
SECTION 6.5. Acquisition Transactions..................... 26
ARTICLE VII ADDITIONAL AGREEMENTS........................... 27
SECTION 7.1. Access to Information........................ 27
SECTION 7.2. Stockholders' Approval....................... 27
SECTION 7.3. Affiliates of CHI............................ 28
SECTION 7.4. Expenses and Fees............................ 28
SECTION 7.5. Agreement to Cooperate....................... 28
SECTION 7.6. Public Statements............................ 28
SECTION 7.7. Notification of Certain Matters.............. 29
SECTION 7.8. Proxy Statement/Prospectus and Registration
Statement............................................... 29
SECTION 7.9. Tax-Free Treatment of Merger................. 29
SECTION 7.10. Directors' and Officers' Indemnification.... 29
SECTION 7.11. Amendment to CCMHI Merger Agreement......... 31
ARTICLE VIII CONDITIONS..................................... 31
SECTION 8.1. Conditions to Each Party's Obligation to
Effect the Merger....................................... 31
SECTION 8.2. Additional Conditions to Obligation of CHI to
Effect the Merger....................................... 32
SECTION 8.3. Additional Conditions to Obligations of
EChapman and Merger Subsidiary to Effect the Merger..... 33
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER................ 33
SECTION 9.1. Termination.................................. 33
SECTION 9.2. Effect of Termination........................ 34
SECTION 9.3. Amendment.................................... 34
SECTION 9.4. Waiver....................................... 34
ARTICLE X GENERAL PROVISIONS................................ 34
SECTION 10.1. Non-Survival of Representations and
Warranties.............................................. 34
SECTION 10.2. Notices..................................... 34
SECTION 10.3. Interpretation.............................. 35
SECTION 10.4. Miscellaneous............................... 35
SECTION 10.5. Counterparts................................ 36
SECTION 10.6. Parties In Interest......................... 36
SECTION 10.7. Exhibits and Schedules...................... 36
SECTION 10.8. Severability................................ 36
SECTION 10.9. Definition of Knowledge..................... 36
</TABLE>
I-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), made this 15(th)day of
November, 1999, by and among EChapman.com, Inc., a Maryland corporation
("EChapman"), CHI Merger Subsidiary, Inc., a Maryland corporation and wholly
owned subsidiary of EChapman ("Merger Subsidiary"), and Chapman Holdings, Inc.,
a Maryland corporation ("CHI").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of EChapman and CHI have each
determined that the merger of CHI with and into Merger Subsidiary (the "Merger")
is consistent with and in furtherance of the long-term business strategy of
EChapman and CHI and subject to receipt of the fairness opinion referred to
hereinafter is fair to, and in the best interests of, CHI and its stockholders;
WHEREAS, the respective Boards of Directors of EChapman, Merger Subsidiary
and CHI have each approved the Merger, upon the terms and subject to the
conditions set forth herein; and
WHEREAS, EChapman, Merger Subsidiary and CHI intend to qualify the Merger as
a tax-free reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Maryland General Corporation Law (the "MGCL"), CHI shall be merged with
and into Merger Subsidiary and the separate corporate existence of CHI shall
thereupon cease. Merger Subsidiary shall be the surviving corporation under the
name Chapman Holdings, Inc. in the Merger and is hereinafter sometimes referred
to as the "Surviving Corporation." The Surviving Corporation will be governed by
laws of the State of Maryland as a direct, wholly owned subsidiary of EChapman.
SECTION 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
at such time (the "Effective Time") as shall be stated in Articles of Merger, in
a form mutually acceptable to EChapman and CHI, to be filed with the State
Department of Assessments and Taxation of Maryland (the "SDAT") in accordance
with the MGCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the Closing (as defined in
Section 3.5) of the transactions contemplated by this Agreement.
I-4
<PAGE>
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1. CHARTER. The Charter of Merger Subsidiary, as in effect
immediately prior to the Effective Time, except that the name of the Surviving
Corporation will change to Chapman Holdings, Inc., shall be the Charter of the
Surviving Corporation until duly amended in accordance with applicable law.
SECTION 2.2. BY-LAWS. The By-laws of Merger Subsidiary, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until duly amended in accordance with applicable law.
SECTION 2.3. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions of
the MGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, except as otherwise provided herein, all the property,
rights, privileges, powers and franchises of Merger Subsidiary and CHI shall
vest in the Surviving Corporation, all debts, liabilities and duties of Merger
Subsidiary and CHI shall become the debts, liabilities and duties of the
Surviving Corporation in the same manner as if the Surviving Corporation had
itself incurred them, and the separate corporate existence of Merger Subsidiary
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth herein.
SECTION 2.4. DIRECTORS. The directors of Merger Subsidiary immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation and shall hold office until their respective successors are duly
elected and qualified in accordance with the Charter and By-laws of the
Surviving Corporation, or their earlier death, resignation or removal.
SECTION 2.5. OFFICERS. The officers of Merger Subsidiary immediately prior
to the Effective Time shall be the initial officers of the Surviving Corporation
and shall serve as the officers of the Surviving Corporation at the pleasure of
the Board of Directors of the Surviving Corporation.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. CONVERSION OF CHI SHARES IN THE MERGER. Subject to Section 3.4
regarding fractional shares, at the Effective Time, by virtue of the Merger and
without any action on the part of any holder of any shares of CHI's common
stock, par value $0.001 per share ("CHI Common Stock"):
(a) Each share of CHI Common Stock issued and outstanding immediately prior
to the Effective Time, other than CHI Common Stock owned by EChapman or Merger
Subsidiary, or owned by an Objecting Stockholder (as defined in
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Section 3.1(c)) shall be converted in accordance with Section 3.3 into the right
to receive the Merger Consideration (as defined in Section 3.2).
(b) Each share of CHI Common Stock owned by EChapman or Merger Subsidiary
(each a "Non-Converting Share") immediately prior to the Effective Time, if any,
shall be cancelled and extinguished without conversion thereof into EChapman
Shares (as defined in Section 3.2(a)) or payment therefor.
(c) Any holder (an "Objecting Stockholder") of CHI Common Stock ("Objecting
Shares") who files with CHI a written objection to the proposed Merger at or
before the stockholders' meeting at which the proposed Merger will be
considered, whose shares are not voted in favor of the approval of the Merger at
the meeting of CHI stockholders at which the Merger is approved, and who, within
twenty (20) days after the Effective Time (which time will be set forth in a
notice provided to any such stockholder by EChapman and Merger Subsidiary by
certified mail, return receipt requested pursuant to Section 3-207(b) of the
MGCL), makes a written demand upon Merger Subsidiary for payment for such
Objecting Shares, accompanied by a surrender of the certificates for such
Objecting Shares, all pursuant to the provisions of Title 3, Subtitle 2 of the
MGCL, or any successor statute thereto, shall be entitled to receive from Merger
Subsidiary in cash the fair value of such Objecting Shares determined in
accordance with the aforesaid provisions of the MGCL, or any successor statute
thereto. The amount paid to any Objecting Stockholder shall be debited against
the capital accounts of Merger Subsidiary. If any Objecting Stockholder objects
to the Merger and demands payment in cash for his Objecting Shares as aforesaid,
EChapman shall pay to Merger Subsidiary, as a contribution to its capital, cash
at a price per share equal to the price per share paid by Merger Subsidiary to
such Objecting Stockholder.
(d) Each unexpired option to purchase CHI Common Stock ("CHI Options") that
is outstanding at the Effective Time shall be converted into an option to
purchase the number of EChapman Shares (as defined in Section 3.2) equal to the
number of shares of CHI Common Stock which could be acquired upon the exercise
of such CHI Options multiplied by the Exchange Ratio (as defined in
Section 3.2), at an exercise price per share equal to the per share exercise
price of such CHI Options divided by the Exchange Ratio rounded to the nearest
whole cent and in any case an amount which, is not less than the par value, if
any, of EChapman Shares (the "Exchanged Options"). EChapman shall maintain
sufficient authorized shares of stock to issue EChapman Shares that will become
issuable upon the exercise of the Exchanged Options.
(e) At the Effective Time, each issued and outstanding share of common
stock, par value $.001 per share, of Merger Subsidiary shall remain outstanding.
(f) No share of CHI Common Stock shall be deemed to be outstanding or to
have any rights other than those set forth in this Section 3.1 after the
Effective Time unless specified by applicable provisions of the MGCL.
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SECTION 3.2. CONSIDERATION.
(a) The consideration to be issued to each holder of CHI Common Stock in the
Merger ("Merger Consideration") will be that number of shares of EChapman common
stock, par value $0.001 per share ("EChapman Shares"), which is determined by
multiplying the Exchange Ratio (as defined below) by the number of shares of CHI
Common Stock held by such holder of CHI Common Stock on the Closing Date (as
defined in Section 3.5). The "Exchange Ratio" shall equal 1.93295 EChapman
Shares for each share of CHI Common Stock.
(b) No fractional EChapman Shares shall be issued, and, in lieu thereof, a
Fractional Share Payment shall be made (as defined in Section 3.4).
(c) The Merger Consideration shall be subject to equitable adjustment in the
event of any stock split, stock dividend, reverse stock split or other change
(other than pursuant to exercises of outstanding options) in the number of
EChapman Shares or CHI Common Stock outstanding prior to Closing.
SECTION 3.3. EXCHANGE OF CERTIFICATES.
(a) Except as otherwise provided in Section 3.1(c) or by the MGCL, from and
after the Effective Time, all CHI Common Stock shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist, and
each holder of a certificate representing shares of CHI Common Stock shall cease
to have any rights with respect thereto, except the right to receive in exchange
therefor, upon surrender thereof to a bank or trust company designated by
EChapman and acceptable to CHI (the "Exchange Agent"), a certificate
representing EChapman Shares to which such holder is entitled pursuant to
Section 3.1 plus the Fractional Share Payment. Notwithstanding any other
provision of this Agreement, until holders or transferees of certificates
theretofore representing shares of CHI Common Stock have surrendered them for
exchange as provided herein, no dividends or other distributions declared or
made after the Effective Time with respect to EChapman Shares with a record date
after the Effective Time shall be paid with respect to any EChapman Shares
represented by such certificates and no Fractional Share Payment shall be made.
Upon surrender of a certificate which immediately prior to the Effective Time
represented shares of CHI Common Stock, there shall be paid to the holder of
such certificate by EChapman without interest, (i) promptly, the amount of any
Fractional Share Payment with respect to a fractional EChapman Share to which
such holder is entitled, (ii) except as provided in (iii), below, the amount of
dividends or other distributions (without interest) with a record date after the
Effective Time which theretofore became payable with respect to whole EChapman
Shares, and (iii) at the appropriate payment date, the amount of dividends or
other distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole EChapman Shares.
(b) If any EChapman Shares are to be issued in a name other than that in
which the certificate for shares of CHI Common Stock surrendered in exchange
therefor is
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registered, it shall be a condition of such exchange that the certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and the person requesting such exchange shall have paid to EChapman or the
Exchange Agent any applicable transfer or other taxes required by reason of such
issuance.
(c) As of the Effective Time, EChapman shall deposit, or cause to be
deposited, with the Exchange Agent, for the account of Merger Subsidiary, the
number of EChapman Shares required to effect the exchanges referred to in
paragraph (a) above, and cash for purposes of the Fractional Share Payment.
EChapman shall thereafter from time to time deposit, or cause to be deposited,
with the Exchange Agent cash for payment of any dividend or distributions in
respect of such EChapman Shares with a record date after the Effective Time.
(d) As soon as reasonably practicable after the Effective Time, EChapman or
the Surviving Corporation shall cause the Exchange Agent to mail to each holder
of record as of the Effective Time of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of CHI
Common Stock (the "CHI Certificates"), whose shares were converted into the
right to receive EChapman Shares (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to CHI
Certificates shall pass, only upon delivery of CHI Certificates to the Exchange
Agent), and (ii) instructions for use in effecting the surrender of CHI
Certificates in exchange for EChapman Shares. Upon surrender of a CHI
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal, the holder of such CHI Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole EChapman Shares into which the shares of CHI Common Stock theretofore
represented by CHI Certificates so surrendered shall have been converted
pursuant to the provisions of Section 3.1, and CHI Certificates so surrendered
shall be cancelled. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of shares of CHI Common Stock
for any EChapman Shares or dividends or distributions thereon delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(e) Promptly following the date which is six (6) months after the Effective
Time, EChapman or the Surviving Corporation shall cause the Exchange Agent to
deliver to EChapman all certificates, property and other documents in its
possession relating to the transactions described in this Agreement. Thereafter,
each holder of a CHI Certificate may surrender such CHI Certificate to EChapman
and (subject to applicable abandoned property, escheat and similar laws) receive
in exchange therefor a certificate representing EChapman Shares to which such
person is entitled, any dividends or distributions with respect to the EChapman
Shares and any Fractional Share Payment, in each case without any interest
thereon. Notwithstanding the foregoing, none of the Exchange Agent, EChapman,
Merger Subsidiary, or the Surviving Corporation shall be liable to a holder of
CHI Common Stock for any
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EChapman Shares delivered to a public official pursuant to applicable abandoned
property, escheat and similar laws.
(f) In the event any CHI Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such CHI Certificate to be lost, stolen or destroyed, and the posting of a bond
by such person in such amount as EChapman may direct as indemnity against any
claim that may be made against it or the Exchange Agent with respect to such CHI
Certificate, the Exchange Agent, EChapman or the Surviving Corporation, as the
case may be, shall issue in exchange for such lost, stolen or destroyed CHI
Certificate, a certificate representing the proper number of EChapman Shares
deliverable in respect thereof determined in accordance with this Section 3.3,
and cash for the Fractional Share Payment and any other dividends or
distributions in respect of EChapman Shares with a record date after the
Effective Time.
SECTION 3.4. NO FRACTIONAL SECURITIES. No fractional EChapman Shares shall
be issued in the Merger and no stock dividend, stock split or interest shall
relate to any fractional security, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a security holder.
In lieu of any such fractional shares, each holder of CHI Common Stock, who
would otherwise have been entitled to receive a certificate representing a
fractional EChapman Share upon surrender of CHI Certificates for exchange
pursuant to this Article III, shall be entitled to receive from the Exchange
Agent a cash payment (the "Fractional Share Payment") equal to the product of
the fractional share interest to which such holder would otherwise be entitled
multiplied by $29.
SECTION 3.5. CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Venable,
Baetjer and Howard, LLP, Suite 1800, 2 Hopkins Plaza, Baltimore, MD 21201, on
the day of CHI's Stockholders' Approval as such term is defined in Section 7.2,
below, or at such other time and place as EChapman and CHI shall reasonably
agree (the date on which the Closing occurs is referred to in this Agreement as
the "Closing Date").
SECTION 3.6. CLOSING OF CHI'S TRANSFER BOOKS. At the Effective Time, the
stock transfer books of CHI shall be closed and no transfer of shares of CHI
Common Stock which were outstanding immediately prior to the Effective Time
shall thereafter be made. From and after the Effective Time, the holders of CHI
Certificates representing shares of CHI Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights as stockholders of
CHI, except as otherwise provided herein or by law. If, after the Effective
Time, subject to the terms and conditions of this Agreement, CHI Certificates
formerly representing CHI Common Stock are presented to the Exchange Agent,
EChapman or Surviving Corporation, as the case may be, they shall be cancelled
and exchanged for certificates representing EChapman Shares and cash for the
Fractional Share Payment and any other dividends or distributions in respect of
EChapman Shares with a record date after the Effective Time in accordance with
this Article III.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ECHAPMAN AND MERGER
SUBSIDIARY
EChapman and Merger Subsidiary each represent and warrant to CHI as of the
date hereof as follows:
SECTION 4.1. ORGANIZATION . The Merger Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Maryland. EChapman is a corporation duly organized and validly existing and in
good standing under the laws of the state of Maryland. Each of EChapman and
Merger Subsidiary has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted. Neither EChapman nor Merger Subsidiary is in violation of any
of the provisions of their respective charters or By-laws.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of EChapman consists of 50,000,000 shares
of EChapman Shares, of which one share is outstanding. The issued and
outstanding EChapman Share is, and all EChapman Shares to be issued at the
Effective Time shall be, when issued, duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights granted by EChapman or by
applicable law.
(b) Except as set forth in this Agreement, the Affiliate Agreements (as
defined in Section 7.3) and the CCMHI Merger Agreement (as defined in
Section 4.10) or in connection with the EChapman Public Offering (as defined in
Section 8.1(f)), there are (i) no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, instrument or other agreement and also including any rights plan or
other anti-takeover agreement, obligating EChapman or any subsidiary of EChapman
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of EChapman or obligating EChapman or any subsidiary
of EChapman to grant, extend or enter into any such agreement or commitment, and
(ii) no voting trusts, proxies or other agreements or understandings to which
EChapman or any subsidiary of EChapman is a party or is bound with respect to
the voting of any shares of capital stock of EChapman and, to the knowledge of
EChapman, there are no such trusts, proxies, agreements or understandings by,
between or among any of EChapman "s stockholders with respect to EChapman
Shares.
(c) The authorized capital stock of Merger Subsidiary consists of 20,000,000
shares of Merger Subsidiary Common Stock, of which 1,000 shares are issued and
outstanding all of which are owned beneficially and of record by EChapman.
EChapman has no other direct or indirect subsidiaries, except for CCMHI Merger
Subsidiary, Inc. and CIHI Merger Subsidiary, Inc.
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SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) EChapman and Merger Subsidiary each have full corporate power and
authority to enter into this Agreement and, subject to EChapman Required
Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Boards
of Directors of EChapman and Merger Subsidiary and by the sole stockholder of
EChapman and Merger Subsidiary, and no other corporate proceedings on the part
of EChapman or Merger Subsidiary are necessary to authorize the execution and
delivery of this Agreement or the consummation by EChapman and Merger Subsidiary
of the transactions contemplated hereby. This Agreement has been duly executed
and delivered by each of EChapman and Merger Subsidiary, and, assuming the due
authorization, execution and delivery hereof by CHI, constitutes a valid and
legally binding agreement of each of EChapman and Merger Subsidiary, enforceable
against each of them in accordance with its terms, except that such enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally, and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of EChapman and
Merger Subsidiary does not, and the performance of this Agreement and the
transactions contemplated hereby by EChapman and Merger Subsidiary shall not,
violate, conflict with or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of EChapman or Merger
Subsidiary, under any of the terms, conditions or provisions of (i) the
respective Charters and By-laws of EChapman or Merger Subsidiary, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority, domestic or
foreign, applicable to EChapman or Merger Subsidiary or any of their respective
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which EChapman or Merger
Subsidiary is now a party or by which EChapman or Merger Subsidiary or any of
their respective properties or assets may be bound. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms, conditions
or provisions described in clauses (ii) and (iii) of the first sentence of this
paragraph (b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or encumbrances
that would not, in the aggregate, have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of EChapman and Merger Subsidiary, taken as a whole (an
"EChapman Material Adverse Effect").
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(c) Except for (i) the filing of the Registration Statement (as defined in
Section 4.6) with the SEC pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the declaration of the effectiveness thereof by the
SEC and filings with various state blue sky authorities and any other required
filings in other jurisdictions to register or exempt EChapman Shares issuable
pursuant hereto, and (ii) the making of the Merger Filing with the SDAT in
connection with the Merger (collectively referred to as the "EChapman Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority, domestic or foreign, is necessary for the execution and
delivery of this Agreement by EChapman or Merger Subsidiary or the consummation
by EChapman or Merger Subsidiary of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have a EChapman Material Adverse Effect, or affect Merger
Subsidiary's ability to consummate the Merger.
SECTION 4.4. ABSENCE OF UNDISCLOSED LIABILITIES. Neither EChapman nor Merger
Subsidiary has any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except liabilities that were incurred in
the ordinary course of business and that will not have an EChapman Material
Adverse Effect.
SECTION 4.5. ABSENCE OF LITIGATION. There is no claim of any kind, suit,
action, proceeding, litigation, arbitration, investigation or controversy
affecting EChapman or Merger Subsidiary pending or, to the knowledge of
EChapman, threatened and neither EChapman nor any of its subsidiaries is subject
to any continuing order of, or written agreement or memorandum of understanding
with, or continuing material investigation by, any governmental entity or
authority, or any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator.
SECTION 4.6. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by EChapman for inclusion in (a) the
Registration Statement on Form S-4 to be filed under the Securities Act with the
SEC by EChapman and CHI in connection with the Merger for the purpose of
registering EChapman Shares and Exchanged Options to be issued in connection
with the Merger (the "Registration Statement"), or (b) the proxy statement to be
distributed in connection with CHI's meeting of stockholders to vote upon this
Agreement and the transactions contemplated hereby (the "Proxy Statement" and,
together with the prospectus included in the Registration Statement, the "Proxy
Statement/Prospectus") will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, at the time of the
meeting of stockholders of CHI to be held in connection with the transactions
contemplated by this Agreement, and at the Effective Time, or, in the case of
the Registration Statement, as amended or supplemented, at the time it is
declared effective by the SEC, contain any untrue statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement and Proxy Statement/Prospectus shall comply in all material respects
as to form and substance with the requirements of the Securities Act, the
Exchange Act and the rules and regulations promulgated thereunder, except that
no representation is made by EChapman with respect to information supplied by
CHI for inclusion therein.
SECTION 4.7. COMPLIANCE WITH AGREEMENTS. EChapman and Merger Subsidiary are
not in breach or violation of or in default in the performance or observance of
any term or provision of, and no event has occurred which, with notice or lapse
of time or action by a third party, could result in a default under (a) their
respective charters or By-Laws; or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which EChapman or Merger Subsidiary is a party or by which
any of them is bound or to which any of their property is subject, which
breaches, violations and defaults, in the case of clause (b) of this
Section 4.11, would have, in the aggregate, an EChapman Material Adverse Effect.
SECTION 4.8. ECHAPMAN STOCKHOLDERS' APPROVAL. The affirmative vote of the
holders of a majority of the outstanding shares of EChapman Shares entitled to
vote is not necessary to approve the transactions contemplated by this
Agreement.
SECTION 4.9. BROKERS AND FINDERS. Neither EChapman nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby.
SECTION 4.10. CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. The representations
and warranties of Chapman Capital Management Holdings, Inc. set forth in
Article V of the Agreement and Plan of Merger dated as of the date of this
Agreement (the "CCMHI Merger Agreement") by and between Chapman Capital
Management Holdings, Inc., CCMHI Merger Subsidiary, Inc. and EChapman are true
and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement is true and correct in all respects).
SECTION 4.11. ANTI-TAKEOVER STATUTES. The provisions of Section 3-601 et
seq. (Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to EChapman or
Merger Subsidiary in connection with the transactions contemplated by this
Agreement.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CHI
CHI represents and warrants to EChapman as of the date hereof as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. CHI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. CHI is qualified to do business and is in good standing, where
applicable, in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of CHI and its
subsidiaries, taken as a whole (a "CHI Material Adverse Effect"). CHI is not in
violation of any of the provisions of its charter or By-Laws.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of CHI consists of 20 million shares of
CHI Common Stock of which 2,953,622 shares are issued and outstanding. All of
the issued and outstanding shares of CHI's capital stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights granted by CHI or by applicable law.
(b) Except as disclosed in CHI SEC Reports (as defined in Section 5.5) or
the CHI minute book, as of the date hereof, there are (i) no outstanding
subscriptions, options, calls, contracts, commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement and also including any rights plan or other anti-takeover agreement,
obligating CHI or any subsidiary of CHI to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of CHI or
obligating CHI or any subsidiary of CHI to grant, extend or enter into any such
agreement or commitment, and (ii) no voting trusts, proxies or other agreements
or understandings to which CHI or any subsidiary of CHI is a party or is bound
with respect to the voting of any shares of capital stock of CHI and, to the
knowledge of CHI, there are no such trusts, proxies, agreements or
understandings by, between or among any of CHI's stockholders with respect to
CHI Common Stock.
SECTION 5.3. SUBSIDIARIES. Except as disclosed in CHI SEC Reports (as
defined in Section 5.5), CHI has no subsidiaries. Each direct and indirect
subsidiary of CHI is duly organized, validly existing and in good standing,
where applicable, under the laws of its jurisdiction of incorporation or
organization and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, except where any failure would not have a CHI Material Adverse
Effect. Each subsidiary of CHI is qualified to do business,
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and is in good standing, where applicable, in each jurisdiction (except
California and Illinois for The Chapman Co.) in which the properties owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified and in
good standing would not have a CHI Material Adverse Effect. All of the
outstanding shares of capital stock of each corporate subsidiary of CHI have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights and are beneficially owned directly or indirectly by
CHI, free and clear of any liens, claims or encumbrances. There are no
subscriptions, options, warrants, rights, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting, transfer, ownership or other rights with
respect to any shares of capital stock of any subsidiary of CHI, including any
right of conversion or exchange under any outstanding security, instrument or
agreement.
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) CHI has full corporate power and authority to enter into this Agreement
and, subject to CHI Stockholders' Approval (as defined in Section 7.2 and CHI
Required Statutory Approvals (as defined in Section 5.4(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors of CHI, and no other corporate proceedings on the part of CHI are
necessary to authorize the execution and delivery of this Agreement or, except
for CHI Stockholders' Approval, the consummation by CHI of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by CHI,
and, assuming the due authorization, execution and delivery hereof by EChapman
and Merger Subsidiary, constitutes a valid and legally binding agreement of CHI,
enforceable against CHI in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by CHI does not, and the
performance of this Agreement and the transactions contemplated hereby by CHI
shall not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of CHI or any of its
subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or By-laws of CHI or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to CHI
or any of its subsidiaries or any of their respective properties or assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which CHI
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or any of its subsidiaries is now a party or by which CHI or any of its
subsidiaries or any of their respective properties or assets may be bound. The
consummation by CHI of the transactions contemplated hereby will not result in
any violation, conflict, breach, termination, acceleration or creation of liens
under any of the terms, conditions or provisions described in clauses
(i) through (iii) of the preceding sentence, subject (x) in the case of the
terms, conditions or provisions described in clause (ii) above, to obtaining
(prior to the Effective Time) CHI Required Statutory Approvals and CHI
Stockholders' Approval, and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Effective
Time) consents required from lenders, lessors or other third parties. Excluded
from the foregoing sentences of this paragraph (b), insofar as they apply to the
terms, conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a CHI Material
Adverse Effect.
(c) Except for (i) the filing of the Registration Statement with the SEC
pursuant to the Securities Act and the Exchange Act and the declaration of the
effectiveness thereof by the SEC and filings with various state blue sky
authorities, and (ii) the making of the Merger Filing with the SDAT in
connection with the Merger (the filings and approvals referred to in clauses
(i) through (ii) above are collectively referred to as the "CHI Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by CHI or the consummation by CHI of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have a CHI Material Adverse Effect.
SECTION 5.5. SECURITIES REPORTS AND FINANCIAL STATEMENTS. Since
December 31, 1998, CHI has filed with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it under each of the Securities Act, the Exchange Act and the
respective rules and regulations thereunder, all of which, as amended if
applicable, complied in all material respects with all applicable requirements
of the appropriate act and the rules and regulations thereunder (collectively,
the "CHI SEC Reports"). As of their respective dates, CHI SEC Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim consolidated
financial statements of CHI included in such reports (collectively, the "CHI
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
CHI and its subsidiaries as of the dates thereof and the results of their
operations and
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changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end and audit
adjustments and any other adjustments described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in CHI
SEC Reports, neither CHI nor any of its subsidiaries had at December 31, 1998,
nor has incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except:
(a) liabilities, obligations or contingencies (i) which are accrued or reserved
against in CHI Financial Statements or reflected in the notes thereto, or
(ii) which were incurred after December 31, 1998 and were incurred in the
ordinary course of business and consistent with past practices;
(b) liabilities, obligations or contingencies which (i) would not, in the
aggregate, have a CHI Material Adverse Effect, or (ii) have been discharged or
paid in full prior to the date hereof; and (c) liabilities and obligations which
are of a nature not required to be reflected in the consolidated financial
statements of CHI and its subsidiaries prepared in accordance with generally
accepted accounting principles consistently applied and which were incurred in
the normal course of business.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
CHI SEC Reports since December 31, 1998, CHI and its subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
past practice and since December 31, 1998, there has not been (a) any change in
the financial condition, results of operations or business of CHI or any of its
subsidiaries having, in the aggregate, a CHI Material Adverse Effect; (b) any
damage, destruction or loss (whether or not covered by insurance) with respect
to any assets of CHI or any of its subsidiaries having, in the aggregate, a CHI
Material Adverse Effect; (c) any change by CHI in its accounting methods,
principles or practices; (d) any revaluation by CHI of any of its material
assets in any material respect; (e) any entry by CHI or any of its subsidiaries
into any commitment or transactions material to CHI and its subsidiaries, taken
as a whole; or (f) any declaration, setting aside or payment of any dividends or
distributions in respect of shares of CHI Common Stock or any redemption,
purchase or other acquisition of any of its securities or any of the securities
of any subsidiary of CHI.
SECTION 5.8. ABSENCE OF LITIGATION. Except as disclosed in CHI SEC Reports,
a claim by Bishop, Rosen & Co., Inc. v. The Chapman Company, NASD Arbitration
No. 98-05015 currently proceeding in arbitration in New York and a threatened
claim by Boca Raton Resort & Club, which has not been filed as of the date of
this Agreement, (a) there is no claim of any kind, suit, action, proceeding,
litigation, arbitration, investigation or controversy affecting CHI or any of
its subsidiaries pending or, to the knowledge of CHI, threatened; and
(b) neither CHI nor any of its subsidiaries is subject to any continuing order
of, or written agreement or memorandum of understanding with, or continuing
material investigation by, any governmental entity or authority, or any
judgment, decree, injunction, rule or order of
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any court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator.
SECTION 5.9. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information supplied or to be supplied by CHI or its subsidiaries for inclusion
in (a) the Registration Statement, or (b) the Proxy Statement will, in the case
of the Proxy Statement or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement and any amendments or supplements
thereto, at the time of the meetings of stockholders of CHI to be held in
connection with the transactions contemplated by this Agreement, and at the
Effective Time, or, in the case of the Registration Statement, as amended or
supplemented, at the time it is declared effective by the SEC, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement and Proxy Statement/Prospectus will comply in all
material respects as to form and substance with the requirements of the
Securities Act, the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by CHI with respect to
information supplied by EChapman for inclusion therein.
SECTION 5.10. NO VIOLATION OF LAW. Except as disclosed in CHI SEC Reports
and a finding by the National Association of Securities Dealers, Inc. of a net
cap violation by The Chapman Co., on February 9, 16, and 23, 1996, neither CHI
nor any of its subsidiaries is in violation of or has been given notice or been
charged with any violation of, any law, statute, order, rule, regulation,
ordinance or judgment including, without limitation, any applicable
environmental law, ordinance or regulation of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a CHI Material Adverse Effect. CHI and its
subsidiaries have all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct their businesses as presently conducted (collectively, the "CHI
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or in
the aggregate, would not have a CHI Material Adverse Effect. CHI and its
subsidiaries are not in violation of the terms of any CHI Permit, except for
delays in filing reports or violations which, alone or in the aggregate, would
not have a CHI Material Adverse Effect.
SECTION 5.11. COMPLIANCE WITH AGREEMENTS. Except as disclosed in CHI SEC
Reports, CHI and each of its subsidiaries are not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or action by a third
party, could result in a default under (a) the respective charters or By-laws of
CHI or any of its subsidiaries; or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which CHI or any of its subsidiaries is a party or by which
any of them is bound or to which any of
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their property is subject, which breaches, violations and defaults, would have,
in the aggregate, a CHI Material Adverse Effect.
SECTION 5.12. TAXES. CHI and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns required to be filed by
them for all periods ending on or prior to the date hereof, and such Tax Returns
are true, correct and complete in all material respects, and (ii) duly paid in
full all Taxes due in connection with or with respect to the filing of such Tax
Returns and have paid all other Taxes as are due, except such as are being
contested in good faith by appropriate government proceedings and with respect
to which CHI is maintaining reserves adequate for their payment. Neither the IRS
nor any other governmental entity or taxing authority or agency is now
asserting, either through audits, administrative proceedings, court proceedings
or otherwise, or, to the best of CHI's knowledge, threatening to assert against
CHI or any of its subsidiaries any deficiency or claim for additional Taxes.
Neither CHI nor any of its subsidiaries has been granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax. There are no tax liens on any assets of CHI or any of
its subsidiaries. Neither CHI nor any of its subsidiaries has received a ruling
or entered into an agreement with the IRS or any other governmental entity or
taxing authority or agency that would have a CHI Material Adverse Effect, taken
as a whole, after the Effective Time. The accruals and reserves for Taxes
reflected in the CHI balance sheet reflected in the latest CHI SEC Report are
adequate to cover all Taxes accruable through the date thereof (including Taxes
being contested) in accordance with generally accepted accounting principles. No
agreements relating to allocating or sharing of Taxes exist among CHI and its
subsidiaries. Neither CHI nor any of its subsidiaries is required to include in
income either (i) any material amount in respect of any adjustment under
Section 481 of the Code, or (ii) any material installment sale gain. Neither CHI
nor any of its subsidiaries has made an election under Section 341(f) of the
Code.
SECTION 5.13. EMPLOYEE BENEFITS PLANS; ERISA.
(a) Neither CHI nor its subsidiaries has any obligation to create any
material employee benefit plans, programs, arrangements and practices for
employees (such plans, programs, arrangements and practices of CHI and its
subsidiaries being referred to as the "CHI Plans"), including employee benefit
plans within the meaning set forth in Section 3(3) of ERISA, or other similar
material arrangements for the provision of benefits or to amend any such plan so
as to increase benefits thereunder, except as required under the terms of CHI
Plans, under existing collective bargaining agreements or to comply with
applicable law.
(b) No member of CHI's "controlled group," within the meaning of
Section 4001(a)(14) of ERISA, maintains or contributes to, or within the five
(5) years preceding the Effective Time has maintained or contributed to, an
employee pension benefit plan subject to Title IV of ERISA. None of the CHI
Plans obligates CHI or any of its subsidiaries to pay material separation,
severance, termination or
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similar-type benefits solely as a result of any transaction contemplated by this
Agreement or as a result of a "change in control," within the meaning of such
term under Section 280G of the Code. None of CHI Plans provides for or promises
retiree medical, disability or life insurance benefits to any current or former
employee, officer or director of CHI or any of its subsidiaries except as
otherwise required with respect to health plan coverage in Section 4980B of the
Code. Each of CHI Plans is subject only to the laws of the United States or a
political subdivision thereof.
(c) Each CHI Plan has been operated in all respects in accordance with the
requirements of all applicable laws and all persons who participate in the
operation of such CHI Plans and all CHI Plan "fiduciaries" (within the meaning
of Section 3(21) of ERISA) have acted in accordance with the provisions of all
applicable laws, except where violations of such applicable laws would not,
individually or in the aggregate, have a CHI Material Adverse Effect, taken as a
whole. CHI and its subsidiaries have performed all obligations required to be
performed by any of them under, are not in any respect in default under or in
violation of, and CHI has no knowledge of any default or violation by any party
to, any CHI Plan, except where such failures, defaults or violations would not,
individually or in the aggregate, have a CHI Material Adverse Effect, taken as a
whole. No legal action, suit or claim is pending or, to the knowledge of CHI,
threatened with respect to any CHI Plan (other than claims for benefits in the
ordinary course) and, to the knowledge of CHI, no fact or event exists that
could give rise to any such action, suit or claim. Neither CHI nor any of its
subsidiaries has incurred any material liability to the Pension Benefit Guaranty
Corporation (other than premiums payable to the Pension Benefit Guaranty
Corporation in the ordinary course) or any material "withdrawal liability"
within the meaning of Section 4201 of ERISA.
(d) Each CHI Plan that is intended to be qualified under Section 401(a) of
the Code or Section 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified, and each trust established in
connection with any CHI Plan that is intended to be exempt from federal income
taxation under Section 501(a) of the Code is so exempt, and, to the knowledge of
CHI, no fact or event has occurred since the date of such determination letter
from the IRS to adversely affect the qualified status of any such CHI Plan or
the exempt status of any such trust. No trust maintained or contributed to by
CHI or any of its subsidiaries is intended to be qualified as a voluntary
employees' beneficiary association or is intended to be exempt from federal
income taxation under Section 501(c)(9) of the Code.
(e) To CHI's knowledge, there has been no non-exempt prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) with
respect to any CHI Plan. CHI and each of its subsidiaries has not incurred any
liability for any excise tax arising under Section 4972 or 4980B of the Code
and, to the knowledge of CHI, no fact or event exists that could give rise to
any such liability
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except for liability which singly or in the aggregate could not reasonably be
expected to cause a CHI Material Adverse Effect.
(f) All contributions, premiums or payments required to be made with
respect to any CHI Plan have been made on or before their due dates.
(g) The CHI Minute Book sets forth a true and complete list of each current
or former employee, officer or director of CHI or any of its subsidiaries who
holds any option to purchase CHI Common Stock as of the date of this Agreement,
together with the number of shares of CHI Common Stock subject to such option,
the date of grant of such option, the option price of such option, whether such
option is intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO") and the expiration date of such option.
The CHI Minute Book also sets forth the total number of such ISOs and such
non-qualified options.
(h) Neither CHI nor any of its subsidiaries is a party to any employment,
severance, consulting or other similar contracts with any employees, officers or
directors of CHI or any of its subsidiaries other than such contracts that are
disclosed in CHI SEC Reports. Neither CHI nor any of its subsidiaries is a party
to any collective bargaining agreements.
SECTION 5.14. LABOR CONTROVERSIES. Except as set forth in the CHI SEC
Reports, (a) there are no material controversies pending or, to the knowledge of
CHI, threatened between CHI or its subsidiaries and any representatives of any
of their employees; (b) to the knowledge of CHI, there are no material
organizational efforts presently being made or threatened involving any of the
presently unorganized employees of CHI or its subsidiaries; (c) CHI and its
subsidiaries have, to the knowledge of CHI, complied in all material respects
with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, civil rights, administration of leave and rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985 and the payment of social
security and similar taxes; and (d) no person has, to the knowledge of CHI,
asserted that CHI or any of its subsidiaries is liable in any material amount
for any arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing, except for such controversies, organizational efforts,
non-compliance and liabilities which, singly or in the aggregate, could not
reasonably be expected to cause a CHI Material Adverse Effect.
SECTION 5.15. TITLE TO ASSETS. CHI and each of its subsidiaries has good and
marketable title to all their respective properties and assets, real and
personal, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (a) liens for Taxes not yet due
and payable; (b) such imperfections in title and easements and encumbrances, if
any, as are not material in character, amount or extent and do not materially
and adversely affect the value or interfere with the present use of the property
subject thereto or affected thereby, or otherwise materially impair CHI's
present business operations; (c) as disclosed in CHI SEC
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Reports; or (d) mortgages incurred in the ordinary course of business, and
except for such matters which, singly or in the aggregate, could not reasonably
be expected to cause a CHI Material Adverse Effect. All leases under which CHI
leases any material real or personal property are in good standing, valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing default or event which with notice or lapse of time
or both would become a default other than defaults under such leases which in
the aggregate will not have a CHI Material Adverse Effect.
SECTION 5.16. CHI STOCKHOLDERS' APPROVAL. The affirmative vote of the
holders of a majority of the outstanding shares of CHI Common Stock entitled to
vote is necessary to approve the transactions contemplated by this Agreement.
SECTION 5.17. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. CHI and its
subsidiaries own or have the right to use all of their Intellectual Property
Rights without any conflict with the rights of others, except for such conflicts
that have not had and are not reasonably likely to have a CHI Material Adverse
Effect, and the consummation of the transactions contemplated hereby will not
alter or impair such rights in any material respect. To the knowledge of CHI, no
claims are pending by any person with respect to the ownership, validity,
enforceability or use of any such Intellectual Property Rights challenging or
questioning the validity or effectiveness of any of the foregoing which claims
could reasonably be expected to have a CHI Material Adverse Effect. To CHI's
knowledge, none of it or its subsidiaries' key technical personnel is in
violation of any term of any employment agreement, patent disclosure agreement
or any other contract or agreement relating to the relationship of any such
employee with it or its subsidiaries or any other party the result of which has
had or is reasonably likely to have a CHI Material Adverse Effect.
SECTION 5.18. MATERIAL AGREEMENTS. CHI has no material agreements other than
those filed as exhibits to CHI SEC Reports or which will be filed with the
Registration Statement as follows: Support Agreement between CHI and Nathan A.
Chapman, Jr. dated November 12, 1999; Fully Disclosed Clearing Agreement between
Pershing Division, Donaldson, Lufkin & Jenrette Securities Corporation and the
Chapman Co., dated March 16, 1999.
SECTION 5.19. INSURANCE. Except to the extent there would be no CHI Material
Adverse Effect, to CHI's knowledge, all of CHI's and its subsidiaries'
liability, theft, life, health, fire, title, worker's compensation and other
forms of insurance, surety bonds and umbrella policies, insuring CHI and its
subsidiaries and their directors, officers, employees, independent contractors,
properties, assets and businesses, are valid and in full force and effect
(without any premium past due or pending notice of cancellation) and are, in the
reasonable judgment of CHI, adequate for the business of CHI and its
subsidiaries as now conducted, and there are no claims, singly or in the
aggregate, in excess of the limitations of coverage set forth in such policies.
The provision and/or reserves in CHI Financial Statements are adequate for any
and all self insurance programs maintained by CHI or its subsidiaries.
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SECTION 5.20. BROKERS AND FINDERS. Neither CHI nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated hereby, except that CHI has retained Ferris,
Baker Watts, Incorporated as its financial advisor.
SECTION 5.21. CERTAIN TRANSACTIONS. Except as set forth in the CHI SEC
Reports, since December 31, 1998, none of the officers or directors of CHI or of
any of its subsidiaries, and, to CHI's knowledge, none of their employees or the
employees of any of its subsidiaries is a party to any transaction with it or
any of its subsidiaries (other than for services as an employee, officer or
director and other than transactions between it and one or more of its direct or
indirect wholly owned subsidiaries or between such subsidiaries), including
without limitation, any contract, agreement or other arrangement (i) providing
for the furnishing of services to or by, (ii) providing for rental of real or
personal property to or from, or (iii) otherwise requiring payments to or from,
any such officer, director, affiliate or employee, any member of the family of
any such officer, director or employee or any corporation, partnership, trust or
other entity in which any such officer, director or employee has a substantial
interest or which is an affiliate of such officer, director or employee (a "CHI
Affiliated Transaction") other than transactions which would not have a CHI
Material Adverse Effect.
SECTION 5.22. OPINION OF FINANCIAL ADVISOR. CHI received the opinion of
Ferris, Baker Watts, Incorporated, its financial advisor, dated November 11,
1999, to the effect that, as of such date, the transactions contemplated hereby
are fair to its stockholders from a financial point of view, a copy of which has
been delivered to the other parties hereto.
SECTION 5.23. ANTI-TAKEOVER STATUTES. The provisions of Section 3-601 et
seq. (Special Voting Requirements) and Section 3-701 et seq. (Voting Rights of
Certain Control Shares) of the MGCL do not apply with respect to CHI in
connection with the transactions contemplated by this Agreement.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY CHI PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless EChapman shall
otherwise agree in writing, CHI shall, and shall cause its subsidiaries to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay
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any dividend or distribution payable in cash, stock, property or otherwise,
except for the payment of dividends or distributions by a wholly owned
subsidiary of CHI;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell, pledge
or dispose of or otherwise cause to become outstanding, any additional shares
of, or any options, warrants or rights of any kind to acquire any shares of
their capital stock of any class or any debt or equity securities convertible
into or exchangeable for such capital stock, except that CHI may issue shares
upon the exercise of CHI Options outstanding on the date hereof;
(d) not (i) incur or become contingently liable with respect to any
material indebtedness for borrowed money other than (x) borrowings in the
ordinary course of business not to exceed $100,000 or in other cases for amounts
in excess of $100,000 which shall be on terms reasonably acceptable to EChapman,
or (y) borrowings to refinance existing indebtedness, in the ordinary course of
business, (ii) redeem, purchase, acquire or offer to purchase or acquire any
shares of its capital stock or any options, warrants or rights to acquire any of
its capital stock or any security convertible into or exchangeable for its
capital stock, (iii) take or fail to take any action which action or failure
would cause CHI or its stockholders (except to the extent that any stockholders
receive cash in lieu of fractional shares) to recognize gain or loss for federal
income tax purposes as a result of the consummation of the Merger, (iv) make any
acquisition of any assets or businesses and expenditures for fixed or capital
(in each case, after consultation with EChapman) or expenditures in the ordinary
course of business which, in such cases of $100,000 or more, shall be on terms
reasonably acceptable to EChapman, (v) sell, pledge, dispose of or encumber any
assets or businesses other than sales in the ordinary course of business which,
in such cases involving $100,000 or more, shall be on terms reasonably
acceptable to EChapman, or (vii) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(e) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees, and preserve the goodwill
and business relationships with customers, vendors and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(f) confer on a regular and frequent basis with one or more representatives
of EChapman to report operational matters of materiality and the general status
of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees except
in the ordinary course and consistent with past practice which shall be on terms
acceptable to EChapman;
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(h) not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health care,
employment or other employee benefit plan, agreement, trust, fund or arrangement
for the benefit or welfare of any employee or retiree except as required to
comply with changes in applicable law and increases in wages in the ordinary
course and consistent with past practice for non-executive employees which, in
such cases involving $25,000 or more, shall be on terms acceptable to EChapman;
(i) maintain with adequately capitalized insurance companies insurance
coverage for its assets and its businesses in such amounts and against such
risks and losses as are consistent with past practice; and
(j) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.2. CONDUCT OF BUSINESS BY ECHAPMAN PENDING THE MERGER. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless CHI shall
otherwise agree in writing, EChapman shall, and shall cause Merger Subsidiary,
to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not, except as necessary to consummate the transactions contemplated
hereby, (i) amend or propose to amend their respective charters or By-laws,
(ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a subsidiary of EChapman and except for cash dividends in
historic amounts payable in a manner consistent with past practices;
(c) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(d) confer on a regular and frequent basis with one or more representatives
of CHI to report operational matters of materiality and the general status of
ongoing operations;
(e) not enter into any arrangement or transaction of the type described in
Section 5.21.
SECTION 6.3. CONTROL OF CHI'S OPERATIONS. Nothing contained in this
Agreement shall give to EChapman, directly or indirectly, rights to control or
direct CHI's operations prior to the Effective Time. Prior to the Effective
Time, CHI shall exercise, consistent with and subject to the terms and
conditions of this Agreement, complete control and supervision of its
operations.
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SECTION 6.4. CONTROL OF ECHAPMAN'S OPERATIONS. Nothing contained in this
Agreement shall give to CHI, directly or indirectly, rights to control or direct
EChapman's operations prior to the Effective Time. Prior to the Effective Time,
EChapman shall exercise, consistent with and subject to the terms and conditions
of this Agreement, complete control and supervision of its operations.
SECTION 6.5. ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, CHI shall not, and shall not permit any of its
subsidiaries to, (i) initiate, solicit or seek, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its stockholders) to acquire all or
any substantial part of the business and properties of CHI and its subsidiaries
or more than fifty percent (50%) of the capital stock of CHI and its
subsidiaries, whether by merger, purchase of assets, tender offer or otherwise,
whether for cash, securities or any other consideration or combination thereof
except for the transaction contemplated herein (any such transactions being
referred to herein as "Acquisition Transactions"), or (ii) otherwise cooperate
in any effort or attempt to initiate, solicit or seek an Acquisition
Transaction.
(b) Notwithstanding any other provision of this Agreement, in response to
an unsolicited proposal or inquiry (or a proposal or inquiry arising from a
general solicitation) with respect to an Acquisition Transaction and subject to
the duties of CHI's Board of Directors under applicable law, if such Acquisition
Transaction is a tender offer subject to the provisions of Section 14(d) under
the Exchange Act, CHI's Board of Directors may take and disclose to CHI's
stockholders a position contemplated by Rule 14e-2(a) under the Exchange Act.
(c) In the event CHI shall receive any offer of an Acquisition Transaction,
it shall (i) immediately inform EChapman of such offer, and (ii) furnish to
EChapman the identity of the proponent of such offer and, unless the Board of
Directors of CHI concludes that such disclosure is inconsistent with its duties
under applicable law, a description of the material terms thereof.
(d) CHI may terminate this Agreement, withdraw, modify or not make its
recommendations referred to in Section 7.2, and enter into a definitive
agreement for an Acquisition Transaction if, but only if, (i) the Board of
Directors of CHI shall have consulted with legal counsel concerning its
obligations under applicable law and (ii) CHI shall have determined in good
faith after consultation with the independent financial advisors of CHI that
such Acquisition Transaction would be more favorable to CHI's stockholders from
a financial point of view than the Merger.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION. From and after the date hereof, each
party shall furnish promptly to one another a copy of each report and other
document filed or received by any of them pursuant to the requirements of
federal or state securities laws or which may have a material effect on their
respective businesses, properties or personnel, and work papers of their
respective accountants and other information or copies of such documentation and
access to senior management personnel as reasonably deemed necessary by the
requesting party's respective accountants, legal counsel or financial advisors
to complete the Proxy Statement/ Prospectus and Registration Statement, and the
opinion referred to in Section 8.2(d) below. EChapman and its subsidiaries shall
hold and shall use their commercially reasonable efforts to cause EChapman's
representatives to hold, and CHI and its subsidiaries shall hold and shall use
their commercially reasonable efforts to cause CHI's representatives to hold, in
strict confidence all non-public documents and information furnished to EChapman
and Merger Subsidiary or to CHI, as the case may be, in connection with the
transactions contemplated by this Agreement. Notwithstanding the foregoing
(i) EChapman and CHI may disclose such information as may be necessary in
connection with seeking EChapman Required Statutory Approvals, CHI Required
Statutory Approvals and CHI Stockholders' Approval (as defined in Section 7.2
below), and (ii) each of EChapman, Merger Subsidiary and CHI may disclose any
information that it is required by law or judicial or administrative order to
disclose.
SECTION 7.2. STOCKHOLDERS' APPROVAL. Subject to the duties of the Board of
Directors of CHI under applicable law, CHI shall, as promptly as practicable,
submit the transactions contemplated hereby for the approval of its stockholders
at a meeting of stockholders and, subject to the duties of the Board of
Directors of CHI under applicable law, shall use its commercially reasonable
efforts to obtain stockholder approval and adoption (the "CHI Stockholders'
Approval") of this Agreement and the transactions contemplated hereby. Such
meeting of the stockholders shall be held as soon as practicable following the
date upon which the Registration Statement becomes effective. CHI shall, through
its Board of Directors, but subject to the duties of the members thereof under
applicable law, recommend to its stockholders approval of the transactions
contemplated by this Agreement. CHI acknowledges and agrees: (i) that a breach
of its covenant contained in this Section 7.2 to convene a meeting of its
stockholders and call for a vote with respect to the approval of this Agreement
and the Merger will result in irreparable harm to EChapman which will not be
compensable in money damages, and (ii) that such covenant shall be specifically
enforceable and that specific performance and injunctive relief shall be a
remedy properly available to EChapman for a breach of such covenant.
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SECTION 7.3. AFFILIATES OF CHI. Within 30 days after the date of this
Agreement: (i) CHI shall deliver to EChapman a letter identifying all persons
who may be deemed affiliates of CHI under Rule 145 of the Securities Act
("Rule 145"), including, without limitation, all directors and executive
officers of CHI; (ii) CHI shall advise the persons identified in such letter of
the resale restrictions imposed by applicable securities laws; (iii) the persons
identified in such letter shall each execute a Memorandum to Persons Deemed to
be Affiliated Persons of Chapman Holdings, Inc. in such form as is acceptable to
EChapman (the "145 Memorandum"); and (iv) Nathan A. Chapman, Jr. shall execute a
Support Agreement in such form as is acceptable to EChapman (the 145 Memorandum
and the Support Agreement are collectively referred to herein as the "Affiliate
Agreements").
SECTION 7.4. EXPENSES AND FEES. Each party hereto agrees to bear its own
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement, except:
(a) CHI shall pay and be responsible for all fees and expenses incurred in
connection with the printing, filing and mailing of the Proxy
Statement/Prospectus; and
(b)If CHI (i) fails to fulfill its obligations as set forth in
Section 6.5(a)-(c) or (ii) terminates this Agreement pursuant to
Section 6.5(d), CHI shall pay to EChapman the sum of $3.0 million in lieu of any
other payments or penalties or the reimbursement of expenses incurred by
EChapman.
SECTION 7.5. AGREEMENT TO COOPERATE.
(a) Subject to the terms and conditions herein provided, each of the parties
hereto shall use all commercially reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable pursuant to all agreements, contracts, indentures or other
instruments to which the parties hereto are a party, or under any applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using its commercially reasonable
efforts to (i) obtain all necessary or appropriate waivers, consents and
approvals from lenders, landlords, security holders or other parties whose
waiver, consent or approval is required to consummate the Merger, (ii) effect
all necessary registrations, filings and submissions, and (iii) lift any
injunction or other legal bar to the Merger (and, in such case, to proceed with
the Merger as expeditiously as possible).
(b) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, EChapman shall have the right, at its own expense, to
participate therein, and CHI will not settle any such litigation without the
consent of EChapman, which consent will not be unreasonably withheld.
SECTION 7.6. PUBLIC STATEMENTS. The parties (i) shall consult with each
other prior to issuing any press release or any written public statement with
respect to this
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Agreement or the transactions contemplated hereby, and (ii) shall not issue any
such press release or written public statement prior to such consultation,
except as may be required by law and applicable listing requirements.
SECTION 7.7. NOTIFICATION OF CERTAIN MATTERS. Each of CHI, EChapman and
Merger Subsidiary agrees to give prompt notice to each other of, and to use
their respective commercially reasonable efforts to prevent or promptly remedy
(i) the occurrence or failure to occur or the impending or threatened occurrence
or failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (ii) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 7.8. PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
EChapman and CHI shall prepare and file with the SEC a Proxy
Statement/Prospectus and Registration Statement on Form S-4 relating to the
approval of the Merger by the stockholders of CHI and shall use all commercially
reasonable efforts to cause the Registration Statement to become effective as
soon thereafter as practicable.
(b) Prior to the date of approval of the Merger by CHI's stockholders, each
of CHI, EChapman and Merger Subsidiary shall correct promptly any information
provided by it to be used specifically in the Proxy Statement/Prospectus and
Registration Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the SEC and
have declared effective or cleared by the SEC any amendment or supplement to the
Proxy Statement/Prospectus or the Registration Statement so as to correct the
same and to cause the Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of CHI and EChapman, in each case to the extent
required by applicable law.
SECTION 7.9. TAX-FREE TREATMENT OF MERGER. EChapman and CHI shall each use
its commercially reasonable efforts to cause the Merger to be treated as a
tax-free reorganization for federal, state and foreign income tax purposes and
agree that this Agreement shall serve as the Plan of Reorganization therefor.
SECTION 7.10. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) The Surviving Corporation shall maintain in full force and observe any
liability, exculpation or indemnification provision (including payment or
advance of expenses) now existing in the Charter or By-laws of CHI for the
benefit of any individual who served as a director or officer of CHI at any time
prior to the Effective Time.
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(b) For a period of six years from and after the Effective Time, the
Surviving Corporation and EChapman shall indemnify, defend and hold harmless
each individual who served as a director, or officer of CHI or any of its
subsidiaries (the "Indemnified Parties") at any time prior to the Effective Time
from and against (i) all losses, claims, damages, costs, expenses, liabilities
or judgments or amounts that are paid in settlement with the approval of the
indemnifying party which approval shall not be unreasonably withheld (net of any
insurance proceeds obtained by the Indemnified Parties) of or in connection with
any claim, action, suit, proceeding or investigation based in whole or in part
on or arising in whole or in part out of the fact that such person is or was a
director or officer of the Company or any of its subsidiaries, whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after the Effective Time
("Indemnified Liabilities) and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the full
extent a corporation is permitted under the MGCL to indemnify its own directors
and officers, as the case may be (and the Surviving Corporation and EChapman
will pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law).
Without limiting the foregoing, in the event that any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Party (whether
arising before or after the Effective Time), (x) the Indemnified Parties may
retain counsel satisfactory to them and CHI (or them and the Surviving
Corporation and EChapman after the Effective Time), (y) CHI (or after the
Effective Time, the Surviving Corporation and EChapman) shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received, and (z) the Company (or after the Effective
Time, the Surviving Corporation and EChapman) will use all commercially
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither CHI nor the Surviving Corporation or EChapman shall be
liable for any settlement of any claim effected without their written consent,
which consent, however, shall not be unreasonably withheld. Any Indemnified
Party wishing to claim indemnification under this Section 7.10, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify the CHI
or, after the Effective Time, the Surviving Corporation or EChapman (but the
failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this Section 7.10 except to the extent such
failure prejudices such party). The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
(c) The provisions of this Section 7.10 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her heirs
and representatives.
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SECTION 7.11. AMENDMENT TO CCMHI MERGER AGREEMENT. Without the consent of
CHI, EChapman will not consent to any material amendment to the CCMCHI Merger
Agreement.
ARTICLE VIII
CONDITIONS
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
Unless waived by the parties, the respective obligations of each party to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following conditions:
(a) this Agreement and the transactions contemplated hereby, as appropriate,
shall have been approved and adopted by the requisite vote of the stockholders
of CHI under applicable law and applicable listing requirements;
(b) the Registration Statement shall have been declared effective by the SEC
in accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued by the SEC and remain in
effect and no proceedings for that purpose shall, on or prior to the Effective
Time, have been instituted or, to the knowledge of EChapman or CHI, threatened
by the SEC.
(c) no preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Merger shall have
been issued and remain in effect (each party agreeing to use its commercially
reasonable efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency which would prevent the consummation of the Merger or make the
consummation of the Merger illegal;
(e) all material governmental waivers, consents, orders and approvals,
legally required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect at the Effective
Time;
(f) EChapman shall have completed a public offering (pursuant to an
effective registration statement under the Securities Act of 1933, as then in
effect, or any comparable statement under any similar federal statute then in
force) of EChapman Shares in which (i) EChapman receives gross proceeds of no
less than Twenty Million dollars ($20,000,000), and (ii) the price paid by the
public for such shares reflects a preoffering valuation of EChapman of no less
than Eighty Million Dollars ($80,000,000.00) (the "EChapman Public Offering");
and
(g) The transactions contemplated by the CCMHI Merger Agreement shall have
closed; and
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(h) CHI shall have received from Ferris, Baker Watts, Incorporated an
updated opinion reasonably acceptable to CHI, dated as of the date on or about
which the Proxy Statement/Prospectus is first distributed to the stockholders of
CHI, to the effect that the consideration to be received by the stockholders of
CHI in the Merger is fair, from a financial point of view, to the holders of CHI
Common Stock, and such opinion shall not have been withdrawn as of the Closing
Date.
SECTION 8.2. ADDITIONAL CONDITIONS TO OBLIGATION OF CHI TO EFFECT THE
MERGER. Unless waived by CHI, the obligation of CHI to effect the Merger shall
be subject to the fulfillment on or prior to the Closing Date of the following
additional conditions:
(a) EChapman and Merger Subsidiary shall have performed in all material
respects their agreements contained in this Agreement required to be performed
on or prior to the Closing Date and the representations and warranties of
EChapman and Merger Subsidiary contained in this Agreement shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects) on and as of the date made
and on and as of the Closing Date, except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), as if made at and as of such date, and
CHI shall have received a Certificate of the Chairman of the Board and the
President of EChapman and Merger Subsidiary to that effect;
(b) Chapman Capital Management Holdings, Inc. and CCMHI Merger
Subsidiary, Inc. shall have performed in all material respects their agreements
contained in the CCMHI Merger Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of Chapman Capital
Management Holdings, Inc. and CCMHI Merger Subsidiary, Inc. contained in the
CCMHI Merger Agreement shall be true and correct in all material respects
(except that where any statement in a representation or warranty expressly
includes a standard of materiality, such statement shall be true and correct in
all respects) on and as of the date made and on and as of the Closing Date,
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such date), as if
made at and as of such date, and CHI shall have received a Certificate of the
Chairman of the Board and the President of EChapman to that effect;
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, an EChapman Material Adverse Effect, taken as a
whole; and
(d) CHI shall have received an opinion from the law firm of Venable, Baetjer
and Howard, LLP, dated the Closing Date, to the effect that the Merger should be
treated as a tax-free reorganization for federal and state income tax purposes.
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SECTION 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ECHAPMAN AND MERGER
SUBSIDIARY TO EFFECT THE MERGER. Unless waived by EChapman and Merger
Subsidiary, the obligations of EChapman and Merger Subsidiary to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the additional following conditions:
(a) CHI shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of CHI contained in this Agreement
shall be true and correct in all material respects (except that where any
statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects) on and as
of the date made and on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), as if made at and as
of such date, and EChapman shall have received a Certificate of the Chairman of
the Board and President of CHI to that effect;
(b) the Affiliate Agreements required to be delivered to EChapman pursuant
to Section 7.3 shall have been furnished as required by Section 7.3; and
(c) from the date hereof to the Closing Date, there shall have been no
changes that constitute, and no event or events shall have occurred which have
resulted in or constitute, a CHI Material Adverse Effect, taken as a whole.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated by the mutual
consent of the parties, or at any time prior to the Closing Date, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of CHI, as follows:
(a) CHI shall have the right to terminate this Agreement;
(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of CHI;
(ii) if the Merger or the transactions set forth in the CCMHI Merger
Agreement are enjoined by a final, unappealable court order not entered at
the request or with the support of CHI or any of their affiliates or
associates;
(iii) if the terms and conditions of Section 6.5(d) and Section 7.4(b)
are satisfied; or
(iv) if CHI's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
(b) EChapman shall have the right to terminate this Agreement;
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(i) if the Merger is not completed by June 30, 2000 other than on
account of delay or default on the part of EChapman;
(ii) if the Merger or the transactions set forth in the CCMHI Merger
Agreement are enjoined by a final, unappealable court order; or
(iii) if CHI's stockholders' vote is not sufficient to approve the
transactions contemplated by this Agreement.
SECTION 9.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either EChapman or CHI as provided in Section 9.1, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of CHI, EChapman, Merger Subsidiary, or their respective officers or directors
(except as set forth in this Section 9.2 and in Sections 7.1, 7.4 and 7.6, all
of which shall survive the termination). Nothing in this Section 9.2 shall
relieve any party from liability for any breach of this Agreement.
SECTION 9.3. AMENDMENT. This Agreement may not be amended except by action
taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 9.4. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall not be deemed to
be continuing or to apply to any future obligation or requirement of any part
hereto provided herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in Articles IV and V of this Agreement
shall not survive the Merger, and after effectiveness of the Merger, CHI,
EChapman, Merger Subsidiary or their respective officers or directors shall have
no further obligation with respect thereto. The covenants and agreements set
forth in this Agreement shall survive the Merger.
SECTION 10.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the
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parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to EChapman or Merger Subsidiary to:
EChapman.com, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Nathan A. Chapman, Jr.
with a copy to:
Venable, Baetjer and Howard, LLP
Suite 1800
2 Hopkins Plaza
Baltimore, MD 21201
Attention: Elizabeth R. Hughes, Esq.
(b) If to CHI, to:
Chapman Holdings, Inc.
World Trade Center--Baltimore
28(th) Floor
401 East Pratt Street
Baltimore, MD 21202
Attention: Donald V. Watkins
Lottie H. Shackelford
with a copy to:
Blank Rome Comisky & McCauley LLP
250 West Pratt Street
Baltimore, MD 21201
Attention: James R. Deveney, II, Esq.
SECTION 10.3. INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears (i) the words "herein," "hereof" and "hereunder" and other words of
similar impact refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 10.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all
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other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof, (b) is not
intended to confer upon any other person any rights or remedies hereunder except
for rights of indemnified parties under Section 7.10, and (c) shall not be
assigned by operation of law or otherwise. THIS AGREEMENT SHALL BE GOVERNED IN
ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF MARYLAND APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
SECTION 10.5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement. Each of the parties agrees to
accept and be bound by facsimile signatures hereto.
SECTION 10.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.7. EXHIBITS AND SCHEDULES. All Exhibits and Schedules referred
to in this Agreement shall be attached hereto and are incorporated by reference
herein.
SECTION 10.8. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, and parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.9. DEFINITION OF KNOWLEDGE. For those warranties and
representations set forth in Article IV which are subject to the qualification
"to EChapman's knowledge," EChapman will be deemed to have knowledge of a matter
if (i) Nathan A. Chapman, Jr. has knowledge of the matter, or (ii) such matter
has come, or should reasonably be expected to have come, to the attention of
such individual if such individual had conducted a reasonable due diligence
review of EChapman's operations and business, including, without limitation,
reasonable inquiries to key personnel of EChapman regarding the business and
operations of EChapman and a review of, and discussion with key personnel
regarding, pertinent books and records of EChapman. For those warranties and
representations set forth in Article V which are subject to the qualification
"to CHI's knowledge," CHI will be deemed to have knowledge of a matter if
(i) Nathan A. Chapman, Jr. has knowledge
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of the matter, or (ii) such matter has come, or should reasonably be expected to
have come, to the attention of any of such individual if such individual had
conducted a reasonable due diligence review of CHI's operations and business,
including, without limitation, reasonable inquiries to key personnel of CHI
regarding the business and operations of CHI and a review of, and discussion
with key personnel regarding, pertinent books and records of CHI.
IN WITNESS WHEREOF, EChapman, Merger Subsidiary and CHI have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first written above.
<TABLE>
<S> <C> <C>
ECHAPMAN.COM, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board and President
CHI MERGER SUBSIDIARY, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------
Nathan A. Chapman, Jr.
President
CHAPMAN HOLDINGS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------------
Nathan A. Chapman, Jr.
Chairman of the Board and President
</TABLE>
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ANNEX II
March 29, 2000
The Board of Directors
Chapman Holdings, Inc.
World Trade Center--Baltimore
401 E. Pratt Street, 28(th) Floor
Baltimore, MD 21202
Members of the Board:
Chapman Holdings, Inc. ("Chapman" or the "Company") has requested a review
of the proposed transaction involving the combination of certain businesses. The
businesses to be combined are the Company, Chapman Capital Management
Holdings, Inc., and Chapman Insurance Holdings, Inc. Specifically, you have
requested a review of the consideration to be received by the shareholders of
the Company in connection with the Transaction and public offering of
3.3 million shares of common stock (the "Offering") by the entity formed as a
result of the Transaction, eChapman.com, Inc. ("eChapman.com").
Pursuant to the Transaction, the Company's shareholders will receive 1.93295
shares of common stock of eChapman.com for each share of the Company. The
Transaction will be contingent upon the successful completion of the Offering,
subject to a minimum Offering size of $20 million and a minimum valuation for
eChapman.com of $100 million post money.
In connection with the Opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) the Agreement and Plan of Merger dated
November 15, 1999, (iii) the draft of Form SB-2 dated March 23, 2000 for
EChapman.com, (iv) the Form S-4 dated March 29, 2000 for EChapman.com,
(v) historical operating results of the Company, and (vi) internally prepared
projections for the Company and eChapman.com. We have held discussions with the
members of the management of the Company regarding the past and current business
operations and financial condition as well as the future prospects for the
Company and eChapman.com. We have reviewed industry specific data regarding the
valuation of publicly traded companies in the brokerage, asset management, and
online trading and online community businesses as well as other such information
as we considered appropriate.
Ferris, Baker Watts, Incorporated ("FBW") as part of its investment banking
business is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for corporate and other
purposes. Currently, FBW makes a market in the Company's common stock and FBW
periodically prepares research reports on the financial services industry. FBW
is also serving as the qualified independent underwriter for eChapman.com. FBW,
its clients, its officers or its employees, in the normal course of business,
may have a position in the common stock of the Company.
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In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information reviewed by us for purposes
of this opinion whether publicly available or provided to us by the Company or
representatives of the Company, and we have not assumed any responsibility for
independent verification of such information. We express no opinion as to the
consideration to be received by holders of interests who may perfect dissenters
statutory fair appraisal remedies.
Our opinion is based upon economic, market and other conditions as in effect
on, and the information made available to us, as of the date hereof. Our opinion
is directed to the Board of Directors of the Company and does not constitute a
recommendation to any stockholder of the Company as to how the stockholder
should vote at the stockholder's meeting held in connection with the
Transaction. It is understood that subsequent developments may affect the
conclusions reached in this opinion and that we do not have any obligation to
update, revise or reaffirm this opinion.
Based upon the foregoing and based upon other such matters that we consider
relevant, it is our opinion that the consideration to be received by the
shareholders of the Company as a result of the Transaction is fair from a
financial point of view.
Very truly yours,
Ferris, Baker Watts, Incorporated
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ANNEX III
SECTION 3-201. "SUCCESSOR" DEFINED.
(a) CORPORATION AMENDING CHARTER.--In this subtitle, except as provided in
subsection (b) of this section, "successor" includes a corporation which amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock, unless the right to do so is reserved by
the charter of the corporation.
(b) CORPORATION WHOSE STOCK IS ACQUIRED.--When used with reference to a
share exchange, "successor" means the corporation the stock of which was
acquired in the share exchange. (An. Code 1957, art. 23, Section 73; 1975, ch.
311, Section 2; 1985, ch. 657.)
SECTION 3-202. RIGHT TO FAIR VALUE OF STOCK.
(a) GENERAL RULE.--Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under Section 3-105(e) of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights, unless
the right to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by Section 3-602 of this title or
exempted by Section 3-603(b) of this title.
(b) BASIS OF FAIR VALUE.--(1) Fair value is determined as of the close of
business:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent corporation,
on the day notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its proposal.
(3) In any transaction governed by Section 3-602 of this title or
exempted by Section 3-603(b) of this title, fair value shall be value
determined in accordance with the requirements of Section 3-603(b) of this
title.
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(c) WHEN RIGHT TO FAIR VALUE DOES NOT APPLY.--Unless the transaction is
governed by Section 3-602 of this title or is exempted by Section 3-603(b) of
this title, a stockholder may not demand the fair value of his stock and is
bound by the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent corporation,
on the date notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the right to
do so; or
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the successor or
cash, scrip, or other rights or interests arising out of provisions for
the treatment of fractional shares of stock in the successor; or
(3) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net asset
value. (An. Code 1957, art. 23, Section 73; 1975, ch. 311, Section 2; 1976,
ch. 567, Section 2; 1983, Sp. Sess., ch. 1; 1985, chs. 363, 657; 1990, ch.
6, Section 2; 1993, ch. 605; 1997, ch. 717; 1999, ch. 395; ch. 459, Section
1.)
SECTION 3-203. PROCEDURE BY STOCKHOLDER.
(a) SPECIFIC DUTIES.--A stockholder of a corporation who desires to receive
payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent corporation,
within 30 days after notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
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(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his stock,
stating the number and class of shares for which he demands payment.
(b) FAILURE TO COMPLY WITH SECTION.--A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share exchange,
transfer of assets, or charter amendment. (An. Code 1957, art. 23, Section 73;
1975, ch. 311, Section 2; 1976, ch. 567, Section 2; 1999, ch. 395.)
SECTION 3-204. EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of business
on the day as at which fair value is to be determined under Section 3-202 of
this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value. (An. Code
1957, art. 23, Section 73; 1975, ch. 311, Section 2; 1976, ch. 567,
Section 2.
SECTION 3-205. WITHDRAWAL OF DEMAND.
A demand for payment may be withdrawn only with the consent of the
successor. (An. Code 1957, art. 23, Section 73; 1975, ch. 311, Section 2.)
SECTION 3-206. RESTORATION OF DIVIDEND AND OTHER RIGHTS.
(a) WHEN RIGHTS RESTORED.--The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief;
or
(4) The transaction objected to is abandoned or rescinded.
(b) EFFECT OF RESTORATION.--The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration. (An. Code 1957, art. 23, Section 73; 1975, ch. 311, Section 2.)
SECTION 3-207. NOTICE AND OFFER TO STOCKHOLDERS.
(a) DUTY OF SUCCESSOR.--(1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
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(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the
corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) MANNER OF SENDING NOTICE.--The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
(An. Code 1957, art. 23, Section 73; 1975, ch. 311, Section 2; 1983, ch. 563;
1985, ch. 10, Section 3.)
SECTION 3-208. PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER
OF OBJECTORS.
(a) PETITION FOR APPRAISAL.--Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) CONSOLIDATION OF SUITS; JOINDER OF OBJECTORS.--(1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation of
all the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding. (An. Code 1957, art. 23, Section 73; 1975, ch. 311,
Section 2.)
SECTION 3-209. NOTATION ON STOCK CERTIFICATE.
(a) SUBMISSION OF CERTIFICATE.--At any time after a petition for appraisal
is filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) TRANSFER OF STOCK BEARING NOTATION.--If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to
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the stock other than the rights of the original objecting stockholder. (An. Code
1957, art. 23, Section 73; 1975, ch. 311, Section 2.)
SECTION 3-210. APPRAISAL OF FAIR VALUE.
(a) COURT TO APPOINT APPRAISERS.--If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) REPORT OF APPRAISERS--FILING.--Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) SAME--CONTENTS.--The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) SAME--SERVICE; OBJECTION.--(1) On the same day that the report is filed,
the appraisers shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it
and request a hearing. (An. Code 1957, art. 23, Section 73; 1975, ch. 311,
Section 2.)
SECTION 3-211. ACTION BY COURT ON APPRAISERS' REPORT.
(a) ORDER OF COURT.--The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) PROCEDURE AFTER ORDER.--(1) If the appraisers' report is confirmed or
modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
(c) JUDGMENT INCLUDES INTEREST.--(1) Except as provided in paragraph (2) of
this subsection, a judgment for the stockholder shall award the value of the
stock and interest from the date as at which fair value is to be determined
under Section 3-202 of this subtitle.
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(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under Section 3-207 of
this subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) the price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(d) COSTS OF PROCEEDINGS.--(1) The costs of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the stock
made under Section 3-207 of this subtitle was arbitrary and vexatious or not in
good faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under Section
3-207 of this subtitle; or
(ii) the value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) EFFECT OF JUDGMENT.--The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment. (An. Code 1957, art. 23,
Section 73; 1975, ch. 311, Section 2; 1976, ch. 567, Section 2.)
SECTION 3-212. SURRENDER OF STOCK.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
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(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished. (An. Code 1957, art. 23,
Section 73; 1975, ch. 311, Section 2.)
SECTION 3-213. RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.
(a) GENERAL RULE.--A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under Section 3-202 of this subtitle.
(b) SUCCESSOR IN TRANSFER OF ASSETS.--After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) SUCCESSOR IN CONSOLIDATION, MERGER, OR SHARE EXCHANGE.--Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock. (An. Code 1957, art. 23 Section 73; 1975, ch. 311,
Section 2; 1976, ch. 567, Section 2.)
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<PAGE>
CHAPMAN HOLDINGS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Chapman Holdings, Inc. hereby appoints Nathan
A. Chapman, Jr. and Earl U. Bravo, Sr., and either of them, as lawful attorneys
and proxies of the undersigned, with several powers of substitution, to vote all
shares of the common stock of Chapman Holdings which the undersigned is entitled
to vote at the special meeting of the stockholders of Chapman Holdings to be
held on April 20, 2000 at 7:00 a.m., or at any adjournment thereof as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To approve the Agreement and Plan of Merger by and among Chapman Holdings,
EChapman.com, Inc., a Maryland corporation, and CHI Merger Subsidiary, Inc.,
a Maryland corporation and wholly-owned subsidiary of EChapman, dated
November 15, 1999, pursuant to which (a) Chapman Holdings shall merge with
and into CHI Merger Subsidiary and (b) each share of common stock of Chapman
Holdings, par value $0.001 per share (other than shares held by holders of
Chapman Holdings common stock who perfect their dissenters' rights)
automatically shall become and be converted into 1.93295 shares of the
common stock of EChapman, par value $0.001 per share.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, to vote upon such other business as may properly come
before the meeting.
/ / FOR / / AGAINST / / ABSTAIN
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED IN THIS
PROXY. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED "FOR" APPROVAL OF THE AGREEMENT AND PLAN OF MERGER AND THE
MERGER AND IN THE BEST DISCRETION OF THE PROXY HOLDERS AS TO OTHER MATTERS.
Dated: _____________________, 2000
__________________________________
Signature of Owner
__________________________________
Additional Signature of Joint
Owner
Please sign exactly as your name
appears hereon. If stock is
jointly held, each joint owner
should sign. When signing as
attorney, executor, administrator,
trustee or guardian please give
full title as such.
