<PAGE>
THE CHAPMAN FUNDS, INC.
- --------------------------------------------------------------------------------
THE CHAPMAN FUNDS, INC.
ANNUAL REPORT
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<PAGE>
THE CHAPMAN FUNDS, INC.
SCHEDULE OF INVESTMENTS - OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(Showing Percentage of Total Value of Net Assets)
U.S. TREASURY MONEY FUND
<TABLE>
<CAPTION>
Principal Value
Amount (Note B)
- ---------- -------------
-----------------------
U.S. GOVERNMENT - 30.7%
-----------------------
<S> <C>
$10,000,000 U.S. Treasury Bills 4.83%, Due 11/7/96 $ 9,991,950
6,000,000 U.S. Treasury Bills 4.765%, Due 11/14/96 5,989,676
1,000,000 U.S. Treasury Bills 5.50%, Due 6/26/97 963,791
------------
16,945,417
-----------------------------
REPURCHASE AGREEMENTS - 69.7%
-----------------------------
13,000,000 Daiwa Securities, dated 10/31/96, 5.48% agreement to
repurchase at $13,001,979 on 11/1/96 (collateralized by
$11,774,000 US Treasury Bonds, 7.50%, due 11/15/24) 13,000,000
13,000,000 Nomura Securities, dated 10/31/96, 5.53% agreement to
repurchase at $13,001,997 on 11/1/96 (collateralized by
$12,985,000 U.S. Treasury Bonds, 6.125% due 12/31/96) 13,000,000
12,404,000 UMB Bank, dated 10/31/96, 5.35% agreement to repurchase
at $12,405,843 on 11/1/96 (collateralized by $11,618,000
U.S. Treasury Bonds, 7.88%, due 11/15/99) 12,404,000
------------
38,404,000
Total Investments (Cost $55,349,417)* - 100.4% 55,349,417
Other Assets and Liabilities - (0.4%) (220,882)
------------
Net Assets - 100.0% $ 55,128,535
------------
------------
* Cost for federal income tax purposes.
</TABLE>
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See Notes to Financial Statements.
<PAGE>
THE CHAPMAN FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 1996
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY FUND
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities (Including repurchase
agreements of $38,404,000) at value (Amortized
cost $55,349,417) (Note B) $55,349,417
Cash 394
Interest receivable 5,819
Prepaid expenses 17,638
-----------
Total assets 55,373,268
-----------
LIABILITIES:
Accrued expenses (Note D) 64,136
Distribution payable 180,597
-----------
Total liabilities 244,733
-----------
NET ASSETS $55,128,535
-----------
-----------
NET ASSETS CONSISTS OF:
Capital stock 55,128
Capital paid-in 55,073,407
-----------
Net assets, for 55,128,535 outstanding common shares
(Note C) $55,128,535
-----------
-----------
NET ASSET VALUE PER SHARE ($55,128,535
divided by 55,128,535 outstanding shares) $1.00
-----------
-----------
</TABLE>
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See Notes to Financial Statements.
<PAGE>
THE CHAPMAN FUNDS, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY FUND
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest income (Note B) $2,150,299
------------
EXPENSES:
Management and administrative fees
(Note D) 240,387
Custodian fees 25,009
Rating expense 20,541
Transfer and dividend disbursing
agent's fees 18,582
Legal and auditing 18,465
Insurance expense 14,548
Directors' fees and expenses (Note E) 318
Other 11,103
------------
Total expenses before reimbursement 348,953
Reimbursement of expenses (Note D) (48,517)
------------
Net expenses 300,436
------------
Net increase in net assets resulting
from operations $1,849,863
------------
------------
</TABLE>
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See Notes to Financial Statements.
<PAGE>
THE CHAPMAN FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY FUND
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED OCTOBER 31,
---------------------------------
1996 1995
------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net increase in net assets
resulting from operations $ 1,849,863 $ 1,490,630
------------- ------------
Dividends:
Distributions paid to shareholders
from net investment income
($.0464 and $.0497 per share,
respectively) (Note B) (1,849,863) (1,490,630)
------------- ------------
Capital Share Transactions
(at $1 per share):
Proceeds from sales of shares 162,896,210 156,891,847
Shares issued in reinvestment
of dividends from net investment
income 1,070,762 1,179,373
Cost of shares redeemed (143,209,871) (143,710,447)
------------- ------------
Increase in net assets derived
from capital share transactions 20,757,101 14,360,773
------------- ------------
Total increase 20,757,101 14,360,773
NET ASSETS:
Beginning of year 34,371,434 20,010,661
------------- ------------
End of year $ 55,128,535 $ 34,371,434
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
THE CHAPMAN FUNDS, INC.
FINANCIAL HIGHLIGHTS - U.S. TREASURY MONEY FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each year and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year. . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . 0.0464 0.0497 0.0294 0.0241 0.0315
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
From net investment income . . . . . . . . . . . . . . 0.0464 0.0497 0.0294 0.0241 0.0315
---------- ---------- ---------- ---------- ----------
Net asset value, end of year. . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . 4.74% 5.09% 3.04% 2.44% 3.20%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of year (000 omitted) . . . . . . . . . . $55,129 $34,371 $20,011 $23,515 $33,002
RATIOS TO AVERAGE NET ASSETS:
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income . . . . . . . . . . . . . . . . . . 4.63% 5.02% 2.94% 2.41% 3.15%
</TABLE>
- --------------------------------------------------------------------------------
* Chapman Capital Management, Inc. (the "Advisor") agreed to bear all expenses
(excluding income, excise and other taxes and extraordinary expenses) of the
Fund in excess of .75% of average daily net assets on an annual basis. The
expense ratio , had there been no reimbursement of the expenses by the Advisor,
would have been .87%, .97%, 1.12%, 1.15%, and 1.02% for the years ended October
31, 1996, 1995, 1994, 1993, and 1992, respectively.
<PAGE>
THE CHAPMAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
NOTE A - GENERAL
The Chapman Funds, Inc. (the "Fund") was incorporated on November 22, 1988, and
operates as a series fund. There are currently two series, the U.S. Treasury
Money Fund (the "Money Fund") and the Institutional Cash Management Fund (the
"Cash Management Fund"). The Fund is registered as a diversified open-end
management investment company under the Investment Company Act of 1940 (the
"1940 Act"). During fiscal year 1991, the Cash Management Fund liquidated its
portfolio and distributed the proceeds to its shareholders. Since 1991, there
has been no activity, including subscriptions for purchase of shares, in the
Cash Management Fund, however, the Cash Management Fund is still authorized to
sell shares to investors meeting the qualifications of the Fund prospectus.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund uses the amortized cost method, which approximates market value, to
value portfolio securities which is permitted under Rule 2a-7 of the 1940 Act
provided the Fund complies with certain conditions. The amortized cost
valuation method involves valuing a security at its cost on the date of purchase
and thereafter assuming a constant amortization from date of purchase to date of
maturity of any discount or premium.
Repurchase Agreements
The Fund's custodian takes possession, through the Federal Book Entry System, of
the collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily to ensure that the value, including accrued interest,
is at least equal to the repurchase price. In the event of default, the Fund
has the right to liquidate the collateral and apply the proceeds in satisfaction
of the obligation.
Distributions to Shareholders
Dividends to shareholders of the Fund are declared daily from net investment
income, which consist of accrued interest and earned discount (including both
original issue and market discount), less amortization of premium and the
accrued expenses applicable to the dividend period.
Federal Income Taxes
Each series of the Fund is treated as a separate entity for Federal income tax
purposes and each intends to continue to qualify as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code and distribute all of
its net investment income to its shareholders. Therefore no provision for
income taxes has been made.
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Interest income is
recorded on the accrual basis.
<PAGE>
THE CHAPMAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Use of Estimates in the Preparation of Financial Statements
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 disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE C - CAPITAL STOCK
The authorized capital stock of the Fund consists of ten billion shares, par
value of $.001 per share divided into two portfolios. Each portfolio currently
consists of five billion authorized shares.
NOTE D - MANAGEMENT ADVISORY AND ADMINISTRATIVE FEES
Chapman Capital Management, Inc. ("CCM") acts as the investment advisor and
administrator for the Fund. The investment advisory and administrative fees are
based on the average daily net assets of the Fund computed at annual rates of
.5% and .1%, respectively. For the year ended October 31, 1996, these expenses
were $240,387.
Effective January 1, 1995, CCM serves as Transfer and Dividend Disbursing Agent
for the Fund pursuant to a Shareholder Services Agreement. For its services, CCM
will be compensated $18 per account with a monthly minimum of $1,500 per fund
excluding out-of-pocket expenses. For the year ended October 31, 1996 expenses
for these services amounted to $18,582.
CCM agreed to assume all expenses (excluding income, excise and other taxes and
extraordinary expenses) of the Fund in excess of .75% of average daily net
assets on an annualized basis until December 31, 1996. Total expenses
reimbursed for the year ended October 31, 1996 were $48,517.
NOTE E - DISTRIBUTION FEES AND RELATED PARTIES
Certain officers and directors of the Fund are "affiliated persons", as defined
in the Investment Company Act of 1940, of the Advisor and Sub-Advisor.
Those directors who are not "affiliated persons" (independent directors) receive
$1,000 plus certain expenses from the Fund for each Board of Directors meeting
they attend. Total expenses paid to directors for the year ended October 31,
1996 were $12,181.
<PAGE>
[LETTERHEAD]
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
The Chapman Funds, Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Chapman Funds, Inc. (comprising, the U.S.
Treasury Money Fund) as of October 31, 1996, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Chapman Funds, Inc. at October 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and financial highlights for each of the five years in the
period then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
November 22, 1996
