<PAGE>
As filed with the Securities and Exchange Commission on May 29, 1998
Registration Nos. 33-25716
811-5697
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
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X Post Effective Amendment No. 14
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT TO COMPANY ACT OF 1940
X Amendment No. 16
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THE CHAPMAN FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 752-1013
copy to:
Nathan A. Chapman, Jr., President Elizabeth R. Hughes, Esq.
The Chapman Funds, Inc. Venable, Baetjer and Howard, LLP
401 East Pratt Street, 28th Floor Two Hopkins Plaza, Suite 1800
Baltimore, Maryland 21202 Baltimore, Maryland 21201
-------------------------- -------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [date] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on [date] pursuant to paragraph (a) (1)
[x] 75 days after filing pursuant to paragraph (a) (2)
[ ] on [date] pursuant to paragraph (a) (2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of securities under
the Securities Act of 1933, as amended, pursuant to Section (a) (1) of Rule
24f-2 under the Investment Company Act of 1940, as amended. Registrant's Rule
24f-2 Notice for the fiscal year ended October 31, 1997 was filed with
Securities and Exchange Commission on January 27, 1998.
<PAGE>
THE CHAPMAN FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location
Part A Prospectus Caption
Chapman US Treasury Money Institutional Shares; DEM Investor Shares;
Fund; Chapman Equity Fund, DEM Equity Fund,
Institutional Cash DEM Index Fund, DEM Index Fund, Investor
Management Fund Institutional Shares Shares
<S> <C> <C> <C> <C>
Item 1. Cover Page Cover Page Cover Page Cover Page
Item 2. Synopsis Fund Expenses Fund Expenses Fund Expenses
Item 3. Condensed Financial Financial Highlights Financial Highlights Financial Highlights
Information
Item 4. General Description of Investment Program; Other Investment Program; Other Investment Program; Other
Registrant Information- Capital Stock Information- Capital Stock Information- Capital Stock
Item 5. Management of the Fund Management; Other Management; Other Management; Other
Information - Transfer Information - Transfer Information - Transfer
Agent; Dividends and Taxes Agent; Dividends; Taxes Agent; Dividends; Taxes
Item 6. Capital Stock and Other Information - Other Information - Other Information -
Other Securities Capital Stock Capital Stock Capital Stock
Item 7. Purchase of Securities Management; Net Asset Management; Net Asset Management; Net Asset
Being Offered Value; Purchase of Value; Purchase of Value; Purchase of
Shares; Exchanges; Shares; Redemption of Shares; Redemption of
Redemption of Shares Shares Shares
Item 8. Redemption or Purchase of Shares; Purchase of Shares; Purchase of Shares;
Repurchase Exchanges; Redemption of Redemption of Shares Redemption of Shares
Shares
Item 9. Pending Legal Not Applicable Not Applicable Not Applicable
Proceedings
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A Item No. Location
Part B Statement of Additional Information Caption
Chapman US Treasury Money DEM Equity Fund;
Fund; Chapman DEM Index Fund
Institutional Cash
Management Fund
<S> <C> <C> <C>
Item 10. Cover Page Cover Page Cover Page
Item 11. Table of Contents Table of Contents Table of Contents
Item 12. General Information Not Applicable Not Applicable
and History
Item 13. Investment Objectives Investment Program Investment Program
and Policies
Item 14. Management of the Management Management
Registrant
Item 15. Control Persons and Capital Stock; Principal Capital Stock; Control Persons and Principal Holders
Principal Holders of Holders of Securities of Securities
Securities
Item 16. Investment Advisory Management; Experts Management; Experts
and Other Services
Item 17. Brokerage Allocation Portfolio Transactions Portfolio Transactions
Item 18. Capital Stock and Capital Stock Capital Stock
Other Securities
Item 19. Purchase, Redemption Purchase of Shares; Purchase of Shares; Exchanges; Redemption of Shares;
and Pricing of Exchanges; Redemption of Net Asset Value
Securities Being Shares; Net Asset Value
Offered
Item 20. Tax Status Dividends and Taxes Taxes
Item 21. Underwriters Management Management
Item 22. Calculation of Yield Yield
Performance Data
Item 23. Financial Statements Financial Statements Financial Statements
Part C
</TABLE>
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION:
THIS REGISTRATION STATEMENT AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS
REGISTRATION STATEMENT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
Preliminary Prospectus dated: May 29, 1998
Prospectus dated: , 1998
DEM INDEX FUND
INVESTOR SHARES
The DEM Index Fund (the "Fund"), is a series of The Chapman Funds, Inc. (the
"Company"), an open-end, management investment company, known as a series fund
(the Fund and each other series of the Company are herein referred to as a
"Series"). The Fund seeks to match as closely as possible, the DEM Index, an
index developed and controlled by The Chapman Co., an investment banking firm
affiliate of Chapman Capital Management, Inc., the Fund's investment advisor, of
companies that are located in the United States and its territories and that are
controlled by African Americans, Asian Americans, Hispanic/Latino Americans or
women. Because of the nature of the Fund's investments and certain strategies it
may use, an investment in the Fund involves certain risks and may not be
appropriate for all investors.
The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Investor Shares are offered by this Prospectus directly from the Fund's
distributor, The Chapman Co. (herein sometimes referred to as the
"Distributor"). Investor Shares are subject to a front-end load of up to 4 3/4%
of the offering price. The minimum initial investment in Investor Shares is $25
and the minimum subsequent investment is $25.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated the same date as
this prospectus and containing additional information about the Fund has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference in its entirety into this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by calling
The Chapman Co. at (800) 752-1013.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Fund Expenses............................................................................ 2
Investment Objectives.................................................................... 3
Risk Factors............................................................................. 7
Management............................................................................... 10
Purchase of Shares....................................................................... 13
Redemption of Shares..................................................................... 17
Net Asset Value.......................................................................... 19
Dividends................................................................................ 19
Taxes.................................................................................... 20
Other Information........................................................................ 21
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Domestic Emerging Markets-Registered Trademark- is a registered trademark and
DEM-TM-, DEM Profile-TM-, DEM Universe-TM-, DEM Company-TM- and DEM Index-TM-
are trademarks of Nathan A. Chapman, Jr.
A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
FUND EXPENSES
The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Fund based on an estimate
of the Fund's operating expenses for the current fiscal year:
<TABLE>
<CAPTION>
STOCKHOLDER TRANSACTION EXPENSES INVESTOR SHARES
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<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................................................ 4 3/4%
Maximum Deferred Sales Load.................................................................. 0%
Maximum Sales Load Imposed on Reinvested
Dividends and other Distributions.......................................................... 0%
Redemption Fee
(as a percentage of amount redeemed)....................................................... 0%
ANNUAL EXPENSES (as a percentage of net assets) (1)
Management Fees (after Investor Share fee waiver) (2)...................................... 0.41%
12b-1 Fees (after Investor Share fee waiver) (3)........................................... 0.00%
Other Expenses (4)......................................................................... 1.57%
Total Fund Operating Expenses (estimated) (5).............................................. 1.98%
</TABLE>
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(1) See "MANAGEMENT."
(2) The Investment Advisor is entitled to a fee for investment advisory and
management services at an annual rate of up to .90% of the average daily net
assets of the Fund attributable to Investor Shares. The Investment Advisor
has voluntarily limited such fee during the first fiscal year of the Fund to
an aggregate of .41% of average daily net assets; however, there can be no
assurance that the Investment Advisor will continue to voluntarily limit the
amount of such fee in the future.
(3) The Distributor is entitled to a fee for stockholder servicing and
distribution services at an annual rate of up to a total of .75% (up to .25%
service fee and .50% distribution fee) of the average daily net assets of
the Fund attributable to Investor Shares. The Distributor has voluntarily
waived such fee during the first fiscal year of the Fund; however, there can
be no assurance that the Distributor will continue to voluntarily limit the
amount of such fee in the future.
(4) Based upon estimated amounts of expenses for the Fund's current fiscal year.
(5) Estimated Total Fund Operating Expenses are currently $99,100 net of the fee
amount expected to be waived pursuant to the voluntary fee waivers of the
Investment Advisor and the Distributor.
In the absence of the voluntary fee waivers of the Investment Advisor and
the Distributor, Estimated Total Fund Operating Expenses would currently be
$161,100.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses (excluding offering expenses) at the levels set
forth in the table above.
2
<PAGE>
EXAMPLE
An investor would pay the following expenses on a $1,000 investment assuming
a 5% annual return, reinvestment of all dividends and distributions at net asset
value and redemption at the end of each time period:
<TABLE>
<CAPTION>
INVESTOR SHARES
-----------------
<S> <C>
1 Year........................................................................ $ 67
3 Years....................................................................... $ 107
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. "Other Expenses" are based on estimated amounts for
the current fiscal year. In the absence of the voluntary fee waivers of the
Investment Advisor and Distributor, the estimated expenses set forth in the
table above would be $78 and $142 for the one year and three year periods,
respectively. Long-term investors in the Fund could pay more in 12b-1 fees than
the economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. (the "NASD") THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OF THE FUND AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE
EXAMPLES ASSUME A 5% ANNUAL RETURN, THE FUND'S PERFORMANCE WILL VARY AND MAY
RESULT IN A RETURN GREATER OR LESS THAN 5%. FOR A FURTHER DESCRIPTION OF THE
VARIOUS COSTS AND EXPENSES INCURRED IN THE FUND'S OPERATION, SEE "MANAGEMENT."
INVESTMENT OBJECTIVES
GENERAL
The Fund's investment portfolio intends to track the DEM Index, an index,
developed and controlled by The Chapman Co., an investment banking affiliate of
Chapman Capital Management, Inc., the Fund's investment advisor (the "Investment
Advisor"), of public companies that are located in the United States and its
territories that are controlled by African Americans, Asian Americans,
Hispanic/Latino Americans or women (the "DEM Profile"). THERE IS NO ASSURANCE
THAT THE FUND WILL ACHIEVE ITS STATED OBJECTIVE.
An index is a group of securities whose overall performance is used as a
standard to measure investment performance. The DEM Index is comprised of stocks
of thirty companies from the universe (the "DEM Universe") of companies that fit
the DEM Profile ("DEM Companies"). These companies are selected to reflect the
market capitalization and industry classification characteristics of the DEM
Universe. The DEM Universe is a growing list of DEM Companies identified by the
Investment Advisor that currently includes approximately 170 companies.
The Fund generally intends to hold each stock found in the DEM Index in
roughly the same proportion as represented in the DEM Index itself . For
example, if 10% of the DEM Index is made up of securities of a particular
company, the Fund would be likely to invest 10% of its assets in such company.
In determining whether a specific portfolio company is "controlled" by
African Americans, Asian Americans, Hispanic/Latino Americans or women, the
Investment Advisor applies the following criteria: at least 10% of the company's
outstanding voting securities must be beneficially owned by members of one or
more of the listed groups and at least one of the company's top three executive
officers (Chairman, Chief Executive Officer or President) must be a member of
one or more of the listed groups.
In tracking the performance of the DEM Index, the Fund will be invested in
DEM Companies with both large and small market capitalizations; however, since
the DEM Universe includes a large proportion of companies with small market
capitalizations, a significant portion of the Fund's portfolio that is invested
pursuant to the DEM Index strategy will be small capitalization companies. To
the extent the Fund invests in companies with smaller market capitalizations,
the securities of such companies may be traded in such
3
<PAGE>
over-the-counter markets as the OTC Bulletin Board and the Pink Sheets. See
"RISK FACTORS -- Investment in Small Companies."
The Fund generally intends to hold each stock found in the DEM Index in
roughly the same proportion as represented in the DEM Index itself. For example,
if 10% of the DEM Index is made up of securities of a particular company, the
Fund would be likely to invest 10% of its assets in such company.
Through the Fund's use of the DEM Index strategy, the Fund will incur
operating expenses. On the other hand, the DEM Index itself does not. Therefore,
although the Fund is expected to track the DEM Index as closely as possible, it
may not be able to match or exceed the performance of the DEM Index.
Under the DEM Index strategy, the portion of the Fund's assets invested in
particular companies in the DEM Index will vary over time depending on changes
in their weighted market capitalizations.
Although it normally seeks to remain substantially fully invested in common
stocks, the Fund may invest temporarily in certain short-term fixed income
securities. Such securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet stockholder redemptions. These securities include:
obligations of the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by these securities.
The Fund's investment objectives and policies other than those specified in
the Statement of Additional Information under "INVESTMENT OBJECTIVES AND
POLICIES -- Fundamental Policies," may be changed by the Board of Directors
without the approval of stockholders.
BORROWING
The Fund may not issue senior securities, borrow money or pledge its assets,
except that it may borrow from banks in amounts aggregating not more than
33 1/3% of the value of the Fund's total assets (calculated when the loan is
made) to take advantage of investment opportunities and may pledge up to 33 1/3%
of the value of its total assets to secure such borrowings. The Fund may
purchase securities on margin pursuant to margin arrangements with banks up to
the limits set forth above for bank borrowings. The Fund is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitations for temporary purposes such as clearance of portfolio transactions
and share redemptions.
The use of borrowings by the Fund may involve leverage that creates an
opportunity for increased net income, but also creates special risks. In
particular, if the Fund borrows or otherwise uses leverage to invest in
securities, any investment gains made on the securities in excess of interest or
other amounts paid by the Fund will cause the net asset value of the Fund's
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on borrowed money) to the Fund, the net
asset value of the Fund's shares will decrease faster than would otherwise be
the case.
To reduce these risks, the Fund will limit its borrowings to 33 1/3% of the
value of its total assets. If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings.
OPTIONS
The Fund may invest up to 15% of its total assets, represented by the
premium paid, in the purchase of call and put options in respect of specific
securities in which the Fund may invest. The Funds may write covered call and
put option contracts to the extent of 15% of the value of its net assets at the
time such option contracts are written. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying
security at the exercise price at any time during the option period. Conversely,
a put option gives the purchaser of the option the right to sell, and obligates
the writer to buy,
4
<PAGE>
the underlying security at the exercise price at any time during the option
period. A covered call option sold by the Fund, which is a call option with
respect to which the Fund owns the underlying security, exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or to possible continued holding
of a security which might otherwise have been sold to protect against
depreciation in the market price of the security. A covered put option sold by
the Fund exposes the Fund during the term of the option to a decline in price of
the underlying security. A put option sold by the Fund is covered when, among
other things, cash or liquid securities are placed in a segregated account with
the Fund's custodian to fulfill the obligation undertaken.
To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
has previously written on the security. To close out a position as a purchaser
of an option, the Fund may make a "closing sale transaction," which involves
liquidating its position by selling the option previously purchased. The Fund
will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof. The Fund intends to treat options in
respect of specific securities that are not traded on a national securities
exchange or the Nasdaq National Market and the securities underlying covered
call options written by the Fund as Illiquid Securities. Illiquid Securities
include securities that are illiquid by virtue of the absence of a readily
available market and securities that are restricted securities as defined in
Rule 144 under the Securities Act. The Fund may invest up to 15% of its net
assets in Illiquid Securities. See "RISK FACTORS -- Non-Publicly Traded and
Illiquid Securities."
SECURITIES LENDING/REPURCHASE AGREEMENTS
The Fund may, but is not required to, utilize various investment techniques
for hedging, risk management and other investment purposes. These investment
techniques may include, but are not limited to, lending of portfolio securities
and entering into "repurchase agreements." Up to 20% of the Fund's assets may be
invested pursuant to such techniques for hedging and risk management purposes or
when, in the opinion of the Investment Advisor, such techniques can be expected
to yield a higher investment return than other investment options.
To the extent that the Fund seeks to increase its income by lending
portfolio securities, such securities loans will be secured by collateral in
cash, cash equivalents, U.S. government securities, or such other collateral as
may be permitted under the Fund's investment program and by regulatory agencies.
The Fund may enter into repurchase agreements pertaining to the securities in
which it may invest with securities dealers or member banks of the Federal
Reserve System. Repurchase agreements facilitate portfolio management and allow
the Fund to earn additional revenue. If the Fund enters into repurchase
agreements, it will do so in order to increase liquidity or as a temporary
investment while the Fund is evaluating the acquisition of suitable investments.
See "INVESTMENT PROGRAM" in the Statement of Additional Information.
The Fund's investment policy of not investing in foreign securities
(including American Depository Receipts) is a fundamental policy which it may
not change without the approval of the holders of a majority of its outstanding
voting securities. For more information about the Fund and its investment
objectives and policies, including fundamental policies, see "INVESTMENT
PROGRAM" in the Statement of Additional Information.
As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments.
5
<PAGE>
Portfolio turnover generally involves some expense, including brokerage
commissions or dealer markups and other transaction costs on the sale of
securities and reinvestment in other securities. These transactions may result
in realization of taxable capital gains. See "TAXES" and "PORTFOLIO
TRANSACTIONS," TAXATION and "INVESTMENT PROGRAM -- Portfolio Turnover" in the
Statement of Additional Information.
6
<PAGE>
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
An investment in the Fund's shares does not constitute a complete investment
program since it involves the market and objective risks inherent in seeking
long-term growth through investments in equity markets and is not recommended
for investors who are unwilling to accept significant fluctuations in share
price. The value of the Fund's investments will vary from day to day and
generally reflect market conditions, interest rates and other company, political
or economic news. In the short term, stock prices can fluctuate dramatically in
response to these factors. Over time, however, stocks have shown greater growth
potential than other types of securities. When you sell your shares, they may be
worth more or less than what you paid for them. Further, returns from an
investment in the Fund are likely to be below the returns of the DEM Index
because the Fund incurs fees and transaction expenses while employing the DEM
Index strategy, while the DEM Index does not incur such fees and expenses.
MARKET EXPOSURE
As a mutual fund investing primarily in common stock, the Fund is subject to
market risk, i.e., the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends to move in cycles,
with periods of rising stock prices and periods of falling stock prices.
The Fund is also subject to objective risk, which is the possibility that
returns from a specific type of stock (for instance, stock of smaller
capitalization companies) will trail returns from the overall stock market. The
portfolio securities in the Fund's DEM Index strategy may go through cycles of
outperformance and underperformance in comparison to the stock market in
general.
INVESTMENT IN SMALL COMPANIES
Because the Fund intends to invest a large proportion of its assets in
securities of emerging companies with small market capitalizations, an investor
should be aware of certain special considerations and risk factors relating to
investments in such companies. No assurance can be given that securities of
small emerging companies will appreciate, that a sufficient number of
appropriate investments will be available or that the Fund's particular
investment choices will be successful. Investors should also be aware of
considerations and risks relating to the Fund's investment practices.
Investing in small capitalization stocks can involve greater risk than is
customarily associated with investing in securities of larger, more established
companies. Small emerging companies may be subject to greater earnings
fluctuation, lack of established markets for products or services, more limited
financial resources and less depth of experienced management. Securities of
small emerging companies generally have more limited marketability and may be
subject to greater price volatility than securities of larger companies. They
may be dependent for management on one or a few key persons, and can be more
susceptible to losses and risks of bankruptcy. Transaction and trading costs in
smaller capitalization stocks may be higher than those of larger capitalization
companies, primarily because of more limited volumes and fewer active market
makers. These risks are in addition to the risks normally associated with any
strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such as the
OTC Bulletin Board and the Pink Sheets where the trading market is thinner and
the spread between bid and offer prices is often larger than on the major
exchanges or Nasdaq system. The nature of these trading markets subjects the
Fund to the risk that should the need arise to rapidly liquidate its position in
such securities, for example to cover net redemptions, the Fund's activities
could aversely affect the market price of such securities, resulting in a
requirement that the Fund sell its position below the price that is deemed to be
representative of their value and, accordingly, the value of the Fund's net
assets could be adversely affected.
7
<PAGE>
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in Illiquid Securities,
which term includes securities that are illiquid by virtue of the absence of a
readily available market and securities that are restricted securities as
defined in Rule 144 under the Securities Act. These securities are less liquid
than publicly traded securities, and the Fund may take longer to liquidate these
positions than would be the case for publicly traded securities. Difficulty in
selling these securities may result in a loss or may be costly to the Fund.
LIMITED EXPERIENCE OF THE INVESTMENT ADVISOR
The Investment Advisor has acted as investment manager for various balanced
and equity portfolios and currently advises a money market fund and an equity
fund that concentrates on DEM Company equity securities that are each a separate
Series of the Company. Further, the Investment Advisor has acted and is
currently acting as an investment advisor and manager for DEM, Inc., a
closed-end, non-diversified management investment company which concentrates on
DEM Company securities. However, prior to 1998, the Investment Advisor has not
acted as an advisor to an open-end management investment company that invests in
equity securities.
LIMITED HISTORY OF THE DEM INDEX
The DEM Index was developed by the Distributor, an affiliate of Investment
Advisor, in late 1995 and such affiliate maintains the DEM Index. Unlike more
established indexes, such as the S&P 500 Index, which is widely accepted as a
performance benchmark for the U.S. stock market, the DEM Index is not widely
used or recognized by the investment community. In addition, given the DEM
Index's limited history, the future stability of the DEM Index cannot be
accurately gauged.
POTENTIAL CONFLICT OF INTEREST
The Fund may utilize the Distributor, The Chapman Co., a broker-dealer
registered under the Securities Exchange Act of 1934, as amended, and a member
of the NASD, in connection with the purchase or sale of portfolio securities in
certain circumstances. The Investment Advisor is a wholly-owned subsidiary of
Chapman Capital Management Holdings, Inc. Mr. Nathan A. Chapman, Jr., the
President and Chairman of the Board of Directors of the Company, is also the
President and Chairman of the Board of Directors of the Investment Advisor and
President, Chairman of the Board of Directors and majority stockholder of
Chapman Capital Management Holdings, Inc. See "MANAGEMENT -- Investment Advisor"
below and "OFFICERS AND DIRECTORS" in the Fund's Statement of Additional
Information. The Distributor is a wholly-owned subsidiary of Chapman Holdings,
Inc. Mr. Nathan A. Chapman, Jr. is also the President, Chairman of the Board of
Directors and majority stockholder of the Distributor and the President and
Chairman of the Board of Directors of Chapman Holdings, Inc. See "MANAGEMENT --
Distributor" below and "MANAGEMENT" in the Fund's Statement of Additional
Information. Mr. Chapman owns approximately 92% of the outstanding voting
securities of Chapman Capital Management Holdings, Inc. and approximately 62% of
the outstanding voting securities of Chapman Holdings, Inc. Accordingly, these
relationships represent a potential conflict of interest with respect to
commissions and other fees on brokerage transactions conducted on the Fund's
behalf by the Distributor A majority of the Company's Board of Directors are
independent directors and such Directors have adopted procedures in compliance
with the Investment Company Act of 1940, as amended (the "1940 Act") to address
such conflict. See "INVESTMENT ADVISORY AND OTHER SERVICES" and "BROKERAGE AND
PORTFOLIO TRANSACTIONS" in the Fund's Statement of Additional Information.
8
<PAGE>
USE OF LEVERAGE
The use of borrowings by the Fund to carry out its investment objectives may
involve leverage that creates an opportunity for increased net income, but also
creates special risks. In particular, if the Fund borrows or otherwise uses
leverage to invest in securities, any investment gains made on the securities in
excess of interest or other amounts paid by the Fund will cause the net asset
value of the Fund's shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on borrowed
money) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case.
9
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
The Fund is managed by the Company's Board of Directors. All of the
Directors are members of minority groups. The Board of Directors approves all
significant agreements between the Fund and other Series of the Company and
between the Fund and persons who furnish services to the Fund, including the
Fund's agreements with the Investment Advisor and the Distributor. The Board of
Directors delegates to the Company's officers and the Investment Advisor
responsibility for day-to-day operations of the Fund. All of the officers of the
Company are directors, officers or employees of the Investment Advisor and/or
the Distributor.
THE INVESTMENT ADVISOR
The Investment Advisor, Chapman Capital Management, Inc., has been retained
under an investment advisory and administrative services agreement (the
"Advisory Agreement") to provide investment advice and, in general, to conduct
the management and investment program of the Fund in accordance with the Fund's
investment objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. The Investment Advisor was
established in 1988 and is located at the World Trade Center - Baltimore, 401
East Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Investment Advisor
is a wholly-owned subsidiary of Chapman Capital Management Holdings, Inc. Nathan
A. Chapman, Jr., who is the controlling stockholder, President and Chairman of
the Board of Directors of Chapman Capital Management Holdings, Inc., is
President and Chairman of the Board of Directors of the Company and President
and Chairman of the Board of Directors of the Investment Advisor.
The Investment Advisor has sole investment discretion for the Fund and makes
all decisions affecting assets in the Fund's portfolio under the supervision of
the Company's Board of Directors and in accordance with the Fund's stated
policies. The Investment Advisor selects investments for the Fund and places
purchase and sale orders on behalf of the Fund. Pursuant to the advisory and
administrative services agreement between the Fund and the Investment Advisor,
the Fund pays an advisory fee at an annual rate of .9 of 1% of the value of the
Fund's average weekly net assets during the preceding month payable monthly in
arrears and an administration fee of .15 of 1% of the Fund's average weekly net
assets during the preceding month payable monthly in arrears. The Investment
Advisor has voluntarily limited its total fees to the annual rate of .41 of 1%
of the value of the Fund's average weekly net assets during the preceding month
during the first fiscal year of the Fund; however, there can be no assurance
that the Investment Advisor will continue to voluntarily limit such fees in the
future.
The Investment Advisor has been in the investment advisory business since
1988 and has served as the investment advisor to a money market Series of the
Company since 1988, an equity Series of the Company investing in DEM Companies
since 1998 and a closed-end non-diversified investment company investing in DEM
Companies since 1995. In addition, the Investment Advisor serves as portfolio
manager to private accounts. As of April 30, 1998, the Investment Advisor had
approximately $523 million in assets under management.
PORTFOLIO MANAGEMENT
Nathan A. Chapman, Jr. who has been the President and Chief Executive
Officer of the Investment Advisor since 1988, is primarily responsible for
management of the Fund's assets invested pursuant to the DEM Index strategy.
Mr. Chapman is and has been the President and Chairman of the Board of
Directors of the Company since its organization in 1988. Mr. Chapman also is and
has been President and Chairman of the Board of Directors of DEM, Inc. since its
inception in 1995. Mr. Chapman founded the Distributor in 1987 and has been its
President and Chairman of the Board since its inception. The Distributor is a
full-service
10
<PAGE>
brokerage and investment banking firm. As Mr. Chapman is the chief executive
officer of a brokerage and investment banking firm, he does not devote his full
time to the management of the Fund's portfolio.
THE DISTRIBUTOR
The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at the World Trade Center-- Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Distributor is a
wholly-owned subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is
the controlling stockholder, President and Chairman of the Board of Directors of
Chapman Capital Management Holdings, Inc., is President and Chairman of the
Board of Directors of the Company and the Distributor.
The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .75% (up to .25% service fee and
.50% distribution fee) of the average daily net assets of the Fund attributable
to the Investor Shares pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act. The Distributor
has voluntarily waived such fees during the first fiscal year of the Fund;
however, there can be no assurance that the Distributor will continue to
voluntarily waive or limit the amount of such fee in the future. Amounts paid to
the Distributor under the Distribution Plan may be used by the Distributor to
cover expenses that are primarily intended to result in, or that are primarily
attributable to, (i) the sale of the shares of the Fund, (ii) ongoing servicing
and/or maintenance of the accounts of the Fund's stockholders, and (iii)
sub-transfer agency services, sub-accounting services or administrative services
related to the sale of the shares of the Fund, all as set forth in the
Distribution Plan. Payments under the Distribution Plan are not tied exclusively
to the distribution expenses actually incurred by the Distributor and the
payments may exceed distribution expenses actually incurred. The Board of
Directors of the Company evaluates the appropriateness of the Distribution Plan
on a continuing basis and in doing so considers all relevant factors, including
expenses borne by the Distributor and amounts received under the Distribution
Plan.
The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
11
<PAGE>
Listed below are persons affiliated with both the Company and the
Distributor.
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL BUSINESS ADDRESS WITH DISTRIBUTOR WITH COMPANY
- ---------------------------------- -------------------------------------- -------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director, President and Chairman Director, President and Chairman
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, MD 21202
Earl U. Bravo, Sr. Senior Vice President, Secretary and Secretary and Assistant Treasurer
The Chapman Co. Assistant Treasurer
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
M. Lynn Ballard Controller, Treasurer and Assistant Treasurer and Assistant Secretary
The Chapman Co. Secretary
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
</TABLE>
EXPENSES
The Investment Advisor bears all expenses in connection with the performance
of its advisory and administrative services. The Company bears all expenses
incurred in its operations. Expenses attributable to the Company, but not to a
particular Series, will be allocated to each Series on the basis of relative net
assets. Similarly, expenses attributable to a particular Series, but not to a
particular class, will be allocated to each class thereof on the basis of
relative net assets. General Company expenses may include but are not limited
to: insurance premiums; Director fees; expenses of maintaining the Company's
legal existence; and fees of industry organizations. General Series expenses may
include but are not limited to: audit fees; brokerage commissions; registration
of the shares of a Series with the SEC and notification fees to the various
state securities commissions; fees of the Series' Administrator, Custodian and
Transfer Agent or other service providers, costs of obtaining quotations of
portfolio securities; and pricing of Series shares.
Class-specific expenses relating to distribution fee payments associated
with a Rule 12b-1 plan for a particular class of shares and any other costs
relating to implementing or amending such plan (including obtaining stockholder
approval of such plan or any amendment thereto), will be borne solely by
stockholders of such class or classes. Other expense allocations which may
differ among classes, or which are determined by the Board of Directors to be
class-specific, may include but are not limited to: printing and postage
expenses related to preparing and distributing required documents such as
stockholder reports, prospectuses, and proxy statements to current stockholders
of a specific class; SEC registration fees and state "blue sky" fees incurred by
a specific class; litigation or other legal expenses relating to a specific
class; Director fees or expenses incurred as a result of issues relating to a
specific class; and different transfer agency fees attributable to a specific
class.
Notwithstanding the foregoing, the Investment Advisor or other service
provider may waive or reimburse the expenses of a specific class or classes to
the extent permitted under Rule 18f-3 under the 1940 Act.
BROKERAGE
The Distributor may effect brokerage transactions for the Fund in compliance
with the requirements of the 1940 Act.
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<PAGE>
CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT
First Data Services, Inc., 3200 Horizon Drive, PO Box 61503, King of
Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and dividend
paying agent and accounting agent (the "Transfer Agent") for the Fund's shares
pursuant to an Investment Company Services Agreement. First Data performs the
following duties in its capacity as Transfer Agent to the Fund: maintains the
records of stockholder's accounts; answers stockholder inquiries concerning
accounts; processes purchases and redemptions of Fund shares; acts as dividend
and distribution disbursing agent; and performs other stockholder service
functions. Stockholder inquiries should be addressed to the Transfer Agent at
(800) 441-6580. As accounting agent, First Data performs certain accounting and
pricing services for the Fund, including the daily calculation of the Fund's net
asset value. For its transfer and dividend paying agency services under the
Investment Company Services Agreement, the Transfer Agent is compensated by a
monthly fee calculated according to a fee schedule approved by the Board of
Directors of the Company.
PURCHASE OF SHARES
Investor Shares of the Fund may be purchased directly from the Fund at the
net asset value per share, plus the applicable sales load, next determined after
receipt of the order in proper form by the Transfer Agent. There is a sales load
in connection with the purchase of shares which is reduced on purchases
involving large amounts and which may be eliminated in certain circumstances
described under "PURCHASE OF SHARES--Purchase Price." The Fund reserves the
right to reject any purchase order and to suspend the offering of shares of the
Fund. The Fund will not accept a check endorsed over by a third-party. The
minimum initial investment is $25, and the minimum subsequent investment is $25.
The Fund reserves the right to vary the initial investment minimum and the
subsequent investment minimum at any time.
Purchase orders for Investment Shares of the Fund which are received by the
Transfer Agent in proper form prior to the close of regular trading hours on the
New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m. Eastern time) on
any day that the Fund calculates its net asset value, are priced according to
the net asset value determined on that day. Purchase orders for shares of the
Fund received after the close of the NYSE on a particular day are priced as of
the time the net asset value per share is next determined.
Purchases may be made in one of the following ways:
PURCHASES BY MAIL
Investor Shares may be purchased initially by completing the Investment
Application included in this Prospectus and mailing it to the Transfer Agent,
together with a check payable to DEM Index Fund Investor Shares, c/o First Data
Services, Inc., 3200 Horizon Drive, PO Box 61503, King of Prussia, PA
19406-0903. All checks for purchase of shares must be drawn on U.S. banks and
payable in U.S. dollars.
Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to DEM Index Fund Investor Shares, c/o UMB Bank,
N.A., PO Box 412797, Kansas City, MO 64141-2797. Please enclose the stub of your
account statement along with the amount of the investment, the name of the
account for which the investment is to be made and the account number. Please
note: A $20 fee will be charged to your account for any payment check returned
to the Custodian.
13
<PAGE>
PURCHASES THROUGH BROKER/DEALERS
The Fund may accept telephone orders from broker-dealers or service
organizations which have been previously approved by the Fund. It is the
responsibility of such broker-dealers or service organizations to promptly
forward purchase orders and payments for the same to the Fund. Shares of the
Fund may be purchased through broker-dealers, banks and bank trust departments
who may charge the investor a transaction fee or other fee for their services at
the time of purchase.
Wire orders for shares of the Fund received by the Transfer Agent prior to
4:00 p.m., Eastern Time, are confirmed at that day's public offering price.
Orders received by the Transfer Agent after 4:00 p.m., Eastern Time, are
confirmed at the public offering price on the following business day.
14
<PAGE>
PURCHASE PRICE
Shares of the Fund are offered at the public offering price which is the net
asset value per share, plus any applicable sales charge. The sales charge is a
variable percentage of the offering price depending upon the amount of the sale.
No sales charge will be assessed on the reinvestment of distributions. The sales
charge will be assessed as follows:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
-------------------------------------------------------
DEALER'S
AS A % OF AS A % OF NET REALLOWANCE AS A %
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE
- ------------------------------------------------ --------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $50,000............................... 4.75% 4.97% 4.25%
$50,000 to $99,999.99........................... 4.25% 4.46% 3.75%
$100,000 to $249,999.99......................... 3.75% 3.88% 3.25%
$250,000 to $499,999.99......................... 3.25% 3.38% 3.00%
$500,000 to $749,999.99......................... 2.75% 2.81% 2.50%
$750,000 to $999,999.99......................... 2.25% 2.32% 2.00%
$1,000,000 and above............................ 1.25% 1.28% 1.00%
</TABLE>
The Distributor will pay the appropriate dealer concession to those selected
dealers who have entered into an agreement with the Distributor. The dealer's
concession may be changed from time to time. The Distributor may from time to
time offer incentive compensation to dealers (which sell shares of the Fund
subject to sales charges) allowing such dealers to retain an additional portion
of the sales load. A dealer who receives all of the sales load may be considered
an "underwriter" under the Securities Act of 1933, as amended. All such sales
charges are paid to the securities dealer involved in the trade. The foregoing
schedule of sales charges applies to single purchases and to purchases made
under a Letter of Intent and pursuant to the Rights of Accumulation, both of
which are described below.
RIGHT OF ACCUMULATION
Reduced sales loads apply to any purchase of Investor Shares by an investor
where the aggregate investment in Investor Shares including such purchase, is
$50,000 or more. If, for example, an investor previously purchased and still
holds Investor Shares, with an aggregate current market value of $40,000 and
subsequently purchases Investor Shares having a current value of $20,000, the
sales load applicable to the subsequent purchase would be reduced to 4.25% of
the offering price. All present holdings of Investor Shares may be combined to
determine the current offering price of the aggregate investment in ascertaining
the sales load applicable to each subsequent purchase. To qualify for reduced
sales loads, at the time of a purchase an investor must notify the Transfer
Agent. The reduced sales load is subject to confirmation of an investor's
holdings through a check of appropriate records.
LETTER OF INTENT
By signing a Letter of Intent form, available from the Distributor, an
investor becomes eligible for the reduced sales load applicable to the total
number of Investor Shares purchased in a 13-month period (beginning up to 90
days prior to the date of execution of the Letter of Intent) pursuant to the
terms and conditions set forth in the Letter of Intent less any redemptions by
such investor during such period. A minimum initial purchase of $5,000 is
required. To compute the applicable sales load, the offering price of Investor
Shares you hold (on the date of submission of the Letter of Intent) that may be
used toward "Right of Accumulation" benefits described above may be used as a
credit toward completion of the Letter of Intent.
The Transfer Agent will hold in escrow 5% of the amount of shares indicated
in the Letter of Intent for payment of a higher sales load if the investor does
not purchase the full amount of shares indicated in the Letter of Intent. The
escrow will be released when the investor fulfills the terms of the Letter of
Intent
15
<PAGE>
by purchasing the specified amount. Assuming completion of the total minimum
investment specified under a Letter of Intent, an adjustment will be made to
reflect any reduced sales load applicable to shares purchased during the 90-day
period prior to the submission of the Letter of Intent. In addition, if the
investor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the investor's total purchase at the end of 13
months.
If the total purchases are less than the amount specified, the investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent, as
attorney-in-fact pursuant to the terms of the Letter of Intent, will redeem an
appropriate number of Investor Shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind the investor to purchase, or the Fund
to sell, the full amount indicated at the sales load in effect at the time of
signing, but the investor must complete the intended purchase to obtain the
reduced sales load. At the time an investor purchases Investor Shares, he or she
must indicate his or her intention to do so under a Letter of Intent.
PURCHASES BY WIRE
To order Investor Shares by wiring federal funds, the Transfer Agent must
first be notified by calling (800) 441-6580 to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Transfer Agent, federal funds and registration instructions should be wired
through the Federal Reserve System to:
UMB BANK, N.A.
ABA #10-10-00695
FOR: FIRST DATA SERVICES, INC.
A/C [ ]
FBO "DEM Index Fund Investor Shares"
ACCOUNT OF (exact name(s) of account registration)
STOCKHOLDER ACCOUNT #
A completed application with signature(s) of registrant(s) must be filed
with the Transfer Agent immediately subsequent to the initial wire. Investors
should be aware that some banks may impose a wire service fee. Stockholders may
be subject to 31% federal income tax withholding if the original application is
not received.
16
<PAGE>
REDEMPTION OF SHARES
Stockholders may redeem their Investor Shares without charge on any business
day that the NYSE is open. See "NET ASSET VALUE." Redemptions will be effective
at the net asset value per share next determined after the receipt by the
Transfer Agent of a redemption request meeting the requirements described below.
The Fund normally sends redemption proceeds on the next business day, but in any
event redemption proceeds are sent within seven calendar days of receipt of a
redemption request in proper form. Payment may also be made by wire directly to
any bank previously designated by the stockholder in a stockholder account
application. There is a $9.00 charge for redemptions by wire which will be
deducted from redemption proceeds. Please note that the stockholder's bank also
may impose a fee for wire service. The Fund will not honor redemption requests
of stockholders who recently purchased shares by check until it is reasonably
satisfied that the purchase check has cleared, which may take up to fifteen days
from the purchase date. To avoid delays of this kind, you may wish to purchase
by wire if you are planning on redeeming your shares in the near future.
Except as noted below, redemption requests received in proper form by the
Transfer Agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates its per share net asset value are
effective that day.
Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.
Investor Shares of the Fund may be redeemed through certain brokers,
financial institutions or service organizations, banks and bank trust
departments who may charge the investor a transaction fee or other fee for their
services at the time of redemption. Such fees would not otherwise be charged if
the shares were directly redeemed from the Fund.
The Fund will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Investment
Advisor or the Board of Directors, result in the necessity of the Fund selling
assets under disadvantageous conditions and to the detriment of the remaining
stockholders of the Fund.
Pursuant to the Company's Charter, payment for shares redeemed may be made
either in cash or in-kind, or partly in cash and partly in-kind. However, the
Fund has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund, during any 90 day period for any one stockholder. Payments in
excess of this limit will also be made wholly in cash unless the Board of
Directors believes that economic conditions exist which would make such a
practice detrimental to the best interests of the Fund. Any portfolio securities
paid or distributed in-kind would be valued as described under "NET ASSET
VALUE." In the event that an in-kind distribution is made, a stockholder may
incur additional expenses, such as the payment of brokerage commissions, on the
sale or other disposition of the securities received from the Fund. In-kind
payments need not constitute a cross-section of the Fund's portfolio. Where a
stockholder has requested redemption of all or a part of the stockholder's
investment, and where the Fund completes such redemption in-kind, the Fund will
not recognize gain or loss for federal tax purposes, on the securities used to
complete the redemption but the stockholder will recognize gain or loss equal to
the difference between the fair market value of the securities received and the
stockholder's basis in the Fund shares redeemed. Investor Shares may be redeemed
in one of the following ways:
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request for redemption to the
Transfer Agent at First Data Services, Inc., 3200 Horizon Drive, PO Box 61503,
King of Prussia, PA 19406-0903.
A written redemption request to the Transfer Agent must: (i) identify the
stockholder's account number, (ii) state the number of shares or dollars to be
redeemed and (iii) be signed by each registered
17
<PAGE>
owner exactly as the shares are registered. A redemption request for amounts
above $25,000 or redemption requests for which proceeds are to be mailed
somewhere other than the address of record, must be accompanied by signature
guarantees. Signatures must be guaranteed by an "eligible guarantor institution"
as defined in Rule 14Ad-15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. Broker-dealers guaranteeing signatures must be members of
a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. The Transfer Agent may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until the
Transfer Agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
Transfer Agent at (800) 441-6580.
REDEMPTION BY TELEPHONE
Stockholders who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
stockholder of the account with signature guarantees as described previously.
Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting a stockholder to correctly state his or her Fund account
number, the name in which his or her account is registered, his or her banking
institution, bank account number and the name in which his or her bank account
is registered. To the extent that the Fund fails to use reasonable procedures to
verify the genuineness of telephone instructions, it and/or its service
contractors may be liable for any such instructions that prove to be fraudulent
or unauthorized.
The Fund reserves the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by the Fund.
ADDITIONAL INFORMATION
The Fund also reserves the right to involuntarily redeem an investor's
account where the account is worth less than the minimum initial investment
required when an account is established, currently $25. (Any redemption of
shares from an inactive account established with a minimum investment may reduce
the amount below the minimum initial investment, and could subject the account
to redemption initiated by the Fund.) The Fund will advise the stockholder of
such intention in writing at least sixty (60) days prior to effecting such
redemption, during which time the stockholder may purchase additional shares in
any amount necessary to bring the account back to $25. The Fund currently does
not intend to exercise this right; however, no assurance can be made that the
Fund will not determine to exercise this right in the future.
If the Board of Directors determines that it would be detrimental to the
best interest of the remaining stockholders of the Fund to make payment in cash,
the Fund may pay the redemption price in whole or in part by distribution in
kind of readily marketable securities, from the Fund, within certain limits
prescribed by the SEC. Such securities will be valued on the basis of the
procedures used to determine the net asset
18
<PAGE>
value at the time of the redemption. If shares are redeemed in kind, the
redeeming stockholder will incur brokerage costs in converting the assets into
cash.
Securities are valued through valuations obtained from a commercial pricing
service or at the most recent mean of the bid and asked prices provided by
investment dealers in accordance with procedures established by the Board of
Directors.
NET ASSET VALUE
The net asset value of shares of the Fund is determined each business day as
of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time). Options
and futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded and are included in such net asset value
determination. The NYSE is scheduled to be open Monday through Friday throughout
the year except for certain Federal and other holidays. The net asset value per
Investor Share of the Fund is calculated by adding the Investor Shares' pro rata
share of the value of the Fund's assets, deducting the Investor Shares' pro rata
share of the Fund's liabilities and the liabilities specifically allocated to
Investor Shares and then dividing the result by the total number of outstanding
Investor Shares. Fund securities listed or traded on a securities exchange for
which representative market quotations are available will be valued at the last
quoted sales price on the security's principal exchange on that day. Securities
that are traded over-the-counter are valued, if bid and asked quotations are
available, at the mean between the current bid and asked prices. If bid and
asked quotations are not available, then over-the-counter securities are valued
through valuations obtained from a commercial pricing service or as determined
in good faith by the Board of Directors. In making this determination the Board
considers, among other things, publicly available information regarding the
issuer, market conditions and values ascribed to comparable companies. In
instances where the price determined above is deemed not to represent fair
market value, the price is determined in such manner as the Board may prescribe.
Investments in short-term debt securities having a maturity of 60 days or less
are valued at amortized cost if their term of maturity from the date of purchase
was less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of purchase when acquired by
the Fund was more than 60 days, unless this is determined by the Board of
Directors not to represent fair value. All other securities and assets are taken
at fair value as determined in good faith by the Board of Directors, although
the actual calculation may be done by others. Income and expenses (including
advisory and administration fees) are accrued daily and taken into account in
computing net asset value.
DIVIDENDS
The Fund calculates its dividends, if any, from net investment income. Net
investment income includes interest accrued and dividends earned on the Fund's
portfolio securities for the applicable period less applicable expenses. The
Fund declares dividends, if any, from its net investment income quarterly and
net realized capital gains annually unless such capital gains are used to offset
losses carried forward from prior years, in which case no such capital gains
will be distributed.
Dividends paid by the Fund with respect to Investor Shares and Institutional
Shares are calculated in the same manner and at the same time. Both classes will
share proportionately in the investment income and expenses of the Fund, except
that the per share dividends of Investor Shares will differ from the per share
dividends of Institutional Shares as a result of additional distribution
expenses applicable to Investor Shares.
Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in additional
Investor Shares of the Fund at net asset value. The election to receive
dividends in cash may be made on the account Application or subsequently, by
writing to the Transfer Agent at First Data Services, Inc., 3200 Horizon Drive,
PO Box 61503, King of Prussia, Pennsylvania 19406, or by calling the Transfer
Agent at (800) 441-6580. Any check in payment of
19
<PAGE>
dividends or other distributions which cannot be delivered by the Post Office or
which remains uncashed for a period of more than one year may be reinvested in
the stockholder's account at the then current net asset value and the dividend
option may be changed from cash to reinvest. Dividends are reinvested on the
ex-dividend date at the net asset value determined at the close of business on
that date. Please note that shares purchased shortly before the record date for
a dividend or distribution may have the effect of returning capital although
such dividends and distributions are subject to taxes.
TAXES
The following discussion reflects applicable tax laws as of the date of this
Prospectus.
TAXATION OF THE FUND
The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION--Capital
Stock"), must satisfy certain tests regarding the source of its income,
diversification of its assets and distribution of its income. If the Fund
otherwise qualifies as a regulated investment company and the Fund distributes
to its stockholders at least 90% of its investment company taxable income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the distributed amount in any calendar year is less than
a sum of (i) 98% of its ordinary income; (ii) 98% of its capital gain net
income; and (iii) any prior year underdistributions.
If in any year the Fund fails to qualify under Subchapter M as a regulated
investment company, the Fund would incur a corporate income tax on its taxable
income for the year, and the entire amount of the Fund's distribution would
generally be characterized as ordinary income.
TAXATION OF STOCKHOLDERS
DISTRIBUTIONS
In general, all distributions to stockholders attributable to the Fund's
investment company taxable income will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of the Fund.
The Fund intends to distribute any net capital gain annually and intends to
designate the appropriate term of those capital gain distributions for tax
purposes. In general, if the Fund designates a dividend as a capital gain
dividend, it will designate the dividend as a 20% rate gain distribution, an
unrecaptured Section 1250 gain distribution or a 28% rate gain distribution.
Capital gains dividends are taxable to stockholders regardless of whether the
dividends are paid in cash or reinvested in additional shares of the Fund and
regardless of how long a stockholder has held shares in the Fund. Distributions
of short-term capital gain dividends result in ordinary income.
Stockholders receiving distributions in the form of additional shares of the
Fund will be treated for federal income tax purposes as having received the
amount of cash used to purchase such shares. In general, the basis of such
shares will equal the price paid for such shares.
SALES OF SHARES
In general, if a share of the Fund is redeemed, the stockholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and the stockholder's adjusted basis in the share. Any gain or loss
realized upon a sale of shares by a stockholder who is not a dealer in
securities will generally be treated as capital gain or loss and capital gain or
loss will be long-term capital gain or loss if the shares that
20
<PAGE>
were sold had been held for more than one year. Long-term capital gains on
shares held more than one year but not more than 18 months by individuals will
be taxed at no higher than a 28% rate, and long-term capital gains on shares
held more than 18 months by individuals will be taxed at no higher than a 20%
rate. However, any loss recognized by a stockholder on shares held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the stockholder and the
stockholder's share of undistributed net capital gain. In addition, any loss
realized on a sale of shares will be disallowed to the extent the shares
disposed of are replaced within a period beginning 30 days before and ending 30
days after the disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at the rate of 31%
of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.
The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "TAXATION" in the Fund's
Statement of Additional Information.
OTHER INFORMATION
CAPITAL STOCK
The Company was incorporated on November 22, 1988 under the laws of the
State of Maryland under the name The Chapman Funds, Inc. It is a registered
open-end, management investment company under the 1940 Act set up as a "series
fund" which is a mutual fund divided into separate portfolios, each of which is
treated as a separate entity for certain matters under the 1940 Act and for tax
and other purposes. A stockholder of one Series is not deemed to be a
stockholder of any other Series. The Fund is diversified under the 1940 Act. The
Company's charter authorizes the Board of Directors to issue 10 billion full and
fractional shares of common stock, par value $.001 per share, of which 1 billion
shares are designated DEM Index Fund Investor Shares. Under the Company's
charter and Maryland law, the Board of Directors has the power to classify or
reclassify any unissued shares of the Company into one or more additional
classes by setting or changing in any one or more respects their relative
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption. The Board of Directors may similarly
classify or reclassify any class of its shares into one or more series and,
without stockholder approval, may increase the number of authorized shares of
the Company. All shares of the Fund, when issued, will be fully paid and
nonassessable.
The Fund offers a separate class of shares, the Institutional Shares, to
institutional investors through a separate prospectus. Shares of each class
represent equal pro rata interests in the Fund's common investment portfolio and
accrue dividends and calculate net asset value and performance quotations in the
same manner. However, Institutional Shares are sold without a load and may have
different sales charges and other expenses, which may affect performance.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where class voting is required by law or the
matter affects only one class. There is no provision for cumulative voting.
21
<PAGE>
The Company is not required under Maryland law to hold annual meetings of
stockholders for the election of Directors and currently does not intend to do
so. Stockholders have the right to call for a meeting to consider the removal of
one or more of the Company's Directors if the request is made in writing by the
holders of at least 10% of the Company's outstanding voting securities. The
Company will assist in calling the meeting as required under the 1940 Act.
Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Institutional Shares or the other
classes of the Company by contacting the Distributor at the telephone number
listed on the back of this Prospectus.
STOCKHOLDER INQUIRIES
Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.
CONTROLLING STOCKHOLDER
As of the date of this Prospectus, the Investment Advisor owns one Investor
Share and one Institutional Share of the Fund which comprises 100% of the Fund's
outstanding Common Stock. Because one stockholder owns in excess of 25% of the
issued and outstanding Common Stock of the Fund, such stockholder is deemed to
control the Fund. Accordingly, such stockholder has significant power to affect
the affairs of the Fund or to determine or influence the outcome of matters
submitted to a vote of the stockholders of the Fund.
The Investment Adviser is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the Investment
Adviser.
THE YEAR 2000 PROBLEM
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its Investment Advisor and other service providers do
not properly process and calculate date-related information from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Company
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE INCLUDED IN THIS PROSPECTUS OR IN SUPPLEMENTAL SALES
LITERATURE ISSUED BY THE FUND OR ITS DISTRIBUTOR.
------------------------
INVESTMENT ADVISOR:
CHAPMAN CAPITAL
MANAGEMENT, INC.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT:
FIRST DATA SERVICES, INC.
3200 Horizon Drive
PO Box 61503
King of Prussia, Pennsylvania 19406
(800) 441-6580
CUSTODIAN:
UMB BANK, N.A.
928 Grand Avenue
Kansas City, Missouri 64141-6226
DISTRIBUTOR:
THE CHAPMAN CO.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
(800) 752-1013
[LOGO]
DEM INDEX FUND
INVESTOR SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
THIS REGISTRATION STATEMENT AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS
REGISTRATION STATEMENT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
Preliminary Prospectus dated: May 29, 1998
Prospectus dated: , 1998
DEM INDEX FUND
INSTITUTIONAL SHARES
The DEM Index Fund (the "Fund"), is a series of The Chapman Funds, Inc. (the
"Company"), an open-end, management investment company, known as a series fund
(the Fund and each other series of the Company are herein referred to as a
"Series"). The Fund seeks to match as closely as possible, the DEM Index, an
index developed and controlled by The Chapman Co., an investment banking
affiliate of Chapman Capital Management, Inc., the Fund's investment advisor, of
companies that are located in the United States and its territories and that are
controlled by African Americans, Asian Americans, Hispanic/ Latino Americans or
women. BECAUSE OF THE NATURE OF THE FUND'S INVESTMENTS AND CERTAIN STRATEGIES IT
MAY USE, AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND MAY NOT BE
APPROPRIATE FOR ALL INVESTORS.
The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Institutional Shares are offered by this Prospectus. Institutional
Shares have no load; however, individual investors may purchase Institutional
Shares only through institutional stockholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and other
financial intermediaries ("Institutions"). The Institutional Shares impose a
12b-1 fee of up to .25% per annum, which is the economic equivalent of a sales
charge and the minimum initial investment in Institutional Shares is currently
$25,000 with no minimum subsequent investment. The Fund's Investor Shares are
available for purchase by individuals directly and are offered by a separate
prospectus.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated the same date as
this prospectus and containing additional information about the Fund has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference in its entirety into this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by calling
The Chapman Co. at (800) 752-1013.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Fund Expenses.......................................................................... 2
Investment Objectives.................................................................. 3
Risk Factors........................................................................... 6
Management............................................................................. 9
Purchase of Shares..................................................................... 12
Redemption of Shares................................................................... 13
Net Asset Value........................................................................ 15
Dividends.............................................................................. 16
Taxes.................................................................................. 16
Other Information...................................................................... 18
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Domestic Emerging Markets-Registered Trademark- is a registered trademark and
DEM-TM-, DEM Profile-TM-, DEM Universe-TM-, DEM Company-TM- and DEM Index-TM-
are trademarks of Nathan A. Chapman, Jr.
A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
FUND EXPENSES
The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Fund based on an estimate
of the Fund's operating expenses for the current fiscal year:
<TABLE>
<CAPTION>
INSTITUTIONAL
STOCKHOLDER TRANSACTION EXPENSES SHARES
- ---------------------------------------------------------------------------------------------- -------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................................................... 0%
Maximum Deferred Sales Load................................................................. 0%
Maximum Sales Load Imposed on Reinvested
Dividends and other Distributions......................................................... 0%
Redemption Fee (as a percentage of amount redeemed)......................................... 0%
ANNUAL EXPENSES (as a percentage of net assets) (1)
Management Fees (2)....................................................................... 0.41%
12b-1 Fees................................................................................ 0.25%
Other Expenses (3)........................................................................ 1.57%
Total Fund Operating Expenses (estimated) (4)............................................. 2.23%
</TABLE>
- ------------------------
(1) See "MANAGEMENT."
(2) The Investment Advisor is entitled to a fee for investment advisory and
management services at an annual rate of up to .90% of the average daily net
assets of the Fund attributable to Institutional Shares. The Investment
Advisor has voluntarily limited such fee during the first fiscal year of the
Fund to an aggregate of .41% of average daily net assets; however, there can
be no assurance that the Investment Advisor will continue to voluntarily
limit the amount of such fee in the future.
(3) Based upon estimated amounts of expenses for the Fund's current fiscal year.
(4) Estimated Total Fund Operating Expenses are currently $223,200 net of the
fee amount expected to be waived pursuant to the Investment Advisor's
voluntary fee limitation.
In the absence of the Investment Advisor's voluntary fee limitation,
Estimated Total Fund Operating Expenses would currently be $272,200.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses (excluding offering expenses) at the levels set
forth in the table above.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment assuming
a 5% annual return, reinvestment of all dividends and distributions at net asset
value and redemption at the end of each time period:
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
---------------------
<S> <C>
1 Year.................................................................... $ 23
3 Years................................................................... $ 70
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. "Other Expenses" are based on
2
<PAGE>
estimated amounts for the current fiscal year. In the absence of the voluntary
fee waiver of the Investment Advisor, the estimated expenses set forth in the
table above would be $28 and $84 for the one year and three year periods,
respectively. Long-term investors in the Fund could pay more in 12b-1 fees than
the economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. (the "NASD") THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OF THE FUND AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while the
examples assume a 5% annual return, the Fund's performance will vary and may
result in a return greater or less than 5%. For a further description of the
various costs and expenses incurred in the Fund's operation, see "MANAGEMENT."
INVESTMENT OBJECTIVES
The Fund's investment portfolio intends to track the DEM Index, an index,
developed and controlled by The Chapman Co., an investment banking affiliate of
Chapman Capital Management, Inc., the Fund's investment advisor (the "Investment
Advisor"), of public companies that are located in the United States and its
territories that are controlled by African Americans, Asian Americans,
Hispanic/Latino Americans or women (the "DEM Profile"). THERE IS NO ASSURANCE
THAT THE FUND WILL ACHIEVE ITS STATED OBJECTIVE.
An index is a group of securities whose overall performance is used as a
standard to measure investment performance. The DEM Index is comprised of stocks
of thirty companies from the universe (the "DEM Universe") of companies that fit
the DEM Profile ("DEM Companies"). These companies are selected to reflect the
market capitalization and industry classification characteristics of the DEM
Universe. The DEM Universe is a growing list of DEM Companies identified by the
Investment Advisor that currently includes approximately 170 companies.
In determining whether a specific portfolio company is "controlled" by
African Americans, Asian Americans, Hispanic/Latino Americans or women, the
Investment Advisor applies the following criteria: at least 10% of the company's
outstanding voting securities must be beneficially owned by members of one or
more of the listed groups and at least one of the company's top three executive
officers (Chairman, Chief Executive Officer or President) must be a member of
one or more of the listed groups.
In tracking the performance of the DEM Index, the Fund will be invested in
DEM Companies with both large and small market capitalizations; however, since
the DEM Universe includes a large proportion of companies with small market
capitalization, a significant portion of the Fund's portfolio that is invested
pursuant to the DEM Index strategy will be small capitalization companies. To
the extent the Fund invests in companies with smaller market capitalizations,
the securities of such companies may be traded in such over-the-counter markets
as the OTC Bulletin Board and the Pink Sheets. See "RISK FACTORS -- Investment
in Small Companies."
The Fund generally intends to hold each stock found in the DEM Index in
roughly the same proportion as represented in the DEM Index itself . For
example, if 10% of the DEM Index is made up of securities of a particular
company, the Fund would be likely to invest 10% of its assets in such company.
Through the Fund's use of the DEM Index strategy, the Fund will incur
operating expenses. On the other hand, the DEM Index itself does not. Therefore,
although the Fund is expected to track the DEM Index as closely as possible, it
may not be able to match or exceed the performance of the DEM Index exactly.
Under the DEM Index strategy, the portion of the Fund's assets invested in
particular companies in the DEM Index will vary over time depending on changes
in their weighted market capitalizations.
Although it normally seeks to remain substantially fully invested in common
stocks, the Fund may invest temporarily in certain short-term fixed income
securities. Such securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet stockholder redemptions. These securities include:
obligations of the United States Government and its agencies or
instrumentalities; commercial
3
<PAGE>
paper, bank certificates of deposit and bankers' acceptances; and repurchase
agreements collateralized by these securities.
The Fund's investment objectives and policies other than those specified in
the Statement of Additional Information under "INVESTMENT OBJECTIVES AND
POLICIES -- Fundamental Policies," may be changed by the Board of Directors
without the approval of stockholders.
BORROWING
The Fund may not issue senior securities, borrow money or pledge its assets,
except that it may borrow from banks in amounts aggregating not more than
33 1/3% of the value of the Fund's total assets (calculated when the loan is
made) to take advantage of investment opportunities and may pledge up to 33 1/3%
of the value of its total assets to secure such borrowings. The Fund may
purchase securities on margin pursuant to margin arrangements with banks up to
the limits set forth above for bank borrowings. The Fund is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitations for temporary purposes such as clearance of portfolio transactions
and share redemptions.
The use of borrowings by the Fund may involve leverage that creates an
opportunity for increased net income, but also creates special risks. In
particular, if the Fund borrows or otherwise uses leverage to invest in
securities, any investment gains made on the securities in excess of interest or
other amounts paid by the Fund will cause the net asset value of the Fund's
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on borrowed money) to the Fund, the net
asset value of the Fund's shares will decrease faster than would otherwise be
the case.
To reduce these risks, the Fund will limit its borrowings to 33 1/3% of the
value of its total assets. If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings.
OPTIONS
The Fund may invest up to 15% of its total assets, represented by the
premium paid, in the purchase of call and put options in respect of specific
securities in which the Fund may invest. The Funds may write covered call and
put option contracts to the extent of 15% of the value of its net assets at the
time such option contracts are written. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying
security at the exercise price at any time during the option period. Conversely,
a put option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying security at the exercise price at any time
during the option period. A covered call option sold by the Fund, which is a
call option with respect to which the Fund owns the underlying security, exposes
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or to
possible continued holding of a security which might otherwise have been sold to
protect against depreciation in the market price of the security. A covered put
option sold by the Fund exposes the Fund during the term of the option to a
decline in price of the underlying security. A put option sold by the Fund is
covered when, among other things, cash or liquid securities are placed in a
segregated account with the Fund's custodian to fulfill the obligation
undertaken.
To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
has previously written on the security. To close out a position as a purchaser
of an option, the Fund may make a "closing sale transaction," which involves
liquidating its position by selling the option previously purchased. The Fund
will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof. The Fund intends to treat options in
respect of specific securities that are not traded on a national securities
exchange or the Nasdaq National Market and
4
<PAGE>
the securities underlying covered call options written by the Fund as Illiquid
Securities. Illiquid Securities include securities that are illiquid by virtue
of the absence of a readily available market and securities that are restricted
securities as defined in Rule 144 under the Securities Act. The Fund may invest
up to 15% of its net assets in Illiquid Securities. See "RISK FACTORS --
Non-Publicly Traded and Illiquid Securities."
SECURITIES LENDING/REPURCHASE AGREEMENTS
The Fund may, but is not required to, utilize various investment techniques
for hedging, risk management and other investment purposes. These investment
techniques may include, but are not limited to, lending of portfolio securities
and entering into "repurchase agreements." Up to 20% of the Fund's assets may be
invested pursuant to such techniques for hedging and risk management purposes or
when, in the opinion of the Investment Advisor, such techniques can be expected
to yield a higher investment return than other investment options.
To the extent that the Fund seeks to increase its income by lending
portfolio securities, such securities loans will be secured by collateral in
cash, cash equivalents, U.S. government securities, or such other collateral as
may be permitted under the Fund's investment program and by regulatory agencies.
The Fund may enter into repurchase agreements pertaining to the securities in
which it may invest with securities dealers or member banks of the Federal
Reserve System. Repurchase agreements facilitate portfolio management and allow
the Fund to earn additional revenue. If the Fund enters into repurchase
agreements, it will do so in order to increase liquidity or as a temporary
investment while the Fund is evaluating the acquisition of suitable investments.
See "INVESTMENT PROGRAM" in the Statement of Additional Information.
The Fund's investment policy of not investing in foreign securities
(including American Depository Receipts) is a fundamental policy which it may
not change without the approval of the holders of a majority of its outstanding
voting securities. For more information about the Fund and its investment
objectives and policies, including fundamental policies, see "INVESTMENT
PROGRAM" in the Statement of Additional Information.
As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments. Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction costs on the sale
of securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. See "TAXES" and "PORTFOLIO
TRANSACTIONS," TAXATION and "INVESTMENT PROGRAM -- Portfolio Turnover" in the
Statement of Additional Information.
5
<PAGE>
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
An investment in the Fund's shares does not constitute a complete investment
program since it involves the market and objective risks inherent in seeking
long-term growth through investments in equity markets and is not recommended
for investors who are unwilling to accept significant fluctuations in share
price. The value of the Fund's investments will vary from day to day and
generally reflect market conditions, interest rates and other company, political
or economic news. In the short term, stock prices can fluctuate dramatically in
response to these factors. Over time, however, stocks have shown greater growth
potential than other types of securities. When you sell your shares, they may be
worth more or less than what you paid for them. Further, returns from an
investment in the Fund are likely to be below the returns of the DEM Index
because the Fund incurs fees and transaction expenses while employing the DEM
Index strategy, while the DEM Index does not incur such fees and expenses.
MARKET EXPOSURE
As a mutual fund investing primarily in common stock, the Fund is subject to
market risk, i.e., the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends to move in cycles,
with periods of rising stock prices and periods of falling stock prices.
The Fund is also subject to objective risk, which is the possibility that
returns from a specific type of stock (for instance, stock of smaller
capitalization companies) will trail returns from the overall stock market. The
portfolio securities in the Fund's DEM Index strategy may go through cycles of
outperformance and underperformance in comparison to the stock market in
general.
INVESTMENT IN SMALL COMPANIES
Because the Fund intends to invest a large proportion of its assets in
securities of emerging companies with small market capitalizations, an investor
should be aware of certain special considerations and risk factors relating to
investments in such companies. No assurance can be given that securities of
small emerging companies will appreciate, that a sufficient number of
appropriate investments will be available or that the Fund's particular
investment choices will be successful. Investors should also be aware of
considerations and risks relating to the Fund's investment practices.
Investing in small capitalization stocks can involve greater risk than is
customarily associated with investing in securities of larger, more established
companies. Small emerging companies may be subject to greater earnings
fluctuation, lack of established markets for products or services, more limited
financial resources and less depth of experienced management. Securities of
small emerging companies generally have more limited marketability and may be
subject to greater price volatility than securities of larger companies. They
may be dependent for management on one or a few key persons, and can be more
susceptible to losses and risks of bankruptcy. Transaction and trading costs in
smaller capitalization stocks may be higher than those of larger capitalization
companies, primarily because of more limited volumes and fewer active market
makers. These risks are in addition to the risks normally associated with any
strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such as the
OTC Bulletin Board and the Pink Sheets where the trading market is thinner and
the spread between bid and offer prices is often larger than on the major
exchanges or Nasdaq system. The nature of these trading markets subjects the
Fund to the risk that should the need arise to rapidly liquidate its position in
such securities, for example to cover net redemptions, the Fund's activities
could aversely affect the market price of such securities, resulting in a
requirement that the Fund sell its position below the price that is deemed to be
representative of their value and, accordingly, the value of the Fund's net
assets could be adversely affected.
6
<PAGE>
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in Illiquid Securities,
which term includes securities that are illiquid by virtue of the absence of a
readily available market and securities that are restricted securities as
defined in Rule 144 under the Securities Act. These securities are less liquid
than publicly traded securities, and the Fund may take longer to liquidate these
positions than would be the case for publicly traded securities. Difficulty in
selling these securities may result in a loss or may be costly to the Fund.
LIMITED EXPERIENCE OF THE INVESTMENT ADVISOR
The Investment Advisor has acted as investment manager for various balanced
and equity portfolios and currently advises a money market fund and an equity
fund that concentrates on DEM Company equity securities that are each a separate
Series of the Company. Further, the Investment Advisor has acted and is
currently acting as an investment advisor and manager for DEM, Inc., a
closed-end, non-diversified management investment company which concentrates on
DEM Company securities. However, prior to 1998, the Investment Advisor has not
acted as an advisor to an open-end management investment company that invests in
equity securities.
LIMITED HISTORY OF THE DEM INDEX
The DEM Index was developed by the Distributor, an affiliate of the
Investment Advisor, in late 1995 and such affiliate maintains the DEM Index.
Unlike more established indexes, such as the S&P 500 Index, which is widely
accepted as a performance benchmark for the U.S. stock market, the DEM Index is
not widely used or recognized by the investment community. In addition, given
the DEM Index's limited history, the future stability of the DEM Index cannot be
accurately gauged.
POTENTIAL CONFLICT OF INTEREST
The Fund may utilize the Distributor, The Chapman Co., a broker-dealer
registered under the Securities Exchange Act of 1934, as amended, and a member
of the NASD, in connection with the purchase or sale of portfolio securities in
certain circumstances. The Investment Advisor is a wholly-owned subsidiary of
Chapman Capital Management Holdings, Inc. Mr. Nathan A. Chapman, Jr., the
President and Chairman of the Board of Directors of the Company, is also the
President and Chairman of the Board of Directors of the Investment Advisor and
President, Chairman of the Board of Directors and majority stockholder of
Chapman Capital Management Holdings, Inc. See "MANAGEMENT -- Investment Advisor"
below and "OFFICERS AND DIRECTORS" in the Fund's Statement of Additional
Information. The Distributor is a wholly-owned subsidiary of Chapman Holdings,
Inc. Mr. Nathan A. Chapman, Jr. is also the President and Chairman of the Board
of Directors of the Distributor and the President, Chairman of the Board of
Directors and majority stockholder of Chapman Holdings, Inc. See "MANAGEMENT --
Distributor" below and "MANAGEMENT" in the Fund's Statement of Additional
Information. Mr. Chapman owns approximately 92% of the outstanding voting
securities of Chapman Capital Management Holdings, Inc. and approximately 62% of
the outstanding voting securities of Chapman Holdings, Inc. Accordingly, these
relationships represent a potential conflict of interest with respect to
commissions and other fees on brokerage transactions conducted on the Fund's
behalf by the Distributor A majority of the Company's Board of Directors are
independent directors and such Directors have adopted procedures in compliance
with the Investment Company Act of 1940, as amended (the "1940 Act") to address
such conflict. See INVESTMENT ADVISORY AND OTHER SERVICES" and "BROKERAGE AND
PORTFOLIO TRANSACTIONS" in the Fund's Statement of Additional Information.
7
<PAGE>
USE OF LEVERAGE
The use of borrowings by the Fund to carry out its investment objectives may
involve leverage that creates an opportunity for increased net income, but also
creates special risks. In particular, if the Fund borrows or otherwise uses
leverage to invest in securities, any investment gains made on the securities in
excess of interest or other amounts paid by the Fund will cause the net asset
value of the Fund's shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on borrowed
money) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case.
8
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
The Fund is managed by the Company's Board of Directors. All of the
Directors are members of minority groups. The Board of Directors approves all
significant agreements between the Fund and other Series of the Company and
between the Fund and persons who furnish services to the Fund, including the
Fund's agreements with the Investment Advisor and the Distributor. The Board of
Directors delegates to the Company's officers and the Investment Advisor
responsibility for day-to-day operations of the Fund. All of the officers of the
Company are directors, officers or employees of the Investment Advisor and/or
the Distributor.
THE INVESTMENT ADVISOR
The Investment Advisor, Chapman Capital Management, Inc., has been retained
under an investment advisory and administrative services agreement (the
"Advisory Agreement") to provide investment advice and, in general, to conduct
the management and investment program of the Fund in accordance with the Fund's
investment objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. The Investment Advisor was
established in 1988 and is located at the World Trade Center - Baltimore, 401
East Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Investment Advisor
is a wholly-owned subsidiary of Chapman Capital Management Holdings, Inc. Nathan
A. Chapman, Jr., who is the controlling stockholder, President and Chairman of
the Board of Directors of Chapman Capital Management Holdings, Inc., is
President and Chairman of the Board of Directors of the Company and President
and Chairman of the Board of Directors of the Investment Advisor.
The Investment Advisor has sole investment discretion for the Fund and makes
all decisions affecting assets in the Fund's portfolio under the supervision of
the Company's Board of Directors and in accordance with the Fund's stated
policies. The Investment Advisor selects investments for the Fund and places
purchase and sale orders on behalf of the Fund. Pursuant to the advisory and
administrative services agreement between the Fund and the Investment Advisor,
the Fund pays an advisory fee at an annual rate of .9 of 1% of the value of the
Fund's average weekly net assets during the preceding month payable monthly in
arrears and an administration fee of .15 of 1% of the Fund's average weekly net
assets during the preceding month payable monthly in arrears. The Investment
Advisor has voluntarily limited its total fees to the annual rate of .41 of 1%
of the value of the Fund's average weekly net assets during the preceding month
during the first fiscal year of the Fund; however, there can be no assurance
that the Investment Advisor will continue to voluntarily limit such fees in the
future.
The Investment Advisor has been in the investment advisory business since
1988 and has served as the investment advisor to a money market Series of the
Company since 1988, an equity Series of the Company investing in DEM Companies
since 1998 and a closed-end non-diversified investment company investing in DEM
Companies since 1995. In addition, the Investment Advisor serves as portfolio
manager to private accounts. As of April 30, 1998, the Investment Advisor had
approximately $523 million in assets under management.
PORTFOLIO MANAGEMENT
Nathan A. Chapman, Jr. who has been the President and Chief Executive
Officer of the Investment Advisor since 1988, is primarily responsible for
management of the Fund's assets invested pursuant to the DEM Index strategy.
Mr. Chapman is and has been the President and Chairman of the Board of
Directors of the Company since its organization in 1988. Mr. Chapman also is and
has been President and Chairman of the Board of Directors of DEM, Inc. since its
inception in 1995. Mr. Chapman founded the Distributor in 1987 and has been its
President and Chairman of the Board since its inception. The Distributor is a
full-service
9
<PAGE>
brokerage and investment banking firm. As Mr. Chapman is the chief executive
officer of a brokerage and investment banking firm, he does not devote his full
time to the management of the Fund's portfolio.
THE DISTRIBUTOR
The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at the World Trade Center-- Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Distributor is a
wholly-owned subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is
the controlling stockholder, President and Chairman of the Board of Directors of
Chapman Holdings, Inc., is also the President and Chairman of the Board of
Directors of the Company and the Distributor.
The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .25% of the average daily net
assets of the Fund attributable to the Institutional Shares pursuant to a
distribution plan (the "Distribution Plan") adopted by the Fund pursuant to Rule
12b-1 under the 1940 Act. Amounts paid to the Distributor under the Distribution
Plan will compensate the Distributor or enable the Distributor to compensate
other persons, including any other distributor of the Institutional Shares or
institutional stockholders of record of the Institutional Shares, including but
not limited to retirement plans, broker-dealers, depository institutions, and
other financial intermediaries, who own Institutional Shares on behalf of
investors, including their customers, clients or (in the case of retirement
plans) participants, and companies providing certain services to such investors,
for providing (a) services primarily intended to result in the sale of the
Institutional Shares and (b) stockholder servicing, administrative and
accounting services to such investors, all as set forth in the Distribution
Plan. Payments under the Distribution Plan are not tied exclusively to the
distribution expenses actually incurred by the Distributor and the payments may
exceed distribution expenses actually incurred. The Board of Directors of the
Company evaluates the appropriateness of the Distribution Plan on a continuing
basis and in doing so considers all relevant factors, including expenses borne
by the Distributor and amounts received under the Distribution Plan.
The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
Listed below are persons affiliated with both the Company and the
Distributor.
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL BUSINESS ADDRESS WITH DISTRIBUTOR WITH COMPANY
- ---------------------------------- -------------------------------------- -------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director, President and Chairman Director, President and Chairman
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, MD 21202
Earl U. Bravo, Sr. Senior Vice President, Secretary and Secretary and Assistant Treasurer
The Chapman Co. Assistant Treasurer
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
M. Lynn Ballard Controller, Treasurer and Assistant Treasurer and Assistant Secretary
The Chapman Co. Secretary
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
</TABLE>
10
<PAGE>
EXPENSES
The Investment Advisor bears all expenses in connection with the performance
of its advisory and administrative services. The Company bears all expenses
incurred in its operations. Expenses attributable to the Company, but not to a
particular Series, will be allocated to each Series on the basis of relative net
assets. Similarly, expenses attributable to a particular Series, but not to a
particular class, will be allocated to each class thereof on the basis of
relative net assets. General Company expenses may include but are not limited
to: insurance premiums; Director fees; expenses of maintaining the Company's
legal existence; and fees of industry organizations. General Series expenses may
include but are not limited to: audit fees; brokerage commissions; registration
of the shares of a Series with the SEC and notification fees to the various
state securities commissions; fees of the Series' Administrator, Custodian and
Transfer Agent or other service providers, costs of obtaining quotations of
portfolio securities; and pricing of Series shares.
Class-specific expenses relating to distribution fee payments associated
with a Rule 12b-1 plan for a particular class of shares and any other costs
relating to implementing or amending such plan (including obtaining stockholder
approval of such plan or any amendment thereto), will be borne solely by
stockholders of such class or classes. Other expense allocations which may
differ among classes, or which are determined by the Board of Directors to be
class-specific, may include but are not limited to: printing and postage
expenses related to preparing and distributing required documents such as
stockholder reports, prospectuses, and proxy statements to current stockholders
of a specific class; SEC registration fees and state "blue sky" fees incurred by
a specific class; litigation or other legal expenses relating to a specific
class; Director fees or expenses incurred as a result of issues relating to a
specific class; and different transfer agency fees attributable to a specific
class.
Notwithstanding the foregoing, the Investment Advisor or other service
provider may waive or reimburse the expenses of a specific class or classes to
the extent permitted under Rule 18f-3 under the 1904 Act.
BROKERAGE
The Distributor may effect brokerage transactions for the Fund in compliance
with the requirements of the 1940 Act.
CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT
First Data Services, Inc., 3200 Horizon Drive, PO Box 61503, King of
Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and dividend
paying agent and accounting agent (the "Transfer Agent") for the Fund's shares
pursuant to an Investment Company Services Agreement. First Data performs the
following duties in its capacity as Transfer Agent to the Fund: maintains the
records of stockholder's accounts; answers stockholder inquiries concerning
accounts; processes purchases and redemptions of Fund shares; acts as dividend
and distribution disbursing agent; and performs other stockholder service
functions. Stockholder inquiries should be addressed to the Transfer Agent at
(800) 441-6580. As accounting agent, First Data performs certain accounting and
pricing services for the Fund, including the daily calculation of the Fund's net
asset value. For its transfer and dividend paying agency services under the
Investment Company Services Agreement, the Transfer Agent is compensated by a
monthly fee calculated according to a fee schedule approved by the Board of
Directors of the Company.
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<PAGE>
PURCHASE OF SHARES
Individual investors may purchase Institutional Shares only through
Institutions (institutional stockholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and other financial
intermediaries). The Fund reserves the right to make Institutional Shares
available to other investors in the future. References in this Prospectus to
stockholders or investors are generally to Institutions as the record holders of
the Institutional Shares.
Each Institution separately determines the rules applicable to its customers
investing in the Fund, including minimum initial and subsequent investment
requirements and the procedures to be followed to effect purchases, redemptions
and exchanges of Institutional Shares.
Orders for the purchase of Institutional Shares are placed with an
Institution by its customers. The Institution is responsible for the prompt
transmission of the order to the Transfer Agent.
Shares of the Fund may be purchased by Institutions directly from the Fund
at the net asset value next determined after receipt of the order in proper form
by the Transfer Agent. There is no sales load in connection with the purchase of
shares. The Fund reserves the right to reject any purchase order and to suspend
the offering of shares of the Fund. The Fund will not accept a check endorsed
over by a third-party. The minimum initial investment is $25,000, with no
minimum subsequent investment. The Fund reserves the right to vary the initial
investment minimum and the subsequent investment minimum at any time. There is
no minimum investment requirement for qualified retirement plans.
Purchase orders for shares of the Fund which are received by the Transfer
Agent in proper form prior to the close of regular trading hours on the New York
Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m. Eastern time) on any day
that the Fund calculates its net asset value, are priced according to the net
asset value determined on that day. Purchase orders for the shares of the Fund
received after the close of the NYSE on a particular day are priced as of the
time the net asset value per share is next determined.
Purchases may be made in one of the following ways:
PURCHASE BY MAIL
An Institution can make an initial purchase of Institutional Shares by
completing the Investment Application included with this Prospectus and mailing
it to the Transfer Agent, together with a check payable to DEM Index Fund
Institutional Shares, c/o First Data Services, Inc., 3200 Horizon Drive, PO Box
61503, King of Prussia, PA 19406-0903. All checks for purchase of shares must be
drawn on U.S. banks and payable in U.S. dollars.
Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to DEM Index Fund Institutional Shares, c/o UMB
Bank, N.A., PO Box 412797, Kansas City, MO 64141-2797. Please enclose the stub
of your account statement along with the amount of the investment, the name of
the account for which the investment is to be made and the account number.
Please note: A $20 fee will be charged to your account for any payment check
returned to the Custodian.
The Fund may accept telephone orders from Institutions which have been
previously approved by the Fund. It is the responsibility of such Institutions
to promptly forward purchase orders and payments for the same to the Fund.
Institutional Shares may be purchased through broker-dealers, banks and bank
trust departments who may charge the investor a transaction fee or other fee for
the services at the time of purchase. Such fees would not otherwise be charged
if the shares were purchased directly from the Fund.
12
<PAGE>
PURCHASE BY WIRE
To order shares for purchase by wiring federal funds, the Transfer Agent
must first be notified by calling (800) 441-6580 to request an account number
and furnish the Fund with your tax identification number. Following notification
to the Transfer Agent, federal funds and registration instructions should be
wired through the Federal Reserve System to:
UMB BANK, N.A.
ABA #10-10-00695
FOR: FIRST DATA SERVICES, INC.
A/C [ ]
FBO "DEM Index Fund Institutional Shares"
ACCOUNT OF (exact name(s) of account registration)
STOCKHOLDER ACCOUNT #
A completed application with signature(s) of registrant(s) must be filed
with the Transfer Agent immediately subsequent to the initial wire. Investors
should be aware that some banks may impose a wire service fee. Stockholders may
be subject to 31% withholding if an original application is not received.
REDEMPTION OF SHARES
An investor of the Fund may redeem (sell) shares on any day that the Fund's
net asset value is calculated (see "NET ASSET VALUE" below). Requests for the
redemption of Institutional Shares are placed with an Institution by its
customers, which is then responsible for the prompt transmission of this request
to the Transfer Agent.
Institutions may redeem Institutional Shares without charge on any business
day that the NYSE is open (see "NET ASSET VALUE"). Redemptions will be effective
at the net asset value per share next determined after the receipt by the
Transfer Agent of a redemption request meeting the requirements described below.
The Fund normally sends redemption proceeds on the next business day, but in any
event redemption proceeds are sent within seven calendar days of receipt of a
redemption request in proper form. Payment may also be made by wire directly to
any bank previously designated by the Institution in an account application.
There is a $9.00 charge for redemption by wire. Please note that the
Institution's bank also may impose a fee for wire service. The Fund will not
honor redemption requests of Institutions who recently purchased shares by check
until it is reasonably satisfied that the purchase check has cleared, which may
take up to fifteen days from the purchase date. To avoid delays of this kind, an
Institution may wish to purchase by wire if it is planning on redeeming its
shares in the near future.
Except as noted below, redemption requests received in proper form by the
Transfer Agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates its per share net asset value are
effective that day.
Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.
The Fund will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Investment
Advisor or the Board of Directors, result in the necessity of the Fund selling
assets under disadvantageous conditions and to the detriment of the remaining
stockholders of the Fund.
Pursuant to the Company's Charter, payment for shares redeemed may be made
either in cash or in-kind, or partly in cash and partly in-kind. However, the
Fund has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90 day period for any one Institution holding
Institutional Shares. Payments in excess of this limit will also be made wholly
in cash unless the Board of Directors believes that economic conditions
13
<PAGE>
exist which would make such a practice detrimental to the best interests of the
Fund. Any portfolio securities paid or distributed in-kind would be valued as
described under "NET ASSET VALUE." In the event that an in-kind distribution is
made, an Institution may incur additional expenses, such as the payment of
brokerage commissions, on the sale or other disposition of the securities
received from the Fund. In-kind payments need not constitute a cross-section of
the Fund's portfolio. Where an Institution has requested redemption of all or a
part of the Institution's investment, and where the Fund completes such
redemption in-kind, the Fund will not recognize gain or loss for federal tax
purposes, on the securities used to complete the redemption but the stockholder
will recognize gain or loss equal to the difference between the fair market
value of the securities received and the stockholder's basis in the Fund shares
redeemed. Shares may be redeemed in one of the following ways:
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request for redemption to the
Transfer Agent at First Data Services, Inc., 3200 Horizon Drive, PO Box 61503,
King of Prussia, PA 19406-0903.
A written redemption request to the Transfer Agent must: (i) identify the
stockholder's account number, (ii) state the number of shares or dollars to be
redeemed and, (iii) be signed by each registered owner exactly as the shares are
registered. A redemption request for amounts above $25,000, or redemption
requests for which proceeds are to be mailed somewhere other than the address of
record, must be accompanied by signature guarantees. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealer guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. The Transfer Agent may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians.
A redemption request will not be deemed to be properly received until the
Transfer Agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
Transfer Agent at (800) 441-6580.
REDEMPTION BY TELEPHONE
Institutions who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
stockholder of the account or by the account's authorized representative with a
signature guarantee, as described previously.
Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting an Institution to correctly state its Fund account number,
the name in which its account is registered, its banking institution, bank
account number and the name in which its bank account is registered. To the
extent that the Fund fails to use reasonable procedures to verify the
genuineness of telephone instructions, it and/or its service contractors may be
liable for any such instructions that prove to be fraudulent or unauthorized.
The Fund reserves the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by the Fund.
14
<PAGE>
ADDITIONAL INFORMATION
The Fund reserves the right to involuntarily redeem an investor's account
where the account is worth less than the minimum initial investment required
when an account is established, currently $25,000. (Any redemption of shares
from an inactive account established with a minimum investment may reduce the
account below the minimum initial investment, and could subject the account to
redemption initiated by the Fund.) The Fund will advise the Institutional
stockholder of such intention in writing at least sixty (60) days prior to
effecting such redemption, during which time the Institution may purchase
additional shares in any amount necessary to bring the account back to $25,000.
The Fund currently has no intention of exercising its right to involuntarily
redeem accounts but reserves the right to initiate involuntary redemptions in
the future.
If the Board of Directors determines that it would be detrimental to the
best interest of the remaining stockholders of the Fund to make payment in cash,
the Fund may pay the redemption price in whole or in part by distribution in
kind of readily marketable securities, from the Fund, within certain limits
prescribed by the SEC. Such securities will be valued on the basis of the
procedures used to determine the net asset value at the time of the redemption.
If shares are redeemed in kind, the redeeming stockholder will incur brokerage
costs in converting the assets into cash.
Securities are valued through valuations obtained from a commercial pricing
service or at the most recent mean of the bid and asked prices provided by
investment dealers in accordance with procedures established by the Board of
Directors.
NET ASSET VALUE
The net asset value of shares of the Fund is determined each business day as
of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time). Options
and futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded and are included in such net asset value
determination. The NYSE is scheduled to be open Monday through Friday throughout
the year except for certain Federal and other holidays. The net asset value per
Institutional Share of the Fund is calculated by adding the Institutional
Shares' pro rata share of the value of the Fund's assets, deducting the
Institutional Shares' pro rata share of the Fund's liabilities and the
liabilities specifically allocated to Institutional Shares and then dividing the
result by the total number of outstanding Institutional Shares. Fund securities
listed or traded on a securities exchange for which representative market
quotations are available will be valued at the last quoted sales price on the
security's principal exchange on that day. Securities that are traded
over-the-counter are valued, if bid and asked quotations are available, at the
mean between the current bid and asked prices. If bid and asked quotations are
not available, then over-the-counter securities are valued through valuations
obtained from a commercial pricing service or as determined in good faith by the
Board of Directors. In making this determination the Board considers, among
other things, publicly available information regarding the issuer, market
conditions and values ascribed to comparable companies. In instances where the
price determined above is deemed not to represent fair market value, the price
is determined in such manner as the Board may prescribe. Investments in
short-term debt securities having a maturity of 60 days or less are valued at
amortized cost if their term of maturity from the date of purchase was less than
60 days, or by amortizing their value on the 61st day prior to maturity if their
term to maturity from the date of purchase when acquired by the Fund was more
than 60 days, unless this is determined by the Board of Directors not to
represent fair value. All other securities and assets are taken at fair value as
determined in good faith by the Board of Directors, although the actual
calculation may be done by others. Income and expenses (including advisory and
administration fees) are accrued daily and taken into account in computing net
asset value.
15
<PAGE>
DIVIDENDS
The Fund calculates its dividends, if any, from net investment income. Net
investment income includes interest accrued and dividends earned on the Fund's
portfolio securities for the applicable period less applicable expenses. The
Fund declares dividends, if any, from its net investment income quarterly and
net realized capital gains annually unless such capital gains are used to offset
losses carried forward from prior years, in which case no such capital gains
will be distributed.
Dividends paid by the Fund with respect to Investor Shares and Institutional
Shares are calculated in the same manner and at the same time. Both classes will
share proportionately in the investment income and expenses of the Fund, except
that the per share dividends of Investor Shares will differ from the per share
dividends of Institutional Shares as a result of additional distribution
expenses applicable to Investor Shares.
Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in additional
Institutional Shares of the Fund at net asset value. The election to receive
dividends in cash may be made on the account Application or subsequently, by
writing to the Transfer Agent at First Data Services, Inc., 3200 Horizon Drive,
PO Box 61503, King of Prussia, Pennsylvania 19406, or by calling the Transfer
Agent at (800) 441-6580. Any check in payment of dividends or other
distributions which cannot be delivered by the Post Office or which remains
uncashed for a period of more than one year may be reinvested in the
stockholder's account at the then current net asset value and the dividend
option may be changed from cash to reinvest. Dividends are reinvested on the
ex-dividend date at the net asset value determined at the close of business on
that date. Please note that shares purchased shortly before the record date for
a dividend or distribution may have the effect of returning capital although
such dividends and distributions are subject to taxes.
TAXES
The following discussion reflects applicable tax laws as of the date of this
Prospectus.
TAXATION OF THE FUND
The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION --
Capital Stock"), must satisfy certain tests regarding the source of its income,
diversification of its assets and distribution of its income. If the Fund
otherwise qualifies as a regulated investment company and the Fund distributes
to its stockholders at least 90% of its investment company taxable income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the distributed amount in any calendar year is less than
a sum of (i) 98% of its ordinary income; (ii) 98% of its capital gain net
income; and (iii) any prior year underdistributions.
If in any year the Fund fails to qualify under Subchapter M as a regulated
investment company, the Fund would incur a corporate income tax on its taxable
income for the year, and the entire amount of the Fund's distribution would
generally be characterized as ordinary income.
TAXATION OF STOCKHOLDERS
DISTRIBUTIONS
In general, all distributions to stockholders attributable to the Fund's
investment company taxable income will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of the Fund.
16
<PAGE>
The Fund intends to distribute any net capital gain annually and intends to
designate the appropriate term of those capital gain distributions for tax
purposes. In general, if the Fund designates a dividend as a capital gain
dividend, it will designate the dividend as a 20% rate gain distribution, an
unrecaptured Section 1250 gain distribution or a 28% rate gain distribution.
Capital gains dividends are taxable to stockholders regardless of whether the
dividends are paid in cash or reinvested in additional shares of the Fund and
regardless of how long a stockholder has held shares in the Fund. Distributions
of short-term capital gain dividends result in ordinary income
Stockholders receiving distributions in the form of additional shares of the
Fund will be treated for federal income tax purposes as having received the
amount of cash used to purchase such shares. In general, the basis of such
shares will equal the price paid for such shares.
SALES OF SHARES
In general, if a share of the Fund is redeemed, the stockholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and the stockholder's adjusted basis in the share. Any gain or loss
realized upon a sale of shares by a stockholder who is not a dealer in
securities will generally be treated as capital gain or loss and capital gain or
loss will be long-term capital gain or loss if the shares that were sold had
been held for more than one year. Long-term capital gains on shares held more
than one year but not more than 18 months by individuals will be taxed at no
higher than a 28% rate, and long-term capital gains on shares held more than 18
months by individuals will be taxed no higher than a 20% rate. However, any loss
recognized by a stockholder on shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital gain
distributions received by the stockholder and the stockholder's share of
undistributed net capital gain. In addition, any loss realized on a sale of
shares will be disallowed to the extent the shares disposed of are replaced
within a period beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at the rate of 31%
of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.
The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "TAXATION" in the Fund's
Statement of Additional Information.
17
<PAGE>
OTHER INFORMATION
CAPITAL STOCK
The Company was incorporated on November 22, 1988 under the laws of the
State of Maryland under the name The Chapman Funds, Inc. It is a registered
open-end, management investment company under the 1940 Act set up as a "series
fund" which is a mutual fund divided into separate portfolios, each of which is
treated as a separate entity for certain matters under the 1940 Act and for tax
and other purposes. A stockholder of one Series is not deemed to be a
stockholder of any other Series. The Fund is diversified under the 1940 Act. The
Company's charter authorizes the Board to issue 10 billion full and fractional
shares of common stock, par value $.001 per share, of which 1 billion shares are
designated DEM Index Fund Institutional Shares. Under the Company's charter
documents and Maryland law, the Board of Directors has the power to classify or
reclassify any unissued shares of the Company into one or more additional
classes by setting or changing in any one or more respects their relative
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption. The Board of Directors may similarly
classify or reclassify any class of its shares into one or more series and,
without stockholder approval, may increase the number of authorized shares of
the Company. All shares of the Fund, when issued, will be fully paid and
nonassessable.
The Fund offers a separate class of shares, the Investor Shares, to
individual investors through a separate prospectus. Shares of each class
represent equal pro rata interests in the Fund's common investment portfolio and
accrue dividends and calculate net asset value and performance quotations in the
same manner. However, Investor Shares are sold with a sales load and may have
different sales charges and other expenses which may affect performance.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where class voting is required by law or the
matter affects only one class. There is no provision for cumulative voting.
The Company is not required under Maryland law to hold annual meetings of
stockholders for the election of Directors and currently does not intend to do
so. Stockholders have the right to call for a meeting to consider the removal of
one or more of the Company's Directors if the request is made in writing by the
holders of at least 10% of the Company's outstanding voting securities. The
Company will assist in calling the meeting as required under the 1940 Act.
Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Investor Shares or the other classes
of the Company by contacting the Distributor at the telephone number listed on
the back of this Prospectus.
STOCKHOLDER INQUIRIES
Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.
CONTROLLING STOCKHOLDER
As of the date of this Prospectus, the Investment Advisor owns one Investor
Share and one Institutional Share of the Fund which comprises 100% of the Fund's
outstanding Common Stock. Because one stockholder owns in excess of 25% of the
issued and outstanding Common Stock of the Fund, such stockholder is deemed to
control the Fund. Accordingly, such stockholder has significant power to affect
the affairs of the Fund or to determine or influence the outcome of matters
submitted to a vote of the stockholders of the Fund.
18
<PAGE>
The Investment Adviser is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the Investment
Adviser.
THE YEAR 2000 PROBLEM
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its Investment Advisor and other service providers do
not properly process and calculate date-related information from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Company
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund.
19
<PAGE>
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- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE INCLUDED IN THIS PROSPECTUS OR IN SUPPLEMENTAL SALES
LITERATURE ISSUED BY THE FUND OR ITS DISTRIBUTOR.
------------------------
INVESTMENT ADVISOR:
CHAPMAN CAPITAL
MANAGEMENT, INC.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT:
FIRST DATA SERVICES, INC.
3200 Horizon Drive
PO Box 61503
King of Prussia, Pennsylvania 19406
(800) 441-6580
CUSTODIAN:
UMB BANK, N.A.
928 Grand Avenue
Kansas City, Missouri 64141-6226
DISTRIBUTOR:
THE CHAPMAN CO.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
(800) 752-1013
[LOGO]
DEM INDEX FUND
INSTITUTIONAL SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION:
Preliminary Statement of Additional Information dated: May 29, 1998
Statement of Additional Information Dated: , 1998
DEM Index Fund
Investor Shares
Institutional Shares
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Telephone: (410) 625-9656, (800) 752-1013
This Statement of Additional Information of the DEM Index Fund
(the "Fund") is not a prospectus and is only authorized for distribution when
preceded or accompanied by the Fund's Investor Shares Prospectus or
Institutional Shares Prospectus dated the same date as this Statement of
Additional Information (each, the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus. A copy of the Prospectus
may be obtained without charge by writing The Chapman Co., World Trade Center -
Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202, or
calling at (410) 625-9656, (800) 752-1013.
Table of Contents
Investment Program.................. B-2 Taxation..................B-21
Management.......................... B-10 Capital Stock.............B-23
Control Persons and Principal....... B-15 Performance Information...B-25
Holders of Securities Counsel to the Company....B-26
Purchase of Shares.................. B-19 Independent Auditors......B-27
Redemption of Shares................ B-20 Financial Statements......F-1
Portfolio Transactions.............. B-20
Domestic Emerging Markets -Registered Trademark- is a registered trademark
and DEM-TM-, DEM Profile-TM-, DEM Universe-TM-, DEM Company-TM- and DEM
Index-TM- are trademarks of Nathan A. Chapman, Jr.
A Domestic Emerging Markets Investment Opportunity
<PAGE>
This Registration Statement and the information contained herein are subject to
completion or amendment. A Registration Statement relating to these securities
has been filed with the Securities and Exchange Commission. These securities may
not be sold nor may an offer to buy be accepted prior to the time the
Registration Statement becomes effective. Under no circumstances shall this
Registration Statement constitute an offer to sell or solicitation of any offer
to buy nor shall there be any sale of these securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such jurisdiction.
<PAGE>
INVESTMENT PROGRAM
The following information supplements the discussion of the
investment policies of the Fund found under "INVESTMENT PROGRAM" in the
Prospectus.
The Fund is a series of The Chapman Funds, Inc. (the
"Company"), an open-end, management investment company, known as a series fund.
The Fund is a diversified portfolio that seeks to, as closely as possible, match
the performance of the DEM Index, an index developed by The Chapman Co., an
investment banking affiliate of the Chapman Capital Management, the Fund's
investment advisor (the "Investment Advisor"), consisting of thirty companies
that are controlled by African Americans, Asian Americans, Hispanic/Latino
Americans or women that are located in the United States and its territories
("DEM Companies"). The Fund's objective of tracking the performance of the DEM
Index pursuant to the DEM Index strategy is not a "fundamental policy" of the
Fund (as described below) and can, therefore, be changed by the Company's Board
of Directors without stockholder approval. See "INVESTMENT OBJECTIVES" in the
Prospectus. There is no assurance that the Fund will achieve its stated
objective.
Options Transactions
The Fund may invest up to 15% of its total assets, represented
by the premium paid, in the purchase of call and put options in respect of
specific securities in which the Fund may invest. The Fund may write covered
call and put option contracts to the extent of 15% of the value of its net
assets at the time such option contracts are written. The principal reason for
the Fund writing covered call options is to realize, through the receipt of
premiums, a greater return than would be realized on its portfolio securities
alone. In return for a premium, the writer of a covered call option forfeits the
right to any appreciation in the value of the underlying security above the
strike price for the life of the option (or until a closing purchase transaction
can be effected). Nevertheless, the call writer retains the risk of a decline in
the price of the underlying security. Similarly, the principal reason for
writing covered put options is to realize income in the form of premiums. The
writer of a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options ordinarily will have expiration dates between one
and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the time the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (a) in-the-money call
options when the Investment Advisor expects that the price of the underlying
security will remain stable or decline moderately during the option period,
(b) at-the-money call options when the Investment Advisor expects that the
price of the underlying security
B-2
<PAGE>
will remain stable or advance moderately during the option period and (c)
out-of-the-money call options when the Investment Advisor expects that the
premiums received from writing the call option plus the appreciation in
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
In these circumstances, if the market price of the underlying security
declines and the security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation of exercise price to market price) may be
utilized in the same market environments that such call options are used in
equivalent transactions.
So long as the Fund's obligation as the writer of an option
continues, it may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring it to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
While it may choose to do otherwise, the Fund generally will
purchase or write only those options for which the Investment Advisor believes
there is an active secondary market so as to facilitate closing transactions.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that otherwise may interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
The Fund intends to treat options in respect of specific
securities that are not traded on a national securities exchange or the Nasdaq
National Market and the securities underlying covered call options written by
the Fund as Illiquid Securities subject to the Fund's investment limitation on
Illiquid Securities. See "INVESTMENT OBJECTIVES" in the Prospectus.
B-3
<PAGE>
Futures Contracts and Options on Futures Contracts
The Fund may enter into futures contracts and options on
futures contracts for the purpose of simulating full investment and reducing
transaction costs. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual
delivery or acceptance of the underlying securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," or "selling" a
contract previously purchased) in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin
deposit in cash or government securities with a broker or custodian to initiate
and maintain open positions in futures contracts. A margin deposit is intended
to assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date. Minimal
initial margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold with
margin deposits which may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the
contract is marked to market daily. If the futures contract price changes to the
extent that the margin on deposit does not satisfy margin requirements, payment
of additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as
either "hedgers" or "speculators." Hedgers use the futures markets primarily to
offset unfavorable changes in the value of securities otherwise held for
investment purposes or expected to be acquired by them. Speculators are less
inclined to own the securities underlying the futures contracts which they
trade, and use futures contracts with the expectation of realizing profits from
fluctuations in the prices of underlying securities. The Fund intends to use
futures contracts only for bona fide hedging purposes.
B-4
<PAGE>
Regulations of the CFTC applicable to the Fund require that
all of its futures transactions constitute bona fide hedging transactions. The
Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. As evidence of this hedging interest, the
Fund expects that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
Although techniques other than the sale and purchase of
futures contracts could be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
Restrictions on the Use of Futures Contracts. The Fund will
not enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Fund's total assets. In addition, the Fund will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Fund's total
assets.
Risk Factors in Futures Transaction. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to hedge it
effectively.
The Fund will minimize the risk that it will be unable to
close out a futures contract by only entering into futures which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction
B-5
<PAGE>
costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. Additionally, the Fund
bears the risk that the Investment Advisor will incorrectly predict future
market trends. However, because the futures strategies of the Fund are engaged
in only for hedging purposes, the Investment Advisor does not believe that the
Fund is subject to the risks of loss frequently associated with futures
transactions. The Fund would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying security and
sold it after the decline.
Use of futures transactions by the Fund involves the risk of
imperfect or no correlation where the securities underlying futures contracts
are different than the portfolio securities being hedged. It is also possible
that the Fund could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or related option. Additionally,
investments in futures contracts and options involve the risk that the
Investment Adviser will incorrectly predict stock market trends.
Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.
Federal Tax Treatment of Futures Contracts. The Fund is
required for federal income tax purposes to recognize as income for each taxable
year its net unrealized gains and losses on certain futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by the Fund may affect the holding period of such
securities and, consequently the nature of the gain or loss on such securities
upon disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least 90% of its
gross income for a
B-6
<PAGE>
taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies, or other income derived with respect to
the Fund's business of investing in securities. Any net gain realized from
the closing out of certain futures contracts will be considered gain from the
sale of securities and therefore be qualifying income for purposes of the 90%
requirement.
The Fund will distribute to stockholders annually any net
capital gains which have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and stockholders will be advised
on the nature of the distributions.
Loans of Securities
The Fund is authorized to lend securities it holds to brokers,
dealers and other financial organizations, but it will not lend securities to
any affiliate of Chapman Capital Management, Inc. (the "Investment Advisor")
unless the Fund applies for and receives specific authority to do so from the
Securities and Exchange Commission (the "SEC"). The Fund's loans of securities
are collateralized by cash, letters of credit or U.S. Government securities that
are maintained at all times in a segregated account in an amount equal to the
current market value of the loaned securities. From time to time, the Fund may
pay a part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. Government securities are used as
collateral. The Fund adheres to the following conditions whenever it lends its
securities: (1) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower, which amount of collateral is
maintained by daily marking to market; (2) the borrower must increase the
collateral whenever the market value of the securities loaned rises above the
level of the collateral; (3) the Fund must be able to terminate the loan at any
time; (4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the loaned securities may
pass to the borrower, except that, if a material event adversely affecting the
investment in the loaned securities occurs, the Board of Directors must
terminate the loan and regain the Fund's right to vote the securities. Up to 20%
of the Fund's assets may be invested pursuant to such techniques for hedging and
risk management purposes or when, in the opinion of the Investment Advisor, such
techniques can be expected to yield a higher investment return than other
investment options.
B-7
<PAGE>
Repurchase Agreements
The Fund may enter into "repurchase agreements" pertaining to
the securities in which it may invest with securities dealers or member banks of
the Federal Reserve System. A repurchase agreement arises when a buyer such as
the Fund purchases a security and simultaneously agrees to resell it to the
vendor at an agreed-upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
interest rate which is effective for the period of time the buyer's money is
invested in the security and which is related to the current market rate rather
than the coupon rate on the purchased security. Such agreements permit the Fund
to keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund requires continual
maintenance by its custodian for its account in the Federal Reserve/Treasury
Book Entry System of collateral in an amount equal to, or in excess of, the
resale price. In the event a vendor defaulted on its repurchase obligation, the
Fund might suffer a loss to the extent that the proceeds from the sale of the
collateral were less than the repurchase price. In the event of a vendor's
bankruptcy, the Fund might be delayed in, or prevented from, selling the
collateral for the Fund's benefit. The Board of Directors has established
procedures, which are periodically reviewed by the Board, pursuant to which the
Investment Advisor is permitted to enter into repurchase agreements on behalf of
the Fund.
Fundamental Policies
The following investment restrictions are fundamental and
cannot be changed without the approval of holders of a majority of the Fund's
outstanding voting shares, which, as used here, means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding shares. The Fund's investment policies that are not designated
fundamental policies may be changed by the Board of Directors without
stockholder approval. The percentage limitations set forth below, as well as
those described in the Prospectus, are measured and applied only at the time an
investment is made or other relevant action is taken by the Fund. The investment
policies adopted by the Fund prohibit the Fund from:
(1) Concentrating investments in particular industries. The
Fund's policy is not to concentrate investments, i.e., to limit its investments
in any one industry, so that it will make no additional investment in any
industry if such investment would result in its having over 25% of the value of
its assets at the time in such industry. (Domestic Emerging Markets and DEM
Companies are not considered an industry for this purpose.)
(2) Engaging in the purchase and sale of real estate or real
estate mortgage-backed securities.
(3) Purchasing or selling commodities, except that the Fund
may enter into futures contracts and options thereon and may invest in stock
index futures contracts,
B-8
<PAGE>
stock options and options on stock index futures contracts to the extent that
not more than 5% of the Fund's assets are required as margin deposit for
futures contracts and are not more than 15% of the Fund's assets are invested
in futures and options at any time.
(4) Making loans to others, except through the purchase of
qualified (publicly distributed bonds, debentures or other securities) debt
obligations, the entry into repurchase agreements and loans of portfolio
securities consistent with the Fund's investment objectives and policies.
(5) Issuing senior securities, except in compliance with the
Investment Company Act of 1940, as amended.
(6) Underwriting securities of other issuers, except to the
extent that, in connection with the disposition of Fund securities or in
connection with the purchase of or sale of Illiquid Securities or Private
Funds, it may be deemed to be an underwriter under certain provisions of the
federal securities laws.
(7) Investing in foreign securities (including American
Depository Receipts).
Other Investment Policies
The policy of the Fund is not to invest its funds for the
purpose of purchasing working control in companies except when and if, in the
judgment of the Investment Advisor, such investment is deemed advisable. This
policy of the Fund, which is established by the Board of Directors, is subject
to change without stockholder approval.
Portfolio Turnover
Although the Fund seeks to invest for the long term, the Fund
retains the right to sell securities regardless of how long they have been held.
Generally, a passively managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the Fund's target index. Although the Fund cannot accurately predict its
turnover rate, because of this, the Fund anticipates that its annual portfolio
will not exceed 50%. (A turnover of 100% would occur, for example, if a
portfolio sold and replaced securities valued at 100% of its total net assets
within a one year period.)
B-9
<PAGE>
MANAGEMENT
Directors and Officers
The Directors and executive officers of the Company are listed
below. Directors deemed to be "interested persons" of the Company for purposes
of the Investment Company Act of 1940, as amended (the "1940 Act") are indicated
by an asterisk.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Principal
Positions(s) Occupations (s)
Held with During
Name and Address Registrant Age Past 5 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* Nathan A. Chapman, Jr. Director 40 President and Director of The Chapman Co.
and since 1986 and Chapman Capital Management,
President Inc. since 1988. President and Director of
DEM, Inc. (a closed-end investment company
managed by the Investment Advisor) since
1995. President and Director of Chapman
Holdings, Inc. since 1997 and Chapman
Capital Management Holdings, Inc. since
1998.
- ------------------------------------------------------------------------------------------------------------
James B. Lewis Director 50 City Administrator, City of Rio Rancho, NM
since 1996. Chief Clerk-State Corporation
Commission of New Mexico from 1995 to 1996,
Chief of Staff, Office of the Governor of
New Mexico from 1991 to 1995. Director of
DEM, Inc.
- ------------------------------------------------------------------------------------------------------------
Wilfred Marshall Director 62 Principal, Marshall Enterprises since
1994. Director, Mayor's Office of Small
Business Assistance - City of Los Angeles
1981 to 1994.
- ------------------------------------------------------------------------------------------------------------
Lottie H. Shackelford Director 56 Executive Vice President of Global USA
since 1994. City Director of Little Rock,
Arkansas, 1978 to 1992. Director of DEM,
Inc. since 1995. Director of Chapman
Holdings, Inc. since 1997.
- ------------------------------------------------------------------------------------------------------------
* Levi Watkins, Jr., MD Director 53 Professor of Cardiac Surgery and Associate
Dean of the Johns Hopkins University,
School of Medicine since 1984.
- ------------------------------------------------------------------------------------------------------------
Ronald A. White Director 48 Senior Partner, Ronald A. White, P.C.,
since 1982, Director of DEM, Inc. since
1995.
- ------------------------------------------------------------------------------------------------------------
*Dr. Benjamin Hooks Director 72 Senior Vice President of The Chapman Co.
since 1993. Executive Director of the
NAACP from 1977 to 1993. Director of DEM,
Inc. since 1997.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Principal
Positions(s) Occupations (s)
Held with During
Name and Address Registrant Age Past 5 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David Rivers Director 54 Director of Community Development Medical
University of South Carolina Environmental
Hazards Assessment Program since 1994;
President, Research Planning and
Management from 1991 to 1994.
- ------------------------------------------------------------------------------------------------------------
Valerie A. Chapman Vice-President 36 Administrator of The Chapman Co. since
March 1988. Ms. Chapman is married to
Nathan A. Chapman, Jr.
- ------------------------------------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary and 50 Secretary and Assistant Treasurer since
Assistant 1997 of The Chapman Co. Vice President,
Treasurer Secretary and Assistant Treasurer of DEM,
Inc. since 1995. Senior Vice President,
Secretary, Assistant Treasurer and Director
of Chapman Holdings, Inc. since 1997. Vice
President, Secretary, Assistant Treasurer
and Director of Chapman Capital Management
Holdings, Inc. since 1998.
- ------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and 55 Controller since 1988 and Treasurer and
Assistant Assistant Secretary since 1997 of The
Secretary Chapman Co. Treasurer since 1990,
Controller since 1995 and Assistant
Secretary since 1997 of Chapman Capital
Management, Inc. Treasurer and Assistant
Secretary of DEM, Inc. Controller,
Treasurer and Assistant Secretary of
Chapman Holdings, Inc. since 1997 and
Chapman Capital Management Holdings, Inc.
since 1998.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Dr. Watkins is an interested director of the Company, as defined under the 1940
Act, because his brother, Donald Watkins, Esq., is a Director of the
Distributor. Mr. Chapman and Dr. Hooks are interested Directors of the Company,
as defined under the 1940 Act, because Dr. Hooks is an officer of the
Distributor and Mr. Chapman is an officer, Director and majority beneficial
owner of both the Distributor and the Investment Advisor.
The address of each Director and officer is World Trade
Center - Baltimore, 401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202.
Directors of the Company who are not officers receive from the
Company a fee of $1,000 for each Board of Directors meeting attended and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
Officers of the Company do not receive compensation from the Company.
B-11
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Retirement or Pension Total Compensation
Aggregate Benefits Accrued as Estimated Annual from Company and Fund
Name of Person/ Compensation from Part of Company Benefits upon Complex Paid to
Position Company Expenses Retirement Directors
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr. None None None None
Director, Chairman,
President
- --------------------------------------------------------------------------------------------------------------------------
James Lewis $4,000 None None $8,000
Director
- --------------------------------------------------------------------------------------------------------------------------
Lottie Shackelford $4,000 None None $8,000
Director
- --------------------------------------------------------------------------------------------------------------------------
Levi Watkins, MD None None None None
Director
- --------------------------------------------------------------------------------------------------------------------------
Ronald A. White $3,000 None None $6,000
Director
- --------------------------------------------------------------------------------------------------------------------------
Dr. Benjamin Hooks $4,000 None None $5,000
Director
- --------------------------------------------------------------------------------------------------------------------------
Wilfred Marshall $4,000 None None $4,000
Director
- --------------------------------------------------------------------------------------------------------------------------
David Rivers $3,000 None None $3,000
Director
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Under the Company's charter and Maryland law, Directors and
officers of the Company are not liable to the Company or its stockholders except
for receipt of an improper personal benefit or active and deliberate dishonesty.
The Company's charter requires that it indemnify its Directors and officers
against liabilities unless it is proven that a director or officer acted in bad
faith or with active and deliberate dishonesty or received an improper personal
benefit. These provisions are subject to the limitation under the 1940 Act that
no director or officer may be protected against liability to the Company for
willful misfeasance, bad faith, gross negligence or reckless disregard for the
duties of his office.
For so long as the Distribution Plan described in the
Prospectus section captioned MANAGEMENT--The Distributor" remains in effect, the
Directors of the Company who are not "interested persons" of the Company, as
defined in the 1940 Act, will be selected and nominated by the Directors who are
not "interested persons" of the Company.
The Investment Advisor
The Investment Advisor, Chapman Capital Management, Inc., has
been retained under an investment advisory and administrative services agreement
("Advisory
B-12
<PAGE>
and Administrative Services Agreement") to provide investment advice
and, in general, to conduct the management and investment program of the Fund in
accordance with the Fund's investment objectives, policies, and restrictions and
under the supervision and control of the Company's Board of Directors. The
Investment Advisor was established in 1988 and is located at the World Trade
Center - Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland
21202.
The Investment Advisor is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the Investment
Advisor.
The table below sets forth the names of affiliated persons of
the Company who are also affiliated persons of the Investment Advisor:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name and
Principal Business Address Position With Investment Advisor Position With Company
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. President, Director and Chairman President, Director and Chairman
401 E. Pratt St.
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary and Secretary and Assistant Treasurer
401 E. Pratt St. Assistant Treasurer
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Controller, Treasurer and Treasurer and Assistant Secretary
401 E. Pratt Street Assistant Secretary
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Advisor has sole investment discretion for the
Fund and makes all decisions affecting assets in the Fund's portfolio under the
supervision of the Company's Board of Directors and in accordance with the
Fund's stated policies. The Investment Advisor selects investments for the Fund
and places purchase and sale orders on behalf of the Fund. Pursuant to an
advisory and administrative services agreement between the Fund and the
Investment Advisor, the Fund pays an aggregate advisory fee at an annual rate of
.9 of 1% of the value of the Fund's average weekly net assets during the
preceding month payable monthly in arrears and an administration fee of .15 of
1% of the Fund's average weekly net assets during the preceding month payable
monthly in arrears and is allocated to the Investor Shares and Institutional
Shares on the basis of the net asset value of the Fund attributable to each such
class.
In connection with the provision of advisory services, the
Investment Advisor will obtain and provide investment research and will
supervise the Fund's investments and conduct a continuous program of investment,
evaluation and, if
B-13
<PAGE>
appropriate, sale and reinvestment of the Fund's assets. The
Investment Advisor will place orders for the purchase and sale of portfolio
securities and will solicit brokers to execute transactions, including The
Chapman Co., in accordance with the Company's policies and restrictions
regarding brokerage allocations. The Investment Advisor will furnish to the
Company such statistical information with respect to the investments which the
Fund may hold or contemplate purchasing as the Company may reasonably request.
Further, the Investment Advisor will supply office facilities, data processing
services, clerical, accounting and bookkeeping services, internal auditing
services, executive and other administrative services; provide stationery and
office supplies; prepare reports to the Fund's stockholders, tax returns and
reports to and filings with the SEC and state Blue Sky authorities; calculate
the net asset value of the Fund's shares; provide persons to serve as the
Company's officers and generally assist in all aspects of the Company's
operations. The Investment Advisor will pay for its own costs in providing the
above listed services.
B-14
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, to the Company's knowledge,
the name, the number of shares and the percentage of the outstanding shares of
the Fund owned beneficially by each person who owned beneficially 5% or more of
the outstanding shares of Common Stock as of April 30, 1998, the latest
practicable date, and the ownership of all Directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER TOTAL INVESTOR TOTAL INSTITUTIONAL %
SHARES SHARES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHAPMAN CAPITAL MANAGEMENT, INC. (1) 1 1 100%
(a Washington, DC corporation)
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ------------------------------------------------------------------------------------------------------------------
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. (2) 1 1 100%
(a Maryland corporation)
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ------------------------------------------------------------------------------------------------------------------
NATHAN A. CHAPMAN, JR. (2) 1 1 100%
Chapman Capital Management Holdings, Inc.
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ------------------------------------------------------------------------------------------------------------------
All current Directors and executive officers as a group 1 1 100%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) The shares of Common Stock are owned beneficially and of record.
(2) The shares of Common Stock are owned beneficially but not of record.
Because the Investment Advisor, Chapman Capital Management,
Inc., owns in excess of 25% of the issued and outstanding Common Stock of the
Fund, such stockholder is deemed to control the Fund. Accordingly, such
stockholder has significant power to affect the affairs of the Fund or to
determine or influence the outcome of matters submitted to a vote of the
stockholders of the Fund.
The Investment Adviser is a wholly-owned subsidiary of
Chapman Capital Management Holdings, Inc. Nathan A. Chapman, Jr., who is the
controlling stockholder of Chapman Capital Management Holdings, Inc. is a
controlling person (as that term is defined under the 1940 Act) of Chapman
Capital Management Holdings, Inc. and, therefore, a controlling person of the
Investment Adviser.
B-15
<PAGE>
Distributor
The Distributor, The Chapman Co., has been retained under a
distribution agreement (the "Distribution Agreement") to undertake the sale, on
a continuous basis as agent, of the Fund's shares. The Distributor is not
obliged to sell any particular amount of shares.
Investor Shares
The Distributor is compensated through the payment of a
front-end load of up to 4 3/4% of the offering price on the sale of Investor
Shares and pursuant to the terms of a distribution plan adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act that is applicable to the Investor
Shares (the "Investor Shares Distribution Plan"). See "PURCHASE OF
SHARES--Purchase Price" in the Investor Shares Prospectus. The Distributor
receives a fee under the Investor Shares Distribution Plan for stockholder
administrative and distribution services at an annual rate of up to a total
of .75% (up to .25% administrative fee and .50% distribution fee) of the
average daily net assets of the Fund attributable to the Investor Shares. The
Distributor has voluntarily waived such fees during the first fiscal year of
the Fund; however, there can be no assurance that the Distributor will
continue to voluntarily waive or limit the amount of such fee in the future.
The Distributor will be paid fees under the Investor Shares
Distribution Plan to compensate the Distributor or enable the Distributor to
compensate other persons, ("Service Providers"), including any other distributor
of the Investor Shares, for providing: (i) services primarily intended to result
in the sale of the Investor Shares ("Distribution Services") and (ii)
stockholder servicing, administrative and accounting services ("Administrative
Services" and collectively with Distribution Services, "Services"). Distribution
Services may include, but are not limited to: the printing and distribution to
prospective investors in the Investor Shares of prospectuses and statements of
additional information describing the Fund; the preparation, including printing,
and distribution of sales literature, reports and media advertisements relating
to the Investor Shares; providing telephone services relating to the Fund;
distributing the Investor Shares; costs relating to the formulation and
implementation of marketing and promotional activities, including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising, and related travel and entertainment expenses;
and costs involved in obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Fund may, from time to
time, deem advisable. In providing compensation for Distribution Services in
accordance with the Plan, the Distributor is expressly authorized (i) to make,
or cause to be made, payments reflecting an allocation of overhead and other
office expenses related to providing Services; (ii) to make, or cause to be
made, payments, or to provide for the reimbursement of expenses of, persons who
provide support services in connection with the distribution of the Investor
Shares including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the
B-16
<PAGE>
Fund, and providing any other Service; and (iii) to make, or cause to be made,
payments to compensate selected dealers or other authorized persons for
providing any Services. Administrative Services may include, but are not limited
to, (i) responding to inquiries of prospective investors regarding the Fund;
(ii) services to holders of Investor Shares not otherwise required to be
provided by the Fund's custodian or any co-administrator; (iii) establishing and
maintaining accounts and records on behalf of holders of Investor Shares; (iv)
processing purchase, redemption and exchange transactions in Investor Shares;
and (v) other similar services not otherwise required to be provided by the
Fund's transfer agent or any co-administrator. Payments under the Plan are not
tied exclusively to the distribution and administrative expenses actually
incurred by the Distributor or any Service Provider, and the payments may exceed
expenses actually incurred by the Distributor and/or a Service Provider.
Furthermore, any portion of any fee paid to the Distributor or to any of its
affiliates by the Fund or any of their past profits or other revenue may be used
in their sole discretion to provide services to holders of Investor Shares or to
foster distribution of the Investor Shares.
Institutional Shares
The Distributor is compensated for the sale of Institutional
Shares pursuant to the terms of a distribution plan adopted by the Fund pursuant
to Rule 12b-1 under the 1940 Act that is applicable to the Institutional Shares
(the "Institutional Shares Distribution Plan" and collectively with the Investor
Distribution Plan, the "Distribution Plans"). The Distributor receives a fee
under the Institutional Shares Distribution Plan for stockholder administrative
and distribution services at an annual rate of up to a total of .25% of the
average daily net assets of the Fund attributable to the Institutional Shares.
The Distributor will be paid fees under the Institutional
Shares Distribution Plan to compensate the Distributor or enable the Distributor
to compensate other persons, including any other distributor of the
Institutional Shares or institutional stockholders of record of the
Institutional Shares, including but not limited to retirement plans,
broker-dealers, depository institutions, and other financial intermediaries
("Institutions"), who own Institutional Shares on behalf of their customers,
clients or (in the case of retirement plans) participants ("Customers") and
companies providing certain services to Customers (collectively with
Institutions, "Service Organizations"), for providing (a) services primarily
intended to result in the sale of the Institutional Shares ("Selling Services")
and (b) stockholder servicing, administrative and accounting services to
Customers ("Stockholder Services").
The annual fee paid to the Distributor with respect to Selling
Services will compensate the Distributor, or allow the Distributor to compensate
Service Organizations, to cover certain expenses primarily intended to result in
the sale of the Institutional Shares, including, but not limited to: (i) costs
of payments made to employees that engage in the distribution of the
Institutional Shares; (ii) payments made to, and expenses of, persons who
provide support services in connection with the distribution of the
Institutional Shares, including, but not limited to, office space and
B-17
<PAGE>
equipment, telephone facilities, processing stockholder transactions and
providing any other stockholder services not otherwise provided by the Fund's
transfer agent; (iii) costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising; (iv) costs of printing and distributing prospectuses, statements of
additional information and reports of the Fund to prospective holders of the
Institutional Shares; (v) costs involved in preparing, printing and distributing
sales literature pertaining to the Fund and (vi) costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Fund may, from time to time, deem advisable.
The annual fee paid to the Distributor with respect to
Stockholder Services will compensate the Distributor, or allow the Distributor
to compensate Service Organizations, for personal service and/or the maintenance
of Customer accounts, including but not limited to (i) responding to Customer
inquiries, (ii) providing information on Customer investments and (iii)
providing other stockholder liaison services and for administrative and
accounting services to Customers, including, but not limited to: (a) aggregating
and processing purchase and redemption requests from Customers and placing net
purchase and redemption orders with the Fund's distributor or transfer agent;
(b) providing Customers with a service that invests the assets of their accounts
in the Institutional Shares; (c) processing dividend payments from the Fund on
behalf of Customers; (d) providing information periodically to Customers showing
their positions in the Institutional Shares; (e) arranging for bank wires; (f)
providing sub-accounting with respect to the Institutional Shares beneficially
owned by Customers or the information to the Fund necessary for sub-accounting;
(g) forwarding stockholder communications from the Fund (for example, proxies,
stockholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers, if required by law and (h) providing
other similar services to the extent permitted under applicable statutes, rules
and regulations. Payments under this Institutional Shares Distribution Plan are
not tied exclusively to the selling and stockholder expenses actually incurred
by the Distributor or any Service Organization, and the payments may exceed
expenses actually incurred by the Distributor or any Service Organization.
Furthermore, any portion of any fee paid to the Distributor or to any of its
affiliates by the Fund or any of their past profits or other revenue may be used
in their sole discretion to provide services to stockholders of the Fund or to
foster distribution of the Institutional Shares.
General Information
Pursuant to the Distribution Plans, the Distributor provides
the Board of Directors with periodic reports of amounts expended under the
Distribution Plans and the purpose for which the expenditures were made.
The Distribution Plans will continue in effect for so long as
their continuance is specifically approved at least annually by the Board of
Directors,
B-18
<PAGE>
including a majority of the Directors who are not interested persons
of the Company and who have no direct or indirect financial interest in the
operation of the Distribution Plans as the case may be (the "Independent
Directors"). Any material amendment of the Distribution Plans would require the
approval of the Board in the manner described above. A Distribution Plan may not
be amended to increase materially the amount to be spent thereunder without the
approval of the holders of a majority of the relevant class of Shares. A
Distribution Plan may be terminated at any time, without penalty, by the vote of
a majority of the Independent Directors or by a vote of a majority of the
outstanding voting securities of the relevant class.
Custodian
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri
64141-6226, serves as custodian of the Fund. Under the Custody Agreement, the
Bank has agreed to: (i) maintain a separate account or accounts in the name of
the Fund; (ii) receive, hold and deliver portfolio securities for the account of
the Fund; (iii) collect and receive all income and other payments and
distributions on account of the Fund's portfolio securities; (iv) disburse funds
to purchase portfolio securities, pay dividends and expenses and for other
corporate purposes; and (v) make periodic reports to the Board of Directors
concerning the Fund's operations.
Transfer and Dividend Paying Agent/Accounting Agent
First Data Services, Inc., 3200 Horizon Drive, PO Box 61503,
King of Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and
dividend paying agent and accounting agent for the Fund pursuant to an
Investment Company Services Agreement.
PURCHASE OF SHARES
(Applicable to Investor Shares only)
The following information supplements and should be read in
conjunction with the sections in the Fund's Prospectus entitled "PURCHASE OF
SHARES." The scale of sales loads applies to the purchases of Investor Shares
made by any "purchaser," which term includes an individual and/or spouse
purchasing securities for his, her or their own account or for the account of
any minor children, or a trustee or other fiduciary purchasing securities for a
single trust estate or a single fiduciary account trust estate or single
fiduciary account (including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code or 1986, as amended (the "Code")) although more than one
beneficiary is involved; or a group of accounts established by or on behalf of
the employees of an employer or affiliated employers pursuant to an employee
benefit plan or other program (including accounts established pursuant to
Sections 403(b), 408(k) and 457 of the Code); or an organized group which has
been in existence for more than six months, provided that it is
B-19
<PAGE>
not organized for the purpose of buying redeemable securities of a registered
investment company and provided that the purchases are made through a central
administration or a single dealer, or by other means which result in economy of
sales effort or expense.
Set forth below is an example of the method of computing the
offering price of the Investor Shares. The example assumes a purchase of
Investor Shares aggregating less than $50,000 subject to the current schedule of
sales charges set forth in the Fund's prospectus at a price based upon the
initial net asset value of the Fund's Investor Shares:
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------
Net Asset Value per Share $14.29
- -------------------------------------------------------------------------------
Per Share Sales Charge--4 3/4% of offering price
$.71
- -------------------------------------------------------------------------------
Per Share Offering Price to the Public $15.00
- -------------------------------------------------------------------------------
</TABLE>
REDEMPTION OF SHARES
Under the 1940 Act, the Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit.
PORTFOLIO TRANSACTIONS
The Investment Advisor is responsible for decisions to buy or
sell securities and the selection of broker-dealers for the Fund subject to
policies adopted by the Company's Board of Directors. Portfolio securities may
be purchased directly from the issuer or from a dealer serving as market maker
or may be purchased in broker's transactions. If securities are sold prior to
maturity, they may be sold directly to an issuer or dealer or in broker's
transactions. When securities are purchased or sold directly from or to an
issuer, no commissions or discounts are paid. The price paid to or received from
a dealer for a security may include a spread between bid and asked prices. When
securities are purchased or sold in a broker's transaction, a commission will be
paid.
The Company's policy for placing orders for purchases and
sales of securities for the Fund is to give primary consideration to obtaining
the most favorable price and efficient execution of transactions. Sales of Fund
shares is not a factor in allocating portfolio transactions.
The Distributor may effect brokerage transactions for the Fund
when it is able to provide a net price and execution at least as favorable to
the Fund as those determined to be available from unaffiliated brokers or
dealers. The commissions paid to
B-20
<PAGE>
the Distributor on transactions for the Fund may not exceed those charged by the
Distributor to comparable unaffiliated clients in similar transactions or the
limits set forth in rules adopted by the SEC. The Board of Directors of the
Company has adopted procedures intended to ensure compliance with these
limitations. The procedures require that the Distributor report each transaction
to the Fund and that the Board of Directors determine at least quarterly that
all transactions effected by the Distributor have been effected in accordance
with the procedures.
When comparable price and execution can be obtained from more
than one broker or dealer, consideration may be given to placing portfolio
transactions with those brokers or dealers who also furnish research and other
services to the Fund or the Investment Advisor. These services may include
information as to the availability of securities for purchase or sale,
statistical or factual information or opinions pertaining to investments,
evaluations of portfolio securities, and research related computer software or
hardware. These services may benefit the Investment Advisor in the management of
accounts of other clients and may not benefit the Fund directly. While such
services are useful and important in supplementing its own research, the
Investment Advisor believes the value of such services is not determinable and
does not significantly reduce its expenses. The fees payable to the Investment
Advisor will not be reduced by the value of such services.
The Investment Advisor and its affiliates deal, trade and
invest for their own accounts in the types of securities in which the Fund may
invest and may have relationships with the issuers of securities purchased by
the Fund.
Investment decisions for the Fund are made independently from
those for other accounts advised by the Investment Advisor.
The Investment Advisor's other accounts may also invest in the
same securities as the Fund. When a purchase or sale of the same security is
made at substantially the same time on behalf of the Fund and another account,
the transaction will be averaged as to price, and available instruments
allocated as to amount, in a manner believed to be equitable to the Fund and the
other account. In some instances, this procedure may adversely affect the price
paid or received by the Fund or the size of the position obtained or sold by the
Fund. To the extent permitted by law, the securities to be sold or purchased for
the Fund may be aggregated with those to be sold or purchased for the other
accounts in order to obtain the best execution.
TAXATION
The following discussion reflects certain applicable tax laws
as of the date of this Statement of Additional Information. For additional tax
information see "TAXATION" in the Fund's Prospectus.
B-21
<PAGE>
Taxation of the Fund
The Fund intends to elect and intends to qualify each year to
be treated as a regulated investment company for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION--Capital
Stock" in the Prospectus) must, among other things: (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of stock or securities and
certain other sources and (b) diversify its holdings so that at the end of each
fiscal quarter (i) at least 50% of the value of its assets is represented by
cash or cash items, U.S. government securities, securities of other regulated
investment companies, and other securities which, with respect to any one
issuer, do not represent more than 5% of the value of its assets nor more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies), or two or more issuers which it controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
If the Fund qualifies as a regulated investment company and
distributes to its stockholders at least 90% of its investment company taxable
income, then the Fund will not be subject to federal income tax on the income so
distributed. However, the Fund would be subject to corporate income tax on any
undistributed income. See "TAXATION--Taxation of the Fund" in the Prospectus. In
addition, the Fund will be subject to a nondeductible 4% excise tax on the
amount by which the Fund's distributed amount in any calendar year is less than
the sum of: (a) 98% of such Fund's ordinary income for such calendar year; (b)
98% of such Fund's capital gain net income for the one-year period ending on
October 31 of that year; and (c) 100% of any prior year underdistributions. The
Fund may retain its net capital gain and pay corporate income tax thereon and
elect to include all or a portion of its undistributed net capital gain in the
income of its stockholders of record on the last day of the taxable year. In
such event, each stockholder of record on the last day of the Fund's taxable
year would be required to include in income for tax purposes his or her
proportionate share of the Fund's undistributed net capital gain. Each
stockholder would be entitled to credit his or her proportionate share of the
tax paid by the Fund against his or her federal income tax liabilities and to
claim refunds to the extent that the credit exceeds such liabilities. In
addition, the stockholder would be entitled to increase the basis of his or her
shares for federal income tax purposes by the difference between the amount of
the includible gain and the tax deemed paid in respect of such shares.
Any capital losses resulting from the disposition of
securities can only be used to offset capital gains and cannot be used to reduce
the Fund's ordinary income. Such capital losses may be carried forward by the
Fund for eight years.
B-22
<PAGE>
The Fund's taxable income will in part be determined on the
basis of reports made to the Fund by the issuers of the securities in which the
Fund invests. The tax treatment of certain securities in which the Fund may
invest is not free from doubt and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of the Fund could
result in adjustments to the income of the Fund.
Taxation of Stockholders
Dividends (other than capital gain dividends) distributed by
the Fund may be eligible for the dividends received deduction in the hands of
corporate stockholders, to the extent that the Fund's taxable income consists of
dividends received from domestic corporations and certain other requirements as
generally described in Section 854 of the Code are met.
Dividends and other distributions by the Fund are generally
taxable to the stockholders at the time the dividend or distribution is made.
However, any dividends declared by the Fund in October, November or December and
made payable to stockholders of record in such months but actually paid in the
following January will be taxable to stockholders as of December 31.
If a stockholder purchases shares of the Fund immediately
prior to a dividend, the dividend received by the stockholder will be taxable
even though it represents economically in whole or in part a return of the
purchase price. Investors should consider the tax implications of buying shares
shortly prior to a dividend distribution.
The Fund will, within 60 days after the close of its taxable
year, send written notices to stockholders regarding the tax status of all
distributions made during the year. The foregoing discussion is a summary of
some of the current federal income tax laws regarding the Fund and investors in
the shares of the Fund, and does not deal with all of the federal income tax
consequences applicable to the Fund or to all categories of investors, some of
which may be subject to special rules. Prospective investors should consult
their own tax advisers regarding the federal, state, local, foreign and other
tax consequences to them of investments in the Fund.
For additional information on taxation, see "TAXATION" in the
Fund's Prospectus.
CAPITAL STOCK
For additional information as to the organization and capital
stock of the Company, see "OTHER INFORMATION" in the Prospectus.
As used in the Prospectus and this Statement of Additional
Information, the term "majority," when referring to the approvals to be obtained
from stockholders in
B-23
<PAGE>
connection with matters affecting the Company as a whole means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority," when referring to the approvals to be obtained from stockholders in
connection with matters affecting only the Fund (for example, approval of an
investment advisory contract), means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy or (ii)
more than 50% of the outstanding shares of the Fund. Stockholders are entitled
to one vote for each full share held and a fractional vote for fractional shares
held.
Each share of the Fund is entitled to such dividends and
distributions out of the assets belonging to the Fund as are declared in the
discretion of the Company's Board of Directors. In determining the Fund's net
asset value, the Fund is charged with the direct expenses of the Fund and with a
share of the general expenses and liabilities of the Company, which are normally
allocated in proportion to the relative asset values of the respective Series at
the time of allocation.
In the event of the liquidation or dissolution of the Company,
shares of the Fund are entitled to receive the assets attributable to the Fund
that are available for distribution, and a proportionate distribution, based
upon the relative net assets of the various Series, of any general assets not
attributable to a particular series that are available for distribution.
Subject to the provisions of the Company's charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Company,
with respect to a Series are conclusive.
Stockholders of the Company are not entitled to any preemptive
or conversion rights.
B-24
<PAGE>
PERFORMANCE INFORMATION
The performance of the Fund may be compared to the record of
the Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the
Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity Index,
the DEM Index, the DEM Universe of companies and returns quoted by Ibbotson
Associates. The S&P 500 Stock Index is a well known measure of the price
performance of 500 leading larger domestic stocks which represents approximately
80% of the market capitalization of the United States equity market. In
comparison, the Nasdaq Composite Index is comprised of all stocks on Nasdaq's
National Market. The Nasdaq Composite Index has typically included smaller, less
mature companies representing 10% to 15% of the capitalization of the entire
domestic equity market. Both indices are unmanaged and capitalization weighted.
In general, the securities comprising the Nasdaq Composite Index are more growth
oriented and have a somewhat higher "beta" and P/E ratio than those in the S&P
500 Stock Index. The Russell 2000 Index is a capitalization weighted index which
measures total return (and includes in such calculation dividend income and
price appreciation). The Russell 2000 is generally regarded as a measure of
small capitalization performance. It is a subset of the Russell 3000 Index. The
Russell 3000 is comprised of the 3000 largest U.S. companies. The Russell 2000
is comprised of the smallest 2000 companies in the Russell 3000 Index. The
Wilshire 5000 Index is a broad measure of market performance and represents the
total dollar value of all common stocks in the United States for which daily
pricing information is available. This index is also capitalization weighted and
captures total return. The DEM Universe is a growing list of companies
identified by the Investment Advisor that are controlled by African Americans,
Asian Americans, Hispanic/Latino Americans or women. The DEM Index was created
by the Investment Advisor and is comprised of 30 companies from the DEM Universe
that reflect the market capitalization and industry classification
characteristics of the DEM Universe. The DEM Index is weighted by market
capitalization and is intended as a performance measure of the DEM Universe. The
small company stock returns quoted by Ibbotson Associates are based upon the
smallest quintile of the NYSE, as well as similar capitalization stocks on the
American Stock Exchange and Nasdaq. This data base is unmanaged and
capitalization weighted.
The total returns for all indices used show the changes in
prices for the stocks in each index. However, only the performance data for the
S&P 500 Stock Index and the Ibbotson Associates performance data assume
reinvestment of all capital gains distributions and dividends paid by the stocks
in each data base. Tax consequences are not included in such illustrations, nor
are brokerage or other fees or expenses reflected in the Nasdaq Composite or S&P
500 Stock figures. In addition, the Fund's total return or performance may be
compared to the performance of other funds or other groups of funds that are
followed by Morningstar, Inc. a widely used independent research firm which
ranks funds by overall performance, investment objectives and asset size.
Morningstar proprietary ratings reflect risk-adjusted performance. The ratings
are subject to change every month. Morningstar's ratings are calculated from a
fund's three-year and five-year average annual returns with appropriate sales
charge adjustments and a risk factor that
B-25
<PAGE>
reflects fund performance relative to three-month Treasury bill monthly
returns. Ten percent of the funds in an asset class receive a five star
rating. The Fund's total return or performance may also be compared to the
performance of other funds or groups of funds by other financial or business
publications, such as Business Week, Investors Daily, Mutual Fund Forecaster,
Money Magazine, Wall Street Journal, New York Times, Baron's, and Lipper
Analytical Services. The Fund's performance may also be compared, from time
to time, to (a) indices of stocks comparable to those in which the Fund
invests and (b) the Consumer Price Index (measure for inflation) may be used
to assess the real rate of return from an investment in the Fund.
Additional Performance Information for the Fund
The Fund may reflect its total return in advertisements and
stockholder reports. Total investment return is one recognized method of
measuring investment company investment performance. Quotations of average
annual total return will be shown in terms of the average annual compounded rate
of return on a hypothetical investment in the Fund over a period of 1 year, 5
years and over the life of the Fund. This method of calculating total return is
based on the assumption that, all dividends and distributions by the Fund are
reinvested in shares of the Fund at net asset value and all recurring fees are
included for applicable periods. Total return may also be expressed in terms of
the cumulative value of an investment in the Fund at the end of a defined period
of time. Any fees charged by banks or their institutional investors directly to
their customer accounts in connection with investments in Investor Shares will
not be included in the Fund's calculations of total return.
All data is based on the Fund's past investment results and
does not predict future performance. Investment performance, which may vary, is
based on many factors, including market conditions, the composition of the
investments in the Fund, and the Fund's operating expenses. Investment
performance also often reflects the risk associated with the Fund's investment
objectives and policies. These factors should be considered when comparing the
Fund to other mutual funds and other investment vehicles.
The performance of the Institutional Shares will normally be
higher than the Investor Shares because of the sales charge (when applicable)
and additional expenses charged to the Investor Shares.
COUNSEL TO THE COMPANY
The validity of the Fund's shares will be passed upon for the
Company by Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Venable,
Baetjer and Howard, LLP also acts as counsel to the Investment Advisor and the
Distributor.
B-26
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, One North Charles Street, Baltimore,
Maryland 21201, serves as the Company's independent auditors. Ernst & Young LLP
will provide audit services, tax advice and assistance in connection with
filings with the SEC.
B-27
<PAGE>
FINANCIAL STATEMENTS
DEM INDEX FUND
COMPOSITE STATEMENT OF ASSETS AND LIABILITIES - APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash $ 29
------
Total assets $ 29
------
LIABILITIES:
$ 0
------
Total liabilities $ 0
------
NET ASSETS - equivalent to $14.28 per share on
2 shares of Common Stock outstanding $ 29
------
------
SUMMARY OF STOCKHOLDERS' EQUITY
Common Stock, par value $.001 per share; authorized
10,000,000,000 shares; issued and outstanding
2 shares $0
Capital paid-in $ 29
------
Net assets applicable to outstanding common stock $ 29
------
------
</TABLE>
C-1
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statement and Exhibits.
<TABLE>
<CAPTION>
<S> <C>
(a) Financial Statements:
Part A: None
Part B: Composite Statement of Assets and Liabilities--April 30, 1998
Part C: None
See Registrant's 1997 Annual Report to Stockholders previously filed.
(b) Exhibits:
Exhibit
Number Description
1(A) Articles of Incorporation of the Registrant (1)
1(B) Articles Supplementary of the Registrant dated July 28, 1997 (2)
1(C) Articles of Amendment of the Registrant dated February 12, 1998 (3)
1(D) Articles Supplementary of the Registrant dated February 12, 1998 (3)
1(E) Articles Supplementary of the Registrant dated February 12, 1998 (3)
1(F) Articles Supplementary of the Registrant dated May 8, 1998 (4)
1(G) Articles of Amendment of the Registrant dated May 11, 1998 (4)
2 Amended and Restated Bylaws of the Registrant dated July 18, 1997 (5)
4 Form of Stock Certificate (6)
5(A) Advisory and Administrative Services Agreement between the Registrant
and Chapman Capital Management (The Chapman US Treasury Money Fund
and The Chapman Institutional Cash Management Fund) (5)
5(B) Advisory and Administrative Services Agreement between the Registrant
and Chapman Capital Management, Inc. (DEM Equity Fund) (3)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5(C) Amendment to Advisory and Administrative Services Agreement between
the Registrant and Chapman Capital Management, Inc. (The Chapman US
Treasury Money Fund and The Chapman Institutional Cash Management
Fund) (3)
5(D) Advisory and Administrative Services Agreement between the Registrant
and Chapman Capital Management, Inc. (DEM Index Fund) (4)
6(A) Distribution Agreement between the Registrant and The Chapman Co.
(The Chapman US Treasury Money Fund and The Chapman Institutional
Cash Management Fund) (5)
6(B) Distribution Agreement between the Registrant and The Chapman Co.
(DEM Equity Fund) (3)
6(C) Amendment to Distribution Agreement between the Registrant and The
Chapman Co. (The Chapman US Treasury Money Fund and The Chapman
Institutional Cash Management Fund) (3)
6(D) Distribution Agreement between the Registrant and The Chapman Co.
(DEM Index Fund) (4)
8(A) Custodian Agreement between the Registrant and UMB Bank, N.A. (7)
8(B) Investment Company Services Agreement between the Registrant and FPS
Services, Inc. (The Chapman US Treasury Money Fund and DEM Equity
Fund) (5)
9(A) Stockholder Services Agreement between the Registrant and Chapman
Capital Management, Inc. (The Chapman US Treasury Money Fund and The
Chapman Institutional Cash Management Fund) (7)
10 Opinion and consent of Venable, Baetjer and Howard, LLP (4)
15(A) Distribution Plan (DEM Equity Fund Investor Shares) (3)
15(B) Distribution Plan (DEM Equity Fund Institutional Shares) (3)
15(C) Distribution Plan (DEM Index Fund Investor Shares) (4)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
15(D) Distribution Plan (DEM Index Fund Institutional Shares) (4)
27.17 Financial Data Schedule (4)
18(A) Multiple Class Plan (DEM Equity Fund) (5)
18(B) Multiple Class Plan (DEM Index Fund) (4)
99 Power of Attorney (7)
</TABLE>
(1) Incorporated by reference from the Registrant's Registration Statement
on Form N-1A (File Nos.: 33-25716; 811-5697) as filed with the
Securities and Exchange Commission on November 23, 1988.
(2) Incorporated by reference from Pre-Effective Amendment No. 13 to the
Registrant's Registration Statement on Form N-1A (File Nos.: 33-25716;
811-5697) as filed with the Securities and Exchange Commission on
August 7, 1997.
(3) Incorporated by reference from Post-Effective Amendment 13 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-25716;
811-5697) as filed with the Securities and Exchange Commission on March
2, 1998.
(4) Filed herewith.
(5) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos.: 33-25716;
811-5697) as filed with the Securities and Exchange Commission on May
31, 1989.
(6) Incorporated by reference from Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos.: 33-25716;
811-5697) as filed with the Securities and Exchange Commission on
February 28, 1995.
(7) Incorporated by reference from Post-Effective Amendment 12 to the
Registrant's Registration Statement on Form N-1A (File Nos.: 33-25716;
811-5697) as filed with the Securities and Exchange Commission on
February 28, 1997.
Item 25. Persons Controlled by or under Common Control with the Registrant.
None
C-3
<PAGE>
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of Record
On April 30, 1998 Title of Class Holders
<S> <C> <C>
The Chapman US
Treasury Money Fund 20
Common Stock
The Chapman
Institutional Cash
Management Fund 0
Common Stock
DEM Equity Fund
Institutional Shares 2
DEM Equity Fund
Investor Shares 4
DEM Index Fund 1
Institutional Shares
DEM Index Fund 1
Investor Shares
</TABLE>
Item 27. Indemnification.
Reference is made to Article VII of the Registrant's Articles of Incorporation,
Article IV of the Registrant's By-laws, Section 7 of the Advisory and
Administrative Services Agreement between the Registrant and Chapman Capital
Management, Inc. and Section 4 of the Distribution Agreement between the
Registrant and the Distributor, which provide for indemnification or limitation
of the liability of Directors and officers, the Investment Advisor, the
principal underwriter and affiliates of the Registrant.
The Registrant has obtained director's and officer's liability insurance which
will insure Directors and officers of the Registrant against liability to the
Registrant and its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to Directors, officers
and controlling persons of the
C-4
<PAGE>
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
understands that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
C-5
<PAGE>
Item 28. Business and Other Connections of Investment Advisor.
<TABLE>
<CAPTION>
Name and
Principal Business Address Position with Investment Advisor Other Business
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director and President President and Director of The Chapman
401 E. Pratt St. Co since 1986 and Chapman Capital
28th Floor Management, Inc. since 1988.
Baltimore, MD 21202 President and Director of DEM, Inc.
(a closed-end investment company
managed by the Investment Advisor)
since 1995. President and Director
of Chapman Holdings, Inc. since 1997
and Chapman Capital Management
Holdings, Inc. since 1998.
- ------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and Assistant Controller since 1988 and Treasurer
401 E. Pratt Street Secretary and Assistant Secretary since 1997 of
28th Floor The Chapman Co. Treasurer since
Baltimore, Maryland 21202 1990, Controller since 1995 and
Assistant Secretary since 1997 of
Chapman Capital Management, Inc.
Treasurer and Assistant Secretary of
DEM, Inc. Controller, Treasurer and
Assistant Secretary of Chapman
Holdings, Inc. since 1997 and Chapman
Capital Management Holdings, Inc.
since 1998.
- ------------------------------------------------------------------------------------------------------------
Theron Stokes Director Attorney for the Alabama Education
401 E. Pratt Street Association. Director Chapman Capital
28th Floor Management Holdings, Inc.
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------
Earl U. Bravo Director, Secretary and Secretary and Assistant Treasurer
401 E. Pratt Street Assistant Treasurer since 1997 of The Chapman Co. Vice
28th Floor President, Secretary and Assistant
Baltimore, MD 21202 Treasurer of DEM, Inc. since 1995.
Senior Vice President, Secretary,
Assistant Treasurer and Director of
Chapman Holdings, Inc. since 1997.
Vice President, Secretary, Assistant
Treasurer and Director of Chapman
Capital Management Holdings, Inc.
since 1998.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
C-6
<PAGE>
Item 29. Principal Underwriter.
(a) The Chapman Co. currently acts as principal underwriter and
exclusive distributor for DEM, Inc.
(b) Directors and Officers
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
- ------------------------------------------------------------------------------------------------------------
Name and With With
Principal Business Address Underwriter Registrant
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director and President Director and President
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, MD 21202
- -----------------------------------------------------------------------------------------------------------
Donald V. Watkins, Esquire Director None
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
- -------------------------------------------------------------------------------------------------------------
Earl U. Bravo, Sr. Senior Vice President, Secretary and Assistant Treasurer
The Chapman Co. Secretary and Assistant Treasurer
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
- ------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and Assistant Secretary Treasurer and Assistant Secretary
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder will be maintained at the offices of Chapman Capital Management,
Inc., World Trade Center--Baltimore, 401 East Pratt Street, 28th Floor,
Baltimore, Maryland 21202 or at the offices of First Data Services, Inc., 3200
Horizon Drive, PO Box 61503, King of Prussia, Pennsylvania 19406.
Item 31. Management Services.
Not applicable.
C-7
<PAGE>
Item 32. Undertakings.
Not applicable.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this post-effective
amendment No. 14 and amendment No. 16 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Baltimore, State of Maryland, on May 28, 1998. The undersigned hereby certifies
that the within post-effective amendment No. 14 and amendment No. 16 meet all of
the requirements for effectiveness pursuant to paragraph (b) of Rule 485
promulgated under the Securities Act of 1933.
THE CHAPMAN FUNDS, INC.
By: /S/ NATHAN A. CHAPMAN JR.
-------------------------
Nathan A. Chapman, Jr.
President
Pursuant to the requirements of the Securities Act of 1933,
this post-effective amendment No. 14 to Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ NATHAN A. CHAPMAN, JR. Director and President May 28, 1998
- ---------------------------
Nathan A. Chapman, Jr. (principal executive
officer)
/S/ M. LYNN BALLARD Treasurer (principal May 28, 1998
- ------------------------------------
M. Lynn Ballard financial and
accounting officer)
</TABLE>
Each of the Directors:
Nathan A. Chapman, Jr., Lottie H. Shackelford, Dr. Levi Watkins, Jr.,
James B. Lewis, Ronald A. White, Dr. Benjamin Hooks, David Rivers, and Wilfred
Marshall.
By: /S/ NATHAN A. CHAPMAN, JR. May 28, 1998
--------------------------
Nathan A. Chapman, Jr.
as Attorney-in-Fact
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1(F) Articles Supplementary of the Registrant dated May 8, 1998.
1(G) Articles of Amendment of the Registrant dated May 11, 1998
5(D) Advisory and Administrative Services Agreement between the Registrant and Chapman
Capital Management, Inc. (DEM Index Fund)
6(D) Distribution Agreement between the Registrant and The Chapman Co. (DEM Index Fund)
10 Opinion and consent of Venable, Baetjer and Howard, LLP
15(C) Distribution Plan (DEM Index Fund Investor Shares)
15(D) Distribution Plan (DEM Index Fund Institutional Shares)
27.17 Financial Data Schedule
18(B) Multiple Class Plan (DEM Index Fund)
</TABLE>
<PAGE>
Exhibit 1(F)
ARTICLES SUPPLEMENTARY
THE CHAPMAN FUNDS, INC.
THE CHAPMAN FUNDS, INC., a Maryland corporation having
its principal office in the State of Maryland in Baltimore, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors has reclassified (i) One Billion
(1,000,000,000) of the authorized but unissued shares of Common Stock of The
Chapman US Treasury Money Fund as One Billion (1,000,000,000) shares of DEM
Multi-Manager Equity Fund, Investor Class Common Stock and (ii) One Billion
(1,000,000,000) of the authorized but unissued shares of Common Stock of The
Chapman Institutional Cash Management Fund as One Billion (1,000,000,000)
shares of DEM Multi-Manager Equity Fund, Institutional Class Common Stock
with the result that the authorized shares of Common Stock of the Corporation
are now classified as follows:
<TABLE>
Class Number of Shares
- -------------------------------------------------- ----------------
<S> <C>
The Chapman US Treasury Money Fund 1,000,000,000
The Chapman Institutional Cash Management Fund 1,000,000,000
DEM Equity Fund, Investor Class 1,000,000,000
DEM Equity Fund, Institutional Class 1,000,000,000
DEM Quantitative Equity Fund, Investor Class 1,000,000,000
DEM Quantitative Equity Fund, Institutional Class 1,000,000,000
DEM Multi-Manager Bond Fund, Investor Class 1,000,000,000
DEM Multi-Manager Bond Fund, Institutional Class 1,000,000,000
DEM Multi-Manager Equity Fund, Investor Class 1,000,000,000
DEM Multi-Manager Equity Fund, Institutional Class 1,000,000,000
--------------
Total 10,000,000,000
</TABLE>
SECOND: The DEM Multi-Manager Equity Fund, Investor Class shares and the DEM
Multi-Manager Equity Fund, Institutional Class shares shall be subject to all
of the provisions of the Corporation's Charter relating to stock of the
Corporation generally, and shall have the preferences, conversion and other
rights, voting powers, restrictions,
<PAGE>
limitations as to dividends, qualifications, and terms and conditions of
redemption as set forth in Article IV of the Corporation's Charter, subject
to the following:
(a) The assets attributable to the DEM Multi-Manager Equity Fund,
Investor Class (the "Investor Class") shares and the assets attributable to
the DEM Multi-Manager Equity Fund, Institutional Class (the "Institutional
Class") shares will be invested in a common investment portfolio (the "Fund").
(b) The investment income, realized and unrealized capital gains
and losses, expenses and liabilities of the Fund that are not attributable to
the Investor Class or the Institutional Class, respectively, in accordance
with law and the relevant Corporation plan adopted pursuant to Rule 18f-3 of
the Securities and Exchange Commission ("SEC") under the Investment Company
Act of 1940, as amended (the "Act"), as the plan may be amended form time to
time, or any successor or substitute plan (the " Rule 18f-3 Plan"), shall be
allocated to the Investor Class and the Institutional Class, respectively, on
the basis of the net asset value of that class in relation to the net asset
value of the Fund, or as otherwise determined by the Board of Directors in
accordance with law and the Rule 18f-3 Plan. Accordingly, the net asset
values, the dividends and distributions payable to stockholders, and the
amounts distributable to stockholders in the event of the liquidation of the
Corporation or the termination of the Fund may vary between the Investor
Class and the Institutional Class in such manner as may be determined by the
Board of Directors in accordance with law and the Rule 18f-3 Plan.
(c) Except as otherwise required by the Act, by the rules and
regulations of the SEC with respect thereto, or otherwise by law, the
stockholders of each of the Investor Class and the Institutional Class,
respectively, shall have (i) exclusive voting rights with respect to any
matter that only affects that class, including, without limitation, the
provisions of any distribution plan, as amended from time to time (a
"Distribution Plan"), adopted by the Corporation with respect to that class
pursuant to SEC Rule 12b-1 under the Act, and (ii) no voting rights with
respect to any Distribution Plan that affects one or more other classes of
Common Stock of the Corporation but not that class, or with respect to any
other matter that does not affect that class.
(d) The proceeds of the redemption of shares of the Investor Class
and the Institutional Class may be reduced by the amount of any contingent
deferred sales charge, liquidation charge, or other charge (which charges may
vary among stockholders within and between the classes) payable on such
redemption pursuant to the terms of issuance of such shares, all in
accordance with the Act, applicable SEC rules and regulations thereunder, and
applicable rules and regulations of the National Association of Securities
Dealers, Inc. ("NASD").
(e) At such times as may be determined by the Board of Directors
(or with the authorization of the Board of Directors, by the officers of the
Corporation) in accordance with the Act, applicable SEC rules and regulations
thereunder, and applicable
2
<PAGE>
rules and regulations of the NASD, and from time to time reflected in the
Corporation's registration statement (the "Corporation's Registration
Statement"), shares of the Investor Class and of the Institutional Class,
respectively, may be converted automatically into shares of the other said
class or into shares of another class of stock of the Corporation, or certain
shares of the particular class may be converted automatically into shares of
the other said class or into shares of another class of stock of the
Corporation, based on the relative net asset values of such classes at the
time of conversion, subject, however, to any conditions of conversion that
may be imposed by the Board of Directors (or with the authorization of the
Board of Directors, by the officers of the Corporation) and reflected in the
Corporation's Registration Statement. The times, terms, and conditions of
such conversion may vary within and among the classes to the extent
determined by the Board of Directors (or with the authorization of the Board
of Directors, by the officers of the Corporation) and set forth in the
Corporation's Registration Statement.
THIRD: The shares classified and reclassified hereby have been classified
and reclassified by the Board of Directors under the authority contained in
the Charter of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Secretary as of May 8, 1998.
The undersigned, Nathan A. Chapman, Jr., President of the
Corporation, hereby acknowledges in the name and on behalf of the Corporation
the foregoing Articles Supplementary to be its corporate act and further
certifies to the best of his knowledge, information and belief, that the
matters and facts set forth herein with respect to the authorization and
approval hereof are true in all material respects and that this statement is
made under the penalties of perjury.
WITNESS: THE CHAPMAN FUNDS, INC.
/s/ Earl U. Bravo, Sr. /s/ Nathan A. Chapman, Jr.
________________________ By: ___________________________
Earl U. Bravo, Sr. Nathan A. Chapman, Jr.
Secretary President
3
<PAGE>
Exhibit 1(G)
ARTICLES OF AMENDMENT
THE CHAPMAN FUNDS, INC.
THE CHAPMAN FUNDS, INC., a Maryland corporation having its
principal office in the State of Maryland in Baltimore, Maryland (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended by redesignating all
of the issued and unissued shares of DEM Quantitative Equity Fund Investor
Class Common Stock and DEM Quantitative Equity Fund Institutional Class
Common Stock of the Corporation to DEM Index Fund Investor Class Common Stock
and DEM Index Fund Institutional Class Common Stock, respectively.
SECOND: The foregoing amendment to the Charter of the Corporation was
approved by a majority of the entire Board of Directors; the foregoing
amendment is limited to a change expressly permitted by Section 2-605 of
Title II of Subtitle 6 of the Maryland General Corporation Law to be made
without action by the stockholders of the Corporation; and the Corporation is
registered as an open-ended investment company under the Investment Company
Act of 1940, as amended.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Secretary as of May 11, 1998.
The undersigned, Nathan A. Chapman, Jr., President of the
Corporation, hereby acknowledges in the name and on behalf of the Corporation
the foregoing Articles of Amendment to be its corporate act and further
certifies to the best of his knowledge, information and belief, that the
matters and facts set forth herein with respect to the authorization and
approval hereof are true in all material respects and that this statement is
made under the penalties of perjury.
WITNESS: THE CHAPMAN FUNDS, INC.
/s/EARL U. BRAVO, SR. By: /s/NATHAN A. CHAPMAN, JR.
- -------------------------- -------------------------
Earl U. Bravo, Sr. Nathan A. Chapman, Jr.
Secretary President
<PAGE>
Exhibit 5 (D)
ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
THE CHAPMAN FUNDS, INC.
DEM QUANTITATIVE EQUITY FUND
The World Trade Center-Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
October 28, 1997
Chapman Capital Management, Inc.
The World Trade Center-Baltimore
401 East Pratt street
Suite 2800
Baltimore, Maryland 21202
Ladies and Gentlemen:
This will confirm the agreement between the undersigned (the
"Corporation") and you as follows:
1. General. The Corporation is an open-end management investment
company which has multiple investment portfolios including, the DEM Quantitative
Equity Fund (the "Fund"). The Corporation proposes to engage in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and limitations specified in the
Corporation's Prospectus and Statement of Additional Information (the
"Prospectus") included in the Corporation's Registration Statement pertaining to
the Fund, as amended and/or supplemented from time to time (the "Registration
Statement"), filed under the Investment Company Act of 1940, as amended (the
"1940 Act"), and the Securities Act of 1933, as amended. Copies of the
Prospectus have been furnished to you. Any amendments to the Prospectus shall
be furnished to you promptly.
2. Advisory Services. Subject to the supervision and approval of
the Corporation's Board of Directors, you will provide investment management of
the Fund's portfolio in accordance with the Fund's investment objectives,
policies and limitations as stated in the Prospectus as from time to time in
effect. In connection therewith, you will obtain and provide investment
research and will supervise the Fund's investments and conduct a continuous
program of investment, evaluation and, if appropriate, sale and reinvestment of
the Fund's assets. You will place orders for the purchase and sale of
<PAGE>
Chapman Capital Management, Inc.
October 28, 1997
Page 2
portfolio securities and will solicit brokers to execute transactions, including
The Chapman Co., in accordance with the policies and restrictions regarding
brokerage allocations of the Fund and the Corporation. You will furnish to the
Corporation such statistical information with respect to the investments which
the Corporation may hold or contemplate purchasing as the Corporation may
reasonably request.
3. Administrative Services. You will supply office facilities, data
processing services, clerical, internal auditing services, executive and other
administrative services; provide stationery and office supplies; prepare reports
to the Fund's stockholders, tax returns and reports to and filings with the
Securities and Exchange Commission and state Blue Sky authorities; calculate the
net asset value of the Fund's shares; provide persons to serve as the
Corporation's officers at the request of the Corporation's Board of Directors
and generally assist in all aspects of the Fund's operations.
4. Assistance. You may employ or contract with other persons to
assist you in the performance of this Agreement. Such persons may include other
investment advisory or management firms and officers or employees who are
employed by both you and the Corporation. The fees or other compensation of
such persons shall be paid by you and no obligation may be incurred on the
Corporation's behalf to any such person.
5. Record Keeping and Other Information. You will create and
maintain all records required of you pursuant to your duties hereunder in
accordance with all applicable laws, rules and regulations, including records
required by Section 31(a) of the 1940 Act. All such records will be the
property of the Corporation and will be available upon request of the
Corporation for inspection, copying and use by the Corporation and will be
surrendered to the Corporation upon demand of the Corporation. Where
applicable, such records will be maintained by you for the periods and in the
places required by Rule 31a-2 under the 1940 Act. Upon termination of this
Agreement, you will promptly surrender all such records to the Corporation or
such person as the Corporation may designate.
6. Fees. In consideration of the advisory services rendered
pursuant to this Agreement, the Corporation, on behalf of the Fund, will pay you
on the first business day of each month a fee at the annual rate of .9 of 1% of
the value of the Fund's average weekly net assets during the preceding month.
In consideration of the administrative services rendered pursuant to this
Agreement, the Fund will pay you on the first business day of each month a fee
at the annual rate of .15 of 1% of the value of the Fund's average weekly net
assets during the preceding month. Net asset value shall be computed in the
manner, on such days and at such time or times as described in the
<PAGE>
Chapman Capital Management, Inc.
October 28, 1997
Page 3
Prospectus from time to time. The fee for the period from the effective date of
the Registration Statement to the end of the first month thereafter shall be
pro-rated according to the proportion which such period bears to the full
monthly period, and upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
7. Expenses:
(a) You will bear all expenses in connection with the
performance of your services under this Agreement. All other expenses to be
incurred in the operation of the Fund will be borne by the Fund, except to the
extent specifically assumed by you. The expenses to be borne by the Fund
include, without limitation, the following: organizational costs, taxes,
interest, brokerage fees and commissions and other expenses in any way related
to the execution, recording and settlement of portfolio security transactions,
fees of Directors who are not also your officers, Securities and Exchange
Commission fees, state Blue Sky qualification fees, charges of custodians,
transfer and dividend paying agents' premiums for directors and officers
liability insurance, costs of fidelity bonds, industry association fees, outside
auditing and legal expenses, costs of maintaining corporate existence, costs of
maintaining required books and accounts, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
stockholders' reports and meetings, costs of preparing, printing and mailing
share certificates, proxy statements and prospectuses, and any extraordinary
expenses.
(b) If in any fiscal year the aggregate expenses of a Fund
(including fees paid to you pursuant to this Agreement, but excluding interest
on borrowings, taxes, brokerage and, with the prior written consent of the
necessary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, the Fund may
deduct from the payment to be made to you under this Agreement, or you will
bear, such excess expense to the extent required by state law. Your obligation
pursuant hereto will be limited to the amount of your fees hereunder. Such
deduction or payment, if any, will be estimated, reconciled and effected or
paid, as the case may be, on a monthly basis.
8. Liability. You shall exercise your best judgment in rendering
the services to be provided to the Fund. The Corporation, on behalf of the
Fund, agrees as an inducement to you and to others who may assist you in
providing services to the Fund that you and such other persons shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Corporation and the Fund and the Corporation agree to indemnify
and hold harmless you and such other persons against
<PAGE>
Chapman Capital Management, Inc.
October 28, 1997
Page 4
and from any claims, liabilities, actions, suits, proceedings, judgments or
damages (and expenses incurred in connection therewith, including the reasonable
cost of investigating or defending same, including, but not limited to
attorneys' fees) arising out of any such error of judgment or mistake of law or
loss; provided, however, that the Corporation's obligation with respect to such
claims, liabilities, actions, suits, proceedings, judgments or damages (and
expenses incurred in connection therewith, including the reasonable cost of
investigating or defending same, including, but not limited to attorneys' fees)
arising out of any such error of judgment or mistake of law or loss shall be
limited to the "assets belonging to" (as such expression is defined in the
Corporation's charter) the Fund and further provided that nothing herein shall
be deemed to protect or purport to protect you or any other such person against
any liability to the Corporation or to its security holders to which you or they
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties hereunder, or by reason of reckless
disregard of the obligations and duties hereunder.
9. Other Accounts. The Corporation understands that you and other
persons with whom you contract to provide the services hereunder may from time
to time act as investment adviser to one or more other investment companies and
fiduciary or other managed accounts, and the Corporation has no objection to
your or their so acting. When purchase or sale of securities of the same issuer
is suitable for the investment objectives of two or more companies or accounts
managed by you or such other persons which have available funds for investment,
the available securities will be allocated in a manner believed by you and such
other persons to be equitable to the Fund and any other account. It is
recognized that in some cases this procedure may adversely affect the price paid
or received by the Fund or the size of the position obtainable for or disposed
of by the Fund.
In addition, it is understood that you and the persons with whom you
contract to assist in the performance of your duties hereunder will not devote
their full time to such service and nothing contained herein shall be deemed to
limit or restrict your or their right to engage in and devote time and attention
to similar or other businesses.
10. Term. This Agreement shall continue with respect to the Fund
until December 29, 1998 and thereafter shall continue automatically for
successive annual periods ending on the anniversary of such date, provided such
continuance with respect to the Fund is specifically approved at least annually
by the Corporation's Board of Directors or a vote of the lesser of (a) 67% of
the shares of the Fund represented at a meeting if holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund, provided that in either event
its continuance also is approved by a majority of the Corporation's Directors
who are not "interested persons" (as defined in the 1940 Act) of any party to
<PAGE>
Chapman Capital Management, Inc.
October 28, 1997
Page 5
this Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable with respect to the Fund
without penalty, on 60 days' notice, by you or by the Corporation's Board of
Directors or by vote of the lesser of (a) 67% of the shares of the Fund
represented at a meeting if holders of more than 50% of the outstanding shares
of the Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund. This Agreement will terminate automatically in
the event of its assignment (as defined in the 1940 Act).
11. "Chapman," "DEM Quantitative" and "DEM" Names. The Corporation
recognizes that from time to time your directors, officers and employees may
serve as directors, trustees, partners, officers and employees of other
corporations, business trusts, partnerships or other entities (including other
investment companies) and that such other entities may include the name
"Chapman," "DEM Quantitative" and/or "DEM" as part of their name. You or your
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the
Corporation agrees that, at your request, the Corporation will take all
necessary action to change the name of the Fund to a name not including
"Chapman," "DEM Quantitative" and/or "DEM" in any form or combination of words.
<PAGE>
Chapman Capital Management, Inc.
October 28, 1997
Page 6
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE CHAPMAN FUNDS, INC., on
behalf of DEM QUANTITATIVE
EQUITY FUND
/s/ Nathan A. Chapman, Jr.
---------------------------------
Name: Nathan A. Chapman, Jr.,
Title: President
Accepted:
CHAPMAN CAPITAL MANAGEMENT, INC.
/s/ Nathan A. Chapman, Jr.
- ---------------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
Exhibit 6 (D)
DISTRIBUTION AGREEMENT
THE CHAPMAN FUNDS, INC.
DEM QUANTITATIVE EQUITY FUND
The World Trade Center-Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
October 28, 1997
The Chapman Co.
The World Trade Center -- Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, The Chapman Funds, Inc. an open-end,
diversified, management investment company organized as a corporation under the
laws of the State of Maryland (the "Corporation"), on behalf of DEM Quantitative
Equity Fund, a series of the Corporation (the "Fund"), has agreed that The
Chapman Co. shall be, for the period of this Agreement, the distributor of
shares of DEM Quantitative Equity Fund Investor Class and Institutional Class
Common Stock, par value $.001 per share ("Investor Shares" and "Institutional
Shares," respectively).
1. Services as Distributor
1.1 The Chapman Co. will act as agent for the distribution of the
Investor Shares and Institutional Shares covered by the post-effective amendment
to the Fund's registration statement on Form N-1A, under the Securities Act of
1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as
amended (the "1940 Act") pertaining to the Investor Shares and the Institutional
Shares of the Fund (the post-effective amendment to the registration statement,
together with the prospectuses (the "prospectus") and statement of additional
information (the "statement of additional information") included as part
thereof, any amendments or supplements thereto, or material incorporated by
reference into the prospectus or statement of additional information, being
referred to collectively in this Agreement as the "registration statement").
<PAGE>
The Chapman Co.
October 28, 1997
Page 2
1.2 The Chapman Co. agrees to use appropriate efforts to solicit
orders for the sale of the Investor Shares and Institutional Shares at such
prices and on the terms and conditions set forth in the registration statement
and will undertake such advertising and promotion as it believes is reasonable
in connection with such solicitation.
1.3 All activities by The Chapman Co. as distributor of the Investor
Shares and Institutional Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted by the Securities and Exchange Commission (the "SEC") or by any
securities association registered under the Securities Exchange Act of 1934, as
amended.
1.4 The Chapman Co. agrees to (a) provide one or more persons during
normal business hours to respond to telephone questions concerning the Fund and
its performance and (b) perform such other services as are described in the
registration statement and in the Investor Class Distribution Plan (the
"Investor Class Plan") and in the Institutional Class Distribution Plan (the
"Institutional Class Plan"), each adopted by the Fund pursuant to Rule 12b-1
under the 1940 Act ("Rule 12b-1") to be performed by The Chapman Co., without
limitation, distributing and receiving subscription order forms and receiving
written redemption requests.
1.5 (a) The Chapman Co. will be paid fees under the Investor Class
Plan to compensate The Chapman Co. or enable The Chapman Co. to compensate other
persons, ("Service Providers"), including any other distributor of Investor
Shares, for providing: (i) services primarily intended to result in the sale of
Investor Shares ("Investor Selling Services"), and (ii) stockholder servicing,
administrative and accounting services ("Investor Administrative Services" and
collectively with Investor Selling Services, "Investor Services"). Investor
Selling Services may include, but are not limited to: the printing and
distribution to prospective investors in Investor Shares of prospectuses and
statements of additional information describing the Fund; the preparation,
including printing, and distribution of sales literature, reports and media
advertisements relating to the Investor Shares; providing telephone services
relating to the Fund; distributing Investor Shares; costs relating to the
formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising, and related travel and
entertainment expenses; and costs involved in obtaining whatever information,
analyses and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable. In
2
<PAGE>
The Chapman Co.
October 28, 1997
Page 3
providing compensation for Investor Selling Services in accordance with the
Investor Class Plan, The Chapman Co. is expressly authorized (i) to make, or
cause to be made, payments reflecting an allocation of overhead and other office
expenses related to providing Investor Services; (ii) to make, or cause to be
made, payments, or to provide for the reimbursement of expenses of, persons who
provide support services in connection with the distribution of Investor Shares
including, but not limited to, office space and equipment, telephone facilities,
answering routine inquiries regarding the Fund, and providing any other Investor
Service; and (iii) to make, or cause to be made, payments to compensate selected
dealers or other authorized persons for providing any Investor Services.
Administrative Services may include, but are not limited to, (i) responding to
inquiries of prospective investors regarding the Fund; (ii) services to
stockholders not otherwise required to be provided by the Fund's custodian or
any co-administrator; (iii) establishing and maintaining accounts and records on
behalf of Fund stockholders; (iv) processing purchase, redemption and exchange
transactions in Investor Shares; and (v) other similar services not otherwise
required to be provided by the Fund's transfer agent or any co-administrator.
Payments under the Investor Class Plan are not tied exclusively to the selling
and administrative expenses actually incurred by The Chapman Co. or any Service
Provider, and the payments may exceed expenses actually incurred by The Chapman
Co. and/or a Service Provider. Furthermore, any portion of any fee paid to The
Chapman Co. or to any of its affiliates by the Fund or any of their past profits
or other revenue may be used in their sole discretion to provide services to
stockholders of the Fund or to foster distribution of Investor Shares.
(b) Pursuant to the Investor Class Plan, the Fund will pay The
Chapman Co. on the first business day of each quarter a fee for the previous
quarter calculated at an annual rate of up to .75% of the average daily net
assets of the Investor Shares of the Fund consisting of up to .50% as
compensation for Investor Selling Services and .25% as compensation for Investor
Administrative Services provided by The Chapman Co. to the Investor Shares
pursuant to this Agreement.
1.6 (a) The Chapman Co. will be paid fees under the
Institutional Class Plan to compensate The Chapman Co. or enable The Chapman Co.
to compensate other persons, including any other distributor of the
Institutional Shares or institutional stockholders of record of the
Institutional Shares, including but not limited to retirement plans,
broker-dealers, depository institutions, and other financial intermediaries
("Institutions"), who own Institutional Shares on behalf of their customers,
clients or (in the case of retirement plans) participants ("Customers") and
companies providing certain services to Customers (collectively with
Institutions, "Service
3
<PAGE>
The Chapman Co.
October 28, 1997
Page 4
Organizations"), for providing (i) services primarily intended to result in the
sale of the Institutional Shares ("Institutional Selling Services"), and (ii)
stockholder servicing, administrative and accounting services to Customers
("Institutional Administrative Services").
(b) The annual fee paid to The Chapman Co. with respect to
Institutional Selling Services will compensate The Chapman Co., or allow The
Chapman Co. to compensate Service Organizations, to cover certain expenses
primarily intended to result in the sale of the Institutional Shares, including,
but not limited to: (i) costs of payments made to employees that engage in the
distribution of the Institutional Shares; (ii) payments made to, and expenses
of, persons who provide support services in connection with the distribution of
the Institutional Shares, including, but not limited to, office space and
equipment, telephone facilities, processing stockholder transactions and
providing any other stockholder services not otherwise provided by the Fund's
transfer agent; (iii) costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising; (iv) costs of printing and distributing prospectuses, statements of
additional information and reports of the Fund to prospective holders of the
Institutional Shares; (v) costs involved in preparing, printing and distributing
sales literature pertaining to the Fund, and (vi) costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Fund may, from time to time, deem advisable.
(c) The annual fee paid to The Chapman Co. with respect to
Institutional Administrative Services will compensate The Chapman Co., or allow
The Chapman Co. to compensate Service Organizations, for personal service and/or
the maintenance of Customer accounts, including but not limited to (i)
responding to Customer inquiries, (ii) providing information on Customer
investments, and (iii) providing other stockholder liaison services and for
administrative and accounting services to Customers, including, but not limited
to: (a) aggregating and processing purchase and redemption requests from
Customers and placing net purchase and redemption orders with the Fund's
distributor or transfer agent; (b) providing Customers with a service that
invests the assets of their accounts in the Institutional Shares; (c) processing
dividend payments from the Fund on behalf of Customers; (d) providing
information periodically to Customers showing their positions in the
Institutional Shares; (e) arranging for bank wires; (f) providing sub-accounting
with respect to the Institutional Shares beneficially owned by Customers or the
information to the Fund necessary for
4
<PAGE>
The Chapman Co.
October 28, 1997
Page 5
sub-accounting; (g) forwarding stockholder communications from the Fund (for
example, proxies, stockholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers, if required
by law and, (h) providing other similar services to the extent permitted under
applicable statutes, rules and regulations. Payments under the Institutional
Class Plan are not tied exclusively to the selling and administrative expenses
actually incurred by The Chapman Co. or any Service Organization, and the
payments may exceed expenses actually incurred by The Chapman Co. or any Service
Organization. Furthermore, any portion of any fee paid to The Chapman Co. or to
any of its affiliates by the Fund or any of their past profits or other revenue
may be used in their sole discretion to provide services to stockholders of the
Fund or to foster distribution of the Institutional Shares.
(d) Pursuant to the Institutional Class Plan, the Fund will pay
The Chapman Co. on the first business day of each quarter a fee for the previous
quarter calculated at an annual rate of up to .25% of the average daily net
assets of the Institutional Shares of the Fund for Selling Services and
Administrative Services provided by The Chapman Co. or any Service Organizations
to the Institutional Shares pursuant to this Agreement.
1.7 The Chapman Co. acknowledges that, whenever in the judgment of
the Corporation's officers such action is warranted for any reason, including,
without limitation, market, economic or political conditions, those officers may
decline to accept any orders for, or make any sales of, the Investor Shares or
Institutional Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.8 The Chapman Co. will transmit any orders received by it for
purchase or redemption of the Investor Shares and Institutional Shares to
Fund/Plan Services, Inc. ("Fund/Plan"), the Fund's transfer and dividend
disbursing agent, or its successor of which The Chapman Co. is notified in
writing. The Fund will promptly advise The Chapman Co. of the determination to
cease accepting orders or selling Investor Shares or Institutional Shares or to
recommence accepting orders or selling Investor Shares or Institutional Shares.
The Fund (or its agent) will confirm orders for Investor Shares and
Institutional Shares placed through The Chapman Co. upon their receipt, or in
accordance with any exemptive order of the SEC, and will make appropriate book
entries pursuant to the instructions of The Chapman Co. The Chapman Co. agrees
to cause payment for Investor Shares and Institutional Shares and instructions
as to book entries to be delivered promptly to the Fund (or its agent).
5
<PAGE>
The Chapman Co.
October 28, 1997
Page 6
1.9 The outstanding Investor Shares and Institutional Shares are
subject to redemption as set forth in the prospectus. The price to be paid to
redeem the Investor Shares and Institutional Shares will be determined as set
forth in the prospectus.
1.10 The Chapman Co. will prepare and deliver reports to the Treasurer
of the Corporation on a regular, at least quarterly, basis, showing the
distribution expenses incurred pursuant to this Agreement, the Investor Class
Plan and the Institutional Class Plan adopted by the Fund pursuant to Rule 12b-1
and the purposes therefor, as well as any supplemental reports as the Directors
from time to time may reasonably request.
1.11 The Chapman Co. will create and maintain all records required of
it pursuant to its duties hereunder in accordance with all applicable laws,
rules and regulations, including records required by Section 31(a) of the 1940
Act. All such records will be the property of the Corporation and will be
available upon request of the Corporation for inspection, copying and use by the
Corporation and will be surrendered to the Corporation promptly upon demand of
the Corporation. Where applicable, such records will be maintained by The
Chapman Co. for the periods and in the places required by Rule 31a-2 under the
1940 Act. Upon termination of this Agreement, The Chapman Co. will promptly
surrender all such records to the Corporation or such person as the Corporation
may designate.
2. Duties of the Fund
2.1 The Corporation, on behalf of the Fund, agrees at its own expense
to execute any and all documents, to furnish any and all information and to take
any other actions that may be reasonably necessary in connection with the
qualification of the Investor Shares and Institutional Shares for sale in those
states that The Chapman Co. may designate.
2.2 The Corporation shall furnish from time to time, for use in
connection with the sale of the Investor Shares and Institutional Shares, such
informational reports with respect to the Fund and the Investor Shares and
Institutional Shares as The Chapman Co. may reasonably request, all of which
shall be signed by one or more of the Corporation's duly authorized officers;
and the Corporation warrants that the statements contained in any such reports,
when so signed by one or more of the Corporation's officers, shall be true and
correct. The Corporation shall also furnish The Chapman Co. upon request with:
(a) annual audits of the Fund's books and accounts
6
<PAGE>
The Chapman Co.
October 28, 1997
Page 7
made by independent public accountants regularly retained by the Corporation,
(b) semiannual unaudited financial statements pertaining to the Fund, (c)
quarterly earnings statements prepared by the Corporation, (d) a monthly
itemized list of the securities held by the Fund, (e) monthly balance sheets as
soon as practicable after the end of each month and (f) from time to time such
additional information regarding the Fund's financial condition as The Chapman
Co. may reasonably request.
3. Representations and Warranties
The Corporation, on behalf of the Fund, represents to The Chapman Co.
that the registration statement has been or will be carefully prepared in
conformity with the requirements of the 1933 Act, the 1940 Act and the rules and
regulations of the SEC thereunder. The Fund represents and warrants to The
Chapman Co. that any registration statement pertaining to the Investor Shares
and/or Institutional Shares, or prospectus and statement of additional
information contained therein, when such registration statement becomes
effective, will include all statements required to be contained therein in
conformity with the 1933 Act, the 1940 Act and the rules and regulations of the
SEC; that all statements of fact contained in any registration statement with
respect to the Investor Shares and/or Institutional Shares, prospectus or
statement of additional information will be true and correct when such
registration statement becomes effective; and that neither any registration
statement nor any prospectus or statement of additional information with respect
to the Investor Shares and/or Institutional Shares when such registration
statement becomes effective will include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the Investor Shares
and/or Institutional Shares. The Chapman Co. may, but shall not be obligated
to, propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus or statement of
additional information as, in the light of future developments, may, in the
opinion of The Chapman Co.'s counsel, be necessary or advisable. If the
Corporation shall not propose such amendment or amendments and/or supplement or
supplements within fifteen (15) days after receipt by the Corporation of a
written request from The Chapman Co. to do so, The Chapman Co. may, at its
option, terminate this Agreement. The Corporation shall not file any amendment
to any registration statement or supplement to any prospectus or statement of
additional information without giving The Chapman Co. reasonable notice thereof
in advance; provided, however, that nothing contained in this Agreement shall in
any way limit the Corporation's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus or statement of
additional information with respect
7
<PAGE>
The Chapman Co.
October 28, 1997
Page 8
to the Investor Shares and/or Institutional Shares, of whatever character, as
the Corporation may deem advisable, such right being in all respects absolute
and unconditional.
4. Indemnification
4.1 The Corporation, on behalf of the Fund, agrees to indemnify,
defend and hold The Chapman Co., its several officers and directors, and any
person who controls The Chapman Co. within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
which The Chapman Co., its officers and directors, or any such controlling
person, may incur under the 1933 Act, the 1940 Act or common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any registration statement, any prospectus or any
statement of additional information with respect to the Investor Shares and/or
Institutional Shares, or arising out of or based upon any omission or alleged
omission to state a material fact required to be stated in any registration
statement, any prospectus or any statement of additional information with
respect to the Investor Shares and/or Institutional Shares, or necessary to make
the statements in any of them not misleading; provided, however, that the
Corporation's agreement, on behalf of the Fund, to indemnify The Chapman Co.,
its officers, or directors, and any such controlling person, and any claims,
demands, liabilities or expenses arising out of or based upon such indemnity
shall be limited to the "assets belonging to" (as such expression is defined in
the Corporation's charter) the Fund; and further provided that the Corporation's
agreement, on behalf of the Fund, to indemnify The Chapman Co., its officers or
directors, and any such controlling person shall not be deemed to cover any
claims, demands, liabilities or expenses arising out of or based upon any
statements or representations made by The Chapman Co. or its representatives or
agents other than such statements and representations as are contained in any
registration statement, prospectus or statement of additional information with
respect to the Investor Shares and/or Institutional Shares and in such financial
and other statements as are furnished to The Chapman Co. pursuant to paragraph
2.2 hereof; and further provided that the Corporation's agreement, on behalf of
the Fund, to indemnify The Chapman Co. and the Corporation's representations and
warranties, on behalf of the Fund, hereinbefore set forth in paragraph 3 shall
not be deemed to cover any liability to the Fund or its stockholders to which
The Chapman Co. would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of The
Chapman Co.'s reckless disregard of its obligations and duties
8
<PAGE>
The Chapman Co.
October 28, 1997
Page 9
under this Agreement. The Corporation's agreement, on behalf of the Fund, to
indemnify The Chapman Co., its officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Corporation's being
notified of any action brought against The Chapman Co., its officers or
directors, or any such controlling person, such notification to be given by
letter or by telegram addressed to the Corporation at its principal office in
Baltimore, Maryland and sent to the Corporation by the person against whom such
action is brought, within ten (10) days after the summons or other first legal
process shall have been served. The failure to so notify the Corporation of any
such action shall not relieve the Corporation from any liability that the
Corporation may have to the person against whom such action is brought by reason
of any such untrue or alleged untrue statement or omission or alleged omission
otherwise than on account of the Corporation's indemnity agreement, on behalf of
the Fund, contained in this paragraph 4.1. The Corporation's indemnification
agreement, on behalf of the Fund, contained in this paragraph 4.1 and the
Corporation's representations and warranties, on behalf of the Fund, in this
Agreement shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of The Chapman Co., its officers and
directors, or any controlling person, and shall survive the delivery of any of
the Corporation's shares. This agreement of indemnity will inure exclusively to
The Chapman Co.'s benefit, to the benefit of its several officers and directors,
and their respective estates, and to the benefit of the controlling persons and
their successors. The Corporation, on behalf of the Fund, agrees to notify The
Chapman Co. promptly of the commencement of any litigation or proceedings
against the Corporation or any of its officers or directors in connection with
the issuance and sale of any of the Investor Shares and/or Institutional Shares.
4.2 The Chapman Co. agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation or the Fund within the meaning of Section 15 of the 1933 Act, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the costs of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) that the
Corporation, its officers or directors or any such controlling person may incur
under the 1933 Act, the 1940 Act or common law or otherwise, but only to the
extent that such liability or expense incurred by the Corporation, its officers
or directors or such controlling person resulting from such claims or demands
shall arise out of or be based upon (a) any unauthorized sales literature,
advertisements, information, statements or representations or (b) any untrue or
alleged untrue statement of a material fact contained in information furnished
in writing by The Chapman Co. to the Corporation specifically for use in the
registration statement
9
<PAGE>
The Chapman Co.
October 28, 1997
Page 10
and used in the answers to any of the items of the registration statement or in
the corresponding statements made in the prospectus or statement of additional
information, or shall arise out of or be based upon any omission or alleged
omission to state a material fact in connection with such information furnished
in writing by The Chapman Co. to the Corporation and required to be stated in
such answers or necessary to make such information not misleading. The Chapman
Co.'s agreement to indemnify the Corporation, its officers and directors, and
any such controlling person, as aforesaid, is expressly conditioned upon The
Chapman Co.'s being notified of any action brought against the Corporation, its
officers or directors, or any such controlling person, such notification to be
given by letter or telegram addressed to The Chapman Co. at its principal office
in Baltimore, Maryland and sent to The Chapman Co. by the person against whom
such action is brought, within ten (10) days after the summons or other first
legal process shall have been served. The failure to so notify The Chapman Co.
of any such action shall not relieve The Chapman Co. from any liability that The
Chapman Co. may have to the Corporation, its officers or directors, or to such
controlling person by reason of any such untrue or alleged untrue statement or
omission or alleged omission otherwise than on account of The Chapman Co.'s
indemnity agreement contained in this paragraph 4.2. The Chapman Co. agrees to
notify the Corporation promptly of the commencement of any litigation or
proceedings against The Chapman Co. or any of its officers or directors in
connection with the issuance and sale of any of the Investor Shares and/or
Institutional Shares.
4.3 In case any action shall be brought against any indemnified party
under paragraph 4.1 or 4.2, and it shall timely notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish to do so, to assume the
defense thereof with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying party and the
indemnified party shall have agreed to the retention of such counsel or (ii) the
indemnified party shall have concluded reasonably that representation of the
indemnifying party and the indemnified party by the same counsel would be
inappropriate due to actual or potential differing interests between them in the
conduct of the defense of such action.
10
<PAGE>
The Chapman Co.
October 28, 1997
Page 11
5. Effectiveness of Registration
None of the Investor Shares or Institutional Shares shall be offered
by either The Chapman Co. or the Corporation under any of the provisions of this
Agreement and no orders for the purchase or sale of the Investor Shares or
Institutional Shares shall be accepted by the Corporation if and so long as the
effectiveness of the registration statement shall be suspended under any of the
provisions of the 1933 Act or if and so long as the prospectus is not on file
with the SEC; provided, however, that nothing contained in this paragraph 5
shall in any way restrict or have an application to or bearing upon the
Corporation's obligation to repurchase its shares from any stockholder in
accordance with the provisions of the prospectus or statement of additional
information.
6. Notice to The Chapman Co.
The Corporation, on behalf of the Fund, agrees to advise The Chapman
Co. immediately in writing:
(a) of any request by the SEC for amendments to the registration
statement, prospectus or statement of additional information then in effect
with respect to the Investor Shares and/or Institutional Shares or for
additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement, prospectus or
statement of additional information then in effect with respect to the
Investor Shares and/or Institutional Shares or the initiation of any
proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement, prospectus
or statement of additional information then in effect with respect to the
Investor Shares and/or Institutional Shares or that requires the making of
a change in such registration statement, prospectus or statement of
additional information in order to make the statements therein not
misleading; and
(d) of all actions of the SEC with respect to any amendment to
any registration statement, prospectus or statement of additional
information with respect to the Investor Shares or Institutional Shares
which may from time to time be filed with the SEC.
11
<PAGE>
The Chapman Co.
October 28, 1997
Page 12
7. Term of Agreement
This Agreement shall continue until December 29, 1998 with respect to
each of the Investor Shares and Institutional Shares, and thereafter shall
continue automatically for successive annual periods ending on the anniversary
of such date, provided such continuance is specifically approved at least
annually by (a) a vote of a majority of the Corporation's Board of Directors or
(b) a vote of a majority (as defined in the 1940 Act) of each of the outstanding
Investor Shares and Institutional Shares, respectively, provided that the
continuance is also approved by a vote of a majority of the Corporation's
Directors who are not interested persons (as defined in the 1940 Act) of the
Corporation and who have no direct or indirect financial interest in the
operation of the Investor Class Plan or the Institutional Class Plan, in this
Agreement or in any agreement related to the Investor Class Plan or
Institutional Class Plan ("Qualified Directors"), by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable with respect to the Investor Shares or the Institutional Shares
without penalty (a) on sixty (60) days' written notice, by a vote of a majority
of the Fund's Qualified Directors or by vote of a majority (as defined in the
1940 Act) of the outstanding Investor Shares or Institutional Shares, as
applicable, or (b) on ninety (90) days' written notice by The Chapman Co. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
8. Amendments
This Agreement may not be amended to increase materially the amount of
the fee with respect to the Investor Shares and/or Institutional Shares
described in Section 1.5 above without approval of at least a majority (as
defined in the 1940 Act) of the outstanding Investor Shares and/or Institutional
Shares, respectively. In addition, all material amendments to this Agreement
must be approved by a vote of the Corporation's Board of Directors, and by a
vote of a majority of the Qualified Directors, cast in person at a meeting
called for the purpose of voting on the approval.
12
<PAGE>
The Chapman Co.
October 28, 1997
Page 13
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
THE CHAPMAN FUNDS, INC., on
behalf of DEM Quantitative Equity Fund
By:/S/ Nathan A. Chapman, Jr.
---------------------------
Name: Nathan A. Chapman, Jr.
Title: President
Accepted:
THE CHAPMAN CO.
By: /s/ Nathan A. Chapman, Jr.
----------------------------
Name: Nathan A. Chapman, Jr.
Title: President
13
<PAGE>
Exhibit 10
May 21, 1998
The Chapman Funds, Inc.
401 E. Pratt Street
Suite 2800
Baltimore, Maryland 21202
Re: The Chapman Funds, Inc.
DEM Index Fund
-----------------------
Ladies and Gentlemen:
We have acted as counsel for The Chapman Funds, Inc., a
Maryland corporation (the "Company"), in connection with the issuance of shares
of its common stock, par value $.001 per share, of DEM Index Fund, Investor
Class and DEM Index Fund, Institutional Class (collectively the "Shares").
As counsel for the Company, we are familiar with its Charter
and Bylaws. We have examined Post-Effective Amendment No. 14 to its Registration
Statement on Form N-1A (Investment Company Act File No. 811-5697), including the
prospectus and statement of additional information contained therein,
substantially in the form in which it is to be filed with the Securities and
Exchange Commission (the "Registration Statement"). We have further examined and
relied upon a certificate of the Maryland State Department of Assessments and
Taxation to the effect that the Company is duly incorporated and existing under
the laws of the State of Maryland and is in good standing and duly authorized to
transact business in the State of Maryland.
We have also examined and relied upon such corporate records
of the Company and other documents and certificates with respect to factual
matters as we have deemed necessary to render the opinions expressed herein. We
have assumed, without independent verification, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
<PAGE>
The Chapman Funds, Inc.
May 21, 1998
Page 2
Based on such examination, we are of the opinion that:
1. The one Investor Class Share and the one
Institutional Class Share currently issued and
outstanding have been validly and legally issued and
are fully paid and nonassessable.
2. The Shares of common stock of DEM Index Fund,
Investor Class and DEM Index Fund, Institutional
Class to be offered for sale pursuant to the
Registration Statement are, to the extent of the
number of Shares of each portfolio authorized to be
issued by the Company in its Charter, duly authorized
and, when sold, issued and paid for as contemplated
by the Registration Statement, will have been validly
and legally issued and will be fully paid and
nonassessable.
This letter expresses our opinion with respect to the Maryland
General Corporation Law governing matters such as due organization and the
authorization and issuance of stock. It does not extend to the securities or
"blue sky" laws of Maryland, to federal securities laws or to other laws.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not hereby admit that we
are "experts" within the meaning of the term "expert" as used in the Securities
Act of 1933, as amended, or the rules and regulations of the Commission issued
thereunder. This opinion may not be relied upon by any other person or for any
other purpose without our prior written consent.
Very truly yours,
/s/ VENABLE, BAETJER AND HOWARD, LLP
<PAGE>
Exhibit 15(c)
THE CHAPMAN FUNDS, INC.
DEM QUANTITATIVE EQUITY FUND INVESTOR CLASS
STOCKHOLDER SERVICING AND DISTRIBUTION PLAN
This Stockholder Servicing and Distribution Plan ("Plan") is
adopted by The Chapman Funds, Inc., a corporation organized under the laws of
State of Maryland (the "Fund"), with respect to the DEM Quantitative Equity
Fund Investor Class Common Stock, par value $.001 per share, of the Fund (the
"Shares") pursuant to Rule 12b-1 (the "Rule") under the Investment Company
Act of 1940, as amended (the "1940 Act"), subject to the following terms and
conditions:
Section 1. Services Payable under the Plan.
(a) The Chapman Co. will be paid fees under the Plan to compensate
The Chapman Co. or enable The Chapman Co. to compensate other persons,
("Service Providers"), including any other distributor of the Shares, for
providing: (i) services primarily intended to result in the sale of the
Shares ("Selling Services") and (ii) stockholder servicing, administrative
and accounting services ("Administrative Services" and collectively with
Selling Services, "Services"). Selling Services may include, but are not
limited to: the printing and distribution to prospective investors in the
Shares of prospectuses and statements of additional information describing
the Fund; the preparation, including printing, and distribution of sales
literature, reports and media advertisements relating to the Shares;
providing telephone services relating to the Fund; distributing the Shares;
costs relating to the formulation and implementation of marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising,
and related travel and entertainment expenses; and costs involved in
obtaining whatever information, analyses and reports with respect to
marketing and promotional activities that the Fund may, from time to time,
deem advisable. In providing compensation for Selling Services in accordance
with the Plan, The Chapman Co. is expressly authorized (i) to make, or cause
to be made, payments reflecting an allocation of overhead and other office
expenses related to providing Services; (ii) to make, or cause to be made,
payments, or to provide for the reimbursement of expenses of, persons who
provide support services in connection with the distribution of the Shares
including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Fund, and providing any
other Service; and (iii) to make, or cause to be made, payments to compensate
selected dealers or other authorized persons for providing any Services.
Administrative Services may include, but are not limited to, (i) responding
to inquiries of prospective investors regarding the Fund; (ii) services to
stockholders not otherwise required to be provided by the Fund's custodian or
any co-administrator; (iii) establishing and maintaining accounts and records
on behalf of Fund stockholders; (iv) processing purchase, redemption and
exchange transactions in Shares; and (v) other similar services not otherwise
required to be provided by the Fund's transfer agent or any co-administrator.
Payments under the Plan are not tied exclusively to the selling and
administrative expenses actually incurred by The Chapman Co. or any Service
Provider, and the payments may exceed expenses actually incurred by The
Chapman Co. and/or a Service Provider. Furthermore, any portion of any fee
paid to The Chapman Co. or to any of its affiliates by the Fund or any of
their past profits or other revenue
<PAGE>
may be used in their sole discretion to provide services to stockholders of the
Fund or to foster distribution of the Shares.
Section 2. Amount of Payments.
The Fund will pay The Chapman Co. on the first business day of each
quarter a fee for the previous quarter calculated at an annual rate of up to
.75% of the average daily net assets of the Shares consisting of up to .50%
as compensation for Selling Services and .25% as compensation for
Administrative Services provided by The Chapman Co. or any Service Providers
to the Shares pursuant to this Agreement.
Section 3. Approval of Plan.
Neither this Plan nor any related agreements will take effect until
approved by a majority of (a) the full Board of Directors of the Fund and (b)
those Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreements related to it (the "Independent Directors"), cast in person at a
meeting called for the purpose of voting on this Plan and the related
agreements.
Section 4. Continuance of Plan.
This Plan will continue in effect with respect to the Shares from
year to year so long as its continuance is specifically approved annually by
vote of the Fund's Board of Directors in the manner described in Section 3(a)
and 3(b) above. The Fund's Board of Directors will evaluate the
appropriateness of this Plan and its payment terms on a continuing basis and
in doing so will consider all relevant factors, including the types and
extent of Selling Services and Administrative Services provided by The
Chapman Co. and/or Service Providers and amounts The Chapman Co. and/or
Service Providers receive under this Plan.
Section 5. Termination.
This Plan may be terminated at any time with respect to the Shares
by vote of a majority of the Independent Directors or by a vote of a majority
of the outstanding voting Shares.
Section 6. Amendments.
This Plan may not be amended to increase materially the amount of
the fees described in Section 1 above with respect to the Shares without
approval of at least a majority of the outstanding voting Shares. In
addition, all material amendments to this Plan must be approved in the manner
described in Section 3(a) and 3(b) above.
2
<PAGE>
Section 7. Selection of Certain Directors.
While this Plan is in effect with respect to the Fund, the
selection and nomination of the Fund's Directors who are not interested
persons of the Fund will be committed to the discretion of the Directors then
in office who are not interested persons of the Fund.
Section 8. Written Reports.
In each year during which this Plan remains in effect with respect
to the Fund, any person authorized to direct the disposition of monies paid
or payable by the Fund pursuant to the Plan or any related agreement will
prepare and furnish to the Fund's Board of Directors, and the Board will
review, at least quarterly, written reports, complying with the requirements
of the Rule, which set out the amounts expended under this Plan and the
purposes for which those expenditures were made.
Section 9. Preservation of Materials.
The Fund will preserve copies of this Plan, any agreement relating
to this Plan and any report made pursuant to Section 8 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of this Plan, the agreement or the report.
Section 10. Meaning of Certain Terms.
As used in this Plan, the terms "interested person" and "majority
of the outstanding voting securities" will be deemed to have the same
meanings that those terms have under the 1940 Act and the rules and
regulations under the 1940 Act, subject to any exemption that may be granted
to the Fund under the 1940 Act by the Securities and Exchange Commission.
Section 11. Date of Effectiveness.
This Plan will become effective as of the date the Fund first
commences its investment operations.
IN WITNESS WHEREOF, the Fund has executed this Plan as of the 28th day
of October, 1997.
THE CHAPMAN FUNDS, INC.
/s/ Nathan A. Chapman, Jr.
--------------------------------
Name: Nathan A. Chapman, Jr.
Title: President
3
<PAGE>
Exhibit 15(D)
THE CHAPMAN FUNDS, INC.
DEM QUANTITATIVE EQUITY FUND INSTITUTIONAL CLASS
STOCKHOLDER SERVICING AND DISTRIBUTION PLAN
This Stockholder Servicing and Distribution Plan (the "Plan") is
adopted by The Chapman Funds, Inc., a corporation organized under the laws of
State of Maryland (the "Fund"), with respect to the DEM Quantitative Equity Fund
Institutional Class Common Stock, par value $.001 per share, of the Fund (the
"Shares") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act
of 1940, as amended (the "1940 Act"), subject to the following terms and
conditions:
Section 1. Services under the Plan.
(a) The Chapman Co., a corporation organized under the laws of the
State of Maryland (the "Distributor"), will be paid fees under the Plan to
compensate the Distributor or enable the Distributor to compensate other
persons, including any other distributor of the Institutional Shares or
institutional stockholders of record of the Shares, including but not limited to
retirement plans, broker-dealers, depository institutions, and other financial
intermediaries ("Institutions"), who own Shares on behalf of their customers,
clients or (in the case of retirement plans) participants ("Customers") and
companies providing certain services to Customers (collectively with
Institutions, "Service Organizations"), for providing (a) services primarily
intended to result in the sale of the Shares ("Selling Services") and (b)
stockholder servicing, administrative and accounting services to Customers
("Administrative Services").
The annual fee paid to the Distributor with respect to Selling
Services will compensate the Distributor, or allow the Distributor to compensate
Service Organizations, to cover certain expenses primarily intended to result in
the sale of the Shares, including, but not limited to: (i) costs of payments
made to employees that engage in the distribution of the Shares; (ii) payments
made to, and expenses of, persons who provide support services in connection
with the distribution of the Shares, including, but not limited to, office space
and equipment, telephone facilities, processing stockholder transactions and
providing any other stockholder services not otherwise provided by the Fund's
transfer agent; (iii) costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising; (iv) costs of printing and distributing prospectuses, statements of
additional information and reports of the Fund to prospective holders of the
Shares; (v) costs involved in preparing, printing and distributing sales
literature pertaining to the Fund and (vi) costs involved in obtaining whatever
information, analyses and reports with respect to marketing and promotional
activities that the Fund may, from time to time, deem advisable.
The annual fee paid to the Distributor with respect to Administrative
Services will compensate the Distributor, or allow the Distributor to compensate
Service Organizations, for personal service and/or the maintenance of Customer
accounts, including but not limited to (i) responding to Customer inquiries,
(ii) providing information on Customer investments and (iii) providing other
stockholder liaison services and for administrative and accounting services to
<PAGE>
Customers, including, but not limited to: (a) aggregating and processing
purchase and redemption requests from Customers and placing net purchase and
redemption orders with the Fund's distributor or transfer agent; (b) providing
Customers with a service that invests the assets of their accounts in the
Shares; (c) processing dividend payments from the Fund on behalf of Customers;
(d) providing information periodically to Customers showing their positions in
the Shares; (e) arranging for bank wires; (f) providing sub-accounting with
respect to the Shares beneficially owned by Customers or the information to the
Fund necessary for sub-accounting; (g) forwarding stockholder communications
from the Fund (for example, proxies, stockholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Customers,
if required by law and (h) providing other similar services to the extent
permitted under applicable statutes, rules and regulations. Payments under this
Plan are not tied exclusively to the selling and administrative expenses
actually incurred by the Distributor or any Service Organization, and the
payments may exceed expenses actually incurred by the Distributor or any Service
Organization. Furthermore, any portion of any fee paid to the Distributor or
to any of its affiliates by the Fund or any of their past profits or other
revenue may be used in their sole discretion to provide services to stockholders
of the Fund or to foster distribution of the Shares.
(b) Any officer of the Fund is authorized to execute and deliver, in
the name and on behalf of the Fund, written agreements, in any form duly
approved by the Board of Directors of the Fund, with Service Organizations
providing for the payment to such Service Organizations of fees for providing
Selling Services and Administrative Services.
Section 2. Amount of Payments.
The Fund will pay the Distributor on the first business day of each
quarter a fee for the previous quarter calculated at an annual rate of up to
.25% of the average daily net assets of the Shares for Selling Services and
Administrative Services provided by the Distributor or any Service Organizations
to the Shares.
Section 3. Approval of Plan.
Neither this Plan nor any related agreements will take effect until
approved by a majority of (a) the full Board of Directors of the Fund and
(b) those Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreements related to it (the "Independent Directors"), cast in person at a
meeting called for the purpose of voting on this Plan and the related
agreements.
Section 4. Continuance of Plan.
This Plan will continue in effect with respect to the Shares from year
to year so long as its continuance is specifically approved annually by vote of
the Fund's Board of Directors in the manner described in Section 3(a) and 3(b)
above. The Fund's Board of Directors will evaluate the appropriateness of this
Plan and its payment terms on a continuing basis and in doing so will consider
all relevant factors, including the types and extent of Selling Services and
2
<PAGE>
Administrative Services provided by the Distributor and/or Service Organizations
and amounts the Distributor and/or Service Organizations receive under this
Plan.
Section 5. Termination.
This Plan may be terminated at any time with respect to the Shares by
vote of a majority of the Independent Directors or by a vote of a majority of
the outstanding voting Shares.
Section 6. Amendments.
This Plan may not be amended to increase materially the amount of the
fees described in Section 1 above with respect to the Shares without approval of
at least a majority of the outstanding voting Shares. In addition, all material
amendments to this Plan must be approved in the manner described in Section 3(a)
and 3(b) above.
Section 7. Selection of Certain Directors.
While this Plan is in effect with respect to the Fund, the selection
and nomination of the Fund's Directors who are not interested persons of the
Fund will be committed to the discretion of the Directors then in office who are
not interested persons of the Fund.
Section 8. Written Reports.
In each year during which this Plan remains in effect with respect to
the Fund, any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any related agreement will prepare
and furnish to the Fund's Board of Directors, and the Board will review, at
least quarterly, written reports, complying with the requirements of the Rule,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made.
Section 9. Preservation of Materials.
The Fund will preserve copies of this Plan, any agreement relating to
this Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of this Plan, the agreement or the report.
Section 10. Meaning of Certain Terms.
As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meanings that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
3
<PAGE>
Section 11. Date of Effectiveness.
This Plan will become effective as of the date the Fund first
commences its investment operations.
IN WITNESS WHEREOF, the fund has executed this Plan as of the 28th
day of October, 1997.
THE CHAPMAN FUNDS, INC.
By: /s/Nathan A. Chapman, Jr.
--------------------------
Name: Nathan A. Chapman, Jr.
Title: President
4
<PAGE>
Exhibit 18(B)
THE CHAPMAN FUNDS, INC.
DEM QUANTITATIVE EQUITY FUND
Rule 18f-3 Plan
Rule 18f-3 (the "Rule") under the Investment Company Act of 1940, as
amended (the "1940 Act"), requires that the Board of an investment company
desiring to offer multiple classes pursuant to the Rule adopt a plan setting
forth the separate arrangement and expense allocation of each class (a "Class"),
and any related conversion features or exchange privileges. The differences in
distribution arrangements and expenses among these classes of shares, and the
exchange features of each class, are set forth below in this Plan, which is
subject to change, to the extent permitted by law and by the governing documents
of the fund listed above (the "Fund"), by action of the Board of Directors.
The Board of Directors, including a majority of the non-interested
Directors, has determined that the following Plan is in the best interests of
each class individually and the Fund as a whole:
1. Class Designation: Fund shares shall be divided into Investor
Shares ("Investor Shares") and Institutional Shares ("Institutional Shares").
2. Differences in Services: Distribution and support services will
be provided by The Chapman Co. (the "Distributor"), financial institutions or
retirement plans to customers and plan participants who beneficially own
Institutional Shares. Distribution and support services will be provided by the
Distributor and /or other broker-dealers in connection with the Investor Shares.
3. Differences in Distribution Arrangements: Investor Shares are
sold to the general public and specified minimum initial and subsequent purchase
amounts are applicable. Investor Shares may be charged a stockholder service
fee (the "Stockholder Service Fee") payable at an annual rate of up to .25%, and
a distribution fee (the "Distribution Service Fee") payable at an annual rate of
up to .50% of the average daily net assets attributable to Investor Shares
pursuant to a distribution plan adopted pursuant to Rule 12b-1 under the 1940
Act ("Distribution Plan"). Payments will be made out of the assets of the Fund
attributable to Investor Shares directly to the Distributor. The Distributor
may reallow all or a portion of its Stockholder Service Fee and/or Distribution
Service Fee to other broker-dealers for providing distribution, administrative,
accounting and/or other services with respect to Investor Shares.
Institutional Shares may be sold to certain institutions including but
not limited to retirement plans, broker-dealers, depository institutions, and
other financial intermediaries ("Institutions") whose clients or customers (or
participants in the case of retirement plans) ("Customers") become owners of
Institutional Shares and specified
<PAGE>
minimum initial and subsequent purchase amounts may be applicable.
Institutional Shares will be charged a combined Stockholder Service and
Distribution Service Fee payable at an annual rate of up to .25% of the average
daily net assets attributable to Institutional Shares pursuant to a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Payments will be made
out of the assets of the Fund attributable to Institutional Shares directly to
the Distributor. The Distributor may reallow all or a portion of the combined
Stockholder Service Fee and/or Distribution Service Fee to Institutions for
providing distribution, administrative, accounting and/or other services with
respect to Institutional Shares. The Distributor or an Institution may use a
portion of the fees paid pursuant to the Plan to compensate the Fund's custodian
or transfer agent or other service providers for costs related to accounts of
customers of the Institution that holds Institutional Shares.
4. Expense Allocation. The following expenses shall be allocated,
to the extent practicable, on a Class-by-Class basis: (a) fees under the
Distribution Plans, as applicable; (b) printing and postage expenses related to
preparing and distributing materials, such as stockholder reports, prospectuses
and proxies, to current stockholders of a specific Class; (c) Securities and
Exchange Commission and Blue Sky registration fees incurred by a specific Class;
(d) the expense of administrative personnel and services required to support the
stockholders of a specific Class; (e) auditors' fees, litigation or other legal
expenses relating solely to a specific Class; (f) transfer agent fees identified
by the Fund's transfer agent as being attributable to a specific Class; (g)
expenses incurred in connection with stockholders' meetings as a result of
issues relating to a specific Class; and (h) accounting expenses relating solely
to a specific Class.
The distribution, administrative and stockholder servicing fees
and other expenses listed above which are attributable to a particular Class are
charged directly to the net assets of the Fund attributable to a particular
Class and, thus, are borne on a pro rata basis by the outstanding shares of that
Class.
5. Allocation of Fund Income, Capital Gains and Expenses. Income,
realized and unrealized capital gains and losses, and expenses of the Fund not
allocated to a particular Class pursuant to paragraph 4 above, shall be
allocated to each Class on the basis of the net asset value of that Class in
relation to the net asset value of the Fund.
6. Conversion Features. No Class shall be subject to any automatic
conversion feature.
7. Exchange Privileges. Shares of a Class shall be exchangeable
into shares of certain other investment companies specified from time to time.
8. Additional Information. This Plan is qualified by and subject to
the terms of the then current prospectus for the applicable Class; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of
2
<PAGE>
the Classes contained in this Plan. The prospectus for each Class contains
additional information about that Class and the applicable Fund's multiple class
structure.
IN WITNESS WHEREOF, the Fund has executed this Plan as of the 28th day
of October, 1997.
THE CHAPMAN FUNDS, INC.
By: /s/ Nathan A. Chapman, Jr.
-----------------------------
Name: Nathan A. Chapman, Jr.
Title: President
3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
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<NET-CHANGE-IN-ASSETS> 14
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<AVERAGE-NET-ASSETS> 14
<PER-SHARE-NAV-BEGIN> 14
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<AVG-DEBT-OUTSTANDING> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 0
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<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 14
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<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 14
<PER-SHARE-NAV-BEGIN> 14
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
THE CHAPMAN FUNDS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director(s) of The
Chapman Funds, Inc., a Maryland corporation, hereby constitute and appoint
NATHAN A. CHAPMAN, JR., and M. LYNN BALLARD and either of them, the true and
lawful agents and attorney-in-fact of the undersigned with full power and
authority in either said agent and attorney-in-fact, to sign for the undersigned
and in their respective names as Directors and Executive Officers of The Chapman
Fund, Inc., the post-effective amendment to the Registration Statement on Form
N-1A (Registration Statement Nos. 33-27516 and 811-5697) filed with the
Securities and Exchange Commission, and any and all further amendments or
supplements (including post effective amendments) to said Registration
Statement, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Nathan A. Chapman /s/ Lynn Ballard
- --------------------------------- ----------------------------------
Nathan A. Chapman, Jr. Lynn Ballard
Director and President Treasurer and Assistant Secretary
(Principal Executive Officer) (Principal Financial & Accounting
Officer
/s/ David Rivers /s/ Ronald White
- --------------------------------- ----------------------------------
David Rivers Ronald White
Director Director
/s/ Wilfred Marshall /s/ Dr. Benjamin Hooks
- --------------------------------- ----------------------------------
Wilfred Marshall Dr. Benjamin Hooks
Director Director
/s/ James Lewis /s/ Lottie Shackelford
- --------------------------------- ----------------------------------
James Lewis Lottie Shackelford
Director Director
/s/ Dr. Levi Watkins, Jr.
- ---------------------------------
Dr. Levi Watkins, Jr.
Director
Dated this______day of May, 1998.
