<PAGE>
As filed with the Securities and Registration Nos. 33-25716
Exchange Commission on June 12, 1998 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. 15
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT TO COMPANY ACT OF 1940
X Amendment No. 17
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THE CHAPMAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(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
401 East Pratt Street, 28th Floor and Howard, LLP
Baltimore, Maryland 21202 Two Hopkins Plaza, Suite 1800
(Name and Address of Agent for Service) Baltimore, Maryland 21201
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 Institutional Shares; Investor Shares;
Money Fund; Chapman DEM Equity Fund, DEM Equity Fund,
Institutional Cash DEM Index Fund, DEM DEM Index Fund, DEM
Management Fund Fixed Income Fund Fixed Income Fund
<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 Highlights Financial Highlights Financial Highlights
Financial
Information
Item 4. General Investment Program; Investment Program; Investment Program;
Description of Other Information- Other Information- Other Information-
Registrant Capital Stock Capital Stock Capital Stock
Item 5. Management of the Management; Other Management; Other Management; Other
Fund Information - Information - Information -
Transfer Agent; Transfer Agent; Transfer Agent;
Dividends and Taxes Dividends; Taxes 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 Management; Net Asset Management; Net Asset Management; Net Asset
Securities Being Value; Purchase of Value; Purchase of Value; Purchase of
Offered 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 Redemption of Shares Redemption of Shares
of Shares
Item 9. Pending Legal Not Applicable Not Applicable Not Applicable
Proceedings
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A Item Location
No.
Part B Statement of Additional Information Caption
Chapman US Treasury DEM Equity Fund;
Money Fund; Chapman DEM Index Fund; DEM Fixed Income 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 Not Applicable Not Applicable
Information and
History
Item 13. Investment Investment Program Investment Program
Objectives and
Policies
Item 14. Management of the Management Management
Registrant
Item 15. Control Persons Capital Stock; Capital Stock; Control Persons and Principal
and Principal Principal Holders of Holders of Securities
Holders of Securities
Securities
Item 16. Investment Management; Experts Management; Experts
Advisory and Other
Services
Item 17. Brokerage Portfolio Portfolio Transactions
Allocation Transactions
Item 18. Capital Stock and Capital Stock Capital Stock
Other Securities
Item 19. Purchase, Purchase of Shares; Purchase of Shares; Exchanges; Redemption of
Redemption and Exchanges; Redemption Shares; Net Asset Value
Pricing of of Shares; Net Asset
Securities Being 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 Financial Statements Financial Statements
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>
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>
SUBJECT TO COMPLETION:
Preliminary Prospectus dated: June 12, 1998
Prospectus dated: , 1998
DEM FIXED INCOME FUND
INVESTOR SHARES
The DEM Fixed Income 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 principal investment objective of the Company is high
current income with the potential for capital appreciation through investment in
income securities of "Domestic Emerging Markets" that it believes are positioned
for growth. Domestic Emerging Markets are companies that are controlled by
African Americans, Hispanic/Latino Americans, Asian Americans and women that are
located in the United States and its territories ("DEM Companies"). Domestic
Emerging Markets may also include asset-backed securities and securitized
mortgage and other debt primarily of individuals within the above listed ethnic
groups that are located in the United States. The Fund's portfolio will have no
maturity restrictions and the average portfolio maturity will be in the judgment
of the Fund's investment advisor. The Company may invest up to 35% of its total
assets in lower grade fixed income securities of domestic companies commonly
referred to as "junk bonds," which involve a high degree of risk and are
predominantly speculative. The Company also may utilize leverage. See
"INVESTMENT OBJECTIVES AND POLICIES." 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.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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 12b-1 fee of up to .75% of
average daily net assets, currently set at .30% of average daily net assets, and
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........................................................................... 8
Management............................................................................. 10
Purchase of Shares..................................................................... 13
Redemption of Shares................................................................... 15
Net Asset Value........................................................................ 17
Dividends.............................................................................. 18
Taxes.................................................................................. 18
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>
INVESTOR SHARES
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<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
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 Fees
(as a percentage of amount redeemed)...................................................... 0%
ANNUAL EXPENSES (as a percentage of net assets) (1)
Management Fees (after Investor Share fee waiver) (2)..................................... 0.60%
12b-1 Fees (after Investor Share fee waiver) (3).......................................... 0.30%
Other Expenses (4)........................................................................ 1.22%
Total Fund Operating Expenses (estimated) (5)............................................. 2.12%
</TABLE>
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(1) See "MANAGEMENT."
(2) The Investment Advisor receives an advisory fee at an annual rate of up to a
total of .90% of the average weekly 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 .60% of average
weekly 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 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 Investor Shares. The Distributor has voluntarily limited
such fee during the first fiscal year of the Fund to an aggregate of .30% of
average daily net assets; 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 $211,650 net of the
fee amount expected to be waived pursuant to the voluntary fee limitations
of the Investment Advisor and the Distributor.
In the absence of the voluntary fee limitations of the Investment Advisor
and the Distributor, estimated Total Fund Operating Expenses would currently be
$286,650.
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
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<S> <C>
1 Year.................................................................... $ 68
3 Years................................................................... $ 111
</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. 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 will seek high current income with the
potential for capital appreciation through investment in income securities such
as preferred stock, bonds, debentures, notes, and other similar securities of
Domestic Emerging Markets that it believes are positioned for growth. Domestic
Emerging Markets are companies that are controlled by African Americans,
Hispanic/Latino Americans, Asian Americans and women that are located in the
United States and its territories ("DEM Companies"). Domestic Emerging Markets
may also include asset-backed securities and securitized mortgage and other debt
primarily of individuals within the above listed ethnic groups that are located
in the United States. The Fund's portfolio will have no maturity restrictions
and the average portfolio maturity will be in the judgment of the Fund's
investment advisor, Chapman Capital Management, Inc. (the "Investment Advisor").
THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS STATED OBJECTIVE.
The Investment Advisor has identified a universe (the "DEM Universe") of
approximately 170 DEM Companies that it expects will continue to grow. In
determining whether a specific portfolio company is "controlled" by African
Americans, Asian Americans, Hispanic/Latino Americans or women, and therefore a
DEM Company eligible for inclusion in the DEM Universe, 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 must be a
member of one or more of the listed groups.
The Fund intends to invest 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.
The yield and share price of the Fund will change daily based on changes in
interest rates and market conditions, and in response to other economic,
political or financial events. The types and maturities of the securities the
Fund purchases and the credit quality of their issuers will impact the Fund's
performance in response to these events. The total return from a bond includes
both income and price gains or losses. While income is the most important
component of bond returns, over time, the Fund's emphasis on
3
<PAGE>
income does not mean the Fund invests only in the highest-yielding bonds
available, or that it can avoid losses of principal.
In general, bond prices, and the value of the Fund's portfolio, will rise
when interest rates fall and fall when interest rates rise. Longer-term bonds
are usually more sensitive to interest rate changes. In other words, the longer
the maturity of a bond, the greater the impact a change in interest rates is
likely to have on the bond's price. In addition, short-term interest rates and
long-term interest rates do not necessarily move in the same amount or in the
same direction. A short-term bond tends to react to changes in short-term
interest rates and a long-term bond tends to react to changes in long-term
interest rates. The Fund's Investment Advisor will consider interest rates,
price volatility and other factors when managing the average maturity of the
Fund's portfolio.
The value of the Fund's portfolio is also affected by the credit quality of
the issuers of portfolio securities. Changes in the financial condition of an
issuer, changes in general economic conditions, and changes in specific economic
conditions that affect a particular type of issuer can impact the credit quality
of an issuer. Lower quality bonds generally tend to be more sensitive to these
changes than higher quality bonds. The Fund may invest in fixed-income
securities rated in the lower rating categories of recognized statistical rating
agencies, such as securities rated "CCC" or lower by S&P or "Caa" or lower by
Moody's or non-rated securities of comparable quality. These debt securities are
predominantly speculative, involve major risk exposure to adverse conditions and
are often referred to in the financial press as "junk bonds." The Fund is
permitted to invest up to 35% of its assets in such "non-investment grade" or
"junk" securities. See "RISK FACTORS -- Lower Rated Securities" and Appendix A.
The Fund may invest up to 20% of its assets in equity securities. Equity
securities may include common stocks, preferred stocks, convertible securities
and warrants. Common stocks, the most familiar type of equity security,
represent an ownership interest in a corporation. Although equity securities
have a history of long-term growth in value, their prices fluctuate based on
changes in a portfolio company's financial condition and on overall market and
economic conditions. The prices of smaller capitalization companies are
especially sensitive to these factors.
The Fund will not invest in foreign securities (including American
Depository Receipts) which policy 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.
DEBT SECURITIES
Bonds and other debt instruments are used by issuers to borrow money from
investors. The issuer generally pays the investor a fixed, variable, or floating
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are sold
at a discount from their face values.
U.S. Government Securities are high-quality debt instruments issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government. Not all U.S. Government securities are backed by the full faith and
credit of the United States. For example, U.S. Government securities such as
those issued by Fannie Mae are supported by the instrumentality's right to
borrow money from the U.S. Treasury under certain circumstances. Other U.S.
Government securities such as those issued by the Federal Farm Credit Banks
Funding Corporation are supported only by the credit of the entity that issued
them.
Asset-Backed Securities include interests in pools of debt securities,
commercial or consumer loans, or other receivables. The value of these
securities depends on many factors, including changes in interest rates, the
availability of information concerning the pool and its structure, the credit
quality of the
4
<PAGE>
underlying assets, the market's perception of the servicer of the pool, and any
credit enhancement provided. In addition, these securities may be subject to
prepayment risk. Prepayment risk occurs when the issuer of a security can prepay
principal prior to the security's maturity. Securities subject to prepayment
risk generally offer less potential for gains during a declining interest rate
environment, and similar or greater potential for loss in a rising interest rate
environment. In addition, the potential impact of prepayment features on the
price of a debt security may be difficult to predict and result in greater
volatility.
Mortgage securities include interests in pools of commercial or residential
mortgages, and may include complex instruments such as collateralized mortgage
obligations and stripped mortgage-backed securities. Mortgage securities may be
issued by agencies or instrumentalities of the U.S. Government or by private
entities. The price of a mortgage security may be significantly affected by
changes in interest rates. Some mortgage securities may have a structure that
makes their reaction to interest rates and other factors difficult to predict,
making their prices highly volatile. Also, mortgage securities, especially
stripped mortgage-backed securities, are subject to prepayment risk.
Stripped securities are the separate income or principal components of a
debt security. The risks associated with stripped securities are similar to
those of other debt securities, although stripped securities may be more
volatile and the value of certain types of stripped securities may move in the
same direction as interest rates. U.S. Treasury securities that have been
stripped by a Federal Reserve Bank are obligations issued by the U.S. Treasury.
Real estate-related instruments include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such as
changes in real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real-estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
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.
5
<PAGE>
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.
ILLIQUID SECURITIES/PRIVATE VENTURE CAPITAL FUNDS
While the Fund intends to concentrate on publicly traded securities, it may
also invest in non-publicly traded securities of DEM Companies, such as those of
privately-held companies or private placements of public companies. The portion
of the Fund's assets invested in these non-publicly traded securities will vary
over time depending on investment opportunities and other factors; however, an
investment in such securities will be considered illiquid and therefore be
subject to the Fund's limitation on the purchase of illiquid securities. The
Fund may not invest more than 15% of its net assets in illiquid securities,
including 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 ("Illiquid Securities"). Illiquid Securities
include securities which have not been registered under the Securities Act,
sometimes referred to as private placements, and are purchased directly from the
issuer or in the secondary market. To the extent that the Fund is permitted to
invest in Illiquid Securities, the Fund may be deemed to act as an underwriter
to portfolio companies. See "RISK FACTORS -- Non-Publicly Traded Securities" and
"INVESTMENT PROGRAM -- Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information.
As an alternative to direct investments in Illiquid Securities, the Fund may
invest up to 10% of its assets in private venture capital funds including United
States private limited partnerships or other investment funds ("Private Funds")
that themselves invest in Illiquid Securities. The Investment Advisor believes
that an investment in Private Funds may offer individual investors the
opportunity to participate in investment opportunities typically available only
to large institutions and accredited investors. Although the Fund's investments
in Private Funds are limited to a maximum of 10% of the Fund's assets, these
investments are highly speculative and volatile and may produce gains or losses
in this portion of the Fund's portfolio that exceed those of the Fund's other
holdings and of more mature companies generally.
To the extent that these Private Funds are investment companies for purposes
of the 1940 Act, the Fund's ability to invest in them will be limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to any one
investment company and, (iii) 10% of the Fund's total assets in the aggregate.
In addition, Fund stockholders will remain subject to the Fund's expenses while
also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Fund to dispose of interests in Private Funds is very
limited and will involve the risks described under "RISK FACTORS -- Non-Publicly
Traded Securities" and "INVESTMENT PROGRAM -- Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional
6
<PAGE>
Information. In valuing the Fund's holdings of interests in Private Funds, the
Fund will be relying on the most recent reports provided by the Private Funds
themselves prior to calculation of the Fund's net asset value. These reports,
which are provided on an infrequent basis, often depend on the subjective
valuations of the managers of the Private Funds and, in addition, would not
generally reflect positive or negative subsequent developments affecting
companies held by the Private Fund. See "NET ASSET VALUE." The securities of
Private Funds will typically themselves be classified as Illiquid Securities by
the Board of Directors. Accordingly, the Fund's total investment in Illiquid
Securities, including Private Funds, is limited to 15% of the Fund's assets with
no more than 10% of the Fund's assets invested in Private Funds.
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 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. 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 the securities underlying covered
call options written by the Fund as Illiquid Securities subject to the Fund's
investment limitation on Illiquid Securities set forth above.
7
<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 risks inherent in seeking high current income with
the potential for capital appreciation through investment in income securities
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, bond prices can
fluctuate dramatically in response to these factors. When you sell your shares,
they may be worth more or less than what you paid for them.
INVESTMENT IN SMALL COMPANIES
Because the Fund intends to invest a large proportion 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 companies 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 company securities 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 high current income with the potential for
capital appreciation through investment in a portfolio of income securities.
Furthermore, such securities 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.
LOWER RATED SECURITIES
The Fund may invest in fixed-income securities rated in the lower rating
categories of recognized statistical rating agencies, such as securities rated
"CCC or lower by S&P or "Caa" or lower by Moody's or non-rated securities of
comparable quality. These debt securities are predominantly speculative, involve
major risk exposure to adverse conditions and are often referred to in the
financial press as "junk bonds." See Appendix A.
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
8
<PAGE>
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
fixed income securities.
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 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.
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 the advisory fee during the first fiscal year of
the Fund to an aggregate of .6 of 1% of average weekly 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.
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.
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 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 limited such fee during the first fiscal year of the Fund to an
aggregate of .30% of average daily net assets; however, there can be no
assurance that the Distributor will continue to voluntarily 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.
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>
11
<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 1940 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 Investor Services Group, 3200 Horizon Drive, PO Box 61503, King
of Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and dividend
paying agent and accounting agent ("First Data" or 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
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 Fixed Income Fund Investor Shares, c/o
First Data Investor Services Group, 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 Fixed Income 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.
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.
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
13
<PAGE>
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>
<S> <C> <C> <C>
TOTAL SALES LOAD
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF NET AS A % OF
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED 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 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
14
<PAGE>
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 INVESTOR SERVICES GROUP
A/C [ ]
FBO "DEM Fixed Income 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.
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.
15
<PAGE>
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 Investor Services Group, 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 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.
16
<PAGE>
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 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
17
<PAGE>
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 Investor Services Group, 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
18
<PAGE>
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 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
19
<PAGE>
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.
20
<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 of Directors to issue 10 billion full and
fractional shares of common stock, par value $.001 per share, of which 500
million shares are designated DEM Fixed Income 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.
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 or other series or classes of the
Company.
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.
21
<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.
22
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
<TABLE>
<S> <C>
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality. they carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than in
Aaa Securities.
A Bonds that are rated A possess may favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
</TABLE>
Moody's applies numerical modifiers (l, 2, and 3) with respect to the bonds
rated "Aa" through "B". The modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in the lower end of
its generic rating category.
<TABLE>
<S> <C>
Caa Bonds that are rated Caa are of poor standing. These issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
STANDARD & POOR'S RATINGS GROUP
AAA This is the highest rating assigned by S&P to a debt obligation and indicates
an extremely strong capacity to pay interest and repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are regarded as
safe. Debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB This is the lowest investment grade. Debt rated BBB has an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree
of speculation, and C the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions. Debt rated
C1 is reserved for income bonds on which no interest is being paid and debt
rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is
attached to derivatives, hybrids and certain other obligations that S&P
believes may experience high variability in expected returns due to
non-credit risks created by the terms of the obligations.
</TABLE>
"AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-2
<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 INVESTOR
SERVICES GROUP
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 FIXED INCOME FUND
INVESTOR SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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>
SUBJECT TO COMPLETION:
Preliminary Prospectus dated: June 12, 1998
Prospectus dated: , 1998
DEM FIXED INCOME FUND
INSTITUTIONAL SHARES
The DEM Fixed Income 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 principal investment objective of the Company is high
current income with the potential for capital appreciation through investment in
income securities of "Domestic Emerging Markets" that it believes are positioned
for growth. Domestic Emerging Markets are companies that are controlled by
African Americans, Hispanic/Latino Americans, Asian Americans and women that are
located in the United States and its territories ("DEM Companies"). Domestic
Emerging Markets may also include asset-backed securities and securitized
mortgage and other debt primarily of individuals within the above listed ethnic
groups that are located in the United States. The Fund's portfolio will have no
maturity restrictions and the average portfolio maturity will be in the judgment
of the Fund's investment advisor. The Company may invest up to 35% of its total
assets in lower grade fixed income securities of domestic companies commonly
referred to as "junk bonds," which involve a high degree of risk and are
predominantly speculative. The Company also may utilize leverage. See
"INVESTMENT OBJECTIVES AND POLICIES." 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.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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........................................................................... 8
Management............................................................................. 10
Purchase of Shares..................................................................... 13
Redemption of Shares................................................................... 14
Net Asset Value........................................................................ 16
Dividends.............................................................................. 17
Taxes.................................................................................. 17
Other Information...................................................................... 19
</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
SHARES
-------------------
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
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 (after Institutional Share fee waiver) (2)................................ 0.60%
12b-1 Fees................................................................................ 0.25%
Other Expenses (3)........................................................................ 1.22%
Total Fund Operating Expenses (estimated) (4)............................................. 2.07%
</TABLE>
- ------------------------
(1) See "MANAGEMENT."
(2) The Investment Advisor receives an advisory fee at an annual rate of up to a
total of .90% of the average weekly 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 .60% of
average weekly 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 $206,650 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 $236,650.
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.................................................................... $ 21
3 Years................................................................... $ 65
</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. 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
2
<PAGE>
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 will seek high current income with the
potential for capital appreciation through investment in income securities such
as preferred stock, bonds, debentures, notes, and other similar securities of
Domestic Emerging Markets that it believes are positioned for growth. Domestic
Emerging Markets are companies that are controlled by African Americans,
Hispanic/Latino Americans, Asian Americans and women that are located in the
United States and its territories ("DEM Companies"). Domestic Emerging Markets
may also include asset-backed securities and securitized mortgage and other debt
primarily of individuals within the above listed ethnic groups that are located
in the United States. The Fund's portfolio will have no maturity restrictions
and the average portfolio maturity will be in the judgment of the Fund's
investment advisor, Chapman Capital Management, Inc. (the "Investment Advisor").
THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS STATED OBJECTIVE.
The Investment Advisor has identified a universe (the "DEM Universe") of
approximately 170 DEM Companies that it expects will continue to grow. In
determining whether a specific portfolio company is "controlled" by African
Americans, Asian Americans, Hispanic/Latino Americans or women, and therefore a
DEM Company eligible for inclusion in the DEM Universe, 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 must be a
member of one or more of the listed groups.
The Fund intends to invest 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.
The yield and share price of the Fund will change daily based on changes in
interest rates and market conditions, and in response to other economic,
political or financial events. The types and maturities of the securities the
Fund purchases and the credit quality of their issuers will impact the Fund's
performance in response to these events. The total return from a bond includes
both income and price gains or losses. While income is the most important
component of bond returns, over time, the Fund's emphasis on income does not
mean the Fund invests only in the highest-yielding bonds available, or that it
can avoid losses of principal.
In general, bond prices, and the value of the Fund's portfolio, will rise
when interest rates fall and fall when interest rates rise. Longer-term bonds
are usually more sensitive to interest rate changes. In other words, the longer
the maturity of a bond, the greater the impact a change in interest rates is
likely to have on the bond's price. In addition, short-term interest rates and
long-term interest rates do not necessarily move in the same amount or in the
same direction. A short-term bond tends to react to changes in short-term
interest rates and a long-term bond tends to react to changes in long-term
interest rates. The Fund's Investment Advisor will consider interest rates,
price volatility and other factors when managing the average maturity of the
Fund's portfolio.
The value of the Fund's portfolio is also affected by the credit quality of
the issuers of portfolio securities. Changes in the financial condition of an
issuer, changes in general economic conditions, and
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<PAGE>
changes in specific economic conditions that affect a particular type of issuer
can impact the credit quality of an issuer. Lower quality bonds generally tend
to be more sensitive to these changes than higher quality bonds. The Fund may
invest in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or lower
by S&P or "Caa" or lower by Moody's or non-rated securities of comparable
quality. These debt securities are predominantly speculative, involve major risk
exposure to adverse conditions and are often referred to in the financial press
as "junk bonds." The Fund is permitted to invest up to 35% of its assets in such
"non-investment grade" or "junk" securities. See "RISK FACTORS -- Lower Rated
Securities" and Appendix A.
The Fund may invest up to 20% of its assets in equity securities. Equity
securities may include common stocks, preferred stocks, convertible securities
and warrants. Common stocks, the most familiar type of equity security,
represent an ownership interest in a corporation. Although equity securities
have a history of long-term growth in value, their prices fluctuate based on
changes in a portfolio company's financial condition and on overall market and
economic conditions. The prices of smaller capitalization companies are
especially sensitive to these factors.
The Fund will not invest in foreign securities (including American
Depository Receipts) which policy 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.
DEBT SECURITIES
Bonds and other debt instruments are used by issuers to borrow money from
investors. The issuer generally pays the investor a fixed, variable, or floating
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are sold
at a discount from their face values.
U.S. Government Securities are high-quality debt instruments issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government. Not all U.S. Government securities are backed by the full faith and
credit of the United States. For example, U.S. Government securities such as
those issued by Fannie Mae are supported by the instrumentality's right to
borrow money from the U.S. Treasury under certain circumstances. Other U.S.
Government securities such as those issued by the Federal Farm Credit Banks
Funding Corporation are supported only by the credit of the entity that issued
them.
Asset-Backed Securities include interests in pools of debt securities,
commercial or consumer loans, or other receivables. The value of these
securities depends on many factors, including changes in interest rates, the
availability of information concerning the pool and its structure, the credit
quality of the underlying assets, the market's perception of the servicer of the
pool, and any credit enhancement provided. In addition, these securities may be
subject to prepayment risk. Prepayment risk occurs when the issuer of a security
can prepay principal prior to the security's maturity. Securities subject to
prepayment risk generally offer less potential for gains during a declining
interest rate environment, and similar or greater potential for loss in a rising
interest rate environment. In addition, the potential impact of prepayment
features on the price of a debt security may be difficult to predict and result
in greater volatility.
Mortgage securities include interests in pools of commercial or residential
mortgages, and may include complex instruments such as collateralized mortgage
obligations and stripped mortgage-backed securities. Mortgage securities may be
issued by agencies or instrumentalities of the U.S. Government or by private
entities. The price of a mortgage security may be significantly affected by
changes in interest rates. Some mortgage securities may have a structure that
makes their reaction to interest rates and other
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factors difficult to predict, making their prices highly volatile. Also,
mortgage securities, especially stripped mortgage-backed securities, are subject
to prepayment risk.
Stripped securities are the separate income or principal components of a
debt security. The risks associated with stripped securities are similar to
those of other debt securities, although stripped securities may be more
volatile and the value of certain types of stripped securities may move in the
same direction as interest rates. U.S. Treasury securities that have been
stripped by a Federal Reserve Bank are obligations issued by the U.S. Treasury.
Real estate-related instruments include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such as
changes in real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real-estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
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.
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
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<PAGE>
the acquisition of suitable investments. See "INVESTMENT PROGRAM" in the
Statement of Additional Information.
ILLIQUID SECURITIES/ PRIVATE VENTURE CAPITAL FUNDS
While the Fund intends to concentrate on publicly traded securities, it may
also invest in non-publicly traded securities of DEM Companies, such as those of
privately-held companies or private placements of public companies. The portion
of the Fund's assets invested in these non-publicly traded securities will vary
over time depending on investment opportunities and other factors; however, an
investment in such securities will be considered illiquid and therefore be
subject to the Fund's limitation on the purchase of illiquid securities. The
Fund may not invest more than 15% of its net assets in illiquid securities,
including 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 ("Illiquid Securities"). Illiquid Securities
include securities which have not been registered under the Securities Act,
sometimes referred to as private placements, and are purchased directly from the
issuer or in the secondary market. To the extent that the Fund is permitted to
invest in Illiquid Securities, the Fund may be deemed to act as an underwriter
to portfolio companies. See "RISK FACTORS -- Non-Publicly Traded Securities" and
"INVESTMENT PROGRAM -- Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information.
As an alternative to direct investments in Illiquid Securities, the Fund may
invest up to 10% of its assets in private venture capital funds including United
States private limited partnerships or other investment funds ("Private Funds")
that themselves invest in Illiquid Securities. The Investment Advisor believes
that an investment in Private Funds may offer individual investors the
opportunity to participate in investment opportunities typically available only
to large institutions and accredited investors. Although the Fund's investments
in Private Funds are limited to a maximum of 10% of the Fund's assets, these
investments are highly speculative and volatile and may produce gains or losses
in this portion of the Fund's portfolio that exceed those of the Fund's other
holdings and of more mature companies generally.
To the extent that these Private Funds are investment companies for purposes
of the 1940 Act, the Fund's ability to invest in them will be limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to any one
investment company and, (iii) 10% of the Fund's total assets in the aggregate.
In addition, Fund stockholders will remain subject to the Fund's expenses while
also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Fund to dispose of interests in Private Funds is very
limited and will involve the risks described under "RISK FACTORS -- Non-Publicly
Traded Securities" and "INVESTMENT PROGRAM -- Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional Information. In valuing the Fund's
holdings of interests in Private Funds, the Fund will be relying on the most
recent reports provided by the Private Funds themselves prior to calculation of
the Fund's net asset value. These reports, which are provided on an infrequent
basis, often depend on the subjective valuations of the managers of the Private
Funds and, in addition, would not generally reflect positive or negative
subsequent developments affecting companies held by the Private Fund. See "NET
ASSET VALUE." The securities of Private Funds will typically themselves be
classified as Illiquid Securities by the Board of Directors. Accordingly, the
Fund's total investment in Illiquid Securities, including Private Funds, is
limited to 15% of the Fund's assets with no more than 10% of the Fund's assets
invested in Private Funds.
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 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. 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.
6
<PAGE>
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 the securities underlying covered
call options written by the Fund as Illiquid Securities subject to the Fund's
investment limitation on Illiquid Securities set forth above.
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<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 risks inherent in seeking high current income with
the potential for capital appreciation through investment in income securities
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, bond prices can
fluctuate dramatically in response to these factors. When you sell your shares,
they may be worth more or less than what you paid for them.
INVESTMENT IN SMALL COMPANIES
Because the Fund intends to invest a large proportion 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 companies 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 company securities 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 high current income with the potential for
capital appreciation through investment in a portfolio of income securities.
Furthermore, such securities 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.
LOWER RATED SECURITIES
The Fund may invest in fixed-income securities rated in the lower rating
categories of recognized statistical rating agencies, such as securities rated
"CCC" or lower by S&P or "Caa" or lower by Moody's or non-rated securities of
comparable quality. These debt securities are predominantly speculative, involve
major risk exposure to adverse conditions and are often referred to in the
financial press as "junk bonds." See Appendix A.
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
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<PAGE>
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
fixed income securities.
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 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.
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.
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<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 the advisory fee during the first fiscal year of
the Fund to an aggregate of .6 of 1% of average weekly 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.
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.
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
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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>
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<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 1940 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 Investor Services Group, 3200 Horizon Drive, PO Box 61503, King
of Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and dividend
paying agent and accounting agent ("First Data" or 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.
12
<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 Fixed Income Fund
Institutional Shares, c/o First Data Investor Services Group, 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 Fixed Income 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.
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
13
<PAGE>
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 INVESTOR SERVICES GROUP
A/C [ ]
FBO "DEM Fixed Income 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 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
14
<PAGE>
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 Investor Services Group, 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.
15
<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.
16
<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 Investor Services Group, 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.
17
<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.
18
<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 500 million shares
are designated DEM Fixed Income 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.
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<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.
20
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
<TABLE>
<S> <C>
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality. they carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than in
Aaa Securities.
A Bonds that are rated A possess may favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
</TABLE>
Moody's applies numerical modifiers (l, 2, and 3) with respect to the bonds
rated "Aa" through "B". The modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in the lower end of
its generic rating category.
<TABLE>
<S> <C>
Caa Bonds that are rated Caa are of poor standing. These issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
STANDARD & POOR'S RATINGS GROUP
AAA This is the highest rating assigned by S&P to a debt obligation and indicates
an extremely strong capacity to pay interest and repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are regarded as
safe. Debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB This is the lowest investment grade. Debt rated BBB has an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree
of speculation, and C the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions. Debt rated
C1 is reserved for income bonds on which no interest is being paid and debt
rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is
attached to derivatives, hybrids and certain other obligations that S&P
believes may experience high variability in expected returns due to
non-credit risks created by the terms of the obligations.
</TABLE>
"AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-2
<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 INVESTOR
SERVICES GROUP
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 FIXED INCOME FUND
INSTITUTIONAL SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
---------------------
PROSPECTUS
---------------------
, 1998
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<PAGE>
SUBJECT TO COMPLETION:
Preliminary Statement of Additional Information dated: June 12, 1998
Statement of Additional Information Dated: , 1998
DEM FIXED INCOME 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 Fixed Income 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-23
Management...................... B-12 Capital Stock.............. B-25
Control Persons and Principal Performance Information... B-27
Holders of Securities........... B-17 Counsel to the Company..... B-28
Purchase of Shares.............. B-21 Independent Auditors....... B-29
Redemption of Shares............ B-22 Financial Statements....... F-1
Portfolio Transactions.......... B-22
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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
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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.
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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 seeks
high current income with the potential for capital appreciation through
investment in income securities of "Domestic Emerging Markets" that it believes
are positioned for growth. Domestic Emerging Markets are companies that are
controlled by African Americans, Hispanic/Latino Americans, Asian Americans and
women that are located in the United States and its territories ("DEM
Companies"). Domestic Emerging Markets may also include asset-backed securities
and securitized mortgage and other debt primarily of individuals within the
above listed ethnic groups that are located in the United States.
The Investment Advisor has identified a universe (the "DEM Universe")
of approximately 170 DEM Companies that it expects will continue to grow. In
determining whether a specific portfolio company is "controlled" by African
Americans, Asian Americans, Hispanic/Latino Americans or women, and, therefore a
DEM Company eligible for inclusion in the DEM Universe, 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
must be a member of one or more of the listed groups.
The Fund's portfolio will have no maturity restrictions and the
average portfolio maturity will be in the judgment of the Investment Advisor.
The Company may invest up to 35% of its total assets in lower grade fixed income
securities of domestic companies commonly referred to as "junk bonds," which
involve a high degree of risk and are predominantly speculative.
The Fund may invest up to 20% of its assets in equity securities. Equity
securities including common stocks. Equity securities may include common
stocks, preferred stocks, convertible securities and warrants. Common stocks,
the most familiar type of equity security, represent an ownership interest in a
corporation. Although equity securities have a history of long-term growth in
value, their prices fluctuate based on changes in a portfolio company's
financial condition and on overall market and economic conditions. The prices
of smaller capitalization companies are especially sensitive to these factors.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily
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available market and securities that are restricted securities as defined in
Rule 144 under the Securities Act ("Illiquid Securities"). Illiquid Securities
include securities which have not been registered under the Securities Act,
sometimes referred to as private placements, and are purchased directly from the
issuer or in the secondary market. Investment companies do not typically hold a
significant amount of restricted securities or other Illiquid Securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and an investment company might be unable to dispose of restricted or
other Illiquid Securities promptly or at reasonable prices. An investment
company might also be required to register Illiquid Securities in order to
dispose of them, resulting in additional expense and delay. Adverse market
conditions could impede a public offering of such securities.
Although the Fund's management believes that investments in Illiquid
Securities offer the opportunity for significant capital gains, these
investments involve a high degree of business and financial risk that can result
in substantial losses in the portion of the Fund's portfolio invested in these
investments. Among these are the risks associated with companies in an early
stage of development or with little or no operating history, companies operating
at a loss or with substantial variation in operating results from period to
period, companies with the need for substantial additional capital to support
expansion or to maintain their competitive positions, or companies with
significant financial leverage. Such companies may also face intense
competition from others including those with greater financial resources or more
extensive development, manufacturing, distribution or other attributes, over
which the Fund will have no control.
PRIVATE FUNDS
As an alternative to direct investments in Illiquid Securities, the
Fund may invest up to 10% of its assets in private venture capital funds
including United States private limited partnerships or other investment funds
("Private Funds") that themselves invest in Illiquid Securities. Although
investments in Private Funds offer the opportunity for significant capital
gains, these investments involve a high degree of business and financial risk
that can result in substantial losses in the portion of the Fund's portfolio
invested in these investments. Among these are the risks associated with
investment in companies in an early stage of development or with little or no
operating history, companies operating at a loss or with substantial variation
in operating results from period to period, companies with the need for
substantial additional capital to support expansion or to maintain a competitive
position, or companies with significant financial leverage. Such companies may
also face intense competition from others including those with greater financial
resources or more extensive development, manufacturing, distribution or other
attributes, over which the Fund will have no control.
Interests in the Private Funds in which the Fund may invest will be
subject to substantial restrictions on transfer and, in some instances, may be
non-transferable for a period of years. Private Funds may participate in only a
limited number of investments
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and, as a consequence, the return of a particular Private Fund may be
substantially adversely affected by the unfavorable performance of even a single
investment. Certain of the Private Funds in which the Fund may invest may pay
their investment managers a fee based on the performance of the Fund, which may
create an incentive for the manager to make investments that are riskier or more
speculative than would be the case if the manager was paid a fixed fee. Private
Funds are not registered under the 1940 Act and, consequently, are not subject
to the restrictions on affiliated transactions and other protections applicable
to regulated investment companies. The valuation of companies held by Private
Funds, the securities of which are generally unlisted and illiquid, may be very
difficult and will often depend on the subjective valuation of the managers of
the Private Funds, which may prove to be inaccurate. Inaccurate valuations of a
Private Fund's portfolio holdings may affect the Fund's net asset value
calculations.
To the extent that these Private Funds are investment companies for
purposes of the 1940 Act, the Fund's ability to invest in them will be limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to any one
investment company and, (iii) 10% of the Fund's total assets in the aggregate.
The securities of Private Funds will typically themselves be classified as
Illiquid Securities by the Board of Directors. Accordingly, the Fund's total
investment in Illiquid Securities, including Private Funds, is limited to 15% of
the Fund's assets with no more than 10% of the Fund's assets invested in Private
Funds.
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-
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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 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
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subject to the Fund's investment limitation on Illiquid Securities. See
"INVESTMENT OBJECTIVES" in the Prospectus.
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
B-6
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realizing profits from fluctuations in the prices of underlying securities. The
Fund intends to use futures contracts only for bona fide hedging purposes.
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
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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 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 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.
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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 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 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
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or when, in the opinion of the Investment Advisor, such techniques can be
expected to yield a higher investment return than other investment options.
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.)
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(2) Engaging in the purchase and sale of real estate, which term
does not include debt, debt securities and other instruments that are secured by
real estate and real estate acquired as a result of foreclosure upon such
instruments.
(3) Purchasing or selling commodities, except that the Fund may
enter into futures contracts and options thereon and may invest in index futures
contracts, and options on 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 not more than 15% of the Fund's assets are invested in futures and
options at any time.
(4) Issuing senior securities, except in compliance with the
Investment Company Act of 1940, as amended.
(5) Underwriting securities of other issuers except to the extent
of 15% of the Fund's investment portfolio or to the extent that, in connection
with the disposition of portfolio securities, the Fund may be deemed to be an
underwriter under certain provisions of the federal securities laws.
(6) 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. Although the Fund cannot accurately predict its turnover rate, its
annualized portfolio turnover rate is not expected to exceed 100% in its
first fiscal year. (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.) This rate varies from year to year. High turnover
rates increase transaction costs and may increase taxable capital gains. The
Investment Advisor considers these effects when evaluating the anticipated
benefits of short-term investing.
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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>
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Positions(s) Principal
Name and Address Held with Occupations (s) During
Registrant Age Past 5 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
* Nathan A. Chapman, Jr. Director 40 President and Director of The
and Chapman Co. since 1986 and
President Chapman Capital Management, 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
C l e r k - 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-12
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Positions(s) Occupations (s) During
Name and Address Held with Age Past 5 Years
Registrant
- --------------------------------------------------------------------------------
<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 - 36 Administrator of The Chapman Co.
President since March 1988. Ms. Chapman
is married to Nathan A. Chapman,
Jr.
- --------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary 50 Secretary and Assistant
and Treasurer since 1997 of The
Assistant 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 55 Controller since 1988 and
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-13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Retirement or Pension Total Compensation from
Aggregate Benefits Accrued as Part Estimated Annual Company and Fund Complex
Name of Person/ Compensation from of Company Expenses Benefits upon Paid to Directors
Position Company Retirement
<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-14
<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 Position With Investment Position With Company
Address Advisor
- --------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. President, Director and President, Director and
401 E. Pratt St. Chairman Chairman
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary and Assistant Secretary and Assistant
401 E. Pratt St. Treasurer Treasurer
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------
M. Lynn Ballard
401 E. Pratt Street Controller, Treasurer Treasurer and Assistant
28th Floor and Assistant Secretary Secretary
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. The Investment Advisor has voluntarily limited the advisory fee during
the first fiscal year of the Fund to an aggregate of .6 of 1% of average weekly
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.
B-15
<PAGE>
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 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-16
<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 June 1, 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 TOTAL %
INVESTOR 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, 1 1 100%
INC. (2)
(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 1 1 100%
officers as a group
- --------------------------------------------------------------------------------
</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 as of
June 1, 1998, 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-17
<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
limited such fee during the first fiscal year of the Fund to an aggregate of
.30% of average daily net assets; however, there can be no assurance that the
Distributor will continue to voluntarily 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-18
<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-19
<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-20
<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 Investor Services Group, 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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<PAGE>
FINANCIAL STATEMENTS
DEM FIXED INCOME FUND
<TABLE>
<CAPTION>
COMPOSITE STATEMENT OF ASSETS AND LIABILITIES - JUNE 1, 1998
- --------------------------------------------------------------------------------
<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.
(a) Financial Statements:
Part A: None
Part B: Composite Statement of Assets and Liabilities--June 1, 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 dated November 22,
1988 (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)
1(H) Articles Supplementary of the Registrant dated June 1, 1998
(1)
2 Amended and Restated Bylaws of the Registrant dated July 18,
1997 (2)
4(A) Form of Stock Certificate (The Chapman U.S. Treasury Money
Fund) (1)
4(B) Form of Stock Certificate (The Chapman Institutional Cash
Management Fund) (1)
4(C) Form of Stock Certificate (DEM Equity Fund, Investor Class)
(1)
4(D) Form of Stock Certificate (DEM Equity Fund, Institutional
Class) (1)
4(E) Form of Stock Certificate (DEM Index Fund, Investor Class) (1)
<PAGE>
4(F) Form of Stock Certificate (DEM Index Fund, Institutional
Class) (1)
4(G) Form of Stock Certificate (DEM Fixed Income Fund, Investor
Class) (1)
4(H) Form of Stock Certificate (DEM Fixed Income Fund,
Institutional Class) (1)
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) (2)
5(B) Advisory and Administrative Services Agreement between the
Registrant and Chapman Capital Management, Inc. (DEM Equity
Fund) (3)
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)
5(E) Advisory and Administrative Services Agreement between the
Registrant and Chapman Capital Management, Inc. (DEM Fixed
Income Fund) (1)
6(A) Distribution Agreement between the Registrant and The Chapman
Co. (The Chapman US Treasury Money Fund and The Chapman
Institutional Cash Management Fund) (2)
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)
<PAGE>
6(D) Distribution Agreement between the Registrant and The Chapman
Co. (DEM Fixed Income Fund) (1)
8(A) Custody Agreement between the Registrant and UMB Bank, N.A.
(1)
8(B) Investment Company Services Agreement between the Registrant
and First Data Investor Services Group (formerly FPS Services,
Inc.) (The Chapman US Treasury Money Fund and DEM Equity Fund)
(2)
8(C) Amendment to Investment Company Services Agreement between the
Registrant and First Data Investor Services Group (formerly
FPS Services, Inc.) (1)
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)
(1)
10 Opinion and consent of Venable, Baetjer and Howard, LLP (1)
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)
15(D) Distribution Plan (DEM Index Fund Institutional Shares) (4)
15(E) Distribution Plan (DEM Fixed Income Fund Investor Shares) (1)
15(F) Distribution Plan (DEM Fixed Income Fund Institutional Shares)
(1)
18(A) Multiple Class Plan (DEM Equity Fund) (2)
18(B) Multiple Class Plan (DEM Index Fund) (4)
18(C) Multiple Class Plan (DEM Fixed Income Fund) (1)
99 Power of Attorney (6)
(1) Filed herewith.
<PAGE>
(2) Incorporated by reference from 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 Amendment 15 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) Incorporated by reference from Amendment 16 to Registrant's Registration
Statement on Form N-1A (File Nos. 33-25716; 811-5697) as filed with the
Securities and Exchange Commission on May 29, 1998.
(5) 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.
(6) 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.
Item 26. Number of Holders of Securities.
Number of Record
On June 1, 1998 Title of Class Holders
The Chapman US
Treasury Money Fund 25
Common Stock
The Chapman
Institutional Cash
Management Fund 0
Common Stock
DEM Equity Fund
Institutional Shares 2
DEM Equity Fund
Investor Shares 16
DEM Index Fund 1
<PAGE>
Institutional Shares
DEM Index Fund 1
Investor Shares
DEM Fixed Income Fund 1
Institutional Shares
DEM Fixed Income Fund 1
Investor Shares
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 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.
<PAGE>
Item 28. Business and Other Connections of Investment Advisor.
- --------------------------------------------------------------------------------
Name and Position with Other Business
Principal Business Address Investment Advisor
- --------------------------------------------------------------------------------
Nathan A. Chapman, Jr. Director and President President and Director of
401 E. Pratt St. The Chapman Co since 1986
28th Floor and Chapman Capital
Baltimore, MD 21202 Management, 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.
- --------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and Assistant Controller since 1988 and
401 E. Pratt Street Secretary Treasurer and Assistant
28th Floor Secretary since 1997 of The
Baltimore, Maryland Chapman Co. Treasurer
21202 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.
- --------------------------------------------------------------------------------
Earl U. Bravo Secretary and Assistant Secretary and Assistant
401 E. Pratt Street Treasurer Treasurer since 1997 of The
28th Floor Chapman Co. Vice
Baltimore, MD 21202 President, 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.
- --------------------------------------------------------------------------------
<PAGE>
Item 29. Principal Underwriter.
(a) The Chapman Co. currently acts as principal underwriter and exclusive
distributor for DEM, Inc.
(b) Directors and Officers
POSITIONS AND OFFICES
- --------------------------------------------------------------------------------
Name and With With
Principal Business Address Underwriter Registrant
- --------------------------------------------------------------------------------
Nathan A. Chapman, Jr. Director and President Director and President
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------
Earl U. Bravo, Sr. Senior Vice President, Secretary and Assistant
The Chapman Co. Secretary and Assistant Treasurer
401 East Pratt Street Treasurer
28th Floor
Baltimore, Maryland 21202
- --------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and Assistant Treasurer and Assistant
The Chapman Co. Secretary Secretary
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
- --------------------------------------------------------------------------------
(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 Investor Services Group, 3200 Horizon
Drive, PO Box 61503, King of Prussia, Pennsylvania 19406.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
post-effective amendment No. 15 and amendment No. 17 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland, on June 11, 1998.
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, as
amended, this post-effective amendment No. 15 to Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
/S/ NATHAN A. CHAPMAN, JR. Director and President June 11, 1998
- --------------------------- (principal executive
Nathan A. Chapman, Jr. officer)
/S/ M. LYNN BALLARD Treasurer (principal June 11, 1998
- --------------------------- financial and
M. Lynn Ballard accounting officer)
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. June 11, 1998
--------------------------
Nathan A. Chapman, Jr.
as Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1(A) Articles of Incorporation of the Registrant dated November 22,
1988
1(H) Articles Supplementary of the Registrant dated June 1, 1998
4(A) Form of Stock Certificate (The Chapman U.S. Treasury Money Fund)
4(B) Form of Stock Certificate (The Chapman Institutional Cash Management Fund)
4(C) Form of Stock Certificate (DEM Equity Fund, Investor Class)
4(D) Form of Stock Certificate (DEM Equity Fund, Institutional Class)
4(E) Form of Stock Certificate (DEM Index Fund, Investor Class)
4(F) Form of Stock Certificate (DEM Index Fund, Institutional Class)
4(G) Form of Stock Certificate (DEM Fixed Income Fund, Investor Class)
4(H) Form of Stock Certificate (DEM Fixed Income Fund, Institutional Class)
5(E) Advisory and Administrative Services Agreement between the Registrant and Chapman
Capital Management, Inc. (DEM Fixed Income Fund)
6(E) Distribution Agreement between the Registrant and The Chapman Co. (DEM Fixed Income
Fund)
8(A) Custodian Agreement between the Registrant and UMB Bank, N.A.
8(C) Amendment to Investment Company Services Agreement between the Registrant and FPS
Services, Inc.
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)
10 Opinion and consent of Venable, Baetjer and Howard, LLP
15(E) Distribution Plan (DEM Fixed Income Fund Investor Shares)
15(F) Distribution Plan (DEM Fixed Income Fund Institutional Shares)
18(C) Multiple Class Plan (DEM Fixed Income Fund)
</TABLE>
<PAGE>
ARTICLES OF INCORPORATION
THE CHAPMAN FUNDS, INC.
The undersigned John W. Scheflen, whose post office address is c/o
Venable, Baetjer and Howard, 1800 Mercantile Bank & Trust Building, 2 Hopkins
Plaza, Baltimore, Maryland 21201, being at least 18 years of age, as an
incorporator, hereby forms a corporation under and by virtue of the laws of the
State of Maryland.
ARTICLE I
NAME
The name of the corporation is The Chapman Funds, Inc. (the
"Corporation").
ARTICLE II
CORPORATE PURPOSES
The purpose for which the Corporation is formed is to engage in the
business of an investment company.
The Corporation may engage in any other business and shall have all
powers conferred upon or permitted to corporations by the Maryland General
Corporation Law.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
Maryland is c/o The Chapman Co., 2 Hopkins Plaza, Baltimore, Maryland 21201.
The name of the resident agent of the Corporation in Maryland is Joseph M.
Roulhac, Esq., and the post office address of the resident agent is 100 Light
Street, 6th Floor, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK AND STOCKHOLDERS
Section 1. AUTHORIZED SHARES. The Corporation is authorized to
issue Ten Billion (10,000,000,000) shares of Common Stock, par value $.001 per
share. The
<PAGE>
aggregate par value of all shares which the Corporation is authorized to issue
is Ten Million Dollars ($10,000,000).
Subject to the following paragraph, the authorized shares are
classified as 5,000,000,000 shares of The Chapman US Treasury Money and
5,000,000,000 shares of The Chapman Institutional Cash Management Fund.
The Board of Directors is authorized to classify or to reclassify,
from time to time, any unissued shares of stock of the Corporation, whether now
or hereafter authorized, by setting, changing or eliminating the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms and conditions of or rights to require
redemption of the stock.
The provisions of these Articles of Incorporation, including those in
this Section shall apply to each class of stock unless otherwise provided by the
Board of Directors prior to issuance of any shares of that class:
(a) As more fully set forth hereafter, the assets and
liabilities and the income and expenses of each class of the Corporation's stock
shall be determined separately and, accordingly, the net asset value, the
dividends payable to holders, and the amounts distributable in the event of
dissolution of the Corporation to holders of shares of the Corporation's stock
may vary from class to class. Except for these differences and certain other
differences hereafter set forth, each class of the Corporation's stock shall
have the same preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of and rights to require redemption.
(b) All consideration received by the Corporation for the issue
or sale of shares of a class of the Corporation's stock, together with all funds
derived from any investment and reinvestment thereof, shall irrevocably belong
to that class for all purposes, subject only to the rights of creditors, and
shall be so recorded upon the books of account of the Corporation. Such
consideration and any funds derived from any investment and reinvestment are
herein referred to as "assets belonging to" that class.
(c) The assets belonging to a class of the Corporation's stock
shall be charged with the liabilities of the Corporation with respect to that
class and with that class' share of the liabilities of the Corporation not
attributable to any particular class, in the latter case in the proportion that
the net asset value of that class (determined without regard to such
liabilities) bears to the net asset value of all classes of the Corporation's
stock (determined without regard to such liabilities). The determination of the
Board of Directors shall be conclusive as to the allocation of liabilities,
including accrued expenses and reserves, and assets to a particular class or
classes.
(d) Shares of each class of stock shall be entitled to such
dividends or distributions, in stock or in cash or both, as may be declared from
time to
-2-
<PAGE>
time by the Board of Directors with respect to such class. Dividends or
distributions shall be paid on shares of a class of stock only out of the assets
belonging to that class.
(e) All holders of shares of stock shall vote as a single class
except with respect to any matter which affects only one or more classes of
stock, in which case only the holders of shares of the classes affected shall be
entitled to vote.
(f) In the event of the liquidation or dissolution of the
Corporation, the stockholders of a class of the Corporation's stock shall be
entitled to receive, as a class, out of the assets of the Corporation available
for distribution to stockholders, the assets belonging to that class less the
liabilities allocated to that class. The assets so distributable to the
stockholders of a class shall be distributed among such stockholders in
proportion to the number of shares of that class held by them and recorded on
the books of the Corporation. In the event that there are any assets available
for distribution that are not attributable to any particular class of stock,
such assets shall be allocated to all classes in proportion to the net asset
value of the respective classes.
Section 2. FRACTIONAL SHARES. The Corporation may issue
fractional shares. Any fractional share shall carry proportionately all the
rights of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including, without limitation, the right to vote and
the right to receive dividends.
Section 3. QUORUM REQUIREMENTS. The presence in person or by
proxy of the holders of one-third of the shares of stock of the Corporation
entitled to vote without regard to class shall constitute a quorum at any
meeting of the stockholders, except with respect to any matter which by law
requires the approval of one or more classes of stock, in which case the
presence in person or by proxy of the holders of one-third of the shares of
stock of each class entitled to vote on the matter shall constitute a quorum.
Section 4. VOTING. Notwithstanding any provision of the laws of
the State of Maryland requiring any action to be taken or authorized by the
affirmative vote of the holders of more than a majority of the outstanding stock
of the Corporation, that action shall, except to the extent otherwise required
by the Investment Company Act of 1940, be effective and valid if taken or
authorized by the affirmative vote of the holders of the majority of the total
number of votes entitled to be cast thereon.
Section 5. NO PREEMPTIVE RIGHTS. No holder of shares of stock of
the Corporation shall be entitled to any preemptive right other than as the
Board of Directors may establish.
Section 6. REDEMPTION OF STOCK. Each stockholder may require the
Corporation to redeem all or any part of the stock owned by that holder, upon
request to the Corporation or its designated agent, at the net asset value of
the shares of that class next determined following receipt of the request in a
form approved by the Corporation
-3-
<PAGE>
and accompanied by surrender of the certificate or certificates for the shares,
if any. The Board of Directors may establish procedures for redemption of
stock. Payment of the redemption price by the Corporation or its designated
agent shall be made within seven days after redemption. The right of redemption
may be suspended and payment of the redemption price may be postponed when
permitted or required by applicable law. The right of a holder of stock
redeemed by the Corporation to receive dividends thereon and all other rights
with respect to the shares shall terminate at the time as of which the
redemption price has been determined, except the right to receive the redemption
price and any dividend or distribution to which that holder had become entitled
as the record holder of the shares on the record date for that dividend.
Section 7. DETERMINATIONS BY BOARD OF DIRECTORS. Any
determination made in good faith by or pursuant to the direction of the Board of
Directors as to the amount of the assets, debts, obligations or liabilities of
the Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves or
charges, as to the use, alteration or cancellation of any reserves or charges
(whether or not any debt, obligation or liability for which such reserves or
charges shall have been created shall have been paid or discharged or shall be
then or thereafter required to be paid or discharged), as to the value of or the
method of valuing any investment or other asset owned or held by the
Corporation, as to the number of shares of any class of stock outstanding, as to
the income of the Corporation or as to any other matter relating to the
determination of net asset value, the declaration of dividends or the issue,
sale, redemption or other acquisition of shares of the Corporation, shall be
final and conclusive and shall be binding upon the Corporation and all holders
of its shares, past, present and future, and shares of the corporation are
issued and sold on the condition and understanding that any and all such
determinations shall be binding as aforesaid.
ARTICLE V
BOARD OF DIRECTORS
Section 1. INITIAL BOARD OF DIRECTORS. The Corporation shall
initially have one director. The name of the initial Director, who shall hold
office until his successor is duly chosen and qualified, is Nathan A. Chapman,
Jr.
Section 2. NUMBER OF DIRECTORS. The number of Directors in office
may be changed from time to time in the manner specified in the By-Laws of the
Corporation, but this number shall never be less than the minimum number
required under the Maryland General Corporation Law.
Section 3. CERTAIN POWERS OF BOARD OF DIRECTORS. In addition to
its other powers explicitly or implicitly granted under these Articles of
Incorporation, by law or otherwise, the Board of Directors of the Corporation
(a) is expressly authorized to make, alter, amend or repeal the By-Laws of the
Corporation, (b) may from time to time
-4-
<PAGE>
determine whether, to what extent, at what times and places, and under what
conditions and regulations the accounts and books of the Corporation, or any of
them, shall be open to the inspection of the stockholders, and no stockholder
shall have any right to inspect any account, book or document of the Corporation
except as conferred by statute or as authorized by the Board of Directors of the
Corporation, (c) is empowered to authorize, without stockholder approval, the
issuance and sale from time to time of shares of stock of the Corporation
whether now or hereafter authorized, and (d) is authorized to adopt procedures
for determination of and to maintain constant the net asset value of shares of
the Corporation's stock.
ARTICLE VI
LIABILITY AND INDEMNIFICATION
(a) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
(b) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify and advance expenses to its officers to
the same extent as its directors and may do so to such further extent as is
consistent with law. The Board of Directors may by Bylaw, resolution or
agreement make further provision for indemnification of directors, officers,
employees and agents to the fullest extent permitted by the Maryland Corporation
Law.
(c) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
(d) References to the Maryland General Corporation Law in this
Article are to that law as from time to time amended. No amendment to the
charter of the Corporation shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
-5-
<PAGE>
ARTICLE VII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment of these Articles of Incorporation now or hereafter authorized by law,
including any amendment which alters the contract rights, as expressly set forth
in these Articles of Incorporation, of any outstanding capital stock.
I have signed these Articles of Incorporation on November 22, 1988 and
acknowledge the same to be my act.
/S/ JOHN W. SCHEFLEN
-----------------------------
John W. Scheflen
-6-
<PAGE>
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) Two Hundred Fifty Million
(250,000,000) of the authorized but unissued shares of DEM Multi-Manager Bond
Fund, Investor Class Common Stock as Two Hundred Fifty Million (250,000,000)
shares of DEM Fixed Income Fund, Investor Class Common Stock; (ii) Two Hundred
Fifty Million (250,000,000) of the authorized but unissued shares of DEM
Multi-Manager Bond Fund, Institutional Class Common Stock as Two Hundred Fifty
Million (250,000,000) shares of DEM Fixed Income Fund, Investor Class Common
Stock; (iii) Two Hundred Fifty Million (250,000,000) of the authorized but
unissued shares of DEM Multi-Manager Equity Fund, Investor Class Common Stock as
Two Hundred Fifty Million (250,000,000) shares of DEM Fixed Income Fund,
Institutional Class Common Stock; and (iv) Two Hundred Fifty Million
(250,000,000) of the authorized but unissued shares of DEM Multi-Manager Equity
Fund, Institutional Class Common Stock as Two Hundred Fifty Million
(250,000,000) shares of DEM Fixed Income Fund, Institutional Class Common Stock,
with the result that the authorized shares of Common Stock of the Corporation
are now classified as follows:
<TABLE>
<CAPTION>
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 Index Fund, Investor Class 1,000,000,000
DEM Index Fund, Institutional Class 1,000,000,000
DEM Multi-Manager Bond Fund, Investor Class 750,000,000
DEM Multi-Manager Bond Fund, Institutional Class 750,000,000
DEM Multi-Manager Equity Fund, Investor Class 750,000,000
DEM Multi-Manager Equity Fund, Institutional Class 750,000,000
DEM Fixed Income Fund, Investor Class 500,000,000
DEM Fixed Income Fund, Institutional Class 500,000,000
----------------
Total 10,000,000,000
</TABLE>
<PAGE>
SECOND: The DEM Fixed Income Fund, Investor Class shares and the DEM Fixed
Income 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, 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 Fixed Income Fund, Investor Class
(the "Investor Class") shares and the assets attributable to the DEM Fixed
Income 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 from 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
-2-
<PAGE>
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 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.
-3-
<PAGE>
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 June 1, 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. By: /s/ NATHAN A. CHAPMAN, JR.
- ---------------------- ---------------------------
Earl U. Bravo, Sr. Nathan A. Chapman, Jr.
Secretary President
-4-
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
THE CHAPMAN U.S. TREASURY MONEY FUND CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF________________
(________) SHARES OF THE CHAPMAN U.S. TREASURY MONEY FUND CLASS COMMON STOCK OF
THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE
HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Countersigned by:
CHAPMAN CAPITAL
MANAGEMENT, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
THE CHAPMAN INSTITUTIONAL CASH MANAGEMENT FUND CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE CHAPMAN INSTITUTIONAL CASH MANAGEMENT FUND CLASS
COMMON STOCK OF THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF
THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED BY THE TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Countersigned by:
CHAPMAN CAPITAL
MANAGEMENT, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND INVESTOR CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE DEM EQUITY FUND INVESTOR CLASS COMMON STOCK OF THE
CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE
HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Countersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND INSTITUTIONAL CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF _______________
(________) SHARES OF THE DEM EQUITY FUND INSTITUTIONAL CLASS COMMON STOCK OF
THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY
THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Countersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM INDEX FUND INVESTOR CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE DEM INDEX FUND INVESTOR CLASS COMMON STOCK OF THE
CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE
HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Contersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM INDEX FUND INSTITUTIONAL CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE DEM INDEX FUND INSTITUTIONAL CLASS COMMON STOCK OF
THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY
THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Contersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND INVESTOR CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE DEM FIXED INCOME FUND INVESTOR CLASS COMMON STOCK OF
THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY
THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE
TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Contersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
STATE OF MARYLAND
NUMBER SHARES
------ ------
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND INSTITUTIONAL CLASS
COMMON STOCK
PAR VALUE-$0.001
Fully Paid Non-Assessable
THIS CERTIFIES THAT________________IS THE REGISTERED HOLDER OF_______________
(________) SHARES OF THE DEM FIXED INCOME FUND INSTITUTIONAL CLASS COMMON
STOCK OF THE CHAPMAN FUNDS, INC. TRANSFERABLE ONLY ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF
THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED BY THE TRANSFER AGENT.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS ______DAY OF _____ A.D.______.
- ----------------------------- ---------------------------------
EARL U. BRAVO, SR., SECRETARY NATHAN A. CHAPMAN, JR., PRESIDENT
PAR VALUE
$0.001
Contersigned by:
FIRST DATA INVESTOR
SERVICES GROUP, INC.
By:
------------------------------
Authorized Signature
<PAGE>
ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND
The World Trade Center-Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
February 11, 1998
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 Fixed Income
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 portfolio
securities and will solicit brokers to execute transactions, including The
<PAGE>
Chapman Capital Management, Inc.
February 11, 1998
Page 2
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.
February 11, 1998
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
<PAGE>
Chapman Capital Management, Inc.
February 11, 1998
Page 4
Corporation agree to indemnify and hold harmless you and such other persons
against 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
<PAGE>
Chapman Capital Management, Inc.
February 11, 1998
Page 5
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 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" 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" 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" and/or "DEM" in any form or combination of words.
<PAGE>
Chapman Capital Management, Inc.
February 11, 1998
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
FIXED INCOME FUND
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------
Name: Nathan A. Chapman, Jr.,
Title: President
Accepted:
CHAPMAN CAPITAL MANAGEMENT, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
-----------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
DISTRIBUTION AGREEMENT
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND
The World Trade Center-Baltimore
28th Floor
401 East Pratt Street
Baltimore, Maryland 21202
February 11, 1998
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 Fixed Income
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
Fixed Income 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.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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).
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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
<PAGE>
The Chapman Co.
February 11, 1998
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.
<PAGE>
The Chapman Co.
February 11, 1998
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.
<PAGE>
The Chapman Co.
February 11, 1998
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.
<PAGE>
The Chapman Co.
February 11, 1998
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 FIXED
INCOME 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
<PAGE>
CUSTODY AGREEMENT
Dated December 23, 1994
Between
UNITED MISSOURI BANK, N.A.
and
THE CHAPMAN FUNDS, INC.
Prototype Custody Agreement
for
Registered Investment Company
for Fund/Plan Clients Only
<PAGE>
Table of Contents
SECTION PAGE
- ------- ----
1. Appointment of Custodian 1
2. Definitions 2
(a) Securities 2
(b) Assets 2
(c) Instructions and Special Instructions 2
3. Delivery of Corporate Documents 2
4. Powers and Duties of Custodian and Domestic Subcustodian 4
(a) Safekeeping 4
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 7
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 9
(i) Segregated Accounts 9
(j) Depositary Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 13
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public
Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Others Disbursements 15
5. Subcustodians 15
(a) Domestic Subcustodians 15
<PAGE>
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 16
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. Standard of Care 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond
Custodian's Control, Armed Conflict, Sovereign
Risk, Etc. 17
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 18
(f) Instructions Appearing to be Genuine 18
(g) Exceptions from Liability 19
7. Liability of the Custodian for Actions of Others 19
(a) Domestic Subcustodians 19
(b) Liability for Acts and Omissions of Foreign
Subcustodians 19
(c) Securities Systems, Interim Subcustodians,
Special Subcustodians, Securities Depositories and
Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. Indemnification 20
(a) Indemnification by Fund 20
(b) Indemnification by Custodian 21
9. Advances 21
10. Liens 21
11. Compensation 22
12. Powers of Attorney 22
13. Termination and Assignment 22
14. Notices 23
15. Miscellaneous 23
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 23rd day of December, 1994, between The
Chapman Funds, Inc. with its principal place of business located at 401 E. Pratt
St, Baltimore, MD 21202 (hereinafter "Fund"), and United Missouri Bank, n.a., a
national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian").
WITNESSETH:
WHEREAS, the Fund is registered as a closed-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, the Fund desires to appoint Custodian as its custodian for the
custody of Assets (as hereinafter defined) owned by the Fund which Assets are to
be held in such accounts as the Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
WHEREAS, the Fund represents that by separate agreement between Fund/Plan
Services Inc. ("Fund/Plan") and the Fund, Fund/Plan (a) has agreed to perform
certain administrative functions which may include the functions of
administrator, transfer agent and accounting services agent and (b) has been
appointed by the Fund to act as its agent in respect of the transactions
contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) Fund/Plan has agreed to act as Fund's
agent in respect of the transactions contemplated in this Agreement and (b) the
Bank is authorized and directed to rely upon and follow directions and
instructions given by Fund/Plan, the Fund's agent, in respect of transactions
contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto, intending to be legally bound, mutually covenant and agree
as follows:
1. APPOINTMENT OF CUSTODIAN.
The Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to the Fund which have been or may be from time to time
deposited with the Custodian. Custodian accepts such appointment as a custodian
and agrees to perform the duties and responsibilities of Custodian as set forth
herein on the conditions set forth herein.
<PAGE>
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills,
rights, scrip, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other instruments or
obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of the Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested
telex, a written (including, without limitation, facsimile transmission)
request, direction, instruction or certification signed or initialed by or on
behalf of the Fund by an Authorized Person; (ii) a telephonic or other oral
communication from a person the Custodian reasonably believes to be an
Authorized Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) on behalf of the Fund. Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral Instructions prior to the Custodian's receipt of such confirmation. The
Fund authorizes the Custodian to record any and all telephonic or other oral
Instructions communicated to the Custodian.
(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any Assistant
Treasurer of the Fund or any other person designated by the Treasurer of the
Fund in writing, which countersignature or confirmation shall be included on the
same instrument containing the Instructions or on a separate instrument relating
thereto.
(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or telex
number agreed upon from time to time by the Custodian and the Fund.
(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been taken.
2
<PAGE>
The Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
The Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, the Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or Trustees and
all amendments or supplements thereto, properly certified or authenticated,
designating certain officers or employees of the Fund who will have continuing
authority to certify to the Custodian: (a) the names, titles, signatures and
scope of authority of all persons authorized to give Instructions or any other
notice, request, direction, instruction, certificate or instrument on behalf of
the Fund, and (b) the names, titles and signatures of those persons authorized
to countersign or confirm Special Instructions on behalf of the Fund (in both
cases collectively, the "Authorized Persons" and individually, an "Authorized
Person"). Such Resolutions and certificates may be accepted and relied upon by
the Custodian as conclusive evidence of the facts set forth therein and shall be
considered to be in full force and effect until delivery to the Custodian of a
similar Resolution or certificate to the contrary. Upon delivery of a
certificate which deletes or does not include the name(s) of a person previously
authorized to give Instructions or to countersign or confirm Special
Instructions, such persons shall no longer be considered an Authorized Person
authorized to give Instructions or to countersign or confirm Special
Instructions. Unless the certificate specifically requires that the approval of
anyone else will first have been obtained, the Custodian will be under no
obligation to inquire into the right of the person giving such Instructions or
Special Instructions to do so. Notwithstanding any of the foregoing, no
Instructions or Special Instructions received by the Custodian from the Fund
will be deemed to authorize or permit any director, trustee, officer, employee,
or agent of the Fund to withdraw any of the Assets of the Fund upon the mere
receipt of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
3
<PAGE>
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform the
powers and duties hereinafter set forth in this Section 4. For purposes of this
Section 4 all references to powers and duties of the "Custodian" shall also
refer to any Domestic Subcustodian appointed pursuant to Section 5(a).
The Bank's performance of its duties hereunder and the day-to-day
operations of the Custody Account shall be in accordance with written service
standards furnished to the Fund, care of the Fund's agent, FDISG, by the Bank
from time to time. Such service standards, as amended from time to time, are
incorporated herein by reference.
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of the Fund which are
delivered to it from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
The Bank shall supply to the Fund, addressed care of its agent, FDISG,
from time to time as mutually agreed upon a written statement with respect to
all of the Property in the Custody Account. In the event that the Fund, acting
through its agent, FDISG, does not inform the Bank in writing of any exceptions
or objections within thirty (30) days after receipt of such statement, the Fund
shall be deemed to have approved such statement.
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of the Fund
either: (i) by physical possession of the share certificates or other
instruments representing such Securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the same in the name
of the Fund or its nominee, or in the name of the Custodian or its nominee, for
whose actions the Fund and Custodian, respectively, shall be fully responsible.
Upon the receipt of Instructions, the Custodian shall hold such Securities in
street certificate form, so called, with or without any indication of fiduciary
capacity. However, unless it receives Instructions to the contrary, the
Custodian will register all such portfolio Securities in the name of the
Custodian's authorized nominee. All such Securities shall be held in an account
of the Custodian containing only assets of the Fund or only assets held by the
Custodian as a fiduciary, provided that the records of the Custodian shall
indicate at all
4
<PAGE>
times the Fund or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by the Fund in, and the Fund hereby approves use of: (a) The Depository
Trust Company; (b) The Participants Trust Company; and (c) any book-entry system
as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies substantially in the form
of 31 CFR 306.115. Upon the receipt of Special Instructions, the Custodian may
deposit and/or maintain domestic Securities owned by the Fund in any other
domestic clearing agency registered with the Securities and Exchange Commission
("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may
otherwise be authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment companies) which
acts as a Securities depository. Each of the foregoing shall be referred to in
this Agreement as a "Securities System", and all such Securities Systems shall
be listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or through
one or more agents or Subcustodians which are also qualified to
act as custodians for investment companies.
(ii) The Custodian shall deposit and/or maintain the Securities in a
Securities System, provided that such Securities are
represented in an account ("Account") of the Custodian in the
Securities System that includes only assets held by the
Custodian as a fiduciary, custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all times
identify those Securities belonging to the Fund which are
maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for the
account of the Fund only upon (a) receipt of advice from the
Securities System that such Securities have been transferred to
the Account of the Custodian in accordance with the rules of
the Securities System, and (b) the making of an entry on the
records of the Custodian to reflect such payment and transfer
for the account of the Fund. The Custodian shall transfer
Securities sold for the account of the Fund only upon (a)
receipt of advice from the Securities System that payment for
such Securities has been transferred to the Account of the
Custodian in accordance with the rules of the Securities
System, and (b) the making of an entry on
5
<PAGE>
the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices
from the Securities System relating to transfers of Securities
for the account of the Fund shall be maintained for the Fund by
the Custodian. The Custodian shall deliver to the Fund on the
next succeeding business day daily transaction reports which
shall include each day's transactions in the Securities System
for the account of the Fund. Such transaction reports shall be
delivered to the Fund or any agent designated by the Fund
pursuant to Instructions, by computer or in such other manner
as the Fund and Custodian may agree.
(v) The Custodian shall, if requested by the Fund pursuant to
Instructions, provide the Fund with reports obtained by the
Custodian or any Subcustodian with respect to a Securities
System's accounting system, internal accounting control and
procedures for safeguarding Securities deposited in the
Securities System.
(vi) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any Securities System on behalf of the
Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the Securities of the Fund
maintained with such Securities System.
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided such
Assets are on hand and available, in connection with the Fund's transactions and
to transfer such Assets to such broker, dealer, Subcustodian, bank, agent,
Securities System or otherwise as specified in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for the Fund for other Securities or cash paid in
connection with any reorganization, recapitalization, merger, consolidation, or
conversion of convertible Securities, and will deposit any such Securities in
accordance with the terms of any reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in definitive form, to
surrender Securities for transfer into a name or nominee name as permitted in
Section 4(b)(2), to effect an
6
<PAGE>
exchange of shares in a stock split or when the par value of the stock is
changed, to sell any fractional shares, and, upon receiving payment therefor, to
surrender bonds or other Securities held by it at maturity or call.
(e) PURCHASES OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay for such
Securities out of monies held for the Fund's account for which the purchase was
made, but only insofar as monies are available therein for such purpose, and
receive the portfolio Securities so purchased. Unless the Custodian has
received Special Instructions to the contrary, such payment will be made only
upon receipt of Securities by the Custodian, a clearing corporation of a
national Securities exchange of which the Custodian is a member, or a Securities
System in accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, upon receipt of Instructions: (i) in connection
with a repurchase agreement, the Custodian may release funds to a Securities
System prior to the receipt of advice from the Securities System that the
Securities underlying such repurchase agreement have been transferred by
book-entry into the Account maintained with such Securities System by the
Custodian, provided that the Custodian's instructions to the Securities System
require that the Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by book-entry of the
Securities underlying the repurchase agreement into such Account; (ii) in the
case of Interest Bearing Deposits, currency deposits, and other deposits,
foreign exchange transactions, futures contracts or options, pursuant to
Sections 4(g), 4(h), 4(l), and 4(m) hereof, the Custodian may make payment
therefor before receipt of an advice of transaction; and (iii) in the case of
Securities as to which payment for the Security and receipt of the instrument
evidencing the Security are under generally accepted trade practice or the terms
of the instrument representing the Security expected to take place in different
locations or through separate parties, such as commercial paper which is indexed
to foreign currency exchange rates, derivatives and similar Securities, the
Custodian may make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the terms of the
instrument representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the Custodian
will, with respect to a sale, deliver or cause to be delivered the Securities
thus designated as sold to the broker or other person specified in the
Instructions relating to such sale. Unless the Custodian has received Special
Instructions to the contrary, such delivery shall be made only upon receipt of
payment therefor in the form of: (a) cash, certified check,
7
<PAGE>
bank cashier's check, bank credit, or bank wire transfer; (b) credit to the
account of the Custodian with a clearing corporation of a national Securities
exchange of which the Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the provisions of Section
4(b)(3) hereof. Notwithstanding the foregoing, Securities held in physical form
may be delivered and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the Custodian of a receipt for
such Securities, provided that the Custodian shall have taken reasonable steps
to ensure prompt collection of the payment for, or return of, such Securities by
the broker or its clearing agent, and provided further that the Custodian shall
not be responsible for the selection of or the failure or inability to perform
of such broker or its clearing agent or for any related loss arising from
delivery or custody of such Securities prior to receiving payment therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment for and deliver
other Assets for the account of the Fund as provided in Instructions.
(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall: (a) receive and
retain confirmations or other documents, if any, evidencing the purchase or
writing of the option by the Fund; (b) if the transaction involves the sale of a
covered call option, deposit and maintain in a segregated account the Securities
(either physically or by book-entry in a Securities System) subject to the
covered call option written on behalf of the Fund; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any notices or
other communications evidencing the expiration, termination or exercise of such
options which are furnished to the Custodian by the Options Clearing Corporation
(the "OCC"), the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for handling such
option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the Custodian, the Fund
and the broker-dealer shall enter into an agreement to comply with the rules of
the OCC or of any registered national securities exchange or similar
organization(s). Pursuant to that agreement and the Fund's Instructions, the
Custodian shall: (a) receive and retain confirmations or other documents, if
any, evidencing the writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by book-entry in a
Securities System), cash and/or other Assets; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any such
agreement and with any notices or other communications evidencing the
expiration, termination or exercise of such option which are furnished to the
Custodian by the OCC, the securities or options exchanges on which such options
were traded, or such other organization as may be responsible for handling such
option transactions. The Fund and the broker-dealer shall be responsible for
determining the quality and quantity of assets held in any segregated
8
<PAGE>
account established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the Fund, the Custodian and the designated
futures commission merchant (a "Procedural Agreement"). Under the Procedural
Agreement the Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option on a futures
contract by the Fund; (b) deposit and maintain in a segregated account cash,
Securities and/or other Assets designated as initial, maintenance or variation
"margin" deposits intended to secure the Fund's performance of its obligations
under any futures contracts purchased or sold, or any options on futures
contracts written by the Fund, in accordance with the provisions of any
Procedural Agreement designed to comply with the provisions of the Commodity
Futures Trading Commission and/or any commodity exchange or contract market
(such as the Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer Assets into
such margin accounts only in accordance with any such Procedural Agreements.
The Fund and such futures commission merchant shall be responsible for
determining the type and amount of Assets held in the segregated account or paid
to the broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on behalf of the
Fund, into which account or accounts may be transferred Assets of the Fund,
including Securities maintained by the Custodian in a Securities System pursuant
to Paragraph (b)(3) of this Section 4, said account or accounts to be maintained
(i) for the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for the
purpose of compliance by the Fund with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by registered
investment companies, or (iii) for such other purposes as may be set forth, from
time to time, in Special Instructions. The Custodian shall not be responsible
for the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance by the Fund
with required procedures noted in (ii) above.
(j) DEPOSITARY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or cause
to be surrendered Securities to the depositary used for such Securities by an
issuer of American Depositary Receipts or International Depositary Receipts
(hereinafter referred to,
9
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collectively, as "ADRs"), against a written receipt therefor adequately
describing such Securities and written evidence satisfactory to the organization
surrendering the same that the depositary has acknowledged receipt of
instructions to issue ADRs with respect to such Securities in the name of the
Custodian or a nominee of the Custodian, for delivery in accordance with such
instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause
to be surrendered ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the organization surrendering the same that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
Securities underlying such ADRs in accordance with such instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer or trustee
thereof (or to the agent of such issuer or trustee) for the purpose of exercise
or sale, provided that the new Securities, cash or other Assets, if any,
acquired as a result of such actions are to be delivered to the Custodian; and
(b) deposit Securities upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the Custodian,
or the tendered Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed to the
contrary in Instructions, to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall notify the Fund of such action in writing by facsimile
transmission or in such other manner as the Fund and Custodian may agree in
writing.
The Fund agrees that if it gives an Instruction for the performance of
an act on the last permissible date of a period established by any optional
offer or on the last permissible date for the performance of such act, the Fund
shall hold the Bank harmless from any adverse consequences in connection with
acting upon or failing to act upon such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred to,
collectively, as "Interest Bearing Deposits") for the account of the Fund, the
Custodian shall purchase such Interest Bearing Deposits in the name of the Fund
with such banks or trust companies, including the Custodian, any Subcustodian or
any subsidiary or affiliate of the Custodian (hereinafter referred to as
"Banking Institutions"), and in such amounts as the Fund may direct pursuant to
Instructions. Such Interest Bearing Deposits may be denominated in
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U.S. Dollars or other currencies, as the Fund may determine and direct pursuant
to Instructions. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other than those
issued by the Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or for the failure of such Banking Institution to pay upon
demand.
(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery on behalf of and for the account of the Fund with such
currency brokers or Banking Institutions as the Fund may determine and direct
pursuant to Instructions. The Fund accepts full responsibility for its use of
third party foreign exchange brokers and for execution of said foreign exchange
contracts and understands that the Fund shall be responsible for any and all
costs and interest charges which may be incurred as a result of the failure or
delay of its third party broker to deliver foreign exchange. The Custodian
shall have no responsibility with respect to the selection of the currency
brokers or Banking Institutions with which the Fund deals or, so long as the
Custodian acts in accordance with Instructions, for the failure of such brokers
or Banking Institutions to comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein, upon
receipt of Instructions the Custodian may, in connection with a foreign exchange
contract, make free outgoing payments of cash in the form of U.S. Dollars or
foreign currency prior to receipt of confirmation of such foreign exchange
contract or confirmation that the countervalue currency completing such contract
has been delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from the Fund, the Custodian will
release or cause to be released Securities held in custody to the pledgees
designated in such Instructions by way of pledge or hypothecation to secure
loans incurred by the Fund with various lenders including but not limited to
United Missouri Bank, n.a.; provided, however, that the Securities shall be
released only upon payment to the Custodian of the monies borrowed, except that
in cases where additional collateral is required to secure existing borrowings,
further Securities may be released or delivered, or caused to be released or
delivered for that purpose upon receipt of Instructions. Upon receipt of
Instructions, the Custodian will pay, but only from funds available for such
purpose, any such loan upon re-delivery to it of the Securities pledged or
hypothecated therefor and upon surrender of the note or notes evidencing such
loan. In lieu of delivering collateral to a pledgee, the Custodian, on the
receipt of Instructions, shall transfer the pledged Securities to a segregated
account for the benefit of the pledgee.
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(2) Upon receipt of Special Instructions, and execution of a separate
Securities Lending Agreement, the Custodian will release Securities held in
custody to the borrower designated in such Instructions and may, except as
otherwise provided below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case of loans of
Securities held by a Securities System that are secured by cash collateral, the
Custodian's instructions to the Securities System shall require that the
Securities System deliver the Securities of the Fund to the borrower thereof
only upon receipt of the collateral for such borrowing. The Custodian shall
have no responsibility or liability for any loss arising from the delivery of
Securities prior to the receipt of collateral. Upon receipt of Instructions and
the loaned Securities, the Custodian will release the collateral to the
borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends, rights,
and other items of like nature and, upon receipt of Instructions, take action
with respect to the same as directed in such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings with Securities or
other property of the Fund except as may be otherwise provided in this Agreement
or directed from time to time by Instructions from the Fund. The Custodian may
also make payments to itself or others from the Assets for disbursements and
out-of-pocket expenses incidental to handling Securities or other similar items
relating to its duties under this Agreement, provided that all such payments
shall be accounted for to the Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to the Fund
with respect to portfolio Securities and other Assets; (b) promptly credit to
the account of the Fund all income and other payments relating to portfolio
Securities and other Assets held by the Custodian hereunder upon Custodian's
receipt of such income or payments or as otherwise agreed in writing by the
Custodian and the Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute ownership and other
certificates and affidavits for all federal, state, local and foreign tax
purposes in connection with receipt of income or other payments with respect to
portfolio Securities and other Assets, or in connection with the transfer of
such Securities or other Assets; provided, however, that with respect to
portfolio Securities registered in so-called street name, or physical Securities
with variable interest rates, the Custodian shall use its best efforts to
collect amounts due and payable to the Fund. The Custodian shall notify the
Fund in writing by facsimile transmission or in such other manner as the Fund
and
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Custodian may agree in writing if any amount payable with respect to portfolio
Securities or other Assets is not received by the Custodian when due. The
Custodian shall not be responsible for the collection of amounts due and payable
with respect to portfolio Securities or other Assets that are in default.
(r) BANK ACCOUNTS.
Upon Instructions, the Custodian shall open and operate a bank account
or accounts on the books of the Custodian; provided that such bank account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(s) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
To enable the Fund to pay dividends or other distributions to
shareholders of the Fund and to make payment to shareholders who have requested
repurchase or redemption of their shares of the Fund (collectively, the
"Shares"), the Custodian shall release cash or Securities insofar as available.
In the case of cash, the Custodian shall, upon the receipt of Instructions,
transfer such funds by check or wire transfer to any account at any bank or
trust company designated by the Fund in such Instructions. In the case of
Securities, the Custodian shall, upon the receipt of Special Instructions, make
such transfer to any entity or account designated by the Fund in such Special
Instructions.
(t) PROCEEDS FROM SHARES SOLD.
The Custodian shall receive funds representing cash payments received
for shares issued or sold from time to time by the Fund, and shall credit such
funds to the account of the Fund. The Custodian shall notify the Fund of
Custodian's receipt of cash in payment for shares issued by the Fund by
facsimile transmission or in such other manner as the Fund and the Custodian
shall agree. Upon receipt of Instructions, the Custodian shall: (a) deliver all
federal funds received by the Custodian in payment for shares as may be set
forth in such Instructions and at a time agreed upon between the Custodian and
the Fund; and (b) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian, in the amount of
checks received in payment for shares which are deposited to the accounts of the
Fund.
(u) PROXIES AND NOTICES; COMPLIANCE WITH THE SHAREHOLDERS COMMUNICATION
ACT OF 1985.
The Custodian shall deliver or cause to be delivered to the Fund all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to Securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Instructions, the
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Custodian shall execute and deliver, or cause such Subcustodian or nominee to
execute and deliver, such proxies or other authorizations as may be required.
Except as directed pursuant to Instructions, neither the Custodian nor any
Subcustodian or nominee shall vote upon any such Securities, or execute any
proxy to vote thereon, or give any consent or take any other action with respect
thereto.
The Custodian will not release the identity of the Fund to an issuer
which requests such information pursuant to the Shareholder Communications Act
of 1985 for the specific purpose of direct communications between such issuer
and the Fund unless the Fund directs the Custodian otherwise in writing.
(v) BOOKS AND RECORDS.
The Custodian shall maintain such records relating to its activities
under this Agreement as are required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 ("the 1940 Act") and to preserve them for the
periods prescribed in Rule 31a-2 under the 1940 Act. These records shall be
open for inspection by duly authorized officers, employees or agents (including
independent public accountants) of the Fund during normal business hours of the
Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by the Fund and the Custodian.
(w) OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The Custodian shall take all reasonable action as the Fund may request
to obtain from year to year favorable opinions from the Fund's independent
certified public accountants with respect to the Custodian's activities
hereunder and in connection with the preparation of the Fund's periodic reports
to the SEC and with respect to any other requirements of the SEC.
(x) REPORTS BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
At the request of the Fund, the Custodian shall deliver to the Fund a
written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, Securities and
other Assets, including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
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<PAGE>
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to be
paid, all bills, statements, or other obligations of the Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, or Interim Subcustodians (as each are
hereinafter defined) to act on behalf of the Fund. A Domestic Subcustodian, in
accordance with the provisions of this Agreement, may also appoint a Foreign
Subcustodian, Special Subcustodian, or Interim Subcustodian to act on behalf of
the Fund. For purposes of this Agreement, all Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians and Interim Subcustodians shall be referred
to collectively as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any bank
as defined in Section 2(a)(5) of the 1940 Act or any trust company or other
entity, any of which meet the requirements of a custodian under Section 17(f) of
the 1940 Act and the rules and regulations thereunder, to act for the Custodian
on behalf of the Fund as a subcustodian for purposes of holding Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"). The Fund shall approve in writing the appointment of
the proposed Domestic Subcustodian; and the Custodian's appointment of any such
Domestic Subcustodian shall not be effective without such prior written approval
of the Fund. Each such duly approved Domestic Subcustodian shall be listed on
Appendix A attached hereto, as it may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity meeting the
requirements of an "eligible foreign custodian" under Section 17(f) of the 1940
Act and the rules and regulations thereunder to act for the Custodian on behalf
of the Fund as a subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Fund and performing other
functions of the Custodian in countries other than the United States of America
(hereinafter referred to as a "Foreign Subcustodian" in the context of either a
subcustodian or a sub-subcustodian); provided that the Custodian shall have
obtained written confirmation from the Fund of the approval of the Board of
Directors or other governing body of the Fund (which approval may be withheld in
the sole discretion of such Board of Directors or other governing body or
entity) with respect to (i) the identity of any proposed Foreign Subcustodian
(including branch designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies
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(hereinafter "Securities Depositories and Clearing Agencies"), if any, through
which, the Custodian or any proposed Foreign Subcustodian is authorized to hold
Securities and other Assets of the Fund, and (iii) the form and terms of the
subcustodian agreement to be entered into with such proposed Foreign
Subcustodian. Each such duly approved Foreign Subcustodian and the countries
where and the Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund shall be listed on Appendix A
attached hereto, as it may be amended, from time to time. The Fund shall be
responsible for informing the Custodian sufficiently in advance of a proposed
investment which is to be held in a country in which no Foreign Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate arrangements
with a proposed Foreign Subcustodian, including obtaining approval as provided
in this Section 5(b). In connection with the appointment of any Foreign
Subcustodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
enter into a subcustodian agreement with the Foreign Subcustodian in form and
substance approved by the Fund. The Custodian shall not consent to the
amendment of, and shall cause any Domestic Subcustodian not to consent to the
amendment of, any agreement entered into with a Foreign Subcustodian, which
materially affects the Fund's rights under such agreement, except upon prior
written approval of the Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that the Fund shall
invest in an Asset to be held in a country in which no Foreign Subcustodian
is authorized to act, the Custodian shall notify the Fund in writing by
facsimile transmission or in such other manner as the Fund and Custodian
shall agree in writing of the unavailability of an approved Foreign
Subcustodian in such country; and upon the receipt of Special Instructions
from the Fund, the Custodian shall, or shall cause its Domestic Subcustodian
to, appoint or approve an entity (referred to herein as an "Interim
Subcustodian") designated in such Special Instructions to hold such Security
or other Asset.
(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall, on behalf
of the Fund, appoint one or more banks, trust companies or other entities
designated in such Special Instructions to act for the Custodian on behalf of
the Fund as a subcustodian for purposes of: (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities through the use of a
common custodian or subcustodian; (ii) providing depository and clearing agency
services with respect to certain variable rate demand note Securities, (iii)
providing depository and clearing agency services with respect to dollar
denominated Securities, and (iv) effecting any other transactions designated by
the Fund in such Special Instructions. Each such designated subcustodian
(hereinafter referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time. In
connection with the appointment of any Special Subcustodian, the Custodian shall
enter into a subcustodian agreement with the Special
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Subcustodian in form and substance approved by the Fund in Special Instructions.
The Custodian shall not amend any subcustodian agreement entered into with a
Special Subcustodian, or waive any rights under such agreement, except upon
prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification to
the Fund, terminate any Subcustodian of the Fund in accordance with the
termination provisions under the applicable subcustodian agreement, and upon the
receipt of Special Instructions, the Custodian will terminate any Subcustodian
in accordance with the termination provisions under the applicable subcustodian
agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of the Fund, the Custodian shall deliver to the Fund a
certificate stating: (i) the identity of each Foreign Subcustodian then acting
on behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of the Fund; and (iii) such
other information as may be requested by the Fund, and as the Custodian shall be
reasonably able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to the Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by the Fund resulting from
the gross negligence or willful misfeasance of the Custodian; provided, however,
in no event shall the Custodian be liable for special, indirect or consequential
damages arising under or in connection with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or Securities System,
or any subcustodian, Securities System, Securities Depository or Clearing Agency
utilized by the Custodian or any such Subcustodian, or any nominee of the
Custodian or any Subcustodian (individually, a "Person") is prevented, forbidden
or delayed from performing, or omits to perform, any act or thing which this
Agreement provides shall be performed or omitted to be performed, by reason of:
(i) any provision of any present or future law or regulation or order of the
United States of America, or any state thereof, or of any foreign country, or
political subdivision thereof or of any court of competent
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jurisdiction (and neither the Custodian nor any other Person shall be obligated
to take any action contrary thereto); or (ii) any event beyond the control of
the Custodian or other Person such as armed conflict, riots, strikes, lockouts,
labor disputes, equipment or transmission failures, natural disasters, or
failure of the mails, transportation, communications or power supply; or (iii)
any "Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event beyond the
Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by the Fund,
insofar as such loss, damage or expense arises from the performance of the
Custodian or any Domestic Subcustodian in reliance upon records that were
maintained for the Fund by entities other than the Custodian or any Domestic
Subcustodian prior to the Custodian's employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all matters. The
Custodian and all Domestic Subcustodians shall be without liability for any
actions taken or omitted in good faith pursuant to the advice of counsel.
(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the advice
of the Fund and upon statements of the Fund's accountants and other persons
believed by it in good faith to be expert in matters upon which they are
consulted, and neither the Custodian nor any Domestic Subcustodian shall be
liable for any actions taken or omitted, in good faith, pursuant to such advice
or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully protected
and indemnified in acting as a custodian hereunder upon any Resolutions of the
Board of Directors or Trustees, Instructions, Special Instructions, advice,
notice, request, consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless otherwise
specifically provided herein, be entitled to receive as conclusive proof of any
fact or matter required to be ascertained from the Fund
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hereunder a certificate signed by any officer of the Fund authorized to
countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under any duty or
obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or for
the Fund, the legality of the purchase thereof or evidence of
ownership required to be received by the Fund, or the propriety
of the decision to purchase or amount paid therefor;
(ii) the legality of the sale of any Securities by or for the Fund,
or the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of Securities, borrowings
or similar actions with respect to the Fund's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of the Fund's Declaration of Trust, Partnership
Agreement, Articles of Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of the Fund, or the Fund's
currently effective Registration Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS.
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or omissions were
performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to the Fund for any loss or damage to
the Fund caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the subcustodian
agreement between the Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform in accordance with
the standard of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign Subcustodian under
the applicable subcustodian agreement.
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(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting from or occasioned by the
actions or omissions of a Securities System, Interim Subcustodian, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the gross negligence or willful
misfeasance of the Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by the Fund resulting from or occasioned by the actions,
omissions, neglects, defaults or insolvency of any broker, bank, trust company
or any other person with whom the Custodian may deal (other than any of such
entities acting as a Subcustodian, Securities System or Securities Depository
and Clearing Agency, for whose actions the liability of the Custodian is set out
elsewhere in this Agreement) unless such loss, damage or expense is caused by,
or results from, the gross negligence or willful misfeasance of the Custodian.
(e) REIMBURSEMENT OF EXPENSES.
The Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this Agreement, but
excluding salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, the Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
losses, damages and expenses (including attorneys' fees) suffered or incurred by
the Custodian or its nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to, any
indemnification obligations undertaken by the Custodian under any relevant
subcustodian agreement; provided, however, that such indemnity shall not apply
to the extent the Custodian is liable under Sections 6 or 7 hereof.
If the Fund requires the Custodian to take any action with respect to
Securities, which action involves the payment of money or which may, in the
opinion of the Custodian, result in the Custodian or its nominee assigned to the
Fund being liable for the payment of money or incurring liability of some other
form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
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(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in addition
to the obligations provided in Sections 6 and 7, the Custodian agrees to
indemnify and hold harmless the Fund from all losses, damages and expenses
suffered or incurred by the Fund caused by the gross negligence or willful
misfeasance of the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each of
which for purposes of this Section 9 shall be referred to as "Custodian"), makes
any payment or transfer of funds on behalf of the Fund as to which there would
be, at the close of business on the date of such payment or transfer,
insufficient funds held by the Custodian on behalf of the Fund, the Custodian
may, in its discretion without further Instructions, provide an advance
("Advance") to the Fund in an amount sufficient to allow the completion of the
transaction by reason of which such payment or transfer of funds is to be made.
In addition, in the event the Custodian is directed by Instructions to make any
payment or transfer of funds on behalf of the Fund as to which it is
subsequently determined that the Fund has overdrawn its cash account with the
Custodian as of the close of business on the date of such payment or transfer,
said overdraft shall constitute an Advance. Any Advance shall be payable by the
Fund on demand by Custodian, unless otherwise agreed by the Fund and the
Custodian, and shall accrue interest from the date of the Advance to the date of
payment by the Fund to the Custodian at a rate agreed upon in writing from time
to time by the Custodian and the Fund. It is understood that any transaction in
respect of which the Custodian shall have made an Advance, including but not
limited to a foreign exchange contract or transaction in respect of which the
Custodian is not acting as a principal, is for the account of and at the risk of
the Fund, and not, by reason of such Advance, deemed to be a transaction
undertaken by the Custodian for its own account and risk. The Custodian and the
Fund acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by the Fund. The Custodian shall promptly notify the
Fund of any Advance. Such notification shall be sent by facsimile transmission
or in such other manner as the Fund and the Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any purpose
or in the event that the Bank or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of its duties hereunder, except
21
<PAGE>
such as may arise from its or its nominee's negligent action, negligent failure
to act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank for
any such advance of cash or securities or any such taxes, charges, expenses,
assessments, claims or liabilities upon request for payment, but should the Fund
fail to so reimburse the Bank, the Bank shall be entitled to dispose of such
Property to the extent necessary to obtain reimbursement. The Bank shall be
entitled to debit any account of the Fund with the Bank including, without
limitation, the Custody Account, in connection with any such advance and any
interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
Payment for the Bank's compensation for services rendered hereunder
shall be the responsibility of the Fund. The Fund represents that by separate
agreement it has appointed Fund/Plan as its agent, and that Fund/Plan, as agent
for the Fund, has agreed to pay the compensation payable in respect of such
services promptly upon receipt of statements therefore. The Fund shall pay to
Fund/Plan fees for services (including the Bank's custodian services) in
accordance with the terms of an agreement between Fund/Plan and the Fund. The
Fund hereby directs the Bank to (i) send all statements for compensation to its
attention care of Fund/Plan at the following address: Fund/Plan Services, Inc.,
2 W. Elm St., Conshohocken, PA 19428, Attention: Mr. Elmer Gardner, Senior Vice
President, and (ii) accept all payments made by Fund/Plan in the Fund's name as
if such payments were made directly by the Fund. The Custodian's compensation
for services rendered hereunder is set forth in an agreement between the Bank
and Fund/Plan. Should Fund/Plan fail to pay or remit such compensation to the
Bank, the Bank will be entitled to debit the Custody Account directly for such
compensation. In the absence of sufficient cash in the Custody Account to cover
compensation, the Fund shall promptly pay the bank for the unpaid compensation
due hereunder. In the absence of prompt payments for the Fund of the unpaid
compensation, the Bank shall be entitled to exercise, in addition to all other
rights existing in law or equity, the rights set forth in Section 10 hereof.
12. POWERS OF ATTORNEY.
Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
The Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return receipt
requested) to the other not less than 90 days prior to the date upon which such
termination shall take
22
<PAGE>
effect. Upon termination of this Agreement, the Fund shall pay to the Custodian
such fees as may be due the Custodian hereunder as well as its reimbursable
disbursements, costs and expenses paid or incurred. Upon termination of this
Agreement, the Custodian shall deliver, at the terminating party's expense, all
Assets held by it hereunder to the Fund or as otherwise designated by the Fund
by Special Instructions. Upon such delivery, the Custodian shall have no
further obligations or liabilities under this Agreement except as to the final
resolution of matters relating to activity occurring prior to the effective date
of termination.
This Agreement may not be assigned by the Custodian or the Fund
without the respective consent of the other, duly authorized by a resolution by
its Board of Directors or Trustees.
14. NOTICES.
Notices, requests, instructions and other writings delivered to the
Fund at _______________________________________________________________________
____________________________________________________, postage prepaid, or to
such other address as the Fund may have designated to the Custodian in writing,
shall be deemed to have been properly delivered or given to the Fund.
The Fund shall give prior notice to the Bank of any change in its
place of incorporation or organization, mailing address, or sponsors, any
significant change in management, investment objectives, fees or redemption
rights and any change to the appointment of Fund/Plan as its agent.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928 Grand
Avenue, Kansas City, Missouri, or mailed postage prepaid, to the Custodian's
Securities Administration Department, Post Office Box 226, Kansas City, Missouri
64141, or to such other addresses as the Custodian may have designated to the
Fund in writing, shall be deemed to have been properly delivered or given to the
Custodian hereunder; provided, however, that procedures for the delivery of
Instructions and Special Instructions shall be governed by Section 2(c) hereof.
15. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be
binding upon, and inure to the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
23
<PAGE>
(c) No provisions of this Agreement may be amended, modified or
waived, in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to time as
Domestic Subcustodians, Foreign Subcustodians, Special Subcustodians, and
Securities Depositories and Clearing Agencies are approved or terminated
according to the terms of this Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following sections of
the Agreement:
Term Section
---- -------
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and 5(b)
Clearing Agencies
Securities System 4(b)(3)
Shares 4(s)
24
<PAGE>
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall be considered severable
and shall not be affected, and the rights and obligations of the parties shall
be construed and enforced as if this Agreement did not contain the particular
part, term or provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof, and accordingly
supersedes, as of the effective date of this Agreement, any custodian agreement
heretofore in effect between the Fund and the Custodian.
IN WITNESS WHEREOF, the parties hereto have caused this Custody
Agreement to be executed by their duly respective authorized officers.
UMB BANK, N.A.
- ----------------------------------
By: /S/ NATHAN CHAPMAN, JR. By: /S/ PAP
------------------------------- --------------------------------
Title: Title: Patricia A. Peterson
---------------------------- -----------------------------
Senior Vice President
[FUND]
By:
-------------------------------
Title:
----------------------------
25
<PAGE>
APPENDIX A
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
Brown Brothers Harriman & Company (Foreign Securities Only)
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS AND CLEARING AGENCIES
- --------- --------------------- ---------------------
Euroclear
UMB BANK, N.A.
- ----------------------------------
By: /S/ NATHAN CHAPMAN, JR. By: /S/ PAP
------------------------------- --------------------------------
Title: Title: Patricia A. Peterson
---------------------------- -----------------------------
Senior Vice President
Date:
-----------------------------
26
<PAGE>
APPENDIX B
CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby
made parties to the Custody Agreement dated December 23, 1994 with UMB Bank,
n.a. ("Custodian") and The Chapman Funds, Inc. and agree to be bound by all the
terms and conditions contained in said Agreement.
LIST THE FUNDS
The Chapman U.S. Treasury Money Fund
DEM Equity Fund
DEM Index Fund
DEM Fixed Income Fund
ATTEST:
/S/ M. LYNN BALLARD The Chapman Funds, Inc.
- ----------------------------- ----------------------------------
By: /S/ NATHAN A. CHAPMAN, JR.
-----------------------------
Name: Nathan A. Chapman, Jr.
---------------------------
Title: President
--------------------------
Date: June 11, 1998
----------------------------
ATTEST:
UMB BANK, N.A.
- -----------------------------
By: /S/ RALPH R. SANTORO
-----------------------------
Name: Ralph R. Santoro
----------------------------
Title: Senior Vice President
---------------------------
Date: June 5, 1998
----------------------------
27
<PAGE>
AMENDMENT TO
INVESTMENT COMPANY SERVICES AGREEMENT
This Amendment dated as of June 11, 1998, is entered into by THE CHAPMAN
FUNDS, INC. (the "Company") and FIRST DATA INVESTOR SERVICES GROUP, INC.
("Investor Services Group"), the successor in interest to FPS Services, Inc.
("FPS").
WHEREAS, the Company and FPS entered into an Investment Company Services
Agreement dated as of October 1, 1997 (the "Agreement");
WHEREAS, the Company and Investor Services Group wish to amend the
Agreement to revise Schedule C to the Agreement;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
hereby agree as follows:
I. Schedule C to the Agreement shall be deleted in its entirety and
replaced with the attached Schedule C.
II. Except to the extent amended hereby, the Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects as amended hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date and year first written above.
THE CHAPMAN FUNDS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
---------------------------
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By: /S/ NEAL FORREST
----------------
<PAGE>
SCHEDULE "C"
IDENTIFICATION OF FUNDS
Below are listed the separate funds to which services under this Agreement are
to be performed as of June 11, 1998:
THE CHAPMAN FUNDS, INC.
The Chapman U.S. Treasury Money Fund*
DEM Equity Fund
"Investor Shares"
"Institutional Shares"
DEM Index Fund
"Investor Shares"
"Institutional Shares"
This Schedule "C" may be amended from time to time by agreement of the Parties.
* Services related to Custody Administration only.
<PAGE>
SHAREHOLDER SERVICES AGREEMENT
This Agreement, dated as of the 12th of September 1994, made by and between
The Chapman Funds, Inc. (the "Fund") a corporation operating as an open-end
management investment company, duly organized and existing under the laws of the
State of Maryland and Chapman Capital Management, Inc. (the "Company"), a
corporation duly organized and existing under the laws of the State of Maryland.
WITNESSETH THAT:
WHEREAS, the Fund consists of a series of Funds, at present namely: The
Chapman U.S. Treasury Money Fund; The Chapman Institutional Cash Management
Fund.
WHEREAS, the Fund desires to appoint the Company as its Transfer,
Redemption and Dividend Disbursing Agent as set forth in this Agreement and to
perform certain other functions in connection with these duties; and
WHEREAS, the Company is willing to perform such functions upon the terms
and conditions set forth below; and
WHEREAS, the Fund will cause to be provided certain information to the
Company as set forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto, intending to be legally bound, do hereby
agree as follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the meanings
herein specified unless the context otherwise requires.
The Fund: The term Fund shall mean any series issued by the authority of
the Board of Directors.
Shareholders: The term Shareholders shall mean the registered owners from
time to time of the Shares of the Fund in accordance with the share registry
records of the Fund.
Shares: The term Shares shall mean the issued and outstanding shares of
the Fund.
<PAGE>
Oral Instruction: The term Oral Instruction shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to the Company in person or by telephone, telegram, telecopy or
other mechanical or documentary means lacking original signature, by a person or
persons believed in good faith by the Company to be a person or persons
authorized by a resolution of the Board of Directors of the Fund, to give Oral
Instructions on behalf of the Fund.
Written Action: The term Written Instruction shall mean an authorization,
instruction, approval, item or set of data or information of any kind
transmitted to the Company in original writing containing original signatures or
a copy of such document transmitted by telecopy including transmission of such
signature believed in good faith by the Company to be the signature of a person
authorized by a resolution of the Board of Directors of the Fund to give Written
Instructions on behalf of the Fund.
TRANSFER AGENCY
Section 2. Company as Transfer Agent, shall make original issues of Shares
in accordance with Sections 9 and 10 below and with the Fund's Prospectus and
Statement of Additional Information upon the written request of the Fund and
upon being furnished with (i) a certified copy of a resolution or resolutions of
the Board of Directors of the Fund authorizing such issue; (ii) an opinion of
counsel as to the validity of such additional Shares; and (iii) necessary funds
for the payment of any original issue tax applicable to such additional Shares.
Section 3. Transfers of Shares shall be registered (i) in form deemed by
Company to be properly endorsed for transfer, (ii) with all necessary endorsers'
signatures guaranteed by a member firm of a national securities exchange or a
commercial bank, accompanied by (iii) such assurances as Company shall deem
necessary or appropriate to evidence the genuineness and effectiveness of each
necessary endorsement, and (iv) satisfactory evidence of compliance with all
applicable laws relating to the payment or collection of taxes.
Section 4. In registering transfers Company as Transfer Agent may rely
upon the Uniform Commercial Code or any other statutes which in the opinion of
counsel protect Company and the Fund in not requiring complete documentation, in
registering transfer without inquiry into adverse claims, in delaying
registration for purposes of such inquiry, or in refusing registration where in
its judgment an adverse claim requires such refusal.
Section 5. Company will maintain stock registry records in the usual form
in which it will note the issuance, transfer and redemption of Shares and is
also authorized to maintain an account entitled Unissued Certificate Account in
which it will record the Shares and fractions issued and outstanding from time
to time for which issuance of Share Certificates is deferred. The Fund is
responsible to provide Company reports of Fund Share purchases, redemptions and
total Shares outstanding on the next business day after each net asset
valuation. Company is authorized to keep records, which will be part
-2-
<PAGE>
of the stock transfer records, in which it will note the names and registered
address of Shareholders and the number of Shares and fractions from time to time
owned by them for which no Share Certificates are outstanding. Each Shareholder
will be assigned a single account number.
Section 6. The Fund authorizes Company to dispense with the issuance and
countersignature of Share Certificates whenever Shares are purchased. In such
case Company as Transfer Agent, shall merely note on its stock registry records
the issuance of the Shares and fractions (if any), shall credit the Unissued
Certificate Account with the Shares and fractions issued and shall credit the
proper number of Shares and fractions to the respective Shareholders. Likewise,
whenever Company has occasion to surrender for redemption Shares and fractions
owned by Shareholders, it shall be unnecessary to issue Share Certificates for
redemption purposes. The Fund authorizes Company in such cases to process the
transactions by appropriate entries in its share transfer records, and debiting
of the Unissued Certificate Account and the record of issued Shares outstanding.
Section 7. Company in its capacity as Transfer Agent will, in addition to
the duties and functions above-mentioned, perform the usual duties and functions
of a Stock Transfer Agent for a corporation. Company may rely conclusively and
act without further investigation upon any list, instruction, certification,
authorization, or other instrument or paper believed by it in good faith to be
genuine and unaltered, and to have been signed, countersigned, or executed by
duly authorized person or persons, or upon the instructions of any officer of
the Fund, or upon the advice of counsel for the Fund or for Company. The Fund
agrees to indemnify and hold harmless Company from and against any and all
losses, costs, claims, and liability which it may suffer or incur by reason of
so relying or acting or refusing to act.
Section 8. In case of any request or demand for the inspection of the
share records of the Fund, Company as Transfer Agent, shall endeavor to notify
the Fund and to secure instructions as to permitting or refusing such
inspection. However, Company may exhibit such records to any person in any case
where it is advised by its counsel that it may be held liable for failure to do
so.
ISSUANCE OF SHARES
Section 9. Prior to the daily determination of net asset value in
accordance with the Fund's Prospectus, Company shall process all purchase orders
received since the last determination of the Fund's net asset value.
Company shall calculate daily the amount available for investment in Shares
at the net asset value determined by the Company as pricing agent (see
Accounting Services Agreement) as of the close of trading on the New York Stock
Exchange, the number of Shares and fractional Shares to be purchased and the net
asset value to be deposited with the Custodian. Company as agent for the
Shareholders, shall place a purchase order daily
-3-
<PAGE>
with the Fund for the proper number of Shares and fractional Shares to be
purchased and confirm such number to the Fund in writing.
Section 10. Company having made the calculations provided for in Section
9, shall thereupon pay over the net asset value of shares purchased to the
Custodian. The proper number of Shares and fractional Shares shall then be
issued daily and credited by Company to the Unissued Certificate Account. The
Shares and fractional Shares purchased for each Shareholder will be credited by
Company to his separate Account. Company shall mail to each Shareholder a
confirmation of each purchase, with copies to the Fund if requested. Such
confirmations will show the prior Share balance, the new Share balance, the
amount invested and the price paid for the newly purchased Shares.
REDEMPTIONS
Section 11. Company shall, prior to the daily determination of net asset
value in accordance with the Fund's Prospectus and Statement of Additional
Information, process all requests from Shareholders to redeem Shares and
determine the number of Shares required to be redeemed to make monthly payments,
automatic payments or the like. Thereupon, Company shall advise the Fund of the
total number of Shares available for redemption and the number of Shares and
fractional Shares requested to be redeemed. Following determination of the
applicable net asset value, Company shall furnish the Fund with an appropriate
confirmation of the redemption and process the redemption by filing with the
Custodian an appropriate statement and making the proper distribution and
application of the redemption proceeds in accordance with the Fund's Prospectus
and Statement of Additional Information. The stock registry books recording
outstanding Shares, the Unissued Certificate Account and the individual account
of the Shareholder shall be properly debited.
Section 12. The proceeds of redemption shall be remitted by Company in
accordance with the Fund's Prospectus by check or wire to the Shareholder. The
Company shall require a signature guarantee of a commercial bank, trust company,
or a member firm of a national securities exchange pursuant to the Fund's
Prospectus. The Fund may authorize Company to waive the signature guarantee in
certain cases by Written Instructions.
For the purposes of redemption of Shares which have been purchased within
15 days of a redemption request, the Fund shall provide Company, from time to
time, with Written Instructions concerning the time within which such requests
may be honored.
DIVIDENDS
Section 13. The Fund declares dividends daily with payment to Shareholders
of record monthly. Upon the declaration of each capital gains distribution by
the Board of Directors of the Fund, the Fund shall notify Company of the date
such declaration, the
-4-
<PAGE>
amount payable per share, the record date for determining the Shareholders
entitled to payment, the payment and the reinvestment date price.
Section 14. On or before each payment date the Fund will transfer, or
cause the Custodian to transfer, to Company in its capacity as Dividend
Disbursing Agent, the total amount of the dividend or distribution currently
reinvest all dividends in additional shares except in cases where Shareholders
have elected to receive distribution in cash, in which case Company will mail
distribution checks to the Shareholders for the proper amounts payable to them.
GENERAL PROVISIONS
Attached hereto is a list of all inaccuracies, omissions, discrepancies,
and other deficiencies in the Materials known to the Fund. The Fund agrees to
promptly advise the Company in writing of all additions to or deletions from
said list necessary to maintain the list in current status. The Company shall
make reasonable efforts to isolate and correct any inaccuracies, omissions,
discrepancies, or other deficiencies in the Materials delivered to the Company,
to the extent such matters are disclosed to the Company or are discovered by it
and are relevant to its performance of its functions under this Agreement. The
Fund shall provide the Company with such assistance as it may reasonably request
in connection with its efforts to correct such matters. The Fund agrees to pay
the Company on a current and ongoing basis for its reasonable time and costs
expended on the correction of such matters, said payment to be in addition to
the fees and charges agreed to for the normal services rendered under this
Agreement.
The Company expressly makes no warranty or representation that any error,
omission or deficiency can be satisfactorily corrected. The Fund further agrees
that if the Company is subject to any claim, suit or other expense which, in the
Company's sole reasonable judgment is due to any inaccuracy, omission,
discrepancy or other deficiency of the Materials delivered to the Company
hereunder, or is due to failure to provide any record or material required
hereunder, the Fund shall pay the Company on a monthly basis for all costs in
connection therewith and indemnify and hold the Company harmless from and
against all costs in connection therewith, including all attorney fees and
costs, provided, however, that if such error, omission, inaccuracy or other
deficiency is caused directly or indirectly by gross negligence or reckless
disregard by the Company of its duties and responsibilities hereunder, the Fund
shall have no obligation to indemnify and hold harmless the Company, its
successors or assigns.
With respect to any matter involving a possible assertion of any past,
present or future potential or contingent liability of the Company as Transfer
Agent or Dividend Disbursing Agent, the Fund warrants that it has not committed
and shall not commit any act or omission that constitutes a waiver, release,
estoppel, or other impairment of any kind of any rights it may heretofore have
had, may now have, or may hereafter have against Fund/Plan Services, Inc. and
that it shall do everything necessary to preserve, and, if appropriate, enforce
all of such rights against Fund/Plan Services, Inc. Without
-5-
<PAGE>
limitation of the foregoing, the Fund agrees that if any suit is instituted
against the Company arising, in the Company's sole reasonable judgment, out of
any act or omission of Fund/Plan Services, Inc., which created a deficiency of
the Materials delivered hereunder, or out of any failure of Fund/Plan Services,
Inc. to deliver material, information or assistance contemplated hereunder, then
the Fund shall take whatever steps are necessary to join Fund/Plan Services,
Inc. as a party defendant or additional defendant in said litigation.
Section 15. Company shall maintain records (which may be part of the stock
transfer records) in connection with the issuance and redemption of Shares, and
the disbursement of dividends and dividend reinvestments, in which will be noted
the transactions effected for each Shareholder and the number of Shares and
fractional Shares owned by each for which no Share Certificates are outstanding.
Company agrees to make available upon request and to preserve for the periods
prescribed in Rule 31 a-2 under the Investment Company Act of 1940 any records
relating to services provided under this Agreement which are required to be
maintained by Rule 31 a-1 under the Act.
Section 16. In addition to the services as Transfer Agent and Dividend
Disbursing Agent as above set forth, Company will perform other services for the
fund as agreed from time to time, including but not limited to, preparation of
and mailing Federal Tax Information Forms, mailing semi-annual reports of the
Fund, preparation of one annual list of Shareholders, and mailing notices of
Shareholders' meetings, proxies and proxy statements.
Section 17. Nothing contained in this Agreement is intended to or shall
require Company in any capacity hereunder, to perform any functions or duties on
any holiday, day of special observance or any other day on which Custodian or
the New York Stock Exchange are closed. Functions or duties normally scheduled
to be performed on such days shall be performed on, and as of, the next business
day on which both the New York Stock Exchange and Custodian are open.
Section 18. The Fund agrees to pay Company compensation for its services
and to reimburse it for expenses, as set forth in Schedule A attached hereto, or
as shall be set forth in amendments to such Schedule approved by the Fund and
the Company. The invoices for the service will be sent to the Fund monthly with
payment to the Company within 15 days of the Fund's receipt of the invoice.
Section 19. (a) The Company, its directors, officers, employees,
shareholders and agents shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the performance
of this Agreement, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Company in the performance of its
obligations and duties under this Agreement.
(b) Any person, even though also a director, officer, employee,
shareholder or agent of the Company, who may be or become an officer, trustee,
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<PAGE>
employee or agent of the Fund, shall be deemed, when rendering services to the
Fund or acting on any business of the Fund (other than services or business in
connection with the Company's duties hereunder), to be rendering such services
to or acting solely for the Fund and not as a director, officer, employee,
shareholder or agent of, or one under the control or direction of the Company
even though paid by it.
(c) Notwithstanding any other provision of this Agreement, the
Fund shall indemnify and hold harmless the Company, its directors, officers,
employees, shareholders and agents from and against any and all claims, demands,
expenses and liabilities (whether with or without basis in fact or law) of any
and every nature which the Company may sustain or incur or which may be asserted
against the Company by any person by reason of, or as a result of: (i) any
action taken or omitted to by taken by the Company in good faith hereunder, (ii)
in reliance upon any certificate; instrument, order or stock certificate or
other document reasonably believed by it to be genuine and to be signed,
countersigned or executed by any duly authorized person, upon the Oral
Instructions or Written Instructions of an authorized person of the Fund or upon
the opinion of legal counsel for the Fund or its own counsel; or (iii) any
action taken or omitted to be taken by the Company in connection with its
appointment in good faith in reliance upon any law, act, regulation or
interpretation of the same even though the same may thereafter have been
altered, changed, amended or repealed. However, indemnification under this
subparagraph shall not apply to actions or omissions of the Company or its
directors, officers, employees, shareholders or agents in cases of its or their
own negligence, willful misconduct, bad faith, or reckless disregard of its or
their own duties hereunder.
(d) The Company shall give written notice to the Fund within ten
(10) business days of receipt by the Company of a written assertion or claim of
any threatened or pending legal proceeding which may be subject to this
indemnification. However, the failure to notify the Fund of such written
assertion or claim shall not operate in any manner whatsoever to relieve the
Fund of any liability arising from this Section or otherwise except to the
extent that the failure to give notice prejudices the Fund's defense.
(e) For any legal proceeding giving rise to this indemnification,
the Fund shall be entitled to defend or prosecute any claim in the name of the
company at its own expense and through counsel of its own choosing if it gives
written notice to the Company within ten (10) business days of receiving notice
of such claim. Notwithstanding the foregoing, the Company may participate in
the litigation at its own expense through counsel of its own choosing. If the
Fund does choose to defend or prosecute such claim, then the parties shall
cooperate in the defense or prosecution thereof and shall furnish such records
and other information as are reasonably necessary.
(f) The Fund shall not settle any claim without the Company's
express written consent which shall not be unreasonably withheld. The Company
shall
-7-
<PAGE>
not settle any claim without the Fund's express written consent which shall not
be unreasonably withheld.
Section 20. Company is authorized, upon receipt of Written Instructions
from the Fund, to make payment upon redemption of Shares without a signature
guarantee. The Fund hereby agrees to indemnify and hold Company, its successors
and assigns, harmless of and from any and all expenses, damages, claims, suits,
liabilities, actions, demands, losses whatsoever arising out of or in connection
with a payment by Company upon redemption of Shares without a signature
guarantee in reliance on Written Instructions from the Fund and upon the request
of Company the Fund shall assume the entire defense of any action, suit or claim
subject to the foregoing indemnity. Company shall notify the Fund of any such
action, suit or claim within 30 days after receipt by Company of notice thereof.
Section 21. (a) The term of this Agreement shall be for a period of two
(2) years, commencing on the date hereof and shall continue in force from year
to year thereafter, but only so long as such continuance is approved (1) by the
Company, (2) by vote, cast in person at a meeting called for the purpose, of a
majority of the Fund's Directors who are not parties to this Agreement or
interested persons (as defined in the Act) of any such party, and (3) by vote of
a majority of the Fund's Board of Directors or a majority of the Fund's
outstanding voting securities unless notice of termination has been given as
provided in paragraph (c) below.
(b) The fee schedule will be fixed for a one (1) year period from
the date of the agreement. After the one (1) year period, the fee will be
subject to annual review.
(c) The Fund or the company may give written notice to the other
of the termination of this Agreement, such termination to take effect at the
time specified in the notice, not less than 30 days after the giving of the
notice. Upon the effective termination date, the Fund shall pay to the Company
such compensation as may be due as of the date of termination and shall likewise
reimburse the Company for any out-of pocket expenses and disbursements
reasonably incurred by the Company to such date.
(d) In the event that in connection with termination of this
Agreement a successor to any of the Company's duties or responsibilities under
this Agreement is designated by the Fund by written notice to the company, the
Company shall, promptly upon such termination and at the expense of the Fund,
transfer all required Records and shall cooperate in the transfer of such duties
and responsibilities.
(e) The Fund acknowledges that in order for the Company to perform
the services contemplated hereunder, Company has made and will make significant
investments of time and money. If this Agreement is terminated for reasons
other than a material breach by the Company prior to the expiration of the
initial term of this contract,
-8-
<PAGE>
the Fund will pay to Company 20% of the minimum fees remaining for the unexpired
term of the Agreement.
Section 22. The Fund shall file with Company a certified copy of each
resolution of its Board of Directors authorizing the execution of Written
Instructions or the transmittal of Oral Instructions, as provided in Section I
of this Agreement.
Section 23. This Agreement may be amended from time to time by a
supplemental agreement executed by the Fund and the company.
Section 24. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first class mail, postage prepaid, to the
respective party as follows:
The Chapman Funds, Inc.
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Attention: Nathan A. Chapman, Jr., President
Section 25. The Fund represents and warrants to Company that the execution
and delivery of this Shareholder Services Agreement by the undersigned officers
of the Fund has been duly and validly authorized by resolution of the Board of
Directors of the Fund.
Section 26. This Agreement may be executed in two or more counterparts,
each of which when so executed shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 27. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of Company or by Company without the written consent of the Fund,
authorized or approved by a resolution of its Board of Directors.
Section 28. This Agreement shall be governed by the laws of Maryland.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their duly authorized officers as of the day and year first above
written.
THE CHAPMAN FUNDS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
--------------------------
Attest: /S/ MELANIE MARKIEWICZ Title: Chairman
---------------------- ------------------------
CHAPMAN CAPITAL
MANAGEMENT, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
--------------------------
Attest: /S/ MELANIE MARKIEWICZ Title: Chairman
---------------------- -----------------------
-10-
<PAGE>
SCHEDULE A
FEE SCHEDULE
THE CHAPMAN U.S TREASURY MONEY FUND
THE CHAPMAN INSTITUTIONAL CASH MANAGEMENT FUND
(All fees are quoted for a period of 90 days and will be for a term of one (1)
year from date of conversion.)
SHAREHOLDER SERVICES AND TRANSFER AGENT
The following is our schedule for Shareholder Services and Transfer Agent
Services:
Monthly Fee $1,500/Portfolio
-11-
<PAGE>
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201-2978
June 11, 1998
The Chapman Funds, Inc.
401 E. Pratt Street
Suite 2800
Baltimore, Maryland 21202
Re: The Chapman Funds, Inc.
DEM Fixed Income 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 Fixed Income
Fund, Investor Class and DEM Fixed Income 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. 15 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.
<PAGE>
We have assumed, without independent verification, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
and the conformity with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion 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 to be offered for sale pursuant to the
Registration Statement are, to the extent of the number of Shares of each
class 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>
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME 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 the State
of Maryland (the "Fund"), with respect to the DEM Fixed Income 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
<PAGE>
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 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.
<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 11th day
of February, 1998.
THE CHAPMAN FUNDS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
---------------------------
Name: Nathan A. Chapman, Jr.
Title: President
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME 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
the State of Maryland (the "Fund"), with respect to the DEM Fixed Income 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 11th day
of February, 1998.
THE CHAPMAN FUNDS, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
---------------------------
Name: Nathan A. Chapman, Jr.
Title: President
4
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME 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 11th day
of February, 1998.
THE CHAPMAN FUNDS, INC.
By: /S/ NATHAN A. CHAPMAN, JR.
---------------------------
Name: Nathan A. Chapman, Jr.
Title: President
-3-
