<PAGE>
THE CHAPMAN FUNDS, INC.
- --------------------------------------------------------------------------------
[LOGO]
U.S. TREASURY MONEY FUND
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Schedule Of Investments - October 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Showing Percentage of Total Value of Net Assets)
<TABLE>
<CAPTION>
Principal Value
Amount (Note B)
------------- ------------
<C> <S> <C>
U.S. GOVERNMENT - 61.3%
$ 35,000,000 U.S. Treasury Bills 3.420%, Due 11/05/98 $ 34,986,700
8,000,000 U.S. Treasury Bills 4.629%, Due 01/21/99 7,920,649
2,000,000 U.S. Treasury Bills 3.850%, Due 02/04/99 1,979,681
30,000 U.S. Treasury Bills 4.975%, Due 02/04/99* 29,607
2,000,000 U.S. Treasury Bills 3.900%, Due 05/27/99 1,955,149
------------
46,871,786
------------
REPURCHASE AGREEMENTS - 49.5%
17,843,000 Societe Generale, dated 10/30/98, 5.40% agreement
to repurchase at $17,851,029 on 11/02/98
(collateralized by U.S. Treasury Notes, 7.00%, due
07/15/2006, $18,437,933 market value) 17,843,000
10,000,000 Dean Witter, dated 10/30/98, 5.30% agreement to
repurchase at $10,004,417 on 11/02/98
(collateralized by U.S. Treasury Notes, 5.75%, due
10/31/2000, $10,469,827 market value) 10,000,000
10,000,000 CS First Boston, dated 10/30/98, 5.30% agreement
to repurchase at $10,004,417 on 11/02/98
(collateralized by U.S. Treasury Notes, 7.75%, due
11/30/99, $10,510,797 market value) 10,000,000
------------
37,843,000
------------
Total Investments (Cost $84,714,786)** - 110.8% 84,714,786
Other Assets and Liabilities - (10.8%) (8,235,797)
------------
Net Assets - 100.0% $ 76,478,989
------------
------------
</TABLE>
*Pledged as collateral for Fidelity Bond
**Cost for federal income tax purposes
See notes to financial statements
1
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Statement of Assets and Liabilities - October 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities (including repurchase
agreements of $37,843,000) at value
(amortized cost $84,714,786) (Note B) $ 84,714,786
Cash 12
Interest receivable 11,242
Prepaid expenses 6,541
------------
Total assets 84,732,581
------------
LIABILITIES:
Accrued expenses 73,948
Distribution payable 258,995
Payable for securities purchased 7,920,649
------------
Total liabilities 8,253,592
------------
NET ASSETS $ 76,478,989
------------
------------
NET ASSETS CONSIST OF:
Capital stock $ 76,479
Paid-in-capital 76,402,510
------------
Net assets, for 76,478,989 common shares
outstanding $ 76,478,989
------------
------------
NET ASSET VALUE PER SHARE $ 1.00
------------
------------
</TABLE>
See notes to financial statements
2
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Statement of Operations - For the year ended October 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income $ 2,629,535
-----------
EXPENSES:
Management and administrative fees 292,208
Custodian fees 39,454
Legal and auditing fees 34,901
Director's fees 20,783
Rating fees 21,912
Transfer and dividend disbursing agent's fees 18,578
Insurance fees 12,503
Other 18,637
-----------
Total expenses before reimbursement 458,976
Reimbursement of expenses (Note D) (142,418)
-----------
Net expenses 316,558
-----------
Increase in net assets resulting from operations $ 2,312,977
-----------
-----------
</TABLE>
See notes to financial statements
3
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended Year ended
October 31, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,312,977 $ 2,388,115
------------- -------------
Net increase in net assets from operations 2,312,977 2,388,115
DIVIDENDS:
Dividends paid to shareholders from net investment
income ($0.0477 and $.0470 per share, respectively) (2,312,977) (2,388,115)
------------- -------------
CAPITAL SHARE TRANSACTIONS (AT $1 PER SHARE):
Proceeds from sales of shares 136,367,309 176,692,845
Shares issued in reinvestment of dividends from net
investment income 1,390,423 1,381,641
Shares redeemed (121,488,853) (172,992,911)
------------- -------------
Increase in net assets from capital share transactions 16,268,879 5,081,575
------------- -------------
Total increase in net assets 16,268,879 5,081,575
NET ASSETS:
Beginning of period 60,210,110 55,128,535
------------- -------------
End of period $ 76,478,989 $ 60,210,110
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
4
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Financial Highlights
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS. IT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES THERETO.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income 0.0477 0.0470 0.0464 0.0497 0.0294
------- ------- ------- ------- -------
Total from investment
operations 0.0477 0.0470 0.0464 0.0497 0.0294
------- ------- ------- ------- -------
DISTRIBUTIONS:
From net investment income (0.0477) (0.0470) (0.0464) (0.0497) (0.0294)
------- ------- ------- ------- -------
Total distributions (0.0477) (0.0470) (0.0464) (0.0497) (0.0294)
------- ------- ------- ------- -------
Net asset value,
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN:(1) 4.88% 4.80% 4.74% 5.09% 3.04%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.65% 0.67% 0.75% 0.75% 0.75%
Expenses (prior to limitation) 0.94% 0.93% 0.87% 0.97% 1.12%
Net investment income 4.75% 4.72% 4.63% 5.02% 2.94%
SUPPLEMENTAL DATA:
Net Assets, end of period
(000 omitted) $76,479 $60,210 $55,129 $34,371 $20,011
</TABLE>
- -------------------------
(1) The total returns in the table represent the return that an investor
would have earned on an investment in the Fund (assuming investment in the
Fund the first day of the fiscal year and reinvestment of all distributions).
(2) Chapman Capital Management, Inc., the Fund's investment adviser, has
agreed to bear all expenses (excluding income, excise and other taxes and
extraordinary expenses) of the Fund in excess of .65% of average daily net
assets on an annual basis. Prior to January 1, 1997 the Fund's expenses were
limited to .75% of average daily net assets on an annual basis.
5
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Notes to Financial Statements - October 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A - GENERAL
The Chapman Funds, Inc. (the "Company"), is an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), containing
diversified and non-diversified series. The Company currently offers five
series; U.S. Treasury Money Fund (the "Fund"), Institutional Cash Management
Fund, DEM Equity Fund, DEM Index Fund, and DEM Fixed Income Fund.
The Fund is a diversified series that seeks to earn as high a level of
current income as is consistent with preservation of capital and maintenance
of liquidity. The Fund invests solely in short-term direct obligations of
the U.S. Government and repurchase agreements collateralized fully by direct
obligations of the U.S. Government.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund uses the amortized cost method, which approximates market value, to
value portfolio securities pursuant to Rule 2a-7 of the 1940 Act, provided
the Fund complies with certain conditions. The amortized cost valuation
method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization from date of purchase to date of
maturity of any discount or premium.
Repurchase Agreements - The Fund's custodian takes possession, through the
Federal Book Entry System, of the collateral pledged for investments in
repurchase agreements. The underlying collateral is valued daily to ensure
that the value, including accrued interest, is at least equal to the
repurchase price. In the event of default, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default, the Fund might be delayed in, or
prevented from, selling the collateral for its benefit.
Distributions to Stockholders - Dividends to shareholders of the Fund are
declared daily from net investment income, which consist of accrued interest
and earned discount (including both original issue and market discount), less
amortization of premium and the accrued expenses applicable to the dividend
period.
Federal Income Taxes - No provision for federal income taxes has been made since
the Fund intends to qualify as a Regulated Investment Company under Subchapter M
of the Internal Revenue Code and distribute all of its taxable income.
Securities Transactions and Investment Income - Securities transactions are
recorded on the trade date. Interest income is recorded on the accrual basis.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE C - CAPITAL STOCK
The Chapman Funds, Inc. is authorized to issue 10 billion full and fractional
shares of common stock, par value $.001 per share, of which 1 billion shares are
designated as U.S. Treasury Money Fund shares.
NOTE D - MANAGEMENT ADVISORY AND ADMINISTRATIVE FEES
Chapman Capital Management, Inc. ("CCM") acts as the investment adviser and
administrator for the Fund. The investment advisory and administrative fees
are based on the average daily net assets of the Fund computed at annual
rates of .5% and .1%, respectively. At October 31, 1998, expenses payable to
CCM for advisory and administrative services were $28,835.
6
<PAGE>
THE CHAPMAN FUNDS, INC.
U.S. TREASURY MONEY FUND
Notes to Financial Statements - October 31, 1998 Continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE D - MANAGEMENT ADVISORY AND ADMINISTRATIVE FEES - Continued
CCM also serves as Transfer and Dividend Disbursing Agent for the Fund
pursuant to a Shareholder Services Agreement. For its services, CCM is
compensated $18 per account with a monthly minimum of $1,500 per fund
excluding out-of-pocket expenses. At October 31, 1998, expenses payable to
CCM for transfer and dividend disbursing agent fees were $1,500.
Effective January 1, 1998, CCM has agreed to bear all expenses (excluding
income, excise and other taxes and extraordinary expenses) of the Fund in
excess of .65% of average daily net assets on an annual basis, until
December 31, 1998.
NOTE E - DIRECTOR'S FEES AND RELATED PARTIES
Certain officers and directors of the Company are "affiliated persons", as
defined in the Investment Company Act of 1940, of the adviser. For the year
ended October 31, 1998, these "affiliated persons" did not receive any
compensation from the Company.
Those directors who are not officers of the Company receive $1,000
compensation plus certain expenses from the Company for each Board of
Directors meeting they attend.
7
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
The Chapman Funds, Inc. - U.S. Treasury Money Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of The Chapman Funds, Inc. - U.S. Treasury Money
Fund as of October 31, 1998, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the Fund's
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Chapman Funds, Inc. - U.S. Treasury Money Fund at October 31, 1998, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and its financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 4, 1998
<PAGE>
THE CHAPMAN FUNDS, INC.
- --------------------------------------------------------------------------------
[LOGO]
DEM EQUITY FUND
A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
A MESSAGE TO OUR SHAREHOLDERS
December 15, 1998
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
We are pleased to provide the first annual report for shareholders of the
DEM Equity Fund and would like to welcome you as shareholders. The Fund,
launched on April 8, 1998, is a pioneer in the "Domestic Emerging Markets"
segment, which we believe, offers exciting opportunities for investment. As a
non-diversified portfolio that seeks aggressive long-term growth through capital
appreciation, the Fund invests in companies that we believe are positioned for
growth within the Domestic Emerging Markets market segment. The "Domestic
Emerging Market" market segment is comprised of companies that are controlled by
African Americans, Asian Americans, Hispanic/Latino Americans or women that are
located in the United States and its territories ("DEM Companies"). The Fund
considers both capital appreciation and income in the selection of investments,
but primary emphasis is on capital appreciation.
In 1998 market volatility continued due to uncertainty over global economic
turmoil affecting emerging markets, especially Asia, Russia, and Brazil.
Domestic events, including the risk of presidential impeachment, added to the
year's market strain. The economy in 1998 has benefited from low inflation and
low interest rates, yet seen a slowing in economic growth. Since Fund inception
through October 1998, the Consumer Price Index has risen by only 1.2%, and the
Federal Reserve lowered the Federal Funds Rate two times by 25 basis points
each, to stand at 5.0%. Both of these factors have helped to fuel continued
consumer income and spending. The Gross Domestic Product started the first
quarter of 1998 at a high 5.5%, yet slowed to a 3.9% rate for the third quarter
of 1998.
The Fund's benchmark, the Russell 2000 Growth Index, climbed to its high
for the year in April 1998, just as the Fund was launched. From that point, as
the market favored large capitalization stocks, the Russell 2000 Growth Index
trended downward until early October, losing 21.8% from April 8, 1998 through
October 31, 1998. However, the DEM Equity Fund outperformed the Russell 2000
Growth Index, losing only 18.9% for the same period. The last three-quarters of
October, however, saw resurgence in small capitalization stock valuations.
Since then, November has seen another Federal Reserve 25 basis point rate cut,
and continued strength in the market. Again outperforming its benchmark, The
Fund gained 12.2% in November of 1998 while the Russell 2000 Growth Index only
gained 7.8%. The Company continues to believe that the best investment strategy
ignores short-term market fluctuations and looks for long-term capital
appreciation.
[GRAPH]
<TABLE>
<S> <C>
Russell 2000 Growth $7,820
Index
DEM Inst'l Shares $8,110
DEM Investor Shares $7,725
</TABLE>
COMPARISON OF CHANGE IN VALUE OF INVESTMENT OF
DEM EQUITY FUND VS. RUSSELL 2000 GROWTH INDEX.
- --------------------------------------------------------------------------------
DEM EQUITY FUND TOTAL RETURN*
As of October 31, 1998
<TABLE>
<S> <C>
Investor Shares (22.74)% with sales charge
(18.96)% without sales charge
Institutional Shares (18.96)%
</TABLE>
*Past performance does not predict future performance
- --------------------------------------------------------------------------------
1
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO WEIGHTINGS
<S> <C>
Health Care 3%
Technology 38%
Consumer Discretionary 28%
Financials 14%
Producer Durables 9%
Other 4%
Auto & Transportation 4%
</TABLE>
Within the portfolio, we reduced the cash position from 17% at April 30 to
1.7% at October 31, 1998. During five of the Fund's seven months of operations,
the cash position was above 5%. During three of these five months, when the
small capitalization market lost value, the cash and the income it earned
benefited the Fund's performance relative to the benchmark. During the month of
October, our fully invested position (less than 5% cash) enabled the Fund to
benefit from the market rally in small capitalization stocks.
As shown in the chart, we have weighted the Fund heaviest in Technology,
Consumer Discretionary, and Financial Services sectors. From inception, the
Technology and Consumer Discretionary sectors showed losses, and the Financial
Services sector showed mixed returns. Your other three sector holdings,
Producer Durables, Auto & Transportation, and Health Care, showed gains in your
Fund. Since inception, we have purchased a total of over $11 million of stock,
while selling approximately $1.3 million in stock. Many of these sales were
companies, which no longer met the DEM criteria.
Although the U.S. economy continues to be the strongest in the world,
market volatility has been the rule this year. Investor sentiment may be
expected to continue to swing short-term with global and domestic events. While
1999 may be a challenge in the event of a slow down in economic growth, we
remain confident that the Fund should benefit from a favorable domestic economy,
growth in the technology sector, careful stock selection and our long-term
capital appreciation strategy.
We thank you for your confidence and the opportunity to earn your business.
Have a safe and very happy New Year!
2
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DEM EQUITY FUND PORTFOLIO HIGHLIGHTS
TOP TEN PORTFOLIO HOLDINGS(*) (AS OF 10/31/98)
- --------------------------------------------------------------------------------
<S> <C>
Solectron Corporation 8.4
Computer Associates International, Inc. 7.2
Popular, Inc. 5.6
Ethan Allen Interiors, Inc. 5.5
Lattice Semiconductor Corp. 5.0
The Warnaco Group, Inc., Class A 4.7
Mas Tec, Inc. 4.4
Atlas Air, Inc. 4.2
Univision Communications Inc. 4.0
Wet Seal, Inc., Class A 3.1
</TABLE>
(*)AS A PERCENTAGE OF THE PORTFOLIO'S TOTAL NET ASSETS.
3
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Schedule of Investments - October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
- ---------- ------------
<S> <C> <C>
COMMON STOCK - 99.0%
AUTO & TRANSPORTATION - 4.2%
AIR TRANSPORTATION
10,000 Atlas Air, Inc. $ 345,000
------------
Total Auto & Transportation 345,000
------------
CONSUMER DISCRETIONARY - 26.3%
APPAREL
15,000 Supreme International Corporation(+) 210,437
COMPUTER RETAIL
9,000 PC Connection, Inc.(+) 137,250
CONSUMER PRODUCTS
10,000 Movado Group, Inc. 188,750
ENVIRONMENTAL SERVICES
10,000 ATG Inc.(+) 73,750
FINANCE: AUTOMOBILES
9,000 Ugly Duckling Corporation(+) 46,125
HOUSEHOLD FURNISHINGS
13,000 Ethan Allen Interiors, Inc. 446,875
RADIO & TV BROADCASTERS
11,000 Univision Communications Inc.(+) 324,500
RETAIL
12,000 Wet Seal, Inc., Class A(+) 253,500
SERVICES COMMERCIAL
5,000 Vincam Group, Inc.(+) 79,062
TEXTILES: APPAREL MANUFACTURERS
15,000 The Warnaco Group, Inc., Class A 383,438
------------
Total Consumer Discretionary 2,143,687
------------
FINANCIAL SERVICES - 13.6%
BANKS
14,000 Doral Financial Corporation 245,000
5,332 Oriental Financial Group Inc. 170,656
15,000 Popular, Inc. 455,625
8,000 R&G Financial Corp., Class B 138,000
FINANCIAL DATA PROCESSING
3,000 Advent Software, Inc.(+) 104,250
------------
Total Financials 1,113,531
------------
HEALTH CARE - 2.6%
HEALTH CARE MANAGEMENT SERVICES
4,500 Pediatrix Medical Group(+) 209,812
------------
Total Health Care 209,812
------------
</TABLE>
See notes to financial statements
4
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Schedule of Investments - October 31, 1998 - Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
- ---------- ------------
<S> <C> <C>
COMMON STOCK - CONTINUED
PRODUCER DURABLE - 12.9%
PRODUCTION TECHNOLOGY EQUIPMENT
12,000 Solectron Corporation(+) $ 687,000
TELECOMMUNICATION EQUIPMENT
10,000 Mas Tec, Inc.(+) 357,188
------------
Total Producer Durable 1,044,188
------------
TECHNOLOGY - 39.4%
COMMUNICATIONS TECHNOLOGY
6,500 LCC International Inc., Class A(+) 30,875
4,000 Premisys Communications, Inc.(+) 105,625
12,000 Smart Modular Technologies, Inc.(+) 252,000
8,000 Startec Global Communications Corporation(+) 76,000
COMPUTER SERVICES SOFTWARE & SYSTEMS
3,500 Aspect Development Inc.(+) 110,578
7,000 Autodesk, Inc. 218,313
15,000 Broadvision, Inc.(+) 225,000
8,000 Complete Business Solutions, Inc.(+) 190,000
15,000 Computer Associates International, Inc. 590,625
12,000 I2 Technologies, Inc.(+) 223,500
5,000 Information Management Resources, Inc.(+) 117,500
13,000 Intelligroup, Inc.(+) 224,250
14,000 Open Market, Inc.(+) 85,750
15,000 Xylan Corporation(+) 240,000
COMPUTER TECHNOLOGY
12,000 CHS Electronics, Inc.(+) 117,000
ELECTRONICS: SEMI-CONDUCTORS
12,000 Lattice Semiconductor Corporation 408,000
------------
Total Technology 3,215,016
------------
Total Common Stock (Cost $9,720,104) - 99.0% 8,071,234
------------
Total Investments in Securities - 99.0% 8,071,234
Other Assets Less Liabilities - 1.0% 80,875
------------
Net Assets - 100% $ 8,152,109
------------
</TABLE>
(+) Non income producing security
See notes to financial statements
5
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Statement of Assets And Liabilities - October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities (Cost $9,720,104) $8,071,234
Cash 141,624
Deferred organization costs 44,042
Receivable for fund shares sold 2,313
Interest receivable 1,002
------------
Total assets 8,260,215
------------
LIABILITIES:
Payable for fund shares repurchased 1,000
Organization costs due to adviser 44,042
Accrued expenses 63,064
------------
Total liabilities 108,106
------------
NET ASSETS $8,152,109
------------
------------
NET ASSETS CONSIST OF:
Paid-in capital $9,843,146
Accumulated net realized loss on investments (42,167)
Net unrealized depreciation of investments (1,648,870)
------------
$8,152,109
------------
------------
Net Asset Value and Redemption Price Per:
Institutional Shares
($8,106,758 / 699,791 shares outstanding) $11.58
------------
Investor Shares
($45,351 / 3,916 shares outstanding) $11.58
------------
------------
Offering Price Per Investor Shares:
Net asset value $11.58
Sales Charge (maximum of 4.75% of offering price) .58
------------
Offering price $12.16
------------
------------
</TABLE>
See notes to financial statements.
6
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
April 8, 1998(1)
through
October 31, 1998
----------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 9,795
Interest income 2,541
------------
Total investment income 12,336
------------
EXPENSES:
Management and administrative fees (Note 3) 52,175
Shareholder reports 28,710
Registration fees 24,855
Accounting fees 20,325
Transfer and dividend disbursing agent's fees (Note 3) 19,620
Legal fees 15,420
Distribution fees (Note 3) 12,422
Audit fees 11,029
Custodian fees 9,500
Director's fees (Note 6) 8,132
Other 11,756
------------
Total expenses 213,944
------------
Net investment loss (201,608)
------------
REALIZED AND UNREALIZED GAIN (Loss) ON INVESTMENTS:
Net realized loss on investment transactions (42,167)
Net unrealized depreciation of investments (1,648,870)
------------
Net realized and unrealized loss on investments (1,691,037)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,892,645)
------------
------------
</TABLE>
- -------------------------
(1) Commencement of operations
See notes to financial statements
7
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
April 8, 1998 (1)
through
October 31, 1998
----------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (201,608)
Net realized loss on investment transactions (42,167)
Net unrealized depreciation of investments (1,648,870)
------------
Decrease in net assets from operations (1,892,645)
------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from shares sold
Institutional Shares 10,000,014
Investor Shares 50,832
------------
Total proceeds from shares sold 10,050,846
------------
Cost of shares repurchased
Investor Shares (6,092)
------------
Increase in net assets from capital share transactions 10,044,754
------------
Total increase in net assets 8,152,109
------------
NET ASSETS:
Beginning of period ---
------------
End of period $ 8,152,109
------------
------------
</TABLE>
- -------------------------
(1) Commencement of operations
See notes to financial statements
8
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Financial Highlights
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS. IT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND NOTES THERETO.
<TABLE>
<CAPTION>
April 8, 1998(1)
through
October 31, 1998
----------------------------
Institutional Investor
Shares Shares
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.29 $ 14.29
------------- -------------
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss(2) (.29) (.29)
Net realized and unrealized loss on investments (2.42) (2.42)
------------- -------------
Total from investment operations (2.71) (2.71)
------------- -------------
DISTRIBUTIONS:
From net investment income -0- -0-
From net realized gains on investments -0- -0-
------------- -------------
Total distributions -0- -0-
------------- -------------
Net asset value, end of period $ 11.58 $ 11.58
------------- -------------
------------- -------------
TOTAL RETURN (3) (18.96)% (18.96)%
RATIOS TO AVERAGE NET ASSETS: (4)
Expenses 4.30% 4.55%
Net investment loss (4.06)% (4.31)%
Expenses prior to voluntary expense waiver N/A 4.80%(5)
SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted) $8,107 $45
Portfolio turnover rate 17.89% 17.89%
</TABLE>
- -------------------------
(1) Commencement of operations.
(2) Net investment loss per share was calculated using the average shares
method.
(3) Total Return represents the return that an investor would have earned on
an investment in the Fund (assuming investment in the Fund the first day of
the fiscal year, and reinvestment of all dividends and distributions). It
excludes the effect of sales load. This ratio has not been annualized.
(4) Ratios have been annualized.
(5) The Distributor has voluntarily agreed to limit the distribution fee to
an aggregate of .25 % of average daily net assets for the first fiscal year
of the Investor Shares.
See notes to financial statements.
9
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Notes To Financial Statements - October 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
The Chapman Funds, Inc. (the "Company"), is an open-end management investment
company registered under the Investment Company Act of 1940 (the "1940 Act"),
containing diversified and non-diversified series. The Company currently
offers five series; DEM Equity Fund (the "Fund"), DEM Index Fund, DEM Fixed
Income Fund, U.S. Treasury Money Fund, and Institutional Cash Management Fund.
The Fund is a non-diversified portfolio that seeks aggressive long-term
growth through capital appreciation from investments in companies that are
controlled by African Americans, Asian Americans, Hispanic/Latino Americans
or women ("DEM Companies"). The Fund, which commenced operations on
April 8, 1998, offers two classes of shares, Institutional Shares and
Investor Shares, which both commenced operations on April 8, 1998. The
Institutional Shares are sold without a sales load, and the Investor Shares
have a maximum 4.75% front-end sales load.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund.
Security Valuation - Portfolio securities primarily traded on an exchange are
valued at the last quoted sales price for that day. Securities 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 an independent pricing service or as
determined in good faith by the Board of Directors. Investments in
short-term securities having a maturity of 60 days or less are valued at
amortized cost.
Federal Income Taxes - No provision for federal income taxes has been made
since the Fund intends to qualify as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code and distribute all of its taxable
income. The Fund reclassified $201,608 from accumulated net investment loss
to paid-in-capital as a result of permanent book-tax differences.
Deferred Organization Costs - Costs incurred in connection with the Fund's
organization have been capitalized and will be amortized on a straight-line
basis over a five-year period.
Securities Transactions, Investment Income, Distributions, and Other - The
Fund accounts for security transactions on a trade date basis. Realized
gains and losses on sales of securities are determined using the specific
identification method for both financial and income tax reporting purposes.
Interest income and expenses are recorded on an accrual basis. Income and
common expenses are allocated on a daily basis to each class based on its
respective net assets. Class specific expenses are charged directly to each
class. Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 - INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES
Chapman Capital Management, Inc. ("CCM"), a wholly-owned direct subsidiary of
Chapman Capital Management Holdings, Inc., is the investment adviser for the
Fund. The Fund pays CCM an advisory fee at an annual rate of .9 of 1% of
the Fund's average weekly net assets, and an administration fee at an
annual rate of .15 of 1% of the Fund's average weekly net assets. At
October 31, 1998 expenses payable to CCM for advisory and administrative
services was $6,258.
10
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Notes to Financial Statements - October 31, 1998 - Continued
- --------------------------------------------------------------------------------
First Data Investor Services Group ("First Data") serves as the Fund's
Transfer and Dividend Paying Agent (the "Transfer Agent"), and Accounting
Agent pursuant to an Investment Company Services Agreement. As compensation
for transfer agent services, the Fund pays First Data an account fee plus an
additional class fee. As compensation for its accounting services, the Fund
pays First Data a fee based on its average daily net assets plus an
additional class fee.
For the period ended October 31, 1998, The Chapman Company, an affiliate of
CCM, earned commissions on sales of Investor Shares of $2,529, and received
brokerage commissions related to Fund portfolio transactions of $20,825.
Pursuant to Rule 12b-1 under the 1940 Act, the Distributor receives a fee
under the Investor Shares Distribution Plan for stockholder service and
distribution services at an annual rate 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. The Distributor has voluntarily limited
such fee during the first fiscal year of the Fund to an aggregate of .50% of
average daily net assets (up to .25% service fee and .25% distribution fee).
These voluntary limits are not contractual and could change. For the period
ended October 31, 1998, total distribution fees waived was $21. The
Distributor also receives a fee under the Institutional Shares Distribution
Plan for stockholder administrative and distribution services at an annual
rate of .25% of the average daily net assets of the Fund attributable to the
Institutional Shares. At October 31, 1998 expenses payable to The Chapman
Company for distribution services was $1,484.
NOTE 4 - CAPITAL SHARE TRANSACTIONS
The Chapman Funds, Inc. is authorized to issue 10 billion full and fractional
shares of common stock, par value $.001 per share, of which 1 billion shares
are designated as DEM Equity Institutional Shares, and 1 billion shares are
designated as DEM Equity Investor Shares. Transactions in shares of the
respective classes were as follows:
<TABLE>
<CAPTION>
For the Period
April 8, 1998 (1)
through
October 31, 1998
-------------------------------------
Institutional Shares Investor Shares
-------------------------------------
<S> <C> <C>
Shares sold 699,791 4,396
Shares issued as reinvestment of dividends --- ---
Shares repurchased --- 480
-------------------------------------
Net increase in shares outstanding 699,791 3,916
-------------------------------------
-------------------------------------
</TABLE>
NOTE 5 - INVESTMENT TRANSACTIONS
Excluding short-term obligations, purchases of investment securities
aggregated $11,070,960 and proceeds from sales aggregated $1,308,689 during
the period April 8, 1998(1) through October 31, 1998.
The following balances are as of October 31, 1998:
<TABLE>
<CAPTION>
Cost for Tax Basis Tax Basis Tax Basis
Federal (Net) (Gross) (Gross)
Income Tax Unrealized Unrealized Unrealized
Purposes (Depreciation) Appreciation (Depreciation)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
DEM Equity Fund $9,720,104 ($1,648,870) $376,212 ($2,025,082)
</TABLE>
- -------------------------
(1) Commencement of operations.
11
<PAGE>
THE CHAPMAN FUNDS, INC.
DEM EQUITY FUND
Notes to Financial Statements - October 31, 1998 - Continued
- --------------------------------------------------------------------------------
NOTE 6 - DIRECTOR'S FEES AND RELATED PARTIES
Certain officers and directors of the Company are "affiliated persons", as
defined in the Investment Company Act of 1940, of the adviser. For the year
ended October 31, 1998, these "affiliated persons" did not receive any
compensation from the Company.
Those directors who are not officers of the Company receive $1,000
compensation plus certain expenses from the Company for each Board of
Directors meeting they attend. Total compensation and expenses paid to
directors for the year ended October 31, 1998 were $8,132.
12
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
The Chapman Funds, Inc. - DEM Equity Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of The Chapman Funds, Inc. - DEM
Equity Fund as of October 31, 1998, and the related statement of operations,
statement of changes in net assets, and financial highlights for the period
April 8, 1998 (commencement of operations) through October 31, 1998. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of October 31, 1998, by
correspondence with the Fund's custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Chapman Funds, Inc. - DEM Equity Fund at October 31, 1998, and the results of
its operations, the changes in its net assets, and its financial highlights
for the period April 8, 1998 (commencement of operations) through October 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 4, 1998
13
