CHAPMAN FUNDS INC, 485BPOS, 1998-11-27

CHAPMAN FUNDS INC
485BPOS, 1998-11-27

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<PAGE>

As filed with the Securities and Registration Nos. 33-25716
Exchange Commission on November 25, 1998 811-5697
- ---------------------------------------- --------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.
---
X Post Effective Amendment No. 18
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT TO COMPANY ACT OF 1940

X Amendment No. 20
---
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):

[X] 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)

[ ] 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

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,
DEM Multi-Manager DEM Multi-Manager
Fund Fund

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>

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 DEM Multi-Manager Equity Fund
Management Fund

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>
November 25, 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 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..................................................................... 14
Redemption of Shares................................................................... 16
Net Asset Value........................................................................ 18
Dividends.............................................................................. 19
Taxes.................................................................................. 19
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 annual 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.

<TABLE>
<CAPTION>
INVESTOR SHARES
-------------------
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................................................... 4.75%

Maximum Deferred Sales Load................................................................. 0%

Maximum Sales Load Imposed on Reinvested
Dividends and other Distributions......................................................... 0%

Redemption Fees
(as a percentage of amount redeemed) (1).................................................. 0%

ANNUAL EXPENSES (as a percentage of net assets) (2)

Management Fees (after Investor Share fee waiver) (3)..................................... 0.60%

12b-1 Fees (after Investor Share fee waiver) (4).......................................... 0.30%

Other Expenses (5)........................................................................ 2.28%

Total Fund Operating Expenses (estimated) (6)............................................. 3.18%
</TABLE>

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(1) The Fund imposes a $9.00 charge only on redemptions by wire transfer.

(2) See "MANAGEMENT."

(3) The Investment Advisor is entitled to 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 full 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.

(4) The Distributor is entitled to a fee for stockholder servicing and
distribution services at an annual rate of up to a total of .75% (up to .25%
service fee and .50% distribution fee) of the average daily net assets of
the Fund attributable to Investor Shares. The Distributor has voluntarily
limited such fee during the first full 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.

(5) Based upon estimated amounts of expenses for the Fund's current fiscal year.

(6) In the absence of the voluntary fee waivers of the Investment Advisor and
the Distributor, estimated Total Fund Operating Expenses would currently be
3.93% of estimated net assets.

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses (excluding offering expenses) at the levels set
forth in the table above.

2
<PAGE>
EXAMPLE

An investor would pay the following expenses on a $1,000 investment assuming
a 5% annual return, reinvestment of all dividends and distributions at net asset
value and redemption at the end of each time period:

<TABLE>
<CAPTION>
INVESTOR SHARES
---------------------
<S> <C>
1 Year.................................................................... $ 78
3 Years................................................................... $ 141
</TABLE>

The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. "Other Expenses" are based on estimated amounts for
the current fiscal year. In the absence of the voluntary fee waivers of the
Investment Adviser and the Distributor, the estimated expenses set forth in the
table above would be $85 and $162 for the one year and three year periods,
respectively. Long-term investors in the Fund could pay more in 12b-1 fees than
the economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. (the "NASD") THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OF THE FUND AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while the
examples assume a 5% annual return, the Fund's performance will vary and may
result in a return greater or less than 5%. For a further description of the
various costs and expenses incurred in the Fund's operation, see "MANAGEMENT."

INVESTMENT OBJECTIVES

GENERAL

The Fund's investment portfolio 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
selected Domestic Emerging Markets companies that it believes are positioned for
growth. Domestic Emerging Markets companies are companies that are controlled by
African Americans, Hispanic 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 180 DEM Companies that it expects will continue to grow. In
determining whether a specific portfolio company is "controlled" by African
Americans, Asian Americans, Hispanic 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 (Chairman,
Chief Executive Officer or President) 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.

3
<PAGE>
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.
Under normal circumstances, no less than 65% of the Company's non cash net
assets can be expected to be invested in income securities of Domestic Emerging
Markets.

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.

4
<PAGE>
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 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 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.

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 net assets
with no more than 10% of the Fund's net 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.

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.

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 of its assets in
securities of emerging companies with small market capitalizations, an investor
should be aware of certain special considerations and risk factors relating to
investments in such companies. No assurance can be given that securities of
small emerging companies will appreciate, that a sufficient number of
appropriate investments will be available or that the Fund's particular
investment choices will be successful. Investors should also be aware of
considerations and risks relating to the Fund's investment practices.

Investing in small capitalization 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 acted as an investment
advisor and manager from 1995 to 1998 for a closed-end, non-diversified
management investment company which concentrated 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 68.2% 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.

THE YEAR 2000 PROBLEM

9
<PAGE>
that it uses and to obtain satisfactory assurances that comparable steps are
being taken by the Fund's 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. In evaluating portfolio investments and potential
investments, the Investment Advisor considers the extent to which such companies
have prepared for the Year 2000 Problem. In this regard, the Investment Advisor
reviews reports filed with the SEC by portfolio companies and potential
portfolio companies, reviews third party publications, if available, and confers
with issuer representatives. At this time, however, there can be no assurance
that these steps will be sufficient to identify all or most portfolio companies
or potential portfolio companies that will have a significant Year 2000 Problem.
To the extent the Fund's portfolio companies experience business disruptions due
to the Year 2000 Problem, this could have a significant effect on the value of
their securities and their ability to make distributions which could have a
material adverse effect on the Fund.

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 full fiscal
year of the Fund to an aggregate of .6 of 1% of the Fund's average weekly net
assets during the preceding month; however, there can be no assurance that the
Investment Advisor will continue to voluntarily limit the amount of such fee in
the future.

10
<PAGE>
invested in DEM Companies from 1995 to 1998. In addition, the Investment Advisor
serves as portfolio manager to private accounts. As of October 31, 1998, the
Investment Advisor had approximately $532 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 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 fees during the first full 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 waive or limit the
amount of such fee in the future. Amounts paid to the Distributor under the
Distribution Plan may be used by the Distributor to cover expenses that are
primarily intended to result in, or that are primarily attributable to, (i) the
sale of the shares of the Fund, (ii) ongoing servicing and/or maintenance of the
accounts of the Fund's stockholders, and (iii) sub-transfer agency services,
sub-accounting services or administrative services related to the sale of the
shares of the Fund, all as set forth in the Distribution Plan. Payments under
the Distribution Plan are not tied exclusively to the distribution expenses
actually incurred by the Distributor and the payments may exceed distribution
expenses actually incurred. The Board of Directors of the Company evaluates the
appropriateness of the Distribution Plan on a continuing basis and in doing so
considers all relevant factors, including expenses borne by the Distributor and
amounts received under the Distribution Plan.

The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.

11
<PAGE>
Listed below are persons affiliated with both the Company and the
Distributor.

<TABLE>
<CAPTION>
NAME AND
PRINCIPAL BUSINESS ADDRESS WITH DISTRIBUTOR WITH COMPANY
- ---------------------------------- -------------------------------------- -------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director, President and Chairman Director, President and Chairman
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, MD 21202

Earl U. Bravo, Sr. Senior Vice President, Secretary and Secretary and Assistant Treasurer
The Chapman Co. Assistant Treasurer
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202

M. Lynn Ballard Treasurer and Assistant Secretary Treasurer and Assistant Secretary
The Chapman Co.
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202

Lottie Shackelford Control Person Director
</TABLE>

EXPENSES

The Investment Advisor bears all expenses in connection with the performance
of its advisory and administrative services. The Company bears all expenses
incurred in its operations. Expenses attributable to the Company, but not to a
particular Series, will be allocated to each Series on the basis of relative net
assets. Similarly, expenses attributable to a particular Series, but not to a
particular class, will be allocated to each class thereof on the basis of
relative net assets. General Company expenses may include but are not limited
to: insurance premiums; Director fees; expenses of maintaining the Company's
legal existence; and fees of industry organizations. General Series expenses may
include but are not limited to: audit fees; brokerage commissions; registration
of the shares of a Series with the SEC and notification fees to the various
state securities commissions; fees of the Series' Administrator, Custodian and
Transfer Agent or other service providers, costs of obtaining quotations of
portfolio securities; and pricing of Series shares.

Class-specific expenses relating to distribution fee payments associated
with a Rule 12b-1 plan for a particular class of shares and any other costs
relating to implementing or amending such plan (including obtaining stockholder
approval of such plan or any amendment thereto), will be borne solely by
stockholders of such class or classes. Other expense allocations which may
differ among classes, or which are determined by the Board of Directors to be
class-specific, may include but are not limited to: printing and postage
expenses related to preparing and distributing required documents such as
stockholder reports, prospectuses, and proxy statements to current stockholders
of a specific class; SEC registration fees and state "blue sky" fees incurred by
a specific class; litigation or other legal expenses relating to a specific
class; Director fees or expenses incurred as a result of issues relating to a
specific class; and different transfer agency fees attributable to a specific
class.

Notwithstanding the foregoing, the Investment Advisor or other service
provider may waive or reimburse the expenses of a specific class or classes to
the extent permitted under Rule 18f-3 under the 1940 Act.

BROKERAGE

The Distributor may effect brokerage transactions for the Fund in compliance
with the requirements of the 1940 Act.

12
<PAGE>
CUSTODIAN

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.

TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT

First Data 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.

13
<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

14
<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>
TOTAL SALES LOAD
-------------------------------------------
<S> <C> <C> <C>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF NET AS A % OF
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
- ---------------------------------------------------------- ------------- ------------- -------------
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 purchased during the
90-day period prior to the submission of the Letter of Intent. In addition, if
the

15
<PAGE>
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 98-7037-071-9
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.

Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.

16
<PAGE>
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.

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

17
<PAGE>
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

18
<PAGE>
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 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

19
<PAGE>
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 type of those capital gain distributions for tax
purposes. In general, if the Fund designates a dividend as a capital gain
dividend, the dividend will be taxed to individual stockholders at no more than
20%. 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 by individuals will be taxed at no higher than a 20% rate.
However, any loss recognized by a stockholder on shares held for six months or
less will be treated as a long-term capital loss to the extent of any long-term
capital gain distributions received by the stockholder and the stockholder's
share of undistributed net capital gain. In addition, any loss realized on a
sale of shares will be disallowed to the extent the shares disposed of are
replaced within a period beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.

BACKUP WITHHOLDING

The Fund may be required to withhold federal income tax at the rate of 31%
of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.

The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "TAXATION" in the Fund's
Statement of Additional Information.

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.

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

---------------------

November 25, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
November 25, 1998
DEM FIXED INCOME FUND
INSTITUTIONAL SHARES

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.

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>

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 annual 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.

<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)(1)................................................... 0%

ANNUAL EXPENSES (as a percentage of net assets) (2)
Management Fees (after Institutional Share fee waiver) (3)................................ 0.60%
12b-1 Fees................................................................................ 0.25%
Other Expenses (4)........................................................................ 2.28%
Total Fund Operating Expenses (estimated) (5)............................................. 3.13%
</TABLE>

- ------------------------

(1) The Fund imposes a $9.00 charge only on redemptions by wire transfer.

(2) See "MANAGEMENT."

(3) The Investment Advisor is entitled to 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 full 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.

(4) Based upon estimated amounts of expenses for the Fund's current fiscal year.

(5) In the absence of the Investment Advisor's voluntary fee limitation,
estimated Total Fund Operating Expenses would currently be 3.13% of
estimated net assets.

EXAMPLE

<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
---------------------
<S> <C>

1 Year.................................................................... $ 32

3 Years................................................................... $ 97
</TABLE>

2
<PAGE>
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
selected Domestic Emerging Markets companies that it believes are positioned for
growth. Domestic Emerging Markets companies 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 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. Under normal circumstances, no less than 65% of
the Company's non cash net assets can be expected to be invested in income
securities of Domestic Emerging Markets.

3
<PAGE>
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.

DEBT SECURITIES

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.

4
<PAGE>
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.

BORROWING

SECURITIES LENDING/REPURCHASE AGREEMENTS

5
<PAGE>
the acquisition of suitable investments. See "INVESTMENT PROGRAM" in the
Statement of Additional Information.

ILLIQUID SECURITIES/ PRIVATE VENTURE CAPITAL FUNDS

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 net assets with no more than 10% of the Fund's net
assets invested in Private Funds.

OPTIONS

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.

PORTFOLIO TURNOVER

7
<PAGE>
RISK FACTORS

INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.

INVESTMENT IN SMALL COMPANIES

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

LIMITED EXPERIENCE OF THE INVESTMENT ADVISOR

8
<PAGE>
investment advisor and manager from 1995 to 1998 for a closed-end,
non-diversified management investment company which concentrated 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 68.2% 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 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
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. In
evaluating portfolio investments and potential portfolio investments, the
Investment Advisor considers the extent to which such companies have prepared
for the Year 2000 Problem. In this regard, the Investment Advisor reviews
reports filed with the SEC by portfolio companies and potential portfolio
companies, reviews third party publications, if available, and confers with
issuer representatives. At this time, however, there can be no assurance that
these steps will be sufficient to identify all or most portfolio companies or
potential portfolio companies that will have a significant Year 2000 Problem. To
the extent the Fund's portfolio companies experience business disruptions due to
the Year 2000 Problem, this could have a significant effect on the value of
their securities and their ability to make distributions which could have a
material adverse effect on the Fund.

9
<PAGE>
MANAGEMENT

BOARD OF DIRECTORS

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 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 that investing in DEM
Companies since 1998 and a closed-end non-diversified investment company that
invested in DEM Companies from 1995 to 1998. In addition, the Investment Advisor
serves as portfolio manager to private accounts. As of October 31, 1998, the
Investment Advisor had approximately $532 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 founded the
Distributor in 1987 and has been its President and Chairman of the Board since
its inception. The Distributor is a full-service brokerage and investment

10
<PAGE>
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.

Listed below are persons affiliated with both the Company and the
Distributor.

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

Lottie Shackelford Control Person Director
</TABLE>

11
<PAGE>
EXPENSES

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.

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

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 98-7037-071-9
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.

Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.

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.

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.

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.

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

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

TAXATION OF STOCKHOLDERS

DISTRIBUTIONS

17
<PAGE>
The Fund intends to distribute any net capital gain annually and intends to
designate the appropriate type of those capital gain distributions for tax
purposes. In general, if the Fund designates a dividend as a capital gain
dividend, the dividend will be taxed to individual stockholders at no more than
20%. 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.

SALES OF SHARES

BACKUP WITHHOLDING

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.

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

19
<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.

20
<PAGE>
APPENDIX A

CORPORATE BOND RATINGS

<TABLE>
<S> <C>
MOODY'S INVESTORS SERVICE, INC.

<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.

SPECULATIVE GRADE

"AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.

A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

------------------------

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

---------------------

November 25, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

Statement of Additional Information Dated: November 25, 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

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>

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 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

B-2
<PAGE>

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

B-3
<PAGE>

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.

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-

B-4
<PAGE>

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

B-5
<PAGE>

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
<PAGE>

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

B-7
<PAGE>

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.

B-8
<PAGE>

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

B-9
<PAGE>

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.)

B-10
<PAGE>

(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) Making loans to others, except through the purchase of
qualified (publicly distributed bonds, debentures or other securities) debt
obligations, the entry into repurchase agreements and loans of portfolio
securities consistent with the Fund's investment objectives and policies.

(5) Issuing senior securities, except in accordance with the
Investment Company Act of 1940, as amended, borrowing money or pledging its
assets, except that the Company may borrow (i) from banks in amounts
aggregating not more than 5% 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 5% of the value of its total assets to
secure such borrowings, (ii) from banks to purchase securities on margin
pursuant to margin arrangements with banks up to the limits set forth above
for bank borrowings, (iii) 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.

(6) 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.

(7) Investing in foreign securities (including American Depository
Receipts).

OTHER INVESTMENT POLICIES

The policy of the Fund is not to invest its funds for the purpose of
purchasing working control in companies except when and if, in the judgment of
the Investment Advisor, such investment is deemed advisable. This policy of the
Fund, which is established by the Board of Directors, is subject to change
without stockholder approval.

PORTFOLIO TURNOVER

Although the Fund seeks to invest for the long term, the Fund
retains the right to sell securities regardless of how long they have been
held. 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.

B-11
<PAGE>

MANAGEMENT

DIRECTORS AND OFFICERS

The Directors and executive officers of the Company are listed below.
Directors deemed to be "interested persons" of the Company for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act") are indicated by an
asterisk.

- --------------------------------------------------------------------------------

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 41 President and Director since
and 1986 of The Chapman Co.
President President and Director since 1988
of Chapman Capital Management,
Inc. President and Director of
Chapman Holdings, Inc. since
1997. President and Director
of Chapman Capital Management
Holdings, Inc. since 1998.
- --------------------------------------------------------------------------------
Dr. Glenda Glover Director 45 Dean of School of Business,
Jackson State University since
1994. Chairperson of Accounting
Department, Howard University
from 1990 through 1994.
- --------------------------------------------------------------------------------
*Dr. Benjamin Hooks Director 73 Senior Vice President of The
Chapman Co. since 1993.
Executive Director of the NAACP
from 1977 to 1993.
- --------------------------------------------------------------------------------
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 - 1995.
- --------------------------------------------------------------------------------
Wilfred Marshall Director 62 Principal, Marshall Enterprises
since 1994. Director, Mayor's
Office of Small Business
Assistance - City of Los Angeles
1981 to 1994.
- --------------------------------------------------------------------------------
David Rivers Director 55 D i r e c t o r of Community
Development Medical University
of South Carolina Environmental
Hazards Assessment Program since
1994; President, Research
Planning and Management from
1991 to 1994.
- --------------------------------------------------------------------------------
* Lottie H. Shackelford Director 57 Executive Vice President of
Global USA since 1994. City
Director of Little Rock,
Arkansas, 1978 to 1992. Director
of Chapman Holdings, Inc. since
1997.
- --------------------------------------------------------------------------------
Ronald A. White Director 49 Senior Partner, Ronald A. White,
P.C., since 1982.
- --------------------------------------------------------------------------------
</TABLE>

B-12
<PAGE>

- --------------------------------------------------------------------------------
Principal
Positions(s) Occupations (s) During
Name and Address Held with Age Past 5 Years
Registrant
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Valerie A. Chapman Vice - 37 Administrator of The Chapman Co.
President since March 1988. Ms. Chapman
is married to Nathan A. Chapman,
Jr.
- --------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary 51 Senior Vice President, Secretary
and and Assistant Treasurer since
Assistant 1997 of The Chapman Co.
Treasurer S e n i o r 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.
Mr. Bravo has been employed in
various senior executive
positions with The Chapan Co.
and Chapman Capital Management,
Inc. s i n c e 1990.
- --------------------------------------------------------------------------------
M. Lynn Ballard Treasurer 56 Controller from 1988 to 1998
and and Treasurer and Assistant
Assistant Secretary since 1997 of The
Secretary Chapman Co. Treasurer since
1990, Controller from 1995
to 1998 and Assistant Secretary
since 1997 of Chapman Capital
Management, Inc. Treasurer and
Assistant Secretary of Chapman
Holdings, Inc. since 1997 and
Chapman Capital Management
Holdings, Inc. since 1998.
- --------------------------------------------------------------------------------
</TABLE>

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 - Fiscal Year 1998

- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Dr. Glenda Glover $1,000 None None $6,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Dr. Benjamin Hooks $4,000 None None $9,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
James Lewis $4,000 None None $9,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
David Rivers $4,000 None None $4,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Lottie Shackelford $4,000 None None $9,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald A. White $3,000 None None $6,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Wilfred Marshall $4,000 None None $4,000
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 Treasurer and Assistant Treasurer and Assistant
28th Floor 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 October 31, 1998, the latest
practicable date, and the ownership of all Directors and executive officers
of the Company as a group.

- --------------------------------------------------------------------------------

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
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

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:

<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, Two Commerce Square, 2001 Market Street,
Philadelphia, PA 19103, 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.

FINANCIAL STATEMENTS

The statement of assets and liabilities of the Fund as of
October 31, 1998, have been audited by Ernest & Young, LLP and are included
herein.

B-29
<PAGE>

THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 1998
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash $26
----------

Total assets 28
----------

LIABILITIES: 0
----------

Total liabilities 0
----------

NET ASSETS - equivalent to $14.29 per share on
1 share of Investor Shares, and 1 share of $28
Institutional Shares of common stock outstanding ----------
----------

Net Asset Value and Redemption Price Per:
Investor Shares
($14.29 / 1 share outstanding) $14.29
----------
----------
Institutional Shares
($14.29 / 1 share outstanding) $14.29
----------
----------

Maximum Offering Price Per Investor Share:
Net Asset Value $15.00
Sales Charge (4.75% of offering price) 0.71
----------
Maximum offering price $14.29
----------
----------

COMPONENTS OF NET ASSETS
Common Stock, par value $.001 per share: authorized
10,000,000,000 shares; issued and outstanding
1 share Investor Series $0
1 share Institutional Series 0
Capital paid-in
Investor Series 14
Institutional Series 14
----------

Net assets applicable to outstanding share $28
----------
----------

</TABLE>

F-1

<PAGE>

THE CHAPMAN FUNDS, INC.
DEM FIXED INCOME FUND
Notes to Financial Statements
October 31, 1998
- -------------------------------------------------------------------------------

NOTE 1 - GENERAL

The DEM Fixed Income Fund (the "Fund") is a series of The Chapman Funds,
Inc., an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). 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, Asian Americans, Hispanic/Latino 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 offers two classes of shares, Investor Shares and Institutional
Shares. The Investor Shares are subject to a 12b-1 fee of up to .75% of
average daily net assets, and a front end sales load of up to 4.75% of the
offering price. Institutional Shares are sold without a front end sales
load, and are subject to a 12b-1 fee of up to .25% of average daily net
assets.

As of October 31, 1998 the Fund has not commenced operations.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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. Actual results could differ from those estimates.

F-2
<PAGE>

Report of Ernst & Young LLP, Independent Auditors

To the Shareholder and Board of Directors of
The Chapman Funds, Inc. - DEM Fixed Income Fund

We have audited the accompanying statement of assets and liabilities of The
Chapman Funds, Inc. - DEM Fixed Income Fund (the "Fund") as of October 31,
1998. This statement of assets and liabilities is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets and liabilities 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 statement of assets and
liabilities is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statement of assets and liabilities. 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 statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of The
Chapman Funds, Inc. - DEM Fixed Income Fund at October 31, 1998, in
conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
November 24, 1998

F-3
<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--October 31,
1998
Part C: None
See Registrant's 1998 Annual Report to Stockholders.

(b) Exhibits:

Exhibit
Number Description

1(A) Articles of Incorporation of the Registrant (1)

1(B) Articles Supplementary of the Registrant dated July 28, 1997
(2)

1(C) Articles of Amendment of the Registrant dated February 12,
1998 (3)

1(D) Articles Supplementary of the Registrant dated February 12,
1998 (3)

1(E) Articles Supplementary of the Registrant dated February 12,
1998 (3)

1(F) Articles Supplementary of the Registrant dated May 8, 1998 (4)

1(G) Articles of Amendment of the Registrant dated May 11, 1998 (4)

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)

C-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)

4(I) Form of Stock Certificate (DEM Fixed Income Fund, Investor
Class (5)

4(J) Form of Stock Certificate (DEM Fixed Income Fund,
Institutional Class) (5)

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)

5(F) Form of Advisory and Administrative Services Agreement between
the Registrant and Chapman Capital Management, Inc. (DEM
Multi-Manager Equity Fund) (5)

5(G) Form of Advisory Agreement between the Registrant and
Sub-advisors (DEM Multi-Manager Equity Fund) (5)

C-2

<PAGE>

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)

6(E) Distribution Agreement between the Registrant and The Chapman
Co. (DEM Fixed Income Fund) (1)

6(E) Distribution Agreement between the Registrant and The Chapman
Co. (DEM Multi-Manager Equity Fund) (5)

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)

11 Consent of independent auditors (6)

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)

C-3
<PAGE>

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)

15(G) Distribution Plan (DEM Multi-Manager Equity Fund Investor
Shares) (5)

15(H) Distribution Plan (DEM Multi-Manager Equity Fund Institutional
Shares) (5)

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)

18(D) Multiple Class Plan (DEM Multi-Manager Equity Fund) (5)

27.1 Financial Data Schedule (6)

27.2 Financial Data Schedule (6)

99.1 Power of Attorney (6)

99.2 Power of Attorney (5)

(1) Incorporated by reference from Amendment No. 17 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 June 12, 1996.

(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 Amendment No. 18 to Registrant's
Registration Statement on Form N-1A (File Nos.: 33-25716; 811-5697) as
filed with the Securities and Exchange Commission on September 30, 1998.

(6) Filed herewith.

(7) Incorporated by reference from Post-Effective Amendment 12 to the
Registrant's Registration Statement on Form N-1A (File Nos.: 33-25716;
811-5697) as filed with the Securities and Exchange Commission on
February 28, 1997.

<PAGE>

Item 25. Persons Controlled by or under Common Control with the Registrant.

None.

Item 26. Number of Holders of Securities.

Number of Record
On October 31, 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 113

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

DEM Multi-Manager
Equity Fund
Institutional Shares 1

DEM Multi-Manager
Equity Fund
Investor Shares 1

DEM Multi-Manager Bond Fund
Institutional Shares 1

DEM Multi-Manager Bond Fund
Investor Shares 1

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 Chapman
Holdings, Inc. since 1997
and Chapman Capital
Management Holdings, Inc.
since 1998.
- --------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and Assistant Treasurer and Assistant
401 E. Pratt Street Secretary Secretary since 1997 of The
28th Floor Chapman Co. Treasurer
Baltimore, Maryland since 1990, and Assistant
21202 Secretary since 1997 of
Chapman Capital Management,
Inc. 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. Senior
Baltimore, MD 21202 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) Not applicable

(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

- --------------------------------------------------------------------------------

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. 18 and amendment No. 20 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
November 24, 1998. The undersigned hereby certifies that the within
post-effective amendment No. 18 and amendment No. 20 meet all of the
requirements for effectiveness pursuant to paragraph (b) of Rule 485
promulgated under the Securities act of 1933.

THE CHAPMAN FUNDS, INC.

By: /S/ NATHAN A. CHAPMAN JR.
-----------------------------
Nathan A. Chapman, Jr.
President

Pursuant to the requirements of the Securities Act of 1933, as
amended, this post-effective amendment No. 18 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 November 24, 1998
- --------------------------- (principal executive
Nathan A. Chapman, Jr. officer)

/S/ M. LYNN BALLARD Treasurer (principal November 24, 1998
- --------------------------- financial and
M. Lynn Ballard accounting officer)

Each of the Directors:
Nathan A. Chapman, Jr., Lottie H. Shackelford, James B. Lewis,
Ronald A. White, Dr. Benjamin Hooks, David Rivers, and Wilfred Marshall,
and Glenda Glover.

By: /S/ NATHAN A. CHAPMAN, JR. November 24, 1998
--------------------------
Nathan A. Chapman, Jr.
as Attorney-in-Fact

<PAGE>

EXHIBIT INDEX

11 Consent of independent auditors

27.1 Financial Data Schedule

27.2 Financial Data Schedule

<PAGE>

Consent of Ernst & Young LLP, Independent Auditors

We consent to the references to our firm under the captions "Independent
Auditors" and "Financial Statements" in the Statement of Additional
Information of the DEM Fixed Income Fund and to the use of our report dated
November 24, 1998, in this Post-Effective Amendment No. 18 to the
Registration Statement (Form N-1A)(No. 33-25716) of The Chapman Funds, Inc.

/s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
November 24, 1998

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's audited annual financial statements dated October 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 14
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 14
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 14
<PER-SHARE-NAV-BEGIN> 14.29
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.29
<EXPENSE-RATIO> 3.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 14
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 14
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14
<PER-SHARE-NII> 14.29
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.29
<EXPENSE-RATIO> 3.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>