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Filed Pursuant to Rule 497(e)
(File No.: 33-25716
811-5697)
August 6, 1999
DEM MULTI-MANAGER EQUITY FUND
INVESTOR SHARES
The DEM Multi-Manager Equity Fund (the "Fund") is a series of The Chapman
Funds, Inc. (the "Company"), an open-end, management investment company known as
a series fund (the Fund and each other series of the Company are herein referred
to as a "Series"). The Fund is a non-diversified portfolio that seeks aggressive
long-term growth through capital appreciation by investment in companies deemed
to possess strong growth characteristics. Such companies are identified through
the Company's domestic emerging markets multi-manager ("DEM Multi-Manager")
strategy. Under the DEM Multi-Manager strategy, the assets of the Fund are
managed by multiple sub-advisors selected by the Fund's investment advisor,
Chapman Capital Management, Inc. (the "Investment Advisor"). Such sub-advisors
must meet the domestic emerging markets profile which includes only those
companies that are controlled by African Americans, Asian Americans, Hispanic
Americans or women that are located in the United States and its territories
(the "DEM Profile"). Both capital appreciation and income will be considered in
the selection of investments, but primary emphasis will be on capital
appreciation. BECAUSE OF THE NATURE OF THE FUND'S INVESTMENTS AND CERTAIN
STRATEGIES IT MAY USE, AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND MAY
NOT BE APPROPRIATE FOR ALL INVESTORS.
The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Investor Shares are offered by this Prospectus directly from the Fund's
distributor, The Chapman Co. (herein sometimes referred to as the
"Distributor"). Investor Shares are subject to a 12b-1 fee of up to .75% of
average daily net assets, currently set at .50% 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
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<TABLE>
<S> <C>
Fund Expenses.......................................... 2
Investment Objectives.................................. 3
Risk Factors........................................... 6
Management............................................. 9
Purchase of Shares..................................... 15
Redemption of Shares................................... 18
Net Asset Value........................................ 21
Dividends.............................................. 21
Taxes.................................................. 22
Other Information...................................... 23
</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- and DEM-Registered Trademark-
are registered trademarks and the stylized C-Eagle Logo-TM-, DEM Profile-TM-,
DEM Universe-TM-, DEM Company-TM-, DEM Index-TM-, and DEM Multi-Manager-TM- are
trademarks of Nathan A. Chapman, Jr.
A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
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FUND EXPENSES
The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Fund based on an estimate
of the Fund's operating expenses for the current fiscal year:
<TABLE>
<CAPTION>
DEM MULTI-MANAGER
EQUITY FUND
STOCKHOLDER TRANSACTION EXPENSES INVESTOR SHARES
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<S> <C>
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 Fee
(as a percentage of amount redeemed)(1)............... -0-%
ANNUAL EXPENSES (as a percentage of net assets)(2)
Management Fees......................................... 1.25%
12b-1 Fees (after Investor Share fee waiver)(3)......... 0.50%
Other Expenses(4)....................................... 1.24%
Total Fund Operating Expenses(4) (estimated)............ 2.99%
</TABLE>
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(1) The Fund imposes a $9.00 charge only on redemptions by wire transfer.
(2) See "MANAGEMENT."
(3) The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .75% (up to .25% service fee
and .50% distribution fee) of the average daily net assets of the Fund
attributable to Investor Shares. The Distributor has voluntarily limited
such fee during the first fiscal year of the Fund to an aggregate of .50%
(.25% service fee and .25% distribution fee) of average daily net assets;
however, there can be no assurance that the Distributor will continue to
voluntarily limit the amount of such fee in the future.
(4) The Investment Advisor has voluntarily agreed to limit the total annual
operating expenses of the Fund, solely attributable to Investor Shares, to
2.99% of average daily net assets until at least December 31, 2000. However,
there is no guarantee that the Investment Advisor will continue to
voluntarily limit the total annual operating expenses of the Fund
attributable to the Investor Shares beyond December 31, 2000. In the absence
of the voluntary fee waiver of the Distributor and the Investment Advisor's
voluntary expense limitation, estimated Total Annual Fund Operating Expenses
would be 3.24% 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.
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 the period:
<TABLE>
<CAPTION>
INVESTOR SHARES
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<S> <C>
1 Year........................................................................ $ 76
3 Years....................................................................... $ 136
</TABLE>
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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 waiver of the
Distributor and the Investment Advisor's voluntary expense limitation, the
estimated expenses set forth in the table above would be $79 and $143 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 seeks aggressive long-term growth through capital appreciation by
investment in companies deemed to possess strong growth characteristics. Such
companies are identified through the Company's domestic emerging markets
multi-manager ("DEM Multi-Manager") strategy. Under the DEM Multi-Manager
strategy, the assets of the Fund are managed by multiple sub-advisors
recommended by the Investment Advisor and approved by the Board of Directors.
Such sub-advisors must meet the domestic emerging markets profile which includes
only those companies that are controlled by African Americans, Asian Americans,
Hispanic Americans or women that are located in the United States and its
territories (the "DEM Profile"). Although the Fund's sub-advisors must meet the
DEM Profile, the sub-advisors will not consider the DEM Profile in making
investment decisions for the Fund's portfolio. Accordingly, the Investment
Advisor does not expect companies that meet the DEM Profile to constitute a
large percentage of the Fund's portfolio. Both capital appreciation and income
are considered in choosing specific investments, but the primary emphasis is on
capital appreciation. The Fund retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies with
large and small market capitalizations. Some of these investments may involve
the purchase of securities directly from portfolio companies in initial or other
public offerings of their securities. See "RISK FACTORS-- Investment in Small
Companies."
The Investment Advisor will track the performance of each of the Fund's
sub-advisors and will have the discretion to allocate assets among the Fund's
sub-advisors, identify and recommend new sub-advisors to the Board of Directors
and terminate existing sub-advisory relationships. Each sub-advisor uses its own
investment strategies to achieve the Fund's investment objectives in accordance
with the Fund's investment restrictions.
The primary objective of the DEM Multi-Manager strategy is to reduce
portfolio volatility through multiple investment approaches, a strategy used by
many institutional investors. The use of multiple investment approaches
consistent with the Fund's investment objective and policies is designed to
mitigate the impact of a single sub-advisor's performance in the market cycle
during which such sub-advisor's approach is less successful. Although there may
be some overlap of investment styles, each sub-advisor will pursue its approach
independently of the other sub-advisors. Because the Fund's sub-advisors will
act independently, the performance of one or more other sub-advisors is expected
to dampen the impact of any other sub-advisor's relatively adverse results.
Conversely, the successful results of a sub-advisor will be dampened by less
successful results of the other sub-advisors. There can be no assurance that the
expected advantages of the DEM Multi-Manager strategy will be realized.
To achieve the Fund's investment objectives, the sub-advisors invest in a
wide variety of types of portfolio companies and seek to identify those
companies that are positioned for growth. Among other factors, the sub-advisors
consider a company's above average earnings growth, high potential profit
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margins, innovative products, high quality management, and competitive advantage
in making investment decisions.
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in equity securities; however, the Fund retains the
flexibility to respond promptly to changes in market conditions. Accordingly,
during periods when the sub-advisors believe a temporary defensive posture in
the market is warranted, the Fund has reserved the right to invest a significant
proportion or all of its assets in cash (U.S. dollars) and/or invest any portion
or all of its assets in high quality short-term debt securities and money market
instruments. The decision to adopt a temporary defensive posture may be affected
by such factors as market conditions generally, the sub-advisors' views on the
direction of movement of the stock prices of specific targeted portfolio
companies and other related factors. It is impossible to predict when or for how
long the Fund will employ defensive strategies, and to the extent it is so
invested, the Fund may not achieve its investment objectives. The Fund will also
invest in the instruments described above pending investment of the net proceeds
of sales of its shares.
The Fund invests in portfolio companies with large, mid, small and micro
market capitalizations. Most of the Fund's investments are in marketable common
stocks or marketable securities convertible into common stock traded on an
exchange or in the over-the-counter markets. To the extent the Fund invests in
companies with smaller market capitalizations, the securities of such companies
may be traded in such over-the-counter markets as the OTC Bulletin Board-SM- and
the Pink Sheets-SM-. See "RISK FACTORS--Investment in Small Companies."
The Fund's investment objectives and policies, other than those specified in
the Statement of Additional Information under "INVESTMENT PROGRAM--Fundamental
Policies," may be changed by the Board of Directors without the approval of
stockholders.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
The Fund may purchase call options on securities that a sub-advisor intends
to include in the Fund in order to fix the cost of a future purchase or attempt
to enhance return by, for example, participating in an anticipated increase in
the value of a security. The Fund may purchase put options to hedge against a
decline in the market value of securities held in the Fund or in an attempt to
enhance return. The Fund may write (sell) put and covered call options on
securities in which it is authorized to invest. The Fund may also purchase put
and call options, and write put and covered call options, on U.S. securities or
indexes. Stock index options serve to hedge against overall fluctuations in the
securities markets rather than anticipated increases or decreases in the value
of a particular security.
ILLIQUID SECURITIES/PRIVATE FUNDS
The Fund may not invest more than 15% of its net assets in securities that
are considered illiquid, 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. The Fund will seek to invest in the securities of private companies that
a sub-advisor believes have the potential for above average capital appreciation
in anticipation of their initial public offering. To the extent that the Fund is
permitted to invest in Illiquid Securities, the Fund may be deemed to act as an
underwriter to portfolio companies. See "RISK FACTORS--Non-Publicly Traded
Securities" and "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional Information.
As an alternative to direct investments in Illiquid Securities, the Fund may
invest up to 10% of its assets in private venture capital funds including United
States private limited partnerships or other investment funds ("Private Funds")
that themselves invest in Illiquid Securities. Investments in Private Funds may
offer the Fund's individual investors a unique opportunity to participate in
investment
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opportunities typically available only to large institutions and accredited
investors. Although the Fund's investments in Private Funds are limited to a
maximum of 10% of the Fund's assets, these investments are highly speculative
and volatile and may produce gains or losses in this portion of the Fund that
exceed those of the Fund's other holdings and of more mature companies
generally. 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.
The Fund's investment in Private Funds will be limited to, subject to
certain exceptions, (i) 3% of the total voting stock of any one Private Fund,
(ii) 5% of the Fund's total assets with respect to any one Private Fund and,
(iii) 10% of the Fund's total assets in the aggregate. In valuing the Fund's
holdings of interests in Private Funds, the Fund may rely on the most recent
reports provided by the Private Funds themselves prior to calculation of the
Fund's net asset value. These reports, which are provided on an infrequent
basis, often depend on the subjective valuations of the managers of the Private
Funds and, in addition, would not generally reflect positive or negative
subsequent developments affecting companies held by the Private Fund. See "NET
ASSET VALUE." The securities of Private Funds will typically themselves be
classified as Illiquid Securities by the Board of Directors. Accordingly, the
Fund's total investment in Illiquid Securities, including Private Funds, is
limited to 15% of the Fund's assets with no more than 10% of the Fund's assets
invested in Private Funds.
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 a sub-advisor, such techniques can be expected to yield
a higher return than other investment options.
A repurchase agreement is a transaction in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to that bank or dealer at an agreed upon price, date and
market rate of interest. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delay and
costs to the Fund in connection with bankruptcy proceedings), it is the Fund's
policy to limit repurchase transactions to primary dealers in U.S. Government
obligations and to banks whose creditworthiness has been reviewed and found
satisfactory by the Investment Advisor.
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.
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 its 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.
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PORTFOLIO TURNOVER
As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments. Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction costs on the sale
of securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. The Fund cannot accurately
predict its turnover rate but anticipates that its annual portfolio turnover
will not exceed 200%. See "TAXES" and "PORTFOLIO TRANSACTIONS," "TAXATION" and
"INVESTMENT PROGRAM--Portfolio Turnover" in the Statement of Additional
Information.
OTHER INFORMATION
Other than with respect to those investment objectives and policies
specified in the Statement of Additional Information under "INVESTMENT
PROGRAM--Fundamental Policies," the Board of Directors may change the Fund's
investment objectives and policies without the approval of the Fund's
stockholders.
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 GREATER MARKET RISKS INHERENT
IN SEEKING HIGHER RETURNS AND IS NOT RECOMMENDED FOR SHORT-TERM OR RISK AVERSE
INVESTORS.
GROWTH-ORIENTED INVESTING
Because the Fund will be invested in growth-oriented companies, the
volatility of the Fund may be higher than that of the U.S. equity market as a
whole. Generally, companies with high relative rates of growth tend to reinvest
more of their profits in the company and pay out less to stockholders in the
form of current dividends. As a result, growth investors tend to receive most of
their return in the form of capital appreciation. This tends to make growth
company securities more volatile than the market as a whole. In addition, there
can be no assurance that growth within a particular company will continue to
occur.
INVESTMENT IN MICRO-CAP AND SMALL-CAP COMPANIES
At times, the Fund may invest in securities of micro- and
small-capitalization companies. Micro- and small-capitalization companies may be
more vulnerable than larger companies to adverse business or economic
developments. Micro- and small-capitalization companies may also have limited
product lines, markets or financial resources, and may be dependent on
relatively small management groups. Securities of such companies may be less
liquid and more volatile than securities of larger companies and therefore may
involve greater risk than investing in larger companies. In addition, micro- and
small-capitalization companies may not be well known to the investing public or
securities analysts may not have institutional ownership and may have only
cyclical, static or moderate growth prospects. Because the capitalizations of
micro-capitalization companies are even smaller than the capitalizations of
small-capitalization companies, the risks described above can be expected to
have a larger effect on micro-capitalization companies than on
small-capitalization companies. Accordingly, micro-capitalization companies can
be expected to be highly volatile and very risky.
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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. 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. Illiquid Securities may involve a high degree of
business and financial risk and may result in substantial losses. These
securities are less liquid than publicly traded securities, and the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in Illiquid Securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, for
example to cover net redemptions, the value of the Fund's net assets could be
adversely affected. See "INVESTMENT --ROGRAM]Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional Information.
OPTIONS
The use of options involves certain investment risks and transaction costs.
These risks include: dependence on the sub-advisors' ability to predict
movements in the prices of individual securities, fluctuations in the securities
markets in general and movements in interest rates; imperfect correlation
between movements in the price of options and movements in the price of the
security or securities hedged or used for cover; the fact that skills and
techniques needed to trade options are different from those needed to select
securities in which the Fund invests; and lack of assurance that a liquid
secondary market will exist for any particular option at any particular time.
NON-DIVERSIFIED STATUS
The Fund is classified as non-diversified under the 1940 Act, which means
that the Fund is not limited by that Act in the proportion of its assets that
may be invested in the securities of a single issuer. However, the Fund intends
to comply with the diversification requirements imposed by the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. See "TAXATION" in the Fund's Statement of Additional
Information. As a non-diversified portfolio, the Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, may be subject to greater risk with respect to its portfolio
securities.
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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, and broker-dealer affiliates of sub-advisors of the Fund 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 Chapman Capital
Management Holdings, Inc. The Distributor is a wholly-owned subsidiary of
Chapman Holdings, Inc. Mr. Nathan A. Chapman, Jr. is also the President and
Chairman of the Board of Directors of the Distributor and Chapman Holdings, Inc.
See "MANAGEMENT--Investment Advisor" below and "MANAGEMENT" in the Fund's
Statement of Additional Information. Mr. Chapman owns a majority of the
outstanding voting securities of each of Chapman Capital Management Holdings,
Inc. and 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.
Similar potential conflicts of interest may arise with respect to the use of
affiliates of sub-advisors for the purchase or sale of portfolio securities. The
Board of Directors has adopted procedures in compliance with the 1940 Act to
address such potential conflicts. Furthermore, at least 40% of the members of
the Company's Board of Directors must be disinterested under the 1940 Act. See
"MANAGEMENT" 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. 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.
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 and sub-advisors consider the extent to which such companies
have prepared for the Year 2000 Problem. In this regard, the Investment Advisor
and the sub-advisors review reports filed with the SEC by portfolio companies
and potential portfolio companies, review third party publications, if
available, and confer 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 that 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.
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MANAGEMENT
BOARD OF DIRECTORS
The Fund is managed under the supervision of 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, the
sub-advisors and the Distributor. The Board of Directors delegates to the
Company's officers and the Investment Advisor responsibility for day-to-day
operation 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 the
Investment Advisor.
The Investment Advisor has overall responsibility for assets under
management, provides overall investment strategies and programs for the Fund,
recommends new sub-advisors to the Board of Directors, allocates assets among
existing sub-advisors, monitors and evaluates the performance of existing sub-
advisors and manages short-term investments for the Fund. The Investment Advisor
receives from the Fund an advisory fee at an annual rate of 1.25% 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 agreed to limit the total annual
operating expenses of the Fund, solely attributable to Investor Shares, to 2.99%
of average daily net assets until at least December 31, 2000. However, there is
no guarantee that the Investment Advisor will continue to voluntarily limit the
total annual operating expenses of the Fund attributable to the Investor Shares
beyond December 31, 2000.
The Investment Advisor has been in business since 1988. It served as the
investment adviser of DEM, Inc., a closed-end company, from 1995 until its
dissolution in 1998 and currently serves as the investment adviser for The
Chapman US Treasury Money Fund, DEM Equity Fund, DEM Index Fund and DEM Fixed
Income Fund. DEM Fixed Income Fund is not currently active. In addition, the
Investment Advisor serves as portfolio manager to private accounts. As of March
31, 1999, the Investment Advisor had approximately $637 million in assets under
management.
Nathan A. Chapman, Jr. who has been the President of the Investment Advisor
since 1988, is primarily responsible for supervision of the performance of the
sub-advisors and the Fund's assets. Mr. Chapman has served as 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 served as 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.
9
<PAGE>
THE SUB-ADVISORS
Under the DEM Multi-Manager strategy, the assets of the Fund are managed by
multiple sub-advisors selected by the Investment Advisor. These sub-advisors
enter into individual sub-advisory agreements with the Fund. Each sub-advisor
makes specific portfolio investments for that segment of the assets of the Fund
under its management in accordance with the Fund's investment objectives and
policies and the sub-advisor's investment approach and strategies. A sub-advisor
may direct Fund transactions to the Company's Distributor, The Chapman Co. or a
broker that is an affiliate of such sub-advisor.
All sub-advisors recommended by the Investment Advisor and approved by the
Board of Directors must meet the DEM Profile. In determining whether a specific
investment advisor is "controlled" by African Americans, Asian Americans,
Hispanic Americans or women and therefore meets that DEM Profile, the Investment
Advisor will apply the following criteria: at least 10% of the investment
advisor's outstanding voting securities must be beneficially owned by members of
one or more of the listed groups and at least one of the investment advisor'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 will seek to identify DEM Profile investment advisors through
research by the Investment Advisor. Such research will include: requests to
specific companies for details of their ownership and management; independent
research for the details of ownership and management including personal visits
and checks with government agencies for investment advisors that have registered
as minority or women-owned business enterprises or are recognized as such by
government agencies; review of business lists compiled by magazines and other
publications which list DEM Profile companies; examination of investment
advisors that generally market themselves as DEM Profile companies; and review
of annual reports and other regulatory filings.
After identifying investment advisors that fit the DEM Profile, the
Investment Advisor applies additional criteria in the selection and retention of
sub-advisors, including: (1) their historical performance records; (2) an
investment approach that is distinct in relation to the approaches of each of
the Fund's other sub-advisors; (3) consistent performance in the context of the
markets and preservation of capital in declining markets; (4) organizational
stability and reputation; (5) the quality and depth of investment personnel; and
(6) the ability of the sub-advisor to apply its approach consistently. The
Fund's sub-advisors may not necessarily exhibit all of these criteria to the
same degree.
The Investment Advisor from its own management fee pays each sub-advisor a
monthly management fee of .35 of 1% of the value of the Fund's average weekly
net assets allocated to the sub-advisor during the preceding month payable
monthly in arrears.
The Board of Directors of the Company and the initial stockholder of the
Fund have approved sub-advisory agreements between the Fund, the Investment
Advisor and each of the investment advisors listed below to serve as
sub-advisors of the Fund. The Investment Advisor will allocate the Fund's assets
among these sub-advisors. In its discretion, the Investment Adviser may allocate
as much as 100 percent or as little as 0 percent of the Fund's assets to any one
sub-advisor.
The Fund and the Investment Adviser are seeking an exemption from the SEC
that will permit the Investment Adviser to retain additional sub-advisors,
terminate existing sub-advisors, and materially amend the sub-advisory
agreements without stockholder approval. Such exemption request has been
approved by the Board of Directors of the Company and the Fund's sole
stockholder. To the extent that the SEC grants the requested exemption, the Fund
will send its stockholders a notice to this effect and will supplement its
Prospectus and Statement of Additional Information with information about new
sub-advisors and changes in sub-advisory agreements. To the extent that the Fund
receives the requested exemption, the Fund also anticipates that within ninety
days of retaining a new sub-advisor or materially amending a sub-advisory
agreement, it will give its stockholders written notice of such addition or
material change.
10
<PAGE>
<TABLE>
<CAPTION>
The current sub-advisors of the Fund are as follows:
<S> <C>
Albriond Capital Management, LLC African-American
55 E. 59th Street, 19th Floor
New York, NY 10022
<CAPTION>
</TABLE>
Albriond Capital Management, LLC was founded in 1991 and has approximately $640
million in assets under management as of March 31, 1999. Albriond Capital
manages assets for corporations, public funds, Taft-Hartley organizations,
foundations, and endowments nationwide. The firm seeks capital appreciation
through the implementation of large-cap growth, mid-cap growth, and balanced
investment strategies. Alan B. Bond is President and Chief Investment Officer
and is responsible for the day-to-day management of the fund's assets assigned
<TABLE>
<CAPTION>
to Albriond.
<S> <C>
Charter Financial Group, Inc. Women
1401 I Street, NW, Suite 505
Washington, DC 20005
<CAPTION>
</TABLE>
Charter Financial Group, Inc. was founded in 1995 and has approximately $96
million in assets under management as of March 31, 1999. The firm specializes in
large-cap equity management with an investment philosophy of growth at a
reasonable price. Susan Stewart and Thomas King are responsible for the
day-to-day management of the fund's assets assigned to Charter Financial. Ms.
Stewart is Chairman and President of Charter Financial and in the fourteen years
prior to co-founding Charter Financial, she was a stockbroker with Merrill Lynch
and Shearson Lehman Brothers and a Vice President with NationsBank and First
Union Bank. Mr. King is Chief Investment Officer of Charter Financial and prior
to co-founding the firm, he was an institutional portfolio manager with the
Chase Manhattan Bank, PNC Bank, and First Union Bank. Mr. King is a Chartered
<TABLE>
<CAPTION>
Financial Analyst.
<S> <C>
CIC Asset Management, Inc. Hispanic-American
633 W. 5th Street, Suite 1180
Los Angeles, CA 90071
<CAPTION>
</TABLE>
CIC Asset Management, Inc. was founded in 1989 and has approximately $359
million in assets under management as of March 31, 1999. The firm specializes in
managing large-cap equity portfolios. Day-to-day management of the fund's assets
assigned to CIC Asset Management is the responsibility of the firm's investment
<TABLE>
<CAPTION>
committee.
<S> <C>
Diaz-Verson Capital Investments, Inc. Hispanic-American
1200 Brookstone Centre Parkway
Suite 105
Columbus, GA 31909
<CAPTION>
</TABLE>
Diaz-Verson Capital Investments, Inc. was founded in 1991 and has approximately
$183 million in assets under management as of March 31, 1999. The firm follows a
value investing approach in the management of its individual and institutional
equity portfolios. Day-to-day management of the fund's assets assigned to
Diaz-Verson Capital is the responsibility of the firm's investment committee.
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EverGreen Capital Management, Inc. African-American
10707 Pacific Street, Suite 201
Omaha, NE 68114
<CAPTION>
</TABLE>
EverGreen Capital Management, Inc. was founded in 1989 and has approximately $75
million in assets under management as of March 31, 1999. The firm specializes in
the management of institutional tax-exempt assets. Michael L. Green and Gary A.
Barohn are responsible for the day-to-day management of the fund's assets
assigned to EverGreen. Mr. Green is President and Chief Investment Officer and
is the firm's portfolio manager. Mr. Green has 20 years experience in the
financial services industry. Mr. Barohn is Senior Vice President and Director of
Research of EverGreen. Mr. Barohn has 12 years experience in the financial
<TABLE>
<CAPTION>
services industry and is a Chartered Financial Analyst.
<S> <C>
GLOBALT, Inc. Women
3060 Peachtree Road, NW
One Buckhead Plaza, Suite 225
Atlanta, GA 30305
<CAPTION>
</TABLE>
GLOBALT, Inc. was founded in 1990 and has approximately $1.7 billion in assets
under management as of March 31, 1999. The firm invests exclusively in
diversified portfolios of globally competitive U.S. companies. The day-to-day
management of the fund's assets assigned to GLOBALT is the responsibility of the
<TABLE>
<CAPTION>
firm's investment committee.
<S> <C>
John Hsu Capital Group, Inc. Asian-American
767 Third Avenue, 18th Floor
New York, NY 10017
<CAPTION>
</TABLE>
John Hsu Capital Group, Inc. was founded in 1991 and has approximately $439
million in assets under management as of March 31, 1999. The firm focuses on
large capitalization companies utilizing a global, top-down growth/value
approach. John Hsu Capital Group provides investment management services for
domestic equity, global international equity, and domestic fixed income
portfolios. John Hsu is Chairman and Chief Investment Officer and is responsible
<TABLE>
<CAPTION>
for the day-to-day management of the fund's assets assigned to the firm.
<S> <C>
The Kenwood Group, Inc. African-American
10 South LaSalle Street, Suite 3610 Women
Chicago, IL 60610
<CAPTION>
</TABLE>
The Kenwood Group, Inc. was founded in 1989 and has approximately $412 million
in assets under management as of March 31, 1999. The firm employs a contrarian
approach to its investment strategy. Day-to-day management of the fund's assets
assigned to The Kenwood Group is the responsibility of the firm's investment
<TABLE>
<CAPTION>
committee.
<S> <C>
Union Heritage Capital Management, Inc. African-American
1642 First National Building
Detroit, MI 48226
<CAPTION>
</TABLE>
12
<PAGE>
Union Heritage Capital Management, Inc. was founded in 1990 and has
approximately $75 million in assets under management as of March 31, 1999. The
firm is a fixed income and equity investment advisor to corporate and public
pension funds, trusts and estates. Derek T. Batts, James L. Bashaw, and Eric L.
Small are responsible for the day-to-day management of the fund's assets
assigned to Union Heritage. Mr. Batts is President and has served as the firm's
portfolio manager since 1992. He also sits on the firm's investment committee.
Mr. Bashaw is Director of Research of Union Heritage and has served on the
firm's investment committee for the last eight years. Mr. Small is Vice
President of Union Heritage and has served on the firm's investment committee
<TABLE>
<CAPTION>
for the last five years.
<S> <C>
Valenzuela Capital Partners LLC Hispanic-American
1270 Avenue of the Americas, Suite 508
New York, NY 10020
<CAPTION>
</TABLE>
Valenzuela Capital Partners LLC was founded in 1989 and has approximately $1.9
billion in assets under management as of March 31, 1999. The firm employs
quantitative and qualitative analyses to identify stocks with the potential for
significant appreciation over a three year period. Day-to-day management of the
fund's assets assigned to Valenzuela Capital is the responsibility of the firm's
<TABLE>
<CAPTION>
investment committee.
<S> <C>
Zevenbergen Capital, Inc. Women
601 Union Street, Suite 2434
Seattle, WA 98101
<CAPTION>
</TABLE>
Zevenbergen Capital was founded in 1987 and has approximately $1.2 billion in
assets under management as of March 31, 1999. The firm employs a fundamental,
bottom-up approach, investing primarily in domestic growth companies. Nancy
Zevenbergen and Brooke de Boutray are responsible for the day-to-day management
of the fund's assets assigned to Zevenbergen Capital. Ms. Zevenbergen is
President and oversees the firm's investment policy and portfolio management
decisions. She is a Chartered Financial Analyst and has 13 years of investment
experience. Ms. de Boutray is Vice President of Zevenbergen Capital and defines
the investment policy in addition to selecting the firm's equity holdings. Ms.
de Boutray is a Chartered Financial Analyst and has seven years of investment
experience.
THE DISTRIBUTOR
The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at the World Trade Center--Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Distributor is a
wholly-owned subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is
the controlling stockholder, President and Chairman of the Board of Directors of
Chapman Capital Management Holdings, Inc., is President and Chairman of the
Board of Directors of the Company and the Distributor.
The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .75% (up to .25% service fee and
.50% distribution fee) of the average daily net assets of the Fund attributable
to the Investor Shares pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act. The Distributor
has voluntarily limited such fee during the first fiscal year of the Fund to an
aggregate of .50% (.25% service fee and .25% distribution fee) of average daily
net assets; however, there can be no assurance that the Distributor will
continue to voluntarily limit the amount of such fee in the future. Amounts paid
to the Distributor under the Distribution Plan may be used by the Distributor to
cover expenses that are primarily intended to result in, or that are primarily
attributable to, (i) the sale of the shares of the Fund, (ii) ongoing servicing
and/or maintenance of the accounts of the Fund's stockholders, and (iii)
sub-transfer agency services, sub-
13
<PAGE>
accounting services or administrative services related to the sale of the shares
of the Fund, all as set forth in the Distribution Plan. Payments under the
Distribution Plan are not tied exclusively to the distribution expenses actually
incurred by the Distributor and the payments may exceed distribution expenses
actually incurred. The Board of Directors of the Company evaluates the
appropriateness of the Distribution Plan on a continuing basis and in doing so
considers all relevant factors, including expenses borne by the Distributor and
amounts received under the Distribution Plan.
The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
Listed below are persons affiliated with both the Company and the
Distributor.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND PRINCIPAL BUSINESS
ADDRESS WITH DISTRIBUTOR WITH COMPANY
- --------------------------- ---------------------- ----------------------
Nathan A. Chapman, Jr. .... Chairman of the Board, Chairman of the Board,
The Chapman Co. Director and President Director and President
401 East Pratt Street
28th Floor
Baltimore, MD 21202
Earl U. Bravo, Sr. ........ Senior Vice President, Secretary and
The Chapman Co. Secretary and Assistant Treasurer
401 East Pratt Street Assistant Treasurer
28th Floor
Baltimore, Maryland 21202
M. Lynn Ballard ........... Controller, Treasurer Treasurer and
The Chapman Co. and Assistant Assistant Secretary
401 East Pratt Street Secretary
28th Floor
Baltimore, Maryland 21202
</TABLE>
EXPENSES
The Investment Advisor pays all expenses in connection with the performance
of its advisory and administrative services and in connection with the advisory
agreements with the sub-advisors. 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
14
<PAGE>
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 and affiliates of the Fund's sub-advisors may effect
brokerage transactions for the Fund in compliance with the requirements of the
1940 Act.
CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT
First Data Investor Services Group, Inc., 211 S. Gulph Road, PO Box 61503,
King of Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and
dividend paying agent and accounting agent (the "Transfer Agent") for the Fund's
shares pursuant to an Investment Company Services Agreement. First Data performs
the following duties in its capacity as Transfer Agent to the Fund: maintains
the records of stockholder's accounts; answers stockholder inquiries concerning
accounts; processes purchases and redemptions of Fund shares; acts as dividend
and distribution disbursing agent; and performs other stockholder service
functions. Stockholder inquiries should be addressed to the Transfer Agent at
(800) 441-6580. As accounting agent, First Data performs certain accounting and
pricing services for the Fund, including the daily calculation of the Fund's net
asset value. For its transfer and dividend paying agency services under the
Investment Company Services Agreement, the Transfer Agent is compensated by a
monthly fee calculated according to a fee schedule approved by the Board of
Directors of the Company.
PURCHASE OF SHARES
Investor Shares of the Fund may be purchased directly from the Fund at the
net asset value per share, plus the applicable sales load, next determined after
receipt of the order in proper form by the Transfer Agent. There is a sales load
in connection with the purchase of shares which is reduced on purchases
involving large amounts and which may be eliminated in certain circumstances
described under "PURCHASE OF SHARES--Purchase Price." The Fund reserves the
right to reject any purchase order and to suspend the offering of shares of the
Fund. The Fund will not accept a check endorsed over by a third-party. The
minimum initial investment is $25, and the minimum subsequent investment is $25.
The Fund reserves the right to vary the initial investment minimum and the
subsequent investment minimum at any time.
Purchase orders for Investor 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.
15
<PAGE>
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 Multi-Manager Equity Fund Investor Shares,
c/o First Data Investor Services Group, Inc., 211 S. Gulph Road, 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 Multi-Manager Equity Fund Investor
Shares, c/o First Data Investor Services Group, Inc., 211 S. Gulph Road, P.O.
Box 61503, King of Prussia, PA 19406-0903. Please enclose the stub of your
account statement along with the amount of the investment and 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 to 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 the amount of the sale.
No sales charge will be assessed on the reinvestment of distributions. The sales
charge will be assessed as follows:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
-----------------------------------------------
DEALER'S
REALLOWANCE
AS A % OF AS A % OF
OFFERING AS A % OF NET OFFERING
AMOUNT OF TRANSACTION PRICE AMOUNT INVESTED PRICE
- ---------------------------------------------- ------------- ----------------- -------------
<S> <C> <C> <C>
Less than $50,000............................. 4.75% 4.97% 4.25%
$50,000 to $99,999.99......................... 4.25% 4.46% 3.75%
$100,000 to $249,999.99....................... 3.75% 3.88% 3.25%
$250,000 to $499,999.99....................... 3.25% 3.38% 3.00%
$500,000 to $749,999.99....................... 2.75% 2.81% 2.50%
$750,000 to $999,999.99....................... 2.25% 2.32% 2.00%
$1,000,000 and above.......................... 1.25% 1.28% 1.00%
</TABLE>
The Distributor will pay the appropriate dealer concession to those selected
dealers who have entered into an agreement with the Distributor. The dealer's
concession may be changed from time to time. The Distributor may from time to
time offer incentive compensation to dealers (which sell shares of the Fund
subject to sales charges) allowing such dealers to retain an additional portion
of the sales load. A dealer who receives all of the sales load may be considered
an "underwriter" under the Securities Act of 1933, as amended. All such sales
charges are paid to the securities dealer involved in the trade. The foregoing
schedule of sales charges applies to single purchases and to purchases made
under a Letter of Intent and pursuant to the Rights of Accumulation, both of
which are described below.
16
<PAGE>
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 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.
17
<PAGE>
PURCHASES BY WIRE
To order Investor Shares by wiring federal funds, the Transfer Agent must
first be notified by calling (800) 752-1013 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:
Boston Safe Deposit & Trust
ABA #011001234
Credit: (DEM Multi-Manager Equity Fund Investor Shares)
FBO: (Insert Shareholder name and account number)
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 original application is not
received.
PURCHASE BY AUTOMATIC INVESTMENT
Shares of the Fund may be purchased through the Fund's "Automatic Investment
Option" by completing the "Automatic Investment Option" section of the
investment application. The Automatic Investment Option provides a convenient
method by which investors may have monies deducted directly from their checking,
savings or bank money market accounts for investment in the Fund. The minimum
investment is $25 per month. The account designated will be debited in the
specified amount, on the date indicated, and Fund shares will be purchased. Only
an account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. The Fund may alter, modify or
terminate this plan at any time.
PURCHASE BY EXCHANGE
To request an exchange of shares from one DEM fund into shares of another
DEM fund offered by The Chapman Funds, Inc., a stockholder must call
(800)441-6580 or send a written request to:
DEM Multi-Manager Equity Fund Investor Shares
c/o First Data Investor Services Group, Inc.
211 S. Gulph Road
PO Box 61503
King of Prussia, PA 19406
Note: An exchange must be made by mail if a new account must be opened or the
accounts are not identically registered.
If shares of one DEM fund are exchanged for another DEM fund by telephone,
the new shares will be registered in the same manner as the shares for which
they were exchanged. The Fund may change or cancel exchange policies at any
time, upon 60 days' notice to stockholders and can terminate the telephone
exchange privilege at any time. An exchange of shares is treated like a sale of
those shares; therefore the stockholder may realize capital gain or loss for
federal income tax purposes when shares are exchanged. Exchanges will be
required to meet the minimum initial investment requirement of each fund.
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
18
<PAGE>
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 value are effective that
day.
Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.
Investor Shares of the Fund may be redeemed through certain brokers,
financial institutions or service organizations, banks and bank trust
departments who may charge the investor a transaction fee or other fee for their
services at the time of redemption. Such fees would not otherwise be charged if
the shares were directly redeemed from the Fund.
The Fund will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Investment
Advisor or the Board of Directors, result in the necessity of the Fund selling
assets under disadvantageous conditions and to the detriment of the remaining
stockholders of the Fund.
Pursuant to the Company's Charter, payment for shares redeemed may be made
either in cash or in-kind, or partly in cash and partly in-kind. However, the
Fund has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund, during any 90 day period for any one stockholder. Payments in
excess of this limit will also be made wholly in cash unless the Board of
Directors believes that economic conditions exist which would make such a
practice detrimental to the best interests of the Fund. Any portfolio securities
paid or distributed in-kind would be valued as described under "NET ASSET
VALUE." In the event that an in-kind distribution is made, a stockholder may
incur additional expenses, such as the payment of brokerage omissions, 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, Inc., 211 S. Gulph Road,
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
19
<PAGE>
of a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. The Transfer Agent may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until the
Transfer Agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
Transfer Agent at (800) 441-6580.
REDEMPTION BY TELEPHONE
Stockholders who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
stockholder of the account with signature guarantees as described previously.
Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting a stockholder to correctly state his or her Fund account
number, the name in which his or her account is registered, his or her banking
institution, bank account number and the name in which his or her bank account
is registered. To the extent that the Fund fails to use reasonable procedures to
verify the genuineness of telephone instructions, it and/or its service
contractors may be liable for any such instructions that prove to be fraudulent
or unauthorized.
The Fund reserves the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by the Fund.
ADDITIONAL INFORMATION
The Fund also reserves the right to involuntarily redeem an investor's
account where the account is worth less than the minimum initial investment
required when the account is established, presently $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 U.S. Securities and Exchange Commission. 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.
20
<PAGE>
NET ASSET VALUE
The net asset value of shares of the Fund is determined each business day as
of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time). Options
and futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded and are included in such net asset value
determination. The NYSE is scheduled to be open Monday through Friday throughout
the year except for certain Federal and other holidays. The net asset value per
Investor Share of the Fund is calculated by adding the Investor Shares' pro rata
share of the value of the Fund's assets, deducting the Investor Shares' pro rata
share of the Fund's liabilities and the liabilities specifically allocated to
Investor Shares and then dividing the result by the total number of outstanding
Investor Shares. Fund securities listed or traded on a securities exchange for
which representative market quotations are available will be valued at the last
quoted sales price on the security's principal exchange on that day. Securities
that are traded over-the-counter are valued, if bid and asked quotations are
available, at the mean between the current bid and asked prices. If bid and
asked quotations are not available, then over-the-counter securities are valued
through valuations obtained from a commercial pricing service or as determined
in good faith by the Board of Directors. In making this determination the Board
considers, among other things, publicly available information regarding the
issuer, market conditions and values ascribed to comparable companies. In
instances where the price determined above is deemed not to represent fair
market value, the price is determined in such manner as the Board may prescribe.
Investments in short-term debt securities having a maturity of 60 days or less
are valued at amortized cost if their term of maturity from the date of purchase
was less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of purchase when acquired by
the Fund was more than 60 days, unless this is determined by the Board of
Directors not to represent fair value. All other securities and assets are taken
at fair value as determined in good faith by the Board of Directors, although
the actual calculation may be done by others. Income and expenses (including
advisory and administration fees) are accrued daily and taken into account in
computing net asset value.
DIVIDENDS
The Fund calculates its dividends, if any, from net investment income. Net
investment income includes interest accrued and dividends earned on the Fund's
portfolio securities for the applicable period less applicable expenses. The
Fund declares dividends, if any, from its net investment income quarterly and
net realized capital gains annually unless such capital gains are used to offset
losses carried forward from prior years, in which case no such capital gains
will be distributed.
Dividends paid by the Fund with respect to Investor Shares and Institutional
Shares are calculated in the same manner and at the same time. Both classes will
share proportionately in the investment income and expenses of the Fund, except
that the per share dividends of Investor Shares will differ from the per share
dividends of Institutional Shares as a result of additional distribution
expenses applicable to Investor Shares.
Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in additional
Investor Shares of the Fund at net asset value. The election to receive
dividends in cash may be made on the account Application or subsequently, by
writing to the Transfer Agent at First Data Investor Services Group, Inc., 211
S. Gulph Road, 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.
21
<PAGE>
TAXES
The following discussion reflects applicable tax laws as of the date of this
Prospectus.
TAXATION OF THE FUND
The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION--Capital
Stock"), must satisfy certain tests regarding the source of its income,
diversification of its assets and distribution of its income. If the Fund
otherwise qualifies as a regulated investment company and the Fund distributes
to its stockholders at least 90% of its investment company taxable income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the distributed amount in any calendar year is less than
a sum of (i) 98% of its ordinary income; (ii) 98% of its capital gain net
income; and (iii) any prior year underdistributions.
If in any year the Fund fails to qualify under Subchapter M as a regulated
investment company, the Fund would incur a corporate income tax on its taxable
income for the year, and the entire amount of the Fund's distribution would
generally be characterized as ordinary income.
TAXATION OF STOCKHOLDERS
DISTRIBUTIONS
In general, all distributions to stockholders attributable to the Fund's
investment company taxable income will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of the Fund.
The Fund intends to distribute any net capital gain annually and intends to
designate the appropriate 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
22
<PAGE>
after the disposition of the shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at the rate of 31%
of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.
The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "TAXATION" in the Fund's
Statement of Additional Information.
OTHER INFORMATION
CAPITAL STOCK
The Company was incorporated on November 22, 1988 under the laws of the
State of Maryland under the name The Chapman Funds, Inc. It is a registered
open-end, management investment company under the 1940 Act set up as a "series
fund" which is a mutual fund divided into separate portfolios, each of which is
treated as a separate entity for certain matters under the 1940 Act and for tax
and other purposes. A stockholder of one Series is not deemed to be a
stockholder of any other Series. The Fund is non-diversified under the 1940 Act.
See "RISK FACTORS--Non-Diversified Status." The Company's charter authorizes the
Board to issue 10 billion full and fractional shares of common stock, par value
$.001 per share, of which 1 billion shares are designated DEM Multi-Manager
Equity Fund Investor Shares. Under the Company's charter documents and Maryland
law, the board 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 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.
23
<PAGE>
Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Institutional Shares or the other
classes of the Company by contacting the Distributor at the telephone number
listed on the back of this Prospectus.
STOCKHOLDER INQUIRIES
Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.
CONTROLLING STOCKHOLDER
As of July 31, 1999, the Investment Advisor owns one Investor Share and one
Institutional Share of the Fund which comprises 100% of the Fund's outstanding
Common Stock. Because one stockholder owns in excess of 25% of the issued and
outstanding Common Stock of the Fund, such stockholder is deemed to control the
Fund. Accordingly, such stockholder has significant power to affect the affairs
of the Fund or to determine or influence the outcome of matters submitted to a
vote of the stockholders of the Fund.
The Investment Adviser is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the Investment
Adviser.
24
<PAGE>
[LOGO]
DEM MULTI-MANAGER
EQUITY FUND
INVESTOR SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
----------------
PROSPECTUS
AUGUST 6, 1999
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
211 S. Gulph Road
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
<PAGE>
August 6, 1999
DEM MULTI-MANAGER EQUITY FUND
INSTITUTIONAL SHARES
The DEM Multi-Manager Equity Fund (the "Fund") is a series of The Chapman
Funds, Inc. (the "Company"), an open-end, management investment company known as
a series fund (the Fund and each other series of the Company are herein referred
to as a "Series"). The Fund is a non-diversified portfolio that seeks aggressive
long-term growth through capital appreciation by investment in companies deemed
to possess strong growth characteristics. Such companies are identified through
the Company's domestic emerging markets multi-manager ("DEM Multi-Manager")
strategy. Under the DEM Multi-Manager strategy, the assets of the Fund are
managed by multiple sub-advisors selected by the Fund's investment advisor,
Chapman Capital Management, Inc. (the "Investment Advisor"). Such sub-advisors
must meet the domestic emerging markets profile which includes only those
companies that are controlled by African Americans, Asian Americans, Hispanic
Americans or women that are located in the United States and its territories
(the "DEM Profile"). Both capital appreciation and income will be considered in
the selection of investments, but primary emphasis will be on capital
appreciation. BECAUSE OF THE NATURE OF THE FUND'S INVESTMENTS AND CERTAIN
STRATEGIES IT MAY USE, AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND MAY
NOT BE APPROPRIATE FOR ALL INVESTORS.
The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Institutional Shares are offered by this Prospectus. Institutional
Shares have no load; however, individual investors may purchase Institutional
Shares only through institutional stockholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and other
financial intermediaries ("Institutions"). The Institutional Shares impose a
12b-1 fee of up to .25% per annum, which is the economic equivalent of a sales
charge and the minimum initial investment in Institutional Shares is currently
$25,000 with no minimum subsequent investment. The Fund's Investor Shares are
available for purchase by individuals directly and are offered by a separate
prospectus.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated the same date as
this Prospectus and containing additional information about the Fund has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference in its entirety into this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by calling
The Chapman Co. at (800) 752-1013.
TABLE OF CONTENTS
------------------------
<TABLE>
<S> <C>
Fund Expenses.......................................... 2
Investment Objectives.................................. 3
Risk Factors........................................... 6
Management............................................. 8
Purchase of Shares..................................... 14
Redemption of Shares................................... 15
Net Asset Value........................................ 17
Dividends.............................................. 18
Taxes.................................................. 18
Other Information...................................... 20
</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- and DEM-Registered Trademark-
are registered trademarks and the stylized C-Eagle Logo-TM-, DEM Profile-TM-,
DEM Universe-TM-, DEM Company-TM-, DEM Index-TM- and DEM Multi-Manager-TM- are
trademarks of Nathan A. Chapman, Jr.
A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
FUND EXPENSES
The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Fund based on an estimate
of the Fund's operating expenses for the current fiscal year:
<TABLE>
<CAPTION>
DEM MULTI-MANAGER
EQUITY FUND
INSTITUTIONAL
STOCKHOLDER TRANSACTION EXPENSES SHARES
-----------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................... -0-%
Maximum Deferred Sales Load............................. -0-%
Maximum Sales Load Imposed on
Reinvested Dividends and other Distributions.......... -0-%
Redemption Fee
(as a percentage of amount redeemed)(1)............... -0-%
ANNUAL EXPENSES (as a percentage of net assets)(2)
Management Fees......................................... 1.25%
12b-1 Fees.............................................. 0.25%
Other Expenses(3)....................................... 0.50%
Total Fund Operating Expenses (estimated)(3)............ 2.00%
</TABLE>
- ------------------------
(1) The Fund imposes a $9.00 charge only on redemptions by wire transfer.
(2) See "MANAGEMENT."
(3) The Investment Advisor has voluntarily agreed to limit the total annual
operating expenses of the Fund, solely attributable to Institutional Shares,
to 2.00% of average daily net assets until at least December 31, 2000.
However, there is no guarantee that the Investment Advisor will continue to
voluntarily limit the total annual operating expenses of the Fund
attributable to the Institutional Shares beyond December 31, 2000. In the
absence of the Investment Advisor's voluntary expense limitation, estimated
Total Annual Fund Operating Expenses would be 2.74% 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.
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 the period:
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
---------------------
<S> <C>
1 Year.................................................................... $ 20
3 Years................................................................... $ 63
</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 waiver of the
Distributor and the Investment Advisor's voluntary expense limitation, the
estimated expenses set forth in the table above would be $79 and $143 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
2
<PAGE>
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 seeks aggressive long-term growth through capital appreciation by
investment in companies deemed to possess strong growth characteristics. Such
companies are identified through the Company's domestic emerging markets
multi-manager ("DEM Multi-Manager") strategy. Under the DEM Multi-Manager
strategy, the assets of the Fund are managed by multiple sub-advisors
recommended by the Investment Advisor and approved by the Board of Directors.
Such sub-advisors must meet the domestic emerging markets profile which includes
only those companies that are controlled by African Americans, Asian Americans,
Hispanic Americans or women that are located in the United States and its
territories (the "DEM Profile"). Although the Fund's sub-advisors must meet the
DEM Profile, the sub-advisors will not consider the DEM Profile in making
investment decisions for the Fund's portfolio. Accordingly, the Investment
Advisor does not expect companies that meet the DEM Profile to constitute a
large percentage of the Fund's portfolio. Both capital appreciation and income
are considered in choosing specific investments, but the primary emphasis is on
capital appreciation. The Fund retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies with
large and small market capitalizations. Some of these investments may involve
the purchase of securities directly from portfolio companies in initial or other
public offerings of their securities. See "RISK FACTORS-- Investment in Small
Companies."
The Investment Advisor will track the performance of each of the Fund's
sub-advisors and will have the discretion to allocate assets among the Fund's
sub-advisors, identify and recommend new sub-advisors to the Board of Directors
and terminate existing sub-advisory relationships. Each sub-advisor uses its own
investment strategies to achieve the Fund's investment objectives in accordance
with the Fund's investment restrictions.
The primary objective of the DEM Multi-Manager strategy is to reduce
portfolio volatility through multiple investment approaches, a strategy used by
many institutional investors. The use of multiple investment approaches
consistent with the Fund's investment objective and policies is designed to
mitigate the impact of a single sub-advisor's performance in the market cycle
during which such sub-advisor's approach is less successful. Although there may
be some overlap of investment styles, each sub-advisor will pursue its approach
independently of the other sub-advisors. Because the Fund's sub-advisors will
act independently, the performance of one or more other sub-advisors is expected
to dampen the impact of any other sub-advisor's relatively adverse results.
Conversely, the successful results of a sub-advisor will be dampened by less
successful results of the other sub-advisors. There can be no assurance that the
expected advantages of the DEM Multi-Manager strategy will be realized.
To achieve the Fund's investment objectives, the sub-advisors invest in a
wide variety of types of portfolio companies and seek to identify those
companies that are positioned for growth. Among other factors, the sub-advisors
consider a company's above average earnings growth, high potential profit
margins, innovative products, high quality management, and competitive advantage
in making investment decisions.
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in equity securities; however, the Fund retains the
flexibility to respond promptly to changes in market conditions. Accordingly,
during periods when the sub-advisors believe a temporary defensive posture in
the market is warranted, the Fund has reserved the right to invest a significant
proportion or all of its assets in cash (U.S. dollars) and/or invest any portion
or all of its assets in high quality short-term debt securities
3
<PAGE>
and money market instruments. The decision to adopt a temporary defensive
posture may be affected by such factors as market conditions generally, the
sub-advisors' views on the direction of movement of the stock prices of specific
targeted portfolio companies and other related factors. It is impossible to
predict when or for how long the Fund will employ defensive strategies, and to
the extent it is so invested, the Fund may not achieve its investment
objectives. The Fund will also invest in the instruments described above pending
investment of the net proceeds of sales of its shares.
The Fund invests in portfolio companies with large, mid, small and micro
market capitalizations. Most of the Fund's investments are in marketable common
stocks or marketable securities convertible into common stock traded on an
exchange or in the over-the-counter markets. To the extent the Fund invests in
companies with smaller market capitalizations, the securities of such companies
may be traded in such over-the-counter markets as the OTC Bulletin Board-SM- and
the Pink Sheets-SM-. See "RISK FACTORS-- Investment in Small Companies."
The Fund's investment objectives and policies, other than those specified in
the Statement of Additional Information under "INVESTMENT PROGRAM--Fundamental
Policies," may be changed by the Board of Directors without the approval of
stockholders.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
The Fund may purchase call options on securities that a sub-advisor intends
to include in the Fund in order to fix the cost of a future purchase or attempt
to enhance return by, for example, participating in an anticipated increase in
the value of a security. The Fund may purchase put options to hedge against a
decline in the market value of securities held in the Fund or in an attempt to
enhance return. The Fund may write (sell) put and covered call options on
securities in which it is authorized to invest. The Fund may also purchase put
and call options, and write put and covered call options, on U.S. securities or
indexes. Stock index options serve to hedge against overall fluctuations in the
securities markets rather than anticipated increases or decreases in the value
of a particular security.
ILLIQUID SECURITIES/PRIVATE FUNDS
The Fund may not invest more than 15% of its net assets in securities that
are considered illiquid, 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. The Fund will seek to invest in the securities of private companies that
a sub-advisor believes have the potential for above average capital appreciation
in anticipation of their initial public offering. To the extent that the Fund is
permitted to invest in Illiquid Securities, the Fund may be deemed to act as an
underwriter to portfolio companies. See "RISK FACTORS--Non-Publicly Traded
Securities" and "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional Information.
As an alternative to direct investments in Illiquid Securities, the Fund may
invest up to 10% of its assets in private venture capital funds including United
States private limited partnerships or other investment funds ("Private Funds")
that themselves invest in Illiquid Securities. Investments in Private Funds may
offer the Fund's individual investors a unique opportunity to participate in
investment opportunities typically available only to large institutions and
accredited investors. Although the Fund's investments in Private Funds are
limited to a maximum of 10% of the Fund's assets, these investments are highly
speculative and volatile and may produce gains or losses in this portion of the
Fund that exceed those of the Fund's other holdings and of more mature companies
generally. 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
4
<PAGE>
"INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information.
The Fund's investment in Private Funds will be limited to, subject to
certain exceptions, (i) 3% of the total voting stock of any one Private Fund,
(ii) 5% of the Fund's total assets with respect to any one Private Fund and,
(iii) 10% of the Fund's total assets in the aggregate. In valuing the Fund's
holdings of interests in Private Funds, the Fund may rely on the most recent
reports provided by the Private Funds themselves prior to calculation of the
Fund's net asset value. These reports, which are provided on an infrequent
basis, often depend on the subjective valuations of the managers of the Private
Funds and, in addition, would not generally reflect positive or negative
subsequent developments affecting companies held by the Private Fund. See "NET
ASSET VALUE." The securities of Private Funds will typically themselves be
classified as Illiquid Securities by the Board of Directors. Accordingly, the
Fund's total investment in Illiquid Securities, including Private Funds, is
limited to 15% of the Fund's assets with no more than 10% of the Fund's assets
invested in Private Funds.
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 a sub-advisor, such techniques can be expected to yield
a higher return than other investment options.
A repurchase agreement is a transaction in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to that bank or dealer at an agreed upon price, date and
market rate of interest. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delay and
costs to the Fund in connection with bankruptcy proceedings), it is the Fund's
policy to limit repurchase transactions to primary dealers in U.S. Government
obligations and to banks whose creditworthiness has been reviewed and found
satisfactory by the Investment Advisor.
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.
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 its 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.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments.
5
<PAGE>
Portfolio turnover generally involves some expense, including brokerage
commissions or dealer markups and other transaction costs on the sale of
securities and reinvestment in other securities. These transactions may result
in realization of taxable capital gains. The Fund cannot accurately predict its
turnover rate but anticipates that its annual portfolio turnover will not exceed
200%. See "TAXES" and "PORTFOLIO TRANSACTIONS," "TAXATION" and "INVESTMENT
PROGRAM--Portfolio Turnover" in the Statement of Additional Information.
OTHER INFORMATION
Other than with respect to those investment objectives and policies
specified in the Statement of Additional Information under "INVESTMENT
PROGRAM--Fundamental Policies," the Board of Directors may change the Fund's
investment objectives and policies without the approval of the Fund's
stockholders.
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 GREATER MARKET RISKS INHERENT
IN SEEKING HIGHER RETURNS AND IS NOT RECOMMENDED FOR SHORT-TERM OR RISK AVERSE
INVESTORS.
GROWTH-ORIENTED INVESTING
Because the Fund will be invested in growth-oriented companies, the
volatility of the Fund may be higher than that of the U.S. equity market as a
whole. Generally, companies with high relative rates of growth tend to reinvest
more of their profits in the company and pay out less to stockholders in the
form of current dividends. As a result, growth investors tend to receive most of
their return in the form of capital appreciation. This tends to make growth
company securities more volatile than the market as a whole. In addition, there
can be no assurance that growth within a particular company will continue to
occur.
INVESTMENT IN MICRO-CAP AND SMALL-CAP COMPANIES
At times, the Fund may invest in securities of micro- and
small-capitalization companies. Micro- and small-capitalization companies may be
more vulnerable than larger companies to adverse business or economic
developments. Micro- and small-capitalization companies may also have limited
product lines, markets or financial resources, and may be dependent on
relatively small management groups. Securities of such companies may be less
liquid and more volatile than securities of larger companies and therefore may
involve greater risk than investing in larger companies. In addition, micro- and
small-capitalization companies may not be well known to the investing public,
may not have institutional ownership and may have only cyclical, static or
moderate growth prospects. Because the capitalizations of micro-capitalization
companies are even smaller than the capitalizations of small-capitalization
companies, the risks described above can be expected to have a larger effect on
micro-capitalization companies than on small-capitalization companies.
Accordingly, micro-capitalization companies can be expected to be highly
volatile and very risky.
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. 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. Illiquid Securities may involve a high degree of
business and financial risk and may result in substantial losses. These
securities are less liquid than publicly traded securities, and the Fund may
take longer to liquidate these positions than would be the case
6
<PAGE>
for publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose securities
are not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in Illiquid Securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, for
example to cover net redemptions, the value of the Fund's net assets could be
adversely affected. See "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid
Securities" in the Statement of Additional Information.
OPTIONS
The use of options involves certain investment risks and transaction costs.
These risks include: dependence on the sub-advisors' ability to predict
movements in the prices of individual securities, fluctuations in the securities
markets in general and movements in interest rates; imperfect correlation
between movements in the price of options and movements in the price of the
security or securities hedged or used for cover; the fact that skills and
techniques needed to trade options are different from those needed to select
securities in which the Fund invests; and lack of assurance that a liquid
secondary market will exist for any particular option at any particular time.
NON-DIVERSIFIED STATUS
The Fund is classified as non-diversified under the 1940 Act, which means
that the Fund is not limited by that Act in the proportion of its assets that
may be invested in the securities of a single issuer. However, the Fund intends
to comply with the diversification requirements imposed by the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. See "TAXATION" in the Fund's Statement of Additional
Information. As a non-diversified portfolio, the Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, may be subject to greater risk with respect to its portfolio
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, and broker-dealer affiliates of sub-advisors of the Fund 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 Chapman Capital
Management Holdings, Inc. The Distributor is a wholly-owned subsidiary of
Chapman Holdings, Inc. Mr. Nathan A. Chapman, Jr. is also the President and
Chairman of the Board of Directors of the Distributor and Chapman Holdings, Inc.
See "MANAGEMENT--Investment Advisor" below and "MANAGEMENT" in the Fund's
Statement of Additional Information. Mr. Chapman owns a majority of the
outstanding voting securities of each of Chapman Capital Management Holdings,
Inc. and 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.
Similar potential conflicts of interest may arise with respect to the use of
affiliates of sub-advisors for the purchase or sale of portfolio securities. The
Board of Directors has adopted procedures in compliance with the 1940 Act to
address such potential conflicts. Furthermore, at least 40% of the members of
the Company's Board of Directors must be disinterested under the 1940 Act. See
"MANAGEMENT" and "PORTFOLIO TRANSACTIONS" in the Fund's Statement of Additional
Information.
7
<PAGE>
USE OF LEVERAGE
The use of borrowings by the Fund to carry out its investment objectives may
involve leverage that creates an opportunity for increased net income, but also
creates special risks. In particular, if the Fund borrows or otherwise uses
leverage to invest in securities, any investment gains made on the securities in
excess of interest or other amounts paid by the Fund will cause the net asset
value of the Fund's shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on borrowed
money) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case. 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.
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 and sub-advisors consider the extent to with such companies
have prepared for the Year 2000 Problem. In this regard, the Investment Advisor
and the sub-advisors review reports filed with the SEC by portfolio companies
and potential portfolio companies, review third party publications, if
available, and confer 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 that 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 under the supervision of 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, the
sub-advisors and the Distributor. The Board of Directors delegates to the
Company's officers and the Investment Advisor responsibility for day-to-day
operation 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
8
<PAGE>
A. Chapman, Jr., who is the controlling stockholder, President and Chairman of
the Board of Directors of Chapman Capital Management Holdings, Inc., is
President and Chairman of the Board of Directors of the Company and the
Investment Advisor.
The Investment Advisor has overall responsibility for assets under
management, provides overall investment strategies and programs for the Fund,
recommends new sub-advisors to the Board of Directors, allocates assets among
existing sub-advisors, monitors and evaluates the performance of existing sub-
advisors and manages short-term investments for the Fund. The Investment Advisor
receives from the Fund an advisory fee at an annual rate of 1.25% 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 agreed to limit the total annual
operating expenses of the Fund, solely attributable to the Institutional Shares,
to 2.00% of average daily net assets until at least December 31, 2000. However,
there is no guarantee that the Investment Advisor will continue to voluntarily
limit the total annual operating expenses of the Fund attributable to the
Institutional Shares beyond December 31, 2000.
The Investment Advisor has been in business since 1988. It served as the
investment adviser of DEM, Inc., a closed-end company, from 1995 until its
dissolution in 1998 and currently serves as the investment adviser for The
Chapman US Treasury Money Fund, DEM Equity Fund, DEM Index Fund and DEM Fixed
Income Fund. DEM Fixed Income Fund is not currently active. In addition, the
Investment Advisor serves as portfolio manager to private accounts. As of March
31, 1999, the Investment Advisor had approximately $637 million in assets under
management.
9
<PAGE>
Nathan A. Chapman, Jr. who has been the President of the Investment Advisor
since 1988, is primarily responsible for supervision of the performance of the
sub-advisors and the Fund's assets. Mr. Chapman has served as 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 served as 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 SUB-ADVISORS
Under the DEM Multi-Manager strategy, the assets of the Fund are managed by
multiple sub-advisors selected by the Investment Advisor. These sub-advisors
enter into individual sub-advisory agreements with the Fund. Each sub-advisor
makes specific portfolio investments for that segment of the assets of the Fund
under its management in accordance with the Fund's investment objectives and
policies and the sub-advisor's investment approach and strategies. A sub-advisor
may direct Fund transactions to the Company's Distributor, The Chapman Co. or a
broker that is an affiliate of such sub-advisor.
All sub-advisors recommended by the Investment Advisor and approved by the
Board of Directors must meet the DEM Profile. In determining whether a specific
investment advisor is "controlled" by African Americans, Asian Americans,
Hispanic Americans or women and therefore meets that DEM Profile, the Investment
Advisor will apply the following criteria: at least 10% of the investment
advisor's outstanding voting securities must be beneficially owned by members of
one or more of the listed groups and at least one of the investment advisor'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 will seek to identify DEM Profile investment advisors through
research by the Investment Advisor. Such research will include: requests to
specific companies for details of their ownership and management; independent
research for the details of ownership and management including personal visits
and checks with government agencies for investment advisors that have registered
as minority or women-owned business enterprises or are recognized as such by
government agencies; review of business lists compiled by magazines and other
publications which list DEM Profile companies; examination of investment
advisors that generally market themselves as DEM Profile companies; and review
of annual reports and other regulatory filings.
After identifying investment advisors that fit the DEM Profile, the
Investment Advisor applies additional criteria in the selection and retention of
sub-advisors, including: (1) their historical performance records; (2) an
investment approach that is distinct in relation to the approaches of each of
the Fund's other sub-advisors; (3) consistent performance in the context of the
markets and preservation of capital in declining markets; (4) organizational
stability and reputation; (5) the quality and depth of investment personnel; and
(6) the ability of the sub-advisor to apply its approach consistently. The
Fund's sub-advisors may not necessarily exhibit all of these criteria to the
same degree.
The Investment Advisor from its own management fee pays each sub-advisor a
monthly management fee of .35 of 1% of the value of the Fund's average weekly
net assets allocated to the sub-advisor during the preceding month payable
monthly in arrears.
The Board of Directors of the Company and the initial stockholder of the
Fund have approved sub-advisory agreements between the Fund, the Investment
Advisor and each of the investment advisors listed below to serve as
sub-advisors of the Fund. The Investment Advisor will allocate the Fund's assets
among these sub-advisors. In its discretion, the Investment Adviser may allocate
as much as 100 percent or as little as 0 percent of the Fund's assets to any one
sub-advisor.
The Fund and the Investment Adviser are seeking an exemption from the SEC
that will permit the Investment Adviser to retain additional sub-advisors,
terminate existing sub-advisors, and materially
10
<PAGE>
amend the sub-advisory agreements without stockholder approval. Such exemption
request has been approved by the Board of Directors of the Company and the
Fund's sole stockholder. To the extent that the SEC grants the requested
exemption, the Fund will send its stockholders a notice to this effect and will
supplement its Prospectus and Statement of Additional Information with
information about new sub-advisors and changes in sub-advisory agreements. To
the extent that the Fund receives the requested exemption, the Fund also
anticipates that within ninety days of retaining a new sub-advisor or materially
amending a sub-advisory agreement, it will give its stockholders written notice
of such addition or material change.
<TABLE>
<CAPTION>
The current sub-advisors of the Fund are as follows:
<S> <C>
Albriond Capital Management, LLC African-American
55 E. 59th Street, 19th Floor
New York, NY 10022
<CAPTION>
</TABLE>
Albriond Capital Management, LLC was founded in 1991 and has approximately $640
million in assets under management as of March 31, 1999. Albriond Capital
manages assets for corporations, public funds, Taft-Hartley organizations,
foundations, and endowments nationwide. The firm seeks capital appreciation
through the implementation of large-cap growth, mid-cap growth, and balanced
investment strategies. Alan B. Bond is President and Chief Investment Officer
and is responsible for the day-to-day management of the fund's assets assigned
<TABLE>
<CAPTION>
to Albriond.
<S> <C>
Charter Financial Group, Inc. Women
1401 I Street, NW, Suite 505
Washington, DC 20005
<CAPTION>
</TABLE>
Charter Financial Group, Inc. was founded in 1995 and has approximately $96
million in assets under management as of March 31, 1999. The firm specializes in
large-cap equity management with an investment philosophy of growth at a
reasonable price. Susan Stewart and Thomas King are responsible for the
day-to-day management of the fund's assets assigned to Charter Financial. Ms.
Stewart is Chairman and President of Charter Financial and in the fourteen years
prior to co-founding Charter Financial, she was a stockbroker with Merrill Lynch
and Shearson Lehman Brothers and a Vice President with NationsBank and First
Union Bank. Mr. King is Chief Investment Officer of Charter Financial and prior
to co-founding the firm, he was an institutional portfolio manager with the
Chase Manhattan Bank, PNC Bank, and First Union Bank. Mr. King is a Chartered
<TABLE>
<CAPTION>
Financial Analyst.
<S> <C>
CIC Asset Management, Inc. Hispanic-American
633 W. 5th Street, Suite 1180
Los Angeles, CA 90071
<CAPTION>
</TABLE>
CIC Asset Management, Inc. was founded in 1989 and has approximately $359
million in assets under management as of March 31, 1999. The firm specializes in
managing large-cap equity portfolios. Day-to-day management of the fund's assets
assigned to CIC Asset Management is the responsibility of the firm's investment
committee.
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Diaz-Verson Capital Investments, Inc. Hispanic-American
1200 Brookstone Centre Parkway
Suite 105
Columbus, GA 31909
<CAPTION>
</TABLE>
Diaz-Verson Capital Investments, Inc. was founded in 1991 and has approximately
$183 million in assets under management as of March 31, 1999. The firm follows a
value investing approach in the management of its individual and institutional
equity portfolios. Day-to-day management of the fund's assets assigned to
<TABLE>
<CAPTION>
Diaz-Verson Capital is the responsibility of the firm's investment committee.
<S> <C>
EverGreen Capital Management, Inc. African-American
10707 Pacific Street, Suite 201
Omaha, NE 68114
<CAPTION>
</TABLE>
EverGreen Capital Management, Inc. was founded in 1989 and has approximately $75
million in assets under management as of March 31, 1999. The firm specializes in
the management of institutional tax-exempt assets. Michael L. Green and Gary A.
Barohn are responsible for the day-to-day management of the fund's assets
assigned to EverGreen. Mr. Green is President and Chief Investment Officer and
is the firm's portfolio manager. Mr. Green has 20 years experience in the
financial services industry. Mr. Barohn is Senior Vice President and Director of
Research of EverGreen. Mr. Barohn has 12 years experience in the financial
<TABLE>
<CAPTION>
services industry and is a Chartered Financial Analyst.
<S> <C>
GLOBALT, Inc. Women
3060 Peachtree Road, NW
One Buckhead Plaza, Suite 225
Atlanta, GA 30305
<CAPTION>
</TABLE>
GLOBALT, Inc. was founded in 1990 and has approximately $1.7 billion in assets
under management as of March 31, 1999. The firm invests exclusively in
diversified portfolios of globally competitive U.S. companies. The day-to-day
management of the fund's assets assigned to GLOBALT is the responsibility of the
<TABLE>
<CAPTION>
firm's investment committee.
<S> <C>
John Hsu Capital Group, Inc. Asian-American
767 Third Avenue, 18th Floor
New York, NY 10017
<CAPTION>
</TABLE>
John Hsu Capital Group, Inc. was founded in 1991 and has approximately $439
million in assets under management as of March 31, 1999. The firm focuses on
large capitalization companies utilizing a global, top-down growth/value
approach. John Hsu Capital Group provides investment management services for
domestic equity, global international equity, and domestic fixed income
portfolios. John Hsu is Chairman and Chief Investment Officer and is responsible
for the day-to-day management of the fund's assets assigned to the firm.
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
The Kenwood Group, Inc. African-American
10 South LaSalle Street, Suite 3610 Women
Chicago, IL 60610
<CAPTION>
</TABLE>
The Kenwood Group, Inc. was founded in 1989 and has approximately $412 million
in assets under management as of March 31, 1999. The firm employs a contrarian
approach to its investment strategy. Day-to-day management of the fund's assets
assigned to The Kenwood Group is the responsibility of the firm's investment
<TABLE>
<CAPTION>
committee.
<S> <C>
Union Heritage Capital Management, Inc. African-American
1642 First National Building
Detroit, MI 48226
<CAPTION>
</TABLE>
Union Heritage Capital Management, Inc. was founded in 1990 and has
approximately $75 million in assets under management as of March 31, 1999. The
firm is a fixed income and equity investment advisor to corporate and public
pension funds, trusts and estates. Derek T. Batts, James L. Bashaw, and Eric L.
Small are responsible for the day-to-day management of the fund's assets
assigned to Union Heritage. Mr. Batts is President and has served as the firm's
portfolio manager since 1992. He also sits on the firm's investment committee.
Mr. Bashaw is Director of Research of Union Heritage and has served on the
firm's investment committee for the last eight years. Mr. Small is Vice
President of Union Heritage and has served on the firm's investment committee
<TABLE>
<CAPTION>
for the last five years.
<S> <C>
Valenzuela Capital Partners LLC Hispanic-American
1270 Avenue of the Americas, Suite 508
New York, NY 10020
<CAPTION>
</TABLE>
Valenzuela Capital Partners LLC was founded in 1989 and has approximately $1.9
billion in assets under management as of March 31, 1999. The firm employs
quantitative and qualitative analyses to identify stocks with the potential for
significant appreciation over a three year period. Day-to-day management of the
fund's assets assigned to Valenzuela Capital is the responsibility of the firm's
<TABLE>
<CAPTION>
investment committee.
<S> <C>
Zevenbergen Capital, Inc. Women
601 Union Street, Suite 2434
Seattle, WA 98101
<CAPTION>
</TABLE>
Zevenbergen Capital was founded in 1987 and has approximately $1.2 billion in
assets under management as of March 31, 1999. The firm employs a fundamental,
bottom-up approach, investing primarily in domestic growth companies. Nancy
Zevenbergen and Brooke de Boutray are responsible for the day-to-day management
of the fund's assets assigned to Zevenbergen Capital. Ms. Zevenbergen is
President and oversees the firm's investment policy and portfolio management
decisions. She is a Chartered Financial Analyst and has 13 years of investment
experience. Ms. de Boutray is Vice President of Zevenbergen Capital and defines
the investment policy in addition to selecting the firm's equity holdings. Ms.
de Boutray is a Chartered Financial Analyst and has seven years of investment
experience.
13
<PAGE>
THE DISTRIBUTOR
The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at the World Trade Center--Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202. The Distributor is a
wholly-owned subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is
the controlling stockholder, President and Chairman of the Board of Directors of
Chapman Capital Management Holdings, Inc., is President and Chairman of the
Board of Directors of the Company and the Distributor.
The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .25% of the average daily net
assets of the Fund attributable to the Institutional Shares pursuant to a
distribution plan (the "Distribution Plan") adopted by the Fund pursuant to Rule
12b-1 under the 1940 Act. Amounts paid to the Distributor under the Distribution
Plan will compensate the Distributor or enable the Distributor to compensate
other persons, including any other distributor of the Institutional Shares or
institutional stockholders of record of the Institutional Shares, including but
not limited to retirement plans, broker-dealers, depository institutions, and
other financial intermediaries, who own Institutional Shares on behalf of
investors, including their customers, clients or (in the case of retirement
plans) participants, and companies providing certain services to such investors,
for providing (a) services primarily intended to result in the sale of the
Institutional Shares and (b) stockholder servicing, administrative and
accounting services to such investors, all as set forth in the Distribution
Plan. Payments under the Distribution Plan are not tied exclusively to the
distribution expenses actually incurred by the Distributor and the payments may
exceed distribution expenses actually incurred. The Board of Directors of the
Company evaluates the appropriateness of the Distribution Plan on a continuing
basis and in doing so considers all relevant factors, including expenses borne
by the Distributor and amounts received under the Distribution Plan.
The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
Listed below are persons affiliated with both the Company and the
Distributor.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS WITH DISTRIBUTOR WITH COMPANY
- ---------------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Nathan A. Chapman, Jr............. Chairman of the Board, Chairman of the Board,
The Chapman Co. Director and President Director and President
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................... Controller, Treasurer and Treasurer and Assistant
The Chapman Co. Assistant Secretary Secretary
401 East Pratt Street
28th Floor
Baltimore, Maryland 21202
</TABLE>
14
<PAGE>
EXPENSES
The Investment Advisor pays all expenses in connection with the performance
of its advisory and administrative services and in connection with the advisory
agreements with the sub-advisors. 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 and affiliates of the Fund's sub-advisors may effect
brokerage transactions for the Fund in compliance with the requirements of the
1940 Act.
CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.
TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT
First Data Investor Services Group, Inc., 211 S. Gulph Road, PO Box 61503,
King of Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and
dividend paying agent and accounting agent (the "Transfer Agent") for the Fund's
shares pursuant to an Investment Company Services Agreement. First Data performs
the following duties in its capacity as Transfer Agent to the Fund: maintains
the records of stockholder's accounts; answers stockholder inquiries concerning
accounts; processes purchases and redemptions of Fund shares; acts as dividend
and distribution disbursing agent; and performs other stockholder service
functions. Stockholder inquiries should be addressed to the Transfer Agent at
(800) 441-6580. As accounting agent, First Data performs certain accounting and
pricing services for the Fund, including the daily calculation of the Fund's net
asset value. For its transfer and dividend paying agency services under the
Investment Company Services Agreement, the Transfer Agent is compensated by a
monthly fee calculated according to a fee schedule approved by the Board of
Directors of the Company.
15
<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 minimums for additional investments 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 Multi-Manager
Equity Fund Institutional Shares, c/o First Data Investor Services Group, Inc.,
211 S. Gulph Road, 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 Multi-Manager Equity Fund Institutional
Shares, c/o First Data Investor Services Group, Inc., 211 S. Gulph Road, PO Box
61503, King of Prussia, PA 19406-0903. Please enclose the stub of your account
statement along with the amount of the investment and 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) 752-1013 to request an account number
and furnish the Fund with your tax identification
16
<PAGE>
number. Following notification to the Transfer Agent, federal funds and
registration instructions should be wired through the Federal Reserve System to:
Boston Safe Deposit & Trust
ABA #011001234
Credit: (DEM Multi-Manager Equity Fund Institutional Shares)
FBO: (Insert Shareholder name and account number)
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.
PURCHASE BY EXCHANGE
To request an exchange of shares from one DEM fund into shares of another
DEM fund offered by The Chapman Funds, Inc., an institution must call (800)
441-6580 or send a written request to:
DEM Multi-Manager Equity Fund Institutional Shares
c/o First Data Investor Services Group, Inc.
211 S. Gulph Road
PO Box 61503
King of Prussia, PA 19406
Note: An exchange must be made by mail if a new account must be opened or
the accounts are not identically registered.
If shares of one DEM fund are exchanged for another DEM fund by telephone,
the new shares will be registered in the same manner as the shares for which
they were exchanged. The Fund may change or cancel exchange policies at any
time, upon 60 days' notice to stockholders and can terminate the telephone
exchange privilege at any time. An exchange of shares is treated like a sale of
those shares; therefore the stockholder may realize capital gain or loss for
federal income tax purposes when shares are exchanged. Exchanges will be
required to meet the minimum initial investment requirement of each fund.
REDEMPTION OF SHARES
An investor of the Fund may redeem (sell) shares on any day that the Fund's
net asset value is calculated (see "NET ASSET VALUE" below). Requests for the
redemption of Institutional Shares are placed with an Institution by its
customers, which is then responsible for the prompt transmission of this request
to the Transfer Agent.
Institutions may redeem Institutional Shares without charge on any business
day that the NYSE is open (see "NET ASSET VALUE"). Redemptions will be effective
at the net asset value per share next determined after the receipt by the
Transfer Agent of a redemption request meeting the requirements described below.
The Fund normally sends redemption proceeds on the next business day, but in any
event redemption proceeds are sent within seven calendar days of receipt of a
redemption request in proper form. Payment may also be made by wire directly to
any bank previously designated by the Institution in an account application.
There is a $9.00 charge for redemption by wire. Please note that the
Institution's bank also may impose a fee for wire service. The Fund will not
honor redemption requests of Institutions who recently purchased shares by check
until it is reasonably satisfied that the purchase check has cleared, which may
take up to fifteen days from the purchase date. To avoid delays of this kind, an
Institution may wish to purchase by wire if it is planning on redeeming its
shares in the near future.
Except as noted below, redemption requests received in proper form by the
Transfer Agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates its per share net asset value are
effective that day.
17
<PAGE>
Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.
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 act, to redeem its shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90 day period for any one Institution holding Institutional
Shares. Payments in excess of this limit will also be made wholly in cash unless
the Board of Directors believes that economic conditions exist which would make
such a practice detrimental to the best interests of the Fund. Any portfolio
securities paid or distributed in-kind would be valued as described under "NET
ASSET VALUE." In the event that an in-kind distribution is made, an Institution
may incur additional expenses, such as the 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 FPS Services, Inc., 211 S. Gulph Road, PO Box 61503, King of
Prussia, PA 19406-0903.
A written redemption request to the Transfer Agent must: (i) identify the
stockholder's account number, (ii) state the number of shares or dollars to be
redeemed and, (iii) be signed by each registered owner exactly as the shares are
registered. A redemption request for amounts above $25,000, or redemption
requests for which proceeds are to be mailed somewhere other than the address of
record, must be accompanied by signature guarantees. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealer guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. The Transfer Agent may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians.
A redemption request will not be deemed to be properly received until the
Transfer Agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
Transfer Agent at (800) 441-6580.
REDEMPTION BY TELEPHONE
Institutions who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
stockholder of the account or by the account's authorized representative with a
signature guarantee, as described previously.
18
<PAGE>
Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting an Institution to correctly state its Fund account number,
the name in which its account is registered, its banking institution, bank
account number and the name in which its bank account is registered. To the
extent that the Fund fails to use reasonable procedures to verify the
genuineness of telephone instructions, it and/or its service contractors may be
liable for any such instructions that prove to be fraudulent or unauthorized.
The Fund reserves the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by the Fund.
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 the account is established, presently $25,000. (Any redemption of
shares from an inactive account established with a minimum investment may reduce
the account below the minimum initial investment, and could subject the account
to redemption initiated by the Fund.) The Fund will advise the Institutional
stockholder of such intention in writing at least sixty (60) days prior to
effecting such redemption, during which time the Institution may purchase
additional shares in any amount necessary to bring the account back to $25,000.
The Fund currently has no intention of exercising its right to involuntarily
redeem accounts but reserves the right to initiate involuntary redemptions in
the future.
If the Board of Directors determines that it would be detrimental to the
best interest of the remaining stockholders of the Fund to make payment in cash,
the Fund may pay the redemption price in whole or in part by distribution in
kind of readily marketable securities, from the Fund, within certain limits
prescribed by the U.S. Securities and Exchange Commission. Such securities will
be valued on the basis of the procedures used to determine the net asset value
at the time of the redemption. If shares are redeemed in kind, the redeeming
stockholder will incur brokerage costs in converting the assets into cash.
Securities are valued through valuations obtained from a commercial pricing
service or at the most recent mean of the bid and asked prices provided by
investment dealers in accordance with procedures established by the Board of
Directors.
NET ASSET VALUE
The net asset value of shares of the Fund is determined each business day as
of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time). Options
and futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded and are included in such net asset value
determination. The NYSE is scheduled to be open Monday through Friday throughout
the year except for certain Federal and other holidays. The net asset value per
Investor Share of the Fund is calculated by adding the Investor Shares' pro rata
share of the value of the Fund's assets, deducting the Investor Shares' pro rata
share of the Fund's liabilities and the liabilities specifically allocated to
Investor Shares and then dividing the result by the total number of outstanding
Investor Shares. Fund securities listed or traded on a securities exchange for
which representative market quotations are available will be valued at the last
quoted sales price on the security's principal exchange on that day. Securities
that are traded over-the-counter are valued, if bid and asked quotations are
available, at the mean between the current bid and asked prices. If bid and
asked quotations are not available, then over-the-counter securities are valued
through valuations obtained from a commercial pricing service or as determined
in good faith by the Board of Directors. In making this determination the Board
considers, among other things, publicly available information regarding the
issuer, market conditions and values ascribed to comparable companies. In
instances where the price determined above is deemed not to represent fair
market value, the price is
19
<PAGE>
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, Inc., 211
S. Gulph Road, PO Box 61503, King of Prussia, Pennsylvania 19406, or by calling
the Transfer Agent at (800) 441-6580. Any check in payment of dividends or other
distributions which cannot be delivered by the Post Office or which remains
uncashed for a period of more than one year may be reinvested in the
stockholder's account at the then current net asset value and the dividend
option may be changed from cash to reinvest. Dividends are reinvested on the
ex-dividend date at the net asset value determined at the close of business on
that date. Please note that shares purchased shortly before the record date for
a dividend or distribution may have the effect of returning capital although
such dividends and distributions are subject to taxes.
TAXES
The following discussion reflects applicable tax laws as of the date of this
Prospectus.
TAXATION OF THE FUND
The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION--Capital
Stock"), must satisfy certain tests regarding the source of its income,
diversification of its assets and distribution of its income. If the Fund
otherwise qualifies as a regulated investment company and the Fund distributes
to its stockholders at least 90% of its investment company taxable income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the distributed amount in any calendar year is less than
a sum of (i) 98% of its ordinary income; (ii) 98% of its capital gain net
income; and (iii) any prior year underdistributions. If in any year the Fund
fails to qualify under Subchapter M as a regulated investment company, the Fund
would incur a corporate income tax on its taxable income for the
20
<PAGE>
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.
21
<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 non-diversified under the 1940 Act.
See "RISK FACTORS--Non-Diversified Status." The Company's charter authorizes the
Board to issue 10 billion full and fractional shares of common stock, par value
$.001 per share, of which 1 billion shares are designated DEM Multi-Manager
Equity Fund Institutional Shares. Under the Company's charter documents and
Maryland law, the board 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 may similarly classify or reclassify any class of its
shares into one or more series and, without stockholder approval, may increase
the number of authorized shares of the Company. All shares of the Fund, when
issued, will be fully paid and nonassessable.
The Fund offers a separate class of shares, the Investor Shares, to
individual investors through a separate prospectus. Shares of each class
represent equal pro rata interests in the Fund's common investment portfolio and
accrue dividends and calculate net asset value and performance quotations in the
same manner. However, Investor Shares are sold with a sales load and may have
different sales charges and other expenses which may affect performance.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where class voting is required by law or the
matter affects only one class. There is no provision for cumulative voting.
The Company is not required under Maryland law to hold annual meetings of
stockholders for the election of Directors and currently does not intend to do
so. Stockholders have the right to call for a meeting to consider the removal of
one or more of the Company's Directors if the request is made in writing by the
holders of at least 10% of the Company's outstanding voting securities. The
Company will assist in calling the meeting as required under the 1940 Act.
Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Investor Shares or the other classes
of the Company by contacting the Distributor at the telephone number listed on
the back of this Prospectus.
STOCKHOLDER INQUIRIES
Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.
CONTROLLING STOCKHOLDER
As of July 31, 1999, the Investment Advisor owns one Investor Share and one
Institutional Share of the Fund which comprises 100% of the Fund's outstanding
Common Stock. Because one stockholder owns in excess of 25% of the issued and
outstanding Common Stock of the Fund, such stockholder is deemed to control the
Fund. Accordingly, such stockholder has significant power to affect the affairs
of the Fund or to determine or influence the outcome of matters submitted to a
vote of the stockholders of the Fund.
The Investment Adviser is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the Investment
Adviser.
22
<PAGE>
[LOGO]
DEM MULTI-MANAGER
EQUITY FUND
INSTITUTIONAL SHARES
A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY
----------------
PROSPECTUS
AUGUST 6, 1999
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
211 S. Gulph Road
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
<PAGE>
Statement of Additional Information Dated: August 6, 1999
DEM MULTI-MANAGER EQUITY 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 Multi-Manager Equity
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
<TABLE>
<S> <C> <S> <C>
Investment Program . . . . . . . B-2 Taxation . . . . . . . . . . . . . B-22
Management . . . . . . . . . . . B-9 Capital Stock. . . . . . . . . . . B-24
Control Persons and Principal. . B-15 Performance Information. . . . . . B-25
Holders of Securities Counsel to the Company . . . . . . .B-26
Purchase of Shares . . . . . . . B-19 Independent Auditors . . . . . . . B-26
Redemption of Shares . . . . . . B-20 Financial Statements . . . . . . . F-1
Portfolio Transactions . . . . . B-20
</TABLE>
Domestic Emerging Markets-Registered Trademark- and DEM-Registered Trademark-
are registered trademarks and the stylized C-Eagle Logo-TM-, DEM Profile-TM-,
DEM Universe-TM-, DEM Company-TM-, DEM Index-TM- and DEM Multi-Manager-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 OBJECTIVES" in the Prospectus.
The DEM Multi-Manager Equity 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 series of the Company are
herein referred to as a "Series"). The Fund is a non-diversified portfolio
that seeks aggressive long-term growth through capital appreciation by
investment in companies deemed to possess strong growth characteristics. Such
companies are identified through the Fund's domestic emerging markets
multi-manager ("DEM Multi-Manager") strategy. Under the DEM Multi-Manager
strategy, the assets of the Fund are managed by multiple sub-advisors
recommended by Chapman Capital Management, Inc. (the "Investment Advisor")
and approved by the Board of Directors. Such sub-advisors must meet the
domestic emerging markets profile which includes only those companies that
are controlled by African Americans, Asian Americans, Hispanic Americans or
women that are located in the United States and its territories (the "DEM
Profile"). Although the Fund's sub-advisors must meet the DEM Profile, the
sub-advisors will not consider the DEM Profile in making investment decisions
for the Fund's portfolio. Accordingly, the Investment Advisor does not
expect companies that meet the DEM Profile to constitute a large percentage
of the Fund's portfolio. Both capital appreciation and income are considered
in choosing specific investments, but the primary emphasis is on capital
appreciation. The Fund retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies
with large and small market capitalizations. Some of these investments may
involve the purchase of securities directly from portfolio companies in
initial or other public offerings of their securities. See "RISK
FACTORS--Investment in Small Companies" in the Prospectus.
The Investment Advisor will track the performance of each of the Fund's
sub-advisors and will have discretion to identify and recommend new
sub-advisors, allocate assets among the existing sub-advisors, and terminate
existing sub-advisors. Each sub-advisor uses its own investment approach and
investment strategies to achieve the Fund's investment objectives in
accordance with the Fund's investment restrictions. See "MANAGEMENT--The
Sub-Advisors" in the Prospectus.
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 then 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
B-2
<PAGE>
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 release income in the form of premiums.
The writer of a covered put option accepts the risk of a decline in the price
of the underlying security. The size of the premiums that the Fund may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
Options ordinarily will have expiration dates between one and nine
months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at
the time the options are written. In the case of call options, these
exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (a) in-the-money call
options when a sub-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 a sub-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 a sub-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 a sub-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
B-3
<PAGE>
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
recur. In such event, it might not be possible to effect closing
transactions in particular options. If, as a covered call option writer, the
Fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise or it otherwise
covers its position.
The Fund intends to treat options in respect of specific securities that
are not traded on a national securities exchange or the Nasdaq National
Market and the securities underlying covered call options written by the Fund
as illiquid securities subject to the Fund's investment limitation on
illiquid securities as set forth below. See "INVESTMENT OBJECTIVES" in the
Prospectus.
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 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. The Fund will
seek to invest in the securities of private companies that a sub-advisor
believes have the potential for above average capital appreciation, in
anticipation of their initial public offering. 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 and might thereby experience difficulty satisfying
redemptions within seven days. 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.
B-4
<PAGE>
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 or any sub-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 portfolio adheres to the following conditions whenever it
lends its securities: (1) the Fund must receive at least 100% cash collateral
or equivalent securities from the borrower, which amount of collateral is
maintained by daily marking to market; (2) the borrower must increase the
collateral whenever the market value of the securities loaned rises above the
level of the collateral; (3) the Fund must be able to terminate the loan at
any time; (4) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities,
and any increase in market value; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) voting rights on the
loaned securities may pass to the borrower, except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Board
of Directors must terminate the loan and regain the Fund's right to vote the
securities. Up to 20% of the Fund's assets may be invested pursuant to such
techniques for hedging and risk management purposes or when, in the opinion
of the Investment Advisor or a sub-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
B-5
<PAGE>
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 monitors the creditworthiness of the dealers and banks with which the
Fund enters into repurchase agreement transactions.
AMERICAN DEPOSITORY RECEIPTS
American Depository Receipts (ADRs) are certificates evidencing
ownership of shares of a foreign issuer. These certificates are issued by
depository banks and generally trade on an established market in the United
States or elsewhere. The underlying shares are held in trust by a custodian
bank or similar financial institution in the issuer's home country. The
depository bank may not have physical custody of the underlying securities at
all times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are an alternative to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of
the underlying issuer's country.
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) Issuing senior securities, borrowing money or pledging its assets,
except that: (i) the Fund 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; (ii) the Fund may purchase securities on margin pursuant to
margin arrangements with banks up to the limits set forth in (i) for bank
borrowings; and (iii) the Fund may borrow an additional 5% of its total
assets without
B-6
<PAGE>
regard to the foregoing limitations for temporary purposes such as clearance
of portfolio transactions and share redemptions.
(2) Engaging in the business of underwriting securities issued by other
persons, except that to the extent the Fund is permitted to invest in
Illiquid Securities (currently, the Fund may not invest more than 15% of its
net assets in Illiquid Securities), the Fund may be deemed to act as an
underwriter to portfolio companies.
(3) 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 (The Domestic Emerging Markets
market segment is not considered an industry for this purpose).
(4) Engaging in the purchase and sale of real estate or real estate or
mortgage-backed securities.
(5) Purchasing or selling commodities or commodities contracts.
(6) 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.
(7) Investing in foreign securities (other than 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
The Fund does not intend to seek profits through short-term trading, but
the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other
mutual funds. For example, options on securities may be sold in anticipation
of a decline in the price of the
B-7
<PAGE>
underlying security (market decline) or purchased in anticipation of a rise
in the price of the underlying security (market rise) and later sold. To the
extent that its portfolio is traded for the short-term, the Fund will be
engaged essentially in trading activities based on short-term considerations
affecting the value of an issuer's stock instead of long-term investments.
Portfolio turnover generally involves some expense, including brokerage
commissions or dealer markups and other transaction costs on the sale of
securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. The Fund cannot accurately
predict its turnover rate, but anticipates that its annual portfolio turnover
will not exceed 200%.
B-8
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The Directors and executive officers of the Company are listed below.
Directors deemed to be "interested persons" of the Company for purposes of
the Investment Company Act of 1940, as amended (the "1940 Act") are indicated
by an asterisk.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal
Positions(s) Occupations(s)
Held with During
Name and Address Registrant Age Past 5 Years
---------------- ---------- --- ------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* Nathan A. Chapman, Jr. Director 41 President and Director since 1986 of The Chapman Co.
and President and Director since 1988 of Chapman Capital
President 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 46 Dean of School of Business, Jackson State University
since 1994. Chairperson of Accounting Department,
Howard University from 1990 through 1994.
- -----------------------------------------------------------------------------------------------------------------
* Dr. Benjamin Hooks Director 74 Senior Vice President of The Chapman Co. since 1993.
Executive Director of the NAACP from 1977 to 1993.
- -----------------------------------------------------------------------------------------------------------------
James B. Lewis Director 51 City Administrator, City of Rio Rancho, NM since March
1996. Chief Clerk-State Corporation Commission of
New Mexico from 1995 until 1996, Chief of Staff,
Office of the Governor of New Mexico from 1991 to 1995.
- -----------------------------------------------------------------------------------------------------------------
Wilfred Marshall Director 63 Principal, Marshall Enterprises since 1994.
Director, Mayor's Office of Small Business
Assistance - City of Los Angeles 1981 until 1994.
- -----------------------------------------------------------------------------------------------------------------
David Rivers Director 55 Director 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 58 Executive Vice President of Global USA since 1994.
City Director of Little Rock, Arkansas, 1978 to 1992.
Director of Chapman Holdings, Inc. since 1998.
- -----------------------------------------------------------------------------------------------------------------
Ronald A. White Director 49 Senior Partner, Ronald A. White, P.C., since 1982.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal
Positions(s) Occupations (s)
Held with During
Name and Address Registrant Age Past 5 Years
---------------- ---------- --- ------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earl U. Bravo, Sr. Secretary and 51 Secretary and Assistant Treasurer since 1997 of
Assistant The Chapman Co. Senior Vice President, Secretary,
Treasurer 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 Chapman Co. and Chapman Capital
Management, Inc. since 1990.
- -----------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Treasurer and 55 Treasurer and Assistant Secretary since 1997 of
Assistant The Chapman Co. Treasurer and Assistant Secretary of
Secretary Chapman Holdings, Inc. since 1997 and Chapman Capital
Management Holdings, Inc. since 1998. Ms. Ballard has
been employed in various financial positions with
The Chapman Co. and Chapman Capital Management, Inc.
since 1990.
- -----------------------------------------------------------------------------------------------------------------
</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-10
<PAGE>
COMPENSATION TABLE -- Fiscal Year 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Retirement or Total Compensation
Aggregate Pension Benefits Estimated Annual from Company and
Name of Person/ Compensation from Accrued as Part of Benefits upon Fund Complex Paid
Position Company Company Expenses Retirement to Directors
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr. None None None None
Director, Chairman,
President
- ---------------------------------------------------------------------------------------------------------
Dr. Glenda Glover $3,000 None None $6,000
- ---------------------------------------------------------------------------------------------------------
Dr. Benjamin Hooks $5,000 None None $7,000
Director
- ---------------------------------------------------------------------------------------------------------
James Lewis $4,000 None None $8,000
Director
- ---------------------------------------------------------------------------------------------------------
Wilfred Marshall $5,000 None None $5,000
Director
- ---------------------------------------------------------------------------------------------------------
Lottie Shackelford $5,000 None None $9,000
Director
- ---------------------------------------------------------------------------------------------------------
Ronald A. White $3,000 None None $5,000
Director
- ---------------------------------------------------------------------------------------------------------
David Rivers $5,000 None None $5,000
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 and Administrative Services Agreement") to provide investment
advice and, in general, to
B-11
<PAGE>
supervise the management and investment program of the Fund in accordance
with the Fund's investment objectives, policies, and restrictions and under
the supervision and control of the Company's Board of Directors. The
Investment Advisor was established in 1988 and is located at The World Trade
Center - Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland
21202.
The Investment Advisor is a wholly-owned subsidiary of Chapman Capital
Management Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Management Holdings, Inc., is a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the
Investment Advisor.
The table below sets forth the names of affiliated persons of the
Company who are also affiliated persons of the Investment Advisor:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Name and
Principal Business Address Position With Investment Advisor Position With Company
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Chairman of the Board, Director and President Chairman of the Board, Director and
401 E. Pratt St. President
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------------
Earl U. Bravo, Sr. Secretary and Assistant Treasurer Secretary and Assistant Treasurer
401 E. Pratt St.
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------------
M. Lynn Ballard Controller, Treasurer and Assistant Secretary Treasurer and Assistant Secretary
401 E. Pratt Street
28th Floor
Baltimore, MD 21202
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Advisor has overall responsibility for assets under
management, provides overall investment strategies and programs for the Fund,
recommends sub-advisors, allocates assets among the sub-advisors, monitors
and evaluates sub-advisors' performance and manages short-term investments
for the Fund. The Fund's assets are managed by sub-advisors who enter into
sub-advisory agreements with the Fund. The Investment Advisor receives from
the Fund an advisory fee at an annual rate of 1.25% 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 that
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 pays all sub-advisory fees from its advisory fee.
The Investment Advisor has voluntarily agreed to limit the total annual
operating expenses of the Fund, solely attributable to the Institutional
Shares, to 2.00% of average daily net assets until at least December 31,
2000. However, there is no guarantee that the Investment Advisor will
continue to voluntarily limit the total annual operating expenses of the Fund
attributable to the Institutional Shares beyond December 31, 2000.
The Investment Advisor has voluntarily agreed to limit the total annual
operating expenses of the Fund, solely attributable to the Investor Shares,
to 2.99% of average daily net assets until at least December 31, 2000.
However, there is no guarantee that the Investment Advisor will continue to
voluntarily limit the total annual operating expenses of the Fund
attributable to the Investor Shares beyond December 31, 2000.
In connection with the provision of advisory services, the Investment
Advisor will supervise a continuous program of investment, evaluation and, if
appropriate, sale and reinvestment of the Fund's assets. Further, the
Investment Advisor will supply office
B-12
<PAGE>
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.
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.
THE SUB-ADVISORS
The Fund currently employs 9 sub-advisors to manage the Fund's assets on
a day-to-day basis. In connection with the provision of sub-advisory
services, each sub-advisor will conduct a continuous program of investment,
evaluation and, if appropriate, sale and reinvestment of the Fund's assets
allocated to such sub-advisor in accordance with the Fund's investment
objectives and policies and the sub-advisor's investment approach and
strategies. The sub-advisors will place orders for the purchase and sale of
portfolio securities and will solicit brokers to execute transactions,
including The Chapman Co., the Company's Distributor, and broker or dealer
affiliates of sub-advisors of the Fund, in accordance with the Company's
policies and restrictions regarding brokerage allocations. The sub-advisors
will furnish to the Investment Advisor and the Company such statistical
information with respect to the investments which the Fund may hold or
contemplate purchasing as the Investment Advisor or the Company may
reasonably request.
All sub-advisors must meet the DEM Profile which includes only those
companies that are controlled by African Americans, Asian Americans, Hispanic
Americans or women that are located in the United States and its territories.
In determining whether a specific investment advisor is "controlled" by
African Americans, Asian Americans, Hispanic Americans or women and therefore
meets that DEM Profile, the Investment Advisor will apply the following
criteria: at least 10% of the investment advisor's outstanding voting
securities must be beneficially owned by members of one or more of the listed
groups and at least one of the investment advisor's top three executive
officers (Chairman, Chief Executive Officer or President) must be a member of
one or more of the listed groups.
After identifying sub-advisors that satisfy the DEM criteria, the
Investment Advisor applies additional criteria in the selection and retention
of sub-advisors, including: (1) historical performance; (2) investment
approaches that are distinct from the approaches of the Fund's other
sub-advisors; (3) consistent performance in the
B-13
<PAGE>
context of the markets and preservation of capital in declining markets; (4)
organizational stability and reputation; (5) quality and depth of investment
personnel; and (6) ability to apply an investment approach consistently.
Each sub-advisor will not necessarily exhibit all of these criteria to the
same degree.
The Investment Advisor (not the Fund) pays each sub-advisor a monthly
management fee of .35 of 1% of the value of the Fund's average weekly net
assets under the sub-advisor's management during the preceding month payable
monthly in arrears.
The current sub-advisors of the Fund are as follows:
- ------------------------------------------------------------------------------
Albriond Capital Management, LLC African-American
55 E. 59th Street, 19th Floor
New York, NY 10022
- ------------------------------------------------------------------------------
Because Alan B. Bond beneficially owns over 25% of the outstanding
equity securities of Albriond Capital Management, LLC, he is presumed to
control Albriond Capital. Mr. Bond is the founder, President and Chief
Investment Officer of the firm and owns 100% of the outstanding equity
securities.
- ------------------------------------------------------------------------------
Charter Financial Group, Inc. Women
1401 I Street, NW, Suite 505
Washington, DC 20005
- ------------------------------------------------------------------------------
Because Susan Stewart beneficially owns over 25% of the outstanding
equity securities of Charter Financial Group, Inc., she is presumed to
control Charter Financial Group. Ms. Stewart is a co-founder, Chairman and
President of the firm and owns 51.79% of the outstanding equity securities.
- ------------------------------------------------------------------------------
CIC Asset Management, Inc. Hispanic-American
633 W. 5th Street, Suite 1180
Los Angeles, CA 90071
- ------------------------------------------------------------------------------
Because Fernando Inzunza, Jorge G. Castro and Elario R. Monteiro each
beneficially own over 25% of the outstanding equity securities of CIC Asset
Management, Inc., they are presumed to control CIC. Messrs. Castro, Inzunza,
and Monteiro are principals and portfolio managers with each owning 33.3% of
the outstanding equity securities of the firm.
- ------------------------------------------------------------------------------
Diaz-Verson Capital Investments, Inc. Hispanic-American
1200 Brookstone Centre Parkway
Suite 105
Columbus, GA 31909
- ------------------------------------------------------------------------------
Because Salvador Diaz-Verson, Jr. beneficially owns over 25% of the
outstanding equity securities of Diaz-Verson Capital Investments, Inc., he is
presumed to control Diaz-Verson Capital. Mr. Diaz-Verson is the founder,
Chief Executive Officer and President of the firm and owns 100% of the
outstanding equity securities.
- ------------------------------------------------------------------------------
EverGreen Capital Management, Inc. African-American
10707 Pacific Street, Suite 201
Omaha, NE 68114
- ------------------------------------------------------------------------------
Because Michael L. Green beneficially owns over 25% of the outstanding
equity securities of EverGreen Capital Management, Inc., he is presumed to
control EverGreen Capital. Mr. Green is the founder, President and Chief
Investment Officer of the firm and owns 100% of the outstanding equity
securities.
- ------------------------------------------------------------------------------
GLOBALT, Inc. Women
3060 Peachtree Road, NW
One Buckhead Plaza, Suite 225
Atlanta, GA 30305
- ------------------------------------------------------------------------------
Because Angela Z. Allen beneficially owns over 25% of the outstanding
equity securities of GLOBALT, Inc., she is presumed to control GLOBALT.
Ms. Allen is a founder, Chief Executive Officer and President of the firm and
owns 51% of the outstanding equity securities.
- ------------------------------------------------------------------------------
John Hsu Capital Group, Inc. Asian-American
767 Third Avenue, 18th Floor
New York, NY 10017
- ------------------------------------------------------------------------------
Because John Hsu beneficially owns over 25% of the outstanding equity
securities of John Hsu Capital Group, Inc., he is presumed to control
John Hsu Capital Group. Mr. Hsu is the founder, Chairman and Chief Investment
Officer of the firm and owns 100% of the outstanding equity securities.
- ------------------------------------------------------------------------------
The Kenwood Group, Inc. African-American
10 South LaSalle Street, Suite 3610 Women
Chicago, IL 60610
- ------------------------------------------------------------------------------
Because Barbara L. Bowls beneficially owns over 25% of the outstanding
equity securities of The Kenwood Group, Inc. she is presumed to control The
Kenwood Group. Ms. Bowls is the founder and Chief Investment Officer of the
firm and owns 100% of the outstanding equity securities.
- ------------------------------------------------------------------------------
Union Heritage Capital Management, Inc. African-American
1642 First National Building
Detroit, MI 48226
- ------------------------------------------------------------------------------
Because Derek T. Batts beneficially owns over 25% of the outstanding
equity securities of Union Heritage Capital Management, Inc., he is presumed
to control Union Heritage Capital. Mr. Batts is President of Union Heritage
Capital and owns 95% of the outstanding equity securities of the firm.
- ------------------------------------------------------------------------------
Valenzuela Capital Partners LLC Hispanic-American
1270 Avenue of the Americas, Suite 508
New York, N.Y. 10020
- ------------------------------------------------------------------------------
Because Thomas M. Valenzuela beneficially owns over 25% of the
outstanding equity securities of Valenzuela Capital Partners LLC, he is
presumed to control Valenzuela Capital. Mr. Valenzuela is founder and
President of Valenzuela Capital Partners. Mr. Valenzuela owns over 50% of the
outstanding equity securities of VCP Holdings LLC, which owns 100% of the
outstanding equity securities of Valenzuela Capital Partners LLC.
- ------------------------------------------------------------------------------
Zevenbergen Capital, Inc. Women
601 Union Street, Suite 2434
Seattle, WA 98101
- ------------------------------------------------------------------------------
Because Nancy A. Zevenbergen beneficially owns over 25% of the
outstanding equity securities of Zevenbergen Capital, Inc., she is presumed
to control Zevenbergen Capital. Ms. Zevenbergen is founder and President of
Zevenbergen Capital and owns over 80% of the outstanding equity securities.
The Board of Directors of the Company and the initial stockholder of the
Fund have approved sub-advisory agreements between the Fund, the Investment
Advisor and each of the investment advisors listed in the Prospectus to serve
as sub-advisors of the Fund. See "MANAGEMENT--The Sub-Advisors" in the
Prospectus. The Investment Advisor will allocate the Fund's assets among
these sub-advisors. In its discretion, the Investment Adviser may allocate as
much as 100 percent or as little as 0 percent of the Fund's assets to any one
sub-advisor.
The Fund and the Investment Adviser are seeking an exemption from the
SEC that will permit the Investment Adviser to retain additional
sub-advisors, terminate existing sub-advisors, and materially amend the
sub-advisory agreements without stockholder approval. To the extent that the
SEC grants the requested exemption, the Fund will send its stockholders a
notice to this effect and will supplement its Prospectus and Statement of
Additional Information with information about new sub-advisors and changes in
sub-advisory agreements. To the extent that the Fund receives the requested
exemption, the Fund also anticipates that within ninety days of retaining a
new sub-advisor or materially amending a sub-advisory agreement, it will give
its stockholders written notice of such addition or material change.
B-14
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, to the Company's knowledge, the name,
the number of shares and the percentage of the outstanding shares of the Fund
owned beneficially by each person who owned beneficially 5% or more of the
outstanding shares of Common Stock as of July 31, 1999, the latest
practicable date, and the ownership of all Directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER TOTAL TOTAL %
INVESTOR INSTITUTIONAL
SHARES SHARES
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CHAPMAN CAPITAL MANAGEMENT, INC. (1) 1 1 100%
(a Washington, DC corporation)
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ---------------------------------------------------------------------------------
CHAPMAN CAPITAL MANAGEMENT HOLDINGS, INC. (2) 1 1 100%
(a Maryland corporation)
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ---------------------------------------------------------------------------------
NATHAN A. CHAPMAN, JR. (2) 1 1 100%
World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
- ---------------------------------------------------------------------------------
All current Directors and executive officers 1 1 100%
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., is deemed a controlling
person (as that term is defined under the 1940 Act) of Chapman Capital
Management Holdings, Inc. and, therefore, a controlling person of the
Investment Adviser.
B-15
<PAGE>
DISTRIBUTOR
The Distributor, The Chapman Co., has been retained under a distribution
agreement (the "Distribution Agreement") to undertake the sale, on a
continuous basis as agent, of the Fund's shares. The Distributor is not
obliged to sell any particular amount of shares.
INVESTOR SHARES
The Distributor is compensated through the payment of a front-end load
of up to 4 3/4% of the offering price on the sale of Investor Shares and
pursuant to the terms of a distribution plan adopted by the Fund pursuant to
Rule 12b-1 under the 1940 Act that is applicable to the Investor Shares (the
"Investor Shares Distribution Plan"). See "PURCHASE OF SHARES--Purchase
Price" in the Investor Shares Prospectus. The Distributor receives a fee
under the Investor Shares Distribution Plan for stockholder administrative
and distribution services at an annual rate of up to a total of .75% (up to
.25% administrative fee and .50% distribution fee) of the average daily net
assets of the Fund attributable to the Investor Shares. The Distributor has
voluntarily limited such fee during the first fiscal year of the Fund to an
aggregate of .50% 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-16
<PAGE>
Fund, and providing any other Service; and (iii) to make, or cause to be
made, payments to compensate selected dealers or other authorized persons for
providing any Services. Administrative Services may include, but are not
limited to, (i) responding to inquiries of prospective investors regarding
the Fund; (ii) services to holders of Investor Shares not otherwise required
to be provided by the Fund's custodian or any co-administrator; (iii)
establishing and maintaining accounts and records on behalf of holders of
Investor Shares; (iv) processing purchase, redemption and exchange
transactions in Investor Shares; and (v) other similar services not otherwise
required to be provided by the Fund's transfer agent or any co-administrator.
Payments under the Plan are not tied exclusively to the distribution and
administrative expenses actually incurred by the Distributor or any Service
Provider, and the payments may exceed expenses actually incurred by the
Distributor and/or a Service Provider. Furthermore, any portion of any fee
paid to the Distributor or to any of its affiliates by the Fund or any of
their past profits or other revenue may be used in their sole discretion to
provide services to holders of Investor Shares or to foster distribution of
the Investor Shares.
INSTITUTIONAL SHARES
The Distributor is compensated for the sale of Institutional Shares
pursuant to the terms of a distribution plan adopted by the Fund pursuant to
Rule 12b-1 under the 1940 Act that is applicable to the Institutional Shares
(the "Institutional Shares Distribution Plan" and collectively with the
Investor Distribution Plan, the "Distribution Plans"). The Distributor
receives a fee under the Institutional Shares Distribution Plan for
stockholder administrative and distribution services at an annual rate of up
to a total of .25% of the average daily net assets of the Fund attributable
to the Institutional Shares.
The Distributor will be paid fees under the Institutional Shares
Distribution Plan to compensate the Distributor or enable the Distributor to
compensate other persons, including any other distributor of the
Institutional Shares or institutional stockholders of record of the
Institutional Shares, including but not limited to retirement plans,
broker-dealers, depository institutions, and other financial intermediaries
("Institutions"), who own Institutional Shares on behalf of their customers,
clients or (in the case of retirement plans) participants ("Customers") and
companies providing certain services to Customers (collectively with
Institutions, "Service Organizations"), for providing (a) services primarily
intended to result in the sale of the Institutional Shares ("Selling
Services") and (b) stockholder servicing, administrative and accounting
services to Customers ("Stockholder Services").
The annual fee paid to the Distributor with respect to Selling Services
will compensate the Distributor, or allow the Distributor to compensate
Service Organizations, to cover certain expenses primarily intended to result
in the sale of the Institutional Shares, including, but not limited to: (i)
costs of payments made to employees that engage in the distribution of the
Institutional Shares; (ii) payments made to, and expenses of, persons who
provide support services in connection with the distribution of the
Institutional Shares, including, but not limited to, office space and
B-17
<PAGE>
equipment, telephone facilities, processing stockholder transactions and
providing any other stockholder services not otherwise provided by the Fund's
transfer agent; (iii) costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct
mail promotions and television, radio, newspaper, magazine and other mass
media advertising; (iv) costs of printing and distributing prospectuses,
statements of additional information and reports of the Fund to prospective
holders of the Institutional Shares; (v) costs involved in preparing,
printing and distributing sales literature pertaining to the Fund and (vi)
costs involved in obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Fund may, from time
to time, deem advisable.
The annual fee paid to the Distributor with respect to Stockholder
Services will compensate the Distributor, or allow the Distributor to
compensate Service Organizations, for personal service and/or the maintenance
of Customer accounts, including but not limited to (i) responding to Customer
inquiries, (ii) providing information on Customer investments and (iii)
providing other stockholder liaison services and for administrative and
accounting services to Customers, including, but not limited to: (a)
aggregating and processing purchase and redemption requests from Customers
and placing net purchase and redemption orders with the Fund's distributor or
transfer agent; (b) providing Customers with a service that invests the
assets of their accounts in the Institutional Shares; (c) processing dividend
payments from the Fund on behalf of Customers; (d) providing information
periodically to Customers showing their positions in the Institutional
Shares; (e) arranging for bank wires; (f) providing sub-accounting with
respect to the Institutional Shares beneficially owned by Customers or the
information to the Fund necessary for sub-accounting; (g) forwarding
stockholder communications from the Fund (for example, proxies, stockholder
reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers, if required by law and (h)
providing other similar services to the extent permitted under applicable
statutes, rules and regulations. Payments under this Institutional Shares
Distribution Plan are not tied exclusively to the selling and stockholder
expenses actually incurred by the Distributor or any Service Organization,
and the payments may exceed expenses actually incurred by the Distributor or
any Service Organization. Furthermore, any portion of any fee paid to the
Distributor or to any of its affiliates by the Fund or any of their past
profits or other revenue may be used in their sole discretion to provide
services to stockholders of the Fund or to foster distribution of the
Institutional Shares.
GENERAL INFORMATION
Pursuant to the Distribution Plans, the Distributor provides the Board
of Directors with periodic reports of amounts expended under the Distribution
Plans and the purpose for which the expenditures were made.
The Distribution Plans will continue in effect for so long as their
continuance is specifically approved at least annually by the Board of
Directors, including a majority of
B-18
<PAGE>
the Directors who are not interested persons of the Company and who have no
direct or indirect financial interest in the operation of the Distribution
Plans as the case may be (the "Independent Directors"). Any material
amendment of the Distribution Plans would require the approval of the Board
in the manner described above. A Distribution Plan may not be amended to
increase materially the amount to be spent thereunder without the approval of
the holders of a majority of the relevant class of Shares. A Distribution
Plan may be terminated at any time, without penalty, by the vote of a
majority of the Independent Directors or by a vote of a majority of the
outstanding voting securities of the relevant class.
CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226,
serves as custodian of the Fund. Under the Custody Agreement, the Bank has
agreed to: (i) maintain a separate account or accounts in the name of the
Fund; (ii) receive, hold and deliver portfolio securities for the account of
the Fund; (iii) collect and receive all income and other payments and
distributions on account of the Fund's portfolio securities; (iv) disburse
funds to purchase portfolio securities, pay dividends and expenses and for
other corporate purposes; and (v) make periodic reports to the Board of
Directors concerning the Fund's operations.
TRANSFER AND DIVIDEND PAYING AGENT/ACCOUNTING AGENT
First Data Investor Services Group, Inc., 211 S. Gulph Street, PO Box
61503, King of Prussia, Pennsylvania 19406, (800) 441-6580, serves as
transfer and dividend paying agent and accounting agent for the Fund pursuant
to a Investment Company Services Agreement.
PURCHASE OF SHARES
(APPLICABLE TO INVESTOR SHARES ONLY)
The following information supplements and should be read in conjunction
with the sections in the Fund's Investor Shares 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 purchase 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
B-19
<PAGE>
that it is 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 with
result in economy of sales effort or expense.
Set forth below is an example of the method of computing the offering
price of the Investor Shares. The example assumes a purchase of Investor
Shares aggregating less than $50,000 subject to the current schedule of sales
charges set forth in the Fund's prospectus at a price based upon the initial
net asset value of the Fund's Investor Shares:
<TABLE>
<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, with respect to short-term investments of the
Fund, and the sub-advisors, with respect to assets of the Fund allocated to
such sub-advisors, are 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. 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 or affiliates of sub-advisors of the Fund may effect
brokerage transactions for the Fund when they are able to provide a net price
and execution at least
B-20
<PAGE>
as favorable to the Fund as those determined to be available from
unaffiliated brokers or dealers. The commissions paid to the Distributor or
an affiliate of a sub-advisor on transactions for the Fund may not exceed
those charged by the Distributor or such sub-advisor affiliate 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 and any affiliate of a sub-advisor
report each transaction to the Fund and that the Board of Directors determine
at least quarterly that all transactions effected by the Distributor or any
such affiliate of a sub-advisor 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, the Investment Advisor or a sub-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 and the sub-advisors in the management of accounts of other clients
and may not benefit the Fund directly. While such services are useful and
important in supplementing their own research, the Investment Advisor
believes the value of such services is not determinable and does not
significantly reduce expenses. The fees payable to the Investment Advisor
will not be reduced by the value of such services.
The Investment Advisor, the sub-advisors and their 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 and the sub-advisors.
Other accounts of the Investment Advisor and the sub-advisors 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
best execution.
B-21
<PAGE>
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.
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 securities loans, gains from the sale or other disposition of
stock or securities or foreign currencies 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 and 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 the Fund's 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
and at least 90% of its net tax-exempt income, 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 the Fund's ordinary income for such calendar year; (b) 98% of the
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 paid by the Fund on the gain
allocable to such shares.
B-22
<PAGE>
Any capital losses resulting from the Fund's disposition of securities
can only be used to offset capital gains and cannot be used to reduce the
Fund's ordinary income. Unusued capital losses may be carried forward by the
Fund for eight years.
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.
B-23
<PAGE>
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 connection with matters affecting the Company as a whole
means the vote of the lesser of (i) 67% of the Company's shares represented
at a meeting if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (ii) more than 50% of the Company's
outstanding shares. The term "majority," when referring to the approvals to
be obtained from stockholders in connection with matters affecting only the
Fund (for example, approval of an investment advisory contract), means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a
meeting if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy or (ii) more than 50% of the outstanding
shares of the Fund. Stockholders are entitled to one vote for each full
share held and a fractional vote for fractional shares held.
Each share of the Fund is entitled to such dividends and distributions
out of the assets belonging to the Fund as are declared in the discretion of
the Company's Board of Directors. In determining the Fund's net asset value,
the Fund is charged with the direct expenses of the Fund and with a share of
the general expenses and liabilities of the Company, which are normally
allocated in proportion to the relative asset values of the respective Series
at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of
the Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the various Series, of any general assets not
attributable to a particular series that are available for distribution.
Subject to the provisions of the Company's charter, determinations by
the Board of Directors as to the direct and allocable liabilities, and the
allocable portion of any general assets of the Company, with respect to a
Series are conclusive.
Stockholders of the Company are not entitled to any preemptive or
conversion rights.
B-24
<PAGE>
PERFORMANCE INFORMATION
The performance of the Fund may be compared to the record of the
Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the
Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity
Index, the DEM Index, the DEM Universe of companies and returns quoted by
Ibbotson Associates. The S&P 500 Stock Index is a well known measure of the
price performance of 500 leading larger domestic stocks which represents
approximately 80% of the market capitalization of the United States equity
market. In comparison, the Nasdaq National Market System is comprised of all
stocks on Nasdaq's National Market System. 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 Americans or
women. The DEM Index was created by the Investment Advisor and is comprised
of 100 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 New York
Stock Exchange, as well as similar capitalization stocks on the American
Stock Exchange and Nasdaq. This data base is unmanaged and capitalization
weighted.
The total returns for all indices used show the changes in prices for
the stocks in each index. However, only the performance data for the S&P 500
Stock Index and the Ibbotson Associates performance data assume reinvestment
of all capital gains distributions and dividends paid by the stocks in each
data base. Tax consequences are not included in such illustrations, nor are
brokerage or other fees or expenses reflected in the Nasdaq Composite or S&P
500 Stock figures. In addition, the Fund's total return or performance may
be compared to the performance of other funds or other groups of funds that
are followed by Morningstar, Inc. a widely used independent research firm
which ranks funds by overall performance, investment objectives and asset
size. Morningstar proprietary ratings reflect risk-adjusted performance.
The ratings are subject to change every month. Morningstar's ratings are
calculated from a fund's three-year and five-year average annual returns with
appropriate sales charge adjustments and a risk factor that
B-25
<PAGE>
reflects fund performance relative to three-month Treasury bill monthly
returns. Ten percent of the funds in an asset class receive a five star
rating. The Fund's total return or performance may also be compared to the
performance of other funds or groups of funds by other financial or business
publications, such as Business Week, Investors Daily, Mutual Fund Forecaster,
Money Magazine, Wall Street Journal, New York Times, Baron's, and Lipper
Analytical Services. The Fund's performance may also be compared, from time
to time, to (a) indices of stocks comparable to those in which the Fund
invests and (b) the Consumer Price Index (measure for inflation) may be used
to assess the real rate of return from an investment in the Fund.
ADDITIONAL PERFORMANCE INFORMATION FOR THE FUND
The Fund may reflect its total return in advertisements and stockholder
reports. Total investment return is one recognized method of measuring
investment company investment performance. Quotations of average annual
total return will be shown in terms of the average annual compounded rate or
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
returns.
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.
COUNSEL TO THE COMPANY
Venable, Baetjer and Howard, LLP, Baltimore, Maryland acts as counsel to
the Company. Venable, Baetjer and Howard, LLP also acts as counsel to the
Investment Advisor and the Distributor.
INDEPENDENT AUDITORS
Ernst & Young LLP, One North Charles Street, Baltimore, Maryland
21201, serves as the Company's independent auditors. Ernst & Young LLP will
provide audit services, tax advice and assistance in connection with filings
with the SEC.
B-26
<PAGE>
FINANCIAL STATEMENTS
DEM MULTI-MANAGER EQUITY FUND
COMPOSITE STATEMENT OF ASSETS AND LIABILITIES - July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Cash $29
-----
Total assets $29
-----
LIABILITIES: $0
-----
Total liabilities $0
-----
NET ASSETS - equivalent to $14.28 per share on
2 shares of Common Stock outstanding $ 29
-----
-----
SUMMARY OF STOCKHOLDERS' EQUITY
Common Stock, par value $.001 per share; authorized
10,000,000,000 shares; issued and outstanding
2 shares $0
Capital paid-in $29
-----
Net assets applicable to outstanding common stock $ 29
-----
-----
</TABLE>
F-1
