CHAPMAN FUNDS INC, 497, 1999-03-02

CHAPMAN FUNDS INC
497, 1999-03-02

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<PAGE>
Filed Pursuant to
Rule 497(e)
(File Nos.: 33-25716
811-5697)

[LOGO]

March 2, 1999

DEM EQUITY FUND
INVESTOR SHARES

DEM Equity Fund is a series of The Chapman Funds, Inc. The fund is a
non-diversified portfolio that seeks aggressive growth through investment in the
Domestic Emerging Markets market segment comprised of companies that are
controlled by African Americans, Asian Americans, Hispanic Americans or women
and that are located in the United States and its territories. The fund also may
utilize leverage.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE 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 DEM Profile(TM), DEM
Universe(TM), DEM Company(TM) and DEM Index(TM) are trademarks of Nathan A.
Chapman, Jr.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
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CONTENTS

<TABLE>
<S> <C>
THE FUND--AN OVERVIEW................................................................. 3
Investment Objectives and Principal Investment Strategies........................... 3
The DEM Universe.................................................................... 3
Principal Risks..................................................................... 3
Fund Expenses....................................................................... 4

YOUR ACCOUNT.......................................................................... 5
Purchasing Shares................................................................... 5
How Sales Charges are Calculated.................................................... 7
Sales Charges Reductions............................................................ 8
Redeeming Shares.................................................................... 8
Keeping Your Account Open........................................................... 8
How and When Shares Are Priced...................................................... 9
How Your Purchase or Redemption Price is Determined................................. 9

DISTRIBUTIONS AND TAXES............................................................... 9
Dividends and Other Distributions................................................... 9
Tax Information..................................................................... 9

MANAGEMENT............................................................................ 10
The Investment Adviser.............................................................. 10
The Management Fee.................................................................. 10
Portfolio Management................................................................ 10
Distribution........................................................................ 11
Brokerage........................................................................... 11
Stockholder Services................................................................ 11
Custodian........................................................................... 11

INVESTMENT PROGRAM.................................................................... 11
Types of Portfolio Securities....................................................... 11
Types of Management Practices....................................................... 12
Other Investment Limitations........................................................ 12
The Year 2000 Processing Issue...................................................... 13

FINANCIAL HIGHLIGHTS.................................................................. 14
</TABLE>

2
<PAGE>
THE FUND--AN OVERVIEW

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES

The fund seeks aggressive long-term growth. Although the investment adviser
considers both capital appreciation and income when selecting investments, the
fund will place primary emphasis on capital appreciation.

The fund will invest in companies in the Domestic Emerging Markets market
segment that it believes are positioned for growth. The Domestic Emerging Market
(or DEM) segment consists of companies that are controlled by African Americans,
Asian Americans, Hispanic Americans or women and that are located in the United
States and its territories. Throughout this prospectus, these companies are
sometimes referred to as DEM companies.

The fund believes that DEM companies have not historically received the
attention of mainstream securities analysts and investment advisers.
Accordingly, the fund believes that the DEM segment includes many companies
whose growth potential is not fully represented in the prices of their
securities. The fund will seek to capitalize on the experience of Chapman
Capital Management, Inc., the fund's investment adviser ("CCM"), with the DEM
segment to identify and invest in those DEM companies whose growth potential is
high relative to the prices of their securities.

THE DEM UNIVERSE

CCM has identified a universe of approximately 180 DEM companies that it
expects will continue to grow. In determining whether a specific portfolio
company is controlled by African Americans, Asian Americans, Hispanic Americans
or women, CCM applies one of the following criteria:

- At least 10% of the company's outstanding voting securities must be
beneficially owned by members of one or more of the listed groups, or

- At least one of the company's top three executive officers (Chairman,
Chief Executive Officer or President) must be a member of one or more of
the listed groups

The fund intends to invest in DEM companies with both large and small market
capitalizations; however, since the DEM universe includes a large proportion of
companies with small market capitalizations, a significant portion of the fund's
portfolio may consist of small capitalization companies.

PRINCIPAL RISKS

As with any growth-oriented mutual fund, the value of your investment will
fluctuate in response to stock market movements. Therefore you may lose money.

Because the fund intends to invest substantially all of its assets in
securities of emerging companies, you should be aware that investing in small
companies involves greater risk than is customarily associated with more
established companies. As compared to securities of larger companies, securities
of small companies may

- Be subject to more abrupt or erratic price movements

- Have limited products lines and lack established markets for products and
services

3
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- Have more limited financial resources

- Have less depth of management experience

Because the fund is permitted to invest up to 15% of its net assets in
illiquid securities, the fund is also subject to liquidity risk. Liquidity risk
is the risk that securities may be difficult or impossible to sell at the time
and the price that the fund would like. Therefore, the fund may have to accept a
lower price, sell other securities instead or forego an investment opportunity,
any of which could have a negative effect on fund management and performance.

The fund is also categorized as "non-diversified" under the Investment
Company Act of 1940. This means that the fund may invest a greater percentage of
its assets in a particular issuer, which subjects the fund to greater risk with
respect to its portfolio securities. The fund has not included performance
information in this prospectus because it has not yet completed a full year of
operations.

FUND EXPENSES

The numbers in Table 1 describe the fees and expenses that you may pay if
you buy and hold shares in the fund. The expenses and fees set forth in the
table are for the period from inception to October 31, 1998 and are expressed as
a percentage of average daily net assets during such period.

TABLE 1
ANNUAL FUND OPERATING EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES THAT YOU MAY PAY IF YOU BUY AND HOLD SHARES OF THE FUND)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price)............................................................................ 4.75%
Maximum Deferred Sales Charge (Load)................................................ -0-%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions..................................................................... -0-%
Redemption Fee...................................................................... -0-%

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee.................................................................... .90%
Distribution (12b-1) Fee*......................................................... .75%
Other Expenses.................................................................... 3.15%
Total Annual Fund Operating Expenses................................................ 4.80%
</TABLE>

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

* The Chapman Co., which serves as the fund's 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.
The Chapman Co. has voluntarily limited such fee to an aggregate of .50% (up
to .25% service fee and .25% distribution fee) of average daily assets.
However, there is no guarantee that The Chapman Co. will continue to
voluntarily limit the amount of such fee beyond fiscal year 1999. Based on
this fee limitation, the fund's total annual operating expenses for fiscal
year 1998 were 4.55%.

Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.

4
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EXAMPLE. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in the
fund with the cost of investing in other funds. Although your actual costs may
be higher or lower, the table shows expenses you would pay if operating expenses
remain the same, you invest $10,000, you earn a 5% annual return, and you hold
the investment for the following periods.

<TABLE>
<CAPTION>
INVESTOR
SHARES
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<S> <C>
1 Year.............................................................................. $ 933
3 Years............................................................................. $ 1,851
5 Years............................................................................. $ 2,772
10 Years............................................................................ $ 5,093
</TABLE>

YOUR ACCOUNT

PURCHASING SHARES

You may purchase shares of the fund by mail, by telephone, by bank wire, by
automatic investment from your bank account or through your broker-dealer or
bank. The fund requires a minimum initial investment of $25, and minimum
subsequent investments of $25. The fund reserves the right to vary the initial
investment minimum and minimums for subsequent investments at any time.

In addition, you may also purchase shares by exchanging shares of the fund
for shares in other DEM funds if the exchange is to an existing account and both
accounts are registered in the same name. Exchanges are subject to the $25
minimum investment.

The following table presents some procedures you should know about when
investing in the fund.

BY MAIL

To make an initial investment, send the fund's application and your check
to:

DEM Equity Fund Investor Shares
c/o First Data Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406

To make a subsequent investment in an existing account, send the stub from
your account statement and your check to:

UMB Bank, N.A.
P.O. Box 412797
Kansas City, MO 64141-2797

Please make your check payable to DEM Equity Fund Investor Shares.

BY WIRE

To make a same day wire investment, call (800) 752-1013 by 12 noon (Eastern
Time).

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The following information will be required to open an account:

- Name and address for account registration

- Tax identification number

- Amount of wire transfer

- Name of bank

Call your bank with instructions to transmit funds to:

UMB Bank, N.A.
ABA #10-10-00695
For: First Data Services, Inc.
A/C: 98-7037-071-9
FBO: "DEM Equity Fund, Investor Shares"
Account of: _______________ (Name(s) of account registration)
Stockholder Account #: _______________

Your bank may charge a wire fee.

To open a new account, you should mail your completed application to The
Chapman Funds, Inc.

BY AUTOMATIC INVESTMENT

Shares of the fund may be purchased through our "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.

THROUGH A BROKER-DEALER, BANK OR BANK AND TRUST DEPARTMENT

To have a broker-dealer, bank or bank and trust department initiate a
purchase of shares of the fund, complete the "Investment Dealer Information"
section of the investment application.

The fund may accept telephone orders from broker-dealers or service
organizations which it has previously approved.

Your broker-dealer, bank or bank and trust department may charge you a fee
for this service.

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BY EXCHANGE

To request an exchange of shares of one fund into shares of another DEM fund
offered by The Chapman Funds, Inc., call (800) 441-6580 or send a written
request to:

DEM Equity Fund Investor Shares
c/o First Data Services, Inc.
3200 Horizon Drive
P.O. 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.

IMPORTANT INFORMATION ABOUT EXCHANGE PRIVILEGES

- If you exchange shares of one fund for shares of another DEM fund by
telephone, the new shares will be registered in the same manner as the
shares for which they were exchanged.

- A 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,
you 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.

HOW SALES CHARGES ARE CALCULATED

Sales charges on purchases of shares of the fund are calculated as follows:

<TABLE>
<CAPTION>
TOTAL SALES LOAD
---------------------------------------------
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING YOUR OFFERING
AMOUNT OF TRANSACTION PRICE INVESTMENT 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 sales charge schedule 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. The fund's distributor, The Chapman Co., will pay the
appropriate dealer concession to those selected dealers who have entered into an
agreement with The Chapman Co. The Chapman Co. may change these dealer
concessions from time to time, as well as offer incentives to dealers allowing
such dealers to retain an additional portion of the sales load.

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SALES CHARGES REDUCTIONS

There are two ways you can combine multiple purchases of shares of the fund
to take advantage of the breakpoints in the sales charge schedule.

- RIGHT OF ACCUMULATION--lets you add the value of any shares you already
own to the amount of your next investment for purposes of calculating the
sales charge. You must notify the fund's transfer agent at the time of
purchase to qualify for reduced sales loads.

- LETTER OF INTENT--lets you purchase shares of the fund over a 13-month
period and receive the same sales charge as if all shares had been
purchased at once. A minimum initial purchase of $5,000 is required.

To use either of these methods, contact First Data Services, Inc. (the
fund's transfer agent; "First Data").

REDEEMING SHARES

You may redeem your shares at any time by mail, by telephone or by wiring
instructions (which must include the stockholder's name and account number).

You may also redeem your shares through certain brokers, financial
institutions or service organizations, banks and bank and trust departments.
These third parties may charge you a transaction fee or other fee for their
services at the time of redemption.

HOW YOU CAN RECEIVE PROCEEDS FROM A REDEMPTION

If First Data Services receives your request by 4 p.m. (Eastern Time) in
correct form, proceeds are usually sent within one business day. Proceeds can be
sent to you by mail or by wire. There is a $9.00 charge for redemptions by wire,
which will be deducted from your redemption proceeds.

Under certain circumstances and when deemed to be in the fund's best
interests, your proceeds may not be sent for up to seven days after First Data
receives your sale or exchange request.

If you redeem shares that you just purchased and paid for by check, First
Data will process your redemption request but will generally delay sending you
the proceeds for up to 15 days to allow the check to clear. This hold does not
apply to certified and cashier's checks.

REDEMPTIONS OVER $250,000

Large sales can adversely affect the ability of CCM to implement the fund's
investment strategy by causing the premature sale of securities that would
otherwise be held. If, in any 90-day period, you redeem more than $250,000, or
your sale amounts to more than 1% of fund net assets, the fund has the right to
pay the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund's portfolio.

KEEPING YOUR ACCOUNT OPEN

Due to the relatively high cost to the fund of maintaining small accounts,
we ask you to maintain an account balance of at least $25. If your balance is
below $25, we have the right to close your account after giving you 60 days in
which to increase your balance.

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HOW AND WHEN SHARES ARE PRICED

The share price (also called "net asset value" or "NAV") for the fund is
generally calculated at 4 p.m. (Eastern Time) each day The New York Stock
Exchange is open for business. To calculate the NAV of the investor shares, the
investor shares' pro rata share of fund assets are valued and totaled, the
investor shares' pro rata share of fund liabilities are subtracted, and the
balance, called net assets, is divided by the number of investor shares
outstanding. In general, the fund's assets are valued at their market price.

HOW YOUR PURCHASE OR REDEMPTION PRICE IS DETERMINED

If First Data receives your request to purchase, redeem or exchange shares
in the fund in the correct form by 4 p.m. (Eastern Time), your transaction will
be priced at that day's NAV. If First Data receives your request after 4 p.m.,
your transactions will be priced at the next business day's NAV.

NOTE: THE TIME AT WHICH TRANSACTIONS AND SHARES ARE PRICED AND THE TIME
UNTIL WHICH ORDERS ARE ACCEPTED MAY BE CHANGED IN CASE OF AN EMERGENCY OR IF THE
NEW YORK STOCK EXCHANGE CLOSES AT A TIME OTHER THAN 4 P.M.

DISTRIBUTIONS AND TAXES

DIVIDENDS AND OTHER DISTRIBUTIONS

Dividend distributions are reinvested in additional fund shares in your
account unless you select another option on your investment application. The
advantage of reinvesting distributions arises from compounding; that is, you
receive income dividends and capital gain distributions on a rising number of
shares.

- 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.

- Fund shares will earn dividends through the date of redemption.

TAX INFORMATION

You need to be aware of the possible tax consequences when:

- You redeem fund shares, including an exchange from one fund to another

- The fund makes a distribution to your account.

TAXES ON REDEMPTIONS

When you redeem shares in the fund, you may realize a gain or loss. An
exchange from the fund to another DEM fund is still a redemption for tax
purposes.

After the end of its tax year, the fund will send you Form 1099-B indicating
the date and amount of each redemption made in the fund during the prior year.
The fund will also report this information to the IRS.

9
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TAXES ON DISTRIBUTIONS

Distributions may be taxed as ordinary income or capital gains (which may be
taxable at different rates depending on the length of time the fund holds its
assets).

After the end of its tax year, the fund will send you Form 1099-DIV
indicating the tax status of any dividend and capital gain distributions made to
you. The fund will also report this information to the IRS. Distributions made
by the fund are generally taxable to you for the year in which they were paid.
Distributions are taxable whether reinvested in additional shares or received in
cash.

MANAGEMENT

THE INVESTMENT ADVISER

- ALL DECISIONS REGARDING THE PURCHASE AND SALE OF THE FUND'S INVESTMENTS
ARE MADE BY CHAPMAN CAPITAL MANAGEMENT, INC.

CCM serves as the fund's investment adviser pursuant to an advisory and
administrative services agreement with the fund. CCM was established in 1988 and
is located at the World Trade Center-- Baltimore, 28th Floor, 401 East Pratt
Street, Baltimore, Maryland 21202.

CCM has been an investment adviser since 1988. CCM served as the investment
adviser of DEM, Inc., a closed-end company that invested in DEM securities, from
1995 until its dissolution in 1998 and currently serves as the investment
adviser for The Chapman US Treasury Money Fund, DEM Index Fund, DEM Fixed Income
Fund, and DEM Multi-Manager Equity Fund, four other series of The Chapman Funds,
Inc. DEM Index Fund, DEM Fixed Income Fund and DEM Multi-Manager Equity Fund are
not currently active. In addition, CCM serves as portfolio manager to private
accounts. As of January 31, 1999, CCM had approximately $613 million in assets
under management.

CCM provides investment advice to the fund and, in general, conducts the
management and investment programs of the fund in accordance with the fund's
investment objectives, policies and restrictions.

THE MANAGEMENT FEE

The fund pays CCM an annual advisory fee of .90% of the fund's average
weekly net assets and an administration fee of .15% of the fund's average weekly
net assets. Both fees are calculated weekly and paid monthly.

PORTFOLIO MANAGEMENT

Nathan A. Chapman, Jr., who has been the President of CCM since 1988, is
primarily responsible for the management of the fund's assets.

Mr. Chapman has served as President and Chairman of the Board of Directors
of The Chapman Funds, Inc. since its organization in 1988. In addition, Mr.
Chapman founded The Chapman Co., the fund's distributor, in 1987 and has been
its President since its inception. The Chapman Co. is a full-service brokerage
and investment banking firm. As Mr. Chapman is the president of a brokerage and
investment banking firm, he does not devote his full time to the management of
the fund's portfolio.

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DISTRIBUTION

The Chapman Co., an affiliated broker-dealer of CCM and the fund,
distributes (sells) shares of the fund and all other DEM funds.

The fund has adopted a plan under rule 12b-1 of the Investment Company Act
of 1940 pursuant to which the fund pays The Chapman Co. a service fee and a
distribution fee to cover the sale of its shares and for services provided to
stockholders. The 12b-1 fee paid by the fund is detailed in the Fund Expenses
section of this prospectus.

BROKERAGE

In placing portfolio trades, CCM may use The Chapman Co., but only when CCM
believes no other firm offers a better combination of quality execution (i.e.,
timeliness and completeness) and favorable price.

STOCKHOLDER SERVICES

First Data serves as the fund's transfer and dividend paying agent and
accounting agent and provides shareholder services, including record-keeping,
and statements, distribution of dividends and processing of purchase and
redemption requests. Stockholder inquiries should be addressed to First Data at
3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 61503 or (800)
441-6580.

CUSTODIAN

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

INVESTMENT PROGRAM

This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment practices
that may be used in day-to-day portfolio management. Each fund's investment
program is subject to further restrictions and risks described in the Statement
of Additional Information.

TYPES OF PORTFOLIO SECURITIES

Under normal circumstances, the fund will invest at least 65% of the value
of its total assets in equity securities of DEM companies. For temporary
defensive purposes, the fund may invest some or all of its assets in the
securities of non-DEM companies that otherwise meet the fund's investment
objectives, hold cash or invest in investment-grade short-term debt securities.

While the fund intends to concentrate on publicly-traded securities, the
fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities include those securities that are illiquid because they have no
readily available market or because they are restricted securities under Rule
144 of the Securities Act of 1933.

11
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10% investment limitation is part of the 15% investment limitation that applies
to illiquid securities in general.

TYPES OF MANAGEMENT PRACTICES

BORROWING MONEY AND PLEDGING ASSETS

The fund can borrow up to 33 1/3% of the value of total fund assets from
banks to take advantage of investment opportunities and may pledge up to 33 1/3%
of total fund assets to secure such borrowings. The fund may purchase securities
on margin up to the 33 1/3% limit on bank borrowings. The fund may also borrow
an additional 5% of its total assets without regard to the 33 1/3% limitation
for bank borrowings.

OPTIONS

Options (a type of potentially high-risk derivative) give the fund the right
(where the fund purchases the option), or the obligation (where the fund writes
(sells) the option), to buy or sell an asset at a predetermined price in the
future. A covered call option is a call option with respect to which the fund
owns the underlying security. A put option is covered when, among other things,
cash or liquid securities are placed in a segregated account with the fund's
custodian to fulfill the obligation undertaken.

The fund may buy or sell options on securities with respect to securities of
DEM companies, and the fund may write covered call and put option contracts with
respect to these securities. The total market value of securities against which
the fund writes call or put options may not exceed 15% of its net assets. The
fund will not commit more than 15% of its total assets to premiums when
purchasing call or put options.

Options may not always be successful hedges and their prices can be highly
volatile.

SECURITIES LENDING/REPURCHASE AGREEMENTS

The fund may use various investment techniques for hedging, risk management
and other investment purposes. These techniques may include, but are not limited
to lending portfolio securities and entering into repurchase agreements. The
fund may invest up to 20% of its assets for hedging or risk management purposes
or when, in the investment adviser's opinion, such techniques can be expected to
yield a higher investment return than other investment options.

OTHER INVESTMENT LIMITATIONS

The following paragraphs describe additional investment policies and
limitations to which the funds adhere.

In general, the fund will not:

- Issue senior securities

- Engage in the business of underwriting securities issued by other persons

- Concentrate investments in particular industries

- Engage in the purchase and sale of real estate or real estate
mortgage-backed securities

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- Lend money

- Invest in foreign securities (including American Depository Receipts)

When the fund purchases or sells illiquid securities or private funds, the
fund may be deemed to be an underwriter under the federal securities laws. Such
a designation will not affect the fund's ability to invest in or dispose of
illiquid securities within the limits described above.

For purposes of determining concentration in an industry, the fund's policy
is to limit its investment in any one industry to no more than 25% of the value
of its assets.

Despite the general prohibition against lending money, the fund may purchase
qualified (publicly distributed bonds, debentures or other securities) debt
obligations, enter into repurchase agreements and lend its portfolio securities
consistent with the fund's investment objectives.

In order to change these investment policies and limitations, as well as the
investment objectives of the fund, which are designated as "fundamental
policies," the fund must obtain stockholder approval.

The fund also follows certain investment policies which can be changed
without stockholder approval. However, significant changes are discussed with
stockholders in fund reports. The fund adheres to applicable investment
restrictions and policies at the time it makes an investment. A later change in
circumstances will not require the sale of an investment if it was proper at the
time it was made.

PORTFOLIO TURNOVER

The fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances warrant,
the fund may purchase and sell securities without regard to the length of time
held. Due to the nature of the fund's investment program, the fund's annual
portfolio turnover rate can be expected to exceed 100%. Although the fund cannot
accurately predict its turnover rate for future years, it anticipates that its
annual portfolio turnover will not exceed 200%. A high turnover rate may
increase transaction costs and result in additional taxable gains. The fund
experienced a portfolio turnover rate of 17.89% for the period ended October 31,
1998.

THE YEAR 2000 PROCESSING ISSUE

Many computer programs use two digits rather than four to identify the year.
Unless adapted, these programs will not correctly handle the change from "99" to
"00" on January 1, 2000 and will not be able to perform necessary functions. The
Year 2000 issue affects virtually all companies and organizations, including
mutual funds and their investment advisers.

CCM is taking steps intended to ensure that its major computer systems are
capable of Year 2000 processing, including assessing, testing and modifying its
own systems and confirming that its and the fund's service providers are Year
2000 compliant. CCM is also preparing a contingency plan intended to ensure that
third party noncompliance will not materially affect the operations of CCM or
the fund.

Companies, organizations, governmental entities and markets in which the
fund invests will be affected by the Year 2000 issue, but at this time, we
cannot predict the degree of impact. To the extent the effect is negative, the
fund's returns could be adversely affected.

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FINANCIAL HIGHLIGHTS

TABLE 2 IS INTENDED TO HELP YOU UNDERSTAND THE FINANCIAL PERFORMANCE OF DEM
EQUITY FUND INVESTOR SHARES SINCE ITS COMMENCEMENT OF OPERATIONS. CERTAIN
INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE TOTAL RETURN
IN THE TABLE REPRESENTS THE RETURN THAT AN INVESTOR WOULD HAVE EARNED ON AN
INVESTMENT IN THE FUND (ASSUMING REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS).
THIS INFORMATION HAS BEEN AUDITED BY ERNST & YOUNG LLP, WHOSE REPORT, ALONG WITH
THE FUND'S FINANCIAL STATEMENTS, IS INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH
IS AVAILABLE UPON REQUEST.

TABLE 2 FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
APRIL 8,
1998(1)
THROUGH
OCTOBER 31,
1998
---------------
<S> <C>
INVESTOR
SHARES
---------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................................... $ 14.29
-------

LOSS FROM INVESTMENT OPERATIONS:
Net investment loss............................................................................ (.29)
Net realized and unrealized loss on investments................................................ (2.42)
-------
Total from investment operations............................................................... (2.71)
-------

DISTRIBUTIONS:
From net investment income..................................................................... 0
From net realized gains on investments......................................................... 0
-------
Total distributions............................................................................ 0
-------
Net asset value, end of period................................................................. $ 11.58
-------
-------
TOTAL RETURN(2).............................................................................. (18.96)%

RATIOS TO AVERAGE NET ASSETS:(3)
Expenses....................................................................................... 4.55%
Net investment loss............................................................................ (4.31)%
Expenses prior to voluntary expense waiver(4).................................................. 4.80%

SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted)........................................................ $ 45
Portfolio turnover rate........................................................................ 17.89%
</TABLE>

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

1 Commencement of operations.

2 Total Return represents the return that an investor would have earned on an
investment in the Fund (assuming investment in the Fund the first day of the
fiscal year, and reinvestment of all dividends and distributions). It
excludes the effect of sales load. This ratio has not been annualized.

3 Ratios have been annualized.

4 The Distributor has voluntarily agreed to waive the distribution fee to an
aggregate of .25% of average daily net assets, the first full fiscal year of
the Fund.

14
<PAGE>
(This page has been left intentionally blank.)

15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

A STATEMENT OF ADDITIONAL INFORMATION WHICH CONTAINS ADDITIONAL INFORMATION
ABOUT THE FUNDS HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND
IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. FURTHER INFORMATION ABOUT
MARKET CONDITIONS AND THE FUND'S INVESTMENT STRATEGIES THAT SIGNIFICANTLY
AFFECTED THE FUND DURING ITS LAST FISCAL YEAR IS AVAILABLE IN THE ANNUAL AND
SEMI-ANNUAL STOCKHOLDER REPORTS. TO OBTAIN FREE COPIES OF ANY OF THESE
DOCUMENTS, CALL (800) 752-1013. FOR STOCKHOLDER INQUIRIES, CALL THE CHAPMAN CO.
AT (800) 752-1013 OR FIRST DATA SERVICES, INC. AT (800) 441-6580.

FUND REPORTS AND STATEMENTS OF ADDITIONAL INFORMATION ARE ALSO AVAILABLE
FROM THE SECURITIES AND EXCHANGE COMMISSION BY CALLING (800) SEC-0330 OR BY
WRITING THE SEC'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20549-6009 (YOU
WILL BE CHARGED A DUPLICATING FEE); BY VISITING THE SEC'S PUBLIC REFERENCE ROOM;
OR BY CONSULTING THE SEC'S WEB SITE AT WWW.SEC.GOV.

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

<TABLE>
<S> <C>
THE
CHAPMAN
FUNDS
[LOGO] A MEMBER OF THE
CHAPMAN GROUP
OF COMPANIES
</TABLE>

WORLD TRADE CENTER--BALTIMORE
401 EAST PRATT STREET, 28(TH) FLOOR
BALTIMORE, MARYLAND 21202
(800) 752-1013

1940 ACT FILE NO. 811-5697

[LOGO]

DEM EQUITY FUND
INVESTOR SHARES

A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY

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

PROSPECTUS

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Filed Pursuant to
Rule 497(e)
File Nos.: 33-25716
811-5697

[LOGO]

March 2, 1999

DEM EQUITY FUND
INSTITUTIONAL SHARES

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE 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 DEM Profile(TM), DEM
Universe(TM), DEM Company(TM), and DEM Index(TM) are trademarks of Nathan A.
Chapman, Jr.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
CONTENTS

YOUR ACCOUNT.......................................................................... 5
Purchasing Shares................................................................... 5
Redeeming Shares.................................................................... 7
Keeping Your Account Open........................................................... 7
How and When Shares Are Priced...................................................... 7
How Your Purchase or Redemption Price is Determined................................. 7

DISTRIBUTIONS AND TAXES............................................................... 8
Dividends and Other Distributions................................................... 8
Tax Information..................................................................... 8

MANAGEMENT............................................................................ 9
The Investment Adviser.............................................................. 9
The Management Fee.................................................................. 9
Portfolio Management................................................................ 9
Distribution........................................................................ 9
Brokerage........................................................................... 10
Stockholder Services................................................................ 10
Custodian........................................................................... 10

INVESTMENT PROGRAM.................................................................... 10
Types of Portfolio Securities....................................................... 10
Types of Management Practices....................................................... 10
Other Investment Limitations........................................................ 11
The Year 2000 Processing Issue...................................................... 12

FINANCIAL HIGHLIGHTS.................................................................. 13
</TABLE>

2
<PAGE>
THE FUND--AN OVERVIEW

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES

THE DEM UNIVERSE

- At least 10% of the company's outstanding voting securities must be
beneficially owned by members of one or more of the listed groups, or

- At least one of the company's top three executive officers (Chairman,
Chief Executive Officer or President) must be a member of one or more of
the listed groups

PRINCIPAL RISKS

As with any growth-oriented mutual fund, the value of your investment will
fluctuate in response to stock market movements. Therefore, you may lose money.

- Be subject to more abrupt or erratic price movements

- Have limited products lines and lack established markets for products and
services

3
<PAGE>
- Have more limited financial resources

- Have less depth of management experience

FUND EXPENSES

TABLE 1
ANNUAL FUND OPERATING EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price)............................................................................ -0-%
Maximum Deferred Sales Charge (Load)................................................ -0-%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions..................................................................... -0-%
Redemption Fee...................................................................... -0-%

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee.................................................................... .90%
Distribution (12b-1) Fee.......................................................... .25%
Other Expenses.................................................................... 3.15%
Total Annual Fund Operating Expenses................................................ 4.30%
</TABLE>

Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front end sales charge.

EXAMPLE. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in the
fund with the cost of investing in other funds. Although your actual costs may
be higher or lower, the table shows expenses you would pay if operating expenses
remain the same, you invest $10,000, you earn a 5% annual return, and you hold
the investment for the following periods.

<TABLE>
<CAPTION>
INSTITUTIONAL
SHARES
-----------
<S> <C>
1 Year........................................................................... $ 432
3 Years.......................................................................... $ 1,304
5 Years.......................................................................... $ 2,188
10 Years......................................................................... $ 4,454
</TABLE>

4
<PAGE>
YOUR ACCOUNT

PURCHASING SHARES

You may purchase institutional shares of the fund only through institutions
such as broker-dealers, financial institutions, depository institutions,
retirement plans and other financial intermediaries that act as institutional
stockholders of record with respect to the fund. The fund may make institutional
shares available to other investors in the future. Each institution separately
determines the rules applicable to its customers that invest in institutional
shares including minimum initial and subsequent investment requirements, and the
procedures investors must follow to effect purchases, redemptions and exchanges
of institutional shares.

In order to invest in institutional shares in the fund, you must place an
order with an institution. The institution is then responsible for prompt
transmission of the order to the fund's transfer agent, as set forth below.

Institutions can purchase institutional shares directly from the fund by
mail, by telephone or by bank wire. There is no sales load in connection with
the purchase of institutional shares. The fund requires a minimum initial
investment in institutional shares of $25,000 with no minimum subsequent
investment; however the fund does not require a minimum initial investment of
qualified retirement plans. The fund reserves the right to vary the initial
investment minimum and minimums for subsequent investments at any time.

The following table presents some procedures institutions should know about
when investing in institutional shares.

BY MAIL

To make an initial investment, an institution should send the investment
shares application and its check (drawn on a U.S. bank and payable in U.S.
dollars) to:

DEM Equity Fund Institutional Shares
c/o First Data Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406

To make a subsequent investment in an existing account, an institution
should send the stub from its account statement and its check (drawn on a U.S.
bank and payable in U.S. dollars) to:

DEM Equity Fund Institutional Shares
c/o UMB Bank, N.A.
P.O. Box 412797
Kansas City, MO 64141-2797

Please make your check payable to DEM Equity Fund Institutional Shares.

BY WIRE

To make a same day wire investment, an institution should call (800)
441-6580 by 12 noon (Eastern Time).

5
<PAGE>
The following information will be required to open an account:

- Name and address for account registration

- Tax identification number

- Amount of wire transfer

- Name of bank

The institution should contact its bank with instructions to transmit funds
to:

UMB Bank, N.A.
ABA: #10-10-00695
For: First Data Services, Inc.
A/C: 98-7037-071-9
FBO: "DEM Equity Fund Institutional Shares"
Account of: ____________ (Name(s) of account registration)
Stockholder Account #: __________

The institution's bank may charge a wire fee.

To open a new account, an institution should mail its completed application
to The Chapman Funds, Inc.

BY EXCHANGE

To request an exchange of shares of one fund into shares of another DEM fund
offered by The Chapman Funds, Inc., an institution should call (800) 441-6580 or
send a written request to:

DEM Equity Fund Institutional Shares
c/o First Data Services, Inc.
3200 Horizon Drive
P.O. 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.

IMPORTANT INFORMATION ABOUT EXCHANGE PRIVILEGES

- If an institution exchanges shares of one fund for shares of another DEM
fund by telephone, the new shares will be registered in the same manner as
the shares for which they were exchanged.

- A fund may change or cancel exchange policies at any time, upon 60 days'
notice to the institutional stockholders and can terminate the telephone
exchange privilege at any time.

- An exchange of shares is treated like a sale of those shares; therefore,
an institution 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.

6
<PAGE>
REDEEMING SHARES

You may redeem your institutional shares at any time by contacting the
institution through which your institutional shares were purchased. Institutions
are responsible for the prompt transmission of redemption requests to First Data
Services, Inc. (the fund's transfer agent; First Data). Institutions can redeem
institutional shares at any time by mail, telephone or by wire instructions
(which must include the institution's name and account number.)

HOW YOU CAN RECEIVE PROCEEDS FROM A REDEMPTION

If First Data receives an institution's request by 4 p.m. (Eastern Time) in
correct form, proceeds are usually sent within one business day. Proceeds can be
sent to institutions by mail or by wire. There is a $9.00 charge for redemptions
by wire which is deducted from redemption proceeds.

Under certain circumstances and when deemed to be in the fund's best
interests, proceeds may not be sent for up to seven days after First Data
receives an institution's sale or exchange request.

If an institution redeems shares that have just been purchased and paid for
by check, First Data will process the redemption request but will generally
delay sending the proceeds for up to 15 days to allow the check to clear. This
hold does not apply to certified and cashier's checks.

REDEMPTIONS OVER $250,000

Large sales can adversely affect the ability of CCM to implement the fund's
investment strategy by causing the premature sale of securities that would
otherwise be held. If, in any 90-day period, an institution redeems more than
$250,000, or its sale amounts to more than 1% of fund net assets, the fund has
the right to pay the difference between the redemption amount and the lesser of
the two previously mentioned figures with securities from the fund's portfolio.

KEEPING AN ACCOUNT OPEN

Due to the relatively high cost to the fund of maintaining small accounts,
we ask institutions to maintain an account balance of at least $25,000. If an
account balance is below $25,000, we have the right to close the account after
giving the institution 60 days in which to increase the balance.

HOW AND WHEN SHARES ARE PRICED

The share price (also called "net asset value" or "NAV") for the fund is
generally calculated at 4 p.m. (Eastern Time) each day The New York Stock
Exchange is open for business. To calculate the NAV of the institutional shares,
the institutional shares' pro rata share of fund assets are valued and totaled,
the institutional shares' pro rata share of fund liabilities are subtracted, and
the balance, called net assets, is divided by the number of institutional shares
outstanding. In general, the fund's assets are valued at their market price.

HOW YOUR PURCHASE OR REDEMPTION PRICE IS DETERMINED

If First Data receives an institution's request to purchase, redeem or
exchange shares in the fund in the correct form by 4 p.m. (Eastern Time), your
transaction will be priced at that day's NAV. If First Data receives your
request after 4 p.m., your transactions will be priced at the next business
day's NAV.

7
<PAGE>
NOTE: THE TIME AT WHICH TRANSACTIONS AND SHARES ARE PRICED AND THE TIME
UNTIL WHICH ORDERS ARE ACCEPTED MAY BE CHANGED IN CASE OF AN EMERGENCY OR IF THE
NEW YORK STOCK EXCHANGE CLOSES AT A TIME OTHER THAN 4 P.M.

DISTRIBUTIONS AND TAXES

DIVIDENDS AND OTHER DISTRIBUTIONS

- Fund shares will earn dividends through the date of redemption.

TAX INFORMATION

You need to be aware of the possible tax consequences when:

- You redeem fund shares, including an exchange from one fund to another

- The fund makes a distribution to your account.

TAXES ON REDEMPTIONS

When you redeem shares in the fund, you may realize a gain or loss. An
exchange from the fund to another DEM fund is still a redemption for tax
purposes.

TAXES ON DISTRIBUTIONS

Distributions may be taxed as ordinary income or capital gains (which may be
taxable at different rates depending on the length of time the fund holds its
assets).

8
<PAGE>
MANAGEMENT

THE INVESTMENT ADVISER

- ALL DECISIONS REGARDING THE PURCHASE AND SALE OF THE FUND'S INVESTMENTS
ARE MADE BY CHAPMAN CAPITAL MANAGEMENT, INC.

CCM has been an investment adviser since 1988. CCM served as the investment
adviser of DEM, Inc., a closed-end company that invested in DEM securities, from
1995 until its dissolution in 1998 and currently serves as the investment
adviser for The Chapman US Treasury Money Fund, DEM Index Fund, DEM Fixed Income
Fund, and DEM Multi-Manager Equity Fund, four other series of The Chapman Funds,
Inc. DEM Index Fund and DEM Fixed Income Fund and DEM Multi-Manager Equity Fund
are not currently active. In addition, CCM serves as portfolio manager to
private accounts. As of January 31, 1999, CCM had approximately $613 million in
assets under management.

CCM provides investment advice to the fund and, in general, conducts the
management and investment programs of the fund in accordance with the fund's
investment objectives, policies and restrictions.

THE MANAGEMENT FEE

PORTFOLIO MANAGEMENT

Nathan A. Chapman, Jr., who has been the President of CCM since 1988, is
primarily responsible for the management of the fund's assets.

Mr. Chapman has served as President and Chairman of the Board of Directors
of The Chapman Funds, Inc. since its organization in 1988. In addition, Mr.
Chapman founded The Chapman Co. the fund's distributor, in 1987 and has been its
President since its inception. The Chapman Co. is a full-service brokerage and
investment banking firm. As Mr. Chapman is the President of a brokerage and
investment banking firm, he does not devote his full time to the management of
the fund's portfolio.

DISTRIBUTION

The Chapman Co., an affiliated broker-dealer of CCM and the fund,
distributes (sells) shares of the fund and all other DEM funds.

9
<PAGE>
BROKERAGE

STOCKHOLDER SERVICES

CUSTODIAN

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

INVESTMENT PROGRAM

TYPES OF PORTFOLIO SECURITIES

The fund may also invest up to 10% of its assets in private venture capital
funds, including United States limited partnerships or other investment funds
that themselves invest in illiquid securities. This 10% investment limitation is
part of the 15% investment limitation that applies to illiquid securities in
general.

TYPES OF MANAGEMENT PRACTICES

BORROWING MONEY AND PLEDGING ASSETS

10
<PAGE>
also borrow an additional 5% of its total assets without regard to the 33 1/3%
limitation for bank borrowings.

OPTIONS

Options may not always be successful hedges and their prices can be highly
volatile.

SECURITIES LENDING/REPURCHASE AGREEMENTS

OTHER INVESTMENT LIMITATIONS

The following paragraphs describe additional investment policies and
limitations to which the funds adhere.

In general, the fund will not:

- Issue senior securities

- Engage in the business of underwriting securities issued by other persons

- Concentrate investments in particular industries

- Engage in the purchase and sale of real estate or real estate
mortgage-backed securities

- Lend money

- Invest in foreign securities (including American Depository Receipts)

For purposes of determining concentration in an industry, the fund's policy
is to limit its investment in any one industry to no more than 25% of the value
of its assets.

11
<PAGE>
Despite the general prohibition against lending money, the fund may purchase
qualified (publicly distributed bonds, debentures or other securities) debt
obligations, enter into repurchase agreements and lend its portfolio securities
consistent with the fund's investment objectives.

PORTFOLIO TURNOVER

THE YEAR 2000 PROCESSING ISSUE

12
<PAGE>
FINANCIAL HIGHLIGHTS

TABLE 2 IS INTENDED TO HELP YOU UNDERSTAND THE FINANCIAL PERFORMANCE OF THE
DEM EQUITY FUND INSTITUTIONAL SHARES SINCE ITS COMMENCEMENT OF OPERATIONS.
CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE
TOTAL RETURN IN THE TABLE REPRESENTS THE RETURN THAT AN INVESTOR WOULD HAVE
EARNED ON AN INVESTMENT IN THE FUND (ASSUMING REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY ERNST & YOUNG LLP, WHOSE
REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS INCLUDED IN THE FUND'S
ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST.

TABLE 2 FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
APRIL 8,
1998(1)
THROUGH
OCTOBER 31,
1998
-------------
INSTITUTIONAL
SHARES
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 14.29
-------------

LOSS FROM INVESTMENT OPERATIONS:
Net investment loss........................................................ (.29)
Net realized and unrealized loss on investments............................ (2.42)
-------------
Total from investment operations........................................... (2.71)
-------------

DISTRIBUTIONS:
From net investment income................................................. 0
From net realized gains on investments..................................... 0
-------------
Total distributions........................................................ 0
-------------
Net asset value, end of period............................................. $ 11.58
-------------
-------------
TOTAL RETURN(2).......................................................... (18.96)%

RATIOS TO AVERAGE NET ASSETS:(3)
Expenses................................................................... 4.30%
Net investment loss........................................................ (4.06)%

SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted).................................... $ 8,107
Portfolio turnover rate.................................................... 17.89%
</TABLE>

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

1 Commencement of operations.

3 Ratios have been annualized.

13
<PAGE>
(This page has been left intentionally blank.)

14
<PAGE>
(This page has been left intentionally blank.)

15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
THE
CHAPMAN
FUNDS
[LOGO] A MEMBER OF THE
CHAPMAN GROUP
OF COMPANIES
</TABLE>

WORLD TRADE CENTER--BALTIMORE
401 EAST PRATT STREET, 28(TH) FLOOR
BALTIMORE, MARYLAND 21202
(800) 752-1013

1940 ACT FILE NO. 811-5697

[LOGO]

DEM EQUITY FUND
INSTITUTIONAL SHARES

A DOMESTIC EMERGING
MARKETS INVESTMENT
OPPORTUNITY

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

PROSPECTUS

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

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

STATEMENT OF ADDITIONAL INFORMATION

March 2, 1999

THE CHAPMAN FUNDS, INC.

DEM EQUITY FUND
INVESTOR SHARES
INSTITUTIONAL SHARES

World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656 or (800) 752-1013

This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by a fund prospectus
dated the same date as this Statement of Additional Information (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 Fund's distributor, The Chapman Co., World
Trade Center - Baltimore, 401 East Pratt Street, 28th Floor, Baltimore,
Maryland 21202, or calling (410) 625-9656 or (800) 752-1013.

CONTENTS

Investment Objective
and Policies B-2 Capital Stock B-26
Management B-11 Performance Information B-27
Purchase of Shares B-22 Counsel to the Company B-30
Redemption of Shares B-22 Independent Auditors B-30
Portfolio Transactions B-23 Financial Statements B-30
Taxation B-24

Domestic Emerging Markets -Registered Trademark- and DEM -Registered
Trademark- are registered trademarks and DEM profile -TM-, DEM Universe -TM-,
DEM Company -TM- and DEM Index -TM- are tradmarks of Nathan A. Chapman, Jr.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

DEM Equity Fund (the "Fund") is a series of The Chapman Funds, Inc., an
open-end management investment company, known as a "series fund" (the "Company";
the Fund and each other series of the Company are herein referred to as a
"Series"). The Fund is considered non-diversified under the Investment Company
Act of 1940 (the "1940 Act").

The Fund seeks aggressive long-term growth through capital appreciation
through investment in the Domestic Emerging Markets market segment that it
believes is positioned for growth.

The Domestic Emerging Markets (or "DEM") market segment consists of
companies that are controlled by African Americans, Asian Americans, Hispanic
Americans or women and that are located in the United States and its territories
("DEM companies").

Both capital appreciation and income will be considered in the selection of
investments, but primary emphasis will be on capital appreciation.

The Fund's principal investment objective of long-term growth through
capital appreciation through investment in equity securities of companies in the
Domestic Emerging Markets market segment is not a "fundamental policy" of the
Fund (as described below) and can therefore be changed by the Company's Board of
Directors without stockholder approval. Except for the matters specified under
"Investment Limitations" in the Prospectus and under "Fundamental Policies" in
this Statement of Additional Information, all matters described herein and in
the Prospectus are not fundamental and may be changed without the approval of
stockholders. Each of the Fund's fundamental polices may not be changed without
the approval of at least a majority of the outstanding shares of the Fund or, if
it is less, 67% of the shares represented at a meeting of stockholders at which
the holders of 50% or more of the shares are represented.

The following information supplements the discussion of the investment
policies of the Fund found in the Prospectus.

B-2
<PAGE>

INVESTMENT PROGRAM

Investments

Set forth below is additional information about certain of the investments
described in the Fund's Prospectus.

The Fund will seek to identify businesses that are DEM companies through
research conducted by Chapman Capital Management, Inc., the Fund's investment
adviser ("CCM"). Such research will include: requests to specific companies
for details of their ownership and management; independent research for the
details of specific companies; ownership, including company visits and checks
with government agencies for companies 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 companies; examination of companies that generally market
themselves as DEM companies; and review of annual reports and other regulatory
filings.

To achieve the Fund's investment objectives, the Fund invests in a wide
variety of types of portfolio companies and seeks to identify those companies
that are positioned for growth. Among other factors, CCM considers 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
flexibility to respond promptly to changes in market conditions and no minimum
percentage of the Fund's assets must be invested in DEM companies at any time.
Accordingly, during periods when CCM believes 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 the securities of non-DEM companies that
otherwise meet the Fund's investment objectives, or alternatively, the Fund may
hold 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 securities
of non-DEM companies that otherwise meet the Fund's investment objectives may or
may not involve less risk than DEM companies. Accordingly, to the extent that
the Fund adopts a temporary defensive posture in which it invests in non-DEM
companies, the Fund's investments will continue to present significant risks.
The decision to adopt a temporary defensive posture may be affected by such
factors as market conditions generally, CCM's 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

B-3
<PAGE>

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 this
offering.

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 of 1933, 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 CCM 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.

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>

PRIVATE FUNDS. As an alternative to direct investments in Illiquid
Securities, the Fund may invest up to 10% of its assets in private venture
capital funds including United States private limited partnerships or other
investment funds ("Private Funds") that themselves invest in Illiquid
Securities. Although investments in Private Funds offer the opportunity for
significant capital gains, these investments involve a high degree of business
and financial risk that can result in substantial losses in the portion of the
Fund's portfolio invested in these investments. Among these are the risks
associated with investment in companies in an early stage of development or with
little or no operating history, companies operating at a loss or with
substantial variation in operation results from period to period, companies with
the need for substantial additional capital to support expansion or to maintain
a competitive position, or companies with significant financial leverage. Such
companies may also face intense competition from others including those with
greater financial resources or more extensive development, manufacturing,
distribution or other attributes, over which the Fund will have no control.

Interests in the Private Funds in which the Fund may invest will be subject
to substantial restrictions on transfer and, in some instances, may be
non-transferable for a period of years. Private Funds may participate in only a
limited number of investments and, as a consequence, the return of a particular
Private Fund may be substantially adversely affected by the unfavorable
performance of even a single investment. Certain of the Private Funds in which
the Fund may invest may pay their investment managers a fee based on the
performance of the Private Fund, which may create an incentive for the manager
to make investments that are riskier or more speculative than would be the case
if the manager was paid a fixed fee. Private Funds are not registered under the
1940 Act and, consequently, are not subject to the restrictions on affiliated
transactions and other protections applicable to regulated investment companies.
The valuation of companies held by Private Funds, the securities of which are
generally unlisted and illiquid, may be very difficult and will often depend on
the subjective valuation of the managers of the Private Funds, which may prove
to be inaccurate. Inaccurate valuations of a Private Fund's portfolio holdings
may affect the Fund's net asset value calculations.

To the extent that these Private Funds are investment companies for
purposes of the 1940 Act, the Fund's ability to invest in them will be limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of total assets with respect to any one investment
company and, (iii) 10% of the Fund's total assets in the aggregate. The
securities of Private Funds will typically themselves be classified as Illiquid
Securities by the Board of Directors. Accordingly, the Fund's total investment
in Illiquid Securities, including Private Funds, is limited to 15%

B-5
<PAGE>

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

OPTIONS TRANSACTIONS. The Fund may invest up to 15% of its total assets,
represented by the premium paid, in the purchase of call and put options in
respect of specific securities in which the Fund may invest. The Funds may
write covered call and put option contracts to the extent of 15% of the value of
its net assets at the time such option contracts are written. The principal
reason for the Fund writing covered call options is to realize, through the
receipt of premiums, a greater return than would be realized on its portfolio
securities alone. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains the risk of
a decline in the price of the underlying security. Similarly, the principal
reason for writing covered put options is to realize income in the form of
premiums. The writer of a covered put option accepts the risk of a decline in
the price of the underlying security. The size of the premiums that the Fund
may receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.

Options written 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 CCM 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 CCM
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
CCM 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

B-6
<PAGE>

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 CCM believes there is an active secondary
market so as to facilitate closing transactions. There is no assurance that
sufficient trading interest to create a liquid secondary market on a securities
exchange will exist for any particular option or at any particular time, and for
some options no such secondary market may exist. A liquid secondary market in
an option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, at times have rendered certain clearing facilities inadequate
and resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.

The Fund intends to treat options in respect of specific securities that
are not traded on a national securities exchange or the Nasdaq National Market
and the securities underlying covered call options written by the Fund as
Illiquid Securities subject to the Fund's investment limitation on Illiquid
Securities.

REPURCHASE AGREEMENTS AND 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 CCM 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."

B-7
<PAGE>

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 CCM, such techniques can be expected to yield a higher
investment return than other investment options.

The Fund may enter into repurchase agreements pertaining to the securities
in which it may invest with securities dealers or member banks of the Federal
Reserve System. A repurchase agreement arises when a buyer such as the Fund
purchases a security and simultaneously agrees to resell it to the vendor at an
agreed-upon future date, normally one day or a few days later. The resale price
is greater than the purchase price, reflecting an agreed-upon interest rate
which is effective for the period of time the buyer's money is invested in the
security and which is related to the current market rate rather than the coupon
rate on the purchased security. Such agreements permit the Fund to keep all of
its assets at work while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. The Fund requires continual maintenance by
its custodian for its account in the Federal Reserve/Treasury Book Entry System
of collateral in an amount equal to, or in excess of, the resale price. In the
event a vendor defaulted on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. In the event of a vendor's bankruptcy, the Fund
might be delayed in, or prevented from, selling the collateral for the Fund's
benefit. The Board of Directors has established procedures, which it
periodically reviews, pursuant to which CCM monitors the creditworthiness of the
dealers and banks with which the Fund enters into repurchase agreement
transactions.

B-8
<PAGE>

FUNDAMENTAL POLICIES

The following investment restrictions are fundamental and cannot be changed
without the approval of holders of at least a majority of the outstanding shares
of the Fund or, if it is less, 67% of the shares represented at a meeting of
stockholders at which the holders of 50% or more of the shares are represented.
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 331/3% 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 331/3%
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) above for bank borrowings; and (iii) the Fund may
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.

(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
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,

B-9
<PAGE>

the entry into repurchase agreements and loans of portfolio securities
consistent with the Fund's investment objectives and policies.

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

OTHER INVESTMENT POLICIES

The policy of the Fund is not to invest its funds for the purpose of
purchasing working control in companies except when and if, in the judgment of
CCM, 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 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 experienced a
portfolio turnover rate of 17.89% for the period ended October 31, 1998.
Although the Fund cannot accurately predict its turnover rate for future years,
it anticipates that its annual portfolio turnover will not exceed 200%.

B-10
<PAGE>

MANAGEMENT

BOARD OF DIRECTORS

The Fund is managed by the Company's Board of Directors. All of the
directors are members of minority groups. The Board of Directors approves all
significant agreements between the Fund and other Series of the Company and
between the Fund and persons who furnish services to the Fund, including the
Fund's agreements with CCM and The Chapman Co., the Fund's distributor. The
Board of Directors delegates to the Company's officers and CCM responsibility
for day-to-day operations of the Fund. All of the officers of the Company are
directors, officers or employees of CCM or The Chapman Co.

The directors and officers of the Company are listed below. Directors
deemed to be "interested persons" of the Company for purposes of the 1940 Act
are indicated by asterisk.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
POSITION HELD WITH THE PRINCIPAL OCCUPATION(s)
NAME AND ADDRESS AGE COMPANY DURING PAST 5 YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nathan A. Chapman, Jr.* 41 President, Director and President and Director
World Trade Center - Baltimore Chairman of the Board since 1986 of The Chapman
401 East Pratt Street, 28th Floor Co. President and Director
Baltimore, Maryland 21202 since 1988 of Chapman
Capital Management, Inc.
President and Director of
Chapman Holdings, Inc.
since 1997. President and
Director of Chapman Capital
Management Holdings, Inc.
since 1998.

- -----------------------------------------------------------------------------------------------------
Dr. Glenda Glover 45 Director Dean of School of Business,
World Trade Center - Baltimore Jackson State University
401 East Pratt Street, 28th Floor since 1994. Chairperson of
Baltimore, Maryland 21202 Accounting Department,
Howard University from 1990
through 1994.

- -----------------------------------------------------------------------------------------------------
Dr. Benjamin Hooks* 73 Director Senior Vice President of
World Trade Center - Baltimore The Chapman Co. since 1993.
401 East Pratt Street, 28th Floor Executive Director of the
Baltimore, Maryland 21202 NAACP from 1977 to 1993.

- -----------------------------------------------------------------------------------------------------
James B. Lewis 51 Director City Administrator, City of
World Trade Center - Baltimore Rio Rancho, NM since March
401 East Pratt Street, 28th Floor 1996. Chief Clerk-

B-11
<PAGE>
- -----------------------------------------------------------------------------------------------------
POSITION HELD WITH THE PRINCIPAL OCCUPATION(s)
NAME AND ADDRESS AGE COMPANY DURING PAST 5 YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Baltimore, Maryland 21202 State Corporation Commission
of New Mexico from 1995 to
1996. Chief of Staff,
Office of the Governor of
New Mexico from 1991 to
1995.

- -----------------------------------------------------------------------------------------------------
Wilfred Marshall 63 Director Principal, Marshall
World Trade Center - Baltimore Enterprises since 1994.
401 East Pratt Street, 28th Floor Director, Mayor's Office of
Baltimore, Maryland 21202 Small Business Assistance -
City of Los Angeles 1981 to
1994.

- -----------------------------------------------------------------------------------------------------
David Rivers 55 Director Director of Community
World Trade Center - Baltimore Development Medical
401 East Pratt Street, 28th Floor University of South
Baltimore, Maryland 21202 Carolina Environmental
Hazards Assessment Program
since 1994; President,
Research Planning and
Management from 1991 to
1994.
- -----------------------------------------------------------------------------------------------------
Lottie H. Shackelford * 57 Director Executive Vice President of
World Trade Center - Baltimore Global USA since 1994. City
401 East Pratt Street, 28th Floor Director of Little Rock,
Baltimore, Maryland 21202 Arkansas, 1978 to 1992.
Director of Chapman
Holdings, Inc. since 1998.

- -----------------------------------------------------------------------------------------------------
Ronald A. White 49 Director Senior Partner, Ronald A.
World Trade Center - Baltimore White, P.C., since 1982.
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21201

B-12
<PAGE>

- -----------------------------------------------------------------------------------------------------
POSITION HELD WITH THE PRINCIPAL OCCUPATION(s)
NAME AND ADDRESS AGE COMPANY DURING PAST 5 YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earl U. Bravo, Sr. 51 Secretary and Assistant Secretary and Assistant
World Trade Center - Baltimore Treasurer Treasurer since 1997 of The
401 East Pratt Street, 28th Floor Chapman Co. Senior Vice
Baltimore, Maryland 21202 President, Secretary,
Assistant Treasurer and
Director of Chapman
Holdings, Inc. since 1997.
Vice President, Secretary,
Assistant Treasurer and
Director of Chapman Capital
Management Holdings, Inc.
since 1998. Mr. Bravo has
been employed in various
senior executive positions
with The Chapman Co. and
Chapman Capital Management,
Inc. since 1990

- -----------------------------------------------------------------------------------------------------
M. Lynn Ballard 56 Treasurer and Assistant Treasurer and Assistant
World Trade Center - Baltimore Secretary Secretary since 1997 of The
401 East Pratt Street, 28th Floor Chapman Co. Treasurer and
Baltimore, Maryland 21202 Assistant Secretary of
Chapman Holdings, Inc.
since 1997 and Chapman
Capital Management
Holdings, Inc. since 1998.
Ms. Ballard has been
employed as a senior
financial executive of The
Chapman Co. and Chapman
Capital Management, Inc.
since 1990.
- -----------------------------------------------------------------------------------------------------
</TABLE>

The Company pays directors who are not officers of the Company a fee of
$1,000 for each Board of Directors meeting attended and reimburses each such
director for all out-of-pocket expenses relating to the attendance at meetings.
Officers of the Company do not receive compensation from the Company.

B-13
<PAGE>

COMPENSATION TABLE--FISCAL YEAR 1998

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL
COMPENSATION
RETIREMENT OR FROM COMPANY
AGGREGATE PENSION BENEFITS ESTIMATED AND FUND
COMPENSATION ACCRUED AS PART ANNUAL COMPLEX (2
NAME OF PERSON/ FROM OF COMPANY BENEFITS UPON COMPANIES) PAID
POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr. None None None None
President, Director,
Chairman of the Board

- -------------------------------------------------------------------------------------------------
Dr. Glenda Glover $1,000 None None $6,000
Director

- -------------------------------------------------------------------------------------------------
Dr. Benjamin Hooks $4,000 None None $9,000
Director

- -------------------------------------------------------------------------------------------------
James Lewis $4,000 None None $9,000
Director

- -------------------------------------------------------------------------------------------------
Wilfred Marshall $4,000 None None $4,000
Director

- -------------------------------------------------------------------------------------------------
Lottie Shackelford $4,000 None None $9,000
Director

- -------------------------------------------------------------------------------------------------
Ronald A. White $3,000 None None $6,000
Director

- -------------------------------------------------------------------------------------------------
David Rivers $4,000 None None $4,000
Director
- -------------------------------------------------------------------------------------------------
</TABLE>

Under the Company's charter and Maryland law, directors and officers of the
Company are not liable to the Company or its stockholders except for receipt of
an improper personal benefit or active and deliberate dishonesty. The Company's
charter requires that it indemnify its directors and officers against
liabilities unless it is proven that a director or officer acted in bad faith or
with active and deliberate dishonesty or received an improper personal benefit.
These provisions are subject to the limitation under the 1940 Act that no
director or officer may be protected against liability to the Company for
willful misfeasance, bad faith, gross negligence or reckless disregard for the
duties of his office.

For so long as the Distribution Agreement remains in effect, the Directors
of the Company who are not "interested persons" of the Company,

B-14
<PAGE>

as defined in the 1940 Act, will be selected and nominated by the Directors who
are not "interested persons" of the Company.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

The following table sets forth, to the Company's knowledge, the name,
address and percentage of the outstanding shares of the Fund owned
beneficially by each person who owned beneficially 5% or more of the
outstanding shares of the Fund as of January 31, 1999 and the ownership of
all directors and executive officers of the Company as a group.

- --------------------------------------------------------------------------------
NAME OF BENEFICIAL OWNER ADDRESS %

- --------------------------------------------------------------------------------
Chrysler Master Trust c/o Chrysler Corporation 99%
1000 Chrysler Dr.
Auburn Hills, MI 48326-2766
- --------------------------------------------------------------------------------

Because the Chrysler Master Trust owns 99.45% 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.

As of January 31, 1999, the officers and directors of the Company as a
group owned less than 1% of the issued and outstanding capital stock of the
Fund.

THE INVESTMENT ADVISER

CCM has been retained under an advisory and administrative services
agreement to provide investment advice and, in general, to conduct the
management and investment program of the Fund in accordance with the Fund's
investment objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. CCM was established in 1988 and is
located at the World Trade Center - Baltimore, 401 East Pratt Street, 28th
Floor, Baltimore, Maryland 21202.

CCM is a wholly-owned subsidiary of Chapman Capital Management Holdings,
Inc., which is structured as a holding company of CCM. 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 CCM.

The table below sets forth the names of affiliated persons of the Company
who are also affiliated persons of CCM:

- --------------------------------------------------------------------------------
NAME AND
PRINCIPAL BUSINESS
ADDRESS POSITION WITH CCM POSITION WITH COMPANY
- --------------------------------------------------------------------------------

Nathan A. Chapman, Jr. President and Director President, Director and
401 E. Pratt St. Chairman of the Board
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

Earl U. Bravo, Sr. Secretary and Assistant Secretary and Assistant
401 E. Pratt St. Treasurer Treasurer
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

M. Lynn Ballard Treasurer and Assistant Treasurer and Assistant
401 E. Pratt Street Secretary Secretary
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

CCM has sole investment discretion for the Fund and makes all decisions
affecting assets in the Fund's portfolio under the supervision of the Company's
Board of Directors and in accordance with the Fund's stated policies. CCM
selects investments for the Fund and places purchase and sale orders on behalf
of the Fund. CCM receives from the Fund an advisory fee at

B-15
<PAGE>

an annual rate of .90% of the Fund's average weekly net assets and an
administration fee of .15% of the Fund's average weekly net assets. Both
fees are billed weekly and paid monthly. For the fiscal year ended October 31,
1998 CCM received management and administrative fees of $44,721 and
7,453, respectively, from the Fund.

In connection with the provision of advisory services, CCM will obtain and
provide investment research and will supervise each Fund's investments each
conduct a continuous program of investment, evaluation and, if appropriate, sale
and reinvestment of the Funds' assets. CCM 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. CCM will furnish to
the Company such statistical information with respect to the investments which
the Fund may hold or contemplate purchasing as the Company may reasonably
request. Further, CCM will supply office facilities, data processing services,
clerical, accounting and bookkeeping services, internal auditing services,
executive and other administrative services; provide stationery and office
supplies; prepare reports to the Fund's stockholders, tax returns and reports to
and filings with the SEC and state Blue Sky authorities; calculate the net asset
value of each Fund's shares; provide persons to serve as the Company's officers
and generally assist in all aspects of the Company's operations. CCM will pay
for its own costs in providing the above listed services.

B-16
<PAGE>

DISTRIBUTOR AND PRINCIPAL UNDERWRITER

The Chapman Co., the Fund's distributor, is a registered broker-dealer
and member of the NASD. The Chapman Co. is located at World Trade
Center-Baltimore, 28th Floor, Baltimore, Maryland 21202. 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 offering of the Fund's shares is continuous.

The Chapman Co. acts as exclusive underwriter to the Fund on a best efforts
basis.

INVESTOR SHARES

The Chapman Co. 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"). The Chapman Co. 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 Chapman Co. has agreed to continue to
voluntarily limited such fee during fiscal year 1999 to an aggregate of .50% of
average daily net assets; however, there can be no assurance that The Chapman
Co. will continue to voluntarily limit the amount of such fee in the future.

The Chapman Co. will be paid fees under the Investor Shares Distribution
Plan to compensate The Chapman Co. or enable The Chapman Co. 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,

B-17
<PAGE>

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 Chapman Co. is expressly authorized (i) to make, or cause to be made,
payments reflecting an allocation of overhead and other office expenses related
to providing Services; (ii) to make, or cause to be made, payments, or to
provide for the reimbursement of expenses of, persons who provide support
services in connection with the distribution of the Investor Shares including,
but not limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding the Fund, and providing any other Service; and (iii)
to make, or cause to be made, payments to compensate selected dealers or other
authorized persons for providing any Services. Administrative Services may
include, but are not limited to, (i) responding to inquiries of prospective
investors regarding the Fund; (ii) services to 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 Chapman Co. or
any Service Provider, and the payments may exceed expenses actually incurred by
The Chapman Co. and/or a Service Provider. Furthermore, any portion of any fee
paid to The Chapman Co. or to any of its affiliates by the Fund or any of their
past profits or other revenue may be used in their sole discretion to provide
services to holders of Investor Shares or to foster distribution of the Investor
Shares.

INSTITUTIONAL SHARES

The Chapman Co. 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 Chapman Co. receives a fee
under the Institutional Shares Distribution Plan for stockholder administrative
and distribution services at an annual rate of up

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<PAGE>

to a total of .25% of the average daily net assets of the Fund attributable to
the Institutional Shares.

The Chapman Co. will be paid fees under the Institutional Shares
Distribution Plan to compensate The Chapman Co. or enable The Chapman Co. to
compensate other persons, including any other distributor of the Institutional
Shares or institutional stockholders of record of the Institutional Shares,
including but not limited to retirement plans, broker-dealers, depository
institutions, and other financial intermediaries ("Institutions"), who own
Institutional Shares on behalf of their customers, clients or (in the case of
retirement plans) participants ("Customers") and companies providing certain
services to Customers (collectively with Institutions, "Service 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 Chapman Co. with respect to Selling Services
will compensate The Chapman Co., or allow The Chapman Co. to compensate Service
Organizations, to cover certain expenses primarily intended to result in the
sale of the Institutional Shares, including, but not limited to: (i) costs of
payments made to employees that engage in the distribution of the Institutional
Shares; (ii) payments made to, and expenses of, persons who provide support
services in connection with the distribution of the Institutional Shares,
including, but not limited to, office space and equipment, telephone facilities,
processing stockholder transactions and providing any other stockholder services
not otherwise provided by the Fund's transfer agent; (iii) costs relating to the
formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (iv) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Fund to prospective holders of the Institutional Shares; (v) costs involved
in preparing, printing and distributing sales literature pertaining to the Fund
and (vi) costs involved in obtaining whatever information, analyses and reports
with respect to marketing and promotional activities that the Fund may, from
time to time, deem advisable.

The annual fee paid to The Chapman Co. with respect to Stockholder Services
will compensate The Chapman Co., or allow The Chapman Co. to compensate Service
Organizations, for personal service and/or the maintenance of Customer accounts,
including but not limited to (i) responding to Customer inquiries, (ii)
providing information on Customer investments and (iii) providing other
stockholder liaison services and for administrative and accounting services to
Customers, including, but not

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<PAGE>

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 Chapman Co. or any
Service Organization, and the payments may exceed expenses actually incurred by
The Chapman Co. or any Service Organization. Furthermore, any portion of any
fee paid to The Chapman Co. or to any of its affiliates by the Fund or any of
their past profits or other revenue may be used in their sole discretion to
provide services to stockholders of the Fund or to foster distribution of the
Institutional Shares.

GENERAL INFORMATION

Pursuant to the Distribution Plans, The Chapman Co. 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 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.

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<PAGE>

Listed below are persons affiliated with both the Funds and The Chapman Co.

- --------------------------------------------------------------------------------
NAME AND
PRINCIPAL BUSINESS POSITION WITH THE
ADDRESS CHAPMAN CO. POSITION WITH COMPANY
- --------------------------------------------------------------------------------

Nathan A. Chapman, Jr. President and Director President, Director and
The Chapman Co. Chairman of the Board
401 E. Pratt St.
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

Earl U. Bravo, Sr. Secretary and Assistant Secretary and Assistant
The Chapman Co. Treasurer Treasurer
401 E. Pratt St.
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

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

Lottie Shackelford Control Person Director
The Chapman Co.
401 E. Pratt Street
28th Floor
Baltimore, MD 21202
- --------------------------------------------------------------------------------

CUSTODIAN

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian of the Fund. Under the Custody Agreement, the Bank has agreed to:
(i) maintain a separate account or accounts in the name of the Fund; (ii)
receive, hold and deliver portfolio securities for the account of the Fund;
(iii) collect and receive all income and other payments and distributions on
account of the Fund's portfolio securities; (iv) disburse funds to purchase
portfolio securities, pay dividends and expenses and for other corporate
purposes; and (v) make periodic reports to the Board of Directors concerning the
Fund's operations.

TRANSFER AND DIVIDEND PAYING AGENT/ACCOUNTING AGENT

First Data Services, Inc., 3200 Horizon Drive, PO Box 61503, King of
Prussia, Pennsylvania 19406, (800) 441-6580, serves as transfer and dividend

B-21
<PAGE>

paying agent and accounting agent for the Fund's shares pursuant to an
Investment Company Services Agreement.

PURCHASE OF SHARES
(APPLICABLE TO INVESTOR SHARES ONLY)

The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "Purchasing 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 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:

- --------------------------------------------------------------------------------
Net Asset Value per Share $14.29
- --------------------------------------------------------------------------------
Per Share Sales Charge--4.75% of
offering price $.71
- --------------------------------------------------------------------------------
Per Share Offering Price to the Public $15.00
- --------------------------------------------------------------------------------

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

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<PAGE>

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

CCM is responsible for decisions to buy or sell securities and the
selection of broker-dealers for the Fund subject to policies adopted by the
Company's Board of Directors. Portfolio securities may be purchased directly
from the issuer or from a dealer serving as market maker or may be purchased in
broker's transactions. If securities are sold prior to maturity, they may be
sold directly to an issuer or dealer or in broker's transactions. When
securities are purchased or sold directly from or to an issuer, no commissions
or discounts are paid. The price paid to or received from a dealer for a
security may include a spread between bid and asked prices. When securities are
purchased or sold in a broker's transaction, a commission will be paid.

The Company's policy for placing orders for purchases and sales of
securities for the Fund is to give primary consideration to obtaining the most
favorable price and efficient execution of transactions. Sales of Fund shares
is not a factor in allocating portfolio transactions.

The Chapman Co. may effect brokerage transactions for the Fund when it is
able to provide a net price and execution at least as favorable to the Fund as
those determined to be available from unaffiliated brokers or dealers. The
commissions paid to The Chapman Co. on transactions for the Fund may not exceed
those charged by The Chapman Co. 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 Chapman Co. report each
transaction to the Fund and that the Board of Directors determine at least
quarterly that all transactions effected by The Chapman Co. have been effected
in accordance with the procedures.

When comparable price and execution can be obtained from more than one
broker or dealer, consideration may be given to placing portfolio transactions
with those brokers or dealers who also furnish research and other services to
the Fund or CCM. 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 CCM
in the management of accounts of other clients and

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<PAGE>

may not benefit the Fund directly. While such services are useful and important
in supplementing its own research, CCM believes the value of such services is
not determinable and does not significantly reduce its expenses. The fees
payable to CCM will not be reduced by the value of such services.

CCM and its affiliates deal, trade and invest for their own accounts in the
types of securities in which the Fund may invest and may have relationships with
the issuers of securities purchased by the Fund.

Investment decisions for the Fund are made independently from those for
other accounts advised by CCM.

CCM's other accounts may also invest in the same securities as the Fund.
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Fund and another account, the transaction will be averaged
as to price, and available instruments allocated as to amount, in a manner
believed to be equitable to the Fund and the other account. In some instances,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or sold by the Fund. To the extent permitted
by law, the securities to be sold or purchased for the Fund may be aggregated
with those to be sold or purchased for the other accounts in order to obtain
best execution.

During the year ended October 31, 1998, the Fund paid a total of $20,825 in
brokerage commissions, of which brokerage commissions paid to The Chapman Co.
represented $20,825, or 100%. Transactions effected through The Chapman Co.
represented 100% of the transactions involving the payment of commissions.

TAXATION

The following discussion reflects certain applicable tax laws as of the
date of this Statement of Additional Information.

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 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, 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,

B-24
<PAGE>

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. 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.

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. Unused 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.

B-25
<PAGE>

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.

CAPITAL STOCK

The Company is an open-end management investment company, known 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. The Company was incorporated under the laws of the State of
Maryland on November 22, 1988.

The Company's charter authorizes the Board of Directors to issue 10 billion
full and fractional shares of common stock, par value, $.001 per share, of which
one billion are designated DEM Equity Fund, Investor Class Shares and one
billion are designated DEM Equity Fund, Institutional Class Shares.

B-26
<PAGE>

The Board has the power to classify and reclassify any unissued shares of
the Company into one or more additional classes by setting or changing in any
one or more respects their relative rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. The Board of Directors may similarly classify or reclassify any
class of its shares into one or more series and, without stockholder approval,
may increase the number of authorized shares of the Company. All shares of the
Funds, when issued, will be fully paid and nonassessable.

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.

Stockholders are entitled to one vote for each full share held and a
fractional vote for fractional shares held.

Each share of a Fund is entitled to such dividends and distributions out of
the assets belonging to that Fund as are declared in the discretion of the
Company's Board of Directors. In determining a Fund's net asset value, each
Fund is charged with the direct expenses of that 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 Funds at the time of
allocation.

In the event of the liquidation or dissolution of the Company, shares of a
Fund are entitled to receive the assets attributable to that 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.

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

B-27
<PAGE>

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 CCM that are controlled by
African Americans, Asian Americans, Hispanic/Latino Americans or women. The DEM
Index was created by CCM and is comprised of 30 companies from the DEM Universe
that reflect the market capitalization and industry classification
characteristics of the DEM Universe. The DEM Index is weighted by market
capitalization and is intended as a performance measure of the DEM Universe.
The small company stock returns quoted by Ibbotson Associates are based upon the
smallest quintile of the 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

B-28
<PAGE>

average annual returns with appropriate sales charge adjustments and a risk
factor that 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, 10 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.

The performance of the Institutional Shares will normally be higher than
the Investor Shares because of the sales charge (when applicable) and additional
expenses charged to the Investor Shares.

For the period from inception (April 8, 1998) to October 31, 1998, the
total return of the Investor Shares was (18.96)% and the total return of the
Institutional Shares was (18.96)%.

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<PAGE>

COUNSEL TO THE COMPANY

Venable, Baetjer and Howard, LLP, Baltimore, Maryland is counsel to the
Company. Venable, Baetjer and Howard, LLP also acts as counsel to CCM and The
Chapman Co.

INDEPENDENT AUDITORS

Ernst & Young LLP, Two Commerce Square, Suite 4000, 2001 Market Street,
Philadelphia, PA 19103, serves as the Company's independent auditors. Ernst &
Young LLP will provide audit services, tax advice and assistance in connection
with filings with the SEC.

FINANCIAL STATEMENTS

The financial statements of the Company for the year ended October 31, 1998
and the Report of Ernst & Young LLP Independent Auditors, are set forth in the
Company's 1998 Annual Report to stockholders and are incorporated herein by
reference. Also see financial highlights in the Company's Prospectus. To
request a copy of the Company's financial statements, at no charge, contact the
administrator at Chapman Capital Management, Inc. at (800) 752-1013, or write
Chapman Capital Management, Inc., Attn.: Administrator, 401 East Pratt Street,
28th Floor, Baltimore, Maryland 21202.

B-30