DEM, INC.
February 29, 1996
Dear Shareholders:
I am pleased to submit this first annual report to
shareholders. We are confident that DEM, Inc. represents a
new frontier in investing, which the market will find as
exciting as we do.
Thank you for your continued support.
Sincerely,
/s/ NATHAN A. CHAPMAN, JR.
Nathan A. Chapman, Jr.,
President
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DEM, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
ARTHUR ANDERSON LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DEM, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the statement of portfolio
investments, of DEM, Inc. (a Maryland corporation), as of
December 31, 1995, and the related statements of operations,
changes in net assets and financial highlights from
inception (November 30, 1995) through December 31, 1995.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities and
portfolio investments referred to above presents fairly, in
all material respects, the financial position of DEM, Inc.
as of December 31, 1995, and the results of its operations,
changes in net assets and financial highlights from
inception (November 30, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles.
Baltimore, Maryland, /s/ ARTHUR ANDERSEN
LLP
February 16, 1996
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<TABLE>
<CAPTION>
DEM, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 2) $4,812,
175
Deferred organizational costs (Note 2) 49,675
Interest receivable 2,431
Total assets 4,864,2
81
LIABILITIES:
Accrued expenses (Note 2) 121,481
NET ASSETS - equivalent to $13.77 per share
on 344,417 $4,742,
shares of common stock outstanding 800
SUMMARY OF SHAREHOLDERS' EQUITY (Note 4):
Common stock, $.00001 par value,
500,000,000 shares $ 3
authorized, 344,417 shares issued and
outstanding
Additional paid-in capital 4,740,9
12
Undistributed net investment income 1,885
Net assets applicable to outstanding $4,742,
common stock 800
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
<TABLE>
<CAPTION>
DEM, INC.
STATEMENT OF OPERATIONS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
<S> <C> <C>
INVESTMENT INCOME:
Interest income (Note 2) $ 2,431
EXPENSES:
Administrative, management and investment
advisory 546
expenses (Notes 2 and 3)
Net investment income and net increase
in net $
assets resulting from operations 1,885
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
<TABLE>
<CAPTION>
DEM, INC.
STATEMENT OF CHANGES IN NET ASSETS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
<S> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net investment income (Note 2) $
1,885
Net increase in net assets resulting 1,885
from operations
CAPITAL SHARE TRANSACTIONS:
Common shares issued, net of issuance 4,740,9
costs (Note 4) 15
Net increase in net assets resulting
from capital 4,740,9
shares transactions 15
TOTAL INCREASE IN NET ASSETS 4,742,8
00
NET ASSETS, beginning of the period -
NET ASSETS, end of the period $4,742,
800
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
DEM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION:
DEM, Inc. (the Company) was incorporated on October 20,
1995, in the State of Maryland and is registered as a
nondiversified close-ended management investment company
under the Investment Company Act of 1940, as amended. As of
December 31, 1995, the Company's only operations were the
issuance of 344,417 shares of common stock, with the
proceeds being invested in a mutual fund.
The principal investment objective of the Company is long-
term growth through capital appreciation. Both capital
appreciation and income will be considered in the selection
of investments, but primary emphasis will be on capital
appreciation. The Company will retain maximum flexibility
as to the types of investments it may make and it will be
permitted to invest in portfolio companies with large and
small market capitalizations. The Company, however, intends
to seek to invest a substantial portion of its assets in
securities of domestic emerging companies with smaller
market capitalizations. There can be no assurance that the
Company's objectives will be achieved. The Company's
investment objectives and policies may be changed by the
Board of Directors without the approval of shareholders.
Most of the Company's investments are expected to be in
marketable common stocks or marketable securities
convertible into common stock traded on an exchange or in
the over-the-counter markets.
While the primary objective of the Company is to seek long-
term growth through capital appreciation, the Company may
invest its assets in income producing securities such as non-
convertible preferred stock, bonds, debentures, notes and
other similar securities, if the Investment Adviser deems
such investments advisable.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 1995, consist
of funds invested in the Fidelity Institutional U.S.
Government Cash Portfolio II, stated at cost which is
market.
Deferred Organizational Costs
Costs incurred to organize the Company totaling $49,675 have
been deferred and will be amortized on a straight-line basis
over a five-year period. As the Company completed its share
transactions on December 28, 1995, amortization of the
organizational costs will begin on January 1, 1996.
If any of the initial shares of the Company are redeemed by
any shareholder during the period organizational costs are
being amortized, the redemption proceeds will be reduced by
the pro-rata amount of the unamortized organizational costs,
based on the number of initial shares being redeemed to the
number of initial shares outstanding.
Accrued Expenses
Accrued expenses includes $16,306 payable to Chapman Capital
Management, Inc. and $45,000 payable to an officer of the
Company for costs paid on behalf of the Company, and $546
due to Chapman Capital Management for administrative and
investment advisory expenses.
Interest Income
Interest income is recorded on the accrual basis to the
extent that such amounts will be collected.
Income Taxes
The Company intends to elect and qualify each year to be
treated as a regulated investment company (a RIC) for
Federal income tax purposes in accordance with Subchapter M
of the Internal Revenue Code of 1986, as amended. In order
to so qualify, the Company must satisfy certain tests
regarding the source of its income, diversification of its
assets and distribution of its income. If the Company
otherwise qualifies as a regulated investment company and
distributes to its stockholders at least 90% of its
investment company taxable income, then the Company will not
be subject to Federal income tax on the income so
distributed. However, the Company would be subject to
corporate income tax on any undistributed income. In
addition, the Company will be subject to a nondeductible 4%
excise tax on the amount by which the amount it
<PAGE>
distributes in any calendar year is less than a statutorily-
designated, required amount of its regulated investment
company income and its capital gain net income (generally
98%).
3. INVESTMENT ADVISORY AGREEMENT:
The investment adviser to the Company is Chapman Capital
Management, Inc. (the Advisor and CCM). Pursuant to an
Investment Advisory Agreement, the Adviser will receive an
advisory fee from the Company at an annual rate of .90% of
the average weekly net assets of the Company. CCM also
serves as the Company's administrator and is compensated for
those services at an annual rate of .15% of the average
weekly net assets of the Company.
4. SHAREHOLDERS' EQUITY:
The Company issued 6,667 shares of common stock to Chapman
Capital Management, Inc. on November 3, 1995 for $15 per
share and another 337,750 shares to the public on December
23, 1995. The shares issued to the public were issued at
$15 per share, less $1.05 per share for sales commissions
and fees. Sales commissions and fees of $354,679 were paid
to The Chapman Co. for underwriting management fees and
broker commissions. The Company incurred $71,260 of costs
related to offering shares to the public. This cost has
been charged against the proceeds received from the public
stock offering.
The Company has a dividend reinvestment plan (the Plan).
Shareholders of record, whose shares are registered in his
or her name, will automatically be a participant in the
Plan, unless the shareholder specifically elects to receive
dividends and capital gains in cash paid by check. The
Company instructs the stock transfer agent to buy shares in
the open market or to issue new shares. When the Company
issues new shares, the price is equal to the last sale price
at the close of the previous trading day. If there is no
sale on that date, then the mean between the closing bid and
asked quotations for such common stock on such date is used.
5. SUBSEQUENT EVENT:
As of February 16, 1996, the Company had invested $275,500
to purchase 15,000 shares of stock in 15 different domestic
emerging companies. These shares had a market value of
approximately $280,000 as of February 16, 1996.
<PAGE>
<TABLE>
<CAPTION>
DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF DECEMBER 31, 1995
<S> <C> <C>
Principa Carrying
l
Amount Value
$ Fidelity Institutuional U.S. Government
4,812,17 Cash Portfolio II (stated at cost which is $4,812,
5 market) 175
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
<TABLE>
<CAPTION>
DEM, INC.
FINANCIAL HIGHLIGHTS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
<S> <C> <C>
CHANGE IN NET ASSETS PER SHARE:
Net asset value on issuance of shares $13.97
Net from investment operations .01
Dilutive effect of organizational costs
(.21)
Net asset value, end of the period $13.77
RATIOS TO AVERAGE NET ASSETS:
Expenses
.04%
Net investment income
1.45%
SUPPLEMENTAL DATA:
Net assets, end of the period $4,742,
800
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
OTHER
INFORMATION
<PAGE>
ARTHUR ANDERSEN LLP
120 East Baltimore Street
Baltimore, MD 21202
To the Board of Directors and Shareholders of:
DEM, Inc.
In planning and performing our audit of the consolidated
financial statements of DEM, Inc. from inception (November
30, 1995) through December 31, 1995, we considered its
internal control structure, including procedures for
safeguarding securities, in order to determine our auditing
procedures for the purpose of expressing our opinion on the
financial statements and to comply with the requirements of
Form N-SAR, not to provide assurance on the internal control
structure.
The management of Dem, Inc. is responsible for establishing
and maintaining an internal control structure and the
practices and procedures referred to in the preceding
paragraph. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected
benefits and related costs of internal control structure
policies and procedures. Two of the objectives of an
internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or
disposition and that transactions are executed in accordance
with management's authorization and recorded properly to
permit preparation of financial statements in conformity
with generally accepted accounting principles.
Because of inherent limitations in any internal control
structure or the practices and procedures referred to above,
errors or irregularities may occur and may not be detected.
Also, projection of any evaluation of them to future periods
is subject to the risk that they may become inadequate
because of changes in conditions or that the effectiveness
of their design and operation may deteriorate.
Our consideration of the internal control structure would
not necessarily disclose all matters in the internal control
structure that might be material weaknesses under standards
established by the American Institute of Certified Public
Accountants. A material weakness is a condition in which
the design or operation of the specific internal control
structure elements does not reduce to a relatively low level
the risk that errors or irregularities in amounts that would
be material in relation to the financial statements
<PAGE>
being audited may occur and not be detected within a timely
period by employees in the normal course of performing their
assigned functions. However, we noted no matters involving
the internal control structure, including procedures for
safeguarding securities, the we consider to be material
weaknesses as defined above as of December 31, 1995.
This report is intended solely for the information and use
of management and the Securities and Exchange Commission.
Baltimore, Maryland /s/ ARTHUR ANDERSEN LLP
February 16, 1996
