ICA File No.: 811-9118
File No.: 33-98454
As filed with the Securities and Exchange Commission on
August 23, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 1
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 7
DEM, Inc.
Exact Name of Registrant as Specified in Charter
The World Trade Center - Baltimore, 401 E. Pratt Street, 28th Floor,
Baltimore, MD 21202
Address of Principal Executive Offices (Number, Street,
City, State, Zip Code)
(800) 752-1013
Registrant's Telephone Number, including Area Code
CSC - Lawyer's Incorporating Service Company, 11 E. Chase Street,
Baltimore, MD 21202
Name and Address (Number, Street, City, State, Zip
Code of Agent for Service)
As soon as practicable after the effective date of this registration
statement
Approximate Date of Proposed Public Offering
<PAGE>
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box.
[X]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed registration statement.
<PAGE>
DEM, INC.
Form N-2
Cross-Reference Sheet
Part A
Item No. Caption Location in Prospectus
1. Outside Front Cover Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Front Cover Page; Inside Front
Cover Page Cover Page; Outside Back Cover
Page
3. Fee Table and Synopsis Prospectus Summary; Company
Expenses
4. Financial Highlights Not Applicable
5. Plan of Distribution Front Cover Page, Prospectus
Summary; Plan of Distribution
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Front Cover Page; Prospectus
Summary; The Company;
Investment Objectives and
Policies; Risk Factors; Common
Stock
9. Management Management of the Company;
Custodian, Transfer Agent and
Dividend Paying Agent and
Registrar
10. Capital Stock, Long-Term Debt and
Other Securities Common Stock; Dividends and
Distributions;
Dividend Reinvestment Plan
11. Defaults and Arrears on Senior
Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Further Information
Part B Statement of Additional
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History Not Applicable
17. Investment Objectives and Policies Investment Objectives and
Policies; Brokerage and
Portfolio Transactions
18. Management Officers and Directors
19. Control Persons and Principal Holders of
Securities See Management of the Company
in the Prospectus
20. Investment Advisory and Other Services See Management of the Company
in the Prospectus; Brokerage
and Portfolio Transactions
<PAGE>
21. Brokerage Allocation and Other
Practices Brokerage and Portfolio
Transactions
22. Tax Status Taxation
23. Financial Statements Report of Independent Public
Accountants; Statements of
Assets and Liabilities
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
Subject to Completion, dated August 23, 1996
662,210 Shares
DEM, Inc.
Common Stock
DEM, Inc. (the "Company"), a non-diversified, closed-end management
investment company, is the nation's first closed-end fund sponsored by a
minority-controlled investment banking firm. The principal investment
objective of the Company is aggressive long-term growth through capital
appreciation through investment in domestic emerging markets that it
believes are positioned for growth. "Domestic emerging markets" are public
companies that are controlled by African Americans, Hispanic Americans,
Asian Americans and women that are located in the United States and its
territories ("DEM Companies"). Both capital appreciation and income will
be considered in the selection of investments, but primary emphasis will be
on capital appreciation. See "INVESTMENT OBJECTIVES AND POLICIES." The
address of the Company is The World Trade Center - Baltimore, 401 East
Pratt Street, 28th Floor, Baltimore, Maryland 21202, and its telephone
number is (800) 752-1013. The Company's investment adviser is Chapman
Capital Management, Inc. (the "Investment Adviser"). See "MANAGEMENT OF
THE COMPANY."
Shares of closed-end investment companies have in the past frequently
traded at discounts from their net asset values. An investment in the
Company involves certain other risks. See "RISK FACTORS." The Common
Stock trades on the Nasdaq SmallCap Market<SM> under the symbol "DEMI." As
of August 16, 1996, the last reported sale price of the Common Stock was
$15.50. The net asset value per share of the Common Stock at August 16,
1996 was $14.42.
This Prospectus sets forth concisely the information about the Company
that a prospective investor ought to know before investing and should be
retained for future reference. A Statement of Additional Information dated
August 23, 1996, containing additional information about the Company, has
been filed with the Securities and Exchange Commission and is hereby
incorporated by reference in its entirety into this Prospectus. A copy of
the Statement of Additional Information, the table of contents of which
appears on page 24 of this Prospectus, may be obtained without charge by
calling (800) 752-1013.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to
Public
Sales Load
(1)
Proceeds to
Company (2)
Per Share
$15.00
$1.05
$13.95
Total
$9,933,150
$695,320.50
$9,237,829.50
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act of 1933.
(2) Before deducting offering expenses payable by the Company, estimated to
be $23,000.
The shares of Common Stock offered by this Prospectus are offered on a
best efforts basis by The Chapman Co. (the "Underwriter") subject to prior
sale, withdrawal, cancellation or modification of the offer without notice,
to delivery to and acceptance by the Underwriter and to certain further
conditions. This offering will terminate upon sale of all the shares
offered hereby unless earlier terminated by the Company or the Underwriter.
[ ], 1996 The Chapman Co.
Underwriter
<PAGE>
[Outside front cover page]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such state.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus. Cross
references in this summary are to headings in the body of the Prospectus.
The Company. The Company is a non-diversified, closed-end management
investment company. See "THE COMPANY."
Investment Objectives and Policies.
The principal investment objective of the Company is aggressive long-term
growth through capital appreciation through investment in domestic emerging
markets that it believes are positioned for growth. "Domestic emerging
markets" are public companies that are controlled by African Americans,
Hispanic Americans, Asian Americans and women that are located in the
United States and its territories. Both capital appreciation and income
are considered in choosing specific investments, but the primary emphasis
is on capital appreciation. The Company retains maximum flexibility as to
the types of investments it may make and is permitted to invest in
portfolio companies with large and small market capitalizations. Some of
these investments may involve the purchase of securities directly from
portfolio companies in initial or other public offerings of their
securities. See "RISK FACTORS--Investment in Small Companies." The
Company's investment objectives and policies, other than those specified
under "INVESTMENT OBJECTIVES AND POLICIES -- Fundamental Policies" in the
Statement of Additional Information may be changed by the Board of
Directors without the approval of stockholders.
To achieve the Company's investment objectives, the Company invests in a
wide variety of types of portfolio companies and seeks to identify those
companies it believes are positioned for growth. While the Company expects
to invest in portfolio companies with large and small market
capitalization, the Company believes that investing in small companies
offers the potential for significant long-term capital appreciation. Most
of the Company's investments are in marketable common stocks or marketable
securities convertible into common stock traded on an exchange or in the
over-the-counter markets. To the extent the Company invests in companies
with smaller market capitalization, the securities of such companies may be
traded in such over-the-counter markets as the OTC Bulletin Board<SM> and
the Pink Sheets<SM>.
<PAGE>
While the primary objective of the Company is 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. The Company may invest in fixed-income securities
rated in the lower rating categories of recognized statistical rating
agencies, such as securities rated "CCC or lower by Standard and Poor's
Corporation ("S&P") or "Caa" or lower by Moody's Investors Service, Inc.
("Moody's") or non-rated securities of comparable quality. These debt
securities are predominantly speculative, involve major risk exposure to
adverse conditions and are often referred to in the financial press as
"junk bonds." The Company is permitted to invest up to 35% of its assets
in such "non-investment grade" or "junk" securities. See "INVESTMENT
OBJECTIVES AND POLICIES," "RISK FACTORS -- Lower Rated Securities" and
Appendix A.
The Company will not invest in foreign securities (including American
Depository Receipts) or restricted securities as defined under Rule 144.
Plan of Distribution. A total of 662,210 shares of Common Stock will be
offered on a best efforts basis at a price of $15.00 by The Chapman Co.,
acting as the dealer manager on an agency basis (the "Underwriter"). The
minimum purchase is 100 shares. See "PLAN OF DISTRIBUTION."
Trading Market. The Common Stock is traded on the Nasdaq SmallCap
Market<SM>.
Stock Symbol. "DEMI."
Investment Adviser. Chapman Capital Management, Inc. is the Company's
investment adviser (the "Investment Adviser" or "CCM"). The Investment
Adviser is a wholly-owned subsidiary of the Underwriter. The Investment
Adviser has been in the investment counseling business since 1988 and as of
June 30, 1996 had approximately $220 million under management. The Company
pays the Investment Adviser a fee for services provided to the Company that
is computed monthly and paid monthly at the annual rate of .90% of the
value of the Company's average weekly net assets during the immediately
preceding month. See "MANAGEMENT OF THE COMPANY -- Investment Adviser."
<PAGE>
Administrator. CCM is also the Company's administrator. The Company pays
CCM a fee for services provided to the Company that is computed monthly and
paid monthly at the annual rate of .15% of the value of the Company's
average weekly net assets during the immediately preceding month.
Fund/Plan Services, Inc. acts as the Company's custody administrator and
agent. The Company pays Fund/Plan Services, Inc. a fee for services
provided to the Company that is payable monthly in arrears computed as of
the last business day of the month at the annualized rate of .02%, .015%
and .01% of the first $30 million, the next $70 million and any amount over
$100 million, respectively, of the Company's net assets, subject to a
minimum monthly fee of $400. See "MANAGEMENT OF THE COMPANY--
Administrator."
Custodian. UMB Bank, N.A., acts as the Company's custodian. See
"CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN
AGENT."
Transfer Agent, Dividend-Paying Agent, Registrar and Plan Agent. Fund/Plan
Services, Inc. acts as the Company's transfer agent, dividend-paying agent,
registrar and agent under the Company's Dividend Reinvestment Plan. See
"CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN
AGENT."
Dividends and Distributions. The Company pays quarterly dividends from its
net investment income, if any (that is, income other than net realized
capital gains) and distributes net realized capital gains, if any,
annually. All dividends or distributions with respect to shares of Common
Stock are reinvested automatically in additional shares through
participation in the Company's Dividend Reinvestment Plan, unless a
shareholder elects to receive cash. See "DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT PLAN."
Risk Factors. Investments in Small Companies and Thinly Traded Issues.
Although the Investment Adviser believes that investing in small companies
offers the potential for significant long-term capital appreciation, it
also presents significant risks. The Company is designed for long-term
investors who have the financial ability to accept greater investment risk
in exchange for the potential of higher than average, long-term capital
appreciation. Small companies may be subject to greater earnings
fluctuation, lack of established markets for products or services, more
limited financial resources and less depth of experienced management than
<PAGE>
larger or more well established companies. Securities of small companies
generally have more limited marketability and may be subject to
greaterprice volatility than securities of larger companies. Furthermore,
such companies are often traded on markets such as the OTC Bulletin
Board<SM> and the Pink Sheets<SM> where the trading market is thinner and
the spread between bid and offer prices is larger than on the major
exchanges or Nasdaq system. The nature of these trading markets may limit
the flexibility of the Company to divest of portfolio securities quickly
and at a reasonable price in response to market conditions. See "RISK
FACTORS -- Investment in Small Companies."
Limited Experience of the Investment Adviser. Although the
Investment Adviser has acted as investment manager for various balanced and
equity portfolios, and is currently acting as an investment adviser for an
open-end diversified management investment company, prior to advising the
Company, it had not acted as an adviser to a closed-end management
investment company. See "RISK FACTORS -- Prior Experience of the
Investment Adviser."
Non-Diversified Status. The Company is classified as a "non-
diversified" investment company under the Investment Company Act of 1940,
as amended, which means that the Company is not limited by that Act in the
proportion of its assets that may be invested in the securities of a single
issuer. However, the Company intends to comply with the diversification
requirements imposed by the U.S. Internal Revenue Code of 1986, as amended,
for qualification as a regulated investment company. As a non-diversified
investment company, the Company may invest a greater proportion of its
assets in the securities of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. See
"RISK FACTORS -- Non-Diversified Status."
Lower Rated Securities. The Company may invest in fixed-income
securities rated in the lower rating categories of recognized statistical
rating agencies, such as securities rated "CCC or lower by S&P or "Caa" or
lower by Moody's or non-rated securities of comparable quality. These debt
securities are predominantly speculative, involve major risk exposure to
adverse conditions and are often referred to in the financial press as
"junk bonds." See "RISK FACTORS -- Lower Rated Securities" and Appendix A.
Special Factors Relating to Closed-End Companies. The Company is
a non-diversified, closed-end investment company designed for long-term
investment and investors should not consider it a trading vehicle. Shares
of closed-end investment companies frequently trade at a discount from net
asset value. The Company cannot predict whether its shares will trade at,
<PAGE>
below or above net asset value. See "RISK FACTORS -- Special Factors
Relating to Closed-End Companies"; "INVESTMENT OBJECTIVES AND POLICIES."
Anti-Takeover Provisions in Charter. Certain provisions of the
Company's Charter may have the effect of inhibiting the Company's possible
conversion to open-end status and limiting the ability of other persons to
acquire control of the Company's Board of Directors. In certain
circumstances, these provisions might also inhibit the ability of
shareholders to sell their shares at a premium over prevailing market
prices. See "COMMON STOCK -- Anti-Takeover Provisions in the Charter."
Potential Conflict of Interest. The Company may utilize The
Chapman Co., a broker-dealer registered under the Securities and Exchange
Act of 1934 and a member of the National Association of Securities Dealers,
in connection with the purchase or sale of portfolio securities in certain
circumstances. The Investment Adviser is a wholly-owned subsidiary of The
Chapman Co. Mr. Nathan A. Chapman, Jr., the President and Chairman of the
Board of Directors of the Company, is also the President and Chairman of
the Board of Directors of the Investment Adviser and The Chapman Co. See
"MANAGEMENT OF THE COMPANY--Investment Adviser" below and "OFFICERS AND
DIRECTORS" in the Company's Statement of Additional Information. Mr.
Chapman owns approximately 63% of the equity and has the right to cast
approximately 71% of the votes entitled to be cast by stockholders of The
Chapman Co. Accordingly, these relationships represent a potential
conflict of interest with respect to commissions and other fees on
brokerage transactions conducted on the Company's behalf by The Chapman Co.
A majority of the Company's board of directors are independent directors
and such directors have adopted procedures in compliance with the
Investment Company Act of 1940 to address such conflict. See INVESTMENT
ADVISORY AND OTHER SERVICES" and "BROKERAGE AND PORTFOLIO TRANSACTIONS" in
the Company's Statement of Additional Information.
COMPANY EXPENSES
The following table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Company based
on the sales load that will be incurred at the time of purchase and an
estimate of the Company's operating expenses for the current fiscal year:
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) 7%
Dividend Reinvestment Plan Fees (1) 0%
<PAGE>
Annual Expenses (as a percentage of net assets) (2)
Management Fees .0.90%
Other Expenses (3) 2.19%
Total Annual Expenses (estimated) 3.09%
______________________
(1) There is no charge to participants for reinvesting dividends and
capital gains distributions (the fees of the Plan Agent (as defined
below) are paid by the Company). Participants are charged a pro rata
share of brokerage commissions on all open market purchases.
Currently, a $5.00 fee is charged by the Plan Agent upon any cash
withdrawal or termination. This amount is in addition to any
brokerage commissions charged to participants upon any cash withdrawal
or termination of participation in the Plan. See "DIVIDEND
REINVESTMENT PLAN."
(2) See "USE OF PROCEEDS" and "MANAGEMENT OF THE COMPANY."
(3) Based upon estimated amounts of expenses for the Company's current
fiscal year.
Assuming the total number of shares offered are sold, the
following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Company. These amounts are
based upon payment by the Company of operating expenses (excluding offering
expenses) at the levels set forth in the table above.
Example
An investor would pay the following expenses on a $1,000
investment assuming a 5% annual return and reinvestment of all dividends
and distributions at net asset value:
1 Year 3 Years 5 Years 10 Years
$86 $121 $157 $260
<PAGE>
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the
Company will bear directly or indirectly. "Other Expenses" are based on
estimated amounts for the current fiscal year. This example should not be
considered a representation of future expenses of the Company and actual
expenses may be greater or less than those shown. Moreover, while the
examples assume a 5% annual return, the Company's performance will vary and
may result in a return greater or less than 5%. In addition, while the
example assumes reinvestment of all dividends and distributions at net
asset value, participants in the Company's Dividend Reinvestment Plan may
receive shares purchased or issued at a price or value different from net
asset value. See "DIVIDENDS AND DISTRIBUTIONS"; "DIVIDEND REINVESTMENT
PLAN."
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following table summarizes certain selected financial data that
have been derived from the audited financial statements as of December
31, 1995, and the unaudited financial statements as of June 30, 1996.
This information should be read in conjunction with the financial
statements as of December 31, 1995 and June 30, 1996, and the notes
thereto, which are included in the Statement of Additional
Information.
Six Months
Ended
June 30, 1996
(Unaudited)
Period November
30, 1995
(Commencement of
operations)
to December 31,
1995
<S>
<C>
<C>
Per Share Operating Performance:
Net asset value, beginning of
period
13.77
13.97
Net investment income
0.03
0.01
Net gain on securities (realized
and unrealized)
0.35
0.00
Total from investment operations
0.38
0.01
Distributions paid from:
Net investment income
(0.05)
0.00
Net realized gain on investments
0.00
0.00
Dilutive effect of organizational
costs
0.00
(0.21)
Net asset value, end of period
14.10
13.77
Market value per share, end of
period
$15.50
$15.00
Total Return*
8.63%
0.0%
<PAGE>
Ratios/Supplemental Data:
Net Assets, end of period (000
omitted)
$4,858
$4,743
Average commission rate paid
5.00%
0.00%
Portfolio turnover rate
2.30%
Ratios to Average Net Assets:
Expenses
3.23%
0.04%
Net investment income
0.50%
1.45%
* Does not reflect sales load
** Annualized
</TABLE>
<PAGE>
THE COMPANY
DEM, Inc. is a non-diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Company was incorporated under the laws of the State
of Maryland on October 20, 1995. The Company's principal office is located
at The World Trade Center-Baltimore, 401 East Pratt Street, 28th Floor,
Baltimore, Maryland 21202. The Company's telephone number is (800) 752-
1013.
USE OF PROCEEDS
Assuming all of the shares of Common Stock are sold, the net
proceeds of the offering will be approximately $9,237,829.50, after
deducting the sales load and estimated offering expenses of the Company.
The net proceeds of the offering will be invested in accordance
with the Company's investment objectives and policies as soon as
practicable after receipt of funds from investors; the Company currently
anticipates investing funds within 90 days of receipt. Pending such
investment, the proceeds may be invested in cash, high quality short-term
debt securities, and/or high quality money market instruments.
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Company is aggressive
long-term growth through capital appreciation through investment in
domestic emerging markets that it believes are positioned for growth.
"Domestic emerging markets" are public companies that are controlled by
African Americans, Hispanic Americans, Asian Americans and women that are
located in the United States and its territories. Both capital
appreciation and income are considered in choosing specific investments,
but the primary emphasis is on capital appreciation. The Company retains
maximum flexibility as to the types of investments it may make and is
permitted to invest in portfolio companies with large and small market
capitalizations. Some of these investments may involve the purchase of
securities directly from portfolio companies in initial or other public
offerings of their securities. See "RISK FACTORS--Investment in Small
Companies." The Company's principal investment objective of long-term
growth through capital appreciation through investment in domestic emerging
markets is not a "fundamental policy" of the Company and can therefore be
changed by the Company without shareholder approval.
<PAGE>
In determining whether a specific portfolio company is
"controlled" by African Americans, Hispanic Americans, Asian Americans or
women, the Company will apply 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; a majority of the members of
the board of directors of the company must be members of one or more of the
listed groups; or a majority of the company's executive officers must be
comprised of members of the listed groups.
To achieve the Company's investment objectives, the Company
invests in a wide variety of types of portfolio companies and seeks to
identify those companies that are positioned for growth. Among other
factors, the Investment Adviser considers a company's above average
earnings growth, high potential profit margins, innovative products, high
quality management, and competitive advantage in making investment
decisions. The Company believes that domestic emerging markets represent
one of America's fastest growing market segments and include well-
diversified, high-growth segments of the economy including but certainly
not limited to personal communications, media/entertainment, environmental
services, applied/advanced technology, personal financial services and
value-oriented consuming.
While the Company invests in portfolio companies with large and
small market capitalization, the Company believes that investing in small
companies offers the potential for significant long-term capital
appreciation. Most of the Company's investments are in marketable common
stocks or marketable securities convertible into common stock traded on an
exchange or in the over-the-counter markets. To the extent the Company
invests in companies with smaller market capitalization, the securities of
such companies may be traded in such over-the-counter markets as the OTC
Bulletin Board<SM> and the Pink Sheets<SM>. See "RISK FACTORS--Investment
in Small Companies."
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, which may include
securities commonly termed "derivatives," as discussed below, if the
Investment Adviser deems such investments advisable. The Company may
invest in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC or
lower by S&P or "Caa" or lower by Moody's or non-rated securities of
comparable quality. These debt securities are predominantly speculative,
<PAGE>
involve major risk exposure to adverse conditions and are often referred to
in the financial press as "junk bonds." The Company is permitted to invest
up to 35% of its assets in such "non-investment grade" or "junk"
securities. See "RISK FACTORS -- Lower Rated Securities" and Appendix A.
The Company does not invest in foreign securities (including
American Depository Receipts) or restricted securities as defined under
Rule 144.
The Company's investment objectives and policies, other than
those specified in the Statement of Additional Information under
"INVESTMENT OBJECTIVES AND POLICIES -- Fundamental Policies," may be
changed by the Board of Directors without the approval of stockholders.
The Company retains the flexibility to respond promptly to
changes in market conditions. During periods when the Investment Adviser
believes a temporary defensive posture in the market is warranted, the
Company 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
Company's investment objectives, or alternatively, the Company 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 Company's
investment objectives may or may not involve less risk than DEM Companies.
Accordingly, to the extent that the Company adopts a temporary defensive
posture in which it invests in non-DEM Companies the Company's investments
will continue to present significant risks. See "RISK FACTORS--Investment
in Small Companies, --Non-Diversified Status, --Lower Rated Securities."
The decision to adopt a temporary defensive posture may be affected by such
factors as market conditions generally, the Investment Advisor'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 Company will employ defensive strategies, and to
the extent it is so invested, the Company may not achieve its investment
objectives. The Company will also invest in the instruments described
above pending investment of the net proceeds of the offering.
In addition to investments in marketable common stocks,
marketable securities convertible into common stock and other securities
consistent with the Company's investment objectives, the Company may, but
is not required to, utilize various investment techniques for hedging, risk
management and other investment purposes. These investment techniques may
include, but are not limited to, lending of portfolio securities and
<PAGE>
entering into repurchase agreements. Such investment techniques are
commonly referred to as "derivatives." Up to 20% of the Company's assets
may be invested in derivatives such as options for hedging and risk
management purposes or when, in the opinion of the Investment Adviser,
derivatives can be expected to yield a higher investment return than other
investment options.
The Company seeks to increase its income by lending portfolio
securities. Such securities loans will be secured by collateral in cash,
cash equivalents, U.S. government securities, or such other collateral as
may be permitted under the Company's investment program and by regulatory
agencies. Additionally, the Company may enter, without limitation, into
"repurchase agreements" pertaining to the securities in which it may invest
with securities dealers or member banks of the Federal Reserve System.
Repurchase agreements facilitate portfolio management and allow the Company
to earn additional revenue. If the Company enters into repurchase
agreements, it will do so in order to increase liquidity or as a temporary
investment while the Company is evaluating the acquisition of suitable
investments. See "INVESTMENT OBJECTIVES AND POLICIES" in the Statement of
Additional Information.
The following are some of the Company's fundamental policies
which it may not change without the approval of the holders of a majority
of its outstanding voting securities. The Company will not invest in
foreign securities (including American Depository Receipts) or restricted
securities as defined in Rule 144. For more information about the Company
and its investment objectives and policies, including fundamental policies,
see "INVESTMENT OBJECTIVES AND POLICIES" in the Statement of Additional
Information.
RISK FACTORS
Investors should consider the following risk factors associated
with an investment in the Company.
An investment in the Company's shares does not constitute a
complete investment program since it involves the greater market risks
inherent in seeking higher returns and is not recommended for short-term or
risk averse investors. No assurance can be given that securities of small
emerging companies will appreciate, that a sufficient number of appropriate
investments will be available or that the Company's particular investment
choices will be successful. The prices of securities in which the Company
may invest may also be more volatile than securities of issuers with larger
market capitalizations and the Company's net asset value may therefore be
subject to greater fluctuation than other investment companies that invest
in equity securities.
<PAGE>
Investment in Small Companies
Because the Company intends to invest substantially all of its
assets in securities of emerging companies with small market
capitalizations, an investor should be aware of certain special
considerations and risk factors relating to investments in such companies.
No assurance can be given that securities of small emerging companies will
appreciate, that a sufficient number of appropriate investments will be
available or that the Company's particular investment choices will be
successful. Investors should also be aware of considerations and risks
relating to the Company's investment practices. An investment in the
Company should not itself be considered a balanced investment program and
is intended to provide diversification as part of a more complete
investment program. The Company is intended for long-term investors not
seeking current income, who have the financial ability to accept greater
investment risk in exchange for the potential of higher than average, long-
term capital appreciation.
Investing in small capitalization stocks can involve greater risk
than is customarily associated with investing in securities of larger, more
established companies. Small emerging companies may be subject to greater
earnings fluctuation, lack of established markets for products or services,
more limited financial resources and less depth of experienced management.
Securities of small emerging companies generally have more limited
marketability and may be subject to greater price volatility than
securities of larger companies. They may be dependent for management on
one or a few key persons, and can be more susceptible to losses and risks
of bankruptcy. Transaction and trading costs in smaller capitalization
stocks may be higher than those of larger capitalization companies,
primarily because of more limited volumes and fewer active market markers.
These risks are in addition to the risks normally associated with any
strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such
as the OTC Bulletin Board<SM> and the Pink Sheets<SM> where the trading
market is thinner and the spread between bid and offer prices is often
larger than on the major exchanges or Nasdaq system. The nature of these
trading markets may limit the flexibility of the Company to divest of
portfolio securities quickly and at a reasonable price in response to
market conditions.
<PAGE>
Limited Experience of the Investment Adviser
The Investment Adviser has acted as investment manager for
various balanced and equity portfolios. Further, the Investment Adviser
has acted and is currently acting as an investment adviser and manager for
The Chapman Funds, Inc., an open-end, diversified management investment
company which currently offers one money market fund. However, prior to
advising the Company, the Investment Adviser had not acted as an adviser to
a closed-end management investment company.
Non-Diversified Status
The Company is classified as a non-diversified management
investment company under the 1940 Act, which means that the Company is not
limited by that Act in the proportion of its assets that may be invested in
the securities of a single issuer. However, the Company complies and
intends to continue to comply with the diversification requirements imposed
by the U.S. Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. See "TAXATION" in the
Company's Statement of Additional Information. As a non-diversified
investment company, the Company may invest a greater proportion of its
assets in the obligations of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to its portfolio securities.
Lower Rated Securities
The Company may invest in fixed-income securities rated in the
lower rating categories of recognized statistical rating agencies, such as
securities rated "CCC or lower by S&P or "Caa" or lower by Moody's or non-
rated securities of comparable quality. These debt securities are
predominantly speculative, involve major risk exposure to adverse
conditions and are often referred to in the financial press as "junk
bonds." See Appendix A.
Special Factors Relating to Closed-End Companies
The Company is a non-diversified, closed-end management
investment company designed for long-term investment and investors should
not consider it as a trading vehicle. Shares of closed-end investment
companies frequently trade at a discount from net asset value. See
"INVESTMENT OBJECTIVES AND POLICIES."
<PAGE>
Potential Conflict of Interest
The Company may utilize The Chapman Co., a broker-dealer
registered under the Securities and Exchange Act of 1934 and a member of
the National Association of Securities Dealers, in connection with the
purchase or sale of portfolio securities in certain circumstances. The
Investment Adviser is a wholly-owned subsidiary of The Chapman Co. Mr.
Nathan A. Chapman, Jr., the President and Chairman of the Board of
Directors of the Company, is also the President and Chairman of the Board
of Directors of the Investment Adviser and The Chapman Co. See "MANAGEMENT
OF THE COMPANY--Investment Adviser" below and "OFFICERS AND DIRECTORS" in
the Company's Statement of Additional Information. Mr. Chapman owns
approximately 63% of the equity and has the right to cast approximately 71%
of the votes entitled to be cast by stockholders of The Chapman Co.
Accordingly, these relationships represent a potential conflict of interest
with respect to commissions and other fees on brokerage transactions
conducted on the Company's behalf by The Chapman Co. A majority of the
Company's board of directors are independent directors and such directors
have adopted procedures in compliance with the Investment Company Act of
1940 to address such conflict. See INVESTMENT ADVISORY AND OTHER SERVICES"
and "BROKERAGE AND PORTFOLIO TRANSACTIONS" in the Company's Statement of
Additional Information.
NET ASSET VALUE AND MARKET PRICE INFORMATION
The outstanding shares of Common Stock of the Company trade on
the Nasdaq SmallCap Market<SM>. The following table shows, for the
Company's first two full fiscal quarters, the high and low bid information
for the Common Stock; the net asset value per share of the Company as
determined on the date closest to each quotation; and the percentage by
which the shares of Common Stock of the Company traded at a premium over,
or discount from, the Company's net asset value per share.
Quarter Ended
Bid
Quotations
($)
Net Asset
Value
($)
Premium or
(Discount)
Percentage
High
Low
High
Low
High
Low
March 31,
1996
15.00
15.00
13.85
13.77
8.30%
8.93%
June 30, 1996
15.00
15.00
14.83
13.78
1.15%
8.85%
<PAGE>
The bid quotations listed above reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
During the first two full fiscal quarters of the Company's
operation, the Company's shares have traded at a price greater than the
Company's net asset value per share. Shares of closed-end investment
companies have frequently traded at discounts from their net asset values
and there can be no assurance that the Common Stock will continue to trade
at a premium to its net asset value per share. On August 16, 1996, the
Company's net asset value was $14.42 per share. As of August 16, 1996, the
last reported sale price of the Common Stock on the Nasdaq SmallCap
MarketSM was $15.50 per share reflectin a premium of $1.08 of share price
over net asset value per share as of August 16, 1996.
MANAGEMENT OF THE COMPANY
Board of Directors
The business and affairs of the Company are managed under the
direction of the Company's Board of Directors, and the day to day
operations of the Company are conducted through or under the direction of
the officers of the Company. The Company's Statement of Additional
Information contains information as to the identity and background of the
Company's directors and officers.
Investment Adviser
The Investment Adviser, Chapman Capital Management, Inc., has
been retained under an investment advisory and administrative services
agreement ("Advisory and Administrative Services Agreement") to provide
investment advice and, in general, to conduct the management and investment
program of the Company in accordance with the Company's investment
objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. The Investment Adviser was
established in 1988 and is located at The World Trade Center - Baltimore,
401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202. The
Investment Adviser is a wholly-owned subsidiary of The Chapman Co., the
Underwriter. Nathan A. Chapman, Jr., who is the controlling stockholder,
President, Chief Executive Officer and Chairman of the Board of Directors
of the Underwriter, is President and Chairman of the Board of Directors of
the Company and President, Chief Executive Officer and Chairman of the
Board of Directors of the Investment Adviser.
<PAGE>
The Investment Adviser has sole investment discretion for the
Company and makes all decisions affecting assets in the Company's portfolio
under the supervision of the Company's Board of Directors and in accordance
with the Company's stated policies. The Investment Adviser selects
investments for the Company and places purchase and sale orders on behalf
of the Company. The advisory fee payable to the Investment Adviser is
payable monthly in arrears computed at the annualized rate of .90% of the
Company's average weekly net assets during the preceding month.
The Investment Adviser has been in the investment advisory
business since 1988 and has served as the investment adviser to The Chapman
Funds, Inc., a registered diversified open-end management investment
company since 1988 which offers a money market fund. In addition, the
Investment Adviser serves as portfolio manager to private accounts. As of
June 30, 1996, the Investment Adviser had approximately $220 million in
assets under management.
Portfolio Management
Nathan A. Chapman, Jr. who has been the President and Chief
Executive Officer of the Investment Adviser since 1988, is primarily
responsible for management of the Company's assets. Mr. Chapman is the
President and Chairman of the Board of the Company. Mr. Chapman also is
and has been President and Chairman of the Board of Directors of The
Chapman Funds, Inc. since its inception in 1988. Mr. Chapman founded The
Chapman Co., which owns the Investment Adviser, in 1987 and has been its
President, Chief Executive Officer and Chairman of the Board since its
inception. The Chapman Co. is a full-service brokerage and investment
banking firm. As Mr. Chapman is the chief executive officer of a brokerage
and investment banking firm, he does not devote his full time to the
management of the Company's portfolio.
Administrator
The Investment Adviser also serves as the Company's administrator
(the "Administrator") pursuant to the Advisory and Administrative Services
Agreement. The Administrator is located at The World Trade Center -
Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202.
Under the Advisory and Administrative Services Agreement, the
administration fee payable to the Administrator is payable monthly in
arrears computed at the amortized rate of .15% of the Company's average
weekly net assets during the preceding month.
<PAGE>
The Administrator provides office facilities and personnel
adequate to perform the following services for the Company: oversight of
the determination and publication of the Company's net asset value in
accordance with the Company's policy as adopted from time to time by the
Board of Directors; maintenance, and oversight of the maintenance, of the
books and records of the Company as required under the 1940 Act; assistance
in the preparation and filing of the Company's U.S. federal, state and
local income tax returns; review of and arrangement for payment of the
Company's expenses; preparation of financial information for the Company's
proxy statements and quarterly, semi-annual and annual reports to the
shareholders; preparation of certain of the Company's reports to the
Securities and Exchange Commission; preparation of various reports
pertaining to the business and affairs of the Company, including the
performance of the Company's service providers; consultation with the
Company's officers, accountants, legal counsel and others; responding to or
referring shareholder inquiries; and assistance with such other services as
generally are required to carry on the business and operations of the
Company properly. See "MANAGEMENT OF THE COMPANY -- Investment Adviser"
for a discussion of the relationship between the Company and Investment
Adviser/Administrator.
Fund/Plan Services, Inc. serves as the Company's custody
administrator and agent (the "Custody Administrator") pursuant to the
Custody Administration and Agency Agreement. The Custody Administrator is
located at 2 West Elm Street, Conshohocken, Pennsylvania 19428. Under the
Custody Administration and Agency Agreement, the fee payable to the Custody
Administrator is payable monthly in arrears computed as of the last
business day of the month at the annualized rate of .02%, .015% and .01% of
the first $30 million, the next $70 million and any amount over $100
million, respectively, of the Company's net assets, subject to a minimum
monthly fee of $400.
The Custody Administrator provides the following services for the
Company: coordinates and processes portfolio trades; inputs and verifies
portfolio trades; monitors pending and failed security trades; coordinates
communications between brokers and banks to resolve operational problems;
advises the Company of any corporate action information; addresses and
follows up on any dividend or interest discrepancies; processes the
Company's expenses; interfaces with the accounting services provider and
the transfer agent to research and resolve custody cash problems; and
provides daily and monthly reports.
<PAGE>
Control Person
A single shareholder of the Company, Memphis Retirement System, owns 59%
of the
issued and outstanding Common Stock as of August 23, 1996. Accordingly,
such shareholder has significant power to affect the affairs of the Company
or to determine or influence the outcome of matters submitted to a vote of
the shareholders including the election of directors. See "Control Persons
and Principal Holders of Securities" in the Statement of Additional
Information.
Estimated Expenses
The Investment Adviser/Administrator is obligated to pay expenses
associated with providing the services contemplated by the Advisory and
Administrative Services Agreement. The Company pays all other expenses
incurred in the operation of the Company including, among other things,
expenses for legal and independent public accounting services, costs of
printing proxies, stock certificates and shareholder reports, charges of
the custodian, any sub-custodians and the transfer and dividend-paying
agent, expenses in connection with the Company's Dividend Reinvestment
Plan, Securities and Exchange Commission fees, fees and expenses of
unaffiliated directors, accounting and pricing costs, membership fees in
trade associations, fidelity bond coverage for the Company's officers and
employees, directors' and officers' errors and omissions insurance
coverage, interest, brokerage costs and stock exchange fees, taxes, stock
exchange listing fees and expenses, expenses of qualifying the Company's
shares for sale in various states and foreign jurisdictions, litigation and
other extraordinary or nonrecurring expenses and other expenses properly
payable by the Company.
In addition to the monthly fee payable under the Custody
Administration and Agency Agreement, the Company is obligated to pay
certain transactions charges and to reimburse the Custody Administrator
monthly for all out-of-pocket expenses including telephone, postage,
telecommunications, special reports, record retention and copying and
sending materials to independent accountants for off-site audits.
The Company may utilize The Chapman Co. in connection with a
purchase or sale of securities when the Investment Adviser believes that,
in accordance with the considerations set forth above regarding portfolio
investments, the broker's charge for the transaction does not exceed usual
and customary levels. In the event that the services of The Chapman Co.
are utilized in connection with a purchase or sale of securities to or by
the Company, its commissions, fees or other remuneration for effecting such
transaction will not exceed usual and customary broker's commissions if the
sale is effected on a securities exchange or two percent of the sales price
if the sale is effected in connection with a secondary distribution of such
securities or one percent of the purchase or sale price of such securities
if the sale is otherwise effected unless a larger commission is approved by
the Securities and Exchange Commission. The Chapman Co. is a full-service
brokerage and investment banking firm. As such, it provides financial and
advisory services pursuant to agreements to a variety of emerging companies
that fit within the Company's investment objectives. As a result, the
Company may invest in companies that have such agreements with The Chapman
Co. or its affiliates.
<PAGE>
Assuming the successful completion of the offering, the
Investment Adviser estimates that the Company's annual operating expenses,
including advisory, administrative and custody fees, exclusive of
amortization of organization expenses, will be approximately $259,500. No
assurance can be given, in light of the investment objectives and policies,
however, that actual annual operating expenses will not be substantially
more or less than this estimate.
Costs incurred by the Company in connection with its organization
were $28,340 and are being amortized on a straight-line basis over 60
months from the commencement of operations. Offering expenses are
estimated at $23,000 are payable upon completion of the offering and will
be charged to the Company's capital.
DIVIDENDS AND DISTRIBUTIONS
The Company pays quarterly dividends of net investment income
(other than net realized gains) to the holders of the Company's Common
Stock. Under the Company's current policy, which may be changed at any
time by the Company's Board of Directors, the Company's quarterly dividends
are made at a level that reflects the past and projected performance of the
Company, which policy over time will be expected to result in the
distribution of all net investment income of the Company. Net investment
income of the Company consists of all interest and dividend income accrued
on the Company's assets less all expenses of the Company. Expenses of the
Company are accrued each day. Net realized capital gains, if any, are
distributed to the stockholders at least once a year. For more information
concerning the tax treatment of distributions to stockholders, see
"TAXATION."
DIVIDEND REINVESTMENT PLAN
Under the Company's Dividend Reinvestment Plan (the "Plan"), a
stockholder whose shares of Common Stock are registered in his own name
will have all distributions from the Company reinvested automatically by
Fund/Plan Services, Inc. (the "Plan Agent") as agent under the Plan, unless
the stockholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is,
in "street name") will be reinvested by the broker or nominee in additional
shares under the Plan, unless that service is not provided by the broker or
<PAGE>
nominee or the stockholder elects to receive distributions in cash.
Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions
to Company stockholders who do not participate in the Plan will be paid by
check mailed directly to the record holder by or under the direction of
Fund/Plan Services, Inc. as dividend-paying agent.
If the Company declares a dividend or capital gains distribution
payable either in shares of Common Stock or in cash, stockholders who are
not Plan participants will receive cash and Plan participants will receive
the equivalent amount in shares of Common Stock. When the market price of
the Common Stock is equal to or exceeds the net asset value per share of
the Common Stock on the Valuation Date (as defined below), Plan
participants will be issued shares of Common Stock valued at the net asset
value most recently determined as described in the Statement of Additional
Information under "NET ASSET VALUE" or, if net asset value is less than 95%
of the then current market price of the Common Stock, then at 95% of the
market value. The Valuation Date is the dividend or capital gains
distribution payment date or, if that date is not a trading day, the
immediately preceding trading day.
If the market price of the Common Stock is less than the net
asset value of the Common Stock, or if the Company declares a dividend or
capital gains distribution payable only in cash, a broker-dealer not
affiliated with the Company, as purchasing agent for Plan participants (the
"Purchasing Agent"), will buy Common Stock in the open market, on the
Nasdaq System or elsewhere, for the participants' accounts. If, following
the commencement of the purchases and before the Purchasing Agent has
completed its purchases, the market price exceeds the net asset value of
the Common Stock, the average per share purchase price paid by the
Purchasing Agent may exceed the net asset value of the Common Stock,
resulting in the acquisition of fewer shares than if the dividend or
capital gains distribution had been paid in Common Stock issued by the
Company at net asset value. Additionally, if the market price exceeds the
net asset value of shares before the Purchasing Agent has completed its
purchases, the Purchasing Agent is permitted to cease purchasing shares and
the Company may issue the remaining shares at a price equal to the greater
of (a) net asset value or (b) 95% of the then current market price. In a
case where the Purchasing Agent has terminated open market purchases and
the Company has issued the remaining shares, the number of shares received
by the participant in respect of the cash dividend or distribution will be
based on the weighted average of prices paid for shares purchased in the
open market and the price at which the Company issues the remaining shares.
<PAGE>
The Plan Agent will apply all cash received as a dividend or capital gains
distribution to purchase Common Stock on the open market as soon as
practicable after the payment date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except
when necessary to comply with applicable provisions of the federal
securities laws.
The Plan Agent will maintain all stockholder accounts in the Plan
and will furnish written confirmations of all transactions in each account,
including information needed by a stockholder for personal and tax records.
The automatic reinvestment of dividends and capital gains will not relieve
Plan participants of any income tax that may be payable on the dividends or
capital gains distributions. Common Stock in the account of each Plan
participant will be held by the Plan Agent on behalf of the Plan
participant, and each stockholder's proxy will include those shares
purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting
dividends and capital gains distributions. The Plan Agent's fees for
handling the reinvestment of dividends and capital gains distributions will
be paid by the Company. No brokerage charges apply with respect to shares
of Common Stock issued directly by the Company as a result of dividends or
capital gains distributions payable either in Common Stock or in cash.
Each Plan participant will, however, bear a proportionate share of
brokerage commissions incurred with respect to open market purchases made
in connection with the reinvestment of dividends or capital gains
distributions. Plan participants may terminate their participation in the
Plan by written notice to the Plan Agent; provided that any such notice
received by the Plan Agent less than ten days before the record date for
any dividend shall not be effective with respect to such dividend or
distribution. Currently, a $5.00 fee is charged by the Plan Agent upon any
cash withdrawal or termination.
Experience under the Plan may indicate that changes to it are
desirable. The Company reserves the right to amend or terminate the Plan
as applied to any dividend or capital gains distribution paid subsequent to
written notice of the change sent to participants at least 30 days before
the record date for the dividend or capital gains distribution. The Plan
also may be amended or terminated by the Plan Agent, with the Company's
prior written consent, on at least 30 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by
mail to the Plan Agent, 2 West Elm Street, Conshohocken, Pennsylvania
19428.
<PAGE>
TAXATION
The following discussion reflects applicable tax laws as of the
date of this Prospectus.
Taxation of the Company
The Company has elected and intends to qualify each year to be
treated as a regulated investment company (a "RIC") for federal income tax
purposes in accordance with Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In order to so qualify, the 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. If the Company is a personal holding company
(a "PHC"), then the federal corporate income tax will be applied at the
highest rate of tax specified in Section 11(b) of the Code, currently 35%,
with respect to any such undistributed income (in addition to the possible
imposition of the personal holding company tax, described in Section 541 of
the Code equal to 39.6 percent of undistributed personal holding company
income (generally for this purpose the full amount of any undistributed
income.)) The Company would be a PHC, generally, if at any time during the
last half of its taxable year more than 50 percent in value of its
outstanding stock is owned, directly or indirectly, by or for not more than
5 individuals. In addition, the Company will be subject to a nondeductible
4% excise tax on the amount by which the amount it 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%).
The Company may acquire securities that do not pay interest
currently in an amount equal to their effective interest rate, such as zero
coupon, pay-in-kind, or delayed interest securities. As the holder of such
a security, the Company is required to include in taxable income original
issue discount that accrued on the security for the taxable year, even if
the Company receives no payment on the security during the year. Because
the Company must distribute annually substantially all of its investment
company taxable income, including any original issue discount, in order to
<PAGE>
qualify as a RIC and to avoid imposition of the 4% excise tax, the Company
may be required in a particular year to distribute dividends in an amount
that is greater than the total amount of cash the Company actually receives
as distributions on the securities it owns. Those annual distributions
will be made from the Company's cash assets or from the proceeds of sales
of portfolio securities, if necessary. The Company may realize capital
gains or losses from those sales, which would increase or decrease the
Company's investment company taxable income or net capital gain.
If in any year the Company should fail to qualify under
Subchapter M as a regulated investment company, the Company would incur a
regular corporate income tax upon its taxable income for the year, and the
entire amount of its distribution would generally be characterized as
ordinary income.
Taxation of Stockholders
Distributions
In general, all distributions to stockholders attributable to the
Company's investment company taxable income will be taxable as ordinary
income whether paid in cash or reinvested in additional shares of Common
Stock pursuant to the Dividend Reinvestment Plan.
Although the Company does not expect to realize significant net
capital gains, to the extent the Company does realize net capital gains, it
intends to distribute such gains annually and designate them as capital
gain dividends. Long-term capital gains dividends are taxable to
stockholders as long-term capital gains, whether paid in cash or reinvested
in additional shares of Common Stock, regardless of how long a stockholder
has held Company shares.
Stockholders receiving distributions in the form of additional
shares of Common Stock purchased pursuant to the Dividend Reinvestment Plan
will be treated for federal income tax purposes as having received the
amount of cash used to purchase such shares. In general, the basis of such
shares will equal the price paid by the Plan Agent for such shares,
including brokerage commissions. For additional information, see "DIVIDEND
REINVESTMENT PLAN."
<PAGE>
Sales of Shares
In general, if a share of Common Stock is sold, the seller will
recognize gain or loss equal to the difference between the amount realized
on the sale and the seller's adjusted basis in the share. Capital gain or
loss will be long-term capital gain or loss if the Common Stock that was
sold had been held for more than one year. However, any loss recognized by
a stockholder on Common Stock held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gain
distributions received by the stockholder and the stockholder's share of
undistributed net capital gain. In addition, any loss realized on a sale
of shares of Common Stock will be disallowed to the extent the shares
disposed of are replaced within a period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed
loss. Any gain or loss realized upon a sale of Common Stock by a
stockholder who is not a dealer in securities will generally be treated as
capital gain or loss.
Backup Withholding
The Company may be required to withhold federal income tax at the
rate of 31% of any dividend or redemption payments made to certain
stockholders if such stockholders have not provided a correct taxpayer
identification number and certain required certifications to the Company,
or if the Secretary of the Treasury notifies the Company that the taxpayer
identification number provided by a stockholder is not correct or that the
stockholder has previously underreported its interest and dividend income.
Stockholders can credit such withheld income taxes against their income tax
liabilities.
The foregoing discussion is a summary of certain of the current
federal income tax laws regarding the Company and investors in the shares
of Common Stock and does not deal with all of the federal income tax
consequences applicable to the Company, 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 Company.
For additional tax information, see "TAXATION" in the Company's Statement
of Additional Information.
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND-
PAYING AGENT AND REGISTRAR
UMB Bank, N.A., located at 928 Grand Avenue, Kansas City,
Missouri 64105 will act as the custodian for the Company's assets.
Fund/Plan Services, Inc., located at 2 West Elm Street, Conshohocken,
Pennsylvania 19428 will act as the Company's dividend-paying agent,
transfer agent and registrar.
PLAN OF DISTRIBUTION
The Company is offering up to 662,210 shares of Common Stock.
The shares of Common Stock will be offered on a "best-efforts" basis, by
The Chapman Co., acting as the dealer-manager on an agency basis. The
Termination Date of the offering is on the earlier to occur of the date the
sale of all of the shares of Common Stock offered hereby is completed or
the date determined by the Company or the Underwriter.
Chapman Capital Management, Inc., the Company's Administrator and
Investment Adviser is a wholly-owned subsidiary of the Underwriter. The
principal business address of the Underwriter is 401 E. Pratt Street, 28th
Floor, Baltimore, Maryland 21202.
The Common Stock will be offered to the public at $15.00 per
share. The Underwriter will be paid a management fee of $.40 per share
sold. In addition, the Underwriter and any other broker-dealer
participating in the selling group will be paid a commission not in excess
of $.65 per share sold.
In the Placement Agency Agreement, the Company has agreed to
indemnify the Underwriter and its controlling persons with respect to
certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The Underwriter has informed the Company that it does not intend
to confirm sales to any accounts over which it exercises discretionary
authority.
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the Company anticipates that the
Underwriter may from time to time act as broker or dealer in connection
with the execution of its portfolio transactions after it has ceased to be
the Underwriter and, subject to certain restrictions under the 1940 Act,
may act as broker while it is the Underwriter.
<PAGE>
The minimum investment requirement is 100 shares. Investors
should consult their brokers concerning the manner and method of payment
for shares of the Company.
The Common Stock trades on the Nasdaq SmallCap Market<SM> under
the symbol "DEMI." As of August 16, 1996, the last reported sale price of
the Common Stock was $15.50. The Chapman Co. makes a market in the Common
Stock; however, The Chapman Co. is not obligated to conduct market-making
activities and any such activities may be discontinued at any time without
notice, at its sole discretion. No assurance can be given as to the
liquidity of, or the trading market for, the Common Stock as a result of
any such market-making activities.
COMMON STOCK
The Company is authorized to issue 500,000,000 shares of capital
stock par value $.00001 per share, all of which shares have been classified
as Common Stock. All shares of Common Stock have equal rights as to
dividends and voting privileges and, when issued, will be fully paid and
nonassessable. There are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of Common Stock is
entitled to its proportion of the Company's assets after debts and
expenses. Shareholders are entitled to one vote per share and do not have
cumulative voting rights.
The following table shows the number of shares of Common Stock
authorized, held by the Company and outstanding as of June 30, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Title of
Class
Amount
Authorized
Amount Held
by the
Company or
for its
Account
Amount
Outstanding
Exclusive of
Amount Held
by Company
Common Stock,
par value
$.00001
500,000,000
- -0-
344,479.97
</TABLE>
<PAGE>
Anti-Takeover Provisions in the Charter
The Company has provisions in its Charter and Bylaws that could
have the effect of limiting the ability of other entities or persons to
acquire control of the Company, to cause it to engage in certain
transactions or to modify its structure. Commencing with the first annual
meeting of stockholders, the Board of Directors will be divided into three
classes having initial terms of one, two and three years, respectively. At
the annual meeting of stockholders in each year thereafter, the term of one
class will expire and directors will be elected to serve in the class for
terms of three years. This provision could delay for up to two years the
replacement of a majority of the Board of Directors. The Charter provides
that the maximum number of directors that may constitute the Company's
entire board is twelve. The maximum number of directors may be increased
only by the affirmative vote of at least 75% of the Directors and of the
holders of 75% of the shares of the Company entitled to be cast on the
matter, unless approved by at least 75% of the Continuing Directors, as
defined below, in which case a majority of the votes entitled to be cast by
shareholders of the Company will be required to approve such action. A
director may be removed from office with or without cause only upon the
vote of 75% of the shares of the Company entitled to be cast on the matter.
In addition, conversion of the Company from a closed-end to an
open-end investment company requires the affirmative vote of at least 75%
of the directors and of the holders of 75% of the shares of the Company
entitled to be cast on the matter, unless approved by at least 75% of the
Continuing Directors, as defined below, in which case a majority of the
votes entitled to be cast by shareholders of the Company will be required
to approve such conversion. If the Company were to be converted into an
open-end investment company, it could be restricted in its ability to
redeem its shares (otherwise than in kind) because, in light of the limited
depth of the markets for certain securities in which the Company may
invest, there can be no assurance that the Company could realize the then
market value of the portfolio securities the Company would be required to
liquidate to meet redemption requests.
The affirmative votes of at least 75% of the directors and the
holders of at least 75% of the shares of the Company are required to
authorize any of the following transactions:
(i) merger, consolidation or share exchange of the Company with or
into any other person;
<PAGE>
(ii) issuance or transfer by the Company (in one or a series of
transactions in any 12-month period) of any securities of the Company to
any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Company in connection with a
public offering, issuances of securities of the Company pursuant to a
dividend reinvestment plan adopted by the Company or pursuant to a stock
dividend and issuances of securities of the Company upon the exercise of
any stock subscription rights distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of transactions in any 12-
month period) to or with any person of any assets of the Company having an
aggregate fair market value of $1,000,000 or more, except for portfolio
transactions effected by the Company in the ordinary course of business and
except with respect to repurchases or redemptions of shares of the Company
(transactions within clauses (i) and (ii) and this clause (iii) each being
known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of
the Company or any amendment to the Company's Charter to terminate its
existence; and
(v) any shareholder proposal as to specific investment decisions made
or to be made with respect to the Company's assets.
However, in the case of a Business Combination, a 75% shareholder
vote will not be required if the transaction is approved by a vote of at
least 75% of the Continuing Directors. In such case, a majority of the
votes entitled to be cast by shareholders of the Company will be required
to approve such transaction if it is a transaction described in clause (i)
or a transaction described in clause (iii) that involves a merger,
consolidation or share transfer or a transfer of substantially all of the
Company's assets with respect to which a shareholder vote is required under
applicable state law and no shareholder vote will be required to approve
such transaction if it is any other Business Combination. In addition, a
75% shareholder vote will not be required with respect to a transaction
described in clause (iv) above if it is approved by a vote of at least 75%
of the Continuing Directors (as defined below), in which case a majority of
the votes entitled to be cast by shareholders of the Company will be
required to approve such transaction.
A "Continuing Director" is any member of the Board of Directors
of the Company (i) who is not a person or affiliate of a person who enters
or proposes to enter into a Business Combination with the Company (such
<PAGE>
person or affiliate, an "Interested Party") and (ii) who has been a member
of the Board of Directors of the Company for a period of at least 12 months
(or since the commencement of the Company's operations, if less than 12
months) or is a successor of a Continuing Director recommended by a
majority of the Continuing Directors then on the Board of Directors of the
Company.
The Company's Bylaws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered
at shareholders' meetings where the Company has not received sufficient
prior notice of the matters.
Reference is made to the Charter and Bylaws of the Company, on
file with the Securities and Exchange Commission, for the full text of
these provisions. See "FURTHER INFORMATION." These provisions could have
the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Company in a tender offer or similar
transaction. In the opinion of the Board of Directors, however, these
provisions offer several possible advantages. They may require persons
seeking control of the Company to negotiate with its management regarding
the price to be paid for the shares required to obtain such control; they
promote continuity and stability and they enhance the Company's ability to
pursue long-term strategies that are consistent with its investment
objectives. The Board of Directors has determined that the foregoing
voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests
of shareholders generally.
STOCK PURCHASES AND TENDERS
The Company's Board of Directors may consider, from time to time,
but not more frequently than once every two years, repurchases of Common
Stock on the open market or in private transactions or the making of tender
offers for Common Stock. The Company does not have a fundamental policy
with respect to the repurchase of Common Stock and these repurchases are
discretionary. There can be no assurance that the Board of Directors will,
in fact, decide to effect repurchases of the Company's shares. See "STOCK
PURCHASES AND TENDERS" in the Statement of Additional Information.
LEGAL MATTERS
Venable, Baetjer and Howard, LLP, Baltimore, Maryland, as counsel
for the Company, has rendered an opinion as to certain legal matters
regarding the due authorization and valid issuance of the Common Stock
<PAGE>
being offered pursuant to this Prospectus. In addition, Venable, Baetjer
and Howard, LLP serves as counsel to the Underwriter on an ongoing basis.
The Underwriter has not been separately represented in this offering.
Venable, Baetjer and Howard, LLP also serves as counsel to the Investment
Ad visor on an on-going basis.
REPORTS TO SHAREHOLDERS
The Company sends semi-annual and audited annual reports to
shareholders, including a list of investments held.
EXPERTS
The Financial Statements of the Company as of December 31, 1995
included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in auditing and
accounting in giving said report.
FURTHER INFORMATION
This Prospectus and the Statement of Additional Information do
not contain all of the information set forth in the Registration Statement
that the Company has filed with the Securities and Exchange Commission.
The complete Registration Statement may be obtained from the Securities and
Exchange Commission upon payment of the fee prescribed by its Rules and
Regulations.
As stated above, the Statement of Additional Information contains
further information about the Company. The table of contents of the
Statement of Additional Information is as follows:
Page
Investment Objectives and Policies A-2
Net Asset Value A-6
Taxation A-6
Officers and Directors A-10
Control Persons and Principal Holders of Securities A-13
Investment Advisory and Other Services A-13
Brokerage and Portfolio Transactions A-15
Stock Purchases and Tenders A-16
Performance Information A-18
Financial Statements F-1
Report of Independent Public Accountants F-2
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of
Additional Information and, if given or made, the information or
representations must not be relied upon as having been authorized by the
Company or the Company's Investment Adviser. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
security other than the shares of Common Stock offered by this Prospectus,
nor does it constitute an offer to sell or a solicitation of an offer to
buy the shares of Common Stock by anyone in any jurisdiction in which the
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder will, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date of this Prospectus. If any material change occurs
while this Prospectus is required by law to be delivered, however, this
Prospectus will be supplemented or amended accordingly.
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
Aaa Bonds that are rated Aaa are judged to be of the best quality.
they carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than in Aaa
Securities.
A Bonds that are rated A possess may favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
<PAGE>
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Moody's applies numerical modifiers (l, 2, and 3) with respect to the
bonds rated "Aa" through "B". The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the
company ranks in the lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Standard & Poor's Ratings Group
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
<PAGE>
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation, and C
the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse
conditions. Debt rated C1 is reserved for income bonds on which
no interest is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The
"r" symbol is attached to derivatives, hybrids and certain other
obligations that S&P believes may experience high variability in
expected returns due to non-credit risks created by the terms of
the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
<PAGE>
No dealer, salesman, or
other person has been
authorized to give any
information or to make any
representation not contained
in this Prospectus. If
given or made, such
information or
representation must not be
relied upon as having been
authorized by the Company or
any underwriter. This
Prospectus does not
constitute an offer to sell
or the solicitation of an
offer to buy any security
other than the shares of
Common Stock offered by this
Prospectus, nor does it
constitute an offer to sell
or the solicitation of an
offer to buy shares of
Common Stock by anyone in
any jurisdiction in which
such offer or solicitation
would be unlawful. Neither
the delivery of this
Prospectus nor any sale made
hereunder shall, under any
circumstances, create an
implication that there has
been no change in the facts
as set forth in the
Prospectus or in the affairs
of the Company since the
date hereof.
662,210 Shares
DEM, Inc.
Common Stock
_______________________
TABLE OF CONTENTS
_____________
PROSPECTUS
Page
_____________
<PAGE>
Prospectus Summary 2
Company Expenses 5
Financial Highlights 7
The Company 7
Use of Proceeds 7
_______________________
Investment Objectives and
Policies 8
Risk Factors 10
Net Asset Value and Market
Price Information....
12
Management of the Company
13
Dividends and Distributions
16
Dividend Reinvestment Plan
16
Taxation 18
Custodian, Transfer and
Dividend-
Paying Agent and
Registrar 20
Plan of Distribution 20
Common Stock 21
Stock Purchases and Tenders
23
Legal Matters 23
Reports to Shareholders
24
[ ], 1996
Experts 24
Further Information 24
Corporate Bond Ratings
Append
ix A
_______________________
Subject to Completion
Preliminary Statement of Additional Information Dated August 23, 1996
<PAGE>
DEM, INC.
STATEMENT OF ADDITIONAL INFORMATION
DEM, Inc. (the "Company") is a non-diversified, closed-end management
investment company. The principal investment objective of the Company is
aggressive long-term growth through capital appreciation through investment
in domestic emerging markets that it believes are positioned for growth.
"Domestic emerging markets" are public companies that are controlled by
African Americans, Hispanic Americans, Asian Americans and women that are
located in the United States and its territories ("DEM Companies"). Both
capital appreciation and income are considered in choosing specific
investments, but the primary emphasis is on capital appreciation. The
Company retains maximum flexibility as to the types of investments it may
make and is permitted to invest in portfolio companies with large and small
market capitalizations. Some of these investments may involve the purchase
of securities directly from portfolio companies in initial or other public
offerings of their securities.
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus for the Company dated
August 23, 1996 (the "Prospectus"). This Statement of Additional
Information does not include all the information that a prospective
investor should consider before purchasing the Company's shares of common
stock, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without
charge, by calling the Company at (800) 752-1013.
TABLE OF CONTENTS
Page
Investment Objectives and Policies A-2
Net Asset Value A-6
Taxation A-6
Officers and Directors A-10
Control Persons and Principal Holders of Securities A-13
Investment Advisory and Other Services A-13
Brokerage and Portfolio Transactions A-15
Stock Purchases and Tenders A-16
Performance Information A-18
Financial Statements F-1
Report of Independent Public Accountants F-2
<PAGE>
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the registration statement filed
with the Securities and Exchange Commission, Washington, D.C. (the "SEC").
These items may be obtained from the SEC upon payment of the fee
prescribed, or inspected at the SEC's office at no charge.
This Preliminary Statement of Additional Information is dated August 23,
1996
<PAGE>
[Outside front cover page]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Company is aggressive
long-term growth through investment in domestic emerging markets that it
believes are positioned for growth. "Domestic emerging markets" are public
companies that are controlled by African Americans, Hispanic Americans,
Asian Americans and women that are located in the United States and its
territories. Both capital appreciation and income are considered in
choosing specific investments, but the primary emphasis is on capital
appreciation. The Company retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies
with large and small market capitalizations. Some of these investments may
involve the purchase of securities directly from portfolio companies in
initial or other public offerings of their securities. See "RISK FACTORS--
Investment in Small Companies" in the Prospectus. The Company's principal
investment objective of long-term growth through capital appreciation
through investment in domestic emerging markets is not a "fundamental
policy" of the Company and can therefore be changed by the Company without
shareholder approval.
In determining whether a specific portfolio company is
"controlled" by African Americans, Hispanic Americans, Asian Americans or
women, the Company will apply 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; a majority of the members of
the board of directors of the company must be members of one or more of the
listed groups; or a majority of the company's executive officers must be
comprised of members of the listed groups.
The Company will seek to identify businesses that are DEM
Companies through research by the Investment Adviser. Such research will
include: requests to specific companies for details of their ownership and
management; independent research for the details of specific companies'
ownership and management 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; the review of business lists compiled by magazines and other
publications which list DEM Companies; the examination of companies that
generally market themselves as DEM Companies; and the review of annual
reports and other regulatory filings.
<PAGE>
To achieve the Company's investment objectives, the Company
invests in a wide variety of types of portfolio companies and seeks to
identify those companies that are positioned for growth. Among other
factors, the Investment Adviser considers a company's above average
earnings growth, high potential profit margins, innovative products, high
quality management, and competitive advantage in making investment
decisions. The Company believes that domestic emerging markets represent
one of America's fastest growing market segments and include well-
diversified, high-growth segments of the economy including but certainly
not limited to personal communications, media/entertainment, environmental
services, applied/advanced technology, personal financial services and
value-oriented consuming. While the Company invests in portfolio companies
with large and small market capitalizations, the Company believes that
investing in small companies may offer the potential for significant long-
term capital appreciation. Most of the Company's investments are in
marketable common stocks or marketable securities convertible into common
stock traded on an exchange or in the over-the-counter markets. To the
extent the Company invests in companies with smaller market capitalization,
the securities of such companies may be traded in such over-the-counter
markets as the OTC Bulletin Board<SM> and the Pink Sheets<SM>. See "RISK
FACTORS--Investment in Small Companies" in the Prospectus.
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, which may include
securities commonly termed "derivatives," as discussed below, if the
Investment Adviser deems such investments advisable. The Company may
invest in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by Standard and Poor's Corporation or "Caa" or lower by Moody's
Investors Service, Inc. or non-rated securities of comparable quality.
These debt securities are predominantly speculative, involve major risk
exposure to adverse conditions and are often referred to in the financial
press as "junk bonds." See "RISK FACTORS -- Lower Rated Securities" and
Appendix A in the Prospectus.
The Company does not invest in foreign securities (including
American Depository Receipts) or restricted securities as defined under
Rule 144.
<PAGE>
The Company is authorized to lend securities it holds to brokers,
dealers and other financial organizations, but it will not lend securities
to any affiliate of the Investment Adviser unless the Company applies for
and receives specific authority to do so from the SEC. The Company'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 Company 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 Company and
that is acting as a "finder."
By lending its securities, the Company 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 Company 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 Company must be able to
terminate the loan at any time; (4) the Company 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 Company 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 Company's Board of
Directors must terminate the loan and regain the Company's right to vote
the securities. Such investment techniques are commonly referred to as
"derivatives." Up to 20% of the Company's assets may be invested in
derivatives such as options for hedging and risk management purposes or
when, in the opinion of the Investment Adviser, derivatives can be expected
to yield a higher investment return than other investment options.
The Company may enter, without limitation, 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 Company purchases a
<PAGE>
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
Company to keep all of its assets at work while retaining "overnight"
flexibility in pursuit of investments of a longer-term nature. The Company
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 Company 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 Company might
be delayed in, or prevented from, selling the collateral for the Company's
benefit. The Company's Board of Directors has established procedures,
which are periodically reviewed by the Board, pursuant to which the
Investment Adviser monitors the creditworthiness of the dealers and banks
with which the Company enters into repurchase agreement transactions.
The Company retains the flexibility to respond promptly to
changes in market conditions. During periods when the Investment Adviser
believes a temporary defensive posture in the market is warranted, the
Company 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
Company's investment objectives, or alternatively, the Company 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 Company's
investment objectives may or may not involve less risk than DEM Companies.
Accordingly, to the extent that the Company adopts a temporary defensive
posture in which it invests in non-DEM Companies the Company's investments
will continue to present significant risks. See "RISK FACTORS--Investment
in Small Companies, --Non-Diversified Status, --Lower Rated Securities" in
the Prospectus. The decision to adopt a temporary defensive posture may be
affected by such factors as market conditions generally, the Investment
Advisor'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 Company will employ
defensive strategies, and to the extent it is so invested, the Company may
not achieve its investment objectives.
<PAGE>
Fundamental Policies
The following investment restrictions are fundamental and cannot
be changed without the approval of holders of a majority of the Company's
outstanding voting shares, which, as used here, means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the
outstanding shares are present in person or represented by proxy or (ii)
more than 50% of the outstanding shares. The Company's investment policies
that are not designated fundamental policies may be changed by the Company
without shareholder 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
Company. The investment policies adopted by the Company prohibit the
Company from:
(1) Issuing senior securities, borrowing money or pledging its
assets, except that the Company may borrow from a lender (i) for temporary
or emergency purposes, (ii) for such short-term credits as may be necessary
for the clearance or settlement of transactions, (iii) to finance
repurchases of its shares (see "Stock Purchases and Tenders") in amounts
not exceeding 10% (taken at the lower of cost or current value) of its
total assets (not including the amount borrowed), or (iv) to pay any
dividends required to be distributed in order for the Company to maintain
its qualification as a regulated investment company under the Code or
otherwise to avoid taxation under the Code. Additional investments will
not be made when borrowings exceed 5% of the Company's total assets. The
Company may pledge its assets to secure such borrowings.
(2) Purchasing securities on margin.
(3) Underwriting the securities of other issuers, except insofar
as the Company may be deemed an underwriter in the course of disposing of
portfolio securities.
(4) Concentrating investments in particular industries. The
Company'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.
(5) Engaging in the purchase and sale of real estate or real
estate or mortgage-backed securities.
<PAGE>
(6) Purchasing or selling commodities or commodities contracts.
(7) Making loans to others, except through the purchase of
qualified (publicly distributed bonds, debentures or other securities) debt
obligations, the entry into repurchase agreements and loans of portfolio
securities consistent with the Company's investment objectives and
policies.
(8) Investing in foreign securities (including American
Depository Receipts).
(9) Investing in restricted securities as defined in Rule 144.
Other Investment Policies
The policy of the Company is not to invest its funds for the
purpose of purchasing working control in companies except when and if, in
the judgment of the Investment Adviser, such investment is deemed
advisable. This policy of the Company, which is established by the Board
of Directors, is subject to change without stockholder approval.
Portfolio Turnover. The policy of the Company with respect to
portfolio turnover will be to make such changes in its portfolio as its
Investment Adviser shall from time to time recommend. The Company cannot
accurately predict its turnover rate, but anticipates that its annual
quarterly portfolio turnover will not exceed 50%.
NET ASSET VALUE
Net asset value is calculated (a) no less frequently than weekly,
(b) on the last business day of each month and (c) at any other times
determined by the Company's Board of Directors. Net asset value is
calculated by dividing the value of the Company's net assets (the value of
its assets less its liabilities, exclusive of capital stock and surplus) by
the total number of shares of Common Stock outstanding. All securities for
which market quotations are readily available are valued at the closing
price quoted for the securities prior to the time of determination (but if
bid and asked quotations are available, at the mean between the last
current bid and asked prices, rather than the quoted closing price).
Although the Company seeks to take into account material changes in value
occurring after the close of a market and before the time the Company's net
asset value is determined, there can be no assurance that it will always be
<PAGE>
able to do so. Securities that are traded over-the-counter are valued, if
bid and asked quotations are available, at the mean between the current bid
and asked prices. If bid and asked quotations are not available, then
over-the-counter securities are valued as determined in good faith by the
Board of Directors. In making this determination the Board considers,
among other things, publicly available information regarding the issuer,
market conditions and values ascribed to comparable companies. In
instances where the price determined above is deemed not to represent fair
market value, the price is determined in such manner as the Board may
prescribe. Investments in short-term debt securities having a maturity of
60 days or less are valued at amortized cost if their term of maturity from
the date of purchase was less than 60 days, or by amortizing their value on
the 61st day prior to maturity if their term to maturity from the date of
purchase when acquired by the Company was more than 60 days, unless this is
determined by the Board of Directors not to represent fair value. All
other securities and assets are taken at fair value as determined in good
faith by the Board of Directors, although the actual calculation may be
done by others.
The Common Stock trades on the Nasdaq SmallCap Market<SM> under
the symbol "DEMI". In recent periods, shares of closed-end investment
companies have generally traded at a discount from net asset value, but in
some cases have traded above net asset value. Among the factors which may
be expected to affect whether shares of the Company trade above or below
net asset value are portfolio investment results and supply and demand for
shares of the Company. The Company cannot predict whether the Common Stock
will trade at, above or below net asset value.
TAXATION
The following discussion reflects certain applicable tax laws as
of the date of this Statement of Additional Information. For additional
tax information see "TAXATION" in the Company's Prospectus.
Taxation of the Company
The Company has elected 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 Company must, among
other things: (a) derive at least 90% of its gross income from dividends,
<PAGE>
interest, payments with respect to loans of securities and gains from the
sale or other disposition of securities or certain other related income;
(b) derive less than 30% of its gross income from the sale or other
disposition of securities and certain other investments held for less than
three months (the "short-short rule"); and (c) diversify its holdings so
that at the end of each fiscal quarter (i) at least 50% of the value of the
Company's assets is represented by cash or cash items, U.S. government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more
than 5% of the value of the Company's assets nor more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Company's 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 the Company
controls and which are determined to be engaged in the same or similar
trades or businesses or related trades or businesses.
If the Company 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. See "TAXATION --
Taxation of the Company" in the Prospectus. In addition, the Company will
be subject to a nondeductible 4% excise tax on the amount by which the
income it distributes in any calendar year is less than a statutorily
designated, required amount. For purposes of the excise tax, the required
distribution for any calendar year equals the sum of: (a) 98% of the
Company's ordinary income for such calendar year; (b) 98% of the Company's
capital gain net income for the one-year period ending on October 31 of
that year; and (c) 100% of the Company's undistributed ordinary income and
capital gain net income from prior years. For purposes of the excise tax,
any ordinary income or capital gain net income retained by, and taxed in
the hands of, the Company will be treated as having been distributed. The
Company may elect to retain its net capital gain and pay corporate income
tax thereon. In such event, each stockholder of record on the last day of
the Company's taxable year would be required to include in income for tax
purposes his or her proportionate share of the Company's undistributed net
capital gain. Each stockholder would be entitled to credit his or her
proportionate share of the tax paid by the Company against his 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 shares for federal income tax purposes by an
amount equal to 65% of his proportionate share of the undistributed net
capital gain.
<PAGE>
The Company may elect to retain all or a portion of its net
capital gain, as described under "Taxation of Stockholders" below.
Any capital losses resulting from the disposition of securities
can only be used to offset capital gains and cannot be used to reduce the
Company's ordinary income. Such capital losses may be carried forward by
the Company for eight years.
The Company may acquire securities which do not pay interest
currently in an amount equal to their effective interest rate, such as zero
coupon, pay-in-kind, or delayed interest securities. As the holder of such
a security, the Company is required to include in taxable income the
original issue discount that accrues on the security for the taxable year,
even if the Company receives no payment on the security during the year.
Because the Company must distribute annually substantially all of its
investment company taxable income, including any original issue discount,
in order to qualify as a regulated investment company and to avoid
imposition of the 4% excise tax, the Company may be required in a
particular year to distribute dividends in an amount that is greater than
the total amount of cash the Company actually receives as distributions on
the securities it owns. Those distributions will be made from the
Company's cash assets or from the proceeds of sales of portfolio
securities, if necessary. The Company may realize capital gains or losses
from those sales, which would increase or decrease the Company's investment
company taxable income or net capital gain. In addition, such gains may be
realized on the disposition of securities held for less than three months.
Because of the short-short rule, (as described above) and its possible
effect on the Company's qualification as a regulated investment company for
tax purposes, such gains could reduce the Company's ability to sell other
securities, or certain options, futures or forward contracts, held for less
than three months that it might wish to sell in the ordinary course of its
portfolio management.
The Company may also acquire securities at a market discount.
Market discount is generally equal to (other than in the case of an
obligation issued with original issue discount) the excess of the stated
redemption price of the obligation at maturity over the purchase price at
which it is acquired by a subsequent purchaser. Market discount is treated
as interest income, rather than as capital gain, when recognized by the
purchaser.
<PAGE>
The Company's taxable income will in part be determined on the
basis of reports made to the Company by the issuers of the securities in
which the Company invests. The tax treatment of certain securities in
which the Company 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 Company could result in adjustments to the income of the Company.
Taxation of Stockholders
Dividends (other than capital gain dividends) distributed by the
Company may be eligible for the dividends received deduction in the hands
of corporate stockholders, to the extent that the Company'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 Company are generally
taxable to the stockholders at the time the dividend or distribution is
made. However, any dividends declared by the Company in October, November
or December and made payable to stockholders of record in such a month
would be taxable to stockholders as of December 31, provided that the
dividend is paid no later than the following January.
If a stockholder purchases shares of Common Stock at a cost that
reflects an anticipated dividend, such dividend 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 Company 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 certain of the current federal income tax laws regarding the Company and
investors in the shares of Common Stock, and does not deal with all of the
federal income tax consequences applicable to the Company, 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 Company.
For additional information on taxation, see "Taxation" in the
Company's Prospectus.
<PAGE>
OFFICERS AND DIRECTORS
NAME AND ADDRESS
AGE
OFFICE
PRINCIPAL OCCUPATIONS
DURING PAST FIVE YEARS
Nathan A. Chapman,
Jr.*
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
38
President,
Chairman of
Board of
Directors and
Director
President, Chief Executive
Officer and Treasurer since
1986 of The Chapman Co. and
President and Chief Executive
Officer of Chapman Capital
Management, Inc. since 1988.
President and Chairman of the
Board of The Chapman Funds,
Inc. since 1988.
Ronald A. White
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
46
Director
President, law firm of
Ronald A. White, P.C. since
1982, Director of The Chapman
Funds, Inc.
Earl U. Bravo, Sr.
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
48
Vice President
and Secretary
Chief Operating Officer
of The Chapman Co. since
1992. From 1990 until 1992,
President of Chapman Capital
Management, Inc.
M. Lynn Ballard
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
53
Treasurer
Controller of The Chapman
Co. and Treasurer of The
Chapman Funds, Inc. since
1988.
<PAGE>
Bonnie Gillette
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
43
Assistant
Secretary
Secretary of The Chapman
Co., Chapman Capital
Management, Inc. and The
Chapman Funds, Inc. since
1988.
James B. Lewis
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
48
Director
City Administrator
/Manager, City of Rio Rancho,
New Mexico since March 1996,
Chief Clerk-State Corporation
Commission, 1995 to 1996.
Chief of Staff, Office of the
Governor from 1991 to 1995.
New Mexico State Treasurer,
1985 to 1991. County
Treasurer, Bernadillo County
1982 to 1985. Director of
The Chapman Funds, Inc.
Lottie H.
Shackelford
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
54
Director
Executive Vice President
Global USA since 1995, City
Director of the City of
Little Rock, Arkansas from
1978 to 1995, City Mayor of
Little Rock, Arkansas from
1987 to 1989; Vice Chair,
Democratic National
Committee, 1989, Co-Chair,
Democratic National
Committee, 1988.
Director of The Chapman
Funds, Inc.
Robert L. Wallace
401 E. Pratt St.,
28th Floor
Baltimore, Maryland
21202
39
Director
President since 1993 of the
BITH Group, Inc. Senior Vice
President of ECS Technology
Inc. from 1992 to 1993.
Assistant Vice President
Maryland National Bank from
1990 to 1992. Author "Black
Wealth Through Black
Entrepreneurship."
<PAGE>
________________________
*Director is interested person of the Company as defined in the 1940 Act.
The Company will pay each of its directors who is not an
affiliated person (as defined in the 1940 Act) of the Investment Adviser a
fee of $1,000 per Board meeting attended and will reimburse any out-of-
pocket expenses. Messrs. Lewis and White and Ms. Shackelford are also
directors of The Chapman Funds, Inc., an open end management investment
company in the same "fund complex" as the Company (as that term is defined
under the 1940 Act) and are paid $1,000 per meeting of the board of
directors of The Chapman Fund, Inc. that they attend. No officer or
director of the Company is paid more than $60,000 in connection with their
services to the Company.
The Charter and Bylaws of the Company provide that the Company
will indemnify directors and officers and may indemnify employees or agents
of the Company against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their positions with
the Company to the fullest extent permitted by law. In addition, the
Company's Charter provides that the Company's directors and officers will
not be liable to shareholders for money damages, except in limited
instances. However, nothing in the Charter or the Bylaws of the Company
protects or indemnifies a director, officer, employee or agent against any
liability to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such person's office. No insurance
obtained by the Company shall protect or purport to protect officers or
directors, the investment adviser or any principal underwriter of the
Company against any liability to the Company or its shareholders to which
they would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of their obligations and
duties.
Commencing with the first annual meeting of shareholders, the
Board of Directors will be divided into three classes, having terms of one,
two and three years, respectively. At the annual meeting of shareholders
in each year thereafter, the term of one class will expire and directors
will be elected to serve in that class for terms of three years. See
"COMMON STOCK -- Anti-Takeover Provisions in the Charter" in the Company's
Prospectus.
<PAGE>
The following table lists all persons known to the Company to own of record
or beneficially five percent or more of the Company's outstanding Common
Stock as of August 23, 1996 and the ownership of all directors and
executive officers of the Company as a group.
Name
Address
Percentage of
Securities Owned
Memphis Retirement
System
125 North Main Street
Room 366
Memphis, TN 38103
59%(1)
All current directors
and executive officers
as a group
The World Trade Center-
Baltimore
401 East Pratt Street
Baltimore, MD 21201
(2)
___________________
(1) To the Company's knowledge, the shares of Common Stock are owned
beneficially and of record.
(2) Less than 1% of shares outstanding.
Because one shareholder of the Company owns 59% of the issued and
outstanding Common Stock as of August 23, 1996, such shareholder is deemed
to control the Company. Accordingly, such shareholder has significant
power to affect the affairs of the Company or to determine or influence the
outcome of matters submitted to a vote of the shareholders including the
election of directors.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Adviser, Chapman Capital Management, Inc., has
been retained under an investment advisory and administrative services
agreement ("Advisory and Administrative Services Agreement") to provide
investment advice and, in general, to conduct the management and investment
program of the Company in accordance with the Company's investment
objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. The Investment Adviser was
established in 1988 and is located at The World Trade Center - Baltimore,
401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202.
The Investment Adviser is a wholly-owned subsidiary of The
Chapman Co. Nathan A. Chapman, Jr., who is the controlling stockholder of
The Chapman Co. is a controlling person (as that term is defined under the
1940 Act) of The Chapman Co. and, therefore, a controlling person of the
Investment Adviser. The Chapman Co. is a broker-dealer registered under
the Securities and Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. The Chapman Co. is the only
minority controlled full service securities firm headquartered in Maryland
and has qualified as a minority business enterprise under various state and
municipal regulations.
The table below sets forth the names of affiliated persons of the
Company who are also affiliated persons of the Investment Adviser:
Name and Age
Affiliation
s with
Company
Affiliations with the Company's
Investment Adviser
Nathan A.
Chapman, Jr.
President
and
Chairman of
the Board
of
Directors
President, Chief Executive Officer
and Chairman of the Board of
Directors of Chapman Capital
Management, Inc.; Controlling
Stockholder, President, Chief
Executive Officer and Chairman of
The Chapman Co. Chapman Capital
Management, Inc. is the wholly-owned
subsidiary of The Chapman Co.
Earl U. Bravo,
Sr.
Vice
President
Director of Chapman Capital
Management, Inc.; Director and Chief
Operating Officer of The Chapman Co.
<PAGE>
Bonnie Shay
Gillette
Secretary
Secretary of Chapman Capital
Management, Inc.; Secretary of The
Chapman Co.
M. Lynn
Ballard
Treasurer
Treasurer of Chapman Capital
Management, Inc.; Controller of The
Chapman Co.
The Investment Adviser has sole investment discretion for the
Company and makes all decisions affecting assets in the Company's portfolio
under the supervision of the Company's Board of Directors and in accordance
with the Company's stated policies. The Investment Adviser selects
investments for the Company and places purchase and sale orders on behalf
of the Company. The advisory fee payable to the Investment Adviser is
payable monthly in arrears computed at the annualized rate of .90% of the
Company's average weekly net assets during the preceding month. As of June
30, 1996, since its commencement of operations the Company has paid the
Investment Adviser $25,374 under the Advisory and Administrative Services
Agreement.
<PAGE>
BROKERAGE AND PORTFOLIO TRANSACTIONS
General
In making portfolio investments, the Investment Adviser seeks to
obtain the best net price and the most favorable execution of orders. The
Investment Adviser may, in its discretion, effect transactions in portfolio
securities with dealers who provide research advice or other services to
the Company or the Investment Adviser. The Investment Adviser is
authorized to pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for
the Company which is in excess of the amount of commission another broker
or dealer would have charged for effecting that transaction if the
Investment Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities
to the Company. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries,
general summaries of groups of stocks or bonds and their comparative
earnings and yields, or broad overviews of the stock, bond and government
securities markets and the economy. The Company's portfolio securities
ordinarily are purchased from and sold to parties acting as either
principal or agent. Newly issued securities ordinarily are purchased
directly from the issuer or from an underwriter; other purchases and sales
usually are placed with those dealers from which the Investment Adviser
determines that the best price or execution will be obtained. Usually no
brokerage commissions, as such, are paid by the Company for purchases and
sales undertaken through principal transactions, although the price paid
usually includes an undisclosed compensation to the dealer. The prices
paid to underwriters of newly issued securities typically include a
concession paid by the issuer to the underwriter, and purchasers of after-
market securities from dealers ordinarily are executed at a price between
the bid and asked price. As of June 30, 1996, since its commencement of
operations, the Company has paid an aggregate of approximately $5,300 in
brokerage commissions.
The Company may utilize The Chapman Co., an affiliate of the
Company and its Investment Adviser (see "INVESTMENT ADVISORY SERVICES") in
connection with a purchase or sale of securities when the Investment
Adviser believes that, in accordance with the considerations set forth
<PAGE>
above regarding portfolio investments, the broker's charge for the
transaction does not exceed usual and customary levels. In the event that
the services of The Chapman Co. are utilized in connection with a purchase
or sale of securities to or by the Company, its commissions, fees or other
remuneration for effecting such transaction will not exceed usual and
customary broker's commissions if the sale is effected on a securities
exchange or two percent of the sales price if the sale is effected in
connection with a secondary distribution of such securities or one percent
of the purchase or sale price of such securities if the sale is otherwise
effected unless a larger commission is approved by the Securities and
Exchange Commission. The Chapman Co. is a full-service brokerage and
investment banking firm. As such, it provides financial and advisory
services pursuant to agreements to a variety of emerging companies that fit
within the Company's investment objectives. As a result, the Company may
invest in companies that have such agreements with The Chapman Co. or its
affiliates. As of June 30, 1996, the Company has paid approximately $5,300
in brokerage commissions to The Chapman Co. since its commencement of
operations, which amount represents 100% of the Company's aggregate
brokerage commissions paid during such period. Transactions through The
Chapman Co. represent 100% of the aggregate dollar amount of the Company's
brokerage transactions involving the payment of commissions since the
Company's commencement of operations.
Research services furnished by broker-dealers through which the
Company effects securities transactions may be used by the Investment
Adviser in managing other investment accounts and, conversely, research
services furnished to the Investment Adviser by broker-dealers in
connection with other accounts the Investment Adviser advises may be used
by the Investment Adviser in advising the Company. Although it is not
possible to place a dollar value on these services, the Investment Adviser
is of the view that the receipt of such services should not reduce the
overall costs of its research services.
Investment decisions for the Company are made independently from
those of other investment accounts managed by the Investment Adviser. If
those accounts are prepared to invest in, or desire to dispose of such
investments at the same time as the Company, however, available investments
or opportunities for sales will be allocated equitably to each client of
the Investment Adviser. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by the Company or the
price paid or received by the Company.
<PAGE>
STOCK PURCHASES AND TENDERS
Although shares of closed-end investment companies sometimes
trade at premiums over net asset value, they frequently trade at discounts.
The Company cannot predict whether the Common Stock will trade above, at or
below net asset value. The Company believes that, if the Common Stock
trades at a discount to net asset value, the share price will not
adequately reflect the value of the Company to investors and that
investors' financial interests will be furthered if the market price of the
Common Stock more closely reflects net asset value per share of the Common
Stock. For these reasons, the Company's Board of Directors currently
intends to consider from time to time repurchases of Common Stock on the
open market or in private transactions or the making of tender offers for
Common Stock. The Company may repurchase shares of its Common Stock in the
open market or in privately negotiated transactions when the Company can do
so at prices below the current net asset value per share on terms that the
Board of Directors believes represent a favorable investment opportunity.
In addition, the Board of Directors may consider, from time to time, but
not more frequently than once every two years, making an offer to each
Common Stock shareholder of record to purchase at net asset value shares of
Common Stock owned by the shareholder. The Company does not have a
fundamental policy with respect to the repurchase of Common Stock and these
repurchases are discretionary.
Before authorizing any repurchase of Common Stock or tender offer
to the Common Stock shareholders, the Company's Board of Directors would
consider all relevant factors, including the market price of the Common
Stock, its net asset value per share, the liquidity of the Company's
securities positions, the effect an offer or repurchase might have on the
Company or its shareholders and relevant market conditions. Any offer
would be made in accordance with the requirements of the 1940 Act and the
Securities Exchange Act of 1934. Although the matter will be subject to
the review of the Board of Directors at the time, a tender offer is not
expected to be made if the anticipated benefit to shareholders and the
Company would not be commensurate with the anticipated cost to the Company,
or if the number of shares expected to be tendered would not be material.
No assurance can be given that repurchases and/or tenders will
result in the Common Stock's trading at a price that is close or equal to
net asset value. The market price of the Common Stock will, among other
things, be determined by the relative demand for, and supply of, the Common
Stock in the market, the Company's investment performance, the Company's
<PAGE>
dividends and investor perception of the Company's overall attractiveness
as an investment as compared with other investment alternatives. The
Company's acquisition of Common Stock will decrease the total assets of the
Company and therefore have the effect of increasing the Company's expense
ratio. The Company may borrow money to finance the repurchase of shares
subject to the limitations described in this Statement of Additional
Information. Any interest on the borrowings will reduce the Company's net
income. Because of the nature of the Company's investment objectives,
policies and securities holdings, the Investment Adviser does not
anticipate that, under normal market conditions, (1) repurchases and
tenders will have an adverse effect on the Company's investment performance
or (2) it will have any material difficulty in disposing of securities to
consummate Common Stock repurchases and tenders.
When a tender offer is authorized to be made by the Company's
Board of Directors, it will be an offer to purchase at a price equal to the
net asset value of all (but not less than all) of the shares owned by a
Common Stock shareholder (or attributed to the shareholder for federal
income tax purposes under the Code). A shareholder who tenders all Common
Stock shares owned or considered owned by him or her, as required, will
realize a taxable gain or loss depending upon such person's basis in such
shares.
The policy of the Company's Board of Directors with respect to
tender offers and to repurchases, which may be changed by the Board of
Directors, is that the Company will not accept tenders or effect
repurchases if (1) those transactions, if consummated, would (a) result in
the exclusion of the Common Stock from the Nasdaq SmallCap Market<SM> or
(b) impair the Company's status as a regulated investment company under the
Code; (2) the Company would not be able to liquidate securities to
repurchase Common Stock in an orderly manner that is consistent with the
Company's investment objectives and policies; or (3) there is, in the
Board's judgment, any material (a) legal action or proceeding instituted or
threatened challenging the transactions or otherwise materially adversely
affecting the Company, (b) suspension of or limitation on prices for
trading securities generally on the Nasdaq SmallCap Market<SM> or any
exchange on which securities held by the Company are traded,
(c) declaration of a banking moratorium by federal or state authorities or
any suspension of payment by banks in the United States, (d) limitation
affecting the Company or issuers of securities held by the Company imposed
<PAGE>
by federal, state or local authorities on the extension of credit by
lending institutions, (e) commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the
United States or (f) other event or condition that would have a material
adverse effect on the Company or its shareholders if shares of Common Stock
were repurchased. The Board of Directors may modify these conditions in
light of experience.
If the Company liquidates securities in order to repurchase
shares of Common Stock, the Company may realize gains and losses. Gains,
if any, may be realized on securities held for less than three months.
Because the Company must derive less than 30% of its gross income for any
taxable year from the sale or disposition of securities held for less than
three months in order to retain the Company's regulated investment company
status under the Code, gains realized by the Company upon a liquidation of
securities held for less than three months would reduce the amount of gain
on the sale of other securities held for less than three months that the
Company could realize in the ordinary course of its investment operations,
which may adversely affect the Company's performance. The Company's
turnover rate may or may not be affected by the Company's repurchases of
shares of Common Stock pursuant to a tender offer.
PERFORMANCE INFORMATION
The performance of the Company may be compared to the record of
the Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"),
the Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000
Equity Index, the DEM Index, the DEM Universe of companies and returns
quoted by Ibbotson Associates. The S&P 500 Stock Index is a well known
measure of the price performance of 500 leading larger domestic stocks
which represents approximately 80% of the market capitalization of the
United States equity market. In comparison, the Nasdaq National Market
System is comprised of all stocks on Nasdaq's National Market System, as
well as other Nasdaq domestic equity securities. 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
<PAGE>
a measure of small capitalization performance. It is a subset of the
Russell 3000 Index. The Russell 3000 is comprised of the 3000 largest U.S.
companies. The Russell 2000 is comprised of the smallest 2000 companies in
the Russell 3000 Index. The Wilshire 5000 Index is a broad measure of
market performance and represents the total dollar value of all common
stocks in the United States for which daily pricing information is
available. This index is also capitalization weighted and captures total
return. The DEM Universe is a growing list of companies identified by the
Investment Advisor that are controlled by African-Americans, Asian-
Americans, Latin/Hispanic-Americans or women. The DEM Index was created by
the Investment Advisor and is comprised of 30 companies from the DEM
Universe that reflect the market capitalization and industry classification
characteristics of the DEM Universe. The DEM Index is weighted by market
capitalization and is intended as a performance measure of the DEM
Universe. The small company stock returns quoted by Ibbotson Associates
are based upon the smallest quintile of the 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 Company's
total return or performance may be compared to the performance of other
funds or other groups of funds that are followed by Morningstar, Inc. a
widely used independent research firm which ranks funds by overall
performance, investment objectives and asset size. Morningstar proprietary
ratings reflect risk-adjusted performance. The ratings are subject to
change every month. Morningstar's ratings are calculated from a fund's
three-year and five-year average annual returns with appropriate sales
charge adjustments and a risk factor that 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 Company'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 Company's performance may also be compared, from time to
time, to (a) indices of stocks comparable to those in which the Company
<PAGE>
invests; (b) the Consumer Price Index (measure for inflation) may be used
to assess the real rate of return from an investment in the Company.
Certain government statistics, such as the Gross National Product, may be
used to illustrate the investment attributes of the Company or the general
economic business, investment or financial environment in which the Company
operates.
Additional Performance Information for the Fund
The Company may reflect its total return in advertisements and
shareholder 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 Company over a period of
1 year, 5 years and over the life of the Company. This method of
calculating total return is based on the following assumptions, all
dividends and distributions by the Company are reinvested in shares of the
Company at net asset value; 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 Company at the end of a defined period of
time.
<PAGE>
FINANCIAL STATEMENTS
Index to Financial Statements
Page
Report of Independent Public Accountants F-2
Financial Statements (audited)
Statement of Assets and Liabilities F-3
Statement of Operations F-4
Statement of Changes in Net Assets F-5
Notes to Financial Statements F-6
Statement of Portfolio Investments F-9
Financial Highlights F-10
Interim Financial Statements (unaudited)
Statement of Assets and Liabilities F-11
Statement of Operations F-12
Statement of Changes in Net Assets F-13
Notes to Interim Financial Statements F-14
Investment in Securities as of June 30, 1996 F-16
<PAGE>
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.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 16, 1996
<PAGE>
DEM, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
<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
4,864,281
LIABILITIES:
Accrued expenses (Note 2)
121,481
NET ASSETS - equivalent to $13.77 per share
on 344,457
shares of common stock outstanding
$ 4,742,800
SUMMARY OF SHAREHOLDERS' EQUITY (Note 4):
Common stock, $.00001 par value,
500,000,000 shares
authorized, 344,457 shares issued and
outstanding
$ 3
Additional paid-in capital
4,740,912
Undistributed net investment income
1,885
Net assets applicable to outstanding
common stock
$ 4,742,800
The accompanying notes are an integral part of this statement
<PAGE>
DEM, INC.
STATEMENT OF OPERATIONS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
INVESTMENT INCOME:
Interest income (Note 2)
$ 2,431
EXPENSES:
Administrative, management and investment
advisory
expenses (Notes 2 and 3)
546
Net investment income and net
increase in net
assets resulting from operations
$ 1,885
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
STATEMENT OF CHANGES IN NET ASSETS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net investment income (Note 2)
$ 1,885
Net increase in net assets resulting
from operations
1,885
CAPITAL SHARE TRANSACTIONS:
Common shares issued, net of issuance
costs (Note 4)
4,740,915
Net increase in net assets resulting
from capital
shares transactions
4,740,915
TOTAL INCREASE IN NET ASSETS
4,742,800
NET ASSETS, beginning of the period
-
NET ASSETS, end of the period
$ 4,742,800
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.
<PAGE>
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.
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.
<PAGE>
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 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:
<PAGE>
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. Subsequent to year-end, Chapman
Capital Management, Inc. purchased an additional 196,400 shares of the
Company's common stock from the public. 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>
DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF DECEMBER 31, 1995
Principa
l
Carrying
Amount
Value
$
4,812,17
5
Fidelity Institutional U.S. Government
Cash Portfolio II (stated at cost which
is market)
$ 4,812,175
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
FINANCIAL HIGHLIGHTS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
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
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, Inc.
Statement Of Assets and Liabilities June 30, 1996 (Unaudited)
Assets
Common Stock Investments (Cost $2,186,275)
$2,307,855
Short-term Investments - at cost plus interest
earned
2,472,805
Interest Receivable
319
Prepaid Expenses
41,315
Deferred Organizational Expense
44,707
4,867,001
Liabilities
Investment Advisory Fee Payable
3,467
Administrator Fee Payable
578
Accrued Expenses
4,469
8,514
Net Assets - equivalent to $14.10 per share on
344,480 shares of Common Stock outstanding
$4,858,487
Summary of Stockholders' Equity
Common Stock, par value $.00001 per share:
authorized
500,000,000 shares; issued and outstanding
344,480 shares
3
Capital Surplus
4,741,251
Overdistributed Net Investment Income
(3,371)
Accumulated Net Realized Loss on Investments
(976)
Unrealized Appreciation of Investments
121,580
Net Assets Applicable to outstanding Common Stock
$4,858,487
See notes to financial statements
<PAGE>
DEM, Inc.
Statement Of Operations (Unaudited)
For the Six Months Ended
June 30, 1996
Investment Income
Dividend Income (Net of withholding
tax of $180)
$ 3,131
Interest Income
86,666
89,797
Advisory Fees
21,749
Transfer Agent Fees
15,579
Legal and Auditing Fees
14,169
Directors' Fees and Expenses
6,234
Organizational Expenses
4,968
Administrative Fees
3,625
Custodian Fees
3,274
Other Expenses
8,232
77,830
Net Investment Income
$11,967
Realized and Unrealized Gain On
Investments
Net Realized Loss on Investments
(976)
Net Unrealized Appreciation
121,580
Net Realized and Unrealized Gain on
Investments
120,604
Net Increase in Net Assets Resulting
from Operations
$132,571
See notes to financial statements
<PAGE>
DEM, Inc.
Statement of Changes in Net Assets
For the Six
Months
November 30,
1995*
Ended June 30,
1996
through
(Unaudited)
December 31,
1995
Operations
Net Investment Income
$ 11,967
$ 1,885
Net Realized Loss on
Investments
(976)
0
Net Increase in Unrealized
Appreciation
of Investments
121,580
0
Net Increase in Net Assets
Resulting
From Operations
132,571
1,885
Distributions to
Shareholders from:
Net Investment Income
(17,222)
0
Net Realized Gain on
Investments
0
0
Net Decrease in Net Assets
Resulting
From Distribution to
Shareholders
(17,222)
0
Increase in Net Assets from
Fund Share
Transactions
338
4,740,915
Total Increase
115,687
4,742,800
<PAGE>
Net Assets
Beginning of year
4,742,800
0
End of Period (including
overdistributed
net investment income
of $3,371 and
undistributed net
investment income
of $1,885,
respectively)
$4,858,487
$4,742,800
* Inception
See notes to financial statements.
<PAGE>
DEM, Inc.
Notes to Financial Statements June 30, 1996 (Unaudited)
1. ORGANIZATION
DEM, Inc. (the Company) was incorporated on October 20, 1995, in the state
of Maryland and is registered as a nondiversified closed-end management
investment company under the Investment Company Act of 1940, as amended.
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 Advisor
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>
These statements are unaudited, and certain information and footnote
disclosures normally included in the Company's annual financial statements
have been omitted, as permitted under the applicable rules and
regulations. The results of operations presented in the accompanying
financial statements are not necessarily representative of operations for
an entire year.
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.
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
outstanding.
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 (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 nondeductible 4%
excise tax on the amount by which it 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%).
<PAGE>
3. INVESTMENT ADVISORY AGREEMENT
The investment advisor 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.
<PAGE>
DEM, Inc.
Portfolio of Investments June 30, 1996 (Unaudited)
Common Stock - 47.5%
Shares
Value
Banking - 12.0%
9,500
BanPonce Corporation
$427,500
1,000
Capital Bancorp/Miami, Florida
28,250
15,000
Carver Federal Savings Bank*
120,000
1,000
Independence Federal Savings Bank*
7,500
583,250
Communications - 5.7%
11,000
Mastec, Inc.*
277,750
Computers - 0.1%
1,000
Micronics Computers, Inc.*
2,562
Consumer Products - 6.9%
13,000
Warnaco Group, Inc.
334,750
Consumer Services - 0.4%
1,000
Jenny Craig, Inc.*
17,875
Clothing and Fabrics - 3.5%
10,000
Supreme International Corporation*
172,500
Electronics - 2.8%
3,500
Lattice Semiconductor Corporation*
84,438
4,000
S3, Inc.*
49,250
133,688
Food - 4.9%
6,710
Tootsie Roll Industries, Inc.
239,043
<PAGE>
DEM, Inc.
Portfolio of Investments (Continued)
Common Stock - continued
Shares
Value
Healthcare - 0.5%
1,000
Owen Healthcare, Inc.*
$ 13,875
1,000
United American Healthcare Corporation*
10,500
24,375
Media/Publishing - 3.5%
5,000
BET Holdings*
131,875
3,000
Granite Broadcasting Corporation*
38,812
170,687
Pharmaceutical - 3.9%
5,000
Watson Pharmaceuticals, Inc.*
189,375
Technology - 3.3%
1,000
Envirotest Systems*
2,750
4,000
Osicom Technologies, Inc.*
65,500
10,000
Sigma Designs, Inc.*
93,750
162,000
Total Common Stock
$2,307,855
Short-term Investments - 50.9%
Princi
pal
Value
Money Markets - 1.5%
70,889
Fidelity Institutional U.S. Government
Cash Portfolio II
$ 70,889
<PAGE>
DEM, Inc.
Portfolio of Investments (Continued)
Short-term Investments - Continued
Princi
pal
Value
Discount Notes - 49.4%
130,00
0
Federal Home Loan Bank Discount Notes
5.29%, due 7/1/96
$ 130,000
740,00
0
Federal National Mortgage Association
Discount Notes
5.24%, due 7/3/96
739,785
500,00
0
Federal Home Loan Bank Discount Notes
5.24%, due 7/9/96
499,418
290,00
0
Federal Farm Credit Bank Discount Notes
5.29%, due 7/10/96
289,616
245,00
0
Federal Home Loan Bank Discount Notes
5.29%, due 7/11/96
244,640
500,00
0
Federal Home Loan Mortgage Corp. Discount
Notes
5.29%, due 7/22/96
498,457
$2,401,916
Total Short-term Investments
$2,472,805
Total Investments - 98.3%
$4,780,660
* Non-income producing during the period
See notes to financial statements
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements
Part A - Financial Highlights
Part B - Report of Independent Public Accountants
Financial Statements (audited)
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Statement of Portfolio Investments
Financial Highlights
Interim Financial Statements (unaudited)
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Interim Financial Statements
Investment in Securities as of June 30, 1996
(2) Exhibits:
(a) -- Charter.1
(b) -- Bylaws.1
(c) -- Not Applicable.
(d) -- (1) See Dividend Reinvestment Plan.
(2) See Charter.
(3) See Bylaws
(e) -- Dividend Reinvestment Plan.1
(f) -- Not Applicable.
(g) -- Advisory and Administrative Services
Agreement between the Company and Chapman Capital
Management, Inc.1
(h) -- (1) Placement Agency Agreement between the
Company and The Chapman Co. 1
(2) Amendment 1 to Placement Agency Agreement
between the Company and The Chapman Co.2
(i) -- Not Applicable.
<PAGE>
(j) -- Custody Agreement between the Company and UMB
Bank, N.A.1
(k) (1) Transfer Agency Services Agreement between
the Company and Fund/Plan Services, Inc.1
(2) Custody Administration and Agency Agreement
between the Company and Fund/Plan Services, Inc.1
(l) -- Opinion and Consent of Venable, Baetjer and
Howard, LLP1
(m) -- Not Applicable.
(n) -- Consent of Arthur Andersen LLP, independent
public accountants for the Company.2
(o) -- Not Applicable.
(p) -- Subscription Agreement between the Company
and Chapman Capital Management, Inc.1
(q) -- Not Applicable.
27(r)-- Financial Data Schedule (1st Six Months
1996).2
(s) -- Power of Attorney.1
1. Incorporated by reference from Pre-Effective Amendment
No. 1 to the Company's Registration Statement on Form
N-2 (File Nos.: 33-98454 and 811-9118) as filed with
the Securities and Exchange Commission on December 7,
1995.
2. Filed herewith.
Item 25. Marketing Arrangements.
None.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this
Registration Statement:
Registration fees $ 0
Blue Sky fees and expenses 500
Printing and engraving expenses 2,500
NASD registration fee 0
Legal fees and expenses 15,000
Accounting fees and expenses 5,000
Total $23,000
<PAGE>
Item 27. Persons Controlled by or Under Common Control with
Registrant.
None.
Item 28. Number of Holders of Securities.
Common Stock, par value $.00001 per share: 315 record
holders as of August 21, 1996.
Item 29. Indemnification.
Section 2-418 of the General Corporation Law of the State of
Maryland, Article VIII of the Company's Articles of Amendment and
Restatement, Article 5.2 of the Company's Bylaws and the
Placement Agency Agreement to be filed as Exhibit h provides for
indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted
to directors, officers and controlling persons of the Company,
pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and
Exchange Commission (the "SEC") such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser.
For information regarding the business of the Investment
Adviser see "Management of the Company" in the Company's
Prospectus.
<PAGE>
Name and Position
with Investment Adviser Other Business
Nathan A. Chapman,
Jr.
Director, Chairman of
the Board, President
President, Chief Executive Officer and
Treasurer of The Chapman Co. and President
and Chief Executive Officer of Chapman
Capital Management, Inc. President of The
Chapman Funds, Inc.
Earl U. Bravo, Sr.
Director
Director and Chief Operating Officer of The
Chapman Co.
M. Lynn Ballard
Treasurer
Controller of The Chapman Co. and Treasurer
of The Chapman Funds, Inc.
Theron Stokes
Director
Attorney, Alabama Education Association
Valerie Chapman
Secretary
Vice-President, The Chapman Funds, Inc. and
Administrator, The Chapman Co.
Item 31. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of
1940, as amended, and the rules promulgated thereunder are
maintained at the office of the Investment Adviser at The World
Trade Center-Baltimore, 401 East Pratt Street, 28th Floor,
Baltimore, Maryland 21202.
Item 32. Management Services.
Not Applicable
<PAGE>
Item 33. Undertakings.
(1) Registrant undertakes to suspend the offering of
the shares of the Common Stock covered hereby until it amends its
Prospectus contained herein if (1) subsequent to the effective
date of this Registration Statement, its net asset value declines
more than 10 percent from its net asset value as of the effective
date of this Registration Statement, or (2) its net asset value
increases to an amount greater than its net proceeds as stated in
the Prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4)(a) Registrant undertakes to file, during any
period in which offers or sales are being made, a post-effective
amendment to this Registration Statement:
(1) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933, as amended;
(2) to reflect in the Prospectus any facts or events
after the effective date of this Registration Statement (or
the most recent post-effective amendment hereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration
Statement; and
(3) to include any material information with respect
to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in this Registration Statement.
(4)(b) Registrant undertakes that, for the purpose
of determining any liability under the Securities Act of
1933, as amended, each subsequent post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of those
securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
(4)(c) Registrant undertakes to remove from
registration by means of post-effective amendment any of the
securities being registered which remain unsold at the
termination of the offering.
(5)(a) For the purpose of determining any liability
under the Securities Act of 1933, as amended, the
information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
Registrant under Rule 497(h) under the 1933 Act shall be
deemed to be part of this Registration Statement as of the
time it was declared effective.
(5)(b) For the purpose of determining any liability
under the Securities Act of 1933, as amended, each post-
effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) Registrant undertakes to send by first class mail
or other means designed to ensure equally prompt delivery,
within two business days of receipt of a written or oral
request, any Statement of Additional Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, and State of Maryland,
as of August 23, 1996.
DEM, INC.
By:/s/ NATHAN A. CHAPMAN, JR.
Nathan A. Chapman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following in the
capacities and on the date indicated.
Signatures
Title
Date
/s/ NATHAN A. CHAPMAN,
JR.
Nathan A. Chapman, Jr.
President, Chairman of the
Board and Director
(Principal Executive
Officer)
August 23,
1996
/s/ M. LYNN BALLARD
M. Lynn Ballard
Treasurer (Principal
Financial and Accounting
Officer)
August 23,
1996
The Entire Board of
Directors
Nathan A. Chapman,
Jr.
Robert L. Wallace
Ronald A. White
By:/s/ NATHAN A.
CHAPMAN
Nathan A. Chapman,
Jr.
Attorney-in-Fact
James B. Lewis
Lottie H. Shackelford
August 23,
1996
<PAGE>
DEM, INC.
EXHIBIT INDEX
Exhibit H(2) Amendment 1 to Placement Agency Agreement between the
Company and The Chapman Co.
Exhibit N Consent of Arthur Andersen LLP
Exhibit 27.R Financial Data Schedule (Six Months 1996).
2
A-19
A-2
F-21
C-4
BA0OCS1/0043400.01
C-7
TIG Insurance Company
August __, 1996
Page 7
BA3D0CS1/0043400.01
</TABLE>
<PAGE>
1,000,000 Shares
Common Stock
DEM, INC.
The World Trade Center - Baltimore
410 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
AMENDMENT 1 TO
PLACEMENT AGENCY AGREEMENT
August 23, 1996
The Chapman Co.
The World Trade Center - Baltimore
410 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Ladies and Gentlemen:
DEM, Inc. a Maryland corporation registered under the
Investment Company Act of 1940, as amended, as a closed-end
investment company, proposes to amend the Placement Agency
Agreement dated November 30, 1995 (the "Agreement") between
the Corporation and The Chapman Co., pertaining to the
issuance and sale through The Chapman Co., on a "best
efforts" basis, of a maximum of 1,000,000 shares of common
stock, $.00001 par value per share, as follows:
The introductory paragraph on page one of the Agreement
is deleted in its entirety and replaced as follows:
DEM, Inc. a Maryland corporation registered under
the Investment Company Act of 1940, as amended (the "Act")
as a closed-end investment company, (the "Corporation"),
proposes to cause to be issued, and sold through The Chapman
Co. (the "Placement Agent") on a "best efforts" basis a
maximum of 1,000,000 shares (the "Shares") of common stock,
$.00001 par value per share (the "Common Stock") at a public
offering price equal to $15.00 per share (the "Offering").
Section 5 of the Agreement is deleted in its entirety
and replaced as follows:
SECTION 5. TERMS OF THE OFFERING
The Offering shall commence upon the effectiveness of
the Registration Statement and shall continue until such
date as all of the Shares are sold or the Offering is
terminated by the Corporation or the Placement Agent as
provided in Section 6 hereof (the "Termination Date").
<PAGE>
Subscription proceeds will be held by the Corporation
pending a closing ("Closing"). Subject to the terms and
conditions of this Agreement, Closings shall be held with
respect to sales of the Shares on a monthly basis or on such
a more frequent basis as the Corporation and Placement Agent
shall agree.
The public offering price will be $15.00 per share.
The minimum subscription will be for 100 shares. The
Placement Agent shall be paid a management fee equal to two
point seven percent (2.7%) of the subscription proceeds
($.40 per share) from all sales of shares. The Placement
Agent will also be paid a selling concession of four point
three percent (4.3%) of the subscription proceeds ($.65 per
share) from all sales of the Shares all, or any portion, of
which the Placement Agent may reallow to other selling
agents. The Corporation shall have the right to accept or
reject in whole or in part subscriptions for the Shares.
Paragraph (g) of Section 8 of the Agreement is deleted
in its entirety and replaced as follows:
(g) This Agreement has been and is made solely for the
benefit of the Placement Agent, the Corporation and their
respective successors, executors, administrators, heirs and
assigns, and the officers, directors and controlling persons
referred to herein, and no other person will have any right
or obligation hereunder. The term "successors" shall not
include any purchaser of the Shares merely because of such
purchase.
Please confirm that the foregoing correctly sets forth
the agreement between the Corporation and the Placement
Agent.
Very truly yours,
DEM, INC.
By: /s/ NATHAN A. CHAPMAN, JR.
Nathan A. Chapman, Jr.
Chairman and President
THE CHAPMAN CO.
By: /s/ NATHAN A. CHAPMAN, JR.
Nathan A. Chapman, Jr.
Chairman and President
BA3DOCS1\0042952.01
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 16, 1996, relating to the financial statements of DEM,
Inc. included in or made a part of this Form N-2.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
August 23, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This Schedule contains Summary Financial Information extracted from the
Registrant's Unaudited Financial Statements dated June 30, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 4,659,080
<INVESTMENTS-AT-VALUE> 4,780,660
<RECEIVABLES> 0
<ASSETS-OTHER> 86,341
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,867,001
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,514
<TOTAL-LIABILITIES> 8,514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,741,254
<SHARES-COMMON-STOCK> 344,480
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,371)
<ACCUMULATED-NET-GAINS> (976)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 121,580
<NET-ASSETS> 4,858,487
<DIVIDEND-INCOME> 3,131
<INTEREST-INCOME> 86,666
<OTHER-INCOME> 0
<EXPENSES-NET> 77,830
<NET-INVESTMENT-INCOME> 11,967
<REALIZED-GAINS-CURRENT> (976)
<APPREC-INCREASE-CURRENT> 121,580
<NET-CHANGE-FROM-OPS> 132,571
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,222
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 23
<NET-CHANGE-IN-ASSETS> 115,687
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 21,749
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77,830
<AVERAGE-NET-ASSETS> 4,851,801
<PER-SHARE-NAV-BEGIN> 13.77
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .35
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.10
<EXPENSE-RATIO> 3.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
