ICA File No.: 811-9118
File No.: 333-2341
As filed with the Securities and Exchange Commission on May 13,
1996
Custom footers, yo.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[ ] Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 5
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 [post-effective amendment]
[registration statement].
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
this Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
DEM, INC.
Form N-2
Cross-Reference Sheet
<TABLE>
<CAPTION>
Part A
Item No. Caption Location in
Prospectus
<S> <C> <C>
1. Outside Front Cover Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Front Cover Page; Inside Front
Cover Page Front Cover Page; Outside Back
Cover
Page
3. Fee Table and Synopsis Prospectus Summary; Company
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Front Cover Page, Prospectus
Summary; Plan of Distribution
6. Selling Shareholders Selling Security -
Holder/Principal
Shareholder
7. Use of Proceeds Not Applicable
8. General Description of the Registrant Front Cover Page;
Prospectus
Summary; The Company;
Investment Objectives and
Policies; Risk Factors; Common
Stock; Net Asset Value and
Market
Price Information
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; Taxation
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 Control Persons and Principal
Holders
of Securities; Officers and
Directors;
See Management of the Company
and
Risk Factors in the Prospectus
<PAGE>
20. Investment Advisory and Other Services Investment
Advisory and Other
Services; Brokerage and
Portfolio
Transactions. See Management
of the
Company, Experts; Custodian,
Transfer and Dividend-Paying
Agent
and Registrar; in the
Prospectus
21. Brokerage Allocation and Other
Practices Brokerage and Portfolio
Transactions
22. Tax Status Taxation
23. Financial Statements Financial Statements
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 May 13, 1996
203,067 Shares
DEM, Inc.
Common Stock
DEM, Inc. (the "Company") is a non-diversified, closed-end
management investment company. The Company's principal investment
objective is long-term growth through capital appreciation through
investment in domestic emerging markets that it believes are positioned
for growth. The Company includes businesses controlled by African
Americans, Hispanic Americans, Asian Americans and women that are
located in the United States and its territories in its definition of
domestic emerging markets ("DEM Companies"). The Company believes that
in the early stages of its operations and from time to time during its
regular operations, it may be prudent to invest some portion of its
assets in securities of companies other than DEM Companies. This
decision may be affected by such factors as market conditions
generally, the views of the Company's investment advisor on the
direction of movement of the stock prices of specific targeted
portfolio companies, opportunities in non-DEM Companies and other
related factors. Accordingly, during such periods, the Company has
reserved the right to invest a significant proportion of its assets in
non-DEM Companies that otherwise meet the Company's investment
objectives. 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."
This Prospectus pertains to the public offering of shares of the
Company's common stock, par value $.00001 per share (the "Common
Stock"), offered from time to time by Chapman Capital Management, Inc.,
the Company's investment adviser (the "Selling Shareholder"). See
"SELLING SHAREHOLDER." The shares of Common Stock may be offered by
the Selling Shareholder in transactions for its own account (which may
include block transactions) on the NASDAQ SmallCap Market(SM), in
negotiated transactions, or a combination of such methods of sale, at
fixed prices, which may be changed, at market prices prevailing at the
time of sales, at prices related to such prevailing prices or at
<PAGE>
negotiated prices. The Selling Shareholder may effect such
transactions by selling shares of Common Stock to or through broker-
dealers, and such broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the Selling Shareholder
or the purchasers of shares of Common Stock for whom such broker-
dealers may act as agent or to whom they sell as principal or both
(which compensation may be in excess of customary commissions). See
"PLAN OF DISTRIBUTION." The Company will not receive any of the
proceeds from the sale of any shares sold hereunder. All expenses of
registration incurred in connection with the offering, including,
without limitation, all registration and qualification fees, printing
and accounting fees and fees and disbursements of counsel are being
borne by the Selling Shareholder. 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." On March 29, 1996, the
last reported sale price of the Common Stock was $15.50. The net asset
value per share of the Common Stock at March 31, 1996 was $13.81.
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 [ ], 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.
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.
<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 long-term growth through capital
appreciation through investment in domestic emerging markets that it
believes are positioned for growth. The Company includes businesses
controlled by African Americans, Hispanic Americans, Asian Americans
and women that are located in the United States and its territories in
its definition of domestic emerging markets ("DEM Companies"). The
Company believes that in the early stages of its operations and from
time to time during its regular operations, it may be prudent to invest
some portion of its assets in securities of companies other than DEM
Companies. This decision 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, opportunities in non-DEM Companies and other related
factors. Accordingly, during such periods, the Company has reserved
the right to invest a significant proportion of its assets in non-DEM
Companies that otherwise meet the Company's investment objectives.
Both capital appreciation and income are considered in the selection of
investments, but primary emphasis is on capital appreciation. The
Company retains maximum flexibility as to the types of investments it
may make and it is permitted to invest in portfolio companies with
large and small market capitalizations. 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
<PAGE>
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).
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." 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. The shares of Common Stock may be offered by the
Selling Shareholder in transactions for its own account (which may
include block transactions) on the NASDAQ SmallCap Market(SM), in
negotiated transactions, or a combination of such methods of sale, at
fixed prices, which may be changed, at market prices prevailing at the
time of sales, at prices related to such prevailing prices or at
negotiated prices. The Selling Shareholder may effect such
transactions by selling shares of Common Stock to or through broker-
dealers, and such broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the Selling Shareholder
or the purchasers of shares of Common Stock for whom such broker-
dealers may act as agent or to whom they sell as principal or both
(which compensation may be in excess of customary commissions).
Trading Market. The Common Stock is traded on the NASDAQ SmallCap
Market(SM).
<PAGE>
Stock Symbol. "DEMI."
Investment Adviser. Chapman Capital Management, Inc. is the Company's
investment adviser (the "Investment Adviser" or "CCM"). The Investment
Adviser has been in the investment counseling business since 1988 and
as of February 29, 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."
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."
<PAGE>
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 larger or more well established
companies. Securities of small companies generally have more limited
marketability and may be subject to greater price 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 Public Market. The Selling Shareholder owns 203,067
of the Company's outstanding shares of Common Stock. As a result, the
Common Stock has a limited trading market and there can be no assurance
that the offering will not adversely affect the market price for the
Common Stock. See "RISK FACTORS -- Limited Public Market."
Control by Principal Shareholder. The Selling Shareholder
owns 59% of the issued and outstanding Common Stock. As a result, the
Selling 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. The
Selling Shareholder intends to offer its entire holding of Common Stock
pursuant to this offering. Accordingly, assuming a successful
completion of the offering, the Selling Shareholder will have no power
to affect the affairs of the Company solely through its ownership of
Common Stock; however, there can be no assurance that the offering will
be successfully completed. Furthermore, the Selling Shareholder will
continue to exercise significant influence over the affairs of the
Company due to its status as the Company's Investment Adviser. See
"RISK FACTORS -- Control
<PAGE>
by Principal Shareholder; MANAGEMENT OF THE COMPANY; PLAN OF
DISTRIBUTION."
Prior 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, below or above net asset value. See "RISK
FACTORS -- Special Factors Relating to Closed-End Companies";
"INVESTMENT OBJECTIVES AND POLICIES."
<PAGE>
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."
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 an estimate of the Company's operating expenses for
the current fiscal year:
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) 0%(1)
Dividend Reinvestment Plan Fees (2) 0%
Annual Expenses (as a percentage of net assets) (3)
Management Fees 0.90%
Other Expenses (4) 2.19%
Total Annual Expenses (estimated) 3.09%
______________________
(1) All of the proceeds of the offering will accrue to the Selling
Shareholder. The Company will not receive any of the proceeds
from any shares sold hereunder.
(2) 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."
(3) See "MANAGEMENT OF THE COMPANY."
<PAGE>
(4) Based upon estimated amounts of expenses for the Company's current
fiscal year.
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 at the levels set forth in the table above.
Example
An investor would pay the following expenses on a $1,000
investment, assuming such investment was made at net asset value, a 5%
annual return and reinvestment of all dividends and distributions at
net asset value:
1 Year 3 Years 5 Years 10 Years
$31 $94 $161 $337
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
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 March 31, 1996.
This information should be read in conjunction with the financial
statements as of December 31, 1995, and March 31, 1996, and the notes
thereto, which are included in the Statement of Additional Information.
</TABLE>
<TABLE>
As of
------------------------
----------------
<S> <C> <C>
March 31 December
31,
1996 1995
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.77 $ -
Net asset value on issuance of shares - 13.97
Net from investment operations .04 .01
Dilutive effect of organizational costs - (.21)
Net gain on securities - -
Net asset value, end of period $ 13.81 $ 13.77
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period 4,755,869 4,742,800
Ratio of expenses to average net assets 3.3% .04%
Ratio of net income to average net 1.1% 1.45%
assets
Portfolio turnover rate N/A N/A
</TABLE>
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.
<PAGE>
USE OF PROCEEDS
All of the proceeds of the offering will accrue to the
Selling Shareholder. The Company will not receive any of the proceeds
from the sale of any shares sold hereunder.
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Company is long-
term growth through capital appreciation through investment in domestic
emerging markets that it believes are positioned for growth. The
Company includes businesses controlled by African Americans, Hispanic
Americans, Asian Americans and women that are located in the United
States and its territories in its definition of domestic emerging
markets. The Company believes that in the early stages of its
operations and from time to time during its regular operations, it may
be prudent to invest some portion of its assets in securities of
companies other than DEM Companies. This decision 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, opportunities in non-DEM Companies and
other related factors. Accordingly, during such periods, the Company
has reserved the right to invest a significant proportion of its assets
in non-DEM Companies that otherwise meet the Company's investment
objectives. 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.
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. 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 OTC
Bulletin Board(SM) and the Pink Sheets(SM).
<PAGE>
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. 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.
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 times when the Investment Adviser
believes a temporary defensive posture in the market is warranted,
including times of economic uncertainty, 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. 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.
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 entering into repurchase
agreements.
<PAGE>
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 Public Market
The Common Stock trades on the NASDAQ SmallCap Market(SM).
However, of the 344,457 shares of outstanding Common Stock of the
Company, 203,067 shares are held by the Selling Shareholder. As a
result, the trading market for the Common Stock is limited.
Furthermore, there can be no assurance that the sale of the Common
Stock by the Selling Shareholder will not have a negative impact on the
market price of the Common Stock. See "PLAN OF DISTRIBUTION."
Control by Principal Shareholder
Of the issued and outstanding Common Stock, 59% is owned by
the Selling Shareholder. Accordingly, the Selling Shareholder has
significant power to direct the affairs of the Company and to determine
or influence the outcome of matters required to be submitted to
stockholders for approval, including the election of a majority of the
directors. The Selling Shareholder intends to offer its entire holding
of Common Stock pursuant to this offering. Accordingly, assuming a
successful completion of the offering, the Selling Shareholder will
have no power to affect the affairs of the Company solely through its
ownership of Common Stock; however, there can be no assurance that the
offering will be successfully completed. Furthermore, the Selling
Shareholder will continue to exercise significant influence over the
affairs of the Company due to its status as the Company's Investment
Adviser. See "MANAGEMENT OF THE COMPANY; PLAN OF DISTRIBUTION; COMMON
STOCK -- Anti-Takeover Provisions in the Charter."
Prior 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.
<PAGE>
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."
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 full fiscal quarter, 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.
<PAGE>
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%
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 full fiscal quarter 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
March 31, 1996, the Company's net asset value was $13.81 per share. On
March 29, 1996, the closing market price of the Common Stock on the
NASDAQ SmallCap Market(SM) was $15.50 per share reflecting a premium of
$1.69 of share price over net asset value per share as of March 31,
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
<PAGE>
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, President, Chief Executive Officer and Chairman of the
Chapman Co., 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.
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 two money market funds. In
addition, the Investment Adviser serves as portfolio manager to private
accounts. As of February 29, 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
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 $154,500. 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 $46,000 and are payable upon completion of
the offering by the Selling Shareholder.
<PAGE>
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 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
<PAGE>
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. 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.
<PAGE>
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.
TAXATION
The following discussion reflects applicable tax laws as of
the date of this Prospectus.
<PAGE>
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 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
<PAGE>
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.
SELLING SECURITY-HOLDER/PRINCIPAL SHAREHOLDER
Name Shares Owned Shares to be Shares Owned
Prior to Sold in the after
Offering Offering Offering
Chapman 203,067 203,067 -0-(1)
Capital
Management,
Inc.
________________
(1) Assuming all the shares offered hereby are sold.
The Selling Shareholder has been the investment adviser and
administrator of the Company pursuant to the Advisory and
Administrative Services Agreement since the Company's organization.
See "MANAGEMENT OF THE COMPANY -- Investment Adviser; --
Administrator." The Selling Shareholder is also investment adviser to
The Chapman Funds, Inc. The Selling Shareholder 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
Selling Shareholder, The Chapman Co. and The Chapman Funds, Inc. See
"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.
<PAGE>
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Shareholder that
it intends to sell all or a portion of the Common Stock offered hereby
from time to time in transactions (which may include block
transactions) on the NASDAQ SmallCap Market(SM), in privately
negotiated transactions, or a combination of such methods of sale, at
fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, or at
privately negotiated prices. The Selling Shareholder may effect such
transactions by selling shares of Common Stock to or through broker-
dealers, who may act as agent or principal, and such broker-dealers may
receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholder and/or the purchasers of
shares of Common Stock for whom such broker-dealers may act as agent or
to whom they may sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
In connection with any sales, the Selling Shareholder and any brokers
participating in such sales may be deemed to be underwriters within the
meaning of the Securities Act of 1933. The Company will receive no
part of the proceeds of sales made hereunder.
Broker-dealers may agree with the Selling Shareholder to sell
a specified number of shares at a stipulated price per share, and, to
the extent such a broker-dealer is unable to do so acting as agent for
the Selling Shareholder, to purchase as principal any unsold shares at
the price required to fulfill the broker-dealer commitment to the
Selling Shareholder. Broker-dealers who acquire shares of the Common
Stock as principal may thereafter resell such shares from time to time
in transactions such as those described above and which may involve
sales to and through other broker-dealers. The Selling Shareholder may
indemnify any broker-dealer that participates in transactions involving
the sale of the Common Stock against certain liabilities, including
liabilities arising under the Securities Act of 1933.
Upon notification by the Selling Shareholder to the Company
that any material arrangement has been entered into with an underwriter
for the sale of any or all of the shares, a supplemental Prospectus and
Statement of Additional Information will be filed with the Securities
The Company expects that The Chapman Co., a broker-dealer
registered under the Securities and Exchange Act of 1934 and a member
<PAGE>
of the National Association of Securities Dealers, Inc. will
participate in the distribution of the Common Stock. The Chapman Co.
is an affiliate of the Company and the Selling Shareholder. See
"SELLING SECURITY-HOLDER." The Company expects additional broker-
dealers will also be involved.
and Exchange Commission setting forth the name of the underwriter, the
number of shares of Common Stock involved, whether the underwriting is
on a best efforts or firm commitment basis, and the commissions paid or
discounts or concessions allowed by the Selling Shareholder to such
underwriter.
There can be no assurance that the Selling Shareholder will
sell any or all of the shares of Common Stock offered by it hereunder.
The Common Stock trades on the NASDAQ SmallCap Market(SM)
under the symbol "DEMI." On March 29, 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 March 29,
1996.
<PAGE>
Title of Amount Amount Held Amount
Class Authorized by the Outstanding
Company or Exclusive of
for its Amount Held
Account by Company
Common Stock, 500,000,000 -0- 344,457
par value
$.00001
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
<PAGE>
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;
(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");
<PAGE>
(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 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.
<PAGE>
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, will render an opinion as to certain legal
matters regarding the due authorization and valid issuance of the
Common Stock being offered pursuant to this Prospectus. Venable,
Baetjer and Howard, LLP serves as counsel to Chapman Capital
Management, Inc. on an on-going basis.
<PAGE>
REPORTS TO SHAREHOLDERS
The Company will send 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-5
Taxation A-5
Officers and Directors A-9
Control Persons and Principal Holders of Securities A-12
Investment Advisory and Other Services A-12
Brokerage and Portfolio Transactions A-14
Stock Purchases and Tenders A-15
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.
<PAGE>
Ba Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small.
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.
<PAGE>
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>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesman, or 203,067 Shares
other person has been
authorized to give any DEM, Inc.
information or to make any
representation not contained
in this Prospectus. If Common Stock
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.
_______________________
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS _____________
PROSPECTUS
<S> <C> <C>
Page _____________
Prospectus Summary 2
Company Expenses 5
Financial Highlights 7
The Company 7
Use of Proceeds 8 _______________________
Investment Objectives and
Policies 8
Risk
Factors....................
10
Net Asset Value and Market
Price Information 12
Management of the Company
12
Dividends and Distributions
16
Dividend Reinvestment Plan
16
Taxation 18
Custodian, Transfer and
Dividend-
Paying Agent and
Registrar 20
Selling Security-
Holder/Principal Shareholder
21
Plan of Distribution 21
Common Stock 22
Stock Purchases and Tenders
25
<PAGE>
Legal Matters 25
Reports to Shareholders [ ], 1996
26
Experts 26
Further Information 26
</TABLE>
_______________________
<PAGE>
Subject to Completion
Preliminary Statement of Additional Information Dated May 13, 1996
DEM, INC.
STATEMENT OF ADDITIONAL INFORMATION
DEM, Inc. (the "Company") is a non-diversified, closed-end
management investment company. The Company's primary investment
objective 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. To
achieve the Company's investment objectives, the Company may invest in
a wide variety of types of portfolio companies, and will seek 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 may offer the potential for significant long-term
capital appreciation.
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus for the Company dated
[ ], 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-5
Taxation A-5
Officers and Directors A-9
Control Persons and Principal Holders of Securities A-12
Investment Advisory and Other Services A-12
Brokerage and Portfolio Transactions A-14
Stock Purchases and Tenders A-15
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 May
13, 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 long-
term growth through capital appreciation through investment in domestic
emerging markets that it believes are positioned for growth. The
Company includes businesses controlled by African Americans, Hispanic
Americans, Asian Americans and women that are located in the United
States and its territories in its definition of domestic emerging
markets ("DEM Companies"). The Company believes that in the early
stages of its operations and from time to time during its regular
operations, it may be prudent to invest some portion of its assets in
securities of companies other than DEM Companies. This decision may be
affected by such factors as market conditions generally, the views of
the Company's investment advisor on the direction of movement of the
stock prices of specific targeted portfolio companies, opportunities in
non-DEM Companies and other related factors. Accordingly, during such
periods, the Company has reserved the right to invest a significant
proportion of its assets in non-DEM Companies that otherwise meet the
Company's investment objectives. Both capital appreciation and income
are considered in the selection of investments, but primary emphasis is
on capital appreciation. While 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, the
Company seeks to invest a substantial portion of its assets in
securities of domestic emerging companies with smaller market
capitalizations. Some of these investments involve the purchase of
securities directly from the portfolio company in an initial or other
public offering of its securities.
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. 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).
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 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.
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."
<PAGE>
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.
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 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
<PAGE>
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.
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.
<PAGE>
(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.
(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%.
<PAGE>
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 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
<PAGE>
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, 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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICE DURING PAST FIVE
YEARS
Nathan A. Chapman, 38 President, President, Chief
Jr.* Chairman of Executive Officer and
401 E. Pratt St., Board of Treasurer since 1986
28th Floor Directors and of The Chapman Co.
Baltimore, Maryland Director and President and
21202 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 46 Director President, law firm
401 E. Pratt St., of Ronald A. White,
28th Floor P.C. since 1982,
Baltimore, Maryland Director of The
21202 Chapman Funds, Inc.
Earl U. Bravo, Sr. 48 Vice President Chief Operating
401 E. Pratt St., and Secretary Officer of The
28th Floor Chapman Co. since
Baltimore, Maryland 1992. From 1990
21202 until 1992, President
of Chapman Capital
Management, Inc.
<PAGE>
M. Lynn Ballard 53 Treasurer Controller of The
401 E. Pratt St. Chapman Co. and
28th Floor Treasurer of The
Baltimore, Maryland Chapman Funds, Inc.
2 since 1988.
1
2
0
2
Bonnie Gillette 43 Assistant Secretary of The
401 E. Pratt St. Secretary Chapman Co., Chapman
28th Floor Capital Management,
Baltimore, Maryland Inc. and The Chapman
2 Funds, Inc. since
1 1988.
2
0
2
James B. Lewis 48 Director City
401 E. Pratt St., Administrator/Manager
28th Floor , City of Rio Rancho,
Baltimore, Maryland New Mexico since
21202 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.
<PAGE>
Lottie H. 54 Director Executive Vice
Shackelford President Global USA
401 E. Pratt St., since 1995, City
28th Floor Director of the City
Baltimore, Maryland of Little Rock,
21202 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 39 Director President since 1993
401 E. Pratt St., of the BITH Group,
28th Floor Inc. Senior Vice
Baltimore, Maryland President of ECS
21202 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.
<PAGE>
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.
<PAGE>
Compensation Table
(Estimated for the year ended December 31, 1996)
<TABLE>
<CAPTION>
Pension Total
Aggregate or Estimate Compensat
Compensat Retiremen d Annual ion
Name of ion from t Benefits from
Person/Position Company Benefits upon Company
Accrued Retireme and
as Part nt Fund
of Complex
Company Paid to
Expenses Directors
<S> <C> <C> <C> <C>
NATHAN A. CHAPMAN, None None None None
JR.
Director,
Chairman,
President
RONALD A. WHITE $4,000 None None $8,000
Director
JAMES B. LEWIS $4,000 None None $8,000
Director
LOTTIE H. $4,000 None None $8,000
SHACKELFORD
Director
ROBERT L. WALLACE $4,000 None None $4,000
Director
EARL U. BRAVO, SR. None None None None
Vice President &
Secretary
M. LYNN BALLARD None None None None
Treasurer
BONNIE GILLETTE None None None None
Assistant
Secretary
</TABLE>
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
<PAGE>
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>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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 March 31, 1996 and the ownership of all
directors and executive officers of the Company as a group.
Name Address Percentage of
Securities Owned
Chapman Capital The World Trade 59% (1)
Management, Inc. Center-Baltimore
401 East Pratt
Street
Baltimore, MD
21201
The Chapman Co. The World Trade 59% (2)
Center-Baltimore
401 East Pratt
Street
Baltimore, MD
21201
Nathan A. Chapman, The World Trade 59% (2)
Jr. Center-Baltimore
401 East Pratt
Street
Baltimore, MD
21201
All current The World Trade 59%
directors and Center-Baltimore
executive officers 401 East Pratt
as a group Street
Baltimore, MD
21201
___________________
(1) The shares of Common Stock are owned beneficially and of record.
(2) The shares of Common Stock are owned beneficially but not of
record.
<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:
<TABLE>
<CAPTION>
Name and Age Affiliation Affiliations with the Company's
s with Investment Adviser
Company
<S> <C> <C>
Nathan A. President, President, Chief Executive Officer
Chapman, Jr. Chairman of and Chairman of the Board of
the Board Directors of Chapman Capital
of Management, Inc.; Controlling
Directors, Stockholder, President, Chief
Beneficial Executive Officer and Chairman of
Owner of The Chapman Co. Chapman Capital
59% of the Management, Inc. is the wholly-owned
Common subsidiary of The Chapman Co.
Stock
Earl U. Bravo, Vice Director of Chapman Capital
Sr. President Management, Inc.; Director and Chief
Operating Officer of The Chapman Co.
<PAGE>
Bonnie Shay Secretary Secretary of Chapman Capital
Gillette Management, Inc.; Secretary of The
Chapman Co.
M. Lynn Treasurer Treasurer of Chapman Capital
Ballard Management, Inc.; Controller of The
Chapman Co.
The Chapman Beneficial Chapman Capital Management, Inc. is
Co. Owner of the wholly-owned subsidiary of The
59% of Chapman Co.
Common
Stock
</TABLE>
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. Since its commencement of operations the
Company has paid the Investment Adviser $13,004.66 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. Since its commencement of operations, the Company
has paid an aggregate of approximately $4,000 in brokerage commissions.
<PAGE>
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
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. The Company
has paid approximately $4,000 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.
<PAGE>
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.
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
<PAGE>
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 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.
<PAGE>
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 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.
<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 March 31, 1996 F-15
Investment in Securities as of May 8, 1996 F-17
<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>
ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 2) $4,812,
175
Deferred organizational costs (Note 2) 49,675
Interest receivable 2,431
Total assets 4,864,2
81
LIABILITIES:
Accrued expenses (Note 2) 121,481
NET ASSETS - equivalent to $13.77 per share
on 344,457 $4,742,
shares of common stock outstanding 800
SUMMARY OF SHAREHOLDERS' EQUITY (Note 4):
Common stock, $.00001 par value,
500,000,000 shares $ 3
authorized, 344,457 shares issued and
outstanding
Additional paid-in capital 4,740,9
12
Undistributed net investment income 1,885
Net assets applicable to outstanding $4,742,
common stock 800
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
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest income (Note 2) $ 2,431
EXPENSES:
Administrative, management and investment
advisory 546
expenses (Notes 2 and 3)
Net investment income and net increase
in net $ 1,885
assets resulting from operations
</TABLE>
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>
<CAPTION>
<S> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net investment income (Note 2) $ 1,885
Net increase in net assets resulting 1,885
from operations
CAPITAL SHARE TRANSACTIONS:
Common shares issued, net of issuance 4,740,9
costs (Note 4) 15
Net increase in net assets resulting
from capital 4,740,9
shares transactions 15
TOTAL INCREASE IN NET ASSETS
4,742,80
0
NET ASSETS, beginning of the period -
NET ASSETS, end of the period $4,742,
800
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION:
DEM, Inc. (the Company) was incorporated on October 20, 1995, in the
State of Maryland and is registered as a nondiversified close-ended
management investment company under the Investment Company Act of 1940,
as amended. As of December 31, 1995, the Company's only operations
were the issuance of 344,417 shares of common stock, with the proceeds
being invested in a mutual fund.
The principal investment objective of the Company is long-term growth
through capital appreciation. Both capital appreciation and income
will be considered in the selection of investments, but primary
emphasis will be on capital appreciation. The Company will retain
maximum flexibility as to the types of investments it may make and it
will be permitted to invest in portfolio companies with large and small
market capitalizations. The Company, however, intends to seek to
invest a substantial portion of its assets in securities of domestic
emerging companies with smaller market capitalizations. There can be
no assurance that the Company's objectives will be achieved. The
Company's investment objectives and policies may be changed by the
Board of Directors without the approval of shareholders. Most of the
Company's investments are expected to be in marketable common stocks or
marketable securities convertible into common stock traded on an
exchange or in the over-the-counter markets.
While the primary objective of the Company is to seek long-term growth
through capital appreciation, the Company may invest its assets in
income producing securities such as non-convertible preferred stock,
bonds, debentures, notes and other similar securities, if the
Investment Adviser deems such investments advisable.
<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.
Interest Income
Interest income is recorded on the accrual basis to the extent that
such amounts will be collected.
<PAGE>
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:
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.
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
Principa Carrying
l
Amount Value
$ Fidelity Institutional U.S. Government
4,812,17 Cash Portfolio II (stated at cost which is $4,812,
5 market) 175
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
FINANCIAL HIGHLIGHTS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
CHANGE IN NET ASSETS PER SHARE:
Net asset value on issuance of shares $13.97
Net from investment operations .01
Dilutive effect of organizational costs
(.21)
Net asset value, end of the period $13.77
RATIOS TO AVERAGE NET ASSETS:
Expenses
.04%
Net investment income
1.45%
SUPPLEMENTAL DATA:
Net assets, end of the period $4,742,
800
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
UNAUDITED STATEMENT OF ASSETS AND LIABILITIES
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in equity securities at fair $1,560,
value 188
Cash and cash equivalents 3,159,9
63
Deferred organizational costs 47,191
Interest receivable 13,658
Prepaid expenses 15,721
Total assets 4,796,7
21
LIABILITIES:
Accounts payable and accrued expenses 40,852
NET ASSETS - equivalent to $13.81 per share
on 344,457 $4,755,
shares of common stock outstanding 869
SUMMARY OF SHAREHOLDERS' EQUITY:
Common stock, $.00001 par value,
500,000,000 shares $ 3
authorized, 344,457 shares issued and
outstanding
Additional paid-in capital 4,740,9
12
Undistributed net investment income 14,954
Net assets applicable to outstanding $4,755,
common stock 869
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $51,830
EXPENSES:
Administrative and management 28,763
Investment advisory 10,680
Total expenses 39,443
Net investment income before net
unrealized 12,387
appreciation on investments
Net unrealized appreciation on investments 682
Net increase in net assets resulting $13,069
from operations
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
UNAUDITED STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net investment income $12,387
Net unrealized appreciation on investments 682
Net increase in net assets resulting 13,069
from operations
TOTAL INCREASE IN NET ASSETS 13,069
NET ASSETS, beginning of the period 4,742,8
00
NET ASSETS, end of the period $4,755,
869
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1996
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.
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>
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. Readers of these statements should refer to the
financial statements and notes thereto as of December 31, 1995, and
from inception (November 30, 1995) through December 31, 1995, included
elsewhere in this filing. The results of operations presented in the
accompanying financial statements are not necessarily representative of
operations for an entire year.
<PAGE>
DEM, INC.
INVESTMENT IN SECURITIES
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Total Market
Security Cost Value
<S> <C> <C>
CASH AND MONEY MARKETS:
Fidelity U.S. Treasury Portfolio II $3,159,9 $3,159,9
63.32 63.32
COMMON STOCK:
Banks-
Banponce Corporation 255,550.00 277,500.00
Capital Bancorp, Fla. 30,800.00 30,250.00
Carver Federal Savings Bank 131,812.50 131,250.00
Independence Federal Savings
Bank 8,175.00 7,250.00
COMMUNICATIONS:
Mastec, Inc. 111,177.50 123,750.00
COMPUTERS:
Micronics Computers, Inc. 3,675.00 2,687.50
CONSUMER SERVICES:
Jenny Craig, Inc. 9,800.00 9,625.00
CONSUMER PRODUCTS:
Warnaco Group, Inc., Class A 270,301.00 265,375.00
CLOTHING AND FABRICS:
Supreme International Corp. 123,250.00 127,500.00
FOOD:
Tootsie Roll 274,414.50 255,500.00
HEALTHCARE:
Owen Healthcare, Inc. 21,050.00 23,375.00
United American Healthcare Corp. 11,050.00 13,500.00
</TABLE>
<PAGE>
DEM, INC.
INVESTMENT IN SECURITIES
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Total Market
Security Cost Value
<S> <C> <C>
MEDIA/PUBLISHING:
Black Entertainment TV $58,725.00 $55,750.00
Granite Broadcasting Corp. 34,275.00 36,000.00
PHARMACEUTICAL:
Watson Pharmaceuticals, Inc. 170,950.00 160,000.00
TECHNOLOGY:
Envirotest Systems 3,175.00 2,875.00
Sigma Designs 41,325.00 38,000.00
Common Stock Total 1,559,50 1,560,18
5.50 7.50
TOTAL PORTFOLIO $4,719,4 $4,720,1
68.82 50.82
</TABLE>
<PAGE>
DEM, INC.
INVESTMENT IN SECURITIES
AS OF MAY 8, 1996
<TABLE>
<CAPTION>
Total Market
Security Cost Value
<S> <C> <C>
CASH AND MONEY MARKETS:
Fidelity U.S. Treasury Portfolio II $181,291 $181,291
COMMON STOCK:
Banks-
Banponce Corporation 413,850 439,375
Capital Bancorp, Fla. 30,800 30,000
Carver Federal Savings Bank 131,813 126,562
Independence Federal Savings
Bank 8,175 7,750
Communications - Mastec, Inc. 111,178 215,875
Computers - Micronics Computers, Inc. 3,675 2,875
Consumer Services - Jenny Craig, Inc. 9,800 13,750
Consumer Products - Warnaco Group, 270,301 327,250
Inc., Class A
Clothing And Fabrics - Supreme 123,250 125,000
International Corp.
Food - Tootsie Roll 274,415 247,625
Healthcare-
United American Healthcare Corp. 11,050 13,500
Owen Healthcare, Inc. 21,050 18,500
Media/Publishing-
Black Entertainment TV 139,625 148,125
Granite Broadcasting Corp. 34,275 37,875
Pharmaceutical - Watson 170,950 165,000
Pharmaceuticals, Inc.
Technology:
Envirotest Systems 3,175 2,625
Sigma Designs 71,725 71,313
Common Stock Total 1,829,107 1,993,000
<PAGE>
GOVERNMENT NOTES:
Federal National Mortgage Association 99,900 99,900
Discount Notes
Federal Home Loan Bank Corporation 2,489,250 2,489,300
Discount Notes
Total Government Notes 2,589,150 2,589,200
TREASURES BILLS:
U.S. Treasury Bills 99,893 99,894
TOTAL PORTFOLIO $4,699,441 $4,863,385
</TABLE>
<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 March 31,
1996
Investment in Securities as of May 8, 1996
(2) Exhibits:
(a) -- Charter.1
(b) -- Bylaws.1
(c) -- Not Applicable.
(d) -- (1) See Dividend Reinvestment Plan.
(2) See Charter.
(e) -- Dividend Reinvestment Plan.1
(f) -- Not Applicable.
(g) -- Advisory and Administrative Services
Agreement between the Company and Chapman
Capital Management, Inc.1
(h) -- Not Applicable.
(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, LLP2
(m) -- Not Applicable.
(n) -- Consent of Arthur Andersen LLP,
independent public accountants for the
Company.4
(o) -- Not Applicable.
(p) -- Subscription Agreement between the
Company and Chapman Capital Management, Inc.1
(q) -- Not Applicable.
(r)(1) --Financial Data Schedule (Fiscal Year
1995).3
(r)(2) --Financial Data Schedule (1st Quarter
1996).3
(s) -- Power of Attorney.2
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. Incorporated by reference from the Company's
Registration Statement on Form N-2 (File Nos.: 333-
2341 and 811-9118) as filed with the Securities and
Exchange Commission on April 8, 1996.
<PAGE>
3. Incorporated by reference from Pre-Effective
Amendment No. 1 to the Company's Registration
Statement on Form N-2 (File Nos.: 333-2341 and 811-
9118) as filed with the Securities and Exchange
Commission on April 11, 1996.
4. 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 organization of the
Company and the offering described in this Registration
Statement:
Registration fees $ 1,051
Blue Sky fees and expenses 2,000
Printing and engraving expenses 3,000
Legal fees and expenses 35,000
Accounting fees and expenses 5,000
Total $46,051
All expenses of the offering will be paid by the Selling
Shareholder.
Item 27. Persons Controlled by or Under Common
Control with Registrant.
Name Control Relationship to Company
Nathan A. Chapman Jr. Owns approximately 63% and has
the right to cast approximately
71% of the votes entitled to be
cast by stockholders of The
Chapman Co.; Beneficial Owner of
59% of the Outstanding Shares of
the Company's Common Stock
<PAGE>
The Chapman Co., a Maryland Owns 100% of the Outstanding
Corporation Shares of Common Stock of
Chapman Capital Management,
Inc.; Beneficial Owner of 59% of
the Outstanding Shares of the
Company's Common Stock
Chapman Capital Management, Record and Beneficial Owner of
Inc., a Maryland Corporation 59% of Outstanding Shares of
Company's Common Stock
Item 28. Number of Holders of Securities.
Common Stock, par value $.00001 per share: 302 record
holders as of
March 31, 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
<PAGE>
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.
Name and Position
with Investment Adviser Other Business
Nathan A. President, Chief Executive Officer
Chapman, Jr. and Treasurer of The Chapman Co.
Director, and President and Chief Executive
Chairman of the Officer of Chapman Capital
Board, President Management, Inc. President and
Chairman of the Board of The
Chapman Funds, Inc.
Earl U. Bravo, Sr. Director and Chief Operating
Director Officer of The Chapman Co.
M. Lynn Ballard Controller of The Chapman Co. and
Treasurer Treasurer of The Chapman Funds,
Inc.
Theron Stokes Attorney, Alabama Education
Director Association
Valerie Chapman Vice-President, The Chapman Funds,
Secretary Inc. and Administrator, The
Chapman Co.
<PAGE>
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
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
<PAGE>
(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.
(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 May 13, 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 1993,
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, President, Chairman May 13, 1996
JR. of the Board and
Nathan A. Chapman, Jr. Director (Principal
Executive Officer)
/s/ M. LYNN BALLARD Treasurer May 13, 1996
M. Lynn Ballard (Principal
Financial and
Accounting Officer)
<PAGE>
The Entire Board of
Directors
James B. Lewis
Nathan A. Chapman, Lottie H.
Jr. Shackelford
Robert L. Wallace
Ronald A. White
May 13, 1996
By:/s/ NATHAN A.
CHAPMAN
Nathan A. Chapman,
Jr.
Attorney-in-Fact
<PAGE>
DEM, INC.
EXHIBIT INDEX
Exhibit N Consent of Arthur Andersen LLP
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
use of our report and all references to our firm included in
or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
March 31, 1996
