ICA File No.:
811-
File No.:
33-
As filed with the Securities and Exchange Commission on
April 8,
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
Pre-Effective Amendment No.
Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
Amendment No.
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
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].
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Amount Proposed Proposed Amount
of
Securities Being Maximum Maximum
Registration
Being Registered Offering Aggregate Fee
Registered Price Per Offering
Unit (1) Price (1)
<S> <C> <C> <C> <C>
Common Stock 203,067 $15.25 $3,096,772
$1,068
shares
</TABLE>
(1) Estimated solely for the purpose of calculating the
registration fee, based on the average of the bid and
asked
prices on the NASDAQ SmallCap SystemSM on April 5,
1996.
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
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
</TABLE>
<PAGE>
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 April 8, 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
considers
domestic emerging markets to include companies
controlled by
African Americans, Hispanics, Asians and women; however
there can
be no assurance that the Company will be able to
identify
sufficient numbers of domestic emerging market
companies to
invest a significant portion of its portfolio in such
companies.
Accordingly, the Company reserves the right to
invest a
significant proportion of its portfolio in companies not
falling
within the definition of domestic emerging market company
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 MarketSM, 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).
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 MarketSM 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. 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, however, seeks to
invest a
substantial portion of its assets in securities of
domestic
emerging companies with smaller market capitalizations.
The
Company considers domestic emerging markets to include
companies
controlled by African Americans, Hispanics, Asians and
women;
however there can be no assurance that the Company will be
able
to identify sufficient numbers of domestic emerging
market
companies to invest a significant portion of its
portfolio in
such companies. Accordingly, the Company reserves the
right to
invest a significant proportion of its portfolio in
companies not
falling within the definition of domestic emerging market
company
that otherwise meet the Company's investment objectives.
The
Company's investment objectives and policies, other than
those
specified under "INVESTMENT OBJECTIVES AND POLICIES
- --
Fundamental Policies" in the Statement of Additional
Information
may be changed by the Board of Directors without the
approval of
stockholders.
To achieve the Company's investment objectives, the
Company
invests in a wide variety of types of portfolio companies
and
seeks to identify those companies it believes are positioned
for
growth. While the Company expects to invest in
portfolio
companies with large and small market capitalization, the
Company
believes that investing in small companies offers the
potential
for significant long-term capital appreciation. Most of
the
Company's investments are in marketable common stocks
or
marketable securities convertible into common stock traded
on an
exchange or in the over-the-counter markets. To the extent
the
Company invests in companies with smaller market
capitalization,
the securities of such companies may be traded in such over-
the-
counter markets as the OTC Bulletin BoardSM and the
Pink
SheetsSM.
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 will not invest in foreign securities
(including
American Depository Receipts) or restricted securities as
defined
under Rule 144.
<PAGE>
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
MarketSM, 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 MarketSM.
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
<PAGE>
Dividend Reinvestment Plan, unless a shareholder
elects to
receive cash. See "DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND
REINVESTMENT PLAN."
Risk Factors. Investments in Small Companies and Thinly
Traded
Issues. Although the Investment Adviser believes that
investing
in small companies offers the potential for significant long-
term
capital appreciation, it also presents significant risks.
The
Company is designed for long-term investors who have
the
financial ability to accept greater investment risk in
exchange
for the potential of higher than average, long-term
capital
appreciation. Small companies may be subject to greater
earnings
fluctuation, lack of established markets for products
or
services, more limited financial resources and less
depth of
experienced management than 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 BoardSM and the Pink SheetsSM 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
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
<PAGE>
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."
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."
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
<PAGE>
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."
(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:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$31 $94 $161 $337
</TABLE>
The purpose of the foregoing table is to assist
the
investor in understanding the various costs and expenses
that an
investor in the Company will bear directly or indirectly.
"Other
Expenses" are based on estimated amounts for the current
fiscal
year. This example should not be considered a
representation of
future expenses of the Company and actual expenses may be
greater
or less than those shown. Moreover, while the examples
assume a
5% annual return, the Company's performance will vary and
may
result in a return greater or less than 5%. In addition,
while
the example assumes reinvestment of all dividends
and
distributions at net asset value, participants in the
Company's
Dividend Reinvestment Plan may receive shares purchased or
issued
at a price or value different from net asset value.
See
"DIVIDENDS AND DISTRIBUTIONS"; "DIVIDEND REINVESTMENT PLAN."
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of
---------------
- ------
--------------
- -----
March 31
December
31,
1996
1995
<S> <C> <C>
INVESTMENTS AT VALUE:
Equity $1,560,1 $-
88
Other 3,159,963
4,812,175
TOTAL ASSETS 4,796,721
4,864,281
NET ASSETS 4,755,869
4,742,800
BOOK VALUE PER SHARE 13.81
13.77
OUTSTANDING COMMON SHARES 344,457
344,457
CHANGE IN NET ASSETS PER SHARE:
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 offering costs -
(.21)
Net asset value, end of period $ 13.81 $
13.77
RATIOS AND SUPPLEMENTAL DATA:
Ratio of expenses to average net assets 3.3%
.04%
Ratio of net income to average net assets 1.1%
1.45%
Portfolio turnover rate N/A
N/A
For the Period
Ended
---------------
- ------
--------------
- -----
Inception
Three
(November
Months 30,
Ended
1995) Th
rough
March 31
December
31,
1996
1995
EARNINGS PER SHARE $ .05 $
.02
</TABLE>
<PAGE>
THE COMPANY
DEM, Inc. is a non-diversified, closed-end
management
investment company registered under the Investment Company
Act of
1940, as amended (the "1940 Act"). The Company was
incorporated
under the laws of the State of Maryland on October 20, 1995.
The
Company's principal office is located at The World Trade
Center-
Baltimore, 401 East Pratt Street, 28th Floor, Baltimore,
Maryland
21202. The Company's telephone number is (800) 752-1013.
USE OF PROCEEDS
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. Both
capital
appreciation and income are considered in choosing
specific
investments, but the 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 invests 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 portfolio companies in
initial or
other public offerings of their securities. The
Company
considers domestic emerging markets to include
companies
controlled by African Americans, Hispanics, Asians and
women;
however there can be no assurance that the Company will be
able
to identify sufficient numbers of domestic emerging
market
companies to invest a significant portion of its
portfolio in
such companies. Accordingly, the Company reserves the
right to
invest a significant proportion of its portfolio in
companies not
falling within the definition of domestic emerging market
company
that otherwise meet the Company's investment objectives.
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 BoardSM and the Pink
SheetsSM.
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>
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.
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.
<PAGE>
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.
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 BoardSM and the
Pink
SheetsSM 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
MarketSM. 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.
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.
<PAGE>
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 MarketSM. 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.
<TABLE>
<CAPTION>
Quarter Ended Bid Net Asset Premium or
Quotations Value (Discount)
($) ($) Percentage
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
March 31, 15.00 15.00 13.85 13.77 8.30% 8.93%
1996
</TABLE>
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
MarketSM
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
<PAGE>
through or under the direction of the officers of the
Company.
The Company's Statement of Additional Information
contains
information as to the identity and background of the
Company's
directors and officers.
Investment Adviser
The Investment Adviser, Chapman Capital
Management,
Inc., has been retained under an investment advisory
and
administrative services agreement ("Advisory and
Administrative
Services Agreement") to provide investment advice and,
in
general, to conduct the management and investment program of
the
Company in accordance with the Company's investment
objectives,
policies, and restrictions and under the supervision and
control
of the Company's Board of Directors. The Investment
Adviser was
established in 1988 and is located at The World Trade
Center -
Baltimore, 401 East Pratt Street, 28th Floor, Baltimore,
Maryland
21202. The Investment Adviser is a wholly-owned
subsidiary of
The Chapman Co. 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 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.
<PAGE>
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. Under the
Custody
Administration and Agency Agreement, the fee payable to
the
Custody Administrator is payable monthly in arrears
computed as
of the last business day of the month at the annualized
rate of
.02%, .015% and .01% of the first $30 million, the next
$70
million and any amount over $100 million, respectively, of
the
Company's net assets, subject to a minimum monthly fee of
$400.
The Custody Administrator provides the
following
services for the Company: coordinates and processes
portfolio
trades; inputs and verifies portfolio trades; monitors
pending
and failed security trades; coordinates communications
between
brokers and banks to resolve operational problems; advises
the
Company of any corporate action information; addresses
and
follows up on any dividend or interest discrepancies;
processes
the Company's expenses; interfaces with the accounting
services
provider and the transfer agent to research and resolve
custody
cash problems; and provides daily and monthly reports.
<PAGE>
Estimated Expenses
The Investment Adviser/Administrator is
obligated to
pay expenses associated with providing the services
contemplated
by the Advisory and Administrative Services Agreement.
The
Company pays all other expenses incurred in the operation of
the
Company including, among other things, expenses for legal
and
independent public accounting services, costs of
printing
proxies, stock certificates and shareholder reports,
charges of
the custodian, any sub-custodians and the transfer and
dividend-
paying agent, expenses in connection with the Company's
Dividend
Reinvestment Plan, Securities and Exchange Commission fees,
fees
and expenses of unaffiliated directors, accounting and
pricing
costs, membership fees in trade associations, fidelity
bond
coverage for the Company's officers and employees,
directors' and
officers' errors and omissions insurance coverage,
interest,
brokerage costs and stock exchange fees, taxes, stock
exchange
listing fees and expenses, expenses of qualifying the
Company's
shares for sale in various states and foreign
jurisdictions,
litigation and other extraordinary or nonrecurring expenses
and
other expenses properly payable by the Company.
In addition to the monthly fee payable under
the
Custody Administration and Agency Agreement, the
Company is
obligated to pay certain transactions charges and to
reimburse
the Custody Administrator monthly for all out-of-pocket
expenses
including telephone, postage, telecommunications,
special
reports, record retention and copying and sending
materials to
independent accountants for off-site audits.
The Company may utilize The Chapman Co. in
connection
with a purchase or sale of securities when the Investment
Adviser
believes that, in accordance with the considerations set
forth
above regarding portfolio investments, the broker's charge
for
the transaction does not exceed usual and customary levels.
In
the event that the services of The Chapman Co. are
utilized in
connection with a purchase or sale of securities to or by
the
Company, its commissions, fees or other remuneration
for
effecting such transaction will not exceed usual and
customary
broker's commissions if the sale is effected on a
securities
exchange or two percent of the sales price if the
sale is
effected in connection with a secondary distribution of
such
securities or one percent of the purchase or sale price of
such
securities if the sale is otherwise effected unless a
larger
commission is approved by the Securities and Exchange
Commission.
The Chapman Co. is a full-service brokerage and
investment
banking firm. As such, it provides financial and
advisory
services pursuant to agreements to a variety of
emerging
companies that fit within the Company's investment
objectives.
As a result, the Company may invest in companies that have
such
agreements with The Chapman Co. or its affiliates.
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.
<PAGE>
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.
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 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
<PAGE>
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.
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
<PAGE>
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.
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 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.
<PAGE>
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."
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
<PAGE>
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.
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
<TABLE>
<CAPTION>
Name Shares Owned Shares to be Shares Owned
Prior to Sold in the after
Offering Offering Offering
<S> <C> <C> <C>
Chapman 203,067 203,067 -0-(1)
Capital
Management,
Inc.
</TABLE>
________________
(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
<PAGE>
has the right to cast approximately 71% of the votes
entitled to
be cast by stockholders of The Chapman Co.
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 MarketSM,
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 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.
The Company expects that The Chapman Co., a broker-
dealer registered under the Securities and Exchange Act of
1934
and a member of the National Association of Securities
Dealers,
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.
<PAGE>
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
MarketSM
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.
<TABLE>
<CAPTION>
Title of Amount Amount Held Amount
Class Authorized by the Outstanding
Company or Exclusive of
for its Amount Held
Account by Company
<S> <C> <C> <C>
Common Stock, 500,000,000 -0- 344,457
par value
$.00001
</TABLE>
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
<PAGE>
terms of one, two and three years, respectively. At the
annual
meeting of stockholders in each year thereafter, the term of
one
class will expire and directors will be elected to serve in
the
class for terms of three years. This provision could delay
for
up to two years the replacement of a majority of the
Board of
Directors. The Charter provides that the maximum
number of
directors that may constitute the Company's entire
board is
twelve. The maximum number of directors may be increased
only by
the affirmative vote of at least 75% of the Directors and
of the
holders of 75% of the shares of the Company entitled to be
cast
on the matter, unless approved by at least 75% of the
Continuing
Directors, as defined below, in which case a majority of
the
votes entitled to be cast by shareholders of the Company
will be
required to approve such action. A director may be removed
from
office with or without cause only upon the vote of 75% of
the
shares of the Company entitled to be cast on the matter.
In addition, conversion of the Company from a
closed-
end to an open-end investment company requires the
affirmative
vote of at least 75% of the directors and of the holders of
75%
of the shares of the Company entitled to be cast on the
matter,
unless approved by at least 75% of the Continuing
Directors, as
defined below, in which case a majority of the votes
entitled to
be cast by shareholders of the Company will be
required to
approve such conversion. If the Company were to be
converted
into an open-end investment company, it could be
restricted in
its ability to redeem its shares (otherwise than in
kind)
because, in light of the limited depth of the markets for
certain
securities in which the Company may invest, there can
be no
assurance that the Company could realize the then market
value of
the portfolio securities the Company would be
required to
liquidate to meet redemption requests.
The affirmative votes of at least 75% of the
directors
and the holders of at least 75% of the shares of the
Company are
required to authorize any of the following transactions:
(i) merger, consolidation or share exchange of the
Company
with or into any other person;
(ii) issuance or transfer by the Company (in one or a
series
of transactions in any 12-month period) of any securities
of the
Company to any other person or entity for cash,
securities or
other property (or combination thereof) having an aggregate
fair
market value of $1,000,000 or more, excluding sales of
securities
of the Company in connection with a public offering,
issuances of
securities of the Company pursuant to a dividend
reinvestment
plan adopted by the Company or pursuant to a stock dividend
and
issuances of securities of the Company upon the exercise of
any
stock subscription rights distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge,
transfer or
other disposition by the Company (in one or a
series of
transactions in any 12-month period) to or with any person
of any
assets of the Company having an aggregate fair market
value of
$1,000,000 or more, except for portfolio transactions
effected by
the Company in the ordinary course of business and except
with
respect to repurchases or redemptions of shares of the
Company
(transactions within clauses (i) and (ii) and this clause
(iii)
each being known individually as a "Business Combination");
(iv) any proposal as to the voluntary
liquidation or
dissolution of the Company or any amendment to the
Company's
Charter to terminate its existence; and
<PAGE>
(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.
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
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Objectives and Policies A-2
Net Asset Value A-5
Taxation A-5
Officers and Directors A-9
<PAGE>
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
</TABLE>
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>
<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 OF CONTENTS _____________
PROSPECTUS
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
Legal Matters 25
Reports to Shareholders [ ], 1996
26
Experts 26
Further Information 26
_______________________
</TABLE>
<PAGE>
Subject to Completion
Preliminary Statement of Additional Information Dated April
8,
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>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
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
</TABLE>
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
April 8, 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. Both
capital
appreciation and income are considered, 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 considers domestic emerging
markets to
include companies controlled by African Americans,
Hispanics,
Asians and women; however there can be no assurance that
the
Company will be able to identify sufficient numbers of
domestic
emerging market companies to invest a significant portion of
its
portfolio in such companies. Accordingly, the Company
reserves
the right to invest a significant proportion of its
portfolio in
companies not falling within the definition of domestic
emerging
market company that otherwise meet the Company's
investment
objectives.
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 BoardSM and the
Pink
SheetsSM.
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 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 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:
<PAGE>
(1) Issuing senior securities, borrowing
money or
pledging its assets, except that the Company may borrow
from a
lender (i) for temporary or emergency purposes, (ii) for
such
short-term credits as may be necessary for the
clearance or
settlement of transactions, (iii) to finance repurchases of
its
shares (see "Stock Purchases and Tenders") in amounts
not
exceeding 10% (taken at the lower of cost or current
value) of
its total assets (not including the amount borrowed), or
(iv) to
pay any dividends required to be distributed in order for
the
Company to maintain its qualification as a regulated
investment
company under the Code or otherwise to avoid taxation under
the
Code. Additional investments will not be made when
borrowings
exceed 5% of the Company's total assets. The Company may
pledge
its assets to secure such borrowings.
(2) Purchasing securities on margin.
(3) Underwriting the securities of other
issuers,
except insofar as the Company may be deemed an underwriter
in the
course of disposing of portfolio securities.
(4) Concentrating investments in
particular
industries. The Company's policy is not to
concentrate
investments, i.e., to limit its investments in any one
industry,
so that it will make no additional investment in any
industry if
such investment would result in its having over 25% of the
value
of its assets at the time in such industry.
(5) Engaging in the purchase and sale of real
estate
or real estate or mortgage-backed securities.
(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.
<PAGE>
Portfolio Turnover. The policy of the Company with
respect
to portfolio turnover will be to make such changes in
its
portfolio as its Investment Adviser shall from time to
time
recommend. The Company cannot accurately predict its
turnover
rate, but anticipates that its annual quarterly
portfolio
turnover will not exceed 50%.
NET ASSET VALUE
Net asset value is calculated (a) no less
frequently
than weekly, (b) on the last business day of each month and
(c)
at any other times determined by the Company's
Board of
Directors. Net asset value is calculated by dividing the
value
of the Company's net assets (the value of its assets less
its
liabilities, exclusive of capital stock and surplus) by the
total
number of shares of Common Stock outstanding. All
securities for
which market quotations are readily available are valued at
the
closing price quoted for the securities prior to the
time of
determination (but if bid and asked quotations are
available, at
the mean between the last current bid and asked prices,
rather
than the quoted closing price). Although the Company
seeks to
take into account material changes in value occurring after
the
close of a market and before the time the Company's net
asset
value is determined, there can be no assurance that it
will
always be 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
MarketSM under the symbol "DEMI". In recent periods,
shares of
closed-end investment companies have generally traded
at a
discount from net asset value, but in some cases have
traded
above net asset value. Among the factors which may be
expected
to affect whether shares of the Company trade above or
below net
asset value are portfolio investment results and supply
and
demand for shares of the Company. The Company cannot
predict
whether the Common Stock will trade at, above or below net
asset
value.
TAXATION
The following discussion reflects certain
applicable
tax laws as of the date of this Statement of
Additional
Information. For additional tax information see
"TAXATION" in
the Company's Prospectus.
<PAGE>
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.
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.
<PAGE>
Any capital losses resulting from the
disposition of
securities can only be used to offset capital gains and
cannot be
used to reduce the Company's ordinary income. Such
capital
losses may be carried forward by the Company for eight
years.
The Company may acquire securities which do not
pay
interest currently in an amount equal to their effective
interest
rate, such as zero coupon, pay-in-kind, or delayed
interest
securities. As the holder of such a security, the
Company is
required to include in taxable income the original issue
discount
that accrues on the security for the taxable year, even if
the
Company receives no payment on the security during the
year.
Because the Company must distribute annually substantially
all of
its investment company taxable income, including any
original
issue discount, in order to qualify as a regulated
investment
company and to avoid imposition of the 4% excise tax, the
Company
may be required in a particular year to distribute
dividends in
an amount that is greater than the total amount of cash
the
Company actually receives as distributions on the
securities it
owns. Those distributions will be made from the Company's
cash
assets or from the proceeds of sales of portfolio
securities, if
necessary. The Company may realize capital gains or losses
from
those sales, which would increase or decrease the
Company's
investment company taxable income or net capital gain.
In
addition, such gains may be realized on the
disposition of
securities held for less than three months. Because of the
short-
short rule, (as described above) and its possible effect on
the
Company's qualification as a regulated investment company
for tax
purposes, such gains could reduce the Company's ability to
sell
other securities, or certain options, futures or
forward
contracts, held for less than three months that it might
wish to
sell in the ordinary course of its portfolio management.
The Company may also acquire securities at a
market
discount. Market discount is generally equal to (other
than in
the case of an obligation issued with original issue
discount)
the excess of the stated redemption price of the
obligation at
maturity over the purchase price at which it is acquired
by a
subsequent purchaser. Market discount is treated as
interest
income, rather than as capital gain, when recognized by
the
purchaser.
The Company's taxable income will in part be
determined
on the basis of reports made to the Company by the issuers
of the
securities in which the Company invests. The tax
treatment of
certain securities in which the Company may invest is not
free
from doubt and it is possible that an Internal Revenue
Service
examination of the issuers of such securities or of the
Company
could result in adjustments to the income of the Company.
Taxation of Stockholders
Dividends (other than capital gain
dividends)
distributed by the Company may be eligible for the
dividends
received deduction in the hands of corporate stockholders,
to the
extent that the Company's taxable income consists of
dividends
received from domestic corporations and certain
other
requirements as generally described in Section 854 of the
Code
are met.
Dividends and other distributions by the Company
are
generally taxable to the stockholders at the time the
dividend or
distribution is made. However, any dividends declared by
the
Company in October, November or December and made
payable to
stockholders of record
<PAGE>
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
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICE DURING PAST FIVE YEARS
<S> <C> <C> <C>
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 of The Chapman Co. and
Baltimore, Maryland and President and Chief
21202 Director 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 of
401 E. Pratt St., Ronald A. White, P.C.
28th Floor since 1982, Director
Baltimore, Maryland of The Chapman Funds,
21202 Inc.
Earl U. Bravo, Sr. 48 Vice
Chief Operating
401 E. Pratt St., President Officer of The Chapman
28th Floor and Co. since 1992. From
Baltimore, Maryland Secretary 1990 until 1992,
21202 President of Chapman
Capital Management,
Inc.
M. Lynn Ballard 53 Treasurer
Controller of The
401 E. Pratt St., 28t Chapman Co. and
h Treasurer of The
F Chapman Funds, Inc.
l since 1988.
o
o
r
Baltimore, Maryland
2
1
2
0
2
Bonnie Gillette 43 Assistant
Secretary of The
401 E. Pratt St., 28t Secretary Chapman Co., Chapman
h Capital Management,
F Inc. and The Chapman
l Funds, Inc. since
o 1988.
o
r
Baltimore, Maryland
2
1
2
0
2
<PAGE>
James B. Lewis 48 Director
City
401 E. Pratt St., Administrator/Manager,
28th Floor City of Rio Rancho,
Baltimore, Maryland New Mexico since March
21202 1996, Chief Clerk-
State Corporation
Commission, 1995 to
1996.
Chief of Staff, Office
of the Governor from
1991 to 1995. New
Mexico State
Treasurer, 1985 to
1991. County
Treasurer, Bernadillo
County 1982 to 1985.
Director of The
Chapman Funds, Inc.
Lottie H. 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."
</TABLE>
________________________
*Director is interested person of the Company as defined in
the
1940 Act.
The Company will pay each of its directors who is
not
an affiliated person (as defined in the 1940 Act) of
the
Investment Adviser a fee of $1,000 per Board meeting
attended and
will reimburse any out-of-pocket expenses. Messrs. Lewis
and
White and Ms. Shackelford are also directors of The
Chapman
Funds, Inc., an open end management investment company in
<PAGE>
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.
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 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.
<PAGE>
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.
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.
<TABLE>
<CAPTION>
Name Address Percentage of
Securities Owned
<S> <C> <C>
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
</TABLE>
___________________
(1) The shares of Common Stock are owned beneficially and
of
record.
(2) The shares of Common Stock are owned beneficially but
not of
record.
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
<PAGE>
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.
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.
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
<PAGE>
its commencement of operations, which amount represents
100% of
the Company's aggregate brokerage commissions paid during
such
period. Transactions through The Chapman Co. represent
100% of
the aggregate dollar amount of the Company's
brokerage
transactions involving the payment of commissions since
the
Company's commencement of operations.
Research services furnished by broker-dealers
through
which the Company effects securities transactions may be
used by
the Investment Adviser in managing other investment accounts
and,
conversely, research services furnished to the Investment
Adviser
by broker-dealers in connection with other accounts
the
Investment Adviser advises may be used by the Investment
Adviser
in advising the Company. Although it is not possible to
place a
dollar value on these services, the Investment Adviser is of
the
view that the receipt of such services should not reduce
the
overall costs of its research services.
Investment decisions for the Company are
made
independently from those of other investment accounts
managed by
the Investment Adviser. If those accounts are prepared to
invest
in, or desire to dispose of such investments at the same
time as
the Company, however, available investments or
opportunities for
sales will be allocated equitably to each client of
the
Investment Adviser. In some cases, this procedure may
adversely
affect the size of the position obtained for or disposed
of by
the Company or the price paid or received by the Company.
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.
<PAGE>
Before authorizing any repurchase of Common
Stock or
tender offer to the Common Stock shareholders, the
Company's
Board of Directors would consider all relevant factors,
including
the market price of the Common Stock, its net asset value
per
share, the liquidity of the Company's securities positions,
the
effect an offer or repurchase might have on the Company or
its
shareholders and relevant market conditions. Any offer
would be
made in accordance with the requirements of the 1940 Act and
the
Securities Exchange Act of 1934. Although the matter
will be
subject to the review of the Board of Directors at the
time, a
tender offer is not expected to be made if the
anticipated
benefit to shareholders and the Company would not be
commensurate
with the anticipated cost to the Company, or if the
number of
shares expected to be tendered would not be material.
No assurance can be given that repurchases
and/or
tenders will result in the Common Stock's trading at a price
that
is close or equal to net asset value. The market price of
the
Common Stock will, among other things, be determined by
the
relative demand for, and supply of, the Common Stock in
the
market, the Company's investment performance, the
Company's
dividends and investor perception of the Company's
overall
attractiveness as an investment as compared with other
investment
alternatives. The Company's acquisition of Common Stock
will
decrease the total assets of the Company and therefore have
the
effect of increasing the Company's expense ratio. The
Company
may borrow money to finance the repurchase of shares
subject to
the limitations described in this Statement of
Additional
Information. Any interest on the borrowings will reduce
the
Company's net income. Because of the nature of the
Company's
investment objectives, policies and securities holdings,
the
Investment Adviser does not anticipate that, under normal
market
conditions, (1) repurchases and tenders will have an
adverse
effect on the Company's investment performance or (2) it
will
have any material difficulty in disposing of
securities to
consummate Common Stock repurchases and tenders.
When a tender offer is authorized to be made by
the
Company's Board of Directors, it will be an offer to
purchase at
a price equal to the net asset value of all (but not less
than
all) of the shares owned by a Common Stock shareholder
(or
attributed to the shareholder for federal income tax
purposes
under the Code). A shareholder who tenders all Common
Stock
shares owned or considered owned by him or her, as required,
will
realize a taxable gain or loss depending upon such person's
basis
in such shares.
The policy of the Company's Board of Directors
with
respect to tender offers and to repurchases, which may be
changed
by the Board of Directors, is that the Company will not
accept
tenders or effect repurchases if (1) those
transactions, if
consummated, would (a) result in the exclusion of the
Common
Stock from the NASDAQ SmallCap MarketSM 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 MarketSM or
any
exchange on which securities held by the Company are
traded,
(c) declaration of a banking
<PAGE>
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
<TABLE>
<CAPTION>
Index to Financial Statements
Page
<S> <C>
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 F-15
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DEM, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the statement of portfolio
investments, of
DEM, Inc. (a Maryland corporation), as of December 31, 1995,
and
the related statements of operations, changes in net assets
and
financial highlights from inception (November 30, 1995)
through
December 31, 1995. These financial statements are the
responsibility of the Company's management. Our
responsibility
is to express an opinion on these financial statements based
on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and
perform the audit to obtain reasonable assurance about
whether
the financial statements are free of material misstatement.
An
audit includes examining, on a test basis, evidence
supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as
evaluating
the overall financial statement presentation. We believe
that
our audit provides a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities and
portfolio investments referred to above presents fairly, in
all
material respects, the financial position of DEM, Inc. as of
December 31, 1995, and the results of its operations,
changes in
net assets and financial highlights from inception (November
30,
1995) through December 31, 1995, in conformity with
generally
accepted accounting principles.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 16, 1996
<PAGE>
DEM, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash and cash equivalents (Note 2)
$4,812,
175
Deferred organizational costs (Note 2)
49,675
Interest receivable
2,431
Total assets
4,864,2
81
LIABILITIES:
Accrued expenses (Note 2)
121,481
NET ASSETS - equivalent to $13.77 per share
on 344,457
$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
</TABLE>
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>
<CAPTION>
<S> <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>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net investment income (Note 2) $
1,885
Net increase in net assets resulting
1,885
from operations
CAPITAL SHARE TRANSACTIONS:
Common shares issued, net of issuance
4,740,9
costs (Note 4) 15
Net increase in net assets resulting
from capital
4,740,9
shares transactions 15
TOTAL INCREASE IN NET ASSETS
4,742,8
00
NET ASSETS, beginning of the period -
NET ASSETS, end of the period
$4,742,
800
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
DEM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION:
DEM, Inc. (the Company) was incorporated on October 20,
1995, in
the State of Maryland and is registered as a nondiversified
close-
ended management investment company under the Investment
Company
Act of 1940, as amended. As of December 31, 1995, the
Company's
only operations were the issuance of 344,417 shares of
common
stock, with the proceeds being invested in a mutual fund.
The principal investment objective of the Company is long-
term
growth through capital appreciation. Both capital
appreciation
and income will be considered in the selection of
investments,
but primary emphasis will be on capital appreciation. The
Company will retain maximum flexibility as to the types of
investments it may make and it will be permitted to invest
in
portfolio companies with large and small market
capitalizations.
The Company, however, intends to seek to invest a
substantial
portion of its assets in securities of domestic emerging
companies with smaller market capitalizations. There can be
no
assurance that the Company's objectives will be achieved.
The
Company's investment objectives and policies may be changed
by
the Board of Directors without the approval of shareholders.
Most of the Company's investments are expected to be in
marketable common stocks or marketable securities
convertible
into common stock traded on an exchange or in the over-the-
counter markets.
While the primary objective of the Company is to seek long-
term
growth through capital appreciation, the Company may invest
its
assets in income producing securities such as non-
convertible
preferred stock, bonds, debentures, notes and other similar
securities, if the Investment Adviser deems such investments
advisable.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to
make estimates and assumptions that affect the reported
amounts
of assets and liabilities and disclosure of contingent
assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting
period. Actual results could differ from those estimates.
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.
<PAGE>
Accrued Expenses
Accrued expenses includes $16,306 payable to Chapman Capital
Management, Inc. and $45,000 payable to an officer of the
Company
for costs paid on behalf of the Company, and $546 due to
Chapman
Capital Management for administrative and investment
advisory
expenses.
Interest Income
Interest income is recorded on the accrual basis to the
extent
that such amounts will be collected.
Income Taxes
The Company intends to elect and qualify each year to be
treated
as a regulated investment company (a RIC) for Federal income
tax
purposes in accordance with Subchapter M of the Internal
Revenue
Code of 1986, as amended. In order to so qualify, the
Company
must satisfy certain tests regarding the source of its
income,
diversification of its assets and distribution of its
income. If
the Company otherwise qualifies as a regulated investment
company
and distributes to its stockholders at least 90% of its
investment company taxable income, then the Company will not
be
subject to Federal income tax on the income so distributed.
However, the Company would be subject to corporate income
tax on
any undistributed income. In addition, the Company will be
subject to a nondeductible 4% excise tax on the amount by
which
the amount it 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.
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.
<PAGE>
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>
Principa
Carrying
l
Amount
Value
<S> <C> <C>
$ Fidelity Institutuional U.S. Government
4,812,17 Cash Portfolio II (stated at cost which is
$4,812,
5 market) 175
</TABLE>
The accompanying notes are an integral part of this
statement.
<PAGE>
DEM, INC.
FINANCIAL HIGHLIGHTS
FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31,
1995
<TABLE>
<CAPTION>
<S> <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>
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>
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>
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.
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>
Page
1 of
2
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,
$3,159,
963.32
963.32
COMMON STOCK:
Banks-
Banponce Corporation 255,550
277,500
.00 .00
Capital Bancorp, Fla.
30,800.00
30,250.00
Carver Federal Savings Bank 131,812
131,250
.50 .00
Independence Federal Savings
Bank
8,175.00
7,250.00
COMMUNICATOINS:
Mastec, Inc. 111,177
123,750
.50 .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
265,375
.00 .00
CLOTHING AND FABRICS:
Supreme International Corp. 123,250
127,500
.00 .00
FOOD:
Tootsie Roll 274,414
255,500
.50 .00
HEALTHCARE:
Owen Healthcare, Inc.
21,050.00
23,375.00
United American Healthcare Corp.
11,050.00
13,500.00
</TABLE>
<PAGE>
Page
2 of
2
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
$55,750
.00 .00
Granite Broadcasting Corp.
34,275.00
36,000.00
PHARMACEUTICAL:
Watson Pharmaceuticals, Inc. 170,950
160,000
.00 .00
TECHNOLOGY:
Envirotest Systems
3,175.00
2,875.00
Sigma Designs
41,325.00
38,000.00
Common Stock Total 1,559,5
1,560,1
05.50
87.50
TOTAL PORTFOLIO $4,719,
$4,720,
468.82
150.82
</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
(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.
(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.
<PAGE>
(n) -- Consent of Arthur
Andersen
LLP, independent public accountants
for
the Company.2
(o) -- Not Applicable.
(p) -- Subscription Agreement
between
the Company and Chapman Capital
Management, Inc.1
(q) -- Not Applicable.
(r) -- Financial Data Schedule.2
(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. 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.
<PAGE>
Item 27. Persons Controlled by or Under
Common Control with Registrant.
<TABLE>
<CAPTION>
Name Control Relationship to
Company
<S> <C>
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
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
</TABLE>
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
<PAGE>
asserted by such director, officer or
controlling
person in connection with the securities
being
registered, the Company will, unless in the
opinion of
its counsel the matter has been settled by
controlling
precedent, submit to a court of
appropriate
jurisdiction the question whether such
indemnification
by it is against public policy as expressed in
the Act
and will be governed by the final adjudication of
such
issue.
Item 30. Business and Other Connections of
Investment
Adviser.
For information regarding the business of
the
Investment Adviser see "Management of the
Company" in
the Company's Prospectus.
<TABLE>
<CAPTION>
Name and Position
with Investment Adviser Other Business
<S> <C>
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.
</TABLE>
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.
<PAGE>
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
(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.
<PAGE>
(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 April 8, 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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ NATHAN A. CHAPMAN, President, Chairman April 8, 1996
JR. of the Board and
Nathan A. Chapman, Jr. Director (Principal
Executive Officer)
/s/ M. LYNN BALLARD Treasurer April 8, 1996
M. Lynn Ballard (Principal
Financial and
Accounting Officer)
The Entire Board of
Directors
James B. Lewis
Nathan A. Chapman, Lottie H.
Jr. Shackelford
Robert L. Wallace
Ronald A. White
April 8, 1996
By:/s/ NATHAN A.
CHAPMAN
Nathan A. Chapman,
Jr.
Attorney-in-Fact
</TABLE>
<PAGE>
DEM, INC.
EXHIBIT INDEX
Exhibit L Opinion of Venable, Baetjer and Howard, LLP
Exhibit N Consent of Arthur Andersen LLP
Exhibit S Directors' Power of Attorney
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK & TRUST BUILDING
2 HOPKINS PLAZA
BALTIMORE, MD 21201
April 8, 1996
DEM, Inc.
The World Trade Center-Baltimore
401 E. Pratt Street
28th Floor
Baltimore, Maryland 21202
Re: Registration Statement on Form N-2
Ladies and Gentlemen:
We have acted as counsel for DEM, Inc., a Maryland corporation (the
"Fund"), in connection with the issuance of shares of its common stock, par
value $.00001 per share (the "Common Stock").
As counsel for the Fund, we are familiar with its Charter and Bylaws. We
have examined the prospectus and statement of additional information included
in its Registration Statement on Form N-2 (the "Registration Statement"),
substantially in the form in which they are to become effective (collectively,
the "Prospectus"). We have further examined and relied upon a certificate of
the Maryland State Department of Assessments and Taxation to the effect that
the Fund is duly incorporated and existing under the laws of the State of
Maryland and is in good standing and duly authorized to transact business in
the State of Maryland.
We have also examined and relied upon such corporate records of the Fund
and other documents and certificates with respect to factual matters as we have
deemed necessary to render the opinion expressed herein. With respect to the
documents we have received, we have assumed, without independent verification,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, and the conformity with originals of all documents
submitted to us as copies.
Based on such examination, we are of the opinion and so advise you that:
1. The Fund is duly organized and validly existing as a corporation in
good standing under the laws of the State of Maryland.
<PAGE>
DEM, Inc.
April 8, 1996
Page 2
2. The 203,067 shares of Common Stock of the Fund to be offered for sale
pursuant to the Prospectus have been validly and legally issued and
are fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the
authorization and issuance of stock. It does not extend to the securities or
"blue sky" laws of Maryland, to federal securities laws or to other laws.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Registration Statement
under the heading "Legal Matters."
Very truly yours,
/s/ VENABLE, BAETJER AND HOWARD, LLP
BA0DOCS1/0034925.01
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
DEM, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
Director(s) and Executive Officers of DEM, Inc., a Maryland
corporation, hereby constitute and appoint NATHAN A.
CHAPMAN, JR., and EARL U. BRAVO, SR. and either of them, the
true and lawful agents and attorney-in-fact of the
undersigned with full power and authority in either said
agent and attorney-in-fact, to sign for the undersigned and
in their respective names as Directors and Executive
Officers of DEM, Inc., the Registration Statement on Form N-
2, and any and all further amendments to said Registration
Statement, hereby ratifying and confirming all acts taken by
such agent and attorney-in-fact, as herein authorized.
DATE
/s/ NATHAN A. CHAPMAN, JR. April 3, 1996
Nathan A. Chapman, Jr., President,
Chairman of Board of Directors and
Director (Principal Executive Officer)
/s/ RONALD A. WHITE April 3, 1996
Ronald A. White, Director,
/s/ JAMES B. LEWIS April
3, 1996
James B. Lewis, Director
/s/ LOTTIE H. SHACKELFORD April 3, 1996
Lottie H. Shackelford, Director
/s/ ROBERT L. WALLACE April 3, 1996
Robert L. Wallace, Director
/s/ M. LYNN BALLARD April 3, 1996
M. Lynn Ballard
Treasurer (Principal Accounting &
Financial Officer)
