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Filed Pursuant to Rule 497(e)
Registration Number: 333-27225; 811-9118
1,194,917 SHARES
DEM, INC.
COMMON STOCK
DEM, Inc. (the "Company"), a non-diversified, closed-end management
investment company, is the nation's first closed-end fund sponsored by a
minority-controlled investment banking firm. The principal investment objective
of the Company is aggressive long-term growth through capital appreciation
through investment in Domestic Emerging Markets-TM- that it believes are
positioned for growth. "Domestic Emerging Markets-TM-" are public companies
that are controlled by African Americans, Hispanic Americans, Asian Americans
and women that are located in the United States and its territories ("DEM-TM-
Companies"). Both capital appreciation and income will be considered in the
selection of investments, but primary emphasis will be on capital appreciation.
See "INVESTMENT OBJECTIVES AND POLICIES." The address of the Company is The
World Trade Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore,
Maryland 21202, and its telephone number is (800) 752-1013. The Company's
investment advisor is Chapman Capital Management, Inc. (the "Investment
Advisor"). See "MANAGEMENT OF THE COMPANY."
Shares of closed-end investment companies have in the past frequently traded
at discounts from their net asset values. An investment in the Company involves
certain other risks. See "RISK FACTORS." The Common Stock trades on the Nasdaq
SmallCap Stock Market-SM- under the symbol "DEMI." As of August 31, 1997, the
last reported sale price of the Common Stock on the Nasdaq SmallCap Stock
Market-SM- was $15.25. The net asset value per share of the Common Stock at
August 31, 1997 was $15.98.
This Prospectus sets forth concisely the information about the Company that
a prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated August 29, 1997,
containing additional information about the Company, has been filed with the
Securities and Exchange Commission (the "SEC") 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 30 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.
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC(1) (1)(2) COMPANY(1)(2)(3)
------------- ------------ ----------------
Per Share...................... $ 15.00 $ 1.05 $ 13.95(1)
Total.......................... $ 17,923,755 $ 1,254,663 $ 16,669,092(4)
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(1) The offering price to the public is the greater of $15.00 or the Company's
net asset value per share (calculated within 48 hours of any sale). The
sales load will be an amount equal to 7% of the price to the public.
Accordingly, to the extent the Company's net asset value per share is below
$15.00, new investors in the Company will pay a premium to net asset value
per share and will be diluted to the extent of such premium. See "RISK
FACTORS--Dilution." Further, because the offering price is not related to
the market price of the Common Stock, a prospective investor may find it
more advantageous to purchase shares in secondary trading on the Nasdaq
SmallCap Stock Market than in this offering. See "DETERMINATION OF OFFERING
PRICE."
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act of 1933, as amended.
<PAGE>
(3) Before deducting offering expenses payable by the Company, estimated to be
$51,000.
(4) This offering has no minimum; therefore, proceeds to the Company could be
substantially less than indicated.
The shares of Common Stock offered by this Prospectus are offered on a best
efforts basis by The Chapman Co. (the "Underwriter") subject to prior sale,
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by the Underwriter and to certain further conditions.
No minimum number of shares must be subscribed in order for any shares to be
sold. This offering will terminate upon sale of all the shares offered hereby
unless earlier terminated by the Company or the Underwriter.
August 29, 1997 The Chapman Co.
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AVAILABLE INFORMATION
The Company has filed with the SEC in Washington, DC, a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered by this Prospectus. This Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to the Company and this
Offering, reference is made to the Registration Statement, including the
exhibits filed therewith, copies of which may be obtained at prescribed rates
from the SEC at the public reference facilities maintained by the SEC at
Judiciary Plaza Building, 450 Fifth Street, NW, Washington, DC 20549.
Descriptions contained in this Prospectus as to the contents of any contract or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete and each such description is qualified by reference to such
contract or document. The SEC maintains a Web site on the Internet that will
contain all future reports, proxy and information statements and other
information that the Company is required to file electronically with the SEC.
The address of the SEC's Web site is http://www.sec.gov.
The Company will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent accounting
firm.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Cross references in this
summary are to headings in the body of the Prospectus.
THE COMPANY. The Company is a non-diversified, closed-end management
investment company. See "THE COMPANY."
INVESTMENT OBJECTIVES AND POLICIES. The principal investment objective of
the Company is aggressive long-term growth through capital appreciation through
investment in Domestic Emerging Markets-TM- that it believes are positioned for
growth. "Domestic Emerging Markets-TM-" are public companies that are
controlled by African Americans, Hispanic Americans, Asian Americans and women
that are located in the United States and its territories. Both capital
appreciation and income are considered in choosing specific investments, but the
primary emphasis is on capital appreciation. The Company retains maximum
flexibility as to the types of investments it may make and is permitted to
invest in portfolio companies with large and small market capitalizations. Some
of these investments may involve the purchase of securities directly from
portfolio companies in initial or other public offerings of their securities.
See "RISK FACTORS--Investment in Small Companies." The Company's investment
objectives and policies, other than those specified under "INVESTMENT OBJECTIVES
AND POLICIES--Fundamental Policies" in the Statement of Additional Information,
may be changed by the Board of Directors without the approval of stockholders.
To achieve the Company's investment objectives, the Company invests in a
wide variety of types of portfolio companies and seeks to identify those
companies it believes are positioned for growth. While the Company expects to
invest in portfolio companies with large and small market capitalizations, the
Company believes that investing in small companies offers the potential for
significant long-term capital appreciation. Most of the Company's investments
are in marketable common stocks or marketable securities convertible into common
stock traded on an exchange or in the over-the-counter markets. To the extent
the Company invests in companies with smaller market capitalization, the
securities of such companies may be traded in such over-the-counter markets as
the OTC Bulletin Board-SM- and the Pink Sheets-SM-.
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 Advisor deems such investments
advisable. The Company may invest in fixed-income securities rated in the lower
rating categories of recognized statistical rating agencies, such as securities
rated "CCC or lower by Standard and Poor's Corporation ("S&P") or "Caa" or lower
by Moody's Investors Service, Inc. ("Moody's") or non-rated securities of
comparable quality. These debt securities are predominantly speculative, involve
major risk exposure to adverse conditions and are often referred to in the
financial press as "junk bonds." The Company is permitted to invest up to 35% of
its assets in such "non-investment grade" or "junk" securities. See "INVESTMENT
OBJECTIVES AND POLICIES," "RISK FACTORS--Lower Rated Securities" and Appendix A.
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The Company will not invest in foreign securities (including American
Depository Receipts) or restricted securities as defined under Rule 144.
DETERMINATION OF OFFERING PRICE. The offering price to the public is the
greater of $15.00 or the Company's net asset value per share (calculated within
48 hours prior to any sale). Accordingly, to the extent the Company's net asset
value per share is below $15.00, new investors in the Company will pay a premium
to net asset value per share and will be diluted to the extent of such premium.
See "RISK FACTORS--Dilution." Further, because the offering price is not related
to the market price of the Common Stock, a prospective investor may find it more
advantageous to purchase shares in secondary trading on the Nasdaq SmallCap
Stock Market than in this offering. See "DETERMINATION OF OFFERING PRICE."
PLAN OF DISTRIBUTION. A total of 1,194,917 shares of common stock will be
offered on a best efforts basis by the underwriter, The Chapman Co., acting as
the dealer manager on an agency basis. the minimum purchase is 100 shares. no
minimum number of shares must be sold before the offering will close and,
accordingly, the proceeds of the offering may be substantially less than would
be the case if all the shares offered are sold. See "PLAN OF DISTRIBUTION."
TRADING MARKET. The Common Stock is traded on the Nasdaq SmallCap Stock
Market-SM-.
STOCK SYMBOL. "DEMI."
INVESTMENT ADVISOR. The Investment Advisor, Chapman Capital Management,
Inc., is a wholly-owned subsidiary of the Underwriter. The Investment Advisor
has been in the investment counseling business since 1988 and as of June 30,
1997 had approximately $439 million under management. The Company pays the
Investment Advisor 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 Advisor."
ADMINISTRATOR. The Investment Advisor, Chapman Capital Management, Inc., is
also the Company's administrator. The Company pays Chapman Capital Management,
Inc. 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."
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TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT. Fund/Plan
Services, Inc. acts as the company's transfer agent, dividend-paying agent,
registrar and agent under The Company's Dividend Reinvestment Plan. See
"CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT."
DIVIDENDS AND DISTRIBUTIONS. The Company pays quarterly dividends from its
net investment income, if any (that is, income other than net realized capital
gains) and distributes net realized capital gains, if any, annually. All
dividends or distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Company's
Dividend Reinvestment Plan, unless a stockholder elects to receive cash. See
"DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN."
RISK FACTORS. Investments in Small Companies and Thinly Traded Issues.
Although the Investment Advisor believes that investing in small companies
offers the potential for significant long-term capital appreciation, it also
presents significant risks. The Company is designed for long-term investors who
have the financial ability to accept greater investment risk in exchange for the
potential of higher than average, long-term capital appreciation. Small
companies may be subject to greater earnings fluctuation, lack of established
markets for products or services, more limited financial resources and less
depth of experienced management than larger or more well established companies.
Securities of small companies generally have more limited marketability and may
be subject to greater price volatility than securities of larger companies.
Furthermore, such companies are often traded on markets such as the OTC Bulletin
Board SM and the Pink Sheets SM where the trading market is thinner and the
spread between bid and offer prices is larger than on the major exchanges or
Nasdaq system. The nature of these trading markets may limit the flexibility of
the Company to divest of portfolio securities quickly and at a reasonable price
in response to market conditions. For that reason, shares of the Company's
Common Stock are designed primarily for long-term investors, and investors in
the Common Stock should not view the Company as a vehicle for trading purposes.
See "INVESTMENT OBJECTIVES AND POLICIES"; "NET ASSET VALUE AND MARKET PRICE
INFORMATION"; and "RISK FACTORS--Investment in Small Companies,--Non-Diversified
Status,--Special Factors Relating to Closed-End Companies."
LIMITED PUBLIC MARKET. The Common Stock trades on the Nasdaq SmallCap Stock
Market SM. However, of the 871,776 shares of outstanding Common Stock of the
Company, as of August 31, 1997, 654,279 shares are held by the four largest
stockholders. As a result, the trading market for the Common Stock is limited.
See "RISK FACTORS--Limited Public Market" and "PRINCIPAL STOCKHOLDERS."
NON-DIVERSIFIED STATUS. The Company is classified as a "non-diversified"
investment company under the Investment Company Act of 1940, as amended, (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 intends to comply with the diversification
requirements imposed by the U.S. Internal Revenue Code of 1986, as amended, for
qualification as a regulated investment company. As a non-diversified investment
company, the Company may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. See "RISK
FACTORS--Non-Diversified Status."
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5
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LOWER RATED SECURITIES. The Company may invest in fixed-income securities
rated in the lower rating categories of recognized statistical rating agencies,
such as securities rated "CCC or lower by S&P or "Caa" or lower by Moody's or
non-rated securities of comparable quality. These debt securities are
predominantly speculative, involve major risk exposure to adverse conditions and
are often referred to in the financial press as "junk bonds." See "RISK
FACTORS--Lower Rated Securities" and Appendix A.
SPECIAL FACTORS RELATING TO CLOSED-END COMPANIES. The Company is a
non-diversified, closed- end investment company designed for long-term
investment and investors should not consider it a trading vehicle. Shares of
closed-end investment companies frequently trade at a discount from net asset
value. The Company cannot predict whether its shares will trade at, below or
above net asset value. See "RISK FACTORS--Special Factors Relating to Closed-End
Companies"; "INVESTMENT OBJECTIVES AND POLICIES."
POTENTIAL CONFLICT OF INTEREST. The Company may utilize the Underwriter,
The Chapman Co., a broker-dealer registered under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc., in connection with the purchase or sale
of portfolio securities in certain circumstances. The Investment Advisor is a
wholly-owned subsidiary of the Underwriter. Mr. Nathan A. Chapman, Jr., the
President and Chairman of the Board of Directors of the Company, is also the
President and Chairman of the Board of Directors of the Investment Advisor and
the Underwriter. See "MANAGEMENT OF THE COMPANY--Investment Advisor" below and
"OFFICERS AND DIRECTORS" in the Company's Statement of Additional Information.
Mr. Chapman owns approximately 92% of the equity and has the right to cast
approximately 99% of the votes entitled to be cast by stockholders of the
Underwriter. Accordingly, these relationships represent a potential conflict of
interest with respect to commissions and other fees on brokerage transactions
conducted on the Company's behalf by the Underwriter. A majority of the
Company's Board of Directors are independent directors and such Directors have
adopted procedures in compliance with the 1940 Act intended to address such
conflict. See "INVESTMENT ADVISORY AND OTHER SERVICES" and "BROKERAGE AND
PORTFOLIO TRANSACTIONS" in the Company's Statement of Additional Information.
IMMEDIATE DILUTION. To the extent the offering price per share exceeds the
then current net asset value per share, an investment in the Common Stock could
involve immediate substantial dilution. As of April 30, 1997, the Company had a
net asset value of $12.37 per share of Common Stock (based on 811,775 shares
outstanding). After giving effect to the sale of all of the Shares offered
hereby at an assumed offering price of $15.00 per share (less selling
commissions and estimated expenses of the Offering) the pro forma net asset
value at that date would have been $13.31 or an immediate dilution of 11%. This
represents an immediate increase in net asset value of $.94 per share to
existing stockholders and an immediate dilution of $1.69 per share to new
investors. See "RISK FACTORS--Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. As of August 31, 1997, 654,279 shares of
Common Stock, or approximately 75.1% of the outstanding Common Stock were held
by four stockholders. The sale of a large number of shares of Common Stock or
the availability of a large number of shares of Common Stock for sale could
adversely affect the market price of the
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6
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Common Stock prevailing from time to time. See "RISK FACTORS--Shares Eligible
for Future Sale" and "PRINCIPAL STOCKHOLDERS."
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 stockholders to sell their shares at a premium
over prevailing market prices. See "COMMON STOCK--Anti-Takeover Provisions in
the Charter."
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7
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COMPANY EXPENSES
The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Company based on the sales
load that will be incurred at the time of purchase and an estimate of the
Company's operating expenses for the current fiscal year:
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)........... 7%
Dividend Reinvestment Plan Fees (2)......................... 0%
<TABLE>
<S> <C> <C> <C>
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Annual Expenses (as a percentage of net assets) (3)
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Number of Shares Sold (4) 1,194,917 600,000 300,000
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Management Fees 0.90% 0.90% 0.90%
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Other Expenses (5) 1.10% 1.50% 1.87%
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Total Annual Expenses (estimated) 2.00% 2.40% 2.77%
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</TABLE>
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(1) The offering price to the public is the greater of $15.00 or the Company's
net asset value per share (calculated within 48 hours prior to any sale).
See "DETERMINATION OF OFFERING PRICE." The Underwriter will be paid a
management fee of 2.7% per share sold (or $.40 per share assuming the
offering price is $15.00) and the Underwriter and any other broker-dealer
participating in the selling group will be paid a commission not in excess
of 4.3% per share sold (or $.65 per share assuming the offering price is
$15.00).
(2) There is no charge to participants for reinvesting dividends and capital
gains distributions (the fees of the Plan Agent (as defined below) are paid
by the Company). Participants are charged a pro rata share of brokerage
commissions on all open market purchases. Currently, a $5.00 fee is charged
by the Plan Agent upon any cash withdrawal or termination. This amount is in
addition to any brokerage commissions charged to participants upon any cash
withdrawal or termination of participation in the Plan. See "DIVIDEND
REINVESTMENT PLAN."
(3) See "USE OF PROCEEDS" and "MANAGEMENT OF THE COMPANY."
(4) The number of shares sold represent amounts that may be sold in this
offering. However, there is no minimum number of shares that must be sold in
order for any shares to be sold; therefore, to the extent fewer shares are
sold than indicated, "Other Expenses" and "Total Annual Expenses
(estimated)" may be higher as a percentage of net assets.
(5) Based upon estimated amounts of expenses for the Company's current fiscal
year. Does not include marketing expenses that the Company may incur to
facilitate the offering of its Common Stock.
8
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The following examples demonstrate 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 an investor of a 7% sales load and payment by the Company of operating
expenses (excluding organizational and offering expenses) at the levels set
forth in the table above.
EXAMPLES
Assuming 1,194,917 shares are sold, an investor would pay the following
expenses on a $1,000 investment assuming a 5% annual return and reinvestment of
all dividends and distributions at net asset value:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
$90 129 170 285
Assuming 600,000 shares are sold, an investor would pay the following
expenses on a $1,000 investment assuming a 5% annual return and reinvestment of
all dividends and distributions at net asset value:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
$94 140 189 323
Assuming 300,000 shares are sold, an investor would pay the following
expenses on a $1,000 investment assuming a 5% annual return and reinvestment of
all dividends and distributions at net asset value:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
$98 151 207 357
The purpose of the foregoing tables is to assist the investor in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly assuming the offering is terminated after
certain numbers of shares are sold. "Other Expenses" are based on estimated
amounts for the current fiscal year. The number of shares sold represent amounts
that may be sold in this offering. However, there is no minimum number of shares
that must be sold in order for any shares to be sold; therefore, to the extent
fewer shares are sold than indicated, "Other Expenses" and "Total Annual
Expenses (estimated)" may be higher as a percentage of net assets. 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 examples
assume 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."
9
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FINANCIAL HIGHLIGHTS
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The following table summarizes certain selected financial data that have
been derived from the audited financial statements as of December 31, 1995 and
December 31, 1996 and the unaudited financial statements as of June 30, 1997.
This information should be read in conjunction with the financial statements
as of December 31, 1995, December 31, 1996 and June 30, 1997 and the notes
thereto, which are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEAR * PERIOD
JUNE 30, 1997 ENDED NOVEMBER 30, 1995
(UNAUDITED) DECEMBER 31, 1996 TO DECEMBER 31, 1995
----------------- ----------------- ---------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period 14.17 13.77 13.97
------- ------- ------
Net investment (loss)/gain (0.17) (0.42) 0.01
Net gain on securities (realized and unrealized) .080 1.15 0.00
------- ------- ------
Total from investment operations 0.63 0.73 0.01
Distributions paid from:
Net investment income (0.38) (0.05) 0.00
Net realized gain on investments 0.00 0.00 0.00
Dilutive effect of shares 0.00 (0.28) (0.21)
Net asset value, end of period 14.42 14.17 13.77
------- ------- ------
------- ------- ------
Market value per share, end of period $ 15.00 $ 15.50 $ 15.00
Total Investment Return 2.22% ** 3.68% 0.00%
Ratios/Supplemental Data:
Net Assets, end of period (000 omitted) $ 11,704 $ 11,025 $ 4,743
Average commission rate paid 5.00% 4.38% 0.00%
Portfolio Turnover 38.20% 332.60% 0.00%
Ratios to Average Net Assets:
Expenses 2.90%*** 3.21% 0.04%
Net investment income -2.49%** -1.89% 1.45%
</TABLE>
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* Commencement of operations
** Annualized
*** Does not reflect sales load
10
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THE COMPANY
DEM, Inc. is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Company was incorporated under the laws of
the State of Maryland on October 20, 1995. The Company's principal office is
located at The World Trade Center-Baltimore, 401 East Pratt Street, 28th Floor,
Baltimore, Maryland 21202. The Company's telephone number is (800) 752-1013.
USE OF PROCEEDS
Assuming all of the shares of Common Stock are sold at a price of $15.00 per
share, the net proceeds of the offering will be approximately $16,669,092, after
deducting the sales load and estimated offering expenses of the Company.
However, the offering price to the public is the greater of $15.00 or the
Company's net asset value per share (calculated within 48 hours prior to any
sale). See "DETERMINATION OF OFFERING PRICE." Accordingly, to the extent the net
asset value per share and, therefore, the offering price per share is above
$15.00, the actual net proceeds of the offering will be higher.
The net proceeds of the offering will be invested in accordance with the
Company's investment objectives and policies as soon as practicable after
receipt of funds from investors; the Company currently anticipates investing
funds within 90 days of receipt. Pending such investment, the proceeds may be
invested in cash, high quality short-term debt securities, and/or high quality
money market instruments. No minimum number of shares must be sold before the
offering will close and, accordingly, the proceeds of the offering may be
substantially less than would be the case if all the shares offered are sold.
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Company is aggressive long-term
growth through capital appreciation through investment in Domestic Emerging
Markets-TM- that it believes are positioned for growth. "Domestic Emerging
Markets-TM-" are public companies that are controlled by African Americans,
Hispanic Americans, Asian Americans and women that are located in the United
States and its territories. Both capital appreciation and income are considered
in choosing specific investments, but the primary emphasis is on capital
appreciation. The Company retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies
with large and small market capitalizations. Some of these investments may
involve the purchase of securities directly from portfolio companies in
initial or other public offerings of their securities. See "RISK
FACTORS--Investment in Small Companies." The Company's principal investment
objective of long-term growth through capital appreciation through investment
in Domestic Emerging Markets-TM- is not a "fundamental policy" of the
Company and can therefore be changed by the Company without stockholder
approval.
In determining whether a specific portfolio company is "controlled" by
African Americans, Hispanic Americans, Asian Americans or women, the Company
will apply the following criteria: at least 10% of the company's outstanding
voting securities must be beneficially owned by members of one or more of the
listed groups and at least one of the
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company's top three executive officers (Chairman, Chief Executive Officer or
President) must be a member of one or more of the listed groups.
To achieve the Company's investment objectives, the Company invests in a
wide variety of types of portfolio companies and seeks to identify those
companies that are positioned for growth. Among other factors the Investment
Advisor considers in making investment decisions are a company's above
average earnings growth, high potential profit margins, innovative products,
high quality management, and competitive advantage. The Company believes that
Domestic Emerging Markets -TM- represent one of America's fastest growing
market segments and include well-diversified, high-growth segments of the
economy including, but not limited to, communications, media/entertainment,
environmental services, applied/advanced technology, financial services and
value-oriented consuming.
While the Company invests in portfolio companies with large and small market
capitalization, the Company believes that investing in small companies offers
the potential for significant long- term capital appreciation. Most of the
Company's investments are in marketable common stocks or marketable securities
convertible into common stock traded on an exchange or in the over-the-counter
markets. To the extent the Company invests in companies with smaller market
capitalization, the securities of such companies may be traded in such
over-the-counter markets as the OTC Bulletin Board-SM- and the Pink Sheets-SM-.
See "RISK FACTORS--Investment in Small Companies."
While the primary objective of the Company is to seek long-term growth
through capital appreciation, the Company may invest its assets in income
producing securities such as non- convertible preferred stock, bonds,
debentures, notes, and other similar securities, which may include securities
commonly termed "derivatives," as discussed below, if the Investment Advisor
deems such investments advisable. The Company may invest in fixed-income
securities rated in the lower rating categories of recognized statistical rating
agencies, such as securities rated "CCC" or lower by S&P or "Caa" or lower by
Moody's or non-rated securities of comparable quality. These debt securities are
predominantly speculative, involve major risk exposure to adverse conditions and
are often referred to in the financial press as "junk bonds." The Company is
permitted to invest up to 35% of its assets in such "non-investment grade" or
"junk" securities. See "RISK FACTORS --Lower Rated Securities" and Appendix A.
The Company does not invest in foreign securities (including American
Depository Receipts) or restricted securities as defined under Rule 144.
The Company's investment objectives and policies, other than those specified
in the Statement of Additional Information under "INVESTMENT OBJECTIVES AND
POLICIES--Fundamental Policies," may be changed by the Board of Directors
without the approval of stockholders.
The Company retains the flexibility to respond promptly to changes in
market conditions and no minimum percentage of the Company's assets must be
invested in DEM-TM- Companies at any time. Accordingly, during periods when the
Investment Advisor believes a temporary defensive posture in the market is
warranted, the Company has reserved the right to invest a significant
proportion or all of its assets in the securities of non-DEM Companies that
otherwise meet the Company's investment objectives, or alternatively, the
Company may hold
12
<PAGE>
cash (U.S. dollars) and/or invest any portion or all of its assets in high
quality short-term debt securities and money market instruments. The
securities of non-DEM-TM- Companies that otherwise meet the Company's
investment objectives may or may not involve less risk than DEM-TM- Companies.
Accordingly, to the extent that the Company adopts a temporary defensive
posture in which it invests in non-DEM-TM- Companies, the Company's investments
will continue to present significant risks. See "RISK FACTORS--Investment in
Small Companies, --Non-Diversified Status, --Lower Rated Securities." The
decision to adopt a temporary defensive posture may be affected by such
factors as market conditions generally, the Investment Advisor's views on the
direction of movement of the stock prices of specific targeted portfolio
companies and other related factors. It is impossible to predict when or for
how long the Company will employ defensive strategies, and to the extent it
is so invested, the Company may not achieve its investment objectives. The
Company will also invest in the instruments described above pending
investment of the net proceeds of the offering.
In addition to investments in marketable common stocks, marketable
securities convertible into common stock and other securities consistent with
the Company's investment objectives, the Company may, but is not required to,
utilize various investment techniques for hedging, risk management and other
investment purposes. These investment techniques may include, but are not
limited to, lending of portfolio securities and entering into repurchase
agreements. Such investment techniques are commonly referred to as
"derivatives." Up to 20% of the Company's assets may be invested in
derivatives such as options for hedging and risk management purposes or when,
in the opinion of the Investment Advisor, derivatives can be expected to
yield a higher investment return than other investment options.
The Company seeks to increase its income by lending portfolio securities.
Such securities loans will be secured by collateral in cash, cash
equivalents, U.S. government securities, or such other collateral as may be
permitted under the Company's investment program and by regulatory agencies.
Additionally, the Company may enter, without limitation, into "repurchase
agreements" pertaining to the securities in which it may invest with
securities dealers or member banks of the Federal Reserve System. Repurchase
agreements facilitate portfolio management and allow the Company to earn
additional revenue. If the Company enters into repurchase agreements, it will
do so in order to increase liquidity or as a temporary investment while the
Company is evaluating the acquisition of suitable investments. See
"INVESTMENT OBJECTIVES AND POLICIES" in the Statement of Additional
Information.
The following are some of the Company's fundamental policies which it may
not change without the approval of the holders of a majority of its
outstanding voting securities. The Company will not invest in foreign
securities (including American Depository Receipts) or restricted securities
as defined in Rule 144. For more information about the Company and its
investment objectives and policies, including fundamental policies, see
"INVESTMENT OBJECTIVES AND POLICIES" in the Statement of Additional
Information.
13
<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 makers. These risks are in addition
to the risks normally associated with any strategy seeking capital
appreciation by investing in a portfolio of equity securities. Furthermore,
such companies are often traded on markets such as the OTC Bulletin Board-SM-
and the Pink Sheets-SM- where the trading market is thinner and the spread
between bid and offer prices is often larger than on the major exchanges or
Nasdaq system. The nature of these trading markets may limit the flexibility
of the Company to divest of portfolio securities quickly and at a reasonable
price in response to market conditions.
14
<PAGE>
LIMITED PUBLIC MARKET
The Common Stock trades on the Nasdaq SmallCap Stock Market-SM-. However,
of the 871,776 shares of outstanding Common Stock of the Company, as of
August 31, 1997, 654,279 shares are held by the four largest stockholders.
As a result, the trading market for the Common Stock is limited and the
Common Stock is infrequently traded. See "PRINCIPAL STOCKHOLDERS."
NON-DIVERSIFIED STATUS
The Company is classified as a non-diversified management investment
company under the 1940 Act, which means that the Company is not limited by
that Act in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Company complies and intends to
continue to comply with the diversification requirements imposed by the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as a regulated investment company. See "TAXATION" in the Company's
Statement of Additional Information. As a non-diversified investment company,
the Company may invest a greater proportion of its assets in the obligations
of a smaller number of issuers and, as a result, may be subject to greater
risk with respect to its portfolio securities.
LOWER RATED SECURITIES
The Company may invest in fixed-income securities rated in the lower
rating categories of recognized statistical rating agencies, such as
securities rated "CCC or lower by S&P or "Caa" or lower by Moody's or
non-rated securities of comparable quality. These debt securities are
predominantly speculative, involve major risk exposure to adverse conditions
and are often referred to in the financial press as "junk bonds." See
Appendix A.
SPECIAL FACTORS RELATING TO CLOSED-END COMPANIES
The Company is a non-diversified, closed-end management investment
company designed for long- term investment and investors should not consider
it as a trading vehicle. Shares of closed-end investment companies frequently
trade at a discount from net asset value. See "INVESTMENT OBJECTIVES AND
POLICIES."
POTENTIAL CONFLICT OF INTEREST
The Company may utilize, the Underwriter, The Chapman Co., a
broker-dealer registered under the Exchange Act and a member of the NASD, in
connection with the purchase or sale of portfolio securities in certain
circumstances. The Investment Advisor is a wholly-owned subsidiary of the
Underwriter. Mr. Nathan A. Chapman, Jr., the President and Chairman of the
Board of Directors of the Company, is also the President and Chairman of the
Board of Directors of the Investment Advisor and the Underwriter. See
"MANAGEMENT OF THE COMPANY[cad 228]Investment Advisor" below and "OFFICERS AND
DIRECTORS" in the Company's Statement of Additional Information. Mr.
Chapman owns approximately 92% of the equity and has the right to cast
approximately 99% of the votes entitled to be cast by stockholders of the
Underwriter. Accordingly, these relationships represent a potential conflict
of interest with respect to commissions and other fees on brokerage
transactions conducted on the Company's
15
<PAGE>
behalf by the Underwriter. A majority of the Company's Board of Directors are
independent directors and such Directors have adopted procedures in
compliance with the 1940 Act to address such conflict. See INVESTMENT
ADVISORY AND OTHER SERVICES" and "BROKERAGE AND PORTFOLIO TRANSACTIONS" in
the Company's Statement of Additional Information.
DILUTION
The difference between the offering price per share of Common Stock and
the net asset value per share of Common Stock constitutes the dilution to new
investors. Net asset value per share is determined by dividing the net asset
value (total assets less total liabilities) by the number of outstanding
shares of Common Stock.
As of April 30, 1997, the Company had a net asset value of $12.37 per
share of Common Stock (based on 811,775 shares outstanding). After giving
effect to the sale of the Shares offered hereby at an assumed offering price
of $15.00 per share (less selling commissions and estimated expenses of the
Offering) the pro forma net asset value at that date would have been $13.31
or an immediate dilution of 11%. This represents an immediate increase in net
asset value of $.94 per share to existing stockholders and an immediate
dilution of $1.69 per share to new investors. Further, due to the ongoing
nature of the offering, the dilution at any given time will fluctuate with
the net asset value per share of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 31, 1997, 654,279 shares of Common Stock, or approximately
75.1% of the outstanding Common Stock was held by four stockholders. The sale
of a large number of shares of Common Stock or the availability of a large
number of shares of Common Stock for sale could adversely affect the market
price of the Common Stock prevailing from time to time. See "PRINCIPAL
STOCKHOLDERS."
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<PAGE>
NET ASSET VALUE AND MARKET PRICE INFORMATION
The outstanding shares of Common Stock of the Company trade on the Nasdaq
SmallCap Stock Market-SM-. The following table shows, for each full quarterly
period within the two most recent fiscal years and each full fiscal quarter
since the beginning of the current fiscal year, the high and low bid information
for the Common Stock; the net asset value per share of the Company as determined
on the date closest to each quotation; and the percentage by which the shares of
Common Stock of the Company traded at a premium over, or discount from, the
Company's net asset value per share.
<TABLE>
<CAPTION>
PREMIUM
BID QUOTATIONS NET ASSET VALUE OR
(DISCOUNT)
($) ($) PERCENTAGE
-------------------- -------------------- ---------
QUARTER ENDED HIGH LOW HIGH LOW HIGH
- ------------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
March 31, 1996.......................................................... 15.00 15.00 13.85 13.77 8.30%
June 30, 1996........................................................... 15.00 15.00 14.83 13.78 1.15%
September 30, 1996...................................................... 15.00 15.00 14.94 13.79 0.14%
December 31, 1996....................................................... 15.00 15.00 15.12 14.17 (0.79)%
March 31, 1997.......................................................... 15.00 15.00 14.49 12.83 3.52%
June 30, 1997........................................................... 15.00 15.00 14.49 12.14 23.56%
<CAPTION>
QUARTER ENDED LOW
- ------------------------------------------------------------------------ ---------
<S> <C>
March 31, 1996.......................................................... 8.93%
June 30, 1996........................................................... 8.85%
September 30, 1996...................................................... 8.77%
December 31, 1996....................................................... 5.86%
March 31, 1997.......................................................... 16.19%
June 30, 1997........................................................... 3.32%
</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 five full fiscal quarters of the Company's operation, the
Company's shares have generally 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 trade at a premium to its net asset value per share.
On August 31, 1997, the Company's net asset value was $15.98 per share. As of
August 31, 1997, the last reported sale price of the Common Stock on the Nasdaq
SmallCap Stock Market-SM- was $15.25 per share reflecting a discount of $0.73 of
share price over net asset value per share as of August 31, 1997.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The business and affairs of the Company are managed under the direction of
the Company's Board of Directors, and the day to day operations of the Company
are conducted through or under the direction of the officers of the Company. The
Company's Statement of Additional Information contains information as to the
identity and background of the Company's Directors and officers.
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<PAGE>
INVESTMENT ADVISOR
The Investment Advisor, 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 Advisor was established in 1988 and is located at The World Trade
Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202.
The Investment Advisor is a wholly-owned subsidiary of the Underwriter, the
Underwriter. Nathan A. Chapman, Jr., who is the controlling stockholder,
President, Chief Executive Officer and Chairman of the Board of Directors of the
Underwriter, is President and Chairman of the Board of Directors of the Company
and President, Chief Executive Officer and Chairman of the Board of Directors of
the Investment Advisor.
The Investment Advisor 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 Advisor selects investments for the
Company and places purchase and sale orders on behalf of the Company. The
advisory fee payable to the Investment Advisor 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 Advisor has been in the investment advisory business since
1988 and has served as the investment adviser to The Chapman Funds, Inc., a
registered diversified open-end management investment company since 1988 which
offers a money market fund. In addition, the Investment Advisor serves as
portfolio manager to private accounts. As of June 30, 1997, the Investment
Advisor had approximately $439 million in assets under management.
PORTFOLIO MANAGEMENT
Nathan A. Chapman, Jr. who has been the President and Chief Executive
Officer of the Investment Advisor 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 Underwriter, which owns the
Investment Advisor, in 1987 and has been its President, Chief Executive Officer
and Chairman of the Board since its inception. the Underwriter is a full-service
brokerage and investment banking firm. As Mr. Chapman is the chief executive
officer of a brokerage and investment banking firm, he does not devote his full
time to the management of the Company's portfolio.
ADMINISTRATOR
The Investment Advisor also serves as the Company's administrator (the
"Administrator") pursuant to the Advisory and Administrative Services
Agreement. The
18
<PAGE>
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 semi-annual and annual
reports to the stockholders; preparation of certain of the Company's reports to
the SEC; 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 stockholder 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 Advisor" for a
discussion of the relationship between the Company and Investment Advisor/
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.
CONTROL PERSONS
One stockholder of the Company, Memphis Retirement System, owns
approximately 25% of the issued and outstanding Common Stock as of August 31,
1997. Accordingly, such stockholder 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 stockholders including the election of Directors. See "Control
Persons and Principal Holders of Securities" in the Statement of Additional
Information.
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<PAGE>
ESTIMATED EXPENSES
The Investment Advisor/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 stockholder 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, SEC 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 Underwriter in connection with a purchase or
sale of securities when the Investment Advisor 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 Underwriter 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 SEC. the Underwriter 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 Underwriter or its affiliates.
Assuming the successful sale of all of the shares offered hereby, the
Investment Advisor estimates that the Company's annual operating expenses,
including advisory, administrative and custody fees, exclusive of amortization
of organization expenses, will be approximately $510,000. 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. Further, the Company may undertake certain marketing initiatives on
its own behalf and at its own expense.
Costs incurred by the Company in connection with its organization were
$49,675 and are being amortized on a straight-line basis over 60 months from the
commencement of operations.
20
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Company pays quarterly dividends of net investment income (other than
net realized gains) to the holders of the Company's Common Stock. Under the
Company's current policy, which may be changed at any time by the Company's
Board of Directors, the Company's quarterly dividends are made at a level
that reflects the past and projected performance of the Company, which policy
over time will be expected to result in the distribution of all net
investment income of the Company. Net investment income of the Company
consists of all interest and dividend income accrued on the Company's assets
less all expenses of the Company. Expenses of the Company are accrued each
day. Net realized capital gains, if any, are distributed to the stockholders
at least once a year. For more information concerning the tax treatment of
distributions to stockholders, see "TAXATION."
DIVIDEND REINVESTMENT PLAN
Under the Company's Dividend Reinvestment Plan (the "Plan"), a stockholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Company reinvested automatically by Fund/Plan Services,
Inc. (the "Plan Agent") as agent under the Plan, unless the stockholder elects
to receive cash. Distributions with respect to shares registered in the name of
a broker-dealer or other nominee (that is, in "street name") will be reinvested
by the broker or nominee in additional shares under the Plan, unless that
service is not provided by the broker or nominee or the stockholder elects to
receive distributions in cash. Investors who own Common Stock registered in
street name should consult their broker-dealers for details regarding
reinvestment. All distributions to Company stockholders who do not participate
in the Plan will be paid by check mailed directly to the record holder by or
under the direction of Fund/Plan Services, Inc. as dividend-paying agent.
If the Company declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, stockholders who are not Plan
participants will receive cash and Plan participants will receive the equivalent
amount in shares of Common Stock. When the market price of the Common Stock is
equal to or exceeds the net asset value per share of the Common Stock on the
Valuation Date (as defined below), Plan participants will be issued shares of
Common Stock valued at the net asset value most recently determined as described
in the Statement of Additional Information under "NET ASSET VALUE" or, if net
asset value is less than 95% of the then current market price of the Common
Stock, then at 95% of the market value. The Valuation Date is the dividend or
capital gains distribution payment date or, if that date is not a trading day,
the immediately preceding trading day.
If the market price of the Common Stock is less than the net asset value of
the Common Stock, or if the Company declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with the
Company, as purchasing agent for Plan participants (the "Purchasing Agent"),
will buy Common Stock in the open market, on the Nasdaq System or elsewhere, for
the participants' accounts. If, following the commencement of the purchases and
before the Purchasing Agent has completed its purchases, the market price
exceeds the net asset value of the Common Stock, the average per share purchase
price paid by the Purchasing Agent may exceed the net asset value of the Common
Stock, resulting in the
21
<PAGE>
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 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.
22
<PAGE>
TAXATION
The following discussion reflects applicable tax laws as of the date of this
Prospectus.
TAXATION OF THE COMPANY
The Company has elected and intends to qualify each year to be treated as a
regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Company must satisfy certain tests
regarding the source of its income, diversification of its assets and
distribution of its income. If the Company otherwise qualifies as a regulated
investment company and distributes to its stockholders at least 90% of its
investment company taxable income, then the Company will not be subject to
federal income tax on the income so distributed. However, the Company would be
subject to corporate income tax on any undistributed income. If the Company is a
personal holding company (a "PHC"), then the federal corporate income tax will
be applied at the highest rate of tax specified in Section 11(b) of the Code,
currently 35%, with respect to any such undistributed income (in addition to the
possible imposition of the personal holding company tax, described in Section
541 of the Code equal to 39.6% 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% 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 distributed 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, the Company may be required in a particular year to distribute
dividends in an amount that is greater than the total amount of cash the
Company actually receives as distributions on the securities it owns. Those
annual distributions will be made from the Company's cash assets or from the
proceeds of sales of portfolio securities, if necessary. The Company may
realize capital gains or losses from those sales, which would increase or
decrease the Company's investment company taxable income or net capital gain.
If in any year the Company should fail to qualify under Subchapter M as a
regulated investment company, the Company would incur a regular corporate income
tax upon its taxable income for the year, and the entire amount of its
distribution would generally be characterized as ordinary income.
23
<PAGE>
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. 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 and 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 eighteen months. 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.
BACKUP WITHHOLDING
The Company may be required to withhold federal income tax at the rate of
31% of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.
The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Company and investors in the shares of Common
Stock and does not deal with all of the federal income tax consequences
applicable to the Company, or to all categories of
24
<PAGE>
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.
DETERMINATION OF OFFERING PRICE
The offering price to the public is the greater of $15.00 or the Company's
net asset value per share (calculated within 48 hours prior to any sale).
Accordingly, the minimum price at which shares will be sold in the offering will
be $15.00. Further, to the extent the Company's net asset value per share is
below $15.00, new investors in the Company will pay a premium to net asset value
per share and will be diluted to the extent of such premium. See "RISK
FACTORS--Dilution." Because the offering price is not related to the market
price of the Common Stock, in the event the market price per share is below the
greater of $15.00 or the Company's net asset value per share, a prospective
investor may find it more advantageous to purchase Common Stock in secondary
trading on the Nasdaq SmallCap Stock Market then in this offering.
The following chart demonstrates the determination of offering price in
relation to certain hypothetical net asset values per share. Please note, that
these net asset values per share are purely hypothetical and have no current
relation to the Company's actual net asset value per share.
<TABLE>
<CAPTION>
PUBLIC OFFERING PRICE PER
HYPOTHETICAL NET ASSET VALUE PER SHARE OF COMMON STOCK SHARE
- ----------------------------------------------------------------------------------- -----------------------------
<S> <C>
$13.00............................................................................. $ 15.00
$15.00............................................................................. $ 15.00
$17.00............................................................................. $ 17.00
</TABLE>
PLAN OF DISTRIBUTION
The Company is offering up to 1,194,917 shares of Common Stock. The shares
of Common Stock will be offered on a "best-efforts" basis, by, the Underwriter,
The Chapman Co., acting as the dealer-manager on an agency basis. No minimum
number of shares must be sold before the offering will close and, accordingly,
the proceeds of the offering may be
25
<PAGE>
substantially less than would be the case if all the shares offered are sold.
The Termination Date of the offering is on the earlier to occur of the date
the sale of all of the shares of Common Stock offered hereby is completed or
the date determined by the Company or the Underwriter.
The Administrator and Investment Advisor, Chapman Capital Management, Inc.,
is a wholly-owned subsidiary of the Underwriter. The principal business address
of the Underwriter is 401 E. Pratt Street, 28th Floor, Baltimore, Maryland
21202.
The Common Stock will be offered to the public at the greater of $15.00 or
the Company's net asset value per share (calculated within 48 hours prior to any
sale). The Underwriter will be paid a management fee of 2.7% per share sold (or
$.40 per share assuming the offering price is $15.00) and the Underwriter and
any other broker-dealer participating in the selling group will be paid a
commission not in excess of 4.3% per share sold (or $.65 per share assuming the
offering price is $15.00). The Company may undertake certain marketing
initiatives on its own behalf and at its own expense.
In the Placement Agency Agreement, the Company has agreed to indemnify the
Underwriter and its controlling persons with respect to certain liabilities,
including liabilities under the Securities Act.
The Underwriter has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority.
To the extent permitted under the 1940 Act and the rules and regulations
promulgated thereunder, the Company anticipates that the Underwriter may from
time to time act as broker or dealer in connection with the execution of its
portfolio transactions subject to certain restrictions under the 1940 Act.
The minimum investment requirement is 100 shares. Investors should consult
their brokers concerning the manner and method of payment for shares of the
Company.
The Common Stock trades on the Nasdaq SmallCap Stock Market-SM- under the
symbol "DEMI." As of August 31, 1997, the last reported sale price of the Common
Stock on the Nasdaq SmallCap Stock Market-SM- was $15.25.
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. Stockholders 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 August 31, 1997.
26
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT HELD BY THE AMOUNT
COMPANY OR FOR ITS OUTSTANDING
ACCOUNT EXCLUSIVE OF
AMOUNT HELD BY
COMPANY
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par
value $.00001............... 500,000,000 -0- 871,776
- -------------------------------------------------------------------------------------------------------------------------------
</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. The Board of Directors is divided into three classes having initial
terms of one, two and three years, respectively. At the annual meeting of
stockholders in each year, 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
stockholders 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
stockholders 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
27
<PAGE>
more, excluding sales of securities of the Company in connection with a
public offering, issuances of securities of the Company pursuant to a
dividend reinvestment plan adopted by the Company or pursuant to a stock
dividend and issuances of securities of the Company upon the exercise of any
stock subscription rights distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition
by the Company (in one or a series of transactions in any 12-month period) to or
with any person of any assets of the Company having an aggregate fair market
value of $1,000,000 or more, except for portfolio transactions effected by the
Company in the ordinary course of business and except with respect to
repurchases or redemptions of shares of the Company (transactions within clauses
(i) and (ii) and this clause (iii) each being known individually as a "Business
Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of the
Company or any amendment to the Company's Charter to terminate its existence;
and
(v) any stockholder 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% stockholder 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 stockholders 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 stockholder
vote is required under applicable state law and no stockholder vote will be
required to approve such transaction if it is any other Business Combination. In
addition, a 75% stockholder 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 stockholders 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
stockholders' 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
SEC, for the full text of these provisions. See "FURTHER INFORMATION." These
provisions could have the effect of depriving stockholders 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
28
<PAGE>
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 stockholders generally.
STOCK PURCHASES AND TENDERS
The Company's Board of Directors may consider, from time to time, but not
more frequently than once every two years, repurchases of Common Stock on the
open market or in private transactions or the making of tender offers for Common
Stock. The Company does not have a fundamental policy with respect to the
repurchase of Common Stock and these repurchases are discretionary. There can be
no assurance that the Board of Directors will, in fact, decide to effect
repurchases of the Company's shares. See "STOCK PURCHASES AND TENDERS" in the
Statement of Additional Information.
LEGAL MATTERS
Venable, Baetjer and Howard, LLP, Baltimore, Maryland, as counsel for the
Company, has rendered an opinion as to certain legal matters regarding the due
authorization and valid issuance of the Common Stock being offered pursuant to
this Prospectus. In addition, Venable, Baetjer and Howard, LLP serves as counsel
to the Underwriter on an ongoing basis. The Underwriter has not been separately
represented in this offering. Venable, Baetjer and Howard, LLP also serves as
counsel to the Investment Advisor on an on-going basis.
REPORTS TO STOCKHOLDERS
The Company sends semi-annual and audited annual reports to stockholders,
including a list of investments held.
EXPERTS
The Financial Statements of the Company as of December 31, 1995 and December
31, 1996 incorporated by reference in the Statement of Additional Information
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 SEC. The complete Registration Statement may be obtained from
the SEC upon payment of the fee prescribed by its Rules and Regulations.
29
<PAGE>
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.......................................................................... B-2
Net Asset Value............................................................................................. B-6
Taxation.................................................................................................... B-6
Officers and Directors...................................................................................... B-10
Control Persons and Principal Holders of Securities......................................................... B-13
Investment Advisory and Other Services...................................................................... B-13
Brokerage and Portfolio Transactions........................................................................ B-15
Stock Purchases and Tenders................................................................................. B-16
Performance Information..................................................................................... B-18
Financial Statements........................................................................................ F-1
</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 Advisor. 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.
30
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
<TABLE>
<S> <C>
Aaa Bonds that are rated Aaa are judged to be of the best quality. they carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or exceptionally stable margin and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risk
appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess may favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this
class.
B Bonds that are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
Moody's applies numerical modifiers (l, 2, and 3) with respect to the bonds
rated "Aa" through "B". The modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in the lower end of
its generic rating category.
A-1
<PAGE>
<TABLE>
<S> <C>
Caa Bonds that are rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
Standard & Poor's Ratings Group
AAA This is the highest rating assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are regarded as safe. Debt
rated A has a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation, and C the
highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated C1 is reserved for income bonds on which
no interest is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is attached
to derivatives, hybrids and certain other obligations that S&P believes may
experience high variability in expected returns due to non-credit risks created by
the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing
within the major categories.
"NR" indicates that no public rating has been requested, that there is insufficient information
on which to base a rating, or that S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company or any underwriter. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or the solicitation of an offer to buy
shares of Common Stock by anyone in any jurisdiction in which such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the facts as set forth in the Prospectus or in the
affairs of the Company since the date hereof.
------------------------
TABLE OF CONTENTS
PAGE
------
PROSPECTUS SUMMARY................................................. 3
COMPANY EXPENSES................................................... 8
FINANCIAL HIGHLIGHTS............................................... 10
THE COMPANY........................................................ 11
USE OF PROCEEDS.................................................... 11
INVESTMENT OBJECTIVES AND POLICIES................................. 11
RISK FACTORS....................................................... 14
NET ASSET VALUE AND MARKET PRICE INFORMATION....................... 17
MANAGEMENT OF THE COMPANY.......................................... 17
DIVIDENDS AND DISTRIBUTIONS........................................ 21
DIVIDEND REINVESTMENT PLAN......................................... 21
TAXATION........................................................... 22
CUSTODIAN, TRANSFER AND DIVIDEND-PAYING AGENT AND REGISTRAR........ 25
DETERMINATION OF OFFERING PRICE.................................... 25
PLAN OF DISTRIBUTION............................................... 25
COMMON STOCK....................................................... 26
STOCK PURCHASES AND TENDERS........................................ 29
LEGAL MATTERS...................................................... 29
REPORTS TO STOCKHOLDERS............................................ 29
EXPERTS............................................................ 29
FURTHER INFORMATION................................................ 29
CORPORATE BOND RATINGS............................................. APPENDIX A
DEALERS MAY HAVE AN OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,194,917 SHARES
DEM, Inc.
Common Stock
---------------------
PROSPECTUS
---------------------
---------------------
August 29, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DEM, INC.
STATEMENT OF ADDITIONAL INFORMATION
DEM, Inc. (the "Company") is a non-diversified, closed-end management
investment company. The principal investment objective of the Company is
aggressive long-term growth through capital appreciation through investment in
Domestic Emerging Markets -TM- that it believes are positioned for growth.
"Domestic Emerging Markets -TM-" are public companies that are controlled by
African Americans, Hispanic Americans, Asian Americans and women that are
located in the United States and its territories ("DEM -TM- Companies"). Both
capital appreciation and income are considered in choosing specific investments,
but the primary emphasis is on capital appreciation. The Company retains maximum
flexibility as to the types of investments it may make and is permitted to
invest in portfolio companies with large and small market capitalizations. Some
of these investments may involve the purchase of securities directly from
portfolio companies in initial or other public offerings of their securities.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Company dated August 29, 1997
(the "Prospectus"). This Statement of Additional Information does not include
all the information that a prospective investor should consider before
purchasing the Company's shares of common stock, and investors should obtain and
read the Prospectus prior to purchasing shares. A copy of the Prospectus may be
obtained without charge, by calling the Company at (800) 752-1013.
TABLE OF CONTENTS
PAGE
------
Investment Objectives and Policies................................. B-2
Net Asset Value.................................................... B-6
Taxation........................................................... B-6
Officers and Directors............................................. B-10
Control Persons and Principal Holders of Securities................ B-13
Investment Advisory and Other Services............................. B-13
Brokerage and Portfolio Transactions............................... B-15
Stock Purchases and Tenders........................................ B-16
Performance Information............................................ B-18
Financial Statements............................................... F-1
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, DC (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 STATEMENT OF ADDITIONAL INFORMATION IS DATED AUGUST 29, 1997
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Company is aggressive long-term
growth through investment in Domestic Emerging Markets -TM- that it believes are
positioned for growth. "Domestic Emerging Markets -TM-" are public companies
that are controlled by African Americans, Hispanic Americans, Asian Americans
and women that are located in the United States and its territories. Both
capital appreciation and income are considered in choosing specific investments,
but the primary emphasis is on capital appreciation. The Company retains maximum
flexibility as to the types of investments it may make and is permitted to
invest in portfolio companies with large and small market capitalizations. Some
of these investments may involve the purchase of securities directly from
portfolio companies in initial or other public offerings of their securities.
See "RISK FACTORS--Investment in Small Companies" in the Prospectus. The
Company's principal investment objective of long-term growth through capital
appreciation through investment in Domestic Emerging Markets -TM- is not a
"fundamental policy" of the Company and can therefore be changed by the Company
without stockholder approval.
In determining whether a specific portfolio company is "controlled" by
African Americans, Hispanic Americans, Asian Americans or women, the Company
will apply the following criteria, at least 10% of the company's outstanding
voting securities must be beneficially owned by members of one or more of the
listed groups and at least one of the company's top three executive officers
(Chairman, Chief Executive Officer or President) must be a member of one or more
of the listed groups.
The Company will seek to identify businesses that are DEM -TM- Companies
through research by the Chapman Capital Management, Inc., the Company's
investment advisor (the "Investment Advisor"). Such research will include:
requests to specific companies for details of their ownership and management;
independent research for the details of specific companies' ownership and
management including company visits and checks with government agencies for
companies that have registered as minority or women-owned business enterprises
or are recognized as such by government agencies; the review of business lists
compiled by magazines and other publications which list DEM -TM- Companies; the
examination of companies that generally market themselves as DEM -TM- Companies;
and the review of annual reports and other regulatory filings.
To achieve the Company's investment objectives, the Company invests in a
wide variety of types of portfolio companies and seeks to identify those
companies that are positioned for growth. Among other factors, the Investment
Advisor considers a company's above average earnings growth, high potential
profit margins, innovative products, high quality management, and competitive
advantage in making investment decisions. The Company believes that Domestic
Emerging Markets -TM- represent one of America's fastest growing market segments
and include well-diversified, high-growth segments of the economy including, but
not limited to, communications, media/entertainment, environmental services,
applied/advanced technology, financial services and value-oriented consuming.
While the Company invests in portfolio companies with large and small market
capitalizations, the Company believes that investing in small companies may
offer the potential for significant long-term capital appreciation. Most of the
Company's investments are in marketable common stocks or marketable securities
convertible into common stock traded on an exchange or in the over-the-counter
markets. To the extent the Company invests in companies with smaller market
capitalization, the securities of
<PAGE>
such companies may be traded in such over-the-counter markets as the OTC
Bulletin Board-SM- and the Pink Sheets-SM-. See "RISK FACTORS--Investment in
Small Companies" in the Prospectus.
While the primary objective of the Company is to seek long-term growth
through capital appreciation, the Company may invest its assets in income
producing securities such as non-convertible preferred stock, bonds, debentures,
notes, and other similar securities, which may include securities commonly
termed "derivatives," as discussed below, if the Investment Advisor deems such
investments advisable. The Company may invest in fixed-income securities rated
in the lower rating categories of recognized statistical rating agencies, such
as securities rated "CCC" or lower by Standard and Poor's Corporation or "Caa"
or lower by Moody's Investors Service, Inc. or non-rated securities of
comparable quality. These debt securities are predominantly speculative, involve
major risk exposure to adverse conditions and are often referred to in the
financial press as "junk bonds." See "RISK FACTORS--Lower Rated Securities" and
Appendix A in the Prospectus.
The Company does not invest in foreign securities (including American
Depository Receipts) or restricted securities as defined under Rule 144.
The Company is authorized to lend securities it holds to brokers, dealers
and other financial organizations, but it will not lend securities to any
affiliate of the Investment Advisor unless the Company applies for and receives
specific authority to do so from the SEC. The Company's loans of securities are
collateralized by cash, letters of credit or U.S. Government securities that are
maintained at all times in a segregated account in an amount equal to the
current market value of the loaned securities. From time to time, the Company
may pay a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Company and that is acting as a "finder."
By lending its securities, the Company can increase its income by continuing
to receive interest on the loaned securities, by investing the cash collateral
in short-term instruments or by obtaining yield in the form of interest paid by
the borrower when U.S. Government securities are used as collateral. The
portfolio adheres to the following conditions whenever it lends its securities:
(1) the Company must receive at least 100% cash collateral or equivalent
securities from the borrower, which amount of collateral is maintained by daily
marking to market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the collateral;
(3) the Company must be able to terminate the loan at any time; (4) the Company
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in market
value; (5) the Company may pay only reasonable custodian fees in connection with
the loan; and (6) voting rights on the loaned securities may pass to the
borrower, except that, if a material event adversely affecting the investment in
the loaned securities occurs, the Company's Board of Directors must terminate
the loan and regain the Company's right to vote the securities. Such investment
techniques are commonly referred to as "derivatives." Up to 20% of the Company's
assets may be invested in derivatives such as options for hedging and risk
management purposes or when, in the opinion of the Investment Advisor,
derivatives can be expected to yield a higher investment return than other
investment options.
F-2
<PAGE>
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 Advisor monitors the creditworthiness of
the dealers and banks with which the Company enters into repurchase agreement
transactions.
The Company retains the flexibility to respond promptly to changes in market
conditions and no minimum percentage of the Company's assets must be invested in
DEM -TM- Companies at any time. Accordingly, during periods when the Investment
Advisor believes a temporary defensive posture in the market is warranted, the
Company has reserved the right to invest a significant proportion or all of its
assets in the securities of non-DEM -TM- Companies that otherwise meet the
Company's investment objectives, or alternatively, the Company may hold cash
(U.S. dollars) and/or invest any portion or all of its assets in high quality
short-term debt securities and money market instruments. The securities of non-
DEM -TM- Companies that otherwise meet the Company's investment objectives may
or may not involve less risk than DEM -TM- Companies. Accordingly, to the extent
that the Company adopts a temporary defensive posture in which it invests in
non-DEM -TM- Companies the Company's investments will continue to present
significant risks. See "RISK FACTORS--Investment in Small
Companies,--Non-Diversified Status,-- Lower Rated Securities" in the Prospectus.
The decision to adopt a temporary defensive posture may be affected by such
factors as market conditions generally, the Investment Advisor's views on the
direction of movement of the stock prices of specific targeted portfolio
companies and other related factors. It is impossible to predict when or for how
long the Company will employ defensive strategies, and to the extent it is so
invested, the Company may not achieve its investment objectives.
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 stockholder approval.
The percentage limitations set forth below, as well as those described in the
Prospectus, are
F-3
<PAGE>
measured and applied only at the time an investment is made or other relevant
action is taken by the Company. The investment policies adopted by the Company
prohibit the Company from:
(1) Issuing senior securities, borrowing money or pledging its assets,
except that the Company may borrow from a lender (i) for temporary or emergency
purposes, (ii) for such short-term credits as may be necessary for the clearance
or settlement of transactions, (iii) to finance repurchases of its shares (see
"Stock Purchases and Tenders") in amounts not exceeding 10% (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed), or (iv) to pay any dividends required to be distributed in order for
the Company to maintain its qualification as a regulated investment company
under the Code or otherwise to avoid taxation under the Code. Additional
investments will not be made when borrowings exceed 5% of the Company's total
assets. The Company may pledge its assets to secure such borrowings.
(2) Purchasing securities on margin.
(3) Underwriting the securities of other issuers, except insofar as the
Company may be deemed an underwriter in the course of disposing of portfolio
securities.
(4) Concentrating investments in particular industries. The Company's policy
is not to concentrate investments, i.e., to limit its investments in any one
industry, so that it will make no additional investment in any industry if such
investment would result in its having over 25% of the value of its assets at the
time in such industry.
(5) Engaging in the purchase and sale of real estate or real estate or
mortgage-backed securities.
(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 Advisor, 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.
F-4
<PAGE>
NET ASSET VALUE
Net asset value is calculated (a) no less frequently than weekly, (b) on the
last business day of each month and (c) at any other times determined by the
Company's Board of Directors. Net asset value is calculated by dividing the
value of the Company's net assets (the value of its assets less its liabilities,
exclusive of capital stock and surplus) by the total number of shares of Common
Stock outstanding. All securities for which market quotations are readily
available are valued at the closing price quoted for the securities prior to the
time of determination (but if bid and asked quotations are available, at the
mean between the last current bid and asked prices, rather than the quoted
closing price). Although the Company seeks to take into account material changes
in value occurring after the close of a market and before the time the Company's
net asset value is determined, there can be no assurance that it will always be
able to do so. Securities that are traded over-the-counter are valued, if bid
and asked quotations are available, at the mean between the current bid and
asked prices. If bid and asked quotations are not available, then
over-the-counter securities are valued as determined in good faith by the Board
of Directors. In making this determination the Board considers, among other
things, publicly available information regarding the issuer, market conditions
and values ascribed to comparable companies. In instances where the price
determined above is deemed not to represent fair market value, the price is
determined in such manner as the Board may prescribe. Investments in short-term
debt securities having a maturity of 60 days or less are valued at amortized
cost if their term of maturity from the date of purchase was less than 60 days,
or by amortizing their value on the 61st day prior to maturity if their term to
maturity from the date of purchase when acquired by the Company was more than 60
days, unless this is determined by the Board of Directors not to represent fair
value. All other securities and assets are taken at fair value as determined in
good faith by the Board of Directors, although the actual calculation may be
done by others.
The Common Stock trades on the Nasdaq SmallCap Market-SM- under the symbol
"DEMI". In recent periods, shares of closed-end investment companies have
generally traded at a discount from net asset value, but in some cases have
traded above net asset value. Among the factors 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.
F-5
<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) for its tax years beginning before August 5,
1997, 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 amount distributed 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. The Company may retain its net capital
gain and pay corporate income tax thereon. The Company also may elect to include
all or a portion of its undistributed net capital gain in the income of its
shareholders of record on the last day of the taxable year. 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 or her federal income tax liabilities and to claim refunds to the extent
that the credit exceeds such liabilities. In addition, the stockholder would be
entitled to increase the basis of his or her shares for federal income tax
purposes by an amount equal to 65% of his proportionate share of the
undistributed net capital gain.
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
F-6
<PAGE>
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, 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 in such months will be taxable to stockholders
as of December 31, even though the dividend is actually paid in 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.
F-7
<PAGE>
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 some 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.
F-8
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS REGISTRANT AGE DURING PAST 5 YEARS
- --------------------------- --------------------- ----- ------------------------------------------------------
Directors to serve until the 2000 Annual Meeting (Class III)
- --------------------------- --------------------- ----- ------------------------------------------------------
<S> <C> <C> <C>
* Nathan A. Chapman, Jr. Director and 39 President, Chief Executive Officer and Treasurer since
401 E. Pratt St., 28th Flr President 1986 of The Chapman Co., the Company's underwriter,
Baltimore, MD 21202 and President and Chief Executive Officer of Chapman
Capital Management, Inc., the Company's advisor, since
1988. President, Chairman of the Board of Directors
and Director of The Chapman Funds, Inc. (an open-end
investment company managed by the Company's advisor).
- --------------------------- --------------------- ----- ------------------------------------------------------
Ronald A. White Director 47 President, Ronald A. White, P.C., a law firm, since
401 E. Pratt St., 28th Flr 1982. Director of The Chapman Funds, Inc.
Baltimore, MD 21202
- --------------------------- --------------------- ----- ------------------------------------------------------
Directors to serve until the 1999 Annual Meeting (Class II)
- --------------------------- --------------------- ----- ------------------------------------------------------
Lottie H. Shackelford Director 56 Executive Vice President, Global USA--since 1995, City
401 E. Pratt St., 28th Flr Director of the City of Little Rock, Arkansas, 1978 to
Baltimore, MD 21202 1995, the City Mayor of Little Rock, Arkansas,
1987-1989; Vice Chair, Democratic National Committee,
1989, Co-Chair, Democratic National Committee, 1988.
Director of The Chapman Funds, Inc.
- --------------------------- --------------------- ----- ------------------------------------------------------
Robert L. Wallace Director 40 President since 1993 of the BITH Group, Inc. Senior
401 E. Pratt St., 28th Flr Vice President of ECS Technology Inc. from 1992 to
Baltimore, MD 21202 1993. Assistant Vice President Maryland National Bank
from 1990 to 1992. Author "Black Wealth Through Black
Entrepreneurship."
- --------------------------- --------------------- ----- ------------------------------------------------------
Directors to serve until the 1998 Annual Meeting (Class I)
- --------------------------- --------------------- ----- ------------------------------------------------------
James B. Lewis Director 49 City Administrator/Manager, City of Rio Rancho, New
401 E. Pratt St., 28th Flr Mexico since March 1996, Chief Clerk-- State
Baltimore, MD 21202 Corporation Commission from April 1995 to March 1996,
Chief of Staff, Office of the Governor from Jan. 1991
to April 1995. New Mexico State Treasurer, December
1985 to January 1991. County Treasurer, Bernadillo
County 1982-1985. Director of The Chapman Funds, Inc.
- --------------------------- --------------------- ----- ------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------- ----- ------------------------------------------------------
Officers
- ---------------------------- --------------------- ----- ------------------------------------------------------
<S> <C> <C> <C>
Earl U. Bravo, Sr. Vice President and 49 Chief Operating Officer of The Chapman Co. since 1992.
401 E. Pratt St., 28th Floor Secretary From 1990 until 1992, President of Chapman Capital
Baltimore, Maryland 21202 Management, Inc.
- ---------------------------- --------------------- ----- ------------------------------------------------------
M. Lynn Ballard Treasurer 54 Controller of The Chapman Co. and Treasurer of The
401 E. Pratt St., 28th Floor Chapman Funds, Inc. since 1988.
Baltimore, Maryland 21202
- ---------------------------- --------------------- ----- ------------------------------------------------------
</TABLE>
- ------------------------
* Directors deemed to be "interested persons" of the Company for purposes of
the Investment Company Act of 1940, as amended are indicated by an asterisk.
In addition to the positions indicated with the Company's advisor and
underwriter, Mr. Chapman is a principal stockholder of the Company's
underwriter.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFIT ACCRUED ESTIMATED FROM FUND AND
COMPENSATION AS PART OF FUND ANNUAL BENEFITS FUND COMPLEX
NAME OF PERSON FROM FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
POSITION ($) ($) ($) ($)
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr.
Director and President........................ -0- -0- -0- -0-
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
James B. Lewis
Director...................................... 3,000 -0- -0- 5,000
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
Lottie H. Shackelford
Director...................................... 2,000 -0- -0- 4,000
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
Ronald A. White
Director...................................... 2,000 -0- -0- 2,000
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
Robert L. Wallace
Director...................................... 3,038 -0- -0- 3,038
- ---------------------------------------------- --------------- ------------------- ------------------- -----------------
</TABLE>
No officer of the Company receives any compensation from the Company. The
Board of Directors has no committees.
Directors of the Company who are not officers receive from the Company a fee
of $1,000 for each Board of Directors meeting attended and are reimbursed for
all out-of-pocket expenses relating to attendance at meetings. Messrs. Lewis and
White and Ms. Shackelford are also directors of The Chapman Funds, Inc., an open
end management investment company in the same "fund complex" as the Company (as
that term is defined under the Investment Company Act of 1940, as amended (the
"1940 Act")) and are paid $1,000 per meeting of the board of
F-10
<PAGE>
directors of The Chapman Funds, Inc. that they attend. No officer or Director of
the Company is paid more than $60,000 in connection with their services to the
Company.
No Director or officer of the Company owns beneficially any shares of the
Company. All of the outstanding equity securities of the Investment Advisor,
Chapman Capital Management, Inc., are held by The Chapman Co., the Company's
underwriter (the "Underwriter"). Mr. Chapman owns 92% of the outstanding equity
securities of the Underwriter on a fully diluted basis and has the right to cast
approximately 99% of the votes entitled to be cast by its stockholders.
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 stockholders 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 stockholders to which they would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of their obligations and duties.
The Board of Directors is divided into three classes, having terms of one,
two and three years, respectively. At the annual meeting of stockholders in each
year, the term of one class expires and Directors are 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.
F-11
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, to the Company's knowledge, the name, the
number of shares and the percentage of the outstanding shares of the Company
owned beneficially by each person who owned beneficially 5% or more of the
outstanding shares on August 31, 1997, the latest practicable date, and the
ownership of all Directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------- ------------------- ---------
NAME AND ADDRESS OF BENEFICIAL OWNER TOTAL SHARES (1) %
- ----------------------------------------------------------------------------------- ------------------- ---------
<S> <C> <C>
Memphis Retirement System.......................................................... 215,636 24.7%
125 North Main Street, Room 368
Memphis, TN 38103-2017
- ----------------------------------------------------------------------------------- ------------------- ---------
Shelby County Retirement System.................................................... 202,451 23.2%
160 North Mid-Atlantic Mall, Suite 950
Memphis, TN 38103
- ----------------------------------------------------------------------------------- ------------------- ---------
Potomac Electric Power Company..................................................... 101,225 11.6%
1900 Pennsylvania Avenue, NW
Washington, DC 20068-0001
- ----------------------------------------------------------------------------------- ------------------- ---------
Texaco--Harrison Capital, Inc...................................................... 134,967 15.5%
2000 Westchester Avenue
White Plains, NY 10650
- ----------------------------------------------------------------------------------- ------------------- ---------
All current Directors and executive officers as a group............................ -0- -0-
- ----------------------------------------------------------------------------------- ------------------- ---------
</TABLE>
- ------------------------
(1) To the Company's knowledge, the shares of Common Stock are owned
beneficially and not of record.
Because one stockholder of the Company owns approximately 25% of the issued
and outstanding Common Stock as of August 31, 1997, such stockholder is deemed
to control the Company. Accordingly, such stockholder 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 stockholders including the election of
Directors.
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Advisor, 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 Advisor was established in 1988 and is located
F-12
<PAGE>
at The World Trade Center--Baltimore, 401 East Pratt Street, 28th Floor,
Baltimore, Maryland 21202.
The Investment Advisor is a wholly-owned subsidiary of the Underwriter, The
Chapman Co. Nathan A. Chapman, Jr., who is the controlling stockholder of the
Underwriter is a controlling person (as that term is defined under the 1940 Act)
of the Underwriter and, therefore, a controlling person of the Investment
Advisor. The Underwriter is a broker-dealer registered under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") and a member of the
National Association of Securities Dealers, Inc. The Underwriter 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 Advisor:
<TABLE>
<CAPTION>
- --------------------------- --------------------- -------------------------------------------------------------
AFFILIATIONS WITH
NAME AND AGE COMPANY AFFILIATIONS WITH THE COMPANY'S INVESTMENT ADVISOR
- --------------------------- --------------------- -------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. President and President, Chief Executive Officer and Chairman of the Board
Chairman of the of Directors of Chapman Capital Management, Inc.; Controlling
Board of Directors Stockholder, President, Chief Executive Officer and Chairman
of The Chapman Co. Chapman Capital Management, Inc. is the
wholly-owned subsidiary of The Chapman Co.
- --------------------------- --------------------- -------------------------------------------------------------
Earl U. Bravo, Sr. Vice President Director of Chapman Capital Management, Inc.; Director and
Chief Operating Officer of The Chapman Co.
- --------------------------- --------------------- -------------------------------------------------------------
M. Lynn Ballard Treasurer Treasurer of Chapman Capital Management, Inc.; Controller of
The Chapman Co.
- --------------------------- --------------------- -------------------------------------------------------------
</TABLE>
The Investment Advisor 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 Advisor selects investments for the
Company and places purchase and sale orders on behalf of the Company. The
advisory fee payable to the Investment Advisor is payable monthly in arrears
computed at the annualized rate of .90% of the Company's average weekly net
assets during the preceding month. As of August 31, 1997, since its commencement
of operations the Company has paid the Investment Advisor $114,532 under the
Advisory and Administrative Services Agreement.
In connection with the provision of advisory services, the Investment
Advisor will obtain and provide investment research and will supervise the
Company's investments and conduct a continuous program of investment, evaluation
and, if appropriate, sale and reinvestment of the Company's assets. The
Investment Advisor will place orders for the purchase and sale of portfolio
securities and will solicit brokers to execute transactions, including The
Chapman Co., in accordance with the Company's policies and restrictions
regarding brokerage allocations. The Investment Advisor will furnish to the
Company such statistical information with respect to the investments which the
Company may hold or contemplate
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<PAGE>
purchasing as the Company may reasonably request. Further, the Investment
Advisor will supply office facilities, data processing services, clerical,
accounting and bookkeeping services, internal auditing services, executive and
other administrative services; provide stationery and office supplies; prepare
reports to the Company's stockholders, tax returns and reports to and filings
with the SEC and state Blue Sky authorities; calculate the net asset value of
the Company's shares; provide persons to serve as the Company's officers and
generally assist in all aspects of the Company's operations. The Investment
Advisor will pay for its own costs in providing the above listed services.
If in any fiscal year the aggregate expenses of the Company (including fees
paid to the Investment Advisor, but excluding interest on borrowings, taxes,
brokerage and, with the prior written consent of the necessary state securities
commissions, extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Company, the Company may deduct from the payment to
be made to the Investment Advisor or the Investment Advisor will bear, such
excess expense to the extent required by state law. The Investment Advisor's
obligation will be limited to the amount of its fees hereunder.
BROKERAGE AND PORTFOLIO TRANSACTIONS
GENERAL
In making portfolio investments, the Investment Advisor seeks to obtain the
best net price and the most favorable execution of orders. The Investment
Advisor may, in its discretion, effect transactions in portfolio securities with
dealers who provide research advice or other services to the Company or the
Investment Advisor. The Investment Advisor 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 Advisor 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 Advisor'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
Advisor determines that the best price or execution will be obtained. Usually no
brokerage commissions, as such, are paid by the Company for purchases and sales
undertaken through principal transactions, although the price paid usually
includes an undisclosed compensation to the dealer. The prices paid to
underwriters of newly issued securities typically include a concession paid by
the issuer to the underwriter, and purchasers of after-market securities from
dealers ordinarily are executed at a price between the bid and asked price. As
of August 31, 1997, since its commencement of operations, the Company has paid
an aggregate of approximately $49,970 in brokerage commissions.
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<PAGE>
The Company may utilize the Underwriter, The Chapman Co., an affiliate of
the Company and its Investment Advisor (see "INVESTMENT ADVISORY SERVICES") in
connection with a purchase or sale of securities when the Investment Advisor
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 Underwriter
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 SEC. The
Underwriter is a full-service brokerage and investment banking firm. As such, it
may provide financial and advisory services to emerging companies that fit
within the Company's investment objectives. As a result, the Company may invest
in companies to which the Underwriter or its affiliates provide financial and/or
advisory services. As of August 31, 1997, the Company has paid approximately
$49,970 in brokerage commissions to the Underwriter since its commencement of
operations, which amount represents 100% of the Company's aggregate brokerage
commissions paid during such period. Transactions through the Underwriter
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 Advisor in
managing other investment accounts and, conversely, research services furnished
to the Investment Advisor by broker-dealers in connection with other accounts
the Investment Advisor advises may be used by the Investment Advisor in advising
the Company. Although it is not possible to place a dollar value on these
services, the Investment Advisor 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 Advisor. 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 Advisor. 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
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<PAGE>
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 stockholder of record to
purchase at net asset value shares of Common Stock owned by the stockholder. The
Company does not have a fundamental policy with respect to the repurchase of
Common Stock and these repurchases are discretionary.
Before authorizing any repurchase of Common Stock or tender offer to the
Common Stock stockholders, 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 stockholders and
relevant market conditions. Any offer would be made in accordance with the
requirements of the 1940 Act and the Exchange Act. 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 stockholders 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 Advisor 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
stockholder (or attributed to the stockholder for federal income tax purposes
under the Code). A stockholder 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 Stock Market-SM- or (b) impair the Company's status as a
regulated investment company under the Code; (2) the Company would
F-16
<PAGE>
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 Stock Market-SM-
or any exchange on which securities held by the Company are traded, (c)
declaration of a banking moratorium by federal or state authorities or any
suspension of payment by banks in the United States, (d) limitation affecting
the Company or issuers of securities held by the Company imposed by federal,
state or local authorities on the extension of credit by lending institutions,
(e) commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or (f) other event
or condition that would have a material adverse effect on the Company or its
stockholders if shares of Common Stock were repurchased. The Board of Directors
may modify these conditions in light of experience.
If the Company liquidates securities in order to repurchase shares of Common
Stock, the Company may realize gains and losses. Gains, if any, may be realized
on securities held for less than three months. Because the Company must derive
less than 30% of its gross income for any taxable year from the sale or
disposition of securities held for less than three months in order to retain the
Company's regulated investment company status under the Code, gains realized by
the Company upon a liquidation of securities held for less than three months
would reduce the amount of gain on the sale of other securities held for less
than three months that the Company could realize in the ordinary course of its
investment operations, which may adversely affect the Company's performance. The
Company's turnover rate may or may not be affected by the Company's repurchases
of shares of Common Stock pursuant to a tender offer.
PERFORMANCE INFORMATION
The performance of the Company may be compared to the record of the Standard
& Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity Index, the DEM
- -TM- Index, the DEM -TM- Universe of companies and returns quoted by Ibbotson
Associates. The S&P 500 Stock Index is a well known measure of the price
performance of 500 leading larger domestic stocks which represents approximately
80% of the market capitalization of the United States equity market. In
comparison, the Nasdaq National Market System is comprised of all stocks on
Nasdaq's National Market System. The Nasdaq Composite Index has typically
included smaller, less mature companies representing 10% to 15% of the
capitalization of the entire domestic equity market. Both indices are unmanaged
and capitalization weighted. In general, the securities comprising the Nasdaq
Composite Index are more growth oriented and have a somewhat higher "beta" and
P/E ratio than those in the S&P 500 Stock Index. The Russell 2000 Index is a
capitalization weighted index which measures total return (and includes in such
calculation dividend income and price appreciation). The Russell 2000 is
generally regarded as a measure of small capitalization performance. It is a
subset of the Russell 3000 Index. The Russell 3000 is comprised of the 3000
largest U.S. companies. The Russell 2000 is comprised of the smallest 2000
companies in the Russell 3000 Index. The Wilshire 5000 Index is a broad measure
of market performance and represents the total dollar value of all common stocks
in the United States for which daily pricing information is available. This
index is also capitalization weighted and captures total return. The DEM -TM-
Universe is a growing list of companies identified by the Investment Advisor
that are controlled by African-Americans, Asian-Americans, Latin/Hispanic-
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<PAGE>
Americans or women. The DEM -TM- Index was created by the Investment Advisor and
is comprised of 30 companies from the DEM -TM- Universe that reflect the market
capitalization and industry classification characteristics of the DEM -TM-
Universe. The DEM -TM- Index is weighted by market capitalization and is
intended as a performance measure of the DEM -TM- Universe. The small company
stock returns quoted by Ibbotson Associates are based upon the smallest quintile
of the New York Stock Exchange, as well as similar capitalization stocks on the
American Stock Exchange and Nasdaq. This data base is unmanaged and
capitalization weighted.
The total returns for all indices used show the changes in prices for the
stocks in each index. However, only the performance data for the S&P 500 Stock
Index and the Ibbotson Associates performance data assume reinvestment of all
capital gains distributions and dividends paid by the stocks in each data base.
Tax consequences are not included in such illustrations, nor are brokerage or
other fees or expenses reflected in the Nasdaq Composite or S&P 500 Stock
figures. In addition, the Company's total return or performance may be compared
to the performance of other funds or other groups of funds that are followed by
Morningstar, Inc., a widely used independent research firm which ranks funds by
overall performance, investment objectives and asset size. Morningstar
proprietary ratings reflect risk-adjusted performance. The ratings are subject
to change every month. Morningstar's ratings are calculated from a fund's
three-year and five-year average annual returns with appropriate sales charge
adjustments and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Ten percent of the funds in an asset
class receive a five star rating. The Company's total return or performance may
also be compared to the performance of other funds or groups of funds by other
financial or business publications, such as Business Week, Investors Daily,
Mutual Fund Forecaster, Money Magazine, Wall Street Journal, New York Times,
Baron's, and Lipper Analytical Services. The Company's performance may also be
compared, from time to time, to (a) indices of stocks comparable to those in
which the Company invests; (b) the Consumer Price Index (measure for inflation)
may be used to assess the real rate of return from an investment in the Company.
Certain government statistics, such as the Gross National Product, may be used
to illustrate the investment attributes of the Company or the general economic
business, investment or financial environment in which the Company operates.
FINANCIAL STATEMENTS
The financial statements of the Company for the fiscal year ended December
31, 1996 and the six months ended June 30, 1997 are set forth in the Company's
Semi-Annual Report to Stockholders for the six months ended June 30, 1997 and
are incorporated herein by reference. A copy of the Semi-Annual Report to
Stockholders may be obtained without charge from Chapman Capital Management,
Inc. by calling (800) 752-1013 or by writing Chapman Capital Management, Inc.,
The World Trade Center-- Baltimore, 401 E. Pratt Street, 28th Floor, Baltimore,
MD. 21202.
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