<PAGE>
ICA File No.: 811-9118
File No.: 333-[ ]
As filed with the Securities and Exchange Commission on May 15, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 *
[ ] Pre-Effective Amendment No._____________
[ ] Post-Effective Amendment No.____________
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 7
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DEM, Inc.
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Exact Name of Registrant as Specified in Charter
The World Trade Center - Baltimore, 401 E. Pratt Street, 28th Floor, Baltimore,
MD 21202
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Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 752-1013
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Registrant's Telephone Number, including Area Code
CSC - Lawyer's Incorporating Service Company, 11 E. Chase Street, Baltimore, MD
21202
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Name and Address (Number, Street, City, State, Zip Code
of Agent for Service)
As soon as practicable after the effective date of this registration statement
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Approximate Date of Proposed Public Offering
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* In addition, pursuant to Rule 429, this Registration Statement on Form N-2
constitutes Post-Effective Amendment No. 2 to Registration Statement No.
33-98454 on Form N-2 filed by the Registrant.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [X]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed registration statement.
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Securities Being Amount Being Proposed Proposed Amount of
Registered Registered Maximum Offering Maximum Aggregate Registration
Price Per Unit (1) Offering Price (1) Fee
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<S> <C> <C> <C> <C>
Common Stock, par 1,000,000 $15.00 $15,000,000(1) $4,546
value $.00001 per share shares
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(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
The within Prospectus covers the 1,000,000 shares of Common Stock being
registered hereunder, plus the 194,917 shares of Common Stock registered by the
Registrant under Registration Statement No. 33-98454 on Form N-2. The
registration fees in respect to the latter shares of Common Stock were paid at
the time of the original filing of Registration Statement No. 33-98454 relating
to those shares of Common Stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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DEM, INC.
FORM N-2
CROSS-REFERENCE SHEET
PART A
ITEM NO. CAPTION LOCATION IN PROSPECTUS
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1. Outside Front Cover ...................... Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Front Cover Page; Inside Front
Cover Page ............................. Cover Page; Outside Back Cover
Page
3. Fee Table and Synopsis ................... Prospectus Summary; Company
Expenses
4. Financial Highlights ..................... Not Applicable
5. Plan of Distribution ..................... Front Cover Page, Prospectus
Summary; Plan of Distribution
6. Selling Stockholders ..................... Not Applicable
7. Use of Proceeds .......................... Use of Proceeds
8. General Description of the Registrant .... Front Cover Page; Prospectus
Summary; The Company;
Investment Objectives and
Policies; Risk Factors;
Common Stock
9. Management ............................... Management of the Company;
Custodian, Transfer Agent and
Dividend Paying Agent and
Registrar
10. Capital Stock, Long-Term Debt and
Other Securities ...................... Common Stock; Dividends and
Distributions;
Dividend Reinvestment Plan
11. Defaults and Arrears on Senior
Securities ............................. Not Applicable
12. Legal Proceedings ........................ Not Applicable
13. Table of Contents of the Statement of
Additional Information ................. Further Information
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
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14. Cover Page ............................... Cover Page
15. Table of Contents ........................ Cover Page
16. General Information and History .......... Not Applicable
17. Investment Objectives and Policies ....... Investment Objectives and
Policies; Brokerage and
Portfolio Transactions
18. Management ............................... Officers and Directors
19. Control Persons and Principal Holders of
Securities ............................. See Management of the Company
in the Prospectus
20. Investment Advisory and Other Services ... See Management of the Company
in the Prospectus; Brokerage
and Portfolio Transactions
21. Brokerage Allocation and Other
Practices .............................. Brokerage and Portfolio
Transactions
22. Tax Status ............................... Taxation
23. Financial Statements ..................... Report of Independent Public
Accountants; Statements of
Assets and Liabilities
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION
Preliminary Prospectus dated: May 15, 1997
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 April 30,
1997, the last reported sale price of the Common Stock was $15.50. The net
asset value per share of the Common Stock at April 30, 1997 was $12.37.
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 May 15, 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.
<TABLE>
<CAPTION>
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Price to Public(1) Sales Load (1)(2) Proceeds to Company(1)(2)(3)
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<S> <C> <C> <C>
Per Share $15.00 $1.05 $13.95(1)
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Total $17,923,755 $1,254,663 $16,669,092(4)
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</TABLE>
(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.
(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.
[ ], 1997 THE CHAPMAN CO.
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THIS REGISTRATION STATEMENT AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS
REGISTRATION STATEMENT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
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.
2
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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.
3
<PAGE>
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 March 31, 1997
had approximately $375 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."
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
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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 811,775 shares of outstanding Common Stock of
the Company, as of April 30, 1997, 650,879 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."
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
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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 April 30, 1997, 650,879 shares
of Common Stock, or approximately 80.2% 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 Common Stock prevailing from time to
time. See "RISK FACTORS--Shares Eligible for Future Sale" and "PRINCIPAL
STOCKHOLDERS."
6
<PAGE>
ANTI-TAKEOVER PROVISIONS IN CHARTER. Certain provisions of the
Company's Charter may have the effect of inhibiting the Company's possible
conversion to open-end status and limiting the ability of other persons to
acquire control of the Company's Board of Directors. In certain circumstances,
these provisions might also inhibit the ability of stockholders to sell their
shares at a premium over prevailing market prices. See "COMMON STOCK --
Anti-Takeover Provisions in the Charter."
7
<PAGE>
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%
ANNUAL EXPENSES (as a percentage of net assets) (3)
Number of Shares Sold (4) 1,194,917 600,000 300,000
Management Fees 0.90 0.90 0.90
Other Expenses (5) 1.10 1.50 1.87
Total Annual Expenses (estimated) 2.00 2.40 2.77
_____________________
(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
<PAGE>
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
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table summarizes certain selected financial data that have been
derived from the audited financial statements as of December 31, 1995 and
December 31, 1996 and the unaudited financial statements as of March 31, 1997.
This information should be read in conjunction with the financial statements as
of December 31, 1995, December 31, 1996 and March 31, 1997 and the notes
thereto, which are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
For the 3 months For the Year For the Period
Ended Ended Ended
March 31, 1997 December 31, 1996 December 31, 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value on issuance of shares $ - $ - $ 13.97
----------- ------------ -----------
Dilution effect from shares-
Organizational costs - - (.21)
Reinvested Shares issued - (.28) -
----------- ------------ -----------
Investment income .01 .30 .01
Expenses (.09) (.72) .00
----------- ------------ -----------
Net investment income (loss) (.08) (.42) .01
Distributions from net investment income (.19) (.05) -
Net realized and unrealized gain (loss) on securities (1.07) 1.15 -
----------- ------------ -----------
Net increase (decrease) in net asset value (1.34) .68 .01
Net asset value-
Beginning of period 14.17 13.77 -
----------- ------------ -----------
End of period $ 12.83 $ 14.17 $ 13.77
----------- ------------ -----------
----------- ------------ -----------
Per share market value, end of period $ 15.00 $ 15.50 $ 15.00
----------- ------------ -----------
----------- ------------ -----------
Total investment return (3.22)% 3.68% -
----------- ------------ -----------
----------- ------------ -----------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.71% 3.21% .04%
Net investment income (loss) (2.43)% (1.89)% 1.45%
Average commission rate paid 5.00% 4.38% -
Portfolio turnover rate 26.0% 332.60% -
SUPPLEMENTAL DATA:
Net assets, end of the period $ 9,981,149 $ 11,025,152 $ 4,742,800
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
3
<PAGE>
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
4
<PAGE>
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
5
<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.
6
<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.
7
<PAGE>
LIMITED PUBLIC MARKET
The Common Stock trades on the Nasdaq SmallCap Stock Market-SM-.
However, of the 811,775 shares of outstanding Common Stock of the Company, as of
April 30, 1997, 650,879 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--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
8
<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 $1.69 per share to new investors. Further, due to the ongoing nature of the
offering, the dilution at any given time will fluctuate with the net asset value
per share of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 30, 1997, 650,879 shares of Common Stock, or approximately
80.2% of the outstanding Common Stock was held by four stockholders. The sale
of a large number of shares of Common Stock or the availability of a large
number of shares of Common Stock for sale could adversely affect the market
price of the Common Stock prevailing from time to time. See "PRINCIPAL
STOCKHOLDERS."
NET ASSET VALUE AND MARKET PRICE INFORMATION
The outstanding shares of Common Stock of the Company trade on the
Nasdaq SmallCap Stock Market-SM-. The following table shows, for each full
quarterly period within the two most recent fiscal years and each full fiscal
quarter since the beginning of the current fiscal year, the high and low bid
information for the Common Stock; the net asset value per share of the Company
as determined on the date closest to each quotation; and the percentage by which
the shares of Common Stock of the Company traded at a premium over, or discount
from, the Company's net asset value per share.
9
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED BID QUOTATIONS NET ASSET VALUE PREMIUM OR
($) ($) (DISCOUNT)
PERCENTAGE
- -----------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996 15.00 15.00 13.85 13.77 8.30% 8.93%
June 30, 1996 15.00 15.00 14.83 13.78 1.15% 8.85%
September 30, 1996 15.00 15.00 14.94 13.79 0.14% 8.77%
December 31, 1996 15.00 15.00 15.12 14.17 (0.79)% 5.86%
March 31, 1997 15.00 15.00 14.49 12.83 3.52% 16.19%
</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 April 30, 1997, the Company's net asset value was $12.37 per
share. As of April 30, 1997, the last reported sale price of the Common Stock
on the Nasdaq SmallCap Stock Market-SM- was $15.50 per share reflecting a
premium of $3.13 of share price over net asset value per share as of April 30,
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.
10
<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 March 31, 1997, the
Investment Advisor had approximately $375 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
11
<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 in
excess of 25% of the issued and outstanding Common Stock as of April 30, 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.
12
<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.
13
<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
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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.
TAXATION
The following discussion reflects applicable tax laws as of the date
of this Prospectus.
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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 it distributes in any calendar year is less than a statutorily
designated, required amount of its regulated investment company income and its
capital gain net income (generally 98%).
The Company may acquire securities that do not pay interest currently
in an amount equal to their effective interest rate, such as zero coupon,
pay-in-kind, or delayed interest securities. As the holder of such a security,
the Company is required to include in taxable income original issue discount
that accrued on the security for the taxable year, even if the Company receives
no payment on the security during the year. Because the Company must distribute
annually substantially all of its investment company taxable income, including
any original issue discount, in order to qualify as a RIC and to avoid
imposition of the 4% excise tax, the Company may be required in a particular
year to distribute dividends in an amount that is greater than the total amount
of cash the Company actually receives as distributions on the securities it
owns. Those annual distributions will be made from the Company's cash assets or
from the proceeds of sales of portfolio securities, if necessary. The Company
may realize capital gains or losses from those sales, which would increase or
decrease the Company's investment company taxable income or net capital gain.
If in any year the Company should fail to qualify under Subchapter M
as a regulated investment company, the Company would incur a regular corporate
income tax upon its taxable income for the year, and the entire amount of its
distribution would generally be characterized as ordinary income.
TAXATION OF STOCKHOLDERS
DISTRIBUTIONS
In general, all distributions to stockholders attributable to the
Company's investment company taxable income will be taxable as ordinary income
whether paid in cash or reinvested in additional shares of Common Stock pursuant
to the Dividend Reinvestment Plan.
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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 one year. However, any loss recognized by a
stockholder on Common Stock held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain distributions
received by the stockholder and the stockholder's share of undistributed net
capital gain. In addition, any loss realized on a sale of shares of Common
Stock will be disallowed to the extent the shares disposed of are replaced
within a period beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Company may be required to withhold federal income tax at the rate
of 31% of any dividend or redemption payments made to certain stockholders if
such stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.
The foregoing discussion is a summary of certain of the current
federal income tax laws regarding the Company and investors in the shares of
Common Stock and does not deal with all of the federal income tax consequences
applicable to the Company, or to all categories of investors, some of which may
be subject to special rules. Prospective investors should consult their own tax
advisers regarding the federal, state, local, foreign and other tax consequences
to them of investments in the Company. For additional tax information, see
"TAXATION" in the Company's Statement of Additional Information.
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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.
Hypothetical Net Asset Value Per Share Of Public Offering Price Per Share
Common Stock
$13.00 $15.00
$15.00 $15.00
$17.00 $17.00
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 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.
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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 April 30, 1997, the last reported sale price of the
Common Stock was $15.50.
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 April 30, 1997.
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Title of Class Amount Authorized Amount Held by the Amount
Company or for its Outstanding
Account Exclusive of
Amount Held by
Company
- -------------------------------------------------------------------------------
Common Stock, par
value $.00001 500,000,000 -0- 811,775
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 more, excluding
sales of securities of the Company in connection with a public offering
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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 control of the Company to negotiate with its management
regarding the price to be paid for the
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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 this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting in giving said report.
FURTHER INFORMATION
This Prospectus and the Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Company has filed with the SEC. The complete Registration Statement may be
obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
As stated above, the Statement of Additional Information contains
further information about the Company. The table of contents of the Statement
of Additional Information is as follows:
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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
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.
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APPENDIX A
CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
Aaa Bonds that are rated Aaa are judged to be of the best quality. they
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess may favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Moody's applies numerical modifiers (l, 2, and 3) with respect to the bonds
rated "Aa" through "B". The modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in the lower end of
its generic rating category.
A-1
<PAGE>
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.
A-2
<PAGE>
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation, and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated C1 is reserved for income
bonds on which no interest is being paid and debt rated D is in payment
default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations
that S&P believes may experience high variability in expected returns due
to non-credit risks created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-3
<PAGE>
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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........................... 16
Management of the Company .................... 17
Dividends and Distributions .................. 21
Dividend Reinvestment Plan ................... 21
Taxation ..................................... 22
Custodian, Transfer and Dividend-
Paying Agent and Registrar ................... 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
UNTIL [ ], 1997 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS 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
----------
---------------------------
[ ] , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
Preliminary Statement of Additional Information Dated May 15, 1997
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 May 15, 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 [ ], 1997
<PAGE>
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE INFORMATION CONTAINED HEREIN
ARE SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES
SHALL THIS STATEMENT OF ADDITIONAL INFORMATION CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<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
B-2
<PAGE>
extent the Company invests in companies with smaller market capitalization, the
securities of such companies may be traded in such over-the-counter markets as
the OTC Bulletin Board-SM- and the Pink Sheets-SM-. See "RISK FACTORS--
Investment in Small Companies" in the Prospectus.
While the primary objective of the Company is to seek long-term growth
through capital appreciation, the Company may invest its assets in income
producing securities such as non-convertible preferred stock, bonds, debentures,
notes, and other similar securities, which may include securities commonly
termed "derivatives," as discussed below, if the Investment 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
B-3
<PAGE>
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 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)
B-4
<PAGE>
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 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.
B-5
<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.
B-6
<PAGE>
TAXATION OF THE COMPANY
The Company has elected and intends to qualify each year to be treated
as a regulated investment company for federal income tax purposes in accordance
with Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In order to so qualify, the Company must, among other things: (a) derive at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities and gains from the sale or other disposition of securities
or certain other related income; (b) derive less than 30% of its gross income
from the sale or other disposition of securities and certain other investments
held for less than three months (the "short-short rule"); and (c) diversify its
holdings so that at the end of each fiscal quarter (i) at least 50% of the value
of the Company's assets is represented by cash or cash items, U.S. government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than 5%
of the value of the Company's assets nor more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the
Company's assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other regulated investment
companies), or two or more issuers which the Company controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
If the Company qualifies as a regulated investment company and
distributes to its stockholders at least 90% of its investment company taxable
income, then the Company will not be subject to federal income tax on the income
so distributed. However, the Company would be subject to corporate income tax
on any undistributed income. See "TAXATION -- Taxation of the Company" in the
Prospectus. In addition, the Company will be subject to a nondeductible 4%
excise tax on the amount by which the income it distributes in any calendar year
is less than a statutorily designated, required amount. For purposes of the
excise tax, the required distribution for any calendar year equals the sum of:
(a) 98% of the Company's ordinary income for such calendar year; (b) 98% of the
Company's capital gain net income for the one-year period ending on October 31
of that year; and (c) 100% of the Company's undistributed ordinary income and
capital gain net income from prior years. 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
B-7
<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
and to avoid imposition of the 4% excise tax, the Company may be required in a
particular year to distribute dividends in an amount that is greater than the
total amount of cash the Company actually receives as distributions on the
securities it owns. Those distributions will be made from the Company's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Company may realize capital gains or losses from those sales, which would
increase or decrease the Company's investment company taxable income or net
capital gain. In addition, such gains may be realized on the disposition of
securities held for less than three months. Because of the short-short rule,
(as described above) and its possible effect on the Company's qualification as a
regulated investment company for tax purposes, such gains could reduce the
Company's ability to sell other securities, or certain options, futures or
forward contracts, held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
The Company may also acquire securities at a market discount. Market
discount is generally equal to (other than in the case of an obligation issued
with original issue discount) the excess of the stated redemption price of the
obligation at maturity over the purchase price at which it is acquired by a
subsequent purchaser. Market discount is treated as interest income, rather
than as capital gain, when recognized by the purchaser.
The Company's taxable income will in part be determined on the basis
of reports made to the Company by the issuers of the securities in which the
Company invests. The tax treatment of certain securities in which the Company
may invest is not free from doubt and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of the Company could
result in adjustments to the income of the Company.
TAXATION OF STOCKHOLDERS
Dividends (other than capital gain dividends) distributed by the
Company may be eligible for the dividends received deduction in the hands of
corporate stockholders, to the extent that the Company's taxable income consists
of dividends received from domestic corporations and certain other requirements
as generally described in Section 854 of the Code are met.
Dividends and other distributions by the Company are generally taxable
to the stockholders at the time the dividend or distribution is made. However,
any dividends declared by the Company in October, November or December and made
payable to stockholders of record 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.
B-8
<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.
B-9
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
NAME AND ADDRESS POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
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
401 E. Pratt St., 28th Flr President since 1986 of The Chapman Co., the Company's
Baltimore, MD 21202 underwriter, 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,
401 E. Pratt St., 28th Flr since 1982. Director of The Chapman Funds,
Baltimore, MD 21202 Inc.
DIRECTORS TO SERVE UNTIL THE 1999 ANNUAL MEETING (CLASS II)
Lottie H. Shackelford Director 56 Executive Vice President, Global USA - since
401 E. Pratt St., 28th Flr 1995, City Director of the City of Little Rock,
Baltimore, MD 21202 Arkansas, 1978 to 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.
401 E. Pratt St., 28th Flr Senior Vice President of ECS Technology Inc.
Baltimore, MD 21202 from 1992 to 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
401 E. Pratt St., 28th Flr Rancho, New Mexico since March 1996, Chief
Baltimore, MD 21202 Clerk - State 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>
B-10
<PAGE>
OFFICERS
<TABLE>
<S> <C> <C> <C>
Earl U. Bravo, Sr. Vice President and 49 Chief Operating Officer of The Chapman Co.
401 E. Pratt St., 28th Floor Secretary since 1992. From 1990 until 1992, President of
Baltimore, Maryland 21202 Chapman Capital Management, Inc.
M. Lynn Ballard Treasurer 54 Controller of The Chapman Co. and Treasurer of
401 E. Pratt St., 28th Floor The Chapman Funds, Inc. since 1988.
Baltimore, Maryland 21202
Bonnie Gillette Assistant Secretary 44 Secretary of The Chapman Co., Chapman
401 E. Pratt St., 28th Floor Capital Management, Inc. and The Chapman
Baltimore, Maryland 21202 Funds, Inc. since 1988.
</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 Estimated Compensation
Aggregate Benefit Accrued Annual Benefits from Fund and
Name of Person Compensation as part of Fund upon Retirement Fund Complex
Position from Fund Expenses Paid to Directors
<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
B-11
<PAGE>
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 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.
B-12
<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 April 30, 1997, the latest practicable date, and the
ownership of all Directors and executive officers of the Company as a group.
NAME AND ADDRESS OF BENEFICIAL OWNER TOTAL SHARES (1) %
Memphis Retirement System 212,236 26.1%
125 North Main Street, Room 368
Memphis, TN 38103-2017
Shelby County Retirement System 202,451 24.9%
160 North Mid-Atlantic Mall, Suite 950
Memphis, TN 38103
Potomac Electric Power Company 134,967 16.6%
1900 Pennsylvania Avenue, NW
Washington, DC 20068-0001
Texaco - Harrison Capital, Inc. 101,225 12.5%
2000 Westchester Avenue
White Plains, NY 10650
All current Directors and executive officers as a group -0- (2)
___________________
(1) To the Company's knowledge, the shares of Common Stock are owned
beneficially and not of record.
(2) Less than 1% of shares outstanding.
Because one stockholder of the Company owns in excess of 25% of the
issued and outstanding Common Stock as of April 30, 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
B-13
<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>
Name and Age Affiliations with Affiliations with the Company's Investment Advisor
Company
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. President and President, Chief Executive Officer and Chairman of the Board of
Chairman of the 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.
Bonnie Shay Gillette Secretary Secretary of Chapman Capital Management, Inc.; Secretary of The
Chapman Co.
M. Lynn Ballard Treasurer Treasurer of Chapman Capital Management, Inc.; Controller of The
Chapman Co.
</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 April 30, 1997, since its commencement
of operations the Company has paid the Investment Advisor $80,994 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
B-14
<PAGE>
information with respect to the investments which the Company may hold or
contemplate 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 April 30, 1997, since its commencement of
B-15
<PAGE>
operations, the Company has paid an aggregate of approximately $42,955 in
brokerage commissions.
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 April 30, 1997, the Company has paid approximately
$42,955 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
B-16
<PAGE>
will be furthered if the market price of the Common Stock more closely reflects
net asset value per share of the Common Stock. For these reasons, the Company's
Board of Directors currently intends to consider from time to time repurchases
of Common Stock on the open market or in private transactions or the making of
tender offers for Common Stock. The Company may repurchase shares of its Common
Stock in the open market or in privately negotiated transactions when the
Company can do so at prices below the current net asset value per share on terms
that the Board of Directors believes represent a favorable investment
opportunity. In addition, the Board of Directors may consider, from time to
time, but not more frequently than once every two years, making an offer to each
Common Stock 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.
B-17
<PAGE>
The policy of the Company's Board of Directors with respect to tender
offers and to repurchases, which may be changed by the Board of Directors, is
that the Company will not accept tenders or effect repurchases if (1) those
transactions, if consummated, would (a) result in the exclusion of the Common
Stock from the Nasdaq SmallCap Stock Market-SM- or (b) impair the Company's
status as a regulated investment company under the Code; (2) the Company would
not be able to liquidate securities to repurchase Common Stock in an orderly
manner that is consistent with the Company's investment objectives and policies;
or (3) there is, in the Board's judgment, any material (a) legal action or
proceeding instituted or threatened challenging the transactions or otherwise
materially adversely affecting the Company, (b) suspension of or limitation on
prices for trading securities generally on the Nasdaq SmallCap 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
B-18
<PAGE>
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-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.
B-19
<PAGE>
FINANCIAL STATEMENTS
The Company sends unaudited semi-annual and audited annual financial
statements of the Company to stockholders, including a list of the investments
held by the Company. The Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 is incorporated into its Statement of Additional
Information by reference in its entirety. A copy of the Annual Report may be
obtained without charge from The Chapman Co. by calling (800) 752-1013.
INDEX TO FINANCIAL STATEMENTS
Page
----
Interim Financial Statements (unaudited)
Statement of Assets and Liabilities......................... F-2
Statement of Operations..................................... F-3
Statement of Changes in Net Assets.......................... F-4
Notes to Interim Financial Statements....................... F-5
Investment in Securities as of March 31, 1997............... F-7
F-1
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Common Stock Investments (Cost $9,559,320) $9,177,937
Short-term Investments 298,066
Cash 482,269
Interest Receivable 1,254
Prepaid Expenses 3,405
Deferred Organizational Expense 37,231
-----------
10,000,162
-----------
LIABILITIES
Investment Advisory Fee Payable 7,469
Administrator Fee Payable 1,245
Accrued Expenses 10,299
-----------
19,013
-----------
NET ASSETS - equivalent to $12.83 per share on
777,815 shares of Common Stock outstanding $9,981,149
-----------
SUMMARY OF STOCKHOLDERS' EQUITY
Common Stock, par value $.00001 per share: authorized
500,000,000 shares; issued and outstanding 777,815 shares 8
Capital Surplus 10,786,264
Overdistributed Net Investment Income (376,373)
Accumulated Net Realized Loss on Investments (47,367)
Unrealized Depreciation of Investments (381,383)
-----------
Net Assets Applicable to outstanding Common Stock $9,981,149
-----------
- ------------
See notes to financial statements
F-2
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31, 1997
--------------------------
INVESTMENT INCOME
Dividend Income (Net of withholding tax of $180) $ 3,961
Interest Income 3,628
---------
7,589
Advisory Fees 24,127
Legal and Auditing Fees 15,399
Transfer Agent Fees 7,498
Administrative Fees 4,021
Directors' Fees and Expenses 3,301
Organizational Expenses 2,512
Custodian Fees 2,239
Other Expenses 13,316
---------
72,413
---------
Net Investment Loss $(64,824)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net Realized Loss on Investments (460,707)
Net Change in Unrealized Depreciation (370,711)
---------
Net Realized and Unrealized Loss on Investments (831,418)
---------
Net Decrease in Net Assets Resulting from Operations $(896,242)
---------
- ---------------
See notes to financial statements
F-3
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, 1997 December 31, 1996
(Unaudited)
-------------------- ------------------
<S> <C> <C>
OPERATIONS
Net Investment Loss $ (64,824) $ (148,428)
Net Realized (Loss)/Gain on Investments (460,707) 413,340
Net Change in Unrealized
Depreciation of Investments (370,711) (10,672)
--------------------- -------------------
Net (Decrease)/Increase in Net Assets
Resulting From Operations (896,242) 254,240
Distributions to Shareholders from:
Net Investment Income (147,784) (17,222)
--------------------- -------------------
Net Decrease in Net Assets Resulting
From Distribution to Shareholders (147,784) (17,222)
Increase in Net Assets from Fund Share
Transactions 23 6,045,334
--------------------- -------------------
Total (Decrease)/Increase in Net Assets (1,044,003) 6,282,352
NET ASSETS
Beginning of Period 11,025,152 4,742,800
--------------------- -------------------
End of Period $9,981,149 $11,025,152
--------------------- -------------------
- ------------
See notes to financial statements
</TABLE>
F-4
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
1. ORGANIZATION
DEM, Inc. (the Company) was incorporated on October 20, 1995, in the state of
Maryland and is registered as a nondiversified closed-end management investment
company under the Investment Company Act of 1940, as amended.
The principal investment objective of the Company is long-term growth through
capital appreciation. Both capital appreciation and income will be considered
in the selection of investments, but primary emphasis will be on capital
appreciation. The Company will retain maximum flexibility as to the types of
investments it may make and it will be permitted to invest in portfolio
companies with large and small market capitalizations. The Company, however,
intends to seek to invest a substantial portion of its assets in securities of
domestic emerging companies with smaller market capitalizations. There can be
no assurance that the Company's objectives will be achieved. The Company's
investment objectives and policies may be changed by the Board of Directors
without the approval of shareholders. Most of the Company's investments are
expected to be in marketable common stocks or marketable securities convertible
into common stock traded on an exchange or in the over-the-counter markets.
While the primary objective of the Company is to seek long-term growth through
capital appreciation, the Company may invest its assets in income producing
securities such as non-convertible preferred stock, bonds, debentures, notes and
other similar securities, if the Investment Advisor deems such investments
advisable.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These statements are unaudited, and certain information and footnote disclosures
normally included in the Company's annual financial statements have been
omitted, as permitted under the applicable rules and regulations. Readers of
these statements should refer to the financial statements and notes thereto as
of December 31, 1996 and for the year then ended included by reference elsewhere
in this filing. The results of operations presented in the accompanying
financial statements are not necessarily representative of operations for an
entire year.
DEFERRED ORGANIZATIONAL COSTS
F-5
<PAGE>
Costs incurred to organize the Company totaling $49,675 have been deferred and
will be amortized on a straight-line basis over a five-year period.
If any of the initial shares of the Company are redeemed by any shareholder
during the period organizational costs are being amortized, the redemption
proceeds will be reduced by the pro-rata amount of the unamortized
organizational costs, based on the number of initial shares outstanding.
INTEREST INCOME
Interest income is recorded on the accrual basis to the extent that such amounts
will be collected.
INCOME TAXES
The Company intends to elect and qualify each year to be treated as a regulated
investment company (RIC) for Federal income tax purposes in accordance with
Subchapter M of the Internal Revenue Code of 1986, as amended. In order to so
qualify, the Company must satisfy certain tests regarding the source of its
income, diversification of its assets and distribution of its income. If the
Company otherwise qualifies as a regulated investment company and distributes to
its stockholders at least 90% of its investment company taxable income, then the
Company will not be subject to Federal income tax on the income so distributed.
However, the Company would be subject to corporate income tax on any
undistributed income. In addition, the Company will be subject to nondeductible
4% excise tax on the amount by which it distributes in any calendar year is less
than a statutorily-designated, required amount of its regulated investment
company income and its capital gain net income (generally 98%).
3. INVESTMENT ADVISORY AGREEMENT
The investment advisor to the Company is Chapman Capital Management, Inc. (the
Advisor and CCM). Pursuant to an Investment Advisory Agreement, the Advisor
will receive an advisory fee from the Company at an annual rate of .90% of the
average weekly net assets of the Company. CCM also serves as the Company's
administrator and is compensated for those services at an annual rate of .15%
of the average weekly net assets of the Company.
F-6
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
COMMON STOCK - 96.8%
Shares Value
- ------ -----
APPAREL - 1.1%
7,000 Supreme International Corp.* $108,500
----------
BANKING - 10.6%
17,000 BanPonce Corporation 607,750
10,000 Capital Bancorp/Miami, Florida 340,000
5,500 Carver Federal Savings Bank* 54,313
----------
1,002,063
----------
COMMUNICATIONS - 4.6%
5,000 Digital Link Corp.* 68,750
15,000 Mastec, Inc.* 365,625
----------
434,375
----------
CONSUMER PRODUCTS - 4.0%
15,000 Movado Group 375,000
----------
CONSUMER SERVICES - 5.4%
10,000 Verifone, Inc.* 341,250
6,000 Vincam Group, Inc.* 167,250
----------
508,500
----------
ELECTRONICS - 2.9%
20,000 S3, Inc.* 276,250
----------
ENVIRONMENTAL SERVICES - 1.6%
10,000 Tetra Tech Inc.* 152,500
----------
FINANCIAL SERVICES - 1.5%
10,000 Capital Factors Holdings, Inc.* 147,500
----------
F-7
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (Continued)
- --------------------------------------------------------------------------------
COMMON STOCK - CONTINUED
Shares Value
- ------ -----
FURNITURE - 4.8%
10,000 Ethan Allen $455,000
----------
HEALTHCARE - 5.1%
5,000 CRA Managed Care Inc.* 201,875
10,000 Health Systems International, Inc.* 280,000
----------
481,875
----------
MEDIA/PUBLISHING - 6.3%
15,000 BET Holdings* 448,125
15,000 Granite Broadcasting Corporation* 146,250
----------
594,375
----------
PHARMACEUTICAL - 4.0%
10,000 Watson Pharmaceuticals, Inc.* 383,750
----------
RETAILERS - 6.0%
10,000 CHS Electronics, Inc.* 201,250
15,000 Wet Seal, Inc.* 367,500
----------
568,750
----------
SOFTWARE AND TECHNOLOGY SERVICE - 12.3%
15,000 Autodesk, Inc.* 474,375
5,000 Avant! Corporation* 143,750
11,500 Computer Associate International 468,625
6,000 Integrated Systems Inc.* 82,500
----------
1,169,250
----------
TECHNOLOGY - 20.2%
15,000 ESS Technology Inc.* 361,875
10,000 Gemstar International Group* 118,750
2,000 Komag, Inc.* 59,000
10,000 Lattice Semiconductor Corp.* 450,000
25,000 Osicom Technologies, Inc.* 253,125
10,000 Solectron Corp.* 530,000
10,000 Trident Microsystems, Inc.* 137,500
----------
1,910,250
----------
F-8
<PAGE>
DEM, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
COMMON STOCK - CONTINUED
Shares Value
- ------ -----
TEXTILES - 6.4%
20,000 Warnaco Group, Inc., Class A* 610,000
------------
TOTAL COMMON STOCK $9,177,938
------------
SHORT-TERM INVESTMENTS - 3.1%
Principal Value
- --------- -----
MONEY MARKETS - 3.1%
298,066 Fidelity Institutional U.S. Government Cash Portfolio II $ 298,066
------------
TOTAL INVESTMENTS - 100.0% $9,476,003
------------
- ---------------------
* Non-income producing during the period
See notes to financial statements
F-9
<PAGE>
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
Part A - Financial Highlights
Part B -The Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 is incorporated into
its Statement of Additional Information by reference in its
entirety.
Interim Financial Statements (unaudited)
----------------------------------------
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Interim Financial Statements
Investment in Securities as of March 30, 1997
(2) EXHIBITS:
(a) -- Charter.(1)
(b) -- Bylaws.(1)
(c) -- Not Applicable.
(d) -- (1) See Dividend Reinvestment Plan.
(2) See Charter.
(3) See Bylaws.
(e) -- Dividend Reinvestment Plan.(1)
(f) -- Not Applicable.
(g) -- Advisory and Administrative Services Agreement between
the Company and Chapman Capital Management, Inc.(1)
(h) -- Placement Agency Agreement between the Company and
The Chapman Co.(2)
(i) -- Not Applicable.
(j) -- Custody Agreement between the Company and UMB Bank,
N.A.(1)
(k)(1) Transfer Agency Services Agreement between the Company
and Fund/Plan Services, Inc.(1)
(2) Custody Administration and Agency Agreement between
the Company and Fund/Plan Services, Inc.(1)
(l) -- Opinion and Consent of Venable, Baetjer and Howard,
LLP(3)
(m) -- Not Applicable.
(n) -- Consent of Arthur Andersen LLP, independent public
accountants for the Company.(2)
(o) -- Not Applicable.
C-1
<PAGE>
(p) -- Subscription Agreement between the Company and Chapman
Capital Management, Inc.(1)
(q) -- Not Applicable.
27(r)--Financial Data Schedule.(2)
(s) -- Power of Attorney.(2)
1. Incorporated by reference from Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form N-2 (File Nos.: 33-98454 and
811-9118) as filed with the Securities and Exchange Commission on
December 7, 1995.
2. Filed herewith.
3. To be filed by amendment
ITEM 25. MARKETING ARRANGEMENTS.
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees.................................$4,546
Blue Sky fees and expenses.........................1,500
Printing and engraving expenses....................2,500
NASD registration fee..............................2,000
Legal fees and expenses...........................35,000
Accounting fees and expenses.......................5,000
Miscellaneous Expenses...............................454
Total............................................$51,000
-------
-------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
Common Stock, par value $.00001 per share: 309 record holders as of May 1,
1997.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VIII of the Company's Articles of Amendment and Restatement, Article
5.2 of the Company's Bylaws and the Placement Agency Agreement to be filed as
Exhibit h provides for indemnification.
C-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the Company, pursuant to the foregoing provisions
or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission (the "SEC") such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
For information regarding the business of the Investment Advisor see
"Management of the Company" in the Company's Prospectus.
Name and Position
with Investment Advisor Other Business
- ----------------------- --------------
Nathan A. Chapman, Jr. President, Chief Executive Officer and
Director, Chairman of Treasurer of The Chapman Co. and
the Board, President President and Chief Executive Officer
of Chapman Capital Management, Inc.
President of The Chapman Funds, Inc.
Earl U. Bravo, Sr. Director and Chief Operating Officer of
Director The Chapman Co.
M. Lynn Ballard Controller of The Chapman Co. and
Treasurer Treasurer of The Chapman Funds, Inc.
Theron Stokes Attorney, Alabama Education Association
Director
Valerie Chapman Vice-President, The Chapman Funds, Inc.
Secretary and Administrator, The Chapman Co.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules promulgated thereunder are maintained at the office of the Investment
Advisor at
C-3
<PAGE>
The World Trade Center-Baltimore, 401 East Pratt Street, 28th Floor, Baltimore,
Maryland 21202.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable
ITEM 33. UNDERTAKINGS.
(1) Registrant undertakes to suspend the offering of the shares
of the Common Stock covered hereby until it amends its Prospectus contained
herein if (1) subsequent to the effective date of this Registration Statement,
its net asset value declines more than 10 percent from its net asset value as of
the effective date of this Registration Statement, or (2) its net asset value
increases to an amount greater than its net proceeds as stated in the Prospectus
contained herein.
(2) Not applicable.
(3) Not applicable.
(4)(a) Registrant undertakes to file, during any period in which
offers or sales are being made, a post-effective amendment to this Registration
Statement:
(1) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(2) to reflect in the Prospectus any facts or events after the
effective date of this Registration Statement (or the most recent post-effective
amendment hereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(4)(b) Registrant undertakes that, for the purpose of determining
any liability under the Securities Act of 1933, as amended, each subsequent
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of those securities
at that time shall be deemed to be the initial bona fide offering thereof.
(4)(c) Registrant undertakes to remove from registration by
means of post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
C-4
<PAGE>
(5)(a) For the purpose of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant under
Rule 497(h) under the 1933 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(5)(b) For the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, and State of Maryland, as of May 14, 1997.
DEM, INC.
By:/s/ NATHAN A. CHAPMAN, JR.
--------------------------
Nathan A. Chapman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following in the capacities
and on the date indicated.
Signatures Title Date
- ---------- ----- ----
/s/ NATHAN A. CHAPMAN, JR. President, Chairman of the May 14, 1997
- -------------------------- Board and Director
Nathan A. Chapman, Jr. (Principal Executive Officer)
/s/ M. LYNN BALLARD Treasurer (Principal May 14, 1997
- ------------------- Financial and Accounting
M. Lynn Ballard Officer)
The Entire Board of Directors
Nathan A. Chapman, Jr. James B. Lewis
Robert L. Wallace Lottie H. Shackelford
Ronald A. White
By: /s/ NATHAN A. CHAPMAN May 14, 1997
---------------------
Nathan A. Chapman, Jr.
Attorney-in-Fact
C-6
<PAGE>
DEM, INC.
EXHIBIT INDEX
Exhibit H(2) Placement Agency Agreement between the Company and The
Chapman Co.
Exhibit N Consent of Arthur Andersen LLP
Exhibit 27.R Financial Data Schedule
Exhibit S Power of Attorney
<PAGE>
Exhibit H(2)
1,194,917 SHARES
COMMON STOCK
DEM, INC.
THE WORLD TRADE CENTER - BALTIMORE
401 EAST PRATT STREET, 28TH FLOOR
BALTIMORE, MARYLAND 21202
PLACEMENT AGENCY AGREEMENT
, 1997
The Chapman Co.
The World Trade Center - Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
Ladies and Gentlemen:
DEM, Inc. a Maryland corporation registered under the Investment Company
Act of 1940, as amended (the "Act") as a closed-end investment company, (the
"Corporation"), proposes to cause to be issued, and sold through The Chapman Co.
(the "Placement Agent") on a "best efforts" basis a maximum of 1,194,917 Shares
(the "Shares") of common stock, $.00001 par value per share (the "Common Stock")
at a public offering price per share equal to the greater of $15.00 or the
Company's net asset value per share (calculated within 48 hours prior to any
sale) (the "Offering").
SECTION 1. APPOINTMENT
The Corporation hereby appoints the Placement Agent, and the Placement
Agent hereby agrees, to act as Placement Agent for the Shares for the period and
on the terms set forth in this Agreement. In connection therewith, the
Corporation has delivered to the Placement Agent copies of its Articles of
Incorporation and Bylaws, the Corporation's Registration Statement with respect
to the Shares and all amendments thereto filed pursuant to the Securities Act of
1933, as amended (the "Securities Act") or the Act (the "Registration
Statement"), and the Corporation's current Prospectus and Statement of
Additional Information with respect to the Shares (collectively, as currently in
effect and as amended or supplemented, the "Prospectus") and shall promptly
furnish the Placement Agent with all amendments of or supplements to the
foregoing.
SECTION 2. DISTRIBUTION SERVICES
Subject to the direction and control of the Corporation's Board of
Directors (the "Board"), the Placement Agent shall serve as Placement Agent for
the Shares.
<PAGE>
(a) As agent for the Corporation, the Placement Agent shall offer, and
solicit offers to purchase the Shares. An offer to purchase the Shares shall
not be binding on the Corporation until the Placement Agent, on behalf of the
Corporation confirms the acceptance of such offer by delivery of a confirmation
of sale and if not previously delivered, a final Prospectus. The Placement
Agent's rights hereunder shall not apply to Shares issued in connection with the
reinvestment in shares by the Corporation's stockholders of dividends or other
distributions or any other offering by the Corporation of securities to its
stockholders.
(b) The Placement Agent shall use its best efforts to obtain offers to
purchase Shares upon the terms and conditions contained herein and in the
Prospectus, including the offering price. The Placement Agent shall notify the
Corporation promptly of all offers to purchase the Shares that the Placement
Agent intends to accept on behalf of the Corporation. The Corporation shall
furnish to the Placement Agent from time to time, for use in connection with the
offering of Shares, such information with respect to the Corporation and Shares
as the Placement Agent may reasonably request. The Corporation shall supply the
Placement Agent with such copies of the Prospectus as the Placement Agent may
request. The Placement Agent may use its employees, agents and other persons
who need not be its employees, at its cost and expense, to assist it in carrying
out its obligations hereunder, but no such employee, agent or other person shall
be deemed to be an agent of the Corporation or have any rights under this
Agreement.
(c) The Corporation reserves the right to suspend the offering of Shares
at any time, in the absolute discretion of the Board, and upon notice of such
suspension the Placement Agent shall cease to offer the Shares.
(d) The Corporation and the Placement Agent will cooperate with each other
in taking such action as may be necessary to qualify Shares for sale under the
securities laws of such states as the Corporation may designate. The
Corporation shall pay all fees and expenses of registering Shares under the
Securities Act and of registering or qualifying Shares and the Corporation's
qualification under applicable state securities laws. The Placement Agent shall
pay all expenses relating to its broker-dealer qualification. The Placement
Agent shall not confirm sales to any purchasers unless the Shares to be sold are
qualified for sale under the securities laws of any state applicable to such
sale.
(e) The Corporation represents that its Registration Statement and
Prospectus under the Securities Act have been or will be, as the case may be,
carefully prepared in conformity with the requirements of the Securities Act and
the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder. The Corporation represents and warrants that its
Registration Statement and Prospectus contain or will contain all statements
required to be stated therein in accordance with the Securities Act and the
rules and regulations of the Commission thereunder, and that the Corporation's
Registration Statement and Prospectus, when they shall become effective or be
authorized for use, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not mislead-
-2-
<PAGE>
ing to a purchaser of Shares. The Corporation will from time to time file such
amendment or amendments to its Registration Statement and Prospectus as, in the
light of future developments, shall, in the opinion of the Corporation's
counsel, be necessary in order to have such Registration Statement and
Prospectus at all times contain all material facts required to be stated therein
or necessary to make any statements therein not misleading to a purchaser of
Shares, but, if the Corporation shall not file such amendment or amendments
within fifteen days after receipt of a written request from the Placement Agent
to do so, the Placement Agent may, at its option, terminate this Agreement
immediately. The Corporation shall not file any amendment to its Registration
Statement and Prospectus without giving the Placement Agent reasonable notice
thereof in advance; provided, however, that nothing in this Agreement shall in
any way limit the Corporation's right to file at any time such amendments to its
Registration Statement and Prospectus, of whatever character, as it deems
advisable, such right being in all respects absolute and unconditional. The
Corporation represents and warrants that any amendment to its Registration
Statement and Prospectus hereafter filed will, when it becomes effective,
contain all statements required to be stated therein in accordance with the Act
and the rules and regulations of the Commission thereunder, that all statements
of fact contained therein will, when the same shall become effective, be true
and correct and that no such amendment, when it becomes effective, will include
an untrue statement of a material fact or will omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares.
(f) The Corporation will indemnify, defend and hold the Placement Agent,
its several officers and directors, and any person who controls the Placement
Agent within the meaning of Section 15 of the Securities Act (collectively, the
"Placement Agent Indemnitees"), free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which any Placement Agent Indemnitee may incur, under
the Securities Act, or under common law or otherwise, arising out of or based
upon any alleged untrue statement of a material fact contained in the
Corporation's Registration Statement and Prospectus under the Securities Act or
arising out of or based upon any alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that in no event shall anything contained in this
paragraph (f) be so construed as to protect the Placement Agent against any
liability to the Corporation or its security holders to which the Placement
Agent would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this Section 2. This agreement to
indemnify the Placement Agent Indemnitees is expressly conditioned upon the
Corporation being notified of any action brought against any Placement Agent
Indemnitee, such notification to be given by letter, facsimile transmission or
telegram to the Corporation and referring to the person against whom such action
is brought within ten days after the summons or other first legal process shall
have been served on such person. The failure so to notify the Corporation of
any such action shall not relieve the Corporation from any liability which it
may have to any Placement Agent Indemnitee otherwise than on account
-3-
<PAGE>
of the indemnification provided for in this paragraph (f). The Corporation will
be entitled to assume the defense of any suit brought to enforce any such claim,
and to retain counsel of good standing chosen by it and approved by the
Placement Agent. In the event the Corporation elects to assume the defense of
any such suit and retain counsel of good standing approved by the Placement
Agent, the defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them. In the event the Corporation does
not elect to assume the defense of any such suit, or in case the Placement Agent
does not approve of counsel chosen by the Corporation or has been advised that
it may have available defenses or claims which are not available to or conflict
with those available to the Corporation, the Corporation will reimburse any
Placement Agent Indemnitee named as defendant in such suit for the fees and
expenses of any counsel retained by such person. The indemnification provisions
contained in this paragraph (f) and the Corporation's representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Placement Agent
Indemnitee and shall survive the sale of any Shares made pursuant to
subscriptions obtained by the Placement Agent. The indemnification provisions
of this paragraph (f) will inure exclusively to the benefit of the Placement
Agent Indemnitees and their respective successors and assigns. The Corporation
agrees promptly to notify the Placement Agent of the commencement of any
litigation or proceeding against the Corporation or any of its Directors or
officers in connection with the issue or sale of Shares.
(g) The Placement Agent agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation within the meaning of Section 15 of the Securities Act
(collectively, the "Corporation Indemnitees"), free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which any Corporation
Indemnitee may incur under the Act, or under common law or otherwise, but only
to the extent that such liability or expense incurred by the Corporation
Indemnitees resulting from such claims or demands shall arise out of or be based
upon any alleged untrue statement of a material fact contained in information
furnished in writing by the Placement Agent in its capacity as distributor to
the Corporation for use in the Corporation's Registration Statement or
Prospectus under the Securities Act, or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Placement Agent's agreement to
indemnify the Corporation Indemnitees is expressly conditioned upon the
Placement Agent being notified of any action brought against a Corporation
Indemnitee, such notification to be given by letter, facsimile transmission or
telegram addressed and referring to the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served on such person. The Placement Agent shall have a right to
control the defense of such action, with counsel of its own choosing,
satisfactory to the Corporation, if such action is based solely upon such
alleged misstatement or omission on the Placement Agent's part, and in any other
event the Placement Agent and
-4-
<PAGE>
the Corporation Indemnitees named shall each have the right to participate in
the defense or preparation of the defense of any such action. The failure to so
notify the Placement Agent of any such action shall not relieve the Placement
Agent from any liability which it may have to any Corporation Indemnitee
otherwise than on account of the indemnification provisions in this
paragraph (g).
(h) The Corporation shall advise the Placement Agent immediately: (i) of
any request by the Commission for amendments to the Corporation's Registration
Statement or Prospectus or for additional information; (ii) in the event of the
issuance by the Commission or any stop order suspending the effectiveness of the
Corporation's Registration Statement or Prospectus or the initiation of any
proceedings for that purpose; (iii) of the happening of any material event which
makes untrue any statement made in the Corporation's Registration Statement or
Prospectus or which requires the making of a change in either thereof in order
to make the statements therein not misleading; and (iv) of all action of the
Commission with respect to any amendments to the Corporation's Registration
Statement or Prospectus which may from time to time be filed with the Commission
under the Act or the Securities Act.
SECTION 3. STANDARD OF CARE
The Placement Agent shall give the Corporation the benefit of its best
judgment and efforts in rendering its services to the Corporation and shall not
be liable for error of judgment or mistake of law, for any loss arising out of
any investment, or in any event whatsoever, provided that nothing herein shall
be deemed to protect, or purport to protect, the Placement Agent against any
liability to the Corporation or to the security holders of the Corporation to
which it would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties hereunder, or by reason of
reckless disregard of its obligations and duties hereunder.
SECTION 4. EXPENSES
The Corporation will pay all fees, costs and expenses incident to the
performance by the Corporation of its obligations hereunder, including: (a) the
preparation, printing, filing and distribution of the Registration Statement
(including the exhibits thereto), all amendments and supplements thereto and the
Prospectus; (b) the preparation, printing, and issuance of the Shares including
any stamp taxes and transfer agent and registrar fees payable in connection with
the original issuance of the Shares; (c) the registrations or qualifications
referred to in Section (2)(d) and 2(e) hereof including fees and disbursements
of counsel for the Placement Agent relating to such registrations or
qualifications; (d) the fees and expenses of the Corporation's accountants and
the fees and expenses of counsel for the Corporation; (e) the expenses of
delivery to the Placement Agent of copies of the Prospectus, as may be requested
for use in connection with the offering and sale of the Shares; (f) any filings
required to be made by the Placement Agent with the National Association of
Securities Dealers, Inc.; (g) the fees and expenses incurred with respect to the
listing of the Shares on the NASDAQ SmallCap Market.
-5-
<PAGE>
SECTION 5. TERMS OF THE OFFERING
The Offering shall commence upon the effectiveness of the Registration
Statement and shall continue until such date as all of the Shares are sold or
the Offering is terminated by the Corporation or the Placement Agent as provided
in Section 6 hereof (the "Termination Date").
Subscription proceeds will be held by the Corporation pending a
closing ("Closing"). Subject to the terms and conditions of this Agreement,
Closings shall be held with respect to sales of the Shares on a monthly basis or
on such a more frequent basis as the Corporation and Placement Agent shall
agree.
The public offering price per share is the greater of $15.00 or the
Company's net asset value per share (calculated within 48 hours prior to any
sale) (the "Offering Price"). The minimum subscription will be for 100 shares.
The Placement Agent shall be paid a management fee of 2.7% of the Offering Price
from all sales of the Shares. The Placement Agent will also be paid a selling
concession of 4.3% of the Offering Price from all sales of the Shares all, or
any portion, of which the Placement Agent may reallow to other selling agents.
The Corporation shall have the right to accept or reject in whole or in part
offers to purchase for the Shares.
SECTION 6. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, (i) by the Board of Directors of the Corporation or by a vote of a
majority of the outstanding voting securities of the Corporation, on 10 days'
written notice to the Placement Agent or (ii) by the Placement Agent on 10 days'
written notice to the Corporation. This Agreement shall automatically terminate
in the event of its assignment.
SECTION 7. ACTIVITIES OF PLACEMENT AGENT
Except to the extent necessary to perform its obligations under this
Agreement, nothing herein shall be deemed to limit or restrict the Placement
Agent's right, or the right of any of its officers, directors or employees
(whether or not they are a director, officer, employee or other affiliated
person of the Corporation) to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
company, corporation, firm, individual or association.
SECTION 8. MISCELLANEOUS
(a) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto and, if required by the Act, by a vote of a majority of the
outstanding voting securities of the Corporation.
-6-
<PAGE>
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion or
portions shall be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid.
(c) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(d) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have been
properly given.
(e) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of Maryland without reference to
principles of conflict of law.
(f) The terms "vote of a majority of the outstanding voting securities,"
"affiliated person," and "assignment" shall have the meanings ascribed thereto
in the Act.
(g) This Agreement has been and is made solely for the benefit of the
Placement Agent, the Corporation and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Shares merely because of such purchase.
(h) The indemnification agreement contained in this Agreement and the
representations, warranties and covenants in this Agreement shall remain in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of the Placement Agent or controlling person
thereof, or by or on behalf of the Corporation or its directors or officers, and
(iii) a Closing under this Agreement.
(i) This Agreement embodies the entire agreement between the Corporation
and the Placement Agent relating to the subject matter hereof and supersedes all
prior agreements, representations and understandings, if any, relating to the
subject matter hereof.
-7-
<PAGE>
(j) Please confirm that the foregoing correctly sets forth the agreement
between the Corporation and the Placement Agent.
Very truly yours,
DEM, INC.
By:
----------------------------
Nathan A. Chapman, Jr.
Chairman and President
THE CHAPMAN CO.
By:
----------------------------
Nathan A. Chapman, Jr.
Chairman and President
-8-
<PAGE>
EXHIBIT N
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use or incorporation
by reference in this Registration Statement of our report dated February 14,
1997, relating to the financial statements of DEM, Inc. included in or made a
part of this Form N-2.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
May 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED FINANCIAL STATEMENTS DATED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 9,857,386
<INVESTMENTS-AT-VALUE> 9,476,003
<RECEIVABLES> 1,254
<ASSETS-OTHER> 522,905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,000,162
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,013
<TOTAL-LIABILITIES> 19,013
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,786,272
<SHARES-COMMON-STOCK> 777,815
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (376,373)
<ACCUMULATED-NET-GAINS> (47,367)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (381,383)
<NET-ASSETS> 9,981,149
<DIVIDEND-INCOME> 3,961
<INTEREST-INCOME> 3,628
<OTHER-INCOME> 0
<EXPENSES-NET> 72,413
<NET-INVESTMENT-INCOME> (64,824)
<REALIZED-GAINS-CURRENT> (460,707)
<APPREC-INCREASE-CURRENT> (370,711)
<NET-CHANGE-FROM-OPS> (896,242)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 147,134
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 2
<NET-CHANGE-IN-ASSETS> (1,044,003)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,827
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,127
<AVERAGE-NET-ASSETS> 10,819,303
<PER-SHARE-NAV-BEGIN> 14.17
<PER-SHARE-NII> (.08)
<PER-SHARE-GAIN-APPREC> (1.07)
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.83
<EXPENSE-RATIO> 2.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT S
DEM, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director(s) of DEM,
Inc., a Maryland corporation, hereby constitute and appoint NATHAN A. CHAPMAN,
JR., and EARL U. BRAVO, SR. and either of them, the true and lawful
agents and attorney-in-fact of the undersigned with full power and authority
in either said agent and attorney-in-fact, to sign for the undersigned and in
their respective names as Directors and Executive Officers of DEM, Inc., the
Registration Statement on Form N-2, and any and all further amendments to
said Registration Statement, hereby ratifying and confirming all acts taken
by such agent and attorney-in-fact, as herein authorized.
Date: May 12, 1997
/s/ NATHAN A. CHAPMAN JR. /S/ RONALD A. WHITE
- -------------------------------- -----------------------------
Nathan A. Chapman, Jr., President, Ronald A. White, Director,
Chairman of Board of Directors and
Director (Principal Executive Director)
/s/ JAMES B. LEWIS /S/ LOTTIE H. SHACKELFORD
- -------------------------------- -----------------------------
James B. Lewis, Director Lottie H. Shackelford, Director
/s/ M. LYNN BALLARD /S/ ROBERT L. WALLACE
- -------------------------------- -----------------------------
M. Lynn Ballard Robert L. Wallace, Director
Treasurer (Principal Accounting &
Financial Officer)
